HEICO Corp (HEI) 2018 Q3 法說會逐字稿

Good morning. I would like to welcome everyone to the HEICO's fiscal year 2018 third quarter earnings results. And now, we're going to take a moment to share the forward-looking statements disclaimer for earnings conference call.

Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual result may differ materially from those expressed in or implied by those forward-looking statements as a result of factors, including: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space or Homeland Security spending by U.S. and/or foreign customers or competition for existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales and sales growth; product development or manufacturing difficulties, which could increase our product development cost and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risks; interest, foreign currency, exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our cost and revenues; the defense spending or budget cuts, which could reduce our defense-related revenue.

Parties listening to or reading a transcript of this call are encouraged to review all the HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, 10-Q and 8-K. We undertake no obligation to publicly update information, future events and otherwise, except to extent required by applicable law.

And now I would like to introduce our host for today Mr. Laurans Mendelson, Chairman and Chief Executive officer of HEICO Corporation. The call is yours.

Thank you, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO Third Quarter Fiscal '18 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation.

I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO.

Now before reviewing our record third quarter operating results, I'd like to take a moment to thank all of HEICO's talented, dedicated and loyal team members, who, again, were responsible for the outstanding results. Our team members and a strong corporate culture of entrepreneurial excellence has allowed us to grow and to win in the markets we serve. Their commitment to customers in producing high-quality products, coupled with the enthusiasm they bring to work every day makes HEICO the great company that it is.

I'd like to take a few moments to summarize the highlights of our third quarter.

Consolidated third quarter net sales, operating income, net income represent record quarterly results, and they were driven principally by record net sales, fueled by double-digit organic growth at both Flight Support and ETG.

Consolidated net income in the third quarter of fiscal '18 increased 47% on operating income and net sales increases of 33% and 19%, respectively, over third quarter of fiscal '17. Consolidated net income in the first 9 months of fiscal '18 increased 45% on operating income and net sales increases of 25% and 18%, respectively, over the first 9 months of fiscal '17.

Consolidated net income per diluted share increased 44% to $0.49 in the third quarter of fiscal '18, and that was up from $0.34 in the third quarter of fiscal '17. It was an increase of 43% to $1.40 in the first 9 months of fiscal '18 and again, up from $0.98 in the first 9 months of fiscal '17.

Consolidated operating margin improved to 21.8% in the third quarter of fiscal '18, and that was up from 19.4% in the third quarter of fiscal '17 and improved to 21% in the first 9 months of fiscal '18 and again, up from 19.7% in the first 9 months fiscal '17.

As we have mentioned on previous calls, a contributing factor to the outstanding growth in net income has been the impact of the U.S. Tax Cuts and Jobs Act of '17. This pro-business cut enjoyed by many companies has unleashed additional cash to invest in plant and equipment, in team members and profitable acquisitions. Our effective tax rate for the first 9 months of fiscal '18 was 17.9%, which was down from 29.8% in that first 9 months of fiscal '17. We intend to utilize these tax savings to grow HEICO and create additional shareholder value.

The ETG group set a quarterly net sales records in the third quarter of fiscal '18 by improving 35% over the third quarter of fiscal '17. This increase in the third quarter of fiscal '18 reflects organic growth of 16% as well as the favorable impact from our fiscal '17 and '18 acquisitions.

The Flight Support Group set a quarterly net sales record in the third quarter of fiscal '18, improving 11% over the third quarter of fiscal '17. The increase in the third quarter of fiscal '18 reflects organic growth of 10% as well as the impact from a fiscal '17 acquisition.

Cash flow, which, as you all know, I believe, is the most important indicator of success. Cash flow provided by operating activities increased 14% to $204.7 million in the first 9 months of fiscal '18, and that was up from $179.3 million in the first 9 months of fiscal '17. Cash flow provided by operating activities increased 34% to $109.7 million in the third quarter of fiscal '18, and that was up from $81.6 million in the third quarter of fiscal '17. We continue to forecast record cash flows from operations in fiscal '18.

Our total debt to shareholders equity decreased to 43.6% as of July 31, '18, and that was down from 54% as of October 31, '17. Our net debt, which we define as total debt less cash and cash equivalents, total debt was $556.8 million to shareholders' equity ratio decreased to 38.9% as of July 31, '18, down from 49.8% as of October 31, '17.

Our net debt-to-EBITDA ratio improved to 1.27x as of July 31, and that compared to 1.67x as of October 31, '17.

During fiscal '18, we have successfully completed 3 acquisitions, and we have completed 4 acquisitions over the past year. We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions and to accelerate growth, which, we believe, will maximize shareholder returns.

In June '18, we declared a 5-for-4 stock split, reflecting the Board of Directors' continued confidence in the strategic trajectory and the growth of our businesses. These additional shares were distributed in June '18. This marks HEICO's second 5-for-4 stock split made this year and the 17th stock split or stock dividend since 1995.

All applicable share and per share information has been retroactively adjusted to reflect the 5-for-4 stock splits distributed in both January '18 and June '18.

In July '18, we paid and increased regular semiannual cash dividend of $0.06 per share. This represented our 80th consecutive semiannual cash dividend and was a 7% increase over the prior semiannual per share amount and a accumulative increase of 17% in dividends since July 2017.

In August '18, we reported that our 3D-Plus subsidiary supplied mission-critical equipment for NASA's Parker Solar Probe. The Parker Solar Probe will travel closer to the sun's corona than any other human space mission before it and has mission goals of understanding coronal heat patterns, particle acceleration dynamics, magnetic field changes, space weather movements and stars' general behavior and characteristics.

We congratulate the entire NASA team and could not be more proud that 3D-Plus helped to make their mission possible. We thank the entire 3D-Plus team for their continued hard work and commitment to unparalleled excellence.

At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group. And he will discuss the results of the Flight Support Group.

Thank you. The Flight Support Group's net sales increased 11% to a record $285.1 million in the third quarter of fiscal '18, up from $258 million in the third quarter of fiscal '17. The Flight Support Group's net sales increased 14% to a record $807.7 million in the first 9 months of fiscal '18, up from $710.7 million in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 is attributable to organic growth of 10% and 6%, respectively, as well as the impact from our profitable fiscal '17 acquisitions. The organic growth in the third quarter and first 9 months of fiscal '18 reflects increased demand and new product offerings within our aftermarket replacement parts, specialty products and repair and overhaul parts and services product lines.

The Flight Support Group's operating income increased 17% to a record $54.7 million in the third quarter of fiscal '18, up from $46.7 million in the third quarter of fiscal '17. The Flight Support Group's operating income increased 15% to a record $152.1 million in the first 9 months of fiscal '18, up from $132.8 million in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 is mainly attributable to the previously mentioned net sales growth.

The operating income increase in the third quarter of fiscal '18 also reflects the favorable impact from efficiencies realized and the benefit of our growth in net sales and relatively consistent period-over-period SG&A expenses and changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition, partially offset by a slightly lower gross profit margin mainly due to a less favorable product mix within our aftermarket replacement parts product line.

