HEICO Corp

NYSE:HEI

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Jennifer, and I will be your conference operator. At this time, I would like to welcome everyone to the Fiscal Year 2018 First Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Certain statements in this conference call will constitute forward-looking statements, which are subject to risk, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed and/or applied (sic) [implied] (00:49) by those forward-looking statements, as a result of factors including: lower demand for commercial air travel or airline fleet changes or airline purchase decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our cost to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and foreign customers or competition from new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development cost and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within the outside of the aviation, defense, space, medical, telecommunications and electronic industries, which could negatively impact our cost and revenues; and defense spending on budget cuts, which could reduce our defense-related revenue.

Parties listening to or reading a transcript of this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except to the extent required applicable by law (sic) [by applicable law] (02:49).

Thank you, ladies and gentlemen. And I'd now turn the call over to Laurans Mendelson, Chairman and CEO. Please go ahead.

[Laurans A. Mendelson, HEICO Corp.]

Thank you very much, and good morning to everyone on the call, and we thank you for joining us. We welcome you to this HEICO first quarter fiscal 2018 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.

Now, before reviewing operating results in detail, I'd like to take a moment to thank all of HEICO's talented, dedicated and loyal team members who again were responsible for our excellent results. I am and the board is very, very proud of this talented, dedicated and loyal group, who consistently everyday turn out the highest quality products and services for our customers and make HEICO the great company that it is.

I'll take a few moments to summarize the highlights of our first quarter results. Consolidated net income increased 59% to a record $65.2 million or $0.60 per diluted share in the first quarter of fiscal 2018 and that was up from $40.9 million or $0.38 per diluted share in the first quarter of fiscal 2017.

Consolidated operating income increased 23% to $79.6 million in the first quarter of fiscal 2018, and that too was up from $64.6 million in the first quarter of fiscal 2017. Our consolidated operating margin improved to 19.7% in the first quarter of fiscal 2018 and that was up from 18.8% in the first quarter of fiscal 2017.

As a result of the passing of the U.S. tax reform in the company's first quarter of fiscal 2018, our effective tax rate in the first quarter was 4.7%, which was down from 26.6% in the first quarter of fiscal 2017. Our net income was favorably impacted by approximately $16.5 million or $0.15 per diluted earnings per share as a result of the lower corporate tax rate, including approximately $11.9 million or $0.11 per diluted earnings per share as the result of a one-time tax benefit, principally due to remeasurement of our net deferred tax liabilities.

Consolidated net sales increased 18% to $404.4 million in the first quarter of fiscal 2018 and that was up from $343.4 million in the first quarter of 2017.

Our ETG Group net sales and operating income in the first quarter of fiscal 2018 are up 23% and 49%, respectively, over the first quarter of fiscal 2017. I'm going to repeat that. Operating income up 49%, truly amazing to me. The increases principally reflect the contributions from our profitable fiscal 2017 and 2018 acquisitions, plus 6% organic growth and improved profit margin for certain defense products.

Our Flight Support Group net sales and operating income in the first quarter of fiscal 2018 are up 15% and 11%, respectively, over the first quarter of fiscal 2017. Those increases principally reflect contributions from our recent acquisitions and 6% organic growth in our commercial aftermarket business.

Cash flow provided by operating activities remained strong totaling $45 million in the first quarter of fiscal 2018. Net debt, which is total debt less cash and equivalents, was $603.3 million as of January 31, 2018 compared to shareholders' equity decreased to 45% as of January 31, 2018 and that was down from 50% as of October 31, 2017.

Our net debt-to-EBITDA ratio was 1.54 times as of January 31, 2018 compared to 1.67 times as of October 31, 2017. Now, during fiscal 2018, we've successfully completed two acquisitions and we have completed five acquisitions over the past year. We have no significant debt maturities until fiscal 2023 and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns.

In November 2017, we acquired all the outstanding stock of Interface Displays & Controls. IDC designs and manufactures electronic products for aviation, marine, military fighting vehicles and embedded computing markets. This acquisition expands our product offerings to existing customers and allows us to better address market needs. IDC is part of our Radiant Power subsidiary in our ETG Group.

Earlier this week, we announced the acquisition of 85% of the business and assets of Sensor Technology Engineering, which we call Sensor Tech. Sensor Tech designs, manufactures sophisticated nuclear radiation detectors for law enforcement, homeland security and military application. Sensor Tech's two founders own the remaining 15% of the business, and will continue to manage it in their existing roles. Sensor Tech is part of our Santa Barbara Infrared subsidiary, which is also in our ETG Group. We expect that both of these acquisitions will be accretive to earnings within the first 12 months following closing.

