Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to HEICO Corporation's 3rd Quarter Fiscal 20 10 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. At this time, I would like to turn the conference over to Mr. Larry Mendelson, Chairman of the Board of Directors and Chief Executive Officer of HEICO Corporation. Please go ahead, sir.
Thank you very much, and good morning to everyone on the call. Again, we thank you for joining us. We welcome you to the HEICO 3rd quarter 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 and 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 will constitute forward looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward looking statements as a result of factors including, but not limited to, lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services product specification costs and requirements, which could cause an increase to our costs to complete contracts governmental and regulatory demands export policies and restrictions reductions in defense, space or homeland security spending by U. S.
And or foreign customers or competition from existing and new competitors, which could reduce our sales HEICO's ability to introduce new products and product pricing levels, which could reduce our sales or sales growth HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest 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 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 update or revise any forward looking statement, whether as a result of new information, future events or otherwise. Thank you. Thank you, Victor.
And now before reviewing our 3rd quarter operating results in detail, I would like to take a few moments to summarize the highlights of our record setting 3rd quarter results. Our consolidated 3rd quarter and year to date net sales, operating income and net income represent all time record quarterly as well as 9 month results for HEICO and they were driven by record results within Electronic Technologies as well as improved results within Flight Support. Consolidated 3rd quarter operating income and net income improved 35% and 34%, respectively, on an 18% increase in net sales over Q3 of last year. Electronic Technologies set record sales and earnings for the Q3 of 10, improving by 46% and 53% respectively due to strong organic growth of approximately 22% as well as additional contributions by previously discussed acquisitions completed during the past 12 months. Flight Support posted 3rd quarter sales and earnings increases of 7% 19%, respectively, and this marks the 2nd quarter in a row of year over year and sequential increases in quarterly net sales.
Net income per diluted share increased by 33 percent to $0.44 per diluted share in the Q3 of 20 10, up from $0.33 per diluted share in the Q3 of 20 9. Our cash flow and balance sheet remain extremely strong. Cash flow from operating activities was $67,900,000 for the 1st 9 months of fiscal 20 10, representing 173 percent of net income and that was up from $43,700,000 in the prior year. As of July 31, the company's net debt to shareholders' equity ratio was a low 6.8 percent with net debt, which is total debt less cash of $36,300,000 We have no significant debt maturities until 2013. In July, we paid our 64th consecutive semiannual cash dividend at a rate of $0.06 per share, and this represents a 25% increase over the prior semiannual per share amount.
Moving on to net sales. Our consolidated net sales increased 18% in the Q3 of 'ten to a record of $158,300,000 and that was up from $134,100,000 in the Q3 of 2009. Consolidated net sales increased 13% to a record $447,700,000 in the 1st 9 months of fiscal 20 10, up from $394,700,000 in the prior year. The 3rd quarter results reflect growth in both ETG and Flight Support. ETG reported record net sales of $54,100,000 in the Q3 of 'ten and that was up 46% from the $37,100,000 in the same period in 2009.
Net sales of ETG in the 1st 9 months of fiscal 20 10 increased to a record 147,200,000 dollars up 51% from $97,500,000 in the 1st 9 months of 2009. The 3rd quarter net sales increase within ETG represents strong organic growth of approximately 22 percent as well as net sales totaling approximately $7,000,000 contributed by 2 acquisitions completed during the preceding 12 months. The organic growth in ETG reflects strength in customer demand for certain of our medical equipment, electronic, satellite and defense products. Flight Support reported net sales of $104,300,000 in the Q3 of 20 10, up 7% from the $97,200,000 in the Q3 of 2009. Flight Support's net sales for the 1st 9 months of 2010 increased to $301,100,000 up 1% from the $297,500,000 in the 1st 9 months of 2009.
The 3rd quarter net sales of increase of 7% with in flight support was entirely organic growth. It was about evenly split between Commercial Aviation and Industrial Products. Our net sales for the 1st 9 months of fiscal 20 10 by market was composed of approximately 63% from commercial aviation versus 70% in the same period in 2009 and 23% was from defense and space versus 18% in 2009, same period and 15% from other markets, which includes medical communications, telecommunications and electronics versus 12% in the same period in 2009. Looking at our operating income. Consolidated operating income in the Q3 of fiscal 20 10 increased 35% to a record 29,000,000 dollars up from 21.4% in the Q3 of 2009 and increased 24% to a record $79,500,000 in the 1st 9 months of fiscal 20 10.
And that was up from $64,200,000 in the 1st 9 months of fiscal 'nine. These earnings increases reflect growth in both Electronic Technologies and Flight Support. Operating income of ETG in the Q3 of 2010 increased 53% to a record $15,200,000 up from $9,900,000 in the Q3 of 2009, reflecting the 22% organic sales growth and the impact of the fiscal 20 10 and 9 acquisitions. Electronic Technologies operating income in the 1st 9 months of fiscal 20 10 increased 51% to a record $40,000,000 up from 26.5 percent in the 1st 9 months of 2009, also reflecting the impact of the recent acquisitions as well as a 14% organic sales growth. Operating income of Flight Support in the Q3 of fiscal 20 10 improved to $17,600,000 up 19% from the $14,800,000 in the Q3 of 2009.
Flight Support's operating income in the 1st 9 months of fiscal 2010 increased 9% to 50,300,000 dollars up from 46.3 percent in the 1st 9 months of 2009. These earnings improvement reflect the higher sales volume and more favorable product sales mix. Corporate expenses in the Q3 of fiscal 20 10 increased to $3,800,000 from $3,300,000 in the Q3 of 20 9 and increased to $10,800,000 in the 1st 9 months of fiscal 'ten compared to $8,600,000 in the first half of 'nine, but remained under 2.5% of net sales. And these increases are primarily due to the higher level of accrued performance awards based upon the improved consolidated operating results. Looking at our operating margins, in Electronic Technologies, they were very strong at 28.1 percent operating margin for the Q3 of fiscal 20 10, up from 26.8% in the Q3 of 20 9.
