HEICO Corp
NYSE:HEI
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
168.77
279.02
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
HEICO Corp
You don't have any saved screeners yet
Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including lower demand for commercial air travel and airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our cost to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development and manufacturing difficulties, which could increase our product developmental costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risks, interest, foreign currency exchange and income tax rates; economic conditions within and outside of aviation, defense, space, medical, telecommunications and electronic industries, which could negatively impact our cost and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue.
Parties listening to or reading a transcript of this call are encouraged to review all of HEICO’s filings with the Securities and Exchange Commission including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
Ladies and gentlemen, my name is Lance and I will be your operator for today's conference. At this time, I would like to welcome everyone to the Fiscal Year 2019 Second Quarter Earnings results. All lines have been placed on a listen only mode to prevent any background noise. Later, we will conduct a question-and-answer session. [Operator instructions]
And now, I'd like to turn the call over to Laurans Mendelson. You may begin.
Thank you very much. And good morning to everyone on this call. We thank you for joining us and we welcome you to the HEICO second quarter fiscal 2019 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 our record second quarter operating results in detail, I'd like to take a moment to thank all of HEICO's team members. Their dedication to customers and mutual respect they show each of their coworkers creates the unique culture of entrepreneurial excellence and success. We believe that this is a significant driver of HEICO's collective success. HEICO is simply the name on a facility wall. It's the team members that make HEICO special. They have our utmost respect and we are very proud to lead this exceptionally talented group of professionals.
Now, I'll take a few minutes to summarize the highlights of the second quarter year-to-date results. Consolidated second quarter and first six months of fiscal ‘19 net income, operating income, net sales represent record results for HEICO, principally driven by record net sales and operating income in both segments of HEICO's operation.
Consolidated net income increased 37% to a record $81.8 million or $0.60 per diluted share in the second quarter of fiscal ‘19, and that was up from $59.6 million or $0.44 per diluted share in the second quarter of fiscal ‘18. Consolidated net income increased 29% to a record $161.1 million or a $1.18 per diluted share in the first six months of fiscal ‘19, and that was up from $124.8 million or $0.91 per diluted share in the first six months of fiscal ‘18.
Consolidated operating margin improved to 23.1% in the second quarter of fiscal ‘19, and that was up nicely from 21.3% in the second quarter of fiscal ‘18. It also improved to 22.1% in the first six months of fiscal ‘19, again up from 20.5% in the first six months of fiscal ‘18.
The ETG group set all-time quarterly net sales and operating income records in the second quarter of fiscal ‘19, improving 27% and 40%, respectively, over the second quarter of fiscal ‘18. The increases principally reflect strong double-digit organic growth, mainly attributable to increased demand for certain defense, aerospace and space products.
The Flight Support Group set all-time quarterly net sales and operating income records in the second quarter of fiscal ‘19, improving 15% and 21%, respectively, over the second quarter of fiscal ‘18. Those increases principally reflect strong double-digit organic growth, mainly attributable to increased demand and product offerings within the aftermarket replacement parts and specialty product lines.
Our total debt to shareholders’ equity decreased to 33.5% as of April 30, ‘19, and that was down from 35.4% as of October 31, ‘18. Our net debt, which is debt less cash and cash equivalents of $492.3 million to shareholders’ equity ratio decreased to 29.6% as of April 30, ‘19, and that was down from 31.5% as of October 31, ‘18.
Net debt to EBITDA ratio decreased to 0.98 times, that’s less than one turn of EBITDA as of April 30, ‘19 and that was down from 1.04 times as of October 31, ‘18. As you can see, we have very, very low debt outstanding. During fiscal ‘19, we successfully completed four acquisitions, and 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 in order to accelerate growth and maximize shareholder returns. This has been HEICO’s standard procedure for the past 25 years.
As previously announced, in February ‘19, we acquired 80.1% of the membership interest of Decavo, LLC. Decavo designs and produces complex composite parts and assemblies incorporated into camera and related sensor assemblies and UAV airframes used in demanding defense and civilian application. Decavo is part of our Flight Support Group, and we expect the acquisition to be accretive to our earnings within the first 12 months, following closing.
At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO’s Flight Support Group, and he will discuss the results of the Flight Support Group.
Thank you.
The Flight Support Group's net sales increased 15% to a record $308.3 million in the second quarter of fiscal ‘19, up from $267.8 million in the second quarter of fiscal ‘18. The Flight Support Group's net sales increased 14% to a record $595.5 million in the first six months of fiscal ‘19, up from $522.6 million in the first six months of fiscal ‘18. The increase in the second quarter and first six months of fiscal ‘19 principally reflects strong organic growth of 15% and 14%, respectively, mainly attributable to increased demand and new product offerings within our aftermarket replacement parts and specialty products product lines.
The Flight Support Group's operating income increased 21% to a record $62.2 million in the second quarter of fiscal ‘19, up from $51.5 million in the second quarter of fiscal ‘18. The Flight Support Group's operating income increased 18% to a record $115 million in the first six months of fiscal ‘19, up from $97.4 million in the first six months of fiscal ‘18. The increase in the second quarter and first six months of fiscal ‘19 principally reflects the previously mentioned net sales growth and the impact from an improved gross profit margin, mainly driven by a more favorable product mix within our specialty products product line.
The Flight Support Group's operating margin increased to 20.2% in the second quarter of fiscal ‘19, up from 19.2% in the second quarter of fiscal ‘18. The Flight Support Group's operating margin increased to 19.3% in the first six months of fiscal ‘19, up from 18.6% in the first six months of fiscal ‘18. The increase in the second quarter and first six months of fiscal ‘19 principally reflects the previously mentioned improved gross profit margin.
With respect to the remainder of fiscal ‘19, we now estimate full-year net sales growth of approximately 10% over the prior year, up from the prior estimate of 7% to 9%, and we now estimate full-year Flight Support Group operating margin to approximate 19.0% to 19.5%, up from the prior estimate of 19.0%, approximately.
Further, we now estimate the Flight Support Group's full-year organic net sales growth rate to be in the high-single-digits, up from the prior estimate of mid to high-single-digits. These estimates exclude additional acquired businesses, if any.
And now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO’s Electronic Technologies Group to discuss the results of the Electronic Technologies Group.
Thank you, Eric.
The Electronic Technologies Group's net sales increased 27% to a record $214.5 million in the second quarter of fiscal ‘19, up from $168.7 million in the second quarter of fiscal ‘18. The Electronic Technologies Group's net sales increased 23% to a record $398.9 million in the first six months of fiscal ‘19, up from $324.4 million in the first six months of fiscal ‘18.
These increases resulted from organic growth of 20% and 16% in the second quarter and first six months of fiscal ‘19, respectively, and the favorable impact from our fiscal ‘19, acquisitions. The organic growth in the second quarter and first six months of fiscal ‘19 is mainly attributable to increased demand for certain defense, aerospace and space products.
