Certain statements in this conference 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 lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space or Homeland Security spending by U.S.

and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to use new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development and manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieving operating synergies from acquired business; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue.

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

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. Ladies and gentlemen, thank you for standing by, and welcome to the Fiscal Year 2019 Fourth Quarter and End of Year Earnings Results.

[Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Laurans Mendelson. Thank you. Please go ahead, sir..

Thank you very much, and good morning to everyone on the call. Again, we thank you for joining us, and we welcome you to HEICO's Fourth Quarter and Full Year of Fiscal '19 Earnings Announcement Teleconference.

I'm Larry Mendelson, 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.

Before reviewing record fourth quarter and annual results, I would like to take a moment and thank all of HEICO's team members. We are proud to lead some of the hardest working and most successful professionals in our industry.

I take great pride in saying that the combination of our exceptional workforce and their entrepreneurial culture has been a winning formula for HEICO and has undoubtedly enabled us to achieve a 29-year compound annual growth rate of 16% in net sales, 19% in net income and 24% in our stock price.

Now I'd like to take a few minutes to summarize the highlights of our record fourth quarter and full fiscal year results.

Consolidated fourth quarter fiscal '19 net sales of $541.5 million, operating income of $120.6 million and net income of $85.7 million all represent record results, driven principally by strong double-digit organic growth within Flight Support and mid-single-digit organic growth within ETG and the impact of our fiscal '19 acquisitions.

Consolidated fiscal '19 net sales of $2,055.6 billion operating income of $457.1 million and net income of $327.9 million also represent record results, driven mainly by our robust double-digit organic growth within both of our operating segments as well as the excellent operating performance of our fiscal '19 acquisitions.

Consolidated net income and operating income in the fourth quarter of fiscal '19 are up 27% and 16%, respectively, on a 14% increase in net sales. Consolidated operating margin improved to 22.3% in the fourth quarter of fiscal '19 and that was up from 21.7% in the fourth quarter of fiscal '18.

Consolidated net income and operating income in FY '19 are up 26% and 21%, respectively, on a 16% increase in net sales. Consolidated operating margin improved to 22.2% in fiscal '19 and that was up 1 full point from 21.2% in fiscal '18.

Consolidated net income per diluted share increased 27% to $0.62 in the fourth quarter of fiscal '19 and that was up from $0.49 in the fourth quarter of fiscal '18. And consolidated net income per diluted share increased 26% to $2.39 in fiscal '19, that was up from $1.90 in fiscal '18.

The ETG group set an all-time quarterly net sales record in the fourth quarter of fiscal '19, increasing 15% over the fourth quarter of fiscal '18, and that resulted from the excellent operating performance of the fiscal '19 acquisitions as well as strong demand for our defense-related products.

Flight Support also set all-time quarterly net sales records in the fourth quarter of fiscal '19, increasing 12% over the fourth quarter of fiscal '18, and that principally reflects strong double-digit organic growth within our aftermarket repair and overhaul services as well as our replacement parts product lines.

Cash flow provided by operating activities increased 33% to a record $437.4 million in fiscal '19 and that was up from $328.5 million in fiscal '18. Cash flow provided by operating activities increased 9% to $124 million in the fourth quarter of fiscal '19 and that was up from $113.7 million in fourth quarter of fiscal '18.

As you all can see, we continue to generate significant cash flow for our shareholders by remaining focused on developing niche products and our strategic commitment to highly decentralized and efficient entrepreneurial structure.

As we reported yesterday, the Board of Directors declared an $0.08 per share regular semiannual cash dividend on both classes of stock, and this is payable on January 23, 2020, to shareholders of record of January 9, 2020. The cash dividend represents a 14% increase over the prior semiannual per share amount of $0.07.

The cash dividend was our 83rd consecutive semiannual cash dividend since 1979. The increased dividend confirms our confidence in continued strong cash flow, HEICO's consistent growth strategies and our desire to continue rewarding shareholders while at the same time retaining sufficient capital to fund internal growth as well as acquisitions.

In September, our dB Control subsidiary acquired all of the outstanding stock of TTT-Cubed, a designer and manufacturer of radio frequency sources, detectors and controllers for certain defense applications. dB Control is part of our ETG group, and we expect the acquisition to be accretive to earnings within the first 12 months following its closing.

Yesterday, we announced the acquisition of 80.1% of the stock of Quell Corporation, which designs and manufactures EMI, RFI and transient protection solutions for a very wide variety of connectors that principally serve customers within the aerospace and defense markets.

Quell is part of our ETG group, and we expect the acquisition also to be accretive to earnings within the first 12 months following closing. In October '19, our Dukane Seacom subsidiary received FAA TSO certifications for their special underwater locator beacon and low lithium battery, and we're pleased to achieve these certifications.

This particular product, which we call DK290 builds on Seacom's product legacy and simplify shipping and handling processes with the lower lithium content. And in December '19, our VPT subsidiary earned the Military & Aerospace Electronics Innovators Award Platinum recognition for their gallium nitride-based DC to DC converters.

This distinction is an important one and is the Military & Aerospace Electronic Innovators highest honor and recognizes companies in the aerospace and defense electronics industries which have made groundbreaking contributions in innovative solutions to solve design challenges.

As always, we thank VPT and their incredibly capable management for the outstanding accomplishments, and we are really humbled by their persistent excellence in innovation.

And just a comment that the management and the people of VPT are some of the most unusually talented individuals, but that's not exceptional for HEICO because we have these people operating companies throughout our system. They are the ones that make HEICO successful.

At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group..

