Laurans Mendelson - Chairman and CEO Eric Mendelson - Co-President and President of HEICO's Flight Support Group Victor Mendelson - Co-President and President of HEICO's Electronic Technologies Group Carlos Macau - EVP and CFO.

George Godfrey - CL King & Associates Larry Solow - CJS Securities Louis Raffetto - Deutsche Bank Ken Herbert - Canaccord Genuity Robert Spingarn - Credit Suisse Andrew Lipke - Stephens Inc. Jim Foung - Gabelli & Company.

lower demand for commercial air travel or airline fleet changes, or airline purchasing decisions, which could cause lower demand for our goods and services; product development or product specification costs and requirements, which could cause an increase to our 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 introduce new products and product pricing levels, which could reduce our sales or sales growth; product development difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest and income tax rate; and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our cost and revenues, and defense budget cuts, which could reduce our defense-related revenue.

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

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

Well, thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to the HEICO's second quarter fiscal '17 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 our record second quarter operating results in detail, I'd like to take a few minutes to summarize the quarterly highlights.

Consolidated second quarter and first six months of fiscal '17 net income, operating income, and net sales, represent record results for HEICO, driven principally by record net sales and operating income within both operating segments.

Consolidated net income increased 18% to a record $45.7 million or $0.53 per diluted share in the second quarter of fiscal '17, and that was up from $38.7 million or $0.45 per diluted share in the second quarter of fiscal '16.

Consolidated net income increased 24% to a record $86.6 million or $1 per diluted share in the first six months of fiscal '17. And again that was up from $69.9 million or $0.82 per diluted share in the first six months of fiscal '16.

Our net debt, which is total debt less cash and cash equivalents, so net debt to EBITDA ratio was a low 1.2x as of April 30 and that compared to 1.8x shortly after the acquisition of Robertson Fuel Systems in January 2016. Robertson, of course, was the largest acquisition in HEICO history.

So I'm continued to be very pleased with HEICO's laser focus on strong cash flow generation, as well as the consistency of our growth in net income. The flight support group set an all-time quarterly net sales and operating income record in the second quarter of fiscal '17 by improving 5% and 8%, respectively, over the second quarter of fiscal '16.

Those increases principally reflect increased demand within the flight support group aftermarket replacement parts and repair and overhaul parts, and services, product lines, as well as the benefit of operating efficiencies.

Our ETG Group set an all-time quarterly net sales and operating income record in the second quarter of fiscal '17 by improving 6% and 16%, respectively, over the second quarter of fiscal '16.

The increases principally reflect period over period net sales growth across the majority of ETG's product offerings as well as the benefit of some operating efficiencies. Cash flow provided by operating activities remain strong totaling $97.7 million or about 113% of net income for the first six months of fiscal '17.

Keep in mind that we are projecting that for the full fiscal year '17, we expect cash flow provided by operating activities to approximate 150% of reported net income. As of April 30, '17 the Company's total debt to shareholder equity ratio was 40.5%.

In addition, our net debt to shareholders equity ratio was 37.3% as of April 30, '17 with net debt again total debt less cash and cash equivalents, total debt net debt of $424.1 million and that was principally incurred to fund acquisitions in fiscal '17 and '16.

In April '17, our Flight Support Group acquired 80.1% of the equity interest in Air Cost Control, a leading aviation electrical interconnect product distributor of such items as connectors, wire, cable, protection, and fastening systems, in addition to distributing a wide range of electromechanical parts.

We expect the acquisition to be accretive to our earnings within the current fiscal year. In April '17, we increased the aggregate principal amount of our revolving credit facilities by $200 million or 25% reaching a total of $1 billion and that was through increased commitments from existing lenders.

We are very pleased to have such strong support and confidence from our lenders and our HEICO's financial strength coupled with our expanded funding capacity should allow us to continue to execute our strategic acquisition strategies and our goals.

In March '17, 2017, we declared a 5-for-4 stock split, which reflects the Board of Directors continued confidence in the strategic trajectory and growth of the business. The additional shares were distributed in April 2017. All applicable share and per share information has been retroactively adjusted to reflect for this 5-for-4 stock split.

And for your interest the -- this marks HEICO's 15 stock dividend or stock split since 1995. I'd now 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 net sales increased 5% to a record $231.8 million in the second quarter of fiscal '17, up from $220.3 million in the second quarter of fiscal '16 and increased7% to a record $452.7 million in the first six months of fiscal '17, up from $424.9 million in the first six months of fiscal '16.

The increase in the second quarter and first six months of fiscal '17 mainly reflects organic growth of 5% and 7 -- and 6%, respectively.

The organic growth in the second quarter and first six months of fiscal '17 is principally attributed to increased demand and new product offerings within our aftermarket replacement parts and repair and overhaul parts and services product lines, partially offset by lower sales within our specialty products -- product lines.

The Flight Support Group's operating income increased 8% to a record $44.7 million in the second quarter of fiscal '17, up from $41.3 million in the second quarter of fiscal '16, and increased 12% to a record $86.1 million in the first six months of fiscal '17, up from $76.8 million in the first six months of fiscal '16.

The increase in the second quarter and first six months of fiscal '17 is mainly attributed to the previously mentioned net sales growth and efficiencies realized from the benefit of our growth net sales on a relatively consistent period over period SG&A expenses.

The f1light Support Group's operating margin increased to 19.3% in the second quarter of fiscal '17, up from 18.8% in the second quarter of fiscal '16, and increased 19% in the first six months of fiscal '17, up from 18.1% in the first six months of fiscal '16.

