Laurans Mendelson - Chairman and Chief Executive Officer 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 Carlos Macau - Executive Vice President and Chief Financial Officer.

Robert Spingarn - Credit Suisse Greg Konrad - Jefferies LLC George Godfrey - C.L. King & Associates Larry Solow - CJS Securities Drew Lipke - Stephens, Inc. Les Sulewski - SunTrust Robinson Humphrey, Inc. Josh Sullivan - Seaport Global Holdings LLC.

lower demand for commercial air travel or airline fleet changes or airline purchase decisions, which could cause lower demand for our goods and services; 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 and competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development cost and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risks; interests, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronic industries, which could negatively impact our cost and revenues; and defense spending on budget cuts, which could reduce or defense – our defense-related revenue.

Parties listening to or reading a transcript of this call are encouraged to review all of HEICO’s filings with the Securities and Exchange Commission including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. I would now like to turn today’s conference over to Mr. Laurans Mendelson. Sir, you may begin your conference.

Thank you very much, and we welcome everybody on the call. We appreciate your attendance and we welcome you to HEICO’s second quarter fiscal 2018 earnings announcement teleconference. I’m Larry Mendelson. I’m Chairman and CEO of HEICO Corporation.

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

So before reviewing our record-setting second quarter operating results in detail, I’d like to take a moment to thank all of HEICO’s talented, dedicated, and loyal team members, who again were responsible for our outstanding results.

I and the Board and executive management are all particularly proud of their contributions to HEICO’s unique culture of entrepreneurial spirit that has allowed us to grow and win in the markets that we serve.

Their commitments to our customers and producing high-quality products, coupled with the enthusiasm and hard work that they bring to work every day, makes HEICO a great company and one that I’m very proud to lead. Without these efforts, HEICO would be nothing, I have always said, a company is its people and its culture.

And as far as we’re concerned and executive management, we just have the best in the industry. I’ll take a few minutes to summarize the highlights of our second quarter.

Consolidated net sales and operating income in the second quarter of fiscal 2018 represents record quarterly results, and they were driven by record net sales and operating income within Flight Support and continued strong net sales and operating income within ETG.

Consolidated net sales, operating income, and net income in the first six months of fiscal 2018 represents record results, and they were driven by record net sales and operating income within both operating segments.

As I mentioned before, the pro-business environment, which is now present in our country, has contributed to the improving health and enthusiasm in the end markets that we serve. This is a positive factor for HEICO, and I submit to you that it is a positive outcome for all honest, hardworking Americans.

Consolidated net income increased 30% to $59.6 million or $0.55 per diluted share in the second quarter of fiscal 2018 and that was up from $45.7 million or $0.42 per diluted share in the second quarter of fiscal 2017. Consolidated net income increased 44% to a record $124.8 million, or $1.14 per diluted share in the first six months of fiscal 2018.

And that was up from $86.6 million or $0.80 per diluted share in the first six months of fiscal 2017. A contributing factor to the outstanding growth in net income has been the pro-business impact of the U.S. Tax Cut and Jobs Act of 2017.

The Tax Cuts enjoyed by HEICO have unleashed capital to invest in plant and equipment, our team members, and profitable acquisitions. Our effective tax rate in the first six months of fiscal 2018 was 14.8%, which is down from 29.5% in the first six months of fiscal 2017.

We intend to utilize these tax savings to grow HEICO and to create additional shareholder value.

Consolidated operating margin improved to 21.3% in the second quarter of fiscal 2018, up from 20.8% in the second quarter of fiscal 2017, and improved to 20.5% in the first six months of fiscal 2018, and that was up from 8 – 19.8% in the first six months of fiscal 2017.

Our Flight Support Group set quarterly net sales and operating income records in the second quarter of fiscal 2018 by improving 16% and 15%, respectively, over the second quarter of fiscal 2017. These increases reflect the impact from our fiscal 2017 profitable acquisitions as well as organic growth of 5%.

Our ETG Group net sales and operating income in the second quarter of fiscal 2018 increased 20% and 24%, respectively, over the second quarter of fiscal 2017. Those increases principally reflect the impact of our fiscal 2017 and 2018 acquisitions.

Cash flow provided by operating activities remained strong totaling $95 million in the first six months of fiscal 2018. Cash flow provided by operating activities increased 20% to $50 million in the second quarter of fiscal 2018, and that was up from $41.7 million in the second quarter of fiscal 2017.

For the full fiscal 2018, we continue to anticipate record cash flow provided by our operating activities. Our net debt, which is total debt less cash and cash equivalents of $635.6 million to shareholders’ equity ratio decreased to 46.4% as of April 30, 2018, and that was down from 49.8% as of October 31, 2017.

Our net debt to EBITDA ratio improved to 1.55 times as of April 30, and that compared to 1.67 times as of October 31, 2017. During fiscal 2018, we have successfully completed three acquisitions and have completed five acquisitions over the past year.

We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. In February 2018, we acquired 85% of the business and assets of Sensor Technology Engineering which we call Sensor Tech.

Sensor Tech designs, manufactures sophisticated nuclear radiation detectors for law enforcement, homeland security and military applications. Sensor Tech’s two founders owned the remaining 15% of the business and will continue to manage it in their existing roles.