This reflects higher net sales and a favorable product mix. ETG operating margins
in the 1st 9 months
of fiscal 20 10 were 27.1 percent and they approximated the 27.2 percent reported in the 1st 9 months of 2009. Operating margins of Flight Support improved to 16.8000000 dollars I'm sorry, 16.8 percent in the Q3 of fiscal 'ten, up from 15 point 2% in the Q3 of 2009 and improved to 16.7% in the 1st 9 months of fiscal 20 10, and this was up nicely from the 15.6% in the 1st 9 months of 2009. The increases reflect the more favorable product sales mix discussed earlier. Our consolidated operating margin in the Q3 of fiscal 20 10 improved to 18.3%, up very nicely from 16% in the Q3 of 2009 and this reflects the improvement in both operating groups. Our consolidated operating margin in the 1st 9 months of fiscal 20 10 improved to 17.8%, up from 16.3% in the 1st 9 months of 2009 and this is principally a result of higher margins within the Flight Support Group.
Diluted earnings per share increased 33% to $0.44 in the Q3 of fiscal 20 10, up from $0.33 in the Q3 of 20 2,009. Diluted earnings per share in the Q3 of 20.10 dollars includes a $0.02 benefit of a lower effective tax rate, which I will discuss in more detail shortly. The majority of this benefit was included in our prior year full year fiscal 20 10 earnings estimates. Diluted earnings per share increased 18% to $1.16 in the 1st 9 months of fiscal 20 10, up from $0.98 in the 1st 9 months of 20 9. As we previously pointed out, earnings per share in the 1st 9 months of 2009 included a $0.04 benefit related to the settlement of an income tax audit, making the fiscal 2010 increase even larger when you exclude the one time benefit items in $4,700,000 in the Q3 of 20 10 compared to $4,000,000 in the Q3 of 20 10 compared to $4,000,000 in the Q3 of 20 9.
The increase is primarily the result of higher amortization expenses related to the intangible assets acquired as part of the 3 acquisitions completed by ETG since May of 2009. R and D expense increased 18% to $6,000,000 in the Q3 of 'ten, up from 5.1 in the Q3 of 20 9. Our investment in new products and services grew to $16,500,000 in the 1st 9 months of 20 10, which was an increase of 12% from the same period in 2009. And we remain confident that these increased expenditures will allow us offer lower cost products, which in turn will facilitate market share growth. That has always been our strategy for the last 20 years and it's been very effective.
For the full fiscal 2010, we continue to target approximately 600 to 700 new PMAs and DER repairs. Significant ongoing new product development efforts continue also within Electronic Technologies. We believe that this commitment to invest in new product development has proven very effective over the years as it aids in our long term growth strategy. SG and A expenses were $28,600,000 for the Q3 of fiscal '10 compared to $24,400,000 in the Q3 of 'nine and were $81,800,000 in the 1st 9 months of fiscal 20 10 compared to $68,000,000 in the 1st 9 months of 20 9. The increases are due principally to the additional operating costs associated with the recent electronic technology acquisitions and higher operating costs supporting the growth in consolidated net sales and these are primarily personnel costs.
SG and A spending as a percentage of net sales was 18% in the Q3 of 'ten compared to 18.2% in the third quarter of 20 9, reflecting the benefit of higher net sales on the portion of SG and A expenses that are fixed cost and these were partially offset by an increase in amortization expense of intangible assets associated with the recent acquisitions and the higher level of accrued performance awards based on improved consolidated operating results. SG and A spending as a percentage of net sales was 18.3% in the 1st 9 months of fiscal 20 10 compared to 17.2% in the 1st 9 months of 20 9 and the increase reflects the increase in amortization expense of intangible assets associated again with the recent ETG acquisitions as well as the higher level of accrued performance awards previously mentioned. Interest expense in the Q3 and the 1st 9 months was not significant due to our low debt levels and low variable interest rate under our revolving credit facility. As I mentioned earlier, our net debt is only $36,300,000 as of July 31, 2010. Other income in the Q3 and the 1st 9 months of 2010 and 2009 was not significant.
Talking about income taxes, HEICO's effective tax rate increased to 32.3% and 34% for the Q3 of 20 10 and the 1st 9 months of 20 10, respectively, versus 30.430.3 in the Q3 and the 1st 9 months of 2009. The increase in the Q3 of fiscal 2010 is principally due to the expiration of income tax credit for qualified R and D activities and this was ended December 2009. The year to date increase principally reflects the benefit of the audit settlement in the prior year and the expiration of the R and D income tax credit and a higher effective state income tax reflecting the impact of recent acquisitions. Our effective tax rate of 32.3 percent in the Q3 of 2010 is less than the 35% rate experienced in the first half of twenty ten as the Q3 includes a $732,000 decrease in the liability for unrecognized tax benefits that principally relates to the finalization of fiscal 2,009 qualified R and D tax credit study activities. As mentioned earlier, the lower effective tax rate increased diluted earnings per share by approximately $0.02 in the 3rd quarter.
Net income attributable to non controlling interest totaled $4,600,000 in the Q3 of 'ten compared to $3,800,000 in the Q3 of 'nine and totaled $13,200,000 in the 1st 9 months of 2010 compared to $11,600,000 in the 1st 9 months of 2009. The increases are attributable to higher earnings of certain flight Support and Electronic Technology subsidiaries in which non controlling interest exist. Moving on now to the balance sheet and cash flow. I mentioned earlier that our cash flow and financial position remains extremely strong. Cash flow from operating activities in the 1st 9 months of 2010 totaled $67,900,000 including $27,700,000 generated in the Q3 of fiscal 20 10.
