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Edited Transcript of HEI earnings conference call or presentation 19-Dec-17 2:00pm GMT

Q4 2017 HEICO Corp Earnings Call

HOLLYWOOD Dec 20, 2017 (Thomson StreetEvents) -- Edited Transcript of HEICO Corp earnings conference call or presentation Tuesday, December 19, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos L. Macau

HEICO Corporation - CFO, EVP and Treasurer

* Eric A. Mendelson

HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group

* Laurans A. Mendelson

HEICO Corporation - Chairman and CEO

* Victor H. Mendelson

HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group

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Conference Call Participants

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* Colin R. Ducharme

Sterling Capital Management LLC - Executive Director of Equity Opportunities & Senior Equity Analyst

* George James Godfrey

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Joshua Ward Sullivan

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Kenneth George Herbert

Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

* Herbert Wertheim

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Presentation

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Operator [1]

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Good morning. My name is Nan, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation Fiscal 2017 Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions)

Certain statements in today's 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: low demand for commercial air travel or air fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification cost and requirements, which could cause an increase in our cost to complete contracts, governmental and regulatory demand; export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing or new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development cost and delay sales or ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest; foreign currency change and income tax rates; economic conditions within, the outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact or cause -- our cost and revenues; and defense budget cuts, which could reduce our defense-related revenue.

Those listening to or reading this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, expect (sic) [except] to the extent required by applicable law. Thank you.

I would now like to turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer. Please go ahead, sir.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [2]

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Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to HEICO's Fourth Quarter and Full Fiscal 2017 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO.

Before reviewing operating results in detail, I would like to take a few minutes to summarize the highlights of our record fourth quarter and full fiscal year results. Consolidated fourth quarter fiscal '17 net sales of $421.2 million represents operating or -- an operating income of $89.4 million, net income, $53.7 million, all represent record results driven principally by continued organic growth, the exemplary execution by our subsidiaries and the acquisition of profitable, well-managed businesses within both of our operating segments. Our consolidated fiscal year '17 net sales of $1,524,800,000, operating income of $306.7 million and net income of $186 million represent record results, driven principally by the impact of our fiscal '17 and '16 successful acquisitions as well as organic growth within both operating segments.

Consolidated net income and operating income in the fourth quarter fiscal '17 are up 21% and 18%, respectively, on a 16% increase in net sales. Consolidated operating margin improved to 21.2% in the fourth quarter of fiscal '17, and that was up from 20.9% in the fourth quarter of fiscal '16. Consolidated net income and operating income in fiscal year '17 are up 19% and 16%, respectively, on an 11% increase in net sales. Our consolidated operating margin improved to 20.1% in fiscal '17, and that's up from 19.3% in fiscal '16. Consolidated net income per diluted share increased 19% to $0.62 in the fourth quarter of fiscal '17, and that was up from $0.52 in the fourth quarter of fiscal '16. Further, consolidated net income per diluted share increased 17% to $2.14 in fiscal '17, and that was up from $1.83 in fiscal '16.

Our Electronic Technologies Group set a net sales and operating income record in the fourth quarter of fiscal '17, improving 22% and 39%, respectively, over the fourth quarter of fiscal '16. The increases principally reflect strong net sales, organic growth of 14%, improved gross profit margins and the benefit of net sales growth on relatively consistent period-over-period SG&A expenses.

As many of our investors know, consistent cash flow growth is the most important attribute of a successful business. I was very pleased that cash flow provided by operating activities was extremely strong, totaling $274.9 million, about $275 million or up 148% of reported net income in fiscal '17. That cash provided by operating activities was up from $249.2 million in the prior fiscal year. Cash flow provided by operating activities increased 25% to $95.6 million in the fourth quarter of fiscal '17, and that was up from $76.8 million in the fourth quarter of fiscal '16. Our management team continues to have a laser focus on cash flow generation, and this is evidenced by the tremendous results in fiscal '17.

As of October 31, '17, the company's total debt-to-shareholder equity was 54%. Our net debt-to-shareholders' equity was approximately 50% with net debt, which we define as total debt less cash, of $621.9 million principally incurred to fund acquisitions in fiscal year '17 and '16.

In September of '17, we acquired all of the outstanding stock of AeroAntenna, which represents the largest purchase in HEICO's history. AeroAntenna designs and produces high-performance active antenna systems for commercial aircraft, precision-guided munitions, other defense applications and commercial uses. AeroAntenna is part of our ETG group, and the acquisition is already accretive to our earnings per share and shall be in the first 12 months following closing.

In November '17, our Radiant Power subsidiary completed our fourth acquisition in 12 months by acquiring all of the outstanding stock of Interface Displays & Controls, which designs and manufactures electronic products for aviation, marine, military, fighting vehicles and embedded computing markets. This acquisition expands our product offerings to existing customers and allows us to better address the market needs. Interface Displays & Controls is part of our Electronic Technologies Group, and we expect the acquisition to be accretive to earnings within the first 12 months following closing.

Our net debt, which is total debt less cash and equivalents, to EBITDA ratio, that ratio of net debt-to-EBITDA was 1.67x as of October 31, 2017. Please note that this leverage ratio, which is quite low, reflects the impact from acquiring 3 businesses during fiscal '17, and that includes HEICO's largest acquisition, AeroAntenna Technology. As I have stated before, our practice of acquiring high-quality and high-margin businesses enables HEICO to execute its strategy of cash flow generation and growth with relatively low leverage.

In November 2017, we entered into a new $1.3 billion unsecured revolving credit facility, providing HEICO with increased credit capacity to continue our aggressive pursuit of quality acquisition opportunities. The new facility, which is a record size for HEICO, may also be increased to $1.65 billion under certain circumstances and replaces the company's previous $1 billion revolving credit facility. The new facility matures in November 2022 and can be extended for 2 additional 1-year period. We would like to thank all of our banking partners for their continued support and confidence in HEICO and our management team. I can tell the people on this call that the banking group that supports HEICO is probably the strongest, finest banking group that exist on earth. The best, strongest and best banks in America are participating in that group.

In December 2017, Institutional Investor magazine awarded me, Laurans Mendelson, the best CEO in the mid-cap aerospace and defense industry for the second time, second year in a row, in its annual All-American Executive Team for 2018. While I am deeply flattered that so many investment professionals feel that I deserve this honor, I do consider it to be an award for all of HEICO's team members worldwide. HEICO is fortunate to have what I consider the best team members in our industry, and I am truly proud to serve with and be part of this talented group. I thank all of our team members, and they are really the ones that make it happen. I could not have accomplished this without all of their support. They are truly a remarkable group.

As reported last week, we declared a 5-for-4 stock split, and we increased the semiannual dividend by over 9% -- cash dividend by over 9%. Over the past 12 months, HEICO has increased its dividend payout by 22%. These actions reflect the board's continuing confidence in the strategic trajectory and long-term growth of the business while, at the same time, rewarding shareholders and retaining sufficient capital to invest in our internal growth objectives and acquisition strategies. HEICO, as you will know, is not a capital-starved company. We have access to all the capital we need for any of the purposes that we can imagine going into the future, and we maintain a very, very strong credit rating with all of the banks with whom we do business. The additional shares and a $0.07 dividend are expected to be distributed on all outstanding shares in -- on January 18 (sic) [January 17], and of course, the this marks HEICO's 16th stock dividend or stock split since 1995.

I would now like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group. Eric?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [3]

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Thank you very much. First of all, I'd like to start out my comments by thanking all of the hard-working and talented team members within the Flight Support Group. We spent a fair amount of time speaking with investors throughout the year, and I think that everybody recognizes that we operate in extremely competitive markets. And our hard-working and talented team members are the reason for our success. They're the ones who figure out how to succeed in these markets, how to make our customers happy, and I could not be happier to work with such a terrific group of human beings.