In December 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 January 2018. And this marks HEICO's second 5-for-4 stock split made within the past year and the 16th stock dividend or split since 1995. All applicable share and per share information has been retroactively adjusted to reflect the 5-for-4 stock splits distributed April 2017 and January 2018.

In January 2018, we paid an increased regular semiannual cash dividend of $0.07 per share, and that represented our 79th consecutive semiannual cash dividend, and also a 9% increase over the prior semiannual per share amount, and a cumulative increase of 22% in the cash dividend since January 2017.

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

[Eric A. Mendelson, HEICO Corp.]

The Flight Support Group net sales increased 15% to $254.7 million in the first quarter of fiscal 2018, up from $220.9 million in the first quarter of fiscal 2017. Excluding a small net sales decrease in our specialty product line for certain defense components, the Flight Support Group experienced 6% organic growth in the first quarter of fiscal 2018, principally in our commercial aftermarket replacement parts and services.

On a consolidated basis, the net sales increase in the Flight Support Group for the first quarter of fiscal 2018 is attributable to the impact from our recent profitable acquisitions as well as overall organic growth of 4%. The organic growth in the Flight Support Group mainly reflects higher demand and new product offerings within our aftermarket replacement parts as well as repair and overhaul parts and services product line, partially offset by the previously mentioned net sales decrease within our specialty products product line.

The Flight Support Group's operating income increased 11% to $45.9 million in the first quarter of fiscal 2018, up from $41.4 million in the first quarter of fiscal 2017. The increase principally reflects the previously mentioned net sales growth, partially offset by higher performance-based compensation expense, and an increase in intangible asset amortization expense mainly resulting from the fiscal 2017 acquisitions.

The Flight Support Group's operating margin was 18% and 18.7% in the first quarters of fiscal 2018 and 2017 respectively. The decrease in the first quarter of fiscal 2018 reflects the previously mentioned higher performance-based compensation expense, and increase in intangible asset amortization expense.

With the result to the remainder of fiscal 2018, we continue to estimate full year net sales growth of approximately 10% over the prior year, and the full-year Flight Support Group's operating margin to approximate 18% to 18.5%. Further, we estimate that approximately half our fiscal 2018 net sales growth will be generated organically. These estimates exclude additional acquired businesses, if any.

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

[Victor Hesq Mendelson, HEICO Corp.]

Thank you, Eric. The Electronic Technologies Group's net sales increased 23% to $155.7 million in the first quarter of fiscal 2018, up from $126.2 million in the first quarter of fiscal 2017. The net sales increase resulted from the contributions by our profitable fiscals 2017 and 2018 acquisitions, and 6% organic growth, principally from increased demand for our space and defense products.

The Electronic Technologies Group's operating income increased 49% to $43.2 million in the first quarter of fiscal 2018, up from $29.1 million in the first quarter of fiscal 2017. The increase principally reflects the previously mentioned net sales growth and an improved gross margin impact mainly attributed to higher net sales and a more favorable product mix for certain defense products.

The Electronic Technologies Group's operating margin improved to 27.8% in the first quarter of fiscal 2018, up from 23.1% in the first quarter of fiscal 2017. The increase is principally attributed to the previously mentioned improved gross profit margin.

With respect to the remainder of fiscal 2018, we now estimate full year net sales growth of approximately 15% to 17% over the prior year, up from the prior estimate of 12%, and anticipate the full-year Electronic Technologies Group's operating income to approximate 27% to 28%, up from the previous estimate of 27%.

Further, we estimate the Electronic Technologies Group's organic net sales growth rate to be in the mid-to-high single digits. These estimates include the recently announced acquisition of Sensor Tech, but exclude any additional acquired businesses, of course, if any.

And now, I'll turn the call back over to Larry Mendelson.

[Laurans A. Mendelson, HEICO Corp.]

Thank you, Victor. Moving on to diluted earnings per share. Consolidated net income per diluted share increased 58% to $0.60 in the first quarter fiscal 2018 and that was up from $0.38 in the first quarter of fiscal 2017. The increase in net income reflects the improved operating performance of both Flight Support and Electronic Technologies, and the benefit of significant changes to U.S. tax law that were enacted at the end of December 2017, and that would include a reduction in the U.S. corporate tax rate.

Diluted earnings per share was favorably impacted by approximately $0.15 as a result of lower federal tax rate and is inclusive of an $0.11 one-time benefit principally from the re-measurement of our net deferred tax liabilities.

As I previously mentioned, all diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock splits, which were distributed in April 2017 and January 2018. Depreciation and amortization expense totaled $19 million in the first quarter of fiscal 2018. That was up from $15.2 million in the first quarter of fiscal 2017. The increase in the first quarter of fiscal 2018 principally reflects incremental impact of higher amortization expense of intangible assets from our fiscal 2017 acquisitions.

