Larry Mendelson - Chairman and Chief Executive Officer Eric Mendelson - Co-President and President of HEICO's Flight Support Group Victor Mendelson - Co-President and President of HEICO's Electronic Technologies Group Tom Irwin - HEICO's Senior Executive Vice President Carlos Macau - Executive Vice President and Chief Financial Officer.

Larry Solow - CJS Securities J.B. Groh - DA Davidson Robert Spingarn - Credit Suisse Sheila Kahyaoglu - Jefferies Kevin Ciabattoni - KeyBanc Capital Markets Steve Levenson - Stifel Chris Quilty - Raymond James Ken Herbert - Canaccord George Godfrey - C.L. King.

Good morning ladies and gentlemen, and thank you for holding. I would like to welcome everyone to the Fiscal 2015 Fourth Quarter and Full-Year Results Conference Call. 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 or implied by those forward-looking statements as a result of factors including, but not limited to lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services, product development or product specifications, costs and requirements, which could cause an increase to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense base or Homeland Security spending by U.S.

and/or foreign customers or competition from existing and new competitors, which could reduce our sales. Our ability to introduce new product and product pricing levels, which could reduce our sales, or sales growth. Product development difficulties, which could increase our product development cost and delay sales.

Our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, income tax rates and economic conditions within and outside of the aviation defense, base, medical, telecommunications and electronics industries, which could negatively impact our cost and revenues and defense budget cuts, which 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 filings on Form 10-K, Form 10-Q, and Form 8-K.

We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise expect to the extent required by applicable law. Thank you. I would now like to turn the call over to Larry Mendelson, please go ahead..

Thank you very much, and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO fourth quarter and full year fiscal 2015 earnings announcement teleconference. I'm Larry Mendelson, I’m the Chairman and CEO of HEICO.

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

Before reviewing our operating results in detail, I'd like to take a few moments to summarize the highlights of our record fourth quarter and full fiscal year results.

Our consolidated fourth quarter fiscal 2015 net sales of $328.7 million, operating income of $69 million and net income of $38.3 million represent record results, driven principally by the impact of our fiscal 2015 acquisitions, as well as increased sales and profit margins for certain of our existing products both within flight support and electronic technologies.

Consolidated fiscal 2015 net sales of $1,188.6 million operating income of $229.7 million and net income of $133.4 million also represent record results, driven principally by the impact of our fiscal 2015 acquisitions, as well as increased sales and profit margin for certain of our existing products both within flight support and electronic technologies.

Consolidated fourth quarter fiscal 2015 operating income and net income are up 28% and 19% respectively on a 12% increase in net sales. In addition, our consolidated operating margin improved to a very strong 21% in the fourth quarter of fiscal 2015, up from 18.4% in the fourth quarter of fiscal 2014.

I just want to point out that that is after the deduction of amortisation of intangibles and that number callers can go into little bit later, but it generally runs about 3% of 4% of the - from our point of view the real operating margin or what we call the cash flow margin is somewhere between 24% and 25%.

Consolidated 2015 operating income and net income are up 13% and 10% respectively on a 5% increase in net sales. In addition our consolidated operating margin improved to 19.3% in fiscal 2015 and that was up from 18% in fiscal 2014. Same comments apply to the amortisation of intangibles.

So our real cash operating, what we call controllable margin was about 3% or 4% higher. Consolidated net income per diluted share increased 17% to $0.56 in the fourth quarter of fiscal 2015 and that was up from 48% in the fourth quarter of 2014.

Consolidated net income per diluted share increased 9% to $1.97 in fiscal 2015 and that was up from $1.80 per diluted share in fiscal 2014. Flight Support set a quarterly net sales and operating income record in the fourth quarter of fiscal 2015 improving 12% and 28% over the fourth quarter fiscal 2014 respectively.

The increase principally reflects net sales contributed by our fiscal 2015 acquisitions and increased sales and profit margins for certain of our existing product lines. Our ETG Group set quarterly net sales and operating income records in the fourth quarter fiscal 2015, improving 13% and 24% over the fourth quarter of fiscal 2014.

The increase principally reflects net sales contributed by our fiscal 2015 acquisition and increased sales and profit margins for certain of our existing products. Cash flow from operating activities was $172.9 million in fiscal 2015 and that represented 130% of net income.

Our cash from operating activities was slightly below our original estimate of $200 million, primarily as a result of an increase in accounts receivable, which reflected strong sales late in the fourth quarter and an increase in inventory to meet increased sales demand in the near-term.

As of October 31, 2015, the company’s net debt to shareholder’s equity ratio was 37.4% with net debt, which is total debt less cash of $334 million.

Additionally, our net debt to EBITDA ratio was a very low 1.2 times as of October 31, 2015 that compared to 1.23 times as of October 31, 2014 and this was in spite of a year in which we closed six acquisition transactions.

We’re very pleased to have closed three accretive acquisitions in the fourth quarter of fiscal 2015 and they were all done in August 2015.

Flight Support acquired all of the outstanding shares of Astroseal Steel Products and Astroseal Steel Manufacturers expanded foil mesh, which is integrated into composite aerospace structures for lightning strike protection in both fixed and rotary wing aircraft.

Astroseal arguments our Flight Support Group’s expanding offering of aerospace composite products.

ETG acquired 80.1% of the equity of Midwest Microwave Solutions, we call it MMS and they design, manufacture and sell unique size, weight, power and cost optimized communications and electronic intercept receivers and tuners for military and intelligence applications.

MMS expands HEICO’s intelligence gathering equipment business and perfectly matches with HEICO in that it makes difficult to design and very unique devices. It’s focused on customer satisfaction and growth and most importantly it has top notch and committed management team.

Flight Support acquired 80.1% of the assets and assumes certain liabilities of Aerospace & Commercial Technologies, we call it ACT, A-C-T and they are a leading provider of products and services necessary to maintain up to date F-16 fighter aircraft operational capability.

