Morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year 2016 Full Year and Fourth Quarter Earnings 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.
Certain statements made in this call will constitute forward looking statements, which are subject to risks, uncertainties and contingencies. Hysco's actual results may differ materially from those expressed and or implied by these forward looking statements as a result of factors including, but not limited to, 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 development or product specification costs and requirements, which could cause an increase to our cost to complete contracts governmental and regulatory demands, export policies and restrictions, reductions in defense, safe or homeland security spending by U. S. And or foreign customer or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and product pricing levels, which could reduce our sales or sales growth product development difficulties, which could increase our product development costs and delay sales our ability to make acquisitions and achieve operating synergies from acquired businesses, lower credit risk, interest and income tax rates and 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 budget cuts, which could reduce our defense related revenue.
Those listening to this call are encouraged to review all of HIFO'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 statements, whether as a result of new information, future events or otherwise, except to the extent required by the applicable law. I would now like to turn the call over to Loren Pietersen. Thank you. You may begin.
Thank you very much, and good morning to everyone on the call. We thank you for joining us and welcome you to this HEICO 4th quarter and full year fiscal 'sixteen 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 Tom Merwin, HEICO's Senior Executive Vice President and Carlos Macau, our Executive VP and CFO. Before reviewing our operating results in detail, I'd like to take a few moments to summarize the highlights of our record full fiscal year and 4th quarter results. Consolidated fiscal year 16 net sales of $1,376,300,000 was up 16%.
Operating income of $265,300,000 also up 16%. Net income of $156,200,000 was up actually 17%. These numbers represent record results, driven principally by the impact of our fiscal '16 and 'fifteen acquisitions as well as organic growth within both of our operating segments. Our consolidated 4th quarter fiscal net 2016 net sales of 363,300,000 dollars was up 11%, operating income of $76,100,000 up 10% and net income of $44,300,000 was up 16% and they too represent record results driven principally by the impact of the fiscal 2016 2015 acquisitions as well as organic growth within flight support and increased demand for majority of Electronic Technology Group's products. Consolidated net income and operating income in fiscal 2016 are up 17% and 16%, respectively, on a 16% increase in net sales.
Additionally, consolidated net income and operating income in the Q4 of fiscal 'sixteen are up 16% and 10%, respectively, on an 11% increase in net sales. Consolidated net income per diluted share increased 16% to $2.29 in fiscal 'sixteen, up from $1.97 in fiscal 'fifteen. Consolidated net income per diluted share increased 16% to $0.65 in the Q4 of fiscal 2016 and that was up from $0.56 in the Q4 of fiscal 2015. Cash flow provided by operating activities was very strong and increased 44% to a record $249,200,000 in fiscal 2016 and that was up from 170 $2,900,000 in fiscal 2015. As of October 31, 2016, the company's net debt to shareholders equity ratio was 39.6 percent with net debt, which we define as total debt less cash of $415,300,000 Our net debt to EBITDA ratio was a very low 1.28 times as of October 31, 2016 and that compared favorably to the 1.97x shortly after the acquisition of Robertson Fuel Fuel System in January of this year.
I remind you that Robertson was the largest acquisition in HEICO's history. The strong cash flow generated by HEICO during fiscal 2016 allowed us to internally fund the growth of our existing businesses, while reducing borrowings under our line of credit by 170,000,000 and I continue to be very pleased with HEICO's laser focus on strong cash flow generation, which is a core strategy for HEICO. And in my opinion, the most important aspect of building a successful business. I have said many times at conferences that HEICO is focused on cash flow and earnings per share will then take care of themselves. We could focus on earnings per share and as many companies do, would have no cash flow or very low cash flow.
And to us at HEICO, that is not the formula for a successful business. I remind you that I think a management upper management feels that HEICO is really a vehicle for generating strong cash flow. The methodology that we use are in 2 groups, aviation and electronic technologies, where we get very, very strong margins on products which are protected mainly from excessive competition. As I previously mentioned, both the Flight Support Group and Electronic Technologies recorded across the board record results in fiscal 'sixteen, and I'm very pleased with the leadership team's constant focus on serving needs of customers, introducing new products and services and developing talented team members to continue our collective success in the new fiscal year 2017. During September 2016, we had a notable and very unique success story in the space market.
As you may recall, in September, we reported that our VPT and 3B plus subsidiaries supplied mission critical components for NASA's OSIRIS REx program, which featured the 1st U. S. Mission in history to carry samples back from an asteroid back to Earth and the largest sample returned from space since the Apollo era. We are constantly amazed by the engineering talent and forward thinking November 16, we regretfully reported that Samuel Higginbotham, a 26 year member of our Board of Directors, passed away at age 95. Sam served on HEICO's Board since December 'eighty nine and he chaired significant committees such as compensation, stock option, served on the Executive and Finance and Audit Committee for many years.
Sam was a great friend to me and to Heiko and many others. His insight into business, world affairs, education and people were legendary and we all counted on him for his wise counsel over the course of several decades. We will deeply miss having his advice and his participation in HEICO. As reported earlier this week, we declared an increased regular semiannual cash dividend of $0.09 per share, which is payable on January 18. This represents our 77th consecutive semiannual cash dividend and is a 13% increase over the prior semiannual amount of $0.08 per share.
By declaring and raising the semiannual cash dividend, our Board of Directors' goal is to confirm its continued confidence in HEICO's consistent growth strategies and continue to reward shareholders while retaining sufficient capital to fund our internal growth objectives and acquisition strategies. In addition, given the strength in HEICO share price and the company's history of stock splits and dividends, the Board of Directors intends to consider a stock split or a stock dividend at its next regular meeting, which will be held on March 17, 2017.
I remind you that historically
we have declared 14 stock splits or stock dividends since 1995. Now I would like to introduce Eric Mendelsohn, Co President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group. Eric? Thank you.