Research and development expense increased 13% to $12.7 million in the first quarter of fiscal 2018 and that was up from $11.2 million in the first quarter of fiscal 2017. As you all expected, significant ongoing new product development efforts are continuing at both Flight Support and ETG, as we continue to invest approximately 3% of each sales dollar into new product development.

Consolidated SG&A expense increased to $75.2 million in the first quarter of fiscal 2018, and that was up from $60.9 million in the first quarter of fiscal 2017. The increase in the first quarter of fiscal 2018 principally reflects $8.9 million attributable to the fiscal 2017 and 2018 acquisitions, and $2.2 million of higher performance-based compensation expense.

Consolidated SG&A expense, as a percentage of net sales, increased to 18.6% in the first quarter of fiscal 2018 and that was up from 17.7% in the first quarter of fiscal 2017. The increase in consolidated SG&A expense as a percentage of net sales in the first quarter of fiscal 2018 principally reflects a 0.3% impact from higher performance-based compensation expense and a 0.3% impact from an increase in intangible asset amortization expense mainly resulting again from our 2017 and 2018 acquisitions.

Interest expense increased to $4.7 million in the first quarter of fiscal 2018, and that was up from $2 million in the first quarter of fiscal 2017. The increase was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal 2017 acquisitions.

As I previously mentioned, the comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act, contains significant changes to existing tax law including, among other things, a reduction in the U.S. federal income tax rate, corporate rate from 35% to 21%, and the implementation of a territorial tax system, resulting in a one-time transition tax on unremitted earnings of foreign subsidiaries.

As a result of this Tax Act, we revised our estimated annual effective U.S. federal tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, which results in a blended rate of 23.3% for HEICO in fiscal 2018.

In addition, we remeasured our U.S. federal net deferred tax liabilities, and recorded a discrete tax benefit of $16.6 million in the first quarter of fiscal 2018. In addition, we recorded a discrete tax expense of $4.7 million in the first quarter of fiscal 2018, and that was related to the one-time transition tax on unremitted earnings of foreign subsidiaries.

Our effective tax rate in the first quarter of fiscal 2018 decreased to 4.7%, down from 26.6% in the first quarter of fiscal 2017. The decrease principally reflects the previously mentioned discrete tax benefit from the re-measurement of U.S. federal net deferred tax liabilities as well as the benefit of a lower U.S. tax rate, which were partially offset by a one-time transition tax expense.

By the way, for all of you on the call, Carlos Macau can explain and go through all the details. I know that the whole matter – the tax matter is very complicated. On the other hand, it was a great boost to HEICO, and it will result in HEICO's cash flow in the future being stronger and we welcomed it.

Net income attributable to non-controlling interests totaled $6.5 million and $5.3 million in the first quarter fiscal 2018 and 2017 respectively. The increase principally reflects the impact of the previously mentioned Tax Act on those subsidiaries of Flight Support and ETG in which non-controlling interests are held, as well as improved operating results of those subsidiaries. For full fiscal 2018, we estimate a combined effective tax rate and non-controlling interest rate between 27% and 29% of pre-tax income.

Now, moving on to the balance sheet and cash flow. Our financial position and forecasted cash flow remain very, very strong. Cash flow provided by operating activities remained strong, totaling $45 million in the first quarter of 2018, and we continue to forecast record cash flows from operations in fiscal 2018. Our strong working capital ratio improved to 2.9 times as of January 31, 2018 compared to 2.5 times as of October 31, 2017.

Our DSOs, days sales outstanding of receivables, totaled 48 days in January 31, 2018, pretty consistent with 47 days reported January 31, 2017. Of course, we closely monitor all receivable collection efforts to limit credit exposure. No one customer accounted for more than 10% of net sales. Top five customers represented approximately 18% and 21% of consolidated net sales in the first quarters of fiscal 2018 and 2017.

Our inventory turnover rate totaled 134 days and 127 days for the first quarter ended January 31, 2018 and 2017 respectively. The increase principally reflects slightly higher inventory levels which, we believe, are necessary to support anticipated higher demand for our products during the remainder of fiscal 2018.

Our total debt to shareholders' equity ratio decreased to 50% as of January 31, 2018, down from 54% as of October 31, 2017. Our net debt, which is total debt less cash and cash equivalents, was $603.3 million as of January 31, 2018 to the shareholders' equity ratio decreased to 45% as of January 31, 2018 and that was down from 50% as of October 31, 2017.

Over the past year, we have successfully completed five acquisitions including the two most recent acquisitions in fiscal 2018, which I referred to earlier. As you know, we are an acquisitive company that generates significant cash flow in order to maintain a healthy balance sheet without the financial burden of high leverage. Because of this strategy, our net debt to EBITDA ratio was a low 1.54 times as of January 31, 2018 compared to 1.67 times as of October 31, 2017.