The Electronic Technologies Group's operating income increased 40% to a record $67.4 million in the second quarter of fiscal ‘19, up from $48.1 million in the second quarter of fiscal 2018. The Electronic Technologies Group's operating income increased 30% to a record $119 million in the first six months of fiscal ‘19, up from $91.4 million in the first six months of fiscal ‘18. The increase in the second quarter and first six months of fiscal ‘19 principally reflects the previously mentioned net sales growth and an improved gross profit margin, mainly driven by increased net sales and a more favorable product mix for certain defense and aerospace products.
The Electronic Technologies Group's operating margin improved to 31.4% in the second quarter of fiscal ‘19, up from 28.5% in the second quarter of fiscal ‘18. The Electronic Technologies Group's operating margin improved to 29.8% in the first six months of fiscal 2019, up from 28.2% in the first six months of fiscal 2018. And as I always like to comment, that is after of course removing -- deducting, if you will, amortization -- intangibles amortizations from our acquisitions. So, for the way that I evaluate and look at our businesses, that margin is actually higher on what I would consider it to be a cash basis.
The increase in the second quarter and first six months of fiscal ‘19 principally reflects the previously mentioned improved gross profit margin. With respect to the remainder of fiscal ‘19, we now estimate full-year net sales growth of approximately 15% to 17% over the prior year, up from the prior estimate of 11% to 13% and anticipate the full-year Electronic Technologies Group's operating margin to approximate 29% to 29.5%, up from the prior estimate of 28% to 29%. Further, we now estimate the Electronic Technologies Group's organic net sales growth rate to be in the high single digits, up from the prior estimate of mid-single-digits. These estimates exclude additional acquired businesses, if any.
I’ll turn the call back over to Larry Mendelson.
Thank you, Victor.
Moving on to diluted earnings per. The consolidated net income per diluted share increased 36% to $0.60 in the second quarter of fiscal ‘19, up from $0.44 in the second quarter of fiscal ‘18. It also increased 30% to $1.18 in the first six months of fiscal ‘18 and that was up from $0.91 in the first six months of fiscal ‘18. These increases reflect significant operating performance of both Flight Support and ETG.
All fiscal ‘18 diluted earnings per share amounts have been adjusted retrospectively for our 5- for-four stock split, which was distributed in June ‘18. Depreciation and amortization expense totaled $20.5 million in the second quarter of fiscal ‘19, and that was up from $19.1 million in the second quarter of fiscal ‘18 and totaled $40.5 million in the first six months of fiscal ‘19, again up from $38.1 million in the first six months of fiscal ‘18.
The increase in second quarter and first six months of fiscal ‘19 principally reflects incremental impact of higher depreciation and amortization expense of intangibles from our fiscal ‘19 acquisitions.
Research and development expense increased 21% to $16.8 million in the second quarter of fiscal ‘19; that was up from $14 million in the second quarter of fiscal ‘18 and increased 20% to $32 million in the first six months of fiscal ‘19, up from $26.7 million in the first six months of fiscal ‘18.
Significant ongoing new product development efforts are continuing at both Flight Support and ETG, and we continue to invest approximately 3% of each sales dollar into new product development. As all-time shareholders know, this is a strategy that we have followed for the past 29 years, and it permits us to grow our product line and develop new products for customers. It’s a critical factor in our ability to grow the Company.
SG&A expenses were $90.2 million and $76.3 million in the second quarter of fiscal ‘19 and fiscal ‘18, respectively. Consolidated SG&A expense were a $174.5 million and a $151.5 million in the first six months of fiscal ‘19 and fiscal ‘18, respectively. The increase in second quarter and first six months of fiscal ‘19 principally reflects the impact of our fiscal ‘19 and ‘18 acquisitions, higher performance-based compensation expense and changes in the estimated fair value of accrued contingent consideration expense.
Consolidated SG&A expense as a percentage of net sales decreased to 17.5% in the second quarter of fiscal ‘19, down from 17.7% in the second quarter of fiscal ‘18. Consolidated SG&A expense as a percentage of net sales decreased to 17.8% in the first six months of fiscal ‘19 and that was down from 18.1% in the first six months of fiscal ‘18. The decrease in consolidated SG&A expense as a percentage of net sales in the first six months of fiscal ‘19 principally reflects efficiencies realized from the net sales growth, partially offset by previously mentioned changes in estimated fair value of a crude contingent consideration.
Interest expense was $5.5 million in the second quarter of fiscal ‘19 compared to $4.9 million in the second quarter of fiscal ‘18 and it was $11 million in the first six months of fiscal ‘19 compared to $9.6 million in the first six months of fiscal ‘18. The increase in the second quarter and first six months of fiscal ‘19 was principally due to higher interest rates due to increases in the LIBOR rate, partially offset by a lower weighted average balance outstanding under our revolving credit facility. Other income and expense in the second quarter and first six months was not significant. So, I won’t go into detail.
Our effective tax rate in the second quarter of fiscal ‘19 was 22.5% compared to 23.6% in the second quarter of fiscal ‘18, and this reflects the impact of the net benefit of tax reform. The effective tax rate in the first six months of fiscal ‘19 was 14.5%, and that was comparable to effective tax rate of 14.8% in the first six months of fiscal ‘18.
Net income attributable to non-controlling interest was $8.3 million in the second quarter of fiscal ‘19 and that compared to $6.4 million in the second quarter of fiscal ‘18. Net income attributable to non-controlling interest was $17 million in the first six months of fiscal ‘19 and that compared to $12.9 million in the first six months of fiscal ‘18. The increase in the second quarter and first six months of fiscal ‘19 principally reflects improved operating results of certain subsidiaries of Flight Support and ETG in which the non-controlling interest are held.
For the full fiscal ‘19 year, we now estimate a combined effective tax rate and non-controlling interest rate of between 26% and 27% of pretax income.
Moving on to the balance sheet and cash flow. Obviously, our financial position and forecasted cash flow remain extremely strong. As we previously discussed, cash flow provided by operating activities remained strong, totaling $178.3 million in the first six months of fiscal ‘19.
Cash flow provided by operating activities increased 150% to $128.7 million in the second quarter of fiscal ‘19 and that was up from $51.5 million in the second quarter fiscal ‘18. We continue to forecast record cash flows from operation in fiscal ‘19.
Our working capital ratio improved to 3.2 times as of April 30, and that was up from 2.6, as of October 31, ‘18.
DSOs or days sales outstanding of receivables improved to 45 days as of April 30, ‘19, down from 50 days as of April 30, ‘18. And we of course, monitor all receivable collections very carefully in order to limit credit exposure. Historically, as most of you know, HEICO has very few accounts receivable losses.
No one customer accounted for more than 10% of net sales. And our top five top customers represented about 21% and 19% of consolidated net sales in the second quarter of fiscal ‘19 and ‘18.
Inventory turnover rate decreased to 126 days for the period ended April 30, ‘19 and that compared to 136 days for the period ending April 30, ‘18.
