Ladies and gentlemen, thank you for standing by, and welcome to the fiscal 2012 fourth quarter and full year-end results. All lines have been placed on mute to prevent any background noise. Before we begin, let me mention that 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 cost 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 statement, whether as a result of new information, future events, or otherwise. Thank you. It is now my pleasure to turn the call over to Laurans Mendelson to begin. Please go ahead.
Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO fourth quarter and full fiscal 2012 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group, Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group, Tom Irwin, HEICO's Senior Executive Vice President, and Carlos Macau, our Executive Vice President and CFO. Before reviewing our operating results in detail, I would like to take a few moments to summarize the highlights of our record-setting fourth quarter and full year results. As you now know, consolidated fourth quarter net sales, operating income, net income, and cash flow from operating activities represent all-time record quarterly results for HEICO.
This is driven principally by record net sales and operating income within our Electronic Technologies Group, as well as record net sales and continued strong operating income within Flight Support. Our fourth quarter results mark the 11th consecutive quarter of consolidated net sales growth. Consolidated fiscal 2012 net sales, operating income, and net income also represent all-time record fiscal results for HEICO, this is driven principally by record results within both of our operating segments. Consolidated fourth quarter 2012 net income and operating income increased by quite a large amount, 29% and 22% respectively, on an increase of 16% in net sales over the fourth quarter of 2011. Our consolidated operating margins improved to 18.8% in the fourth quarter of 2012, and that's up considerably from 17.9% in the fourth quarter of 2011.
Consolidated fiscal 2012 net income and operating income increased 17% and 18% respectively on an increase of 17% in net sales over the full fiscal 2011. Our consolidated operating margins improved to 18.2% for fiscal 2012, up from 18.1% in fiscal 2011. ETG set a quarterly net sales record in the fourth quarter of 2012, improving 45% over the fourth quarter of 2011. The increase in net sales reflects organic growth of about 11% and additional net sales contributed by four acquisitions since the third quarter of 2011. FSG set a quarterly net sales record in the fourth quarter of 2012, improving by 4% over the fourth quarter of 2011. That increase in net sales reflects organic growth of approximately 2% and additional net sales contributed by two acquisitions during the fourth quarter of 2012.
Consolidated net income per diluted share increased 29% to $0.45 per diluted share for the fourth quarter of 2012, and that's up considerably from $0.35 in the fourth quarter of 2011 as a result of continued strong performances in both of our operating segments. Cash flow and balance sheet remains very strong. Cash flow from operating activities was a record $139 million in fiscal 2012 compared to $126 million in 2011. As of October 31, the company's net debt to equity ratio was below 15.3% with net debt, which is total debt less cash, of about $110.4 million. In August 2012, we acquired 84% of the assets and assumed certain liabilities of CSI Aerospace, a leading repair and overhaul provider of specialized components for airlines, military, and other aerospace-related organizations.
We believe the acquisition of CSI will augment the already extensive offering of our aircraft component repair group, and that this acquisition is consistent with our strategy of offering customers advanced and cost-saving aircraft maintenance alternatives. In October 2012, we acquired 80.1% of the assets and assumed certain liabilities of Action Research Corp. Action Research is an FAA-approved repair station that has developed unique proprietary repairs that extend the lives of certain engine and airframe components. We believe the acquisition of Action Research will complement our already existing ability to bring high-quality aircraft maintenance alternatives to our customers. We do expect both of these acquisitions to be accretive to our earnings per share within fiscal 2013.
As all of you know by now, in November 2012, our board of directors declared an acceleration of our regular semi-annual $0.06 per share cash dividend, as well as a special and extraordinary $1.14 per share cash dividend on both classes of our common stock. Based on the strong enthusiasm from our shareholders after that announcement, our board announced in December an additional $1 increase per share so that the total special and extraordinary dividend will now be $2.14 per share on both classes of stock. The dividend will be paid in one payment on or before December 31, 2012, in view of impending tax increases expected to take effect in calendar 2013. As a reminder, we also, the company, executed a five-for-four stock split of its shares in April 2012.
In total, we declared or paid $2.32 in cash dividends on both our Class A common stock and common stock during the past 12 months. The split and cash dividends demonstrate our continued commitment to delivering value to HEICO shareholders and to superior long-term shareholder return. Last week, as we announced, we entered into an amendment to extend the maturity date of our revolving credit facility by one year to December 2017. We also amended certain other covenants to provide us with additional financial flexibility. I would now like to introduce Eric Mendelson as Co-President of HEICO and President of HEICO's Flight Support Group. He will discuss the outstanding results of the Flight Support Group.
Thank you. Net sales of the Flight Support Group increased 4% to a record $149.7 million in the fourth quarter 2012, up from $144.4 million in the fourth quarter 2011. The net sales increase is principally attributed to organic growth of approximately 2%, an additional net sales of $2.7 million contributed by acquisitions. The organic growth in the Flight Support Group primarily reflects increased market penetration from both new and existing product offerings for certain of our aerospace products and services, resulting in an aggregate increase of $7.2 million in net sales from our aftermarket replacement parts and repair and overhaul services product lines, reflecting organic growth of approximately 6%. The aforementioned increases to our net sales were partially offset by a $4.6 million decrease in net sales within our specialty product lines, principally reflecting normalization in demand as compared to the fourth quarter 2011.
