Q3 2019 Earnings Call
Let me down first session. If you would like to ask a question. During this time simply press Star then number one on your telephone keypad.
Your host for today's call is Laurans Mendelson, Chairman and Chief Executive Officer, HEICO Corporation before the conference call begins I will read the following statement.
Certain statements in this conference call constitute forward looking statements, which are subject to risks uncertainties and contingencies heico's actual results may differ materially from those expressed or implied by such forward looking statements as a result of factors, including lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services product specification costs and requirements, which could cause an increase to work cost to complete contracts governmental and regulatory demands export policies and restrictions reductions in good friends.
Space or homeland security spending by U.S. and or for customers weren't carpet competition.
From existing and new competitors, which could reduce our sales our ability to introduce new products and services are profitable pricing levels, which could reduce our sales or sales cross product development or manufacturing difficulties, which could increase our product development cost and believe field <unk> ability to make acquisitions and achieve operating synergies from acquired businesses customer credit risk interest foreign currency exchange <unk> income tax rates economic conditions within and outside obligation defense space medical telecommunication and electronic industries, which could negatively impact our cost of revenues and good parents spending or budget cuts.
Which could reduce our defense related revenue pardon 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 erry.
Form 10-Q , and form eight k., we undertake no obligation to publicly update or revise any forward looking statement better as a result of new information future events or otherwise except to the extent required by applicable law. Thank you I will now vertical over to Laurans mendelson.
Well, thank you very much and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO third quarter fiscal 19 earnings announcement teleconference.
I'm, Larry Mendelson, I'm, Chairman and CEO of HEICO Corporation I'm joined here. This morning by Eric Mendelson, Heico's Bice co President and President of Heico's Flight support group Victor Mendelson Heico's co President and President of Heico's Electronic technologies group and Carlos Macau, Our executive Vice President and CFO .
Before reviewing our record third quarter operating results in detail I would like to take a minute and make a few important comments about our company.
In my opinion, the HEICO team members are really directly responsible for this success through their dedication and their professional handling of all matters within the company. We have a very talented group that continues to deliver industry, leading growth and new product innovation or well, maintaining heico's unique entrepreneurial culture of excellence.
We continue to win in the marketplace through a simple strategy, putting our customers first.
Our record setting results prove that when you respect your customer treat them fairly deliver on time high quality products.
And don't push prices to unaffordable levels, you can sustain positive growth build long lasting and mutually beneficial business relationships and that is the HEICO culture.
Business conditions and end markets, we serve continue to be strong.
Well, we haven't completed our budgeting forecasting process for next year.
Current business conditions at HEICO remain excellent.
I mentioned in the last call that I had never seen business conditions stronger and that has followed through in the third quarter and we're very optimistic for the future.
Our end markets, consisting principally of commercial aerospace defense and space remain very healthy and continue to provide HEICO with broad growth opportunities to generate shareholder value.
I'll now take a few moments to summarize the highlights of our third quarter and year to date results.
Consolidated third quarter fiscal 19 operating income and net sales represent record results for HEICO driven principally by record net sales at both operating segments.
Consolidated net income increased 21% to 81.1 million or 59 cents per diluted share in the third quarter of fiscal 19, and that was up from 67.1 million or 49 cents per diluted share in the third.
[laughter] quarter of fiscal 18.
Consolidated net income increased 26% to a record two for 242.2 million or $1.76 per diluted share in the first nine months of fiscal 19, and that was up from 191.9 million or a $1.40 per diluted share.
In the first nine months of fiscal 18.
Consolidated operating margin improved to a strong 22.4% in the third quarter fiscal 19 up from 21.8% in the third quarter fiscal 18.
The operating margin also improved to a strong 22.2% in the first nine months of fiscal 19.
And that was up from 21% in the first nine months of fiscal 18, all these growth percentages to me seem really.
Extraordinarily great performance on the part of our team.
The TG group set an all time quarterly net sales record in the third quarter of fiscal 19, increasing 16% over the third quarter of fiscal 18.
The increase resulted from single high digit organic net sales growth and the excellent operating performance of our fiscal 19 acquisition.
Flight support set all time quarterly net sales and operating income records.
In the third quarter fiscal 19, improving 12% and 18% respectively over the third quarter of fiscal 18.
These increases principally reflect strong double digit organic net sales growth, mainly attributable to increased demand and new product offerings within our aftermarket replacement parts and specialty product lines.
Cash flow that's my favorite.
Provided by operating income operating activities is very strong increasing 46%.
To 313.4 million in the first nine months of fiscal 19 up from 214.8 million in the first nine months of fiscal 18, and we continue to forecast strong cash flow from operations up for the rest of fiscal 19.
During fiscal 19, we successfully completed six acquisitions and Weve completed seven acquisitions over the past year as a result of these acquisitions, partially offset by the impact of our strong cash flows our total debt to shareholders equity increased to 39% as of July 30, 119, and that was up slightly from 35.4% as of October 30 118.
But it remains at a low level, giving us greater financial flexibility.
Our net debt, which we defined as total debt less cash and equivalents.
Of.
581.1 million.
To shareholders equity ratio increased to 35.4% as of July 30, 119, and that was up slightly from 31.5% as of October 30 118.
Our net debt to EBITDA ratio increased to 1.11 times as of July 30, 119, and that was up from 1.04 times as of October 30, 118, I think you will all agree that that is a very very.
Low level of debt.
