Good morning. My name is Mary, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Fiscal Year 2018 Full Year and 4th Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. It is now my pleasure to introduce your host for today, Lawrence Mendelson. 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 cost and 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 reduce our sales or 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 weighing 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, Communications and Electronics Industries, which could negatively impact our cost and revenues and defense spending or budget cuts, which could reduce our defense related revenues. 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 ks, Form 10 Q and Form 8 ks. 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 applicable law.
Good morning to everybody on the call. This is Larry Mendelson. We thank you for joining us and we welcome you to the HEICO 4th quarter and full year of fiscal 2018 earnings announcement teleconference. I'm Chairman 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 record Q4 and annual results, I'd like to take a moment and thank all of HEICO's team members.
We are proud to lead some of the hardest working and most successful professionals in our industry. These are people who consistently surpass our targets and milestones without compromising our transparency, our values and our trust. I take great pride in saying that the combination of exceptional workforce and the entrepreneurial culture has been a winning formula for HEICO and has undoubtedly enabled us to achieve a 28 year compound annual growth rate of 16% in net sales, 19% in net income and a 23% in stock price. Now I'd like to summarize some of the highlights of our record 4th quarter and full fiscal year results. Consolidated 4th quarter fiscal 2018 net sales of $476,900,000 operating income of $103,700,000 and net income of $67,400,000 represent record results driven principally by double digit organic growth within Flight Support as well as the acquisition of profitable well managed businesses within ETG and as well as continued organic growth from our existing ETG businesses.
Consolidated fiscal year 2018 net sales of $1,780,000,000 operating income of $376,200,000 and net income of $459,000 represent record results driven principally by our fiscal 2017 and 2018 acquisitions as well as the high mid to high single digit organic growth within both of our operating segments. Consolidated net income and operating income in the Q4 of fiscal 2018 are up 26% 16%, respectively, on a 13% increase in net sales. In addition, our consolidated operating margin improved to 21.7 percent in the Q4 of fiscal 2018, up from 21.2 percent in the Q4 of fiscal 2017. Consolidated net income and operating income in fiscal 2018 are up 39% 23%, respectively, on a 17% increase in net sales. In addition, consolidated operating margin improved to 21 point 2% in fiscal 2018, up from 20.1% in fiscal 2017.
Consolidated net income per diluted share increased 26% to $0.49 in the Q4 of fiscal 2018, up from $0.39 in the Q4 of fiscal 2017. In addition, consolidated net income per diluted share increased 39% to $1.90 in fiscal year 2018, up from $1.37 in fiscal 2017. Consolidated EBITDA increased 15% to $123,300,000 in the 4th quarter of fiscal 2018, up from $107,600,000 in the Q4 of fiscal 2017. In fiscal 2018, EBITDA increased 22 percent to $453,400,000 and that was up from $372,600,000 in fiscal 2017. Our EBITDA margin, which we define as EBITDA divided by net sales, improved to approximately 25 0.5% in fiscal 2018 compared to 24.4% in fiscal 2017.
Focusing on cash generation is a hallmark of HEICO's success and core to our strategic management philosophy. Electronic Technologies set a net sales and operating income record in the Q4 of fiscal 2018, improving 13% 12%, respectively, over the Q4 of fiscal 2017. The increases principally reflect our profitable fiscal 2017 2018 acquisitions in addition to organic growth as well as improved gross profit margins. Flight Support set a net sales record and reported strong operating income in the Q4 of fiscal 2018, improving 13% 17%, respectively, over the Q4 of fiscal 2017. These increases principally reflect double digit organic growth and improved gross profit margin.
Cash flow provided by operating activities increased 14% to 328 $500,000 in fiscal year 2018, and that was up from $288,300,000 in fiscal 2017. Cash flow provided by operating activities increased 17% to $113,700,000 in Q4 fiscal 2018 and that was up from $97,300,000 Q4 fiscal 2017. As of October 31, 2018, the company's total debt to shareholders' equity decreased to 35.4 percent and that was down from 54% as of October 31, 2017. Our net debt, which we define as total debt less cash and cash equivalents, of $472,900,000 to shareholders' equity decreased to 31.5% as of October 31, 2018 and that was down from 49.8% on October 31, 2017. Net debt to EBITDA ratio improved to 1.04x as of October 31, 2018 compared to 1.67 times as of October 31, 2017.
During fiscal 2018, we successfully completed 4 acquisitions and in November 2018, an additional 2 acquisitions. We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial flexibility to aggressively pursue high quality acquisitions, which will accelerate growth and which we believe will maximize shareholder returns. As we reported yesterday, we declared a $0.07 per share semiannual cash dividend on both classes of common stock payable January 17, 2019 to shareholders of record on January 3, 2019. This cash dividend The cash dividend represents our 81st consecutive semiannual cash dividend since 1979. The increased semiannual cash dividend confirms our confidence in HEICO's consistent growth strategy and our desire to continue rewarding shareholders, while at the same time retaining sufficient capital to fund our internal growth as well as our acquisitions.
I'm pleased to announce that over the past few months, we reported that our Sierra Microwave subsidiary, VPT subsidiary, 3 d Plus subsidiary, supplied mission critical equipment and components for various NASA missions. Such equipment and components were utilized on NASA's landing vehicle named InSight, which recently landed on Mars NASA's Jet Propulsion Laboratory Radar in a CubeSat mission and NASA's ICESat-two mission. Technological innovation in space in the space realm continues to be a crucial factor in advancing humankind's knowledge and well-being, And HEICO is very proud to be part of this journey. As always, we thank Sierra Microwave, BPT and 3 d Plus for their outstanding accomplishments, and we're humbled by their persistent excellence in innovation as well as execution. In August 2018, we acquired 100% of the business and assets of Optical Display Engineering, which we refer to as ODE.