The Sykes Support Group's net sales increased 5 percent to a record $228,500,000 in the Q4 of fiscal 'sixteen, up from $218,300,000 in the Q4 of fiscal 'fifteen. The Flight Support Group's net sales increased 8% to a record $875,900,000 in the fiscal year 2016, up from 809000000 dollars in fiscal year 'fifteen. The increase in Q4 fiscal year of '16 reflects net sales contributed by our fiscal 'fifteen acquisitions as well as organic growth of 4% and 3%, respectively. The organic growth in the Q4 fiscal year of 2016 is principally attributed to increased demand in new product offerings within our aftermarket replacement parts and specialty products product line. The aforementioned increases were partially offset by lower organic net sales from our repair and overhaul parts and services product line, principally resulting from the mix of products repaired, which required less extensive repair and overhaul services as well as softer demand from our South American market.
The Flight Support Group experienced organic revenue growth of 6% in both the Q4 fiscal year of 2016 excluding our repair and overhaul parts and services product line. The Flight Support Group's operating income increased 6% to a record $44,700,000 dollars in the Q4 of fiscal 'sixteen, up from $42,300,000 in the Q4 of fiscal 'fifteen. The increase principally reflects the previously mentioned net sales growth. The Flight Support Group's operating income increased 9% to a record $163,400,000 in fiscal year 'sixteen, up from $149,800,000 in fiscal year 2016. The increase principally reflects the previously mentioned net sales growth and a profit margin impact mainly from favorable net sales volumes and product mix within our aftermarket replacement parts and specialty products product lines.
These increases are partially offset by higher performance based compensation expense, changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition and an increase in amortization expense of intangible assets. The Flight Support Group's operating margin increased to 19.6% in the Q4 of fiscal 'sixteen, up from 19.4% in the Q4 of fiscal 'fifteen. The increase principally reflects a decrease in certain selling, general and administrative expenses as a percentage of net sales, partially offset by a gross profit margin impact, mainly from the previously mentioned decrease in net sales within our repair and overhaul services product line. The Flight Support Group's operating margin improved to 18.7% in fiscal year 2016, up from 18.5% in fiscal year 2015. The increase principally reflects the previously mentioned gross profit margin impact, partially offset by higher performance based compensation expense, changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition and an increase in amortization expense of intangible assets.
With respect to fiscal 2017, we are estimating mid single digit growth in the Flight Support Group's net sales over fiscal 'sixteen levels and the full year Flight Support Group's operating margin to approximate 19.0% 19.5 percent. 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 22 percent to a record $138,300,000 in the Q4 of fiscal 'sixteen, up from $113,500,000 in the Q4 of fiscal 'fifteen. The Electronic Technologies Group's net sales increased 31% to a record $511,300,000 in fiscal 'sixteen, up from $391,000,000 in fiscal 'fifteen. The increase in the Q4 fiscal year 'sixteen is principally attributed to the net sales contributed by our fiscal 'sixteen and 'fifteen acquisitions. Further, the increase in net sales in fiscal year 'sixteen reflects organic growth of 4%, mainly resulting from higher net sales of certain space and medical products.
Additionally, our Q4 of fiscal 'sixteen results were moderated by a decrease in customer demand for certain defense products. The Electronic Technologies Group's operating income increased 12% to a record $36,800,000 in the Q4 of fiscal 'sixteen, up from $32,800,000 in the Q4 of fiscal 'fifteen. The increase principally reflects previously mentioned net sales growth, partially offset by a gross margin impact, namely driven by a less favorable product mix for certain of our space products and an increase in amortization expense of intangible assets. The Electronic Technologies Group's operating income increased 28% to a record $126,000,000 in fiscal 'sixteen, up from $98,800,000 in fiscal 'fifteen. The increase principally reflects the previously mentioned net sales growth, partially offset by an increase in amortization expense of intangibles.
The Electronic Technologies Group's operating margin was 26.6% and 28.9% in the Q4 fiscal 2016 and 2015 respectively. The decrease principally reflects the previously mentioned decrease in gross profit margin and the increase in intangible assets amortization expense. The Electronic Technology Group's operating margin was 24.7% 25.3% in fiscal year 'sixteen and 'fifteen, respectively. The decrease principally reflects the previously mentioned increase in amortization expense for intangible assets. With respect to fiscal 2017, we are estimating mid to high single digit growth in the Electronic Technologies Group net sales over fiscal 'sixteen levels and our full year Electronic Technologies Group's operating margin to approximate 24%.
These estimates exclude additional acquisitions, if any. I'll turn the call back over to Larry Mendelson. Thank you. Thank you, Victor. Moving on now to some of the details.
We talked about diluted earnings per share. Consolidated net income or diluted share increased 16% to $0.65 in the Q4 of fiscal 2016 and that was up to $0.56 in the Q4 of fiscal 2015 and increased to increased by 16% to $2.29 in the fiscal year 'sixteen and again that was up from $1.97 in fiscal 'fifteen. As I have mentioned before, onetime nonrecurring acquisition costs of 3,100,000 dollars were incurred in the Q1 in connection with the fiscal 'sixteen acquisition. These costs reduced our consolidated net income per diluted share by $0.03 in fiscal 'sixteen. Of course, if you had any impact, it would have been 3.32.
Depreciation and amortization expense totaled $15,700,000 $12,800,000 in the 4th quarters of fiscal 'sixteen and 'fifteen, respectively, and totaled $60,300,000 $47,900,000 in fiscal year 'sixteen and 'fifteen. The increase in Q4 fiscal year of 'sixteen principally reflects the incremental impact of higher amortization expense of intangible assets attributable to fiscal 2016 2015 acquisitions. R and D expense increased 22 percent to $12,100,000 in the Q4 of fiscal 2016 and that was up from $9,900,000 in the Q4 of fiscal '15 and increased 15% to $44,700,000 in fiscal 'sixteen for the full year and that was up from $38,700,000 in fiscal 2016. As you can imagine, significant on growing new product development efforts are continuing at both Flight Support and Electronic Technologies as we continue to invest approximately 3% to 4% of each sales dollar into new product development. SG and A expenses totaled $59,600,000 in the Q4 of fiscal 'sixteen and that was up from $57,800,000 in the Q4 of 'fifteen.