And this is up from $43,700,000 in the 1st 9 months of 'nine. Our working capital ratio remained strong at 3.8% at July 31 compared to 3.7 October 31, 2009. DSOs of accounts receivable improved slightly to 49 days as of July 31, 2010, down from 50 days as of October 3, 1,009. And I have said this before, we do work carefully and very hard to reduce our credit risk through the regular monitoring of all of our receivables and strong collection efforts. And we really have an outstanding team that stays on top of this issue constantly.
Our inventory turnover rate at July 31, 2010 was 129 days, down slightly from 133 days as of October 31, 2009. And again, we are managing our inventory levels, I think, very, very well. No one customer accounted for more than 10% of sales. Our top 5 customers represented approximately 18% of consolidated net sales in the 9 months of 2010 compared to 21% in 2,009 and I consider this a very nice improvement. Capital expenditures in the 1st 9 months of fiscal 'ten were approximately 6,700,000 dollars We currently estimate CapEx of $10,000,000 to $12,000,000 in the full fiscal 2010.
Now a comment about the outlook. As we look forward to the balance of fiscal 'ten and beyond, we are seeing some signs of improved product demand within commercial aviation and this represents that segment represents over 60% of our consolidated net sales. Based upon current market conditions within our aviation and other markets, we are raising our fiscal 20 10 net sales target to approximately 600,000,000 dollars representing growth of approximately 11% over fiscal 2009 and we are raising our net income per diluted share targets to a range of $1.50 to $1.53 representing growth of 14% to 16% over fiscal 2009. We continue to expect consolidated operating margins for the full fiscal year to approximate 17%. These targets exclude the impact of any potential acquisition opportunities.
The fiscal 2010 sales target of approximately $600,000,000 reflects forecasted 4th quarter growth within Flight Support of between 3% 4% over last year, all organic. Based on the moderate strengthening we have seen within the commercial aviation market to date. Based on the current order backlog and recognizing that ETG has reported 2 consecutive quarters of record sales, we are forecasting 4th quarter growth within ETG of approximately 12% over last year and this will be represented by sales contributed by recent acquisitions. As we have mentioned in the past, sales and operating income of ETG can vary significantly from quarter to quarter and at times it can be lumpy. Cash flow provided by operating activities is expected to remain strong and to approximate $78,000,000 to $82,000,000 for fiscal 2010.
This is higher than our previous estimate of $75,000,000 to $80,000,000 In closing, let me say that we believe that our strong commitment to develop new products and services, our efforts to increase market penetration, our continued strong financial position and disciplined acquisition strategy will provide opportunity for continued substantial growth and profitability. And one other comment that we continue to focus on the acquisition of companies that have strong operating margins, hopefully 20% or more. Our business strategy calls for businesses with high operating margins And that's been a consistent strategy for the last 20 years and it served us very well. That is the extent of my prepared comments. And now I would like to open the floor for any questions that you might have.
Your first question comes from Tyler Hojo with Sidoti and Company.
Good morning, everyone. Good morning, Tyler.
First thing I just want to ask, did I hear you say that you expect ETG to be up 12% in the 4th quarter year on year?
Kyle, this is Tom Irwin. Yes, that's the current projection based on the backlog of orders that we have within that segment today, which again represents substantially all that would be from acquired businesses as opposed to additional organic growth that we've seen in the second and third quarter.
Okay, understood. Now I'm just trying to understand relative to some of the comments you made on the Q2 call, where you indicated you kind of saw a benefit from some shipping schedules in ETG, which were to your favor in the second quarter and to the detriment of the second half. So now I'm looking at obviously a very strong and impressive quarter here in 3Q and additional strength in 4Q. And I'm just trying to figure out exactly what has changed?
Yes. I think as we ran into the Q3, we didn't have a high level of confidence that it would be sustainable as to the level that we saw in the second quarter. It turned out to be, it was sustainable and there were some additional orders that were accelerated. But our caution now relative to the Q4 is that those orders are not in our backlog and there could be some risk of some things being pushed to the right, which does happen in that segment. It's got a history of being lumpy.
Again, we're not suggesting the business is falling on hard times. It's even with that forecast of no organic growth in the 4th quarter. The only Heron is that is about a 9% organic growth for the full year in that segment, which I think given the economic times and even though they're in some good industries, it's still again a strong performance by our ETG group.
Understood. Is it possible to characterize from a product perspective where some of that strength has kind of come from?
Victor?
Yes. Hi, Tyler. This is Victor. Hey, Victor. It's been pretty broadly based for us across just about all of the products and product lines we have.
So it's there's somewhat stronger than others, but overall, it's been pretty good across the board. Tyler, this is Larry. I just want to make a comment. In the press release, in my quotation, I mentioned somewhere in here, we're very proud of our team and the results and so forth. And I just want to emphasize that on the call.
When we look around HEICO and we've done some traveling, we've all been traveling this summer and visiting various facilities. I wish that the investor base could see or meet some of the outstanding team members that are running these subsidiaries. I mean, they are really impressive and they are very highly motivated and incentivized by money. Money really works. And they want to earn these bonuses.
Some of them get huge bonuses for producing. And they're very reluctant upfront in their budgets to come forward and say, we're going to do this and do that. But believe me, in their heads, they're thinking they want those bonuses and they want those subsidiaries to shine. And in fact, without being specific, I can tell you that Victor and I visited a few of them and these guys are really outstanding. So I don't say they sandbag their numbers, they don't, but they try to be conservative and they have generally surprised to the upside and we're very happy, but they're incentivized to do that.
Okay. That's good color and I appreciate that. Just one other thing for me. So if I look at your full year guidance of $600,000,000 approximately, I can get to kind of a growth rate for the Flight Support Group for the Q4 of, call it 4%. So that's down a little over 300 basis points from the growth rate in the 3rd quarter.
