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

Greg Konrad – Jefferies Larry Solow – CJS Securities Ken Herbert – Canaccord Genuity George Godfrey – C.L. King & Associates Robert Spingarn – Credit Suisse Chris Quilty – Raymond James Jim Foung – Gabelli & Company.

Ladies and gentlemen thank you for standing by and welcome to the Fiscal 2016 Second Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

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 changes or airline purchasing decisions, which could cause lower demand for our goods and services, product development or product specification 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, space 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 products 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 space, 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 except to the extent required by applicable law. Thank you. I would now like to turn the call over to Chairman of the Board and CEO, Mr. Larry Mendelson. Please go ahead, sir..

Thank you and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO second quarter fiscal 2016 earnings announcement teleconference. I’m Larry Mendelson, I’m Chairman and CEO of HEICO.

And this morning I’m joined here 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 record second quarter operating results in detail, I’d like to take a few moments to summarize the quarterly highlights.

And just before I do that, I want to thank all of the team members at HEICO who are putting out an extraordinary performance in the first half and particularly the second quarter of fiscal 2016, everyone, shareholders, management, directors, appreciate this extraordinary efforts and we have an extremely high regard for this team, so thank you very much.

So our consolidated second quarter net sales and net income represent quarterly record – quarterly results driven principally by record net sales at both operating segments and record operating income at ETG. Both the consolidated net sales and operating income in the second quarter of fiscal ‘16 increased 20% over the second quarter of fiscal ‘15.

Consolidated net income per diluted share increased 17% to $0.57 in the second quarter of fiscal ‘16 up from $0.49 in the second quarter fiscal ‘15. The ETG Group set a quarterly net sales record in the second quarter of fiscal ‘16 improving 46% over the second quarter of ‘15.

The increase reflects net sales contributed by our fiscal 2016 and 2015 acquisitions as well as strong organic growth of 12%. The Flight Support Group set quarterly net sales record in the second quarter of fiscal ‘16 improving 9% over the second quarter of fiscal ‘15.

This increase reflects net sales contributed by our fiscal ‘15 acquisitions as well as organic growth of 4%. Cash flow provided by operating activities and operating income was very strong, increasing 58% to $102.7 million in the first six months of fiscal ‘16, and that was up from $64.8 million in the first six months of fiscal ‘15.

As of April 30, 2016 the company’s net debt to shareholders’ equity was 53.8%, with net debt of about $526 million. I would now like to introduce Eric Mendelson, Co-President of HEICO and President of our Flight Support Group and he will discuss the results of the Flight Support Group..

Thank you. The Flight Support Group’s net sales increased 9% to a record $220.3 million in the second quarter of fiscal ‘16, up from $202.8 million in the second quarter of fiscal ‘15 and increased 10% to $424.9 million in the first six months of fiscal ‘16 up from $384.8 million in the first six months of fiscal ‘15.

The increase in second quarter and first six months of fiscal ‘16 mostly reflects net sales contributed by our fiscal ‘15 acquisitions which continue to perform well and organic growth of 4% and 3% respectively.

The organic growth in the second quarter and first six months of fiscal ‘16 is principally attributed to increase demand in new product offerings within our aftermarket replacement parts and specialty product lines.

Additionally, these increases were partially offset by lower net sales from our repair and overhaul parts and services product line principally resulting from softness in demand from our South American market.

Excluding our repair and overhaul parts and service product line, the Flight Support Group experienced organic revenue growth of 7% and 6% in the second quarter and first six months of fiscal ‘16 respectively.

The Flight Support Group’s operating income increased 10% to $41.3 million in the second quarter of fiscal ‘16, up from $37.5 million in the second quarter of fiscal ’15 and increased 13% to $76.8 million in the first six months of fiscal ’16, up from $68.2 million in the first six months of fiscal ‘15.

The increase in the second quarter and first six months of fiscal ‘16 mainly resulted from the previously mentioned net sales growth and the gross margin profit impact from favorable net sales volume and product mix within our aftermarket replacement parts and specialty products product line.

These increases were partially offset by the impact of previously mentioned in net sales within the repair and overhaul parts and services product line, changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition and higher performance based compensation expense.

Additionally, the first six months of fiscal ‘16 reflects an increase in amortization expense of acquired intangible assets.

The Flight Support Group’s operating margin increased to 18.8% in the second quarter of fiscal ‘16 up from 18.5% in the second quarter of fiscal ‘15, and increased to 18.1% in the first six months of fiscal ‘16 up from 17.7% in the first six months of fiscal ‘15.

The increase in the second quarter and first six months of fiscal ‘16 principally reflects the previously mentioned improved gross profit margins, partially offset by changes in the estimated fair value of accrued contingent consideration and higher performance based compensation expense.

Additionally, the first six months of fiscal ‘16 reflects the previously mentioned increase in amortization expense of acquired intangible assets.

With respect to the remainder of fiscal ‘16, we continue to estimate the Flight Support Group’s full year net sales growth to be between 8% to 10% with organic growth in the mid-single digits and the full year Flight Support Group operating margin to approximate that of fiscal ‘15.

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..

Thank you, Eric. The Electronic Technologies Group’s net sales increased 46% to a record of $132.6 million in the second quarter of fiscal ‘16, up from $91 million in the second quarter of fiscal 2015 and increased 31% to $236.7 million in the first six months of fiscal 2016, up from $180.2 million in the first six months of fiscal 2015.