The increase in the second quarter and first six months of fiscal '17 principally reflects the previously mentioned net sales growth and efficiencies realized within SG&A expenses. With respect to the remainder of fiscal '17, we now estimate mid to high single-digit growth in the Flight Support Group's net sales over fiscal '16 level.

In the full-year, Flight Support Group operating margin to approximate 19.0% to 19.5%. We continue to estimate mid single-digit organic growth in full fiscal '17 net sales over fiscal '16 level. These estimates include our recent acquisition of Air Cost Control, but exclude additional acquired businesses, if any.

Lastly, I'd like to acknowledge our team, which we consider to be the best in the industry for being recognized as the top 2016, 2017 supplier by ALTA's Airlines. ALTA is the Latin American and Caribbean Air Transport Association and represents the airlines in that region. HEICO was ranked number 1 out of over 200 suppliers evaluated.

This recognition is presented to industry suppliers that have demonstrated their dedication to the highest standards in categories such as customer support and documentation, turnaround time, and quality service.

And I can tell you that this does not come by accident, our team worked extremely hard to make sure they satisfy our customers and keep them happy, and I'd like to acknowledge our team and thank them for their outstanding service.

Now, I'd 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. As I start the review with the ETG businesses, I would like to thank and recognize the ETG team members who made our excellent results possible, not only this quarter, but over a long period of time and continue to endeavor mightily for us and for our customers and for each other every day.

The results we achieve aren't the result of blueprints or equipments or buildings, they come from hard-working, dedicated team members who show up every day and do everything they can for our Company. So I thank you all for your hard work.

In sales, the Electronic Technologies Group's net sales increased 6% to a record $141.2 million in the second quarter of fiscal '17, up from $132.6 million in the second quarter of fiscal '16, and increased 13% to a record $267.3 million in the first six months of fiscal '17, up from $236.7 million in the first six months of fiscal '16.

Increase in the second quarter and first six months of fiscal '17 reflects organic growth of 5% and 6%, respectively. The organic growth in the second quarter and first six months of fiscal '17 resulted from increased demand in certain aerospace, other electronics and medical products.

Additionally, the increase in the first six months of fiscal '17 reflects the contribution from our profitable fiscal '16 acquisition.

The Electronic Technologies Group's operating income increased 16% to a record $38.8 million in the second quarter of fiscal '17, up from $33.4 million in the second quarter of fiscal '16, and increased 22% to a record $67.9 million in the first six months of fiscal '17, up from $55.7 million in the first six months of fiscal '16.

The increase in the second quarter and first six months of fiscal '17 came primarily from the previously mentioned net sales growth and efficiency realized from the benefit of our growth in net sales and relatively consistent period over period SG&A expenses.

Further, the increase in the first six months of fiscal '17 reflects a decrease in acquisition costs due to the first quarter of fiscal '16 reflecting $3.1 million in acquisition costs associated with prior year acquisition, partially offset by higher performance-based compensation expense.

The Electronic Technologies Group's operating margin improved to 27.5% in the second quarter of fiscal '17, up from 25.2% in the second quarter of fiscal '16 and improved to 25.4% in the first six months of fiscal '17, up from 23.5% in the first six months of fiscal '16.

The increase in the second quarter and first six months of fiscal '17 principally reflects the previously mentioned net sales growth and efficiencies realized within SG&A expenses.

With respect to the remainder of fiscal 2017, we are continuing to estimate mid to high single-digit growth in the Electronic Technologies Group's net sales over fiscal '16 levels, principally reflecting organic growth and anticipate the full-year Electronic Technologies Group's operating margin to approximate 25%.

Of course these estimates exclude additional acquired businesses, if any. I turn the conversation back over to Larry Mendelson. Thank you..

Thank you, Victor. Looking at diluted earnings per share, consolidated net income per diluted share increased 18% to $0.53 in the second quarter of fiscal '17, and that was up from $0.45 in the second quarter of fiscal '16 and it increased 22% to $1 in the first six months of fiscal '17, again up from $0.82 in the first six months of fiscal '16.

All fiscal '16 diluted EPS amounts have been adjusted retrospectively for the 5-for-4 stock split which was distributed April 2017. Looking at R&D, the expense increased 2% to $11.2 million in the second quarter of fiscal '17, and that was up from $11 million in the second quarter of fiscal '16.

It was an increase of 12% to $22.5 million in the first six months of fiscal '17. Again, up from $20 million in the first six months of fiscal '16. Significant ongoing new product development efforts are continuing at both Flight Support and ETG as we continue to invest approximately 3% to 4% of each sales dollar into new product development.

As we’ve told you many times, it is a basic driver of HEICO, we constantly spend money on research and development to develop new products and improve the existing products that we sell and that's a basic strategy that we will never give up. SG&A expense decreased to $63.8 million in the second quarter of fiscal '17.

That was down from $67.2 million in the second quarter fiscal '16 and decreased $224.7 million in the first six months of fiscal '17, down from $126.8 million in the first six months of fiscal '16.

The decrease in the second quarter fiscal '17 principally reflects a $1.5 million impact from foreign currency transaction adjustments on borrowings denominated in euros under our revolving credit facility and a $1.2 million impact from changes in the estimated fair value of accrued contingent consideration associated with prior year acquisitions.

The decrease in the first six months of fiscal '17 principally reflects $3.1 million of acquisition costs recorded in the first six months of fiscal '16 associated with the fiscal '16 acquisition, and a $1.6 million impact from current foreign currency transaction adjustments on borrowings denominated in euros under our revolving credit facility and partially offset by a $2.8 million increase in performance-based compensation expense.