ODE is an FAA authorized Part 145 repair station focusing on repair of LCD screens and display modules for aviation displays used in civilian and military aircraft. OGE also holds FAA PMA authority to supply products that it repairs. It is part of our Flight Support Group and we expect the acquisition to be accretive to earnings per share within the 1st 12 months following closing. In November 2018, we acquired 93% of the stock of Apex Micro Technology. Apex designs and manufactures precision, power, analog, monolithic, hybrid and open frame components for a wide range of aerospace, defense, industrial measurement, medical and test applications.
Apex is part of our ETG group and we expect that acquisition to be accretive to earnings within the 1st 12 months following closing. In November 2018, we also acquired all of the outstanding stock of specialty silicone products, which we refer to as SSP, and they design and manufacture silicone material for a variety of demanding applications used in aerospace, defense, research, oil and gas, testing, pharmaceuticals and other markets. It is part of our ETG Group, and we expect the acquisition to be accretive to earnings per share in the 1st 12 months following closing. And last week, Moog reported that it is appointed our Blue Aerospace subsidiary as its sole international distributor for its F-sixteen leading edge flap drive system. This cooperation will further expand Blue Aerospace F-sixteen capabilities and enhance their ability to provide nose to tail support for F-sixteen operators worldwide.
We're very happy for the success of Blue Aerospace and we look forward to growing our business through this mutually beneficial OEM partnership. On a sad note, earlier this month, we reported that Wolfgang Meyer Ruber, a member of our Board of Directors, passed away at age 71. Wolfgang had served on HEICO's Board since March 2001 and as an advisor to the Board since 1997. On the Board, he served on our Executive Committee and the Environmental Safety and Health Committee. Wolfgang was a great friend to us, to HEICO and many others.
And with his trademark combination of great knowledge and experience, humility, open mindedness, hard work, determination, compassion and humor, he possessed legendary insight into business, aviation technology, world affairs, culture and People. We counted on his wise counsel over the course of several decades and he will be deeply missed and we will miss his advice and participation at HEICO. And now I would like after that long introduction, you must be tired of listening to me. So I'm going to pass this over to Eric Mendelson, Co President of HEICO and President of HEICO's Flight Support Group, and he will talk about the results of the Flight Support Group. Thank you very much.
The Flight Support Group's net sales increased 13% to a record $290,300,000 in the Q4 of fiscal 2018, up from $256,900,000 in the Q4 of fiscal 2017. The Flight Support Group's net sales increased 13% to a record $1,097,900,000 in fiscal year 2018, up from $967,500,000 in fiscal year 2017. The increase in the Q4 fiscal year of 2018 reflects organic growth of 13% 8%, respectively, mainly resulting from increased demand within all of the Flight Support Group's product lines and our fiscal 2017 2018 acquisition. The Flight Support Group's operating income increased 17% to $54,600,000 in the 4th quarter fiscal 2018, up from $46,500,000 in the Q4 of fiscal 2017. The increase in the Q4 of fiscal 2018 is principally attributable to the previously mentioned net sales growth and an improved gross profit margin, mainly reflecting a more favorable product mix within our specialty products product line, partially offset by changes in the estimated fair value of accrued contingent consideration associated with a prior year acquisition resulting from an improved outlook and better than previously estimated operating performance.
The Flight Support Group's operating income increased 15% to a record $206,600,000 dollars in fiscal year 2018, up from $179,300,000 in fiscal year 2017. The increase in fiscal year 2018 is principally attributable to the previously mentioned net sales growth and an improved gross profit margin, mainly reflecting higher net sales within our aftermarket replacement parts product line. The Flight Support Group's operating margin increased to 18.8% in both the Q4 of fiscal year 2018, up from 18.1% in the 4th quarter of fiscal 2017 and from 18.5% in fiscal year 2017. The increase in the Q4 fiscal year of 2018 principally reflects the previously mentioned improved gross profit margin. Additionally, the increased operating margin in the Q4 of fiscal 2018 was partially moderated by the previously mentioned unfavorable impact from changes in the estimated fair value of approved contingent consideration.
With respect to fiscal 2019, we are estimating net sales growth of approximately 7% to 8% over the prior year and the full year Flight Support Group operating margin to approximate 19.0%. Further, we estimate mid to high single digit organic growth in fiscal 2019. 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 13% to a record $191,100,000 in the Q4 of fiscal 2018, up from $169,100,000 in the Q4 of fiscal 2017. The increase in the Q4 of fiscal 2018 resulted from our fiscal 2017 2018 acquisitions as well as organic growth of 3%. The organic growth in the Q4 of fiscal 2018 principally reflects increased demand for certain aerospace and other electronic products, partially moderated by lower demand for certain space products. And I should further mention that organic growth in the Q4 of 2017 was over 14%.
So despite a difficult comp, I am very proud that our team to continue to win in the markets they serve and performed at a very high level. The Electronic Technologies Group's net sales increased 22% to a record $701,800,000 in fiscal 2018, up from $574,300,000 in fiscal 2017. The increase in fiscal year 2018 principally resulted from our fiscal 2017 2018 acquisitions as well as organic growth of 6%. The organic growth in fiscal 2018 principally reflects increased demand for certain defense products. The Electronic Technologies Group's operating income increased 12 percent to a record $57,100,000 in the Q4 of fiscal 2018, up from $51,000,000 in the Q4 of fiscal 2017.
The increase in the Q4 of fiscal 2018 principally reflects the previously mentioned net sales growth and an improved gross margin, profit margin that is mainly from increased net sales for certain other electronics and aerospace products as well as a more favorable product mix for certain defense products, partially offset by a decrease in net sales and less favorable product mix for certain space products. Further, the increase in operating income in the Q4 of fiscal 2018 is partially moderated by higher performance based compensation expense and intangible asset amortization expense. The Electronic Technologies Group's operating income increased 30% to a record $204,500,000 in fiscal 2018, up from $157,500,000 in fiscal 2017. The increase in fiscal 2018 is principally attributable to the previously mentioned net sales growth and an improved gross profit margin attributable to increased net sales and a more favorable product mix for certain defense products, partially offset by a less favorable product mix for certain space products. The Electronic Technologies Group's operating margin decreased slightly to 29.9% in the 4th quarter of fiscal 2018 from 30.2% in the Q4 of fiscal 2017, but remained very strong.
