HEICO - Q4 2011

Transcript

Operator (participant)

Welcome to the HEICO Corporation's 2011 Fourth Quarter and Full Year Results Conference Call. Certain statements in this conference call constitute forward-looking statements, which are subject to risk, uncertainty, and contingencies. HEICO's actual results are materially [affected] and modified by those forward-looking statements. As a result, the effect could include but is not limited to lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services, product specification requirements, which could cause an increase to our quality contract, governmental and regulatory demand, export policies and restrictions, reduction in [incentives], Homeland or Homeland Security spending by U.S., or foreign competition from existing competitors, which could reduce our sales. HEICO's ability to introduce new products and product pricing levels, which could reduce our sales growth.

HEICO's ability to make acquisitions and operating synergies from acquired businesses, customer credit risk, interest income tax rates, and economic conditions within and outside of the aviation, [crosstalk] medical, telecommunications, and electronic industries could negatively impact our costs and revenues. 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 Forms 10-K, 10-Q, and 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. The moderator for today's call is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation. Please go ahead, sir.

Laurans Mendelson (Chairman and CEO)

Thank you, Christy, and good morning to everyone on the call. Again, we thank you for joining us, and we welcome you to the HEICO Quarter and Full Fiscal 2011 Announcement Teleconference. I'm Larry Mendelson. I'm the 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, and Tom Irwin, HEICO's Executive Vice President and CFO. I just want to comment that Victor Mendelson, who would normally take part in this teleconference is unable to be here. His wife had a medical procedure. It's very serious, but he won't be here this morning. Before we do our operating results in detail, I would like to take a few moments to summarize the highlights of our record-setting quarter and full-year results.

Our consolidated full fiscal 2011 and quarter net sales operating income represent time record fiscal year quarterly results for HEICO. This was driven principally by the record results in our Flight Support Group, and the continued results in the Electronics Technologies Group. Consolidated full fiscal 2011 net income and operating income increased 33% and 27% respectively, on an increase of 20% net sales over fiscal 2010. Additionally, our consolidated operating margins improved to 18.1% in fiscal 2011, from 17.7% in fiscal 2010. Consolidated fourth quarter 2011 net income and operating income increased 18% and 20% respectively, on an increase of 20% in net sales over the quarter 2010. Additionally, our consolidated operating margins improved to 17.9% in the quarter 2011, all from 17.5% in the fourth quarter 2010. Flight Support set a quarterly net sales record in the quarter 2011, improving 30% over the quarter of 2010.

That increase in net sales principally reflects on organic growth of 20%, as well as additional net sales by the acquisition of Blue Aerospace during the quarter 2011. Electronic Technologies set a quarterly net sales record in the quarter 2011, improving 20% over the quarter of 2010. The increase in net sales principally reflects on organic growth of 9%, as well as additional net sales contributed by the 3D Plus acquisition in September 2011. [crosstalk] net income per diluted share increased 19% over the comparative period of fiscal 2010. The fourth quarter of 2011 included a net expense charge from impairment losses, partially offset by a reduction in the liability for recorded or contingent consideration. Our cash flow and balance sheet remain extremely strong. Cash flow from operating activities was $106 million in Fiscal 2011 compared to $102 million in Fiscal 2010.

As of October 31st, the company net debt to equity ratio was 0.7%, with net debt, which is total debt plus cash, of $22.7 million. We completed our 43rd acquisition in 1990, with the acquisition of 3D Plus in September 2011. 3D is a leading designer and manufacturer of three-dimensional microelectronic and stacked memory products used predominantly in satellites, and also utilized in medical equipment. We believe that 3D is a unique company offering us the opportunity to expand our satellite product business both inside and out of the United States. We also completed the acquisition of Switchcraft in November 2011. Switchcraft is a leading designer and manufacturer of high-performance, high-reliability, and hard-environment electronic connectors and other connect products. Switchcraft will enhance our connect offering, by adding many products to our business, which we did not offer and by adding many customers not previously served by HEICO.

We expect both of these acquisitions to increase our earnings per share within Fiscal 2012. Fiscal 2011 marked the sixth consecutive year that HEICO has been included in the list of 200 small companies, and the second consecutive year HEICO was named as one of the 100 small companies [crosstalk]. During Fiscal 2011, we distributed 45 stocks in April and increased our semi-annual cash dividend by 25% effective July dividend. Earlier this week, we declared our 67th consecutive semi-annual cash dividend since 1979. I want to note that our board may consider additional stock splits and/or increases in cash dividend in the future as deemed appropriate. At the present time, we don't have the authorized number of shares to permit a stock split or dividend, but I would think the board would consider requiring shareholders to increase the authorized shares when the board next meets in March 2012.

Earlier this week, we also completed a new $670 million revolving credit facility, giving us excellent flexibility to aggressively pursue quality acquisition opportunities. We are very grateful that HEICO's excellent performance and credit characteristics enabled us to more than double the size of our prior $300 million facility. That's the extent of the overall 30,000 comment. Now, drilling down into the detail, our net sales consolidated increased 23% in the fourth quarter of 2011, to a record $208.9 million up from $169.4 million in the fourth quarter of 2010. Consolidated net sales increased 24% to a record $760.9 million in Fiscal 2011, up from $617 million in Fiscal 2010. Flight Support reported record net sales of $144.4 million in the fourth quarter of 2011, up 30% from the $111.2 million in the fourth quarter of 2010.

Flight Support net sales in Fiscal 2011 increased to a record $539.8 million, up 31% from $412.3 million in Fiscal 2010. Flight Support's fourth quarter in Fiscal 2011 net sales increased, principally reflecting organic growth of approximately 20% and 21% respectively, as well as additional net sales attributed by the acquisition of Blue Aerospace in the fourth quarter of 2011. Net sales of Flight Support have now increased over the past seven quarters, reflecting higher sales of new products and services, as well as demand for our aftermarket replacement parts and their overhaul services. This is the result of increased airline capacity, higher sales of demand for our industrial products. Electronic Technology reported record net sales of $65.3 million in the fourth quarter of 2011, up 12% from $58.4 million in the fourth quarter of 2010.

