Ladies and gentlemen, thank you for standing by, and welcome to the fiscal 2016 second quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. Certain statements made in this 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, 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 costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could 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, customer 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 HEICO's filings with the Securities and Exchange Commission, including but not limited to, filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. Thank you. I would now like to turn the conference over to Chairman of the Board and the CEO, Mr. Laurans Mendelson. Please go ahead, sir.
Thank you. Good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO second quarter fiscal 2016 earnings announcement teleconference. I'm Larry Mendelson. I'm Chairman and CEO of HEICO Corporation, and this morning I'm joined here 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 Irwin, HEICO's Senior Executive Vice President, and Carlos Macau, our Executive VP and CFO. Before reviewing our record second quarter operating results in detail, I'd like to take a few minutes to summarize the quarterly highlights. Just before I do that, I want to thank all of the team members at HEICO for putting out an extraordinary performance, in the first half and particularly the second quarter of fiscal 2016.
Everyone, shareholders, management, directors appreciate this extraordinary effort. We have an extremely high regard for this team. Thank you very much. Our consolidated second quarter net sales and net income represent record quarterly results driven principally by record net sales at both operating segments and record operating income at ETG. Both the consolidated net sales and operating income in the second quarter of fiscal 2016 increased 20% over the second quarter of fiscal 2015. Consolidated net income per diluted share increased 17% to $0.57 in the second quarter of fiscal 2016, up from $0.49 in the second quarter of fiscal 2015. The ETG group set a quarterly net sales record in the second quarter of fiscal 2016, improving 46% over the second quarter of 2015.
The increase reflects net sales contributed by our fiscal 2016 and 2015 acquisitions, as well as strong organic growth of 12%. The Flight Support Group set quarterly net sales record in the second quarter of fiscal 2016, improving 9% over the second quarter of fiscal 2015. This increase reflects net sales contributed by our fiscal 2015 acquisitions, as well as organic growth of 4%. Cash flow provided by operating activities and operating income was very strong, increasing 58% to $102.7 million in the first six months of fiscal 2016, and that was up from $64.8 million in the first six months of fiscal 2015.
As of April 30, 2016, the company's net debt to shareholders' equity was 53.8%, with net debt of approximately $526 million. I would now like to introduce Eric A. Mendelson, Co-President of HEICO and President of our Flight Support Group, and he will discuss the results of the Flight Support Group.
Thank you. The Flight Support Group's net sales increased 9% to a record $220.3 million in the second quarter of fiscal 2016, up from $202.8 million in the second quarter of fiscal 2015, and increased 10% to $424.9 million in the first six months of fiscal 2016, up from $384.8 million in the first six months of fiscal 2015. The increase in second quarter and first six months of fiscal 2016 mostly reflects net sales contributed by our fiscal 2015 acquisitions, which continue to perform well, and organic growth of 4% and 3% respectively. The organic growth in the second quarter and first six months of fiscal 2016 is principally attributed to increased demand in new product offerings within our aftermarket replacement parts and specialty product lines.
Additionally, these increases were partially offset by lower net sales from our repair and overhaul parts and services product line, principally resulting from softness in demand from our South American market. Excluding our repair and overhaul parts and services product line, the Flight Support Group experienced organic revenue growth of 7% and 6% in the second quarter and first six months of fiscal 2016, respectively. The Flight Support Group's operating income increased 10% to $41.3 million in the second quarter of fiscal 2016, up from $37.5 million in the second quarter of fiscal 2016, and increased 13% to $76.8 million in the first six months of fiscal 2016, up from $68.2 million in the first six months of fiscal 2015.
The increase in the second quarter and first six months of fiscal 2016 mainly resulted from the previously mentioned net sales growth and the gross profit margin impact from favorable net sales volumes and product mix within our aftermarket replacement parts and specialty products product lines. These increases were partially offset by the impact from the previously mentioned decrease in net sales within the repair and overhaul parts and services product line. Changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition and higher performance-based compensation expense. Additionally, the first six months of fiscal 2016 reflects an increase in amortization expense of acquired intangible assets.
The Flight Support Group's operating margin increased to 18.8% in the second quarter of fiscal 2016, up from 18.5% in the second quarter of fiscal 2015, and increased to 18.1% in the first six months of fiscal 2016, up from 17.7% in the first six months of fiscal 2015. The increase in the second quarter and first six months of fiscal 2016 principally reflects the previously mentioned improved gross profit margin, partially offset by the changes in the estimated fair value of accrued contingent consideration and higher performance-based compensation expense. Additionally, the first six months of fiscal 2016 reflects the previously mentioned increase in amortization expense of acquired intangible assets.
With respect to the remainder of fiscal 2016, we continue to estimate the Flight Support Group's full year net sales growth to be between 8%-10%, with organic growth in the mid-single digits and the full year Flight Support Group operating margin to approximate that of fiscal 2015. 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 46% to a record $132.6 million in the second quarter of fiscal 2016, up from $91 million in the second quarter of fiscal 2015, and increased 31% to $236.7 million in the first six months of fiscal 2016, up from $180.2 million in the first six months of fiscal 2015. The increase in the second quarter and first six months of fiscal 2016 reflects net sales contributed by our fiscal 2016 and 2015 acquisitions, which continue to perform well, and organic growth of 12% and 8% respectively. The organic growth in the second quarter and first six months of fiscal 2016 mainly resulted from increased demand for certain defense and space products.
