Laurans Mendelson – Chairman & CEO Eric Mendelson – Co-President, Director; President and CEO of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. Victor Mendelson – Co-President & President of Electronic Technologies Group Tom Irwin – Senior Executive Vice President.

J.B. Groh – D.A. Davidson & Co. Tyler Hojo – Sidoti & Company Arnie Ursaner – CJS Securities Julie Yates – Credit Suisse Ken Herbert – Canaccord Genuity Herbert Wertheim – Brain Power Inc. Michael Ciarmoli – KeyBanc Capital Markets Sheila Kahyaoglu – Jefferies & Co. LLC Jim Foung – Gabelli & Co.

Stephen Levenson – Stifel Nicolaus Michael Derchin – CRT Capital Group.

Ladies and gentlemen, thank you for standing by, and welcome to the FY ‘14 third quarter earnings results and first 6 months of FY ‘14 conference call. [Operator Instructions] Your host today is Laurans Mendelson, Chairman and Chief Executive Officer of HEICO Corporation.

Certain statements made in this call will constitute forward-looking statements which are subject to risks, uncertainties and contingencies.

HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to lower demand for commercial air travel or airline fleet change or airline purchasing decisions which could cause lower demand for our goods and services, product development or products, specification cost and requirements which could cause an increase to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or Homeland Security spending by US and/or foreign customers or competition from existing and new competitors which could reduce our sales, our ability to introduce new products and product pricing levels which could reduce our sales or sales growth, product development difficulty which could increase our product development costs and delay sales, our ability to make acquisitions and achieve operating synergies from acquired business, customer credit risk, interest and income tax rates and economic conditions within and outside of the aviation and space, medical, telecommunications and electronic industries which could negatively impact our costs and revenues, defense budget cuts which is could reduce our defense-related revenue.

Those listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission including but not limited to the 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, further events or otherwise except to the extent required by applicable law. Thank you. I will now turn the conference over to Mr. Mendelson. Please go ahead..

Thank you very much, and thank all of you on this call for joining us. We welcome you to the HEICO third quarter FY ‘14 earnings announcement teleconference. I am Larry Mendelson.

I am Chairman and CEO of HEICO Corporation, and I am joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; Tom Irwin, HEICO's Senior Executive Vice President; and Carlos Macau, our Executive Vice President and CFO.

Before reviewing our third quarter operating results in detail, I would like to take a few minutes to summarize the highlights of another record-setting quarter.

Our consolidated third quarter FY ‘14 net sales and net income represent record quarterly results, driven principally by record sales within electronic technologies and continued year-over-year growth in net sales within our flight support group.

Consolidated net sales, operating income, and net income in the first 9 months of FY ‘14 also represent record results, principally driven by record net sales and operating income within flight support and electronic technologies.

I would like to point out that in spite of some people, investors believing that the bud is off the rose in terms of aerospace, commercial aerospace, HEICO's annual sales to the commercial aerospace industry have increased by over $100 million in the last 12 months, and approximately 60% of that is from organic growth.

Consolidated third quarter FY ‘14 net income and operating income are up 15% and 4%, respectively, on a 9% increase in net sales over third quarter of FY ‘13. Consolidated net income and operating income in the first 9 months of FY ‘14 are up 23% and 17%, respectively, on a 16% increase in net sales over the first 9 months of FY ‘13.

Consolidated net income per diluted share increased 14% to $0.49 per share in the third quarter of FY ‘14, up from $0.43 in the third quarter of FY ‘13 Our ETG Group set an all-time quarterly net sales record in the third quarter of FY ‘14, improving 17% over the third quarter of FY ‘13.

And that increase principally reflects organic growth of about 9% and additional net sales contributed by a FY ‘13 acquisition. Cash flow provided by operating activities increased by 38% to $127.2 million in the first 9 months of FY ‘14, and that was up from $92.3 million in the first 9 months of FY ‘13.

As of July 31, 2014, the Company's net debt to shareholders equity ratio was 49%, with net debt which we say is total debt less cash of $365.4 million.

In June 2014, a subsidiary of our flight support group acquired certain assets and liabilities of Quest Aviation Supply, and that is a niche supplier of parts, predominantly PMA parts to repair thrust reversers on various aircraft engines.

In July of 2014, we paid our 72nd consecutive semiannual cash dividend since 1979, and that dividend was at the rate of $0.06 per share.

In July 2014, we were pleased to report that Forbes Magazine had named HEICO as one of the World's 100 Most Innovative Growth Companies for 2014, making HEICO the only Company listed in that category under aerospace and defense.

The recognition is a true testament to the expertise and innovative spirit of our more than 4,000 team members, and I express my deepest appreciation for their remarkable efforts and their dedication.

While this is the first time that HEICO has been included in the selection of the Best Performing companies under $10 billion in market cap, it complements the 7 years that HEICO has been included in either list of Forbes 200 Best Small Companies or Forbes 100 Best Small Companies.

At this time, 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 that group..

Thank you. The flight support group's net sales increased 6% to $191.6 million in the third quarter of FY ‘14, up from $181.3 million in the third quarter of FY ‘13 The increase in the third quarter of FY ‘14 is attributed to additional net sales of $6.5 million from a FY ‘13 acquisition, as well as organic growth of approximately 2%.

The organic growth in the third quarter of FY ‘14 principally reflects increased market penetration from new product offerings, further building upon our 17% organic growth posted in the third quarter of FY ‘13.

The organic growth in the third quarter of FY ‘14 consists of strong net sales growth within our aftermarket replacement parts and repair and overhaul services product lines, partially offset by softer demand for certain defense-related products in our specialty products lines.

The flight support group's net sales increased 19% to a record $568 million in the 9 months of FY ‘14, up from $475.6 million in the first 9 months of FY ‘13. The increase in the first 9 months of FY ‘14 resulted from organic growth of approximately 12%, as well as additional net sales of $37.7 million from a FY ‘13 acquisition.