As far as the outlook, we look ahead to the remainder of fiscal 2018. We anticipate continued sales growth within Flight Support, commercial aviation and defense products. We also anticipate growth within ETG, principally driven by demand for the majority of our products. During the remainder of fiscal 2018, we will continue our commitments to developing new products and services, further market penetration, aggressive acquisition strategy, while at the same time maintaining our financial strength and flexibility and maximizing shareholder returns.

I remind you, HEICO is not a capital constrained company. We have enormous flexibility. We have our unsecured bank facility, with some of the top banks in America, at $1.3 billion unsecured facility. We can probably raise it to $1.650 billion, and outstanding is somewhere $600-and-some-odd million. So, we have lots of room to accomplish our growth targets, which we try to focus at 15% to 20% bottom line.

Based on our current economic visibility, we are increasing estimated consolidated fiscal 2018 year-over-year growth in net sales to 12% to 14% and in net income to 30% to 32%, up from prior growth estimates in net sales and net income which were 10% to 12%. The increased net income guidance reflects the impact of a lower federal income tax rate and continued improvements in our consolidated operating results.

In addition, we now anticipate our consolidated operating margin to approximate 20% to 21%, up from our prior estimate of 20%. And cash flow from operations is estimated to be approximately $310 million, up from our prior estimate of $290 million. Furthermore, we continue to anticipate depreciation and amortization expense to approximate $75 million, CapEx $50 million. These estimates include our recent acquisition of Sensor Tech, but exclude additional acquired businesses, if any.

In closing, we will continue to focus on intermediate and long-term growth strategies with a laser focus on cash flow generation, growing our core business, acquiring profitable businesses at fair prices, maximizing shareholder returns. I want to remind you that the management considers HEICO a vehicle for generating strong cash flow. Our most important focus is on cash flow generation. And we believe that when we have strong cash flow which we do, the earnings per share will fall in line. So, sometimes you can have earnings per share and no cash flow. HEICO is just the opposite. Normally, our cash flow runs between 140% and 180% of reported net income. So, that is our focus, and we intend to be very disciplined and continue that focus into the future.

That is the extent of our prepared remarks. And I would like to open the floor to questions now. Thank you.

[Operator]

Your first question comes from Rob Spingarn with Credit Suisse.

[Audrey Preston, Credit Suisse Securities (NYSE:USA) LLC]

Hi. This is Audrey Preston on for Rob. So, just following up on the cash flow statements that you mentioned before, I understand that it's a very big priority for you, and it's been very impressive over the past few years. When I was going through my model, I noticed that the cash flow guidance increase is a little bit less than what we would have expected from tax reform. So, I was just curious if you could comment a little bit on that. Is that just conservatism or are mistakes involved (31:41)?

[Laurans A. Mendelson, HEICO Corp.]

Well, thank you for the good question, and Carlos will respond.

[Carlos L. Macau, HEICO Corp.]

Hi. This is Carlos. I think the reason you're going to see that phenomenon is because you have a fair amount of non-cash net deferred tax liabilities that you pull out of net income on the cash flow statement, which impact the operating cash flow. So, that's really the sole reason you're seeing that discrepancy.

[Laurans A. Mendelson, HEICO Corp.]

If you look at the cash flow – because I went through this very question. Your question is a good one. I went through this earlier with Carlos when I saw the statement. You will see the treatment of the deferred – if you go to the cash flow statement, you'll see that we – in the cash flow, there is a deduction from operating income of $17.3 million in deferred income tax benefit. So, this is really the – this is what Carlos was talking about.

[Audrey Preston, Credit Suisse Securities (NYSE:USA) LLC]

Okay. Great. Thanks for clearing that up. And then, just a quick follow-up to – I noticed that CapEx appeared just a little bit light in terms of what we're expecting. So, could you talk a little bit more about the cadence through the remainder of the year? Do you see some sort of acceleration moving forward or what should we expect with that?

[Carlos L. Macau, HEICO Corp.]

This is Carlos. At this moment, I do expect us to gravitate to that $50 million number for the year. I think there was – in the mindset of the business leaders that run our facilities, I do believe that there was a conscious effort to defer some CapEx last year into this fiscal year, primarily due to some of the, at the time, talked-about changes in 100% expensing versus the old 50% rule. So, I think those decisions were made.

The interesting thing about it is, I probably would have expected a little more CapEx this quarter, but the mentality of the unit business leaders who run our businesses, they're very frugal. And I think that while I know that they have some CapEx in the hopper for growth and expansion, I think that every dollar they spend is precious to them and it causes them to react as such. So, I wouldn't deviate much from the $50 million number they've put out there for guidance, but you're right that cadence will probably be more mid to back-end loaded on the spend.

