Welcome to HEICO Corporation's Fiscal 2015 Third Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. 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 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 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 risks, interest, foreign currency exchange and income tax rates and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which can 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 ks, Form 10 Q and Form 8 ks. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
Thank you. I would now like to turn the call over to Lawrence Mendelson, HEICO's Chairman and CEO.
Thank you and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO 3rd quarter fiscal 2015 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. I'm joined here this morning by Eric Mendelson, HEICO's Co President and President of HEICO's Flight Support Group Victor Mendelson, HEICO's Co President and President of HEICO's Electronic Technologies Group Tom Erwin, HEICO's Senior Executive Vice President and Carlos Macau, our Executive VP and CFO. Now before reviewing our Q3 operating results in detail, I'd like to take a few moments to summarize the highlights of another record setting quarter.
I want to thank our HEICO team members for their collective efforts, outstanding execution during the Q3 and by remaining focused on income generation, cash flow and profit margin strength. As I've said before, our mission is not just to grow sales to make a larger company, but to generate income and strong cash flow for all shareholders. The record 3rd quarter results, I'll now discuss are a testament to that strategy. Our consolidated net sales, operating income and net income in the Q3 of fiscal 2015 represent record quarterly results and they were driven principally by record quarterly net sales and operating income in Flight Support and increased profitability in ETG. Consolidated net sales, operating income and net income in the 1st 9 months of fiscal 2015 represent all time record results for HEICO and they were driven principally by record net sales and operating income within both segments.
Consolidated operating income increased 17% to a record 58 $500,000 in the Q3 of fiscal 2015 and that was up from $50,100,000 in the Q3 of fiscal 2014 and increased 7% to a record $160,700,000 in the 1st 9 months of fiscal 2015 and that was up from $149,700,000 in the 1st 9 months of fiscal 2014. Consolidated net income increased 3% to a record $34,400,000 in the Q3 of fiscal 2015 and that was up from $33,400,000 in the Q3 of fiscal 2014. It also increased 7% to a record $95,100,000 in the 1st 9 months of fiscal 2015 and that was up from $89,200,000 in the 1st 9 months of fiscal 2014. Consolidated net income per diluted share increased 4% to $0.51 in the Q3 of fiscal 2015, up from $0.49 in the Q3 of fiscal 2014. Consolidated net income per share diluted share in the Q3 of fiscal 2014 included a net $0.05 per diluted share benefit from a reduction in accrued contingent consideration related to a prior year acquisition.
Consolidated net income per diluted share increased 6% to 1 $0.40 in the 1st 9 months of fiscal 2015 and that was up from $1.32 in the 1st 9 months of fiscal 2014. Consolidated net income per diluted share in the 1st 9 months of fiscal 2014 included a net $0.10 per diluted share benefit from a reduction in accrued contingent consideration related to a prior year acquisition. Just a comment later on in the Q and A, I'm sure Carlos and Tom will be happy to discuss that the impact of those reductions in accrued contingent consideration. Cash flow from operating activities remained strong in the Q3 of fiscal 2015, totaled $56,500,000 or 100 and 64 percent of our consolidated net income, very strong, I may add. Cash flow provided by operating activities in the 1st 9 months of fiscal 2015 totaled $121,300,000 or 128 percent of consolidated net income.
In July 2015, we paid our 74th consecutive semiannual cash dividend since 1979 and that was paid at a rate of $0.07 per share. As of July 31, 2015, we remain extremely well positioned for growth as a result of our financial flexibility. The company's net debt to shareholders' equity ratio was only 31%, with net debt of $267,800,000 In June 15, we reported that our Duquesne's C COM subsidiary had created the 1st FAA and ESA certified 90 day underwater beacon. We're pleased to note that they have now established the new operational standard in underwater locator beacon technology. With over 40 years of industry experience, Duquesne's CECOM has the largest installed base of underwater locator beacons on commercial, military and biz jets around the world.
In July 2015, we reported that our 3 d plus and VPT subsidiaries supplied mission critical components for NASA's New Horizon spacecraft, which has traveled farther and faster than any prior space mission in history. We are consistently amazed by the engineering talent and forward thinking of our team members who supported NASA in this historic life past Pluto and beyond. 3 d plus VPT and certain other HEICO subsidiaries have routinely supplied critical components on NASA and the European Space Agency programs. And many of HEICO's subsidiaries are well known leaders in complex, high reliability, mission critical engineering and manufacturing for spacecraft. We want to congratulate our teams at 3d plus VPT and Duquesne's CECOM on these wonderful tremendous accomplishments.
As I reported in our last conference call, the acquisition pipeline has been very active. And as you know, we're pleased to report that we closed 4 transactions since the second quarter. In May 2015, our Flight Support Group completed the acquisition of Thermal Energy Products, which engineers, designs and manufactures removable and or reusable insulation systems for industrial, commercial, aerospace and defense applications. And this is now part of HEICO Specialty Products Group. In August 2015, our Flight Support Group acquired 80.1% of the equity of Aerospace and Commercial Technologies, we call it ACT, a leading provider of products and services necessary to maintain up to date F-sixteen aircraft operational capabilities.