The acquisition expands our reach into the defense market support and extends HEICO’s business pace in this very important sector which we see as a growing part of HEICO as we move forward.

Additionally, in December 2015 a subsidiary of ETG acquired all the assets and assumed certain liabilities of a company that designs and manufactures underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship voyage recorders, as well as other devices which have been submerged underwater.

As we reported earlier this week, we declared an increased regular semi-annual cash dividend of $0.08 per share and that’s payable on January 19. This dividend declaration represents our 75th consecutive semi-annual cash dividends and it is a 14% increase over the prior semi-annual per share amount of $0.07.

By declaring and raising this semi-annual cash dividend the Board of Directors’ goal is to confirm its continued confidence in HEICO’s consistent growth strategies and to reward our shareholders, while at the same time retaining sufficient capital to fund our internal growth objectives and acquisition strategies.

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 the Flight Support Group, Eric..

The Flight Support Group’s net sales increased 12% to a record $218.3 million in the fourth quarter of fiscal 2015, up from $194.8 million in the fourth quarter of fiscal 2014. The increase principally reflects net sales contributed by our fiscal 2015 acquisition.

The Flight Support Group’s net sales increased 6% to a record $809.7 million in fiscal year 2015, up from $762.8 million in fiscal year 2014.

The increase reflects net sales contributed by our fiscal 2015 acquisitions, as well as additional net sales in our aftermarket replacement parts and repair and overhaul services product lines, principally from new product and service offerings.

Further, these increases were partially offset by lower net sales of certain industrial products within our specialty products line. As a result of the aforementioned lower net sales of certain industrial products, the Flight Support Group experienced a 1% organic revenue decline in fiscal 2015.

Excluding the impact of the decline in net industrial sales, the Flight Support Group experienced organic growth of approximately 3% in both the fourth quarter in fiscal year 2015. As previously noted, the lower industrial products net sales is principally attributed to the completion of a customer’s multi-year orders in late fiscal 2014.

The Flight Support Group’s operating income increased 28% to a record $42.3 million in the fourth quarter of fiscal 2015, up from $33.2 million in the fourth quarter of fiscal 2014.

The increase principally reflects a more favorable product mix within our aftermarket replacement parts and repair and overhaul services product lines in the previously mentioned net sales growth. The Flight Support Group’s operating income increased 10% to a record $149.8 million in fiscal year 2015, up from $136.5 million in fiscal year 2014.

The increase principally reflects the previously mentioned net sales growth, a decrease in general and administrative expense and a more favorable product mix partially offset by an increase in amortization expense of intangible assets recognized in connection with the fiscal 2015 acquired businesses.

The Flight Support Group’s operating margin improved to 19.4% in the fourth quarter of fiscal 2015, up from 17% in the fourth quarter of fiscal 2014. The increase principally reflects the previously mentioned more favorable product mix within our aftermarket replacement parts and repair and overhaul services product line.

The Flight Support Group’s operating margin improved to 18.5% in fiscal year 2015, up from 17.9% in fiscal year 2014. The increase principally reflects lower general and administrative expense and a more favorable product mix, partly offset by the increase in amortization expense associated with fiscal 2015 acquired intangible assets.

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..

Eric, thank you. The Electronic Technologies Group’s net sales increased 13% to a record $113.5 million in the fourth quarter of fiscal 2015, up from $100.1 million in the fourth quarter of fiscal 2014 and increased 3% to a record $391 million in fiscal year 2015, up from $379.4 million in fiscal year 2014.

The increase in both the fourth quarter and fiscal year of 2015 were driven mainly by the impact from a late fiscal 2015 acquisition and increased demand for the majority of our products, which resulted in 5% and 1% organic net sales growth in the fourth quarter and fiscal year ended October 31, 2015 respectively.

The Electronic Technologies Group’s operating income increased 24% to a record $32.8 million in the fourth quarter of fiscal 2015, up from $26.4 million in the fourth quarter of fiscal 2014, and increased 11% to record $98.8 million in fiscal year 2015, up from $88.9 million in fiscal year 2014.

The increase in both the fourth quarter and fiscal year 2015, principally reflects a more favorable product mix for certain defense products, net sales growth, the impact of impairment losses recorded in the prior year related to certain intangible assets and lower amortization expense of intangible assets, partially offset by the impact of a prior-year reduction in the estimated fair value of accrued contingent compensation.

The Electronic Technologies Group’s operating margin improved to 28.9% in the fourth quarter of fiscal 2015, up from 26.4% in the fourth quarter of fiscal 2014. The Electronic Technologies Group’s operating margin improved to 25.3% in fiscal year 2015, up from 23.4% in fiscal year 2014.

The increase in both the fourth quarter and fiscal year 2015 resulted mainly from the more favorable product mix, impact of prior-year impairment losses and lower amortization expense of intangibles, partially offset by a prior-year reduction in the estimated fair value of accrued contingent compensation.

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

Thank you, Victor and Eric. Moving on to earnings per share, the diluted consolidated net income per diluted share increased 17% to $0.56 in the fourth quarter of fiscal 2015 and that was up from $0.48 in the fourth quarter of fiscal 2014 and they increased 9% to a $1.97 in fiscal year 2015, that was up from $1.80 in fiscal 2014.

The fourth quarter and fiscal year 2014 included a net benefit of $0.03 and $0.15 per diluted share, respectively, mainly from the previously mentioned reduction in the estimated fair value of accrued contingent consideration that was partially offset by impairment losses to certain intangible assets associated with the prior-year acquisition.

Depreciation and amortization expense increased by 12% to $12.8 million in the fourth quarter of 2015 that was up from 11.5% in the fourth quarter of 2014 and totaled $47.9 million and $47.8 million in fiscal 2015 and 2014, respectively.

That increase in the fourth quarter of fiscal 2015 principally reflects the incremental impact of higher amortization expense of intangible assets and depreciation expense attributable to our fiscal 2015 acquisitions.

