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Edited Transcript of HEI earnings conference call or presentation 28-Aug-19 1:00pm GMT

Q3 2019 HEICO Corp Earnings Call

HOLLYWOOD Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of HEICO Corp earnings conference call or presentation Wednesday, August 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos L. Macau

HEICO Corporation - Executive VP, CFO & Treasurer

* Eric A. Mendelson

HEICO Corporation - Co-President & Director

* Laurans A. Mendelson

HEICO Corporation - Chairman of the Board & CEO

* Victor H. Mendelson

HEICO Corporation - Co-President & Director

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Conference Call Participants

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* Audrey Elizabeth Preston

Crédit Suisse AG, Research Division - Research Analyst

* Colin R. Ducharme

Sterling Capital Management LLC - Executive Director & Portfolio Manager

* Gautam J. Khanna

Cowen and Company, LLC, Research Division - MD & Senior Analyst

* George James Godfrey

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

* John Frank;Fort Baker Capital LLC;Analyst

* Kenneth George Herbert

Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst

* Louis Harold Raffetto

UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense

* Michael Frank Ciarmoli

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

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation Third Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions)

Your host for today's call is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation. Before the conference call begins, I will read the following statement.

Certain statements in this conference call constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed and/or implied by those forward-looking statements as a result of factors, including lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space or Homeland Security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales or 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 costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of aviation, defense, space, medical, telecommunications and electronic industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense related revenue.

Parties listening to or reading a transcript of 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, except to the extent required by applicable law.

Thank you. I will now turn the call over to Laurans Mendelson.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [2]

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Well, thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to the HEICO third quarter fiscal '19 earnings announcement teleconference. I'm Larry Mendelson, I'm Chairman and CEO of HEICO Corporation. I'm joined here this morning by Eric Mendelson, HEICO's Vice -- 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 our record third quarter operating results in detail, I would like to take a minute and make a few important comments about our company. In my opinion, the HEICO team members are really directly responsible for the success through their dedication and their professional handling of all matters within the company. We have a very talented group that continues to deliver industry-leading growth and new product innovation, all while maintaining HEICO's unique entrepreneurial culture of excellence.

We continue to win in the marketplace through a simple strategy: putting our customers first. Our record-setting results prove that when you respect your customer, treat them fairly, deliver on time high-quality products and don't push prices to unaffordable levels, you can sustain positive growth, build long-lasting and mutually beneficial business relationships, and that is the HEICO culture.

Business conditions and end markets we serve continue to be strong. While we haven't completed our budgeting forecast and process for next year, current business conditions at HEICO remain excellent. I mentioned in the last call that I had never seen business conditions stronger and that has followed through in the third quarter, and we're very optimistic for the future. Our end markets, consisting principally of commercial aerospace, defense and space, remain very healthy and continue to provide HEICO with broad growth opportunities to generate shareholder value.

I'll now take a few moments to summarize the highlights of our third quarter and year-to-date results. Consolidated third quarter fiscal '19 operating income and net sales represent record results for HEICO driven principally by record net sales at both operating segments.

Consolidated net income increased from 21% to $81.1 million or $0.59 per diluted share in the third quarter of fiscal '19, and that was up from $67.1 million or $0.49 per diluted share in the third quarter of fiscal '18. Consolidated net income increased 26% to a record $242.2 million or $1.76 per diluted share in the first 9 months of fiscal '19, and that was up from $191.9 million or $1.40 per diluted share in the first 9 months of fiscal '18.

Consolidated operating margin improved to a strong 22.4% in the third quarter of fiscal '19, up from 21.8% in the third quarter of fiscal '18. The operating margin also improved to a strong 22.2% in the first 9 months of fiscal '19, and that was up from 21% in the first 9 months of fiscal '18. All these growth percentages, to me, seem really extraordinarily great performance on the part of our team.

The ETG group set an all-time quarterly net sales record in the third quarter of fiscal '19, increasing 16% over the third quarter of fiscal '18. The increase resulted from single high digit organic net sales growth and the excellent operating performance of our fiscal '19 acquisitions.

Flight Support set all-time quarterly net sales and operating income records in the third quarter of fiscal '19, improving 12% and 18%, respectively, over the third quarter of fiscal '18. These increases principally reflect strong double-digit organic net sales growth mainly attributable to increased demand and new product offerings within our aftermarket replacement parts and specialty products lines.

Cash flow. That's my favorite. Provided by operating income, operating activity was very strong, increasing 46% to $313.4 million in the first 9 months of fiscal '19, up from $214.8 million in the first 9 months of fiscal '18, and we continue to forecast strong cash flow from operations for the rest of fiscal '19.

During fiscal '19, we successfully completed 6 acquisitions and we've completed 7 acquisitions over the past year. As a result of these acquisitions partially offset by the impact of our strong cash flows, our total debt to shareholders' equity increased to 39% as of July 31, '19, and that was up slightly from 35.4% as of October 31, '18, but it remains at a low level giving us great financial flexibility.

Our net debt, which we define as total debt less cash and equivalents, of $581.1 million to shareholders' equity ratio increased 35.4% as of July 31, '19, and that was up slightly from 31.5% as of October 31, '18.

Our net debt to EBITDA ratio increased to 1.11x as of July 31, '19, and that was up from 1.04x as of October 31, '18. I think you will all agree that, that is a very, very low level of debt for a company that is growing bottom line close to 20% annually. We continue to avoid high debt levels and leverage, and I remind you that in no time in our history have we even been at 2x debt-to-EBITDA.

We have no significant debt maturities until fiscal '23, and we plan to utilize financial flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. I remind you that we are a very disciplined acquirer. We do not pay huge multiples for purchases and that is just our DNA and our -- the way we do things, and it has proven to be a successful strategy and we will stick to that model.

In July '19, 2019, that is, we paid a regular semiannual cash dividend of $0.07 a share, and that represented our 82nd consecutive semiannual cash dividend. In June 2019, we acquired 75% of the membership interest of REI, which is Research Electronics International, a designer and manufacturer of technical surveillance countermeasures equipment to detect devices used for espionage and information theft. REI is a part of our ETG group, and we expect the acquisition to be accretive to earnings within the first 12 months following closing.

By the way, if any shareholders out there are concerned about other people bugging their premises or conference rooms, bedrooms, hotel rooms, please get in touch with Victor Mendelson who will put you in touch with REI because REI will be able to pinpoint and shut down that operation instantly. So I've put in a pitch for a fantastic company, a fantastic acquisition that we made recently.

July '19, 2019, we acquired substantially all the assets of a French company called BERNIER, a designer and manufacturer of interconnect products used in demanding defense, aerospace and industrial applications primarily for communications-related purposes. BERNIER is part of the ETG group. And again, we expect the acquisition to be accretive to our earnings within the first 12 months following closing.

