Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation third quarter fiscal 2013 earnings 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. At that time, if you would like to ask a question, please press star one on your push button phone. If you would like to withdraw your question, press the pound sign. Your host today is Laurans A. Mendelson , Chairman and Chief Executive Officer of HEICO Corporation. Before the conference call begins, I will read the following statement. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies.
HEICO's actual results may differ materially from those expressed and/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, which could cause lower demand for our goods and services, 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, base, or Homeland Security spending by U.S. and/or foreign customers, or competition from existing and new competitors, which could reduce our sales. HEICO's ability to introduce new sales products and product pricing levels, which could reduce our sales or sales growth.
HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, income tax rates, and economic conditions within outside of the aviation, defense, space, medical, telecommunication, and electronic industries, which can negatively impact our costs and revenues. 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 the filing forms on 10-K, 10-Q, and 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, further events, or otherwise. Thank you. I will now turn the conference over to Laurans Mendelsohn.
Thank you, Jennifer, and good morning to everyone on this call. We thank you for joining us, and we welcome you to the HEICO third quarter fiscal 2013 earnings announcement telecon. I'm Larry Mendelson. I'm the Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-president and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-president and President of HEICO's Electronic Technologies Group; Tom Irwin, HEICO's Senior Executive Vice President; and Carlos Macau, our Executive Vice President and CFO. Before reviewing our third quarter operating results in detail, I would like to take a few minutes to summarize the highlights of another record-setting quarter.
Our consolidated third quarter 2013 net sales, operating income, and net income represent record quarterly results driven principally by record net sales and operating income within our Flight Support Group, as well as continued strong net sales and operating income within our Electronic Technologies Group. Consolidated year-to-date net sales, operating income, and net income represent all-time record results for HEICO, driven principally by record net sales and operating income within both segments. Consolidated third quarter fiscal 2013 net income and operating income are up 25% and 14%, respectively, on an 18% increase in net sales over the third quarter of fiscal 2012. Consolidated net income and operating income for the first nine months of fiscal 2013 are up 18% and 9%, respectively, on a 10% increase in net sales over the first nine months of fiscal 2012.
Our Flight Support Group set a quarterly net sales and operating income record in the third quarter of fiscal 2013, improving 29% and 24%, respectively, over the third quarter of fiscal 2012. The increases principally reflect strong organic growth of approximately 17%, as well as additional net sales of $16.1 million contributed by our fiscal 2013 and 2012 acquisitions. Consolidated net income per diluted share increased 26% to $0.54 in the third quarter of fiscal 2013, up from $0.43 in the third quarter of fiscal 2012. In July, we paid our 70th consecutive semiannual cash dividend since 1979. This was at a rate of $0.07 per share, which represents a 17% increase over the prior semiannual per share amount. Cash flow provided by operating activities was $92.3 million in the first nine months of fiscal 2013, including $47.8 million, which was generated during the third quarter.
As of July 31st, 2013, the company's net debt to shareholders' equity was 44%, with net debt of $307 million. In May 2013, our Flight Support subsidiary completed the acquisition of Reinhold Industries. Reinhold is believed to be the world's leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation, defense, and space applications. This acquisition is consistent with our practices of acquiring outstanding niche designers and manufacturers of critical components in the aerospace industry. This will further enable us to broaden our product offerings, technologies, and customer base. Now, I would like to introduce Eric Mendelson, Co-President of HEICO, and President of HEICO's Flight Support Group, to discuss the results of the Flight Support Group.
Thank you. The Flight Support Group's net sales increased 29% to a record $181.3 million for the third quarter of fiscal 2013. Increased 13% to a record $475.6 million for the first nine months of fiscal 2013, up from $140.8 million and $420.7 million for the third quarter and first nine months of fiscal 2012, respectively. The increase in the third quarter and first nine months of fiscal 2013 reflects organic growth of approximately 17% and 7% respectively, as well as additional net sales of $16.1 million and $23.5 million, respectively, from fiscal 2013 and 2012 acquisitions. The organic growth for the third quarter and the first nine months of fiscal 2013 principally reflects an increase in net sales from new product offerings and improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines, and within our specialty product lines.
The Flight Support Group's operating income for the third quarter of fiscal 2013 increased 24% to a record $32.6 million, up from $26.4 million for the third quarter of fiscal 2012, and increased 11% to a record $87.2 million for the first nine months of fiscal 2013, up from $78.5 million for the first nine months of fiscal 2012. The increase for the third quarter and first nine months of fiscal 2013 is primarily attributed to the previously mentioned net sales growth. The Flight Support Group's operating margin equaled 18% and 18.3% for the third quarter and first nine months of fiscal 2013, respectively, compared to 18.7% for both the third quarter and first nine months of fiscal 2012.