SG&A expense increased 18% to $57.8 million in the fourth quarter of fiscal 2015 that was up from $49.2 million in the fourth quarter of fiscal 2014.

The increase in fourth quarter 2015, primarily reflects the impact of the previously mentioned prior-year reduction in estimated fair value of accrued contingent consideration and $4.6 million contributed by the fiscal 2015 acquisitions and they were partially offset by previously mentioned prior-year impairment loss and decrease in accrued performance-based compensation.

SG&A expenses increased 5% to $204.5 million in fiscal 2015 that was up from $194.9 million in fiscal 2014.

The increase principally reflects the previously mentioned reduction in the estimated fair value of accrued contingent consideration and additional $7.2 million contributed by fiscal 2015 acquisitions and that were partially offset by prior-year impairment losses resulting in lower current year amortization expense and decreased accrued performance-based compensation, as well as the impact of foreign currency gains on our Euro denominated borrowings.

Interest expense totaled $1.3 million in both the fourth quarter of fiscal 2015 and 2014. The expense decreased to $4.6 million in fiscal year 2015, down from $5.4 million in fiscal 2014.

That decrease was principally due to a higher weighted average balance outstanding under our revolving credit facility in fiscal 2014 and that was associated with our fiscal 2013 acquisitions and the acquisition of certain non-controlling interest in fiscal 2014.

Our effective tax rate increased to 34.5% in the fourth quarter of fiscal 2015 that was up from 31.3% in the fourth quarter fiscal 2014 and they increased to 31.7% in fiscal 2015 up from 30.1% in fiscal 2014.

That increase is principally attributed to the impact of the reduction in accrued contingent consideration as well as unrealized gains in the cash or undervalue of life insurance policies related to our deferred comp plan in fiscal 2014, both of these are nontaxable.

The increases were partially offset by a higher R&D tax credits recognized in fiscal 2015 due to the retroactive extension of the U.S. R&D tax credit as well as additional foreign tax credits related to R&D activities at one of our foreign subsidiaries and the impact of a fiscal 2015 foreign acquisition which was in a lower tax jurisdiction.

Net income attributable to non-controlling interest increased to $5.8 million in the fourth quarter of fiscal 2015, up from $4 million in the fourth quarter of fiscal 2014, an increase to $20.2 million in fiscal 2015 up from $17.5 million in fiscal 2014.

The increase in net income attributable to non-controlling interest in the fourth quarter and fiscal year 2015 principally reflects the impact of net income allocations to certain of the fiscal 2015 acquisitions in which non-controlling interest are held.

Now moving on to the balance sheet and cash flow, our financial position and cash flow remain very strong. As I previously mentioned, cash flow provided by operating activities totaled $172.9 million in fiscal 2015 and that reflects an increase in earnings and the impact of certain non-cash adjustments.

Strong working capital ratio improved to 3 times as of October 31, 2015, that was up from 2.8 times in October 31, 2014. DSO Day Sales Outstanding or receivables was 51 days in October 31, 2015 up slightly from 47 days as of October 31, 2014. And that reflected the impact of higher sales volume late in the fourth quarter of fiscal 2015.

Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure. I remind you that we really have losses from accounts receivable bad debt. No one customer accounted for more than 10% of net sales. Our five top customers represented about 17% of consolidated sales in both fiscal years 2015 and 2014.

Inventory turnover increased to 118 days as of October 31, 2015 and that was up from 108 days as of October 31, 2014. That reflected mainly our fiscal 2015 acquisitions on inventory levels in the Flight Support group and other inventory increases to meet increased sales demand in the near term.

Our net debt to shareholders equity was 37% as of October 31, 2015. Net debt of $334 million principally incurred to fund acquisitions and the payment of special cash dividends which we declared in fiscal 2014 and fiscal 2013.

We have no significant debt maturities until fiscal 2019 and we plan to continue utilizing our financial flexibility to aggressively pursue high-quality acquisition opportunities. Just to comment on debt, we have a wonderful revolving debt facility which is led by group of fantastic banks.

We work very closely with them and I can say they are just top notch. The outlook, as we look forward to fiscal 2016, we do anticipate net sales growth within Flight Support product lines that serve commercial aviation and defense, and for certain of our industrial products within specialty product lines.

We also expect growth within ETG compared to fiscal 2015 and that will be principally driven by demand for our defense and commercial aerospace products moderated by slightly lower demand for certain of our space related products.

During fiscal 2016, we will continue our commitments to developing new products and services, further market penetration and an aggressive acquisition strategy while maintaining our financial strength and flexibility.

Based upon our current economic visibility, we are estimating year-over-year growth in both net sales and net income of approximately 8% to 10% over fiscal 2015 levels with our consolidated operating margins approximating 18.5%. These estimates exclude additional acquired businesses if any.

In addition, we anticipate depreciation and amortization expense of approximately $57 million, CapEx to approximate $30 million, cash flow from operations to approximate $200 million and a combined effective tax rate and non-controlling interest rate expressed as a percentage of pretax income and that should be around 39%.

Approximately half of the aforementioned net sales growth is expected to be organic and the other half generated from the 2015 acquired businesses.

Within Flight Support, we currently estimate fiscal 2016 net sales growth to approximate the previously mentioned fiscal 2016 consolidated net sales guidance and the full year operating margin of Flight Support to approximate the operating margin achieved in fiscal 2015.

With respect to ETG, we currently estimate fiscal 2016 net sales growth to approximate the aforementioned fiscal 2016 consolidated estimates and the full year operating margin to approximate 23.5% which is consistent with ETG’s operating margins experienced during the three preceding fiscal years which ended October 31, 2014.

In closing, I want to thank the HEICO team members. It’s through their dedication and efforts that we’ve achieved our significant 25 year compound annual growth rate of approximately 16% in net sales, 18% in net income and 21% in our stock price. One further comment, my special thanks and appreciation go to our HEICO team.