A slight decrease in the Q4 of fiscal 2018 principally reflects the previously mentioned higher performance based compensation expense and intangible asset amortization expense, partially offset by the previously mentioned improved gross profit margin. The Electronic Technology Group's operating margin improved to 29.1% in fiscal 2018, up from 27.4% in fiscal 2017. The increase in fiscal 2018 mostly resulted from the previously mentioned improved gross profit margin. With respect to fiscal 2019, we are estimating net sales growth of approximately 10% to 11% over the prior year and anticipate the full year Electronic Technologies Group's operating margin to approximate 28% to 29%. Further, we estimate low to mid single digit organic growth in fiscal 2019.
These estimates exclude any additional acquired businesses, if any. I turn the call back over to Larry Mendelson. Thank you, Victor and Derek. Moving on to further information, diluted earnings per share. Consolidated net income per diluted share increased 26 percent to $0.49 in the Q4 of fiscal 2018, and that was up from $0.39 in the Q4 of fiscal 2017 and it increased 39% to $1.90 in fiscal 2018, up from $1.37 in fiscal 2017.
Depreciation and amortization expense totaled $19,700,000 in the Q4 of fiscal 2018 and that was up from $17,900,000 in the 4th quarter of fiscal 2017. For the year, it totaled $77,200,000 and that was up from $64,800,000 in fiscal 2017. The increase in the Q4 fiscal year 2018 reflects the incremental impact of higher amortization expense of intangible assets from our 2017 2018 acquisitions. Research and development expense totaled $16,800,000 $12,600,000 in the 4th quarter of fiscal 2018 2017, respectively. And for the year, totaled $57,500,000 and $46,500,000 in fiscal 2018 2017, respectively.
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 and A expense increased to $82,800,000 in the Q4 of fiscal 2018, and that was up from $70,600,000 in Q4 of fiscal 2017. For the year, it increased to $314,500,000 in 2018, up from $268,100,000 in fiscal 2017. The increase in 4th quarter fiscal year 2018 principally reflects our fiscal 2018 2017 acquisitions as well as higher performance based compensation expense. The increase in the Q4 of fiscal 2018 also reflects an unfavorable impact from changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition resulting from an improved outlook and better than previously estimated operating performance.
That's
kind of
a confusing sentence, But bottom line is, it cost us more, but it was a very good thing for it to happen to us. If you want more detail later on, you're welcome to discuss it with Carlos and he can explain it to you. But when a situation like that happens, we're very happy. Consolidated SG and A expense as a percentage of net sales were 17.4% and 16.8% in the Q4 of fiscal 2018 and 2017 respectively and 17.7% and 17.6% in fiscal year 2018 2017 respectively. The increase in consolidated SG and A expense as a percentage of net sales in the Q4 of fiscal 2018 reflects what I mentioned earlier, the impact from changes in the accrued contingent consideration, again, a good thing.
Interest expense was $5,100,000 in the Q4 of fiscal 2018 compared to $3,400,000 in the Q4 of fiscal 2017 $19,900,000 in fiscal 2018 as compared to $9,800,000 in fiscal 2017. The increase in 4th quarter was due to higher interest rates. The increase in fiscal 2018 was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility and that was associated with the late fiscal 2018 acquisition. Other income and expense in the Q4 in fiscal 2018 2017 was not material. I won't comment on it.
Our effective tax rate in Q4 2018 decreased to 24.9% from 31.5% in the Q4 of fiscal 2017 and decreased to 19.8% in fiscal 2018, down from 30.3% in fiscal 2017. As we have mentioned on previous calls, the decrease in the effective tax rate for the Q4 and full fiscal 2018 is directly related to the Tax Cuts and Jobs Act or the Tax Act, under which U. S. Federal tax rate was reduced from 35% to 21 percent effective January 1, 2018. As a result of the Tax Act, the company remeasured its U.
S. Federal net deferred tax liabilities and recorded a discrete tax benefit of $16,500,000 in fiscal 2018. In addition, the company recorded a provisional discrete tax expense of $4,400,000 in fiscal 2018, and that was related to a one time transition tax on the unmitigated earnings of the company's foreign subsidiaries, again, as a result of the Tax Act. In addition, the decrease in our effective tax rate in the Q4 of fiscal 2018 was partially offset by the unfavorable impact of lower tax exempt unrealized gains and cash surrender values of life insurance policies related to HEICO Corporation Leadership Compensation Plan. The net income attributable to non controlling interest totaled $6,700,000 $5,400,000 in the Q4 of fiscal 2018 2017, respectively, and totaled $26,500,000 $21,700,000 in fiscal 2018 2017, respectively.
The increase in the Q4 fiscal 2018 mainly reflects improved operating earnings of certain subsidiaries of Flight Support and Electronic Technologies in which non controlling interests are held as well as the impact of the Tax Act. Again, a cost which is a good cost. So we're happy about that. The full tax fiscal year 2019, we estimate a combined effective tax rate and non controlling interest rate of approximately 26% to 28%. Moving on to the balance sheet and cash flow.
As you all know, our financial position and forecasted cash flow remain very strong. As I previously discussed, cash flow provided by operating activities increased 14% to $328,500,000 in fiscal 2018, and that was up from $288,300,000 in fiscal 2017. Cash flow provided by operating activities increased 17 percent to $113,700,000 in the 4th quarter of fiscal 2018 and again up from 97.3% Q4 of fiscal 2017. Our working capital ratio was 2.6x and 2.5x as of October 31, 2018 and 2017 respectively. DSOs, days sales outstanding of receivables was 49 days both October 31, 2018 2017.
And of course, we closely monitor all receivable collection efforts in order to limit credit exposure. As you know, people who followed HEICO, we have very low receivable losses. No one customer accounted for more than 10% of net sales. Top 5 customer represented 20% 18% of consolidated net sales in fiscal 2018 2017 respectively. Inventory turnover rate was 135 days 132 days for the years ended October 31, 2018 2017 respectively.