The slight decrease for the third quarter and first nine months of fiscal 2013 principally reflects the impact of additional amortization expense from intangible assets recognized in connection with the fiscal 2013 and 2012 acquisitions. 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 1% to $87.4 million for the third quarter of fiscal 2013, and increased by 5% to a record $250.2 million for the first nine months of fiscal 2013, up from $86.5 million and $237.2 million for the third quarter and first nine months of fiscal 2012, respectively. The increase in the third quarter and first nine months of fiscal 2013 reflects organic growth of approximately 1% and 3% respectively, primarily attributed to an increase in demand for certain space products, partially offset by a decrease in demand for some defense products. The net sales increase for the first nine months of fiscal 2013 reflects additional net sales of $4.9 million from fiscal 2012 acquisitions.
The Electronic Technologies Group's operating income for the third quarter of fiscal 2013 increased by 3% to $21.5 million, and increased by 9% to a record $57.3 million for the first nine months of fiscal 2013, up from $21 million and $52.5 million for the third quarter and first nine months of fiscal 2012, respectively.
The increase for the third quarter and first nine months of fiscal 2013 is principally attributed to the previously mentioned improved operating margins and increased net sales. The Electronic Technologies Group's operating margin improved by 24.6% and 22.9% for the third quarter and first nine months of fiscal 2013, respectively, up from 24.2% and 22.1% for the third quarter and first nine months of fiscal 2012, respectively. These increases principally reflect the previously mentioned more favorable product mix for certain higher-margin space products. Now I turn the call back over to Laurans Mendelson.
Thank you, Victor and Eric. Going to the diluted earnings per share, consolidated net income per diluted share increased 26% to $0.54 in the third quarter of fiscal 2013. That was up from $0.43 in the third quarter of fiscal 2012, principally driven by continued strong performances from both of our segments and the $0.03 tax-related benefit from higher tax credits based on fiscal 2012 tax returns, which were filed during the current quarter. Net income per diluted share for the third quarter of fiscal 2012 included a similar tax-related benefit, which was equal to $0.02. Consolidated net income per diluted share increased 18% to $1.36 in the first nine months of fiscal 2013. This was up from $1.15 in the first nine months of fiscal 2012, principally driven by continued strong performances from both of our operating segments.
Depreciation and amortization expense increased by $1.8 million and $3.7 million in the third quarter and first nine months of fiscal 2013. That was up from $7.7 million and $22.2 million in the third quarter and first nine months of fiscal 2012. The increase in both periods principally reflects higher amortization expense of intangible assets recognized in connection with our fiscal 2012 and 2013 acquisitions. The non-cash charge for amortization expense associated with intangible assets equaled $5.4 million or 2% of net sales in the third quarter of fiscal 2013, and it was $4.2 million in the third quarter of fiscal 2012. It equaled $14.3 million or 2% of net sales in the first nine months of fiscal 2013, and $11.7 million in the first nine months of 2012.
Research and development expense increased 14% to $8.5 million in the third quarter of 2013. This was up from $7.5 million in the third quarter of 2012. It increased 5% to $23.5 million in the first nine months of 2013. That was up from $22.4 million in the first nine months of 2012. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we continue to invest approximately 3% of each sales dollar into new product development. We believe that our commitment to invest in new product development has proven very effective and continues to be a significant part of our long-term growth strategy in both of our operating segments.
SG&A expenses increased 18% to $49.1 million in the third quarter of fiscal 2013, up from $41.8 million in the third quarter of fiscal 2012. It increased 14% to $136.5 million in the first nine months of fiscal 2013, up from $120 million in the first nine months of fiscal 2012. The increases in the third quarter and first nine months of fiscal 2013 principally reflect the incremental impact from fiscal 2013 and 2012 acquired businesses, plus an increase in accrued performance awards based upon improved consolidated operating results and an increase in sales-related commissions associated with net sales growth.
SG&A expense as a % of net sales decreased to 18.4% in the third quarter of fiscal 2013, down from 18.5% in the third quarter of fiscal 2012. Increased to 18.9% in the first nine months of fiscal 2013, up from 18.3% in the first nine months of fiscal 2012. The increase in SG&A expense as a % of net sales for the first nine months of fiscal 2013 principally reflects the impact from the previously mentioned increase in accrued performance award and sales-related commissions, as well as higher amortization expense of intangible assets recognized in connection with recently acquired acquisitions. Interest expense for the third quarter and first nine months of fiscal 2013 was $1.1 million and $2.5 million respectively, up from $600,000 and $1.8 million in the third quarter and first nine months of fiscal 2012, respectively.
The increases principally reflect a higher weighted average balance outstanding under our revolving credit facility. That was associated with borrowings to fund recent acquisition, as well as a special and extraordinary cash dividend paid to shareholders in December 2012. Other income and expense for the third quarter and first nine months of fiscal 2013 was not significant. I won't comment on it. Our effective tax rate in the third quarter of fiscal 2013 decreased to 26.6%, down from 31.4% in the third quarter of fiscal 2012. That decrease is partially due to a tax credit related to foreign taxes paid on earnings that were repatriated by one of our foreign subsidiaries.