Aerospace and Commercial Technologies, ACT, were working coordination with our Blue Aerospace subsidiary to support the F-sixteen community worldwide. The acquisition expands our reach into defense aftermarket support and broadens our existing base of business in this very important sector. In August 15, our Flight Support Group also acquired all of the outstanding stock of ASTRO Steel Products Manufacturing Corp, a manufacturer of expanded foil mesh, which is integrated into composite aerospace structures for lightning strike protection in both fixed and rotary wing aircraft. This acquisition expands HEICO's capabilities and offerings of aerospace and composite parts. And also in August 2015, our ETG Group acquired 80.1 percent of the equity in Midwest Microwave Solutions, we referred to it as MMS, a designer and manufacturer of unique size, weight, power and cost optimized communications and electronic intercept receivers and tuners for military and intelligence applications.
This application I'm sorry, this acquisition is a perfect fit for HEICO and expands our intelligence gathering equipment business. In June 2015, we were pleased to report that Forbes Magazine had again named HEICO as one of the world's 100 most innovative growth companies. This makes 10 awards in 10 years. The recognition is a true testament to the expertise and innovative spirit of our more than 4,500 team members worldwide. And I express my deepest appreciation and admiration for their remarkable efforts and dedication to HEICO's success.
I would now like to introduce Eric Mendelson, Co President of HEICO and President of HEICO's Flight Support Group to discuss the results of Flight Support Group. Eric?
The Flight Support Group's net sales increased 8% to a record 206 point $6,000,000 in the Q3 of fiscal 2015, up from $191,600,000 in the Q3 of fiscal 2014 and increased 4% to a record $591,400,000 in the 1st 9 months of fiscal 2015, up from $568,000,000 in the 1st 9 months of fiscal 2014. The increase in the 3rd quarter and 1st 9 months of fiscal 2015 mainly reflects net sales contributed by the fiscal 2015 acquisitions as well as additional net sales from new product offerings in our aftermarket replacement parts and repair and overhaul services product line. These increases were partially offset by lower net sales of certain industrial products that we have discussed in prior conference calls. As a result of the lower net sales of certain industrial products, the Flight Support Group experienced a small 1% and 2% organic revenue decline in the 3rd quarter and 1st 9 months of fiscal 2015 respectively. Excluding the impact of declines in certain industrial net sales, the Flight Support Group experienced organic growth of 4% and 3% in the Q3 and 1st 9 months of fiscal 2015 respectively.
Consistent with most of our peers, we experienced somewhat lower aftermarket industry growth in our 3rd quarter and 1st 9 months of 2015 as compared to expectations for higher industry growth going into this year. Based on current available seat miles or ASMs, we believe that in our Q3, airlines avoided spending on maintenance costs where possible and ultimately will have to increase such spending if they continue to fly the aircraft that they are currently operating. The Flight Support Group's operating income increased 15% to a record $39,300,000 in the Q3 of fiscal 2015, up from $34,200,000 in the Q3 of fiscal 2014 and increased 4% to a record $107,500,000 in the 1st 9 months of fiscal 2015, up from $103,300,000 in the 1st 9 months of fiscal 2014. The increase in 3rd quarter and 1st 9 months of fiscal 2015 is principally attributed to the previously mentioned net sales growth. The increase in the Q3 of fiscal 2015 also reflects the impact of foreign currency gains related to a euro denominated contingent earn out liability and lower accrued performance based compensation expense, partially offset by a less favorable product mix from the previously mentioned decrease in net sales of certain industrial products.
The Flight Support Group's operating margin improved to 19.0% in the Q3 of fiscal 2015, up from 17.9% in the Q3 of fiscal 2014 and approximated 18.2% in both the 1st 9 months of fiscal 2015 2014. The increase in operating income as a percentage of net sales in the Q3 of fiscal 2015 principally reflects the previously mentioned foreign currency gains in lower accrued performance based compensation expense, partially offset by the less favorable product mix. 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.
Eric, thank you. The Electronic Technologies Group's net sales decreased 5% to $97,200,000 in the Q3 of fiscal 2015 from $102,100,000 in the Q3 of fiscal 2014. The decrease principally reflects foreign currency exchange rate changes as well as slightly lower demand for certain space and medical products, partially offset by higher demand for certain defense and other electronic products. The Electronic Technologies Group's net sales decreased 1% to $277,400,000 in the 1st 9 months of fiscal 2015 from $279,300,000 in the 1st 9 months of fiscal 2014. The decrease is mostly from lower net sales of certain space and other electronics products, resulting mainly from foreign currency exchange rate changes, partially offset by higher demand for certain defense and aerospace products.
As for our principal markets, overall, our defense businesses have strengthened and as we discussed in last quarter's call, there is bipartisan support in Washington for increased defense spending in the next fiscal year. So we're cautiously optimistic that U. S. Defense budgets overall will grow. Our commercial space business has been a little bit softer, about half of which came from currency translation changes and half of which resulted from some parts of our businesses coming off excellent performance last year as well as earlier this year.
Overall, we're very pleased with our space businesses, but we'll wait to see if the industry is a little softer than it was. Notably, Lusix did well in the quarter and has continued to improve. The other ETG markets that we serve are seeing a slightly positive overall mix of conditions, but there are pockets of weakness in some of the electronics markets that we serve. The Electronic Technologies Group's operating income increased 14% to $24,400,000 in the Q3 of fiscal 2015, up from $21,500,000 in the Q3 of fiscal 2014. The increase principally reflects a more favorable product mix for certain space and defense products.