The strong organic growth in the flight support group principally reflects new product offerings and favorable market conditions in the commercial aerospace sector, resulting in net sales increases in our aftermarket replacement parts and repair and overhaul services product line, and our specialty product lines.

Over the past 12 months, the flight support group's organic growth has exceeded 10%, which we estimate to approximate 1.5 to 2 times the market growth.

The flight support group's operating income increased 5% to $34.2 million and 19% to a record $103.3 million in the third quarter and first 9 months of FY ‘14, respectively, up from $32.6 million and $87.2 million in the third quarter and first 9 months of FY ‘13, respectively.

The increase in the third quarter and first 9 months of FY ‘14 principally reflects the aforementioned net sales growth. The flight support group's operating margin was 17.9% and 18.2% in the third quarter and first 9 months of FY ‘14, respectively.

It was comparable to the operating margins of 18% and 18.3% in the third quarter and first 9 months of FY ‘13. Now we 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..

Thank you, Eric. The Electronic Technologies group's net sales increased 17% to a record $102.1 million and 12% to a record $279.3 million in the third quarter and first 9 months of FY ‘14, respectively, up from $87.4 million and $250.2 million in the third quarter and first 9 months of FY ‘13, respectively.

The increase in both the third quarter and first 9 months of FY ‘14 reflects additional net sales of $6.8 million and $19 million, respectively, from a FY ‘13 acquisition and organic growth of 9% and 4%, respectively.

The electronic technologies group's organic growth in both the third quarter and first 9 months of FY ‘14 reflects increased demand for the product offerings, across substantially all of the markets that ETG serves.

The electronic technologies group's operating income was $21.5 million in both the third quarter of FY ‘14 and FY ‘13, and increased 9% to $62.5 million in the first 9 months of FY ‘14, up from $57.3 million in the first 9 months of FY ‘13.

The increase in the first 9 months of FY ‘14 reflects the previously mentioned net sales growth, partially offset by a less favorable product mix. Furthermore, during the first 9 months of FY ‘14, we reduced the estimated contingent consideration and impaired certain intangible assets associated with the previously referenced FY ‘13 acquisition.

The impact of these adjustments, net of lower than expected operating income from the FY ‘13 acquisition, resulted in a $0.05 and $0.10 benefit in the third quarter and first 9 months of FY ‘14.

The reduction to contingent consideration effectively means that we no longer believe it is probable that a significant earn-out payment will be made to the previous owners of Lucix.

We believe the long-term outlook for Lucix, which is a strong and profitable business remains attractive, despite the short-term backlog hurdles and general lumpiness of demand seen from time to time in the commercial satellite industry.

The ETG's operating margin was 21% and 22.4% in the third quarter and first 9 months of FY ‘14, respectively, as compared to 24.6% and 22.9% in the third quarter and first 9 months of FY ‘13, respectively.

Operating margins remained strong, but decreased in the third quarter of FY ‘14 due to the previously mentioned less favorable product mix, including the overall impact of the FY ‘13 acquired business. I will turn the call back over to Larry Mendelson..

Thank you, Victor. Moving into some of the details, diluted earnings per share. Consolidated net income per diluted share increased 14% to $0.49 and 21% to $1.32 in the third quarter and the first 9 months of FY ‘14, respectively. And that was up from $0.43 and $1.09 in the third quarter and first 9 months of FY ‘13, respectively.

The increase in the third quarter and the first 9 months of FY ‘14 principally reflects the previously mentioned consolidated sales growth, as well as the net benefits from the previously referenced ETG acquisition.

Depreciation and amortization expense increased by $2.6 million and $10.4 million in the third quarter and first 9 months of FY ‘14, respectively, up from $9.5 million and $25.9 million in the third quarter and first 9 months of 2013, respectively.

The increase in both periods principally reflects higher amortization expense of intangible assets recognized in connection with our FY ‘13 acquisition.

R&D expense increased 15% and 20% to $9.9 million and $28.3 million in the third quarter and first 9 months of FY ‘14, respectively, up from $8.5 million and $23.5 million in the third quarter and first 9 months of FY ‘13, respectively.

Significant ongoing new product development efforts are continuing at both flight support and ETG, as we continue to invest between 3% and 4% of each sales dollar into new product development, in order to support our future growth strategies.

SG&A expenses increased 8% to $53.2 million and 7% to $145.7 million in the third quarter and first 9 months of FY ‘14, respectively, up from $49.1 million and $136.5 million in the third quarter and first 9 months of FY ‘13, respectively.

The aforementioned increases in the third quarter and first 9 months of FY ‘14 were principally due to additional costs incurred to support the higher net sales volumes.

In addition, these increases were partially offset by the previously mentioned net impact of the adjustments to contingent consideration, and impairment losses related to the write-down of certain intangible assets.

SG&A expenses as a percentage of net sales were 18.3% and 17.3% in the third quarter and first 9 months of FY ‘14, as compared to 18.4% and 18.9% in the third quarter and first 9 months of FY ‘13.

The decrease in the first 9 months of FY ‘14, principally reflects the previously mentioned net impact of adjustments to contingent consideration, and impairment losses related to the write-down of those intangible assets.

Interest expense in the third quarter and first 9 months of FY ‘14 was $1.4 million and $4.2 million, and that was up from $1.1 million and $2.5 million in the third quarter and first 9 months of FY ‘13.

The increases principally reflect a higher weighted average balance outstanding under our revolving credit facility, and this was associated with borrowings that we needed to fund recent acquisitions, and payment of special cash dividends. Other income in the third quarter and 9 months of FY ‘14 was not significant.

Our effective tax rate in the third quarter of FY ‘14 decreased to 23.4%, down from 26.6% in the third quarter of FY ‘13.

The effective tax rate in the first 9 months of FY ‘14 increased slightly to 29.7%, from 29.5% in the first 9 months of FY ‘13 The decrease in the effective tax rate in the third quarter of 2014 is principally attributed to the impact of the previously mentioned reduction in accrued contingent consideration, and that is non-taxable.