The Flight Support Group's net sales increased 12% to $256.9 million in the fourth quarter of fiscal '17, up from $228.5 million in the fourth quarter of fiscal '16. The increase in fourth quarter net sales reflect aggregate organic growth of 6% in our aftermarket replacement parts and repair and overhaul parts and services product line and the impact of our recent profitable acquisition, partially offset by lower demand within our specialty products product line for certain aerospace and defense products. Overall, organic growth for the Flight Support Group was 2% in the fourth quarter of fiscal '17.

The Flight Support Group's net sales increased 10% to a record $967.5 million in fiscal year '17, up from $875.9 million in fiscal year '16. The increase in fiscal year '17 net sales reflect aggregate organic growth of 9% in our aftermarket replacement parts and repair and overhaul parts and services product line and the impact of our recent profitable acquisition, partially offset by lower demand within our specialty products product line for certain aerospace, industrial and defense products. Overall, organic growth for the Flight Support Group was 5% for fiscal '17.

The strong organic growth in our aftermarket replacement parts and repair and overhaul parts and services product line resulted principally from continued penetration of our customer base with new and existing proprietary parts and the continued success of our component repair business enjoyed in the marketplace with industry-leading turnaround time and highly cost competitive pricing on over 26,000 unique repairs we offer. The lower demand we experienced in our specialty products product line for certain aerospace, industrial and defense products was principally due to delays in customer orders that have pushed to the right. Many of these projects relate to defense, and our current backlog is encouraging for fiscal '18.

The Flight Support Group's operating income increased 4% to $46.5 million in the fourth quarter of fiscal '17, up from $44.7 million in the fourth quarter of fiscal '16. The Flight Support Group's operating income increased 10% to a record $179.3 million in fiscal year '17, up from $163.4 million in fiscal '16. The increase in the fourth quarter in fiscal year of '17 principally reflects the previously mentioned net sales growth, partially offset by: an increase in performance-based compensation expense; an unfavorable gross profit margin impact, mainly from a decrease in net sales within our specialty products product line; and an increase in amortization expense associated with purchased intangible assets.

The Flight Support Group's operating margin was 18.1% and 19.6% in the fourth quarter of fiscal '17 and '16, respectively. The Flight Support Group's operating margin was 18.5% and 18.7% in fiscal year '17 and '16, respectively. The decrease in operating margin in the fourth quarter of fiscal '17 reflects the previously mentioned lower gross profit margin and the increase in performance-based compensation expense earned by our team members as a result of the record operating results.

With respect to fiscal '18, we are estimating net sales growth of approximately 10% over the prior year and the full year Flight Support Group operating margin to approximate 18.0% to 18.5%. Further, we estimate that approximately half of our fiscal '18 net sales growth will be generated organically. These estimates exclude additional acquired businesses, if any.

And now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [4]

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Thank you, Eric. As Eric did before he began his remarks, I would like to thank all of HEICO's team members and call out the -- all the team members in the Electronic Technologies Group for their continuing excellent work, devotion to our company and devotion to our customers and to each other. It is a remarkable group of people who endeavor on our behalf and our shareholders' behalf in good times and bad. And while I'm proud of the team for this particular excellent quarter, I'm proud of them at all times even when the quarters and the results are not as good. So thank you all for your hard work.

The Electronic Technologies Group's net sales increased 22% to a record $169.1 million in the fourth quarter of fiscal '17, up from $138.3 million in the fourth quarter of fiscal '16. The increase in the fourth quarter net sales resulted from strong organic growth of 14%, principally from increased demand for our defense, space and aerospace products as well as the contribution from our profitable fiscal 2017 acquisition. Electronic Technologies Group's net sales increased 12% to a record $574.3 million in fiscal '17, up from $511.3 million in fiscal '16. The increase in fiscal '17 net sales resulted from organic growth of 7%, principally from increased demand for our space, aerospace and other electronics products as well as the contribution from our profitable fiscal '17 and '16 acquisitions.

The Electronic Technologies Group's operating income increased 39% to a record $51 million in the fourth quarter of fiscal '17, up from $36.8 million in the fourth quarter of fiscal '16. The Electronic Technologies Group's operating income increased 25% to a record $157.5 million in fiscal '17, up from $126 million in fiscal '16. The increase in the fourth quarter and fiscal year of '17 principally resulted from the: previously mentioned net sales growth; an improved gross profit margin, mainly from higher net sales and a favorable product mix from certain of our aerospace and defense products; and net sales growth on relatively consistent period-over-period SG&A expenses. Also, fiscal 2017 reflects a decrease in acquisition costs associated with the prior year acquisition.

The Electronic Technologies Group's operating margin improved to 30.2% in the fourth quarter of fiscal '17, up from 26.6% in the fourth quarter of fiscal '16. The Electronic Technologies Group's operating margin improved to 27.4% in fiscal '17, up from 24.7% in fiscal '16. The increase in the fourth quarter and fiscal 2017 came mostly from improved gross profit margin associated with the favorable product mix and SG&A efficiencies.

With respect to fiscal '18, we are estimating approximately 12% net sales growth over the prior year and anticipate the full year Electronic Technologies Group's operating income to approximate 27%. Further, we estimate that approximately half of our fiscal '18 growth in net sales will be generated organically. The estimates exclude additional acquired businesses, if any.

I turn the call back over to Larry Mendelson.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [5]

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Thank you, Victor. Moving on to diluted earnings per share. Consolidated net income per diluted share increased 19% to $0.62 in the fourth quarter of fiscal '17, and that was up from $0.52 in the fourth quarter of fiscal '16. And it increased 17% to $2.14 in the fiscal year '17, and that was up from $1.83 in fiscal '16. All fiscal '17 diluted EPS amounts have been adjusted for our 5-for-4 stock split distributed in April, but not for the split that will be coming up in January.

Depreciation and amortization expense was $17.9 million in the fourth quarter of fiscal '17. That was up from $15.7 million in fourth quarter of '16 and totaled $64.8 million in fiscal year '17, and that was up from $60.3 million in the fiscal year '16. The increase in fourth quarter fiscal '17 principally reflects incremental impact of higher amortization expenses of intangible assets from our fiscal '17 acquisitions. The increase in fiscal '17 principally reflects incremental impact, higher amortization expense of intangible assets and depreciation expense attributable to fiscal '17 and '16 acquisitions as well as higher depreciation expense associated with continued investments in certain existing international business units to support their profitable growth.

Research and development expense increased 4% to $12.6 million in the fourth quarter fiscal '17, up from $12.1 million in the fourth quarter fiscal '16. And it increased 4% to $46.5 million in fiscal '17, and that was up from $44.7 million in fiscal '16. Significant ongoing new product development efforts are continuing at Flight Support and ETG, and we continue to invest approximately 3%, possibly 4% of each sales dollar in new product development. As I've mentioned many times before, this is a key driver of HEICO's success, our ability to reinvest, develop new products for sale to the market at strong margin and good prices with good demand.

SG&A expenses increased to $70.6 million in the fourth quarter fiscal '17. That was up from $59.6 million in the fourth quarter fiscal '16. The increase in the fourth quarter '17 reflects $4.8 million attributable to fiscal '17 acquisitions, a $2.6 million increase in performance-based compensation expense, a $0.9 million -- $900,000 impact from foreign currency adjustment transactions and borrowings denominated in euros under our revolving credit facility. Our consolidated SG&A expense increased to $268.1 million in fiscal '17, and that was up from $250.1 million in fiscal '16. The increase in fiscal '17 principally reflects $13.6 million attributable to fiscal '17 acquisitions, $4.3 million of higher performance-based compensation expense, $2.9 million impact foreign currency transaction adjustments and borrowings denominated in euros under our revolving credit facility. That was partially offset by $3.1 million of acquisition costs recorded in fiscal '16, and that was associated with the fiscal '16 acquisition.