I mean, is that conservatism? Or are you concerned that perhaps we're seeing a bit of a slowdown here just in terms of the commercial aftermarket?
Tyler, this is Tom. No, I think your computations are reasonable. It's in line with the math and so on and so forth. What we see in the Q4 is the potential of some as Larry mentioned in the Q3, the organic growth was both commercial aviation and industrial products. At this point, we don't have in that backlog of the Flight Support Group that same incremental growth in the industrial products.
So if you back out the industrial products in the Q3, you're in that sort of 2% to 3% organic growth. So the answer is as it relates to the commercial aviation, no, we're not seeing a fall off. The fall off is based on scheduled shipments of industrial products, which again are less than 5% of the commercial aviation group, flight support group. So it's some situations that resulted in some back in the second quarter, probably $3,000,000 to $5,000,000 of sales and slightly less in the 3rd quarter and again slightly less expected in the 4th quarter. But our core business is where we're seeing the moderate strengthening.
Okay. So it sounds like industrial products will continue to be kind of a swing factor for you guys and you just aren't really counting on it in the Q4. Is that fair?
That is correct. Yes. Okay, great. Thanks a lot. Thank you, Tom.
Your next question is from Ken Herbert with Wedbush Securities.
Hi, good morning, everybody.
Good morning.
I just wanted to follow-up on that. I mean it seems like specifically for the aftermarket within Flight Support at about 3% to 4% growth for the Q4 year over year that implies a sequential decline in the from the Q3 to Q4 in the Flight Support Group. Is that I mean, should we be thinking about the aftermarket within Flight Support Group as essentially flat sequentially and that decline is the industrial side or how should we can you dig drill down into that a little bit for us?
Again Ken, this is Tom. Yes, basically in that forecast, there's a contemplation that the industrial product would fall off and the commercial aviation would have a product would fall off and the commercial aviation would have a partial uptick, but not a full offset.
Okay. And does that explain as well, I mean, when I look at the full year EPS guidance, it implies essentially a flat, dollars 0.35 flat number with the Q4 of last fiscal year. Can you again, in drilling down into that, is that largely some of what you just talked about in the obviously in the industrial supply within Flight Support Group? Or is there anything else there that we should be thinking about?
Inherent in that guidance, as we mentioned in the ETG, if ETG falls in the range of the numbers we're talking about, it would be down relative to the Q4 of last year. But again, that's a lumpy business. And last year, excuse me, the Q4 of the DTG Group, which operating income you may recall was around $13,500,000 that compares to the 3 other quarters that operating income in that segment was under $10,000,000 So we had a very strong Q4 last year. So again, the relative quarter over quarter, we would expect Flight Support Group to be up inherent in our guidance and the ETG to be down some.
Okay. Okay. Thank you. And then just finally then within the Flight Support Group, can you comment specifically within the aftermarket? I mean, you mentioned that you're starting to see this strengthen.
Can you comment at all about the mix within your products as well as your service business? Are you seeing strength in one area relative to the other or in any particular area?
Right. Ken, this is Eric. Yes, we are seeing more strength
in the parts business as opposed to the service business in the Flight Support Group. And again, that's both on the Aerospace and the Industrial side. But we are seeing continued interest in our repair services. There's a very good opportunity for us. It's been a very successful business and we anticipate it to continue to grow.
Over on the parts side, I'd say the interest has been across the board on everything from engines, components, airframe, all sorts of different products that we are doing. There's just a general we've been speaking about now for years. There's an increasing acceptance of alternatives and the airlines realize they need this they need to incorporate more of this to reduce their expenses and we're working very hard with them to do that.
Good. Well, thank you very much for the color and great quarter.
Thank you very much.
The next question is from Arne Ursaner with CJS Securities.
Good morning. Good morning, Arne.
Yes, I think you've sort
of been asked this in
a few different ways, but I'm going to try again. On FSG, your 3% to 4% view improvement year over year doesn't make a whole lot of sense. Last year in Q4, you were down 16%, airlines were cutting capacity as fast as they could. We're seeing a completely different dynamic now. So I'll start with that as an observation and maybe why don't we start with that?
It just doesn't seem to make sense with everything we're hearing from the IATA data. Even in Q4 last year, you indicated at that point, your customer inventories were at or near a bottom and nearly at a point where any pickup in traffic would require potentially urgent replacement?
Arne, this is Eric. We're very proud of the results. If you look at our results compared to the other aerospace companies, I think our results compare very favorably. The other aerospace manufacturers continue to report declining or flat sales. A few of them are up a little bit.
But they have not come out and reported a rebound despite the amount of air travel that's occurred this summer. A lot of the equipment is out there flying. We've been very careful to not predict when the bounce is going to happen other than to say that it's really not sustainable. Some of the other companies have been out there and have predicted it that it was going to occur a year ago and then in the first half and then now the second half and now in 2011, we've been very careful to be very conservative and just report what we've seen. But we do know that I mean, it's only logical if the aircraft are flying out there, they're not getting a lot of maintenance and that sooner or later there's going to have to be a maintenance performed where it's been deferred and inventories are very lean.
But again, through the Q3, I think the results speak for themselves and are really very favorable when compared to the rest of the industry.
Yes, I appreciate. But a company like TransDigm just reported double digit improvement in their maintenance work. And again, it seems to me that your parts are as critical as TransDigm's are. 3% to 4% seems incredibly conservative. But let's leave it at that for the minute.
Let's shift gears and talk about your operating margin guidance for the year and maybe a better understanding of your business model. You did a 17.8% operating margin for the 1st 9 months. With additional growth in FSG, you should see an improvement in that segment margin unless there's a very unusual mix issue. I'm hard pressed to see why your operating margin would be would have to be at least 150 basis points below your 1st 9 month number to meet your operating margin goal for the year? What would cause that?