Our full year combined tax rate and non-controlling interest rate expressed as a percentage of pretax income is now anticipated to be approximately 39%.

Net income attributable to non-controlling interest was $4 million and $13.5 million in the third quarter and first 9 months of FY ‘14, and that was compared to $5.8 million and $16.2 million in the third quarter and first 9 months of FY ‘13.

The decrease in net income attributable to non-controlling interest in the third quarter and first 9 months of FY ‘14 reflects the purchase of certain non-controlling interest during FY ‘14, which resulted in lower allocations of net income to non-controlling interest. Now moving on to our balance sheet and cash flow.

Our financial position and cash flow remain extremely strong. Cash flow provided by operating activities increased by 38% to $127.2 million in the first 9 months of FY ‘14, and that was up from $92.3 million in the first 9 months of FY ‘13.

That reflected the impact of favorable changes in working capital, increase in earnings, and the impact of certain non-cash adjustments, and we continue to expect cash flow provided by operating activities to approximate $160 million in FY ‘14.

As a comment, one of the analysts reported today that our actual, our cash earnings was 200% of reported operating income. So we think that's a pretty good result, and I can tell you that our banks, and anybody whose looking at our balance sheet and our ability to generate quality earnings has been very, very impressed and happy with that.

The working capital ratio, that is current assets divided by current liabilities, was a strong 3.2 times as of July 31, 2014, that was up from 2.7, as of October 31, 2013. Day sales outstanding, DSOs and receivables are down to 47 days on July 31, and that is down from 50 days as of October 31, 2013.

As you know, we continue to closely monitor all receivable collection efforts, and we watch the granting of credit very carefully. No one customer accounted for more than 10% of sales, net sales. Our top 5customers represented about 16% of consolidated net sales.

As you can see, not a concentration at all, and in both the third quarter of FY ‘14 and FY ‘13. Inventory turnover rate improved to 108 days as of July 31, 2014. That is down 3 days from 111, which it was at October 31, 2013. Net debt to shareholders equity ratio was 49% as of July 31, 2014.

And as I said before, net debt of $365.4 million, principally incurred to fund FY ‘13 acquisitions and the purchase of certain non-controlling interest earlier this year. We have no significant debt maturities until FY ‘19, and we plan to utilize our financial flexibility to aggressively pursue high quality acquisition opportunities. Now the outlook.

As we look ahead to the remainder of FY ‘14, we continue to anticipate growth within flight support, commercial aerospace, aftermarket replacement parts, and repair and overhaul services product lines, partially offset by declines in some of our defense products within our specialty products lines.

We anticipate softer demand in ETG's defense products during the fourth quarter, partially offset by a net increase in demand within the other markets served by ETG.

During the remainder of FY ‘14, we plan to remain focused on new product development, further market penetration, executing acquisition strategies, and maintaining our financial strength.

Based upon our current economic visibility, we are increasing our estimate of FY ‘14 year-over-year growth in net income to 14% to 16%, up from our prior growth estimate of 12% to14%. We estimate FY ‘14 year-over-year growth in net sales at 12% to 14%.

Our full year FY ‘14 consolidated operating margin should approximate 18%, CapEx about $20 million, depreciation amortization expense approximately $49 million, and cash flow from operations approximately $160 million. That is the extent of my prepared comments. And at this time, I would like to open the floor for questions from our callers.

Thank you..

[Operator Instructions] Your first question comes from the line of J.B. Groh with D.A. Davidson..

Can you hear me okay?.

I can hear you, yes..

Great. Hey, Larry..

Hey, J.B..

A quick one for Eric.

Eric, can you remind us of what the military mix is in FSG? I mean, I think it sounds like what you said, that the commercial side was pretty strong still, so trying to get a feel for what the drag was from the military markets?.

Well, we don't – good morning, J.B. We don't break out by segment our quarterly results on product lines. However, the military is a minority of what we do. I can tell you that the shortfall in military sales was really as a result of certain, primarily foreign military contracts slipping to the right.

We are in receipt of the purchase orders, so we do have the business. But as you know sometimes with foreign military sales, there can be a little bit of a delay due to the bureaucracy and number of people involved there. So we do anticipate making those shipments, but they just got delayed a little bit.

But we can't – we don't break out as a percentage of the overall flight support sales..

Okay. I can probably back into it. And then I just sort of had a conceptual question. Eric, I mean, given the fact that traffic has been really good, and margins at airlines have been decent, and profitability has been pretty strong for 5 years.

I mean, do you – is it – I mean, I guess, it would be normal when margins are pressured for the phone for PMA to ring pretty significantly.

Do you notice when margins are higher, and profitability is better at the airlines, that maybe they back off on using PMA, or give me your thoughts on that?.

Yes, I think normally, we always say that we gain market share in financial downturns. That is when airlines realize they have got to focus on cost. So I think in general, what happens is when markets turn down, we get more parts approved more quickly. And then, as the markets recover, we benefit from that.

I think that our issue this quarter was, we had such strong organic growth last year in the third quarter of – I don't know – some 17%.

And I think if you look at what we had, organic growth in our first and second quarters of this year, it was really off the chart, as our first quarter organic growth was about 19% in flight support group, second quarter was 15%. Last year, third quarter was 17% and fourth quarter was 14%. So we have got such tough comps that we are up against.

And really, I think it's more just a matter of consolidating those sales. We come out with some new products, we get them sold. The customers need to burn off a little bit of inventory, and then we are back selling some more stuff.

But frankly, I was very proud of being able to hold on to those big gains that we reported in say, over the last past year in organic growth, and being able to build on top of it. So the airlines remain very focused on cost savings, and we are doing very well in that area.

I can also tell you, just as a little bit of color, last week I met with our aftermarket sales and operations teams for just about the entire week. And I can tell you that I have never been more impressed with those people, and with the projects that we have got in process and their strategies.