The Electronic Technologies Group's operating income increased 50% to a record $33.4 million in the second quarter of fiscal 2016, up from $22.2 million in the second quarter of fiscal 2015, and increased 34% to $55.7 million in the first six months of fiscal 2016, up from $41.6 million in the first six months of fiscal 2015. The increase in the second quarter and first six months of fiscal 2016 came mostly from previously mentioned net sales growth and favorable product mix for certain defense and space products, partially offset by an increase in amortization expense of acquired intangible assets and higher performance-based compensation. Additionally, the first six months of fiscal 2016 reflects $3.1 million in non-recurring acquisition costs associated with the Robertson acquisition.
The Electronic Technologies Group's operating margin improved to 25.2% in the second quarter of fiscal 2016, up from 24.4% in the second quarter of fiscal 2015, and improved to 23.5% in the first six months of fiscal 2016, up from 23.1% in the first six months of fiscal 2015. The increase in the second quarter and first six months of fiscal 2016 was mainly driven by previously mentioned net sales growth and favorable product mix, partially offset by the increase in amortization expense of acquiring intangible assets and higher performance-based compensation expense. Additionally, the first six months of fiscal 2016 reflects a 1.3% reduction to our operating margin as a result of the non-recurring Robertson transaction expenses.
With respect to the remainder of fiscal 2016, we are increasing our estimate for the Electronic Technologies Group's full-year net sales growth to be between 29% and 32%, up from 27% to 30%, with organic growth in the mid-single digits. We continue to estimate full-year operating margin to approximately 24%, which I know is very strong because if you look at the true operating margin of these businesses before amortization of intangible expenses, which typically consume about 400-plus basis points of our margin, you'll see that the operating level of these businesses on their own is actually closer to 28%. We're very proud and pleased with the performance out of our businesses. I turn the call back over to Larry Mendelson.
Thank you, Victor and Eric. Moving on to diluted earnings per share. Consolidated net income per diluted share increased 16% to $0.57 in the second quarter of fiscal 2016, and that was up from $0.49 in the second quarter of fiscal 2015, and increased 14% to $1.03 in the first six months of fiscal 2016. Again, that was up from $0.90 in the first six months of fiscal 2015. As previously mentioned, one-time non-recurring acquisition costs totaling $3.1 million were incurred in connection with a first quarter fiscal 2016 acquisition. These acquisition costs reduced our consolidated net income per diluted share by $0.03 in the first six months of fiscal 2016. Depreciation and amortization expense totaled $15.3 million and $12.2 million in the second quarter of fiscal 2016 and 2015, respectively, and totaled $29.2 million and $23.1 million in the first six months of fiscal 2016 and 2015.
The increase in the second quarter and first six months of fiscal 2016 principally reflects the incremental impact of higher amortization expenses of acquired intangible assets attributable to our fiscal 2015 and 2016 acquisitions. Research and development expense increased 8% to $11 million in the second quarter of fiscal 2016, and that was up from $10.1 million in the second quarter of fiscal 2015, and increased 3% to $20 million in the first six months of fiscal 2016, again, up from $19.4 million in the first six months of fiscal 2015. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies, as we continue to invest approximately 3%-4% of each sales dollar into new product development.
Our effective strategy for the last 26 years has been to reinvest a portion of our earnings into the development of new products and services that we can offer at lower costs to our customers, which in turn facilitates market share growth sufficient to meet our growth goals. Moving on now to SG&A expenses. They totaled $67.2 million in the second quarter of fiscal 2016. That was up from $49.7 million in the second quarter of fiscal 2015, and totaled $126.8 million in the first six months of fiscal 2016, up from $97.1 million in the first six months of fiscal 2015.
The increase in second quarter and first six months of fiscal 2016 principally reflects the impact from fiscal 2016 and 2015 acquisitions, foreign currency translation adjustments on borrowings denominated in EUR under our revolving credit facility, that's the EUR facility, higher performance-based compensation expense and changes in the estimated fair value of contingent consideration associated with a prior year acquisition. In addition, the first six months of fiscal 2016 reflect the $3.1 million in acquisition cost, which I mentioned earlier. SG&A expenses as a percentage of net sales were 19.2% in the second quarter of fiscal 2016, up from 17.1% in the second quarter of fiscal 2015, 19.3% in the first six months of fiscal 2016, and that was up from 17.4% in the first six months of fiscal 2015.
The increase in second quarter and first six-month fiscal 2016 principally reflects the impact from previously mentioned foreign currency translation adjustments on borrowings denominated in euros under our revolving credit facility, higher performance-based compensation expense, changes in estimated fair value of contingent consideration associated with a prior year acquisition. Additionally, the first six months of 2016 reflects a half a percent impact from the non-recurring acquisition cost. That's that $3.1 million. Our interest expense did increase to $2.3 million in the second quarter of fiscal 2016, from $1.1 million in the second quarter of fiscal 2015. Increased to $3.9 million in the first six months of fiscal 2016, up from $2.3 million in the first six months of fiscal 2015.