Consolidated SG&A expenses as a percentage of net sales decreased to 17.3% in the second quarter of fiscal '17 and that was down significantly from the 19.2% in the second quarter of fiscal '16, and decreased to 17.5% in the first six months of fiscal '17, down again significantly from 19.3% in the first six months of fiscal '16.

That decrease in consolidated SG&A expense as a percentage of net sales in the second quarter of fiscal '17 principally reflects efficiencies realized from the benefit of our growth in net sales on relatively consistent period over period SG&A expense, as well as the impact from the previously mentioned foreign currency transaction adjustments and changes in the estimated fair value of accrued contingent consideration.

The decrease in SG&A expense as a percentage of net sales in the first six months of fiscal '17 principally reflects the efficiencies realized from the benefit of our growth in net sales on relatively consistent period over period SG&A expenses, as well as the impact from the previously mentioned decrease in acquisition costs.

Interest expense was $2 million in the second quarter of fiscal '17 and that compared to $2.3 million in the second quarter of fiscal '16 and it was about $3.9 million in both the first six months of fiscal '17 and '16. Other income was insignificant and I won't comment it.

Income taxes, our effective tax rate in the second quarter of fiscal '17 decreased to 32% from 32.8% in the second quarter of fiscal '16 and that decrease principally reflects the favorable impact of higher tax exempt unrealized gains in the cash surrender value of life insurance policies related to the HEICO Corporation leadership compensation plan.

Our effective tax rate in the first six months of fiscal '17 decreased to 29.5% from 31.1% in the first six months of fiscal '16.

The decrease principally reflects a discrete income tax benefit related to stock option exercises resulting from the adoption of the new accounting standards on share-based payment transactions in the first quarter '17 and the favorable impact of higher tax exempt unrealized gains in cash surrender value of life insurance policies again related to the HEICO Corporation leadership compensation plan.

The decreases were partially offset by the benefits recognized in the first quarter fiscal '16 from the retroactive and permanent extension of the US Federal R&D tax credit, and that resulted in recognition of additional income tax credit for qualified R&D activities related to the last 10 months of fiscal '15.

Net income attributable to non-controlling interest was $5.1 million in both the second quarter of fiscal '17 and '16 and $10.5 million in the first six months of fiscal '17 compared to $9.7 million in the first six months of fiscal '16.

For the full-year -- fiscal year 2017, we continue to estimate a combined effective tax rate and non-controlling interest rate of between 39% and 40% of pre-tax income and that assumes that the U.S corporate tax reform does not become effective during this fiscal year.

Now moving on to the balance sheet and cash flow, our financial position and our forecasted cash flow remain extremely strong.

As we previously discussed, cash flow provided by operating activities totaled $97.7 million in the first six months of fiscal '17, representing 113% of net income and for the full fiscal year '17 we anticipate cash flow provided by operating activities to approximate 150% of net income.

And later on if -- the people on the call want to ask Carlos for the details of why it was only 113% as opposed to 150%, it was because there were some payments that were -- that came in the first six months and will not repeat in the second and we expect our cash flow again to be 150% of net income and very strong.

The working capital ratio improved to 3x as of April 30, '17. That was up from 2.7x as of October 31, '16. DSOs, days sales outstanding of receivables increased to 52 days as of April 30, '17 and that was up from 46 days a year prior April 30, '16. That was due to the quarter end acquisition of Air Cost Control and the timing of receivable collections.

Excluding the impact of this acquisition on DSOs -- the DSOs would've been 49 days as of April 30, '17. We closely monitor receivable collection efforts to limit credit exposure. We have very little receivable write-off losses and we've never had big ones. No one customer accounted for more than 10% of net sales.

The top five customers represent approximately 19% and 21% of consolidated net sales in the second quarter of fiscal '17 and '16, respectively. Our inventory turnover rate increased to 133 days for the period ended April 30, '17 as compared to 125 days for the period April 30, '16.

And that was due to the quarter end acquisition again of Air Cost Control. And if we exclude the impact of this acquisition, the inventory turnover rate actually decreased to 123 days versus 125 for the first six months of fiscal '17.

As previously mentioned, our total debt to shareholders equity was 40.5% as of April 30, '17, and our net debt to shareholders equity was 37.3% on April 30, '17 with net debt, again debt less cash and cash equivalents of $424.1 million and that was principally incurred to fund acquisitions in fiscal '16 and '17.

We have no significant debt maturities until fiscal '19 and we plan to utilize our financial flexibility and strength to aggressively pursue high quality acquisition opportunities to accelerate growth and maximize shareholder returns. I know I’m going to be asked this question in a few minutes, so the pipeline for acquisition is very strong.

We can hardly keep up with it. But we do such a thorough due diligence process that it really takes us a lot of time and we try to turn over all the stones and do an extremely thorough complete job. But we have a very, very full acquisition pipeline, and all price within our normal guidelines for acquisition.

As we look ahead to the outlook for the remainder of fiscal '17, we do anticipate net sales growth in the Flight Support Group and ETG resulting from increased demand across the majority of our product lines.

During the remainder of fiscal '17, we'll continue our commitments to developing new products and services, market penetration, aggressive acquisition strategy, while maintaining financial strength and flexibility.

Based on our current economic visibility, we are increasing our estimated consolidated fiscal '17 year-over-year growth in net sales to 8% to 10% and in net income to 12% to 14%. And both of those are up from prior growth estimates in net sales of 6% to 8% and net income of 9% to 11%.