And the fact, that we had this team now, that over the last 20 years has been integrated, and is working incredibly, incredibly well together and embracing this culture. So I am very optimistic going forward, that they will continue to find opportunities, as are they..

That's helpful, Eric. Thanks. I will hop back in the queue..

Thank you..

Your next question comes from the line of Tyler Hojo with Sidoti & Company..

Hello, everyone. Just a follow-up to J.B.'s question on specialty products in the defense markets.

Maybe you could talk about kind of your expectations for that product line? Do you think that area has stabilized? And I am also kind of curious maybe as a follow-on is, if you were to back that out, what would the organic growth – what would the organic growth have looked like within the commercial aftermarket this quarter?.

Yes, hello, Tyler. This is Eric. As we, I think we put in the press release, the organic growth was strong and was higher in the commercial parts market, as compared to the defense and industrial markets. We all know that the defense sales can be rather lumpy. This is a great business.

We really like being in those businesses, and the returns are very good. We have got some incredible people and products, but it does sometimes – it generate lumpiness, and the same in the industrial markets. So we are still very optimistic. We are very committed to those markets.

I don't think that is really a surprise to most people, given there has been some defense and industrial weakness in the economy lately. But we are very optimistic that it is going to prove to be, and will continue to prove to be a very strong business.

And again, we were stronger than – over in the commercial market, as compared to the defense and industrial markets..

Interesting..

And I'm sorry, and again, if we look at our numbers, and we still think that our organic growth is somewhere for the 9 months in the 1.5 to 2 times the industry growth. So we still feel confident of our ability to outgrow the industry..

Okay. So is it fair to say, that you are kind of chalking up the weakness in specialty products more to lumpiness? And I guess, what I am going with this, is I know specialty products has been kind of a tail wind for you for at least the last couple of quarters.

And I guess, maybe what my concern is, is that now on the downswing?.

Well, no. I would not consider it to be on the downswing at all. It, number one, it can be lumpy. And number two, when some contracts are pushed a little bit to the right, that impacts obviously when they are delivered. Again, we are in receipt of the POs, so it's not a matter of losing the business if you will.

But the defense business can get pushed to the right, and industrial products, things are designed. They have some shorter life spans, there is switch-overs in products, so as a result those can be lumpy as well. But I wouldn't say it is any significant change to the business.

Yes, we have done very well in past on that, and I anticipate we will continue to do well in the future on those programs as well..

Okay, great. Thanks for that color. And just lastly for me, was curious if you could maybe you shed a little bit more light on the Quest acquisition? First, I am wondering, what the contribution from Quest is to the guidance? And I am also – it just seems like a really good fit within your existing business.

I am also curious about kind of the acquisition pipeline within FSG?.

Yes, it – again, Quest was not a large business, it was a product line. It was basically a bolt-on. It helps round out some of our products, and frankly, it was make versus buy on some of that stuff. We could have just as easily developed it, but we had the opportunity to go ahead and buy it. We think that it fits very well.

We are very optimistic on the product line and the capability. As far as acquisitions, I can tell you the pipeline is quite full. We are looking at a number of transactions at the moment. I can't go into what kind of businesses they are for competitive reasons, and our competitors I am sure are listening on this call.

But we are looking at a number of companies out there..

I would like to just – this is Larry. I would like to add a little bit of color into the acquisition questions, because I am sure somebody on this call is going to ask it. We are, as Eric says, looking at a number of transactions. We are as you know, as investors very disciplined in the way we buy companies.

We do not pay 14 times or 12 times EBITDA for companies. And we believe that when pricing, interest rates rise a little bit, and pricing becomes more reasonable, we will be able to get more active. But saying that, we are still finding good companies at prices that we can afford and that can be accretive.

We are spending a lot of time in the due diligence processes, and we are not going to rush a closing of an acquisition, in order to meet Wall Street expectation or hope, and try to financially engineer our results.

We are going to do due diligence in a very thorough manner, the way we always do it, and make sure that we are not buying a pig in a poke. And so, we won't change that process and the strategy that we have used. And it's, that strategy has proven to be very, very good over the last 20 years.

So I think the acquisitions will come, but it is going to take a little bit longer to complete the due diligence..

Got it. That's great color. That's all I had. Thanks a lot..

Thank you..

The next question comes from the line of Arnie Usaner with CJS Securities..

Hello, good morning..

Good morning, Arnie..

Could you discuss the actions you took or have taken in Q3 to resolve the issues at Lucix? And do you anticipate these will continue to impact your Q4 results?.

Yes, Arnie, this is Victor. I will answer the question. So at this point, Lucix is profitable. It is a profitable business, it is a very good business, it's a strong business.

I think that a lot of the issues we saw in the first half of the year were washing out in the second – in the third quarter, excuse me, and we anticipate Lucix will be stronger as time wears on. That doesn't mean it won't be lumpy quarter by quarter. In fact, that is really what I would expect.

These are little longer cycle businesses, companies like Lucix are a little longer cycle in nature than some of the other defense – excuse me – space work that we do in some of our other companies.

So I, from what I see out there and the order flow that has been coming in, which has been pretty good of late, I would say that those extreme issues we saw in the first half of the year seem to be behind us at this point..

Great. My second question is just numerical. In your guidance for the upcoming year, if I took the low end of your revenue growth, you give us an operating margin assumption. There is an implied tax rate given in that 39% that you mentioned before.

The problem I have with that math is, it would lead to net income growth well above the targeted level you gave us.

I don't know if you or Tom care to comment on it?.

Arnie, this is Tom. Inherent in our guidance numbers at the high end range, I guess, what you are looking at – as you are pointing out, roughly flattish with the fourth quarter last year.

What we see in our near-term outlook is continued strength on the commercial aerospace side, and some continued uncertainty in the defense side relative to the fourth quarter last year. So that is going to have an impact on the reported margins, because of the margin mix between FSG and ETG.

And again, we, in our guidance numbers, we try to be highly confident in those numbers. We are always targeting to do better, and that will continue to be the effort..