The Flight Support Group's operating margin increased to 19.2% in the third quarter of fiscal '18, up from 18.1% in the third quarter of fiscal '17. The Flight Support Group's operating margin increased to 18.8% in the first 9 months of fiscal '18, up slightly from 18.7% in the first 9 months of fiscal '17.

The increase in the Flight Support Group's operating income as a percentage of net sales in the third quarter of fiscal '18 principally reflects the previously mentioned SG&A efficiencies and changes in the estimated fair value of accrued contingent consideration, partially offset by the previously mentioned lower gross profit margin.

With respect to the remainder of fiscal '18, we now estimate full year net sales growth of approximately 11% to 12% over the prior year, up from the prior estimate of 10% and the full year Flight Support Group's operating margin to approximate 19.0%, up from the prior estimate of 18.5% to 19%.

Further, we now estimate the Flight Support Group's full year organic net sales growth rate to be in the mid- to high single digits. These estimates exclude additional acquired businesses, if any.

Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 35% to a record $186.4 million in the third quarter of fiscal '18, up from $137.9 million in the third quarter of fiscal '17. The Electronic Technologies Group's net sales increased 26% to a record $510.8 million in the first 9 months of fiscal '18, up from $405.2 million in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 reflects organic growth of 16% and 8%, respectively, as well as favorable impact from our fiscal '17 and '18 acquisitions. The organic growth in the third quarter and first 9 months of fiscal '18 principally reflects increased demand for certain defense products. Further, the organic growth in the third quarter was partially moderated by lower demand for certain space products.

The Electronic Technologies Group's operating income increased 45% to a record $56 million in the third quarter of fiscal '18, up from $38.5 million in the third quarter of fiscal '17. The Electronic Technologies Group's operating income increased 38% to a record $147.4 million in the first 9 months of fiscal '18, up from $106.5 million in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 is principally attributable to the previously mentioned net sales growth and an improved gross profit margin, mainly reflecting increased net sales and a more favorable product mix for certain defense products, partially offset by a less favorable product mix for certain space and other electronics products.

Further, the increase in the third quarter and the first 9 months of fiscal '18 reflects efficiencies realized from the benefit of our growth in net sales on relatively consistent period-over-period SG&A expenses.

The Electronic Technologies Group's operating margin improved to 30.1% in the third quarter of fiscal '18, up from 28% in the third quarter of fiscal '17. The Electronic Technologies Group's operating margin improved to 28.9% in the first 9 months of fiscal '18, up from 26.3% in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 principally reflects the previously mentioned improved gross profit margin and SG&A efficiencies.

With respect to the remainder of fiscal '18, we now estimate full year net sales growth of approximately 20% to 21% over the prior year, up from the prior estimate of 18% to 20% and the full year Electronic Technologies Group's operating margin to approximate 28.5% to 29%, up from the prior estimate of 28% to 29%. Further, we continue to estimate the Electronic Technologies Group's operating net -- excuse me, organic net sales growth rate to be in the mid-single digits. These estimates exclude additional acquired businesses, if any.

I'll turn the call back over to Larry Mendelson.

Thank you, Victor and Eric. And now moving on to diluted earnings per share. Our consolidated net income per diluted share increased 44% to $0.49 in the third quarter of fiscal '18, and that was up from $0.34 in the third quarter of fiscal '17. It was increased to 43% to $1.40 in the first 9 months of fiscal '18, and that was up from $0.98 in the first 9 months of fiscal '17.

As we said before, all fiscal '17, '18 diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock splits, which we did in January and June of '18.

Depreciation and amortization expense totaled $19.4 million in the third quarter of fiscal '18. That was up from $16.4 million in the third quarter of fiscal '17. It totaled $57.5 million in the first 9 months of fiscal '18, up from $46.9 million in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 principally reflects the incremental impact of higher amortization expense of intangible assets from our fiscal '17 acquisitions.

Research and development expense increased 23% to $14 million in the third quarter of fiscal '18. That was up from $11.4 million in the third quarter of fiscal '17 and increased 20% to $40.7 million in the first 9 months of fiscal '18, up from $33.9 million in the first 9 months of fiscal '17.

Significant ongoing new product development efforts are continuing as usual at both Flight Support and ETG, and we continue to invest approximately 3% of each consolidated net sales dollar into new product development.

SG&A expenses on a consolidated basis increased to $80.2 million in the third quarter of fiscal '18. That was up from $72.8 million in the third quarter of fiscal '17 and increased to $231.7 million in the first 9 months of fiscal '18, and that was up from $197.5 million in the first 9 months of fiscal '17.

The increase in the third quarter and first 9 months of fiscal '18 mainly reflects the impact from our fiscal '18 and '17 acquisitions and higher performance-based compensation expense. Furthermore, the increase in the third quarter of fiscal '18 was partially mitigated by changes in the estimated fair value of accrued contingent consideration associated with a prior year acquisition.

Our consolidated SG&A expense as a percent of net sales decreased to 17.2% in the third quarter of fiscal '18, and that was down from 18.6% in the third quarter of fiscal '17. And it decreased slightly to $17.8 million -- I'm sorry, 17.8% in the first 9 months of fiscal '18, down slightly from 17.9% in the first 9 months of fiscal '17.

The decrease in consolidated SG&A as a percentage of net sales in the third quarter of fiscal '18 principally reflects efficiencies realized from the benefit of our growth in net sales on relatively consistent period-over-period SG&A expense as well as the favorable impact from the previously mentioned changes in accrued contingent consideration.

Interest expense increased to $5.2 million in the third quarter of fiscal '18, and that was up from $2.4 million in the third quarter of fiscal '17. It was $14.8 million in the first 9 months of fiscal '18 as compared to $6.4 million in the first 9 months of fiscal '17. The increase in the third quarter and first 9 months of fiscal '18 was principally due to, one, higher interest rates due to increases in the LIBOR rate, and as well as a higher weighted average balance outstanding under our revolving credit facility, and that was associated with our fiscal '17 acquisitions.

Other income and expense in the third quarter was not significant so I won't comment on it.

Our effective tax rate in the third quarter of fiscal '18 decreased to 23.1%, down from 30.3% in the third quarter of fiscal '17. Our effective tax rate in the first 9 months of fiscal '18 decreased to 17.9%, down from 29.8% in the first 9 months of fiscal '17. As mentioned on our previous calls, the decrease in the effective tax rate for the third quarter and first 9 months of fiscal '18 is directly related to the Tax Cuts and Job (sic) [Jobs] Act or call it, the Tax Act, under which the federal -- U.S. federal tax rate was reduced from 35% to 21%, effective January 1, 2018, and that resulted in a blended federal rate of 23.3% for HEICO in fiscal '18.

Of course, the months of November and December, our 2 -- first 2 months of our fiscal year were taxed at the old tax rate of -- top tax rate of 35%. In addition, the decrease in the first 9 months of fiscal '18 reflects the $16.6 million discrete tax benefit we recognized in the first quarter of fiscal '18 from the remeasurement of our U.S. federal net deferred tax liabilities using the lower federal tax rate that was partially offset by $4.7 million discrete tax expense we recorded in the first quarter of fiscal '18. And that was related to a onetime transition tax on unremitted earnings of foreign subsidiaries, again, as a result of the Tax Act.