In addition, we now anticipate our consolidated operating margin to approximate 20%, depreciation and amortization expense to approximate $65 million, CapEx expenditures about $35 million, cash flow from operations to approximate $270 million, and that's up from the previous estimate of $260 million in cash flow from operations.

Of course these estimates include our recent acquisition of Air Cost Control, but exclude additional acquired businesses, if any. In closing, I'd like to thank all of HEICO's team members for another outstanding quarter of excellence in execution and financial results.

It's because of their dedication and hard work that we're able to deliver consistent high performance for our shareholders and as always we will continue to focus on intermediate and long-term growth strategy with an emphasis on acquiring profitable businesses.

And just one personal comment, what doesn't appear in 10-K's, 10-Q's financial statements and presentation is the incredible capability of our team members. These are the people that make these results possible. These are the people that strive for growth.

Of course, we incentivize them with what we believe are great incentive plans, but these are exceptionally talented people and we are very pleased and proud to be working with them, because these are the ones that produce the results. So thank you. Those are the -- that’s the extent of our prepared comments, and the floor is open for questions..

[Operator Instructions] Our first question comes from George Godfrey with CLK..

Thank you. Good morning, gentlemen..

Good morning..

Just wanted to ask two questions. The first one, organic growth this quarter of 5% in mid single digits for the full-year, very solid, but little bit of a downtick from Q1.

Can you just comment on what you're seeing on the organic growth trends going from 8% in Q1 down to 5% here in Q2?.

You’re -- George, are you speaking about the FSG segment?.

Yes, if memory serves, they were both 8% organic growth last quarter, but I could be wrong on that?.

I can tell you that if you look at the comps, the comps got tougher in the second, third, fourth quarters of 2016. So I'd say that that's probably the biggest reason why the -- why it was lower in number. I mean, we still feel very good about the industry.

There is still a lot of potential, lot of opportunity in new products being discussed with our customers, being contracted. So I think where we believe that we're outgrowing the industry and we continue to do very well. But we did have an uptick in the organic sales, in the final nine months of 2016, which I think is driving this..

Got it. Thank you. And then just a follow-up, the operating margin specifically on Electronic Technologies grew 27 -- I mean, that's just outstanding.

Is that a high watermark or is there even an opportunity to continue to march that up? And then as a follow-on, is Robertson a material driver of that profitability there?.

George, this is Victor. It's a very good question. Look, it is always our objective to see margins improve, but I wouldn't plan that in, I wouldn't model that in, I think the guidance that we gave you is the right place to look. Sometimes we have great quarters in margin, other times it's not as good. I don't know if it's a high watermark.

I honestly don't remember. It's toward the higher end. And there are lot of factors that can contribute to it.

You remember -- if you, over time and listened to our conference calls and over the years and attended some conferences over the years, you’ve heard me say that we managed the business and we have our companies manage their business to the year and not so much to the quarters, that we're very focused on maximizing profitability and margins and that just means we have lumpiness in the quarters over the course of the year and we really try to get people to look to the full-year.

So we're -- if we do better, that's great, but we don't encourage people to look for more than our guidance on that. In terms of Robertson, Robertson is a contributor to the margins. It is not the sole contributor to the margins. It's a very important business for us, but truthfully the other businesses are very important too and pretty healthy.

I would say overall the Company, the ETG across the board had a strong quarter..

Understood. Thank you for taking my questions..

Thank you, George..

Our next question comes from Larry Solow with CJS..

To those questions, for -- Eric, on the FSG side, I know you mentioned and you’ve continually mentioned a lot of the growth is -- driven your growth, at least by new product offerings.

How about just the underlying growth in the aftermarket? Is that basically or lack thereof, is it still basically essentially nearly flat, what’s your feel that you’re saying that improve at all, obviously excluding the easier year-over-year comp?.

That’s a good question, Larry. You know, since we don't get very much price, maybe we get 1% a year. Most of our grow -- I mean, basically all of our growth, the 5% was due to unit volume growth. And I think that unit volume growth of 5% is far in excess of what the industry is seeing, number one.

So, I think that we -- we're building up a tremendous amount of goodwill.

There's been a lot of new aircraft delivered over the last couple of years and are in that sort of 0 to 5 year range where they don't need much maintenance or they don’t need maintenance and I think that that’s having -- that’s holding down the industry aftermarket growth and -- but I think our numbers are really quite good when you look at basically 5% organic growth.

Also it is important to point out and it was referenced in there that our specialty products business saw little bit of weakness this quarter. And that probably trimmed off about 2 points of growth from the FSG segment.

So when you look at it, I mean, the organic unit growth was even higher and we feel very strongly about the new product, the customer relationship. You can see with the recognition by ALTA and I think that while that’s just one region of the world, I think that typifies how our customers view us.

And I think we're setting up very good -- in a very good way for a nice up cycle as some of these newer -- some of the newer equipment need maintenance, because the OE prices on this newer equipment, some of it is just crazy. And yes of course we’ve got to develop the parts, we got to get improved at the airlines, we’ve to get install it, etcetera.

But I feel very strongly that our strategy of maintaining basically a very low price increases in building a lot of customer goodwill is putting us in a very positive position with our customers..

Okay, great. And then maybe a question for Victor, just I know -- in terms of new defense budget, it sounds about that’s going to -- it's still -- it's several quarters, if not a year or plus away.

But I know on the last call you had mentioned and maybe in the last couple of calls you guys have seen a little bit less reluctance to spend sort of budgeted dollars.