Sensor Tech is part of our Santa Barbara Infrared subsidiary, which is part of our Electronic Technologies Group. In April 2018, we acquired all of the business and assets of Emergency Locator Transmitter Beacon product line of Instrumar Limited.

This product line designs, manufactures Emergency Locator Transmitter Beacons for the commercial aviation and defense markets, that upon activation, transmits a distress signal to alert research and rescue operation of an aircraft’s location. This acquisition is part of our Dukane Seacom subsidiary, which is also in our ETG Group.

We expect both of these acquisitions to be accretive to our earnings within the first 12 months following closing. Now at this time, I’d 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?.

Thank you. The Flight Support Group’s net sales increased 16% to a record $267.8 million in the second quarter of fiscal 2018, up from $231.8 million in the second quarter of fiscal 2017.

The Flight Support Group’s net sales increased 15% to a record $522.6 million in the first six months of fiscal 2018, up from $452.7 million in the first six months of fiscal 2017.

The increase in second quarter and first six months of fiscal 2018 is attributable to the impact from our recent profitable acquisitions, as well as organic growth of 5% and 4%, respectively.

The organic growth in the second quarter and first six months of fiscal 2018 is principally from increased demand in new product offerings within our aftermarket replacement parts and repair and overhaul parts and services product lines.

Additionally, the increase in the first six months of fiscal 2018 was partially offset by lower net sales within our specialty products product line. Excluding the net sales decrease in our specialty products product line, the Flight Support Group experienced organic growth of 6% in the first six months of fiscal 2018.

The Flight Support Group’s operating income increased 15% to a record $51.5 million in the second quarter of fiscal 2018, up from $44.7 million in the second quarter of fiscal 2017.

The Flight Support Group’s operating income increased 13% to a record $97.4 million in the first six months of fiscal 2018, up from $86.1 million in the first six months of fiscal 2017.

The increase in the second quarter and first six months of fiscal 2018 is mainly attributable to the previously mentioned net sales growth and the impact from an improved gross profit margin, partially offset by an increase in performance-based compensation expense.

Additionally, the first six months of fiscal 2018 reflects an increase in intangible asset amortization expense, mainly resulting from the fiscal 2017 acquisitions. The Flight Support Group’s operating margin was a strong 19.2% in the second quarter of fiscal 2018, as compared to 19.3% in the second quarter of fiscal 2017.

The Flight Support Group’s operating margin decreased slightly to 18.6% in the first six months of fiscal 2018 from 19% in the first six months of fiscal 2017.

The decrease in the first six months of fiscal 2018 principally reflects the previously mentioned increases in performance-based compensation expense and intangible asset amortization expense, partially offset by the previously mentioned improved gross profit margin.

With respect to the remainder of fiscal 2018, we continue to estimate full-year net sales growth of approximately 10% over the prior year and we now estimate the full-year Flight Support Group operating margin to approximate 18.5% to 19%, up from the prior estimate of 18% to 18.5%.

Further, we estimate the Flight Support Group’s full-year organic net sales growth rate to be in the mid-single digits. These estimates exclude additional acquired businesses, if any.

And now I would like to introduce Vic 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 20% to $168.7 million in the second quarter of fiscal 2018, up from $141.2 million in the second quarter of fiscal 2017.

The Electronic Technologies Group’s net sales increased 21% to a record $324.4 million in the first six months of fiscal 2018, up from $267.3 million in the first six months of fiscal 2017. The increase in the second quarter and first six months of fiscal 2018 was favorably impacted by the contributions of our fiscal 2017 and 2018 acquisitions.

Additionally, the increase in the first six months of fiscal 2018 reflects organic growth of 3% principally from increased demand for our defense and space products. The Electronic Technologies Group’s operating income increased 24% to $48.1 million in the second quarter of fiscal 2018, up from $38.8 million in the second quarter of fiscal 2017.

The Electronic Technologies Group’s operating income increased 35% to a record $91.4 million in the first six months of fiscal 2018, up from $67.9 million in the first six months of fiscal 2017.

The increase in the second quarter and first six months of fiscal 2018 came primarily from the previously mentioned net sales growth and an improved gross margin impact, reflecting increased net sales and a more favorable product mix for certain defense products, partially offset by a less favorable product mix for certain space and other electronics products.

Further, the increase in the second quarter and first six months of fiscal 2018 reflects an increase in intangible asset amortization expense mainly from the fiscal 2017 and 2018 acquisitions.

The Electronic Technologies Group’s operating margin improved to 28.5% in the second quarter of fiscal 2018, up from 27.5% in the second quarter of fiscal 2017. The Electronic Technologies Group’s operating margin improved to 28.2% in the first six months of fiscal 2018, up from 25.4% in the first six months of fiscal 2017.

The increase in the second quarter and first six months of fiscal 2018 principally reflects the previously mentioned net sales growth and improved gross profit margin, partially offset by the previously mentioned increase in intangible asset amortization expense.

With regard to the remainder of fiscal 2018, we now estimate full-year net sales growth of approximately 18% to 20% over the prior year, up from the prior estimate of 15% to 17%, and anticipate the full-year Electronic Technologies Group’s operating margin to approximate 28% to 29%, up from the prior estimate of 27% to 28.0%.