Net sales of the Flight Support Group increased 6% to a record $570.3 million in fiscal 2012, up from $539.6 million in fiscal 2011. The net sales increase in fiscal 2012 principally reflects organic growth of approximately 4%, as well as additional net sales of $9.1 million contributed by acquisitions. The organic growth in fiscal 2012 principally reflects increased market penetration from both new and existing product offerings for certain of our aerospace products and services, resulting in an aggregate increase of $11.3 million in net sales from our aftermarket replacement parts and repair and overhaul services product lines, representing organic growth of approximately 3%. Additionally, the organic growth in the Flight Support Group reflects an increase of $10.3 million in net sales within our specialty product lines, primarily attributed to the sales of industrial products used in heavy off-road vehicles as a result of increased market penetration.
Organic net sales growth in the Flight Support Group has now averaged approximately 13% over the past two fiscal years. Operating income of the Flight Support Group was $25.4 million in the fourth quarter of 2012, compared to $26.6 million in the fourth quarter of 2011. The slight decrease in operating income is primarily attributed to the previously mentioned normalization of demand within our specialty industrial product lines. Operating income of the Flight Support Group increased 9% to a record $103.9 million in fiscal 2012, up from $95 million in fiscal 2011. The increase in operating income for fiscal 2012 principally reflects the increased sales of higher margin products within our aftermarket replacement parts and repair and overhaul service product lines. The Flight Support Group's operating margin was 17% in the fourth quarter of 2012, compared to 18.4% in the fourth quarter of 2011.
The decrease in operating margin principally reflects the dilutive impact of inventory purchase accounting adjustments for recent acquisitions and certain year-end valuation adjustments, including a non-recurring positive valuation adjustment of approximately $900,000 in the fourth quarter of 2011. The Flight Support Group's operating margin improved to 18.2% for fiscal 2012, up from 17.6% for fiscal 2011, principally reflecting the previously mentioned increased sales of certain higher margin products. I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the record results of the Electronic Technologies Group.
Thank you, Eric. Net sales of the Electronic Technologies Group increased 45% to a record $94.4 million in the fourth quarter of fiscal 2012, up from $65.3 million in the fourth quarter of fiscal 2011. The net sales increase has been principally attributed to additional net sales of $21.6 million contributed by acquisitions and organic growth of approximately 11%. The organic growth in the fourth quarter of fiscal 2012 was mostly from an increase in demand and market penetration for certain of our space, defense, aerospace, and electronics products. Net sales of the ETG increased 46% to a record $331.6 million in fiscal 2012, up from $227.8 million in fiscal 2011. The net sales increase for fiscal 2012 resulted mainly from additional net sales of $87.4 million contributed by acquisitions since the third quarter of fiscal 2011 and organic growth of approximately 7%.
The organic growth for fiscal 2012 principally reflects an increase in demand and market penetration for certain of our defense, space, electronics, aerospace, and medical products. Organic net sales growth in the ETG has now averaged approximately 8% over the past two fiscal years. The ETG operating income increased 67% to a record $25 million in the fourth quarter of fiscal 2012, up from $14.9 million in the fourth quarter of fiscal 2011, and increased 30% to a record $77.4 million in fiscal 2012, up from $59.5 million in fiscal year 2011. These increases are mainly the consequences of increased sales volumes. The Electronic Technologies Group's operating margin improved to 26.5% for the fourth quarter of fiscal 2012, up from 22.8% in the fourth quarter of 2011. The improved operating margin is primarily attributed to increased sales volumes of higher margin products.
The Electronic Technologies Group's operating margin was 23.4% for fiscal 2012, compared to 26.1% in fiscal 2011. The decrease in operating margin principally reflects the dilutive impact of approximately 4% from lower operating margins realized by the 3D Plus and Switchcraft acquisitions in 2011. These lower operating margins are mostly attributable to amortization expense associated with intangible assets and inventory purchase accounting adjustments aggregating approximately $10 million during fiscal 2012. Now I turn the discussion back to Larry Mendelson. Thank you.
Thank you, Eric and Victor. Moving on to earnings per share. As I mentioned earlier, diluted earnings per share increased 29% to $0.45 per share in the fourth quarter of 2012. That was up from $0.35 in the fourth quarter of 2011, and they increased 17% to a record $1.60 for fiscal 2012, and that's up from $1.37 in fiscal 2011. Be reminded that all fiscal 2011 diluted earnings per share amounts have been adjusted retrospectively for our five-for-four stock split, which we distributed in April 2012. In depreciation and amortization, the expense was increased to $8.5 million in the fourth quarter of 2012, up from $5.1 million in the fourth quarter of 2011, and it increased to $30.7 million in fiscal 2012, up from $18.5 million in fiscal 2011.
The increase in both the fourth quarter and the fiscal year 2012 primarily reflects higher amortization and depreciation expenses related to six acquisitions completed since the third quarter of 2011. Amortization expense of the acquired intangible assets total $4.5 million in the fourth quarter of 2012 and $16.2 million for fiscal 2012, and that's up from $2.2 million in the fourth quarter of 2011 and $7.6 million for fiscal 2011. R&D expense increased 12% to $8 million in the fourth quarter of 2012, and that's up from $7.1 million in the fourth quarter of 2011. It increased 20% to $30.4 million in fiscal 2012, up from $25.4 million in fiscal 2011. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we reinvest approximately 3% of each sales dollar in R&D.
We do believe that our unwavering commitment over the past 22 years to invest in new product development has proven very effective in allowing us to offer customers lower cost and/or innovative products, and it continues to be a significant part of our long-term earnings growth strategy. We do intend to continue investment in R&D during 2013 at similar levels that we did in 2012. SG&A expenses increased 20% to $44.1 million in the fourth quarter of 2012, up from $36.9 million in the fourth quarter of 2011, and they increased 21% to $164.1 million in fiscal 2012, up from $136 million in fiscal 2011. The increase in SG&A in the fourth quarter and the full fiscal year principally reflects the newly acquired businesses, most of it being amortization.