Is that trend still -- anything shaking out on that side of the things?.

At this point, I think we should be careful to predict where things are going with the budget. It was sort of flattish for us in defense in the quarter down slightly, but to me within the noise level, I still think that we should look for the net benefit next year, not this year.

And I don't think we've seen things shakeout palpably except I have noticed and I think I mentioned this on the last call, we have noticed in our businesses, there is less reticence to spend and to commit dollars where in the past, in the prior administration, there were I call them, quasi-obstructionist efforts geared at finding ways to not spend the allocated money and thereby let it get redirected to something else.

And we're not seeing that -- we’re not seeing it as much and that the usual amount of confusion in the defense budget that exist over the years and decades is always there for us in terms of spending and why isn't this contract coming through or that contract, why is it delayed? And they have the agencies and departments at their own internal issues.

And generally speaking, I think we all saw what was published yesterday on the budget proposal and that's only a proposal at this point as we all know. Our general view is it's a net positive going forward, but not to really expect it in a material way this year.

And of course as -- as that gets delayed, if it gets delayed, then that would delay the benefit to us..

Got it. And just last question, if I may, just on the Air Cost Control, it looks like just from your cash flow statement, you guys spent about $80 million on that and it sounds like it's in your usual acquisition criteria, immediately accretive.

Is it fair to say that the impact from that or the effect from that is most of the reason behind the increase in guidance for the year?.

I think -- Larry, this is Carlos. Some of it was related to that. The increase in guidance what from mid single digits to mid to upper single digits, some of that was our cost control and some of that is higher expectations to some of our operating units. So it's a combination of both..

Got it. Okay, great. Excellent. Thanks, guys..

Our next question comes from Louis Raffetto with Deutsche Bank..

Good morning, gentlemen. I’m going to stick with ETG, just you mentioned this, the second quarter in a row I guess of good aerospace.

Is that just linked to sort of high overall production rates or is there anything else there?.

No -- Louis, this is Victor. It's -- some of it is aftermarket, some of its production. I’d probably say maybe a little more aftermarket than production improvement, but it's a nice mix..

All right. And then just, sorry, sanity check my numbers here. I think the -- you called out 6% growth in ETG or -- yes, 6% growth, but only organic was 5%.

I thought we were sort of at a clean year-over-year now, but -- so I wasn’t sure what that discrepancy was?.

Louis, this is Carlos. I think the 5% was quarter six, was a six month period, so that’s [multiple speakers]..

Okay. All right. And then just last one on the cash flow, I guess, it was just a bit below what I expected, but obviously you’ve raised the guidance, was there -- and I think Larry may have touched on this a bit, but I may have missed it.

Anything timing in the first half versus second half or in the second quarter, I guess?.

No, I think -- Louis, I think generally speaking, if you look back on history of HEICO and our cash generated by operations, traditionally and it could change, but traditionally the first half of the year from a cash flow generation standpoint is generally a little less than the latter half. And so, that’s part of it.

I would say as it relates specifically to this fiscal year, there wasn’t anything unusual. Most of it was timing related. We do have some -- we had a little bit of an inventory build, which if you look across our subsidiaries its directly tied to backlog or orders in-house.

We had some timing on some accrueds that were paid out, some of that was performance based comp related which is a little higher as a result of '16 operations versus the prior '15 operations which would have been accrued in that cash flow statement.

So I wouldn’t say there is any trend or any unusual items and that it was principally based on timing..

No purchase consideration or meaningful in the quarter, I guess? I know that you pointed to $7 million I think this year?.

No..

Okay..

The $7 million, well, Louis I’m sorry..

The purchase consideration, I guess, I thought, I think there is $7 million that was going to be paid out this year..

We’ve already paid that out, but that doesn’t come out operations..

Okay..

That’s operating cash flow, that’s below that..

Thank you..

Our next question comes from Ken Hubert (sic) [Herbert] with Canaccord..

Hi, good morning..

Good morning..

I wanted to first ask a question for Eric. Just bigger picture, Eric, when you look at your conversations with your airline customers, fuel prices seem to have settled in here. If you look at your argument regarding delivery of aircraft, currently we’re starting to see a slowdown in deliveries of certainly wide-body aircraft.

Have you seen any change or can you comment on any change you’ve seen from your airline customers, maybe in their desire to spend on some of the older aircraft with -- they maybe been -- more benign fuel environment and maybe a little bit more predictability on the cost from that standpoint as you look through the rest of either your fiscal '17 or calendar '17?.

Yes, that’s a good question, Ken. We’ve seen some increase in spending on some of the order equipment. I think one of the -- also one of the tougher comps as you pointed out in some of your reports is that last year there was a big PW4000 overhaul, a program and a lot of money that needed to be spent due to some service bulletins.

So I think that last year's numbers in hindsight were probably helped by that, which is making the comps a little bit tougher. But yes, we are seeing some increase in spending on the order equipment as you pointed out.

The build rate coming down on some of the wide-body equipment and we don't have that factored into our numbers right now, because we don't know really what the future is going to bring on that.

But clearly with wide-body build rates being down and fuel being down, I mean, that should bode well for extending some of the time on some of the order equipments. But again, we don't have that baked into our projections at this point..

Okay. That's helpful.

And now that you’ve completed the A2C acquisition and obviously you’ve been able to build a very nice distribution business within FSG, how do you think about organic growth maybe for specifically A2C or maybe distribution at large within the segment? Not just in '17, but over the next few years?.