Net sales in ETG Fiscal 2011 increased to a record $227.8 million, up 11% from $205.6 million in Fiscal 2010. The fourth quarter and-year net sales increase in ETG represents strong organic growth of approximately 9% and 10% respectively, as well as additional net sales contributed by a Fiscal 2010 acquisition, as well as the mentioned acquisition of 3D Plus. ETG's fourth quarter in Fiscal 2011 organic growth principally [reflects] on the demand for certain [crosstalk] medical and electronic products. Our net sales by market in Fiscal 2011 was composed approximately 60% from commercial aviation versus 62% in 2010. 27% from the defense and space versus 23% in 2010, and 16% from other markets, including medical, telecommunications, and electronics, and this compared to 15% in 2010. Moving on to operating income.

Consolidated operating income in the fourth quarter of 2011 increased 26% to a record of $37.4 million, up from $29.7 million, the fourth quarter of 2010, and increased 27% to a record $138.4 million for Fiscal 2011, up from $109.2 million in Fiscal 2010. Operating income in the fourth quarter of 2011 improved to a record $26.6 million, up 52% from the $17.6 million in the fourth quarter of 2010. Operating income in Fiscal 2011 increased 40% to a record $95 million, up from $67.9 million in Fiscal 2010. The increases in operating income for the fourth quarter and in Fiscal 2011 represent both higher sales and improved operating margins.

ETG reported operating income of $0.9 million in the fourth quarter of 2011, compared to $16.2 million in the fourth quarter of 2010, and the results for the fourth quarter of 2011 include, the impairment losses related to write-down and intangible assets to their estimated fair value, partially offset by reduction in the value of contingent consideration related to prior year's acquisition. This reduced operating income by $98 million in the aggregate. ETG's operating income in Fiscal 2011 increased 10% to a record $99.5 million from $56.1 million in Fiscal 2010, and the increase in operating income in Fiscal 2011 principally reflects higher sales volume. Corporate expenses remained flat at $4.1 million for both the fourth quarter of 2011 and 2020 increased to $16 million in Fiscal 2011 compared to $14.8 million in Fiscal 2010, but fell to 2.1% of net sales in Fiscal 2011 compared to 2.44% in the prior year.

Our consolidated operating margin increased to 17.9% in the fourth quarter of 2011, up from 17.5% in the fourth quarter of 2010, and improved to 18.1% in Fiscal 2011, up from 17.7% in Fiscal 2010. Operating margin of Flight Support increased significantly to 18.4% in the fourth quarter of 2011, up from 15.8% in the fourth quarter of 2010, and increased to 17.6% in Fiscal 2011 and that was 16.5% in Fiscal 2010. The improved operating margins in the fourth quarter and Fiscal 2011 principally reflect efficiencies realized through higher sales volume. Our operating margins of ETG increased to 22.8% in the fourth quarter of 2011, compared to 27.7% in the fourth quarter of 2010, and 26.1% in Fiscal 2011 compared to 27.3% in Fiscal 2010.

The decrease in operating margins for the fourth quarter of 2011, principally reflects the impairment losses which were partially offset by the reduction in the reported value of contingent consideration. Diluted earnings per share increased 19%, $0.44 in the fourth quarter of 2011, up from $0.37 in the fourth quarter of 2010 and they increased 32% to a record $1.71 in Fiscal 2011, up from $1.30 in Fiscal 2010. All Fiscal 2010 diluted share amounts have been adjusted retrospectively for our five stock splits which were distributed in 2011. Depreciation and amortization expense increased to $18.5 million for Fiscal 2011, up slightly from $17.6 million in 2010, primarily reflecting higher amortization expense related to identified intangible assets acquired as a part of the previously discussed 2011 acquisition.

R&D expense increased 14% from [$7.1] million in the fourth quarter of 2011, up from $6.2 million in the fourth quarter of 2010, and they increased 10%, by $25.4 million in Fiscal 2011, up from $22.7 million in Fiscal 2010. Significant ongoing product development efforts continue in Flight Support and Electronic Technology. We reinvest roughly 4% of each sales dollar in our new product. We are budgeting approximately $7 million in our spending in Fiscal 2012, and that would be an increase by 5%. We believe that our unwavering commitment over the 21 years to invest in product [crosstalk] and/or innovative products, continues to be a significant part of our long-term earnings growth strategy. SG&A was $36.9 million in the fourth quarter of 2011, compared to $31.4 million in the fourth quarter of 2010. That increase compares to the fourth quarter of 2010 principally due to previously mentioned impairment loss.

SG&A expenses were $136 million in Fiscal 2011, compared to [$130.2] million in Fiscal 2010, and the increase in SG&A in 2011 as compared to 2010 is primarily attributed to higher operating costs associated with previously growth in net sales as well as the acquired businesses. SG&A's percentage of net sales decreased to 17% in the fourth quarter of 2011, down from 18.5% in the fourth quarter of 2010, and decreased to 17.8% in Fiscal 2011, down from 18.3% in Fiscal 2010. That decrease is presented as a result primarily due to the impact of higher sales volumes on the fifth quarter of SG&A expenses, as well as controlled spending relative to our net sales growth. Interest expenses in the fourth quarter Fiscal 2011 and 2010 were significant due to our low debt levels and low variable rate interest under our revolving facility.

Outstanding debt balance was $36 million as of October 31st, 2011, and the average interest rate was less than 1%. Other income in the fourth quarter of both years was not significant. HEICO's effective fixed rate was 36.6% in the fourth quarter of 2011, compared to 32.8% in the fourth quarter of 2010, and was 31% in Fiscal 2011, compared to 37% in Fiscal 2010. During Fiscal 2011, we recognized the tax benefits principally in state income enrichment update and higher R&D development tax credits, compiling our 2010 federal and the state tax returns, and amendments to prior year state tax returns in the third quarter. We also benefited from an income tax credit on the retroactive extension in the fourth quarter of the R&D tax credit, and that increased net income by approximately $2.8 or 7% per diluted share.