The benefit from higher tax-exempt unrealized gains in the cash surrender value of life insurance policies related to HEICO Corporation Leadership Compensation Plan, also from an income tax deduction for the special and extraordinary cash dividend paid in December 2012 to participants of the HEICO 401(k) plan, which holds substantial HEICO common stock. Our effective tax rate for the first nine months of fiscal 2013 decreased to 29.5% from 33.3% in the first nine months of fiscal 2012, due to the same items I just mentioned. That lowered our tax rate in the third quarter, as well as the benefit we recognized in the first quarter from the retroactive extension of the R&D tax credit. For the full fiscal 2013 year, we estimate that we will have an effective tax rate of approximately 31%.
Net income attributable to controlling interest was $5.8 million and $16.2 million in the third quarter and first nine months of fiscal 2013, respectively. This compares to $5.5 million and $16 million in the third quarter and first nine months of fiscal 2012. The changes in net income attributable to non-controlling interests for the third quarter and first nine months of fiscal 2013 reflect the aggregate impact of higher earnings of Flight Support Group and ETG subsidiaries in which non-controlling interests are held, partially offset by our purchases of certain non-controlling interests during fiscal 2012 and 2013, resulting in lower allocations of net income through the repurchased non-controlling interests. Moving on to our balance sheet and cash flow. Our financial position and forecasted cash flow remain extremely strong. Cash flow provided by operating activities increased to $92.3 million in the first nine months of fiscal 2013.
That was up from $78.3 million in the first nine months of fiscal 2012. We continue to expect cash flow provided by operating activities to approximate $140 million for fiscal 2013. Our working capital ratio is strong at 2.9 times as of July 31, 2013, and that was up slightly from 2.8 times at October 31, 2012. DSOs of receivables, accounts receivable, was 48 days in July 31, 2013 compared to 46 days as of October 31, 2012. We continue to monitor closely all receivable collection efforts in order to limit our credit exposure. No one customer accounted for more than 5% of net sales. Our top five customers represented approximately 16% of consolidated net sales in both the third quarter of fiscal 2013 and 2012. Inventory turnover was 117 days as of July 31, 2013, compared to 114 as of October 31, 2012.
That increase in inventory turnover rate principally reflects an increase in inventory levels to support anticipated sales growth in the remainder of fiscal 2013 and beginning in 2014. Net debt to shareholders' equity was 44% as of July 31, 2013, and net debt of $306.8 million, and again, principally incurred to fund acquisitions as well as the payment of the one-time special and extraordinary cash dividends, which total $116.6 million and was paid December 2012. Our trailing 12-month leverage ratio was 1.47 times as of July 31, 2013. The leverage ratio, we define it as net debt to EBITDA. We have no significant debt maturities until fiscal 2018, and we plan to utilize our financial flexibility to aggressively pursue other high-quality acquisition opportunities. The outlook.
We remain highly confident in the near-term and long-term outlook for the commercial airline industry, and we expect increases in airline capacity and maintenance spending to yield moderate growth within the Flight Support Group for the remainder of fiscal 2013 as compared to the fourth quarter of fiscal 2012. Ongoing uncertainty surrounding the impact of government budget reductions on our defense-related products has contributed to slower growth in the ETG Group during the first nine months of 2013. We anticipate growth and demand for our non-defense products in ETG will contribute to overall growth in the remainder of fiscal 2013.
Based upon our current economic visibility, we are increasing our estimates for fiscal 2013 year-over-year growth in net sales to 10%-11%, and growth in net income of 15%-16%. That is up from our prior growth estimates of 8%-10% in net sales and 11%-13% in net income. We expect approximately 60% of the sales growth to be organic. For the full year 2013, we continue to anticipate CapEx to approximate $20 million and depreciation in amortization expense to approximate $38 million. In addition, we continue to estimate our full-year fiscal 2013 consolidated operating margin to approximate 18%. These estimates include the recent acquisition of Reinhold Industries but exclude any other potential acquisition opportunities during the remainder of fiscal 2013. HEICO remains committed to acquiring profitable businesses at fair prices, and we are actively pursuing opportunities within both of our segments.
In closing, we believe that our focus on developing new products and services and on executing a disciplined acquisition strategy will continue to provide HEICO with the opportunity to achieve our short-term and long-term growth objectives. Jennifer, that's the extent of my prepared comments. I would now like to open the floor for questions, please.
At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, that is star, then the number 1. Your first question will come from Steve Levenson with Stifel.
Everybody.
Good morning, Steve.
Morning.
Mostly on the FSG side. I was going to ask, was the result so strong because of, and I've got four choices for you, anticipation of increased MRO activity from the high level of air travel going on this summer and previously in the year? Is there a larger portion of the fleet coming into a regular service interval? Do you also see some restocking from low inventory levels at distributors and service providers and a higher confidence in MRO outlook? Is it really a combination of all three?
Steve, I'm going to ask Eric to respond, please.
Okay, thank you.