The ETG Group's margins operating income increased 6% to a record $66,000,000 in the 1st 9 months of fiscal 2015, up from $62,500,000 in the 1st 9 months of fiscal 2014. The increase mainly reflects a more favorable product mix for certain space and defense products and lower amortization expense associated with intangible assets. The ETG Group's operating margin improved to 25.1% in the Q3 of fiscal 2015, up from 21% in the Q3 of fiscal 2014. The increase mainly reflects a more favorable product mix for certain space and defense products. The Electronic Technologies Group's operating margin improved to 23.8% in the 1st 9 months of fiscal 2015, up from 22.4% in the 1st 9 months of fiscal 2014.
The increase mainly reflects a more favorable product mix for certain space and defense products and lower amortization expense associated with intangible assets. At this point, I turn the call back over to Larry Mendelson. Thank you, Victor and Eric. Commenting now on diluted earnings per share. Consolidated net income per diluted share increased 4% to $0.51 in the Q3 of fiscal 2015.
That was up from $0.49 in the Q3 of 2014. 3rd quarter fiscal 2014 again included a net benefit of $0.05 per diluted share that was mainly due to the reduction of accrued contingent earn out liabilities associated with a prior year acquisition. Consolidated net income per diluted share increased 6% to $1.40 in the 1st 9 months of fiscal 2015 and that was up from $1.32 in the 1st 9 months of fiscal 2014. The 1st 9 months of fiscal 2014 again included a net $0.10 per diluted share benefit mainly due to the reduction of accrued contingent earn out liabilities associated with that prior year acquisition. Depreciation and amortization expense was $11,900,000 in the Q3 of 2015, comparable to the Q3 of 2014.
Depreciation and amortization expense decreased to $35,100,000 in the 1st 9 months of fiscal 2015, and that was down from $36,300,000 in the 1st 9 months of fiscal 2014. That decrease mainly reflects lower amortization expense of certain intangible assets resulting from impairment losses recorded in fiscal 2014, partially offset by a higher amortization expense of intangible assets recognized in connection with some of our fiscal 2015 acquisitions. Research and development expense totaled $9,400,000 in the Q3 of fiscal 2015 that compared to $9,900,000 in the Q3 of 2014. R and D expense totaled $28,900,000 in the 1st 9 months of fiscal 2015 compared to $28,300,000 in the 1st 9 months of fiscal 2014. Significant ongoing new product development efforts are ongoing at both Flight Support and ETG as we continue to invest approximately 3% to 4% of each sales dollar into new product development.
Our effective strategy for the last 24 years has been to reinvest a portion of our earnings into the development of new products and services that can offer lower cost and higher value to our customers. And that in turn facilitates market share growth sufficient to meet our growth goals. SG and A expense decreased to $49,600,000 in the Q3 of fiscal 2015. That was down from $53,200,000 in the Q3 of fiscal 2014. SG and A expense as a percentage of net sales decreased to 16.5% in the Q3 of fiscal 2015 and that was down from 18.3% in the Q3 quarter of fiscal 2014.
The decrease in SG and A expense as a percentage and expenses as a percentage of net sales in the Q3 fiscal 2015 mainly reflects the impact of foreign currency gains, and that was related to liabilities denominated in euros as well as lower accrued performance based compensation expense. SG and A expenses totaled $146,700,000 in the 1st 9 months of fiscal 2015 and that was comparable to the $145,700,000 in the 1st 9 months of fiscal 2014. SG and A expense as a percentage of net sales decreased to 17.1% in the 1st 9 months of fiscal 'fifteen. That was down from 17.3% in the 1st 9 months of fiscal 2014. Interest expense decreased to $1,100,000 in the Q3 of fiscal 2015 and that was down from $1,400,000 in the Q3 of fiscal 2014.
Interest expenses decreased to $3,300,000 in the 1st 9 months of fiscal 2015, again down from $4,200,000 in the 1st 9 months of fiscal 2014. The decrease in interest expense during the Q3 and 1st 9 months of fiscal 2015 principally reflects a higher weighted average balance outstanding under our revolving credit facilities in the prior periods and that was associated with fiscal 2013 acquisitions and the acquisition of certain non controlling interest in fiscal 2014. Other income and expense was not significant. I won't comment on it. Income tax.
The effective tax rate in the Q3 of fiscal 2015 increased to 32% from 23.4% in the Q3 of fiscal 2014. The lower tax rate experienced in the Q3 of 2014 was mainly attributed to a reduction of contingent earn out liabilities associated with a prior year non taxable stock acquisition. The reduction in contingent earn out liabilities during the 3rd quarter of fiscal 2014 was non taxable and accounted for approximately 7% of the change in the effective tax between the two periods. The effective tax rate in the 1st 9 months of fiscal 2015 was 30.6% comparable to 29.7% effective rate in the 1st 9 months of fiscal 2014. Net income attributable to non controlling interests increased to $4,600,000 in the Q3 of fiscal 2015.