As I previously mentioned, total debt to shareholders' equity decreased to 35.4% as of October 31, 2018. That was down from 54% as of October 31, 2017. Our net debt, which is total debt less cash and cash equivalents of 472,900,000 dollars to shareholders' equity decreased to 31.5 percent as of October 31, 2018. And again, that was down from 49.8 percent as of October 31, 2017. Our net debt to EBITDA ratio improved to 1 point 0 four times as of October 31, 2018 compared to 1.67 times as of October 2017.
During fiscal 2018, we successfully completed 4 acquisitions. And again, I mentioned 2 recently completed after year end in November 2018. We have no significant debt maturities until fiscal 2023 and we plan to utilize our financial flexibility to aggressively pursue high quality acquisitions, which will accelerate growth and maximize shareholder returns. And now for the outlook. We look ahead to fiscal 2019 and anticipate net sales growth in flight support and ATG resulting from increased demand across the majority of our product lines.
We will also continue our commitments to develop new products and services, further market penetration, aggressive acquisition strategy and maintaining at the same time our financial strength and flexibility. Based upon current economic visibility, we are estimating 8% to 10% growth in full year net sales and approximately 10% growth in full year net income over fiscal 2018. We anticipate our fiscal year 2019 consolidated operating margin to approximately 21% to 21.5 percent depreciation and amortization expense approximately 84,000,000 dollars CapEx around $48,000,000 cash flow from operations around 360,000,000 dollars These estimates exclude additional acquired businesses, if any. In closing, I want to thank again, thank our HEICO team members and it's through their dedication and efforts that we have achieved our significant 28 year compound annual growth rate of 16% net sales and 19% in net income. We believe the focus on developing new products and services as well as increasing market penetration, while maintaining strong financial position, disciplined acquisition strategy, relentless focus on cash generation will continue to provide the company with opportunities for substantial growth and profitability.
One other point I want to make is many of you have heard me discuss the HEICO culture. We think that, of course, the culture is of the company is what drives the operating financial results. And we continue to believe that working with our team members, having a strong culture, making team members feel part of HEICO that they are owners is a critical factor in our success. That's the extent of my planned comments. And I'd like to open the floor for any questions.
Thank you.
Operator?
Yes, sir?
Yes, would you please open the floor for questions? I'm finished with my prepared remarks. And I'd like we have a number of people, I believe, waiting to ask questions. So would you please handle that?
Okay, sir. All right. Your first question comes from the line of Robert Hopkins from Credit Suisse. Your line is now open.
Hi, good morning. I hope you can all hear me. Yes, I can. Thank you. Good morning.
Okay. Okay, good. I'm on the road doing my best to dial in here. The first question at a high level and it's for all of you is, are you seeing any headwinds forming in the business that would indicate a macro slowdown anywhere across your business? And I ask that because I know the growth rates are moving around a little bit and that sounds like that's just specific to the business.
But do you see any macro issues?
The answer Rob, the answer is absolutely not. We don't. I think our business we've given guidance. We feel very confident hopefully. We start out, as you know, with a bottoms up projection based upon what our subsidiaries are telling us.
I don't like to say they sandbag us, but they are conservative. And that historically, we've been able to move the guidance up as the year progresses and as we digest additional acquisitions and they see get more visibility into their operating results. But the answer to your question is no. As a matter of fact, we see things as pretty strong. And the big issue that we have coming from some of the subs is their ability to access material to fill the orders.
I mean, meaning by that, we've had to increase inventory. If you look at the balance sheet, you'll see the increased inventories. And we've had to increase inventories in order to be confident that we have enough materials on hand to supply the demand of our customers. So we have not seen the slowdown.
Rob, this is So Larry, that's
I'll just add to that.
I've spent roughly in the last 7, 8 weeks on the road in our budget process visiting our subsidiaries or up to about a week or so, 10 days ago,
I was doing that. And
generally, I would say almost across the board, almost universally, people see our business to see very strong conditions. I mean, there's always in the best of times and the worst of times, there's always a business out there that's struggling with something. And there's always whether it's the customer, a market or a product and that will always be the case. Again, that's the time, worst the time. And we have those and I expect that will always be the case.
But notwithstanding that, the general pattern was strength across the board and in the end markets and the difficulty, as my father said, is in getting material supplies, components and people.
And that seems to be the
greatest challenge that we're dealing with. Now whether the media talks the economy into a slowdown more broadly, time will tell. Hopefully, they don't, but our businesses aren't seeing it.
Okay. That's very helpful, both Larry and Victor. Larry, something you said and Victor expanded on was the increase in inventory. I actually had a question for Carlos on this. You're growing your net income 10% in 2019.
If I remember correctly, the operating cash flow at 360 also represents about 10% growth. There was a use of cash in 2018, so it seems like you'll have a similar use of cash for working capital, I should say, in 2019. So on working capital, if you could talk to the moving pieces and what seems like a continued, I suppose, spending on inventory.
Yes. Rob, this year, as the guys mentioned, we did see situations where we had to, if you would, pre buy material to keep our folks with enough material to meet demand. So we'd like to see that continue into next year. We've sort of budgeted in our thought process and how we've gone about the cash flow estimates, a slight increase but not much more than what we had this year as far as the overall change in inventory between years. I think our at the levels we're at right now, the turn in at 135 days principally works for us.
So I don't see a huge use of cash outside of what you saw this year and next year for inventory. The rest of working capital receivables or days sales are very good. We tend to see the large players dragging out payments, but we're very aggressive on the collection side, and our guys have been able to maintain our day sales down. So I don't see I see normal growth in receivables and inventory commensurate with the sales growth. And we treat our vendors very well.
Our a lot of that's a function of timing, whether it's payables or accruals and things like that. But the one thing that we are good to, not only our customers, the folks that allow us to be good to our customers, and then if you treat them very well also. So I would say similar to the moment as you've seen historically there. So no real big changes in working capital from my perspective.
Okay. Appreciate the help. Thank you all.