Total debt to shareholders’ equity was 33.5% as of April 30, ‘19 compared to 35.4% as of October 31, ‘18. Also, our net debt of $492.3 million to shareholders’ equity ratio was 29.6% as of April 30, ‘19 compared to 31.5% as of October 31, ‘18.
Net debt to EBITDA ratio, as I mentioned earlier, was 0.98 times, less than one turn, as of April 30, ‘19 compared to 1.04 times as of October 31, ‘18. As you know, our debt level is very, very low for a Company that's able to grow and generate cash flow as quickly as we do. We have no significant debt maturities until fiscal ‘23, and we plan to utilize our fiscal financial flexibility to continue to aggressively pursue high-quality acquisitions and accelerate growth to maximize shareholder returns.
Looking forward, the outlook. We anticipate net sales growth within Flight Support and ETG resulting from increased demand across majority of our product lines. We will also continue our commitments to develop new products and services for the market trend penetration, strong cash flow generation, aggressive acquisition strategy while maintaining financial flexibility and strength. Based upon our current economic visibility, we now estimate our fiscal ‘19 year-over-year growth in net sales to be 12% to 13% and in net income to be 17% to 18%, and that's up from our prior growth estimates in net sales of 9% to 11% and net income of 11% to 13%.
We now anticipate consolidated operating margin to approximate 21.5% to 22%, and that’s up from prior estimate of 21% to 21.5%. And we continue to anticipate depreciation and amortization expense to approximate $84 million. In addition, we anticipate cash flow from operations to be approximately $380 million, up from the prior estimate of $370 million, and CapEx to approximate $38 million, and that was down from our prior estimate of $43 million. Of course, these estimates exclude additional acquired businesses, if any.
In closing, I would again like to thank HEICO's team members. They are the ones that delivered outstanding results and deserve the credit for the hard work and discipline it took to successfully navigate through another quarter. Executive management has the utmost respect for everything they do to make HEICO a great Company. I also want to add that all of the shareholders of course do not have the luxury of knowing the people that operate the subsidiaries of HEICO. I can assure you these are the group of the most extraordinary individuals who are focused, hard working, brilliant in their own fields and people who I know that anybody on this call would truly admire. They are again are the ones that make this happen.
I just want to make one other comment. Of course it’s too early to actually predict what the final results will be for fiscal ‘19. As you know management sets a target growth goal bottom-line of 15% to 20%. We have given an estimate, an official estimate, based upon all the numbers that we have available to us at the moment. I still believe that I'm very confident that we will meet those goals. And I'm hopeful, although I can’t promise that we will actually surpass those goals. But, we will find out as we move into the second half of the year.
That is the extent of my prepared comments, our prepared comments. And I would now like to open the floor for questions from all of you listeners. Thank you.
[Operator Instructions] Your first question comes from the line of Robert Spingarn from Credit Suisse. Your line is open.
Hi. Good morning.
Good morning, Rob.
Well, excellent numbers again here. And I guess, I have a question similar to what I’ve asked you in the past, both for FSG, Eric and Victor to your business. Are there certain business lines for driving the growth here or just timing in either of the businesses that are contributing to what is really sector-leading growth in a lot of ways. I'm just curious to hear your answers.
Yes. Rob, this is Larry. I'm going to give you my thoughts on that, then Victor can -- and Eric will fill in more color. In the 29 years that we have been running HEICO, I have never seen a business climbing as positive and strong as this one. And I would say, as a general comment, it’s across the board and orders continued very strong. But Eric and Victor can add their thoughts.
Hi, Rob. This is Eric. I think, I agree, the orders in the business were strong across the board. I would say in particular in our parts business which includes our proprietary PMA business as well as our distribution businesses, we were very strong. I believe that we are picking up market share from other PMA companies. And we continue to really do very, very well in what I would say is an extremely competitive market.
I think, people look at our numbers and they think that this has been easy business and that we just grab market share and we sell more parts and increase sales easily. And I’d say, that is absolutely not the truth. We have to fight, like you can’t believe for each sales that we get. It’s extremely competitive. The OEMs are very, very fierce competitors. And we -- of course, we do nicely. But, I would say, the PMA market is an extremely competitive one and it’s really due to our people picking up market share. I think that is permitting us to succeed, as well as over in the distribution business. We’re also picking up market share there because of our customer service levels, and I think the way that we treat our principles. Also on the specialty…
Eric -- yes, I was going to ask you on that market share. Is there that much share to capture from others? I mean, is there a way for you to frame your current share or where you’ve been moving from and to in terms of quantifying the share growth?
Yes. We are by far the largest PMA supplier in the world. We do have competition from some other smaller PMA companies. And based on conversations that I've had with our people, with our customers, I believe that our customers are preferring to come over to us as we continue to build out product line and do parts that we haven’t done in the past.
Okay. And are we -- on the organic side, are we in some kind of an overhaul period where there is just higher level of activity in parts demand, just based on the particular age of the fleet right now or the fact that we don’t have as many new narrowbodies, delivering due perhaps to the Max or is there some other element that may be somewhat timely?
At the moment, I really don't see it as an impact due to the Max in my discussions with our people to date. And as a matter of fact, if you look at the repair area, the repair area is probably the lower area in terms of growth, and that's been -- that’s a particularly competitive market. And if in fact there were increased demand as a result of the Max, I'd expect to see it more in the repair area. Now, maybe we will be seeing that in the next couple of quarters, I don't know. But definitely, the repair area has been a -- in terms of growth percentage, has been lower than over on our parts side. And then also, you’d asked about the various segments. Our specialty products business has done exceptionally well also in terms of picking up market share. And their sales growth has been very good, both on the commercial as well as the defense side.
And Rob, this is Victor. I would say, it was pretty broad-based in the ETG businesses as well. Of course, there's always a pocket of weakness here and there. There is always a business that’s suffering for reasons unique to that business. But market-wise, I would say overall, it was, as you’d say, firing on -- pretty much firing on all cylinders.
So, there is no specific -- whether it’s space or defense, there are no particular programs that are creating a lift there?
Well, sometimes it’s difficult to measure that because we don't always know where our products are going. We may have an idea or a sense of that. I would say that there are some businesses that are stronger than others. I think, our organic growth in defense, for example, was strongest for the Company this quarter and probably is looking like that for the year. There are a lot of places where we're seeing that. We're seeing that on some precision guided munitions programs, without being able to get into specific names, we’re seeing it on rotary wing, helicopter programs as well, somewhat broad-based. But, I’m sure, if we dig into those, we will find out that some programs are particularly strong.
Okay. And then, just lastly for Carlos and I will step aside. On the CapEx, and I don’t know if you might have touched on this earlier, I might have missed it. But, is the CapEx coming a little under budget and might that offer some upside on the cash flow for the year?
