Good morning. My name is Suzette, and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2013 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies.
HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, 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 costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers, or competition from existing and new competitors, which could reduce our sales, HEICO's ability to introduce new 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 and income tax rates, and economic conditions within and outside of the aviation, defense, space, medical, telecommunication, and electronic industries, which could 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, filings on forms 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 call over to Laurans Mendelson.
Thank you very much. Good morning to everyone on the call. We thank you for joining us. We welcome you to this HEICO second quarter fiscal 2013 earnings announcement teleconference. I'm Larry Mendelson. I'm the Chairman and CEO of HEICO. 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 Executive Vice President, and Carlos Macau, our Executive Vice President and CFO. Before reviewing our second quarter operating results in more detail, I would like to take a few minutes to summarize the highlights. Consolidated second quarter 2013 results exceeded our expectations and were accentuated by strong organic growth, within both of our operating segments, an all-time quarterly record net sales and operating income within our Flight Support Group.
Consolidated year-to-date net sales, operating income, and net income represent all-time record results for HEICO. This was driven principally by record net sales and operating income in both segments. Consolidated second quarter fiscal 2013 net income and operating income are up 24% and 19%, respectively, on a 10% increase in net sales over the second quarter of fiscal 2012. Consolidated net income and operating income in the first six months of fiscal 2013 are up 14% and 6%, respectively, on a 6% increase in net sales over the first six months of fiscal 2012. Flight Support Group set an all-time quarterly net sales and operating income record in the second quarter of fiscal 2013, improving 10% and 14%, respectively, over the second quarter of fiscal 2012. The increases principally reflect organic growth of approximately 7% and additional net sales contributed by two acquisitions since the third quarter of fiscal 2012.
Consolidated net income per diluted share increased 22% to $0.44 in the second quarter of fiscal 2013, up from $0.36 in the second quarter of fiscal 2012. This was as a result of continued strong performances from both of our segments. Cash flow provided by operating activities was $44.5 million in the first six months of fiscal 2013. As of April 30th, 2013, the company's net debt to shareholders' equity ratio was 32.1%, with net debt, which is total debt less cash, of $211.7 million. As previously announced, we recently entered into an agreement to acquire Reinhold Industries. Closing, which is subject to government approval and standard closing conditions, is expected to occur within the next 10 to 30 days. 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.
Reinhold is an excellent acquisition for HEICO because it offers a growing product line in growing markets. Reinhold's outstanding quality record, reputation, and exceptional management were also critical to our decision to buy the business. Additionally, Reinhold will be part of our Flight Support Group, and we expect the acquisition to be accretive to our earnings per share within the first 12 months following closing. We plan to fund our acquisition of Reinhold through our existing credit facility. Immediately following the acquisition, even after paying our special dividend in December 2012, and that was a little bit in excess of $100 million, we expect our trailing 12-month leverage ratio, which is EBITDA to debt, to be less than 1.75 times, and then subsequently decreasing to less than 1 time by the end of fiscal 2014.
This, of course, excludes the impact of any additional acquisitions which we might make during that period. As we look ahead to the remainder of fiscal 2013, our financial flexibility will continue to allow us to aggressively pursue high-quality acquisition opportunities. One other comment I've been asked often was our December dividend of in excess of $100 million, was that an indication that we've run out of acquisition opportunities? I've responded many times that the answer is absolutely not. We have more than enough firepower to finance any acquisition that we would conceivably make. We are not capital constrained in any way. I would like to now introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.
Thank you. The Flight Support Group's net sales increased 10% to a record $155.2 million in the second quarter of fiscal 2013, as compared to $141 million in the second quarter of fiscal 2012. The increase reflects organic growth of approximately 7%, as well as additional net sales of $3.9 million from the successful integration of our fiscal 2012 acquisitions. The organic growth principally reflects an increase in demand from improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines, as well as within our specialty product lines. Flight Support Group's net sales in the first six months of fiscal 2013 increased 5% to a record $294.2 million, up from $279.9 million in the first six months of fiscal 2012. The increase reflects additional net sales of $7.4 million from fiscal 2012 acquisitions, as well as organic growth of approximately 2%.
The organic growth principally reflects an increase in demand from improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines and within our specialty product lines. Approximately 80% of the Flight Support Group's organic growth came from increased aftermarket sales. The Flight Support Group's operating income in the second quarter of fiscal 2013 increased 14% to a record $30.3 million, as compared to $26.6 million in the second quarter of fiscal 2012, and increased 5% to a record $54.5 million in the first six months of fiscal 2013, up from $52.1 million in the first six months of fiscal 2012. The increase in the second quarter and first six months of fiscal 2013 principally reflects the previously mentioned higher net sales.