That was up from $4,000,000 in the Q3 of fiscal 2014. The increase mainly reflects the impact of net income allocations to the fiscal 2015 acquisitions in which non controlling interests are held. Net income attributable to non controlling interest increased to $14,500,000 I'm sorry, dollars 14,400,000 in the 1st 9 months of fiscal 2015. That was up from $13,500,000 in the 1st 9 months of fiscal 2014. The increase in the 1st 9 months of fiscal 2015 again mainly reflects higher allocations of net income to certain subsidiaries of FSG and ETG in which non controlling interests are held.
On a combined basis, we estimate fiscal 2015 effective tax rate and non controlling interest allocations will approximate 40% of consolidated pretax income in the full fiscal year. Now moving on to the balance sheet and cash flow. As you can see, our financial position and forecasted cash flow remain extremely strong. Cash flow was strong in the Q3 of fiscal 2015 and cash flow provided by operating activities totaled $56,500,000 and that was 164 percent of reported net income. Working capital ratio is a strong 3.2 as of July 31 and that was up from 2.8 as of October 31, 2014.
DSOs or receivables was 46 days in the Q3 of fiscal 2015 and that was comparable to the 47 days in the Q3 of fiscal 2014. Of course, we continue to closely monitor all receivable collection efforts to limit our credit exposure. No one customer accounted for more than 10% of net sales and our top five customers represented approximately 18% 17% in the Q3 of fiscal 2015 and 2014 respectively. Inventory turnover rate in the 1st 9 months of fiscal 2015 was days compared to 111 in the 1st 9 months of 2014. The increase in our inventory turnover rate principally attributed to slightly higher inventory balances at our subsidiaries, which we need to meet customer orders in the near term.
Net debt to shareholders' equity ratio was 31.3 percent as of July 31, 2015 and net debt of $267,800,000 principally incurred to fund acquisitions and the payment of the special cash dividends in fiscal 2014 2013. We have no significant debt maturities until fiscal 2019 and we plan to use our flexibility financial flexibility to aggressively pursue high quality acquisition opportunities, which should accelerate growth and maximize shareholder returns. As for the outlook, we look ahead to the remainder of fiscal 2015 and we anticipate organic growth within our product lines that serve commercial aviation markets, moderated by lower demand for certain industrial related products within our specialty products lines. Despite the currency headwinds impacting our foreign subsidiaries within the ETG Group, we continue to forecast full year organic growth within ETG. During the remainder of fiscal 2015, we plan to continue to focus on new product development, further sales penetration into markets we serve, executing our acquisition strategies and continuing to maintain financial strength.
Based upon current economic visibility, we estimate consolidated fiscal 15 year over year growth in net sales to approximate 5% versus our prior estimate of 8% to 10% percent and net income growth to approximate 8%, which is within our prior estimate of 8% to 10%. We have raised our full year fiscal consolidated operating margin estimate to approximate 18.5% versus our prior estimate of 2018. We also anticipate depreciation, amortization, CapEx and cash flow from operations to approximate $48,000,000 $20,000,000 $200,000,000 respectively. While we have lowered our full year revenue estimates in light of headwinds, which we are experiencing as a result of slower industry growth in aerospace aftermarket, and Eric talked about that earlier, as well as the impact of foreign currency rates exchange rates, which Victor spoke about, we are pleased to maintain our net income growth estimates at approximately 8% for the full fiscal year, and we have benefited from our focus on profit margin strength. Our fiscal 2015 acquisition should position us for continued growth in fiscal 2016 and beyond.
We expect those acquisitions to be accretive at least in the 1st year of the acquisition. In closing, we will continue to focus on creating shareholder value through remaining focus on customers, strong cash flow, generating growth in net income and strong profit margins. And those are the extent of our prepared comments and we would like to open the floor for questions.
Your first question comes from the line of Larry Solow of CJS Securities.
Hi. This is actually Lee Jagoda for Larry. Good morning.
Good morning.
I know on the acquisition side, talking about individual acquisitions purchase price and revenue contribution is sometimes difficult. But given you've made 3 in the last few weeks, is there any way you can combine them and sort of give us a ballpark range for both purchase price and revenue as the combined group of them?
Actually,
we didn't release that information and we don't release it. And at this point, we really cannot give you that information. It's it has not been released to the public, But Carlos can comment a little more on that.
Yes. Baked into our guidance that Larry just articulated, we knew about those acquisitions that were closing that were factored into it. They're not material. Otherwise, we would have disclosed that information, but they are acquisitions that are very complementary to our existing product lines and expand our business and we think they're going to be very good for us, as Larry mentioned, going forward.
Okay. And then
I mean part of the answer which you guys will figure out is when you see the cash flow statement and so forth, you're going to get a kind of a guesstimate from the cash flow statement that we produce, I guess, in the Q4. So it'll give you a kind of figure. But as Carlos says, overall, it was not that material.
And assuming at the end of the year that the 5% top line growth is achieved, What are the components of that 5% meaning what's organic? What would acquisitions contribute? And then what's the negative from FX embedded in that 5%?
So right now year to date, we have acquired growth on a consolidated basis about $32,000,000 And so we expect similar run rate going through the end of the year from the acquired acquisitions that we've already purchased in the Q1, maybe about $10,000,000 a quarter. And then as we just previously mentioned, we're not going to talk specifically about the financial operations or contributions of the acquired acquisitions because they are insignificant to the overall consolidated operations.