Yes. How are you doing, Rob? So, we spent $12.5 million in the first six months. And frankly, our budget was double that for the first six months. And as I went back and looked at what our guys had asked for and procured versus what they estimated it would cost, they, as we have mentioned in the past, they're very frugal every dollar that they spend on equipment is very personal to them. So, what I found is, they bought equipment they have asked for but they found it at much cheaper price point. So, in looking at that, the judgment was as follows. I still think there's a bunch of names out there that they've asked for. The guidance that I have given at $38 million, we’d presumably spend another $12.5 million each quarter going forward. My guess is that they’ll probably under spend that but right now I have to go with those numbers, given what they've asked for. And that was really the emphasis, if you would for the reduction in the CapEx spend.
As far as the…
So, no reason?
No, no reason. The guys are getting everything they need to continue to grow their businesses. They just are -- they’re the most frugal business owners and operators I’ve ever met in my life. And they're getting exactly what they need to make this done.
But my point is, you are not yet at the point where you want to call for higher cash levels.
Well, we did. We increased our cash flow by $10 million from operations. And the reason I did that was because, if you remember over the past -- I guess starting in Q3 last year, Rob, we started to see some really nice organic growth out of businesses and some really nice growth period for the overall consolidated company. As we talked about, we had some inventory build to support that growth. What we’ve noticed -- what I’ve noticed over the past quarter to four months has been that some of that inventories burn off. In fact, our inventory only grew 6% since October 31st. And my observation is that they burn off some of that pre-buy, if you were to support the growth. And I have an expectation that we’re going to have some working capital needs going forward. So, what I did was I assumed that we would -- we redevelop some of inventory balances to support the growth and that produces about $380 million of cash from operations number.
And Rob, we’re conservative in how we make those estimates. We’ll see how it all plays out. But, we did increase…
Okay. Thank you all so much.
Thank you.
Rob, just -- Larry again, as a comment, Carlos normally and rightly so, tends to be conservative. When you talk about cash flow and earnings and so forth, we never want to get ahead of ourselves and promise something that may not happen. We would much rather, under promise and over perform, and that's pretty much our history. So, we don't want to count our chickens before they hatch. So, we'd like to be a little careful on predictions.
Right, right. Thank you, Larry.
Thank you, Rob.
Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.
Hi. Good morning, guys, and great quarter. Thank you for the time. Eric, Victor, you guys talked about Mr. Rob's question. But I guess, given the business environment seems to be robust, what truly surprised you guys a bit, Victor for you precision initiatives that expected or what kind of surprising and what’s accounting for the deceleration in the second half?
I don't know if I’d call it deceleration in the second half. I think, we had a particularly strong second quarter. I think what we’re expecting in the second half is actually pretty good. And it was somewhat broad-based, as I said, across a number of defense lines for us, as well as some commercial aviation. That was strong for us where we do a number of things in commercial aviation, ranging from power supplies to locator transmitters to panels and bunch of other things. So, I would I would say that, we were just kind of pleased with everything that happened in the quarter, and I think we’ll be pleased with what transpires in the rest of the year.
Hi. And Sheila, as far as the Flight Support Group goes, again, I think what was surprising was in particular over on the PMA and distribution side in the parts business, those were very strong. I think, one area in particular in our distribution businesses I think, we are doing exceptionally well, picking up market share. I think, we deliver a unique service, a unique product that frankly nobody else in the industry can offer. And we've been particularly successful in that area, as well as I mentioned to Rob’s question over on the PMA side. As far as specialty products, that is very strong. We had expected that it would be strong. It had been weaker a couple years ago. It's now doing particularly well. Of course, the defense component of that is doing extraordinarily well. And that can be lumpy, and sometimes we don’t know exactly when it is going to hit. But, we did very well. And then probably, the only area where we had lesser organic growth I would say would be over on the repair side.
All right. Thank you for the color. And then, Larry, maybe one for you. In terms of the business environment, you said it’s the strongest you’ve seen in 29 years. How do you think about pricing in your overall portfolio? You are kind of hesitant to increase price. But, do you think that business environment runs to that right now, and as the OEM switch to next generation aircraft, does that provide an opportunity?
Well, I think that historically, we have relied upon volume increases to grow the business. One of the things, our philosophy has been to try to be very fair with customers and not push the envelope. As you know, in the aviation business, the OEMs really push the envelope and push price and so forth, and we try to lay back, and could we increase perhaps. But we’re really looking at volume. So, I don’t think we want to take advantage of the pricing environment. We would rather get increased volume and get more of our products in line then to push the price button. But, I’ll let -- Eric and Victor can comment a little more on that. But that’s generally our philosophy.
Yes. Sheila, I echo what our dad said about pricing. I think our philosophy is pretty well known. When we came to HEICO nearly 30 years ago, the Company was doing less than $25 million in sales. And our philosophy was that the future had a lot more to give the Company than in the past. And we wanted to make sure that we were always the supplier of choice. And we adopted this very fair and conservative pricing ethos in the Company where we don’t want to take advantage of our customers. And we instead want to run very lean and efficient operations and basically be able to earn our profits that way as opposed to by jacking prices.
So, that continues to be our philosophy and meet those in all parts of the Flight Support and the Electronic Technologies Group but Victor can answer -- can talk about ETG.
I think that’s well said.
I appreciate it. Thank you.
Thanks, Sheila.
Your next question comes from the line of Gautam Khanna from Cowen & Company. Your line is open.
Yes. Thank you, guys, and congratulations on a great quarter. I was wondering if you could comment on any developments you guys have undertaken for PMA parts on the CFM engines, given the agreement last year?
Yes. This is Eric. We try to stay away, as a result of competitive reasons. And our competitors I see are all on the call and we welcome them. But, we think that there is opportunity for us. I think, we’ve developed a lot of these parts in the past. We have a fairly large portfolio and the tooling is already paid for. We’ve got inventory on the shelf. So, I think, we can go ahead and support our customers’ needs. But, I'm reluctant to change any of our projections to reflect. It’s really a significant change in this area, until we really see the results. I think, the customers across the board want our services, engines are no different. Of course, the newer engines are even are fairly expensive to operate.
I’d point out -- I think that our engine competitors, there used to be -- 15 years ago, there was a big scare that PMA would definitely make their businesses. I think that’s absolutely not true. They have great businesses; they make a lot of money. And I think, we can continue, if you will, nibble around the edges and do very nicely for HEICO. But, they continue to have very good businesses. So, hopefully we can both thrive together.
Got it. And in terms of lead times to develop those products, you mentioned you have the tooling, you have a portfolio already that addresses other folks’ engines. Is there -- I mean, is it a shorter development window, just given relative to typical PMA parts, just given you already have capability in the space?
Well, I think it’s consistent. We’ve got a library of some 11,000 parts, and we've got a lot of experience in doing many different sort of classifications of parts. So, as we want to add more engine parts, I think, it is fairly easy for us to do because we’ve got so many similar ones already. We’re not, if you will, reinventing the wheel. There is just some minor, if you will, changes. So, we’re able to do that fairly quickly.
That's very helpful. Last question for me, just maybe, Larry, if you could talk about the acquisition pipeline, how promising it is, what you're seeing with respect to the size of some of the more promising candidates, and in what segments those might actually -- which segment is more right for M&A right now, for additional M&A? Thank you.
