HEICO Corp (HEI) 2019 Q1 法說會逐字稿

Good morning. My name is Felicia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation Fiscal Year 2019 First Quarter Earnings Results. (Operator Instructions) Please note that today's call is being recorded.

And certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results 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 from existing and new competitors, which could cause -- reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product developmental costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; 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 costs and revenues; and 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 of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K.

We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by the applicable law.

Thank you, and I'll turn the call over to Laurans Mendelson, and you may begin.

Thank you very much, and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO First Quarter Fiscal '19 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and 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.

Before reviewing our operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members, who, again, were responsible for our excellent results. I'm truly proud of this dedicated loyal group and they continue to produce the highest quality products and services for our customers, while maintaining our unique entrepreneurial culture and delivering outstanding returns to our shareholders.

I now take a few minutes to summarize the highlights of our first quarter results.

Consolidated net income increased 22% to a record $79.3 million or $0.58 per diluted share in the first quarter of fiscal '19 and that was up from $65.2 million or $0.48 per diluted share in the first quarter of fiscal '18.

Consolidated operating income increased 23% to $97.9 million in the first quarter of fiscal '19 and that was up from $79.6 million in the first quarter of fiscal '18. Our consolidated operating margin improved to 21% in the first quarter of fiscal '19, and again that was up from 19.7% in the first quarter of fiscal '18.

Our consolidated net sales increased 15% to $466.1 million in the first quarter of fiscal '19 and that was up from $404.4 million in the first quarter of fiscal '18.

Our ETG group net sales and operating income in the first quarter of fiscal '19 are up 18% and 19%, respectively, over the first quarter of fiscal '18. Those increases principally reflect 12% organic growth as well as the impact of our profitable fiscal '19 and '18 acquisitions.

Flight Support net sales and operating income in the first quarter of fiscal '19 are up 13% and 15%, respectively, over the first quarter of fiscal '18. The increases principally reflect 13% organic growth.

Total debt to shareholders' equity was 38% as of January 31, '19 and that compared to 35.4% as of October 31, '18. Our net debt, which is total debt less cash and cash equivalents, was $550.7 million as of January 31, '19 to shareholders' equity ratio was 34.4% as of January 31, '19 and that compared to 31.5% as of October 31, '18.

Our net debt to EBITDA ratio was 1.17x as of January 31, '19, that compared to 1.04x as of October 31, '18. We have no significant debt maturities until fiscal '23, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions, which will accelerate growth and maximize shareholder returns.

In January '19, we paid an increased regular semiannual cash dividend of $0.07 per share and this represented our 81st consecutive semiannual cash dividend and a 17% increase over the prior semiannual per share amount and it represented a cumulative increase of 25% since January 2018.

In November '18, we acquired both Specialty Silicone Products and Apex Microtechnology. Both acquisitions have been successfully integrated into our ETG group.

In February '19, we acquired 85% of Solid Sealing Technology, Inc., which we sometimes refer to as SST. They design and manufacture high-reliability ceramic-to-metal feedthroughs and connectors for demanding environments within the defense, industrial, life science, medical research, semiconductor and other markets. SST is part of our ETG group, and we expect the acquisition to be accretive to our earnings within the first 12 months following the closure.

Lastly, the Israeli nonprofit company, SpaceIL, in cooperation with NASA launched the Beresheet Moon Lander. That lander is an exploratory robotic spacecraft, which is scheduled to land on the lunar surface in April 2019. Several HEICO subsidiaries supplied mission-critical parts on the lander and the launch vehicle. We congratulate the entire SpaceIL and NASA teams and could not be more proud of our subsidiaries that helped make that mission possible. Again, we point that out to try to explain to shareholders the extent of our technical reach and capabilities as a high-tech company.

The Japanese Aerospace Exploration Agency, JAXA, recently landed the Hayabusa2 space probe on the Ryugu asteroid. The spacecraft is collecting physical material from the asteroid and will return the material samples to earth in 2020. HEICO subsidiaries provided mission-critical components on the space probe, which has been exploring space since 2014. We are very pleased and proud of the quality of the components produced by the HEICO subsidiaries for JAXA, which has helped the Hayabusa2 space probe thrive in space for the past 5 years.

Now 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 13% to $287.2 million in the first quarter of fiscal '19, up from $254.7 million in the first quarter of fiscal '18. This increase reflects our outstanding organic growth of 13%. The Flight Support Group's organic growth is mainly attributable to increased demand and new product offerings within our aftermarket replacement parts and specialty products product line.

The Flight Support Group's operating income increased 15% to $52.9 million in the first quarter of fiscal '19, up from $45.9 million in the first quarter of fiscal '18. The increase reflects the previously mentioned organic net sales growth of 13% as well as an improved gross profit margin, mainly attributable to a more favorable product mix within our specialty products product line.

The Flight Support Group's operating margin increased to 18.4% in the first quarter of fiscal '19, up from 18.0% in the first quarter of fiscal '18. The increase principally reflects the previously mentioned improved gross profit margin.