The Flight Support Group's operating margin improved to 19.5% in the second quarter of fiscal 2013, up from 18.9% in the second quarter of fiscal 2012. The increase principally reflects higher net sales and a more favorable product mix within our aftermarket replacement parts and repair and overhaul services product lines and higher net sales within our specialty product lines. The Flight Support Group's operating margin in the first six months of fiscal 2013 was 18.5%, comparable to the 18.6% reported in the first six months of fiscal 2012. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.
Thank you, Eric
The Electronic Technologies Group's net sales increased 10% to $83.9 million in the second quarter of fiscal 2013, up from $76.3 million in the second quarter of fiscal 2012. The increase reflects organic growth of approximately 9%, as well as additional net sales of $700,000 from acquisitions made in fiscal 2012. The organic growth principally reflects an increase in demand for certain space products, and was partially offset by a small decrease in demand for certain of our defense products. In the first six months of fiscal 2013, ETG net sales increased 8% to a record $162.8 million, up from $150.7 million in the first six months of fiscal 2012. The increase mainly resulted from organic growth of approximately 5%, as well as additional net sales of $4.9 million from fiscal 2012 acquisitions.
This organic growth principally reflects an increase in demand for certain of our space products, which was partially offset by a small decrease in demand for certain of our defense products. The Electronic Technologies Group's operating income in the second quarter of fiscal 2013 increased by 32% to $20.2 million, up from $15.3 million in the second quarter of fiscal 2012, and increased by 14% to a record $35.8 million in the first six months of fiscal 2013, up from $31.5 million in the first six months of fiscal 2012. The increases in the second quarter and first six months of fiscal 2013 principally reflect the previously mentioned increase in net sales.
The Electronic Technologies Group's operating margin improved to 24.1% in the second quarter of fiscal 2013, up from 20.1% in the second quarter of fiscal 2012, and improved to 22% in the first six months of fiscal 2013, up from 20.9% in the first six months of fiscal 2012. These increases principally resulted from higher net sales and a more favorable product mix for certain of our space products, again, partially offset by lower net sales and a less favorable product mix for certain of our defense products. At this point, I turn the call back over to Larry Mendelson.
Thank you, Victor and Eric. One thing I'd like to mention at this point before I get into the detail, nowhere in our call, in the financial data, do we have anything that shows the outstanding performance of business group leaders. All these performances that we see are really due to their extraordinary efforts, and I know some of them are on the call. On behalf of the board of directors, HEICO shareholders, executive management, I want to thank them. I'm not going to name them all. There are too many. If the shareholders out there listening to this call could meet some of these people, they would be duly impressed. It's truly an extraordinarily talented, dedicated, hardworking bunch that makes all of this happen. They're the ones that really deserve all the credit for our great results. Moving on to diluted earnings per share.
The consolidated net income per diluted share increased 22% to $0.44 in the second quarter of fiscal 2013. That's up from $0.36 in the second quarter of fiscal 2012, principally driven by, again, continued strong performances in both segments. Consolidated net income per diluted share increased 14% to $0.82 in the first six months of fiscal 2013. That was up from $0.72 in the first six months of fiscal 2012, again, principally driven by continued strong performances in both segments. Depreciation and amortization expense of $8.3 million in the second quarter and $16.4 million in the first half increased by about $800,000 and $2 million in the second quarter and first six months of fiscal 2013, and that was up $7.5 million and $14.4 million in the second quarter and first six months of fiscal 2012.
The increase in both periods reflects higher amortization expense of intangibles that were primarily the result of our fiscal 2012 acquisitions. R&D expense increased to $7.7 million in the second quarter of fiscal 2013. That was up from the $7.3 million spent in the first quarter and approximated the expense in the second quarter of fiscal 2012. For the first six months of fiscal 2013, R&D was $15 million, up about 1% from $14.9 million in the first six months of 2012. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies, and we continue to invest over 3% of each sales dollar in the R&D programs. We believe that that commitment to invest in new product development has proven very effective over the years, and it continues to be a significant part of our long-term growth strategy in both operating segments.
SG&A expenses increased 19% to $44.8 million in the second quarter of fiscal 2013. That was up from $37.6 million in the second quarter of fiscal 2012, and increased 12% to $87.4 million in the first six months of fiscal 2012, and that was up from $78.2 million in the first six months of fiscal 2012. The increases in the second quarter and the first six months of fiscal 2013 principally reflect the incremental impact from the fiscal 2012 acquired businesses, an increase in accrued performance awards, which were based on improved consolidated operating results, and an increase in certain selling costs associated with higher net sales volumes.