The effective tax rate of 36.6% in the fourth quarter of 2011 is in line with the estimated effective rate for fiscal 2012, which is 34%, 35%. Net income attributable to controlling interest totaled $5.9 million in the fourth quarter of 2011, compared to $4.2 million in the fourth quarter of 2010, and totaled $22.6 million in fiscal 2011, compared to $17.4 million in fiscal 2010. The increase in both periods is principally related to higher earnings by the support group, in which 20% [from] controlling interest was held by the sponsor. Moving over to our balance sheet and cash flow, I note that the financial position and flow remain strong. Cash flow from operating activities in 2011 totaled $125 million, including $40.5 million is generated in the fourth quarter of 2011. That was up from $101.7 million in 2010, and represented 172% of reported net income.

HEICO as you all know loves cash flow. Our working capital ratio continues to be strong at 2.6 as of October 31, and that's compared to 3.2 as of October 31, 2010. DSO of accounts receivable decreased every day as of October 31, down to [50] days as of October 31, 2010. As I've said before, we continue to work very hard to limit our credit risk and regularly monitor all of our receivables, and we do have strong collection efforts. No one customer accounted for more than 10% of net sales. Our top five customers represented approximately 17% of the net sales in fiscal 2011, compared to 18% in fiscal 2010. As the public is aware, AMR, the parent company of American Airlines, filed for Chapter 11 protection in November 2011. To date, HEICO has not been significantly impacted, although American Airlines is a prominent customer of ours.

We previously indicated no one customer accounted for more than 10% of our net sales, and it's been our experience with previous airline bankruptcies such as Delta, United, that our businesses [have not been dismissed] as a result of the value acquired by our products and services. Inventory turnover as of October 31, 2011 was 113 days, down from 117 in October 2010, and that reflects efforts to manage inventory. CapEx for 2011 were $9.4 million, and depreciation was $10.7 million. The company net debt to equity ratio increased to 3.7% as of October 31st, with net debt of $2.7 million. As previously reported earlier this week, we have entered into a new $670 million unsecured revolving credit agreement, with a strong bank syndicate. It matures December 2016, in five years.

The new credit facility may be extended to a one-year period, and may be increased to $800 million under certain circumstances. Our strong cash balance combined with our availability to debt capital has allowed us to take advantage of the acquisition of 3D Plus and Switchcraft, and of course will enable us to take advantage of other prospective acquisition opportunities as they occur. Now, for the outlook, improved economic conditions and in capacity within the airline industry, resulted in significantly higher demand in fiscal 2011 for our flight support products and services. Demand within defense aerospace, medical, and electronic markets for our electronic technology has also remained strong. As we look forward to 2012, the general overall economic uncertainty may moderate growth in commercial aviation markets. We expect overall stable markets for the product of ETG.

Historically, we have experienced greater growth in the markets we operate, and we will continue to target such growth in fiscal 2012. We are currently estimating growth in fiscal 2012, full-year net sales of approximately 15%- 18%, of which approximately 50% will be acquired and net income approximately 10%-12% in 2011 levels, with consolidated operating incomes approximating $155 million, depreciation amortization approximating $30 million. These estimates include the recent acquisitions of 3D Plus and Switchcraft, excluding any additional acquisitions we might make. Our fiscal 2012 earnings growth estimate of 10%-12% approximates our fiscal 2011 guidance estimate as we began last year 12 months ago. Of course, I don't have to remind you as the years progressed that up, as did the board's visibility, and finally round up the year, the bottom line is ahead of 37%.

Cash flow provided by operating activities is expected to remain strong, to approximate $120 million-$150 million in fiscal 2012, CapEx in 2012, budgeted [a present approximate] of $20 million-$22 million. As you all know, in addition to new product development, strategic acquisitions complement our existing operation and support our long-term growth strategy. Consistent with our strategy and our long-term growth goals, we continue to target income growth of 20% for the fiscal 2012 year, but it is too early at this time for us to make such final predictions. With our new revolving credit facility, we are in a strong position to aggressively grow our strategy to acquire high-quality companies with strong management, offering earnings, increasing growth opportunities, all at reasonable prices that we have paid in the reins historically. Our pipeline remains full, and the market for acquisition opportunity is robust.

I remain optimistic we will have opportunities to further enhance our objective through additional acquisitions. In closing, I would like to thank our team members. It is through their dedication and efforts that we've achieve significant one-year compound annual growth of 17% in net sales, and 19% compound growth in net income. We believe our focus on new products and services, as well as increasing market penetration, while maintaining a very strong financial position. A very disciplined acquisition strategy will provide an opportunity for continued substantial growth and profitability. I also want to thank our investors, many of them on our line right now, for being so supportive and interested in HEICO. We hope that we can feel confident that we'll continue to earn your confidence. With that, I would like to open the floor for any questions.

Operator (participant)

Thank you. At this time, [crosstalk] a question, press star then press the number one on your telephone keypad. Your first question [crosstalk] of the [Zodiac] Company?

Speaker 15

Yeah. Good morning. Hi, Larry. I was actually wondering if you could talk a little bit about what kind of air traffic growth or capacity growth is [crosstalk] to your preliminary thought guidance.

Laurans Mendelson (Chairman and CEO)

I think let Tom talk about that, please.

Thomas Irwin (Executive VP and CFO)

Yes, [crosstalk]. At this point, what we see in terms of our market expectations, I think built into our business unit or traffic growth is somewhere in the mid to low single-digit, just say 4% or 5%, something like that. Somewhat down from 2012 and 2011 based on again not our own internal levels, but what we see in really [crosstalk] marketplace estimates.

Speaker 15

Okay, that seems about right. Okay, and just in regards to that, I guess you said 50%- 60% of that growth range is required. Would you be able to talk a little bit about how that breaks between the two business segments, just the overall rate of growth?

Thomas Irwin (Executive VP and CFO)

Generally speaking, I didn't have to start [the FSG thing] because it has a higher organic profile than the Electronic Technologies Group business unit for a number of years. We've seen a single-digit ETG and 10% or 12% in FSG. Again, we don't give out this one. We certainly wouldn't issue a guide of the overall organic growth without weighted average [real] numbers, of about 32% in Flight Support and 1/3 in Electronic.

Speaker 15

Okay, thanks. Just one last thing from me. The 20% organic growth you saw in the fourth quarter. Just wondering, have you seen any benefit from restocking [crosstalk] or is that still kind of just steady state demand?

Thomas Irwin (Executive VP and CFO)

[crossatalk]. No, we really don't believe that the airline is restocking. Clearly, a history-bearing [crosstalk] demand in 2011. I would not consider it really restocking. In other words, taking [crosstalk] of maintenance, they got caught up on some of that maintenance. I would not say that we will restock or sell the one-month variant [on there].