The increase in the second quarter and first six months of fiscal ‘16 reflects net sales contributed by our fiscal 2016 and 2015 acquisitions which continue to perform well and organic growth of 12% and 8% respectively.

The organic growth in the second quarter and first six months of fiscal ‘16 mainly resulted from increased demand for certain defense and space products.

The Electronic Technologies Group’s operating income increased 50% to a record $33.4 million in the second quarter of fiscal ‘16, up from $22.2 million in the second quarter of fiscal ‘15 and increased 34% to $55.7 million in the first six months of fiscal ‘16 up from $41.6 million in the first six months of fiscal ‘15.

The increase in the second quarter and first six months of fiscal ‘16 came mostly from previously mentioned net sales growth and favorable product mix for certain defense and space products, partially offset by an increase in amortization expense of acquired intangible assets and higher performance based compensation.

Additionally, the first six months of fiscal ‘16 reflects $3.1 million in non-recurring acquisition costs associated with the Robertson acquisition.

The Electronic Technologies Group’s operating margin improved to 25.2% in the second quarter of fiscal ‘16, up from 24.4% in the second quarter of fiscal ‘15 and improved to 23.5% in the first six months of fiscal ‘16, up from 23.1% in the first six months of fiscal ‘15.

The increase in the second quarter and first six months of fiscal ‘16 was mainly driven by previously mentioned net sales growth in favorable product mix, partially offset by the increase in amortization expense of acquired intangible assets and higher performance based compensation expense.

Additionally, the first six months of fiscal ‘16 reflects a 1.3% reduction to our operating margin as a result of the non-recurring Robertson transaction expenses.

With respect to the remainder of fiscal ‘16, we are increasing our estimate for the Electronic Technologies Group’s full year net sales growth to be between 29% and 32%, up from 27% to 30% with organic growth in the mid-single digits.

We continue to estimate full year operating margin to approximately 24% which I know is very strong because if you look at the true operating margin of these businesses before amortization and intangible expenses, which typically consumed about 400 plus basis points of our margin, you’ll see that the operating level of these businesses on their own is actually closer to 28%.

So we’re very proud and pleased with the performance out of our businesses. I’ll turn the call back over to Larry Mendelson. .

Thank you, Victor and Eric.

Moving on to diluted earnings per share; consolidated net income per diluted share increased 16% to $0.57 in the second quarter of fiscal ‘16 and that was up from $0.49 in the second quarter of ‘15 and increased 14% to $1.3 in the first six months of fiscal ‘16 and again that was up from $0.90 in the first six months of fiscal ‘15.

As previously mentioned, one-time non-recurring acquisition cost totaling $3.1 million were incurred in connection with a first quarter fiscal ‘16 acquisition. These acquisition cost reduced our consolidated income per diluted share by $0.03 in the first six months of fiscal ‘16.

Depreciation and amortization expense totaled $15.3 million and $12.2 million in second quarter of fiscal ‘16 and ‘15 respectively and totaled $29.2 million and $23.1 million in the first six months of fiscal ‘16 and ‘15.

The increase in the second quarter and first six months of fiscal ‘16 principally reflects the incremental impact of higher amortization expenses of acquired intangible assets attributable to our fiscal 2015 and 2016 acquisitions.

Research and development expense increased 8% to $11 million in the second quarter of fiscal ‘16 and that was up from $10.1 million in the second quarter of fiscal ‘15 and increased 3% to $20 million in the first six months of fiscal ‘16 again up from $19.4 million in the first six months of fiscal ‘15.

Significant ongoing new product development efforts are continuing at both flight support and electronic technologies, as we continue to invest approximately 3% to 4% of each sales dollar into new product development.

Our effective strategy for the last 26 years has been to reinvest a portion of our earnings into the development of new products and services that we can offer at lower cost to our customers, which in turn facilitates market share growth sufficient to meet our growth goals.

Moving on now to SG&A expenses, they totaled $67.2 million in the second quarter of fiscal ‘16, that was up from $49.7 million in the second quarter of fiscal ‘15, and totaled $126.8 million in the first six months of fiscal ‘16 up from $97.1 million in the first six months of fiscal ‘15.

The increase in second quarter and first six months of fiscal ‘16 principally reflects the impact from fiscal ‘16 and ‘15 acquisitions, foreign currency translation adjustments on borrowings denominated in Euros under our revolving credit facility, that’s the euro facility, higher performance-based compensation expense and changes in the estimated fair value of contingent consideration associated with the prior year acquisition.

In addition, the first six months of fiscal ‘16 reflects the $3.1 million in acquisition costs which I mentioned earlier.

SG&A expenses as a percentage of net sales were 19.2% in the second quarter of fiscal ‘16, up from 17.1% in the second quarter of fiscal ‘15, 19.3% in the first six months of fiscal ‘16 and that was up from 17.4% in the first six months of fiscal ‘15.

The increase in second quarter and first six months fiscal ‘16 principally reflects the impact from previously mentioned foreign currency translation adjustments on borrowings denominated in Euros under our revolving credit facility, higher performance-based compensation expense, changes in estimated fair value of contingent consideration associated with the prior year acquisition and additionally, the first six months of ‘16 reflects a 0.5% impact from the non-recurring acquisition cost that’s at $3.1 million.

