All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. I would now like to turn the call over to Mr. Mendelson to begin. Please go ahead, sir.
Thank you, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO 4th quarter and full fiscal 2010 earnings announcement telecom. I'm Larry Mendelson. I'm the 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 and by Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin, Victor Mendelson will read a statement.
Thank you. Certain statements in today's conference call constitute forward looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed and or implied by those forward looking statements as a result of factors including but not limited to lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services product specification costs and requirements, which could cause an increase to our cost to complete contracts governmental and regulatory demands export policies and restrictions reductions in defense, 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 and telecommunications and electronic industries, which could negatively impact our costs and revenues.
Parties listening to today's 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 ks, 10 Q and 8 ks. We undertake no obligation to publicly result of new information, future events or otherwise. Thank you. Thank you, Victor. And now before reviewing our operating results in detail, I'd like to take a few moments to summarize the highlights of our record setting 4th quarter and full year results.
Our consolidated 4th quarter and full fiscal 2010 net sales, operating income and net income represent all time record quarterly and fiscal year results for HEICO, driven by record results within Electronic Technologies and improved results within Flight Support. Electronic Technologies set record sales and earnings for the Q4 of 2010, improving 27% 20%, respectively, reflecting organic growth of approximately 7%, as well as additional contributions from an acquisition completed earlier this year and 2 in the prior year. Flight Support posted 4th quarter sales and earnings increases of 14% and 28%, respectively. And this marks the 3rd quarter in a row of year over year and sequential increases in quarterly net sales, all of which represents organic growth. Consolidated operating margins improved to 17.5% in the Q4 of 20 10, up from 16.8% in the Q4 of last year.
Consolidated 4th quarter net income and operating income increased 34% 23% respectively on an increase of 18% in net sales over the Q4 of last year. Net income per diluted share increased by 31 percent to $0.46 per diluted share in the 4th quarter of 2010, up from $0.35 per diluted share in the Q4 of 'nine. Our cash flow and balance sheet remained extremely strong and cash flow from operating activities was $102,000,000 in fiscal 2010, representing 185 percent of net income, up from $76,000,000 in the prior year. As of October 31, the company's net debt to shareholders' equity ratio was at extremely low, 1.4%, with net debt, which is total debt less cash of $7,700,000 We have no significant debt maturities until 2013. 2010 marks the 5th consecutive year that HEICO has been included in the list of Forbes 200 Best Small Companies and the 1st year HEICO was named as one of the best 100 Small Companies by Forbes Magazine.
Also during fiscal 2010, we distributed a 5 for-four stock split in April and increased our semi annual cash dividend by 25%, effective with our July cash dividend, which was HEICO 64th consecutive semiannual cash dividend since 1979. Now moving on to the specific items in the financial statement. Consolidated net sales increased 18% in the Q4 of 20 10 to a record of 169 $400,000 and that was up from $143,600,000 in the Q4 of 'nine. Consolidated net sales increased 15% to a record $617,000,000 in fiscal 'ten, up from $538,300,000 in the prior year. The 4th quarter results reflect growth in both ETG and Flight Support.
ETG reported record sales of $58,400,000 in the Q4 of 20 10, up 27% from the $45,800,000 in the same period of 2009. Net sales of Electronic Technologies in fiscal 20 10 increased to a record $205,600,000 up 43% from the $143,400,000 in fiscal 2009. The 4th quarter and full year net sales increase within ETG represents strong organic growth of approximately 7% to 12%, respectively, as well as net sales totaling approximately 9,000,000 dollars 40,000,000 respectively, contributed by the previously mentioned acquisitions. The organic growth in Electronic Technologies principally reflects strength in consumer customer demand for certain of our medical equipment, defense and electronic products. Flight Support reported net sales of $111,200,000 in the Q4 of 20 10, up 14% from the $97,900,000 in the Q4 of 20 9.
Flight Support's net sales for fiscal 20 10 increased to $412,300,000 up 4% from the $395,400,000 in fiscal 2009. The 4th quarter and full year net sales increase with in Flight Support was entirely organic, reflecting the capacity growth of our commercial customers airline customers during the 3rd and 4th quarters as well as improved demand in our industrial markets. Our net sales for fiscal 20 10 by market was composed of approximately 62% from commercial aviation versus 68% in 2009, 23% from Defense and Space versus 20% in 2009 and 15% from other markets, including medical telecommunications and electronics versus 12% in 'nine. Moving now to the operating income. In the Q4, consolidated operating income in 10 increased 23% to a record $29,700,000 that was up from 24.1 percent in the Q4 of 2009 and it increased 24% to a record 109,200,000 dollars in the full fiscal 2010, up from $88,300,000 in fiscal 2009.