As an interesting side note, the team members of BERNIER petitioned the approval process in France to select HEICO as the purchaser because after significant investigation on the part of team members, they found -- they felt strongly that HEICO would be the past acquirer to treat the team members in the best possible way and grow BERNIER. We're very proud of our reputation, which helped us in the acquisition of BERNIER.

I'd like to remind everyone that HEICO does have 2 classes of common stock, both traded on the New York Stock Exchange. Both the Class A Common Stock, which has a symbol HEI. A, and the Common Stock, HEI, are virtually identical in all economic respects. The only difference between the share classes is the holding rights and the Class A Common Stock has 1/10 of a vote per share and the Common Stock has 1 vote per share. Otherwise, they're completely the same.

And now I would 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. Thank you.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [3]

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Thank you very much. The Flight Support Group's net sales increased 12% to a record $320 million in the third quarter of fiscal '19, up from $285.1 million in the third quarter of fiscal '18. The Flight Support Group's net sales increased 13% to a record of $915.5 million in the first 9 months of fiscal '19, up from $807.7 million in the first 9 months of fiscal '18. The increase in the third quarter and the first 9 months of fiscal '19 is attributable to continued strong organic growth of 12% and 13%, respectively, mainly due to increased demand and new product offerings within our aftermarket replacement parts and specialty products product line.

The Flight Support Group's operating income increased 18% to a record $64.8 million in the third quarter of fiscal '19, up from $54.7 million in the third quarter of fiscal 2018. The increase in the third quarter of fiscal '19 principally reflects the previously mentioned net sales growth and the impact from an improved gross profit margin mainly driven by increased net sales and a more favorable product mix within our aftermarket replacement parts product line.

The Flight Support Group's operating income increased 18% to a record $179.8 million in the first 9 months of fiscal '19, up from $152.1 million in the first 9 months of fiscal '18. The increase in the first 9 months of fiscal '19 principally reflects the previously mentioned net sales growth and the impact of an improved gross profit margin mainly driven by a more favorable product mix within both our aftermarket replacement parts and specialty products product line.

The Flight Support Group's operating margin increased to 20.2% in the third quarter of fiscal '19, up from 19.2% in the third quarter of fiscal '18. The Flight Support Group's operating margin increased to 19.6% in the first 9 months of fiscal '19, up from 18.8% in the first 9 months of fiscal '18. The increase in the third quarter and first 9 months of fiscal '19 principally reflects the previously mentioned improved gross profit margin.

Consistent with our past practice of increasing our ownership in certain non-wholly owned subsidiaries, in June 2019, HEICO Corporation acquired the 20% noncontrolling interest held by our partner, Lufthansa Technik AG, in 8 of our existing subsidiaries within our HEICO Aerospace subsidiary that are principally part of the Flight Support Group's repair and overhaul parts and services product line. Pursuant to the transaction, HEICO Aerospace paid dividends proportional to the ownership, which is 80% and 20% to HEICO and Lufthansa, respectively, and HEICO transferred the businesses to HEICO Flight Support Corp., a wholly-owned subsidiary of HEICO. We did not record any gain or loss in connection with the transaction.

Lufthansa's dividend of $91.5 million was paid in cash principally using proceeds from our revolving credit facility. Lufthansa continues to remain a 20% owner in HEICO Aerospace, a designer and manufacturer of jet engine and aircraft component replacement parts.

HEICO Aerospace has grown significantly and generated substantial cash flow since Lufthansa partnered with us nearly 22 years ago. This transaction rewards Lufthansa with $91.5 million in cash and at the same time, permits HEICO to increase its ownership in 8 very successful businesses. Lufthansa has been and continues to be a great partner and great customer of HEICO Aerospace, and we look forward to our continued mutual success. This transaction does not impact the breadth of PMA parts offered by HEICO Aerospace Holdings Corp.

With respect to the remainder of fiscal '19, we now estimate full net year sales growth of approximately 11% to 12% over the prior year, up from the previous estimate of 10% and now estimate the full year Flight Support Group operating margin to approximate 19.5% to 20.0%, up from the prior estimate of approximately 19.0% to 19.5%. Further, we now estimate the Flight Support Group's full year organic net sales growth rate to be in the low double digits, up from the prior estimate of the high single digits. These estimates exclude additional acquired businesses if any.

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 [4]

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Thank you, Eric. The Electronic Technologies Group's net sales increased 16% to a record $216.1 million in the third quarter of fiscal '19, up from $186.4 million in the third quarter of fiscal '18. The Electronic Technologies Group's net sales increased 20% to a record $615 million in the first 9 months of fiscal '19, up from $510.8 million in the first 9 months of fiscal '18. These increases resulted from organic growth of 7% and 13% in the third quarter and first 9 months of fiscal '19, respectively, and the favorable impact from our fiscal '19 acquisitions. The organic growth in the third quarter and first 9 months of fiscal '19 is mainly attributable to increased demand for certain defense and aerospace products.

The Electronic Technologies Group's operating income increased 11% to $62.2 million in the third quarter of fiscal '19, up from $56 million in the third quarter of fiscal '18. The increase in the third quarter of fiscal '19 principally reflects the previously mentioned net sales growth and an improved gross profit margin mainly driven by higher net sales and a more favorable product mix for certain aerospace products. The Electronic Technologies Group's operating income increased 23% to a record $181.2 million in the first 9 months of fiscal '19, up from $147.4 million in the first 9 months of fiscal '18. The increase in the first 9 months of fiscal '19 principally reflects the previously mentioned net sales growth and an improved profit -- an improved gross profit margin mainly driven by increased net sales and a more favorable product mix for certain aerospace and defense products.

The Electronic Technologies Group's operating margin remains strong at 28.8% in the third quarter of fiscal '19 as compared to 30.1% reported in the third quarter of fiscal '18. The operating margin in the third quarter of fiscal '19 is inclusive, by the way, of higher acquisition-related costs associated with one of our recent acquisitions.

The Electronic Technologies Group's operating margin improved to 29.5% in the first 9 months of fiscal '19, up from 28.9% in the first 9 months of fiscal '18. The increase in the first 9 months of fiscal '19 principally reflects an improved gross profit margin partially offset by higher performance-based compensation expenses, the impact of changes in the estimated fair value of accrued contingent consideration and the higher acquisition-related costs as a percent of sales.

With respect to the remainder of fiscal '19, we now estimate full year net sales growth of approximately 18% to 19% over the prior year, up from our previous estimate of 15% to 17%, and anticipate the full year Electronic Technologies Group's operating margin to approximate 29% as compared to our prior estimate of 29% to 29.5%. Further, we now estimate Electronic Technologies Group's organic net sales growth rate to be in the low double digits, up from the prior estimate of high single digits. And these estimates, of course, exclude additional acquired businesses if any.