Our interest expense did increase to $2.3 million in the second quarter of fiscal ‘16 from $1.1 million in the second quarter of fiscal ‘15, increased to $3.9 million in the first six months of fiscal ‘16, up from $2.3 million in the first six months of fiscal ‘15.

The increase in the second quarter and first six months of fiscal ‘16 was principally due to higher weighted average balances outstanding under our revolving credit facilities and that was associated with the fiscal ‘15 and ‘16 acquisitions.

Other income in the second quarter and first six months was not significant and I’m not going to comment on that. Income taxes, our effective tax rate in the second quarter of fiscal ‘16 increased to 32.8% up from 30% in the second quarter of fiscal ‘15.

The increase principally reflects the benefit from prior year tax return amendment recognized in the second quarter of fiscal ‘15 and that was for additional foreign tax credits related to R&D activities at one of our foreign subsidiaries.

Our effective tax rate in the first six months of fiscal ‘16 increased to 31.1%, up from 29.8% in the first six months of fiscal ‘15. The increase principally reflects the aforementioned benefit of additional foreign tax credit related to the prior year tax return amendment which we recognized in the first six months of fiscal ‘15.

In addition, the effective tax rate in the first six months of fiscal ‘15 reflects the favorable impact of higher tax exempt unrealized gains and the cash surrender values of life insurance policies related to the HEICO Corporation’s leadership compensation plan.

Net income attributable to non-controlling interest was $5.1 million in the second quarter and $9.7 million in the first six months of fiscal ‘16, and that’s comparable to the $5.4 million and $9.9 million reported in the second quarter and first six months of fiscal ‘15.

For the full fiscal ‘16 year, we continue to estimate a combined effective tax rate and non-controlling interest rate of 39% to 40% of pre-tax income. Moving on to our balance sheet and cash flow, our financial position and forecasted cash flow remain very strong.

As we previously discussed, cash flow provided by operating activities were very strong, increased 58% to $102.7 million in first six months of fiscal ‘16 and that represented 147% of net income and that’s compared to $64.8 million in the first six months of fiscal ‘15.

And one thing I want to point out here, often HEICO, when we speak to investors, they say that we love HEICO, we love everything about it, but the valuation is very high, it’s a rich price.

Incidentally, that’s been the case for many, many years and some investors – was that they don’t think that HEICO is richly priced and they say that based on cash flow results, HEICO is pretty much in line and some investors feel that it’s actually priced lower than comparable companies that do not generate as much cash as HEICO does.

As you know, we focus number one on cash flow and number two, on earnings per share. They kind of go hand in hand but cash flow to us is the name of the game and that’s how we grow our business. Our working capital ratio is strong 3.4 times as of April 30, ‘16 and that was up from October 31, ‘15.

DSO Day Sales Outstanding or receivables improved to 46 days as of April 30, ‘15 and that was down from 51 days on October 31, ‘15 and of course, as usual we continue to monitor all receivable collection efforts in order to limit our credit exposure. As most investors know, we suffer very, very few losses on accounts receivable.

No one customer accounted for more than 10% of net sales and our five top customers represented approximately 21% and 18% of consolidated net sales in the second quarters of fiscal ‘16 and ‘15.

As expected, our inventory turnover rate increased due to the impact of a January 2016 acquisition and that turnover rate was 125 days for the period ending April 30, 2016 and that was up from 116 days for the period ending April 30, 2015.

If we exclude the impact of this acquisition, the inventory rate turnover was 117 days and 116 days in the first months of fiscal ‘16 and ‘15 respectively.

Our net debt to shareholders’ equity ratio was 53.8% as of April 30, ‘16 with net debt and that means total debt plus cash and cash equivalents of $526.1 million and that was principally incurred to fund acquisitions in fiscal ‘15 and ‘16.

We have no significant debt maturities until fiscal ‘19 and we plan to continue utilize our financial flexibility to aggressively pursue high-quality acquisition opportunities which should accelerate growth and of course, maximize shareholder return. Now the outlook.

As we look ahead to the remainder of fiscal ‘16, we anticipate organic growth within our aftermarket replacement parts and specialty products lines that serve the commercial aviation markets, moderated by softer demand for certain component repairs and overhauls.

We expect organic growth in ETG, reflecting increasing demand for the majority of our products. During the remainder of fiscal ‘16, we plan to continue our focus on new product development, further market penetration and executing our acquisition strategies and maintaining our financial strength.

Based upon our current economic visibility, we are increasing our estimated consolidated fiscal ‘16 year-over-year growth in net sales to between 15% and 17%, and growth in net income to 12% to 14%, and this is up from prior growth estimates in net sales of 14% to 16% and growth in net income of 10% to 13%.

Additionally, we anticipate our consolidated operating margin to approximate 18.5% to 19%, depreciation and amortization expense of approximately $62 million, CapEx approximately $32 million and cash flow from operations to approximate $220 million.

In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on again cash generation and acquiring profitable businesses at fair prices. That is the extent of our prepared remarks, and I would now like to open the floor for questions from all the callers on this call. .

[Operator Instructions]. Your first question comes from Michael Ciarmoli of KeyBanc Capital Markets. .