These earnings increases reflect the growth in both ETG and Flight Support. The operating income of ETG in the Q4 of 20 10 increased 20% to a record 16,200,000 dollars up from 13.5 percent in the Q4 of 2009, reflecting the organic sales growth and impact of the fiscal 20 10,009 acquisitions. Electronic Technologies operating income in the full fiscal 2010 increased 40% to a record $56,100,000 up from $40,000,000 in fiscal 'nine This reflects the 12% organic sales growth as well as the impact of acquisitions. Operating income of Flight Support in the Q4 of 20 10 improved to $17,600,000 and that was up 28% from the $13,700,000 in the Q4 of 2009. Flight Support's operating income in the full fiscal 2010 increased 13% to $67,900,000 and that was up from $60,000,000 in fiscal 'nine.
And these earnings improvements are the result of both higher operating margins and higher sales. Corporate expenses in the Q4 of 20 10 increased to $4,100,000 from $3,100,000 in the Q4 of 20 9 and increased to $14,800,000 in fiscal 20 10 compared to $11,700,000 in fiscal 20 9, but they remained under 2.5% of net sales. The increases are primarily due to the higher level of accrued performance awards based upon the improved consolidated operating results in 2010. Operating margins of ETG continued to be very strong at 27.7 percent for the Q4 of 20 10. That was compared to 29.4% for the Q4 of 20 9 and ETG operating margins in the full fiscal 20 10 were 27.3% and they approximated the 27.9% reported in fiscal 'nine.
The slight decrease in operating margins reflects variations in product mix, including the impact of certain recent acquisitions. Operating margins of Flight Support improved to 15.8% in the Q4 of 20 10, up from 14% in the Q4 of 20 9 and improved to 16.5% in the full fiscal 20 10, up from 15.2% in fiscal 20 9. The increases reflect the impact of higher sales volumes as well as a more favorable product sales mix. Our consolidated operating margin in the 4th quarter and the full fiscal 'ten improved to 17.5% 17.7%, respectively, and that was up nicely from 16.8% 16.4% for the Q4 and full fiscal 2,009. Principally, this was a result of the higher margins within Flight Support.
Diluted earnings per share, as you already know, increased 31% to $0.46 per share in the Q4 of 2010, and this was up very nicely from $0.35 a share in the Q4 of 2009 and increased 23% to $1.62 in fiscal 20 10, up from $1.32 in fiscal 20 9. Depreciation and amortization expense increased to $17,600,000 in the fiscal 2010, up from $15,000,000 in the prior year. The increase for the full year reflects higher amortization expenses related to the intangible assets acquired as part of the previously discussed acquisitions completed in the ETG Group. Research and development expense increased 25 percent to $6,200,000 in the Q4 of 'ten, up from $5,000,000 in the Q4 of 20 2,009. And our investment in new products and services grew to $22,700,000 in fiscal 20 10.
That was an increase of 15% over the same period in 2009. The effective strategy for the last 20 years has been to increase these expenditures in R and D and that allows us to offer lower cost products to our customers, which in turn facilitates market share growth. Our Flight Support Group added approximately 700 new PMAs and DER repairs in fiscal 20 10 10, and we're targeting similar numbers for 2011. Significant ongoing new product development efforts continue, of course, within electronic technologies as well. And we are now budgeting $24,000,000 in R and D spending in fiscal 2011, and that would be an increase of about 6% over 10%.
SG and A expenses were $31,400,000 in the Q4 of 20 10 compared to $24,700,000 in the Q4 of 20 9 and they were $113,200,000 in fiscal 20 10 compared to $92,800,000 in fiscal 20 9. These increases are due principally to higher operating costs supporting the growth in consolidated net sales, primarily personnel related and the additional SG and A operating costs associated with the ETG acquisitions, which I previously mentioned. SG and A spending as a percentage of net sales was 18.5 percent for the Q4 of 20 10 compared to 17.2 percent in the Q4 of 20 9 and it was 18.3 percent in full fiscal 20 10 compared to 17.2% in fiscal 20 9. The increases principally reflect the higher level of accrued performance awards based upon the improved consolidated operating results. Interest expense in the Q4 of both years was not significant due to our low debt levels and very low variable interest rate under our revolving credit facility.