With respect to the remainder of fiscal '19, we now estimate full year net sales growth of approximately 7% to 9% over the prior year, up from the prior estimate of 7% to 8%, and the full year Flight Support Group operating margin to approximate 19.0%. These estimates exclude 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 18% to $184.4 million in the first quarter of fiscal '19, up from $155.7 million in the first quarter of fiscal '18. The increase reflects organic growth of 12% and the impact from our profitable fiscal '19 and '18 acquisitions. The organic growth is mainly attributable to increased demand for certain defense, aerospace and space products. The Electronic Technologies Group's operating income increased 19% to $51.6 million in the first quarter of fiscal '19, up from $43.2 million in the first quarter of fiscal '18. The increase principally reflects the previously mentioned net sales growth.

The Electronic Technologies Group's operating margin improved to 28% in the first quarter of fiscal '19, up from 27.8% in the first quarter of fiscal '18.

With respect to the remainder of fiscal '19, we now estimate full year net sales growth of approximately 11% to 13% over the prior year, up from the previous estimate of 10% to 11%, and we continue to anticipate the full year Electronic Technologies Group's operating margin to approximate 28% to 29%. We also now estimate the Electronic Technologies Group's organic net sales growth rate to be in the mid-single digits. These estimates, of course, exclude additional acquired businesses, if any.

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

Thank you, Victor. Moving on to earnings per share. Our consolidated net income per diluted share increased 21% to $0.58 in the first quarter of fiscal '19 and that was up from $0.48 in the first quarter of fiscal '18. The increase in diluted earnings per share reflects strong operating performance of both Flight Support and ETG. Fiscal '18 diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock split distributed in June 2018.

Depreciation and amortization expense totaled $20 million in the first quarter of fiscal '19 and that was up from $19 million first quarter of fiscal '18. The increase in the first quarter of '19 principally reflects incremental impact of fiscal '19 and '18 acquisitions.

R&D expense increased 20% to $15.2 million in the first quarter of fiscal '19 and that was up from $12.7 million in the first quarter of fiscal '18. Significant ongoing new product development efforts are continuing at both Flight Support and ETG as we continue to invest approximately 3% of each sales dollar in new product development.

SG&A expenses consolidated increased to $84.3 million in the first quarter of fiscal '19 and that was up from $75.2 million in the first quarter of fiscal '18. The increase in the first quarter of fiscal '19 principally reflects changes in the estimated fair value of accrued contingent consideration associated with prior year acquisitions, the impact of our fiscal '18 and '19 acquisitions as well as higher performance-based compensation expense.

Consolidated SG&A expense as a percentage of net sales decreased to 18.1% in the first quarter of fiscal '19 and that was down from 18.6% in the first quarter of fiscal '18. The decrease in consolidated SG&A expense as a percentage of net sales principally reflects efficiencies realized from net sales growth, partially offset by previously mentioned changes in the estimated fair value of accrued contingent consideration.

Interest expense increased to $5.5 million in the first quarter of fiscal '19, up from $4.7 million in the first quarter of fiscal '18. The increase principally due to higher interest rates, partially offset by a lower weighted average balance outstanding under our revolving credit facilities.

Other income and expense in the first quarter of both years was not significant.

Income taxes. Our effective tax rate in the first quarter of fiscal '19 decreased to 4.5% from 4.7% in the first quarter of fiscal '18. Our net income in the first quarters of fiscal '19 and '18 were both favorably impacted $0.09 per diluted share as a result of discrete tax benefits.

In the first quarter of fiscal '19, the benefit was $13 million, net of noncontrolling interests, from stock option exercise recognized in the first quarter of fiscal '19 compared to the first quarter of fiscal '18.

In the first quarter of 2018, we recognized an $11.9 million provisional discrete tax benefit or $0.09 per diluted share, primarily due to the remeasurement of our net deferred tax liabilities as a result of the enactment of the Tax Cuts and Jobs Act.

Net income attributable to noncontrolling interest was $8.7 million in the first quarter of fiscal '19 and that was up from $6.5 million in the first quarter of fiscal '18. The increase mainly reflects the previously mentioned larger tax benefit from stock option exercises as well as improved operating results of certain subsidiaries of the Flight Support Group and Electronic Technologies Groups in which noncontrolling interests are held.

For the full fiscal year '19, we continue to estimate a combined effective tax rate and noncontrolling interest rate of approximately 26% to 28%.

Now moving on to the balance sheet and cash flow. As you know, our financial position, liquidity and forecasted cash flow remain very strong. Cash flow provided by operating activities was $49.6 million in the first quarter of fiscal '19. We continue to forecast strong cash flows from operations for the balance of fiscal '19.

Our strong working capital ratio improved to 3.5 as of January 31, '19 compared to 2.6 on October 31, '18.