Good morning guys. This is actually Kevin on for Mike. .

Good morning. .

Nice quarter, wanted to start on the FSG side, just wondering if you guys could elaborate a bit more on the increased demand you saw in the quarter.

Anything in terms of region carriers or certain aircraft or part families that were particularly strong in the quarter?.

Hi, this is Eric, I’ll take the question. Good morning. I wouldn’t say that if there was any particular area of strength. I think that all of our products did quite nicely in reviewing the sales performance with our sales executive.

I think that the demand for the products has been very broad based with the customers wanting us to develop additional parts so that they can save money and have an additional source of supply. So no, I wouldn’t say that it was in any particular area. .

Okay, that’s helpful.

And then just on the margins in FSG, Eric, it sounds like - was a factor there given that MRO was down a bit, I mean anything else going on in the margin, it saw a pretty sharp increase sequentially?.

No, I would say it’s just sort of part of our natural mix. Sometimes we have a little bit more of lower profit margins, sometimes we have a little less of that business. I would just say that it’s mixed, I’m very happy with the continued focus at all of our businesses on cash flow generation.

So, I wouldn’t say that it was anything really out of the ordinary. .

Okay. .

Thank you, Kevin. .

We continue to hear that there is strength in the aftermarket but particularly on the CFM56 and the V2500.

Can you talk a little bit Eric may be about how you guys are positioned on those programs and what you’re seeing there?.

Well yes, I’ll talk a little bit about it, we have to be careful about specific platforms because of course our competitors are very interested in what we’re doing. But I think as everybody knows the majority of our sales are – over half of our sales are in the PMA parts area are components.

So it’s not engines, it’s fuel, hydraulic, pneumatic, electromechanical, wheels and brakes, structures all sorts of various parts for the aircraft. We continue to be active over on the engines side, I’d say that roughly over the last 20 years there’s been increases competition in the engine side.

Of course, I think most people are familiar that the European commission is looking into some of I think what they believe are anti-competitive practices of certain suppliers. But there’s no question that the engine business has been a tougher business, but we still continue to be active in it.

We’ve got customers who want us to develop parts, who want us to support them, but it definitely has become more competitive as certain manufacturers have really in my personal opinion, used a lot of anti-competitive practices to try to squeeze competition out of the market.

So, it continues to be something that we’re going after, but again, most of our businesses are on the component side. .

Okay. Thanks. Just last one for me, I guess shifting to ETG may be for Victor here, saw the highest organic growth since early 2011.

Any specific thoughts you can provide on kind of the DoD budget environment or programs that are specifically driving growth there? And then may be your thoughts on how sustainable you think these levels are? I mean what do you guys have in terms of backlog and visibility on the ETG side? Thanks. .

Kevin, sure. This is Victor.

In answer to your question on the DoD budget, truthfully we really don’t have much visibility beyond what everybody else has, I think we get the same information that the public receives which is that budgets are expected to grow, that there has been some improvement in procurement, and that is our expectation going forward.

The growth in our defense operations sales were across multiple product lines, not every one of them, not every business, but it was across many different ones including short-cycle and long-cycle businesses which to us, is pretty healthy. We’d like to see that.

And then I think it’s consistent with the expectations that we’ve talked about now probably you’ve heard us talk about this for the last year or year and a half even, I’m trying to remember back some of those conference calls.

So, we feel that the budget should be healthy, I’m not looking for massive increases in the budgets, I don’t think we’re looking back at the kind of 2003-2002 budget increase levels.

And then of course, foreign defense is contributing to that as well, and that’s important part of our business whether some of it’s directly to foreign contractors or through the foreign - here in the U.S.

And in terms of what we’re expecting going forward, you talked about that that organic growth, it does move around over time and so the guidance that we’ve given in the press releases what – and I addressed in our call in the comments earlier, it’s still operative and we hope to achieve these growth rate.

You know we’ve done it often in the past, but we rather commit to something lower and if we do better, that’s great. So we’re going to hold into the kind of the historic growth rates that we’ve said which is the mid-to-low single digits and hopefully we can do better than that, but I would count on our guidance and that’s where we are putting it. .

Great. Thanks for the detail. Appreciate it. .

You’re welcome. .

Your next question comes from Greg Konrad of Jefferies. .

Good morning, great quarter. Just to stick with ETG, it appeared that Robertson’s contribution was may be a little bit stronger than we had modeled.

Could you may be size that contribution and is there any seasonality into the business?.

- it’s Victor, I can’t size the revenue contribution from Robertson itself, but I can answer the question on seasonality and there is no particular seasonality to this business but it does tend to batch meaning that it can happen that one quarter will have a disproportionate share of revenue versus another quarter and that’s because these are kind of high dollar items and they tend to ship in large batches as required by our customers.

So, that’s the sort of thing that can happen over time, I don’t know if that was the case in this quarter, but I would expect that – happen, but even out over the course of the year. It should even out over the course of a typical year. .

Thanks. And then also just on the commercial side, we’ve seen OEs may be look for opportunities to take cost out of the supply chain whether it’d be – partnering for success other OEs.

Being a lower cost producer, have you seen any benefit to these shifts in the supply chain?.