Our outstanding debt balance was only $14,000,000 as of October 31, 10 and an interest rate was under 1%. Other income in both years was not significant. HEICO's effective tax rate decreased to 32.8 percent in the Q4 of 'ten, down from 36.2% in the Q4 of 'nine, an increase to 33.7% in the full fiscal year of 'ten, up from 31.9% for fiscal 'nine. The increase of 1.8% in the full year effective tax rate principally reflects the expiration of the R and D income tax credit in the current year. The benefit of the audit settlement in the prior year and a higher effective state income tax rate in the current year reflecting the impact of some recent acquisitions.
Net income attributable to controlling interest totaled $4,200,000 in the Q4 of 'ten compared to $3,600,000 in the Q4 of 'nine and it totaled $17,400,000 in fiscal 20 10 compared to 15.3 of course to the higher earnings of certain Flight Support Group and Electronic Technologies Group subsidiaries in which the non controlling interests exist. Now moving over to the balance sheet and cash flow. As I said earlier, our financial position and cash flow remain very strong. Cash flow from operating activities was a very strong $33,800,000 in the Q4 of 'ten, bringing the full fiscal 'ten total to $101,700,000 and this was up from $75,800,000 in fiscal 'nine. Our working capital ratio, of course, assets divided by current assets divided by current liabilities remain very strong at 3.2@October31 and they were 3 point 7 as of October 30 1,009.
DSOs of accounts receivable were 50 days in both periods October 30 1, 2010 and 20 9. And of course, we continue to work hard to limit our credit risk through regular monitoring of all receivables and our very strong collection efforts. Our inventory turnover rate, October 31, 2010 improved to 117 days, down from 133 days in October 2009. This reflects continuing efforts of course to manage inventory levels, while at the same time meeting customer delivery requirements. No one customer accounted for more than 10% of our net sales.
Our top 5 customers represented approximately 18% of consolidated net sales in 2010 compared to 20% in 2,009. CapEx in fiscal 20 10 were approximately 8,900,000 dollars Now let's look forward. As we look forward to fiscal 2011, we are seeing continuing signs of improved product demand within our commercial aviation markets, which represent over 60% of our consolidated net sales. This improved demand appears sustainable, especially in light of the expected increase in capacity in the commercial airline industry during 2011, and this should positively impact HEICO. In our electronic defense and space markets, we are pleased with increasing demand for some of our commercial products and overall stable demand for our defense products.
Based on our current market conditions within aviation and other major markets, we are estimating growth in fiscal 2011 full year net sales and net income of approximately 10% to 12% above 2010 levels, with consolidated operating margins for the full fiscal year approximating the fiscal 20 10 operating margins. These estimates exclude the impact of potential acquisition opportunities. As you all know, in addition to new product development, strategic acquisitions that complement our existing operations are an important element of our long term growth strategy. Consistent with this strategy and our long term growth goals, we continue to target net income growth of 20%, inclusive of the impact of acquisitions. But it is too early at this time for us to make such a prediction for fiscal 2011.
One comment, those of you who know HEICO well know that historically our organic to acquired growth has been about sixty-forty, 60 organic, 40 acquired. And we target basically fifty-fifty. So I think what we're saying if we can hit our 20% target, 10% to 12% would be 50%, 60% of the 20 percent would be organic and the balance would be acquired and this is typical of our performance over the last 15, 20 years. Cash flow provided by operating activities is expected to remain strong and to approximate $90,000,000 to $100,000,000 in fiscal 2011. Our CapEx in 2011 our budgeted between $10,000,000 $12,000,000 In closing, I'd like to thank our team members, HEICO team members.
It is through their dedication and efforts that we have achieved our significant growth record. We believe that our focus on developing new products and services and increasing market penetration while maintaining our strong financial position and disciplined acquisition strategy will provide continuing opportunity for continued substantial growth and profitability and to continue to create shareholder value. That is the extent of my prepared remarks. And I would now like to open the floor for any questions, which the listening audience may have.
Thank you, sir. Your first question is from Rama Banda of Royal Bank of Canada.
Good morning, gentlemen.
Good morning.
Quick question. Could you please provide some color on the end market assumptions that are baked into your guidance for next year?
The end market assumptions, meaning in both groups or one group?
In both groups, both your aerospace half to market assumptions and also what you're seeing in medical and in defense?
Eric will cover the FSG assumptions and then Eric can come I mean, Richard can comment on the ATG. Sure.
So on the FSG assumptions, judging from what other manufacturers are seeing, they're expecting somewhere between a 5% 7% increase for 2011. We have a very detailed budgeting process whereby we go through all of our business units by customer, by part number, by product. And then we do we get to budget based on what their usage is and what current levels of inventory they have. So we've been able to roll all that up and that is what is baked into our current numbers.