SG&A expense as a percentage of net sales increased from 17.4% in the second quarter of fiscal 2012 to 18.8% in the second quarter of fiscal 2013, and they increased from 18.2% in the first six months of fiscal 2012 to 19.2% in the first six months of fiscal 2013. Those increases in the second quarter and first six months of fiscal 2013 principally reflect the impact from previously mentioned increase in accrued performance awards and sales-related commissions and costs. Interest expense in the second quarter and the first six months of fiscal 2013 were $800,000 and $1.4 million respectively, up slightly from the $700,000 and $1.3 million in the second quarter and first six months of fiscal 2013, respectively.
The increases principally reflect a higher weighted average balance outstanding under our revolving credit facility, that was associated with borrowings to fund recent acquisitions, as well as the special and extraordinary cash dividend paid to shareholders in December 2012. I mentioned earlier that was slightly in excess of $100 million. Other income in the second quarter and first six months of fiscal 2013 was not significant. Income taxes. The effective tax rate in the second quarter of 2013 decreased to 34.1%, down from 34.7% in the second quarter of fiscal 2012. The decrease is principally due to an income tax deduction for the special and extraordinary cash dividend paid in December 2012 to participants of the HEICO 401 plan who were holding HEICO common stock.
Additionally, the decrease reflects a benefit resulting from the retroactive extension in January 2013 of the R&D tax credit to cover a two-year period from January 1, 2012 to December 31, 2013. The company's effective tax rate in the first six months of fiscal 2013 decreased to 31.3%, down from 34.5% in the first six months of fiscal 2012, that is due principally to previously mentioned income tax credit for qualified R&D activities, as well as the income tax deduction for the special and extraordinary cash dividend paid in December 2012. For the full fiscal 2013, we continue to estimate an effective tax rate of approximately 33%. Net income attributable to non-controlling interest was $5.3 million and $10.4 in the second quarter and first six months of fiscal 2013, compared to $5.2 and $10.5 in the second quarter and first six months of fiscal 2012.
The changes in net income attributable to a non-controlling interest in fiscal 2013 compared to 2012 principally reflect higher earnings of certain Flight Support Group companies and Electronic Technologies Group subsidiaries, which was partially offset by purchases of certain non-controlling interests by HEICO, of course, resulting in lower allocations of net income to those non-controlling interests. On to the balance sheet and cash flow. As I mentioned earlier, our financial position and forecasted cash flow remain extremely strong. Cash flow provided by operating activities was $44.5 million in the first six months of fiscal 2013, we continue to expect strong cash flow for the rest of the year, we project about $140 million in fiscal 2013. Our working capital ratio is strong, 3.2 as of April 30th, that was up from 2.8 as of October 31st.
DSOs of receivables were 47 days compared to 46 in October 31, 2012. Of course, we continue to closely monitor all receivable collection efforts in order to limit credit exposure. We rarely have losses in accounts receivable, I want to remind. We tend to collect what we sell. No one customer accounted for more than 10% of net sales, top five customers represented about 17% of consolidated net sales in the second quarter, up from 16% in the second quarter of fiscal 2012. Inventory turnover rate was 120 days as of April 30th, compared to 114 as of October 2012, the increase in the inventory rate reflects an increase in inventory levels towards the end of the second quarter of 2013, due to anticipated sales growth which we see coming in the second half of fiscal 2013.
Our net debt to shareholders' equity was, I mentioned before, 32.1% on April 30th, with net debt of $211.7 million principally incurred to fund certain fiscal 2012 acquisitions, as well as the payment of that one-time special cash dividend, which actually totaled $116.6 million in December 2012. We have no significant debt maturities until fiscal 2018. The outlook. Consistent with our previous guidance, we remain confident in the outlook for the commercial airline industry, and expect increases in airline capacity and maintenance spending to yield moderate organic growth within the Flight Support Group for the remainder of 2013. Uncertainty surrounding the impact of governmental budget reductions has continued to soften the market for certain defense products, and remained a contributing factor to the decline in sales for certain defense products within the Electronic Technologies Group during the first six months of fiscal 2013.
Despite these market conditions, we continue to anticipate that healthy demand for non-defense products will drive moderate organic growth within ETG for 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 8%-10%, and growth in net income to 11%-13%, that was up from our prior growth estimates of 6%-8% in net sales and 9%-11% in net income. Approximately 60% of the mentioned sales growth is expected to be organic. For fiscal 2013, we anticipate capital expenditures to approximate $20 million, and depreciation and amortization to approximate $38 million.
We continue to estimate consolidated operating margins to approximate 18% for fiscal 2013, and these estimates do include the impact of Reinhold Industries acquisition, but they exclude any other potential acquisitions which we might make during the remainder of fiscal 2013. In closing, we will continue to focus on intermediate and long-term growth strategies, with an emphasis on acquiring profitable businesses at fair prices. Currently, we are actively pursuing opportunities within both of our segments that complement our existing operations. That is the extent of our prepared comments. I would like to open the floor for any questions which you all may have. Thank you. Hello? Do we have an operator on the line?