Speaker 15

Understood., great. Thanks a lot.

Thomas Irwin (Executive VP and CFO)

Thank you.

Operator (participant)

Your next question comes from [crosstalk] with Credit Suisse.

Speaker 12

Good morning, guys. Nice quarter.

Laurans Mendelson (Chairman and CEO)

Thank you.

Thomas Irwin (Executive VP and CFO)

Thank you, Julie.

Speaker 12

Tom, please can you provide a breakdown of the growth between services and parts in the Flight Support Group for the quarter?

Thomas Irwin (Executive VP and CFO)

In the fourth [quarter forward], in Flight Support, [we're going to go with 20%]. The parts business obviously has markedly grown with services quarter-over-quarter of this year, the quarter of last year. Services probably maybe got 10% on the parts. The other two quarters [crosstalk] was 21% I think.

Speaker 12

Okay. With the cost commentary on commercial aviation about the uncertain momentum, are you seeing any weakening demand, trends in demand for flight support or is this more conservatism?

Laurans Mendelson (Chairman and CEO)

I think, Julie, it's our natural conservatism. One of the problems we face, and I have said this on calls before and to anybody who will listen to me, our team is highly compensated and incentivized to do very well. When they start the year out there, they're all conservative [crosstalk], which is fine. During the year, historically, we've been able to move up their estimates. They gain more confidence in the ability. Going into the year, we assume things are not going to boom. We found in trying to guide expectations for investors, we're much better off starting low with a number that we feel very confident with and moving that up. That helps credibility when you tell somebody something. They believe the problem [crosstalk] that some people start out ahead of us. We really don't know. I feel confident.

That's why we have the comment that the aim is 20%. Do I know that we can go over 20%? No, I don't know that. We're going to be pushing for that. We're going to be trying for that. Our people, budgets, and as the year moves on and as we go by those budgets, we exceed the budgets [and better]. I think we'd rather be conservative and not get out far ahead of our own. Believe me, we're pushing these people. We're pushing them in the sense that they have the incentive to produce a strong result.

Speaker 12

Okay. What's the objection on the tax rates for 2012?

Thomas Irwin (Executive VP and CFO)

For 2012, we're looking at, have you heard anything [more than 35%]. We rearranged in 34%-34.5%, something like that. Overall, as 2011 was, both the tax rate and the [crosstalk] all menage ran about 48% accurate tax. In our model, and in our overall, about 48% of the tax rate went up a bit. We purchase reduced the non-controlling inflow tolerance. The tolerance of that will come down a bit as a pretext. We taxed in overall, 48.8% for both that and then the non-controlling.

Laurans Mendelson (Chairman and CEO)

Unless Julie, let me remind you, if we get a Republican administration, it might be 25%.

Speaker 12

All right. Thanks, guys. Thanks, guys.

Laurans Mendelson (Chairman and CEO)

Thank you, Julie.

Operator (participant)

Your next question comes from Arnie Ursaner of CJS Securities.

Arnie Ursaner (President)

Hi. Good morning. I guess[crosstalk] quarter anymore.

Laurans Mendelson (Chairman and CEO)

Arnie, thank you.

Arnie Ursaner (President)

My first question will chart you to two or three mechanical questions. Obviously, if I just stay at that point, [will you have] 580 points change your margin there above [the higher]? I assume it's simple math, and that's correct?

Thomas Irwin (Executive VP and CFO)

Yeah, that's correct. At the operating income level, the net positive add value would be $5 million lined up to $1.4 million for operating yard under guard for net $3.8 million pre-tax.

Laurans Mendelson (Chairman and CEO)

Arnie, I just want to clarify this special write-off and [crosstalk]. As I understand it, as Thomas explained it to me, this would have been future amortization anyway. You have to go through the numbers. Again, we're conservative and that's fine. We'll take it now. t's gone. It's history, and it would have been written off in a future period [crosstalk]. Over the next five years, it would be written off [crosstalk. We took a year, and that's fine.

Arnie Ursaner (President)

That's very obvious. Wasn't one single acquisition, one disappointing acquisition off the chart?

Thomas Irwin (Executive VP and CFO)

The chart involved a couple of product lines, big but big dollars, both the chart and the one item of consideration was one product line and one product acquisition a couple of years ago. Of course, the process is that we annually review all of our intangibles, we have a fair value analysis, and [crosstalk] complicated. As Larry said, you look at the five-year forecast, revenue, etc., and we go from ability to deficit and net and right down to $3.8 free tax.

Arnie Ursaner (President)

Another obvious question, you normally don't like specific D&A guidance. You get your quarter in percent [crosstalk] year over year. I'm a little surprised to see a pre-hit on the hit on D&A. What is the cause? Sizable D&A expected next year?

Thomas Irwin (Executive VP and CFO)

The answer is, we did it because it is going up. Most of it is going up, of the $30 million that quarterly D&A forecast [crosstalk] for next year. Round numbers of [crosstalk] in amortization of course through acquisition. We had a few new businesses that weren't $2,000 at all, 3D Plus for a month and Switchcraft not at all. The impact [crosstalk] those acquisitions, and both those businesses' capital budgets that weren't in the prior year, therefore the depreciation went up. Since it's going up by a significant amount, and many companies keep it up because [crosstalk] for us, for operating income. D&A is pretty much equivalent to EBITDA. We thought that would be helpful to investors and evaluation models as well, to have some color, if you will, on both numbers.

Arnie Ursaner (President)

One more very quick question. Rates on the facility you have, and if you start moving the ordinary percent rate change.

Laurans Mendelson (Chairman and CEO)

The answer is, you could say, the rate that we are paying now for this new facility is more than the rate that we were paying on the old facility. I'd like to expand on the reason for going $300 million to $670 million. I think management will believe that we are in a unique situation with regards to interest rates. In fact, effectively, we think that projected is probably going to be around maybe 1.5%, 2%, maybe 1.5%. It's a rate which is so de minimis compared to the benefits of acquisition, that we would like to be very aggressive, not in overpaying, but aggressive in making acquisitions which have strong care, have good businesses.