That increase mainly reflects the impact from our fiscal 'sixteen and 'fifteen acquisitions, partially offset by changes in foreign currency transaction adjustments, principally from borrowings in euros under our revolving credit facility. SG and A expense as a percent of net sales were 16.4% 17.6% in the Q4 of fiscal 2016 and 2015, respectively. The decrease principally reflects the efficiencies and favorable leverage on SG and A expenses attributable to 'sixteen and 'fifteen acquisitions and in addition the previously mentioned change in foreign currency transaction adjustments. SG and A expenses were $250,100,000 204,500,000 dollars in fiscal 'sixteen and 'fifteen, respectively. The increase principally reflects the impact from fiscal 'sixteen and 'fifteen acquisitions, inclusive of previously mentioned acquisition costs associated with the fiscal 'sixteen acquisition, That was $0.03 per share that I mentioned earlier.
Higher performance based compensation extends, change in estimated fair value of accrued contingent consideration and changes in foreign currency transaction adjustments on borrowings denominated in euros under our revolving credit facility. SG and A expenses as a percentage of net sales were $18,200,000 $17,200,000 in fiscal 'sixteen and 'fifteen, respectively. The increase principally reflected higher performance based compensation, the previously mentioned change in estimated fair value of approved contingent consideration, foreign currency transaction adjustments and acquisition costs associated with fiscal year 2016 acquisition. Interest expense increased to $2,100,000 in the Q4 of fiscal 'sixteen and that was up from $1,300,000 in the Q4 of fiscal 'fifteen, an increase to $8,300,000 in fiscal year 'sixteen, up from $4,600,000 in fiscal 'fifteen. And that increase in the Q4 fiscal 'sixteen was due to a higher weighted average balance under our revolving credit facility associated with the 2016 2015 acquisitions as well as slightly higher interest rates.
Other expense in the Q4 fiscal 2016 was not significant, so no comment. Taxes. Our effective tax rate in the Q4 of fiscal 'sixteen decreased to 32.9 percent from 30.5% in the Q4 of fiscal 'fifteen. That decrease principally reflects the lower effective state tax rate driven by certain proportionate updates recognized upon the amendment of certain prior year tax returns in fiscal 'sixteen. Our effective tax rate in fiscal 'sixteen decreased 31.5% from 31.7% in fiscal 'fifteen.
The decrease again principally reflecting larger income tax credit for qualified R and D activities and lower effective state tax driven by certain proportionate updates in fiscal 'sixteen. The decreases were partially offset by the benefits recognized in fiscal 'fifteen from a prior year tax return amendment for additional foreign tax credits related to R and D activities at 1 of our foreign subsidiaries as well as higher net income attributable to non controlling interest in subsidiaries, which are structured as partnerships. Net income attributable to non controlling interest was $5,300,000 in the Q4 of fiscal 201620,000,000 for the full fiscal 2016 and that's comparable to the $5,800,000 $20,200,000 reported in the Q4 fiscal 'fifteen, respectively. For full fiscal 'seventeen, we do estimate a combined effective tax rate and non controlling interest rate of between 39% 40% of pretax income. Now moving on to the balance sheet and cash flow.
Our financial position in cash flow remained very strong. As previously discussed, cash flow provided by operating activities was extremely strong and increased 44% to a record $249,200,000 in fiscal 'sixteen. That represents 160 percent of net income as compared to the $172,900,000 in fiscal 'fifteen. Our working capital ratio, gross current assets divided by current liabilities, is strong at 2.7 times as of October 31, 'sixteen, and this compared to 3 times as of October 31, 'fifteen. DSOs, sales outstanding of receivable was 51 ways as of October 31, 'sixteen, same as October 31, 2015.
Of course, we continue to monitor very carefully all receivable collection efforts to limit our credit exposure. Traditionally, HEICO has very, very little accounts receivable write offs. No one customer accounted for more than 10% of sales. Top 5 customers represented approximately 21% 17% of sales, consolidated sales in fiscal 2016 2015. As a comment, the Robertson acquisition, Robertson is principally the U.
S. Government defense related business and that increased the customer exposure to the U. S. Government. Of course, it's a pretty good credit.
As expected, our inventory turnover rate increased principally due to the impact of the January 16 acquisition, and that went to 2 22 days for the period ending October 31, 2016, up a little bit from 118 days from the period October 31, 2015. If you exclude the impact of the acquisition, the inventory turnover rate was 120 days in fiscal 2016 and pretty comparable to the 118 in the year before. Our net debt to shareholders' equity ratio was 39.6% as of October 31, 'sixteen, with net debt of 415,300,000 dollars principally incurred to fund acquisitions in fiscal 'sixteen and 'fifteen. We have no significant debt maturities until fiscal 'nineteen and we plan to utilize our financial flexibility to aggressively pursue high quality acquisition opportunities and to accelerate growth and maximize shareholder returns. The EBITDA to debt ratio was 1.28.
I mentioned that earlier as of October 31, a very, very low ratio for a company that does as many acquisitions as we do. And I want to answer in advance questions, which I expect will come, that the acquisition pipeline is very, very full. As a matter of fact, it's hard to keep up with it. Price is a little bit higher, but certainly nothing that we're really the pricing is nothing that really preclude us from doing acquisitions. It's due diligence and great in-depth detail of due diligence that we do that really makes the difference.