It doesn't seem to make any sense.
Arne, this is Tom. Again, I think the big variable in our guidance relative to the 1st 9 months is the record results in the ETG Group, both record sales, record operating income dollars and margins in the 28%. We see based on the again, we have a little bit more visibility in ETG based on the backlog numbers and the orders that are scheduled to go out in Q3 did go out plus what scheduled to go out in the Q4. And again, there is inherent in our expectations are that there might be a fall off in operating margins within ETG versus the 1st 9 months. But again, for the full year, inherent in our numbers is very, very strong operating margins for the whole segment for the whole year.
But again, that's a lumpy business in terms of revenue, margins and obviously operating income dollars. And again, the full year is going to be very strong, but the Q4 might fall off some in terms of percentages as well, which would obviously impact the mix for 1 individual quarter. We consistently manage the business for long term profitability and not focus so much on 1 quarter versus another quarter. I think that's what we're seeing in particular in ETG.
And Arne, to add on what this is Eric. To add on what Tom said, it's important to note that most of the Flight Support revenue increases are due to an increase in volume as opposed to due to increases in price. That's not to say we don't have price increases, we do. But unlike what typically occurs in the industry with other companies achieving revenue growth largely through price increases, that is not HEICO's model. So again, you're not going to see the pricing driving revenue, it's really volume unit volume increasing.
Incidentally, Arne, TransDigm, as I have said to many people, is an outstanding company. They are very, very well run. They I believe they focus on price increases more than we do. Our strategies and TransDigm are different even though we are in the same industry. Their product line is very different than our product line and so forth.
So and we really do focus on a very long term strategy in our pricing and the numbers fall where they fall out. But we do see continued growth as the industry gets stronger, as capacity begins to fill in. All the reports from IATA show that capacity is increasing, the planes are flying fuller and they're putting more planes on. So I have confidence in the future that flight support will increase. We have to be very careful in our guidance that we don't get ahead of ourselves and say things that we think might happen and then reflect those in our numbers.
And traditionally, we have avoided doing that and we only report predict what we are very certain about. We don't speculate on the future. Personally, I'd be disappointed if we didn't do a lot better, but we don't want to trumpet that because we don't have hard facts to base it on at this moment. Now hopefully that will change and personally I think it will, but until it really is clear that it definitely will happen, we would prefer to on the side of conservatism and play it down. If it happens, it happens and the earnings will come through.
Larry, if I can just as a maybe a longer term, I know you won't provide your formal views for next year till late December. But if you were to look at your business over, let's say, the next 4 to 6 quarters, just remind us, if you would, of how you see the operating leverage in your business in both of the segments?
I don't think that the operating leverage particularly in ETG you're going to see great operating leverage. We operate at over 28% operating margins. I don't think there's real operating leverage there. In the Flight Support group, I think we can push up into the 18% to 19% is that top operating leverage. Where I do see the increase in the business, you know that we target a growth of 20%, a compounded growth, and we've done that for 20 years.
And speaking very selfishly, as the largest shareholders, our family and the team members, we get compensated in stock value really because that's where the big compensation, because we do grow. And I see growth in acquisition. I don't I mean, there may be some margin expansion and operating leverage that we'll see. But the big thing is going to be increased sales, hopefully, some very strong acquisitions, although until they're done, they're not done. But I personally am looking at 20%, and I still hold that target and that's what we're shooting for.
And even in a bad year such as this, we're not doing too badly in terms of growth. So but I don't see the operating I wouldn't count on great operating leverage from here. Tom, do you agree with that? Yes, I would agree. We're talking about again, historically, the operating margins have peaked in the 17% to 18% range.
And so that's in line with what I think what Tyre is describing as to opportunistic going forward.
Thanks very much.
Thank you, Warren.
Your next question is from JB Growe with D. A. Davidson.
Good morning, guys. Hey, congratulations on a fantastic quarter. I think all my questions have been answered on the margins and the guidance. But maybe, Larry, you could talk about what you're seeing on the acquisition front in terms of opportunities and specifically how multiples are trending and sort of the number of opportunities versus maybe
a year ago? Well, first, JB, let me thank you for the compliment. It's very kind to answer your question. We have a number of transactions that we are in active due diligence on. They are all priced within our normal pricing, 5 to 7 times EBIT, not EBITDA.
I would say probably if you want to focus in closer, probably lower maybe 6 times 6 or even 5.5 times, 6 times EBIT, not EBITDA. These should all prove to be if we close them, they should prove to be accretive to the earnings. They're all reasonably good cash flow businesses. And I think the pipeline is as full as it's ever been. Unfortunately, because of our strategy, we are priced out of some of the very expensive opportunities where they want 10 times and 12 times EBITDA.
And there are some very good companies, but the price we feel is too high for us. And so we're not playing in that field, but I do see good opportunity. And I would expect, based upon past experience, that we'll make our normal somewhere between 2 to 4 acquisitions in the 4th in the upcoming year as to whether we can close a transaction by October 31, the end of the fiscal year, I don't know because a lot depends on due diligence. And we do, as you know, a very, very thorough due diligence with our own staff, our own in house staff, really scrubs the business, scrubs the financial. We go out and we speak to their customers and we really try to cover the waterfront.
We've been very successful in our acquisition program by being extremely thorough. Now the corollary to that is that when we dig and dig and dig, sometimes we find things we don't like and then the deal collapses and we walk away. So that also can happen. But as a general comment, I think the acquisition pipeline is strong. I would be surprised if we didn't close a good number at favorable accretion numbers to the company.
So And more opportunities in ETG mostly, is it or is there flight support stuff as well?