Well, again, it's simple math. Again, if I put in around a 30% tax rate even at the lower end, your net income growth would be between 19% and 20%, well above what you have given us in the way of guidance. So I appreciate conservatism, but just the pure math doesn't work. Might be something we follow-up on offline..

Yes, sure. I am just saying – we will have to check how – the computations. But again, at the high end of the range, you are looking at roughly flattish with the fourth quarter net income last year. So I will have to check to see what your modeling numbers are..

Okay. Thank you very much..

Thanks, Arnie..

Your next question comes from the line of Julie Yates with Credit Suisse..

Just to continue on that – I mean, the – so the margin guidance of 18% suggests margins will bounce back in the fourth quarter.

What are the drivers there, and how should we think about the margin trajectory from the levels we saw in the third quarter in both segments?.

Yes, Julie, this is Tom Irwin. Again, in terms of our guidance numbers, we use an approximate 18% number, and that is our best estimate.

That would be a mix again of the flight support group and the FS at approximately 18% I think, in terms of the math numbers, it might be still comparable to what they have been running, the 9-month numbers that are a huge, huge change.

There might be upside, but there might be a little bit of downside too, again depending on the uncertainty, primarily in some of the higher margin defense electronic work..

Okay.

Are the specially product margins higher margin than your aftermarket, your commercial aftermarket products?.

Within flight support group, the specialty product margins are good. Again for competitive reasons, we don't want to try to get too granular, particularly with customers. But the, typically the specialty products have been good margin.

And when we added, as clarification, when we added to that specialty product group, Reinhold last year, which began impacting the comps in this quarter, that is where the larger portion of defense component sales comes from.

So one of the earlier questions about the mix of specialty products, the defense component increased with the acquisition last May of Reinhold..

Okay, great. And then, just going back to the organic growth discussion.

As organic growth is decelerating with the tough comps, can you help us calibrate expectations for FSG over the next several quarters? Should we kind of continue to expect a low single-digit organic growth rate?.

Again, I think that as Eric mentioned, we typically target within our FSG group and particularly the commercial aerospace, 1.5 to 2 times the industry growth. And I guess, it's – so therefore, that continues to be our target.

If the industry is going to grow mid single-digits – we don't know what for sure – we don't have a crystal ball in terms of what the MRO spend and traffic et cetera, et cetera over the next 1 to 12 months are. But I think we are comfortable that we will outperform the market..

Julie, this is Larry. Historically, when we go back over a period of time, and we don't take it quarter by quarter, the FSG group has organic growth somewhere in the area of 10% to 14%. I just used a round number of 12%. So as Eric pointed out, we have had 17%.

We – and I have said this to investors, 17% organic growth is not sustainable, and similarly if we have a 5%, that is probably too low. I think somewhere between 10% and 12% is a reasonable target for the organic growth.

But it's going to fluctuate, because when you are coming off a very – if you come out of a low period, all of a sudden it is – like we have had sometimes where it is 20%-some growth, and totally unsustainable. But that is only comparing 1 period to another.

If you look at, in my opinion, if you look at the FSG group and HEICO as a long-term investment, I think that is a – the numbers I just gave you are reasonable organic growth targets..

And Julie, this is Eric. Just to add that, if you went back and looked at some of the historic numbers, in FY ‘11, our organic growth in flights support was about 22%. And then in FY ‘12, it was 4%, in FY ‘13 it was above 9%.

So you can see that it fluctuates up and down, and typically when you have got a very high organic growth rate, I mean, you can't continue to build upon that. Likewise when it's lower, you have got the opportunity obviously on the upside.

I can tell you though, that as I mentioned on one of my other comments, that in meetings for 4days last week with our parts and repair, sales and operating teams, we have a tremendous number of products that are in the market, in development right now, where we are working with customers, and we are very optimistic on the future of those products.

When you have got a great team, I think they are able to execute. They understand the market very well, they understand the HEICO culture very well. I never seen a group like this at HEICO before. We have, in my opinion, the best group that we have ever had by far, in the history of the Company in this market sector.

So I can tell you, we are right now working on our budgets for FY ‘15. Our FY ‘15 year starts November 1. I don't have those budgets, so I don't have the numbers in front of me.

But I can tell you that based on the caliber of these people and the culture that we have got and how they work together, I am very optimistic that they are going to do quite well, and beat whatever is going on in the market..

Julie, one more comment from me. Historically, I have seen when the organic growth is low, it picks up, and when it's very high, it drops, and it's a cyclical business. And I have often said again, to investors at meetings, that there is a conflict between the aerospace cycle and the financial cycle.

And the financial cycle is 12 months, or 3 months if you go by quarter, and the aerospace cycle, the MRO cycle is somewhere between say, 30 and 36 months. So within 1 MRO cycle of 36 months, you are going to have 3 financial cycles of 12 months.

And I think the way I look at it is that, we are going to have peaks and valleys, and we are comparing it to a financial cycle, to a natural business cycle, and investing under those circumstances takes an adjustment to convert the financial to the actual business cycle.

That is the result of my observation of running this Company for the last 20 some years..

Thank you very much..

Thanks, Julie..

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

Good morning..

Good morning..

First, Victor, I wanted to ask you a question. I mean, a couple years ago you had similar situation, not exactly the same as you are facing with Lucix, but you had 3D Plus, and now you have got the Lucix, and it sounds like it's a timing issue.

But have your experience with some of these deals in the space market in particular, maybe changed what you are looking for from an acquisition standpoint, or maybe the attractiveness of some of these markets? Or is it really timing, and more of a short-term issue?.

Good question. As a rule of thumb, no, I think – of course, as we gain more experience in space and understand the markets a little better, we fine-tune the strategy as we go. But for example, but in the case of 3D Plus that was a rough first 6 months, but that acquisition has turned into a home run.

It is just a great business, and I think we may even be able to drive more business to 3D Plus from some of our other space businesses, and in fact, vice versa. And I could see 3D Plus benefiting Lucix, as we get out probably a year from now or so. It's still a great market, but it is somewhat of a lumpy market.