Consolidated SG&A expenses as a percentage of net sales increased to 16.8% in the fourth quarter of '17, up from 16.4% in the fourth quarter of fiscal '16. The increase in the consolidated SG&A as a percentage of net sales in the fourth quarter of fiscal '17 principally reflects impact from the previously mentioned higher performance-based compensation expense and foreign currency transaction adjustments. Consolidated SG&A expense as a percentage of net sales decreased to 17.6% in fiscal '17, down from 18.2% in fiscal '16. To us, that's a very good sign. The decrease in consolidated SG&A expense as a percentage of net sales in fiscal '17 principally reflects the impact from efficiencies realized in the benefit of our net sales growth on relatively consistent period-over-period SG&A expenses and the aforementioned decrease in acquisition cost, partially offset by the impact of the previously mentioned foreign currency transaction adjustments.

Interest expense was $3.4 million in the fourth quarter of fiscal '17 compared to $2.1 million in the fourth quarter of '16 and $9.8 million in fiscal '17 compared to $8.3 million in fiscal '16. The increases were principally due to higher interest rates. Other income or expense in the fourth quarter of both years was not significant.

Our effective tax rate in the fourth quarter of fiscal '17 decreased to 31.5%, down from 32.9% in the fourth quarter of fiscal '16 and decreased to 30.3% in fiscal '17, down from 31.5% in fiscal '16. The decrease in the fourth quarter of '17 principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender value of life insurance policies related to the HEICO Corporation Leadership Comp Plan, and these are partially offset by lower effective state tax rate in fiscal '16 due to the amendment of certain state tax returns in prior year. The decrease in fiscal '17 principally reflects higher tax-exempt unrealized gains in cash surrender value life insurance policies related to HEICO Corporate Leadership Comp Plan and a discrete income tax benefit related to stock option exercises resulting from the adoption of a new accounting standard on share-based payment transactions in the first quarter of fiscal '17. These decreases were partially offset by the benefit recognized in the first quarter of fiscal '16 from the retroactive and permanent extension of the U.S. federal R&D tax credit.

Net income attributable to noncontrolling interest totaled $5.4 million and $5.3 million in the fourth quarter of fiscal '17 and '16, pretty comparable, and increased to $21.7 million in fiscal '17, up from $20 million in fiscal '16. The increase in '17 principally reflects higher net income of certain subsidiaries of the Flight Support and ETG groups in which noncontrolling interests are held, inclusive of a fiscal '17 acquisition.

Now moving on to the balance sheet and cash flow. Our financial position and forecasted cash flow remain extremely strong. Previously, I discussed cash flow provided by operating activities was very strong, totaling just shy of $275 million in fiscal '17, and that represented 148% of net income. Cash flow provided by operating activities increased 25% to $95.6 million in the fourth quarter fiscal '17, and that was up from $76.8 million in the fourth quarter fiscal '16. Our working capital ratio, current assets divided by current liabilities, was 2.5x as of October 31, '17 and '16.

DSOs or days sales outstanding of receivables improved to 49 days as of October 31, '17, and that was down from 51 days as of 1 year before. We closely monitor receivable collections and all efforts to -- in order to limit credit exposure. We have very little loss from credit exposure. No one customer accounted for more than 10% of net sales. Top 5 customers represented 18% and 21% of net sales for the year '17 and '16. So you see the concentration actually dropped. In the current year, it was 18%; and a year ago, it was 21%. We feel very comfortable with those numbers. Inventory turnover for the years ending October 31, '17 and '16, excluding the impact of fiscal '17, '16 acquisitions, increased very slightly to 122 days in fiscal '17 compared to 120 days in fiscal '16.

Our total debt-to-shareholders' equity was 54%. Our net debt-to-shareholders' equity was approximately 50% on October 31, '17, with net debt, that's debt less cash and cash equivalents of $621.9 million, principally incurred to fund acquisitions in '17 and '16. Our net debt less cash and cash equivalents to EBITDA ratio was 1.67% -- times -- 1.67x as of October 31, '17. And please note that this ratio reflects the financial impact after acquiring 3 businesses during fiscal '17, including HEICO's largest acquisition ever. That was AeroAntenna. So our ratio of debt-to-EBITDA is considered, in the industry and by us, as very low.

Perhaps a more important thing is when we consider our outstanding debt to our cash flow. The ability to pay down that debt in very short order is really the key to the financial strength of HEICO. And Carlos can get into it a little later, but it's probably less than 2 years, 1.5 years?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [6]

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1.5 years to 2 years.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [7]

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1.5 years to 2 years, we pay off the whole debt. And to us, that's the critical factor. We have no significant debt maturities until fiscal '23. We plan to use our financial strength and flexibility to aggressively pursue high-quality acquisition opportunities to accelerate growth and maximize shareholders' return.

Now for the outlook. As we look ahead to fiscal '18, we anticipate net sales growth in Flight Support, commercial aviation and defense products. We expect growth within ETG to be principally driven by demand for the majority of our products. During fiscal '18, we will continue our commitments to develop new products and services, further market penetration, aggressive acquisition strategy, and we will maintain our financial strength and flexibility.

Based upon our current economic visibility, we are estimating 10% to 12% growth in full year net sales and in full year net income over fiscal '17 levels. We anticipate our fiscal '18 consolidated operating margin to approximate 20%; depreciation, amortization expense of approximately $75 million; CapEx to approximate $50 million; cash flow from operations to approximate $290 million. These estimates exclude the impact of any pending tax reforms that are currently being legislated in Congress, and furthermore, these estimates exclude any additional acquired businesses.

One other comment with regard to this. Those analysts and shareholders on the call, who are very familiar with HEICO, will probably note that for the first time in many years, we have given guidance of 10% to 12% coming out of the box. Our normal guidance historically has been 6% to 8% or 8% to 10%, and we're at 10% to 12%. This is only our projection. But I must say that as CEO speaking to our subsidiary companies, their business unit leaders speaking to banks, other CEOs in the business community, we foresee a very strong year for fiscal '18. We see strong order patterns, and we also believe that the tax -- the new tax plan will be implemented. I leave it to all of the analysts to do the calculations as to how the tax reduction and, the reversal of the deferred income tax on our balance sheet, how that will impact the bottom line and earnings per share. In my humble opinion and I'm not guaranteeing it, but in my own mind, I truly believe it will be very significant. That has not been baked into these numbers.

In closing, I would like to thank HEICO's team members. Again, it is through their dedication and efforts that we have achieved 27 years of success with compound annual growth rates of 16% in net sales, 18% net income. We believe our simple consistent strategy of compounding cash through focusing on new product development, new services, increased market penetration, high levels of customer satisfaction. That is the most important guy in the whole formula is the customer, and we are here to serve that customer and do the best possible work for that customer. And that is our creed. And we believe that, that will allow us to maintain our strong financial position, execute disciplined acquisition strategy, return true value to shareholders, and we look forward to all of the opportunities ahead in fiscal '18 for HEICO.

We want to wish everyone on this call, their families a very happy, healthy holiday season and new year, and we will open the floor for questions. Thank you all.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Rob Spingarn with Credit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [2]

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Well, first of all, outstanding quarter. Let's start with that. Impressive on a lot of counts, and you have gone through most of it. A few things, and if I missed this, forgive me, but you provided a lot of detail. First of all, Larry, on the CapEx, the doubling in CapEx for next year, if you could dig into that a little bit.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [3]

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Carlos? I'm going to give it to Carlos.