And at this point, I can't project which acquisitions, if any, we'll make. But I can assure you that we are working on a very, very large number. Looking forward to fiscal 'seventeen, we do anticipate net sales growth within Flight Support's commercial aviation and defense product lines. We expect growth within ETG, principally driven by demand for the majority of our products. During fiscal 'seventeen, we'll continue our commitments to developing new products and services.
This is, of course, critical to our strategy and further market penetration and aggressive acquisition strategy, and we'll continue to maintain financial strength and flexibility, and we avoid getting overleveraged, as you all know. But we still will be able to grow because of our enormous cash flow strength. Based on current economic visibility, we are estimating 5% to 7% growth in the full year net sales and a 7% to 10% growth in full year net income over fiscal 'sixteen levels. In addition, we anticipate fiscal 'seventeen consolidated operating margin to approximate 19% to 20%, depreciation and amortization of approximately 63,000,000 dollars CapEx approximately $38,000,000 and cash flow from operations approximately 255,000,000 dollars These estimates exclude additional acquired businesses, if any. Some analysts have written that our projected guidance for 2017 is slightly below our guidance for 'sixteen.
That is true. And I just want to remind you that as another analyst wrote, since 2005, HEICO has under promised and over delivered. So some of the analysts tend to get a little bit ahead of us in their estimates. We like to come out of the box in December with annual guidance. On the conservative side, we do not want to overpromise and underperform.
So we're a little bit conservative. And as we go and it's based on a bottoms up budget that we get from all of the team members and the subsidiaries, then we give our guidance based upon that. Historically, these people are very conservative. They don't want to get ahead of the curve. They don't want senior management coming in and saying, well, why didn't you make your budget?
So they tend to shoot low. And we understand that, but we don't want to push them. We accept their budgets. And as the year progresses, we get more color and visibility on their operations. And historically, we have moved our estimates and guidance up.
I don't want to predict we're going to do the same thing this year. I hope we will, and truthfully, I think we will, but there's no assurance that, that will happen. But we certainly are going to try to do it. One other thing I'd like to mention, you all are aware of the new administration coming in, in January and their focus on reducing the corporate income tax rate and perhaps individual too. But as it impacts HEICO, if they should reduce it from 35, of course, we pay about 31.
And if they reduce it to 15, the impact on HEICO, you can do the calculations yourself, but would be very, very significant and would add a big number to cash flow and would also add a big number to earnings per share. I don't want to jump ahead of the analysts who might want to make those calculations and I guess the SEC says I shouldn't do it either. But you can do it yourself. And I don't know if there will be a reduction in taxes, but we've got our fingers crossed and it will be very, very healthy for HEICO's earnings per share and also HEICO's cash flow. Big, big effect.
In closing, I would like to thank HEICO team members. We're very proud to lead one of the hardest working and most successful teams in our history. This team consistently surpasses our targets, as I mentioned before, and milestones without compromising transparency, values and trust. It is through their dedication and efforts that we have achieved our significant 26 year compound annual growth rate of 16% in net sales, 18% in net income and 22% in stock price. That is the extent of my prepared comments, and I would like to open the floor for any questions which might be asked.
Thank you.
Your first question comes from the line of Robert Spingarn of Credit Suisse. Your line is open.
Good morning. Good morning, Rob. Well, nice quarter, nice end of the year. So with that, I wanted to talk about next year a little bit. And first on the top line, 5% to 7% target, I guess I ask you this question all the time and
if you mentioned it earlier, I apologize. But what's
the organic component there in that 5% to 7% sales growth for 'seventeen? And then I wanted to ask Victor and Eric about their respective margin targets for 'seventeen. It looks like SG is going up a little
bit, but Victor, your target, is
that a little conservative? Is that
how should we think about that? Okay. So the first question I'm going to give to our CFO, Carlos Montal.
If I could remember it. Hey, Rob. So on the FSG, we're speaking mid single digits. That definition is 5%. It's what we're looking for is organic growth in that division.
We have no acquisitions to roll. So at the moment, that's what our team members, when they're doing their budgets, are rolling everything up to us at the present time. On the ETG, we're expecting mid- to high single digit growth in that division. Half of that is going to be organic after we burn off the effect of some of the acquisitions in 'fifteen to 'sixteen.
Okay. Yes.
That's what I was looking for. Yes. Your next question was on margins. You want to ask? Yes.
Eric will talk about margins for SSG
margins are anticipated between 19% 19.5%, which is an increase from this past year. I think that it's important to point out that when we prepare the budget, obviously, the budgets are prepared starting in the middle of summer, finishing up late summer. And typically, we have a very good Q4 that later comes. But the focus is on earnings. And yes, they have to project revenue and that's obviously important in the calculation.
But the thing that everybody is measured on is earnings. And so I think that typically that's one of the reasons why we outperform in revenue a little bit. But also with regard to earnings, I think our people are very much focused on eliminating, if you will, lower margin sales and trading them in for higher margin sales. So I think that we could have I mean, if the focus at HEICO were revenue and not earnings, we probably could have much higher revenue growth. But since it's earnings growth, that's why the margins are going up and why the operating income will be going we anticipate will increase at a faster clip than the revenue growth.
So Eric, before we go over to Victor, with the higher margin focus driving earnings, what is how do we think about that qualitatively in terms of the product mix shift?
Yes. I think more aftermarket parts, less lower margin activities, just more spare parts being sold. We do anticipate a recovery in the repair and overhaul product line. So that will help a little bit, but it's primarily just a greater focus on parts that save our customers a lot of money. We've got a lot of very good parts in the hopper right now, a lot of parts that our customers are committed to purchasing as soon as we deliver them.
Our new product development output was very strong this year as it's been roughly the last 5 years, and we're pretty optimistic on good sales growth and penetration of those products.
Just quickly, Eric, on the new product generation, is there a way to quantify what you got through in 2016 versus 2015
in terms of new parts? It's hard to
quantify because it depends what you look at. I can tell you in terms of numbers of approval, it's similar to I think a little bit ahead of where we've been in the past. But the value of those parts is very strong. The commitment from the customers is very strong. I think our reputation and credibility out there in the industry is very strong.