Steve, good morning. Your first component of that question was, is it due to an increase in ASMs? Yes, I think that that's helping. ASMs are up what, mid-single digits. That definitely helps. Two, yes, I think a larger portion of the fleet is getting into, if you will, that sweet spot. Of course, that is offset by a number of retirements. Roughly half of what Boeing and Airbus are producing now is being used to replace existing aircraft.
Right.
The equation is the drop there offset by the benefit of the remaining roughly 15,000 aircraft aging one year per year. That has helped as well. With regard to restocking, I would say no. We have not seen that. Other manufacturers perhaps have seen restocking. We maintain significant inventory, so our customers don't have to hold big inventories. They're used to that. It's part of our, if you will, friendly service offering with not significant price increases in holding a lot of inventory. We are not seeing them restock. As a matter of fact, some major airlines have gone, I just got into the details about 10 days ago on this, and some major airlines have gone from about six months inventory down to one month of inventory. That's what they're expecting from us, and that's what we're providing.
No, we're not seeing them wanting to invest in inventory.
Okay, great. Thank you. Last one is just on the cash flow. With prices being asked on M&A opportunities, do you see yourself more towards leaning towards doing those transactions or repaying debt?
The answer is both. We are not a capital-constrained company by any means, so we continue to use all of our cash flow to reduce debt. That has really nothing to do with our appetite for acquisition. We have a wonderful bank line, a wonderful group of banks. We also have Half of Wall Street knocking on Tom and Carlo's door every day to lend us money, give us money, sell stock and so on. We have no capital constraint, and we are looking at many acquisitions. As you know, we're quite disciplined, and we're not going to pay crazy prices, and we want to make sure that these acquisitions are accretive, really in the first 12 months of acquisition. We're going to do both.
As I mentioned, our EBITDA to debt is less than one and a half times, we just have plenty of firepower and total flexibility. We are doing both very aggressively.
Okay, thanks for sticking to your knitting. Have a good day. Thank you.
Thank you very much.
Your next question is from Tyler Hojo with Sidoti.
Yeah. Hi, good morning. Just in regards to your guidance for Flight Support Group, when you talk about kind of moderating growth in the fourth quarter, would you expect kind of sales volumes for the Flight Support Group in the fourth quarter to be lower than they were in the third quarter?
Tyler, this is Eric. I'm going to answer that. I would say that, we do not anticipate 17% organic growth in the fourth quarter. I think our folks knocked it out of the park this quarter, and frankly, even greatly surprised us because the markets are not growing, in our opinion, after being at some of these conferences and speaking with my peers and other investors. I do not think the market at all is growing by 17%. I do not think the PMA market in particular is growing by 17%. I think that this is really due to HEICO's culture, which has been developed over decades of having these autonomous business units where we really trust these folks to go out there and find the opportunities.
To answer your question, as we enter the fourth quarter, we do expect it to be up over the fourth quarter of 2012, but would not necessarily anticipate an increase over the third quarter in 2013. These numbers were just so outstanding that I think it's going to be hard to grow above that rate. 17% growth is, in particular in this market when the tide is not going up that much, I think is really a breakneck pace. Even though we've got 150 sales folks out in the field in the Flight Support Group, they can't continue to do that every single quarter.
This is Larry. I just have one comment, and it's from 30,000 feet. Our guys never fail to surprise me in their accomplishments. They're heavily motivated, incentivized, and the answer is, honestly, I don't know, and Eric doesn't know. We have a feeling, and we try to be on the conservative side. We won't know until October 31st when the results are in. You know.
Well, I would certainly agree that the 17% growth is impressive. Just in regards to the new part introductions that you kind of highlighted as being a driver for that growth, were any of those new part sales to new customers, or were they all to existing customers?
I would say, we continue to add new customers. Obviously not at the pace as we sell existing parts to existing customers because there are only so many new customers to add out there. I would say most of it is existing parts to existing customers. We're also seeing in all of our business units that I talk about this decentralized approach where, typically in larger businesses, they need to try to educate the folks out in the field to treat the customer like a customer. That comes naturally when you operate in the condition with the size business units that we operate and trust the folks out in the field to make the decisions. I think people want to move their purchases to us, and we're able to pick up the benefit as a result of that.
Okay, wonderful. Just lastly for me, just in context with the kind of the prior comments in regards to the mid-teen increase in R&D expense. I'm just kind of wondering how much further you can kind of ratchet up the number of PMAs and DERs that you can run through and get approved. I think at last count, we were talking about something like 500 new PMAs and DERs per year.
I would say, in terms of us having the engineering ability to do more, we could do more. The issue is, what can the customers really approve and digest? I think, we're at a good number right now. I think it's a good solid number. I think there's obviously some additional products that we can go out and develop, and the customers are always speaking to us about that. I would say, there's no theoretical limit to what we can develop. In terms of getting the customers to buy it, that's really the key thing.
The actual FAA approval process isn't necessarily the biggest gating factor in terms of the approvals? Is that accurate?