The increase in second quarter and first six months of fiscal 2016 was principally due to higher weighted average balances outstanding under our revolving credit facility. That was associated with the fiscal 2015 and 2016 acquisitions. Other income in the second quarter and first six months was not significant. I'm not going to comment on it. Income taxes. Our effective tax rate in the second quarter of fiscal 2016 increased to 32.8%, up from 30% in the second quarter of fiscal 2015. The increase principally reflects the benefit from a prior year tax return amendment recognized in the second quarter of fiscal 2015. That was for additional foreign tax credits related to R&D activities at one of our foreign subsidiaries. Our effective tax rate in the first six months of fiscal 2016 increased to 31.1%, up from 29.8% in the first six months of fiscal 2015.
The increase principally reflects the aforementioned benefit of additional foreign tax credit related to that prior year tax return amendment, which we recognized in the first six months of fiscal 2015. In addition, the effective tax rate in the first six months of fiscal 2015 reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan. Net income attributable to non-controlling interest was $5.1 million in the second quarter and $9.7 million in the first six months of fiscal 2016. That's comparable to the $5.4 million and the $9.9 million reported in the second quarter and first six months of fiscal 2015. For the full fiscal 2016 year, we continue to estimate a combined effective tax rate and non-controlling interest rate of 39%-40% of pre-tax income.
Moving on to our balance sheet and cash flow. Our financial position and forecasted cash flow remain very strong. As we previously discussed, cash flow provided by operating activities was very strong, increased 58% to $102.7 million in the first six months of fiscal 2016. That represented 147% of net income. That's compared to $64.8 million in the first six months of fiscal 2015. One thing I want to point out here. Often HEICO, when we speak to investors, they say that we love HEICO, we love everything about it, but the valuation is very high. It's a rich price. Incidentally, that's been the case for many, many years.
Some investors say to us that they don't think HEICO is richly priced, they say, based on cash flow results, HEICO is pretty much in line, then some investors feel it's actually priced lower than comparable companies that do not generate as much cash as HEICO does. As you know, we focus number one on cash flow. Number two on earnings per share. They kind of go hand in hand, but cash flow is, to us, is the name of the game, and that's how we grow our business. Our working capital ratio is a strong 3.4 times as of April 30, 2016, and that was up from 3 at October 31, 2015. DSOs, days sales outstanding, of receivables improved to 46 days as of April 30, 2016, and that was down from 51 days on October 31, 2015.
Of course, as usual, we continue to monitor all receivable collection efforts in order to limit our credit exposure. As most investors know, we suffer very few losses on accounts receivable. No one customer accounted for more than 10% of net sales, and our top five customers represented approximately 21% and 18% of consolidated net sales in the second quarters of fiscal 2016 and 2015. As expected, our inventory turnover rate increased due to the impact of a January 2016 acquisition, and that turnover rate was 125 days for the period ending April 30, 2016, and it was up from 116 days for the period ending April 30, 2015. If we exclude the impact of this acquisition, the inventory rate turnover was 117 days and 116 days in the first months of fiscal 2016 and 2015, respectively.
Our net debt to shareholders' equity ratio was 53.8% as of April 30, 2016, with net debt, and that means total debt less cash and cash equivalents, of $526.1 million, and that was principally incurred to fund acquisitions in fiscal 2016 and 2015. We have no significant debt maturities until fiscal 2019, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisition opportunities, which should accelerate growth and, of course, maximize shareholder returns. The outlook. We look ahead to the remainder of fiscal 2016, we anticipate organic growth within our aftermarket replacement parts and specialty products lines that serve the commercial aviation markets, moderated by softer demand for certain component repairs and overhauls. We expect organic growth within ETG, reflecting increased demand for the majority of our products.
During the remainder of fiscal 2016, we plan to continue our focus on new product development, further market penetration, executing our acquisition strategies and maintaining our financial strength. Based upon our current economic visibility, we are increasing our estimated consolidated fiscal 2016 year-over-year growth in net sales to between 15% and 17%, and growth in net income to 12%-14%. This is up from prior growth estimates in net sales of 14%-16% and the growth in net income of 10%-13%. Additionally, we anticipate our consolidated operating margin to approximate 18.5%-19%, depreciation and amortization expense of approximately $62 million, CapEx approximately $32 million, and cash flow from operations to approximate $220 million. In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on, again, cash generation and acquiring profitable businesses at fair prices.
That is the extent of our prepared remarks, and I would now like to open the floor up for questions from all the callers on this call.
The floor is now open for your questions. If you would like to ask a question at this time, simply press star then the number 1 on your telephone keypad. Again, that's star 1. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Your first question comes from Michael Ciarmoli of KeyBanc Capital Markets.
Hi. Good morning, guys. This is actually Kevin on for Mike.
Good morning.
Nice quarter. Wanted to start on the FSG side. Just wondering if you guys could elaborate a little bit more on the increased demand you saw in the quarter. Anything specific in terms of region, carriers, or certain aircraft, or part families that were particularly strong in the quarter?