At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, star 1. Your first question comes from Tyler Hojo.
Yes, hi. Good morning.
Good morning, Tyler.
The first question relates to the organic aftermarket growth rate. Certainly, it's nice to see the improvement there. I was hoping that you could maybe provide a little bit more granularity as to what drove that. I'm also hoping that you could maybe comment on, certainly, it seems like there's been more focus on concerns surrounding competing used parts coming onto the market and impeding growth rates. Is that impacting you? Thanks a lot.
Tyler, let me answer the last part of the question first, I'm going to shift it over to Tom and Carlos to get into the detail. As far as cannibalization and aircraft and so forth, we don't believe that that's really having much of an impact really on us, because most of those parts are expendable parts that people are not going to pick up out of used aircraft and so forth. If we're having washers, bushings, so forth and so on, that is probably not going to impact us in a significant way. I think some writers who, I know a number of analysts have mentioned this theory, and I think they're right, as it regards perhaps the OEMs, because maybe they'll see a little of their spares drop.
The kind of things that we're selling, I don't think are too sensitive to that type of cannibalization. Keep in mind, we also have within our MRO group, a company that actually does that kind of thing, buys engines and aircraft and so forth, and sells and tears down and so forth. We're a little bit active in that business. We see it from the other side. We understand if there's a plethora of parts coming on the market, we're very aware of it. The answer to it is we're not concerned about that. As to the first part of the question, I'm going to ask Tom to-
Yeah. Tyler, this is Tom Irwin. As Eric mentioned, in the second quarter, our organic growth for the FSG group
was around 7%, as you also mentioned, about 80% was attributable to the aftermarket sales, which we saw growth organically in the parts and service business. Obviously, the other 20% of the organic growth was contributed by our specialty products, which is broadly OEM type product. I think the answer is we typically target outgrowing the market, and probably we did that in the second quarter. I think, looking forward, inherent in our estimates for the full year are comparable organic growth for the rest of this year, which again, as I think you're pointing out, is probably a bit higher than overall MRO spend outlook and so on and so forth.
I think, as we've seen over longer periods of time, the MRO cycle is a bit longer, and we think there is some pent-up demand that we're beginning to see, we began to see in the second quarter, dating back to our first quarter conference call, and at this point that we're expecting in the second half of this year. For particular color, I don't know, Eric, if you have anything else to add.
I would say, Tyler, it's been broad-based support and enthusiasm for our products and what we're doing. I think we continue to outgrow the market, which means we're taking market share in various areas. For obvious reasons, we don't like getting into specific products or customers because our competitors listen to these calls and then go and try to protect what they can. We mentioned in the first quarter that I had gone customer by customer and done a review with our folks, and that was the basis for our confidence in the remaining three quarters of fiscal 2013. Certainly, we've seen that growth and that increase already now manifest itself in the second quarter. I would anticipate we're probably at a reasonable run rate now where we've seen that pickup in demand, and we're just continuing to focus in all of our areas.
Okay, great. Certainly encouraging. Just one other question, if I may. Related to the guidance and how Reinhold kind of folds in. I get the sales increase looks like it's mostly driven by the acquisition, but on the earnings side, you said in the press release you expect the deal to be accretive in 12 months. My guess is it's not accretive to earnings in fiscal 2013, but maybe you could just expand upon that.
I think that assumption is not correct. We think it's going to be accretive from the get-go. Tom can give you more color on it. We can't be exactly sure. We'll let Tom give you more color.
Again, Tyler, it's Tom Irwin.
Okay
Yeah, the answer is we're not exactly sure of the exact timing, but we do have in our estimates, obviously, some revenue projections for Reinhold, presuming closing roughly within 10-30 days. The earnings impact has been moderated in our estimates. The reason being, as you may recall, typically in acquisitions post-closing, you have acquisition costs as it gets fenced. You also have, for us, typically inventory write-offs and for purchase accounting, which typically hit pretty quickly. The answer is, basically we upped our earnings guidance obviously. Most of the earnings guidance increase was attributable to our core businesses. There is a little bit in for Reinhold impact, but very minimal. And again, today we haven't given any financial details on the Reinhold transaction. As we go forward, we'll be able to add a bit more color.
Suffice it to say, there's more sales added to the guidance than there are earnings at this point.
Yeah. Okay. That's what I thought. Great. Thanks a lot.
Thank you. Your next question comes from J.B. Groh.
Hi, guys. Alex in for J.B. today.
Okay. Good morning.
Good morning. I had a question about the ETG segment. You talked about how defense products saw a little bit of softness this quarter, and I'm wondering how you guys are looking at that going forward with sequestration setting in and everything. We've kind of heard other people around the group state that they don't see much impact for the remaining 2013 from sequestration. I'm just wondering if you guys are kind of thinking about it the same way, somewhere around flat, maybe down a little bit, maybe up a little bit, and then how you're looking at it in 2014.