Thank you, Ron.
Your next question comes from the line of Luis Raffetto from UBS. Your line is now open.
Good morning, everybody.
Good morning.
So we're just going to stick with the cash flow for now. The CapEx, you finally came closer to spending what you call it you'd spend. And it looks like next year, it's going to be another high year. So is there anything going on or just the business growing? Anything specific under the to base that 48,000,000 dollars
Yes, Louis, how are you doing? This is Carlos. We actually do our Board approves a CapEx budget every year, and we go through and we ask our subsidiaries to come up with what they call critical capital spend required and then nice to have, sort of 3 columns. And as you can imagine that the number that in total of those three columns would be much larger than what we reported on what we think we'll spend. The $48,000,000 is nothing more than what we call critical and nice to have right now.
We tend I mean, sorry, critical and required. We tend to underspend those budgets, but coming out of the box, it's hard for me to I don't want to underestimate, if you would, that CapEx. So right now, we think it's around 48 $1,000,000 I think if you look back historically as time passes, we'll buy used equipment, we'll buy equipment at auction as opposed to going out and spending for new and sometimes we have to ratchet that number down. So let's see how the year progresses. But there's nothing unusual.
It's principally growth capital in that budget, and I think that will be sufficient for our upcoming year.
Okay. And so you think that's more of a sustainable rate going forward, I guess, as well?
I think the way I've looked at it, if you're looking at a sustainable rate, 2% to 2.5% of our sales is generally where the CapEx budget falls out, sometimes a little more, sometimes a little less, but that's a good barometer.
All right. That sounds good. And then any contingent consideration payments for 2019? I know usually it's in the K, but jump ahead here.
We'll have one payment in Q1. I'm sorry, it will go out at the end of Q1 or early in Q2, but that's it.
Okay. And then also go forward tax rate. I know usually you guys will give a combination of tax and the minority interest expense. I didn't I don't think I saw one. So I just don't know, is the 24% sort of average we saw over the final three quarters sort of the area to think about?
No, I wasn't thinking it that way. The best way to look at it, I think Larry mentioned it earlier, was we think that the rate will be on a combined basis 26% to 28%. And that roughly breaks out 2019, 2020 tax, 7% to 8% NPI. That's kind of how we're looking at it right now.
Okay. So the sorry, the 26 and 20 28 is the combined NCI and tax?
That's correct.
Okay. Sorry, I missed and say that earlier. All right. And then last one, any guidance or any info you can give us on the deals from November from a size, I mean, 170 employees based on the organic growth, going to guess around $50,000,000 in sales. I know the leverage is way down again.
I guess it will go up a little bit, but any size you can add to that?
We actually we haven't in the acquisitions that we made in November, we haven't disclosed sales and size other than employees. I think you can probably do some math. I'll give you the number of employees and if you look at the revenue per employee in each segment, you can get kind of close. They were good acquisitions, normal sized single double type acquisitions for HEICO that will be accretive to us in 2019.
Your next question comes from the line of Peter Arment from Baird. Your line is now open.
Hi, guys. Good morning, Larry, Eric, Victor, Carlos.
Good morning, Peter.
Maybe this question for Eric on FSG, just 13% organic growth, really impressive. And I know you guys aren't pushing price, so the volume
that you're
seeing, can you give us a little more color on whether this is all benefits of new products or is there new customers? Maybe any color there would be helpful. Thanks.
Hi, Peter. Yes, this is Eric. You're right that the 13% organic growth, I think, is even somewhat more exceptional considering we only get roughly 1% pricing. So it is all
volume, 12% of it
is volume percent of it is volume related. And I would say that it's strength across the board in all of our product lines and it's a combination of basically new parts getting sold to our existing customer base as well as some increase in sales on some older parts that we've had. We pretty much sell to everybody in the world. So in terms of picking up new customers, there's not really a lot of, if you will, new names out there because we're doing business with everybody. But it is just increased penetration.
And I think it shows basically the support that HEICO has got at our customer base because we provide very good value at a reasonable price.
Appreciate that. And could you and just related to that, Eric, if you could just how about on the introduction of new products? I mean, I think you guys have been continuing to develop 400 to 500 parts a year. Is that still look like an achievable plan for 2019?
It does, yes. We're running consistent with past practice, and we've got the development pipeline running really wide open right now, and there's a lot of great products in there.
Appreciate the color. Thank you.
Thank you.
Your next question comes from the line of Ken Herbert from Canaccord. Your line is now open.
Hi, good morning everybody.
Good morning, Ken.
First, Eric, just wanted to ask you regarding or Carlos, regarding the guidance within FSG, when you've got the first half of twenty nineteen with again relatively easy comps, but then obviously much more difficult comps after the sort of the inflection you've seen here in the fiscal Q3 of 2018. Do we how should we think about the full year? I mean, is it fair to assume that you continue to see double digit growth organically through the first half and then maybe a step down in the second half to get you to the full year number? Or maybe just a little bit of color around the cadence within FSG in 2019 would be helpful.
Ken, this is Carlos. As you know, within the FSG, we principally get the majority of orders in the month of shipment. So we have a pretty good sense for what, let's say, Q1 is going to look like based on backlog and sort of what we got in the pipes right now. But it is difficult and which is one of the reasons why we're going to give quarterly guidance outside of EQG's fluctuations is the FSG's lack of, if you would, visibility Q4 out of the future. So I would take it right now to try and guess that that cadence would not be in our best interest.
I think our guys are projecting at the moment, it reaches in our budgets, linear growth, and that's what it looks like in the budget. And of course, we can adjust as we move forward. But we're not prepared, and I don't think it will be wise for us to give quarterly guidance or any type
of cadence at this point.
Okay, Carlos. That's helpful. I guess then fair to say and based on earlier comments, you haven't seen here heading just from into the calendar 3rd to the 4th quarter, you haven't seen any change or inflection one way or another, I guess, in the FSG customer buying habits or patterns?