The SG&A expenses as a percentage of net sales increased to 18.2% in the fourth quarter of 2012, up from 17.7% in the fourth quarter of 2011. They increased to 18.3% for fiscal 2012, up from 17.8% in 2011. The increase in the SG&A expense as a percentage of net sales in both the fourth quarter and fiscal 2012 represents an increase in amortization expense of intangible assets from acquired businesses. Our interest expense increased to $0.6 million and $2.4 million in the fourth quarter in fiscal year 2012, not very much in either case. That's due principally to higher weighted average balances outstanding under our revolving credit. This was associated with the recent acquisitions. The outstanding debt balance was $131 million as of October 31, 2012, at a weighted average interest rate of approximately 1.2%.
Other income and expense in 2012 and 2011 was not significant. Our effective tax rate was 35% in the fourth quarter of 2012 compared to 34.6% in the fourth quarter of 2011. For fiscal 2012 was 33.8% versus 31% in fiscal 2011. The increase in the effective tax rate is partly attributed to the retroactive extension in R&D tax credits to cover the two-year period ending December 31, 2011. This resulted in the recognition of an income tax credit for qualified R&D activities for the last 10 months of fiscal 2010 and the first quarter of fiscal 2011. It reduced the recognition of such income tax credit to just the first two months of qualifying R&D activities in fiscal 2012. It's a little complicated. If you want further clarity on that, Carlos and Tom Irwin will be able to give it to you in the Q&A.
Additionally, the comparative increase in the effective tax rate in 2012 reflects our purchase of certain non-controlling interests, as well as the benefit from state income apportionment updates recognized last year upon filing of the currently due tax returns and the amendment of certain prior year state tax returns. The effective tax rate of 35% in the fourth quarter of 2012 is in line with our estimated effective tax rate that we're projecting for 2013. Net income attributable to non-controlling interest, a total $5.5 million in the fourth quarter of 2012 compared to $5.9 million in the fourth quarter of 2011. Net income attributable to non-controlling interest was $21.5 million in fiscal 2012 compared to $22.6 million in fiscal 2011.
You'll note that the decrease in both periods principally reflect the previously mentioned purchase of certain non-controlling interest by HEICO during fiscal 2011 and 2012. This resulted in lower allocations of net income to those non-controlling interests. Moving on now to the balance sheet. As I mentioned earlier, our financial position and cash flow remain extremely strong. Cash flow from operating activities in the full fiscal 2012 totaled a record $138.6 million, representing 163% of net income. That was up from $125.5 million in the full fiscal 2011. Cash flow from operating activities in the fourth quarter of 2012 was $60.3 million. That was up from $40.5 million in the fourth quarter of 2011. Working capital ratio continues very strong at 2.8 as of October 31. That compared to 2.6 as of October 31, 2011.
DSOs of receivables decreased to 46 days from 47 days as of October 31, 2011. We monitor receivable collection efforts in order to limit our credit exposure. We do pretty well in that area. No one customer accounted for more than 10% of sales, and our top five represented approximately 15% of consolidated net sales for fiscal 2012 compared to 17% for fiscal 2011. This is one of our strategies. As I've told many people in meetings, HEICO wants to continue to diversify customer. We don't want customer concentration, product concentration, product line concentration, and we constantly try to diversify, and that's what you're seeing as our top customers are representing lower and lower percentages of our total business. The turnover rate of 114 days in inventory at October 2012 was approximately the same as 113 days as of October 31, 2011.
CapEx in fiscal 2012 were $15.3 million, and depreciation expense, which includes tooling amortization, was $13.7 million. The company's net debt to equity was a very low 15.3% as of October 31, 2012, and net debt, I think I mentioned it earlier, was $110.4 million. Moving on to our outlook. As investors have come to know and expect, HEICO prefers to issue conservative December estimates, which are based upon more certain knowledge, and we try to avoid future speculation. If and when business events become clearer as the year progresses, we have typically, in past years, increased our estimates. As an example, our net income estimate for fiscal 2012, which we issued in December 2011, projected growth of 10%-12%. Final 2012 results were growth of 17%. We hope that we will be able to do the same as fiscal 2013 progresses.
As we look ahead to fiscal 2013, the general overall economic uncertainty surrounding the domestic fiscal cliff and the Eurozone recession may moderate growth in our principal markets. We do remain optimistic in our ability to execute a disciplined, flexible growth strategy while navigating these challenging macro environment economic circumstances. While some commercial aviation industry participants have indicated the potential for an acceleration of growth in airline capacity as well as maintenance spending in 2013, to date, we have not seen signs of a significant recovery in customer demand. Therefore, we are currently estimating growth in fiscal 2013 full-year net sales and net income of approximately 5%-7% over 2012, with consolidated operating income margins approximating 18%. 70%-80% of the growth is expected to be organic, principally occurring in the second half of 2013.
These estimates include acquisitions completed to date, but do not include and of course exclude the impact of additional 2013 acquisitions, if we do any. If our commercial aviation markets experience an accelerated recovery, or if an effective resolution to the domestic fiscal cliff allows our customers to pursue more aggressive strategies, we would expect to improve on these sales and earning growth targets. I'm sure I don't have to remind our listeners that HEICO has been active in the acquisition world, and personally, I feel quite confident that during 2013, we will make some of these acquisitions that we're working on and some that we haven't even seen yet. I would expect to hopefully announce better growth as the year moves on.
Consistent with our long-term growth goals, management continues to target net income growth averaging 20% over the next one to three years, including the effects of these additional potential acquisitions. Fiscal 2013 cash flow provided by operating activities, which do not include future acquisitions, of course, is expected to remain very strong at $140 million. CapEx in 2013 expected around $18 million-$20 million. Depreciation amortization in 2013, approximately $35 million. In closing, with our prepared remarks, I want to thank the HEICO team members. It is through their dedication and efforts that we have achieved significant 22-year compound annual growth of 17% in net sales and 19% in net income.