And what do you think the FX impact has been over the 1st 3 quarters? And how should we think about that for Q4?
That's interesting. And it's principally impacted the Electronic Technologies Group through some of our foreign subsidiaries that do business in euros and Canadian dollars. And so in the Electronic Technologies Group in particular, they had about a 5% revenue headwind comparatively between Q3 last year and this year, about half of that was related to FX impacts on our revenue line. And I don't have a crystal ball as to what currencies are going to do right now, but we've sort of been conservative in the way we thought about it going forward.
Okay. And then one more question and I'll hop back in the queue. In terms of the better margin forecast despite the lower sales, what are the key drivers of the 50 basis point increase?
There's the key drivers overall were, I think as both Eric and Victor mentioned in their presentation, we had a lower some lower crude performance based compensation. And we've also had we have a euro denominated loan, which we took out in Q1 to do the acquisition of Aeroworks, which had some positive FX benefits, which also contributed to it. And then finally, some of the efficiencies that our subsidiary general managers have baked into their businesses through operating leaner over the past 9 months has contributed principally to it.
Great. Thanks very much.
Your next question comes from the line of J. B. Growe of D. A. Davidson.
Hey, guys. Good morning. Thanks for taking my call.
Good morning, JB.
Hey, Eric. One of the other aftermarket levered players the other day talked a lot about retirements and how that's impacted growth in aftermarket. Maybe you could give us your kind of thoughts on that and how that's impacting your business? Obviously, you guys have multiple ways to grow, but it seems like the organic growth has been a little slow, but you think that's having an impact in terms of total aftermarket demand?
Well, I think that's a very good question. We've been in a number of investor conferences over the last month or so and received a lot of these kinds of questions. And I think in looking at it, as we entered the year, the investors and I would say the analyst community were a little more bullish on the aftermarket performance than what turned out for most of the suppliers. If you look at most of the suppliers, they've been reporting sort of comparable a little bit disappointing numbers with the exception of GE and Safran, which I think had some initial provisioning related to some new aircraft engine types in their numbers. But the way we look at it is, it's a fairly complex equation in that you've got the base fleet aging obviously 1 year per year and then the older aircraft dropping out at the back end and of course the new aircraft coming in at the front end.
The airlines have been flying the older aircraft beyond what everybody originally anticipated. And I think that's one of the reasons why the ASMs are up. And if the airlines continue to fly these older aircraft, they're going to have to put some dollars into it. We had baked into when we build our budgets, we analyze the fleet plans of our customers and we have that all put in there in the if you will, the complex equation. So yes, I think the retirements are impacting it.
And what's going to be really a telling quarter will be in the Q4 when we find out whether the airlines are in fact going to go ahead and buy some of these older assets longer or whether they're going to pull them out as originally planned. That's a little bit unclear as of now.
But in any case that probably wouldn't slow your pace of PMA development, which is
That's correct. Our pace of PMA development is not slowing whatsoever. And as a matter of fact, the airlines are very focused on how we can help them with their current fleet as well as with the fleet that they will be taking deliveries of. So there's no change to our business model whatsoever. As a matter of fact, I've been getting a lot of questions recently.
I don't want to go into specifically which aircraft type or which engines, but I've been getting a lot of questions from senior airline executives about what we're going to be doing on the newer platforms, because they very much want us to be there.
And then one more Eric and then I'll hop back in queue. Just speaking some geographically, I mean, I guess the fleet age is going to vary by region depending on what markets are kind of replacement markets and what markets are growth markets and specifically everybody's worried about China. I'm guessing that geographically that's not a huge PMA market for you quite yet?
Yes. China as we say is a very good remains a very good opportunity for us. We do sell some parts into China, but I do not anticipate any significant impact on our business whatsoever as a result of specifically China. Now to the extent China impacts the rest of the world and as the rest of the world gets impacted and reduces their flying, then obviously there could be some impact. But with regards specifically to China, no, that's not going to be a major impact for us.
So PMA is probably more highly levered to North America, Europe?
Yes. I would say the world with the exception of China.
Okay. Hey, thanks a lot guys.
You're welcome. Thank you. Thank you.
Your next question comes from the line of Robert Spingarn of Credit Suisse.
Good morning, everybody. Good morning. Eric, staying on the topic, is there a way to quantify the organic growth in same parts? So you talked earlier in your monologue about the fact that your growth was derived from the introduction of the new parts. Larry, you talked about the R and D that gets you there.
But if we looked at sort of a same store sales on particular parts, can you talk about what's happening?
Yes. We analyze those numbers periodically. And but we don't disclose what they are, because we can't get into obviously trends on specific platforms or engines or product types. But we do we definitely look at that. Most of our growth again is through a volume change as opposed to pricing.
We're not one of those suppliers who ratchets up pricing and gets it that way. It's if we get 1% to 2% on pricing, that's probably all we get. And the vast majority is on volume growth.
Well, is it fair to say then just given the softness the industry is seeing that volumes are modestly down year on year?
I don't have that information in front of me. I mean, but with us, we were up, for example, 4%. So and we're not getting 4% on pricing.
So No, I know. But you're getting this adoption of the new products, which is organic growth, but it's also really market share driven. And so you're as long as you continue to spend on that R and D, I would expect that that market share will continue to grow. I'm just trying to get a sense. So really about what you just talked about a moment ago, which is the behavior of the airlines.