So what is
your like traffic and your capacity growth numbers?
I would say it's comparable to
what everybody else is expecting.
Again, we just look at what the overall increase is and we're not 100% sure whether it's coming from a little bit of restocking, capacity increase or deferred maintenance.
But I would say just in terms
of the traffic growth, probably in the 5% to 7% area.
And for the Electronics Group?
Yes. This is Victor Gama. Hi, Victor. How are you? We're looking for mid single digits organic growth in the Electronic Technologies Group and it really varies by market the overall what we expect.
And similar to the Flight Support Group, really have to drill down to individual products and programs that we're on. It doesn't really come from a macro view. We tend to do very bottoms up views and analyses.
Ram, this is Eric. Just to expand on what I said, again, the budgets were put together a few months ago. And obviously, there's been a renewed vigor in the economy lately. So I would say it was based on the information that we've received from our customers to the extent that the customers have been in fact a little conservative on their estimates and their guidance, then of course that would be reflected in our numbers.
And this is Victor. That would imply the same for the electronic technology. Sure. There's one thing, Ram, I want to emphasize to you and to Doug who's listening that we think that we use a relatively conservative guidance system because we don't try to project further than the orders that we may have on the books at any one time. Let me give you an example.
And this is not an example, don't take this to be specific. But let's say, for example, the budget is created between July September, October of 2010, that's the 2011 budget. That is based upon a bottoms up review as Eric told you and we have some numbers. And that is what we would use as our guidance for 2011. Now let's assume for a moment that the month of November half of December, which we are past now, that's behind us.
We know what those numbers are. Well, if we assume that the month of November early December was a great period and we greatly or significantly exceeded the budget, we don't reflect that in the guidance. Similarly, if November and part of December was very weak, we don't reflect that in the guidance. Why? Because a month to 1.5 months, we feel is not sufficient to really give us a strong feel.
We can't interpolate that for the whole year. I mean, we could, if we were aggressive and if it was a very strong month, we could bump it up, but we would be we're too conservative to do that. So we go pretty much by what the original budget was. At the end of the Q1 when we revised guidance, we will then have the benefit of the Q1. We will know what it does and we will have a better idea and better or worse, we will adjust the guidance because we have a solid 3 months under our belt and we know where we're going.
It is also our feeling that and this is just our basic conservative strategy that when the earnings come out, they come out. And we don't have to front run and jump ahead and tell everything is going to be greater. We're going to we would rather be, as we were last year, on the side of conservatism because we can't guarantee what the results will be. We would rather be conservative and not to mislead people into thinking that earnings can be up and then something happens and people are disappointed. That's just the way we do it.
Sure. And could you provide some more detail about segment margin expectations for FY 2011? I just want to get a better understanding of your guidance of flat margins for next year. I would suspect that there would be a margin improvement in FSG in the ongoing airline traffic and capacity growth. So what parts of the business are sort of diluting that margin expansion in the aerospace business?
Robert, it's Tom Irwin. I would say we see modest opportunity to grow the operating margins in FSG a bit, again, not dramatically. We target getting back to the 17%, 18%. We've previously spoken about that and we'll move towards that. We wouldn't expect to get it back all in 1 year.
In the ETG, again, those margins have been extremely strong. They ran about 27% operating margins in 2010. We again target typically between 26% 28 There we the overall guidance numbers of relatively flat operating margin percentages might see a little bit uptick on FSG and a slight downtick against still very, very strong operating margins at ECG. But if they go down to 26 0.5% or whatever, that would impact the weighting. We don't see any significant change in the corporate component, which is typically running under 2.5% of consolidated net sales.
Okay. All right, great. Thanks a lot guys.
The next question is from Arne Ursiner of CJS Securities.
Hi, good morning. My question is basically follow ups to the questions you were just asked. The IATA data indicated capacity jumped 4% in the 1st 10 months of this year and they're predicting a 7.5% or near doubling in the next 6 months. And yet I believe your view was you only expect 5% to 7 Can you reconcile those two numbers?
Arne, it's Eric. Our number was an annual number. The I add, you're right, if the 6 month numbers were, as you said, and then the 2nd 6 months numbers were higher. I mean our 5% to 7% is really an average. But again, I wouldn't get too wrapped around the in terms of capacity growth, because again, when we do our budget, it's again a by customer, by part number budget and our sales folks aren't looking at the IATA capacity growth numbers when they're coming up with those budgets.