They are the ones that produce the extraordinary results. These are dedicated, honorable, very hard working and extremely intelligent group of executives and people underneath the top level of each of our companies.

They are the ones that make this happen and I and the Board of Directors and shareholders of course are extremely thankful for the hard work that they contribute. Those are the extent of my prepared remarks and I would like to open the floor for questions. Thank you..

[Operator Instructions] Our first question comes from the line of Larry..

Hi, good morning. Larry Solow, CJS..

Okay. Hi, Larry..

Good morning, Larry, and gentlemen. Quickly just on, so Larry, you are generally flat year on revenue on guiding basis, you’re still - if you add those growth into your I think 19% or close to 20% on a net income basis excluding your earn out in 2014, so congrats on that great year.

As you look out to 2016, it sounds like you expect organic growth to return into the mid single digits.

So the 8% to 10% total net income growth, what are some of the puts and takes there? And I guess I think the real thing, it looks like you’re expecting a little bit of a contraction in profit and what sort of some of the factors behind that?.

Well, I’ll give you an overall comment and then give it to Victor and Eric too if they want to further illuminate. So in general, we come out of the box I think as you know historically with a bottoms up projection based upon the budget which is submitted by all of the subsidiaries.

We don’t push them to sandbag if we don’t want them to make it too high and we prefer to look at in a conservative basis. And annually we generally increase as we go through the year, that’s kind of been the history of HEICO. And I think we have done it in exactly the same way.

We’ve kind of said that the fourth quarter margins were extremely high, so we don’t know – we don’t want to project and tell the public we’re going to do that and make promises that we might not fulfill.

So I think the 8% to 10% is a number which we feel is definitely achievable that we are not disappoint anybody and as you know it does not include any acquisitions if in fact we make them.

Now, I’m going to comment on acquisition because I am sure some of these are going to ask me the question maybe you’re going to ask it to me in the next question, but we have a very full pipeline of acquisitions. The acquisitions are within our normal range in terms of pricing and would all be accretive in the first year of acquisition.

So if we are successful in closing these acquisitions, I would expect the 8% to 10% to start to move up and hopefully that will happen and I’m optimistic that in fact it will happen.

It’s kind of a low of averages, we won’t make all the ones that are on our plate but the more we have in the pipeline, the more we are likely to make and I can hoard you that our staff is just up to their ears, Carlos Macau and his people, the financial people, they are not enough hours and the day to do the 10-K which we have to file tomorrow and the other financial information, and then do the financial due diligence that must be done and as you know, we do the financial due diligence in-house, our people who know what we are looking for go out in the field.

So I feel highly confident that we are going to make those – a good number of those acquisitions and hopefully and of course if we do I am sure we’ll be able to move up the projected growth.

I don’t know if that answers your question?.

I’m sorry, I appreciate the color. Just one quick follow-up just in terms of your view on the aftermarket, it clearly was a little bit disappointing versus the beginning of your expectations in these [indiscernible] and you guys did outperform the industry I think 3% growth.

Do you think we are sort of stable around the number? Do you see as you look out an improvement in the upcoming year?.

I’m going to let Eric respond to that..

Larry, this is Eric. I think if you look at 2015 when we started the year, some of the other industry participants were a little bit more optimistic than we were in terms of a rebound in 2015. We were far more cautious and of course we received most of our orders in the month of shipment. So we don’t have a tremendous amount of visibility.

So I think that we are quite pleased with our performance. Certainly if you look at the profitability and our business units are measured on profitability, not on sales.

So and I understand that our investors look at organic growth and they want to see what those numbers are, but again our business units are focused on profitability and they did really quite well. I think that the market is settling out in this area.

There has been a lot of talk in the marketplace about sort of the changing landscape of the aftermarket with airlines focusing on keeping less inventory and really driving down their cost, and I think that the OEM purchases have become really the purchases of last resort, airlines are trying to figure how can they buy the parts as PMA or surplus rather than spend the big prices and get them from the OEM.

So I do think that it’s settling out at this area. I think it’s too early to try to call a rebound I’m aware of certain areas where sales were depressed last year and you would ordinarily anticipate them to bounce forward especially with fuel prices where they are. But I think we right to be very conservative and not predict until we see a rebound.

I do know that our pipeline to develop new products is very robust.

We are doing extremely well getting our new products sold to our customers, so I’m very optimistic on our performance compared to the industry sector, the industry as a whole but getting back to your 3% question, I think that’s probably realistic for the industry sort of low single digits, maybe as high as mid single digits.

But I wouldn’t anticipate a snapback of double digits at this point. Again, we’ll watch that and see how that evolves over the next couple of quarters..

Got it. Great. Thanks very much, Eric..

Your next question comes from the line of J.B. Groh of DA Davidson..

Hey, morning, guys..

Good morning, J.B..

A couple of questions for Eric. I mean I guess kind of playing on this aftermarket theme. You’ve got a lot of new aircraft in development that it would be coming online over the next couple of years, low fuel prices, good profitability.

Can you comment on what airline customers are saying about just PMA in general? I mean it seems like some of these things would be a little bit of a headwind for PMA in general but I think it’s like I’ve always said the generic ad once you go PMA you’re just going to go back, but just your thoughts on that would be real helpful..

Okay, sure J.B. We in conversations with the airlines, I mean PMA has got to tie us the acceptance in its history by far.

And if you look at number of the airlines who are being very careful about their fleet plans and wanting to make sure that they harvest all the aircraft that are out there and are looking at fuel and saying they’re better off keeping some of the older equipment, I think that puts us in very good position.

Of course as new aircraft are delivered they don’t need parts for let’s just say the first five years or so to the extent that those new aircraft replace retiring aircraft that would be a headwind for us.

But again you’ve got whatever the number is 15,000 aircraft in the fleet that are aging one year per year and those are very, very expensive to maintain and increasingly more expensive to maintain.