That's correct. I would say for us, it is not. It's instead making sure that we have a home for these parts, because it's real easy in theory to go out there and take a look at what airlines are buying and to just assume that you'll end up picking up market share, and to assume that you'll end up supplying these parts. I have to point out that our competitors don't cede market share easily. It's a fight. It's hand-to-hand combat every day, working to make sure that we get these parts sold. In theory, yeah, you can work up a spreadsheet and show we can develop all these parts, we're going to sell them to all these customers. It doesn't really work that way, and instead, you really have to get down to the details, and that's really where we're particularly good at doing that.
Okay, wonderful. Well, thanks a lot.
Thank you.
Your next question is from Arnie Ursaner with CJS.
Morning.
Good morning.
A couple of questions regarding Reinhold, if I can. Obviously, you are absorbing amortization and some expenses related to the acquisition, including perhaps marking up inventory. Can Tom perhaps give us a better feel for the impact in this quarter, direct impact from Reinhold?
Yeah. As Larry mentioned, most of the impact in the quarter was the amortization of the intangible assets. There was some write-up of inventory that's being, if you will, amortized as we ship the inventory, but the more meaningful impact was at the operating margin line, was the amortization.
Okay. Can you quantify that?
I guess the run
$1.2 million.
Yeah, the amortization increase was about $1.2 million.
Just from Reinhold, because to the extent, you should typically incur 3%-5% depreciation amortization when you make an acquisition. Yet you mentioned, I think this was only 2% of net sales?
The amortization number of 1.2, that includes all acquisitions added since the prior period. There was more than Reinhold. Reinhold, of course, was the biggest component. Typically, our amortization varies by the type of the business, and typically, amortization or the intangible amortization is customer relations, intellectual property, and depending on the lives, et cetera, of the underlying products and the nature of the business, the lives could change quite a bit. I would say typically it's running as a percentage of sales, you have 2%-4%.
If we exclude that factor, would it be fair to say that Reinhold had operating margins much closer to the high 20s than the 18% you're reporting after the various amortization expenses?
Again, we don't disclose operating margins certainly by business entities, or actually by product line. I would say that Reinhold is performing as we expected. As we mentioned when we bought it, we expect it to be accretive the first year. It was slightly accretive in the quarter. We expect still that it'd be accretive for the full year. Again, we don't break out margins by product lines or by business unit.
My last question, you mentioned on your last call, the leverage ratio year-end might be 1.75 or less, and yet this quarter was 1.47. What caused this enormously positive change?
Larry Mendelson's conservatism. It was really that because we don't like to get out ahead of ourselves, and I think, Arnie, what you're inferring is that we thought there might be an acquisition that would have pushed it back up. No, we were just trying to be on the conservative side and not try to get out ahead of what was happening. That's really all.
Okay. Congratulations. Great job.
Thank you very much, Arnie.
Your next question is from Julie Stewart with Credit Suisse.
Morning, Julie.
I think last call, you guys characterized how much of the organic growth in Flight Support was attributable to aftermarket. I think last quarter it was 80%. Can you give a similar metric for the 17% organic growth and how much of that was driven by aftermarket this quarter?
Julie, this is Tom. I would say, quick and dirty off the top, comparable amounts. When you think about Flight Support Group, other than the bit of the OEM markets in the specialty products area, it's effectively aftermarket, either PMA parts distribution, others PMAs, or component repair and overall. I would say, again, we don't have that exact computation, but it's probably comparable.
Okay. Great. Victor, one for you. Can you provide some more granularity on what's going on in ETG by end market? You've referenced the decrease in defense products, that there's some offset from the space products. Over the next nine to 12 months, can we still expect kind of that low to mid-single digit organic growth profile in that segment?
Julie, this is Victor. I think we can. I would say definitely on the low side of that. In terms of the individual markets that we're dealing with, as we said before, our commercial space businesses are pretty strong, right now we anticipate that should continue for at least, we would think, the next six months and possibly well beyond that. It gets foggier once we really get out further. I would expect defense to continue to be soft. I think on the last call, I indicated that we had just sort of gotten into it, and I think that's picked up steam, and that will continue to pick up steam a little bit in terms of the budget cuts and weakness in defense. Our other markets that we serve have been more or less pretty healthy.
In the medical side, I think, where we have some components there, those have done nicely, and the outlook is pretty good for those. On the general markets that we serve, kind of electronics and technology markets, it's kind of a mixed bag out there right now. Some good news, some bad news as we go.
Okay. Can you remind us the end market split for ETG? How much is defense versus space, medical, and then the other markets?
When you look at the business overall, defense is a little bit less than 30% now. It's probably about 28% or somewhere around that range, but let's say a little bit less than 30% all in. That would include some space that we have. The general kind of other markets that we serve is probably comparable in that range, space is probably somewhere in the neighborhood of 10%-15%, somewhere around there. That would be mostly commercial space or almost entirely commercial space.
Okay, medical is then just included in that general bucket?
Medical would be in that general bucket.
Okay, great. Thank you so much.