I would say in both. I think that we have opportunities on both sides. As you know, it's always been our desire to have a balanced company so that ETG would be about 50% and Aerospace 50%. So it could be sixty-forty, it could be fifty-fifty. So we want to keep it in that range.
But the opportunities that come along, I would sometimes you get a lot of ETG and sometimes you get a lot of flight support. But I would say at this time, it's pretty evenly balanced. The other thing is you never know which deal is going to work. And again, the due diligence is so critical. We look at a deal on paper, it looks great.
They show us the numbers. And then you start to dig in and you find that there's dead bugs under the sheet. So and then we have to walk away. But and that's why until the deal is closed, it's very hard even at my level to speculate whether it will get done. We always go in with a positive outlook.
We want to make the deal based upon the information we're given initially, the financials, the market information, the customer list, we decide, yes, that's a deal we want to do. Virtually there, 20% operating margins are better and reasonably good cash flow and so forth. But once we get in there, then the rubber meets the road and I don't know. But again, I'm optimistic that we will close a what I would call a normal number, which would be 2% to 4%. We are looking at some which are truthfully a little bit larger, but nothing that we're going to choke on.
We do singles and doubles. So but maybe we're pushing from doubles to triples in 1 or 2 cases in terms of size. I don't know if it will happen, but it's certainly nothing that is going to tax our financing ability. You're not going to have to go and sell the farm to do any of these deals and they would all be nicely accretive.
In terms of other uses for your cash flow, would it be a potential to buy out some of these minority interests?
Yes. We have in many of these situations, we have put in call provisions, I think really all of them. So the owners of the minority interest have the opportunity after a number of years to put their shares to us, normally over a period of time, not all in 1 year, but and we also have the right to call the balance of the shares. So some have actually current in the current year in the cash flow, Tom isn't there, we spent some money on the redemptions and that's in our cash flow statement. So yes, we will be retiring some of these minority interest.
Okay, thanks. I'll let someone ask questions.
Thank you very much.
Your next question is from Eric Huegel with Stephens.
Hey, good morning guys. Good quarter.
Good morning, Eric. Thank you very much.
Hedi, Victor, was there any the sales in the ETG business were great. Was there any acceleration of demand out of the Q4 that was pushed forward?
I would say probably a small amount. Sometimes it's difficult to judge that, but it will be a small amount.
All right, fair enough. With regards to the IGT business, the industrial business in the FSG, I guess I'm trying to figure is that a very high margin business and sort of what so what we're seeing there in terms of the margins, is that more should we think about really the PMA business growing much faster than the average driving the margins? Or is it really you're getting nice profitability out of the industrial gas turbine sales? Yes.
We have to be careful to obviously not speak about the margins of particular products for competitive reasons. But I can tell you that it's generally consistent with our other business and we're seeing both growth on the industrial side as well as the aerospace side. And by the way, when we say industrial, that's not solely IGT, that's a number of industrial products.
Okay, fair enough. So we should assume then that if we look at the underlying parts business, which is the higher margin end of that business, it may be growing 2x the underlying growth rate of the underlying sort of commercial aerospace sort of 3% number that you threw out. Is that sort of safe to assume?
I'm not I don't really I'm sorry, I don't understand your question.
I'm just trying to figure out the underlying parts business, the commercial aerospace parts business, if you're saying total commercial aerospace in the FSG segment was growing 3%, the parts business should be growing if you're getting that kind of margin expansion, should be growing much faster than that. Is that safe to assume?
Well, we
said that the repair
was parts was growing at a faster rate than the repair side. And I think at the end of the year, we break out the percentage of parts versus repair in our flight support segment. Yes.
But that percentage is still running about sixty-forty over a long period of time over the last 12, 9 months or so.
All right. Maybe Eric, can you give us a little breakout maybe by region sort of what you're seeing in the PMA or in the commercial aerospace side of the business, sort of North America, Europe, Asia, Middle East, sort of what's going on in those regions?
Yes. Yes, I would say that we continue to see growth worldwide for us. Historically, we had less penetration in the international markets. So we saw that there was a bigger opportunity for us there and we're continuing to mine that opportunity. But I think there's opportunity in all of the segments.
I mean, the growth from quarter to quarter can bounce around depending on a particular airline or particular product that they're buying. But I would say that in general, the international market is growing at a faster rate than the domestic market.
Okay, fair enough. And lastly, with regards to your CapEx expectations, I guess that's a big there's a big jump in the Q4. Can you sort of talk about what's going on
there?
This is Tom Irwin again. It's based on what we've got scheduled to spend, again, it is an estimate and cash acquisitions or CapEx expenditures sometimes has to do with timing and purchase order releases and so on and so forth. But that's basically just our best estimate. I guess what you're pointing out is year to date we've done what 6.7 and on the low end, it's probably not too much higher at the $10,000,000 low end of our estimate. It's obviously not that much more at the high end if some of this stuff that's in our budget, but yet is not yet passed our capital expenditure review that could drive it to the 12.
But that is not committed capital at this point.
Okay. So there's no like major facility expansion or something like that, that we should be understanding, just normal?
That's correct. Not at this point, yes.
Okay, great.
Thanks a lot guys.
Thank you.
Your next question comes from Mickey Schleien with Ladenburg.
I want to understand the dynamic of aircraft that are being brought back out of mothballs out in the desert and the impact of those that inventory on demand in the FSG group. More specifically, are these aircraft newer models for which you generally don't supply parts? Or are there some older models that do incrementally add demand given that they've been sitting around a while and would obviously need some maintenance?
Mickey, I think the answer is both. And truthfully, we have given up trying to correlate it directly to because we've never been successful at figuring out how long after they bring aircraft back and which planes and all that stuff. And some of them some of the planes that the statistics you read about aren't even our customers. So it gets very confusing and it's hard to correlate the aircraft in the desert coming back into utilization. However, we do know that over a longer term, 6 months, a year, 2 years, as they bring more planes in, Some of those planes have some of them are new ones like you suggest, most of them are the older planes.