[Audrey Preston, Credit Suisse Securities (NYSE:USA) LLC]

All right. Thank you.

[Laurans A. Mendelson, HEICO Corp.]

Thank you.

[Operator]

Your next question is from Ken Herbert with Canaccord.

[Kenneth George Herbert, Canaccord Genuity, Inc.]

Hi. Good morning, everybody.

[Laurans A. Mendelson, HEICO Corp.]

Good morning, Ken.

[Kenneth George Herbert, Canaccord Genuity, Inc.]

I wanted to first start and ask a question to Victor. The margins within the ETG segment were obviously very strong. Can you provide a little more color on opportunity there from the recent acquisitions relative to sort of base business performance, and maybe some of the benefit of mix you're seeing? Any more detail on that in the quarter would be helpful.

[Victor Hesq Mendelson, HEICO Corp.]

Yeah. Ken, this is Victor. Those are good questions. It was pretty broad on the margins, the improvement in the margins this quarter. Acquisitions contributed to that. But we were happy across the board. And, as you know, the margins move around and we're very focused on the performance over the course of the year. So, they tend to be volatile. So, what may happen in one quarter may not happen, as you know, in the next. But, as I said, it's nice and broadly-based.

[Kenneth George Herbert, Canaccord Genuity, Inc.]

Okay. Can you just – now that you've had the business, I know it's just a few months, but provide any more detail on your expectations specifically around AAT and relative to some of the priorities now we've seen in the fiscal 2019 defense budget? What do you think of that business from sort of an organic growth perspective, maybe opportunities in the next one to two years on that business? It seems like a great fit certainly with priorities today. Just looking for a little more detail on how you're modeling out that business.

[Victor Hesq Mendelson, HEICO Corp.]

Sure. It's a growing business for us. It's experiencing its own organic growth. The way we account is very conservative, so we don't consider its organic growth to be organic growth, until we've owned it for a full year, right? So, until September of this year, we won't call it organic growth which is quite a while. But it's growing, that was growing when we were buying it and when we bought it. It's growing this year. We would expect that the budget priorities, as they've been articulated so far, would indicate more growth as well as what we're seeing on the commercial side because a good chunk in their business is commercial. They're very successful there as well. It's a great company with some broad-based penetration of working on new programs.

On top of that, they do tend to do some work on precision-guided munitions. And as you know from the budget, that is a priority for the DoD both in terms of recapitalization and for current operations and our operations tempo.

[Kenneth George Herbert, Canaccord Genuity, Inc.]

Okay. Great.

[Laurans A. Mendelson, HEICO Corp.]

Ken, I'd like to add one thing. The management of that company is fantastic. I mean, a great, great manager and it's really a wonderful company. And great management produces great things.

[Kenneth George Herbert, Canaccord Genuity, Inc.]

Oh, that's helpful. And, Larry, if I could, just one final question. You've obviously had two very, sort of, strong years in fiscal 2017 and 2018 from capital deployment for acquisitions. I know, obviously, from your comments, you've got plenty of capacity and that's never a concern. Can you just comment on what you're seeing today in terms of opportunities, maybe where you're focused at any one particular area or markets, if there is one, and how should we think about potential activity levels here throughout the remainder of fiscal 2018? Thank you very much.

[Laurans A. Mendelson, HEICO Corp.]

Okay. So, the answer to that is that we remain very disciplined in terms of what we will pay, because – well, money is getting more expensive now. There is a lot of competition in the market. All you have to do is read about Warren Buffett, and he's buying Treasury bills, because he can't find things at good prices. Interestingly enough, because of our discipline to pay somewhere – and depending on the deal, 5 times to 8 times EBIT or EBITA, we don't focus really on EBITDA because we think that depreciation ultimately becomes CapEx and it's cash, and I think you understand that.

We are very disciplined. And the type of buyer that we find and the person that wants to sell to us is somebody who is looking for a cultural fit and the ability to keep, say, 20% of his business and have a put and call. And all these companies say, next year, we're going to do better and better and better. And if that's the case, a seller to us will have a liquidity event, and have another 20% on the back end, which often can be more than the first 80%, if he really produces. It is also a person who is not just looking for the top dollar and we explain this going in. And we tell people if you want the top dollar, we are probably not going to be your buyer. And so, it doesn't matter if the multiples run from 10 times EBITDA to 12 times EBITDA, because we're not there anyway, and we tell people right up front.

But if you want to sell your business, run it, be able to keep your employees, keep your organization together, keep busy and determine the future growth to a great extent of your operation, we will be your best buyer. So, those people since they're not looking for the top dollar, we explain it to them, will continue to sell to us.