No, we haven’t seen really any significant shifts right now other than the customers are very knowledgeable about what’s going on and they recognize that there is a not a lot of competition in the market. I think they really value us being in the market.

So I think whenever a potential competitor drops out, it just makes their interest in us even greater because they need to preserve the competition and they like the independence of HEICO. But I can’t say that I’ve seen anything thus far as a result of that. .

Thanks.

And then just last, can you size the change in the estimate fair value of accrued contingent consideration?.

This is Carlos. The change in accrued contingent consideration really for the quarter and for the year, they were similar changes about $1.5 million and about $2.5 million for the six months.

So for the quarter about $1.5 million to $2.5 million for the six months and that was principally due to one of our earn-out deals with a foreign subsidiary is performing much greater than we had anticipated on the frontend, and we’re proud and very happy about that.

So as they continue to outperform our expectations, we have to increase the earn-out liability that we would owe them at a point in the future. .

Thank you. .

Your next question comes from Larry Solow of CJS Securities. .

Good morning. .

Good mooring, Larry. .

Good morning.

Just a quick follow up on the contingency liability, did that flow through FSG or was that in the corporate lines, because I know that corporate line was also a little higher than we expected?.

It goes to the – corporate. .

I’m sorry, it is in the corporate line, okay. .

And Larry, some of that also includes some FX impact for the quarter and the year exchange rate of euro against the dollar is working – so there is a little bit of FX end of those number. .

That’s more a balance sheet operational I guess. .

That actually goes to the P&L, because we are holding the euro debt on our books and we are holding the euro liability on our books which are functional currency as dollars. So we have to take the hit through – of the quarter….

It goes to the P&L but it’s actually a balance sheet transactional thing, not a….

We have liability on the balance sheet. .

Okay. And then just a little more granularity on Flight Support Group, obviously things are going, it sounds it’s going pretty well there and not a lot of change to your outlook. Just curious obviously aftermarket doing a little better, it’s up 6% this year, I guess you guys are up 3% last year and some of your competitors are noting improvement.

Have you seen any sequential improvement over the last couple of quarters, year-to-date, or some of this growth is driven just more by your – and more new product introductions?.

Larry, this is Eric. With regard to the FSG organic growth, we did see, we did report stronger numbers in the second quarter for organic growth as compared to the first quarter. So there was acceleration there.

I think in talking with the sales people, we don’t think that there is a lot of access inventory in the supply chain, the customers want us to develop more parts, I think we’ve got a lot of good stuff consistent with what we’ve had in the past on horizon.

But I wouldn’t say that there is any really change to our strategy or focus but there has been definitely a pick up in the organic growth. .

Okay, great. Got it.

And then on the repair and overhaul side, is the weakness, is it really predominantly just from South America, because I thought last quarter there was also just a general sluggishness, that’s pretty much gone now - so South American market that’s hurting you?.

Larry I think, this is Carlos, I think a couple of things; one, the South American market is soft and that’s the predominant factor. There is -- we did mention in the first quarter we saw a little bit in the second quarter the average ticket price in some of our repairs is a little lower than it had been.

I do think that’s a combination mostly some of these – parts that are going out some of the repairs are getting as acute as they were historically, there’s little more – time left and the parts were taken in and they were not as worn out.

So we are seeing a little bit of a decrease in the average revenue per ticket price but not sustainably, the majority of it was the South American market and those carriers down there. .

Okay, great. And then just last question and I think you may be touched upon it on the last call, just on CapEx, pretty significant step-up year-over-year, I know - obviously your sales were higher but I guess on a percentage of sales, it’s a little bit over 2% versus about 1.5% last couple years.

Just for – I think you have some – for some investment for some of the newly acquired companies is that what’s driving the CapEx higher and should we expect that to sort of tail-off as you look out to next year?.

We got a CapEx budget that contemplates an expansion. So some of that expansion is happening in those acquisitions that were made in ‘15 and ‘16 and so I would expect the CapEx spend to be I know historically we might have been a little bit under-spent to our guidance but I’m expecting this year to be close to our guidance on the CapEx spend.

Our guidance – frivoled us but they do surprise me but we do have some nice plans for growth expansion right now. .

Great. Excellent. Appreciate it. Thanks a lot. .

Thank you, Larry. .

Your next question comes from Ken Herbert of Canaccord. .

Hi, good morning. .

Good morning, Ken. .

Hey, Eric if I could, I just wanted to dig a little deeper into the repair and overhaul commentary I can appreciate the South American impact.

Can you quantify may be how much that business was down in the quarter? And then, are you seeing any shift where may be there is less opportunity as MROs start to do may be more repair in-house, has that been at all a factor that you faced or a headwind that you faced?.

Okay, good morning, Ken. With regard to the second part of your question, MROs doing more in-house, I wouldn’t say that there is really a trend towards that. If anything, I think there is more of a trend to send it out.

We’re in a good position so if they want to send it out we have the opportunity to take it in and turn the wrenches, if you will ourselves.

And then if they -- if MROs perform their own maintenance or airlines perform their own maintenance, then we can sell them parts in order for them to accomplish their maintenance or may be prepare some sub-assemblies for them. So I wouldn’t say that there is a significant change there.

With regard to the MRO, you asked about the drop in South American sales, I don’t think that that’s a loss to the market share. I mean we’re all familiar with what’s going on in South America with commodity prices and some of the political turmoil going on.