Further, we now estimate the Electronic Technologies Group’s organic net sales growth to be in the mid-single digits. These estimates exclude additional acquired businesses, if any.

As a commentary on ETG’s organic growth, as many of you heard me say and literally dozens of times, we expect this business to grow over time in the mid-single digits to the low-single digits rate.

Historically, this growth rate has varied widely over the quarters and even the years and I expect that will continue to the case for a variety of reasons, one of which, as you’ve also heard we say before, is that we manage the business to meet customer demands to maximize profitability, which doesn’t always fit as neatly as we like into 90-day timeframes.

So while the second quarter’s organic growth was lower than our longer-term and annual targets, based on information I have today, I feel very comfortable with our growth rate projection. I should also point out that our public organic growth rate measurement is very conservative, as it excludes growth of businesses we’ve owned for less than a year.

And usually, our acquired businesses grow in the first year we own them. And on a net basis, our businesses acquired in the past year have overall grown.

So that what I consider to be our true organic growth rate in the second quarter, which to me, would include the overall growth of businesses acquired in the past year, was higher – nicely higher than we conservatively report. And I think we report the right way and do things in the right way.

But again, the way I look at things and the way I measure how our businesses are doing, I’m very pleased. So, again, I’m very pleased with the ETG’s growth profile. And I turn the call back over to Larry Mendelson..

Victor, I agree with you.

I’m pleased with the growth profile of ETG, too, and I’m sure, all the shareholders are moving on to diluted earnings per share, the consolidated net income per diluted share increased 31% to $0.55 in the second quarter of fiscal 2018, and that was up from $0.42 in the second quarter of fiscal 2017, and it increased 43% to a $1.14 in the first six months of fiscal 2018, up from $0.80 in the first six months of fiscal 2017.

All fiscal 2017 diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock split, which was distributed in January 2018.

Depreciation and amortization expense totaled $19.1 million in the second quarter of fiscal 2018, and that was up from $15.3 million in the second quarter of fiscal 2017, and for six months totaled $38.1 million, up from $30.5 million in the first six months of fiscal 2017.

The increase in the second quarter and first six months of fiscal 2018, principally reflects the incremental impact of higher amortization expense of the intangible assets from our fiscal 2017 acquisitions.

Research and development expense increased 24% to $14 million in the second quarter of fiscal 2018, up from $11.2 million in the second quarter of fiscal 2017, and increased 19% to $26.7 million in the first six months of fiscal 2018, and that was up from $22.5 million in the first six months of fiscal 2017.

Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies and we continue to invest about 3% of each sales dollar in new product development.

Consolidated SG&A expense increased to $76.3 million in the second quarter of fiscal 2018, up from $63.8 million in the second quarter of fiscal 2017, and increased to $151.5 million in the first six months of fiscal 2018, and that was up from $124.7 million in the first six months of fiscal 2017.

The increase in the second quarter and the first six months of fiscal 2018, principally reflect $8.4 million and $17.4 million attributable to fiscal 2017 acquisitions, as well as $2.6 million and $4.8 million, respectively, of higher performance-based compensation expense.

Consolidated SG&A expense as a percentage of net sales increased to 17.7% in the second quarter of fiscal 2018. And that was up from 17.3% in the second quarter of fiscal 2017 and increased to 18.1% in the first six months of fiscal 2018, up from 17.5% in the first six months of fiscal 2017. Excuse me.

The increase in consolidate SG&A expense as a percentage of net sales in the second quarter and first six months of fiscal 2018 basically reflects a 0.6% and 0.4% impact from previously mentioned higher performance-based compensation expense.

And further, the increase in the first six months of fiscal 2018 represents a 0.3% impact from increases in intangible asset amortization expense, which resulted from our fiscal 2017 acquisitions.

Interest expense was $4.9 million in the second quarter of fiscal 2018, compared to $2 million in the second quarter of fiscal 2017, and was $9.6 million in the first six months of fiscal 2018, compared to $3.9 million in the first six months of fiscal 2017.

The increase in those periods was principally due to higher interest rates, increases in the LIBOR rate, as well as a higher weighted average balance outstanding under the revolving credit facility, and that was related to our fiscal 2017 acquisition program.

Other income and expense in the second quarter was – and first six months was not significant. Moving on to income taxes.

Last – on our last call, the comprehensive tax legislation commonly referred to as the Tax Cuts and Job Act contains significant changes to existing law, among other things, including among other things, reduction in the federal – U.S.

federal income tax rate from 35% to 21%, and the implementation of a territorial tax system resulting in a one-time transition tax on unremitted earnings of foreign subsidiaries. As a result of the Tax Act, we revised our estimate annual effective U.S.

federal tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, and that results in a blended rate of 23.3% for HEICO in fiscal 2018. Also, we remeasured our U.S. federal net deferred tax liabilities and recorded a provisional discrete tax benefit of $16.6 million in the first quarter of fiscal 2018.

We also recorded a discrete tax expense of $4.7 million in the first quarter of fiscal 2018 related to the one-time transition tax on unremitted earnings of our foreign subsidiary. Our effective tax rate in the second quarter of fiscal 2018 decreased to 23.6%, and that was down from 32% in the second quarter of fiscal 2017.