Thank you. The Flight Support Group's net sales increased 12% to a record $324.7 million in the fourth quarter of fiscal '19, up from $290.3 million in the fourth quarter of fiscal '18. The Flight Support Group's net sales increased 13% to a record $1,240.2 billion in FY '19, up from $1,097.9 billion in fiscal '18.

The increases in the fourth quarter and fiscal year of '19 are attributable to strong organic growth of 12% and 13%, respectively, mainly due to increased demand in new product offerings across all of our product lines.

The Flight Support Group's operating income increased 14% to $62.2 million in the first -- in the fourth quarter of fiscal '19, up from $54.6 million in the fourth quarter of fiscal '18.

This increase principally reflects the previously mentioned net sales growth and the favorable impact from the changes in the estimated fair value of accrued contingent consideration, partially offset by a decrease in gross profit margin, mainly reflecting a slightly less favorable product mix within our specialty products product line.

The Flight Support Group's operating income increased 17% to a record $242 million in fiscal year '19, up from $206.6 million in fiscal year '18, which resulted mainly from the previously mentioned net sales growth and improved gross profit margin, mainly attributable to higher net sales of our aftermarket replacement parts and efficiencies realized from the net sales growth.

The Flight Support Group's operating margin increased to 19.2% in the fourth quarter of fiscal '19, up from 18.8% in the fourth quarter of fiscal '18, principally reflecting the previously mentioned changes in the estimated fair value of accrued contingent consideration, partially offset by a slightly less favorable gross profit margin.

The Flight Support Group's operating margin increased to 19.5% in fiscal year '19, up from 18.8% in fiscal year '18, principally reflecting the previously mentioned improved gross profit margin and efficiencies realized from the net sales growth.

With respect to fiscal year '20, we are estimating net sales growth of approximately 7% to 8% over the prior year, and the full year Flight Support Group operating margin to approximate 19.5% to 20%. Further, we estimate mid- to high single-digit organic growth in fiscal '20. These estimates exclude additional acquired businesses, if any.

Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies group..

Thank you, Eric.

The Electronic Technologies Group's net sales increased 15% to a record $219.5 million in the fourth quarter of fiscal '19, up from $191.1 million in the fourth quarter of fiscal '18, which is attributable to the favorable impact from our fiscal '19 acquisitions as well as organic growth of 4%, mainly due to increased demand for our defense products.

The Electronic Technologies Group's net sales increased 19% to a record $834.5 million in fiscal '19, up from $701.8 million in fiscal '18 as a result of 10% organic growth, mainly due to increased demand for certain defense and aerospace products and the impact from our fiscal '19 acquisitions.

The Electronic Technologies Group's operating income increased 13% to $64.6 million in the fourth quarter of fiscal '19, up from $57.1 million in the fourth quarter of fiscal '18, principally reflecting the previously mentioned net sales growth, partially offset by higher acquisition-related expenses.

The Electronic Technologies Group's operating income increased 20% to a record $245.7 million in fiscal '19, up from $204.5 million in fiscal '18.

This increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, mainly driven by increased net sales and a more favorable product mix for certain defense products and efficiencies realized from the net sales growth, partially offset by higher performance-based compensation expense and higher acquisition-related costs.

The Electronic Technologies Group's operating margin remained strong at 29.4% in the fourth quarter of fiscal '19 compared to 29.9% as reported in the fourth quarter of fiscal '18.

The operating margin in the fourth quarter of fiscal '19 is inclusive of the higher acquisition-related costs associated with a recent acquisition, which negatively impacted the current period operating margin by approximately 0.4%.

Had we not incurred these additional costs, the fourth quarter fiscal '19 operating margin would have been consistent with the fourth quarter fiscal '18 operating margin.

The Electronic Technologies Group's operating margin improved to 29.4% in fiscal '19, up from 29.1% in fiscal '18, which resulted mainly from an improved gross profit margin, partially offset by increased SG&A expenses as a percentage of net sales, inclusive of higher acquisition-related costs and higher performance-based compensation expense.

With respect to fiscal '19, we are estimating net sales growth of approximately 5% to 6% over the prior year, and we anticipate the full year Electronic Technologies Group's operating margin to approximate 28% to 29%. Further, we estimate low to mid-single-digit organic growth in fiscal '20, which could be higher in fiscal '20 depending on U.S.

defense spending allocation. These estimates exclude any additional acquired businesses, if any. I turn the call back over to Larry Mendelson..

Thank you, Victor. Moving on, consolidated net income per diluted share increased 27% to $0.62 in the first quarter of fiscal '19 -- in the fourth quarter of fiscal '19 and that was up from $0.49 in the fourth quarter of fiscal '18.

Diluted earnings per share increased 26% in the fiscal year to $2.39, and that was up from $1.90 in fiscal year '18, and these increases reflect the very strong operating performance within both segments, Flight Support and ETG. Depreciation and amortization expense totaled $21.8 million in the fourth quarter of fiscal '19.

That was up from $19.7 million in the fourth quarter of fiscal '18, and totaled $83.5 million in fiscal '19 and that was up from $77 million in fiscal '18.

The increase in the fourth quarter and fiscal year '19 principally reflects the incremental impact of higher depreciation and amortization expense of intangible assets from our fiscal '19 acquisitions. R&D expense increased 7% to $17.9 million in the fourth quarter of fiscal '19. That was up from $16.8 million in the fourth quarter of fiscal '18.