Our DSO, days sales outstanding, of receivables, improved to 47 days as of January 31, '19, that compared to 48 days of January 31, '18. We continue to closely monitor all receivable collection efforts in order to limit credit exposure as shareholders know that we have experienced very, very low accounts receivable losses in the past. We expect the same in the future. No one customer accounted for more than 10% of net sales. Top 5 customers represented approximately 20% and 18% of consolidated net sales in the first quarter of fiscal '19 and '18, respectively.

Our inventory turnover rate improved to 132 days as of January 31, '19 and that compared to 134 days as of January 31, '18.

HEICO Corporation maintains substantial financial liquidity, which allows us to execute our robust acquisition strategy, while aggressively growing our core businesses. We currently have a low level of debt relative to our cash flows, and we believe we are uniquely positioned to swiftly act upon acquisition opportunities that expand our global capabilities and cement our leadership position in the markets we choose to serve.

Looking out to the future. As we look ahead in the remainder of fiscal '19, we continue to anticipate net sales growth within the Flight Support Group's commercial aviation and defense product lines. We also anticipate growth within the Electronic Technologies Group, principally driven by demand for the majority of our products.

During fiscal '19, we plan to continue our commitments to developing new products and services, further market penetration and an aggressive acquisition strategy, while at the same time maintaining our financial strength and flexibility. We are not a financially challenged company.

Based on our current economic visibility, we are increasing our estimated consolidated fiscal '19 year-over-year growth in net sales to 9% to 11% and a net income to be 11% to 13%. These are both up from prior growth estimates in net sales of 8% to 10% and a net income of approximately 10%. We continue to anticipate consolidated operating margin to approximate 21% to 21.5% and depreciation and amortization expense to approximate $84 million.

Furthermore, we now anticipate cash flow from operations to approximate $370 million and that was up from our prior estimate of $360 million. We expect CapEx to approximate $43 million and that's down slightly from the prior estimate of $48 million, and of course, these estimates exclude additional acquired businesses, if any.

In closing, we will continue to focus on our immediate and long-term growth strategies with a laser focus on generating strong cash flow, growing our core businesses and acquiring profitable businesses at fair prices. That is the extent of my prepared remarks.

And I would like to open the floor for questions.

(Operator Instructions) Your first question comes from the line of Krishna Sinha of Vertical Research.

Couple of questions for Eric and a couple of questions for Victor. First for Eric, maybe, the industry seems to be deal with some tailwinds from lack of aircraft retirements and even part aircraft coming out of storage? Can you maybe comment on whether you are seeing those tailwinds impact your aerospace business and maybe whether you expect that trend to continue and to help some with the organic growth in the medium term?

Yes, I'd be happy to answer that. Actually, in sales reviews that I had with our sales folks this week, we probably have been more impacted by retirements as compared to aircraft remaining in-service. So the answer is, I'm not aware of any -- in particular, any aircraft that have remained in service beyond what was anticipated a while ago that have increased our sales and we're being a little conservative, I would say, going forward, and our forward guidance assumes that we're not going to continue to run at this breakneck 13% organic growth. But I don't believe that this 13% has been significantly held by extended life when we look at -- look across our customer base.

Okay. That's great. And then, obviously, you recently saw this commission, European Commission arbitration on the engine OEMs and I know you commented on that and you don't expect necessarily the engine OEMs to start playing nice immediately. But can you just give us a sense of what would the leading indicator be that would show us that engine OEM market is starting to open up to you guys a little bit? I mean, is it going to come straight from your results? Are we going to start seeing it from MRO shops like Lufthansa and some of these other places? Or are we going to start seeing some penetration there? And also, is there possibility that you can penetrate into some of the older engine platforms that are perhaps not subject to some of this long-term agreements that the engine OEMs are kind of locking people upon?

Krishna, I think that's a very good question. And when we look at what the opportunity is, it's important to remember that the resolution between IATA and the other engine manufacturer, that only takes effect, I believe, tomorrow. However, the resolution is very clear in what's expected in both parties. And I can tell you that we've had a lot of very positive discussion with a number of our customers. Our customers have certainly taken note of this, and I think are hopeful. And I'm hopeful that it will end up inuring to really everybody's benefit. When you look at the PMA potential out there for the engines, this is not going to significantly impact the OEMs. The OEMs will continue to have a majority of the business, and I think are going to do extremely well. We refer to it more as certain nibbling around the edges and the -- their customers want competition, and I think that we're providing it in a way that's meaningful for us, but not that significant for the OEMs and it really won't hurt their business model. So to answer your question, I think, it first starts with discussions and then we need to see where it goes from there, but the airlines are very aware of it and they're very intent upon using it to their benefit. I know that we're also having discussions with airlines about how they view these -- the changes in the marketplace and how that could open up certain other markets. But I think we will end up seeing it in our results over time. But it's something that that's going to take a while. We certainly don't have anything modeled in for 2019, and we don't have our budgets yet for 2020. But I think it's more of a long-term situation. The OEMs are very busy with the new equipment that's coming out, they've got their hands full with this. If they lose a very small percentage due to competition, I think, that's a heck of lot better for them than the airlines, their customers getting very upset at them and going after them in other ways that can be far more damaging. So I would say that we are hopeful and yes, we hopefully will start to see it, if not this year, but down the road in our results.