Net income attributable to noncontrolling interest increased to $6.8 million in the third quarter of fiscal '18. That was up from $5.8 million in the third quarter of fiscal '17 and increased to $19.7 million in the first 9 months of fiscal '18, again, up from $16.3 million in the first 9 months of fiscal '17.

The increase in the third quarter and first 9 months of fiscal '18 principally reflects the impact of the Tax Act as well as improved operating earnings of certain subsidiaries of the Flight Support and ETG groups, in which noncontrolling interests are held. For the full fiscal '18, we estimate a combined effective tax rate and noncontrolling interest rate of between 27% and 28% of pretax income.

Moving on to the balance sheet and cash flow. I'm happy to note that our financial position and forecasted cash flow remain very strong. As previously discussed, cash flow provided by operating activities increased 14% to $204.7 million in the first 9 months of fiscal '18. That was up from $179.3 million in the first 9 months of fiscal '17. Cash flow provided by operating activities increased 34% to $109.7 million in the third quarter of fiscal '18, up from $81.6 million in the third quarter of fiscal '17. We continue to forecast record cash flows from operations in 2018 -- fiscal 2018.

Our working capital ratio, that's current assets divided by current liabilities, improved to 2.9x as of July 31, '18, and that was up from 2.5x as of October 31, '17.

DSOs or accounts receivable days outstanding -- day sales outstanding was 49 days in both July 31, '18 and July 31, '17. We continue to closely monitor all receivable collection efforts in order to limit credit exposure. As you know, as you -- shareholders have been around for a long time, we have very few receivable losses.

No one customer accounted for more than 10% of net sales. Our top 5 customers represented about 21% and 18% of consolidated net sales in the third quarters of fiscal '18 and '17, respectively.

Our inventory turnover rate was 134 days for the period ended July 31, '18, which is consistent with 135 days for the period ended July 31, '17. As previously mentioned, our total debt-to-shareholder equity ratio decreased to 43.6% as of July 31, '18. That was down from 54% as of October 31, '17. In addition, our net debt of $556.8 million to shareholders equity ratio decreased to 38.9% as of July 31, '18, and that was down from 49.8% as of October 31, '17.

Our net debt-to-EBITDA ratio improved to 1.27x as of July 31, '18, and that compared to 1.67x as of October 31, '17. And I just point out this really signifies very strong cash flow and earnings growth relative to high gross consolidated debt. We are not a debt-constrained company. And we -- I would preempt the question that probably will come up. We have plenty of firepower left for acquisition activity. We have no significant debt maturities until fiscal '23, and we plan to utilize financial flexibility to continue to aggressively pursue high-quality acquisition opportunities and to accelerate the growth and again maximize shareholder returns.

The outlook. As we look ahead for the remainder of fiscal '18, we anticipate net sales growth within Flight Support and ETG, resulting from increased demand across the majority of our product lines. We will also continue our commitment to developing new products and services, further market penetration and aggressive acquisition strategy while maintaining our financial strength and flexibility.

Again, we are not a capital-constrained company and have access to $1.3 billion unsecured revolving credit facility to accomplish our controlled growth strategy. In -- as a practical matter, we can increase that probably to $1.6 billion or $1.65 billion if we need the additional available market availability. At this moment, we don't foresee that we would need that. But you never can tell. Our acquisition pipeline remains very robust, and we continue to actively work on a number of potential acquisitions. Of course, as is always the case, we do not know when or if an acquisition we're working on will be consummated, but we're excited about all of them at this point.

Based on current economic visibility, we now estimate consolidated fiscal '18 year-over-year growth in net sales to be 15% to 16% and net income to be 35% to 37%, up from our prior growth estimates in sales -- of net sales of 13% to 14%. So we went from 13%, 14% now to 15% to 16% and in net income of 33% to 35%. So for net income, we're now forecasting 35% to 37% increase, up from our prior estimate, 33% to 35%.

We continue to anticipate our consolidated operating margin to approximate 21%, cash flow from operations to approximate $310 million, depreciation and amortization expense to approximate $77 million and CapEx, about $45 million. These estimates exclude additional acquired businesses, if any.

In closing, I'd like to end where I began. HEICO's team members have delivered these outstanding results and deserve the credit for hard work and discipline it took to successfully navigate another record-setting quarter. HEICO's executive management team has the utmost respect for everything our team leaders do to make their company successful. For my contribution, I intend to continue leading these talented team members with a focus on intermediate and long-term growth strategies, a laser focus on cash generation and the acquisition of profitable businesses at fair prices.

That is the extent of our prepared remarks, and I would like to open the floor for any questions which may be out there.

(Operator Instructions) Your first question comes from the line of Rob Spingarn from Crédit Suisse.

You continue to deliver outstanding performance. And even in the spots where there are some pressures, such as the product mix that Victor mentioned in space, and Eric talked about gross margins. In each of these cases, you've offset that pressure elsewhere and very successfully. So I wanted to -- given, here we are in August, another good quarter, I wanted to go a little less conventional here and ask each of the 4 of you if you could talk about just briefly your greatest individual unrealized opportunity at HEICO. And at the same time, what your greatest challenge might be in the business? And I was hoping that Eric might be able to factor in this recent CFM news to see if, maybe, that's an opportunity.

Well, Rob, over the last 28.5 years, we've gotten a lot of questions. And I would have to say that, that's definitely the first time that I've gotten this question. But I think it's really a terrific one. And of course, I've only had 30 seconds to think about it. But I would have to say -- we have great opportunities within all of the businesses within Flight Support. They're run by -- we speak a lot about the structure of the business. And I think our greatest competitive advantage is the way that we're structured. And instead of having one single enterprise where all the decisions end up on one desk, my desk, the decisions are made within Flight Support by roughly 25 really talented people, who, frankly, know more about their spaces than I will ever know. And we are really grateful to have them, their dedication. They treat those businesses like they're -- they own 100% of them. They get very emotional about their businesses. And they each have got incredible growth opportunities going forward in many, many different segments. But since you asked the question, I haven't had very long to think about it. I do think that one of our largest unrecognized opportunities would be, frankly, the engine PMA business. This is from where we came. The company started out in this area. And we did very well. We've saved a lot of airlines and customers a lot of money. And that, of course, has led to competitive dynamic and competition in the non-engine space. And that's what our customers wanted us to get into 20 years ago. And we branched out from airlines, I mean, from engines into non-engine. So we're doing very well in area -- in all of those areas. But the engine space, over the last 10 years, has become very difficult. And from our perspective and from what the airlines have taught us, some manufacturers have been extremely anti-competitive and have basically threatened their customers and told them that if they used alternative parts, they're not going to support them. And they're going to play all sorts of games. And it would be like, if you bought a car and you decided that you wanted to change the tires on the car and the original manufacturer said, no, if you change from whatever, Michelin tires to some other tires, I'm not going to support it. And next time you have a problem, I'm not going to support you. And that's been a real headwind for our business. And as you know, the airlines got very upset about this. They went to their trade association IATA and complained to the European Commission on this point, because they really couldn't take it any longer. And the -- there ultimately was a settlement. The European Commission had to make a decision whether they were going to take on a formal investigation. They encouraged the parties, from what I hear, to settle that. And they decided to basically agree to a set of conduct policies, which would promote competition. If those conduct policies are stuck to and are adhered to by all parties, I think that it would be very pro-competitive. I think that the engine manufacturers will continue to do extraordinarily well. They've got incredible backlogs. They've got great engineering. I really admire those organizations, their technical, their manufacturing ability. And frankly, I think their future is phenomenal. And they're going to make a lot of money for themselves and their shareholders. But at the same time, the airlines want a choice, just like when you buy, when you bring your car in for service, you want to trade some tires, what you're going to use. And so if the manufacturers heed this warning and basically cut out these, what I would term, I'm not a lawyer, but anticompetitive monopolistic trade practices, then I think that, that is probably the Flight Support Group's greatest opportunity. However, I have to caveat this with, I don't know, in fact that, that's definitely going to happen. And I feel confident that if it doesn't happen, the airlines still can complain to the European Commission and to the DOJ, and we've spoken to a number of airlines, and we are certain that they will. However, frankly, HEICO is not a complainant into that matter. And we really don't have a front row seat to it. So I think it is a good opportunity, but I just caution you to not get overly excited about it until we see some of the results. So sorry for this long-winded explanation, but it's...