And it increased 16% to $66.6 million in fiscal year '19, and that was up from $57.5 million in fiscal '18. Significant new ongoing product development efforts are continuing as usual at both Flight Support and ETG, and we continue to invest approximately 3% of each sales dollar into new product development.

Consolidated SG&A expense was $88.8 million and $82.8 million in the fourth quarter of fiscal '19 and fiscal '18, respectively, due principally to the impact of fiscal '19 and '18 acquisitions, and that was partially offset by a favorable change in the estimated fair value of accrued contingent consideration.

Consolidated SG&A expenses were $356.7 million and $314.5 million in fiscal '19 and fiscal '18, respectively, due principally to the impact of fiscal '19 and '18 acquisitions as well as higher performance-based compensation expense and changes in the estimated fair value of accrued contingent consideration.

Consolidated SG&A expense as a percentage of net sales decreased to 16.4% in the fourth quarter of fiscal '19, down about 1% from 17.4% in the fourth quarter of fiscal '18, and this is mainly attributable to favorable changes in estimated fair value of accrued contingent consideration.

Consolidated SG&A expense as a percent of net sales decreased to 17.4% in fiscal '19, down slightly from 17.7% in fiscal '18, which is mainly attributable to efficiencies realized from net sales growth.

I think everybody on the call can understand that as we grow our business, we are, in effect, shrinking the SG&A expense, so it's a very beneficial increase in our performance. Interest expense was $5.2 million in the fourth quarter of fiscal '19.

That was compared to $5.1 million in the fourth quarter of fiscal '18 and $21.7 million in fiscal '19 compared to $19.9 million in fiscal '18. The increase in fiscal '19 was principally due to higher interest rates, partially offset by a lower weighted average balance outstanding under our revolving credit facility.

Other income and expense in the fourth quarter and fiscal '18 and '19 was not significant, so we won't comment on it. Income taxes. Our effective tax rate in the fourth quarter of fiscal '19 decreased to 19.8% compared to 24.9% in the fourth quarter of fiscal '18.

And this decrease principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO corporate leadership compensation plan as well as the reduction in the federal tax rate from a blended rate of 23.3% in fiscal '18, down to 21% in fiscal '19.

Our effective tax rate in fiscal '19 decreased to 17.8% from 19.8% in fiscal '18, and the decrease is mainly attributable to the reduction in the federal tax rate from a blended rate of 23.3% in fiscal '18 to 21% in fiscal '19.

The decrease in our effective tax rate in fiscal '19 also reflects a $14.3 million larger tax benefit in fiscal '19 from stock option exercises compared to fiscal '18, partially offset by the net impact of certain discrete tax benefits recorded in fiscal '18.

The provisions of the Tax Act that became effective for HEICO in fiscal '19 did not have a material net effect on the company's effective tax rate. Net income attributable to noncontrolling interest was $6.9 million in the fourth quarter of fiscal '19 compared to $6.7 million in the fourth quarter of '18 -- fiscal '18.

Net income attributable to noncontrolling interest was $31.8 million in fiscal '19 compared to $26.5 million in fiscal '18. The increase in the fourth quarter and fiscal year '19 reflects improved operating results of certain of our Flight Support Group and ETG subsidiaries in which noncontrolling interests are held.

For the full fiscal '20, we estimate a combined effective tax rate and noncontrolling interest rate of 19% to 20% of pretax income. Now moving on to the balance sheet and cash flow. Our financial position and forecasted cash flow remain very strong.

As we discussed earlier, cash flow provided by operating activities was very strong and increased 33% to a record $437.4 million in fiscal '19, and that was up from $328.5 million in fiscal '18.

Cash flow provided by operating activities increased 9% to $124 million in fourth quarter of fiscal '19, and that also was up from $113.7 million in fourth quarter of fiscal '18. Our working capital ratio was 2.8 and 2.6x as of October 31, '19 and '18, respectively.

DSOs, day sales outstanding of receivables, was 47 days as of October 31, '19, pretty much comparable to the same date in '18. And of course, we closely monitor receivable collections to limit our credit exposure. We have historically had very few losses on credit.

No one customer accounted for more than 10% of net sales, and our 5 -- top 5 customers represented about 20% of consolidated net sales in both fiscal '19 and '18. Inventory turnover rate of 124 days for the year ended October 2019 was comparable to the same period in '18.

Total debt to shareholders' equity decreased to 33.2% as of October 31, '19, that was down from 35.4% as of October 31, '18. Net debt, which is cash -- total debt less cash and cash equivalents, of $505 million to shareholders' equity decreased to 29.8% as of October 31, '19, and that was down from 31.5% as of October 31, '18.

Net debt-to-EBITDA ratio improved to 0.93x, that's less than 1x EBITDA, as of October 31, '19, compared to 1.04x as of October 31, '18. And during fiscal '19, we successfully completed 7 acquisitions. I mean, clearly, I'd just point out something which is obvious that our debt-to-EBITDA ratio is extremely low. We have tremendous liquidity capability.

We continue to look for acquisitions, good acquisitions, but we are very disciplined in what we look for, but we certainly have the firepower and the financial strength to accomplish what our growth goals are.

We have no significant debt maturities until fiscal '23, and we will utilize our financial flexibility to aggressively pursue the high-quality acquisitions in order to accelerate growth and maximize shareholder returns.

As we look ahead to fiscal '20, we anticipate net sales growth within Flight Support and ETG resulting from increased demand across the majority of our product lines and our commitments to developing new products and services, further market penetration, pursuing an aggressive acquisition strategy with discipline while maintaining our great financial strength and flexibility.