And we will get some parts opportunity as time goes on. But we're not able to correlate it as closely as we would like to and I'm sure that you would like to.
Mickey, this is Eric.
I mean, obviously, the dynamic is the airline each airline will park its least fuel efficient or I would say its most expensive aircraft, which is typically the aircraft that's most fuel inefficient as well as they'll consider what aircraft needs maintenance. So airlines or customers who have older equipment that's been parked, that will be called out and we'll go ahead and supply those parts. There are many of our customers who don't operate old equipment. For example, Lufthansa. So if Lufthansa hypothetically is parked the 747-400 or an A320 and they bring that, they will utilize the parts from us on that as well.
So it really doesn't matter whether it's a new piece of equipment or an older piece of equipment that's been parked. We're going to supply the parts either way.
And what's your sense then of their inventories of parts? I mean, we've been talking about for several quarters where they had just driven their inventories down to unsustainably low levels. Do you see them rebuilding those inventories at this point, particularly given that many of them are reporting very strong results for the first half of the year?
Yes. I mean, through the Q3, we reported what the commercial numbers were up. Again, the equipment is all out there flying right now. So we through the end of the third quarter haven't seen a huge snapback, but logic would dictate that sooner or later this is going to happen. I mean the maintenance is at what we believe unsustainably low levels as well as the inventories have been drawn down and are very lean.
So we think what will end up happening is they're going to realize the inventories are far too small for even the current level of maintenance. And when the level of maintenance increases X percent, they're going to realize that they're very short on the inventory and there should be a reaction at that point. But again, through the end of Q3, we reported what those numbers were.
Right. So everything remaining equal in terms of demand, the economy, things of that nature, that snapback could occur sometime in, let's say, the first half of next year?
Well, we've been very careful about predicting a snapback because with our business, we tend to have very short lead times on our products. We tend to have them on the shelf. So when the customers want them, they order them and we deliver them pretty quickly. So we don't have the visibility that some other companies do when they're able to dictate or their business model supports longer lead times. So I think it really is going to depend very much on the world economy.
I mean if air travel remains strong, I think it will obviously happen sooner than if the air travel starts tailing off a little bit. But it really depends on what happens with air travel. So I'm reluctant. I don't mean to not answer, but we just don't have that data to know exactly when it's coming.
Okay. My last question, would a prolonged strike at American Airlines or AMR, I guess, impact you materially given that contract negotiations there are just not going very well?
Yes, I would not say that
it would impact us materially. We're careful to not speak about any particular customer, but American is a very good customer of ours and so it would impact us. But I don't think that it would be material. And also we are hopeful that there really wouldn't be a prolonged strike because with the economy out there and the lack of jobs out there, I'm hopeful that labor doesn't go down that road and that labor and the management are able to come up with something that works for everybody.
Appreciate your time. Thank you.
The next question is from Steve Levinson with Stifel.
Thanks. Good morning, everybody.
Good morning, Steve.
Thanks a lot for all the detail. Most of my questions have been answered, but I thought maybe you could talk to us about the leasing companies. They've become a little bit more active here. And what are you doing with the leasing companies? What are you hearing about their attitude toward using PMA parts?
Sure. When leasing companies look
at PMA parts, they look at it in multiple areas. And I would say that the leasing company that has been the most vocal about not wanting to use PMA, surprise, surprise, it's been General Electric, GECAS. However, I can tell you that GECAS has got many competitors out there and those competitors do permit the use of our parts when requested by their customers. And we have had success in getting these competitors to realize that there is a strategic advantage that they can offer their customers. Specifically, GECAS has come out with the argument that if a PMA part is used, that may restrict the marketability of the aircraft after they take it back.
And we say that that is just sheer nonsense. When you look at 19 of the world's 20 largest airlines are our customers and accept our parts, this is not a valid argument. It's really just an argument for, frankly, General Electric to try to gouge their customers and sell more overpriced engine parts. So, GECAS is customer GECAS's competitors realize this. There's no love for GE or GECAS there.
And we've been successful in educating them as well as the community that these parts are acceptable. Now when it comes to non engine parts, that is typically not an issue that GECAS or anybody else gets involved with. So it's more specifically just a GECAS and an engine parts issue.
Great. That was real helpful. Thanks a lot.
You're welcome.
Thank you.
Your next question is from Chris Quilty with Raymond James.
Hello? Do I have you? Yes.
Okay. Hi, Larry.
Good morning, Chris.
Okay. I'll try to do a couple of quick questions. Tom, just in regards to the acquisitions you're looking at, any changes in how you would pay for these things in terms of the mix of cash stock and earn out that you've traditionally done?
I would say generally no. I mean traditionally we use cash. Our traditional selling opportunities are individuals that are looking for diversification and so on and so forth. We have used stock on occasion. But at this point, we have a revolving credit facilities, substantially all of which is unused.
It's a $300,000,000 facility and as Larry mentioned, our net debt is under $40,000,000 So we have substantial cash opportunities and probably never say never, but if necessary we might, but more traditionally the answer is no, we wouldn't normally expect so. Chris, strategically or tactically, for us, cash is the least expensive way to buy companies. We can afford the cash. Right now, we're paying 80 basis points or 90 basis points or something like that for interest. And in the foreseeable future, we don't think it's going to go up too much more.
And stock to us is a much more valuable commodity. So we don't want to give out stock. And as Tom mentioned that most of these people are entrepreneurs that would like to see some cash and put it away for the as they get older. And it's a win win for both of us. So right now, cash is the most likely medium of exchange.