Our effective tax rate in the first six months of fiscal 2018 decreased to 14.8%, and that was down from 29.5% in the first six months of fiscal 2017. The decrease in the second quarter and first six months of fiscal 2018, principally reflects the benefit of the lower U.S. tax rate.

In addition, the decrease in the first six months of fiscal 2018 reflects the previously mentioned discrete tax benefit from the remeasurement of our U.S. federal net deferred tax liability, partially offset by the one-time transition expense.

If any of the listeners want more color on that very detailed explanation, Carlos Macau, our CFO, will be happy to speak to you when you want to call and hopefully, nobody will ask the question on the call. But it’s a very complex matter, and Carlos will be able to explain it to you in detail if you’re so inclined to ask.

Net income attributable to non-controlling interests increased to $6.4 million in the second quarter of fiscal 2018, and that was up from $5.1 million in the second quarter of fiscal 2017. It increased to $12.9 million in the first six months of 2018, up from $10.5 million in the first six months of fiscal 2017.

The increase in the second quarter and first six months of fiscal 2018, principally reflects the impact again, of the Tax Act, as well as improved operating results of certain subsidiaries of the Flight Support and Electronic Technologies Groups in which non-controlling interests are held.

For the full fiscal 2018 year, we continue to estimate a combined effective tax rate and non-controlling interest rate between 27% and 29% of pre-tax income. Now moving over to the balance sheet and cash flow. As you can see from the press release, our financial position and forecasted cash flow remain extremely strong.

As we discussed before, cash flow provided by operating activities totaled a strong $95 million in the first six months of fiscal 2018. Cash flow provided by operating activities increased 20% to $50 million in the second quarter of fiscal 2018, and that was up from $41.7 million in the second quarter of fiscal 2017.

We continue to forecast and expect record cash flows from operation in fiscal 2018. Our working capital ratio, current assets divided by current liabilities improves to 3 times as of April 30, and that was up from 2.5 times as of October 31, 2017.

DSOs, days sales outstanding of receivables, improved to 50 days as of April 30, 2018, that was down from 52 days as of April 30, 2017. And of course, we monitor very carefully all receivable collection efforts in order to limit our credit exposure.

Those of you who have been on a number of these calls know that HEICO has very little loss in accounts receivable write-offs. No one customer accounted for more than 10% of sales. Our top five customers represented about 19% of net sales in both the second quarter of fiscal 2018 and 2017.

Inventory turnover rate increased to 136 days for the period ended April 30, 2018, that compared to 133 days for the period ended April 30, 2017, and that increase reflects slight higher inventory levels, which are necessary to support current backlog and projects requiring long lead time material buys, as well as anticipated higher demand for products during the remainder of fiscal 2018.

We have very little obsolescence in our inventory. We have a very conservative inventory policy. And as management, we look at that lengthening or a large increase in inventory as a very positive sign leading to the future, because all of our business operations need to buy additional materials to fill orders.

If we don’t do that, we won’t fill and we will not be on-time delivery. So to us, that is really a very positive sign for the future. Total debt to shareholders’ equity 49.9% as of April 30, 2018, down from 54% as of October 30, 2017.

Net debt of $635.6 million to shareholders’ equity ratio was 46.4% as of April 30, 2018, and that was down from 49.8% as of October 31, 2017.

Our net debt to EBITDA ratio, which is a critical ratio for me to look at improved to 1.55 times as of April 30, 2018, compared to 1.67 times as of October 31, 2017, and this represents strong cash flow earnings growth and the ratio of 1.55 times is a very low ratio.

And considering all of the acquisitions that we have made over the year and the largest one, our AeroAntenna acquisition was $317 million and still our EBITDA ratio to – net debt to EBITDA is still extremely, extremely low. We have no significant debt maturities till fiscal 2023.

We plan to utilize our financial flexibility to continue to aggressively pursue high-quality acquisition opportunities to accelerate the growth and to maximize shareholder returns. Now for the outlook.

If we look ahead to the remainder of fiscal 2018 and anticipate net sales growth within Flight Support any ETG, resulting from increased demand across the majority of our product lines.

We will continue our commitments to developing new products and services, further market penetration, aggressive acquisition strategy and at the same time maintaining our financial strength and flexibility. We are not – and you’ve heard me say this before, have never been a capital constrained company.

As we have access to a committed $1.3 billion unsecured revolving credit facility, and this helps us to accomplish our controlled growth strategy. In addition to that, we have a possibility to increase it to $1.65 billion as an accordion feature.

At this moment, we have no thoughts of doing that in the near future, because we have sufficient cash flow to continue our growth program.

Based on current economic visibility, we estimate our consolidated fiscal 2018 year-over-year growth in net sales to be at 13% to 14% and net income 33% to 35%, and that was up from our prior growth estimates and net sales of 12% to 14% and net income of 30% to 32%.

We now anticipate our consolidated operating margin to approximate 21%, up from our prior estimate of 20% to 21%. We continue to anticipate cash flow from operations to approximate $310 million and CapEx to approximate $50 million, and we estimate depreciation and amortization expense to approximate $77 million.