You're welcome. Thank you.
Your next question is from Kenneth Herbert with Canaccord.
Good morning.
Morning, Ken.
First, Eric, if I could, I just wanted to go back to the growth question just one more time. Are you seeing anything different specifically within the PMA versus the distribution or the DER or the repair sides of the business in terms of the growth? I know Seal Dynamics and Blue have typically been doing very well, but are you seeing comparable growth on the PMA side?
Yeah, I would say we're seeing growth in all of our markets. I think, again, what's driving this growth is I think your question is you're trying to get to how are the end markets doing. I don't think that this is, again, is an end market thing. I don't think the PMA market overall is growing at this rate. I think that this is really more of a HEICO specific thing as a result of really the way we're structured with our business units and the 150 salespeople we've got out there in the field who are out there mining and mining and mining to find all these opportunities.
I think they're the ones who are really uncovering the opportunities that it's not the customer's job to contact us when they need something, but we have to be in front of the customer, and that's why we have to make this major investment. Obviously, it costs a lot of money to have these folks out there in the field. We think that we've got to have, by having these dedicated sales forces and by having so many people out there and having this kind of coverage, I think that's why we're able, as a company, to have these results. I think, frankly, outgrow our competitors in all of our different end markets.
Yeah, that's helpful. Just by type within the engine side, are you seeing any variation in demand, say, for some of the strong legacy, PW4000 or JT9D engines on the wide body side versus maybe your CFM56 product line?
Obviously, for competitive reasons, we can't get into product line specific information. Frankly, it bounces around based on what customers may need. What's strong this quarter may not be strong next quarter. I wouldn't say that the strength is coming really from any one area. It's really the entire portfolio that we've got, all the different products and services. Frankly, these business units work together and are able to secure deals as a result of the breadth of the products that we're doing. By having all these different folks out in the field, we're able to find opportunities and present them to one of the other HEICO business units that may ordinarily not have that kind of opportunity.
I think a lot of this is, in addition to the, if you will, the DNA of the company, a lot of it is really due to our size and our ability to refer business from one business unit to the other. Frankly, that was really helpful this quarter, and we were able, I think as a result of HEICO's breadth of product, we were able to do a bunch of new
stuff that we had not done in the past, it was really as a result of being in all these different end markets. It was not due to a particular strength in any one market.
Great. That's helpful. Just finally, Larry, you've talked about now you're at about one and a half times in terms of the leverage when you talk about the debt to EBITDA. What's the upper level that you think the company can support, or specifically, what level or what leverage are you comfortable with at the upper end?
The answer is, I really don't know. We just do what we've got to do. I would be comfortable, in some cases, at 4 times. I don't think I'd be comfortable if some companies go up to 7. I think at 4, I would live with 4. It all depends on what we're buying, what the cash flow looks like. I like to be under 2. We'll go to 3 or 4 without a big problem, depending upon that acquisition. Again, we want to make sure that what we buy, what we leverage, to buy, has to have a very strong likelihood of being able to pay back the debt relatively quickly. We don't like long-term, long payout debt and so forth.
I want to add to that if we, which we do, with Tom and Carlos putting together our own cash flow projections, our earnings growth projections, we can meet what we target, which is 20%. We say that we think we can do 20% in the next few years and continue to grow like that. We can do that without putting on a tremendous amount of debt and getting over 3 or 4 times and then having it come down pretty quickly. We've modeled that. I don't foresee going past 3 or 4 times at most.
That's very helpful. Thank you very much. Great quarter.
Thank you.
Your next question is from Michael Ciarmoli with KeyBanc.
Morning, guys. Thanks for taking my questions. Just to dig a little deeper on the Flight Support growth, can you give us a sense if you're seeing more strength on the parts side or the service side? I guess what I'm getting at is that there's still an influx or growing influx of surplus parts. Is that giving you guys a bit of a tailwind in your component repair facilities or the growth rate you're seeing there?
Yeah. Hi, Michael. This is Eric. We're seeing the growth really across the businesses. We do offer some asset management services as well, and of course, that's been helped through the growth in the teardowns there. I think we're really seeing it pretty broad-based in what we're doing. Again, I don't think it's the end markets growing at this rate. As I've said before, I think it's more a matter of the business units going out and specifically finding those opportunities because I think we have a competitive advantage in the way that we're structured. We don't go to market in the Flight Support Group as one business doing many hundred millions of dollars. It's broken down into smaller business units who are really able to go out and hunt and clean their fish and cook it and do it all by themselves.
I think that's why the business is doing so well.
Got you. Just on, in terms of the R&D spending, can you give us a sense of what product areas you're focusing on? Is it engine? Is it inside the cabin? Is it more prepping up for maybe composite repairs that might be coming down the pipe? Can you just give us a sense of what the spending's kind of geared towards?