Yes, I’m very positive in that area. Actually a week after -- roughly a week after the MRO show, I went and visited A2C in Hamburg and Toulouse.

And while I have been there in the past, I can tell you that as I got to know the people better and we got into some of the details, I was really super impressed by the company’s DNA, the people, the processes, the culture, and we are immediately finding opportunities for our distribution companies to work together.

There really is no product overlap. So we don't have a situation where we’d have multiple subsidiaries trying to sell the same product. It truly is complimentary.

And the relationships that our existing distribution business has with Seal Dynamics and with the new distribution business with Air Cost Control or ACC, I think it's extremely complimentary and the people are on both -- in both businesses are very excited to help open doors for the others and I got -- I’d say some significant expectations for great opportunities down the road.

We met with some of the larger customers and agencies really viewed in an extremely unique light due to their business model, their customer attentiveness.

I think this is a company that 17 years ago didn’t even exist and it started with one person and then two people in a little office and they learned how to again as other HEICO businesses do, listen to their customers, understand what they want, proactively deliver high-quality products, find alternatives at a lower price, and in meeting with some of A2C's customers, A2C's growth was not by accident.

I mean it was by targeting these opportunities and making sure that the customers were very happy. So I do see a great opportunity and synergy with the -- with our distribution business. And then of course with distribution and PMA, I mean, there is the synergy that we’ve spoken about for a while and I would say, I’m very bullish on this..

Well, thank you very much for that color.

If I could just one final question for Victor, just a follow-up again on the margins in the quarter, very impressive and I just want to make sure I heard you correctly, really no sort of one-time items you specifically point to either from a mix standpoint or timing, just good performance or is there anything in particular you would highlight as maybe something that doesn’t repeat with the segment moving forward?.

Yes. Overall, I wouldn’t call at anything notable. I think there were elements of everything in the quarter, right. We -- the mix was favorable to us. The I think the cost control, if you will, the attention to cost detail, the opportunities that we are able to execute on were good.

I think we always have the business here or there were something pulls forward a quarter or with the quarter and maybe we had a little bit better in that regard, but I don’t think anything outside of the noise level that we typically see on that. So overall I'd say it was just kind of all the factors each adding up incrementally delivered it for us..

Okay. Thank you very much. Really nice quarter..

And Carlos has something to add..

Yes, I just want to add, Victor's point is absolutely correct. We’ve had the scenario this quarter in the ETG where really all of our subs and the industry participants were firing on all cylinders. Occasionally that happens, and we had a similar situation in Q4 last year where we sort of had broad growth across all of the subsidiaries.

And when that happens, and given the fact that most of the folks around this business units are very entrepreneurial and to Victor's point cost-conscious we get some nice leverage on our SG&A spend and we get some nice product mix and growth. And so, I wouldn't over read that.

To Victor's point, we plan for diversification, we plan for ups and downs within the segment by subsidiary and so the guidance we’ve given of 25% on the year, we’d hope to do better, but that's how we see things on a go-forward basis based on backlog and what we can see at this point..

Great. Thank you very much..

Our next question comes from Rob Spingarn with Credit Suisse..

Hi, guys..

Good morning..

Good morning..

Good morning. I missed the beginning of your call, because I was on another one. So, I’m not sure whether or not you talked about this or not, but Eric this one's for you.

Have you talked at all incrementally about your opportunity on OEM parts, second source saying or whether its military or commercial, any opportunities there?.

No, we haven't covered that yet on the call. I mean, we continue to think and that’s a very good question. We continue to think that there is opportunity as the air framers want to bring down the cost of operation of their equipment that there is opportunity for HEICO in that.

And I think that that’s an area for growth and opportunity for us as time goes on. Yes, go ahead..

I’m sorry, Eric.

Well, I was going to ask you from a process perspective, how might a cooperative effort to develop second source parts differ from a traditional PMA process for an aftermarket part?.

Well, I mean to be a little careful on this call, because we of course have a number of competitors listening in and we love them..

Understood..

I -- unfortunately I can't go into the details on that, but suffice it to say that the air framers and some of the larger OEMs don’t necessarily have the same interest as some of the smaller OEMs and where you got situation when airlines are complaining to manufacturers about the cost to maintain their equipment, but there may be opportunity for some of those larger OEMs to put some pressure to reduce those costs and I think that that's really where HEICO would fit in..

Okay, excellent. Victor, I wanted to ask you about margins, that just got asked. And so it sounds like we’ve just -- both you and Carlos had expected just a range of outcomes as we go, it's really depended on a mix of what's flowing through in the quarter.

Did I get that right?.

I think you’ve got that exactly right. And again with the emphasis on expect what more of what we're telling you for the year, that 25% number and not the margins higher. And if we do better great, the objective is great. It is high of course, but let's keep where we are.

And by the way, even 25% is not guaranteed, none of this is easy and we work very hard, but I can't be certain of where the margins will be either..

Right, right. Well, I guess, as a follow-up to that and somewhat related maybe Carlos this is for you, but as a percentage of sales and again this might have come up earlier. SG&A look pretty -- couple of quarters.

How are you expecting that to trend for the rest of the year? Is this a sustainable level under 18% of sales or how we should we think about that?.

I think that we've been blessed by the way that all our subsidiaries are entrepreneurial in nature, they are very cost conscious. We have no corporate initiative on cost-cutting. These guys drive their businesses and what we've seen over the last couple of quarters is some leverage on the SG&A spend.