That's great. And then maybe just a couple of follow-ups for Victor. On ETG, another strong quarter for organic growth, and I believe a few quarters ago, you had mentioned that sometimes you get these big organic growth quarters due to a bit of pull forward in a high-demand environment. Is that what we're seeing again this quarter? And specifically to, you called out aerospace, defense and space as being the 3 main contributors there. I guess, that's understandable given how those end markets are trending, but the other industrial segment, which is also a big piece of your sales mix in ETG. What's the demand in that part of the end market? Is that helping? Can you just give us a sense of what's happening in that end-market over the last kind of 12 months?

Yes, Krishna, those are good questions. The answer is, there is no pull forward, nothing added the unusual out of the ordinary in the quarter. And in terms of the other markets that we serve, they are healthy. I don't think there is anything particularly notable out of them. They weren't as high growth organically as the other markets that you mentioned that we mentioned, but they were certainly very good and we're very happy with them. And we expect them -- right now, based on the orders we have, we expect to see more of the same. Now in terms of the organic growth over the rest of the year and the growth levels over the rest of the year, the guidance that we just gave is, of course, what we have for you.

Your next question comes from the line of Robert Spingarn of Crédit Suisse.

I wanted to stick with some of this organic growth topic and maybe follow up on some of Krishna's questions, and this applies to both segments. But you do seem to be outpacing end market growth or at least average end market growth in commercial aero, et cetera. Other companies are putting up some strong aftermarket too. But I'm just wondering, how do we think about this growth? Is there a benefit from new product introduction. I think you mentioned that earlier, Larry? Or is there a share gain? Are you taking some share in addition to just the volume growth from normal expansion in the markets? And that really is both for Victor and for Eric in both of your businesses?

Yes. From 30,000 feet, I think it's all of the above. It's a little bit of each, and I think -- look, they are my sons, but I think Eric and Victor are doing an outstanding job. If you could see the amount of time and travel that they spend all over the country in the world, staying on top of these businesses, they're really doing an extraordinary job. But let them comment further, but I think it's all of the above. Eric?

Rob, thanks. I'll start out first with regard to Flight Support Group. The new product introductions are very strong. We're doing very well. The pipeline is very full, outstanding customer interest, getting the products sold. I think we're doing very well. And then as far as increased penetration, yes, I think that, that continues, and we anticipate that to continue to build. We actually over -- I would say, over the last couple of years, we had been hit with a fair amount of retirement and we see that a little bit down the road, perhaps, starting to slow a little bit for us. I think, whereas, some of the other companies who have reported, they really benefit significantly, as you know, by the initial new part stocking of new equipment that's out there. So...

The initial provisioning?

The initial provisioning, yes. And whereas HEICO does not have that tailwind. So ours is really -- our 13% organic growth is just that. It's just going out blocking and tackling, finding one new part at a time, getting it sold. I think the value proposition is very strong. We're very well respected in the marketplace. And frankly, all of the -- all of the signs are quite optimistic for us.

Before Victor goes, Eric, a question for you. As the OEMs start to get more involved in the aftermarket, there is some fear that prices will inflate, they will push pricing up for aftermarket parts with the traditional suppliers. Is that beginning to show some opportunity for you? Are you starting to get some customers who come in and express some concern about more price inflation than they've seen in the past and therefore greater desire for PMA parts?

Definitely. We hear a lot of concern out there from our customers about what the OEs continue to do. And when OEs tend to enter the aftermarket, they're not -- they don’t tend to be focused on reducing prices for their customers. They're really intended on getting prices higher. So I think that, that bodes quite well for us. One of the questions that we've been getting a fair amount in investor conferences recently is if some OEMs start entering the aftermarket and competing with other subcontractor OEMs, what really happens? And our read of that is that prices -- our initial belief is that prices are going to end up going up to the end customer because as manufacturers want to bid and get on new equipment and if they, in fact, have to give a piece of their aftermarket revenues to somebody else, we don't anticipate them to just sit idly by. I think the airlines are going to paying the bill. Now having said that, I don't want to make it sounds like what we do is easy because it's anything but. And I think, while our opportunity is huge and tremendous, the challenges are very daunting. We compete against very large companies, they are very aware when we come out with the product, they don't sit idly by, they take action, they talk to the customers and say, oh, you know, you shouldn't buy these guys parts, it's no good and then occasionally they respond in -- with price and it's very hard to get the airlines focus to go do this. Now having said that, I think HEICO was really in a very strong position based on our 11,000 PMAs because there is really -- there is not a lot of new stuff out there. We're doing a lot of different nomenclature in different product. So I think we are in a very good position, but I got to say it is very hard. I mean, this is hand-to-hand combat every day, nothing comes to us easily. And it's -- but fortunately, I think we've got this critical mass and the combination with repair and distribution where we're able to put up good numbers.