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [4]

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Rob, it's Carlos. Couple of things. One, we spent about $26 million last year, which we significantly underspent our budget. Part of that was some holdback by some of our subsidiaries, frankly, looking forward to taking advantage of some of the tax benefits that are being credited to tax reform. So that's part and parcel of it. Secondarily, we have some growth opportunities that we're looking into for our existing businesses. So when you put that all together, we do expect a higher spend this coming year. However, as you know, we typically go with our wish list that our subsidiaries provide to us. Generally and historically speaking, that has been higher than when we turn up at the end of the year. But as we're sitting here today, we feel best to put the number out there as our subs would like to see it, and then we'll update that guidance quarterly as we go forward through the year and our visibility increases into what they look like they're going to spend.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [5]

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Okay, all right. On another note, on the acquisition side, you've had a somewhat linear trend upward over the last several years, specifically fiscal '15 through '17, not quite doubling each year. But do you -- and again, this is a question for anybody. But is there a way we should think about your appetite for acquisitions in '18? I know you still look at them and you're still positive on that, but is there any way for us to quantify some kind of target amount, either a percentage growth in sales or just a size of deployed capital?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [6]

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Well, Rob, from my perspective, I can't model in acquisitions. We have traditionally done 2, 3 acquisitions a year. I can tell you that Larry will ask me to go out and work with the bankers and get a big line of credit so we have plenty of firepower to acquire what we wanted to, and I could tell you that our acquisition team is quite busy. But as far as modeling into your projections, I'm going to leave that up to you. I do not want to provide any type of guess on that topic.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [7]

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Is it -- would it be unreasonable for me to try to size or to ask you if you're looking at things that are larger than anything you've done historically?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [8]

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I think, Rob, we have looked both at big, medium and small acquisitions. We're very opportunistic. We're not going to walk away from a big deal. We're not going to go out and hunt a big deal or a small deal. We're going to look at the stuff that we've presented with and the best opportunity for the company and our shareholders is what we're going to go after. Now to your point, and I know where you're heading with this, the last few deals has been rather large, Robertson and AAT. We've had a few bolt-ons, A2C. So we have gravitated to some bigger deals, if you would. I think that's a function of the fact that we're a much larger company now. And as you can imagine, to move the needle, we have to think a little bigger, which is fine, but I would not discount the importance to HEICO's growth strategy of our bolt-on deals or traditional smaller transactions that we're very good at doing.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [9]

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Okay. And just a couple of quick ones for Eric and Victor on the margins. Eric, I know you had some pressure in specialty products at the incremental -- the organic sales growth was a little bit lower than it has been. I think you're seeing that's going to rebound this coming year. The incremental margin was -- over last year's fourth quarter, was not very high. Can you speak to -- is it simply volume and mix? Is there anything else going on there?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [10]

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No. It is just a pushout to the right of certain projects, certain orders, and actually, we are in receipt of those orders now. So we are very optimistic for 2018. I think it was sort of, if you will, a onetime deferral of certain things. We did not lose any business. We maintained our business, but it's just simply a slide to the right. And in that operation, it's a manufacturing-intensive operation with a certain amount of fixed costs, so that hurt us in the fourth quarter.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [11]

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So Eric, just to put a finer pencil on this, the numbers I have are -- historically, you were in double-digit incremental margins every quarter. The fourth quarter was mid-single-digit. So should we be looking for double-digit incrementals quarterly in '18?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [12]

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When you say double-digit incremental margins, I'm not...

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [13]

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So your incremental margin, again, this is relying on my math to see if it's correct, probably average 25% in each quarter. So this is the margin on your incremental sales. And in the first 3 quarters of this year, they were healthy, they were in the double digits, probably averaging about 25%. In this last quarter, it was 6.5%.

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [14]

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Yes. I -- we don't actually look at it on an incremental basis. I understand what you're saying, but we just don't look at it that way. But -- and if you look, last year's fourth quarter was really -- had very, very high margins and was somewhat of an outlier. If you look at it for the full year, the operating margin is down just 20 basis points, and I think that's within the normal fluctuation. Remember, also, we had some acquisitions in there and increased intangible amortization associated with those acquisitions. If you were to add that back, we're right there. So I -- nothing has changed fundamentally with the business. So while I can't comment on the incremental margin impact, I can tell you nothing has changed. We're in receipt of the orders, and we feel very good about the business going forward.

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [15]

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I will say -- Rob, I will say this. I wouldn't want people to lose sight of the fact that, as Eric mentioned, we do have some pushout to the right in specialty products, but our aftermarket business is very strong. We pushed 9% organic growth through the pipe in FSG, and that's pure aftermarket parts business. And we're very proud of that, and hopefully, folks don't lose sight of that fact.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [16]

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Yes -- no, Carlos, you're talking about the year or the quarter there?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [17]

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I'm talking about the year. The quarter was 6%, which I also submit is very strong.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [18]

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No, no, no. It's excellent. The quarter was very strong across-the-board. I was just trying to hone in on the fact it looks like this particular quarter was an anomaly. And if I hear Eric correctly, that's because certain things moved to the right.

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [19]

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Correct.

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Operator [20]

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Your next question comes from the line of Ken Herbert with Canaccord.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [21]

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I first just wanted to start -- Victor, obviously, very nice organic growth in the quarter within the ETG segment. Can you just provide any more color on any specific, either products or opportunities that you saw in the quarter? And how much of it maybe was onetime or pushout from prior quarters in fiscal '17? Or just a little more color around the 14% -- around the very strong organic growth in the quarter.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [22]

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Sure. I'd be happy to do that. It was broadly based. It really was a case of kind of firing on all cylinders in the quarter for our businesses. I mean, there's always a weak spot here or there, but I would say there were very few of them. So unfortunately, I can't attribute it to any particular company. It wasn't a case of pull-ins so much. I mean, our companies are always very aggressive about shipping things as quickly as possible, so I think that's kind of steady state for us. They tend to tell us they're going to ship later than they do, and they tend to do things faster. And I'm happy with that. They're conservative. So at this point, it's -- it was just a good quarter across-the-board. And I would expect as the year wears on, we're not going to have a linear progression through the fiscal year. And as -- I don't think we ever do in the ETG. So I just wouldn't want you to expect that or this rate or this growth rate in every quarter in this way that it came, and typically, it builds in the year, as you probably noticed. Typically, the end of the year is a little stronger than the beginning of the year. So usually, I look for it not so much in the first quarter as much as I do later on, but we'll see where we come in.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [23]

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Yes -- no. And if you look at '17, obviously, the first quarter comparison is certainly more challenging than the second and third quarter for you. Is it fair to say that we should maybe see lower growth in the first quarter relative to the full year guide just considering the comparison and maybe some stuff was pulled forward a little bit into the fourth quarter as we think about the cadence, again, to your point there for ETG sales across the full year?

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [24]

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Yes. I don't think -- it's a good question. I don't think we had any meaningful pull from the first quarter into the fourth quarter, nothing outside of the usual noise level that we always see. And I don't even know if I call it pulled from the first quarter so much as they give us a little bit different expectation. We don't give quarterly guidance, but -- and at this point, we're really just basically 6 weeks, almost halfway through the quarter. So I really don't know, but I wouldn't be surprised if it builds later in the year and the first quarter is not as strong as future quarters. But honestly, I don't know that that's going to be the case either. I'm -- our guys are very conservative when they give us projections, so I tend to be conservative as well.