And the answer is, yes, we're looking at a number of transactions. Some of them – one recently, the guy just wanted more money than we're willing to pay, and the answer is no, we're not going to pay that. So, we want to make acquisitions which are accretive in the first year, which have strong cash flow, generally low CapEx and so forth. And we are able to find companies that fit that description without competing at 10 times, 12 times, 14 times EBITDA. So, I think our potential is still very good. We're doing with our volume is at $1.7 billion. So, we have room to grow. And then I think we can make additional acquisitions and keep up the focus on our target of 15% or 20% bottom line growth.

Does that kind of answer your question?

[Kenneth George Herbert, Canaccord Genuity, Inc.]

Yeah, that's very helpful. I appreciate it. So, I guess I take from that and it's consistent with prior comments that you're not necessarily prioritizing any market now over another, but you're clearly taking what the market provides and staying disciplined and also being opportunistic.

[Laurans A. Mendelson, HEICO Corp.]

Completely opportunistic. So, since we are not capital constrained, if we see a great deal in ETG and Flight Support, we'll do both of them. And on the other hand, we don't want to grow too fast and we don't want to pile on debt. Again, looking at Buffett, Buffett says that's how you get in trouble, and we agree. So, we've always had a relatively low debt profile. And we know because Carlos builds projections and we know how we can grow, what that we need to grow, and we can grow at 15% to 20% target with the credit line that we now have. We don't have to sell more stock and we don't have to do all kinds of fancy footwork to do it. And as you know, we buy companies for cash. We prefer not to give stock and dilute shareholders.

[Kenneth George Herbert, Canaccord Genuity, Inc.]

Thank you very much, and really nice quarter.

[Laurans A. Mendelson, HEICO Corp.]

Thank you very much.

[Operator]

And your next question is from Larry Solow with CJS Securities.

[Larry S. Solow, CJS Securities, Inc.]

Good morning. Thanks for taking my questions. Just a couple for Eric. Maybe just your thoughts just on the general, the macro and the aftermarket. I think 2015 and 2016 were a little slow. Obviously, you saw some recovery last year. And you guys have continued to outperform and, of course, we know yours is all volume and no price. But any real change or are we sort of in a solid continued growth projection? And anything with rising oil, has that done anything to spending patterns?

[Eric A. Mendelson, HEICO Corp.]

Hi, Larry. This is Eric. No, I would say everything is consistent with how it's been really for at least the last year. There is tremendous enthusiasm for our products. Our customers continue to show a lot of interest in our new products and wanting us to go into various areas. We have very strong relationships with them in terms of inventory. They don't hold much inventory, which we've been saying now for the last many years. So, they depend on us to be able to deliver. But OEMs continue to raise the prices and continue to employ abusive tactics. So, we are their go-to company. So, I think everything is very much continuing along the same line, it's sort of steady as she goes.

[Larry S. Solow, CJS Securities, Inc.]

Okay. On the repair side, you guys had a little bit of a lull I think early on in 2017, is that pretty much past us now? I know South America impacted that a little bit as well. Is that pretty much – that was just pretty much a temporary thing?

[Eric A. Mendelson, HEICO Corp.]

Yes. I think that was maybe two years ago or so. But yes, that's past us and we're doing very well in the repair markets.

[Larry S. Solow, CJS Securities, Inc.]

And just lastly, a little bit of the shift to the – continued shift to the right on the specialty products on the defense side. I think it relates more to some restrictions on exports, just your confidence level that that should rebound as we look out over the next couple of quarters?

[Eric A. Mendelson, HEICO Corp.]

Absolutely. We have the orders. Sometimes, these orders with foreign military programs can flip to the right. You read about them all the time between our governments, foreign governments, negotiations, it's just everything can take some time. And then all of a sudden they need it right away. So, we do have the orders. And I would say that there should be a nice improvement in the second half of 2018 for us in that area. Maybe a little bit in the second quarter, but I'd rather – I feel more comfortable saying second half, because we've got to spool up and basically make some of this stuff, get it out the door, but I feel very good that in the second half, that's all going to be behind us.

[Larry S. Solow, CJS Securities, Inc.]

Got it. Great. Thanks so much.

[Eric A. Mendelson, HEICO Corp.]

Thank you.

[Operator]

Your next question is from Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, Jefferies LLC]

Hi. Good morning, and thanks for taking my question.

[Laurans A. Mendelson, HEICO Corp.]

Good morning, Sheila.

[Sheila Kahyaoglu, Jefferies LLC]

Good morning, Larry. Eric, one more for you actually on the aftermarket demand. It has been more consistent than some other suppliers. Maybe if you could elaborate on just replacement trends that you're seeing in the market, if you could give any color at all.

[Eric A. Mendelson, HEICO Corp.]