So it's not in a company like ours that tends to have relatively short visibility in terms of orders, because we have a short lead time, that kind of information isn't as relevant
for us. And going back to again, one number I want to drill down on perhaps in multiple ways, but the same issue is the sequential decline in FSG margin of over 100 basis points. You're getting a lot more revenue, yet your margins are going the wrong way. You're introducing a lot of new parts. And also embedded in this, you had built excess inventories in anticipation of client demand.
I guess what I'm trying to get a feel for when you weigh all of these factors, you had much greater revenue growth, but a sizable sequential decline in margin. Are the new products at lower margin? Is the stuff within inventory at lower margin? What do you attribute the sequential decline in FSG margin? And how do we fix it?
Arne, this is Tom Irwin. Relative to FSG in the 4th quarter, again, about 100 basis points decline, that's about $1,000,000 Most of that was 2 things. 1, we do our full annual review of our inventory reserve based on not only our back of historic sales, but also the outlook for the next 12 to 18 months based on our sales forecast. We increased our inventory reserves of some products about $600,000 The other would be as we hit our performance targets in some of the business units, there was more than a pro rata charge, if you will, for performance awards accrued in the Q4. So those two things, I think, hit in the Q4 might have been spread in other quarters, but again, it's not that material.
But again, overall, we did show the operating margin improvement for the segment for the full year of 130 basis points or so. And I think that's more significant than just that 1 quarter. There's nothing in terms of underlying changes in margins of new products versus whatever.
And also just to point out the last year's compared to last year's Q4, our operating margins were up 180 basis points. So it's difficult to have some variation quarter to quarter. We think it's most important to look at the full year numbers.
Right. And Larry, I guess a little more strategic. If I look back at the actual acquisitions completed last year for you, it was if anything an average, maybe even a below average year and yet we're in an environment where interest rates are extraordinarily low. The Fed is on full throttle ahead. Many companies are more comfortable having discussions.
With hindsight, what do you think caused you to have a, if you will, below average acquisition year versus prior years? And do you expect that to change fairly soon? Well, as you know, Arne, we are very disciplined. Some of the sellers coming off a week 2,009 backed out of the market and they didn't want to sell. Companies that we look at felt that they had a weak year.
We based things on trailing numbers and they were reluctant to sell in a weak environment and they were really waiting for their earnings to come up. In fact, a lot of these companies that we follow, their earnings did pop back and we are in discussions with quite a number of companies. Again, I can never predict whether a deal will close. I am of the opinion that they will and a number of them will happen, but I can't guarantee it. So we can't reflect that.
But I think the opportunities are certainly out there. Our inventory of deals that we're due diligence seeing right now is very full. And we have our teams doing a lot of due diligence on a lot of companies we're having. So I would at this moment, just seeing what's out there, I would be optimistic looking out in 2011. And all I can tell you is stay tuned because I think we're getting very close, but it's not until the final papers and the money's wired that the deal is done.
But I feel that we'll have a stronger acquisition year in 2011 than we did in 'ten. And we've intentionally put wording in our press release and in my comments this morning that say our target is still 20%, and it is. And for my money, I hope it's higher than that. And I think the outlook at this moment is very good, but we can't include it because it's not a done deal. I think for decades, you have proven your attention to shareholder value and I think your shareholders appreciate that.
I'll see you guys in January. Thank you very much Arne.
The next question is from Steve Flemington of Stifel.
Good morning, everybody. Good morning, Steve.
Tom, you were talking about an inventory reserve and I don't know if I missed something. Is that slow moving parts or obsolete parts?
Slow moving, yes. Again, we there is the high probability that we will sell them. But again, under our policy, that's excess of so many months worth of usage. We reserve it, we don't get rid of it, we don't scrap it. But again, that was a bit of and again, that's not a huge amount, but specific to that 1 quarter, it was a component of that $1,000,000 swing in terms of operating margins within FSG.
Right. So this is similar to what happened, I think, in was it first between first and second?
Yes, exactly there. It's happened at other occasions that we reserved and then I think in the current fiscal 2 then it reversed this year. We reserved it last year and it reversed partially in I don't recall right now whether it's I think it was the Q1, but yes, exactly.
Okay. Thanks. And just a question on what you're hearing from customers. You've had the consecutive growth now for 3 quarters. Do you think a lot of that's related to restocking?
I know you said this is sustainable, but I guess I'm wondering is it sustainable at this sort of rate or do you see an acceleration as capacity grows?
Yes. Hi, this is Eric. I think that most of the increase that we've seen is the result of increased demand actually going into the product. As everybody knows, the airplanes have been very full for the last 6 months or more. And I don't see any significant stocking going on, but I just see that the inventories were drawn down so low that they were really at unsustainable levels.