I'll turn the call back over to Larry Mendelson.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [5]

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Thank you, Victor and Eric. Moving on to earnings per share. Consolidated net income per diluted share increased 20% to $0.59 in the third quarter of fiscal '19, and that was up from $0.49 in the third quarter of fiscal '18. Diluted earnings per share increased 26% to a record $1.76 in the first 9 months of fiscal '19, up from $1.40 in the first 9 months of fiscal '18. These increases reflect the strong operating performance of both segments, Flight Support and ETG.

Depreciation and amortization expense totaled $21.1 million in the third quarter of fiscal '19, up from $19.4 million in the third quarter of fiscal '18 and totaled $61.7 million in the first 9 months of '19 -- fiscal '19, up from $57.5 million in the first 9 months of fiscal '18. The increase in the third quarter and first 9 months of fiscal '19 principally reflects the incremental impact of higher depreciation and amortization expense of intangible assets from our fiscal '19 acquisitions. Further, the increase in depreciation expense in the third quarter and first 9 months of fiscal '19 reflects the impact of CapEx expenditures attributable to the expansion at certain existing subsidiaries.

Research and development expense increased 19% to $16.6 million in the third quarter of fiscal '19, and that was up from $14 million in the third quarter of fiscal '18 and increased 20% to $48.7 million in the first 9 months of fiscal '19, up from $40.7 million in the first 9 months of fiscal '18. Significant ongoing new product development efforts continue at both Flight Support and ETG, and we continue to invest approximately 3% of each sales dollar into new product development. As shareholders of long standing, you know that we feel that R&D expenditures are critical to the future of the company. We will not cut back on R&D expenditure, and we know that we get great returns from these expenditures.

Consolidated SG&A expenses were $93.4 million and $80.2 million in the third quarter of fiscal '19 and fiscal '18, respectively, and the consolidated SG&A expenses were $267.9 million and $231.7 million in the first 9 months of fiscal '19 and '18, respectively. The increase in the third quarter and the first 9 months of fiscal '19 principally reflects the impact of the fiscal '19 and '18 acquisitions, higher performance-based compensation expense, changes in the estimated fair value of accrued contingent consideration and higher acquisition-related costs.

Consolidated SG&A expense as a percentage of net sales was 17.5% and 17.2% in the third quarter of fiscal '18 and '19, respectively -- '19 and '18, respectively. And consolidated SG&A expense as a percentage of net sales decreased slightly to 17.7% in the first 9 months of fiscal '19, and that was down very slightly from 17.8% in the first 9 months of fiscal '18. The increase in consolidated SG&A expense as a percentage of net sales in the third quarter of fiscal '19 principally reflects what I previously mentioned, the higher acquisition-related costs.

Interest expense was $5.5 million in the third quarter of fiscal '19 compared to $5.2 million in the third quarter of fiscal '18 and $16.5 million in the first 9 months of fiscal '19 compared to $14.8 million in the first 9 months of fiscal '18. The increase in the third quarter and first 9 months of fiscal '19 was principally due to higher interest rates partially offset by a lower weighted average balance outstanding under our revolving credit facility.

Our effective tax rate in the third quarter of fiscal '19 was 22% compared to 23.1% in the third quarter of fiscal '18, and our effective tax rate in the first 9 months of fiscal '18 was 17.1% as compared to 17.9% in the first 9 months of fiscal '18. The decrease in our effective tax rate in the first 9 months and third quarter of fiscal '19 is mainly attributable to the reduction in the federal tax rate from a blended rate of 23.3% at fiscal '18 to 21% at fiscal '19, partially offset by the net effect of the provisions of the Tax Act that became effective for HEICO in fiscal '19.

Net income attributable to noncontrolling interest was $8 million in the third quarter of fiscal '19 compared to $6.8 million in the third quarter of fiscal '18 and the net income attributable to noncontrolling interest was $25 million in the first 9 months of fiscal '19 compared to $19.7 million in the first 9 months of fiscal '18. The increase in the third quarter and first 9 months of fiscal '19 principally reflects the improved operating results of certain subsidiaries of the Flight Support and ETG groups in which noncontrolling interests are held. For the full fiscal '19 year, we now estimate a combined effective tax rate and noncontrolling interest of 25% to 26% of pretaxed income.

Moving now to the balance sheet and cash flow. Our financial position and forecasted cash flow remain extremely strong. As previously mentioned, cash flow provided by operating activities was a very strong -- totaling $313.4 million in the first 9 months of fiscal '19, and that cash flow provided by the operating activities increased 21% to $135.1 million in the third quarter of fiscal '19, and that was up from $111.4 million in the third quarter of fiscal '18, and we continue to forecast record cash flows from operations in fiscal '19.

Our working capital ratio improved to 3x as of July 31, '19, up from 2.6x as of October 31, '18. DSOs, days’ sales outstanding, of receivables was constant at 45 days as of July 31, '19, and that was comparable to DSOs July 31, '18. We continue to closely monitor receivable collection efforts to limit credit exposure. I remind you that we have very few if any, credit losses from accounts receivable.

No one customer accounted for more than 10% of net sales, and our top 5 customers represented approximately 21% of consolidated net sales in both the third quarter of fiscal '19 and '18. Inventory turnover of 125 days for the period ended July 31, '19 is comparable to the turnover rate in the period ending July 31, '18.

Total debt to shareholders' equity was 39% as of July 31, '19, compared to 35.4% as of October 31, '18. I mentioned that earlier. Also, net debt of $581.1 million to shareholders' equity was 35.4% as of July 31 compared to 31.5% as of October 31, '18.

Our net debt to EBITDA ratio was 1.11x as of July 31, '19, compared to 1.04 as of October 31, '18. I commented that, that still is a very, very low leverage ratio and we intend to keep relatively low leverage. We have no significant debt maturities until fiscal '23, and we plan to utilize our financial strength and flexibility to continue to progressively pursue high-quality acquisition opportunities to accelerate growth and maximize shareholder returns.

I want to mention that -- something that many, many investors have said to us as we visit with them at various aerospace conferences, and that is that they look at HEICO as a compounding and cash flow generating company. And as you can see, that is, I think, one of the reasons that we sell at a very high multiple.

Personally, I think that we do a very good job with that, and that is the reason I think that we do sell at a high multiple. Some people don't feel that such a high multiple is warranted. Of course, obviously, management disagrees with that and obviously, the marketplace does too. So they set the price of HEICO, we don't.

As we look ahead to the remainder of fiscal '19. We anticipate net sales growth within Flight Support and ETG resulting from increased demand across the majority of our product lines. Also, we'll continue our commitments to developing new products and services, further market penetration and pursuing aggressive acquisition strategy, maintain -- while maintaining financial strength and flexibility.