Of course, these estimates exclude any additional acquired businesses. In closing, I would like to end sort of where I began. HEICO’s team members have delivered these outstanding results and deserve the credit for the hard work and discipline it took to successfully navigate another quarter.

HEICO’s management team, again, has the utmost respect for everything our team members do to make the company success.

For my contribution, I intend to continue leading these talented team members with a focus on intermediate and long-term growth strategy with a laser-focus as usual on cash generation and a passion towards acquiring profitable businesses at fair prices. That is the extent of our prepared remarks. And I would like to open the floor to any questions..

[Operator Instructions] Your first question comes from the line of Rob Spingarn from Credit Suisse..

Good morning, everybody..

Good morning, Rob..

Good results here, guys. I wanted to dig a little bit into Victor and Eric’s segments a bit. Victor, simple high-level question for you – for your group.

Are you starting to see some of this enhanced spending from the big 2018 budget – defense budget?.

I think, we’re beginning to see a little bit of it, not a lot yet, we’re seeing signs of it, and I think some of the activity that’s sort of the pre-purchasing activity. So I would say signs, but not a lot of the firm POs from it..

Do you think this is more of a next year kind of thing for you?.

Difficult to tell. I would say, maybe fourth quarter, some in the third quarter, fourth quarter, and into next year. I would -- because we’re now in the third quarter, so I would say, more impact probably in fiscal 2019 than in fiscal 2018, but some of it in fiscal 2018..

Okay.

And then just, Victor, to close on this topic, what are some of the businesses within ETG where you’d see some of this? Are there particular pieces that will really benefit from the kind of spending that DoD is pushing for here?.

I think it’s actually pretty broad-based for us. And there are sort of the obvious ones that are some of our larger, more recent acquisitions like AeroAntenna and Robertson Fuel, and – that are more notable, and I think we would feel it more pronounced there. But generally speaking, I think, probably broad-based.

We’ve got a lot of other companies that will feel it, too..

Okay, I appreciate that. Eric for you. I was thinking about your organic growth. I think, you said, it was 4% for the quarter and 5% for the half-year.

If I got that right?.

I think, it was the other way around..

Was it okay?.

Yes..

Okay. So….

It accelerated in the – the growth accelerated in the second quarter compared to the first quarter. That’s correct..

Within that, we’ve talked in the past every now and again, I’ll ask you the following question.

Are you seeing that from higher traffic, more customers or new parts in the catalog? I know it’s a mix of all thre, but I want to get a sense of what is the strongest among those factors?.

I think, it’s really all of those. It’s our new parts. We’ve got a big new product development, but we’re going out finding additional products that our customers want whether it’s in the parts or the repair or the specialty products area. So it’s – it is new products. It is customers buying more of the existing products that they’ve already purchased.

And I would say that in summary, it’s all – it’s almost totally volume-related. We don’t get price. So we don’t push price, where, as you know, we’re very customer-friendly.

Our – maybe we get 1% a year in price, so when you look at our numbers of the organic growth, excluding specialty products in the second quarter, it would be 6%, and let’s just say, roughly 5% of that is volume, just may be 1% or even less than 1% is price. And it’s a – it’s pretty broad-based across a lot of different areas..

Okay. And then just, Eric, sticking with your side of the business just – we mostly talk about M&A over at ETG.

But on the FSG side, do you – are there others getting any traction in the PMA market that we should be aware of? And are there opportunities to add to that business externally?.

I think, there are a couple of small opportunities. The PMA market is a very tough market, and I have said this many times. You’ve got the OEMs fighting and competing for every single piece of business, and they do not make it easy.

I think, HEICO is in a unique position because the airlines are very comfortable dealing with a large organization, $8 billion, $9 billion market cap company with the technical depth, the resources, the financial strength, and the breadth of products that we bring. When we go and work with an airline, we’re working with them on multiple fronts.

One is PMA, the second is repair, and the third is distribution. And we’ve got these three specialized teams, each going in and working with the airlines. And I think the airlines are very happy with that HEICO relationship, because we know – they believe, which is our mantra that we do well if they do well and if we save them money.

And we can save them money in anyone of those particular channels, and we really push very hard and we focus in that area.

So while there are others in the PMA space, I think, that it is a probably very difficult space for others other than HEICO, and what we really bring is with the repair and the distribution as well, we probably have the largest sales force out there in the industry other than perhaps the five major OEMs being the engine makers and the airframers and a couple of large component guys.

So we’re out there. But I think, it will continue to be a nice growth area for us..

Okay. Well, thank you for that. I have one more. Apologies, Larry, this one is for Carlos..

Okay..

I’ve gotten to three of the four of you.

But Carlos, just on the cash conversion for the year between the deferred tax benefit in Q1 and the higher CapEx, is this normalized conversion or should we expect it to go back up in the future?.

I think that in a transition year like we have now with this new tax regulation, you’re going to see maybe a little bit of auditing our cash flow statement and operations, because of that I think it will turn into a more normalized situation back to the typical conversion rate you’re used to seeing from HEICO in fiscal 2019. I have very high hopes.

We’re projecting $310 million in cash flow from operations this year, that is record cash flows for HEICO. And of course, we always hope to do better than that.

But right now, given the investments that we’re making in growth and some, as you pointed out, some of the deferred tax challenges that impact cash flow from operations, I was hesitant to raise that or change that this quarter..