In conversations with the airlines, I think that as long as fuel stays down at this level perhaps some of the backlog is at risk but the airlines really want to see fuel maintaining at this level and not being a blip on the horizon.

So there is really been no dramatic change with the direction of our business, we continue to increase market share whether it’s on PMA or DER Repair component overhaul distribution. We are very, very strong in the aftermarket and I think they’re doing very well.

So regardless of the new aircraft they get delivered, I think we’re going to have very good positions on those aircraft as they ultimately will need parts. But of course there is that short term headwind to the extent that the order equipments get retired..

So I know it’s kind of a squishy number to get at but what’s your sense and what the PMA penetration? I know it’s kind of obviously vary a lot by how old a particular model of aircraft is but say on your standard 737 NG what’s the PMA penetration and what’s the max capability there?.

We think that we are far from the max. Sort of backing up and a lot of people have been looking Kevin Michael over at ICS has done some very nice work about what’s going on with the aftermarket and has spoken at a number of conferences.

His latest material shows that commercial aircraft material spend is roughly $38 billion and PMA parts are roughly 1% of that number. So I think there is a big opportunity to grow that number, a used serviceable material he is saying is in the 9% area but I think it’s in parts repairing including DER’s 22%.

So I think that there is a very large opportunity that continues to be available after all. So if you look at those aircraft, they are continuing to wear an age and show their age and then need parts that they hadn’t needed in the past. So I think that that’s also an opportunity for us..

Great.

And could you remind us what percentage of FSG is industrial?.

And industrial would be less than 5%..

Okay.

And then a quick one for Victor, probably the best margins we’ve seen in your group there for a really long time and I know that on a quarter-to-quarter basis they are above, so I think you mentioned some good product mix specifically in military, could you give us any more details on what within military has been strong and your general thoughts on military starting to hear mildly more positive comments from some companies..

J.B. this is Victor here. I would say that generally speaking some of our actually longer cycle businesses in the military side were a little bit stronger during the last part of the year and I think we sort of hinted it that in some earlier conference calls that we were seeing some strengthening there.

In terms of the defense budget it’s of course very difficult to predict what’s going to come out of Washington at any time but it does seem to still be a general consensus for investing in our military. We also see that outside the U.S. and of course it makes sense with what’s going on around the world today with violence and terrorism and so forth.

So, we’re generally optimistic I wouldn’t get by the way I wouldn’t imply out of that that we’re going to see growth rates like we saw in the early 2000s as we were engaged in the early stages of Afghanistan and Iraq, but if you look to the mid-to-low single digits growth rate in defense that’s kind of the way we do it at this point.

And like you said, on the margins to be honest with you the way I look at it is I add back somewhere around 400 basis points of amortization to evaluate our businesses because amortization is not an operating expense of a business. It’s not a cost of sales, it is not a good cost that you incur on running a business.

So when I look at our guys and I see they’re running up in the 29-ish percent rate on what I consider to be a real margin, I can’t get too upset if it’s 28% the next quarter or 27.5% or something like that.

To me, there’s still excellent incredible numbers, so I don’t split the hairs too much and so at this point my own planning is that we won’t get those same margins in 2016, but I don’t know and we’re certainly working to do that and we’ll see what happens..

Good. Hey thanks for your input guys and congratulations on another great year..

Thank you..

Thank you..

Your next question comes from the line of Robert Spingarn of Credit Suisse..

Good morning everybody..

Good morning..

So, following up on some of the questions that have been asked already, Eric, with regard to the PMA what are the trends that you’re seeing lately between airframe and engine, how do we think about that?.

As we’ve said for a while, we’ve had a larger emphasis over on the non-engine part of our business, HEICO started out originally as a supplier of one particular part for one particular engine that was made by one particular OEM and then we got into other parts for that engine and then other OEMs and then the airlines helped us to get into the component area so, a majority of our sales are for non-engine applications.

I think everybody is aware that the engines have become more competitive, the OEMs have become very aggressive in that area.

We continue to develop engine parts, we continue to do very well, airlines want to continue to procure those parts, they want us to develop other ones, but we’ve had a big diversification focus for the last 15 years on the non-engine side and now that represents a majority of our sales.

So, I think that trend will continue with our non-engine percentage continuing to tick up over the years, but I don’t want to give off the impression that we aren’t and aren’t focused and aren’t continuing to develop engine parts because we are and we think that that’s a very good opportunity.

In addition and of course nobody knows where this is going to end up, but the European Commission has launched an inquiry into, in particular the engines maintenance market and we’ll see where they end up and whether they will launch a formal investigation or not, but that of course could change some of the dynamics in the engine business, a lot of airlines feel that they have had a lack of choices because typically the parts just come from one manufacturer and we think that a lot of the airlines feel that if there were more competition that they’d be able to more significantly reduce their costs, so we’ll see what happens there..

Rob, I just want to clarify one thing that when Eric talked about accessories, he is including many other parts of the aircraft besides airframe because your question was engine airframe, a lot of the things we do are not PMA parts or non-airframe also. We do some airframe, we do some cabin parts, but it’s all over the aircraft..

Right. .

When I say non-engine I’m talking non-core engines, part of our components business is engine controls and parts that go around the engine, but actually aren’t core engine parts..

Okay. That’s helpful.

I wanted to ask you, you brought up the investigation, do you think there’s a chance that power by the hour gets brought into this thing?.

Yeah, I think that the EC is looking into this and I think their investigation is going to be very comprehensive from what we’ve read in the papers. They’re looking into the lack of alternatives there and they are looking into the power by the hour..

Okay.

And then higher level question this might actually, I do not may be Carlos this is for you but the revenue growth target for this coming year, how much of that is organic versus full-year contributions of 2015’s acquisitions?.

Rob, thanks for the question. Right now, we are looking at about half of the growth that we projected coming from our fiscal 2015 acquisitions and about half the growth coming from organic growth in our existing businesses..