Based upon our current economic visibility, we estimate our consolidated fiscal '19 year-over-year net sales growth to be in the area of 14% to 15% and net income growth to be 23% to 24%, up from our prior growth estimate in net sales, which was 12% to 13%, and net income of 17% to 18%. I want to just repeat that the revision in net income, in my opinion, is very substantial based upon the success. So we're now estimating 23% to 24%, whereas before, we were thinking 17% to 18%. I think that indicates the strength of our business.

We now anticipate consolidated operating margin to approximate 22%, and that was at the high end of a prior estimate of 21.5% and 22%. We anticipate depreciation and amortization expense to approximate $84 million, and we anticipate cash flow from operations to approximate $405 million, up from the prior estimate of $380 million. And we estimate CapEx expenditure to approximate $31 million. That's a reduction from our prior estimate of $38 million. These estimates exclude additional acquired businesses, if any.

In closing, HEICO's team members have delivered these outstanding results and deserve credit for the hard work and discipline that it took to successfully navigate through another quarter. HEICO's management team has the utmost respect for everything that our team members do to make their company and your company a success.

That is the extent of our planned remarks, and we would like to open the floor to any questions. Thank you very much.

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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 Robert Spingarn with Crédit Suisse.

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Audrey Elizabeth Preston, Crédit Suisse AG, Research Division - Research Analyst [2]

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It's Audrey Preston on for Rob Spingarn. And congrats on another great quarter. All right. So I just wanted to check in first and ask on -- if you've seen any sort of growth related to the MAX, if there's been any sort of unexpected boost just from [crew] utilization rates, more or less, across the existing fleet? And then also moving forward, if we were to see an uptick in retirement rates and potentially an increase in the supply of [new service flow] material on the aftermarket, could that potentially impact your growth expectations going forward as well?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [3]

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This is Eric. I'll take that question. With regard to the MAX, it's very difficult to determine exactly how that is impacting our sales. Yes, with regard to the aftermarket and the replacement parts business, it clearly cannot hurt us. But how much it is helping us is a bit confusing because we are still seeing retirements of older product lines, for example, the MD-80 with the JT8D-200 engine. That does continue to shrink. And some of the older CFM56 engines continues to shrink. So it's very difficult.

It's not, if you will, stopping the retirement. However, it may be slowing them in some areas. The big question is, if it is slowing them, are airlines [inducting] the aircraft, the engines, and the components for maintenance? And are they actually spending more money? And it's very difficult to see what that is.

I get that it is helping us a little bit, but we really don't know frankly to what extent. We do know, however, in our specialty products business that it is actually hurting us a little bit because we do supply some new equipment which goes onto each MAX aircraft. And the demand for that has been reduced. So when you put the 2 together, I -- my guess is, it's not been a significant tailwind, but that, frankly, is just a guess based on the current information that I've got.

For the second part of your question with regard to the [use serviceable], that's always been an issue for us. We do participate a little bit in that industry through our Prime Air subsidiary, so we do have pretty good knowledge and access as to what's going on in that business, and there's a little bit of an offset there if that should improve. However, at this moment, we really don't anticipate a significant impact to our business on either aftermarket replacement parts or repair and overhaul due to any potential increase in retirement of aircraft.

We've already taken, if you will, somewhat of a hit as the result of some of the maturing and the pulling out of these aircraft. So at this point we really don't see anything significant in that area. I don't know if that answers your question, but I'd be happy to expand if you need more color.

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Audrey Elizabeth Preston, Crédit Suisse AG, Research Division - Research Analyst [4]

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Sure. And then, a follow-up for Eric. So you pointed out that there's some pretty strong growth related to new products. So was there anything, in particular, that was driving any outside growth? Or was it more broad-based across the portfolio?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [5]

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I would say that it was fairly broad-based across the portfolio. There were specific products, which did very well, and I wouldn't want to get into them on this call due to competitive reasons, but there are definitely areas of outperformance, I think, due to HEICO's market penetration and competitive advantages. But clearly, there was also a very broad-based increase.

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Operator [6]

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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 [7]

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A great quarter once again. Victor, maybe if I could start with you if that's okay. You've seen great growth. Can you talk about what you're seeing in the defense and space end markets? You're going to run into some comps. And maybe where do you think your revenue growth is versus outlays? Is there still a big lag?

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [8]

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I do think -- Sheila, this is Victor. I do think that there remains a lag between orders and outlays, and that will continue at least for some time. We're doing our budgets for the next year. Right now, our company is just preparing those, so we don't have those yet. But the defense part of our business right now is strong. The general tenor with me on it was very strong. They seemed to be very pleased with what they're -- they've developed, what they have selling and what their quotation rates are and order rates, et cetera. So right now, I'm feeling pretty good about that. And we'll update more once we have the budgets for the next year, but that's how it is at the moment on this side.

On the space side, I would say that's been, in the third quarter, kind of flattish to down a little bit. But it's not kind of unusual quarter-to-quarter to have those kinds of fluctuations. I think sequentially, I believe as we get into particularly the first quarter of the next year, based on where I see orders at this point because that tends to be a longer lead business, I see that to be a strengthening business for us, at least at this point sequentially.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [9]

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And just on defense, one more question, if you don't mind, is there anything you could talk about, areas where trends accelerated or decelerated?

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [10]

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Where trends have accelerated or decelerated, there's nothing in particular. I would say it's pretty much across the board on the growth. I mean there's always a product or a product line. There's always somewhere in the company that's weaker for one reason or another. But I would say, I wouldn't -- I can't really think of anything that stands out on a material basis.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [11]

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Okay. And this is just a more general question for anyone. I mean leverage is pretty low. I guess I know you guys are disciplined in the deals, and that's -- they've been fairly small this year. How do you think about potentially a larger transaction, if there's anything that's an inhibitor to that?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [12]

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So Sheila, we look at all comers. We look at opportunities, big ones, small ones. And as you know, we're opportunistic. We want things that are going to be accretive, both cash flow wise, earnings wise, earnings per share wise. So it really depends on what comes along at a price that we feel is warranted. Again, as I mentioned earlier, we are disciplined not to pay up these -- we're not paying 12, 14x. So in many cases, we just drop out of the competition because we're not going to do it.

But if an opportunity did come along, we would use our leverage, but we would -- the only time we'd do it is where we felt very, very confident that we could delever pretty quickly, and I mean within a year or 2. So we would not -- some companies will sit at 5, 6, 7x EBITDA leverage. We don't intend to do that.