Okay, great. Thank you, everybody..

Your welcome..

Thanks, Rob..

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

Good morning..

Good morning..

You mentioned distribution in the last question. There has been some consolidation in that industry.

Can you may be discuss any impact you’re seeing, or if you see any increased opportunities from consolidation?.

Hi, Greg, this is Eric. Yes, we do see opportunities. Our distribution business, I think, is very unique in the industry, because we focus on the details. We take a limited number of product lines.

We understand them extremely well in the competitive environments in which they operate and we’re able to deliver sales increases and margin increases to our principals by operating in that space. Again, our distribution business is basically all of the growth that is organic. I mean, that company started out life as a very small company.

It’s a start-up. And it still retains that intense entrepreneurial focus and technological differentiator in terms of its sales proposition and showing customers how to save money, whether it’s through products that are in the OEM manual or whether it’s alternatives that customers can use in order to save money.

So I think, in general, to answer your question, consolidation has been good for us, because we’ve been able to find additional areas to grow in. And I’m still extremely optimistic about that business..

Thank you. And then just on ETG, I mean, just looking back at the margins the past several years, I mean, they continue to climb.

I mean, is there anyway to kind of parse – has the business structurally changed through acquisitions? Is some of that more accretive M&A or just maybe some of the moving parts of the continuous improvement on the ETG margin?.

I think it’s mix sensitive. This is Victor, by the way. It’s very mixed sensitive what we do on the ETG side. I think, there is continuous improvement focus at our businesses, and they are always lean and focused on keeping costs low. As a rule of thumb, they’re not fat organizations.

I mean, if you look within HEICO, you’re not going to find organizations that are fat and you can just go in and cut out large amounts of the business and – which is different from a lot of companies. I think, you’ll find in a lot of companies they go in and sort of hive off sections and whole groups, we really don’t have that.

So it is a steady state of lean operations. But typically, they are finding ways. As volumes increase, they’re finding ways to do things more efficiently and/or to produce more without adding overhead. But I will say this on our margins. They are strong.

And in fact, if you do look, you’ll see that our amortization runs between 400 and 500 basis points close to 500 basis points this quarter. So all-in, our operating margins are really closer to 33% or so. And I’m really not looking for improvements on that. I can’t go out and push our guys to try to push those margins.

If anything, in my own mind, I just don’t count on improvement on that. And if we get it great. But I don’t look for that and I’m certainly not going to go out and penalize somebody who comes and says, well, gee what, I didn’t get 33% margin this quarter, I got 32%. There’s certainly nothing to be ashamed about there..

Thank you. And just one last question on ETG. In terms of Q2, I mean, you mentioned organic growth was a little bit light, but you look at the outlook and it continues on kind of that mid single-digit range.

I mean, were there some shipments that kind of slipped out of Q2 that you hope to capture the back-half of the year, just any more color around that?.

Yes, I mean that – to be honest, that’s not unusual for us to see that happen. And it’s happened many quarters in the past and that will happen many quarters in the future. So that’s part of it. And I would expect that, we’ll see some of that pick up in the back-half of the year..

Thank you..

We’ll see the benefit the other side of that in the back-half of the year..

That – this is Carlos. I mean, that’s been the history of that segment for many years. It’s a lumpy business. It’s very much contingent on doing business with large firms. We’re very customer-friendly. We will shift when they need it not before and not late.

And so that can cause on a quarter, 90-day run period a quarter, it can cause some lumpiness in the growth profile. But on a yearly basis, it’s – to Victor’s point, the mid single-digit growth rate is about what we expect and that’s been history for this segment for quite sometime..

And this is Victor. You have to be comfortable with that and we are, if you’re going to be in the ETG at HEICO. And the idea is that, again, we maximize our margin. We maximize the performance. But the 90 days at the time are going to move around.

And they have historically, and you just sort of have to view that as the noise level and look at it over time that we fall and we meet it. So there are quarters that you will see where growth is negative. And there are quarters, where growth is very positive and sometimes flattish and all in-between.

And I – one thing I can assure you is, if you invest in HEICO, you will continue to see that, because that’s what we allow and that’s what we feel maximizes the margins in the business and the operation that takes care of our customers..

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

Thank you. Good morning, gentlemen..

Good morning..

Nice quarter, and thank you for taking my question. Question for Eric.

Eric, can you tell us where the size of the PMA data base now is now? And is the annual product rate adds still around the 350 to 400 parts per year?.

Yes, I would say, George, it is within that 350, 400. If you include some of the repairs that we do then which are somewhat similar to PMA parts than it can get above 500. But basically, the development rate is consistent with the last many years..

Got it. And then, Eric, in your comments you’d mentioned that new product contributing to the growth. Are those products are from acquired companies and/or new developed products internally to HEICO? Could you highlight perhaps some of them specifically, I’m thinking on the internal developed ones? Thanks..

Yes, George, that’s a good question, George. They are 100% internally generated. There is no acquired growth within our PMA business for the last many years. We’ve got the ability to generate these products internally. Our customers really want the HEICO design process to be used and it’s all organic growth there..

Got it. Thank you very much..

Thank you..

Thanks..

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

Great. Good morning, guys..