So for that reason, we're pretty optimistic on it.
Okay. Great color. Thanks.
Thank you, Rob.
This is Victor. So in answer to your question, the margin for ETG, of course, the GAAP margin for ETG of about 24% that we're forecasting for next year, of course, is after intangibles amortization, which is about 400 basis points, which puts what I consider the true margin when
you look at the business
and their trading margin. What they're doing is about 28%, somewhere in that range, which to us is pretty high and is very good. So it's hard for me to beat down on businesses if they're 50 basis points lower on average or something like that or maybe a little more year over year, they tend to be conservative in their budgeting. But I wouldn't plan that they are being conservative. It really is what we believe is going to happen.
And that predominantly is a result, I would say, of product mix, not necessarily at a high level. For example, not necessarily saying that we're going to have more defense product than space product or more commercial aviation and defense or space or something like that. It's just when you drill down in the individual line items and the estimated shipments, what they think they're going to do over the course of fiscal 'seventeen, it winds up at around what I consider sort of 28% true margin or 24% when you look at it in our financial statement.
Okay. Does
that help? That explains. Well, yes.
So it's really the intangibles and it's acquisition driven.
That's a big part of it.
That hurts the GAAP margin. It doesn't to Victor's point that I don't know if you can hear me, Rob. Victor's point, I think, is an important one. It doesn't hurt the cash margin. But as you know, we had some good acquisition, good sized acquisitions last year in the EQG.
And of course, we're buying businesses that are not capital intensive. So really all we're paying for is intellectual capital and a lot of IP, a lot of things that have to be amortized off the books. So it does put a bit of a damper on the GAAP margin. As you recall, last year, we came out of the box also. We estimated 24% for the ETG margin.
They did about 24.7% this year, which is great. We're very proud of that. We hope to do better. But at the moment, as Victor said, when you look at the backlog, when you think about it very tactically and you look back over history, that 24% margin is a good barometer, and then that's one for us to be.
Rob, this is Larry. I mentioned earlier and you know about this, our focus is really cash flow. So if you add the amortization, which truthfully to me doesn't make a whole heck of a lot of sense because these companies are growing and they're telling us to write off customer lists and all this kind of stuff and as though it were decreasing in value when in fact it's increasing in value, but we have to follow GAAP. But the key margin to us as operators of the company is the pre amortization margin. We understand depreciation, but amortization of these intangibles provides cash.
So our actual if you add it back, if you add the amortization back, what is our So in ETG, we're between 28% and 30%. And in Flight Support, we're probably in the low 20s, 22%. And to us, that is really the key because that's where the money comes from to generate R and D, to generate expansion, acquisition and so forth. We key on that and I think you know that.
Great. Thank you all for the help.
Thanks, Rob.
Your next question comes from the line of Larry Solow of CJS Securities. Your line is open.
Great, thanks. Good morning, guys, and thanks for the color you've provided so far. It's very enlightening. Just I
was wondering if you could just
help us a little bit, just give us your read on the aftermarket. It seems obviously from your performance quite steady. Perhaps Generally outperformed the market, has there been any trend different divergence in the market, any price of oil is coming up a little bit, but still startups sort of hanging pretty low and other variables out there, anything noteworthy?
Larry, this is Eric. Thank you for your question. With regard to our growth rate, the organic growth rate in the Q4 for FSG was 4%. However, if you exclude the repair and overhaul businesses, it's 6%. And I think that 6% is outperforming the market.
We feel confident of our ability to outperform the market. There's been a fair amount of new products delivered in the recent half, which hasn't needed maintenance and I think has in general had an impact on the industry. It's important to note though that our organic growth is primarily volume related and it's not price related. This is not coming to Euessler. We don't gouge our customers.
We don't jack up prices. We have very mild, very nominal price increases and
we treat our
customers extremely well. So it's really volume related. And I think if you look at just the pure volume, we're way outperforming our competitors because most of our competitors' increases has been coming from pricing. And that's probably a difficult thing to sustain in the long term. And we feel that our focus on keeping costs low, generating value, I think will permit us to continue to outperform the industry.
And any thoughts on the aftermarket in 2017? Do you see a similar market that we've see in the last few quarters, a little firming up, I guess?
Yes. It looks like there's a little bit of firming, I would say, similar to firming. We certainly don't see deterioration. I met with our heads of our various sales regions last week to review some of the details and they all tell me that our customers are not holding much inventory. Some customers are holding very, very little inventory.
So I would not anticipate certainly with our products a destocking of anything. I think they're going to have to buy more products. So I would say consistent to where it is, I mean improving a little bit.
And have the inventories changed at all? Or have they been pretty low for quite some time now, right?
I'd say they've been low since the financial crisis, but they continue to remain low. They continue to remain low and to the point where there's not much excess supply in the chain.
Got it. And then perhaps just a question for Victor. Just independent of what might happen on the truck, I know I think you mentioned some of the defense contracts were pushed a little bit to the right. I think you mentioned that on last quarterly call. And it looks like organic growth, ETG has been sort of flat last couple of quarters.
Any thoughts on that? And do you see some
of those contracts moving forward? And maybe you get a little bonus under the deposit?
Yes. Well, a couple of things. That's a good question, Larry. With respect to the kind of lumpiness of the quarters, it's something we've had historically. And if you go back and look at 10 years, 15 years, you'll see the same thing.
And I would expect past to be prelude in that regard, and that will continue to be the case. I think some of the things that were, if you call delayed, have shaken loose, if you will, more recently and which is kind of what we expect. And we expect things to delay from time to time and then accelerate and so forth. I wouldn't say there's anything extraordinary in the mix. I think it's going to be fairly typical that way.