Now is the time to do it because instead of paying interest into the markets, paying the banks on a credit line, which in normal times is 8%, we're going to be paying 1.5%, maybe 2%. The difference is 7%. Let's assume we draw it down. I'm just throwing a number out, $400 million balance. You know kind of where we are, midway, $670 million. We would be in normal times at the percentage of $424 million in interest tax, that is about $15 million. That $15 million is debt service and reducing debt, and that's a lot of money. We expanded the facility. We have a lot of transactions paying very low interest rates. As a matter of fact, at 1.5%, you can almost ignore the calculation of creation and everything else. It was so positive. That's the reason for expanding the facility.

Also, the money market are very strained. I don't have to be petty. I mean, we believe you have to take the money when it's available. We have a very good bank group. They bought the facility. We're very happy to take it. They're happy. It gives us a billion firepower to know what's happening in the bank in Europe. There's traction in lending over there. Although we're a U.S. bank, but you never know what might happen. Running a company, protecting the company and the shareholders and our investment, we thought this was a very good opportune moment to take a significant $600 million-$800 million. It was a very wise thing to do. That's the philosophy behind what we did, and I've given you the interest rate.

Arnie Ursaner (President)

Thank you very much.

Laurans Mendelson (Chairman and CEO)

Thank you, Arnie.

Operator (participant)

Your next question comes from [crosstalk] Capital Markets.

Speaker 11

Morning. It's actually [crosstalk]. Nice quarter, guys.

Thomas Irwin (Executive VP and CFO)

Thank you.

Speaker 11

Can you set expectations for overall capacity next year? What are you seeing in terms of the cargo space? We saw Lufthansa last month. They were looking to cut their cargo capacity by 20%-30% next year. How much of a role does that play in your overall kind of aerospace business?

Thomas Irwin (Executive VP and CFO)

I would say that [crosstalk]our forecast, the number in terms of the combination of [crosstalk] very difficult to have it down. We know we're at the part that[crosstalk]. I would say it would give you a cooler number.

Speaker 11

Okay. Looking at ETG, can you guys just give us some color on your thoughts on the defense business for next year? Maybe where some of the bigger risk opportunities are there?

Thomas Irwin (Executive VP and CFO)

Okay. Victor Mendelson is on the line. He's on now. He can respond to some of these questions as well. Victor, if you can go ahead.

Victor Mendelson (Co-president and Director)

I'm here. The answer is that we think 2012, we're not anticipating major changes for us, except we're [crosstalk] do our ground-related products, our ground-related subsystems. Generally, [crosstalk] at this point, we think probably for the most part, those are relative [on the defense side]. The rest of the [crosstalk], our medical business has been very strongly indicated for more of that as well. Our general electrical markets are strong as well. At this point, we're probably officially the best on the business.

Speaker 11

Okay, thanks. Lastly, you know margins in the quarter are pretty strong. If you kind of back out of that impairment, what are your thoughts on how that shapes up heading into the next year? Are those sustainable? Are you guys expecting it to be throughout the quarters?

Victor Mendelson (Co-president and Director)

Yeah. For ETG, I would expect that[crosstalk] pass. In my mind, I couldn't doubt that because it really is on the [crosstalk]. At this point, I'm expecting it to be relatively similar.

Thomas Irwin (Executive VP and CFO)

Yeah. [This is topic], what Victor was referring to of course was the amortization numbers both in the fourth quarter of last year and also the estimate going forward. Their own record of their earlier increase for 2012 based on the acquisition graph [crosstalk]. If you do the math of our estimates for OY, a little bit declined in reported operating margins after the amortization of [intangible]. That is virtually all attributable to accounting amortization on that transaction, as well as the [current] accounting. You have transaction expenses now that also have some one-time valuation inventory like that, that allow a one-time way type data that reduces profits. The aggregate of that would be, 2012 all being Electronics Group. This one's [crosstalk] activity in 2011. Those margins as the opportunity [crosstalk].

Speaker 11

Is it safe to assume that that would occur in the top of the year?

Thomas Irwin (Executive VP and CFO)

Yeah, exactly. One of the disadvantages is, we've got to jump into our estimates. Since the acquisition of 3D Plus, [crosstalk] and Switchcraft, we're actually still working on some of those numbers. I would evaluate the intangible [crosstalk] and the opening balance, maybe the estimates for the 3D. It could change slightly. Switchcraft hasn't been there at all, and so on and on. At this point, I bet everything there are not solid estimates [crosstalk]. Typically, it's based on inventory write-out, and obviously reverse days of the new inventory. Typically, [crosstalk] nine months at the most. Yeah.

Speaker 11

Okay. Thanks, guys.

Thomas Irwin (Executive VP and CFO)

Thank you.

Operator (participant)

Your next question comes from Ken Herbert with Wedbush.

Ken Herbert (Company Representative)

Hi. Good morning. Thank you.

Thomas Irwin (Executive VP and CFO)

Good morning.

Ken Herbert (Company Representative)

I just wanted to clarify, Tom, Switchcraft was not reflected in your numbers [crosstalk] the release. Switchcraft wasn't reflected in the 2012 guidance?

Thomas Irwin (Executive VP and CFO)

No. Switchcraft isn't in our revenue and [crosstalk]. What I mentioned was, some of the Switchcraft estimates purchased are in fact estimates that didn't have a completely evaluated valuation. Our estimate revenue and earnings after purchasing are in our full of 2012.

Ken Herbert (Company Representative)

Okay. Yeah, that's what I thought. Thanks. For the Switchcraft business, I know it's got probably a little wider end market exposure than obviously[crosstalk] business. What do you think about that business? You talked about that in 2012.

Thomas Irwin (Executive VP and CFO)

[crosstalk] I can answer that for you. We believe [crosstalk] growth had been less comparable to the overall growth within the ETG. What I typically say, is we say sort of the mid-single digits or the mid-single digits growth rate organically in that business. If we do better, we'll be very happy. I went into the [crosstalk] acquisition planning for the mid-single digits.

Ken Herbert (Company Representative)

I think one question on Switchcraft's comments on synergy. I know obviously you've got an existing and [crosstalk] exposure, but how should we think about that as it relates to the other part of the ETG, and particularly the opportunity there for synergy or maybe a little more market upside than from other hyper acquisitions?