Good morning, Sheila. I think replacement continues to be very strong. One of the things which, of course, can skew the results, as you know, is the initial stocking orders. So, HEICO does not benefit from initial stocking, and I think that that can cause wide swings among other aftermarket participants. And I think, recently, there have been a number of initial stocking orders which have had very positive results for various market participants.

Our business continues to be very strong. The fundamental dynamics are still there. Of course, also we've read in the newspaper about companies that employ all sorts of bizarre accounting techniques to measure performance. HEICO doesn't do any of that. Ours is real basic, we get an order, we ship it, we bill it, we collect the money. It's not a black box where people can't understand what's going on. We're extremely transparent. So, I feel very confident about the direction that this is going in and about our continued strength really in all the markets in which we operate.

[Sheila Kahyaoglu, Jefferies LLC]

Great. Thanks for the color. And then, just one more, more broadly in terms of segment margin. The increase of 100 basis points in segment margins, what gives confidence in the acceleration as we progress throughout the year?

[Carlos L. Macau, HEICO Corp.]

Hi, Sheila. This is Carlos. First of all, congratulations on becoming a new mother.

[Sheila Kahyaoglu, Jefferies LLC]

Thank you.

[Carlos L. Macau, HEICO Corp.]

A very beautiful picture you sent us. I think if you're looking for a direct reason for the increase, we experienced some nice market improvement in ETG which we had to acknowledge and we believe that that improved margin is sustainable for this year, maybe not in absolute terms but a general trend upward. So, that's the main culprit, if you would, that's causing us to be more optimistic in our consolidated margin increase.

[Sheila Kahyaoglu, Jefferies LLC]

Got it. Thanks a lot, Carlos.

[Carlos L. Macau, HEICO Corp.]

You're welcome.

[Operator]

Your next question is from Michael Ciarmoli with SunTrust.

[Les Sulewski, SunTrust Robinson Humphrey, Inc.]

Good morning. This is actually Les in for Michael.

[Laurans A. Mendelson, HEICO Corp.]

Good morning.

[Les Sulewski, SunTrust Robinson Humphrey, Inc.]

Good morning. Just to go back to the margin question and, in particular, to FSG, noticing that – as you mentioned, ETG perhaps you'll see some upside there, but would you look at FSG as running kind of at peak margin or peak profitability at this point? There were some incremental margin growth of about 13%, but how can we look at that segment?

[Eric A. Mendelson, HEICO Corp.]

I think our numbers are fairly consistent. No, I don't – to specifically answer your question, I don't believe we're at peak margin. We did have – and Carlos can get into it, we did have some intangible amortization headwind which impacted the numbers, but I think that I anticipate that we're going to be performing certainly on an EBITA basis, consistent with how we've done in the past. As we make acquisitions, of course, we've got this intangible amortization headwind, which personally I happen to think is silly because our companies grow, yet we have to amortize the intangible and we reduce our operating income, as a result of it, when in fact the value of the company is going up, the earnings are going up. So, to me, it really makes no sense, but the rules are the rules, so we have to conform. But I think that there is continued upside on those margins.

And I think Carlos can add some specific comments.

[Carlos L. Macau, HEICO Corp.]

I think, Eric, you captured all of what I was going to say. I do believe that Eric is correct that we're not at peak margins. And as you know, when we did two acquisitions last year which contributed incrementally a fair amount more margin compression, which usually is with us for the first couple of years of an acquisition. It tapers off after that, based on the way we amortize these intangibles. So, to Eric's point, the EBITA margin is very consistent with history. So, no worries there on our end.

[Les Sulewski, SunTrust Robinson Humphrey, Inc.]

Thank you for the additional color, guys. And to go into Robertson Fuel Systems, at the time of the deal, that was one of the largest acquisitions you guys made. So, clearly a lot of a military exposure there, specifically in helicopters. But what does the outlook look like now for Robertson, given that budget upturn and, I guess, importantly, the opportunity within ground vehicles that appear to be poised for some solid growth uptick? Where do you look at that in terms of that business?

[Victor Hesq Mendelson, HEICO Corp.]

This is Victor. The answer is, of course, we don't really usually comment on the numbers of our individual subsidiaries. But broadly speaking, Robertson is doing well. We're optimistic. We continue to be optimistic about it. The budget priorities align very well with what Robertson is doing. So, that should bode well for Robertson. They've also had success in the commercial market now with crashworthy fuel systems for commercial helicopters, and we are now selling and shipping those. So, it continues to be an excellent acquisition. We have a great team there as well focused on growth. I feel pretty good about it.

[Les Sulewski, SunTrust Robinson Humphrey, Inc.]

Okay. Thank you. I guess, last one. I'm not sure if you mentioned or not, but what would be the assumption for the tax rate for the full year?

[Carlos L. Macau, HEICO Corp.]