Okay.

I wanted to ask I guess actually Eric this goes back to you, you mentioned the surplus fleet in the retirement of old aircraft, do you have any sense do you guys do any internal studies that can predict when the USM inventory, the surplus material inventory flushes out? Is there any kind of milestone of all of the prior generation or out of production aircraft retired and therefore none are flying and that does it?.

Well, I think that with the used serviceable there’s still plenty of assets to be parted out.

We know that long-term those assets are going to come out of the fleet, so I think that it’s going to be a while until that goes away, but if you look at it we don’t believe that the used serviceable market really impacts our business significantly at all because most of our parts are expendable parts and they’re not typically salvaged when an engine or an airframe is gone down, so I don’t believe that that’s going to have a significant impact on us..

Okay. And then there’s one last one Larry this one’s for you.

The special dividends the past couple of years how do we think about that going forward? What’s the strategy behind those? Does it occur during a period where acquisition activities lower anything else behind that?.

Well, my first comment is we don’t think about it going forward, but seriously when we did those it had nothing to do with the acquisition activity. It was an opportunity to reward shareholders at a lower tax base so they would pay lower taxes when they raised the dividend rate so we did it. We thought that it would be appreciated.

It really didn’t affect our ability to make acquisitions and we were very careful when we did it to make sure that we had the financial flexibility to make all the acquisitions that we would have needed to continue our growth.

So no, it really didn’t impact that and right now we’re focused as I said earlier in this call we’re focused on a number of acquisitions, some could be larger than we normally do and I’m optimistic that we will close them however the caveat is, until it’s, it’s not closed, so we’ve seen deals die at the last minute, but I’m optimistic that we will make these acquisitions.

They could be larger than normal. Some would be normal size, but we have plenty of financial flexibility, were we to declare a dividend, we would have the financial flexibility, but at this point the board did not focus on that at our recent meeting..

Okay. And then just lastly, Victor if I could just turn to you I know I said that last one was the final one but I don’t want to leave Victor out here..

Sure..

Could you just talk about the trends within the end markets in your business space versus defense? We’ve heard some commentary on different directionality there and how we think about 2016 from your end markets..

Sure Rob, thank you that’s a good question.

Generally speaking the way we’re looking at it is on defense as I said mid-to-low single digits in the market overall for us and for what we’re doing I think we believe that commercial space probably will be flattish, I mean may be up a little, may be down a little, but it’s a lumpy thing, but we are generally thinking kind of flattish and then in the other markets that we’re serving for our products again because we do a bottoms up budget for each one of our company, so sometimes the market may be growing at a different rate than the business, but it’s based on their wins and so forth and their successes and so those were looking at the lower to mid-single digits let’s say on general electronics and things where we serve medical, commercial aviation may be a little bit better than that because of some of the things we’ve done there, but that’s generally our thinking..

Okay. Thank you all very much..

Thanks Rob..

Thank you for asking..

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

Hi, good morning everyone, thank you for taking the questions..

Good morning..

Good morning.

Victor, I have two for you if you don’t mind, just on MMS, the contribution seems a bit higher than I thought, could you maybe just give in the number of employees the business has could you maybe talk about that a little bit?.

Sure. MMS is a great company that has an excellent production method. They are really a remarkable team of mostly engineers. It’s an engineering group with some very talented technicians, assembly and test people, so they have a model where they do most of their production externally and do a fair amount of test in assembly internally.

So that’s really the nature of the business and they’ve been doing that for a while and very, very successful and their great value add I think is on the engineering side and the responsiveness to their customers.

So they have it appears a very sticky customer base as well and they’re doing unique products which generally command a lot of the respect and attention for their customers..

Thank you. That’s helpful.

Is there a specific contract that drove the fairly healthy revenue in the quarter or can we expect that continued run rate?.

Well, they have a number of contracts and that’s going to move around. I mean it’s going to be - it’s one of these lumpier businesses.

I would expect them to stay a very healthy business but I would certainly expect that to move around from quarter to quarter and there will be quarters where it’s much less and there will be quarters where it’s they’re may be even higher and it should average out to at this point we believe what we were looking at when we acquired the business, so, so far so good..

Okay.

That’s helpful and then on the defense business you mentioned an improvement, could you maybe talk about, are you seeing an improvement in build rates or is it their support that’s increasing?.

Well, ours is really, the ETG’s defense business is not so much an aftermarket business. There’s a little bit that you would consider aftermarket so it would generally be related to production of equipment, sometimes it’s retrofit related, but more often than not it would be new equipment..

Got it, thanks.

And then Eric one for you, if you don’t mind, I will ask you a 2015 after-market question, I guess are you seeing any changes in buying behavior whereas people might call fare is a bit more or is there a pick-up with Boeing’s GoldCare and Airbus’ FHS program that’s driving how airlines are buying now or, I don’t know, you could talk about that a bit..

Sure.

Sheila with regard to the Boeing and Airbus programs, we haven’t seen a big pickup in areas that would impact us, so we’re not really concerned about that at the moment, but with regard to buying behavior yes, a number of airlines have really started focusing on the amounts of inventory that they take in and are holding very little inventory currently.

So when they place an order they need to make sure that they get the part because otherwise they don’t have it. They used to give buyers sort of more autonomy to purchase parts and now they have become very, very careful about spending money.

I had mentioned before about in concept purchasing from the OEM becoming more of a purchase of past resort and the buyers are trying to figure out where they can buy the parts really at any other place.

So, in general I would say reduced inventory is far really shortening the lead time that suppliers have to deliver apart because airlines don’t want to hold inventory any longer and have become very focused in that area. .

Okay, thank you. That’s very helpful..

Thank you..

Your next question comes from the line of Kevin Ciabattoni of KeyBanc Capital Markets..

Hi good morning guys, couple of quick ones..

Good morning..