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [25]

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Just to put a finer point on -- Ken, just to put a finer point on that. I think as a general matter, we don't pull things forward for our numbers. We do, however, if a customer needs something and it's done, we will ship it. And if that means it goes early and they need it, we do it. And that's really how we create a lot of customer goodwill, and that's one of the things in the ETG that makes it such a sticky segment with our customers because we are truly customer-centric and friendly in that segment.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [26]

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Yes, okay. No, I appreciate that. Just switching over quickly, Eric, on the FSG segment. I can appreciate the lumpiness within the specialty products segment. As you look at organic growth, specifically within the replacement parts and the repair and overhaul parts of the business, you're obviously up against a 9%. It looks like the guidance implies maybe a little bit slower organic growth there in fiscal '18, especially if you consider, give or take, sort of $20 million as a catch-up for specialty products. Is there anything you'd specifically highlight on the guide for the more legacy aftermarket parts of the business? Are you seeing anything structurally changed there? Or is there maybe just conservatism in the outlook against -- obviously, with the full year numbers for '17 and the fourth quarter were very impressive, but how should we think about the organic growth within, specifically, the repair and overhaul and, of course, the replacement parts part of the business?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [27]

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Ken, that's a very good question. We were really very, very happy with the 9% organic growth in the aftermarket for the year. I think that's a heck of a number. And really, I'm very, very proud of the team and all areas of our aftermarket for hitting those numbers because this was not a year where we had any special, if you will, one-offs, where there was deferral in prior years and it was -- got boosted this year. This was really as a result of developing a lot of new products, great customer penetration, working extremely hard with the customers. So I just feel very good about it. And our guidance for next year, I think, is a little bit more conservative overall in that area. But again, we receive most of our orders in the month of shipment, so we really don't have visibility. It's very difficult for us to be able to project. I've done sales reviews with the -- with our sales folks over the last number of weeks, and I can tell you that they feel very good about where we're going, our product offering, the customer acceptance. Frankly, it's never been at this level before. So I just anticipate continued strength in this area, and I anticipate also a recovery in the specialty products area, again, because it was not a loss of business. It was just simply a slip to the right. And we all know that in certain types of businesses, product can slip to the right due to no fault of ours, but that's just sort of what happened. And I think if you look back in the fourth quarter of last year, we had a lot of very good things bunched up unexpectedly, and we didn't realize until after the fact on how great that was. But we -- as I said before, we're in possession of the orders, so we know we're going to ship them, and we feel very good about it.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace and Defense Analyst [28]

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Great. And if I could just finally, Carlos, can you just let me know what the amortization or the adjustment associated with AAT was in the fourth quarter and what the guidance implies for fiscal '18 for the amortization of intangibles associated with that acquisition?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [29]

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Well, what I can tell you, Ken, is that typically within the Electronic -- we break this out in our 10-K, which should be out on Thursday. Typically, the amortization runs about 4 margin points NOI. What I'm looking for in fiscal '18 relative to ETG amortization is maybe around 5%. So it is going to add about 1% drag on the OI margin for the ETG.

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Operator [30]

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Your next question comes from the line of George Godfrey with CLK.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [31]

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Two questions. The first one is, if I look at the stock chart, and it's a really nice stock chart. And the valuation where we were 4 or 5 years ago trading at 12 to 14x EBITDA, and now you're north of 20. And so my question is, how agreeable are acquisition targets still today? For you paying, call it, high single digits EBITDA. When they perhaps look at your stock trading at such a higher multiple of where you'd like to buy the acquisition target.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [32]

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George, this is Victor. The answer is the acquisitions we're buying are very different from HEICO in the aggregate. And multiples have moved up a bit. And I think the multiples we pay are slightly higher than they were, let's say, 10 years ago or 5 years ago, although I think we pay a very fair price for businesses. And so sellers -- occasionally, there is a seller who believes that their multiples should be comparable to ours and those don't work, and that's always been the case. But generally speaking, we pay a fair price and people who are looking for a good home for their businesses who are not concerned with squeezing the last penny out of the sale price, but who are equally concerned with the legacy they're leaving behind with the business, with their people. Generally, those people are not as sensitive to that kind of argument, and they are more concerned with what I'll call the social issues, not that we can pay an unfair price. But I think we always pay a fair price and a reasonable price. And we're not having difficulty -- we didn't this year. We didn't have difficulty paying a fair price for our acquisitions and we have a number that we're looking at. And I think there are a number of reasonable sellers, but there are people probably in the private equity and some other worlds out there who will not be interested in the prices we offer and that's fine. We're not going to jeopardize our company, our balance sheet in order to do something transitory.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [33]

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Got it. Understood. And I heard everything you said on the capital expenditures. So just for my own clarity, if I look at product segments within ETG, electrooptical, data microwave, electrical and think about Flight Support at the engine or in the cockpit, the CapEx, there isn't any one area or product line or region of concentration that's the $50 million is looking to build up capacity in every single area. Do I have that right?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [34]

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I think it's -- George, this is Carlos. It's broad based. Again, we underspent last year by a fair amount. And again, I think part and parcel of that was planning as it relates to some of the full expensing that the legislators are talking about now. And so -- and that means it's equipment that could have waited. It is broad-based. It's not germane to any one particular segment. So -- and again, I would encourage you, if you look back at our guidance, we came out of the box in December with our budget numbers. There's no magic that we overlay on top of that. We truly are taking the information from our subs. They tend to have little higher wish list at the beginning of the year than we end up with at the end of year. So let's see how it plays out. But no overallocation of that capital in any one particular segment.

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Operator [35]

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And your next question comes from the line of Dr. Herbert Wertheim with Brain Power.

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Herbert Wertheim, [36]

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Well, once again, I think you've exceeded all of our expectations, although our expectations were quite high. You've had an amazing year. It's been extraordinary.

As you know, I've been with you from the time we are the original shareholders who took over HEICO. And you have allowed us to -- and our family to make hundreds of millions of dollars in contributions through many organizations. And we want to thank you and both of the Mendelson boys who grew up with my daughters for the outstanding job you've done not only for us, but for so many other investors in our community. So keep up the good work. We look forward to the next year.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [37]

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Herb, I want to thank you very much for your kind comments. Yes, you were there at the beginning. And I've always said you have a brilliant mind as a scientist and as an investor and you understood the value of long-term investing. And we could not be happier having you as a shareholder, of course, as a happy shareholder, and seeing that you have done so well and then have taken the proceeds of your largesse and contributed to so many charitable institutions in and around South Florida. So you have done good for a lot of people and we congratulate you, wish you a very happy, healthy, wonderful new year, and we will be in touch.

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [38]

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And Herb, this is Eric. Also, I add my thanks and appreciation and just being grateful for your friendship and support over the years, and thank you so much for your kind comments.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [39]

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Herb, this is Victor. I echo what Eric has to say and also, congratulate you on some good news that I saw on your family recently.

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Herbert Wertheim, [40]

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Well, thank you very much. And as you know, I've known you since you were in high school and your dad since he was just doing deals. Certainly, one of the smartest, hardest working families I've ever known, ever, ever, ever. Well, thank you, Larry, for all you do for all of us shareholders and what you've done for our community in Miami.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [41]

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Thanks, Herb. Much appreciated.

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Operator [42]

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Your next question comes from the line of Larry Solow with CJS Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [43]

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Just a few follow-ups. Most of my questions have been answered and I echo all the positive commentary. Just real quick on the -- Eric, [if can you just give] a little more color? You mentioned 2017 was actually more of a development year when it started and, obviously, the 9% growth in the aftermarket was phenomenal. And I know you would probably unlikely ever target that in your guidance number, but any reason to believe qualitatively as some of these products have incubated and maybe that '18 could be as good of a year? Doesn't seem like there's any change for the negative in the overall macro environment. And for you specifically, it sounds like maybe more of these products will have contributions this year compared to last.

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [44]

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No, I would say nothing has changed in the overall macro environment other than, I think, we continue to improve our relationships, our reputation in the marketplace and I think we are getting stronger. So I think the -- if you will, the tide is rising. Again, it is very, very hard work. I don't want to understate the amount of effort that everybody needs to put forth in every single part of our business. This is not automatic. It's not the type of thing where we can just close our eyes and come in tomorrow and anticipate the business will grow. It is extremely hard. So I would say nothing has -- nothing really has changed in that area. But the only thing that I would add, of course, is that the first quarter of fiscal '17, the organic growth was extremely strong. So we are up against tougher comps for the first quarter. So I think everybody should be mindful of that. But no, I feel very, very strong about where we're going, what we're doing. No fundamental change in the business.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [45]

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And historically, you've targeted launching, I think, 300 to 500 new products a year, new product introductions. Are we in that area, maybe at higher end of that number, maybe a little above it?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [46]

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Yes. I would say we're right in that area, probably around the midpoint. I can tell you we had a very strong year of new product development this year, but -- and I would anticipate that to continue. Again, we target that number to be -- to really optimize what our customers can handle and we feel very good about it.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [47]

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Okay. And then just switching gears real quick. On the ETG side, just on the acquisition of AeroAntenna, I believe it's all in there. Just doing the math, it looks like without getting into exact [signs], exact numbers there. It seems like it's going to contribute, I don't know, half of the $70 million gains? So maybe it's like a -- is that -- am I right there? And then it looks like only a $40 million, $50 million revenue number? Or is that what your guidance implies?