Yeah, I would say it's across the board. We continue to develop all of the above. I would say it's more focused in the non-engine area. Our non-engine business is now over half of our total sales. We continue to have tremendous focus in that area, but we continue to develop engine parts as well. I think the fact that we have the engine legacy in the engine business is very important because those are viewed as, and they are, very critical parts. In order to have the credibility to sell an engine part, the customer really needs to trust you because that's an expensive piece of equipment, and it's very expensive if they ever need to pull out the part.
I think as a result of having the credibility on the engine side, it's opening up opportunities for us in terms of critical components as well that most people probably wouldn't think of as opportunities for PMA or aftermarket. It all, if you will, works together. It's a broad product offering, and a broad customer relationship that, if you will, all fits together. We can't dissect it, if you will, into one area or another.
Okay, perfect. That's helpful. The last one for me, just on the whole US Airways American Airlines merger, can you just remind us, your thoughts there? Would that combined entity be a benefit to you guys with your presence at each carrier? Just remind us, if you can, how, in terms of customer relationships there and maybe your general thoughts on that transaction, where it stands.
Yeah. Michael, we've gotten this question a lot from many different folks. As you know, unfortunately, we can't go into detail by either customers or product lines for competitive reasons. We think that HEICO is well-positioned regardless of how this turns out. We've got very good relationships with both airlines, and they think that it will be a very good merger and therefore we think it will be a good merger. It'll be good for the industry. It'll be good for HEICO as well. We certainly hope that they do it, but I think regardless, we're going to be in a good position.
Okay, fair enough. Thanks a lot, guys. Nice quarter.
Thank you.
Thank you very much.
Your next question is from Chris Quilty with Raymond James.
Morning, gentlemen. With some of the new developments in engine technology around ceramics and new materials, additive or 3D printing, can you kind of give us a thought on where you see the industry moving in terms of sort of technology, your ability to compete with some of the new parts that are eventually going to be hitting the market? And whether Ryan and I can buy a 3D printer and get in competition with you, perhaps.
Yeah, Chris, this is Eric. We're not concerned about the new technologies that are out there. We also use a lot of these technologies as well, specifically with respect to 3D printing. You got to be very careful with the recast layer that the parts could have as a result of such a process. I don't really see, despite what you read in the press, I don't see mechanics having 3D printers just whipping up a part that they need right there on the tarmac and sticking it into the airplane in general. I'm not saying that can't happen in a specific case, but I think that's more hype than anything else. It's certainly nothing that's going to impact us for a long time.
If you figure it takes, what, five, seven years to develop a new aircraft or engine, then they sell it for 20 years, and then it continues flying, the last one continues flying 25 years after it's delivered. There's a very long cycle in here, and manufacturers and the FAA are very hesitant to change the process once something is up and going, because it's certified, and it works, and you know it works, and you don't want to take that level of risk in unknown by changing something. I don't really see that affecting current generation, I think with regard to future generation, we'll be just fine with the technology, and we're staying up on all this as well.
Remember, with the breadth of product, we see a lot of different stuff, with engines, with components, and interiors, and I think we're going to be in a good position to take advantage of that.
That's interesting. Government agencies are resistant to change. I'll remember that.
I just say everybody. We all tend to be resistant to change, and government, certainly our large customers, the engineering community in general is resistant to change. I think we're going to do just fine.
Wait, Chris, this is Larry. I'm trying to recollect, didn't Obama say that he brings change that you can rely on? Didn't he promise government change you can rely on?
Something like that.
Hope and change.
Hope and change. We're having hope and change.
Good. Okay, one other question. I think there was an article, I think in The Wall Street Journal recently, talking about the number of pilots getting sucked into the Chinese market because of the growth of the market there. Lots of acquisitions of parts and component companies. Can you give us an update on where you stand in your effort in China specifically?
Yeah. Well, again, we don't like to give too much specifics for competitive reasons, but we are present in China. I think we can do a lot more in China. There's a tremendous amount of what I consider to be unsold potential through our entire business in China. It's not just a matter, in some cases, of walking in the door and selling the product. There's a lot of homework that needs to be done, but we are successful over there, but I think that we have tremendous upside opportunity.
Great. Thank you.
Thanks.
Thank you, Chris.
Your final question is from James Long with Gabelli.
Good morning, everyone. Great quarter, guys.
Thank you, Jim.
I just have one question, since everything else seems to have been answered. Regarding Reinhold, I noticed they're big in missile defense, and I was just kind of wondering, how big is the exposure? With this potential conflict with Syria, do you anticipate any big orders from the U.S. government in this area?
Jim, this is Eric, and I think that's a good question. When we bought Reinhold, they have a lot of proprietary composite missile technology. When we bought it, of course, there was this thought that peace could break out, and missiles would never need to be used, and we never bought into that. They continue to be very successful in what they do. The products that they sell, basically in a missile, they get shot once and that's it. I think that this issue with Syria just shows that the United States needs to continue to maintain its technological lead and its dominance, and we need to be present in the defense area, in many different areas, because there are plenty of crazy people out there. As long as they exist, the United States really has an opportunity to provide these parts.