No, I think from my perspective, Ken, and I think as I mentioned to you and others before, I find this environment, particularly in the FSG, to be really a special one. We have the benefit of all the new builds coming in. We've got the older equipment still running. We see the airlines purchasing and a high need for materials. We offer a great value proposition to our customers.
We are always there for them. And that pattern hasn't stopped. It's been a pretty robust environment for us in that regard. Inevitably, trees don't grow to the sky, but for fiscal 2019, what we're seeing right now is a continuation of that fantastic
environment. Okay. That's great. And if I could, Eric, can you just level set us, I know as fleet growth really on the commercial aerospace side, it accelerates in emerging markets in China and Asia in particular, And it's probably a few years off before a lot of these aircraft maybe hit some of the sweet spot for your business. But can you just talk about what you're seeing from customers in China and the Middle East in areas that have maybe typically not been as big a customers as legacy airlines, but over time as those fleets evolve could potentially be much larger depending upon penetration.
I mean, how are you thinking about these markets today and maybe what you're doing to better position to access those markets down the road?
Yes. I'd be happy to speak to that. We are doing nicely, I would say, in the if you want to call them the emerging market. I think there's still very great potential for us in those markets. We're very much focused on them, and I think we're continuing to do nicely.
There's no question that the majority of our business comes out of the Americas and Europe, and we expect that to continue for quite some time. But we are picking up a nice chunk of business in the emerging markets as well. There's a lot of interest in our products and I anticipate further growth there.
Is there any reason to think that structurally those airlines wouldn't have the same opportunity as a legacy airline in the United States or Europe
as their competitor?
No, I think as things mature, they're going to have a lot of demand coming out of those areas.
Great. Thank you. And just one final one for Carlos. Within ETG, can
you give us what the
fiscal 2019 guidance implies for the intangible amortization expense?
Yes. For AT and T, amortization expense is roughly 5% of sales. It's a pretty big slug. I think historically, it would be between 4% and 5%. We're getting closer to 5% right now.
Great. Excellent. Well, thank you very much. Really nice end of the year.
Thanks very much, Ken.
Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is now open. Hi. Good morning, guys, and thank you for the time.
Good morning, Sheila.
Good morning. Maybe my first one for any of you. You've seen just bigger deals in the space, a lot of consolidation. How do you guys think about maybe a potentially bigger transaction and your capacity to do so?
Well, that's a good question. Other people have asked that question. We are very as you know, we're very disciplined in what we buy. And we want to make sure that it makes sense. We don't want to grow for the sake of growing and saying that we're a bigger company.
And we don't grow because the CEO and the executive office gets its compensation based on gross revenue, which so many corporate players do. We own as you know, Sheila, we own equity, probably the largest shareholders individually. And so our compensation, our benefit is on the bottom line cash flow, earnings per share and growth. So to grow the top line, so we gain a couple of $1,000,000 in compensation is not what motivates us. So we're going to focus on something that comes down to the bottom line.
We have been shown many opportunities to acquire, merge, whatever you want to call it with other entities. But unfortunately, Corporate America generally runs on a 7% to 11% operating margin. To us, that's not very tempting because our all in operating margin before amortization or eliminating amortization is around 25%. So we're not going to go for that kind of thing just to get bigger for the sake of getting bigger. So we have to be careful on what we buy.
Now, we have and we have looked at larger companies where we could make an acquisition, possibly trim some expense, possibly consolidate and gain some additional sales. But a lot of these companies, these bigger companies or companies our size don't have the bottom line cash flow operating margins that we like to have. So we certainly have the firepower. We can buy companies. We probably could spend $4,000,000,000 maybe more because we are not a capital constrained company.
Our debt to EBITDA right now is around one time. So we could probably acquire anything that we may want to acquire in the future. But we're going to be very disciplined because we want the cash flow. And truthfully, most acquisitions, if you look at all acquisitions, most are not successful. Poke and they get stuck with it.
And we're very entrepreneurial and we do not plan to do that. However, we do focus on bottom line growth and cash flow. So that is going to make the determination. And but if we get an opportunity to buy a buy or merge or something with a much larger entity and we can still get the juice out of the orange and we get the bottom line that we look for, we can do it and we would do it. And I've also been asked how much debt would we be willing to take on.
And my answer is we would do something like TransDigm 6, 7 times. However, it's got to come down within a couple of years, say 2 years to around the 3 time level, 2 to 3 time level. So it's not the initial expenditure, but how quickly we could bring that debt down to a manageable level, particularly in current times when there are many articles that are in the press today about excess debt all over the place and the ability to service debt and to handle it. We don't want to get into a jackpot like that. As you know, we have grown pretty well close to 20% over 28 years.
We intend to continue. Our bottom line is the growth and the cash flow and the compounding of earnings. So I don't know if that's a long answer to your question, but I hope I've given you some light.
It's helpful. It's very helpful. And I guess on that note, Victor, maybe if you could talk about 2 of your bigger deals, Arrow Antenna and Robertson, how they're going? And as you look at your organic growth forecast, what you're seeing in defense and space into 2019?
Hi, Sheila. Yes, this is Victor. Both of those companies, Aeroantenna and Robertson, had excellent years. We're very pleased with them. We're excited about 2019 for both of them.
They've so far proven to be great acquisitions. As you know, they occupy very important market spaces, market positions in what they do. They're very well regarded by their customers, which is critical. And they're also product developers, meaning that they continue to develop new product. They stay out there, and they stay ahead of the curve that way.
They're not in harvest mode or anything like that. They're sharp. They're very focused on staying competitive. And so I'm optimistic beyond just the short term and beyond 2019 for both of those businesses. And in terms of what we see in defense for 2019, our budgets internally are for growth in our defense businesses overall in fiscal We are very careful.
We all read the same newspapers, so to speak, and the same reports out of Washington on what might happen with the budgets. I think you've known us well that we don't get too excited. And we run the company very conservatively and very cautiously so that we kind of base our assumptions on the fact that we always assume that even when there's going to be defense budget growth, but in the long term, there has to be a normalization to that. And so we want to keep our cost structure to that line and enjoy ourselves when the times are good. But at the same time, we really want to do an excellent job for our customers and to deliver for them and to deliver competitively.