And then, Victor, at ETG, sort of similar question, but that business is different clearly. Is it volume, the end markets or is it the new product introductions? And is there an opportunity there? Or you are taking share from other folks to make similar products?

Bob, this is Victor. I think it's really a combination of the first 2. I think as well there is some opportunity to take market share and our companies are doing that. I would say though overall it is not a market share taking story and -- so it's really a combination of new product introductions, getting on programs from historical periods kind of the good work, the result of the good work that the companies have done historically and growth in the markets themselves and growth of the customers' need as well as, to a lesser extent, the taking of some market share. And I would -- as we go forward, by the way, Rob, I would anticipate that, that should probably be more or less what the mix looks like at least over the next year or so.

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

Victor, I have 2 questions for you, if that's okay? First, I guess, on the organic growth in the quarter up 13%, quite strong, and you said that order rates were also keeping up. I guess, what surprised you most in the quarter? And maybe where are you forecasting a bit of conservatism for the remainder of the year?

Yes. I don't know if I'd call it conservatism for the remainder of the year, I just, as you know, believe that when we look at this business over time that it grows organically in the mid-single digits to even low single digits growth rate. So it's just my sense that it reverts to those levels and kind of across the board that we would expect to see that. I think this year defense probably and commercial aviation will probably be the strongest parts of the business and will have the highest organic growth of our portfolio. But the other parts of the business certainly are not doing poorly and we're pretty happy with them. But again, I always guide people back to looking to the mid-single digits. And if we do better, that's great. And we're certainly shooting to do that and trying and we've got a lot of great people and a lot of great companies working on it.

Great. And then, secondly, just on AeroAntenna and Robertson, they seem to have worked out pretty well for you. Maybe if you could just give us an update on where you are on those businesses, how they've grown over the last 2 or 3 years since you've acquired them, just an update on that if that's possible.

Yes. They're both doing very well. We are extremely happy with both of those companies. We have wonderful teams there, wonderful people. And again, that's an example of continuing to innovate new products in the case of Robertson, not only on the defense product but on commercial product, which has been very successful. And when we brought the business, although they were working on it and they told us that they thought they would be successful with it. We actually in our own internal modeling put that at 0, and so that has been a nice upside for us. AeroAntenna has been successful on a number of both commercial and military products and winning new programs in addition to very strong growth in the existing programs there as well as, I would say, flawless or near flawless execution on meeting customer demand and doing so on responsive turn times and at very fair prices which, by the way, is also very important to us to deliver very fair value to our customers. It's always a competitive market out there and we know we have to remain competitive and keep our pencils sharp.

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

Eric, I just wanted to start off with you and again starting to keep pushing on the growth question, but I wanted to get at it from maybe a different angle. You obviously didn't mention repair and overhaul when you highlighted specifically replacement parts and specialty products. Was there much of a difference in the organic growth in the quarter between sort of the 3 segments within FSG or anything that stood out as particularly strong within those?

Yes. Ken, the repair group actually had -- went backwards a little bit in terms of revenue for the quarter, but that's not unusual. The repair business can be very lumpy, and it can be very seasonal. And November and December are short months. Historically, they're the low months, and so it's not something, which concerns us. And then at other times of the year repair and overhaul way outperforms. So the answer is, I think we are doing extremely well in repair and overhaul as well as within parts and specialty products. And I think that at the -- by the time the year is done, they're all to end up in similar area.

Okay. Okay, that's helpful. And then, as I think about that, I know that a lot of the material volume that goes into the repair and overhaul business you have is your own parts, or a lot of it. And I know typically your growth is virtually all volume versus price. But I can imagine you do certainly get some price when I think about the distribution business. Is it fair to say that this quarter price was considering volume in the repair and overhaul was down, price was maybe a little bit better of a tailwind that has been in prior quarters. But in the broader context, I know it's all -- it's the majority volume, but was price maybe a little bit more of a factor for you in the growth this quarter?

No. Actually, the 13% was pretty much all volume. And when you think about it compared to other people in the market, 13% or, say, 12% or 13% is probably volume, that's tremendous. Price is still -- we are very conservative on that. We want to make sure that we deliver very good value. So it was really just the volume increase.

Okay. That's helpful. Very good. And then, if I could, Victor, just one for you. We're all expecting a defense budget here in the next week or 2. As you look at the fiscal '20 budget, are there any particular areas you are particularly focused on or any particular programs that I know you've got a very broad-based business, but any particular programs that are needle movers or particularly relevant for you as you think about the fiscal '20 budget?

Ken, this is Victor. That's also a good question. At this point, no. We'll see when it comes out, but like you said that broad-based that we have is part of our strategy. So I think as a rule of thumb, there is nothing in particular that I'm aware of which will be important to us, but that could change.

Okay. Great. And just finally one for Carlos. You obviously brought down the CapEx spend, it looks like $5 million for the full year. Anything in particular there Carlos? Is there any particular areas where you may be slowing investment? Or is that a timing? Or how should we think about that?