But Rob, this is Larry, I have a different take on this stuff from Eric. I agree with everything he said. But I have always viewed HEICO as a company that must get it done. It's my basic nature. I was in the Army and there was no such thing as -- any of you've been in the Army, there's no such thing as I can't do it. So my whole nature in business and my life is do it. So HEICO, we're not going to live or die on PMA parts. The PMA business is very good, very -- it's wonderful business. But we have expanded far beyond PMA. And HEICO has become a great company, not because -- only because of PMA. PMA is part of the team. HEICO is a big team with -- I can't tell you, we probably have, how many, 50 different operating -- say 50 different -- I would say 90% of those 50 groups have incredibly outstanding management. That is what makes HEICO grow. It's not me, and it's not Victor, it's not Eric, it's not Carlos. I'm giving all of the credit -- 95% of the credit goes to those team members, some of which make more money than I do or Eric or Victor or Carlos, and God bless, because they're so outstanding. I don't want to mention names here. The guys on the phone, some of them are on the phone, they know who I'm talking about. But these are incredibly talented, loyal, hard-working individuals. And in my opinion, shareholders of HEICO, they look at the numbers and so forth, and I'm not sure if they truly understand the depth of the management. And that is, in my opinion, the key. We -- if we had not another PMA, I guarantee you HEICO would be an unbelievably successful company, and it's because it really is our ability to pick these fantastic individuals. So that's my two cents on it and...

Rob, this is Victor. It's good that Eric and my father went first to gain me time to think about some answers to your question. It's a very good question. When I think about sort of ETG, because I think you're kind of looking for me to distill down at that level. Is that right?

Yes. And then Carlos on the financial side.

Yes. On the ETG level, our focus is more on components, subcomponents and that part of the world. And we've done very well doing the things that Eric talked about and my father talked about, serving the customers through our team members and just the basic blocking and tackling and expanding the product mix and developing product. And there continues to be opportunity to do that and grow that as larger companies consolidate. And as we see consolidation invariably, what happens is customers are increasingly mistreated, product lines fall out, the large companies tend to lose focus. And our structure doesn't allow for that, because in small business units, there's nowhere to hide. And if you're losing customers or you're losing product focus, it gets noticed really quickly. If somebody doesn't show up in a 70-person business, the president of the business knows about it. So that gives us opportunity. Another area we're starting to flesh out more is on smaller acquisitions, ones that we wouldn't have made as stand-alone businesses, but businesses that earn maybe $1 million or $2 million of operating income, and operating income to us is earnings before interest, taxes and amortization. We don't do EBITDA where we add back the depreciation, because that's not really, to us, a true cash flow number because we have some CapEx. But businesses that are kind of smaller in size where there is -- where it's a product line, they may actually -- would be lower-margin products, it's a product line. Or there's an owner who is retiring and doesn't have a successor, and it's time for the business to close or be consolidated into something else. And we've had some opportunities where we've bought those, and we're buying them. And we'll see how that continues and how that plays out. And it certainly has its own risks. But we've been successful so far with a number of those. And if we're able to do more of those, and I'm looking to ETG and there are roughly 19 companies that sort of roll up at a top level. And then there's -- some of those -- a number of companies have subsidiaries. But if it's just at the top level, 19 companies, we did -- all 19 companies made an acquisition of the $1 million or $2 million of EBITA a year, that would be very promising for us. So there's -- those were a couple of examples of potential for us. Now that's not likely to happen at every single one of 19, though, but if we got halfway there, then certainly, it'd be very exciting. So that offers some potential, and we'll see how that goes. That's a good possibility. You'd asked for some of the challenges. I think, we're always mindful with what can happen with the economy, with the U.S. government budget. There's not a lot we can do about that. We're not going to influence, frankly, what the budget -- the U.S. budget's going to be beyond voting. And we don't really have a lot of influence on that. And we're not going to influence the broader economy all too much. So the best thing we can do there is what we've always done historically, which is keep our eyes on cost for our businesses, not us. So at the corporate levels, as my father said, we're not there running the businesses, but our businesses could just be really tight on cost and really cautious and don't run out and expand too much in the expansionary economy, Economic Times. And lately, one of the things that I think companies are seeing, the economy is extremely strong, is that -- it's something -- companies, not just us, everybody is going to deal with this lead time increases, material shortages, labor shortages, things like that. We're managing it fine. It's working out fine. But that's a challenge that we're going to have to continue to make sure it works okay. And increasingly, we see things slip out to the right here and there because of material shortages and labor shortages.

Let Carlos say, I don't know, did that answer your question Rob?

Yes, no, that was great, I appreciate that.

So you saved the best for last finance, accounting. Look, I feel very fortunate to lead the finance and accounting function at HEICO. We -- as you know, we've got a very diversified structure, and we utilize principally the same management style as Eric, Victor and Larry do for the operating units, is to empower the employees and team members on my team to both make mistakes and do good things. And then not beat them over the head whenever something bad happens, but to encourage them to continue to learn and to do good things. So [I think there's] opportunities and untapped potential, I think, growing that team and continuing to allow them to grow in their careers is something that is very important to me, and that's -- that's an opportunity and a challenge, frankly, in a diversified environment. I do think on the challenge side, the one thing that concerns me personally is some of the changes to generally accepted accounting principles just keep getting, I'll say jammed down our throats. Some of these changes, I think are, when it comes to revenue and leases and some of the things coming down the pipeline, I'm not so sure that, that helps our shareholders or our investors fully understand our financial statements. I think it's confusing. Sometimes I think it is the full employment act for auditors. But nonetheless, those -- when it comes to challenges, our group is quite talented and able to effect these changes, but I sometimes question the need for them. So hope that answers your question, Rob.