Yeah, this is Victor. The answer to that is I would expect that we would see some continued deterioration in defense domestically in our overall defense numbers. I think where we've seen it thus far has been on our short lead, short cycle businesses. Unfortunately, some of that is higher margin. I think that as the year wears on, it will become more pronounced, and we'll see more of it in sort of the six to nine-month timeframe. I don't think it's going to overwhelm us, as I've talked about at many conferences and on these calls before. I think we've gotten an early taste of it
Okay, great. Thanks.
You're welcome.
Along the same line then, we saw some space product pickup in the quarter. Can we expect that going forward as well? Are you going to use that to kind of offset impact to sequestration?
Well, for the moment, our space business is strong, and the outlook for it is pretty good. I think that, overall, in the year, it will be an offset to sequestration. We'll see how it goes as we get later in the year and into next year. The space business is an excellent business, but by nature, there's variability to it on top line and, of course, bottom line. Over time, it's a great place to be, and we've done phenomenally with it.
Right. Okay, great. Thanks a lot, guys.
Thank you.
Thank you. Your next question comes from Michael Ciarmoli.
Hey, guys. On a good quarter. I guess, first off here, I just wanted to maybe do a follow-up on the organic growth rate throughout the quarter. You guys kind of report a month off from, I guess, a lot of the peers we're comparing you to here. Did you see any type of large, I guess, monthly sequential step-up towards the end of the quarter, or was it pretty consistent throughout the quarter?
April was a relatively strong month, in FSG. I'm speaking of FSG principally, compared to the couple prior months. That, in fact, as you look at our cash flow, our receivables jumped up a bit, and again, it was primarily because the sales were a little bit heavier on a monthly basis in April. I think, we tend to look at longer periods, even beyond quarters, in terms of trying to estimating forecast sales growth, because different airlines order on different cycles. You may recall, particularly in FSG, where 60% or 70% of our shipments each month come in under the PO in the same month. We need to look at a longer period window to come up with our forecast.
Okay, fair enough. Maybe I'll just follow up a little bit along the same lines then. A little bit different way to go about it, I guess. Based on your first quarter report versus second quarter report, there was a pretty dramatic reversal there. Was it very progressive, or was there a time period in which things kind of dramatically started to turn?
Yeah. This is Eric. I would say it really occurred pretty much throughout the quarter, and I would be careful about reading, transferring HEICO's results and inferring that other companies are going to show this kind of growth. When I speak to our peers in the industry, I don't think they are seeing the kind of growth that we are seeing. That's really continuing to now. It really occurred, I would say, through the quarter. We knew that the first quarter was lower than we had expected. There was the pickup in the second quarter, and we anticipate sort of this level of activity going forward, through the remainder of the year.
Okay, great. That was helpful. I guess the one other thing I wanted to ask was really on the electronics side of the business, just around margins. We had a pretty big step-up in operating margin for the second quarter. Sounds like that was related to the space products. Sounds like that also may continue. I guess, just how should we be thinking about the run rate there, I guess, for the balance of the year?
Yeah. Again, this is Tom Irwin. Again, in our guidance numbers and our overall operating margin estimate of about 18%, it continues, as we previously stated, that for the full year, we expect operating margins in ETG to be comparable to last year. That would put it 22%-23%, again, for the full year. You may recall, first quarter was lower. As you're pointing out, second quarter was a bit higher. I think roughly averaging the second half of the year somewhere in the 22%-23% would bring us to a full year average in that range.
Okay, that's all for me. Thank you, guys.
Thank you.
Thank you. Your next question comes from Stephen Levenson.
Hey.
Morning, Steve.
Just curious in terms of the organic growth into the aftermarket, can you point to it as being a part of fleet growth, additional miles traveled, or is it that more planes are coming into their maintenance intervals now, and is it a specific model or pretty well-balanced?
Yeah, I would say that I would not attribute it. Of course, I don't have, if you will, the scientific data in front of me, but I would not attribute it to fleet growth, nor to significantly higher maintenance activity. I would really attribute it, from my chair, to what I consider to be our structural advantage, where our businesses are broken down into individual business units. Each with a very competent, highly incentivized, very intelligent, hardworking leader and team of people. I think they go out and find these opportunities. The MRO was just in Atlanta about one month ago, and in speaking with other folks in the industry, they're not seeing a, if you will, a rising tide in terms of level of activity in the aftermarket.
I would really attribute this to our folks having a sized business where they can go out and find opportunities and reap those opportunities, as opposed to a higher level of maintenance or of flight hours.