We believe that the focus on developing new products and services, as well as increasing our market penetration while maintaining a very strong financial position, very disciplined acquisition strategy, will provide opportunity for continued substantial growth and profitability. This strategy has served HEICO and its shareholders very well in the past, and we do not intend to change any of our basic strategies. With that, I would like to open the floor for any questions that the listeners may have.
Thank you. The floor is now open for questions. If you have a question, please press star, then the number one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing the pound key. Our first question comes from Julie Yates Stewart with Credit Suisse. Please go ahead.
Good morning.
Good morning, Julie.
A question on the organic growth outlook. Larry, can you help set expectations between ETG and FSG for FY 2013? I think ETG came in a little bit better than most expected this year, looking at the last three years, the growth between the two segments has been roughly equal on average. How do we think about this going forward?
Okay. Julie, I'm going to ask Tom to respond to that.
Yeah. Julie, with respect to our fiscal 2013 estimates at the 5%-7% growth level, that would contemplate organic, as it said, roughly 70%-80% organically. It was pretty consistent within both of the segments. That is the organic growth inherent in our estimates is about the same in both industry segments, including some caution, if you will, with respect to defense within the electronics business.
Okay. Eric, this one's probably for you. On the normalization of the specialty products demand, you saw that as a headwind in FQ4. Is this a headwind that continues into FY 2013?
Yes. We see it definitely continuing into the first quarter. Maybe even the first half of FY 2013. We do expect this to turn around as the year moves on. Of course, there's been a lot of holdback in spending, which we've all seen in many investment areas as a result of the fiscal cliff and concerns over the economic situation. That's what is driving this.
Okay, great. Thank you.
Thank you, Julie.
Our next question comes from the line of Arnold Ursaner, a private investor.
Well, I'm with CJS Securities, a little different than a private investor. Good morning.
Good morning, Arnie. I was wondering if you had retired and just gone to managing your own personal portfolio.
Well, I'll tell you, I thought about it, but not today. Two questions related to ETG. Are you actually seeing changes in activity from clients over fear of sequestration, or do you expect to see it?
Arnie, this is Victor. I think we expect to see it. We really haven't seen it much at this point, if at all.
Okay.
I would expect to see it at some point. Maybe we're seeing a little bit of it now. The general consensus, I think, is that this will layer in over time in 2013, if it happens, and to the extent it happens.
Okay.
Incidentally, Arnie, just to put it in context, I think you might know this, but others may not. We do about 20% is total defense, and if the sequestration resulted in 10%, we're talking about what I consider would be 2% exposure to our top line. Not significant. Even that, because we're in electronic areas, we're not making truck bodies and armor and stuff like that. I'm not expecting to see a real big problem from the sequestration. I guess it can't help them. I think most of our programs are fairly safe.
Right. The second question on ETG is, in your view towards 2013, you mentioned you expect operating margins that approximate those of fiscal 2012. In fiscal 2012, you had a 400 basis point headwind from some accounting and other issues. Were you implying that excluding that 400 basis points? If not, why would they be down that much next year?
I'm going to add, Arnie, Tom will respond.
Yes, Arnie. Again, with respect to our estimates in fiscal 2013, inherent in those estimates, is probably about a 200 basis points estimate of decline in operating margins in ETG from what we experienced this year. That is, full year this year was 25%, at roughly mid-23%, or roughly for the full year, about 23%, would represent mostly additional amortization and then some mix. As Eric and Victor talked about, we have varying margins on a number of product lines in ETG. We have some very profitable margins that contributed quite favorably. Specifically, we spoke about 3D and how it's recovered in the second half. If you normalize that and take the amortization of the two larger acquisitions last year, we've tempered the ongoing operating margins a bit. Again, at 23%, we really think they're very strong and reasonably sustainable.
Incidentally, Tom, in the 23% has been deducted approximately what for amortization?
Typically, amortization in ETG runs about 4%. We're talking about consolidated amortization of roughly $17 million-$18 million inherent in our estimate for 2013, and most of that is in the ETG Group.
Arnie, management adds back the amortization, of course, per GAAP, we have to deduct it. The way we look at it, we just add about the 4%, the amortization. If we have a 23, in our minds, it is a 27. When we acquire companies, they sell them, we buy them based on that number without the amortization. Of course, we do not deduct amortization for cash, so the cash flow flows through.
Okay. Again, maybe I am confused, you were 26.5 in Q4, where you still had some of these impacts. 23 for the year, 27 if you add them back, and you are saying there will be 200 basis points next year. I guess I am somewhere between the 23 and 27. Maybe I could try and ask you one more time, see if I can pin you down a little bit.
Well, again, as we have spoken about in ETG, the margins typically move around quite a bit. Last year, as an example, they were in the 20% up to, what you are pointing out, to 26.5% in the fourth quarter. I think what we are saying is on a full year basis, they may move around quarter by quarter, on a full year basis, we would not expect to do the 26 and a half again, mostly mix. Again, evening of the amortization will continue. The purchase accounting is largely behind us. Again, based on mix, we are more comfortable in the mid 23, versus again, what averaged the second half of 2012 was more in the 25 range.
What I think, Arnie, the bottom line to it, as Tom says, we are projecting that the mix will change, and it will be slightly less profitable looking through all of our product lines. It also depends on what happens during the year, what the throughput is, the volume, I think we have taken a conservative view. If it is better, we will be happy. If it is not, we think that barring the bottom falling out of the world and everything else, that we are projecting very conservatively.