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [48]

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I don't quite understand it. This is Victor. I don't quite understand the question.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [49]

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Right. So you have the ETG growing 12% top line. And obviously, it contributed -- the AeroAntenna acquisition contributed a little bit in Q4, maybe half a quarter's worth. But just simple math. If I just -- I would say you grow that business $75 million-ish, and if half of that is organic, that means it's about $35 million from acquisitions. And maybe you had a little bit of that in Q4 already. So is my math somewhat right? Or at least that's what the guidance implies.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [50]

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Well, we -- honestly, Larry, we don't break out the numbers on our subsidiaries specifically, especially, the acquisitions. It's also a business that's growing, or at least at this point, it's growing, so it's a little difficult to measure. It depends how you look at it, whether it's just from the point of acquisition forward, et cetera. So that the business is -- typically, when we buy a business, it tends to be growing.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [51]

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Right. No, I understand that, but I'm just -- essentially, this acquisition was towards the end of the year, right? And it didn't -- it was maybe half a quarter of contribution in fiscal '17. So just the simple math. If you grow that, if you grow ETG 12%-ish using round numbers, that's somewhere in the $65 million to $75 million in revenue, right? And half of that from acquisition, the one big acquisition in there was AAT, right? So that's okay. We can talk off-line, but that cut that in half, that's $40 million, which would imply that revenue run rate, maybe a little higher of AAT.

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Operator [52]

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Your next question comes from the line of Michael Ciarmoli with SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [53]

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Just maybe some housekeeping and cleanup questions here. Eric, I appreciate the conservatism with the guidance, but you've got the 5% organic growth in FSG. Sounds like the specialty orders were in receipt. I get that a lot of the aftermarket is booked and shipped in the quarter. It seems like the 18%, 18.5% margins could have some potential upside. I mean -- and again, I understand that's where the business has been tracking. But just thinking about the potential positive implications of the specialty coming back, should we expect to see a little bit of upside on those margins in FSG next year?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [54]

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Well, we -- I'll let Carlos...

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [55]

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And Michael, this is Carlos. The thing that we've got going on with FSG next year is we've got quite a bit more amortization coming in from some of these acquisitions that he's done. And so that's going to be a governor on our margin expansion in that segment. To your point, if specialty does come back strong, we anticipate that it will come back depending on the level of strength we get out of that. You're 100% right, we could see a little bit of expansion. As we see it now based upon our backlog, based upon the budgets that we have from our subsidiaries, the 18% to 18.5% range is kind of where things are falling out. Again, I'll update that quarterly. And we always hope to do better and to beat what we've given you, particularly earlier in the year. I think if you go back over history you've known us long enough that our out-of-the-box guidance tends to be conservative. And there's a reason for that because we do like to take the numbers that our guys in the field are telling us and provide that to the Street and then give you better information as the year progresses. So I wouldn't, and as you're thinking about your models and your projections, you can do what you want with that information I just gave you, but as we're sitting here right now, those numbers from our standpoint are pretty good ones.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [56]

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Got it. Can you quantify the amortization headwind from the recent deals?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [57]

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Can I quantify the amortization headwind from the recent deals? Yes. So we're going to have -- just bear with me for one second. Within the FSG, we're probably going to be looking at about a 2% drag on the OI margin for amortization. That's all in on just the (inaudible), okay?

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [58]

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Got it. Okay, perfect. That's helpful. And then just, Victor, the defense orders that had slipped, I think that you talked about last quarter, have those all been recovered?

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [59]

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I think our -- I mean, I think they were very strong -- not I think. They were very strong in the fourth quarter continuing it looks like in the first quarter. So I would say so.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [60]

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Okay. Yes, I know. On the last quarter, you just talked about some contracts that were delayed and they were expected to start hitting in 4Q and into '18, so it sounds like that's all been picked up.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [61]

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Yes, absolutely. And we're happy with them.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [62]

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Okay. And then just the last one. Eric, you might not what to give specifics here, but thinking about some of those new product developments, some of the 787s really starting to come in for C-checks. Is your, I guess, success rate in getting PMA replacement parts on a new platform like the 787 in line with your expectations? Is it above or below expectations?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [63]

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Again, we don't like to talk about specific platforms, but I can tell you that in general, with regard to the newer platforms, we're doing consistent with our expectations.

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Operator [64]

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Your next question comes from the line of Colin Ducharme with Sterling Capital.

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director of Equity Opportunities & Senior Equity Analyst [65]

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Most of my questions have been answered, but just a quick one, a little bit longer term. Just given the Electronic Technologies Group is a higher free cash flow margin segment that's structurally raising the consolidated HEICO margin over time now that its absolute profitability is approaching the Flight Support's level, and then taking into account your recent 30% increase in credit capacity. Just wondering, in your view, is the consolidated HEICO growth M&A flywheel, is that an inflection point here and actually beginning to accelerate? I'm just specifically thinking of the increasing quantum of higher FCF margin -- free cash flow margin that you're now going to have at your disposal.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [66]

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I -- truthfully, I'm not sure of the question you were -- this is Larry. I'm not sure of the question that you were asking. Can you define it a little...

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director of Equity Opportunities & Senior Equity Analyst [67]

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Sure. Yes. Simply put, just ETG, as a higher margin and free cash flow segment becoming a larger part of the consolidated pie. So I'm curious over time now, in the next couple of years, is your margin and free cash flow growth actually beginning to accelerate on a consolidated basis?

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [68]

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The answer is absolutely yes. It is -- it has been accelerating and we hope it will continue to accelerate. I don't know if it is going to be more in the ETG or the Flight Support Group. We have always said that we expect our businesses -- we would like to keep diversification in 40-60, 60-40, 50-50, so we don't want either one of our segments to overwhelm the other. So there is no intentional bias or managerial idea that we're going to build ETG because at the present time, their margin -- it just happens their margins are bigger than Flight Support. There are reasons that Flight Support -- and this is very interesting. The shareholders on this call love high margins, and so do I. On the other hand, if there are any industry players, airlines or people on this call, they hate high margins. They want us to have 2% margins. They want us in low margin. So in Flight Support, we are probably better off keeping a margin in the area of 18% to 20% because we don't get as much pushback, believe it or not, from our customers. So -- and there are many good businesses that come in close to 20%. So in the Flight Support Group, as I said, 18% to 20%, maybe a little above that. In the Electronic Technologies, it's a very different business and we can get better margins. And truthfully, in some of the areas that we operate in Electronic Technologies, they're more arcane sciences. There are -- it's tougher. It's tough to compete with some of the results and products that we develop. Remember, we -- in the Flight -- in the Electronic Technologies, we own virtually all the IP. So we don't build to suit. In Flight Support, we own most of it, but we do have distribution where we don't own the intellectual property and some of the other overhaul and repair facilities, which are wonderful and profitable and generate cash and everything and bring us close to our clients, but they don't have the margin because there is a little bit more competition in that area. So...