No, we're not spilling investment, Ken. Thanks for the question, by the way. We just let -- we had a spend in Q1 with a little bit lighter than what we had anticipated. And frankly, it's not from the lack of buying equipment in our -- or subjugating what they need, it's just over approval. And as I've talked to you in the past, we tend to see our subsidiaries buying a lot of used equipment when they can and they tend to under spend their budget. So taking that into consideration and looking at what was spent relative to budget in Q1, I felt like, for the full year, we're probably going to be a little lighter than our initial gas, if you would. So no big changes. We're not starting anybody down in this field with their customers. That's we continue to buy everything they need and this is just a refinement, if you would, based on the Q1 activity.

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

Most of my questions were answered. Just a couple of follow-ups on Robert's question on the new product introductions in FSG. Eric, has the -- the amount of new products, has that changed much from sort of that 500 new ones a year and has the mix or anything like that changed at all really with those towards certain grouping or...

No. I wouldn't say that anything has changed. The numbers are very consistent with where they've been in the past. We continue to broaden the types of products we do. But I would say, it's all very consistent with what we've done historically.

Okay. And the amount, it's still about the same on annual basis, right?

Correct.

Yes, okay. Just on the CapEx, I know you lowered numbers a little bit, still some pretty decent amount of spending and it was up last year to sort of relative to the -- had been running sort of, I think, a couple of prior years around $30 million or even lower than that before that? Maybe just give us a little color on sort of what's some of this actual growth capital spending? Or what are some of the bigger projects out there that you spend...

This is Carlos Macau. There is no -- if you think about what we've done, gosh, 6 acquisitions over the past 12 months. So when we take on these businesses, we do have new CapEx requirements, which is going to be incrementally more than what we had last year. I don't think there is anything that you could point to in our pipeline of CapEx budgeting, roughly half of the budget is maintenance, half is growth, which has been a pretty consistent pattern for the past several years. So I don't see anything unusual or large and the budget is kind of the normal stuff.

Okay. Carlos, well, I got you. On the -- just on the -- I know this will be in the queue, some more too, but margins in the 2 respective segments were, I think, sort of flattish year-over-year on a reported basis, despite the material revenue growth and I imagine a lot of that is due to just the core amortization intangibles. You just happen to have a rough ballpark of how much that impacted the quarter?

For amortization?

Yes. Exactly.

Yes, I do. We probably had incrementally in amortization about $0.5 million more in expense in the quarter than last year.

All right. Okay. And then just last question, obviously, really rapid growth in the quarter, not an easy comp either. And I know your guidance, obviously, incorporates some slowdown. But just on a more high-level basis, are you guys seeing any signs of the slowdown whether it'd be lead times for -- to suppliers or from customer conversations or anything?

Look, I'll let Eric and Victor address that for their segments from a guidance perspective. As Eric mentioned earlier, I don't think we're going to -- we're not planning on continuing a breakneck pace of 13% organic growth. But we do feel a lot of optimism at the subsidiary level, which is our guidance, which lends to how we report guidance to you guys. So it feels a lot like last year in that regard. The business environment is very good. Our subs are optimistic. Our end markets are very strong and so we're cautiously optimistic for the rest of year that it's going to be very similar to prior year as far as growth goes. I'll let Eric and Victor address their segments.

Within the Flight Support, I can tell you that material supply is very tight. There is not much excess capacity out there. And I would say, it's, in general, tougher to get product than it has been in the past. We continue to be able to meet our commitments that we are doing fine. But yes definitely -- the market has definitely tightened up. And with the focus, in particular, on the new narrow body engines, I think, a lot of the suppliers of order product are sort of less focused in that area, and of course, that's where our focus is, and I'd say that's probably another reason why we are hopeful for our business in the future because we're starting to focusing in an area that is a bit of a pain in the neck for our competitors. And I think we're able to serve the market and in many cases, they are okay with that.

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

This is Asher Carey on the line of Peter. Great results. Victor, maybe if I could just touch on the space end market. A lot's been discussed and you're clearly seeing strength and seems to be a lot of investment going on. If you would, could you talk about some of the puts and takes, some of the changes from the weaknesses you've talked about in the past and the visibility you're seeing in the commercial and defense sectors, GEO sat. Curious, if you've made any shifts to your mix exposure, just how should we think about that area going forward?

Yes. I mean, look, space was for good for us in the quarter. We had organic growth in commercial space in the quarter. And I think, as I said on the last conference call, commercial space has remained overall pretty good for us, but we -- I guess, we had to call out what was the weakest link, if you will, arithmetically and it was space and within space, it was specifically the GEO sat market. And that was last year. I don't think the GEO sat market has recovered. We are not projecting a recovery in the GEO sat market. But the rest of our space business is doing well, both commercially and in defense. We expect to continue to do well there. We like those markets, but we're watching to see how things settle out in this new world, if you will, with new space and right now, our companies are addressing both markets as appropriate. They're doing it very carefully, and I think they're doing it very sensibly.