I think that the pipeline is what I would call, normal. We're looking at an awful lot of different deals. Some of them are priced out of our price scope. Again, we don't pay 12, 14 times EBITDA. We want to stay in the lower range. So, some deals that we might like, we're not going to reach for them because they don’t work, let somebody else by them. And we're going to stick to our strategy of buying high operating margin companies, ones that generate cash flow, ones that are accretive within the first year, and we're looking at transactions in both segments in Flight Support and ETG.
I think, I can never predict whether a deal will close. I believe that we have some that will close in the near future, but I can't predict that they will, because I have seen deals blow up at the closing table. So, all-in-all, I think it's normal. And remember, HEICO is a company that we try to balance our cash flow because we don't want to get heavily indebted. And part of balancing the cash flow, if you’re growing bottom-line at 15%, 20% annually, which we are, you don't want to get ahead of yourself and make these acquisitions and pay crazy prices and suck up all your cash and then get stuck and buy a bad deal. We’ll let other people do that.
So, if you look historically at our acquisition program, it’s been extremely successful. And we follow the same exact strategy all the time. So, I would say everything is normal. I would say that we probably can expect some transactions to close, over the next three, six months, maybe some sooner, but I think everything is very normal. And it fits in to the way we want to control the growth of HEICO. We don't want to go like a saw to go up and down and up and down. We want to have continual growth, 15%, 20% bottom-line. And that's what we’re scheduled to accomplish.
And just to add to that, this is Eric. Our very disciplined pricing model, I think is what permits our culture and what can permit this continued success in terms of treating our people right and treating our customers right. When people pay too much for companies, they've got to jack the prices; that has a long-term negative effect. We believe on the business. We want to remain very customer-friendly. And then also, when we talk about our people and our culture and how we’ve got we believe the best people in the industry, I think, one of the things that permit them to behave that way and encourages that type of behavior and performance is that, we don't have unrealistic goals. And there are other buyers out there, whether it's private equity or large corporate where they pay very high prices and they really hold a fire to the people and they cause them, they push them to do things that are A, not in the long-term interest business; and B, not really ethical or what the people want to do. And I think by -- the only way that we can continue this culture is by paying the prices that we pay and that permits us to in turn invest in the people and this whole thing becomes just a continuing self reinforcing program. So, it's worked very well thus far and we plan to continuing that.
Thank you very much.
Thank you.
Your next question comes from the line of Louis Raffetto from UBS. Your line is open.
Hey. Good morning, guys. So, I want to go back to Sheila’s question on pricing, and I know Eric, you just sort of covered this. There has been a bit of new push in Congress relating to DoD supplier pricing. So, have you had discussions with anyone in Congress or any branch of the military about potential use for PMA to save money? You guys have some exposure there, but I don't believe it's that large. I think you disclosed, it was about $150 million or so $160 million in FSG.
I don't have the defense numbers in front of me. But, I can tell you that the Department of Defense remains a very important customer to us. I think that there is a lot more product they can buy that they are not currently buying. It's an interesting paradox in that DoD doesn't like the high prices that some people charge them, yet, when it comes to approving alternate sources, it's very difficult for them to commit the resources to be able to go ahead and do that. We succeed, and I think that there is a lot more opportunity for us in that area. But, the reason why they have to pay some of these very high prices is because, on the one hand, they say they don’t like the high prices, but on the other hand, they don't do anything about it. And the DoD I think and particularly under this new administration is starting to wake up and become a lot more focused in that area. So, I think that there is good opportunity for us.
Great. Thank you. And then, just within the aftermarket parts, I know engines used to be the majority. Now, I think it's still roughly 50%. But, are you seeing strength sort of broad-based across the aircraft, or is there any specific areas where it’s stronger than others?
We say that the non-engine business actually has been well over 50% than if you will the majority of our business for a number of years. I think our strength really is in all parts of the business. We are doing nicely in engine but in particular in the non-engine area. We really see a lot of opportunity there as well. So, I think we want to continue to develop whatever our customers’ needs. And I think we've got the technology to be able to do that.
All right. And then, just one last one, Eric. So, MRO I think was negative last quarter. It sounds like I guess it was at least somewhat positive this quarter, the number would be on the Q, but just curious.
Yes. It was positive. We had positive organic growth in the repair area. And I anticipate continued strength as we move through the year.
Great. Thank you, guys.
Thank you, Louis.
Your next question comes from the line of Larry Solow from CJS Securities. Your line is open.
Great. Thanks, guys. Most of my questions have been answered. Just a couple of follow-ups, Eric, on the repair piece, I think it was like you said flat last quarter and a little bit growth this quarter. Any reason that you can identify it wouldn’t grow as fast as sort of that mid-teens plus rate your other businesses but why it’s sort of been lackluster or flattish?
Yes. I think, in particular, we're very strong in South America. And I think that that area has been a little bit weak. Don't get me wrong, we're performing very nicely in that area. Again, it's an extremely competitive space. People look at HEICO and they see how we've grown from whatever $25 million to roughly $2 billion and they think well, that can't be too hard. If those boneheads could do it, anybody can do it. And in fact, it's really very, very tough space. And the component repair space is just very, very difficult to be able to win the business, to service it on time, at a reasonable price for the customers. I mean we’ve got the advantage we can use our parts, we can use OEM parts, surplus parts, serviceable parts, whatever it is. But, it’s just a very, very tough space. And I think that if you look around the industry, the component repair areas that have higher growth are the ones who have a lot of pricing and that typically is the OEM component repair. Ours is a lot more competitive and we provide a very good service, but it’s just -- it’s a very tough business. It’s not easy. And I'm proud of our team. And I think we’re going to continue to see growth in that area. We’re still very much committed to it. But, it’s just very difficult to execute.
Right. And on the specialty products piece, which I realize is a minority piece, but could sometimes move the overall growth a lot. Obviously another strong quarter there. I know you mentioned, it could be a little bit choppy. But if I'm not mistaken, as you mentioned a lot of these are defense contracts and some of them -- you had some decent visibility of that at least for a few quarters out, is that fair to say?
We do, yes. I would say that for the next number of quarters that we’ve got good visibility there. I think we’re going to continue to do well in that space. If you look at all of the emerging threats around the world, I think the defense companies are going to do very well, in particular China is announcing it seems daily a new technology that’s coming out that the rest of the world needs to consider and develop alternates for. So, I anticipate there’s just going to be continued strength in missile defense and other areas. So, I think we’re going to do very nicely.
And then, just one quickie for Victor. You mentioned pretty broad-based strength. If I'm not mistaken, space had been lagging a little bit last few quarters. I assume you saw a rebound there as well.