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director of Equity Opportunities & Senior Equity Analyst [69]

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Sure, sure. And that's helpful color, Larry. I appreciate it. I guess the genesis of the question is just in many roll-up story cases, law of large numbers begins to weigh and it's just interesting that your platform seems to be strengthening and actually accelerating as this higher margin segment begins to be a larger portion of the overall business.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [70]

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Basically, our strategy has always been -- I've said HEICO, I've said this many times at presentations, I perceive HEICO not as an aerospace or electronic technologies' company. HEICO is a very strong, well-managed vehicle for generating cash flow. And as I look at HEICO, I see a snowball of cash. That's why we are in business. I don't want to be in the business of 7%. Some of you, and you know industrial companies, lots of them are operating at 7%, 9% and all that. We don't -- our management, we're not focused on that and we don't want to go there. So we intentionally look for high margin. High margin is what permits us to constantly explode the company. We can take the funds and we don't -- our operating margin doesn't require us to invest huge amounts of money in receivables and inventories. Other guys who have low margins, they have all their money stuck in nonproductive assets of receivables and inventory. So if anything sets HEICO apart from other companies, it's that basic philosophy of how to manage that money. And that's the only way we -- well, we know how to do it is shoot at big margins and grow. And that extra margin that we get is what permits us to reload and grow. And we're not going to cut it -- we're not going to go out and buy a 7% margin company. The other thing which I'm going to throw out to these people listening, the Mendelson family and our team members own a very large percentage of the company and we're not interested in the top line growth and building a company at 7%, 8% operating margin. We're -- because we are interested in the bottom line. The only thing that makes us as shareholders and you as our partners wealthy, is the ability to have bottom line earnings per share, and more important, cash flow growth. So our whole focus is cash flow. So when we talk about growing the company, we're going to grow the company with margin, a strong margin. We started 20% in acquisition. Hopefully, we get more than that. And that's really the philosophy and the -- if you want to know what makes it work, that is really at the basic philosophy. Everything else...

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director of Equity Opportunities & Senior Equity Analyst [71]

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Absolutely. And I appreciate that. And the fact that you see the free cash flow profile accelerating over time as I do, is great and impressive. Just as a quick follow-up for Eric, my final question is just on the PMA segment. Can you characterize and talk about any change at all in the competitive dynamic from your largest, #2 competitor owned by a financial sponsor, especially given certain financial pressures that, that firm has recently faced?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [72]

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Yes. Colin, we compete very vigorously in the market. Unfortunately, we're not able to talk about competitors or customers by name for competitive reasons. But I can tell you that HEICO is doing very well in the marketplace and I don't see any change in that regard. We're going to continue to build and grow. I think we're very much appreciated by our customers and we've got a lot of great things in the pipeline.

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Operator [73]

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And your next question comes from the line of Josh Sullivan with Seaport Global.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [74]

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I guess, it's just a follow-up to that last question. Just curious to hear your thoughts maybe on the larger OEMs entering more aftermarket activity. Obviously, don't want to name names, but are you seeing any of the aerospace OEMs operating more aggressively in any of your markets at this point?

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [75]

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We haven't really seen any change in that regard. Our competitors have always been very aggressive including the OEMs, so I anticipate that will continue. I think that there's opportunity for HEICO to work with certain OEMs. We already do work with a number of OEMs. So I -- if what you're getting to is some of the talk about some of the large airframers starting to want to bring in-house some of their products that were formerly designed outside, I think that there's an opportunity for HEICO to -- for our strategy to be parallel with their strategy. I don't anticipate as airframers try to get into some of the markets that we're in for there to be an impact on our business. I think that this is more a matter of trying to reduce their own procurement costs and capture more of the aftermarket at what I would say, is that historical OE price point. So HEICO will continue to offer the benefit that we offer to our customers. And I think there are opportunities to work with a number of OEMs. And as I said earlier in response to your question, we are doing that, and doing that very successfully.

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Operator [76]

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Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [77]

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Just going back to the very first question from Rob. How do you think about tax reform as it relates to the M&A environment and valuations in the space? And can you just remind us of your net debt-to-EBITDA target that you wouldn't want to go above with a particular deal?

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Carlos L. Macau, HEICO Corporation - CFO, EVP and Treasurer [78]

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Sheila, this is Carlos. So the limitations as currently proposed by both the Senate and the Congress of their committee consensus are significantly in excess of any interest expense to our EBIT or EBITDA, and so I don't foresee that aspect impairing us in anything that we do. The issue that I can't answer and I wish I could directly is, that I don't know how this is going to impact sellers. My sense is, is that if the individual tax rates do go down for middle America, then that could be an incentive for sellers. If the sellers are über-wealthy, maybe not so much. Maybe it's just status quo. I will tell you, though, from HEICO's standpoint, any time that we can get a reduction in the federal tax rate, let's say, which is at 35%, and they're going to drop it to 21% when you phase it in because of our fiscal year not being December, we may be in the 24%, 23% range. That's a hell of a nice benefit to HEICO. I don't want to say a whole lot more than that because as you know, these things are changing every hour. But from a macro perspective, I'm very excited about the tax reform at a corporate level. And as Larry mentioned earlier, as that develops, we will provide additional detail on its impacts to HEICO when that is known.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [79]

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And Carlos, just the target leverage, sorry.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [80]

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But Sheila, I did mention, and I strongly believe one that they will pass this tax bill. Of course, there's still speculation. It's my opinion, but you will know in a few days if it's passed. After that, the impact on HEICO can be calculated by taking our taxable income and figure 10% of -- we're talking about a huge number. And that has not been reflected in any of our 10% or 12% next year, nor has the reversal of the deferred tax account, which will go from a basis of 35% on -- when it was set up to whatever it is, 21%. And now that's not a -- that's a noncash item, but it's going to flow through the income statement, I believe. I don't know -- unless the accounting people say, no, it goes somewhere else. But -- maybe they'll say, it goes directly to equity and it won't flow through. But whatever it does, it's going to drop the liability side of our balance sheet by, I don't know, pick a number, and you probably have a better number than I -- maybe $30 million are going to drop out of there. So if it goes to income and you're reducing taxes by 10% of $30 million and this by $30 million, you're talking about $60 million. $60 million on 85 million shares at $0.70 a share, that hasn't been reflected. Now again, I'm not trying to be a financial analyst, but I look at it because I run the company and I see that it's astounding and how is that going to be received. And I think one of the reasons -- there's 2 reasons that HEICO sells at the multiple it sells: one, because people don't look at HEICO's EPS multiple as much as they look at the cash multiple. And if we have 145%, 150% of net -- reported net income as cash flow, most investors base it on that. Number two, these people are very smart, a lot smarter than I am. The guys in Wall Street, financial people have figured out everything that I just said openly. And that's what they're betting on. So again, I see -- I speak to bankers, I speak to business people, I speak to our people, and I see nothing but a very, very strong 2018. Now God forbid, 9/11, some other thing, SARS, I don't know, exogenous events happen, and that's what we can't predict. Maybe the Federal Reserve will jack interest rates up to 8% and the whole thing will collapse. But not assuming those kind of events, I'd be shocked if 2018 is not a banner year for HEICO and for other companies too. But I know specifically HEICO, I would be shocked if it's not. I mean, we can't go more than 10% or 12% because that's what our people are telling us now. But I know our people, and I know they are conservative. So I am very, very optimistic about the outcome for HEICO in 2018, period. That's just the way it is.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [81]

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Sure. Understood. And then sorry, Carlos, do you mind commenting on your target leverage that you wouldn't want to exceed?

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [82]

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Let me comment on that, Sheila. The targeted leverage, I would go 6x EBITDA. I go 7x. But no, let me finish before you laugh. The key to the turns of EBITDA is how quickly we pay it down. It's not the level of EBITDA. I don't want to hang out there. I would go 6x if I knew that in 2 years, it would be down to 3x or 2.5x. And so that's really the answer. I don't want to be more than 2.5x or 3x. But if there was a sensational acquisition that had all -- met all the ingredients that we look for, I would stretch and do it. If would have to have the margin, it would have to have the cash flow, it would have to have all the things, the outlook and everything else. But if we could do it and get the multiple down to 2.5x to 3x within 2 years, I would go 6x. I don't know if that helps you.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [83]

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That's helpful. And then last question for me, maybe for Eric, on just FSG trends within the aftermarket, the 9% growth this year, what you're seeing maybe on a regional basis and wide-body platforms versus narrow-body platforms.