I think that our market share is very strong and we are going to be in a good position to recover that. But in terms of breaking out specifically, I think that’s hard for us to do because of competitive reasons. .

Okay. That’s helpful. I can appreciate that.

So I guess on the repair and overhaul side again, just to echo what or to clarify what mentioned Carlos I think mentioned a few minutes ago, you are seeing lower ticket prices as there may be less or more green time availability may be a little more surplus or other alternative material that might be lowering those overall ticket prices.

Do you -- as you look out for the second half of the year, do you anticipate any shift in the repair and overhaul, the MRO side of your business or any sort of sequential improvement we could expect in that business?.

I don’t think we anticipate a significant shift. I think it’s probably going to be in the area that it’s in now, may be there could be a little bit of improvement but we don’t like to forecast something like that that we really don’t control.

We feel confident that when the airlines need the components, they are going to send them to us, but honestly, until we tear them down and know what they need, it’s very difficult.

I mean I would think the bias may be would be a little bit to the upside but I wouldn’t want to overstate that or overplay that, because it’s – we just don’t have enough data points right now. .

Okay, okay, that’s helpful. If I could, Victor, on Robertson, really nice quarter, is there anything in particular you could point to around the growth for that business that you saw in the quarter may be quantify, may be you don’t want to quantify Robertson specific to the contribution or the growth there.

But I know there’s been a lot of talk lately about the FAA and NTSB looking at crash resisting fuel systems on civil helicopters at least here in United States.

Are you seeing any pull there yet or could that be any sort of upside opportunity for you to the extent to which you see any activity on the civil side?.

Thank you, yes, this is Victor. It’s a good question. The answer is at this point it’s upside to us, as you know, it wasn’t driver or why we bought the business, but I expect that to be upside for us.

We haven’t really seen much out of it at this point and I think it’s probably something that’s a little further out than we are now just in terms of development, certification and government push.

In terms of Robertson’s business overall, while you’re correct I can’t break out the revenue from it and exactly talk about specific customers, I can say that their success was broad-based and it was in the areas we expected. When we made the acquisition, they are doing what we anticipated and maybe even a little bit better than we anticipated.

And so far it’s going very nicely, as I said before, I think we have an excellent team there, starting with an excellent CEO and cascading through the entire organization. .

That’s helpful. Just….

- time with them at different events and trade shows and we continue to be impressed. .

That’s great. And then broadly, within ETG, any other color you could provide on I know obviously space and defense seem to be good in the quarter and you said it was broad based.

Is there any particular programs you would point to, region or geographies you would point to or may be you’re seeing a little better strength than you thought or should we think about that with any other additional detail you could provide?.

It’s a good question. I think it’s always the case, it’s not every space line for us or every space business that moves – it was moving ahead kind of the same as I mentioned with our defense business, right then it’s overall direction.

And I would say that we had -- there is no one particular region again was broad based, not a particular region where the revenues coming from that drove it.

I would expect that commercial space growth rate for us may moderate a little bit, as the year wears on but still good, but overall I would expect some moderation in that and I think that maybe it’s reflected in the items that we’ve given. .

Okay, well thank you very much. Really nice quarter guys. .

Thank you very much. .

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

Thank you. Good morning gentlemen. .

Good morning, George. .

I wanted to follow up, just to dig in a little bit more in ETG side, the organic growth rate accelerating from 4% up to 12% this quarter, that’s a pretty substantial jump in just one quarter.

Would you say that, and I’ve heard the comments for broad based, is that reflective of the batch nature that you’ve talked about that there were more programs simultaneously getting a sweet spot this quarter?.

Well it’s a result George, this is Victor by the way, it’s a result of a few things, and by the way it’s not historically if we go back a number of years, it hasn’t so much jumped around recently but we have seen this kind of thing in the past, we have seen levels jump up and have a very high growth rate in the quarter and we may have a flat or even slightly down in another quarter.

So, I would expect that kind of things and those kinds of movements to continue into the future. It was a result really of a number of factors I don’t think there’s any single one that I would particularly call out. I think you look at prior year, we look at the demand for the products and they all factor into it.

And then I wouldn’t say anything is necessarily or particularly batched into the quarter, although we run this business to maximize income. So we don’t do anything to smooth it out, that’s just not our style.

We tell our businesses, you ship when you believe you should be shipping according to your contracts and when you’re ready and quality and so on, all layer into that.

And that too has an effect on the business because we’re not trying to smooth it out, we’re often producing and it will be produced in a level loaded way, but again if the customers are taking it later on that will have that batch effect and also looking - at certain batches. So, we produce efficiently as we can. .

Understood. And then the gross margin up 200 basis points year-over-year, really nice impact there.

Is that principally Robertson having a higher profitability structure?.

Robertson is part of the mix in that and of course, an important part of the mix in that, but we’ve got a number of good businesses in there as well. And some other acquisitions we’ve made along the way in the last few years have pretty strong margins too. .

And speaking of the acquisitions, the $3.1 million expense that you called out for the first six months, do you have an estimate on how that breaks down between the Q1 and Q2, would a 50-50 mix be a reasonable place to start?.

I’ll let Carlos answer you, but I think it’s all Q1. .