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Operator [13]

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Your next question comes from the line of Gautam Khanna with Cowen.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [14]

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Great quarter. I was curious if you could speak to where we are on the CFM parts development if you've made any progress there. When -- what you see in the market -- selling these products commercially.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [15]

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This is Eric. I'd be happy to answer that question. I think you're referring to the IATA and GE settlement that they had, which we believe provides opportunities for us. We've been actually selling CFM parts into the market for over 20 years, and we -- it continues to be a successful part of our business. We don't like to comment on specific product lines due to competitive reasons obviously, but I can tell you that we continue to have conversations with airlines, and we're, I would say, cautiously optimistic about our future in that space.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [16]

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Okay. Is there anything you can say of their receptivity to purchasing a broader portfolio of parts, or...?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [17]

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I think the airlines, they recognize the monopolistic nature of the replacement parts industry. And in conversation with those airlines, we've helped to educate them on how they pay very high prices. And we show them physical example of the parts, and they are often shocked and stunned when they see how expensive these parts are. So I think HEICO provides a very nice alternative. Our businesses are doing very well. I think it's essential to the cost control of the airlines to have HEICO in there. They understand very clearly that if HEICO were not a competitor, they would be paying even significantly higher prices than they're paying now. So I think that our presence in the market is absolutely necessary. And frankly, you could talk to any airline out there and I think that they would agree 100%. So the opportunities are vast. We're a very small part of the industry. We think that there's a lot of potential out there and you can see from our growth rate over the years and the growth in the earnings and the share price and the revenue of the company, sort of the wind behind our backs. And we anticipate that, that's going to continue really regardless of the particular product. The IATA GE settlement, I think, was very important because it shows other manufacturers that it's not accepted, and also we chose the airline that what we are doing is endorsed and absolutely needed. So frankly, I think we're going to continue to do very well as our results have shown.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [18]

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And one last one for me. If you can just comment on aftermarket demand broadly, if maybe -- was there any major regional difference, or anything you could speak to within the product portfolio, more discretionary versus nondiscretionary thoughts. Anything you can give us some insight (inaudible) or flavor on the aftermarket.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [19]

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Sure. I would be happy to. I would say that in the aftermarket replacement parts area, the volume continued to be very strong in terms of developing additional new products. We're finding a lot of opportunities out there. It's very broad-based. It's in engine. It's in non-engine. It's in what all the airlines need and use. So we're continuing to find those opportunities and develop them very successfully and get them sold to our customers.

So I would not say that it was really due to any regional area of particular strength or weakness. There's always variability in those markets due to maintenance cycles that occur. Sometimes one area is stronger than another due to a whole variety of reasons. But I would say that it really is extremely broad-based. We're doing well in all areas of the market. And also, I'm particularly encouraged with newer airlines who haven't had the experience in performing much maintenance, I think we're gaining a very nice amount of traction as they realize how expensive these assets are to operate.

So I think it's really across-the-board. I'm really very pleased with our team and our businesses. I think they're executing across the board very well.

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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 Corp., Research Division - MD and Senior Aerospace & Defense Analyst [21]

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I wanted to first start with a question for Carlos if I could. Can you quantify what the impact was in the quarter with ETG margins from the accelerated amortization and accounting adjustments from the recent acquisitions?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [22]

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Yes. I think for Q3, roughly, Ken, we had about $2 million worth of acquisition costs that -- we typically -- we did a foreign acquisition, and to deal with all the regulatory environment over in France, it was a little bit more expensive. Great company we bought. But the reason we call it out is the truth of the matter is if you added that back in -- which we don't do on our releases -- but if you added that back into the operating income, you'd see that our margins are pretty consistent period to period.

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

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Okay. That's helpful. And is it -- does the guidance imply a similar amount in the fourth quarter? Or does it step down in the fourth quarter assuming no other acquisitions?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [24]

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Well, we've assumed no other acquisitions in our guidance, so no. Maybe -- no, we haven't, in our guidance, assumed any acquisitions in Q4.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [25]

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Okay. Yes, no. I realize that. But should we assume a similar $2 million headwind in terms of the margins within ETG?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [26]

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No.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [27]

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Okay. Okay. That's helpful. And then, with the, I guess, the buyout or the acquisition of the minority interest held by Lufthansa -- Lufthansa Technik, what does that do? I know you gave an assumption for sort of your full year tax and minority interest, but how should we think about that on a steady-state basis now?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [28]

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I think it's interesting. We reduced our estimate for combined tax and noncontrolling interest by about 1%. About half of that was related to changes in tax laws. Remember, at our fiscal year-end, we had a higher tax rate than most other corporates at 21% last year. We had that blended rate [23 end of tax.] So it's a combination of a decrease in the stat rate on the federal side, and then we will pick up a benefit from those businesses coming on board and not having to allocate their earnings to a noncontrolling partner in those businesses. However, you have to remember that we borrowed money to buy them out. So there's an interest component to it also.

So net-net for this year, it's not too impactful. As we do our budgets and we look forward to the following fiscal year, I'll have a better answer for you. But right now, with the interest charge against those earnings, it's roughly a wash.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [29]

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Okay. That's helpful. And if I could, Eric, I know you stated in your remarks that the act or the change now with Lufthansa doesn't have any implication for sort of the long-term or strategic relationship, but can you just comment on why now and was there anything, in particular, to read into that? And then second, it sounds like it was really just within the repair businesses, I think you mentioned 8 repair businesses. If you can provide any more color around that and the nature of the transaction, that'd be helpful.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [30]

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Ken, it's Eric. I would be happy to do that. To answer your question, yes, it was primarily the repair businesses and really almost exclusively the repair businesses. And we have an outstanding relationship with Lufthansa and Lufthansa Technik. They invested originally about $50 million in HEICO approximately 22 years ago. The relationship is incredibly strong. They are a great customer, a great partner. As the business has grown, I would say Lufthansa's percentage of our sales, of course, as we sell a lot of products to other people, has decreased. And Lufthansa, as you probably have read, is having some challenging times over in the European market right now. HEICO has tremendous cash generation. Frankly, the company built up a lot of cash and it was time to pay it out. And HEICO was happy to -- we did not need the cash. I think, frankly, Lufthansa -- it would be helpful if they don't need it. They're doing extremely well, and I think they're going to continue to do well. But probably to have this cash and the gains is probably helpful to them as well. This does not impact our partnership and our strategic relationship on our PMA business. That continues, and we're very aggressive in development of new parts for Lufthansa. But frankly, the repair business was not as core to that. And it just sort of continues on basically the same thing that we did roughly 5 years ago on some other non-PMA core businesses that we acquired as a result of another dividend in HEICO Aerospace Holdings Corp. I don't know if that answers your question.

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Operator [31]

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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 [32]

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Nice quarter. Maybe, Eric, just to stay on that topic. I mean, do you guys consider buying out the remaining portion of Lufthansa's interest over time? I mean, is that a consideration as you look at capital deployment, look at certainly market multiples, what's out there, what might be the best sort of accretive moves you guys can make?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [33]

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Yes, Mike. At this moment, we're not having any discussions with Lufthansa about repurchasing their remaining stake. I think they're very happy with it, we're very happy with it. I might add, I think that our relationship with Lufthansa goes well beyond their investment in the company. They've been a great customer of HEICO's for over 40 years. So I anticipate that continues to move forward and continues to develop.