Based upon current economic visibility, we believe fiscal '20 will be a record -- another record year. We are estimating approximately 13% to 14% growth in full year net income, 6% to 8% growth in full year net sales over fiscal '19.

We anticipate fiscal year '20 consolidated operating margin to approximate 21.5% to 22%, depreciation and amortization expense about $89 million, CapEx to approximate $42 million, cash flow from operations to approximate $475 million, and these estimates exclude additional acquired businesses, if any.

I just want to mention at this time that, historically, many analysts have written, and correctly so, that coming out of the box and giving initial guidance for the past number of years, HEICO has given that guidance on the conservative side. I do believe -- without sticking my neck out too far, I do believe that we will be conservative again.

That is our policy, and we would rather under promise and over perform than promise something that we cannot deliver. So I really -- hopefully, as you know, our target growth is bottom line growth net income of 15% to 20% over the prior year, and I'm very confident that we will be able to accomplish that in fiscal '20.

In closing, HEICO's team members have delivered these outstanding results and again, deserve the credit for the hard work, the discipline it took to successfully navigate another quarter.

Our team members continue to win in the markets they serve, and HEICO's management team has the utmost respect for everything they do to make this company a great success. Unfortunately, we can't reflect the quality and the competence of the people within HEICO, the team members cannot be reflected in the financial statements.

However, what they do is reflected in the performance and driving and the growth of net income annually, and this has happened over the past 30 years, so I don't think it's a flash in the pan. With that, that is the extent of our prepared remarks, and I would like to open the floor for questions. Thank you..

[Operator Instructions]. Our first question comes from the line of Louis Raffetto from UBS. .

So thanks for a little bit of clarity on the -- a little bit of the disconnect between the sales growth and the margin guidance and net income growth.

But can you give us a little bit more, what's driving down the combined interest -- I'm sorry, tax rate and NCI from sort of 25% to this 19% or 20%? Is there a special tax item? Or what's really driving down the NCI next year, I guess, if it's not tax?.

Louis, this is Carlos.

Can hear me okay?.

Yes..

So as you can recall from looking back at the year, our -- both classes of shares had nice growth in stock appreciation. And one thing that we did experience in our fiscal year was an acceleration of some option exercises.

What will wind up happening is, as those options get exercised, the company gets a tax benefit for the appreciation, if you would, of the shares [indiscernible] the benefit of our team members in the form of compensation expense.

We recognize that every quarter because we had almost double the amount of option exercises in fiscal '19, which, principally, the majority of them were due to time outs. We have 10-year options in the tenth year, if you want to exercise and you use them, so we have quite a few options in that situation.

Those get exercised this year about double the prior year. So that is going to cause us to have the lower tax rate next year, the true tax cash benefit to HEICO, and we'll experience that in Q1 of fiscal '20..

Okay.

So similar to last year, just a larger magnitude?.

Yes. And we also have pretty consistent NCI rates with the prior year, so roughly around 7%..

Okay. All right. And then just one quick follow-up, I guess, for Eric. I understand that you guys don't have a single platform risk, I guess, but how do you guys think about the guidance, given the 737 MAX news after the close yesterday..

Louis, I think HEICO is probably one of the companies in the industry with the least impact as a result of the 737 MAX. We do have some new content that goes on it, and that will be impacted, but I believe that's going to be mitigated by the increase in our aftermarket part sales. So I don't see this as a major item to HEICO.

HEICO has always got various speed bumps along the way. We take care of those. We don't call out special excuses for special events. So I'm very confident that there's not going to be much of an impact to HEICO..

Louis, also, we can't factor it in and give you a hard number. But traditionally, as older airplanes fly, that's our business, supplying parts in older airplanes. So you can put two and two together for yourself..

Sure. No, should be -- again, I don't want to call it benefit. But to Eric's point, shouldn't be a -- least impact in the segment..

We have our next question from the line of Robert Spingarn from Crédit Suisse..

So I wanted to dig into the guidance a little bit for both segments. You talked about your organic growth expectations, a little bit different for the two. So Eric and Victor, if you could walk through how you think about growth.

And Eric, in particular, based on that last question, it does look like the MAX is going -- the redelivery of the MAX is going to slip here a bit. We've got replacement lift, if you will, or ultimate lift in there with older aircraft consuming parts.

So how -- to what extent does that inform your expectations for '20? And then if you could also comment on the directionality of the margins in each segment..

Sure. Rob, this is Eric. I'll go ahead and go first. With the Flight Support Group, we had organic growth in the fourth quarter of fiscal '19 at 12%, and that was against an extremely difficult comp. In the fourth quarter of fiscal '18, our organic growth was 13%.

And so that means between the 2 years, we had organic growth of 25%, which is really a number that is outstanding, and frankly, I've never seen before at HEICO or at any other company to be able to post 25% organic growth over a 2-year period.

I think the fourth quarter surprised us with the strength that we had in fiscal '19 coming on top of fiscal '18. And frankly, I would have expected some of that to fall into fiscal '20. So I think that's one of the things that's tempering down our expectations for fiscal '20.

We just shipped so much in fiscal '19 because that's when our customers wanted it that it, in effect, made our '19 number is higher, and I believe some of those shipments probably normally would have occurred in fiscal '20. So I think that they're very strong. I think our margins continue to increase. Last year, I think it was 18.8% operating margin.

This year, it was about 19.5% for Flight Support Group approximately. And so I anticipate the margins will continue to trend in that area. Did that answer your question? I don't know....

I think the other variable that we're all a bit focused on, again, is just with regard to MAX, and I know we're all kind of guessing here on timing, and you may not be able to really calibrate how much of your strength is coming from those temporarily extended airplanes.