George, this is Carlos. We incurred that expense all in Q1 when we closed on the Robertson deal and that was a - investment bankers. .

Okay.

So no recurring one-time expenses here, - that in Q2?.

No, no. .

Okay. And then last question just on the MRO business, is that - the maintenance repair and overhaul, do you expect that to continue to trend down as we move through the next four to six quarters? And I’m just wondering when the comparisons get such that the full flight support growth organic rate of 4% matches the backed out MRO growth of 7%.

Will we see that in ‘17?.

George, this is Eric. I don’t believe that the repair and overhaul sales are going to be trending down going forward. I think it’s – we’re always very conservative on predicting and sort of calling a turn, but as I mentioned in the prior question, I think that we probably have more exposure if you will in the upside than the downside there.

So I think that that will – as I said better exposed to the upside, but having said that, with regard to when that rolls off, I would say the R&O business got a little weaker basically in our first quarter. So that would be the period starting November, but again, I think we’re still performing extremely well in that area.

We speak to other firms in the space and I think that they are much more adversely impacted than we are. So, I’m optimistic that we’re going to do quite well in that space. .

George, I may want to add to that. If you look at our repair and overhaul business, all of our facilities for the most part are again very well. We do have, it is really targeted to the South American and – Latin American marketplace where it’s a little weaker.

And as Eric mentioned earlier, that’s kind of been the anomaly that we experienced in the first quarter and second quarter and I don’t – I think we may see that marketplace continue to be soft in the Q3 is kind of our expectation, but we don’t think it’s a perpetual problem because again they are going to have fly their fleet and they are going to need these things repaired.

So we believe we - the market share and we’re still in that market and we’ll get that business when economic conditions improve in that part of the world. .

Understood. Nice work. Thank you very much for taking my questions gentlemen. .

Thank you, George. .

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

Good morning, Mendelsons and Carlos. .

Good morning..

Good morning, Robert. .

I think my peers have done a good job getting to a lot of the detailed stuff on the quarter, so I wanted to ask a couple of more strategic questions. And Victor if I could indulge you on ETG a little bit more, I wanted to see if you could highlight a few areas, you’ve got so many interesting businesses that you’ve acquired over time.

Are there any areas you could highlight where you have an opportunity to organically grow the catalogue? In other words, I don’t know if you take Robertson and fuel controls in helicopters, does that translate into other kinds of aircrafts, that’s where I’m headed with this type of question. .

Yes, Rob, this is Victor. It’s a very good question. Certainly in the case of Robertson, we do think the fuel systems are applicable to other aircraft generally rotating wing planes. And we’ve talked a little bit about the commercial opportunities there, but there are also expansion opportunities I think outside the U.S.

for them in rotorcraft strategically.

And I think that also applies in a number of our space businesses as well as they have developed and continue to develop what I would call more advanced technology and more advanced designs, and it’s really what’s driven the growth that we’ve seen over the years and some of it this year, where they – these businesses have been investing in newer again more advanced designs which are higher value to their customers.

And then, of course in our space business, we have that in a number of places as well. Now not all of them will succeed right? And there will be different levels of success and that’s kind of what informs us on our overall growth level expectations, but those are important parts of course business.

What we are not doing is harvesting, and strategically, when we acquire a business, we look at where they are in the technology spectrum for their product and how that’s moved by their customers and what the customers want.

And it’s very much driven by where we think the customers want to go as opposed to necessarily where we want the customers to go. .

And is there any way Victor to quantify when you look at the broad spectrum of ETG, what percentage of your businesses have this somewhat horizontal opportunity, is there any way to think about that?.

Yeah, sort of in a rough sense, I would say it’s better than half of the businesses. I have to actually go through and sit down and think of each one of them and then I have to distill it down to revenue. But as I think of it at a gross basis, I certainly can think of more than half on the top of my head. .

Okay, that’s a good answer. Eric, if I could switch over to FSG, I wanted to ask, this is a follow-on to the question earlier about the supply chain and whether I think you’ve said repeatedly on this call, that your customers are asking you to find other areas where you could help them with tool sourcing product.

Have the air framers ask the same question? Have you seen any of that?.

I mean the air framers asking us to develop parts for them?.

For them, for their programs or may be they want a second source?.

I appreciate your question, but I think we need to be a little bit careful in how to answer that. I think that there will be opportunities for us in that space as they want to drive their cost down, but I think at this moment, I’m sorry, I have to differ on answering that. .

That’s a reasonable answer, I understand why. And then, just one more question on and this is more toward the quarter Eric, and I’ve asked this in the past and you’ve talked about the organic growth.

Is there anywhere again that talk about same-store sales on particular parts? I’m trying to get a sense of what unit volumes are truly doing in the market? So this is same airplane comparison, related to traffic growth and so on, so not penetration for particular customer type growth or catalog addition, but just flying up so we’re seeing an equivalent increase in the utility or utilization of that part.

.

Yeah, I would say that our organic growth comes primarily from volume not from price. We tend to be very price friendly to our customers. However, diving deeper on your question, of course that organic growth is made up of a lot of things and one of them is increased market penetration and change in volumes and all that.

I would say that volumes are less on the programs right now in general. I would say they are more flattish. .

So you’re adjusting out sort of the catalog effects, you’re really looking at one airplane versus one airplane flattish?.