And they've discovered, it seems recently various means to put off maintenance. And trying to figure out how deep that goes and if we're going to start to see some evidence that that's reversing. You talked about it a moment ago. But is it possible that they're also sourcing from the surplus market and we may not see that recovery so
soon? No, I don't think so. In the products that we provide, there's not a lot of surplus available. We tend to supply more of the expendable parts. So I don't believe it's a surplus phenomenon.
I think what's going on is that with lower fuel, the airlines are flying some of the order equipment and that's increasing ASMs, but they're not putting money into fixing the order equipment. So really the moment of truth will come out when we find out whether they're going to in fact retire or extend the lives of some of these aircraft. I mean there are certain airlines with certain what I would say not competitive, non, if you will, current generation aircraft. And we anticipate those to go down. And no matter what fuel does, we don't anticipate those non competitive aircraft to be flown beyond their expected retirement date.
But there are other competitive aircraft. And with fuel down where it is, it makes sense to extend time on those. Now I don't believe the industry in general has seen the benefit and that Heiko included has seen the benefit of extending the time on those order competitive aircraft. And that's really what we're going to end up seeing. I think as the airlines develop their budgets in the Q4 and then we learn about it, of course, perhaps in the 4th and in the first quarter.
Okay. And then just
Yes. I was going to yes, go ahead.
Yes. But for us specifically, we're doing well with the new product introductions. And again, our business is one of since we basically enter a product, let's just say roughly 5 to 10 years after the initial delivery of the first aircraft, by definition, we are in there on the back end as they retire the aircraft. So we do always have, I mean, as part of our business model, it's always contemplated being on the Sunset fleets. So but I don't anticipate any significant change to our business model or what we've seen over the last 20 years.
Okay. And then just a question really for all of you, which is in your non aerospace businesses, if you could just talk about some of the both positive and negative trends that might have been a bit of a surprise. So I think there was some industrial pressure, Eric, in your business. Victor, you had medical and space and then upside in defense. If you could just talk a little bit about that?
The largest non flight business non aerospace business within the Flight Support Group is this ancillary industrial product line. And again, that was something basically where a customer had come to us a number of years ago, wanted to use an aerospace solution for an industrial product. We went ahead and we did this. We had the orders and then they realized that their unit that they were shipping to customers was not running as hot as they anticipated it to run and they were able just to basically remove the product from the bill of materials. So it wasn't really a loss to a competitor, but it was really a change in the design specification.
And that's our only significant non aerospace application. I can tell you that in terms of foreign military sales, we continue to do very well. We have a little bit of defense exposure and we're doing very well in that area as well.
Rob, this is Victor. I would first tell you that the organic growth in ETG in the Q3 was around 9% in 2014. So we're coming off the sort of heavy comp there. But in terms of the overall markets that we're looking at, defense has been good for us and it's been good for us this year. And I think it hasn't been on fire, but we talked about and you and I have talked about this and talked about this on other calls that we expected that at some point this year we'd see defense turning.
I think that is happening. We'll have to see what happens as I mentioned in the earlier comments with the happening. We'll have to see what happens as I mentioned in the earlier comments with the defense budgets. But right now there appears to be support for that as well in Washington. And by the way, our defense business, I think, has been good in both domestic capacity and in foreign business.
And that's a big chunk. As I told you in the past, the foreign destined part of ETG's defense sales probably are average in excess of a third.
By the way, Victor, on that note, do you get any visibility into the behavior of those
customers with all
this emerging market pressure etcetera? Do you get to see that or is it too many degrees of separation for you?
I think that's probably too many degrees of separation for us and we're generally not so much on the emerging market side. So we don't really see a lot of that. And then in terms Rob of the other markets that we're serving, space has been extremely strong for us and moderated a little bit in the period about somewhere in the neighborhood of half of that or somewhere around that is a result of the heavy foreign sales that we have in Europe denomination changes internally when we have to translate back into dollars from our foreign businesses. But I wouldn't say those are weak, but they're just a little bit softer. And in the other markets that we're serving, again, we singled out medical, but again, a big chunk of that was related to foreign currency translation changes.
And in terms of those businesses' local operations, they've been strong overall. And we're pretty happy with those. And then the other markets are just kind of the typical mix that we see out there.
Okay. Thank you.
Thank you.
Your next question comes from the line of Chris Quilty of Raymond James.
Thanks, gentlemen. I know you don't comment on specific acquisitions, but I think last quarter you did mention unusually large one that was in the pipeline and I didn't hear mention of that. Has that one slipped off the radar screen or is it potentially still in the pipeline?
Chris, it's potentially still in the pipeline. The acquisitions, as you know, you never can know when they're going to come around. You do the due diligence, you have questions in them. And some of these things take a year and a half or more to incubate. And the one that I was thinking about is still around.
I don't know where it will wind up. We never do until we get to the closing table.
Got you. And just to circle back on that Industrial Products, I remember how long we've been talking about that. Is it fair to assume we're about at the end of the negative comps in that or when do we get some relief
from that headwind? Chris, this is Carlo. We'll get relief. That will pay a lot in Q4. So our tail off in Q4.