Yes. Space has been good for us. It wasn’t bad, but in the prior periods we had to point out what was the weakest or had slight negative growth or -- and that had been because geosynchronous earth orbit, commercial geosynchronous earth orbit satellite market. But, the rest of our space business has been very strong and stayed strong throughout that time. So, that really has been good for us. I mean, I wouldn’t expect commercial GEOSAT to be strong for us for sometime but the rest of the commercial, I think at least as far as I can see after this year, should be fairly healthy.
Got it. Okay, great. Thanks, guys. I appreciate it.
Welcome.
Your next question comes from the line of Peter Arment from Baird. Your line is open.
Yes. Thanks. Good morning, everyone. Nice quarter. So, most of my questions have been answered, but maybe just one on just your international exposure. Just given all the daily headlines that we see on the trade front, you’ve got about, I don’t know, just greater than 35% of your sales from a broad distribution, most of the countries, it’s over a 100. I believe but maybe -- are there anything that is jumping out either in Eric your business or Victor that are watch [ph] items just on the growth front that you’re seeing any positive activity?
I'm sorry, Peter, our what items?
Any watch items, any areas, any particular countries that are -- you’re seeing any slowing or anything that may be in addition now but you put it on a watch list [technical difficulty]?
There is nothing -- nothing that I can think of. This is Victor. There’s nothing that I can think of in terms of country watching that we’re particularly concerned with, at this point I mean no more than the usual noise level. And I wouldn’t call it country risk either, like generally we tend to look at the individual customers.
And then, also, typically, the product that we’re supplying, needs to be obtained from a U.S. based company. So, we have not seen any issues or any problems. As a matter of fact, in our distribution business, I don’t have the numbers in front of me. But quite a lot of our sales occur from European subsidiaries. But we haven't seen any problems and we don’t…
Okay…
As a rule of thumb, we're not really selling to -- not as a rule of thumb. We're not selling, period, to any which we consider the suspect countries that the U.S. does not want to sell into. So, I’m not worried about selling, risk of sales to America’s enemies or something like that.
Your next question comes from the line of George Godfrey from CLK. Your line is open.
Really nice job on the quarter. Just a question for Victor as much as he can. And I heard the comments about pricing really hasn't been the driving factor, it’s been volume. If I look at ETG's operating margin, just 2.5 years ago, it was -- at least by my numbers, 24.7%. Now, this quarter, really impressive 31.4%, almost 700 basis points of margin in just two and half years. Can you comment what product mix manufacturing process might have improved, or 700 basis-point margin improvement in such a short space of time really impressive, and not like it was coming from depress level to begin with, it was pretty high. So, I'm just trying to get a sense of what is just driving such really great profit expansion? Thanks.
George, this is Victor. That is a good question. It’s a variety of factors, of course, it's mix and it’s mix sensitive. So, there's been more of a shift to higher margin products. Some of that is a result of acquisitions. Also some of the margin shift is driven by volume increases, which leads to significant efficiency gains in a number of the businesses where it just so happens, we have fairly repeatable processes and were able to do things on less of a customized basis. So, we’re really able to capture those efficiencies. And some of it is a result of some things that we've done on the SG&A side in some of our business. When I say we, I mean our individual businesses have done, we’ve had a few facility consolidations along the way. And that has also helped reduce some of the overhead burden on there. And so, that's really kind of -- if you look at, you’ve got this combination of all these factors that lead to it.
Your next question comes from the line of Michael Ciarmoli from SunTrust. Your line is open.
Hey, good morning, gentlemen. Real nice quarter, and thanks for taking the questions here. In business conditions, everything is so optimistic. Forgive me, I’m going to maybe try and take a more negative view here just to make be stress test things. But historically, especially I guess in FSG, after you guys have seen growth really accelerate to these levels, we've seen a fall off. And some of that comes from tougher comps. But, do you get the sense that anything is different this time? Certainly airlines seem to be a little bit more deliberate in their inventory purchasing. But, is visibility better? I know, you keep saying that trends are about as good as you’ve seen in 29 years. But has the visibility expanded? Do you think these trends can be sustained?
Yes. I think, the numbers are certainly phenomenal. I don’t think that -- for example, in Flight Support 15% [ph] organic growth for every single quarter. I think that that’s a bit aggressive to expect. However, I do really believe that our culture and our value proposition is catching on. And it will swing up and down, but I really do believe that we are able, as a result of they are paying their prices, compensating people properly, not having unrealistic expectations, being able to treat our customers right, I think this is what permits the long-term growth that we’ve had, the organic growth, far in excess of what the industry does, especially when you look and think we're not even pushing the pricing lever. I mean, we got 15% organic growth and it's not pricing. And that really is a result of the culture and the customers wanting more from us. Now, that's not to say that they are not incredibly demanding, because they are, and it's very difficult for our people to satisfy them. But I think we do frankly an amazing job at it.
So, I anticipate this really just continuing. And I think that we will continue to perform in the upper quartile, if you will, of companies out there, because -- of competing companies, because of this culture. So, I think that we should continue to do quite nicely.
Okay, understood.
This is Carlos. I just want to make one other observation on that. My observation is as follows. We’ve broadened our SKU list and the FSG has become more than just an engine shop or structure shop, or an interior shop, we really do provide to our customers now a much broader basket of parts that they can rely on that that has also increased the appeal, if you would, or a customer base to do business HEICO. And that's part of our strategy. And I think as long as we continue down that path, broaden that product mix and continue to penetrate those customers of product that they're not currently buying, then, we should be able to continue, as Eric pointed out, top quartile industry growth.
Got it. That's helpful, and maybe a good segue too Carlos. I mean, Eric, you mentioned distribution picking up share. What do you attribute the share pickup to? Do you think there's any residual impact from KLX getting scooped up by Boeing or any of the other M&A or consolidation that's taking place in the market?
There has been a lot of consolidation. And we operate our businesses as a separate standalone independent companies and that permits them to have the flexibility and the entrepreneurial -- maintain their entrepreneurial culture and not bureaucracy. There is no, if you will, central HEICO number to call for all of our distribution services. Our companies are focused on their niches and they are able I think to deliver best value in their niches. And I think they deliver the best value both in terms of increased market share for the companies for whom we distribute. So, when somebody comes to HEICO and trusts us with one of their product lines, they know that HEICO is going to focus on the details and figure out specifically, how to get the market share higher and we showed them exactly what those results are. We're not, if you will, an order fulfillment house. We have a 30-year culture in the distribution area really focusing in those areas and giving a demonstrated market share increases to our principles.
So, I think we do extremely well in that area, in all of -- that you are seeing that all of the HEICO distribution and defense sustainment businesses have in common. And so that is what’s permitting us to pick up additional principles. I mean, it's gotten to the point where we have so many people who are wanting to sign up with us that we are having to not be able to except certain product lines, because we want to make sure that we continue to do really an outstanding job for anybody who trusts us with their product line. And we need to make sure that we've got the bandwidth to be able to go ahead and do that.
It's not a low cost operation. Our distribution businesses spend a lot of money because we've got to be able to deliver those services as opposed to just straight order fulfillment, which we’re also quite good with. So, I think all of that sets us together.