Your next question comes from the line of Louis Raffetto of UBS.

So just back, I think, to Larry's question about margin. Just want to make sure and I know Larry sort of covered this. But was the headwind to segment margins about the $2 million from accrued increasing accrued contingent?

Louis, this is Carlos. There was a drag on the margins for change in accrued. We had some outperformed subsidiary that is eligible for an accrued earn-out this year. And so we have to adjust that this quarter. I would say though that was overshadowed by a bigger benefit relative to our leverage on fixed SG&A cost. As we're growing revenues at this pace, we're not expanding our overhead and our SG&A spend, so we are getting some leverage there so -- well, that was a little bit of a headwind for the accrued contingent consideration. It was more than offset by that leverage we're picking up on our fixed costs.

Oh, yes. No, no, definitely. I just want to make sure that -- I mean, the number on the cash flow statement was about $1.9 million, so I wasn't sure if that was sort of the equivalent of the headwind on the income statement basically?

Yes. That's a little higher than what hit the P&L this quarter. I think the change year-over-year was a little bit heavier. I think we had about $1.2 million in adjustment for all of our accrued contingent considerations. Some of that discounting related to all of our longer-term earn-outs, but bigger one was due to performance in the subs being a little better than we anticipated.

A good thing in a long run, right?

Absolutely. Absolutely.

And then, Eric, I guess, for you, so it's nice to see specialty products sort of back on the right track following couple of years of different things? Anything you can give us about what's in specialty products that's doing particularly better, I guess, or is it just lack of headwind, I guess?

Yes. The headwind that we had in specialty products was number of years ago and that was really from industrial products where we moved out of that market now. I would say, our strength is in the -- all of the aerospace and defense stuff that we're doing, both commercial and military as well as some space product there. It's very strong, it's doing very well and I expect it to continue to do very nicely.

All right. Sounds good. And then just sort of sticking with that for a second. Given some of the supply chain initiatives we saw in commercial space last year and you guys don't play on the OEM side for the most parts. Were you approached by anybody about given your ability and your scale to step in at all?

Yes, I mean, we're approached all the time from customers to take on more work. And I think that that's one of the things that's reflected in the 13% organic growth. But yes, our specialty products business does do work with OEM. And I think we've got a very good position with those OEMs, where we treat them very well, we support them extremely well and we're picking up additional product. So I would anticipate that would continue.

All right. And Larry, I know you sort of probably covered in your initial remarks, but just a commentary on the M&A environment?

I think the M&A environment is what I would call normal. We have a number of prospects in the works. I can't predict whether we will close because you never know until you get to the closing table. But I would assume that in the near future, we might be able to close something. But I never know until it's closed. So -- but I would say, it's normal. I think, in general, prices are high. We are very disciplined that we're not going to play in the 14x EBITDA range. We watch very carefully. I think one of the reasons that we have been successful is our deployment of investment capital, and I think we've done it wisely at prices that permit us to have accretive acquisitions. So each acquisition that we make pays for itself. And we're going to continuing in that process. But I think the outlook for M&A is pretty standard and it's fine.

Your next question comes from the line of George Godfrey of CL King.

Most of my questions are answered, but I'll add my congratulations on another great quarter. One question for Eric. On the opportunity engines in the European Union, is there -- you said you would nibble around the edges, is that both literally and figuratively meaning that parts of the engine you won't touch or would you look at the entire engine opportunity? And then, is the margin profile providing those parts versus other components in the plane higher or lower? And I'll leave it there.

George, great questions. I think the margin opportunity in terms of percentage is fairly similar. Our expertise is in a certain area and I would anticipate we continue to focus in that area. In general, we do expendables, parts which are replaced typically at every shop visit or at most shop visits. And then we also do a certain repairables as well. So I think we're going to continue to focus in those areas. We don't do life-limited parts. So -- and that really is the bread-and-butter for the original equipment manufacturers. When I'm speaking about nibbling around the edges, I'm talking about doing all sorts of product. There were many products that are sort of the pain in the neck for the OEs to mess around within support, where you've got a lot of different part numbers and you've got support and it's sort of erratic or inconsistent use by the customer. And that's really the step that we focused on. So what I meant was, the OEs are going to continue to focus on their bread-and-butter, they're going to continue to make a majority of the profit associated with those. I think it's enough to satiate HEICO and to -- where we can do very well and our customers can get meaningful savings. But the OEMs will continue to generate very good margins and we're not a threat to their business model whatsoever. So I think that's sort of the world in which we are looking. Of course, they want to try to maintain everything, I get that. But that's not always practical. And if they try to go down that road and they maintain everything, then you get into a situation where the customer really gets upset because there is no outlet. At least by having HEICO in there, we're able to generate some savings, generate some competition, the airline is happy, it doesn't significantly impact our competitor, we're happy. Pretty much everybody wins. So that's sort of what I meant by that comment.