In terms of the new administration, right now, we're operating under a continuing resolution, although a plus sub one as an aside. So it's kind of an odd continuing resolution, but it's a
positive, I think, net positive
for the industry. And buying more defense goods. We'll see what buying more defense goods. We'll see what he does in terms of pressuring the industry on other things like we've seen some of the headlines later. So I don't want to get out ahead of ourselves and make predictions at this point.
I do think it's a net positive and I think everybody in the industry is very excited about it. We all, I think, just have to be careful not to get too excited. And keep in mind that these things don't happen overnight. And the new administration takes office, what is it, January 20th and it will take some time for these things to get reflected, orders to be made, and things to be built and shipped. So I wouldn't be looking for anything out of it until somewhere toward later in calendar 2017, maybe in our fiscal year, maybe not.
That's where I would start to feel. So to me, I think the effects are felt in a big way a little further out. Got it. That's just my view and I can find different people with different views in the industry for sure. Absolutely.
And
just I think that on the skepticism and if it happens, great. And just lastly, and let me not to split hairs, I think your cash flow generation was phenomenal. And the reason why the year over year increase pretty muted? Is there any working capital issue or anything there? Or is it just sort of it was a great year last year and perhaps you'd imagine modestly even beat that, but the growth is not quite as high as maybe I would thought with 10% net income growth.
Larry, this is Carlos. I was very pleased, frankly, with our cash flow from operations. In fact, I put a big smile on Larry's face. Every morning, that's the first call I get is how's our cash situation, do we have more than yesterday and etcetera. So I think from a cash flow generation, the increase in net income helped.
I think our working capital management was phenomenal. We did have a little bit of a benefit in the 4th quarter with some deposits coming in for customers for work to be performed in the first half of twenty seventeen. We had increased some of our current liabilities, which obviously is a source of cash. So if your real question is, was there a surprise there? I wouldn't call that a surprise.
I would call that something that's very unpredictable, particularly in the group when we get those contracts. And we do get those upfront fundings to begin the work and through the research and development. It's very hard to predict, right? And so
that was the one part
of working capital. I'm always pleased to get the cash ahead of time to start the work, right? And so that contributed to it. But 160% of cash flow from operations against our net income number tells me that the quality of our earnings are very strong, and I couldn't be happier and I feel very fortunate to be the CFO company generating this kind of cash flow.
Absolutely. Couldn't agree more. Great. Thanks guys. Appreciate it.
Thank you, Larry.
Your next question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open. Hi, good morning team. Thank you for taking my questions.
Good morning, Sheila.
Good morning. Maybe one for Victor, if that's okay. Robertson trended out a little lightly versus my expectations that might be modeled on plan.
Yes. Go ahead. I'm sorry, Sheila. I didn't mean to cut you off.
No, no, it's okay. Just a quick follow-up with regards to that. I think the organic growth was about was really good in the first half, flattish in the second half. So the mid- to high single digits is forecasting a reacceleration. And so what's driving that if it's not the defense budget?
Okay. So the first question, how is Robertson doing? It is doing pretty much exactly as we expected and we forecasted when we bought it. So we're very happy with the business, with the operation. Now this will be the first year that they'll operate for the full pretty much the full year under our under the budget that they've submitted to us for the year going forward.
And we're pretty happy with what they've submitted. I think they're probably in their own internal forecasting. They're cautious as we are, but I'm going to rely on those numbers and see how that goes as the year pans out. But with respect to the company overall, so far so good. And we're very pleased, especially with the team there.
We think we've got a great team, which has done some really terrific things. With respect to organic growth, just a reminder, one of the things that we exclude over the course of the year is the growth of the companies that we acquired over the period before we own them. And so we don't our organic growth numbers don't pick that kind of thing up. So just keep that in mind. Generally, we're buying growing businesses and we, in fact, have an internal discussion debate about it whether we should because to me, that's really organic growth, and we've seen or we may see organic growth out of businesses that we acquire.
In terms of where we expect things to grow, it's pretty much across the board. And if we go on
it, as I said earlier
in my comments to Rob Spingarn's question, if we really go through business by business and then in turn they go product by product. And so we're expecting the vast majority of the ETG businesses to see growth some more than others over the prior year. Some will go backward over the prior year, which is always the case. So it's kind of evenly spread out amongst the businesses for the forecast for 2017 and across the business lines. By the way, Sheila, I believe that you can correct me if I'm wrong.
I believe that a number of other companies that make acquisitions reflect the organic growth in a different way, which shows up much higher than what we do. Am I correct, Victor? Yes, that's right. There are different ways of accounting and a number of companies included. So, we are on the conservative side, but other companies show organic growth from prior to the day they acquired it.
So if you look into Jason, Carlos can comment
on that. Sheila, it's Carlos. I'll just make a quick comment on that. What the guys mentioned, we do a straight organic growth calculation. We exclude inorganic growth, we call it acquired.
There's all kinds of different ways to skin a catheter, HEICO chooses to do it. I will tell you this. And since you asked about the ETG, both acquisitions that were done in the ETG grew nicely under our leadership, under Victor's leadership in the ETG. And we were pleased when we modeled those acquisitions out and looked at them. They performed, as Victor said, as expected, maybe even slightly ahead of what we expected.
And so we're very proud of that. Our acquired growth in ETG, roughly 85% to 87% of the total growth of the segment when you look at a year over year comparison basis. Does that answer your question?
Yes. And then I guess just one for Eric. In terms of aftermarket, you sort of alluded to more spare parts growth versus maybe overhauling repair activity. Is there any distinction between the 2 of them in terms of a CRT check might be more spare parts or any sort of clarity that's provided there?
I think, Sheila, what I was referring to is this past year, we had more aftermarket parts sales because that business moves up whereas the repair and overhaul was down just a little bit. And we are anticipating next year a recovery in the overhaul and repair business, but continued good growth over in the spare parts area. With regard to the ultimate application of the parts, most of our we say well over half of our business is non engine parts. So it's both component as well as airframe. And the component parts are not heavily dependent on the heavy checks.