But I don't think in our numbers we've got in the actual sales nor in a forecast going forward, there's any appreciable restocking in there. If there is significant restocking, I think that will be on the upside for
us. Okay. So in other words, you think the customers probably still need to build up their inventories a little bit to handle?
Correct. They don't have the inventories to fix what they've got to fix in the shops right now. So I think they're using basically everything that we're shipping them.
Okay, sounds good. Thank you. And this is a little accounting question, I guess, for Tom again. Do you have an estimate on what the tax rate ought to be in fiscal 2011?
Approximately, yes. As I mentioned, the rate in fiscal 2010 wound up around 34%. With the changes in the tax laws and some changes in the minority of non controlling interest that we'll be buying, probably a more normalized rate of about 35%. And we often speak about the combined tax and noncombining or minority yield, what used to be called minority interest rate. This year it ran about 50% combined at 34% and 16%.
Percent with the tax rate going to 35%, we're scheduled to buy some non controlling interest. We have already bought some and so that would come down a little bit probably on a combined basis, the 2 charges, minority interest and taxes will probably go down about 49%. Kind of inherent in our guidance numbers.
Got it. Thank you. And I'm sorry, I'm bouncing around here, but one last question, I guess, for Eric. Is there one or several particular programs that you find as real potential drivers for growth in the next year or 2?
No, I wouldn't say that there's any particular program. I mean, we're seeing very broad based strength in our sales, really in everything that we do. I mean, it's not confined to any one business unit or any one particular type of program. It really is very, very broad. I mean, the airlines are now fortunately making money, and they are stepping up and doing the maintenance that they've got to do.
A lot of it had deferred, but I would say it's just very strong across the board.
Great. Thanks very much everybody. Happy to hear you.
And to
you too. Thank you.
The next question is from J. B. Groh of D. A. Davidson.
Good morning, guys. Most of my questions have been answered, but I just want to get a little clarification on the cash flow. I think I can't remember if it was Larry or Tom said the cash flow from operations for 2011 is $90,000 to $100,000 with CapEx of $10,000 to $12,000 correct?
That is correct. That's our outlook for fiscal 2010, correct.
And as usual, when you give that CapEx number, I think, Larry, you say that's sort of a wish list number that would represent a MAX, right? I mean, that comes from
your property. I think that that's a very realistic number. We internally, I can tell you that we have an approved budget, which is higher than that. But historically, we use half, let's say, half of what the approved budget. But we think that's a real a very realistic CapEx budget for the company.
Before we've approved anything, it goes through multiple layers of scrutiny and return on investment and everything else. So we're very, very tight in letting those CapEx dollars out. So I think it's a very realistic number.
So you've got basically $80,000,000 to $90,000,000 in sort of free cash flow. What are your sort of scheduled minority interest purchases that you would have in 2011 based on
the past deals that you did?
Well, we
would budget about what we did this year in terms of cash flow distributions were typically run $10,000,000 to $12,000,000 And of course, what really happens with the excess cash flow is we pay down the credit facility. But as Larry mentioned, given our opportunities we're looking at for acquisitions, effectively they would the excess cash flow would likely go towards acquisitions.
Right. So you can do that all with just using free cash flow and maybe some short term debt that gets paid down. Okay. All right. Thanks.
That's all I had. Congratulations on the year.
Thank you very much, Dmitry.
Your next question is from Ken Herbert of Wedbush.
Hi, good morning.
Good morning, Ken.
Hi.
I just wanted to drill down a little bit into the
ETG segment.
I mean, I know you talked about this in your outlook for 2011, you mentioned commercial products. You're seeing increasing demand there with overall stable demand for the defense side. What's the sensitivity around your defense exposure? And are there any specific areas that are maybe viewed as potentially greater risk or lower risk underlying the essentially the flat or stable demand heading into fiscal 2011?
This is Victor. The answer is, I don't think we have any flashing red sirens or anything like that at this point. The products we produce, as you know, and our strategy is to have to be on a broad cross section of programs, a number of which are still growing programs. For example, things that we do on the F-thirty 5, that really represents pretty much all upside to us. Things that we do on the next generation of GPS satellites, which are pretty much locked in, that's mostly upside to us at this point.
There's still upside, I think, on UAV programs where we are in some
of our
companies. So we are kind of reacting in our anticipation, our predictions to some of the more cautious predictions we're seeing out of analysts and the press and not wanting to be too optimistic as to what we're going to see in that business. There is nothing at this point that we've seen where we're seeing cancellations or big flashing lights. So that's why we say we feel pretty good with our stable forecast. And if it does better, great, but right now we like the stability forecast.