If I had the choice to do it all over again, to make these acquisitions, I would make each one of them. They really are great businesses, they can't be replicated. They are in very important niches.

But one does have to look over kind of a longer period of time, it's sort of a longer cycle, which is a little more similar to the ETG, as you used to know it a few years ago. I think we became a little more linear in our progression each year, in terms of performance, as opposed to as variable as it had been in the past.

But I kind of look over the year, I think in some of the space businesses, maybe over a 2-year period, to see how these perform..

Okay. No, that's helpful. And the organic growth within ETG I think, was a nice surprise in this quarter. Is that something as we think about it? I know your comps were obviously the inverse of what FSG was facing.

But as you go through the fourth quarter and into 2015, what do you think is a good sort of normalized organic growth rate in the near-term for the ETG segment?.

Well, I would rather tell you to look at what I have always said, historically out of ETG, and that is organic growth in the sort of mid to low single-digits organically from ETG, and we are working to do higher. And I know over the last few years, we have done higher than that.

But I would rather not, go out there and tell you to look for the higher numbers, and for us to be unable to deliver. So I am a little more comfortable sticking with that right now..

Okay. Okay, no, that's reasonable. And then, Larry, you had great, obviously as you mentioned and you called out great cash flow generation in the quarter. It looks like you paid down some of the debt at least for some of the near-term.

As you think about cash flow for the rest of this year, any change in your priorities? And I know the last few years, you have considered a special dividend.

Anything you can comment, as you continue to generate such strong cash, and considering the acquisition pipeline, and how we should think about it?.

At this time, I really don't know. The question of dividends, we always bring up at the Board meetings. Excuse me, that is a Board decision. Of course, management will make recommendations. I did indicate earlier, that we do have a few acquisition opportunities that we are in due diligence right now, so that is going to use a little bit of that money.

But I think we will just have to play it by ear, and see what we do. The greatest concern that I have is cash flow, cash earnings, and the quality of earnings as opposed to earnings per share. As you know, we can show great earnings per share, but no cash.

And HEICO is a Company that we historically have generated 140% to 180% of our net income has been cash, and in this quarter, it was 200% or something. But we don't know what we are going to do with that cash.

But if we have excess cash, we will seriously consider additional dividends and acquisitions, so the 2 uses of the cash will be acquisition and additional dividend. No change in the overall strategy..

Okay. Okay, that's helpful.

And then finally, Eric, I don't want to belabor this too much, but as you – any color you can provide – I know within FSG segment specifically on the PMA side, whether it be engine versus non-engine, is the ramp of the non-engine business that you have talked about, whether it be interiors or maybe some of the more recent components and other systems you are looking at, is that ramp going according to plan? Or are you seeing maybe any push to the right of the adoption of some of the newer product line?.

Ken, we are seeing, I would say, results consistent with our plans, and consistent with what we have expected and what we have experienced in the past. No, there is not, we haven't seen a push to the right. We think that there is very good opportunity in the products that we have got coming out.

Yes, we have been saying now for many years, that our non-engine business is a majority, is over 50% of our total PMA business. It continues to be very strong. We have a tremendous focus in that area. Again, 15 years ago, we weren't even in that space.

Today we are a significant – we are the largest player in that space, and we are very optimistic on the future for it..

All right. I will stop there. Thank you very much..

Thank you..

Your next question comes from the line of Herbert Wertheim of Brain Power Inc..

Good morning, Larry, and very young children who I remember when they were just walking around as teenagers. Thank you for all you have done at HEICO.

As you know, I am your single largest individual shareholder for the last 20-plus years, and I thank the family for doing such a wonderful job, and allowing us to be able to share the experience with you.

I have a question that has to do with a long-term objective, or whether you have had some bites at the apple? Have there been any inquiries about the purchase of HEICO to be bolted-on to any of the other companies that might be interested what you do each and every day?.

Herb, first of all – this is Larry. Thank you, one for your comments, two for your strong support over many years, and that support as you have mentioned many times has been well-rewarded, and you have done extremely well as a long-term investor.

And your mentality is a perfect HEICO investor, because you happen to be a brilliant guy, and a brilliant investor. And not only in HEICO, but many other securities where you have had the vision for the long-term.

To answer your question specifically, we really don't comment on questions about, has HEICO been approached or selling the Company and so forth and so on. We really don't comment on that type of thing.

If there is a serious approach, HEICO management would recommend to the Board – if there is a price at which somebody wants to purchase HEICO, and it's beneficial for all shareholders, we would certainly consider it. But to make a comment about being approached, we really don't make those comments unless something is truly on the table.

So I can't comment on that..

But you would not be opposed at the right number to be able to….

Absolutely not. Absolutely, we are all committed. Remember that the benefit that the Mendelson family gets from this, and the same benefit that you get, is in the ownership of equity shares. We are not in this for salary and benefits and so forth, but to build a strong Company, which as we all know we have been able to do over the past 20 some years.

So if somebody comes with the generous offer, we are very happy to consider that offer. We would talk to them, and no, we are not in entrenched management at all..

Well, thank you. And again, I want to thank you for allowing me to be one of your investors over the last 20 something years, where you take a few million dollars and turn it into hundreds of millions of dollars. Thank you very much from our family..

And again, Herb, the thanks goes back to you, because it's unique having a wonderful investor, a brilliant guy, and a good friend in Herb Wertheim. So we appreciate your comments and your loyalty, and we will stay in touch. Thanks so much..

Thank you very much..

Your next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets..

Hey, good morning. Thanks for taking my questions..

Good morning..

Just a couple of housekeeping items.

In terms of the earnings guidance or net income guidance for the remainder of the year, is there any additional earn-out reversal baked into that guidance? Or any other items that, whether it's a buyback of more than non-controlling – anything else out there that would sort of I guess, dilute the quality of earnings for the remainder of the year?.

The answer is no..