So we take all of that into the mix. Sheila, this is Larry. I just want to add one thing which is really critical to the mix. And that is that the ability and the quality of the managers that operate those companies and U. S.
Specifically of 2 companies and AeroAntenna and Robertson, but this applies to many, many of our success. It's really in the brilliance and the dedication, the focus and capability of those managers, they're fantastic. And they don't appear on the balance sheet and financial statements, but they're the guys that make it happen. They're
fantastic.
Sheila, any other questions?
Yes, sir. Your next question comes from the line of Michael Ciarmoli from SunTrust.
Real nice quarter here to close out fiscal 2018. Carlos, just maybe a quick housekeeping first. Can you give us the value, the change in fair value contingent consideration in the quarter that was the little bit of the headwind for FSG?
Yes. It's just a tick over a couple of $1,000,000 that we took a charge for in Q4. But that was based upon, as we mentioned earlier, a little rosier outlook. And you also got some FX things going back and forth between periods, but that was roughly the charge you want to.
Got it. And then you've given us a lot of line by line detail for 2019 interest expense. Should we kind of assume this $20,000,000 run rate? Is that a good barometer for 2019?
Yes. I think if you're it just depends. I mean, look,
it depends what the Fed does and how that impacts law, but what tied to. I'm estimating somewhere between $20,000,000 to $22,000,000 in interest, and we'll see how that fares out. If we're able to generate the cash that I think, you're probably going to be right at $20,000,000 And if we find further investments, we're both going to be wrong. So but right now, that's in the guidance. That's what we're estimating.
Got it. And then maybe, Eric, just on FSG. I mean, you've kind of hit this multi year high here in organic growth. I mean, is there obviously, if we look at the planes coming off warranty, the fleet growing, is there any correlation there with the 787s? I guess there have been 100 or so that were delivered before and during 2013.
Are you getting growth on some new platforms that you haven't seen before? And then maybe can you just any other color on it seems like there's broad based strength, but any noticeable differences between parts, repair or distribution?
Yes, Mike. I would say the strength is really very broad based. It's all over the business. It's in parts, repair, distribution, specialty manufacturing. All of those businesses are doing quite well.
In terms of any specific programs, I would say we're doing nicely on the new platforms, and we're also doing well on all of the historical platforms. I think it speaks to the value proposition that HEICO creates in any of our businesses. And since, of course, we have all of our competitors on the telephone calls, I would rather not go into specifics on which businesses are seeing what kind of strength. But I would just say that it's very, very broad based. And as you know, the way HEICO was structured with operating with these smaller businesses that have the authority and the responsibility, we've always said that over time, they're able to drive above average sales and earnings growth because of their structure and because they're very close to the customers.
And if you look at it, I'm even more proud than the 13% organic growth. I'm proud of the whatever it was roughly 15% operating income growth that we had in these businesses, all organic. But again, it's very broad based.
Got it. That's helpful. And then maybe just one last one. Can you give us any update or changes or developments on the IATA and CFM sort of competitive agreement that they've come up with?
Sure. There's been a lot of buzz and talk in the industry about this. That agreement takes effect at the end of February, I believe. And airlines have really taken notice of what's happened here. And I think that there should be a decent opportunity for independents to grow in the marketplace and decent opportunity for HEICO to recover some lost ground.
Got it.
Your next question comes from the line of Josh Seidlum from Seaport Global. Your line is now open.
Hey, good morning.
Good morning.
Just within that bottoms up approach in your guidance, I know you can parse out some of the specifics for us. I know you said you're seeing continuation of the attractive trends here, but just interested to hear your thoughts on air traffic growth expectations for 2019 and maybe beyond.
This is Eric. I mean, we read frankly the same analyst reports that everybody at and that's where we get our information, we believe it to be consistent and we believe it to be supportable. And clearly, we're seeing the sales growth in our various businesses. And I think it's very believable. Rob asked the question upfront about, say, do we see any changes in the marketplace?
And no, I mean, we see continued strength. So I think everything is pointing in a positive direction.
A few of the analysts, Wall Street analysts over the past few weeks days have pointed out the strength in airline seat miles growth and it's growing somewhere. It depends on which month, but it's growing anywhere from 5% to 7%. That's an enormous growth. It's like double GDP. So and if you go back 10 years, HEICO has been talking about the growth of the aerospace industry in those terms.
And Boeing has been putting out those kind of figures too. And it's coming true. And so we believe that and that's why we're in the business. We believe that this particular area of business, this industry is a very strong growth industry because of the shrinking of the world and world trade, and we can only see a continuation of this kind of growth. Now if the economy is pulled back, yes, we'll see a little slowdown and so forth.
But as a general trend over the next our outlook over the next 10 years or more is a very strong growth industry and that's why we're in this business.
Okay. Thanks
for that. And then just on the M and A front, given the recent market volatility here, have you guys had any impact on M and A conversations with targets, valuation expectations getting more reasonable, any changing behavior there?
I think that we probably are normalized, which is good. I think we're seeing lots of opportunities. We're doing due diligence on a number of companies at the moment. We can't predict that we'll make these deals. But last year, and we did, I think, 4 acquisitions in November.
We closed 2. I think pricing is getting a little higher. I think private equity has a lot of money in their pocket and they're competitive. So that makes it a little more difficult. But to answer your question, I think we can make our normal number of acquisitions.
We see good opportunities. Companies that want to sell to us normally want to sell because of our culture. And so we differentiate ourselves that we tell people at the outset we're not going to be the highest price and we back out of different types of auctions and things because we won't pay a price that private equity can pay. We intend to keep the company essentially forever and build it. Private Equity likes to keep it for 1 to 5 years, put lipstick on the pig, cut expenses, do all kinds of things and financial engineering and then dump it to somebody else.
And we're just the opposite. So what we look for is a company and a management that wants to be in it for the longer term, that wants to continue running the company with minimal interference and pressures to get immediate profits today and tomorrow. So it's a long answer, but I think we see our number of acquisitions and that's fine. It's fine. Okay.