Victor, first one for you I guess, you mentioned the margin outlook for next year to high level, obviously well below what we saw from your group in the back half of 2015, I appreciate some conservatism, but just wondering if there is anything else specific within the operating margin outlook for next year as to why it’s down versus what we have seen the last couple of quarters?.

Yeah, I mean by the way I don’t view it as well below, I view it as little below, but it is really kind of the mix in where things fall in and so that’s really what drives it.

So, we kind of see how the year goes, but there is nothing beyond really the mix of sales and products between the different businesses, I think kind of gets more to the normal rate that you saw..

Okay.

That’s helpful and then just one more from me, I know we are probably running short on time here, you talked about receivables were up, you saw some ordering strategy in the quarter, anything there specifically that we can expect to see continue in 2016 or was it more just a matter of customer order timing?.

Kevin, I’m going to ask Carlos to respond..

Kevin this is Carlos Macau, it is good question. I think principally what drove the increased receivables at year end was a very strong late quarter finish for the company.

We had good growth and good sales out of our divisions, probably two-thirds to maybe a little bit more than the growth in our receivables business is really based on the strong linked quarter sales and the rest of it was due to additional growth in receivables from our acquired company, so those are all positive and as while I mentioned earlier we watch our credit very closely and all of our customers and the cash flow in those receivables are supporting the quality and so we have no worries there.

.

Okay, thanks. .

Your next question comes from the line of Steve Levenson of Stifel..

Thanks, good morning everybody..

Good morning Steve..

I know you all have mentioned a few times on the call and in the Q&A about airlines reluctance to build up inventory, have you considered, I know your inventory is up a little bit and I guess that is what you have to do to serve them, but is there any way to make adjustments for just in time delivery system or I guess I am asking how you intend to handle this going forward?.

Steve, this is Eric, I think that the inventory is up, I think as a result of acquired businesses primarily. We, I think do a very good job at inventory management. It is a very good question with regard to what we can do to try to offset some of that.

Most of the products that we support at least over on the PMA side are manufactured really in batch quantities. They are not – it’s not really a production wide. So we have to take delivery of an economical lot quantity of material. So it’s something that we’ve always had a very good support record for the industry.

I wouldn’t anticipate that it’s going to have a significant impact on our ability to supply parts, but it is just the phenomenon which is going on as airlines really watch the amount of inventory that they’re able to hold it.

We can call it this is very good because as the airlines become more of cost conscious, then HEICO Solutions I think have greater opportunity to penetrate and pick up business and really that’s what we’ve seen whether it’s in parts, repair, distribution.

Whenever airlines are focused on reducing cost, I think it’s been a great opportunity for us and also the same thing over on the defense side as we support foreign militaries and also domestic militaries with our aftermarket programs.

Again, it’s the same thing as they focus on how to squeeze cost out of the system whether its inventory or direct purchase cost. I think the opportunities are very good for us..

Got it. That’s great additional detail. Thanks.

One other question I know Larry you talked about continuing aggressive acquisition strategy, do you still feel that a lot of companies view HEICO as the prepared acquirer or do you think you might have to adjust your valuation metrics when going after some of these companies?.

No, I think that the right kind of company that we like to acquire does view us as the preferred acquirer because of the way we run the companies when we compete with a private equity firm that buys and sells buy the pound every three to five years, managements really find that very stressful.

So when they have a say as some input we are always preferred buyer. When a seller who wants to have a liquidity event wants to protect his employees continue running the – very often continue in the position of presidency of his company, we are definitely the preferred buyer.

And [indiscernible] we cannot be the highest price but we’ll also do a transaction where we buy 80.1% leave somebody with roughly 20%.

So if their projection of growth is correct over the next three, five, seven years, they will benefit significantly by the growth of their own company while at the same time pulling money out and having a liquidity event. So I don’t think any of that has changed and we continue to follow the same strategy in the acquisition..

Got it. Thanks very much. I know it’s little early but Happy New Year, it’ll be a good one..

Thank you to you too. Thank you. Bye-bye..

Thanks..

[Operator Instructions] Your next question comes from the line of Chris Quilty of Raymond James..

Thanks, gentlemen.

Just wanted to follow-up, last quarter you had mentioned that your customers fleet extension decisions for 2016 were going to be predicated on their outlook for fuel prices and given what we have seen with the recent trend in fuel prices, is it fair to assume that those decisions have been favorable or is that whole process still in play?.

Chris, this is Eric. I think the process is still in place. Certain airlines such as Delta have been very vocal and very successful in this area of talking about keeping the order equipment longer. So I think that we’ve seen very, very firm belief by Delta on maintaining the order equipment.

Of course they’ve got that competitive and strategic advantage with their TechOps facility in Atlanta where they are able to keep the order equipment operating longer.

So I know that a number of the airlines out there looking at Delta strategy figuring out how they can emulate it, but I think it’s going to continue to reveal itself over the next 12 months..

Okay.

So potentially still some upside if we see fleet extensions?.

Correct..

Okay.

Also while I have you Eric the industrial product line, can you just remind us the overall impact on margins, was it a contributor or did it take down margins on a mix basis? And can you confirm whether there is any remaining headwind in the first quarter related to comp sales?.

With regard to the second part of your question, no, there is no headwind any longer remaining. We finished it all out in the fourth quarter. So we don’t anticipate any of that going forward. With regard to the impact on margins, I’ll let Carlos Macau for that..

Hey, Chris, this is Carlos. So the business that Eric was referring to was a good business for us. It was a slightly more from an operating margin perspective higher rate than the overall rated FSG, so it did have a slight impact on the margins. But to Eric’s point, those sales fell off after this quarter so we won’t have that one going forward..

Okay.

And one question for Victor I guess just with the space product weakness, is it fair to assume that’s just related to the pretty crappy order cycle that happened this year? Is there anything happening with regard to either competitive shifts or technology trends where you feel like you need to do more work?.