Okay. It really sounds more like you're capturing more market share, and do you think that's coming because HEICO is a little bit more integrated and coordinated in the way this is being done, and that it's tougher for the other guys to compete?
Yeah, I think that we execute very well. In order to have a meeting for the HEICO businesses, they're able to get, if you will, the top five folks in each business around the table and figure out what each person needs to do, and these folks are very motivated, very accomplished, and talented, and they go out and do it. I think that really is due to our structural advantage. We're not this type of organization where you've got these silos and you've got to have all these managers who really don't know what's going on, and assemble them all and their crazy teams of people to figure out how to make decisions and how to move the ball forward. Our guys are like little regimental combat teams, and they go in and they get the job done.
I think that's why in this sort of flat environment, I think that's why we're doing well. I think that's why my dad mentioned in the beginning of the call that our people are really working very hard, because I think they're the ones making the difference in an otherwise flat market.
Sounds great. Now, I'm not going to try to build this into a forecast or anything, but if we watch flight available seat mile statistics, could we translate that into something that might accelerate in the future then?
I would be careful about that. Because again, in speaking with our peers, people are seeing sort of flattish markets out there. I think our performance, my sense is, and of course we'll see how other people report, My sense is I think we're sort of doing better than most out there, and I think it's more of a HEICO market share story in everything that we're doing, whether it's parts or repair services. We're very close with our customers. I think we deliver great value to them. I think we're the supplier of choice. They want to give us a business. I'd be careful.
Some analysts have come out, I read all the material, Some folks have come out and say, "The first half of 2013 sort of marked the bottom of the engine cycle and it should be coming back." I certainly hope that's true, In speaking with the players out there, they're not speaking about that. Maybe they're being a little conservative. Instead, it's more of an analyst driven thought as to how we're doing. I think activity does go up from here, though. I would be careful about inferring that the tide is rising, if you will.
Got it. Thanks for the additional detail. Thanks very much.
You're welcome.
Thank you.
Thank you. Your next question comes from Michael Ciarmoli.
I think it's actually Kevin on for Mike. Nice quarter, guys.
Thank you.
Put up record margins in FSG this quarter. Just wondering what, other than the obvious volume, was responsible for that and how maybe we should look at that in the back half of the year, given the acquisition.
Again, this is Tom Irwin. As I mentioned relative to ETG, our full year estimates for operating margins really haven't changed. I think, again, in the FSG, we're looking for the full year to run somewhere around 18%. Again, that has some impact reflected of Reinhold, but again, it certainly is obviously less than the full six-month period, so there might be a little bit of impact. Again, overall, we're still targeting the same operating margins for really both segments as well as a consolidated operating margin.
Okay. Great. Realizing you haven't closed yet, I was wondering if you could give us some color around Reinhold and maybe the end market breakdown of sales there, obviously without going into the exact numbers and how it would fit into the existing business.
Sure. When we look to make acquisitions, we've got a number of criteria. One, that they're fairly priced. Number two, that they're in very good businesses with strong barriers to entry. Number three, superior leadership teams. The type of people who we want to be in business with and we want to work with for decades. We met the folks over at Reinhold, and we got to know the business, and we felt we were able to structure a deal that was fair to everybody, in a business which is excellent, with a management team that is really top-notch. I think that it fits with us philosophically.
I had mentioned that we, if you will, I think we have a structural advantage in the way HEICO is structured, that we have these autonomous business units, which are each very close to their customers, understand their manufacturing processes and the financial results, and they don't feel like a cog in somebody else's big wheel. They are very rifle shot approach businesses, and Reinhold fits in that criteria. They are very strong in the composite markets. They're both in the commercial aviation as well as defense and space applications. Most of their defense and space is not directly for U.S. government programs. Much of it is done through Foreign Military Sales. With all of the concerns in the world, folks need these products. We think that it fits very well.
It's more of a specialty product type company, whereby a customer comes to it with a problem to solve. Reinhold figures out how to solve that problem, and has proprietary manufacturing and design technology to be able to solve that problem at a very competitive cost and make a fair profit on top of it. We've already proven over the last 15 years, we've supplied specialty type products. Not necessarily directly to the aftermarket, but to other players in the aviation industry. I think that this just further broadens HEICO's productive ability as well as customer reach. There's other things that we can sell to some of these customers, in the other HEICO business units, where Reinhold will be able to open the door for these other HEICO units. Likewise, the other HEICO units will be able to open the door for Reinhold.
I think we've proven that we're able to buy these kind of businesses. We maintain the leadership there, make sure that they're motivated, they're incentivized, we stay out of the way. We think it would be a great fit, and frankly, the people at Reinhold are very excited because this is what they wanted to do. Type businesses, we think that there's a good synergy opportunity. I think it's a great fit.
Thanks, Eric. Would you be willing to kind of give a ballpark in terms of how much of that business is commercial versus the space and defense piece of it?