Good morning, Larry..

Can you just speak – it looks like a lot of the improvement in the margin this quarter was driven on the gross margin line and perhaps that was in the ETG Group.

Is that more a mixed-related driven thing? And is – I’m guessing that’s sustainable?.

Yes. So you’re correct, Larry. Most of it was mixed in ETG. A lot of that was the pickup in some defense work, as you know, with no specs and some of the tighter quality requirements on that type of product. The margin profile in those products can be a bit higher and that’s what that’s principally what drove it.

We did have, however, within the segment, most of the businesses were all doing quite nicely. So it was, again, another one of those quarters, where all the businesses were pretty much firing on all cylinders. Defense led the way and that had a bit of a drag up on our gross margin for the quarter..

Okay. And then perhaps next question for Eric a little bit on the high-level side. Aftermarket environment, it looks like, at least, for you guys your results are pretty consistent over the last few quarters. Any change over the last six to 12 months? Obviously, the passenger demand remains – it seems like it’s pretty consistently strong.

Any changes? Any change in spending you’ve seen patterns changing with oil prices sort of assuming to remain a little bit high than they have been over the last couple of years?.

No. We’ve really seen just consistent growth similar with the last many quarters in terms of aftermarket demand. I’ve met with our salespeople and reviewed our customers, our retirement plans. And I can tell you that, as of now, we’re not aware of any increased retirements due to the fluctuation in fuel prices.

We have certain retirement built to our models and we’re still continuing to operate under that. But we’ve now been advised that there’s any change in our customers utilization as a result of fuel prices. So I would say, just the continuing strengthening building of the aftermarket..

Okay. And then just one follow-up on the cash flow question. I guess, the lack of an increase and I realize your net income has only increased modestly. And – but depreciation also a little bit higher. So the reason for cash flows sort of remaining, the outlook remained the same.

Is that just perhaps a little bit on the working capital usage and then the deferred tax issue, Carlos, you mentioned?.

I would say, a lot of it, Larry, is due to the deferred tax situation I spoke about earlier. We had a pickup in appreciation for some CapEx and some acquisitions that we had in this quarter, but we’ll see. As you know, our guidance is generally conservative.

I want to get another quarter under my belt and see how Q3 plays out before we change that number..

Got it. Understood. Great. Thanks, guys. I appreciate it..

Your next question comes from the line of Drew Lipke from Stephens Investments..

Yes, good morning. Thank you for taking the time..

Good morning..

Are you okay?.

Yes, good morning, Drew..

Yes. Just first question for Victor. You highlighted the impresses growth inorganically that you’ve seen through the first six months.

And I’m curious as we look at that and maybe as you think of AeroAntenna, is there any kind of quarterly variability or seasonality with that business that we need to be aware of, or any kind of large project timing that could cause deviation in the second-half of the fiscal year, compared to the first-half?.

Hi, Drew, this is Victor. No, there really isn’t at Aero. There isn’t the seasonality. Of course, the delivery schedule is different every quarter. So it’s not going to be the same, but there’s not a particular repeat seasonality year-to-year.

And there are months of the year, where there are factory shutdowns either at the customer side or our side, let’s say, around holidays and things like that. So where it may be slower for a couple of weeks and we may see that. But I wouldn’t call it material usually..

Al right. Thanks, Victor. And then, Eric, it sounds like specialty products were no longer drag in the quarter.

Can you talk about some of the underlying demand trends there? And then maybe just kind of parsing out the organic growth transfer, both aftermarket replacement parts and then repair and overall that we saw in the quarter?.

With regard to specialty products, the sales were down, but just very, very slightly in the second quarter. And we’re anticipating, as we’ve said, a rebound in the second-half of the year.

That is still on track, in particular, there were some military programs that got slid to the right and these are defense programs, which were very comfortable with and believe are going to be very strong going forward. There were also some commercial programs, would slipped a little bit to the right.

But we think that in the second-half of the year, we’re going to be beyond that. With regard to organic growth, excluding specialty products, it was about 6% in the second quarter, which again is almost all due to volume very little due to price..

Okay.

And then what’s driving the improved gross margin in FSG? Is that maybe more mixed, or better volume utilization, since there’s not a lot of price benefit, or how should we think about that and then also just the impact of rising commodity costs?.

Drew, this is Carlos. I think the majority of the margin in FSG, some of that improvement was gross margin. As we get some of that specialty product business back online, back in growth mode, that does – it’s additive to our gross profit and to our OI, so that was helpful.

We also have the drag from amortization from Carbon by Design and A2C that we bought in 2017. But overall – so I was pretty pleased. If you look at the margin overall, just the OI margin for a second, it was consistent between quarters. And that’s what – it was a pretty big slug of amortization come in of those two acquisitions last year.

So naturally, their gross margin improvement from some of this recovery that Eric mentioned that we start towards the latter half of Q2 helped the situation.

So we have as well Eric even mentioned, as I believe, last quarter that we do have an expectation in Q2, the specialty products will have an uptick and, of course, that will be good for our margins..

That’s helpful. Thanks, Carlos. Thank you, guys..

You’re welcome..

Thank you..

[Operator Instructions] Your next question comes from the line of Michael Ciarmoli from SunTrust..