Thank
Okay. Next question. Yes.
Your next question comes from the line of Colleen Beuchar from Sterling Capital. Your line is now open.
Hi, good morning. Thanks for the time. Just a quick question for Eric, more of a clarification, again, on that IATA CSM ruling over the summer. Could you remind us of the you said it's coming in force, I believe you said, in February. Can you remind us of the broader implications that, that really might have, in particular, in other geos and for other OEMs?
Just curious there. Well, just
as a little bit of history, the airlines got upset. They complained through their World Wide Trade Association, IATA, to the European Commission. European Commission started looking at practices of a number of OEMs. They decided to launch an informal investigation into General Electric and CFMI. And in the I would say at the end of that informal investigation before it was going to become
a what we believe was a
formal investigation, There was the settlement between IATA and GE CFMI. That agreement has a number of specific clauses. I don't have it in front of me. So I don't have the details. But basically, it prohibits the manufacturer from doing certain things that they were doing.
And I want to be careful to not misspeak. I think you can get it online. But there were all sorts of behavior that is now not permitted. So that I think is what the airlines are interested in. With regard to how it impacts other manufacturers, I think everybody in the industry is taking note at this.
And they are they want to make sure that they behave consistent with whatever was in that agreement because presumably if other companies go outside of what's in that agreement, they may be they may have issues down the road. So that's sort of what we're hearing. But if you want to see the specifics, I think you can get that online.
Okay, great. Thanks. And then just to follow-up on the FSG guidance out
of the box here.
I'm trying to just triangulate various comments thus far in the call, but clearly an exit rate from Q4 with a fantastic top line trend, we've got higher CapEx expectations going in on a consolidated basis for 2019. Yet, if memory serves, kind of the out of the box guide versus last year, just a little bit lower. So making sure I understand, is it primarily the larger base now? Because your color comments on through the windshield there was that you're not seeing material weakness. And I just want to be sure I'm properly putting context around that.
Yes. This is Carlos. I think our out of the box guidance, 7% to 8% growth is pretty consistent with where we came out last year, maybe just a tick under, but this is all, for the most part, organic growth. So we're actually very happy with the guidance that we put out and are excited about it. As we mentioned earlier on the call, we would prefer to underpromise and overdeliver.
And I think that the at least the attitude and the industry dynamics that we see suggest that we're going to have a fantastic year in that space. But for right now, from a bottoms up budgeting perspective, if you would, the 7% to 8% top line growth is kind of what seeing. And we'll adjust that as we go through the year and then we get more visibility. We don't give quarterly guidance, as I mentioned earlier, so the cadence to that growth is going to be hard to articulate. We won't be able to articulate that to you.
But from my perspective, that's robust growth and that's indicative of mid to high single digit organic growth, which is kind of what we expect out of the company right now.
Okay, great. And then final question, I guess, for Victor. You talked about slightly lower sales of space products, but we're starting to see some of the larger private space companies begin to get traction with launch vehicles, etcetera. And I just wanted kind of broader kind of higher level comments here on where you think ETG is currently positioned, how it's positioned for the private commercial space trend. Is more of the kind of ship set exposure on the payload side or on the launch vehicle side or both?
How are the relationships trending there? And what are you seeing? Thanks.
Yes. Hi, this is Victor. Most of the overwhelming majority of what we do in the ETG that is space related is on the payload side. It is not on launch vehicles. We do very little actually on launch vehicles.
So our focus tends to be on, let's say, what stays up in space. And our business there is heavily weighted to the commercial sector and has really always been more weighted toward the commercial sector, although we have a pretty good defense business there as well. Where the weakness has been, has been in the large in the geosynchronous earth orbit satellite segment. The rest of the space business has been very strong for us and continues to be very strong. So that has offset it.
I wouldn't call it very weak, but there's been we have to identify where there's been some weakness that offset the strength and that was it. And but overall, the Space business is very good business for us. Thank you. Operator, it sounds like we're ready for our next question.
Your next question comes from the line of George Godfrey from CLP. Your line is now open.
Good morning. Thank you for taking my questions. Very nice job on the quarterly annual results. Thanks, George. If I roll and I've heard all the comments and business is great, the organic growth rate is great here in Q4 and actually accelerated through the year.
If we roll back the clock, say, the 2,008, 2009 timeframe and with the benefit of hindsight, 2,009 revenue was down about 8%. Were there any leading indicators or signs that you look back and say, that was a good foreteller of what was coming ahead perhaps in 'eight or were things more coincidental that it kind of all sell that simultaneously? Thanks and nice job.
George, I would say it became pretty clear that when the financial crisis hit, immediately the whole world went into concern mode and panic mode and spending went down. And it was a totally different situation than we are seeing right now, just completely different. And so we saw back then immediate action being taken by everybody. If you recall back then, there was concern that the OEMs wouldn't be able to deliver their backlogs because airlines wouldn't be able to get money. I mean, the situation today couldn't be any more different than it is.
We continue to see strength in our end market, strength with our customers. So I would say that we would have to see a major market dislocation and panic in order to see something like we saw back then. And right now, we're seeing quite the contrary.
But George, this is Victor. Having said that, it's all the more reason we always have to be careful within our company and stay lean and cautious. And it's why we run the business the way we do because we never know what will happen with the broader economy and we want to be prepared for all seasons. Understood. Thank you very much.
You're welcome.
Operator, I don't think there
are any more questions, are there?
There are no further questions at this time. Presenters, you may continue.
So this is Larry Mendelson again. We thank you all for your interest in HEICO. We appreciate it. We are available. If you have further questions, give us a call, Carlos, Eric, Victor, myself.
And we wish you all a very happy holiday, a healthy and wonderful New Year. And unless we hear from you, we will speak to you Q1 next year around February when we release Q1 results. So that is all and we are signing off right now. Operator, we're done.
This concludes today's conference call. Thank you all for joining. You may now disconnect.