See you guys in January. Thank you.
Thank you, Arnie.
Our next question comes from the line of J.B. Groh of D.A. Davidson. Please go ahead.
Can you hear me okay?
J.B.? Yeah, we can now.
Great. Okay. Hey, had a question on prioritization of cash flow you're going to have with the dividend payment. You have a little bit of debt, a little bit. Can you talk about what the prioritization of cash flow is going to be in 2013?
Well, truthfully, the prioritization is going to be try to make as many acquisitions as we can. The debt, if our net debt was $110 at the end of the year and we borrow, what do we borrow? $117. It's $227, and our debt is maybe 1 with that before any pay down, it would be approximately 1 time EBITDA, so it's very low. We're going to try to find as many acquisitions that make sense to us as we possibly can to build that. As you know, we're not a capital-constrained company. We'll generate in free cash flow next year-
Around at least $100 million.
$100 million. At the end of next year, we'll be give or take, assuming no further acquisitions, will be one half a turn of EBITDA. It's nothing. We're going to put as much money out as we possibly can, and that's what we're going to do. We haven't focused on dividend policy in next year. I believe, unless the dividend tax becomes as onerous, the 45% that's being projected, then maybe we're considering other methods of paying dividends. You could pay a stock dividend so people get capital gain treatment on the stock and the sale if they want it. I think that we're going to be spending, acquiring, paying dividends, similar I don't want to say the same kind of $2.20 dividend that we pay, but I think that it's going to be business as usual. There will be no constraints to our spending.
Within, I'm assuming, most of the acquisition focus would probably be on the ETG side, just because there's probably more different kinds of opportunities, but are there particular segments there that have an interest to you?
First of all, we are looking at transactions in both segments as we always do. We, as you know, are opportunistic buyers, we're going to be buying wherever the opportunity exists. We don't favor one or the other. As far as specific segments, I'll let Victor answer that. He's looking at different companies. There are some very interesting companies out there. Victor, do you want to comment?
Yes. Hey, J.B. I would say that it's pretty much more of the same. The interest that we've had in the past will mirror what we're interested in the future. As you heard, we're going to be opportunistic as we've been. I mean, we particularly do like space businesses. Historically, we haven't been enamored of ground equipment, and my sense is that will continue to be the case. Upper end items, higher margin, that require a fair amount of engineering going in. A lot of smaller production runs. Generally speaking, I think, sub-components. If we can find those, we're somewhat agnostic as to whether they go into space or aircraft, although, as I said, we've done very well in the space markets.
J.B., this is Eric. I can tell you, we're also looking at acquisitions within the Flight Support Group. There are plenty of candidates in there as well. We've been, as everybody knows, fairly conservative. We started seeing some aftermarket weakness a number of months ago, and we've been conservative with our projections. As a result, we've been able to do a couple of deals, and I'm optimistic that we'll be able to do more.
Good. Just one last one. Eric, just with respect to, I don't know how you measure it, RFP activity or that sort of thing. There's been talk of aftermarket being soft for 12-18 months, we're, I guess, roughly six months into that. Can you talk to us about the trajectory of inquiries and how that's been going currently?
Sure. As everybody knows, the airlines deferred a fair amount of maintenance in the 2009 and early 2010 area. Of course, we saw that snap back in demand in second half of 2010 and early 2011, where we were up 20-something percent or 23% organic growth. We expressed some caution roughly a year ago that obviously that that can't continue in perpetuity. Airlines were not, in our opinion, restocking in that they weren't building up their inventories, but these were parts that were going into the overhaul and repair of engines and components and airframes. Of course, with the general economic situation slowing down in 2012, that had a negative impact there. In speaking to our customers, they continue to maintain very lean inventories.
As everybody knows, we have a 10/31 year-end, and the two shortest months of the year for us, due to the number of vacation days, are November and December. In addition, with most of our major customers reporting a 12/31 year-end, they have programs to reduce inventory as much as possible. Historically, November and December have always been lean months for us. January, on the other hand, is a month with a lot of days. Typically, our January month has dictated the results, has driven the performance in the first quarter. In our business, we continue to get most of the orders in the month of shipment because we've got the parts on the shelf.
It's very difficult to predict what the beginning of next year is going to look like. If it is consistent with prior years, we've done very nicely in January, but we're a conservative company, and we don't like to promise something unless we are certain that we're able to deliver it. I can tell you in speaking to airlines, they've got significant programs to reduce their inventories in November and December, and I think that's consistent with what we're seeing. For anybody who's been flying out there on the airlines, as I have and as you have, you see that the flights are quite full. There has been some talk in the investor markets and in some of the investor conferences, including yours, that we've attended with investors speaking about a recovery in demand. Logically, that should happen.
For us to say that it's going to happen, we prefer to first see the evidence. I'm sorry, that's a long explanation, but it gives you some color of what we're looking at.
No, super thorough, appreciate it, and congratulations to Albion on a great year. Thanks.
Thank you. Thank you.
Our next question comes from the line of Tyler Hojo of Sidoti & Company. Please go ahead.
Good morning, everyone. Just to kind of follow on with the last question, what specifically is the air traffic growth or the capacity growth forecast that's embedded in the fiscal 2013 guidance?
Tyler, this is Tom Irwin. I would say most of what we're reading in terms of estimates and early discussions is probably airline capacity growing in FY 2011, or say calendar 2011, somewhere between two and a half and 4% or 5%. I would say low single digits on the upper range of mid-single digits. I think that's generally what we've been saying and kind of what I think our business units have inherently, indirectly reflected in their estimates, which of course is the basis for our estimates at this point.