Hi, this is Eric. I'll take the question. Good morning. I wouldn't say that there was any particular area of strength. I think that all of our products did quite nicely. In reviewing the sales performance with our sales executives, I think that the demand for the products has been very broad-based with the customers wanting us to develop additional parts for them so they could save money and have an additional source of supply. No, I wouldn't say that it was in any one particular area.
Okay. That's helpful. Just on the margins in FSG, Eric, it sounds like mix was a factor there given that MRO was down a bit. Anything else going on in the margins? We saw a pretty sharp increase sequentially.
No, I would say it's just sort of part of our natural mix. Sometimes we have a little bit more of lower profit margins, sometimes we have a little less of that business. I would just say that it's mix. I'm very happy with the continued focus at all of our businesses on cash flow generation. I wouldn't say that it was anything really out of the ordinary.
Okay.
Thanks, Kevin.
We continue to hear that there's strength in the aftermarket, particularly on the CFM56 and the V2500. Can you talk a little bit, Eric, maybe about how you guys are positioned on those programs and what you're seeing there?
The answer is yes, I'll talk a little bit about it. We have to be careful about specific platforms because, of course, our competitors are very interested in what we're doing. I think, as everybody knows, the majority of our sales are, over half of our sales in the PMA parts area are components. It's not engines, it's fuel, hydraulics, pneumatic, electromechanical, wheels and brakes, structures, all sorts of various parts for the aircraft. We continue to be active over on the engine side. I'd say that roughly over the last 20 years, there's been increasing competition in the engine side. Of course, I think most people are familiar that the European Commission is looking into some of, I think, what they believe are anti-competitive practices of certain suppliers. There's no question that the engine business has been a tougher business.
We still continue to be active in it. We've got customers who want us to develop parts, who want us to support them. It definitely has become more competitive as certain manufacturers have really, in my personal opinion, used a lot of anti-competitive practices to try to squeeze competition out of the market. It continues to be something that we're going after, but again, most of our business is over on the component side.
Okay, thanks. Just last one for me, I guess shifting it to ETG, maybe for Victor here. Saw the highest organic growth since early 2011. Any specific thoughts you can provide on kind of the DoD budget environment or programs that are specifically driving growth there? Maybe also your thoughts on how sustainable you think these levels are. What do you guys have in terms of backlog and visibility on the ETG side? Thanks.
Kevin, sure. This is Victor. In answer to your question on the DoD budget, truthfully, we really don't have much visibility beyond what everybody else has. I think we get the same information that the public receives, which is that budgets are expected to grow, that there has been some improvement in procurement, and that is our expectation going forward. The growth in our defense operations sales were across multiple product lines, not every one of them, not every business, but it was across many different ones, including short cycle and long cycle businesses, which to us is pretty healthy. We like to see that. I'd just say, I think it's consistent with the expectations that we've talked about now, probably, and you've heard us talking about this for the last year or year and a half, even. I'm trying to remember back to some of those conference calls.
We feel that the budget should be healthy. I'm not looking for massive increases in the budgets. I don't think we're looking back at the kind of 2003, 2002 defense budget increase levels. Of course, foreign defense is contributing to that as well. That's an important part of our business, whether some of it's directly to foreign contractors or through the prime defense here in the U.S. In terms of what we're expecting going forward, you talked about that organic growth rate. It does move around over time, the guidance that we've given in the press releases, and I discussed in the comments earlier, are still operative, and we hope to achieve these growth rates. I know we've done it often in the past, but we'd rather commit to something lower, and if we do better, that's great.
We're going to hold into kind of the historic growth rates that we've said, which is the mid to low single digits, and hopefully can do better than that. I would count on our guidance, and that's where we're putting it.
Great. Thanks for the detail. Appreciate it.
You're welcome.
Your next question comes from Greg Konrad of Jefferies.
Good morning, great quarter. Just to stick with ETG, it appeared that Robertson contribution was maybe a little bit stronger than we had modeled. Can you maybe size that contribution? Is there any seasonality into the business?
Unfortunately, this is Victor, I can't size the revenue contribution from Robertson Fuel Systems itself. I can answer the question on seasonality. There is no particular seasonality to this business, but it does tend to batch, meaning that it can happen that one quarter will have a disproportionate share of revenue versus another quarter, and that's because these are kind of high-dollar items, and they tend to ship in large batches as required by our customers. That's the sort of thing that can happen over time. I don't know that that was the case in this quarter. I would expect that to happen, but even out over the course of a year. It should even out over the course of a typical year.
Thanks. Also just on the commercial side, we've seen the OEs maybe look for opportunities to take costs out of the supply chain, whether it be Boeing with Partnering for Success or other OEs. Being a lower cost producer, have you seen any benefit to these shifts in the supply chain?
No, we haven't seen really any significant shifts right now other than the customers are very knowledgeable about what's going on, and they recognize that there's not a lot of competition in the market. I think they really value us being in the market. I think whenever a potential competitor drops out, it just makes their interest in us even greater because they need to preserve the competition, and they like the independence of HEICO. I can't say that I've seen anything thus far as a result of that.
Thanks. Just last, can you size the change in the estimated fair value of accrued contingent consideration?