Yeah. Hi. This is Carlos. What we did was, as you know, with the new tax rules, the implementation of it is provisional. So, we're still going through maturations (52:32). But right now, our guidance is 26% to 28% for both the effective tax rate and the non-controlling interest charge. So, looking at them together, about 26% to 28% of pre-tax income.

[Les Sulewski, SunTrust Robinson Humphrey, Inc.]

Got it. Thank you.

[Laurans A. Mendelson, HEICO Corp.]

You're welcome.

[Operator]

Your next question will come from Drew Lipke with Stephens.

[Drew Lipke, Stephens, Inc.]

Yeah. Good morning, guys. Congratulations on a great quarter.

[Laurans A. Mendelson, HEICO Corp.]

Good morning. Thank you.

[Drew Lipke, Stephens, Inc.]

Maybe first for Eric. The 4% organic growth, 6% in aftermarket, you talked about specialty picking up in the back half of the year, the comparisons there do get easier. I realize your visibility is somewhat limited in aftermarket, but you talked about the underlying trends being very good. With this backdrop, is there anything that maybe gives you pause or makes you think that organic growth will not be greater than this kind of mid-single digit range?

[Eric A. Mendelson, HEICO Corp.]

I feel that we'll continue to perform much as we've had. I think that the organic growth is certainly possible to do much better than we are doing now. The specialty product headwind, as I mentioned earlier, I think will be finished and in the second half, we will see improvement there. I just feel very good about the underlying strength of our markets and how our customers feel about us.

Again, as you're familiar, we have to fight for every sale that we get. Our competitors are very vicious and want to hold on to all of the ground that they've got. So, we have to work very hard. None of this comes easily or for free. But I feel that we definitely can perform in excess of what we're doing now.

[Drew Lipke, Stephens, Inc.]

Okay. And then, maybe for Victor, and putting a finer point on a question from earlier, if you think about the inorganic growth contribution that's implied in guidance, it's kind of $45 million to $60 million or so for fiscal 2018. And if you look at the pro forma sales for AAT back in fiscal 2017, $68 million, it was growing over 30%. You talked about the budget trends and the growth within AAT. And then, now we're layering in IDC and Sensor Tech. Is there any kind of share loss or market share loss with AAT that we should be concerned about or is there any reason that that shouldn't from a pro forma basis continue to grow from that kind of $68 million that it posted in fiscal 2017?

[Victor Hesq Mendelson, HEICO Corp.]

Well, we put pro forma numbers in the K, but that was not what it did in fiscal 2017. So, your number is not really applicable here. All I'll say on it is it's an excellent business. We're happy with its growth. We're happy with its margins. I'm not going to say what the margins are. I'm not going to say what the growth is, and I'm not going to say what the revenue is because we don't break that out, but I can tell you that we're very happy with the business. And if we had it to do all over again, I would do exactly the same thing, we would do exactly the same thing that we did.

[Drew Lipke, Stephens, Inc.]

Yeah. It seems like a great acquisition.

[Victor Hesq Mendelson, HEICO Corp.]

Yeah.

[Drew Lipke, Stephens, Inc.]

Just last one for Larry on the M&A pipeline. Would you classify it as more kind of tuck-in opportunity such as Sensor Tech or more opportunities kind of in the range of AAT? Are there any kind of transformational opportunities in the pipeline in any way that we should kind of think about that?

[Laurans A. Mendelson, HEICO Corp.]

The answer is all of the above, but we don't really comment individually and to go out on the limb and tell you it's going to be one thing or another, deals don't impact us until we close. And as you know, closing a deal is very difficult and lots of things happen. So, we can be in the middle of due diligence and, all of a sudden, that thing blows up. And so, that's why we don't really like to comment on anything.

We're, as I think Ken Herbert said earlier, highly opportunistic. We will buy companies. We are not only tuck-in acquisitions, absolutely not. Whatever is opportunistic for us, we will buy it. If it's priced right, if the product line is right, if the margin meets all of our criteria, that's what we look for. So, I can't give you anything consistent except margin and cash flow. That's what we're looking for. And if it doesn't meet those hurdles, we're not interested.

[Drew Lipke, Stephens, Inc.]

All right. Thanks, guys.

[Laurans A. Mendelson, HEICO Corp.]

Thank you.

[Operator]

That does conclude our Q&A session for today. I will now turn it back to management for their closing remarks.

[Laurans A. Mendelson, HEICO Corp.]

All right. This is Larry Mendelson again. I want to thank you all for your interest in HEICO. We remain available to field your questions. You know where to reach us by phone or visit. And we look forward to the second quarter conference call, which will be in about three months. So, to you all, have a good day. And again, thank you very much for your interest and confidence in HEICO. That's all we have.

[Operator]

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.