Okay. And then, Victor, on Lucix, you said the business is profitable. I am assuming the margins are still a drag to ETG. It sounds like the incoming orders are picking up, sounds like the backlog is growing.

When do you expect that those margins would maybe get up to sort of in line or even possibly accretive to the ETG Group?.

It is difficult to say for sure. I could see that happening within the next year. I can't guarantee that, but I could see that happening within the next year. And also by the way, keep in mind that amortization of intangibles, acquisition intangibles is a drag on our margins.

And of course, that accounts for some of the reason for the gap between net income and cash flow, and why you have got cash flow running at such – so much greater than net income generally with us.

So that is a drag, and we make acquisitions, certainly the newer ones it takes a number of years for that intangible amortization to run off, versus companies we have had for a longer period of time.

So as we make more acquisitions, when we generally expect the intangibles rate to take an increasing chunk, not huge, but increasing each year, of the income. When we evaluate the businesses internally by the way, the way I look at it, I look at the business as before amortization of intangibles.

What is the true – what are the true operating characteristics of the business? What is the cash that is coming out of each business, and what is the outlook for each business?.

Got it. And then, just I think last quarter on Lucix, you were saying some of the satellite programs, you had customers coming in, making changes to designs, you had rework. I mean, is that all in the rear view mirror? I think you said, it was – kind of somewhat slide into Q4, I guess, restarting in Q3 and then in Q4.

Are you – are those issues all in the rear view mirror now?.

Yes, you are referring to the rework issues, and the change issues on existing programs. As far as I know, those are all in the rear view mirror, and have been now for some months..

Okay, perfect. And then just a last one. Eric, can you give us a sense – FSG on a sequential basis from the second quarter to the third quarter, the revenues were down. It sounds like most of the peer companies are seeing aftermarket expansion.

I know you have got the tough comps on a year-over-year basis, but can you give us any color, what you are seeing kind of sequentially or month by month, in terms of airline purchasing patterns, incoming orders or behavior there?.

Yes, I would be happy to. If you take a look at our sales, I mean as you know, we had a tremendous jump in the third and fourth quarters of FY ‘13, and that strong sales continued into the first and second quarters of FY ‘14. If you look, yes, our third quarter revenue in flight support group is down about $3 million, compared to the second quarter.

But again, up very substantially from where we were in the early part of FY ‘13. As my dad mentioned, our sales in Flight Support are up over $100 million over the last 12 month period. So I think that we have got tremendous growth, but we have just got some very tough comps that we have got in there.

We did have some, as we mentioned before, we had some military contracts slip to the right. Again, we are in receipt of the POs, so it's not a matter of losing the business. It is more, just sometimes those contracts get a little lumpy.

And that is why we caution and we don't like to give – we don't give quarter by quarter guidance, because we really don't know. And unlike some other companies, we don't game the system. When the sales come, that is when we ship them, when the customer wants the product. And we are always focused, our people are always focused on doing the right thing.

So as a result, sometimes we just have a blow-out quarter, and I wish that it would be more linear. But it's just not, and that's really how it falls out. But I wouldn't say that there is any material change in the outlook of the business, or the products, or anything.

As a matter of fact, I am again much more optimistic in the quality of our people, the quality of the products. And as they put together the budget for 2015, I think they are going to do great things..

I would….

This is Larry. I would like to just go back to the Lucix question, and point something out. That this whole accounting for Lucix contingent earn-out and reversal and everything is complicated accounting. However, I want to point out 2 things which are beneficial to us. Number one, the earn-out is cash.

And so, that means that we will not be paying, or we estimate we will not be paying approximately $50 million over a 2-year period in an earn-out. So that is number one. Number two, the reversal of the liability for the earn-out also reduces amortization of intangibles that would hit the P&L going forward.

So at this moment, I can't predict what the net effect will be. But if Victor is correct, and I do believe he is correct, that Lucix begins to pick up and do better in the future, the earnings should come through stronger than they would have come through, because there is less amortization that will go against those earnings.

So it's a complicated calculation, but I am expecting that would – should be the result..

Okay. That's helpful. Thanks a lot..

Thank you..

Your next question comes from the line of Greg Konrad with Jefferies..

Hello, it's actually Sheila. Sorry for the mix up. I just actually had a follow-up on the ETG margins medium-term.

Do we – so should we see that go back to the 22% to 24% level, as defense mix and Lucix rework works its way through, or is the medium term margin for ETG closer to 20% to 22%?.

Sheila, I would say, I am kind of looking in the midpoint of that entire range that you laid out there, kind of midpoint of the lower 20%s..

Okay.

And the mix impact should anniversary itself through, as we head into FY ‘15?.

The mix impact anniversary itself through….

Right. Because it has been – I feel like for the last few quarters, we have had mix impact hit profitability, and that is why we have seen the contraction year-over-year, in addition to what has been going on at Lucix..

Yes..

So that's sort of works out, I guess?.

Yes, Sheila, it's difficult for me to really anticipate the mix, particularly as we get further out at this point. Of course, we haven't done, completed the budgets for 2015 yet, so I just am not certain as to that answer. I would expect over time, we probably get back more toward our historical mix, but I can't be certain.

And I don't want to give you a definitive answer on that until I am certain..

Yes. And I guess, Victor, just one more follow-up.

In terms of the organic growth you saw in the quarter, sequentially what markets improve the most?.

It was pretty much across the board. I wouldn't highlight any one of them, I think as a particularly strong versus another..

Okay. And then, Eric, if you don't mind, just 1 last question for you. In terms of Steel Dynamics, I know the business has been progressing really well, but some of the competitors have seen some industry dynamics change.

Could you comment on that at all? And maybe who your big customers are, and the success of that business?.

Yes, Sheila. We have to be careful obviously for competitive reasons because, as about speaking about any business or particular product line.

But I can tell you Steel Dynamics is in the distribution business, and it's extremely successful and has an incredible management team, a great list of principles, a great business strategy which I believe is not able to be replicated by anybody else in the industry.