Anything is possible in the future, but it's not something that we're contemplating. I think they're very happy. They recognize the strategic nature of the PMA business. We always said that the PMA business, their investment was a lot more strategic in nature than the other businesses. The other businesses were great, and it was very helpful to have them as a partner and a customer. But it was really the PMA area which had the most interest from them. And frankly, they've -- we've done well, and they've done extraordinarily well. They've gotten huge dividends, and I think they're very, very happy with their relationship with HEICO.

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [34]

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Ken, this is Carlos. I just wanted to just make 1 point. Just because we required those interests, doesn't mean that Lufthansa still doesn't send business and utilize the services that we have in that repair group. That relationship is not impacted by this. Just as Eric pointed out, there's a dividend to reward them for many years of partnership with us, and we chose to take our dividend in kind, which -- with certain businesses. So I wouldn't view that as a relationship-impacting move at all. In fact, it's probably neutral to the whole thing.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [35]

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Got it. And then just maybe to follow-up. I think from a market share perspective, I think last quarter, you guys noted that you were picking up some share in distribution, picking up some share from other PMA providers. And even -- I guess, how should we think about potential opportunities for PMA within the Department of Defense given that one of the larger players there has come under some scrutiny and investigation for their pricing. Does that create some opportunities to gain real share in the DOD world with PMA parts?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [36]

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This is Eric. I think that it does. We've sold parts to the Department of Defense and offer tremendous savings opportunities to them. We continue to do very well in that area. The DOD understands what opportunities exist. And if they want to do more, they clearly can go ahead and do more. I think one of the things that's been talked about is if the DOD wants to encourage competition, they need to approve the use of other material. And if they restrict themselves to a single supplier, then, of course, that has pricing implications, and they pay higher prices. And I think intelligently so, other suppliers have said, "Hey, our price is our price, and if you want to buy these parts elsewhere, you have to go ahead and approve other people and go ahead and do so. It's a free world." And the DOD, they're very smart. And I think they -- they've got that option. If they want to do it, they can do it. And if not, they can sit with their current practice. But I think we're going to continue to do very well.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [37]

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Got it. And then just, Eric, the process getting PMA parts approved, I mean, is it similar to the commercial world? Is it easier in the DOD world? I mean, just trying to get a sense of if DOD came to you today, I mean, how long does it take for you guys to PMA a part? Are there -- is there more regulation, less regulation? How do you look at that side?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [38]

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Yes, I would say that it's somewhat similar. Nothing in our business is easy. We offer great savings opportunities to a lot of people. And if it were easy, I think that they would take greater advantage of it right away. It's extremely difficult. They want to be very, very careful. I mean, these platforms have to work, obviously, just as commercial aircraft have to work, just as rocket engines and missile defense systems have to work. So they're very, very careful. I think that they're very confident in HEICO. And they need to decide to really allocate the resources to approve these alternatives. So I think that we're going to do well. It's different, but I would say, in general, consistent with what we do with commercial airlines.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [39]

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Got it. And then just last one for me here, and I'll get out of the way. Just on the margins in FSG, I mean, you guys are getting great incremental margins in the upper 20% range. Is that -- I mean, I know you guys, you just kind of break out 55% of that group or so, give or take its part. I mean, is it all volume from parts, or are you actually getting some margin lift on the repair and overhaul side as well?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [40]

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I'd say -- I'll let Carlos answer, but I can tell you that we are getting both. I would say though it's more coming from the parts and the specialty products business. Repair is a very competitive area. You don't have some -- if you will, the same efficiencies that you would have, the volume efficiencies that you'd get over on the parts side. But I would say that it's really, one is mix, but the other, we continue to focus and develop proprietary repairs and parts which generate significant value to our customers. So I think that we're able to capture slightly higher margins when we're able to do that, and the customers seem to be really, if you will, clamoring for a lot of the new products that we have coming out. We just had a sales meeting last week, and if not for this call due to competitive reasons, but I can tell you that a lot of the products that we are coming out with are really tremendous value generators for our customers. And I think a lot of stuff that people would not really have expected us to do. And we're really doing well. We're winning a lot of business. So I feel very good about our margins.

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Operator [41]

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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 & Portfolio Manager [42]

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I have a quick question for Carlos. If you could just please offer a little bit of anecdotal color, perhaps some of the subsidiary level on 2 line items in the cash flow statement, one on the inventories and the other on the CapEx. You're getting pretty good kind of differentials there year-on-year. I'm just trying to understand what's informing that, and I just had a quick follow-up.

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [43]

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Well, I would say on the inventory line specifically, I think our subsidiaries are experts at managing working capital. If you recall from our prior conference calls, we bulked up on inventory a little bit towards the end of our fiscal '18 period because we knew coming into '19 we'd have high demand, and we did that intentionally. And so what you see now is you see some, what I would say, maybe a little bit more normalization in our inventory levels relative to the growth in the company, and we think that's good. That's not something that we're sitting here hoping and pushing buttons. That's the guys down in the field managing it and managing our working capital. So we're very proud of them and I'm glad you pointed that out -- that particular issue out, which is a good one to have.

Additionally, you asked about CapEx. That's -- I've got to be honest with you, I know these numbers inside and out and upside down and sideways, but the one area that always surprises me is our CapEx spend. Our guys in the field are entrepreneurs at heart, in nature, and from birth. And if they don't have to spend a penny, they don't do it. And by the way, when they have to spend that penny, they contemplate, do I buy a new machine, or do I buy maybe one that's a few years old and put a few bucks into it and it'll operate and do exactly what the new machine does? They tend to gravitate towards a more frugal standpoint, and they'll typically buy some used equipment. I'm not saying everybody does that, but that's a conundrum I face when I look at our CapEx. The guys budget for new equipment is -- as I would want them to, and we give them everything they need to grow their businesses and be successful. They tend to underspend. They tend to gravitate to a less expensive piece of equipment. Not a less effective or lower-quality piece of equipment, but they tend to gravitate towards the lower cost choice, and that's just in their nature. So that's why our CapEx spend was a little bit lower than what we had anticipated this year, and that's why we brought guidance down. I would say maybe for the year, I think were roughly 1.5% of our revenues, and that, historically, has been about the spend if you look back many years over time. So that's the -- I hope that answers your question. That's my comments on that topic.