Thomas Irwin (Executive VP and CFO)

Yeah. I don't want to promise anything at this point. I think that's there, and in fact, some of our other connected businesses have strongly [crosstalk] with Switchcraft, and seeing where it might be [crosstalk]. I suspect that they will [crosstalk]. The offers out [crosstalk]. We have not asserted anything going in. If we achieve them, then we'll be very happy. The assumption is to not have them.

Ken Herbert (Company Representative)

Okay. Thank you. Tom, I just wanted to clarify the guidance.

Thomas Irwin (Executive VP and CFO)

Hello.

Operator (participant)

His phone actually is disconnected.

Thomas Irwin (Executive VP and CFO)

I'm sorry. [crosstalk] his line?

Operator (participant)

Yes, sir.

Laurans Mendelson (Chairman and CEO)

Okay. He probably hit a button. Maybe we should move on to the next person on the list, and then he can call back in.

Operator (participant)

Okay. Your next question comes from [crosstalk].

Speaker 16

Thanks. Good morning, everybody.

Laurans Mendelson (Chairman and CEO)

Good morning, Steve.

Speaker 16

On the SG&A, I think to get leverage going forward, will the acquisition require some additional SG&A spending?

Laurans Mendelson (Chairman and CEO)

I don't think that we're talking about a significant SG&A spending. We're not going to ban it off at all. We have to hire some a little bit. I would say, I think as we expand the point, we would expect to gain a benefit through SG&A being a reduced percentage. No, we don't expect any. We have a very flat organization, and we don't expect to layer it with a lot of overhead.

Speaker 16

Great. That's what I was hoping to hear. The other thing is now on the credit line, the [crosstalk] larger amount of money. I know the [crosstalk] the OEMs are trying the supply chain. Do you see that same effort in the MRO supply chain? Do you think there are not necessarily unique players [crosstalk] looking at right now?

Thomas Irwin (Executive VP and CFO)

I'll let Eric answer.

Eric Mendelson (Co-President and President of HEICO's Flight Support Group)

Where we're at [crosstalk], we're doing all right. I think there's a [capacity out there to take care of it]. It's a matter of getting a very good opportunity to take it away to our distribution [crosstalk]. We're getting their product, and they can also buy competitive products as well for that platform. We don't obviously [crosstalk] the product to provide. We can really drive through synergizing on additional capabilities [crosstalk]. No, I would not say that we're seeing a constraint to the supply chain, if that is the message you wanted [crosstalk].

Speaker 16

No, not so much constraint that your customers are looking to reduce the vendors they deal with. Maybe it is the same sort of question worded differently.

Thomas Irwin (Executive VP and CFO)

I think that [crosstalk] the acquisition came with, and I think they just consolidated.

Speaker 16

Exactly.

Thomas Irwin (Executive VP and CFO)

I was really on the [crosstalk] consolidated. You know we've got all the consolidation out there. Yes, there are [crosstalk] who are out on our emergency plan. [crosstalk] I think that there's some opportunity, but I wouldn't overplay that one.

Speaker 16

Got it. Thanks very much. Happy to hear that. Thank you.

Operator (participant)

We do have Ken Herbert back in the queue.

Laurans Mendelson (Chairman and CEO)

Sure. What was Ken's question, the line that disconnected? Ken.

Ken Herbert (Company Representative)

Yes.

Thomas Irwin (Executive VP and CFO)

Hi, Ken.

Ken Herbert (Company Representative)

Yes, great. I just wanted to check a clarification. With the revenue guidance, when I look at the estimate you gave me for organic acquisitions, does the guidance include about $75 million from acquisitions in terms of 2012?

Laurans Mendelson (Chairman and CEO)

Approximately on the low end of that range, yes.

Ken Herbert (Company Representative)

Okay. Just wanted to clarify that. Thank you very much.

Laurans Mendelson (Chairman and CEO)

Yeah, the math is right.

Operator (participant)

Your next question comes from Ronda of Royal Bank of Canada.

Ronda MacPherson (Financial Services VP)

Morning, gentlemen.

Speaker 12

Good morning.

Ronda MacPherson (Financial Services VP)

A question, going back to the right side that you mentioned that it was in regard to the product line. The end market, [crosstalk] product or a medical product?

Thomas Irwin (Executive VP and CFO)

Primarily defense, and they were primarily customer relationship evaluations when we bought the company. Again, the two were related. We had earnout provision valuing the tangible. We considered that they would have the earnout amount based on the current asset. They [will not now earnout versus that]. Similarly, they looked at an update of our revenue forecast. [crosstalk] the five-year again, the valuation process is a residual and [continual cash flow] value. I would compare it to that value and [crosstalk].

Ronda MacPherson (Financial Services VP)

It wasn't like a program that [crosstalk] was either high or down?

Thomas Irwin (Executive VP and CFO)

No, there wasn't anything specific about the valuation. It wasn't that somebody [crosstalk] their forecast that were used to set up the intangible earnout or that were used for the balance sheet based on the appraisal that was updated. For all of our businesses, the result was right there.

Ronda MacPherson (Financial Services VP)

Okay. Earlier, [crosstalk] Larry you had mentioned that the growth that you were saying you were expecting in that would be similar to what you saw in FY 2011, organically speaking. Later on, there was talk of mid-single digits. I think last year electronics had 10% organic growth. Should we be looking at 10% organic growth, or is it more mid-single digit for FY 2012?

Laurans Mendelson (Chairman and CEO)

I think the answer is the clarification we were talking about in the foreseeable future. The number that we're referencing is single digit or say, 3%-5% is the estimate at this point.

Ronda MacPherson (Financial Services VP)

Okay, and then one other question. I think maybe I missed it. Looking at your FY 2012 guidance, you had mentioned CapEx is expected to be $2 million. How about twice the level you have this year and kind of the last couple of years? Is there anything going on there that we ought to be aware of?

Laurans Mendelson (Chairman and CEO)

Let's forward again. The answer is a couple of things. Number one, this is our budget. Currently, we don't spend our full budget even looking at the latter [crosstalk]. Now, that being said, [crosstalk] $20 million-$23 million, there's a couple of ones. Number one, we have 3D Plus and Switchcraft. We have to [tap up the cash] for that. We do have a facility expansion, which again, when our CapEx goes up, it goes up because of the facility as opposed to basically replacement [crosstalk].