But Rob, this is Victor. Just one thing I wanted to add. My comment on some smaller opportunities doesn't mean that we are abandoning our typical acquisition. So the typical kind of company we buy, the stand-alone business, I think will remain our bread and butter, where we are a great home for the acquirer, where we leave the business alone to do what it did pre-closing. We will continue to do that. And in fact, most of the acquisitions, we're working on now, the majority of them fit in exactly that mold, where the management team, the people will stay, the company will be where it was pre-closing under the same name, same operations and so forth.

Rob, there is one other thing I would like to add, a little bit of color that after running this company for about 28 years, I have finally realized it a while ago, and that is the culture of the company. And I have said this at some of the conferences that we've attended. The culture of a company, I think, becomes very, very important. And I think it's the tone from the top, it's the honesty, the integrity and so forth. But it's also how you treat the team members, the employees. And I think you know this. A number of years ago, we sold a block of stock to the 401(k). People defer 6%, they can defer 6% in the 401(k). They have a whole menu of mutual funds that they invest in. And we match that annually with 5% in HEICO stock. And the thing that -- and the reason I bring -- you will hear in a minute, why I'm bringing this out, why it's so important. We have 4,000 U.S. -- approximately 4,000 U.S. employees. Most of them are in the 401(k). 10% or little more have between $750,000 and $1.5 million in their 401(k) principally as a result of their gift or -- of HEICO's stock to the 401(k). Another 40 or 50 of them have between $1.5 million and $6.5 million in their 401(k), principally HEICO stock. I'm not talking about senior executives. I'm talking about shipping clerks, factory workers, secretaries and people who work hard for manual labor for a living. Now what has happened is that we now have -- a good majority of those 4,000 people think of HEICO as their company. It's no longer, "Oh yes, well, we're working for some rich guys on Wall Street and mutual funds and the CEO, he is getting all this money, we're getting nothing" led by the "when I retire, I have Social Security, I can't even make ends meet and so forth." And the last thing I want to tell you is that about 6 months ago when I send out the quarterly reports, I received an e-mail back from one of our secretaries. And the comment, I paraphrase, "Dear Larry, thank you so much for sending the report. We are doing so well. "We meant she. It wasn't HEICO. She didn't write HEICO is doing so well, we are doing so well. And she further went on to say, "And it's wonderful to know that someday when I retire, I will retire as a millionaire." This is a secretary. So when you put that in perspective and understand that the people who are building this company, and supporting it, and doing the great things that we can do, they look at it as their company, they are working for themselves. So I feel very strongly that, that strategy that we have used has been extremely, extremely effective. And I hear it all the time. People say to me, "God, the stock is doing so well." They have access through Fidelity and they see their 401(k) values and so forth. They feel part of it. And if somebody is out of line, believe me, those -- the people themselves, the team members will go and say, "Hey, you know, this is -- you got to get on the ball." They're not going to let people goof off. So that is why, I think, we have a great reason for the great success that we've had, and it's in the execution and the performance of the people in the field. So I just wanted to add that.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

I think that question covered about everything. So I don't know if I've anything more to ask. But -- maybe we could just start off with ETG, Victor, superb organic growth. How do we think about how sustainable that is, what a more normalized growth outlook for the business of late and some of the drivers?

Sheila, that's a good question. I wouldn't expect organic growth of that level every quarter. I think, what we guided historically is what we'll continue to tell people to expect at ETG over time, and we do look at it over long term is a mid -- mid-to-low single digits organic growth kind of business, and we have quarters where it's much higher, and then there are quarters where it is lower. And if you look at it that way, I think you're safe. I know, we have done more historically, and people always say to me, well, you're sandbagging because the business grows -- seems to faster than that. And if it does, great, and then we can all be very happy. But in the meantime, I think we're much safer expecting the mid-to-low single digits growth. Because as I said, we can't predict a lot of things like defense budgets and the economy overall.

Got it. And then were there specific drivers this quarter that shouldn't repeat as a pull forward? Or is it just a robust defense funding?

In robust economic times, what I noticed is there always seems to be, in every quarter, some amount of what I would consider a pull forward. The guys tell me -- Oh, we had -- we get to the end of the month or end of the quarter and they say, "Hey, we shipped more than we expected to ship, we've got more out the door, the customers were pulling things in." And I tend to notice that there's a few million dollars every quarter, and I wouldn't say this quarter was any exception where it seemed that there were orders that shipped in the quarter that I thought would ship in the next quarter, and originally our budget or our plan was to see it ship in the next quarter, so this -- so this wasn't an exception. And when economic times are weaker, it seems to shift the other way more frequently. I wouldn't call it anything major this quarter, and we'll see if they give me the same surprise in the fourth quarter.

Eric, I just wanted to ask about the IATA and CFM ruling, just following up on that a little bit more. How do we think about next steps? Are there other rulings that we should expect from the other engine OEMs? And what should we be looking out for?

That's a good question, Sheila. As I mentioned in my earlier answer, we were not a complainant in the matter. So it is the airlines who went to the European -- IATA with their concerns. I think that the European -- I know from what I've been told that the European Commission wants to send a message to all the manufacturers that they can't take advantage of the customers and squash competition. So I'm not aware, I don't have specific information on what they're looking at. I do know, and it was reported in the press that they did look or they were looking into other manufacturers. I know that IATA wants this to be a precedent for the whole industry, but I'm not aware of exactly where this stands at the moment.

Your next question comes from the line of Larry Solow from CJS Securities.

Just stick a little bit more of a minutiae on the quarterly performance. Perhaps a question for Eric first. It's on the -- on the aftermarket growth, looks like it accelerated a little bit close to 9%, 10% in the quarter. Was there anything particular in that? You did mention little bit of some mix issues on the negative side, but on the positive side anything that had that bump up? Maybe just a little bit of timing? And was that the main driver for sort of the increase in the organic expectations? I know you had expected Specialty Products to rebound, which they obviously did. So just a little more color on that would be great.

Right. Thanks, Larry. Again, it's a very good question. So with regard to specialty products, we did forecast that in the second half of 2018 we would see a rebound. And in fact, we're very pleased that we did see that rebound in specialty products, and expect that it will continue. You are right that aftermarket was up about 9%. And remember that with HEICO is pretty much all volume related, it's not pricing. So when we compare that to other companies that are reporting, who get a pricing, and who also get initial provisioning for new fleet, ours is 9% on the portion on the core business. So I'm really proud of the team for hitting those numbers. 9% is a heck of a number. So I would never want to predict that number in perpetuity going forward, but there's definitely a lot of strength in all of the areas that we're looking at. Also, I'm particularly happy that, that -- the 10% organic growth follows roughly 6% organic growth a year ago -- in the year-ago quarter. So when looked at that, when viewed in that light, the team has really outperformed. So again, I think that there's a lot of interest in what we do. So I'm very encouraged by it. But as I'll always say, I like to be very vocal about this, our competitors are very, very tough, and they don't give up any ground easily or willingly. So we've got to fight for every inch of ground that we have and to keep it. And I think what's the European -- this resolution with the European Commission and IATA and engine manufacturers, I think that, that is a very good sign for us. But I don't want to get carried away and start predicting something different going forward because of it. I think it's a great opportunity, but what we've got to -- we've got to go see what happens.