Yeah. This is Carlos. The change in accrued, sorry, contingent consideration really for the quarter and for the year, there were similar changes, about a million and a half and about two and a half million for the six months. For the quarter it's about a million and a half, and two and a half million for the six months. That was principally due to one of our earn-out deals with a foreign subsidiary is performing much greater than we had anticipated on the front end. We're very proud of that and happy about that. As they continue to outperform our expectations, we have to increase the earn-out liability that we would owe them at a point in the future.
Thank you.
Your next question comes from Larry Solow of CJS Securities.
Good morning.
Good morning, Larry.
Good morning. Just a quick follow-up on the contingency liability. Did that flow through FSG, or was that in the corporate line? I know the corporate line was also a little higher than we expected.
It goes to the SG&A corporate.
Oh, it is in the corporate line. Okay.
Larry, some of that also includes some FX impact for the quarter and the year. The exchange rate of the euro against the dollar has worked against us, there's a little bit of FX baked into those numbers.
That's more a balance sheet than an operational, I guess.
That actually goes through the P&L because we're holding the euro debt on our books, and we're holding the euro liability on our books with our functional currency as dollars. We have to take the hit to the P&L every quarter when we have-
Right. It flows through the P&L, it's actually a balance sheet transactional thing, right? Not a
We have the liability on the balance sheet.
Yeah. Exactly. Okay. Then just a little more granularity on Flight Support Group. Obviously things sound like they're going pretty well there. Not a lot of change to your outlook. Just curious, obviously you have the market doing a little better. It's up by, I think, 6% this year. I think you guys are up 3% last year. Some of your competitors are noting improvement. Have you seen any sequential improvement over the last couple of quarters, year-to-date? Or is some of this growth being driven more just by your initiatives and more new product introductions?
Larry, this is Eric. With regard to the FSG organic growth, we did report stronger numbers in the second quarter for organic growth as compared to the first quarter. There was acceleration there. I think that in talking with the salespeople, we don't think that there's a lot of excess inventory in the supply chain. The customers want us to develop more parts. I think we've got a lot of good stuff consistent with what we've had in the past on the horizon. I wouldn't say that there's any really change to our strategy or focus. There has been definitely a pickup in the organic growth from-
Okay, great
first quarter to this.
Got it. Then on the repair and overhaul side, is the weakness, is it really predominantly just from South America? Because I thought last quarter there was also just a little general sluggishness. Is that pretty much gone now, and it's basically just the South American market that's hurting you?
Larry, this is Carlos. I think a couple of things. One, the South American market is softer, and that's the predominant factor. We did mention in the first quarter, we saw a little bit in the second quarter, the average ticket price in some of our repairs is a little lower than it had been. I do think that's a combination mostly of some of these part outs that are going on. Some of the repairs that we're getting aren't as acute as they were historically. There's a little bit more ring time left in the parts we're taking in. They're not as worn out. So we are seeing a little bit of a decrease in the average ticket revenue per ticket price, but not substantially. The majority of it was the South American market and those carriers down there.
Got it. Okay, great. Then just last question that may have been touched upon on the last call, just on CapEx. Pretty significant step up year-over-year. I know you obviously, sales were higher, but I guess on a percentage of sales, it's a little over 2% versus about one and a half the last couple of years. Just remind us, I think you have some initiatives for some investments at some of the newly acquired companies. Is that what's driving the CapEx higher? Should we expect that to sort of tail off as we look out to next year?
We've got a CapEx budget that contemplates some expansion.
Okay.
To your point, some of that expansion is happening in those acquisitions that we made in 2015 and 2016. I would expect the CapEx spend to be, I know historically we might have been a little bit underspent to our guidance, but I'm expecting this year to be close to our guidance on the CapEx spend. Our guys are very frugal, though, so they may surprise me, but we do have some very nice plans for growth and expansion right now that are included in that budget.
Great. Excellent. Okay, appreciate it. Thanks a lot.
Thank you, Larry.
Your next question comes from Ken Herbert of Canaccord.
Hi, good morning.
Morning, Ken.
Hey, Eric, if I could, I just wanted to dig a little deeper into the repair and overhaul commentary. I can appreciate the South American impact. Can you quantify maybe how much that business was down in the quarter? Then are you seeing any shift where maybe there's less opportunity as MROs start to maybe do more repair in-house? Has that been at all a factor that you faced or a headwind that you faced?
Okay. Good morning, Ken Herbert. With regard to the second part of your question, MROs doing more in-house, I wouldn't say that there's really a trend towards that. If anything, I think there's more of a trend to send it out. We're in a good position, if they want to send it out, we have the opportunity to take it in and turn the wrenches, if you will, ourselves. Then if MROs perform their own maintenance or airlines perform their own maintenance, then we can sell them parts in order for them to accomplish their maintenance or maybe repair some subassemblies for them. I wouldn't say that there is a significant change there. With regard to the MRO, you asked about the drop in South American sales. I don't think that's a loss of market share.
We're all familiar with what's going on in South America with commodity prices and some of the political turmoil going on. I think that our market share is very strong, and we're going to be in a good position to recover that. In terms of breaking out specifically, I think that's hard for us to do because of competitive reasons.