There is a component in the $20 million-$22 million for expansion footprint, if you will. That being said, it would not shock us that [they] don't spend the full $20 million[crosstalk]. That approval process beginning of the year, ending the year, [crosstalk] ROI and then payback period. Now often they're [crosstalk]. In the 2022, is two acquisitions, two facilities and then sort of a normal expense of the $13 million equipment, if you will.

Ronda MacPherson (Financial Services VP)

Is that specifically the expansion in the [ERs] on an electronics side?

Laurans Mendelson (Chairman and CEO)

It's actually both.

Ronda MacPherson (Financial Services VP)

Okay, both. Okay, great. Thanks a lot.

Laurans Mendelson (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from J.B Groh, D.A. Davidson.

J.B. Groh (Analyst)

Morning, guys.

Laurans Mendelson (Chairman and CEO)

Morning, J.B.

J.B. Groh (Analyst)

Congratulations on a great end of the year. Most of my questions have been crossed off. Just to play a little last question, Tom and Larry, I guess you characterize your CapEx budget. I mean, there's a hint of a [crosstalk].

Laurans Mendelson (Chairman and CEO)

We have a wish list, and as Tom pointed out, as a matter of fact, I don't recall that we've ever had a CapEx budget. At the beginning of the year, as Tom points out, we've been wanting to put in, we don't like surprises. We've put in their wish list [crosstalk]. For any of those expenditures during the year, they go through a very detailed vetting process, as Tom pointed out, and all these other things. These are not just rubber stamps, but this is the potential that our operating people tell us is the max potential that they will need during the year, if they did everything that they think they might do. I would be shocked, I don't think there's a candidacy to that number.

J.B. Groh (Analyst)

Okay. Maybe Victor could help us out with the with business mix currently in ETG, and then post-switch between I think the three major buckets there would be medical, general, and [crosstalk]. How does that change?

Victor Mendelson (Co-president and Director)

The general and medical as a percentage would increase. Mostly though, the general electronic market would increase the most. Such a percentage would come down as a result of it, probably considerably. Just because there's so much in the market, and then of course, some maybe the aviation portion of ETG sales would be flat or up a little bit.

J.B. Groh (Analyst)

Tom, what is the defense spend now? I mean, enough to be significant for ETG, correct?

Thomas Irwin (Executive VP and CFO)

Historically we've been in the neighborhood of, I'd say, 40%. Maybe this medical spend is 15%, something like that. Somewhere in that range.

J.B. Groh (Analyst)

Okay. The balance is general. You said probably, does it get as much as [crosstalk]?

Thomas Irwin (Executive VP and CFO)

No, it gets cut considerably. Definitely, I think it would be below the 40% range.

J.B. Groh (Analyst)

Okay, that's helpful. Congratulations again, and thanks for your help.

Thomas Irwin (Executive VP and CFO)

Thank you.

Operator (participant)

Your next question, Eric [crosstalk] of Stevens.

Speaker 14

Good morning, guys.

Laurans Mendelson (Chairman and CEO)

Good morning.

Speaker 14

Morning. Hey. Last quarter, you made a comment with regards to your ad pipeline, that I think your comment was that it was the most robust pipeline that you'd ever seen. Are you still as enthusiastic about the pipeline today as you were last quarter? I guess the trigger on, [crosstalk] and all that stuff, but can you give us an update there?

Laurans Mendelson (Chairman and CEO)

I think that the pipeline is robust. I think that we're seeing a lot of transactions. As you know, some of these things got looked at, and they don't look as good. You start to turn over the stones. I'm thinking of one more thing that's been [crosstalk] to look at. It still is interesting, but not at the price and the initial, and you've seen so many of these offerings where they tell you [crosstalk] start to go in and look at it.

It's really not there. I can say there's many opportunities. We are really busy doing the due diligence reviews. The fact that we took down $670 million is some indication that we have confidence that there are deals out there that we're going to be able to make. I think it's still a good pipeline. I can't tell you exactly the same or more or less. It's still a pipeline. I think there's a lot of opportunity.

Speaker 14

Great. You talk about where you are in the [PMA] part, new part in a section, sort of how many new parts or sort of ER authorizations are you expecting for this year? Maybe you talk about where you are now, so we can think about it in terms of growth.

Laurans Mendelson (Chairman and CEO)

[crosstalk] our number in PMA are [crosstalk] prior year levels. We've been very [crosstalk] in the development of a new part. We don't know if [crosstalk] our past numbers.

Speaker 14

Great.. Thanks a lot, guys.

Laurans Mendelson (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from [crosstalk] of Raymond James.

Speaker 13

Morning, gentlemen. I don't think the specific question has been asked a lot this morning, which is, when you talk about your [crosstalk] 10%-12% earnings growth and income growth, and you want to target 10%, is there a single major item in there that you look at as a driver, or is it a combination of a bunch that would get you to that level?

Laurans Mendelson (Chairman and CEO)

I think it's a bunch of things coming out of the narrative. I think it's all the things together. Intentionally, as a strategy, I think we have intentionally broadened our product base, customer base, and diversified the company so that I've used this term many times before, it grows glacially. We're not this one superstar thing that's going to do it. It's going to be a combination of a number of things. That's really the way we like it.

Speaker 13

Okay. If you [crosstalk] ahead in terms of air traffic, you know that shaped too often expectations, can you still get there?

Laurans Mendelson (Chairman and CEO)

Yeah, I think so. The only thing people would ask is, you know, what keeps you up at night? If we had a major national downturn, recession-type of thing, [crosstalk] air traffic significantly, we're going to see our business cut. If the CEC sharply goes up in defense budget, it's going to impact us a little bit. It can be critical for us. I mean, we have it [crosstalk], but it's not that much.

That part of our business will be hit. I think the most important thing is overall economic activity. Overall economic activity is reasonable. We're going to get the number that we estimate, maybe we'll even do better. If economic activity strengthens, election year and so forth, you know, then business will strengthen. We'll see a little bit of that. I don't think there is anything, one way or the other, except a major economic downturn that would have a major impact on what we see at HEICO.