Okay, and then switching -- a question for Victor. Obviously, another great performance for ETG. Just a couple of questions. You -- obviously, you left the organic growth number the same, and still mid-single digit, an impressive number, but I guess, I assume growth in AeroAntenna, which is the [prime] acquisition of the last year is sort of driving that upside, which is I guess (inaudible) growth, but it is growing since you acquired it. Is that fair to say?

That's correct. Aero is a very successful company. In fact, as you know, we are conservative the way we measure organic growth. We measure organic growth starting one year after the acquisition or the anniversary of the acquisition. Only then does it count as organic growth in our computation. So we, so to speak, lose the organic growth for the period in the first year of the acquisition. And in their case, it would have driven our organic growth nicely higher. I can't say exactly what it is, but it would appear to be nicely higher. So it's been a great acquisition, great company.

Right, and the 30% or over 30% segment operating margin. Anything in the unusual, obviously you had great top line growth which I guess, helps the economies of scale and whatnot, but anything that would sort of prevent you from not reaching this number as we look out?

I would say, we're -- you know what, Larry, this is Carlos. I don't want Victor to get ahead of my projections. I think, as we go up to 28%, to 29% OI margins. And I think first of all, I'm not embarrassed of that. I think the 30% that we posted this quarter was the combination of really all of our businesses hitting on all cylinders. We had really nice growth in the defense area, an area that we've now we've got a fair amount of certainty in the budgets. And we've got our foreign contractors that we work for acting much more predictably, rationally, and so that contributed quite a bit to the quarter. And I think on an ongoing basis, if we have the same dynamics and same circumstances, God bless us all, we would be able to post an OI margin like that, but I'm not counting on it for the full year.

Got it. And Carlos, while I got your attention, just last question. Any particular reason why you didn't raise the cash flow from operations guidance despite the increase in net income outlook?

Yes, there are 2 reasons, Larry. One, we tend to invest in our growth and that requires a little bit of working capital. So by example, we have to invest in some inventories to support, not only Q4 growth, but the first half of fiscal '19. And as Victor, I think, mentioned earlier, we're seeing in the supply chain scarcity of resources. And so our guys are making sure that we have what we need on hand to support our customers. That's one aspect of it. The other aspect of it is, we've got -- with this Tax Act change, we've got a lot of moving parts, and that is working with our deferred tax liability change, it goes through our operating cash flow status. It's a noncash item, but nonetheless, it's not something that's easy to nail down. I think it's growing, and so I have been a little conservative, if you would, on some of those estimates. And if we think, the $310 million that were projected from cash flow from operations is achievable, of course, we always hope to be better.

Your next question comes on the line of Michael Ciarmoli from SunTrust.

Maybe I guess, whoever wants to chime in on this one, but it has been touched upon a couple of times regarding the supply chain. Carlos, you just mentioned some scarcity of resources, Victor, you mentioned it. Can you guys just elaborate on that? Certainly, we're hearing about a lot of tightness in the commercial aerospace world, not only on OE production, but also in the aftermarket especially as it relates to labor. Can you guys just maybe elaborate on where specifically you're seeing the tightness? Are these creating any headwinds? Are they manageable for you right now? And just -- just maybe a little bit more color in general on supply chain?

This is Victor. So I was referring to in the Electronic Technologies Group more particularly, not so much commercial aviation and commercial aviation aftermarket, components, component shortages and delays, lead time stretching out, things like that. So in a number of instances our companies have been great about getting out ahead of that, anticipating it, building a buffer stock, and inventory for the most part. Now that's not always the case, but sometimes we've got vendors, who just are very far behind the power curve on that. So we'll have a delay here and there, it hasn't been too bad. Finding really qualified people is becoming an increasing challenge, and I think, we can always find bodies, but finding the right people, and that's big part of what we do. So it hasn't been a big problem for us, but here and there, sporadically, it is, and of course, the issue for a public company is always when does that rear its head, you have it around the end of a quarter, and does that push something from shipments or group of shipments out a week or something like that from one quarter into the next, and that's something we're vigilant about, and we try to watch closely. So far we've been able to handle it pretty well.

Yes, and over on the Flight Support side, I think, we've been able to handle it. I mean, yes, there are particular areas where there have been some shortages, we have been able to handle it. There are couple of areas where the pricing is going up. So we are going to have to look at that. While we're very good to our customers, if our costs go up, then we do have to pass that along. So we've got that opportunity to do that. And I think that customers are very realistic and understanding of that, but so far, I think, we're handling it just fine.

Got it. Would you be able to elaborate on those areas, where you're seeing the pricing going up, Eric?

No, I would just say, in certain materials, but it is nothing that is having a major impact on us.

Got it. And then just last one for me. And maybe I'm getting a little bit too enthusiastic here and putting the cart before the horse. But on this IATA CFM, Eric, I mean, one of the biggest, I feel like negatives around the HEICO story, if there has ever really been a negative, has been the opportunities in engines, and you guys being boxed out. I mean, doesn't this ruling potentially change the total market opportunity for you guys on a go forward basis? And seemingly allow you to start PMA-ing parts with materially higher price points than airframe components? I mean, I am just -- I know it's early and I know this just happened and -- but it seems like this has been a major, major obstacle and this would seemingly knock down the wall to reopen a very sizable market for you?

Well, I agree that it's probably been our greatest headwind. I mean it's been a massive disappointment that we haven't been able to make more progress in this area, because the customers really want it, but frankly, they have been boxed out by all of this behavior, which hopefully is going to stop going forward. So I think that there is very good opportunity, but we need to be very cautious about it. We are not going to go spend a whole bunch of money, and go develop a whole bunch of parts without commitment, and knowing, in fact that there's going to be a home for those parts. It's a very [extensive] process to be able to develop these parts. And again, we also -- our philosophy has never been to take too much of the pie. We want to make sure that we share with the original manufacturers, and that they have the opportunity to continue to do very well. They've got huge backlog. They're going to make a fortune. They've got incredible, incredible business models. And frankly, we can get a small amount of business and not do any damage to them. So yes, I think the opportunity is there, and really stay tuned, we're going to be continuing to talk to the customers. Again, this news just broke within the last 30 days. A lot of people are on vacation right now. So we are seeing where everybody stands on this. But I do think it's good opportunity. I don't believe it's going to show up in our numbers over the next year or 2. It would be a longer story, but clearly, it does put the legs back on in terms of opportunity in that space. And also, hopefully, as Sheila had alluded to or somebody asked in another question, hopefully, the other manufacturers see the same thing, and they recognize, you know what, it's not really so bad to have a little bit of competition, nibbling around the edges on some of the stuff. They are able to, frankly, mint money on the new production, as well as the majority market shares that they have got. So I do think that there's good opportunity for us.