Okay, sounds good. If I look at the organic growth forecast, I guess you said it's going to be roughly split evenly between the two segments. How do we think about that? Are you going to get some pricing power in fiscal 2013? I would think that would be a tailwind for you guys.
Inherent in our estimates, we have both organic unit quantity and selling price. Historically, and we've spoken about this, that typically we don't expect and see a significant contribution to revenue and bottom line in terms of selling price adjustments as we focus on market penetration, and Eric can speak more about that strategy. There's inherent in our 5%-7% growth, there is not at this point a large contributor of pricing in that number. Right. This is Eric. Historically, we have really moderated our price increases. I do think that there is an opportunity to pass along some cost increases, so maybe we'll see a little bit more of that in the future. Traditionally, our sales growth comes from unit volume. We've got a tremendous amount of goodwill from our customers.
We really enjoy that goodwill, and it helps us acquire other businesses that they want us to own and helps us pick up market share. We haven't pushed that lever or pulled that lever as some other companies have, but I do think that there's more of an opportunity to do so as we go forward.
Okay, great. Thanks for that color. Then just going back to specialty products, I was curious if you could maybe talk a little bit about how big that is today and basically where did it come from?
Our specialty product, actually, we've had these businesses for over a decade. We were very successful in taking basically aerospace technology and transferring them over to non-aerospace markets. In particular, over the last five years, the EPA has changed the rules and has reduced the amount, the level of unburned hydrocarbons that can be dumped into the atmosphere. As a result, the only way to get rid of these unburned hydrocarbons is to, by definition, burn them. When you burn them, you create a lot of heat. That heat damages the electronic or metal or composite components around it. We've developed some solutions in our specialty products group, which are really an offshoot from the aerospace business, where we are able to satisfy that market and permit these industrial products to operate at much higher temperatures than they've operated at in the past.
It's really an extension of businesses that we've owned for over a decade. We saw the opportunity out there and we just went out after it. I think there continues to be very good opportunity in those segments. Of course, in 2011, in particular at the end of 2011, there was a lot of investment. That has now slowed down in 2012. We have the negative comparison. We do anticipate that to turn around really in the second half of next year. Again, it is an offshoot. It's related to what we're doing on the aerospace side.
Tyler, just in terms of rough order of magnitude, it's round numbers, runs typically about 10% of sales, in terms of that specialty product sales. As Eric said, started out exclusively commercial. We've grown into the industrial. It moves around. It's round numbers, half and half. Of course, the half industrial is reported in our, what we report as other industries. Then the half commercial would be part of what we report in terms of our commercial aviation markets.
Okay, got you. Then just a little bit of a clarification. You said the pickup expected in the second half of fiscal 2013. Would you expect the volumes to be roughly flat with where they were in Q4 in the first half?
Yeah. Tyler, this is Tom again. We don't give quarterly earnings or revenue guidance. We stick to our full-year outlook. So we don't get into the granular on that end. As both Eric and Victor mentioned, I think based on what we've seen November and December to date, the opportunity for upside is more on the back half of the year than certainly the first quarter. Other than that kind of general statement, we don't provide specific commentary by quarter.
just to add, these parts that we manufacture over in that area are typically protected, the manufacturing processes are patent protected. We're fairly confident that I should say extremely confident, that we will get the orders when the customers need the parts. It's just a matter that they need a little bit of a pickup in demand. There's been some, again, continual tightening of the EPA regulations about the amount of unburned hydrocarbons that can be dumped out there. As the EPA regulations get tougher year after year, our customers must redesign their products. Sometimes there's a little bit of delay, sometimes they have to raise their prices to their end customers, and there can be a little lag.
Again, since our manufacturing processes are, many of which are patented, we're very confident we will see the demand as soon as the customer needs the parts.
Tyler, a little more color. I think that this particular business is a classic example of how technology that's developed out in space and in aerospace is then transferred to a general industry. We've seen this time and again, as you know, whether it's for small components and electrical components, computers, and so forth, solid state things. This is, I think, a great example of that, and it's the result of having developed this in the aerospace side. It was natural to go into the industrial side, where there was tremendous demand for that particular product. As Eric said, with some of our patented processes and techniques, this was just natural for us. We actually set up another facility, another factory, to handle the industrial because it was so big that we couldn't handle it from our other facility. It's been very successful.
Yeah, it certainly looks like it. Great. Thanks for that color. Just lastly from me, how did you shake out on the PMA and DER development side? Did that track as you thought it would in fiscal 2013? I guess with R&D flat, you'd expect that to be flat in fiscal 2013. Is that accurate?
Yeah, we met our numbers. It's been consistent with the past years in terms of numbers of PMAs, in terms of revenue potential of those PMAs. We continue to be very successful in that area. We also continue now to, we're moving into more aircraft components and other non-engine products for the airlines. Those have been very well received. We're moving into technologies where people haven't seen HEICO's participation in the past. That's been extremely well received.
Great. Thanks so much, guys.
Thank you.
Our next question comes from the line of Ken Herbert of Imperial Capital. Please go ahead.
Hi, good morning, everybody.
Good morning, Ken.
Good morning.
Eric, just first wanted to ask you, if I remember well, I think you were seeing through much of 2012, better growth within the repair business as compared to the parts business, slightly. I just wanted to see if you saw that continue into the fourth quarter. As you look into 2013, as we look at sort of the 4% organic, or not 4% organic, but the 5%-7% call it all in growth for Flight Support, FSG, are you seeing better growth still on the repair side or relative to the parts side, how does that look?
I'm sorry, can you just repeat that last phrase? We had a little technical problem here.