Okay. No, that's helpful. I can appreciate that. I guess on the repair and overhaul side, again, just to echo or to clarify what mentioned, and Carlos, I think, mentioned a few minutes ago, you are seeing lower ticket prices as there's maybe more green time availability, maybe a little more surplus or other alternative material that might be lowering those overall ticket prices. As you look out for the second half of the year, do you anticipate any shift in the repair and overhaul, the MRO side of your business? Any sort of sequential improvement we could expect in that business?
I don't think we anticipate a significant shift. I think it's probably going to be in the area that it's in now. Maybe there could be a little bit of improvement, but as you know, we don't like to forecast something like that we really don't control. We feel confident that when the airlines need the components that are going to send them to us. But honestly, until we tear them down and know what they need, it's very difficult. I would think the bias maybe would be a little bit to the upside, but I wouldn't want to overstate that or overplay that because we just don't have enough data points right now.
Okay. That's helpful. If I could, Victor, on Robertson, really nice quarter. Is there anything in particular you could point to around the growth for that business that you saw in the quarter? Maybe quantify, maybe you don't want to quantify Robertson specifically, the contribution or the growth there, I know there's been a lot of talk lately about the FAA and the NTSB looking at crash-resistant fuel systems on civil helicopters, at least here in the U.S. Are you seeing any pull there yet, or could that be any sort of upside opportunity for you to the extent to which you see any activity on the civil side?
Thank you. Yes, this is Victor. It's a good question. The answer is, at this point, it's upside to us. As you know, it wasn't the driver for why we bought the business, I expect that to be upside for us. We haven't really seen much out of it at this point, I think it's probably something that's
A little further out than we are now, just in terms of development, certification, government push. In terms of Robertson's business overall, while you're correct, I can't break out the revenue from it exactly, of course, talk about specific customers. I can say that their success was broad-based, that it was in the areas we expected when we made the acquisition. They're doing what we anticipated, maybe even a little bit better than we anticipated. So far, it's going very nicely. As I've said before, I think we have an excellent team there, starting with an excellent CEO, cascading through the entire organization. I've had the opportunity-
Yeah, that's helpful
to spend a little time with them at different events and trade shows, and we continue to be impressed.
No, that's great. Broadly within ETG, any other color you can provide on, I know obviously space and defense seem to be good in the quarter, and you said it was broad-based. Is there any particular programs you would point to, regions or geographies you might point to where you're maybe seeing a little better strength than you thought? How should we think about that with any additional detail you can provide?
It's a good question. I think as is always the case, it's not every space line for us or every space business that was moving ahead. Kind of the same as I mentioned with our defense business, right? It's overall in that direction. I would say that there's no one particular region. Again, it was broad-based, not a particular region where the revenue was coming from that drove it. I would expect that commercial space growth rate for us may moderate a little bit as the year wears on, but still good. Overall, I would expect some moderation in that, and I think that maybe is reflected in the guidance that we've given.
Great. Well, thank you very much, and really nice quarter, guys.
Thank you very much.
Thank you.
Your next question comes from George Godfrey of CL King.
Thank you. Good morning, gentlemen.
Morning, George.
I wanted to follow up just to dig in a little bit more on the ETG side, the organic growth rate accelerating from 4% up to 12% this quarter. That's a pretty substantial jump in just one quarter. Would you say that, and I heard the comments about broad base, is that reflective of the batch nature that you talked about, that there were more programs just simultaneously hitting a sweet spot this quarter?
Well, it's a result, George, this is Victor, by the way. It's a result of a few things. By the way, historically, if we go back a number of years, it hasn't so much jumped around recently. We have seen this kind of thing in the past. We have seen levels jump up, and we'll have a very high growth rate in a quarter, and we may have a flat or even slightly down in another quarter. I would expect that kind of thing and those kinds of movements to continue into the future. It was a result really of a number of factors. I don't think there's any single one that I would particularly call out. I think you look at prior year, we look at the demand for the products, and they all factor into it.
I wouldn't say anything is necessarily particularly batched into the quarter, although we run this business to maximize income, so we don't do anything to smooth it out. That's just not our style. We tell our businesses, you ship when you believe you should be shipping, according to your contracts and when you're ready, and quality and so on, all layer into that. That too, has an effect on the business because we're not trying to smooth it out. We're often producing, and it will be produced in a level-loaded way. Again, if the customers are taking it later on, that'll have that batch effect, and they'll say, "Look, we want them in certain batches." We produce as efficiently as we can.
Understood. The gross margin up 200 basis points year-over-year, really nice impact there. Is that principally Robertson having a higher profitability structure?
Robertson is part of the mix in that, and of course, an important part of the mix in that, but we've got a number of good businesses in there as well. Some other acquisitions we've made along the way in the last few years are pretty strong margin too.
Speaking of the acquisitions, the $3.1 million expense that you called out for the first six months, do you have an estimate on how that breaks down between the Q1 and Q2? Would a 50/50 mix be a reasonable place to start?
I'll let Carlos answer, but I think it's all Q1.
George, this is Carlos. We incurred that expense all in Q1 when we closed on the Robertson deal, and that was a fee paid to the investment bankers.