And I would anticipate -- barring any one timers or anything like that, I would anticipate to continue to catch some of that leverage on SG&A spend which is really a contributor frankly to our move up, if you will, on the consolidated margin to approximate 20% from a range of 19% to 20%..

Right.

I guess when I look at it, this makes 2017 look a little more like '15 in terms of SG&A performance where '15 was relatively a little higher?.

Yes, again -- yes, you have to remember in '16 it was littered with -- we had a one-time charge of about $3.1 million for an acquisition and there we had some FX impacts during '16 that we haven't experienced this year. So if you back historically '15 even maybe '14 and prior, our SG&A expense 17.5 to 18 or so is kind of been the range ….

Right..

… and as we grow the business, the top line at a greater rate than that sort of range bound SG&A expense we are catching leveraging and I’m quite proud of the guys for that..

Okay. All right. Well, thank you. Hello, Larry. Sorry, I didn’t have one for you..

That’s fine. They answered it better than I could..

There you go. Thanks, guys..

[Operator Instructions] Our next question comes from Drew Lipke with Stephens..

Yes. Good morning, guys. Thanks for taking the time..

Good morning..

Just for Eric, you pointed out the goodwill with customers and I'm curious if you think about maybe aircraft coming off warrantee, maybe that kind of aging of the fleet there, have you seen any kind of change in demand from your customers for replacement parts, kind of meaning have you hit a tipping point where the demand has turned from more of a push to a push?.

Well, if you take a look at our -- the organic growth, the FSG organic growth was about 5% then. Of course, that was held down by a couple of points due to some slippage in the specialty products area. So if you look at it, we're probably looking at roughly 6% unit growth and I think a lot of that is demand being, if you will, pulled by the customers.

We don't really differentiate it, when we do the sales reviews, don't really differentiate it between sort of what we're pushing and what the customers are pulling, its I think a group effort.

The goodwill is palpable, and I think that that is really having or permitting us to find more opportunities with the airlines and I think setting up for a very good increase in sales as some of this newer equipment matures and is going to need maintenance and the price points are higher on the newer equipment.

So I think there's general recognition by the customers that there were a very important part of their -- very important part of their approach in reviewing specific customers with our sales leadership.

I can tell you that there is -- really at a high level at the airlines, a desire to increase the amount of competitive procurement and HEICO is really at the forefront of that.

And I've heard in a number of examples whereby, perhaps 10 years ago, some of the finance folks were more likely to sign, if you will, power by the hour packages from the OEMs, because of ease of -- ease, but now as those packages where on in duration and the airlines see that they've got basically no operating leverage and HEICO has developed this reputation of not taking advantage of the customers when we can take advantage of the customers.

We’ve now seen a number of airlines tilt towards the competitive procurement site where they don't want to go with power by the hour, they don't want to go with the OEM, because it ties their hands. So to your point in terms of pull-through, I think that that's an example of -- and we’ve seen this in a number of cases.

That’s an example where the airlines are really putting us in position to be able to, further increase our unit volumes and supply more products.

I mean, I’ve heard examples that some OEMs out there that have raised prices 10% or 11% per year for the last number of years and we've been -- clearly we could have done the same and we did it, and they recognize that and they -- and that's why HEICO, I believe has built this goodwill and why ALTA and others hold us in very high regard, because our people do the right thing when nobody's looking and we do that because we're very small, we’re tiny compared to the industry and we were here for the long-haul and we want to be able to position ourselves and supply more parts and services.

And we think that our shareholders are going to be better rewarded by taking the long view, and that's also frankly -- it fits in very well with our people, because we want people who want to be here, we want team members who want to be here for the long-haul, and want to be with the company that is moving in the right direction and is in the forefront of serving its customers.

So, I think it really sets HEICO up very well for this pull-through that you’re referencing and I anticipate we’re going to see a lot more of that over the next couple of years..

Yes. That absolutely makes sense.

And then your ability to increase your annual parts approval from 500 to maybe something greater, if we start to see that greater pull-through, what are the gating factors there?.

From a regulatory process, we're very confident that we can get them approved. We’ve got a great relationship and a great rapport and confidence from regulators. So I feel very comfortable about that. It would require obviously increasing the engineering efforts a little bit, also increasing the manufacturing effort, but we've got plenty of capacity.

So I feel very, very confident. I mean, we’ve been careful. It's a little bit of a chicken and egg thing, because if we come out with too many products, then the OEMs get very concerned and start cutting very good deal. So we need to be very careful.

We know with whom we can develop products and we know that they’re really going to buy them and they’re just not going to use us as a stalking horse.

So we again want to be very careful on how we do this, but I feel very confident that as this new equipment burns in that we are going to be increased, be -- we will be able to increase our product offerings and our new product approval process commensurate with the increase in demand. I don't view that as a limiting factor whatsoever..

Okay.

And last one from me, pooling has been referenced as a headwind for the industry and if you also think about just the greater use of open-source IT platforms for the supply chain and greater use of e-commerce solutions, is there a silver lining for you guys and that allows you to highlight your lower-priced position and provide more transparent pricing for you to capture more share?.

Yes, I mean, in general as I think as information becomes more readily accessible, it definitely provides an opportunity for us. It also permits our competitors to see more quickly what we're doing and obviously that's not helpful to us. But we -- clearly with the airlines, we're able to point out the areas of savings, the areas of opportunity.

There have been many newspaper or many media reports on the increases coming on particularly the cost of engine parts, there have been a number of articles and independent reports that have come out, particularly on the CFM56 and the C6, showing price increases over a 10-year period roughly in the 8% per year area.