Yeah, the majority is commercial.
Okay.
No, we're not, at this point, providing further detail than that.
No, that's good enough for now. Thanks, that's all I have.
Okay. Thank you.
Thank you. Your next question comes from Arnold Ursaner.
A couple of quick follow-ups on Reinhold. First, it's going to go in the FSG segment, is that correct?
Yes.
Okay. Well, in your prepared remarks regarding earnings and revenue guidance for the balance of the year, even if I take the high end and the % that would coming from acquisition, it would imply for the five months you might own it, about $36 million of revenue and roundly $90 million or so for the year. Is that about the right math?
Arnie, this is Tom. We haven't provided any financial details on the Reinhold transaction. I think going forward, post-closing, et cetera, we'll be able to provide additional details. What we did disclose was obviously the employment number of 200 people, roughly. Commentary, it's a typical bolt-on acquisition, as Larry described, singles, doubles. We historically said that these bolt-on acquisitions typically have revenue of $10 million-$70 million. At 200 team members, this would put it on the high end of that range. Within those kind of parameters, I think, is a reasonable estimate.
Tom,
On an annual basis. Yeah.
Yeah. If it were not as much as $90 million or so of annual revenue, then it would imply a slowdown in your growth rate in the organic business, which I don't think you're hinting at at all.
We are not hinting at that, no.
Okay. Again, that's just pure math based on what you said. The other question I have regarding Reinhold is they have a very important contractual relationship with B/E Aerospace as a component supplier. I know you do tremendous diligence before any acquisition. What more can you tell us about that contractual relationship that gives you confidence it will continue for the next decade, which is sort of driven by the new programs that they're involved with?
I think, Arnie, in general, we do a very thorough due diligence. Part of the due diligence is customer contact and discussion.
Based upon all of our due diligence, we think it was a wise acquisition. In addition, I think that Reinhold makes a extremely high-quality, unique kind of a product. The process to make this product is not very simplistic. I was surprised at the complexity when I saw the manufacturing operation. Also, they have the capacity to supply large quantities to important users. Putting all that together, and I think competitive pricing, focus, and so forth, I think that our due diligence told us that this is a pretty good bet.
Again, just focusing on the math, to the extent you're going to have an inventory write-up plus amortization expense. You indicated overall the operating margin can be maintained even after this acquisition, it would imply that Reinhold is a low to mid-20s operating margin business. Is that, again, the right way to think of it?
I don't think we give that color. I do think that we normally say, and you know that we always say that our acquisitions have to meet a hurdle rate of a 20% operating margin. We've said that publicly, but as to the specific operating margins of individual businesses, we prefer not to give it out. If it was a low margin or lower margin business, we would not be interested just by its basic nature. I think that, again, looking at Reinhold in the overall key components that we look for in an acquisition, I think Reinhold fit right in there. It meets all of the requirements that we normally look for.
Larry, Tom mentioned it was towards the larger end. Was this as large as Switchcraft for you?
I think it was in the range of Switchcraft. It's within Tom's range, maybe slightly lower, but slightly smaller, but it was in the Switchcraft range.
Okay. Thank you very much.
Thank you, Arnie.
Thank you. Your next question comes from Eric Hugel.
Good morning.
Hey, thanks for taking the question. Eric, can you talk about, with regards to the FSG business, any sort of highlights in terms of regional strengths and weaknesses?
I would say that the sort of consistent strength from the Americas as well as Asia. Europe continues to be weak across the board for all the reasons everybody reads about.
Okay.
Just really European weakness would be the only clarifying comment there.
Okay. With regards to when you look at the products and services, is there any sort of strength or weakness in the engine-related products and services versus maybe non-engine related products and services? Are the airlines focused more on engines or non-engines, or can we read anything from that?
I would say that nothing in particular. Some of the analysts have written that they thought engine overhaul sales bottomed in the first half or are bottoming in the first half of this year and will be rebounding in the second half of this year and in 2014. I would say that probably is the only additional color there. Remember that engine sales, the engine manufacturers reported significantly higher sales in 2011 than they did in 2010, and we all thought, we all surmised that perhaps some of the sales that occurred in 2011 should have occurred in 2012, but the airlines thought the level of activity would continue growing at that rate, and it didn't.
I would say it was probably just due to more of a, if you will, overbuying in 2011 on the engine side, those being slightly loaded and then being a little under going forward.
Great. Last thing, maybe Tom, can you quantify the tax benefits in the quarter? You talked about a tax benefit from the dividend that you paid as well as the R&D tax credit.
This is Carlos. The effect of the dividend and the income tax benefit related to the R&D credit was about 1% on our rate in the quarter, and we expect, as I think Larry mentioned in his prepared comments, for the full year, we expect about a 33% effective rate.