Your next question comes from the line of Peter Arment from Baird.

A lot has been discussed here. Victor, maybe if I can just touch upon, maybe to get a little more color on just the ongoing weakness, I guess, in the space market, you kind of talked about in the past, but just maybe what the visibility you're seeing there? And how we should think about that going forward?

Yes, Peter, it's really in the GEO sat market. It is something, I mean, that is well covered in the trade press and other press. And right now, visibility isn't great. I think, I would not expect GEO sat orders to pick up anytime soon. I don't think I'm in the minority in that view. And the rest of our space business is strong, and is doing very well, but -- and continues to grow actually. So that's positive for us.

And then just -- Eric, just quickly on the consolidation on the distribution side in the commercial space. Is this -- did this create some additional opportunities for you longer term? How should we be thinking about that?

I think so. Frankly, over on the distribution side, whether it is commercial through our Seal Dynamics subsidiary or over on the military side through Blue Aerospace in ECT, I think that we provide a very, very unique value to manufacturers. Those companies started out very, very small. They're focused on the detail. They don't take tons of different lines. They focus on their line. And frankly, they knock the balls out of the park, and they do an amazing job. I was over in Farmborough with these guys a month ago, and the way our principals feel about us due to the performance, it's not BS, it's actual performance, our people know how to sell their product. So I think that there is a lot of opportunity for those companies to continue to grow in both the commercial as well as the military market, and I'm pretty optimistic. We're not a catalog house where we cover everything. There are firms that do that, and they do a great job, and that is tremendously needed. But there are certain areas where we can really differentiate, and make a lot of money for the companies for whom we distribute, the manufacturers for whom we distribute, and we're really good at it. So yes, I'd expect this to continue to be an increasing part of the HEICO story. And I expect that we're going to do really well in those areas. And, frankly, we have done just amazingly in those spaces.

Your next question comes from the line of Jennifer Oppold up from Alpine Peaks Capital.

Quick accounting question for either Carlos or Eric, Wondering about the approximate impact of the reduced contingent consideration in flight support? And then secondly it was great to hear that specialty products had good demand this quarter. And I was wondering, if you could provide a little bit more color whether that was due to new customers or if you are just seeing a step up in demand from your existing customers?

So Jennifer, this is Carlos. The accrued contingent consideration change is $3 million and primarily that impact was from mostly FX last year. So we had some losses last year due to the euro, and then this year we had some strength in the dollar, which sort of erases that. So we had kind of that change on a change going through there. That was the -- if you would, the accrued contingent consideration impact. And I think on the mix issue that we mentioned, our volume, as Eric mentioned, was up. And there is no trend there, it's just a product mix thing in our aftermarket parts that -- that was a little different than what we had in Q3 last year, but nothing unusual, no trends and nothing that we're worried about. Does that answer your question, Jennifer?

Yes. Just to follow up frankly on the specialty product line. That was an area that had been struggling a little bit in the last year or 2. Just wondering if you had any color about what is helping that business to -- it sounds like it is on better footing now?

Jennifer, it's Eric. Yes, that business is doing better in a number of areas. One in some OE equipment that we manufacture. There was a little bit of a slowdown roughly in the last year or so that is picking up, number one. And by the way, in no particular order, but just as it is coming into my mind, number one. Number two, we do a lot of defense and space products, and we are very strong in that area, and that business is doing well with the increased spending that everybody is aware of, and they're benefiting -- we're benefiting from that. So I would say, that is number two. And then number three, in some other just general specialty product areas, we continue to do really well. We've got great management teams. They are really focused in their businesses. I went out and visited all the specialty products companies within the last couple of weeks, and they are doing very well, and frankly, they have got great growth prospects. And we thought that we were -- there was a little period of softness there, we are past it, and we believe that it's going to continue to do well.

Your next question comes from the line of Ken Herbert from Canaccord.

Just if I could, I guess, either Carlos or Larry perhaps. You've had really good improvement over time on the gross margin in the last -- recent -- this quarter and last quarter at very good levels. Can you just talk about either initiatives you're doing across the company that may be benefiting this? And where we could see kind of opportunity in the gross margin? Or is this -- because obviously volume, I'm sure is a part of this recently, but what are the other opportunities on the gross margin or maybe, if you can talk about what you've been doing across the organization to really specifically focus on this?

So this is Larry. One of the areas that we've been very successful and it is something that Victor mentioned earlier before. And that is where we take a company, which is not doing very well. That's up for sale, might be break even, may be have a low gross margin or even they may be negative. And what we do, you'll purchase that company, relocate them, merge them into one of our existing operations. And all of a sudden drop out all of the excess cost and overhead, and add the profitability to an already existing operation without much overhead attached to it. That has been a very, very powerful driver for increased profit and increased margin, and that's been very successful, and we've done that about 3, 4, 5 times and the results are really amazing. The other thing, of course, which we mentioned, as the volume goes up and SG&A kind of remains constant or goes up, but we eke out a bigger spread between the increased revenue and the existing SG&A. So that helps margins a little bit. Of course, I guess, somebody mentioned the defense industry, and, of course, as you increase throughput, you're going to see margin increase for whole bunch of reasons. You're going to see -- again, the relationship, SG&A and fixed cost as your margin -- as your revenue goes up, those spreads will start to expand. So all of those things are very critical. I don't know, Carlos, do you have some other thoughts on that too?

I would agree with everything Larry just said, and I would further emphasize that we don't have -- frankly, we don't need to have corporate initiatives, if you would, to mitigate our spending. Our culture and our, if you would, general managers and CEOs of our subsidiaries, are already very frugal, they're very cost conscious and they watch every nickel like it's their own, and we're in a very fortunate position because of that. So no big corporate initiatives on improving margins from a cost-cutting perspective. It is all what Larry said, leverage on our SG&A costs, and really doing a good job with integrating some product lines and smaller acquisitions in, and then giving them the opportunity to grow their top line, so that they can capitalize on their own profitability.

Okay, that's helpful. Thank you. And if you could, just finally, on the leverage -- you had a very nice quarter with again paying down debt and leverage. Obviously you've got plenty of capacity. But question more is about what's the lower range of where you would like to see the leverage get to. And then moving forward, how should we think about acquisitions relative to a potential special dividend or some other use of capital depending upon that pipeline moving forward?

I think, as you know, our policy is to grow the company because we feel that the growth of the company is the best place that we can add capital. So barring the market collapse or something, we don't foresee stock repurchases. We are not in the business to shrink HEICO. So we're in the business to grow HEICO. It's been a very successful endeavor. And that's our focus to move forward. So as to where the debt levels go, it's opportunistic. So we don't say we must -- we don't feel a pressure to, "Hurry up, we have got to make an acquisition because we have to make Wall Street happy and all that kind of stuff." We are strictly opportunistic, and we're going to buy companies that will add to our cash flow and so forth. And people have asked me in the past, where would I feel comfortable in terms of leverage. The real question is, how quickly we could reduce the leverage. So I would be content. I would -- I could sleep at night if we had 6x -- our debt was 6x EBITDA or more. As long as I knew that within a year or 2 that 6x would be 3x. So in fact, we have looked many occasions at very big acquisitions that would increase leverage, they didn't work out. They didn't -- weren't interesting to us. We did the due diligence and kicked the tires, but we said, no, this won't work. But we have considered much higher levels of debt initially, but not for a prolonged time. So it all depends on the availability of acquisition opportunity, how we think it's going to fit in, does it meet our criteria as far as strong margins, ability to generate cash, and to pay down the debt.