Okay, no recurring or one-time expenses here related to that in Q2?
No.
Okay. Last question, just to go on that MRO business. The maintenance, repair, and overhaul, do you expect that to continue to trend down as we move through the next four to six quarters? I'm just wondering when the comparisons get such that the full Flight Support growth, organic rate of 4% matches the backed-out MRO growth of 7%. Do we see that in 2017?
Well, George, this is Eric. I don't believe that the repair and overhaul sales are going to be trending down, going forward. We're always very conservative on predicting and sort of calling a turn. As I mentioned in the prior question, I think that we probably have more exposure, if you will, to the upside than the downside there. I think that we're, as I said, better exposed to the upside. Having said that, with regard to when that rolls off, I would say the R&O business got a little weaker, basically in our first quarter, so that would be the period starting November. Again, I think, we're still performing extremely well in that area. We speak to other firms in the space, and I think that they're much more adversely impacted than we are.
I'm optimistic that we're going to do quite well in that space.
Okay. Great. Thank you very much.
George, I may want to add to that. If we look at our repair and overhaul business, all of our facilities, for the most part, are doing very well. It is really targeted to the South American and to some degree, Latin American marketplace, where it's a little weaker. As Eric mentioned earlier, that's kind of been the anomaly that we experienced in the first quarter and second quarter. I think we may see that marketplace continue to be soft into Q3 as our kind of expectation, we don't think that it's a perpetual problem, again, they're going to have to fly their fleet, and they're going to need these things repaired. So we believe we still have the market share, and we're still in that market, and we'll get that business when economic conditions improve in that part of the world.
Understood. Nice quarter. Thank you very much for taking my questions, gentlemen.
Thank you, George.
Your next question comes from Robert Spingarn of Credit Suisse.
Morning, Mendelsons and Carlos.
Good morning.
Morning, Rob.
I think my peers have done a good job at getting to a lot of the detailed stuff on the quarter. I wanted to ask a couple of more strategic questions. Victor, if I can indulge you on ETG a little bit more, I wanted to see if you can highlight a few areas. You've got so many interesting businesses that you've acquired over time. Are there any areas you can highlight where you have an opportunity to organically grow the catalog? In other words, I don't know, if you take Robertson and fuel controls on helicopters, does that translate into other kinds of aircraft? That's where I'm headed with this type of question.
Rob, this is Victor. It's a very good question. Certainly, in the case of Robertson, we do think that the fuel systems are applicable to other aircraft, generally rotating wing planes. We've talked a little bit about the commercial opportunities there, but there are also expansion opportunities, I think, outside the U.S. for them in rotor craft, strategically. I think that also applies in a number of our space businesses as well, as they've developed and continue to develop what I would call more advanced technology and more advanced designs. It's really what's driven a lot of the growth that we've seen over the years, and some of it this year, where these businesses have been investing in newer, again, more advanced designs, which are higher value to their customers.
Of course, in our space business, we have that in a number of places as well. Now, not all of them will succeed, right? There will be different levels of success, and that's kind of what informs us on our overall growth level expectations. Those are important parts of our business. What we're not doing is harvesting, and strategically, when we acquire a business, we look at where they are in the technology spectrum for their product and how that's viewed by the customers and what the customers want. It's very much driven by where we think the customers want to go as opposed to necessarily where we want the customers to go.
Is there any way, Victor, to quantify, when you look at the broad spectrum of ETG, what percentage of your businesses have this somewhat horizontal opportunity? Is there any way to think about that?
Yeah. Sort of in a rough sense, I would say it's better than half of the businesses.
Okay.
I'd have to actually go through and sit down and think of each one of them, and then I'd have to distill it down to revenue. As I think of it at a close basis, I certainly can think of more than half, kind of off the top of my head.
Okay. That's a good answer. Eric, if I could switch over to FSG, I wanted to ask, this is a follow-on to the question earlier about the supply chain and whether, I think you've said repeatedly on this call that your customers are asking you to find other areas where you can help them with dual sourcing product. Have the airframers asked the same question? Have you seen any of that?
You mean the airframers asking us to-
develop parts for them?
For them, for their programs, where maybe they want a second source.
I appreciate your question, but I think we need to be a little bit careful in how I answer that.
Okay.
I think that there will be opportunities for us in that space, as they want to drive their costs down. I think at this moment, I'm sorry, I have to defer on answering.
That's a reasonable answer. I understand why. Just one more question on, this is more toward the quarter, Eric. I've asked this in the past, and you've talked about the organic growth. Is there any way, again, to talk about sort of same store sales on particular parts? I'm trying to get a sense of what unit volumes are truly doing in the market. This is same airplane comparisons related to traffic growth and so on. Not penetration of a particular customer type growth or catalog addition, but just flying's up, so we're seeing an equivalent increase in the utility or utilization of that part.
Yeah, I would say that our organic growth comes primarily from volume, not from price. We tend to be very price friendly to our customers. However, diving in deeper on your question, of course, that organic growth is made up of a lot of things, and one of them is increased market penetration and then change in volumes and all that.
Yeah.
I would say that volumes are flat on the programs right now, in general.
Okay.
I would say they're more flattish, I think.