And airlines see that, they're not happy about it. And I think that there is continued opportunity throughout the industry..

Right. Thanks, guys. Best of luck..

Thank you..

Thank you..

Our next question comes from Jim Foung with Gabelli & Company..

Hi, guys. Good quarter there..

Thanks, Jim..

I want to just ask about the specialty products, I guess, you said sales for that was a little disappointing.

Maybe just talk a little bit about what happened there and you see a catch-up in the second half of sales in that unit?.

So, Jim, in the specialty products area, there is a higher proportion of -- basically that's where all of our industrial business is and that's where some of our defense business is. And there were two areas. One, I would say, I think the second quarter probably saw the bottom of the industrial market. We're starting to see a pick up now.

I don’t want to get ahead of myself, because we’re only less than a month into our third quarter, but I think we are seeing a pick up in the industrial side. So I'm fairly confident that we bottomed in that area. And then, with regard to defense, this can be a lumpy business because these are fairly large contracts.

And sometimes there are breaks in production, because the government is working with a foreign military sales order and one country can finish taking delivery of its product and then maybe there is a break until the next country sort of gets in line. So that’s fairly common in the defense area. So we’ve seen -- that was the other source of weakness.

The other thing which we really need to take a look at is on the commercial aviation side there's been a shift in some of the production from wide-body to narrow-body, and I think that’s having an impact -- a little bit of an impact on us and it's probably going to hit other suppliers as well, because some of the wide-body production was requiring some additional products and that, if you will, has tick down whereas the narrow-body doesn't need as much of that on the OE side.

So -- but it is also important to point out -- I don’t want to overstate the industrial side for us, because its only about 4% of FSG. So it is not a very big part, but that's why I'm sort of confident that we’ve hit the bottom there..

Okay.

But that could kind of be a potential upside as you were up to the second half, maybe there would be some catch up from the weaker first half then?.

Yes, I think there could be and of course we need to see what happens with the wide-body and the narrow-body production rate. But, yes, I do think that there is a lot of catch up opportunity for the second half and frankly 2018 in a big way..

And then just on the industrial, I mean, on the defense area, maybe Victor you can chime in on this.

Typically, there is kind of a yearend budget spending, to make sure they get all the money spent, so that they can request more money with the upcoming budget? And do you typically get kind of a yearend surge in buying, in the October fiscal year with the budgeting? And I’m just wondering are you expecting that they should particularly, if they’re talking about an increase in the budget in the fiscal 2018 budget?.

Jim, this is Victor. There is no reliable pattern or discernible pattern in that.

There have been times in the past where it would happen in November that we would get a bump, because the government would essentially have spent their money and sort of run out of money, so there are times when we actually see the inverse where things get quiet in the back end of the year get a little bit quiet on the backend of the year and because they’ve just run out of money to spend and then all of a sudden comes flying through in November.

We've seen the opposite effect where money has been clogged up for allocation reasons earlier in the year and it comes out later on in the year. So it's really difficult to say, we’re not counting on any surge, if you will, in our defense revenue in the back half of the year and if that happens that’s great.

I guess, that would be upside, but we’re not counting on any of that right now..

Yes, I was thinking if they’re talking about an increase in the defense budget, everyone wants to make sure they get their last dollars spent..

Right, yes..

All right.

That either comes in October or November, you should see a little bit of it then, in that case?.

Yes, I mean, that’s -- I think that the more reliable sort of pattern, but there's no -- again there is no great discernible pattern as far as we’re concerned, that we noticed on our business.

Now maybe other people notice different things, but in terms of what we noticed in our business over the years, essentially government spending can lock up and unleash at any time during the year and we plan kind of according to the orders that we have and level loading our shops and more comes, that's great, but we're not going to likelihood gear up for that and increase our spending for that..

Okay. And then last one for me would be, I mean, you’ve [indiscernible] just the stock options, so a lot of companies are getting some lower tax rate from the exercise of options.

You had some of that in your second quarter? You expect more in the second half of the year where your tax rate could be lower than you expect?.

Hi, Jim. So actually we -- that particular phenomenon or new accounting guidance you’re talking about, we’ve implemented in Q1..

Okay..

And so we did have a discrete tax benefit in Q1, the impact cumulatively through six months is about $0.02 bump, if you would in our EPS. I do believe based on that standard because it does force you to increase the denominator or the number of shares outstanding that will see that diminish down over the years.

So I don't expect that on an aggregate annual basis to have a significant impact on our overall rate..

Okay.

And were you guiding for your tax rate to still kind of 30% for the year?.

Well, what we’re guiding to is between our income tax rate and our non-controlling interest rate as a percent of pre-tax income, roughly 39% to 40% for those two..

Okay, great. All right. Thank you. That’s all I have..

Thank you, Jim..

Thank you, Jim..

Ladies and gentlemen, that does conclude today’s Q&A session. It's now my pleasure to hand our program back over to Laurans Mendelson for any additional or closing remarks..

Thank you. And to everyone on the call, we thank you for your interest in HEICO. We remain available to you by phone or personal visit to answer your questions. I know a lot of you speak to Carlos and some -- Tom Irvin, and Eric and Victor throughout the year, so we're happy to chat with you and give you answers that we can provide.

And we look forward to speaking to you at the end of our third quarter and that conference call will be sometime towards the end of August of this year. So we wish you a good summer, safe summer and look forward to speaking to you real soon. Thank you and that's the end of this call..

Ladies and gentlemen, that does conclude today’s conference call. You may now disconnect your lines and have a great day..