Speaker 13

Did you quantify what was out of Europe, and specifically whether you had any tangible weakness?

Laurans Mendelson (Chairman and CEO)

I'll let Eric answer that.

Eric Mendelson (Co-President and President of HEICO's Flight Support Group)

I don't think. There's a natural fluctuation in business month to month. I don't think there's anything outside of our natural fluctuation to date, so we're not anticipating anything out of the ordinary.

Speaker 13

Great. Thanks a lot, guys.

Laurans Mendelson (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from Jim Bella with Baird and Company.

Jim Bella (Managing Director)

Hi, good morning.

Laurans Mendelson (Chairman and CEO)

Good morning, Jim.

Jim Bella (Managing Director)

Great year. Yeah, I actually have all my questions answered. Let me just add one. I don't know if you want to answer this. However, [crosstalk] Larry?

Laurans Mendelson (Chairman and CEO)

As a general comment, the answer is no. I don't want to preclude anything because if it was such a [crosstalk] mean, in the long term, if it would be accretive, growing earnings and cash flow and be very strong, it would be a short-term dilution. Would we consider it? We probably would consider it. It would have to be so spectacular going forward. As a general comment, we prefer accretive acquisitions.

Jim Bella (Managing Director)

Okay, perfect.

Laurans Mendelson (Chairman and CEO)

Let me say one other thing. I don't think we're so smart. If we can make an acquisition and be so much smarter than the guy that hasn't come to [crosstalk], we know how to operate and we know how to run these companies and we hire good management. I don't want to tell anybody that we're the smartest people in the world. Generally, what you see is what you get.

Generally, it's been our experience that whatever a company is like when we acquire them, we do our due diligence, that's pretty much how the company is going to be after we acquire them. To expect wonders, you really believe that? Go into something saying, "Not going to really be good this year or next year." The visibility tremendously further out of making something[crosstalk]. It'd be wonderful. That's a leap of faith you're highly unlikely to make.

Jim Bella (Managing Director)

Great. Thanks so much. Have a great holiday, you all.

Laurans Mendelson (Chairman and CEO)

Thank you. You too.

Operator (participant)

Your next question, Dr. Herbert Wertheim, Brain Power.

Herbert Wertheim (Founder and CEO)

Hello. [crosstalk] congratulations to Larry and your team. My friend, there's an awful lot more analysts on the phone now than there was 20-something years ago. You know that very well. We owe $4 million to your company. I've been [crosstalk] just your greatest admirer over the last few years,and we thank you, our family and certainly other shareholders.

Laurans Mendelson (Chairman and CEO)

Thank you very much.

Herbert Wertheim (Founder and CEO)

When I saw that you were purchasing that Switchcraft, [crosstalk]. When I was a young engineer almost 50 years ago at NASA, we were one of the largest purchasers of Switchcraft products. You are really getting, [as I said], one of the finest company there is in [that product]. I have a question in that area. What percentage of their product is for the industrial business versus aviation and medical business?

Laurans Mendelson (Chairman and CEO)

Victor, can you answer that?

Victor Mendelson (Co-president and Director)

Yeah, their medical, aviation space-related business is below roughly 20% of their business, and balance is pretty well divided between audio, broadcast, and general electronics markets.

Herbert Wertheim (Founder and CEO)

Okay. Thank you. This is certainly, I guess one of your largest acquisitions as far as number of people, and you're getting into a different product line. Do you see yourself more and more in industrial-type product lines versus those [crosstalk] in the aviation field?

Laurans Mendelson (Chairman and CEO)

I don't think necessarily. We're opportunistic in the acquisition. As you know, we look to acquire well-managed, profitable, strong companies. Switchcraft came right on the radar screen, and it's because of that. If we had a product line that was outside aviation and medical, that had the attributes in terms of margin, cash flow, and so forth, we would be very interested in acquiring because it's just like we look at it as we are investing HEICO's money to get those strong cash flow earnings. If we can get that in the widget business, we'll do it. Interestingly enough, most companies that have those characteristics are in the fields that we are operating in, electronics, technologies, aerospace, and in some cases, areas of defense. We don't see that opportunity in any other area. I wouldn't say that that's a strategy that we're pursuing as a business strategy. No.

Herbert Wertheim (Founder and CEO)

Okay. Thank you very much. Thank you very much for all you've done for our family, our shareholders, doing the work you have done in the last 20 years. Thank you.

Laurans Mendelson (Chairman and CEO)

Herb, thank you very much for your kind comments.

Operator (participant)

Your final question comes from Dr. Benevich.

Speaker 17

Good morning, gentlemen. Congratulations for your great year.

Victor Mendelson (Co-president and Director)

Thank you.

Speaker 17

Okay. I guess you are aware of the current gaps we have between HEICO common shares. Would you please explain the reason for that abnormal gap?

Victor Mendelson (Co-president and Director)

The answer that we have been told is that the Class A shares do not have the same liquidity as the HEI shares. When people buy shares, they are particularly interested in liquidity. Therefore, if you look at the monthly amount on a one-to-one basis, they buy the HEI shares as compared to the [crosstalk] shares. Now, the reason that they don't trade, in our opinion, as much the HEI shares is because over the years, since suppliers and large holders have purchased HEI shares, there are some discount to the HEI shares and have put those shares away, and they're not for sale. I've had people call me. I've had growers call me and ask me, they would like to buy HEI shares, but they can't find them.

The problem, it is our understanding, as explained to a number of banking firms that have done studies for us, that the issue is a 100% liquidity issue that makes people buy API as opposed to HEIA. That probably the difference is probably three times as many HEI shares traded as APIA. As you know, there are more HEI shares outstanding. Those shares were put away. To our knowledge, that is the explanation.

Speaker 17

Okay. Thank you very much.

Laurans Mendelson (Chairman and CEO)

Okay, thank you.

Operator (participant)

There are no further questions.

Laurans Mendelson (Chairman and CEO)

Okay. With that, I thank you for your interest in HEICO. If you have any other questions, we're all available. Give us a call. We wish you a very good holiday season. We look forward to speaking with you on our quarter 2012 earnings call, which will take place sometime, I guess, in February 2012. Thank you all. That ends our conference call for this morning.

Operator (participant)

Thank you. This does conclude today's conference. You may now disconnect.