So our 16 numbers will be comparatively clean when it comes to that. So it tails off in Q4 and then we should be good. And as Eric mentioned, that's tended to be between $7,000,000 $10,000,000 a quarter in headwinds for us as a result of those customer orders not being necessary in the current year.
Got you. And Eric, the better margins in the Flight Support Group, are those sustainable looking out into 2016 or were there some one time benefits that we shouldn't expect to repeat?
I'm sorry, can you repeat your question?
Yes. The flight support margins better than expected. Are those margins sustainable going into fiscal 2016? Or were there one time benefits that you derived in the current quarter?
Yes. We've always said that the operating margins in the Flight Support Group run around the 18% level and they move around from sort of the low 17% or 17% up to 19% or sometimes a little bit higher. I wouldn't want to say that anything has changed. There was a greater focus on higher margin activities in the quarter. There was some lower sales and some lower margin.
We do a little bit of parts trading and there definitely was pressure and we decided not to be active in that market where prices, I think, have been bid up by financial buyers without a lot of experience in the sector and we decided to sit some of that out. And those tend to be lower margins. So I think that weighed on our organic growth sales change, but also helped our operating margin. So I would say that if the surplus market continues to show the dynamics that we've seen over the last 3 9 months, then they would tend to the upper side. But if that market becomes a little bit more reasonable where we've got some good entry points, then it would drop back down a little bit.
Got you. All right. Thank you, gentlemen.
Thank you. Thanks, Bruce.
Your next question comes from the line of Michael Ciarmoli of KeyBanc Capital Markets.
Hey, good morning guys. Thanks for taking my questions.
Good morning.
Eric, just or Carlos back on to the FSG margins. Did you guys actually quantify? I mean, it looks like the 50 basis point increase for the year works out to about $4,500,000 Is that was all that in the current quarter between the accrued comp and the euro denominated earn out? Or is that kind of split between this current quarter and next quarter?
A lot of that was in this quarter. And as we mentioned before, some of that was FX related and some of that was related to lower accrued performance based comp.
Okay. So is that kind of the ballpark number about 4 $500,000
now? That's very close, yes.
Okay, perfect. And then just Victor, you mentioned commercial space moderating. Should we be concerned at all what we're seeing Boeing citing the export import bank and potentially laying off workers and the satellite domestic satellite market coming under pressure. Will that be an impact to you guys in that business line?
I think it's a little too early to tell. It doesn't help us, I don't think. But our sales in the business are spread in a few markets, right? We've got the U. S.
Businesses, but we also have our French business 3d plus which offsets a certain degree when the U. S. Satellite primes are softer. So I think we'll have to see how it plays out and give it a little bit of time.
Okay. Fair enough. And then just the last one on ETG again. I mean, margins in the quarter, I think the best they've been in quite some time, maybe since that Q4 of 2014. But should we expect this sort of 25 ish percent level as we move into 2016?
I mean, is all the amortization headwind behind you guys? Should we be thinking about this as again a mid consistent mid-twenty percent segment margin?
Yes. Overall, whether it's the same as it was this quarter, remember you have to keep in mind that we have somewhere around 403 to 400 basis points of amortization expense, which impacts us. So when we look at these businesses, we're really looking at 25% is somewhere around give or take 29% of what I consider to be the true margin of the business, what it derived from making and selling its products and services. So that's a pretty good number to me, whether it becomes 28 or 27 or 30, I'll be honest with you. I don't get too worked up about it.
To me, that's all pretty similar. So I would hope and expect that somewhere in that range is where we'll continue to fall. And I think you'll see quarters where it's a little better and I think you'll see quarters where it's a little bit off from there. But this range is around the range that seems to make sense for us. Again, whether it's a point or too lower or a point or too higher, it's kind of hard to see.
Great. Thanks guys. That's all I had. Welcome.
Our Our next question comes from the line of James Fong of Gabelli and Company.
Hi, good morning everyone.
Good morning.
So I just wanted to see if you
could just talk about the flow of new products coming in for the next 12 months. I mean, it seems like that kind of been a big contributor to your profit this quarter. And I was just wondering if sequentially you can see more of a new product introduction over the next three quarters?
Jim, Eric will answer that.
Hi, Jim. I anticipate the new product development over the next three quarters to be consistent with what we've done in the past. I don't think any tremendous changes there. We continue to develop the same kinds of parts we've done as well as enter into other adjacent markets. So but I don't anticipate any significant change there.
Okay. But they typically carry a higher margin because you get better pricing from the products than your existing components?
Not necessarily. Not necessarily. Especially when a product is new, there may be some initial costs in first articles until we streamline the process. So it's not necessarily higher margin.
Okay. And maybe shifting gears a little bit on acquisitions, Larry. Can you just talk about your pipeline of acquisitions? You have been pretty active in the last quarter in August making some of these acquisitions. How does it look for the rest of the year and going into 2016?
Well, I think the pipeline is good. One of the problems as we've discussed before is that we can have a strong pipeline and then we get in there and we do the due diligence, which we do very thoroughly and we find problems. And I can tell you we are looking, I guess Chris Quilty asked me about one large acquisition. I can tell you we actually when I say large, I mean larger than we normally do. But I can tell you that there's more than one, but you never know what you're going to find.