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director & Portfolio Manager [44]

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Yes. Just as a quick follow-up. I wanted to just kind of pull the management team from a new business growth perspective and perhaps I can kind of cut it both ways. And I don't know who is best-positioned to kind of cover this, but here it goes. From an M&A standpoint, you guys -- to move the needle going forward, you're going to need some margin [nails]. Stock has had a great run. Healthy multiple. Can you remind us your stance on using stock as currency to perhaps widen the aperture for incremental M&A? And then secondarily, I was curious on the potential opportunity to penetrate more DOD business. Eric had some good comments there. And I guess my thought is before you would perhaps have the opportunity to PMA a part or something like that, could you perhaps have an easier entree with a service-based business like distribution or something like that as an initial tip of the spear before kind of bringing other parts through the door?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [45]

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So let me answer your first question about using stock or cash for acquisition. We have traditionally liked to use cash because all of our acquisitions are accretive in the first year, and that's our style and our discipline. And if you have accretive acquisitions, by giving cash and having strong cash flow, we'd rather not give out stock because we feel that the accretion and the acquisition is going to make the stock more valuable. So it's -- for us, it's not a good strategy -- has not been a good strategy to give out stock. Now you could say selling at our multiple, it might be a good idea to give out stock. And so in future acquisitions, we always consider the benefit between cash and stock, and we make a decision as to -- part of the decision is what does the seller want. Historically, a seller is looking for a liquidity event and because we can give them a liquidity event without saying your deal is subject to us getting financing, it gives us a big leg up when competing with somebody else who says, well, let me get to financing it, bop bop bop, and we can just sign a contract. So cash has been a great tool. The seller likes it, and we like it. So it's a win-win for both of us. But in the future, again, we would consider giving stock for the right transaction. So every deal is different. There are no 2 deal the same. And every deal is analyzed from a cash or stock perspective. So now the -- I hope that answers your question. Is that okay?

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director & Portfolio Manager [46]

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Yes. And then just on the DOD penetration, certainly...

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [47]

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So Eric -- Eric will take that.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [48]

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That's a very good question. And we are very active with the DOD, supporting them over on our distribution and defense sustainment component repair as well as the parts -- aftermarket parts side. So we continue to do very well. We have many avenues into the DOD and many different touchpoints there. So I think that does offer us very good opportunity to increase our penetration with the DOD as well as with other militaries around the world. We're also very strong. Typically, we are licensed by the original manufacturers of the defense platforms, and we do sell to many of the U.S. allies worldwide as well, offer them -- offering them these products. So if that answers your question.

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Operator [49]

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Your next question comes from the line of Louis Raffetto with UBS.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [50]

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So I just want to follow up on Ken's question about the implied margins for ETG in the fourth quarter. There's no -- I mean, obviously, there's no other costs. So is there anything you see bringing those margins down even more from where they were this quarter that was impacted?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [51]

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Louis, this is Carlos. There's nothing. We're assuming for the rest of the year, it's going to be 29% range. We're -- generally speaking, we're satisfied with those kind of margins. I don't think that there's any implied decrease or anything like that in the guidance that we've given, and I think that we're going to continue to have the same type of growth and performance we've had throughout the year, which we're pushing to maintain the margins that we have in Q3 going forward.

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [52]

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And just to add to what Carlos had to say -- Louis, this is Victor. To me, I don't see any difference between 29% and 29.5% margins as a practical matter. I mean, they're incredible. The performance our people put in is nothing less than remarkable. And you've heard them say this before, I mean, I just don't watch it that closely and split the hairs like that. And I'll also point out that we have, what Carlos, probably 400 -- 4 points -- 400 basis points of...

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [53]

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Amortization.

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [54]

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Of amortization. So that number is really like 33-or-so percent. Whether it's 33%, 33.5%, I just -- to be honest, we just don't run the company that way.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [55]

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And one other follow-up question, I guess. The organic growth has been strong across both businesses. I guess my question had -- was more for FSG. I know you did DOD acquisition about a year ago. It was $20 million. You did Decavo back in February. I guess it is. They're both pretty small businesses. But over the last 4 quarters, you've only had about $4 million of sales. So it seems a little bit light. So I just want to make sure if there was anything specific going on there. I know you had some issues earlier on, but...

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [56]

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We're -- the numbers are, I suppose as you point out, both businesses are doing very nicely. ODE did have some issues when the FAA shut down roughly a year ago. There was a delay on getting some of their licenses moved over. All of that's been completed for a while now. The business is doing very well, and I'm very, very happy with both of those acquisitions. I think that we've got great opportunities. We take the long view in these businesses. Sometimes, there are short-term fluctuations, and we stand by our management teams. And I can tell you that I am really, really excited, without getting into any specifics, on those businesses and the future of those businesses. We've got products coming out that are, frankly, remarkable and I feel really, really good about them. Sometimes, there can be a longer period that it takes for something to come to fruition, but we still very much believe in those companies, and I would definitely do them again.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [57]

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Great. One last cleanup. Carlos, I know you mentioned the NCI would likely come down as a result of the Lufthansa stake. Is that the same on the balance sheet, I guess, side? Are we going to see that number drop, I guess?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [58]

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No, you won't see it. You'll see it on the balance sheet in equity, Louis, because their ownership interest in HEICO aerospace was a permanent investment. And so you'll see the dividend come out through our permanent equity, not through the redeemable noncontrolling interest. So it will show up there. And...

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [59]

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Yes, but not through the redeemable NCI, but the noncontrolling interest that (inaudible)? Okay, perfect.

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [60]

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And then, as far as the -- we'll see. We're still -- we're in the budgeting process right now, so we'll see how that plays out for next year. What we're seeing right now is that our partnership businesses are knocking on all cylinders right now. So we've had pretty good lift in that noncontrolling interest charge going out as a result of the success that we're having in the marketplace. So that's driving -- that's actually working against me. It's taking away earnings as a result of the success that they're having. And then, of course, we have this earnings add back, if you will, for the businesses that we just took back to our dividend. But as I mentioned earlier, the impact of that because of the interest carry on that particular acquisition or dividend that we took is roughly going to be a push for this year. And then I'll give -- I'll have to give guidance for next year. It's going to be positive, by the way. I just -- until we get out budgets done and we know what the businesses are going to do, it would be irresponsible for me to try and estimate that right now on a call.

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Operator [61]

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

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [62]

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Once again, fantastic quarter.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [63]

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Thank you, George.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [64]

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And Carlos and Eric, I heard what you said about the margin, and I agree on 29.5% versus 29%. 50 basis points is really not that big a deal. And I'm going to nitpick here, so just bear with me. If I look at Q2 in ETG, the margin was 31.4% and based on your guidance here for the full year, it implies that Q4 is going to be roughly around 27.5%. So about 400 basis points. Can I ask what moves around within ETG maybe within the space, defense or other industries that the product mix would, or price and what have you, would switch the margins around like that? And again, great quarter. Just trying to understand what some of the profit variances might be within ETG.

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [65]

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So George, it's a good question. It's similar to the one that Louis asked a while ago. As we've always had within Electronic Technologies Group, it's a lumpy business, primarily because the business is heavily weighted towards defense. We do a lot of work for a lot of big clients and sometimes those orders push out on time, sometimes they get delayed, not for anything that we're doing, but because of their schedules. And so based on our backlog and based on what we see, that's what drives these estimates and these forecasts that we're giving to you. So I think you're always going to see -- I think it's very difficult, and it's -- and you've been with us for a while and you saw with the company, it's very difficult on a quarterly basis to analyze and project based on a quarter. You have to look at the ETG based on a year and as you probably noticed over the last 3 or 4 years, that margin has crept up. It's crept up to -- it's crept up as a result of leverage on some of our fixed costs and our -- and our margin has improved -- our gross margin has improved because of product mix.