Your next question comes from the line of George Godfrey from CLK.

Just one question as it relates to the margins within the different segments. If I go back to 2013, the margin differential between flight support and ETG 540 basis points for the full year, and the quarter just reported now that differential is over 1,000 basis points. So my question is; One, what's specifically within the product mix for ETG makes it such a more profitable business; and then B, is there an opportunity in the Flight Support to bring those margins up and close that gap to be tighter perhaps with having more markets and engine part PMA or some other product line? And again, a very nice quarter. Well done.

This is Larry. I really don't think that there is much of an opportunity to close that gap because of the product mix and so forth. I think flight support -- on its own, flight support has a margin of 20% give or take the operating margin of...

19% is what I guided to, Larry.

Okay, 19%. Okay, 19%, 20% whatever it is. That's a very impressive margin. If you look at aerospace companies across the board, we are way, way, way up there. In the electronic technology, it's a different industry. It's a niche industry, smaller products and so forth. And in those areas, by the nature of the business, it's just higher margin. So the margin that I use actually is 25%. HEICO is a 25% margin company in operating margin, because I ignore amortization, which is a GAAP kind of a thing. And from an operating point of view, it's just -- it's nothing. So we ignore that. And I'm sure you do when you analyze HEICO's numbers. So all-in, we're 25%. One is 30%, one is 20%, so we are at 25%. But I really don't think those 2 are going -- I can't see that and I don't suggest you expect much higher. Maybe, I think we're doing extremely well compared to all the other aerospace companies. I think we're an outlier. The only one that has higher margin is TransDigm and they have a whole different business model, and they're a terrific company. But I think after TransDigm, HEICO was at the top of the list. So I think we're doing very well, and I wouldn't expect more, George.

Your next question comes from the line of Colin Ducharme from Sterling Capital.

Just a quick housekeeping question for Carlos. Because Eric and Victor already hit my earlier question on margins that I had. On -- just on cash for housekeeping, Carlos, could you just add a little bit more color on the year-over-year difference in the inventory line, the receivables line, AR, and then the CapEx line? I'm assuming inventories and CapEx are just kind of above guidance growth that you're experiencing, but that AR balance, just trying to understand that year-on-year?

Yes, sure. So you're right on CapEx and inventories. As I kind of mentioned earlier, we are -- our guys are investing into inventory in the third quarter to support some growth that we expect in Q4 and first half of '19. And so that doesn't bother me. Our days in inventory and our terms are pretty consistent, as we grow on our revenue. So that growth, while nobody likes to invest in working capital unless you get a quick return into a dollar. Our guys do quick return into a dollar. So I don't worry about that so much. On the receivable side, our DSOs have remained consistent around 49 days. So what's happening is our business is growing and our receivables are growing with it. There is a phenomena going on where you have some large companies that try and bang terms out to 90 days from what might typically be 30 days. We have seen some of that. That hasn't necessarily contributed to an extraordinary growth in our receivable balance relative to our sales growth. But that is one thing we're seeing in industry that it's been going on for over a year, 1.5 years, and it's getting a little more prevalent. So that's one aspect, I guess, in the receivable world that we're dealing with. I'd say, the quality of our receivables and the terms are fantastic. We have no worries about credit write-offs or anything like that. We are high quality, if you would, on the receivable side.

Okay, great, thanks. And then just a quick follow-up, I guess, for Larry, Victor and Eric. We're seeing the shift from the 2 big OEMs, certainly making an increased presence on the one hand from Boeing in the services space, and on the other hand from both of them in kind of the mid-tier business in regional jet space. It's a kind of a two-pronged question. Number one, the enlarged service presence from Boeing, is that affecting any of the market dynamics from demand at all? Is that affecting your business? And then on the other hand, I know you do business with all of the above, Bombardier and Embraer, but now that we've got some consolidation there, incremental risk or incremental opportunity, just trying to understand if that dynamic is changing? And how it might affect your business?

We do a tremendous amount of business with all of the OEMs. People sort of -- very often when they think of HEICO, the think of us with our original legacy business, which was the PMA business, but that is just one piece of HEICO today. I mean, HEICO is, frankly, so much larger in all these other areas. It's larger than our PMA business. So we have a very good relationship with the -- with all these different manufacturers. And as I alluded to earlier, the order books are so tremendous and the products that these guys are developing are so outstanding that they are going to do very, very well for the next many, many years. And they're going to make a lot of money, and they're going to really make their customers very happy. Having said that, the customers want choice. And while they can be very happy with a particular supplier, I mean, you may buy, as I said, as an example a particular car, you want service option. And I think the manufacturers are coming to grips with this. And frankly, the volumes are going up so much, and I think that the service opportunities for non-OE providers in certain spaces are also going to go up. And that is not going to be overall to the detriment to these manufacturers. They're going to continue to do extremely well. So I think there are certain customers, who are going to want, if you will, one-stop shopping. And the benefits that, that brings to them. And they're going to be other customers who want alternatives and options. And it's like what do you want for dinner tonight. French, Chinese or the Italian food. I mean, there is no one right answer. So HEICO endeavors to have very good relationships with all of the market participants. We're now, after seeing our stock this morning, we have north of $10 billion market cap. So we're a legitimate credible company. We work with all of the participants in the industry. And I think that, specifically, Boeing and Airbus, are going to do very well on their initiatives, and we are also going doing very well. And there are certain products that manufacturers are going to want to put through them, and there are the products that they're going to want to put through us. And there is no one right package. And I think HEICO can work with all of the market participants to make sure that there is a very good dynamic, growing, competitive, yet healthy industry. So I don't know if that answers both parts of your question, Colin?

Yes, that's helpful, I guess, and thank you very much, Eric. I guess, I was just curious on whether you see kind of any of the demand dynamic changing and my takeaway is it doesn't sound like it, as you guys are still able to kind of forge ahead with your existing models. So thank you.

And your takeaway is 100% correct. That's how I feel and think.

(Operator Instructions) There are no further questions at the moment. Presenters, please continue.

This is Larry Mendelson, again. We want to thank you for your interest in HEICO. We thank you for participating, asking questions and digging into it. We are available, as you know, Eric, Victor, me, Carlos. If you have further questions, please give us a call, you know where to reach us. And otherwise, we wish you a very good Labor Day weekend. Drive safely if you're traveling, and we look forward to speaking to you at the next quarterly conference which will be when Carlos?

In December.

In December. So here we are. Again, thank you all and have a wonderful weekend.

Thank you for joining. This concludes today's conference call. You may now disconnect.