I think Reinhold's in a very good position there. We're doing both commercial as well as military, it's nice because they somewhat balance each other. We think both are very advantageous markets for us to be in. We're on long-range missiles. We're on short-range missiles. We're on all sorts of things. I think that there's a very good opportunity for us there.
Well, I guess two things is, could you just give us a sense of how big of exposure HEICO's missile defense business is? I guess if this conflict gets dragged out, the more it gets dragged out, the more likely the government needs to replenish its inventory on these things. Maybe you can give us a sense of how big of a potential increase in orders you might see.
Yeah, Jim, we're not really sure. Actually, I don't have the missile numbers in front of me right now, because, of course, it's in both sides of the business. The other issue is you never know what the current inventories look like of those missiles. A majority of Reinhold's missile defense sales are for foreign military markets. You can just imagine, what's going on in Syria is probably quite good for the foreign military market.
That's where we want to make because there are a lot of countries that want to protect themselves. We think that there's a lot of opportunity there. I wouldn't view it as anything that would significantly change the business or where we're headed or what we've said. I think it sort of is all embedded in what we do. If there's opportunity over because of what's happening in Syria, unfortunately, that could be offset by reduced demand elsewhere. I wouldn't necessarily look at it just by itself. I think you got to look at it all together.
Right. Okay. Still overall, I mean, yeah.
Yeah. Definitely positive.
It's one of those, but it's positive for you guys in terms of.
Definitely positive. Reinhold, again, has a great relationship with its customers. It's the go-to place for what they do, and I think we're going to be in a very good position to continue supplying what we're supplying as well as to make additional stuff for these missile OEMs.
Jim, I just want to mention one thing. When we talk about these missile parts that we make at Reinhold Industries, these are highly engineered parts. Now, some people have an idea that a missile is something like a bullet casing or something like that. These are very, very highly refined, machined parts where composites are applied to the surface for heat resistance, and they are extremely complex casings. We're talking about a highly engineered product, not some kind of a flimflam thing, just like a tube or like a bazooka tube or something like that. This is a very, very well-engineered, manufactured to close tolerance, piece of equipment. That's why they operate as well as they do.
Actually, just to put some meat on that, the product that Reinhold Industries does is an ablative technology where basically the composite burns off when it's in flight and protects the missile itself.
It's a very sophisticated, complex technology, and we see that continuing in demand.
It's hard to replicate this. Other people aren't going to go out and say, "Oh, I'm just going to put some gunpowder in a tube and shoot it off." It's not the way it works. It's very complex.
Do you have competitors in this space, or is Reinhold the only provider of this?
No, we have competitors.
We have competitors in much of what we do.
Okay.
I would say most of what we do. Certainly, there are competitors. It's sort of interesting. I think that raises an interesting point. I think one of the reasons why we succeed so well is because we do face, in all these businesses, aggressive competition. It's not like we're the only game out in town where we can get fat and lazy. We have to be very aggressive, and we've got to continue to mine these opportunities. They're definitely all competitive.
Right. Okay. Well, you guys certainly doing a great job with your results this quarter.
Thank you.
Thank you very much, Jim.
Thank you.
Your next question is from Rene Plessner.
Good morning.
Good morning, gentlemen.
Good morning, Rene.
I just have one comment, which is woohoo.
Well, I just want to congratulate all of you. This is above and beyond expectations, as we've just heard. I have been a happy shareholder for 20 years, and I just want to thank you for the brilliant way you run the company.
Rene, I thank you very much. You've been a great supporter of HEICO, and you've had confidence in it and the management team. You've been very well rewarded as so many of the other listeners on this call, but we try very hard, and we're going to try to continue to perform. Thank you so much for your kind comment. Much appreciated.
You're very welcome. May it ever be thus.
I also would like to say, as long as compliments are being given, I'd like to take this time to really thank the team members of HEICO who are responsible for the performance of HEICO. We have some amazing team leaders that run some of these subsidiaries. The financial community can't follow them on the balance sheet or the P&L. You can see their tracks on the P&L, but you can't see their capability. Without mentioning them by name, they know who they are, but these people, I think, are extraordinary. They have vision. They have hard work. They have honesty, integrity, a great commitment to HEICO. They themselves have done very well financially and continue, and that's great. We want to incentivize people. We have a wonderful team out in the field working every day.
On behalf of myself and the board of directors, I want to take this public opportunity to thank them all. Hello?
Well, if I'm still on, amen. If I'm not on to the next.
Well, I'm waiting for Jennifer. She is the operator. Thank you, Rene.
You're welcome.
At this time, you have no further questions?
Okay, if that is all, if there are no further questions, I thank everyone who is interested in HEICO and has been listening and remind you that we are available for questions should you have any. Give us a call, and we're open to try to respond to your questions. We look forward to speaking to you sometime in late December when we have the fourth quarter and the year-end wrap-up for 2013. Again, thank you all for your interest in HEICO.
Thank you, ladies and gentlemen. This does conclude today's conference call.