I mean, for example, Eric and I are having dinner with people tonight on an acquisition. God only knows what we're going to find out. So it's just a question of due diligence digging and so forth. So to predict we're going to do it is very difficult. And I don't like to blow smoke and I don't like to tell people, oh, we're doing we're going to do this.
There is a good pipeline, but we never know when these things will close and what we're going to find when we look under the rocks. And that's the problem with the acquisitions. Unfortunately, many sellers, just to put it plain misrepresent. They say that they're going to produce apples and they produce oranges. And when we get in there and we start turning over the rocks, we don't like what we see.
So even though we're optimistic because they give us a great picture company it is and then we start to look and we find out that it isn't. So we are very active. So to answer your question, we're very active, but to predict which one is going to stick, we really can't.
Right. So I guess the involvement in activity has picked up more so than in the past essentially. In just spending time in meeting with potential companies?
I think that's accurate. I think there are a lot of transactions. We have actually 1.5 people working on we used to have one person that's focused strictly on M and A. And recently we hired another individual, a younger person. And but the other person that used to do it is kind of does it half time now.
He was tired and he wanted to kind of retire half time. So we have 1.5 people. And then in addition to that, we have Eric, myself, Victor and others, Carlos. But the pipeline is good. In theory, it's good.
We're looking in Europe. We're looking in the U. S. But to predict an acquisition is such a risky thing and to give people false thought. I do think the more that we have, the more likely we are to make more just the odds are that we will do more acquisitions.
And some of the ones that we see are really terrific and we have to nail them down. But as to when and how, I don't know. And Jim, this is Eric.
If you look, we've done 6 acquisitions so far this year. And I think what was unique in all of those cases is that HEICO was the preferred acquirer by far by each of those sellers and many of whom are partners with us and we're very excited about where they can take their businesses and how we can continue to help them grow their businesses and induct them into the HEICO network. So I think that there's a lot of very good opportunity. We are, as mentioned, working on a number of deals. And I think HEICO remains still the preferred acquirer in these transactions.
So we're relatively optimistic there.
And you know the acquisitions that Eric's referring to are companies where the seller wants to have a liquidity event, however, wants to remain active, is very knowledgeable about his industry. So he winds up with a minority interest of roughly 20% And it's a win win for us. We're normally not an acquirer that wants to buy a company and then take that and shrink it down and get rid of personnel and fire people and so forth. But that's normally not our model. In a few cases, we have purchased companies or product lines and put them in, but we prefer to keep the personnel, keep the company, to keep the management and to work cooperatively.
It's just our style.
No, I think it's great formula. It keeps the owner
that we'll go over anywhere from 3 to 8 years or something. So they can put the stock to us over a period of time and we can call the stock for over a period of time. Interestingly enough, in some of these cases, in many of the cases, the people have cashed out completely and they still continue to run the company and they're compensated, incentivized and so forth. And the relationship remains very strong. As a matter of fact, probably our best sales tool is to give a potential acquire a company that we want to acquire a list of 10 or 15 names of people from whom we've acquired companies and we say just call them up and ask them.
And that's really the best sales tool because they do that and they find out that HEICO does what it says it's going to do. If they promise you something that's exactly what will happen. So that's our formula and it works.
Okay, terrific. Thank you for the update and look forward to seeing you at my conference on September 9.
Right. Thanks, Jim.
Your next question comes from the line of Steve Levinson of Stifel.
Thanks. Good morning, everybody. Good morning. Just wondering, there's a huge installed base of CFM56 engines of various types. And over the next few years, CFM will be winding down production of that engine and shifting over to the LEAP.
Do you see HEICO's role changing on the CFM56? Do you see an additional investment required in parts development? Or do you think it will just go along as it is now?
Yes. Steve, that's a good question. Unfortunately, we can't comment on specific engine platforms or customer relationships. But we are watching all of the various developments out there and plan to remain active and do what our customers want us to do. Okey doke.
And they will and we anticipate the follow on engine to be very successful as well as Pratt option as well.
Okay. Rather than ask on a specific engine then, maybe we can look back on previous engines of any types. Has in general, has the role changed? Do you find yourself being asked to deliver additional parts or develop additional parts to supplant what the OEM had made?
I would rather not answer the question due to competitive dynamics. I mean, we're active across a wide array of engines as well as components to airframe parts. And we're basically all over we're all over the aircraft. I mean, we're not going to want to necessarily develop a part at the end of its life, because we're not going to be able to recover our investment. But we are all
No, I just meant because the engines the last engines will still be in service for 20 years. Right.
But we're active, I would say, on anything that's flying, we want to be active on it.
Got it. Thanks very much. Thank you.
At this time, there are no further questions. I'll now turn the call to Lawrence Mendelsohn for any additional or closing remarks.
No. I 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. I'm sure we're going to get a bunch of calls Carlos and Tom are going to get a bunch of calls this afternoon for further detail. But we are open to your questions and anything that we can do to help you, please let us know.
Until then, we wish you a good balance of the summer, happy Labor Day, And we will speak to you with the Q4 conference call, which will be probably around the mid December date. So this is all that we have for the moment and we will speak to you soon. Bye bye.
Thank you for participating in HEICO Corporation's fiscal 2015 Q3 earnings results conference call. You may now disconnect your lines and have a wonderful day.
Thank you.