But is there a range, is there a right way to think about your numbers if we have an early MAX return in calendar '20 versus a late return? Is there any kind of thought process around that we can anchor to?.

It's really hard to do, I mean, even at our level. Our -- we do have some content, which I mentioned on the MAX, and of course, that does get negatively impacted, but it gets mitigated by the aftermarket. So I think that the MAX delay is probably net-net beneficial for HEICO -- or I'm sure it's net beneficial for HEICO.

But it's very difficult for us to get on really where that is because it really depends on how much money the airlines decide to put into the legacy fleet to keep it flying. I suspect after the announcement yesterday that airlines will be more encouraged to spend money because they realize this is not going to be a fast return to service.

So when I talk with our folks internally, frankly, I expect that there should be very good aftermarket revenues as a result of this. And of course, you never know how long this could take to get corrected.

And now that the pause is in there, it could end up taking longer, I think, than people originally thought in terms of resolving the regulatory and the technical and the manufacturing issues. So I think net-net for our aftermarket business, it will be good, but it's very hard to figure out the exact number.

The other thing, which I also did want to point out is -- you asked about margins is that while we had 12% organic growth in the fourth quarter in Flight Support, but we actually had operating income growth of 17%, and that was basically all organic.

And I think that our team really did a phenomenal job because when you look at 17% organic growth in a single quarter on top of a difficult comp is really, frankly, even surprising me to the upside..

Rob, this is Larry, I just want to add my own thoughts. The budgets and the estimates and the guidance was done prior to Boeing announcing the pushout of the MAX production and....

Of course..

So to my knowledge, I don't think our knowing our people, who actually tend -- Carlos always says to me, those guys are sandbagging me. So -- and knowing these people, I suspect that they didn't put a lot of extra power into the benefits that we may receive.

I think I'd just look at it business as usual without any effect -- additional impact from the MAX delay. So I don't think the guidance contains much of a push as a result of what happened with the MAX..

Right. Okay.

Thanks for that? Victor, on your side?.

Yes, Rob. So I would say that, as I have in the past, we go through this budget process and each subsidiary submits a bottoms-up budget, and they are generally conservative. And then I go through with each company, we review the budget, and I get a sense for where I think they are perhaps being too conservative and something too aggressive.

And then there's everybody in between. And so this is really based on what I received from our guys. And my sense of it is that they are being more conservative than usual.

I think they're concerned over where things could go in a number of areas like the defense budget and some other areas in space, which is doing very well for us right now, by the way, at this point in time and has a very good outlook for us for next year. So I just kind of have to accept what they give us.

And I don't really make too many adjustments unless they basically acknowledge to me that they know they're right..

Victor, just on that -- on the difference between space and defense, and I guess, you've some commercial as well. But I think you said, both in the press release and in your comments, that defense drove the organic growth in the quarter, in the latest quarter..

Correct..

And so does that mean that the other areas were flattish or maybe down a little? And how do we think about those three pieces within your guide for this coming year?.

Yes, that's a very good question. The answer is, no, the others didn't do poorly. They just didn't -- overall, didn't do as well in the period.

And for the next year, I would say it's -- we've got a pretty good growth estimate across the board, but we have pockets here and there, companies that are giving us lower forecast than I think they're really believing internally themselves.

And some of that is on the defense side, but we're thinking 2020 will be very good for us, for example, on the space side, should be very good for us. Commercial aviation is kind of a mixed bag for us for fiscal 2020. We've got some good prospects there.

But I think our guys have been, again, on the conservative side, and that's sort of proven out a little bit so far. But I can't really make any trends out of the first month or 6 weeks of the fiscal year..

Right.

And you're saying you think that from a margin perspective, you'll be just, I guess, a hair around where you've been, a hair below?.

Yes, exactly. Exactly. And look, as you've heard me say before, when our guys come in and they've got businesses that are averaging, before amortization of intangibles, in the low 30s. And they come in to you and they say, well, somebody says, I'm going to be 50 basis points lower.

I really can't get too upset with them because in absolute terms, they're doing great. It is typical for them, again, to come in and give me a conservative look at the margins. But I believe, and you've heard me say this before, and I think we believe and you've heard us say this before, that we prefer to have people rely on our official guidance.

And if we do better, great, but if not, then we feel comfortable we're doing the right thing. Carlos has something to add..

Well, Rob, I would just add to Victor and Eric's comments. You'll see this in the K, but our backlog is up that -- you'll see backlog is up like 15% over last year at this time, which indicates to me that there's strength going into 2020.

I think one of the challenges when we put our budgets together, it was really across those segments, was we had breakneck growth in our defense business.

We anticipated that, but the question is, at what point does that moderate a bit? And I think what Victor and Eric has done in the budgets and really what their subsidiaries and business unit leaders has done is they've moderated their expectations.

[Indiscernible] go to describe, we can't continue to grow at, what I'll call, breakneck pace in that segment of our business. Now I hope I'm wrong, and I think we all, as a management team, believe that we'll continue to do very well and that, that will continue.

But as Larry mentioned, and Victor and Eric both mentioned, our guidance is relatively conservative coming out of the box, and we hope to do better and over deliver..

We have our next question from the line of Greg Konrad from Jefferies..

Great quarter. Not to harp on the outlook and specifically ETG, but in the prepared comments, I think, Victor, you mentioned that ETG could be higher based on U.S. defense allocations.

Are there particular areas of the budget that we should be focused on in terms of upside drivers?.