This is Larry. I'd like to put point something out to you in the way to think about HEICO and at least give you the way I look at HEICO. I look at HEICO as an orchestra. And I don't look at is the trombone player better than the base player and is the violin doing better than the trumpet and all that. We focus on HEICO growing bottom-line, as I’ve said many times, 15% to 20% bottom-line, and that is what we key on. So, whether one division does a little bit better, has a higher margin or something else, we work with that throughout the orchestra, so to speak. And that’s a very important in trying to coordinate the results of the company because we could announce that one division or one distribution or space or something did great but all the other companies did terribly. That’s not how we manage the Company. We manage the Company as an orchestra. And the total sound of the orchestra has to come out. And that’s when I talk about the 15% or 20% bottom-line. And I think that we can continue to do that over the next three to five years. We can’t guarantee it but that is how we manage the Company and that is how we focus. So, just a little color in the way we do things.
No, understood, good analogy. And then, maybe last one, just housekeeping. Victor, within Electronic Technology, I know we’ll get in the Q on the revenue for space defense and aero, but do you just have what the defense revenue growth was if you could parse that out? And I know it might be tough and I know you’ve got some defense that flows through FSG as well. But, any color as to what just your defense market did just this quarter?
Well, as a percent of the ETG business, defense is just under half of the business. And in terms of the growth in defense and space, well, we’re only breaking that out. I want to be careful what we break out. I am going to let Carlos answer it, because I…
So, we don’t -- for competitive reasons, we don’t bust out the different buckets like that. To Victor’s point, space -- I am sorry, defense has been a high grower; it’s become a larger portion as the ETG in the high 40s as a percent of the overall business. That business is growing very nicely. The commercial aerospace business actually this quarter and for the six months has been very well within ETG. That could be anywhere in the trailing 12% or 15%, let’s say of the segments sometimes higher, 15% to 20%. And space, to Victor’s earlier point, has grown this year, in this quarter in particular it did very well. And I think that’s due to all of the other space activities we do, besides what Victor mentioned, with the GEOSATs being a little softer. So, while we don’t break it out individually, Michael, we view that nice growth across -- broadly across all those sectors.
Got it. Thanks a lot, guys.
Your next question comes from the line of Ken Herbert from Canaccord. Your line is open.
Hi. Good morning.
Good morning, Ken.
Eric, I just wanted to first start off with the question on FSG, if I could. As I think about your PMA sales, you’ve got phenomenal penetration with legacy airlines, both here and in Europe and North Asia. Obviously, the fleets are migrating more to emerging markets, Middle East, Southeast Asia, China, other areas. Can you just talk about what kind of reception you’re seeing to PMA in some of these emerging markets, which have historically been largely OEM customers? And maybe what you’re doing structurally with the business or any changes to the business to try and position yourself to better capture this growth in the emerging markets, as I would expect it will eventually open up similar what we’ve seen with other airlines?
Right. I agree with you Ken that we anticipate that it will open up similar to other regions. What we found with PMA acceptance is directly correlated to the sort of age of the airline, the age and sophistication. When airlines are taking a lot of deliveries of new equipment, they get a lot of attention from the OEMs and they don’t really see the need or the value proposition at the beginning. And then, of course, as those deliveries as a percentage of the fleet go down, they sort of get less attention, and they realize that these machines are extraordinarily expensive to maintain. And that’s where we get in there and we’re able to show our value.
So, i.e. history over the last 30 years that that’s absolutely been the case. I mean, without mentioning names but I can tell you that airlines in all regions of the world, whether it’s North America, South America, Europe, Asia, where in the beginning they were refusing and not interested in using PMA parts and then as time went on, we go in and show why this makes sense, and they become very good customers. So, I anticipate that will continue. And we are making headway around the world. We’re also making headway with leasing companies in terms of the acceptance of our engine material. So, I anticipate that this is the continuing education effort, but I anticipate it will continue to bear fruit.
Okay. That’s great. And you don't anticipate the sort of the varying degree of maybe regulatory sophistication, for lack of a better word, might slow the adoption of some of these parts in other regions or you don't see any structural sort of headwinds or tailwinds or other issues, as you think about the natural sort of opportunity in these emerging markets.
We see the continued opportunity. In general, the FAA approval is accepted around the world and due to the bilateral. So, I think that is sufficient and we will continue to do well and continue to educate people around the world.
One thing, Ken, that I might add to that is, and Eric is probably going to blush when I say this. But, I think he has done a good job, an exceptional job of educating airlines around the world on the value of our parts. And I think part of getting into the markets you’re referring to, at some point at the right entrance point, will not only be product that we have to deliver but how good are we at education and selling into that market. And I think we have a proven track record of doing that. And I think we will have a heads up on the competition when it comes to breaking to their market at the right time when that fleet is ready for parts that we produce.
That’s very helpful. And if I could, Carlos for either you or Victor, just on final one on ETG. Seasonally, you typically see stronger margins in the second half of the year, and I know it’s not every year but often your fiscal fourth quarter can be one of the higher margin quarters of the year. Is there any reason you shouldn't continue to see sort of a seasonal strength? I know, maybe it sounds like there was clearly some nice mix tailwind in the second quarter, but any reason you don't see the typical pattern in ETG margins in the second half of this year that we’ve seen in prior years?
I’m not sure that -- to be honest that I feel there is -- this is Victor that I feel there is a pattern. I think, we feel good about the guidance we’ve given. And so, that I think we would stick with what I said in the comments earlier.
The only thing I would add to that, Ken, as you know, we do have a little bit more visibility into ETG from a backlog perspective as opposed to some of the FSG business we do. And in looking at the backlog, it looks to me more consistent maybe with what we’ve had over the last four quarters. I would say, the only exception to that is Q2 was really strong. And as Victor mentioned earlier, all our businesses were hitting on all cylinders. The defense business was really outstanding for us. That could continue. I mean, if we can continue what I will call the new optimal mix because I know last quarter as I said like we -- optimal product mix. Listen, if what we had in Q2 continues, that’s great. We could pose some stellar margins. But, based on backlogs, based on what the guys are telling us, we feel like 29 to 29.5 for the rest -- for the full-year is probably the right margin to be thinking about on the operating income line.
And by the way, we're proud of that. That’s nothing -- we're proud of the 31-plus-percent margin for this quarter. But I think if the Company can sustain over 12-month period 29% to 29.5% margins, that’s a GAAP margin, that doesn’t even include 5 points of amortization you could stick on top of that. We're very proud of that. So, that’s how we're looking at it right now and we will see how the rest of the year plays out.
Great. Phenomenal quarter. And thanks for the color.
You’re welcome. Thanks, Ken.
[Operator Instructions] The next question comes from the line of Colin Ducharme from Sterling Capital. Your line is open.
Hi. Thank you for taking my question. I had a couple of quick ones for each person. Carlos, just very quickly, could you remind us of the materiality, if any on tariff impact of subsidiary input costs? And then, secondarily, the leverage today is very, very low. I understand hierarchy use for cash flows, M&A driven, to what extent is shareholder return an increased focus now, especially given where the balance sheet is today?