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

This is George (inaudible) on for Mike. I guess, a lot of the questions have been answered. But I have one that, I guess, is a near term -- just question that has come from investors. And that revolves around the aircraft lease portfolio of General Electric. Several of our contacts and industry has kind of highlighted the fact that GE was very protective of the parts of business. And now that you have the potential that spinning off into private equity hands, how do you think about that opportunity?

We think it's really only upside for us. I think you're right that because they were in the leasing business and in the engine business. They were really the ones who drove this. And I think a lot of the resolution with the European Commission addresses these points. A lot of other leasing companies have viewed it as a competitive advantage to permit the use of alternative material. And we've got many examples where the world's biggest lessors do permit the use of HEICO product. So I think that this is something that we'll continue. I don't know whether private equity or somebody else is going to buy that business. I think that as long as it's done on a arm's length basis, there would be very good opportunity. There really is no -- in our opinion, there is no reason why a lessor would restrict. This is something that was created by one lessor for obvious reasons. And we see the tide moving in the other direction, but again, it will take some time to be able to do that. And it is important that the airlines negotiate with their lessors to get relief to be able to use alternative parts, so they're not put at a competitive disadvantage. Certainly, if a leasing company does not want to permit the use of alternative parts then they need to have a materially lower lease rate to offset the damage that they're causing to their lessees and most lessors don't want to do that. So we think the opportunity would be very good for us.

Okay. Excellent. I guess, my last question just revolves around additive manufacturing. I mean, we talked about how the pricing environment, especially for OEs, coming into the aftermarket is not necessarily beneficial to the end item user, but it seems like that there is -- from the OE perspective, there is a very heavy push in the additive manufacturing, lightweighting of parts and multilevel printing. That seems to be -- seems to lead to a conclusion that R&D will have to go up for any of the aftermarket providers. Can you provide any color to that? And that's my last question.

Sure. We -- look, a couple of things. We've been using 3D printing for, I don’t know, 25 years. So we are extremely familiar with the technology. And we use it largely in tooling and in making prototypes. You're right that recently over the last couple of years, some of the manufacturers have been using it in newly certified applications. We believe that when it comes time that we will definitely have the technology to be able to produce an interchangeable part. We think that it's fairly limited in terms of the market product that we provide. I don't think a lot of what we make is going to be 3D printers. There is a very famous example of fuel nozzle part, which we actually don't make, but -- and that makes sense to eliminate the number of detailed parts in 3D printing. And I think there'll be a number of examples, but I think when it comes time for HEICO to enter that market, we will be completely prepared and I do not anticipate a large capital expenditure to be able to do this. There are a lots of companies out there offering 3D printing services. As some of those companies have been brought, they've been more for trading, then they have been for actually doing business. We have not purchased any of them because we didn't think it was wise. I think that's probably proven to be the correct, or it's definitely proven to be the correct position to take. But the capacity exists then we will be there. And then, again, to be clear, we do not believe that airlines will be printing in significant quantities or even material quantities replacement parts. There may be a couple of one-off things here or there, but this is not going to be a large opportunity, certainly not for the next many decades. So we're watching it, and we're right on top of it and I don't anticipate any disruption for us.

Your final question comes from the line of Josh Sullivan of Seaport Global.

We see a push by the OEMs and others to get deeper into real-time analytics. Just interested to hear if any of those business models are matriculating into HEICO outlook in anyway either internally or externally?

We are familiar very much with the analytics and most of what we provide would not be impacted by them. So we think that our business is providing products and services sort of where we want to be. I don't want to rule out doing anything. If we find a business that's good in a particular area, again, we're very familiar with those models, but if we find something that make sense where we can get decent returns and provide good value to our customers, we'll definitely go out and do it and analytics would definitely fit that category.

Okay. Got it. And then, I guess, it's just fitting all end on a PMA question here, but I understand the conservatism and I think investors appreciate that. But again just looking at any cracks in the dam, there are some reports that maybe Latin America Airlines are more open into PMA. Just wanted if you're seeing any specific regional areas look to take-up PMA before any others?

Right. We -- of course, since our competitors are on the phone call, we were a little sensitive about providing specifics in terms of customers, geography, products. But I can tell you that we're doing very well globally. We are all around the world. The value proposition is the same. Once we mature, they become very expensive to operate, that's really our sweet spot. And we continue to be extremely active, and we're really active in every region of the world making sure that people know what we can bring to the table. And I think they were doing quite well in all the regions.

And there are no further questions at this time. I'll turn the call back over to management.

Thank you very much, and thank you to everybody who's on this call and for your interest in HEICO. As you all know, we -- management remains available to you. Give us a call if you have question or comment, we will be around. So we look forward to speaking to you after our second quarter's release, which will be -- that call will be sometime towards the end of May. So for those of you up north, brave rest of the winter and for those of you in South Florida, enjoy the weather. So that is all that we have for today, and we'll talk to you soon.

And this concludes today's conference call. You may now disconnect at this time.