You're adjusting out sort of the catalog effects and so forth. You're really looking at one airplane versus one airplane, flattish.
Yes. As you know, some of the older aircraft are coming out, some of the newer aircraft are increasing, I really need to go back and take a look at that. I would say just in terms of unit volumes, they're pretty flat.
Okay. All right. Well, thank you.
Thank you.
Thanks, Rob.
Your next question comes from Chris Welty of Raymond James.
Morning, gentlemen. I think this question was asked in a more generic sense. I'll ask it more directly. There was an article or announcement by Boeing that they're looking to pull in potentially some more of their parts business, which they view as attractive. Can you talk about, to the degree that they move in that direction, whether that benefits or hurts you in the marketplace?
Hi, Chris. This is Eric Mendelson. I'm happy to answer that question. I think the opportunity exists for us in that space. For example, if Boeing or Airbus have suppliers, and they're not getting the, if you will, the pricing that they want out of those suppliers, I think there is an opportunity to come to us. We're familiar with the regulatory process, and in many cases, the airframer does not own the intellectual property. As you know, that's not a barrier for us because we can develop it ourselves. I think that that could be an opportunity for us, but we sort of have to see how that plays out.
Okay. Also, on the space side of the business, if I think about your positioning with Sierra Microwave and other, you tend to be on more of this sort of big geo program exposure. Are you undertaking any efforts to look at some of the new developments, new space CubeSats, satellite constellations that are starting to percolate?
Absolutely. I don't know that we'll be a big player in the CubeSat market so much, but certainly some of the LEO constellations draw our interest, and I would foresee at some point in time us participating to some extent.
Very good. Congratulations on the great results.
Thank you.
Thanks, Chris.
As a reminder, to ask a question, please press *1. Your next question comes from Jim Fong of Gabelli Company.
Hi, good morning, everyone. Great quarter.
Thank you, Jim.
It seems like the Robertson acquisition is doing quite well and meeting your expectations. I was wondering, did that give you more confidence to make acquisitions more in this kind of order of magnitude of the size? You kind of touched upon this with some early response, but does this also kind of open some new opportunities in the defense area for you to look at acquisitions?
I think, Jim, the answer is we're very confident on making acquisitions, large acquisitions, smaller ones, and we're an opportunistic buyer. If a large acquisition comes along, we're happy to do it. I guess we've always been that way, and we have confidence in our due diligence process, our ability to analyze, and so forth. As you know, over the years, the acquisition program has been very good, and we've made a lot of right guesses, good acquisitions. The second part of your question was, can you repeat that?
Robertson's more in the defense end. I was just curious if you're now looking at that market as another opportunity for you to make more acquisitions, with valuations still relatively inexpensive in that area.
The answer is definitely yes. Again, we've always looked in this defense market, and we've made other acquisitions before Robertson in the defense space. We're open to make acquisition, as long as the acquisition meets our criteria, which is high margin, strong management, history of positive growth, and we analyze the product. Those two are the really key. If they don't have strong management and margin, we would not be interested in it. To answer your question, absolutely, we're wide open to acquisitions in the defense space. Sure.
Very good. Could you just comment on your pipeline of opportunities currently?
Well, the pipeline of opportunities, there are a lot of companies listed. It kind of goes up or down. Unfortunately, we've said this at many conferences, we start to get into transactions, and they look great on paper, and we're told this, that, and the other thing, and we start to kick the tires, and we do our due diligence internally. Carlos has a financial group that really goes out and scrubs these things. Believe it or not, unfortunately, we have investment bankers and sellers that tend to fabricate what's really going on. When we start to turn over the stones, instead of having 15 million in EBIT, they have 10 million in EBIT, and they say, "Well, why is that?" They give you a whole bunch of excuses, they still want the same price.
We run into this more often than I would like to think that it would happen. It happens, we can spend a lot of time, until the deal is closed, we don't know where it's going to wind up. We are looking at things. We are negotiating with people, it's amazing how they promise you one set of results, you go in there, you discover that it is really not the way they set it up. We walk. There's no way I can predict how many we're going to make. Last year, we made about 6 acquisitions during the year. This year, we've made how many? 2. I think we've made 2. Of course, the Robertson was a large one, great acquisition.
By the way, Robertson, I just want to point out, the seller, the management, there was no fluffing, no baloney. Great people to deal with, great management. Very pleased, as you've heard on the call. We love acquisitions. We've also made a number of Recently, we made a defense acquisition, MMS. Fantastic. The guys are super stars. That's what we like to do, and if we can't get that quality, we would rather pass.
Well, I guess the results that you show really shows the type of work you've been doing on the acquisition front. Congratulations.
Thanks.
That's all I have. Thank you.
Thank you, Jim.
At this time, there are no further questions. I would now like to turn the floor back over to management for any additional or closing remarks.
Thank you. We want to thank everybody on this call for their interest in HEICO. We remain available by phone or personal visit to answer questions which you may have. We look forward to speaking to you at the end of our third quarter, which should be sometime near the end of August. If we don't speak to you till then, have a good summer and a very good holiday weekend this weekend, and we will resume late August. We can turn off now.
Thank you. This concludes today's conference. You may now disconnect.