Those things, as Victor has pointed out, look relatively sustainable and very positive. We're in a very good environment and market for the company. But to try and look at an individual quarter, given the types of businesses we have, and then assume that, that's going to be the norm, due to the lumpiness in the business, I think that's the wrong way to look at the ETG. So that's my 2 cents. I don't know if you have anything else...

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [66]

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Yes. And -- this is Victor, and just to add to that, I mean if you go back and you look at our first quarter of the year, I think it was a 28% operating margin in the first quarter of the year. So -- and you go back and you look at '18, the first quarter of '18 was 20 -- between 27.5% and 28%. And we see that a lot. And you go back over time, it's one of the things that I try to guide people to expect, is you'll see that variability, and it's been the case historically in the margin. We really focus on the year and producing efficiently throughout the course of the year, so we really don't take any steps to manage or smooth it out. We try to maximize profitability, and it's just where things tend to fall. And that will be the case going forward. And I've said in the past, that it's best (inaudible) with this business. And that will, I believe, always be the case. And it's where the customers want shipments. It may be where our components arrive. It may be other factors. But generally, that's what we're looking to do, I would say, we expect to do year-over-year. And again, if you look at our full year guidance on the margin, it was held back by a couple million dollars on transaction costs, which acquisition and transaction costs, onetime acquisition transaction cost.

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Operator [67]

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Your next question comes from the line of John Frank with Fort Baker Capital.

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John Frank;Fort Baker Capital LLC;Analyst, [68]

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Job well done on another set of very impressive results. All my questions have been -- (inaudible) all my questions have been answered, but just wanted to circle back on the discussion between the 2 share classes. Just, is there any -- what's the reason for the A shares to be trading at over a 30% discount to ATI?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [69]

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So the answer is we don't know. We don't understand it either. We've had many -- the biggest investment banking firms in the country have looked at it. They claim that the difference is the liquidity, and the people prefer to buy the ATI, and they pay a premium for the liquidity. That is their -- that's the investment bankers' answer. I suspect it's something a little bit different, and that is that as a result of HEICO's success and so forth, many funds and many large investment funds and institutional investors have owned the stock for close to 20 years. And when we came out with HEI. A in 1999, we did an offering, HEI. A was actually trading at a higher price than HEI. A lot of institutional investors have held, and you can just check the records, go on Yahoo! or Google or wherever you want, and you see that these institutions who have held onto it and won't sell. As a matter of fact, I get -- occasionally I get traders calling me and saying, "Oh, I'd like to buy a block of A, and you know where I can get $500,000," and so forth. And I don't know. So I think it's just the fact that some people have such large profits. They don't want to give it up. They want to continue their interest in the company, and that's my own belief. But maybe the investment bankers are right. Remember, we don't set the price of HEI. A, and on day 1, the derivation of HEI. A was that in 1998, we distributed 1 share of A for every 2 shares of HEI. So -- and at that moment, everybody had exactly the same thing. So it was up to the marketplace to differentiate the price. But the answer is we really don't know.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [70]

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And by the way, this is Eric. I'd also like to point out to our shareholders and our team members that if they like the company and they like HEI, there is an opportunity to buy HEI. A at a 20% savings, so...

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John Frank;Fort Baker Capital LLC;Analyst, [71]

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(inaudible) I think 30%.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [72]

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Yes. So I think it provides really a great opportunity for people to be able to buy the stock at a 20% discount. And...

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John Frank;Fort Baker Capital LLC;Analyst, [73]

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And to make -- sorry to interrupt, to make sure, the economics are exactly the same between the 2 securities?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [74]

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That is correct. They are identical. The only difference is the vote. The common has 1 vote per share and the HEI. A has 1/10 vote per share. So unless somebody assigns such a value to the common, they can buy the same thing at a 20% discount. It seems like a no-brainer to me.

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John Frank;Fort Baker Capital LLC;Analyst, [75]

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Sure. And given the concentration of HEI, I struggle to put much value on the value of a vote.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [76]

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Right. We agree.

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Operator [77]

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We have a follow-up question from Gautam Khanna with Cowen.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [78]

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Yes. Actually, as a follow-up to the prior question, have you guys ever contemplated just repurchasing A, either issuing more common, because that would just be an accretive move out of the gate, wouldn't it?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [79]

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Well, Gautam, the problem with that is that the issue common -- to buy Class A, that we can do. But the issue with common, of course, is a process, a laborious process and so on, and that could potentially put pressure on the common, right? Introducing more supply of the common stock. So I'm not so sure that the common holders would be thrilled to hear we were issuing common and buying into Class A. And particularly, you have a lot of common holders saying, gee, Class A holders have bought the stock, let's say of late, over the last few years, at a discount, and then you're doing that to sort of push up the Class A at the -- potentially at the expense of the common, so it's something we've looked at. And it's not the first time we've had the suggestion, but we just don't think that, that would be the right...

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [80]

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There's another thing too. We're in the mode to expand HEICO and make it a larger company, more profitable, more cash flow. And you can't do that by buying in your shares and shrinking the company. So it's really a choice. Do we want to spend money by buying shares? What you're suggesting, buy one and sell the other, and what Victor suggest would happen I believe is true. And that's -- also, that, to us, sort of smacks of financial manipulation. We are not in the business of financial -- we have never done financial manipulation with HEICO. Some companies do, we don't. And the market sets the price, and they buy the A because it's 20% or 30%, whatever it is, less. And we just let the free market set its own price. So all of those things go against the way we have decided to run the company. I think it's more important for shareholders to look at the gains and the very significant gains on whatever shares they own rather than to be thinking about, oh, if they buy this in and sell that thing and do all this financial engineering, that's why we're buying HEICO because of financial engineering. We really want to run a very, very strong company and not be financial engineers.

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Operator [81]

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(Operator Instructions) At this time, there are no further questions on queue. Presenters, you may continue.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [82]

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Okay. So I do want to thank everybody who tuned in to this call, and we appreciate your interest in HEICO. We are available to answer questions, Carlos, Eric, Victor, and myself. If you have any specific questions, we are available to answer them.

Again, we thank you for all your interest, and we look forward to speaking to you on the -- actually, our fourth quarter, I guess, will be in December, sometime in December when we have year-end and the fourth quarter.

So thank you. Enjoy your Labor Day Holiday, and we will all be in touch. Thank you.

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Operator [83]

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Thank you. And that concludes HEICO Corporation Third Quarter 2019 Earnings Conference Call. You may now disconnect.