Okay. And I guess a question for this is Eric and Tom in terms of the inventory. Eric, you seem to indicate that you think some of your customer inventory levels are low. Your inventory levels look sufficient, I guess, at this point. But have you had any issues with inventory in terms of increased obsolescence or write off because of the change of the fleet and engine types required out there?
Or has it been relatively unchanged?
I would say that it's been consistent with past cycles. I mean, our business assumes a certain level of obsolescence. And we have that and all of that those reserves or write offs or scrapping of that inventory is already incorporated in our publicly reported results.
And in that regard, the numbers have not varied significantly in the last 12 months or so. There haven't been any big increases or decreases in recent quarters.
And Tom, I don't know if you gave it, but tax rate guidance for Q4. And then more generally, I haven't heard you talk about it, but are you dealing with Congress's failure to pass R and D tax credits or does that impact your business?
Yes. First of all, relative to the Q4, our first half of the year was about 35%. That's what we would expect in a normal current environment. And again, the Q3 was a bit lower than that, maybe 2.5 points lower than that. But I would say 35 ish in the 4th quarter would be more normal.
That was our previous expectations and continues to be the normal. The answer is relative to the R and D, our outlook and our forecast has considered the expiration of the R and D. The answer is yes, we did lose the R and D as based on our friends in Washington's failure to renew that R and D credit, which we think is ridiculous given the fact that what it does to businesses, both small and large businesses. And we certainly hope they'll come to realize that and take action. But at this point, we have lost the R and D tax credit, which on an annual basis has been up to a couple of pennies a year or something like that or more depending on the activities.
So we do hope they will renew that. I think our expectation is it will not be renewed in time to be considered by HEICO in our current fiscal year.
Okay. And final question since I haven't gotten to talk to Victor. Just generically speaking on the strength of the business, which I think you said was pretty broad based across space, defense, medical and whatnot, Organic sales were down last fiscal year. It looks like they're going to be up maybe a little bit over the long term trend this year. I know you don't provide guidance out out to next fiscal year yet, but probably fair to assume the more high single digit long term sustainable growth in that business going into next year or might the growth rate be a little bit slower next year on tougher comps?
Well, that's a very good question. We're in the process of doing our budgets now for next year and really drilling down and analyzing it. At this point, I would be most comfortable telling you what I know you've heard me say many times over the years and that is to expect mid single digits organic growth out of the business and if we do better, we'll let you know.
Okay. Very good. Thanks guys.
Thank you, Chris.
And your final question is from Jim Fong with Gabelli and Company.
Hi, good morning. Great quarter.
Good morning, Jim.
Well, most of my questions have been answered. But let me just ask you a more long term strategic question, Larry. There's a lot of talk about reengineering the narrow body engines and even possibly doing a whole new engine. And I was kind of curious to see if they were to embark on a reengine narrow body engine, would that prompt airlines to reduce their maintenance of their existing engines in anticipation of buying a newer one in the near future?
My answer is probably not, but I'm going to give that to Eric. He'll give you more detail.
Great. Jim, this is Eric.
Eric. If airlines have new equipment on order and they're expecting short term delivery, that always impacts their expected maintenance. However, this particular engine isn't flying yet. I mean, it's not contemplated to be on there. There are so many engines outstanding in service right now that we don't anticipate that there would be any impact whatsoever to our business for at least 10 years or so.
I mean, it would be a very long time until this happens if ever. Also just to point out, obviously Pratt wants the new engine to be out there because they don't have very much content on the narrow body engines. But if you look at GEG, doesn't want it to isn't in a rush to get this engine out there. And if you look at Boeing and Airbus, their margin is coming largely from their narrow body fleet. So I don't think that they're going to be really a big driver at the moment of this.
But this is not something that we're really focused on, I would say, for the next decade. It's really not going to have an impact on our business model.
And Jim, just to add to Eric mentioned, there are so many, I don't know, 18,000 CFM56, there are thousands of CF6 and these other drivers. There's also a lot of JTAD that is still flying. It's probably, I don't know, Eric, 5,000 JTAT, 4 or 5,000. It's a lot of it's a big population of engines. Airlines are not flush, as you know, with cash to go out and buy new engines.
And they've got a huge investment in the existing engine population. So as Eric says, 10 years at least. So as a matter of fact, you take an engine like the GE90 where we have little or no content and that's because there aren't enough engines in the fleet and the population to make it worth our while to go after parts in that engine. So until there would be a significant population of those new engines, which as Eric says, maybe 10 years from now, we do not see that as a significant long term strategic barrier to what we're doing.
Great. Okay. So if it happens, it'd be very distinct, long ways in the system for anything to impact your business. And then just one other question regarding your PMAs this year. You're doing about kind of 400 to 500 PMAs this year.
And I was just wondering, when do you think we're going to see the impact of those new PMAs that you're doing this year as we go out?
Well, it's probably the same as always. They get into the stream over 3 to 4 years. We always say as an example, if a part is estimated to generate $100,000 say an average part, I'm just using $100,000 I'm not saying that these parts generate $100,000 because that's information we don't disclose. But if it were $100,000 apart, we would expect to see $25,000 in the first revenue of $25,000 the 1st year to 33, the 2nd year $50,000,000 to $66,000,000 the 3rd year $75,000,000 And then by the end of the 4th year, we would expect a stabilized revenue stream of 100. That's the general run.
Now obviously, parts that enter the stream early in the year, they might be slightly more and the parts that enter in the last month of the year, we won't see any revenue. But if you take the average of a grad what we call it a graduating year, that's all the parts that we make in 1 year, I would say 25% to 33 percent will kind of get into the revenue stream.
Yes. Okay. Terrific. Looking forward to seeing you guys next week in my conference
or a couple of weeks. Yes. We will be there and we'll look forward to it. Thank you, Jim.
At this time, I'd like to turn the conference back over to Mr. Mendelson for closing remarks.
Thank you. I want to thank all of you for your interest