Great. Thanks, Carlos, and thanks, guys, and good quarter.
Thank you.
Thank you.
Thank you. Your next question comes from Julie Yates Stewart.
Hey, guys, this is Russell on for Julie today.
Good morning.
Morning. Maybe just one more question on organic growth. If 80% of the organic growth in FSG was attributable to aftermarket, that's a pretty incremental positive compared to what we've heard from some of your peers. Can you talk a little bit about maybe what drove your specific outperformance when previous quarters have been more in line with industry trends?
That's easy, superior management. You know that.
Yeah.
Eric will answer.
Yeah. I really do think that it was more due to our structural
The structural advantage, what I consider to be the structural advantage of the company. That we had these groups of people and they were each focused in their particular areas. I think that they were just able to outperform. Even when we reported in the first quarter that things were a little weaker than we had hoped they would be, I think our peers were even below us in terms of their comparisons overall. I would think that it's really just due to the focus that our folks put in in going out there and getting the sale.
Okay. Thanks, guys.
Thank you.
Thank you. Your next question comes from Kenneth Herbert.
Go ahead, Ken.
Good morning. It's actually Andrew Dupuy on for Kenneth Herbert. I had a question for Larry. Larry, could you just provide some color around M&A, just what you're seeing out there? If you're seeing more opportunity within commercial relative to defense.
I think that we're seeing opportunity on both sides of the fence. We're an equal opportunity buyer. We're opportunistic in what we look at. I would say that the pipeline is what I would call normal. At any one moment, the pipeline can be way up or way down. Once we get into the due diligence and start kicking the tires and everything else, We look at 100 companies, and we may buy one. We do a very thorough due diligence, and most companies, we drop after the due diligence because people, as you very well know, people who promote the companies, they give you information, which is always a hockey stick. When you go in and kick the tires, and you discover there are a lot of pitfalls there. We try to buy very strong companies.
The result of our acquisition program of 46 acquisitions has been really excellent. I would say at this time, the pipeline is normal. We're looking at a number of transactions, and if they fit our model, we're not financially constrained in any way, as I mentioned earlier. We're going to go Flight Support or Electronic Technologies, either one, we will buy, and we are looking at companies in both segments.
Andrew, this is Eric. Just to add a little bit of color. I think we tend to be, due to our operating structure, we tend to be the acquirer of choice. Because unlike a large vertically integrated business where you've got all these functional areas and functional executives come in and try to change everything in these businesses, we like to retain the focus of the business down in the business unit. That's very advantageous to the companies that we acquire. We hear this very frequently, that we are management's choice. We're the leadership's choice on an acquirer. With regard to the due diligence, I think what my dad means is that we are given certain data up front, and then we go and we check it out.
If people have misrepresented what that data is, then we're very thorough, and we go in, and we figure it out, and obviously, we would not be a finalist in that particular type of case. We're very knowledgeable in our areas. We do a lot of homework. We verify what management says, and we tend to be the company that they want to acquire them. I think that there's good opportunities really in all the areas that we continue to focus in.
Okay, great. Thanks. That's very helpful. Eric, I just had one more question for you. When you sort of structure out your plan to go into these airlines and sell to them, are you seeing more opportunities within the mainline carriers or more the sort of start-up airlines? I guess any sort of color there, if you're seeing any more opportunity for PMA product there. Obviously assuming the more start-up airlines that'll obviously occur within Latin America or East Asia or these parts of the world. Any sort of color there as far as how you approach these customers would also be very helpful. Thank you.
Yeah. In general, our best customers are those who have mature fleets because obviously there's the maintenance honeymoon when somebody buys new equipment. If somebody is a start-up airline, they probably don't have much experience nor need for maintenance. That would not be a prime target for us. What has to happen is that equipment has to age. They have to realize how expensive it is to maintain. They have to see the annual price increases, and frankly, the way that they are treated. We walk in and offer a suite of services where we're able to make sure that they're very happy with what we have to offer. We give them personalized attention because our business units are structured to really understand their product, and that's something that a bigger company cannot do. It would not be a brand-new airline with brand-new equipment.
It's somebody as the equipment starts to age. We sell to both, if you will, legacy mainline carriers, domestic, international, low-cost carriers. We work with everybody out there.
Makes sense. Thanks a lot. Great quarter.
Thank you.
Thank you.
Thank you. There are no further questions in queue, sir.
Thank you very much. We thank all of the people out there who are listening to HEICO and interested in the company. As you know, we are available. If you have questions, call any one of us, and we'll try to accommodate you and be responsive. We look forward to our next third quarter conference call, which will be in about three months. We wish you all a pleasant summer, and we look forward to speaking to you real soon. Thank you.
Thank you. This concludes today's conference call. You may now disconnect.