Well, I think it's -- I don't want to say which programs, but I think it's more specific on programs that our guys are giving me -- in a few businesses, an isolated number of incidents -- subsidiaries that they're giving me -- giving us a more conservative view than we think is likely.

But they are -- I mean, it's specific programs, it's specific products..

That's helpful. And then there were some press reports about expansion of PMA parts in Asia.

I mean any color around potential penetration and maybe regional opportunities that you're seeing within the market?.

We continue to do very well in Asia. We've been selling into Asia now for over 25 years. Those customers are already great customers for us, and I just anticipate continued enthusiasm and excitement for what we're doing.

I met with our sales leadership over the last couple of weeks and have gone on a review -- a customer-by-customer review, and I can tell you we're doing extraordinarily well. There's been a lot of acceptance, and there's a lot of enthusiasm around our parts..

And then just quick -- I'm sorry..

No, no, that's right. Without naming specific customers, in general, there's been a tremendous amount of enthusiasm for our parts. HEICO has got really an exceptional quality and technical reputation in the industry with a 75 million parts shipped and no worthiness directives or in-flight shutdowns.

We really have a technical experience rating with these airlines unlike any other -- frankly, any other supplier that works with them. So in particular, the Asian customers really appreciate that. So I think we're going to continue to do very well..

And then just a follow-up on PMA. I mean, obviously, the FAA has kind of looked at their proper specific aircraft certification.

I mean, is there any read-through or carry over into the PMA market and maybe opportunities or changes to the process?.

I don't believe so. I think the FAA is very satisfied with the process. HEICO has a very good relationship with the FAA. They trust us. And our -- I would have to say our relationship has never been better. So we don't see any impact -- any negative impact..

Our next question comes from the line of Peter Arment from Baird..

Nice quarter. And Carlos, maybe just a quick one on just CapEx. Pretty big step-up kind of where you finished versus '19 that $42 million.

Is that all timing related? Or is there anything specific you want to call out?.

No, there's some specific growth capital we have. For fiscal 2020, we have some expansion that we're planning on, which is not speculative, and we have some renovations we're doing to accommodate growth. So that's in the budget. It's not too dissimilar from the prior year. I think last year, we just had an extraordinarily low spend.

Keep in mind, we brought on 7 new companies and they have needs too. So I think overall, even though it appears like a big step-up from '19, if you look at '18, it's pretty similar to that spend. And so I think that we're going to be around that ballpark number.

Now having said all that, right, at the end of the day, we always -- our guys always wind up being very frugal. And as Larry mentioned, the guys have mentioned before, there's a lot of buy used equipment instead of new equipment, they can get it cheaper. They still retain sort of that entrepreneurial mindset on spend.

So I don't -- at this point, I don't expected exceeding that, but I do, based on our plans, expect it to approximate that $42 million..

Okay. That's helpful. And then just quickly on M&A. You continue to obviously source deals and quite successfully, another strong year, $240 million, I think $41 million you spent in fiscal '19.

Maybe Larry, just comment a little bit on the environment where multiples have been high for an extended period of time, but you're still able to get deals done?.

Yes. I think that's exactly right. Multiples are high. We still are the best buyer actually for the type of company that we want to acquire, and that is an entrepreneurial company that has really -- has heart in the business. And we are the best buyer from a cultural point of view. There are a lot of opportunities, we're looking at them.

And I would say, the runway is filled, we just have to find the right companies. So I mean, last year, we did 6 and the -- or 7, and we -- the atmosphere wasn't very much different than it is today. Quite honestly, we see some of the private equity people paying enormous prices. They don't always make the right decision.

Sometimes they do, they do very well. But I think we'll be able to do our normal, if you will, number of acquisitions and the kind of acquisitions we want. So I think that, yes, price is a consideration.

But we've found in the past, too, when prices drop and conditions are bad, sellers also pull out of the market because they feel they missed the peak and they're going to wait till the price comes back. So again, I think it's kind of normal for us, and we'll just continue doing what we do.

Again, if we did 7 last year, the market conditions aren't that much different today than they were over the last year..

At we have our next question from the line of Ken Herbert..

Eric, I first wanted to ask, in either your distribution or your PMA businesses, has pricing -- I know the vast majority of your growth is volume, but has pricing at all been any more of a tailwind, either in the third or in the fourth quarter, in particular? Considering pricing for the aftermarket industry in the aggregate has been a much stronger tailwind in '19 than in '18, but I'm curious if that's provided any cover for you to see any incremental benefit recently?.

At HEICO, we often speak with investors to say, why don't we push pricing. And our philosophy really has been to maintain outstanding customer relationships and to leave a lot on the table to make sure that the customers want to come back for more.

Because with organic growth of 25% over a 2-year period and operating income growth of roughly 17%, all organic, in the fourth quarter, we believe that we're doing very well, and if you will, we want to share the benefits. So to answer your question, no, we have not been pushing pricing. We know that this is an opportunity for us.

It is something that we have not done and frankly, in order to just continue to develop the relationships that we have with our customers.

You've been to a number of our customer events, and I at -- the energy that our customers feel towards HEICO and the spirit among our people is sort of unique in the industry, and I think moderating pricing is one of the ways that we are able to do that.

So frankly, private equity folks, whether on the repair side or the PMA side, they've got to push pricing because they've got big debt payments. We don't have that. So we're able to really take the long view, and I think that's how we've been able to accomplish this over 30 years..

Okay. That's very helpful. And if I could, just on the fourth quarter growth maybe in a slightly different way. I wanted to follow-up on the question asked earlier around international opportunities.