And in the meantime, of course, some of our commercial markets, a number of them are doing quite well and moving ahead and that's how we get to this balanced view that we should see organic growth in the somewhere in the mid single digits range.
Okay. Okay. No, that's helpful. And then, just to get further clarification on, again, for ETG, the sequential decline in the margin. I know the Q3 fiscal Q3 was particularly strong.
As I think about this now heading into fiscal 2011, any additional insight or color you can provide on the sequential step down, but then more importantly in 2011, how we should be thinking about the margins within ETG?
Well, I think you've heard me say before, it's a high margin business and I'm really not looking for margin expansion. It makes sense that certainly if we were to make an acquisition that were below our average, but still a high margin business, it could bring the margins down. I think we had a little bit of that at some point this year. But I feel comfortable telling people to look in the 27% range, 26%, 27%, 28%, somewhere in there. I just can't pinpoint it.
And our view is more or less, we have very good profitable businesses and I don't quibble, if you will, too much with our people when it moves around in that range.
Okay. I mean they are obviously very strong margins. Just if I could then to jump over to Flight Support. I know obviously coming off the last cycle 7, 8 years ago coming off the trough, you had extremely strong top line growth. Can you just remind me again what was the mix of the last cycle in terms of the organic versus the acquisition growth specifically within Flex Support because you obviously had some really strong 30% to 40% numbers, 2004, 2005, 2006 in those years?
Ken, this is Tom. I mean, in part after the downturn, we had the impact of a significant coming out of that, we had the benefit of a dramatic fall off from our GTAP business, push 911. So our growth, I'd have to check the numbers, but it's probably half and half within flight support growth, maybe 60%, 40%. So the organic growth was certainly higher than the 10% to 15%. But again, we were coming off a significant reduction in our JPAT mature products in a different market, if you will.
Okay. So as we look out to 2011 and into 2012 even over the next few years, from an organic growth standpoint, I guess, realistically, mid teens kind of growth in flight support on the top line is even with the fact that this cycle hasn't been perhaps the trough hasn't been perhaps as deep as in the prior cycle, mid to high teens seems sort of maybe mid teens is implied in the guidance to an extent, obviously, with some variability there. But how much upside, I guess, do you potentially see to that number? Or is there anything you can specifically comment from that standpoint?
Again, just in
terms of I can tell you what's in our guidance is a mixture again. We have within Flight Support Group roughly 60% of the revenue around numbers, parts, which, as we've spoken about in the past and as you're referencing grows organically faster than the other portion of that business, which is through MRO services. The MRO services tends to grow more with the market. We typically do outgrow the market some, but not as dramatically as we do on the parts business because there again we're adding 400 to 500 PMA parts per year and so on and so forth. So if you wait organic growth in the mid teens of 1 more market growth on the other, then you come to somewhere at about the 10% to 12% overall organic growth.
So that's kind of what's inherent in our guidance in fiscal 2011. And obviously, going out at this point, it's a little early in terms of think about what 2012 specifically may look like in terms of what market opportunities are?
I can tell you, we're certainly pushing all of the team members at HEICO and the team members are major shareholders of the company. So they want to sell as much as they can possibly sell and everybody is 100% focused on maximizing that number in every single one of our businesses. So I think it really depends on the strength of the recovery, and we'll certainly have greater visibility and greater clarity over the next quarter or 2 as we see what's going on now with the economy.
Great. Thank you very much and excellent quarter.
Thank you very much.
Your next question is from Jim Fong of Gabelli.
Hi, good morning everyone. Great quarter. Jim,
good morning. Thank you very much.
Most of my questions have been asked. I just have one question regarding material costs. We've seen commodity costs moving up as the economy starts to strengthen. And could you just speak about how you're responding to higher material costs, where you might be seeing them and if you're able to get higher prices due to the increased costs?
Jim, this is Eric.
We when we look at material costs, it is a relatively small portion of our total revenue number. You are right, the material costs are going up in many areas. And to the extent that they have an impact on us, we're going to have to share that impact with our customers. So we're currently looking at that, but I wouldn't say that there's anything dramatic on that point right now.
What percent of that total revenue does material cost represent for you?
Hi, Jim. It's Tom. Yes, for competitive reasons, we don't disclose it just like our OEM competitors don't disclose specifically. But again, as Eric said, it's not a material portion of our cost of sales or therefore our revenue, but specific numbers again will decline specific.