Good morning. This is actually Les in for Michael..

Good morning..

Good morning..

Victor, just to go back to that previous question of ETG and the organic growth rate. I mean, asked from what I understand, it’s all relative timing in 2Q.

But can you kind of give us indication of any certain product line it came from or end market? And then also, if you could give us a bit more color on the actually end markets specifically and space and communications?.

I’m sorry, I didn’t quite catch the full extent of your last question – the last part of the question. Could you….

Sure.

Yes, could you give us a little bit more color on kind of end markets you are seeing specifically in space and communications?.

Well, I’ll cover that first. In space and communications, our space businesses is healthy overall and doing nicely overall. But where we are seeing some weakness and where it is more difficult is in the Geo satellite market.

And I think, as you probably know, orders were pretty low, I think, about seven last year for Geo satellites and the remaining fairly low this year. And so to the extent we have products that ordinarily sells to those on the commercial side.

That is – that – that’s on the low side and that’s driven by number of factors and among those are, I think, including a wait-and-see attitude is that what will happen with the LEO sat constellations that are being announced plus some of the new terrestrial technologies and some of the improvement in fiber optic capability.

And so there’s a debate about what need there is and perhaps there was a little bit of a glut of GEO sat capacity for commercial communication. So that’s where we saw weaker in some of the space markets for us in the quarter, and I would expect that will take some time to sort out. But overall, space is doing well for us and it remains a good market.

In terms of the rest of the business, it’s sort of mixed in where the growth wasn’t as high as it had been in the prior quarter. But again, I would expect that to reverse itself as we get on in the remainder of the year. And so I’m not too alarmed about it..

Got it. Thank you. And I guess, just overall, and I guess, this goes for the team.

But – and packing order would you go for on M&A, any real kind of specific calls to a lack or product needs in the portfolio?.

Well, as you know, we’re very opportunistic and we focus on where the opportunities are as opposed to just trying to fill a particular market adjacency or a product line or something of that sort. So we cast the net broadly historically.

We are not going to wait for a particular niche to open up if it never opens up and that’s fine, it’s an opportunity it has to present itself and we’ll move on to something else.

So we’ll just continue to cast the net very broadly, obviously, anything we’re already in is of interest to us and anything adjacent to something we’re already in is of interest to us. And what is adjacent to us has grown dramatically and there’s just a lot of territory. There’s a lot of real estate, so to speak, that’s adjacent to what we already do.

So there’s just a tremendous amount of opportunity. And in terms of the acquisition pipeline, it’s very strong at this point. We’re looking at a lot of acquisitions right now on both sides of the business. And as you know though that doesn’t mean we will close on them.

Historically, we’ve got to go in and we’ve got to do the due diligence and make sure that the businesses are what they’re represented to be.

Although I think we have a pretty good record that once we reach a certain level with the negotiation with acquired businesses or businesses we’re talking with that we tend to see our – the ability to follow through on them. So we got a lot of good ones working on. But you don’t know if you’re going to close until it actually happens..

Great. Thank you for that color, guys..

You’re welcome..

Thank you..

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

Hey, good morning..

Good morning, Josh..

Good morning..

Just as a follow-up on the oil impact question in retirements.

How are you guys balanced just between legacy and next generation aircraft looking maybe across the portfolio?.

We are in the aftermarket space, typically, in our – the PMA and the repair business, that definitely spec more to products, which have been in service for roughly 10 years or greater since the original introduction of the aircraft. So by definition, we sort to handle it from 10 years, if you will, from first delivery until retirement.

On the distribution side, we are – we’re right upfront in the moment they need the parts we participate in that space. In the specialty products that’s both. There’s a little bit of aftermarket there, but it’s predominantly new equipment. So there we’re in the beginning part of the cycle much more than in the later part of the cycle.

And then and ETG is more like specialty products, as well as having some of the aftermarket component. But I would say, that’s through the entire lifecycle..

Okay, thanks for that. And then just one on capital deployment. I mean, if valuations of M&A and targets proved to be too rich, not to say they’re.

But what are your other capital deployment priorities maybe behind attractive M&A?.

Well, again, our focus is definitely on M&A and in growing the business. We are spending what we can spend in terms of making prudent investments to increase a plant and equipment and to be able to increase the product line. But we would not be afraid to go a period of time and accumulate cash in order to, if we couldn’t find proper opportunities.

And we feel that there are new companies being created all the time. Those new companies are often looking for homes, but there are various times in the cycle where it becomes a little more difficult to buy businesses. And if that’s the case, we can just sit very patiently and buy them when the time is right for the seller and for us.

But so far, we’ve done quite well this year. The pipeline is quite full. We’re looking at a lot of opportunities. So we’re pretty optimistic that we’re going to be able to continue to deploy capital even in this market..

Okay. Thank you, everyone..

Thank you..

And we have no further questions at this time..

Well, if there are no further questions, I want to thank everybody for participating and listening to this call. We look forward to speaking to you after our third quarter earnings, our release sometime in late August. And in the meantime, if you have any questions for any of us, we are available by telephone or personal visit, if you like.

And we wish you a good summer and we will speak to you in late August. So that is the extent that we are finished with the call. Thank you..

This does conclude today’s conference call. You may now disconnect..