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [84]

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We're doing very well in all of those areas and we've always had strength in all of those areas and I anticipate it to continue. With regard to the new build, there's some talk about the wide-body market perhaps being a little bit overbuilt. And there's some questions as to whether all the wide-body aircraft can be absorbed. That doesn't really impact us all that much. But that is another issue that has to be -- I guess, the market will end up figuring out. But with regard to our aftermarket involvement, I think that we're going to do very well on both sides, wide-body, narrow-body as well as the regional aircraft market.

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Operator [85]

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And your final question comes from the line of Dr. Herbert Wertheim with Brain Power.

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Herbert Wertheim, [86]

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Larry, when I spoke with you earlier, I didn't ask the question. This has bothered me and I'm sure many of the shareholders. The disparity between the HEI shares and the HEI. A shares, what can be done to be able to narrow that gap from 20% to something that's more reasonable? Or can it be converted some time where it's all the same? Because there's an awful lot of value there that is not being expressed.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [87]

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Well, Herb, it's a very difficult question. We have had studies done as to why the A sells where it sells and so forth. The conclusion that has come from many different -- major investment banking firms when they study it and opine on it, the HEI shares trade -- have much greater trading than the HEI. A shares. Even though HEI. A shares -- there are more [HEI] shares outstanding than HEI. And the reason that the HEI. A does not trade as much, is that institutional owners, guys like you, guys like us won't sell HEI. A. The liquidity is dry, so they won't sell their stock -- it is almost, Herb, become a cold stock, just like you don't sell it and we don't sell it. You can take a look on the Google list or the Yahoo! and you see the major -- I mean, the companies, the institutional investment firms that own these mutual funds, investors -- is the bluest of blue chip funds. And they will not -- some of these people have owned it since the late '90s, and they just won't sell it. So it's the -- again, these advisers have told us that it's the question of the liquidity. People like to buy and sell and so they pay up for the right to have the greater liquidity. And by the way, that sometimes it gets below -- the differential gets below 10% and sometimes it goes up to 15%. I'm not sure what it is today. We could calculate it, but I can take a look. This morning, it's -- well, one is about $98 and the other one is about $80. So it's, I guess, almost 20%, yes. It fluctuates 10% to 20%, kind of. But I -- the problem is this: we've studied how to merge the two. The problem is if we merge the two, people who own HEI are going to say, wait a minute, why did the other guy only paid $80 and we just paid $100? Why are they giving him $100 stock? Why, that's not fair. That dilutes us. It's not right. Similarly, the reverse is true. The -- if we said, well, we're only going to give you 80% of an HEI share, the people who own HEI. A would say, we have always said and we have, that the value of the shares is identical. If we ever sell a company, everybody gets the same thing and so forth. So that's not right. And we should get a full share. So we would have more legal issues and problems and stuff. The people who are in the shares know what they bought. The other thing is on the get-go, when we started, we gave out 1 HEI. A for every 2 HEI shares that were owned. And that was at the beginning and you got that and I got it, we all got it. And -- so at the beginning, everybody had the same thing. It was only because of the difference in trading that there was more demand for -- originally, there was a bigger demand for HEI. A because there was more HEI. A available. Then when all these people glommed onto it and wouldn't sell it, the HEI. A dropped and was at a -- HEI was at a premium.

But the answer is at this point, I don't know of any way we've checked, we've thought about it, and there is nothing that I know of that is going to change that. The only thing if we ever sell the company, everybody else -- everybody gets the same.

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Herbert Wertheim, [88]

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Well, we own in excess of 7.5 million shares. So -- and the majority of those now are A shares. So it would certainly -- be certainly helpful to us if there was some equity there. But again, thank you for the explanation. I appreciate your dilemma. But we don't want you to sell the company anytime soon, but that's one of the reasons we hold on to the A shares because we think eventually, you may do that. So -- and make us all even wealthier than we are. Thank you so much for explaining that to me. As I say for someone who owns more than 7.5 million shares, we're critically aware of the differences in the value.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [89]

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Well, I -- again, I repeat, I thank you for your loyalty and confidence and all the comments and for all the good things you've done with a lot of those shares. So I wish we had more people like Herb Wertheim.

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Herbert Wertheim, [90]

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Well, thank you very much. I wish I had more of me, too. Have a good day, and thanks a lot for answering that question for me. And again, I guess, we'll all be rewarded if and when the company is sold, and we thank you very much for all you've done, Larry.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [91]

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Thanks, Herb.

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Operator [92]

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And we have a question from Rob Spingarn from Credit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [93]

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Victor I have a question for you. I have to ask you, Victor, I'm looking at the margin trend for the year at ETG, and I want to ask what you're putting in the water in the commissary, because it's clearly outstanding. And I know this is -- you've discussed it and touched on it throughout this call, but I wanted to dig a little further into that and then ask you what the implied margin expectation is for your group in '18. And again, apologies if this was already discussed. I've been on and off the call given the length.

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [94]

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Yes. Rob, this is Victor. It's a good question. It's very difficult to predict exactly what happens from placing a lot of caffeine in the water coolers. All kidding aside, we -- we're expecting that the margin in fiscal 2018 will be around 27%. Our objective, while it is to do higher, I caution people, don't get out ahead of ourselves. This is based on what our companies have told us and the information they've given us in their budgets. They've historically done better. I know that. You're probably going to say that to me they generally do better than you guide us to. But there are unforeseen circumstances that can arise. And if they do better, that will be great. But I would definitely stick to the guidance on this and let's see where we come out. There's spending some places, it's very product-mix sensitive. You can have a great mix in a quarter and not as great in another quarter. And we may make acquisitions that have excellent margins. But if we bought a business with a 25% operating margin, that would be an excellent acquisition, but oddly enough, dilutive to this number. But we're not, by the way, factoring any acquisitions into that -- any acquisitions that haven't already been completed into that 27% number.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [95]

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Now I know that you have a lot of niche markets among the various properties you have in ETG. So this is a question for you and really for Eric as well. To the extent that you have some price-sensitive product lines and where you have competition, do you see the tax reform maybe accelerating the price aggressiveness between you and your competitors?

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Victor H. Mendelson, HEICO Corporation - Co-President, Director & CEO of Heico Electronic Technologies Group [96]

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Well, I don't -- this is Victor. And I'll let Eric answer his view, but I don't really know that there's going to be much of an impact on the tax reform. I will tell you this that we do have competition on almost everything that we do. There is some form of competition somewhere. Our growth generally is not a result of price increases. In fact, our business has really looked for ways to take cost out and to get the customers the benefit of that cost takeout. So we really try to rely on that and recognize that we're going to -- we have excellent competitors in this industry in just about everything that we do. Tax-wise, I don't know that, that's going to change their thinking or our thinking, at least at this point. And Eric...

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Eric A. Mendelson, HEICO Corporation - Co-President, Director, CEO of Heico Flight Support Group & President of Heico Flight Support Group [97]

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Yes, I would agree. I think it's too early. I don't really see any impact with regard to our customers, with regard to the new tax code, but we will see. Again, we -- we're looking at increasing our capital expenditures a little bit, taking advantage of some of the new policies that may be in place. But I haven't yet seen with our customers any change.

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Operator [98]

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And there are no further questions.

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Laurans A. Mendelson, HEICO Corporation - Chairman and CEO [99]

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Okay. Well, I want to thank everybody who has been on this call, thank them for their interest in HEICO, thank them for their interesting questions. And as you know, we remain available to you to answer other questions or take comments that you may have. You know where to reach us at our offices. We wish you a very happy, healthy, wonderful holiday season and new year, and we look forward to speaking again for 2018, fiscal 2018 first quarter call, which should be some time in mid- to late February. So this ends our call for today, and we will speak soon. Thank you.

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Operator [100]

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Ladies and gentlemen, thank you for joining the HEICO Corporation Fiscal 2017 Fourth Quarter and Full Year Earnings Conference Call. This does conclude today's conference call. You may now disconnect.