Okay. And then when you do say escalating cost, you have to pass them on to your customers then?
Generally, it depends on the nature of the customer's contract that is if it's a longer term contract, there's typically cost escalation. If it's a shorter term contract, then we sort of recaptured if you will when we do our catalog price adjustments.
Okay. And then maybe Victor can talk about on the electronic technology side?
You're talking about
higher material costs?
Yes. I don't think at this point it's been that much of a factor. We also tend to use less metals and so forth. So right now, we're not seeing it. And we're not planning for it at this point, not that it couldn't happen, but Jim, in that business, the material content is certainly less there's more intellectual content and brainpower that goes into that because the ETG group is really driven by high-tech design and engineering and so forth.
So the plant and equipment and material that you normally find in the manufacturing business is replaced with intellectual capital and things of that sort, intellectual almost intangible kinds of assets and cost when it's in the electronic technology. Now there are some businesses we that of course we have wiring businesses and high voltage engineering, power lines and stuff like that. But it's not a significant portion.
Okay, terrific. And then just Larry, just going back to your guidance, could we look at what you provided in the press release that sales and net income growth of 10% to 12% in 2011 and operating margin is same as 2010.
That's kind
of like a baseline of what we can expect based on your orders on A and M and what you see the business can do. And we could see further growth if there were acquisitions during the course of 2011?
I think that's accurate. I just want to clarify it. We are working on a number of acquisitions. As I said earlier, we don't know if and when they will close. History tells us that some close and some don't.
So when they when and if they close, of course, we'll announce them promptly. The other thing is that if we have a strong recovery and the recovery is stronger than our people budgeted during the last quarter of 2010, then those numbers I think will be flowing through and we'll have better numbers. But at this point, it's too early to tell if that will happen. So we're going to be conservative and go with the numbers that we feel very comfortable with. And so I think we have left upside in our projection.
You focused on those 2 upsides. I think you got it exactly right. And we hope that we're going to do better than what our guidance is. And we have said that. We still targeting 20%.
It's too early in the year to come out and say, yes, we're going to definitely do it. So we'll stick with our 10% to 12. I think that we're very confident that we can do that. I would be honestly disappointed if we didn't do a lot better. So but I can't guarantee it at this point and therefore I don't want to stick our necks out and misguide.
Perfect. That's a great quarter and have a great holiday and a happy New Year.
Jim, thanks and the same to you.
The next question is from Eric Huegel of Stephens.
Good morning, guys. This is Amir for Eric.
Okay. Amir, this is a question for Eric.
Fair enough. I got a couple of quick questions for you guys. How much of the fourteen percent growth in the FSG business came from industrial versus the aerospace market end markets?
In the Q4, round number is half and half.
Okay. Thank you. And lastly, you had mentioned your like long term organic versus acquisition sales growth mix targets. But more specifically for how much of the 10% to 12% sales growth in your guidance is organic versus coming from already announced acquisitions?
Yes. Inherent in our guidance are no future acquisitions. It does include the impact of 1 acquisition that we completed in fiscal 2010, but was only in there for a partial year within the Electronics Group. The impact of which is of the growth forecast in fiscal 2011 and affects about $6,000,000 to $7,000,000 will come from the impact of partially acquired revenue last year. The rest is organic.
Okay, great. Thank you, guys.
Thank you.
At this time, there are no further questions.
I'd like to make one final comment, which I'd like to impart a thought that really was absent and should have been included in our comments earlier. And that is that those of you who have been to HEICO's facilities around the country or in South Florida and have met the people that are working there, our team members have all been impressed with their capability. But I want to emphasize to you that, I think the success of HEICO is a direct result of the extraordinary people, team members that we have at this company. This is when you dig down and you see the people operating as presidents, heads of companies, heads of divisions, decent people who are 20 fourseven guys and women, who have done an extraordinary job, who continue to do it and who receive excellent compensation for their performance and the compensation is well deserved. But at the heart of all this stuff, we can talk about numbers and we can talk about margins and everything else, but it's the people that we have in place that are the performers.
And most of them are not on the phone, those who might be on the phone, I want to thank them and congratulate them. And I want all the investing public to understand what an outstanding group of people work for HEICO Corporation. And that's my comments. I wish you all a very happy and healthy holiday and New Year. And I guess we'll speak to you the next time at the end of the middle or end of February when we come out with our Q1 results.
So those are my comments. Hello?
Yes, sir. There are no further questions.
Are there other questions?
There are no further questions, sir.
Okay. Well, thank you and goodbye.
This concludes today's conference. You may now disconnect.