Chris, this is Victor. I would say bingo on the first one. It really appears to be more a market related for the most part. There are already shifts that we’re dealing with and things that are within markets, but overall the vast preponderance so that I think is market related..

Okay.

And by the way the overall guidance for down ETG margins for 2016, is that – I mean I think you said in your press release it’s consistent with the historical three year trend but obviously below what you did in 2015, should we just view that as 2015 having been a little bit of an upside year?.

This is Carlos, Chris. I think as Victor mentioned earlier in the call, we do have bottom of budgeting, we kind of look at all of the subsidiaries performance to historical performance.

And when you look at the segment, the margin that we are projecting for fiscal 2016 is consistent with principally the prior three years and we think from a projection standpoint, that’s a pretty conservative way to look at and obviously we hope to do better.

That margin is contingent on how acquisitive we are and how much intangible amortization we pick up along the way, but so right now using I think 23.5% is what we’re projected for the group I think is a fair way to look at it.

And that really has been about from a consistency standpoint about ETG has grown on a GAAP basis for at least the last three years..

Mention the amortization..

Yeah. And to Larry’s point earlier, in the ETG in particular, there is about a 4% headwind on the margin relative to amortization. So the two cash margins are much higher..

Gotcha. Alright. Thanks guys..

Thanks, Chris..

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

Hi, good morning..

Good morning, Ken..

I would first, Eric, just wanted to ask you or for Victor, as you look at acquisitions now but specifically within FSG, has the - any some of the structural changes within the PMA markets or your parts markets maybe had an impact on your preference for more distribution or repair assets is the first part of the question.

And then the second part I know obviously you’ve done some more internationally which seems to be bringing some benefits as well.

Is that perhaps a stream that with which you’re looking at acquisitions maybe a little bit more - higher priority I guess is how I think about it?.

With regard to acquisitions, I mean we are very active both in the United States as well as internationally. We are very pleased with our international acquisitions and I think we developed a very good ability to work with those companies. We’ve got some great partners and I think that that will continue to be an opportunity for us.

With regard to PMA versus a repair or distribution, again I think what the airlines are looking for is reducing their total cost of ownership, reducing their total cost and whether we sell a product as a direct PMA or we embody it in a repair or we are able to structure something with a distribution deal, I think that they are all very complementary and things are getting very fussy between our PMA and our repair because there are all sorts of products which perhaps in the past we would have sold as PMA and now we’re selling as repairs because sometimes you’re able to salvage part of a unit and have the cost of the repair be lower than the cost of making a brand new part.

So the two really go hand-in-hand and as you know, our repair business we believe is the largest independent component repair operation in the world. And when we say independent, we are talking about non-OEM, non-airline affiliated component repair businesses. So we continue to focus in those areas.

We are active in the acquisitions in all of those areas and I think that would just continue to grow..

Okay, that’s helpful.

And then if I could Eric, just on the comments around inventory levels and structural changes at the airlines in terms of how they’re managing their spend across the airlines but specifically as it impacts your business, do you get a sense that we are early in the process or do you get a sense that there is as some of the major U.S.

airlines perhaps continued on this path that we get to a steady state in a fairly near future.

What you’re thinking about the process or the evolution of the airline efficiency push I guess is how I put it?.

Yes, that’s a good question. I’d say we’re probably two thirds through the process. I think the airlines have developed their plans and procedures. They are implementing that right now. I think that to a certain extent we’ve helped them along those lines because we’ve been able to hold inventory and would be able to support them as they needed.

But I think we’re really pretty much through that process at this point..

Okay, great, that’s helpful. And then finally Victor, there has been a lot of discussion around margins within ETG and the guidance, I guess my question would be this has been a segment that because of mix and obviously some of your end markets, you’ve seen maybe a little more volatility in the margin recently.

Do you get a sense that we start to see a little more consistency across the quarters in 2016 or still relatively lumpy with just what you are seeing from the markets right now..

We like it to be more even but I would feel more comfortable guiding you to kind of some lumpiness for now and then we’ll see how it goes..

Okay, that’s great. Thank you very much..

You’re welcome. Thank you..

Your next question comes from the line of George Godfrey of C.L. King..

Thank you and good morning gentlemen.

Just wanted to focus on the cash flow statement for just one minute, the $111 million you spent on acquisitions in this Q4, is it fair to say that represents about $32 million in annualized revenue or is that number higher or low in that?.

Annualized revenue?.

Annualized, yeah..

That’s pretty close, George..

That’s pretty, okay. And then secondly CapEx going up to $30 million this year versus the range of $15 million to $18 million over the last four years, but the incremental $12 million, do you have a targeted plan where that $12 million is going as it’s going to go across the business as a whole..

It’s going to grow across the business as a whole. We do have certain unique users for some facility expansion. We are actually investing in our foreign acquisition to expand that which is a lower cost manufacturing environment in a very favorable business environment and a very favorable tax environment. So we do have target areas, we are expanding.

The board approves a wish less budget and then we have to make a judgment as to what we think the guys will spend. As we talked about in the past, our subsidiaries in the business unit leaders who run them are very entrepreneurial and very prevalent their spend.

So we started out last year, if you recall, we fell – we spend around $25 million and look we did $18 million. So I think our best estimate right now is around $30 million, there is targeted spend, it is very detailed by line item and we will see how the year flushes out but as of this moment that’s our best projection..

Okay, great. Thank you..

Thank you..

[Operator Instructions] And there are no further questions registered in queue..

This is Larry Mendelson again. I want to thank everybody on this call for their interest in HEICO.

The management remains available to you if you have further questions or want information, please call us and otherwise we wish you a very, very happy, healthy, wonderful holiday season and new year and we look forward to speaking to you again probably the mid towards the end of February when we will have our Q1 2016 conference call.

So this is – we are ending the call and again thank you very much..

Thank you ladies and gentlemen. That does conclude today’s conference call. You may now disconnect..