And then, for Eric, if you could just kind of help us. I know that kind of code of conduct with CFM OEM a couple of months ago applied to a single engine manufacturer, but in practice, I'm curious as the industry has kind of digested this, are we seeing the effect on other OEMs over time in terms of market conduct?
And then, finally for Victor, as you got incredible growth, as you think about the M&A and trajectory ETG from here, are you fairly well set in terms of the verticals? And by that I mean your end market exposures where you're just trying to better increase the depth of your penetration in your verticals or are you also considering entering new verticals over time? And then, I had a follow-up for Larry, which I'll hold off.
So, your question about tariffs, we get asked that question quite a bit. About a third of our sales are exported. And I think Eric made a point earlier, a lot of those either exported or foreign manufactured and sold to foreign countries. When we think about that, we're not terribly concerned about the tariffs as it relates to products being sold. On the intake, if you would, on raw materials and things of that nature, keep in mind, HEICO, yes, we have metals that we use in our products but a lot of the stuff we're doing particularly in ETG and even in a lot of the aircraft metals, they're very specialized. We're using things like gold and on precious metals if you would, for conductivity and in the aerospace area we're using the highly specialized metals, things that aren't sourced typically from China, and are often procured locally by our subsidiaries in the local marketplace. So, we haven't seen pressure to date on that front. Yes, raw materials are inching up over slightly. And the way we deal with that frankly is, if we haven't seen it today but to the extent that pricing in the market goes up, for example, our OE competitors raise prices, since we use their pricing umbrellas set our prices, we follow them up. We do not have a cost plus profit way of setting our prices on a lot of the stuff we manufacture. So, I don't have any great expectations that the tariffs are going impact HEICO in a material way.
And then, with regard to the CFMI and GE conduct principles, we believe that other manufacturers have looked at that and are aware of those principles and are basically falling in line as well. I recognize that competition is here to say and that they've got to continue to give their customers the choice.
This is Victor. What was the question? I'm kidding.
Just curious -- trying to think…
I'm kidding. I remember the question. The answer is, I mean, we're always looking to increase penetration in the existing markets that we’re in for the different products, and the different topologies that we offer of those products. However, we do widen our aperture and we're continuing to do that both within our existing subsidiaries as well as in acquisitions. And the key to the acquisition strategy, you’ll notice that over the years, we have widened the base of products that we've offered, and they're not adjacent products, right? They're are not adjacent designs or utilizations, if you will. And so, the key to us is whether they are niche products found at a certain level within the supply chain that have a certain amount of design, upfront design engineering that’s required, as well as on the production side is certain amount of complexity to the production. So, those are kind of the keys to us. And those generally are higher margin products though where we are interestingly enough able to offer them at a very competitive price to our customers, very often cost price, much less than their alternatives. So, those are the kinds of things we look to do. And as long as it remains within those realms, then, we will do them and that will mean in our likelihood, product type expansion.
Okay, thanks. And final follow-up for Larry and I’ll pass the baton here. You’re in 29 years, superlative, was fantastic color. You’ve touched on it once or twice already in the call. But if you could just help educate me through the art of your experience over that timeframe, the broader trends that are informing that view, I mean, I think of a couple, nationalistic headlines, fueling defense or development of emerging markets or consolidation of the domestic airline industry to help your landscape, what are the key themes in your mind, from again that 30,000-foot level that are informing such a great environment for HEICO? Thanks.
Well, I think, you did a very good job in mentioning some of the items that I would have mentioned. In addition to that, we perceive an administrative -- forget about getting into politics and whether you like Trump or not and -- but clearly, we have an administration, which is very pro-business; we have administration that reduced taxes on corporations, permitting much, much stronger cash flow and our ability to literally function very, very efficiently with cash and reducing the tax rate from 35% to 21%, I think, you mentioned the military build-up under the Obama administration. You had all kind of problems, cutting military spending and so forth. I think, we and other companies like us involved in defense are beneficiaries of that. I think, in spite of -- you take a look at the backlog for Boeing and Airbus -- Boeing has it’s problem with the Max, I'm sure that they’re going to get it fixed. But by the sheer number of aircraft on order, you can see that the industry is very strong and the flying public. I mean, you have so many people flying, developing nations, China, India, The Far East. And so the entire business atmosphere is just incredible. I also think we’re seeing the results of lower unemployment. People are spending money. I read reports that people are optimistic on the economy. So, all of these things go in.
The other thing that’s happening with HEICO is as you’ve heard on this call, more airlines are buying into our value proposition. It’s a very tough -- as Eric told you, very tough to get the airlines to focus and so forth. But, we are making tremendous headway. So, that’s happening.
The other thing is HEICO as a company is I think Victor got into this where he said the volume increase is reducing as a percentage, the overhead expenses, the SG&A expenses. So, we’re becoming a much more efficient operation as we increase. We also have interchange between all of the subsidiaries where we have meetings, constantly meetings in different companies within the HEICO Group get together and talk about using the resources of one another if they have products that they buy from the outside, they can now buy it from a HEICO company, so we keep the business in house.
So, I think from an operating point of view from where I sit, everything just seems to be going in the right direction. And it’s an incredible -- the demand out there for our products is extremely strong. The other thing is I mentioned earlier, the group of people that we have running these subsidiaries, these are really extraordinary people. And I can say Eric, Victor and I, Carlos picked these people when we made acquisitions, but they are just an amazing, amazing group of people who are honest, driven and love what they're doing. And basically what we do in the corporate office is say how can we help you? And they don't need much help, but if they do, if they make a request for CapEx or something else or introduction, and there's a lot of cross-fertilization within the HEICO Group. So, you put all these things together, and I think you get the results that we showed in the second quarter and honestly for this year. That's why I have tremendous confidence in going forward. And I made a comment that I said we shoot for 15% to 20%. And I don't want to promise that and we’re not going to give guidance of that. But in my heart of hearts I believe that we should exceed that. And I think we’re clicking on all cylinders. So, I think it's all of the above. It's not one single thing but everything pulling together.
There are no questions at the moment. You may continue.
Are there any other questions, anybody in line for any questions? So if there aren’t, I just want to remind everybody on the call that Eric, Victor, Carlos and I remain available if you do have questions that you didn’t ask at this call, get in touch with us. You know where to reach us. And we again thank you very much for your interest in HEICO. And we as management, we’re doing everything possible to run a great company and have greater profitability. And if anybody's looked at the stock price, you could see that somebody out there believes that we have a great future because I think we were hitting over $113 a share.
So, that kind of makes me happy and I’m happy that probably everybody on this call is happy with their HEICO shares. We look forward to talking to you for our third quarter, which will be sometime in late August. So, have a good summer all of you. And we will be in touch and speak with you when you contact us. Thank you. That's the extent of the call.
Thank you for joining. This concludes today's conference call. You may now disconnect.