Can you provide any more maybe detail on the growth you're seeing with airlines or customers in emerging markets that are coming off a relatively lower base for you relative to maybe the more established Western Europe and North American legacy airlines? Is there any color you could provide on how the growth might break out? And to what extent you're seeing penetration into what historically have been more challenging customers out in the emerging markets?.

Yes. We're doing very well with new customers. The opportunity for us is to bring on new customers as well as to take existing customers and broaden the product line. So overall, we're doing, I think, very well in both of those areas.

But frankly, that story is consistent with the last 20 years, and I wouldn't say that it's really any different than it is now. But we -- it continues to, I would say, grow at a similar rate to how it has in the past..

Okay. That's great. And just finally, if I could.

Victor, were there any impact or any delayed shipments in October for you as a result of the lack of a fiscal '20 defense budget? I mean was timing at all a factor of some of what maybe -- I think you alluded to this earlier, maybe what held back some of the organic growth for you in the fourth quarter that could have maybe slipped into '20? Or was that not a factor?.

It's a good question. For the defense budget, no, I don't think -- the continuing resolution issues and so on, I don't think that really impacted us.

We do have, every quarter, shipments that slip from 1 to the other for any number of ordinary reasons like the truck doesn't show up or the customer doesn't perform their final test and evaluation, things of that nature. And we had what I would call the typical noise level of that in the fourth quarter. So nothing notable at this point..

We have our next question from the line of Michael Ciarmoli from SunTrust..

I don't know if this is Eric or Victor, but maybe just to go back to PMA penetration and adoption, certainly within the commercial space, it seems like you're very well penetrated.

Can you maybe talk about what you're seeing within the DoD marketplace, especially as they look to cut costs, maybe wean themselves off of some of the sole source suppliers out there? Are you -- as you're looking at that market is there a lot of runway for growth? Or maybe if you could just give some color on penetration rates and what you're expecting at the DoD level there?.

Mike, that's a great question. We think that there is a good opportunity. We're harvesting that opportunity. It is a very difficult market to access because the DoD may complain about high prices in particular areas, but they have to really dedicate their resources to go after it.

We are succeeding in that area, and I think due to HEICO's reputation that we're able to do well.

Does that gives you the color you're looking for?.

It did.

And can I assume it's fixed wing, rotorcraft, kind of the normal product lines that you might penetrate in the commercial world?.

Yes. Yes, I think that that's fair. It's probably more fixed wing..

Got it. And then just maybe back to the 737 MAX situation. And I mean thinking about the return to service, obviously, a lot of the carriers are looking for extra capacity, have used older planes.

Do you get a sense that there could be some headwinds when we finally get that return to service, pick a date, maybe it is midyear for a global return to service? I mean if we do see a wave of legacy retirements, and we see a lot of surplus parts used in serviceable material in the marketplace, do you think that actually flips around and create some headwinds for you guys that we should be aware of?.

I don't think so. My guess is -- and look, I frankly don't know much more than what everybody reads in the Wall Street Journal and reads in the various analyst reports and the publications. I mean this is a very complex situation, and I feel very badly for Boeing for what they're going through with this.

But it's very difficult to -- I mean, this is a monumental task that these folks have ahead of themselves. So you've got to assume that it's going to take a good chunk of time until a return to service. Guess -- who knows, 6 months or something. And once that happens, they then have to get a 400-foot aircraft that are built into the system.

So I think that's going to take a period of time. I do think that airlines who have been deferring maintenance and anticipating a return to service are going to have to finally, if you will, bite the bullet and do some of this maintenance. But all of this news is relatively new, so it's hard to guesstimate on what the impact to HEICO is going to be.

But no, I don't anticipate some massive retirements based upon the return to service of these aircraft. I think it's going to take really a while to get them delivered. So yes..

Got it. Okay. Okay. Last one for me. Just can you give a little bit more color, Eric, on the product development.

Are you seeing more opportunities on specific parts of the plane, whether it's engine, airframe, whether it's some of the newer planes coming off warranty, and you're seeing new greenfield opportunities? Just anything you could provide around how you're spending and where those new products are being targeted for..

Sure. I just say it's really consistent with every place in the past. We're doing very well over on the engine side, the component side, across the fleet, narrow-body, wide-body, I think it's a broad-based support for our business.

As I mentioned, Ken had asked this question, I think by being very customer-friendly with regard to pricing, that also helps us and has helped to develop the culture that HEICO has and the customer appreciation that we've got. So it's really very broad-based across our entire product family..

We have our next question from the line of George Godfrey from CLK..

Nice quarter as always. Just wanted to come -- I know we're beating a dead horse here on the 737.

But can you provide any average content over any time period that you've looked at within the fleet, and I realize many planes, many customers, but is there any way to gauge over a 3 or 5 year period on a per platform, how much an average customer might take in content from HEICO for that plane? And that's really all I had..

Yes, it's a good question, but due to the decentralized nature of our business, it would be very difficult for us to determine exactly what that number is. It depends on -- based on the burn rate of the parts and which customers approve, which part, I think we have it layered into our expectations.

But it -- by itself, it really would be difficult to do..

We have our next question from the line of Gautam Khanna from Cowen..

Just had a couple of questions.

One, I was wondering if you could tell us where you are on the CFM part development and qualification, any news there? When do you anticipate launching more products given the developments earlier in the year?.

So I would say we're doing very well over in that area. We continue to develop products. I think there's a lot of customer interest. I'm reluctant, due to competitive reasons, to specifically call it out. But I think that the IATA resolution has been uniquely good for HEICO. And frankly, I think CFM is going to continue to do extremely well.