So I don't anticipate tremendous correlation there. We do sell some airframe parts, thrust reverser and various other structural parts as well. And some of those may have more of a heavy check component, but I think our business is pretty well diversified, so we're not focused in any one area.
Okay, thanks. And then just a clarification question as well on SG margins. What was the was there a total earn out associated with all the 5 deals that were done for 'sixteen? And is there anything for 'seventeen that we should
be thinking about? I'll let Carlos answer that.
Sheila, If you recall, when we acquired AeroWorks in the Netherlands, January 15, As part of that deal, we had an earn out with our partner over there and that earn out was basically a 4 year earn out, 4 chances, if you would, based upon him or the company hitting certain operation metrics. So, it's a good and a bad thing. When you hear us say that we're increasing our contingent earn out, That means that the business subsidiary performed much greater than our expectations, okay? Now at the moment in time that we have to make that adjustment to increase that liability, yes, it hits
our P and L.
It's an unfortunate thing in some regards. But the story behind that adjustment is that the subsidiary itself performed much more profitably and much more better than what we expected. So that's the only earn out we have in the FSG right now.
Okay. So the level is similar year over year since the 4 year earn out or does it decline over time? Yes.
We do a probability weighted analysis. It declines as payments are made and if we have
to adjust it based on probable outcomes, we do so And that's where the adjustments come from. Shneur.
Your next question comes from the line of Michael Sinclair, F. K. Capital Management. Your line is open.
Hello, good morning.
Good morning.
Can you please provide
an update on how the license agreement negotiated with Northrop Woman Corporation is doing and if you have any similar deals with other OEMs in the pipeline?
Eduardo, this is Eric. I'll answer the question. Hi.
We have to be
careful about giving specific information with regard to specific product lines, customers, partners for obvious competitive reasons. But I can tell you that in general it is going very well. We have become their license source for the repair and overhaul of certain inertial navigation units and inertial reference unit systems, and we've got a very good relationship with them. We are always in constant discussion with various manufacturers about ways that we can continue to support them and support our joint customers in the marketplace. So I can tell you we do have various conversations ongoing, but unfortunately I'm not able to provide any more detailed information than that.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Jim Fong of Cowen and Company. Your line is open.
Hi, good morning guys.
Good morning. Good morning, Jim.
I was just wondering if you could just talk a little bit about your acquisition pipeline. You seem pretty positive in more acquisitions going forward in 2017. And with the emphasis on
that, we've been very busy.
And so maybe if you can kind of give us a little bit of idea, the range and size and the type of acquisitions you're looking at?
Jim, we are as I mentioned, we're looking at a large number of acquisitions. Some of them are quite large. I mean, for us, everything is relative. But for us, they would be large acquisition.
Is it like the Robertson type acquisition?
Well, I would say that there
are some like the Robertson type acquisition. There are some which are smaller than the Robertson, all following the same guidelines, being accretive, being a reasonable multiple that we're used to paying, having good forward opportunity. But I always caution people, and there are many of them, I caution people that although there are many in the pipeline and that normally results in a number of good acquisitions, You never know with an acquisition if it's going to close until it closes, at the closing table and we wire the money and so forth. So I feel optimistic about the number we'll get, but I don't want to promise. And of course, we never build into our projections and our guidance acquisitions that we might make because I really don't know.
I mean some of these things are very fluid and we go in and they give us a book and they tell us what they're doing in the financials and you go in there and you discover that it's not exactly the way it was and then or sometimes the guy in the middle of the deal raises the price and all kinds of things happen where the deal doesn't happen. Again, I'm optimistic because the more in the pipeline, the more likely I believe that we will find some that close. They're not all going to close, but I think we're seeing there's enough opportunity for me to be very optimistic, but to make a promise or to build those expectations into our guidance, we never do that.
Robinson acquisition was a little more towards defense market and I was just curious whether you look more with defense companies trying to increase exposure as the macros for the defense spending increase looks more positive?
Well, Jim, the way we look at acquisitions and the way we look at our business is number 1, I told you we are focused on cash flow. Right. And so there are lots of opportunities within industry for us to acquire defense related. But the key is always the bottom line, the cash flow, the opportunity, the accretion and so forth. And we're an opportunistic buyer.
And we don't go out and say we want to acquire X dollars of intense business. We look at all these businesses and whichever meets our bottom line needs and meeting by that earnings per share and cash flow, we really don't have a focus. In my personal opinion, it might be a good time to acquire defense assets because of what we've been told about the Trump administration is looking to build the military and so forth. So clearly, when we do the due diligence, we would review their projections and expectations with a positive bias as to it probably is going to get better as opposed to saying under the Obama administration, it's probably going to get worse. So we would have that positive bias.
But in either case, we're not going to make an acquisition until we're very confident that we're going to get a minimum result and we're going to get the bang for the buck and the accretion and the cash flow even if things don't go soaring up in space, that all of a sudden this company doubles its sales and all that. I mean every acquisition we look at, they predict this hockey stick projection next year we're going to do 20% and 30% and all this kind of stuff. We ignore it and we basically buy based upon past history. So in the area of defense specifically to answer your question, it would be a positive bias looking forward, but we're not going to pay today for what he thinks he's going to a seller is going to do in 2 years from now. Jim, this is Victor.
I'll just add to that. We tend to be cautious about what we buy and when we buy it. So we were buying defense in the sequester because we thought that various factors, the business we were buying with the right businesses, we were paying the right price, it was the right point in the cycle of earnings and so on. So we take that into our account. We tend to go where other people aren't going.
And that's what we'll look for as well in continuing defense. We're probably you're not going to find us following the herd just for a short term period.
So that puts you in a very good position for growth as you look forward with these defense companies that you acquired during the downturn?