Yeah. In fiscal 2013, are you expecting to see better growth on the parts business when you think about distribution and the traditional PMA parts, or better growth perhaps on the repair side?
I would say what we're seeing consistent across the two. There are opportunities in both areas. I wouldn't say that one is materially different than the other.
Okay. It's true that in 2012, repair, I think you were saying you saw better growth on the repair business, correct?
This is Tom. I'm sorry. In certain of the quarters, the answer is yes. I think for the full year, the growth was in both parts and aftermarket repairs and roughly comparable.
Okay. That's helpful. Thank you. Then again, just one more on FSG. The two recent acquisitions, Action and CSI, have been both on the repair side. Can you just talk a little bit about, Eric, as you look at future, to drill down within opportunities within that business, and I know you're going to be opportunistic, but anything you can say about sort of where you're seeing activity levels or opportunities perhaps within FSG when you think about acquisitions moving forward?
I would say we're seeing them all over. There's no one particular area. We're seeing them in general, all of the business segments in which we operate. Really the key for us is, not only to make the numbers work, but we've really got to make sure that we have a cultural fit with these businesses. Our style is to buy businesses that are extremely well run, where there's a large emotional investment and commitment to the businesses, and they really operate the way that we would operate if we were to be there on a day-to-day basis. I think that's perhaps the greatest or one of the significant challenges for us is really to find those fits.
Also, when we find those companies, we're really the perfect acquirer for those folks, because if they were to sell to a private equity firm, life could change substantially down the road as the business gets sold. If they sell to a larger corporate acquirer, typically there's a group of folks from the corporate office who come in and change how things are done. We bring great value to those folks who appreciate it, and the trick is to find those businesses that mesh well with what we're doing. We're seeing opportunities, I would say, across the spectrum of areas that we're in within the Flight Support Group.
Okay. No, that's helpful. It obviously seems to have been working very well for you, so appreciate that. If I could, just one final question on ETG. Clearly it sounds like Switchcraft and 3D Plus have turned a corner and are performing. Would you say that there's sort of additional opportunity from a margin standpoint with those businesses in 2013 through actions you can take, or is it really now they're sort of at ETG levels and it's going to be primarily a volume story?
Tyler, a couple things, just as an aside. Switchcraft, not that it turned the corner. It was never a bad acquisition. It wasn't, I would say, underperforming at any point. We had, of course, these one-time inventory-related intangible adjustments and so on that affected it in the first six months, as we can see with acquisitions, based on their inventory levels at the time of acquire. It's not an operating issue. In 3D Plus, the orders were lower, and they rebounded, as you know. I would say right now that generally speaking, I would expect that margins improve with sales improvements. We'll see what happens. I don't want to go out there and predict that at this point. I think there's opportunity for it, but I'd rather wait and see exactly what happens before promising anything.
Okay. Hey, thanks, Victor. That's helpful. Thank you very much.
You're welcome.
Your next question comes from the line of Ron Epstein of Bank of America. Please go ahead.
Hi. Good morning. It's actually Elizabeth in for Ron today.
Okay. Good morning.
Good morning. I just had a couple follow-on questions to some stuff that was discussed earlier. First of all, I thought in your press release that you said that margins for both ETG and FSG would be the same as 2012, but it sounds like margins and ETG are actually going to be down 200 basis points. Is that right?
Well, the reference in the press release and the conference earlier was that the margins in ETG would approximate the full year of 2012. I think the reference that I made to 200 basis points is in the second half of 2012, it ran higher than that, about mid-20. In fact, that was the commentary in our third quarter call that we expected.
I see
ETG margins to be about 25% or mid-20s. The commentary was on the full year average, 23%. That's the mathematics.
Okay. Got it. Just one other follow-up question. It's also in your release, you say you're expecting 5%-7% net income growth in 2013, you also say that you're expecting an average of 20% potentially over the next year. Is that difference of 13% possibly in the next year, all through acquisitions?
I think what we're referencing is that we continue our near-term growth goals, as Larry's often mentioned, the 20% earnings growth and strengthened cash flow. The 20% reference is over a longer period than just short-term from fiscal 2013 estimates that we've introduced. I think that's the difference, referring to a one-to-three year period as opposed to just fiscal 2013 estimates.
One of the problems we have is that with all of the uncertainty out there, it's very hard to predict at this early stage in our fiscal 2013, what 2013 is going to look like from an organic point of view. Again, we've talked about, some people have asked about the second half, will sales pick up in the second half and all these other things. We just don't know where it will hit. We feel pretty confident that over a one to three-year period, we can hit the targets that we normally do. We don't know where this uncertainty will take us, particularly in the first half of 2013, and maybe in the latter half.
For example, one thing that we talk about very often in our conferences, when we have conferences in New York and Boston and meet with investors, is the fact that the aerospace cycle, the overhaul and repair cycle is not the same as the SEC reporting cycle or the financial industry reporting cycle of one year. We tend to measure income and expense in a 12-month period. That's required for SEC reporting purposes. The aerospace industry, the overhaul and repair cycle runs somewhere that's between, we think, say, 2-3 years. In order to measure it accurately, people ask me, they say, "Well, when are we going to see a big upswing in repair, maintenance activity, and parts sales and so forth?" The truth is, we don't know. Some people venture a guess. We're not sure what it is.
We do know if it doesn't happen in early 2013, as we move into the latter part of 2013, we become more certain that it will happen. This is the example in 2008 and 2009 and early in 2010, the industry was weak. Then in 2011 there was a boom, HEICO Aerospace organic was up over 20%. For the year 2011, our growth was 32% or 33%. In 2012, it came back down again. That, in my opinion, reflects the overhaul repair MRO kind of cycle. If you take 2011 and 2012 and add them up and divide by two, you get a pretty good growth rate. When Tom says we're saying for the next one to three years, we feel very comfortable with that.