They've got a lot of parts in that engine, we're going to take our little piece. But I think it will continue to be important to HEICO as well as CFM..

Okay. And can you also maybe -- in the Q, it usually comes out, but the growth in aftermarket parts versus R&O in the quarter, what are you seeing in R&O..

In the quarter? We saw it -- actually in Q4, we saw a very strong organic growth in our component repair business. And it was -- out of all of the 3 groups, it was probably the quickest organic grower. However, both other groups grew very strong also.

So -- and that was, I think, the first time in fiscal '19 that we actually see the repair business outpace the parts and specialty product group. So that tells me that if there is some system repairs have been starting to pick up.

And as Eric mentioned earlier, maybe some of the maintenance people were [indiscernible] because they were [indiscernible] we're benefiting from them..

And just one last one.

Should we assume a normal year for product -- new PMA part introduction, 500, 600 parts? Or how does '20 shape up?.

I would say, consistent with past years. But yes, we're doing very well in that area as well..

[Operator Instructions]. We have our next question from the line of Colin Ducharme from Sterling Capital..

Most of my questions have been answered.

But I just wanted to drill down a little bit with Eric on your -- I guess, it was in the release, your comment on the year-on-year comparison benefit from contingent consideration, could you just shed a little bit more color? Is that just to compare? Or is that actually a decline based on some recent deal performance? And then also for Carlos, you talked a little bit about the CapEx expectations for the year forward.

If you could provide a little bit more color on which side of the business and perhaps which end market verticals are kind of driving that growth? That would be great. And then I had a follow-up..

Let me take the -- this is Carlos, let me take the contingent earn-out question. The favorability of that is really a change on the change. We had, in Q4 2018, a charge that we took to increase contingent earn-out based on anticipated better performance, which actually panned out in '19, so we were right to do that.

We did not have similar charges in Q4 '18. So that actually was a help -- that helped us.

You understand that?.

Yes, got it. I appreciate that color. And then just following up on that CapEx, which kind of side of the business or end market verticals there driving that increased forecast..

So across both segments, we had CapEx spend in growth. However, we have -- within the ETG, we do have some expansion that we're doing, that we're plan to do, which has teetered it up a little bit on their side.

And then we actually have some -- we're actually doing some corporate renovations, which are not out of turn, but that's something that's really not -- it's shared by all segments and the corporate office. So there's some expansion that we're doing there. Some of that goes towards Flight Support and some of it goes towards corporate.

But other than some expansion for those reasons, it's the normal CapEx trends that we normally see here at HEICO, nothing unusual..

Okay. And then just a quick follow-up for Eric.

Just speculating, perhaps probing a little bit here, as we get extensions with the MAX kind of deliveries, is there a sales opportunity, perhaps with content per platform? I'm thinking specifically of airlines that, in your words, eventually have to bite the bullet, they've forestalled certain maintenance.

They haven't used -- used HEICO on certain parts of the aircraft, perhaps not on others.

Is this an opportunity for you kind of uniquely to grow your wallet share and expand relationships to seize the moment?.

I think, yes, it is an opportunity for us to pick up additional sales. The primary route for that will be parts that customers had already been buying from us in the past and maybe they slowed down buying because they thought they were going to retire the aircraft and that will permit them to go ahead and make the expenditures.

And as far as customers who haven't purchased the parts, yes, I think that it's all part of our continuing value proposition. We see the benefits that they've got from -- as a result of buying our parts, the cost impact that they've got on the MAX being out of service. And clearly, they can save money as a result of buying additional parts.

So yes, I think you've hit the nail on the head..

Okay. And then one final one for Victor. I love looking at the companies you've rolled up over time. Quell looks very interesting indeed. To my untrained eye, rubber seals, well, it looks replicable from the outside looking in.

Can you just perhaps use the lens of your M&A framework and talk a little bit about, whether it be patent protection or perhaps increased growth opportunities once you bring this product set on board, what do you see with this asset over time?.

Well, yes, thank you. It's a good question. It's a great company. It is -- would be very difficult if not impossible to replicate those parts. They're not rubber seals. They are EMI filters. They're electrical filters with electronic components embedded in them.

And they operate in a certain way and they're built in a certain way that would be very, very difficult to replicate. Aside from the fact that some of their products have patent protection, I don't rely on the patent protection, in fact, usually for any of our products.

You've got to really rely on competitive protection that's -- at least, in our opinion. So it's a growing business, it's a rapidly growing business, successful business.

It's been around for a while, but their growth has really stepped up in the last few years because some of the -- because of some of the changes they've made, marketing changes, in particular, and getting much more aggressive about going out and visiting the customer base.

I personally interviewed their top customers in the due diligence in the last week or so, major companies, engineers, purchasing people alike, and they were raving about Quell. Now having said that, it's our typical kind of acquisition, so it is not going to change HEICO's profile. Don't expect -- as you know, we don't swing for the fences.

There are singles and doubles. So it's not the sort of thing that you're going to pick up in our next earnings report and find that we've doubled because we're getting a giant increase because of this business. It will add to HEICO as our typical acquisitions do..

There are no questions at this time. Please continue..

Well, we want to thank everybody who has been listening on this call. And we will be back again in the middle of February, I guess, for -- or towards the end of February with our first quarter 2020 report. We wish everybody a very good holiday -- healthy and happy holiday season. We are available for questions if you have any.

And that is all that we have for today. So have a good holiday, and we are now signing off..

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day..