This is a business that grew from a very small business, by putting in the correct disciplines, and over the last 25 years has just done exceptionally well. So I can tell you, we are very optimistic on where the business is going, and we think that there is a lot of fit with what HEICO does and the credibility that HEICO brings to the marketplace.

So I am not familiar with any specific industry dynamics that would negatively impact us. I think everything is very much going in our favor..

Okay. Thank you very much..

Thank you, Sheila..

Your next question comes from the line of Jim Foung with Gabelli..

Hello, everyone. Got all my questions answered here. But I just have one question regarding just the growth rate for FSG. You say it was 1.5% to 2% the industry growth over the longer-term period.

But what are the drivers that caused that to go higher than that or below that trend line? Eric Mendelson, HEICO Corporation - Co-President & President of Flight Support Group 100 Jim, that is a great question.

When we look at our growth, it's primarily driven by the sales, the development of new products which are sold to existing as well as new customers, as well as additional sales of existing product to existing customers who are not buying those particular parts.

So when we look at the number of aircraft that are being delivered, roughly half of them are for new growth, half of them are for replacement. So the ones that are for replacement, obviously that takes away opportunity for us.

But on the other hand, we have got roughly 95% of the fleet is aging by 1 year every year, and the parts become even more expensive. So I think that it is really the aging of the – to answer your question, it is the aging of the existing fleet that gives us the opportunity. And that is why we are optimistic on the future of where we are headed.

Our sales growth, unlike other aftermarket firms is not impacted by the delivery of new material or new stocking for new deliveries, for example, 787. Our sales are the support of the existing products. So if you look at the aftermarket of mature products, that is where we think we are going to be able to grow 1.5 to 2 times the industry average.

And if you look historically, we have done that or better..

Great.

And then just lastly, how big is your specialty product line now in the FSG segment?.

Yes, we don't break out, again due to competitive reasons. We don't break out the sales of the various business units within the reporting segments, and we aren't permitted to do that..

Right..

And also, we don't want to let our competitors know. But again, these businesses basically have grown out of what we are doing in the aftermarket side. So there are some relationships there, and we are very optimistic on the future of these businesses..

Okay, great. That's all I have. See you in a couple of weeks..

Thank you. See you in a few weeks..

Thanks, Jim..

The next question comes from the line of Steve Levenson with Stifel..

Hey, everybody..

Good morning..

Hello, Steve..

Just a question, with the increased role of leasing companies, I know that is not going to have an immediate effect, but do you see it as more of an opportunity in the future? Or do you see potential restrictions that they would have on parts and repair services as a headwind? Thanks..

We see it as an opportunity. We have had to deal with this issue for over 10 years, and we see it as a big opportunity. There are some very progressive lessors out there, that want to give their customers competitive advantage to be able to use alternative material, and we see that as a very positive trend.

Again, I think HEICO is unique in this space, because people have faith in HEICO's product line due to our quality reputation, that frankly nobody else has in the industry. So we have seen very good success in that area.

We are making sure that we educate the airlines around the world about the alternatives, and the opportunity that they have got in leasing. So I see it as a great opportunity for us..

Thanks very much..

Thank you..

Thank you..

The next question comes from the line of Michael Derchin with CRT Capital Group..

Well, thanks for taking my question. Just two quick ones. One, we are seeing in the airline industry, an increasing move to part-out older aircraft, and Boeing is even talking about potentially going into that business.

Is that something that competes with PMA parts more effectively than a new part? Or is that something that, are they dealing in areas that are not competitive with you?.

Yes, it is in areas that are primarily not competitive with us. Most of our PMA businesses are expandables, which are not typically recovered in a part-out. We also do some parting out in some asset management services, and we do that very successfully.

So we are very up to date on the market and the market trends that are out there, and we don't believe that there is a significant impact on our parts business. As far as Boeing getting into the space, I don't know whether they will or they won't, but I don't think it is going to have a really an impact on our business..

And just one more quick one. I saw one of your competitors, Wencor was sold to Warburg Pincus from Odyssey recently.

And I was just wondering whether or not you looked at that, and whether or not the reason – if you did – whether you rejected it because it was too expensive? Or there was a size issue, in terms of, you are really more focused on bolt-on acquisitions, as opposed to something that was larger?.

Right. That's a good question. We have received that question from many investors. We are not permitted to comment on any specific acquisition as you can imagine, due to possible confidentiality agreements, so I can't say whether we did look at it or we didn't look at it.

But what I can tell you, is various investors have mentioned to us that it went at a very high price, about 15 times earnings. And if you look at their product line and their capability and their reputation in the marketplace, 15 times earnings was certainly a price that was very aggressive.

And personally speaking, if Wencor is worth 15 times earnings, my guess is HEICO is probably worth 25 times earnings. So but it is, what we tend to do, is we tend to look for businesses where there is going to be a very good cultural fit with the Company, where they want to join HEICO. They want to sell at a reasonable price.

We all know that you can't get blood from a stone. And if something is sold at a very high price, that means invariably, there is probably going to have to be adverse effects on employees, customers, suppliers.

And typically the people who sell businesses and work with HEICO are interested in continuing the growth of those companies, and are very loyal to the people who remain behind, and the customers. And it is really a necessity for us to find those people who want to be part of the HEICO family.

As we mentioned before, we have got a number of transactions that we are looking at, that are a very good cultural fit with HEICO. So I am very optimistic that we can buy businesses below 15 times earnings..

Thank you very much..

Thank you..

Thanks, Michael..

At this time, there are no questions in queue..

Okay. Well, I would like to thank everybody whose participated in this call, comments and listeners alike. We look forward to hearing from you, and speaking with you on the fourth quarter earnings call, which should be some time in December.

And in the meantime, if you do have any questions or comments as you know, the Management team here at HEICO is available by phone or e-mail, and please stay in touch with us. Again, thank you, and have a good Labor Day weekend..

This concludes today's conference call. You may now disconnect..