To target it to exactly one year, 2013, or the first six months, we don't know. I'm trying to give you the color that we use, that we build into our own guidance and estimates. I don't know if that's helpful or more confusing.
Just an additional, the 20% growth goals, which again, have been our historic long-term goals, they do include the additional acquisition opportunities that we would expect in the normal course of business over the next one to three years to execute on. Again, the 20% growth goal would include both organic and future potential acquisitions, which, in some cases, haven't yet even been identified.
Okay. All right. Thank you.
Let me, one other thing, comment, just adding on what Tom said. Historically, we've made a number of acquisitions. Last year, we made four or five. The guidance includes zero. I would say, based on history, that that's a very unlikely scenario. It could happen. Things could be such that we couldn't make any, but I think that would be quite unusual. Therefore, when we talk about five to seven, it's kind of what we consider baseline, and if we make acquisitions, and we normally make accretive acquisitions, I would expect that would go up. Hello? Hello?
I'm sorry. Are you ready for your next question?
Yes. Okay. You had gone, and I didn't hear anything. I thought there was some disconnect here. Are we all online now?
Yes, you're still online, sir.
Thank you. By the way, did the listeners hear my last comment?
Yes, sir.
Okay. Thank you.
You're welcome. Your next question will come from Michael Ciarmoli of KeyBanc Capital Markets.
Hey, good morning, guys. Thanks for taking my questions. Most have been asked. Just one, maybe for Eric. When you look at sort of your existing product line in the Flight Support Group, there continues to be a lot of pressure on aircraft retirement. We're seeing the older fleet retired. We're seeing maybe some of that pressure centered around the CF6, Boeing 747s, 767s, A330s. Are you guys seeing any impact in terms of product sales related to those platforms or any of the other retirements that are taking place?
Yeah. We don't typically comment by product type or platform. Yes, I can tell you, we've seen some weakness in those segments. Partly, some of them have been retired, but also perhaps a lot of that maintenance was really performed in the end of 2010 and 2011. Maybe, there's just a period of time where there's just not as much demand for that stuff. Most of those aircraft continue to fly, and we would anticipate future spending on them. Yes, in the short term, definitely the wide body market has been the source of greater weakness than the other markets. If you look at, I think, Pratt's latest report was that their engine spare sales were down in organic 25%. We're not seeing anything like that whatsoever. Definitely, it's more of that wide body market that's seen some weakness.
Got you. Fair enough. Thanks, guys. That was my only one.
Thanks.
Thank you, Michael.
Our next question is a follow-up from Julie Yates Stewart of Credit Suisse. Please go ahead.
A quick housekeeping item for you, Tom. Just what are the expectations embedded in the FY 2013 guidance on tax rate and then for SG&A?
With respect to the tax rate, I think as I mentioned, our estimates include about a 35% full year effective tax rate for 2013. The other component that's a variable of that or works in conjunction with that is the non-controlling interest or what used to be called minority interest. Again, based on our estimates, that number runs, it's computed as a percentage of pre-tax, about 12%. As we spoke in the past, we often, in our modeling, combine the two, because in some cases, as the non-controlling interest rate goes down, taxes go up. On a combined basis, as an example, in the fourth quarter, it ran about 47% taxes and non-controlling interest as a percentage of pre-tax. That's inherent in our estimates. It doesn't have a moment on 2013.
Julie?
I'm here.
Oh, okay.
On SG&A?
In terms of SG&A, I'd say, our guidance is based on the operating margins of, again, about 18% consolidated. We don't give particular estimates in terms of SG&A or margins, but rather again, sales and OI.
Okay. On a % of sales basis, should it come down some, assuming no more acquisitions?
Well.
Acquisitions, yes
subject to the impact of other significant changes, whether it's the acquisition or major changes in businesses. We wouldn't expect to see a huge change in SG&A as a percentage of sales. In terms of absolute dollars, obviously, they go up with sales increases, but as a percentage of sales, not a dramatic change contemplated in our estimates.
Tom, I want to ask you a question. Maybe this will help, Julie. In the SG&A, do we disclose the percentage of intangible amortization that's in that SG&A?
No we don't, because it's split up in a couple of different places. What we do disclose, again, is the total amortization amount, which again, we disclose the total depreciation and amortization estimate, and about $35 million is the estimate for 2013. The split between depreciation and amortization is roughly 50/50.
Yeah. Julie, one of the things that I personally find a little confusing in looking at our own numbers is, with that amortization, which, again, is kind of a GAAP requirement, and we show it, but in running the company, we can't control that. That's not a controllable expense. We kind of, in management, drop that out. That pushes the SG&A percentage higher, but on a cash flow basis, which we manage the company, it doesn't impact it. Our SG&A, to us, is really lower, if you follow what I'm saying.
I got it. Thank you very much.
Okay. Julie, thanks a lot.
At this time, there are no further questions. I would like to turn the floor back over to management for any closing remarks.
Thank you. I thank all of you who are on this call this morning for your interest in HEICO. We remain available to you at any time. You know where to reach us by telephone and email. If we can answer any of your questions, please let us know. You're all invited, actually, to make appointments to visit our facility, particularly one in South Florida, at any time. Set up an appointment, call Tom or Carlos. We will show you the facilities. We wish you all a very, very happy and healthy holiday season. We look forward to speaking to you for the Q1 conference call, which will be, I guess, the middle of February next year. All have a very good year-end holiday, and we'll speak to you soon. That's all we have now.
Thank you. This concludes today's fiscal 2012 fourth quarter and full year-end results conference call. You may disconnect and have a great day.