Yes, however as you know, as some of the order aircrafts are coming out, some of the newer aircrafts are increasing. So I really need to go back and take a look at that, but I would say just in terms of unit volumes, they are pretty flat. .

Okay, all right. Well thank you. .

Thank you. .

Thanks, Rob. .

Your next question comes from Chris Quilty of Raymond James. .

Good morning gentlemen. I think this question was asked in a more generic sense, I’ll ask it more directly. There was an article or announcement by Boeing that they are looking to pull in potentially some more of their parts business which they view of it as attractive.

And can you talk about the degree that they move in that direction whether that benefits or hurts you in the marketplace?.

Hi, Chris. This is Eric. I’m happy to answer that question.

I think the opportunity exists for us in that space, for example of Boeing or Airbus had suppliers and they are not getting the if you will, the pricing that they want out of those suppliers, I think there is an opportunity to come to us, we’re familiar with the regulatory process and in many cases, the air framer does not own the intellectual property.

And as you know, that’s not a barrier for us because we can develop it ourselves. So I think that that could be an opportunity for us, but we sort of have to see how that plays out. .

Okay. Also on the space side of the business, if I think about your positioning with Sierra Microwave, I think about your positioning with Sierra Microwave and other, you tend to be on sort of the big geo-program exposure.

Are you undertaking any efforts to look at some of the new developments, new space cube satellites constellations that are starting to percolate?.

Absolutely. I don’t know that we’ll be a big player in cube sat markets so much but certainly some of the Leo constellations draw our interest. And I would foresee at some point in time us participating to some extent. .

Very good. Congratulations on the great results. .

Thank you. .

Thanks, Chris. .

[Operator Instructions]. Your next question comes from Jim Foung of Gabelli & Company. .

Hi, good morning everyone. Great quarter. .

Thank you, Jim. .

It seems like the Robertson acquisition is doing quite well, meaning your expectations.

I was wondering does that give you more confidence to make acquisitions more in this kind of order of magnitude of this size? And then also, you kind of touched upon this question early response, does this also opens up new opportunities in the defense area for you to look at acquisitions?.

I think Jim the answer is we’re very confident on making acquisitions, large acquisitions, smaller ones, and we’re an opportunistic buyer. So a large acquisition comes along, we are happy to do it. So, I guess we’ve always been that way and we have confidence in our due diligence, process, our ability to analyze and so forth.

And as you know, over the years there’s the acquisition program has been very good, we have made a lot of right guesses, good acquisitions.

In terms of – the second part of your question was, could you repeat that?.

Yeah, just Robertson more in the defense, I was wondering if that’s kind of – if you are now looking at that market as another opportunity for you to make more acquisitions, with valuation still relatively inexpensive in that area?.

The answer is definitely yes and again, we’ve always looked in this defense market and we’ve made other acquisitions before, Robertson in the defense space and we are open to make acquisitions as long as the acquisition meets our criteria which is high margin, strong management, history of positive growth and we analyze the product, but those two are the really key.

If they don’t have a strong management and margin, we would not be interested in it. So, to answer your question, absolutely we’re wide open to acquisitions in the defense space, sure. .

Very good.

And could you just comment on the pipeline of opportunities currently?.

Well the pipeline of opportunities, there are a lot of companies listed, it kind of goes up or down. Unfortunately, we’ve said this at many conferences, we start to get into transactions and they look great on paper and we’re told this, that and the other things and we start to kick the tyres and we do our due diligence internally.

Carlos has a financial root that really goes out and scrubs these things. And believe or not, unfortunately we have investment bankers and sellers that tend to fabricate what’s really going on and when we start to turn over the stones, instead of having 15 million in EBIT, they have 10 million in EBIT.

And they say, well why is that? And they give you whole bunch of excuses but they still want the same price. So, we’ve run into this more often than I would like to think that it would happen. But it happens, and we can spend a lot of time and until the deal is closed, we don’t know where it’s going to wind up.

So, we are looking at things, we are negotiation with people but it’s amazing how they promise you one set of results, and you go in there and you discover that it is really not the way they set it up. So we walk. So in order to, there is no way I could predict how many we’re going to make.

Last year, we made about six acquisitions during the year, this year, I think we’ve made two of course the Robertson was a large one, great acquisition. By the way, Robertson I just want to point out, the seller, the management, there was no fluffing, no baloney, great people to deal with, great management, very pleased as you’ve heard on the call.

So we love acquisitions. And we also made a number of I can think of it’s on my recently remade defense acquisition MMS, fantastic. The guys are super, super stars. So that’s what we like to do and if we can’t get that quality, we would rather pass. .

Well I guess the results that you showed, it shows the type of work you’ve been doing on the acquisition front. Congratulations. That’s all I have. Thank you. .

Thank you, Jim. .

At this time, there are no further questions. I would now like to turn the floor back over to management, for any additional or closing remarks. .

Thank you. We want to thank everybody on this call for their interest in HEICO. We remain available by phone or personal visit to answer questions which you may have. And we look forward to speaking to you at the end of our third quarter which it should be some time near the end of August. So we don’t speak to you till then. Have a good summer.

And very good holiday weekend, this weekend, and we will resume late August. That’s – we can turn off now. .

Thank you. This concludes today’s conference. You may now disconnect..