That's absolutely. By the way, we put that bias into our acquisition this year. When we saw the 2 acquisitions, MMS and Robertson, that was early in the year, we said that defense probably would be a good thing because whoever won Trump or Hillary, both of them had indicated an increase in the defense budget over the Obama administration. So we had a positive bias and more confidence in making those defense acquisitions than we would have had at the beginning of the Obama administration where his philosophy was completely opposite. And I think that served us well.
And we made those acquisitions and we'll continue to try to find assets that meet again, to us, it's bottom line cash flow. I said earlier, HEICO is a cash flow it's a vehicle to generate strong cash flow. And then after that earnings per share, and that's just what we do. If we don't think it's going to be strong cash flow, we're not interested. And it can be defense or it can be widgets or it could be any anything within those 2 spheres, aerospace and electronic technologies.
And of course, all the other things have to fit in. We have to have great management. We have to have consistency and honest people, hardworking, smart people. All those things go into the formula. We've been very successful.
As you know, we've done 62 acquisitions, and we've never had a bust. We've had some do better. We have some do a little worse, but we've never had a disaster scenario as, oh my God, this thing blew up on us and so forth. And we're very picky. We do a lot of due diligence and we reject a lot of things that we see.
And then just the last question is, Salim, would you consider buying something outside your traditional areas like energy where the assets are going still very cheap?
Well, the answer is we would consider it. It has to meet all of the items that we number 1, cash flow number 2, management, 3 earnings per share or with cash flow is basically low CapEx and so forth. And then we'd have to study the industry. I have said many times that we buy an ice cream cone company if it had all those benefits. And the problem is that most companies don't have that.
And you know as a very successful analyst that if you go down the Aerospace Group, you'll see how many companies operate at 4% operating margin. Some operate at 7% and 9%. We wouldn't get up in the morning for that. We wouldn't even think about going into a business just to keep busy and do that. So that's why we're all in.
We're somewhere around 19, 20 and Electronic Technologies is closer to 30 and light support of 22 without amortization. So it would have to have all the elements, that business has to have all the elements. The other thing is the energy business is something we don't know. And we go into something that we really don't know and I don't want to preclude any kind of business, but we like stable businesses. We like slow growth.
We're very happy if a company grow if our acquisition grows at 5% a year, 7% a year. And the reason is that our strategy is to use the tremendous cash flow to acquire other businesses. You can grow a business by investing and increasing your market or you can grow a company by making acquisitions with the cash flow that comes out of that business. And to us, if we grow cash flow and bottom line, that's what we're here for. That's what we're trying to accomplish.
And so if we buy a very strong company that grows slowly, that's great. I'm very, very happy. If we can get the returns that we get and the cash flow strong cash flow, Remember, if it's strong cash flow by the 2nd or 3rd year, our investment has been paid back. A big chunk of the investment is back, and we have much less and on a going forward basis, the EBIT the price that we pay to EBIT drops considerably. If you have a company that has very low cash flow, your investment stays the same, you never get your money back.
So this is very important to us to see the return, cash flow return that we get.
Right. That's great.
I was just going to add. This is Victor. I was going to add that. With respect to energy specifically, we look at our different product lines that we have in our businesses. And we have some businesses that are aerospace or electronics or defense that also sell into the energy markets.
It's not a huge part of what we do. It's pretty small. It's not the focus. But when you get into some of the harsh environment or the high reliability environments, they have the same characteristics for downhole drilling, deep drilling, redoing and space background, but maybe for heat instead of cold. But anyway, so we do look at that and we do include it in what we've said.
Great. Thank you so much for all the color in the details.
Thanks, Jim. Thank you.
Your next question comes from the line of George Crossley of CL King.
Harry, I share your passion with free cash flow. And I just wanted to ask 2 questions. First, a housekeeping question. I wasn't ETG organic revenue growth 4% for the year. Was that the same in the quarter as well?
Carlos will respond to that.
No. The ETG organic growth in the 4th quarter was down a
tick. Down a tick? Okay.
Yes, it was just down a tick. And that was principally movements, as Victor mentioned earlier, and some vacillation of defense. Again, we don't give quarterly guidance, George, for that reason because particularly in the ETG, we do have that up and down trend of orders coming in and fulfillment back and forth.
Got it. And then the free cash flow question.
If I look at CapEx in 2015,
it was $18,000,000 And then here in 'seventeen, you're guiding to $38,000,000 So about a $20,000,000 increase or on an incremental basis about 7% of the incremental net revenue. Can you just at a somewhat granular level, can you tell me where that $20,000,000 in incremental CapEx is going? As a percentage of revenue, it's going up from 1.5% to 2.5%. I just want to get an idea of what the incremental spending is on.
About okay, I can give you the best granular level to keep it simple is roughly half to 60% some low 60% was expansion, expanding our new some of our existing locations for growth. And the rest was normal course of business replacement type stuff.
Okay. Business expansion, Carlos, in both FSG and ETG?
Both segments, correct. And to be honest with you, George, we get a capital budget every year from our guys. And it's got several cuts at it. There's a wish list, there's a like to have and then there's a must have. And so we have to make judgment as to what to put out there.
This year, we're shooting the $38,000,000 But I think they'll spend that money, probably not. But right now, that would be their wish list and we'll see what happens. Historically, I think we've understand our capital budgets quite a bit. But in reference to your specific question, the majority, 67% was expansion, which is a good spend of capital and the rest of it was replacement over that time period.
There are no further questions at this time. I'll turn the call back over to presenters for closing remarks.
Okay. Well, thank you all very much for your interest in HEICO. We all remain available to you by phone or e mail if you have additional questions. Also, we wish you HEICO and its board and top management wishes everybody on the call a very happy holiday and wonderful New Year with health and good fortune. And we look forward to speaking to you.
I guess the next call will be the Q1 'seventeen fiscal, which will be around mid to late February. So again, thank you all, and we're signing off.