For a company that is growing bottom line close to 20% annually.
We continue to avoid high debt levels and leverage and I remind you that in no time in our history have we even been at two times debt to EBITDA.
We have no significant debt maturities until fiscal 23.
And we plan to utilize financial flexibility to aggressively pursue high quality acquisitions to accelerate growth and maximize shareholder returns I remind you that we are a very disciplined acquirer.
We do not pay huge multiples book purchases and that is just a DNA and our.
The way, we do things and it has proven to be a successful strategy and we will stick to that model.
In July 19.
2019 that is we paid a regular semiannual cash dividend.
Of seven cents, a share and that represented our 82nd consecutive semi annual cash dividends.
In June 2019, we acquired 75% of the membership interest of Oreo I, which is research electronics international.
A designer and manufacturer of technical surveillance countermeasures equipment to detect devices used for espionage and information theft ARIA is a part of our EPG group.
And we expect the acquisition to be accretive to earnings within the first 12 months following closing by the way if any shareholders out there are concerned about other people.
Bugging their premises or conference rooms bedrooms hotel rooms, please get in touch with Victor Mendelson to put you in touch with reality.
Because we are yeah, I will be able to pinpoint and shut down that operation instantly. So I put it in a pitch for for a fantastic.
Company a cup fantastic acquisition that we made recently.
July 19, 2019, we acquired substantially all of the assets.
Of a French company called burn da a designer and manufacturer of interconnect products used in demanding defense aerospace and industrial applications.
Primarily for communications related purposes.
For India is part of the TG group and again, we expect the acquisition to be accretive to our earnings within the first 12 months following closing as an interesting side note.
The.
Team members of Bernie.
Petitioned the.
Approval process in France to select HEICO as the purchaser because after significant investigation on the part of team members. They found that you felt strongly that HEICO would be the best acquirer treat the team members in the best possible way and grow burn yet we're very proud of the of our reputation which helped us in the acquisition of Burndy.
I'd like to remind everyone that HEICO does have two classes of common stock both traded on the New York stock exchange.
Both the class a common stock, which has a symbol H.A. and the common stock H.
They are virtually identical in all economic respect the only difference between the share classes is the voting rights and the class a common stock has 110th of AFFO per share and the common stock as one vote per share otherwise they're completely.
The same.
And now 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.
Thank you very much.
The flight support group.
Sales increased 12% to a record $320 million in the third quarter of fiscal 19 up from $285.1 million in the third quarter of fiscal 18.
The flight support group's net sales increased 13% to a record $915.5 million in the first nine months of fiscal 19.
From $807.7 billion in the first nine months of fiscal 18.
The increase in the third quarter and the first nine months of fiscal 19 is attributable to continued strong organic growth of 12% and 13% respectively.
Mainly due 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 18% to a record $64.8 million in the third quarter fiscal 90.
Up from $54.7 million in the third quarter of fiscal 2018.
The increase in the third quarter of fiscal 19, principally reflects the previously mentioned net sales growth and the impact from an improved gross profit margin, mainly driven by increased net sales and a more favorable product mix within our aftermarket replacement parts product lines.
The flight support group's operating income increased 18% to a record $179.8 million in the first nine months of fiscal 90.
Up from $152.1 million in the first nine months of fiscal 18.
The increase in the first nine months of fiscal 19, principally reflects the previously mentioned net sales growth and the impact of an improved gross profit margin, mainly driven by a more favorable product mix within both our aftermarket replacement parts and specialty products product line.
The flight support group's operating margin increased to 20.2% in the third quarter of fiscal 19 up from 19.2% in the third quarter fiscal 18.
The flight support group's operating margin increased to 19.6% in the first nine months of fiscal 19.
From 18.8% in the first nine months of fiscal 18.
The increase in the third quarter and first nine months of fiscal 19, principally reflects the previously mentioned improved gross profit margin.
Consistent with our past practice of increasing our ownership in certain non wholly owned subsidiaries.
In June 2019, HEICO Corporation acquired the 20% non controlling interest held by our partner content Technic AJ in eight of our existing subsidiaries within our HEICO aerospace subsidiary that are principally part of the flight support groups repair and overhaul parts and services product line.
Pursuant to the transaction HEICO aerospace pay dividends proportional to the ownership, which is 80% and 20% to HEICO and live concert, respectively, and HEICO transferred the businesses.
To HEICO flight support Corp., a wholly owned subsidiary of HEICO.
We did not record any gain or loss in connection with the transaction.
The conference is dividend of $91.5 million was paid in cash principally using proceeds from our revolving credit facility. Lufthansa continues to remain a 20% owner in HEICO aerospace a designer and manufacturer of jet engine and aircraft component replacement parts.
HEICO aerospace has grown significantly in generated substantial cash flow since looked on sept partnered with us nearly 22 years ago.
This transaction rewards Lufthansa with $91.5 million in cash and at the same time permits HEICO to increase its ownership in eight very successful businesses.
Lufthansa has been and continues to be a great partner and great customer of HEICO Aerospace and we look forward to our continued mutual success.
This transaction does not impact the breadth of Pmeight parts offered by HEICO Aerospace Holdings Corp.
With respect to the remainder of fiscal 19, we now estimate full net year sales growth of approximately 11% to 12% over the prior year up from the previous estimate of 10% and now estimate the full year flight support group operating margin to approximate 19.5% to 20.0%.
Up from the prior estimate of approximately 19.0% to 19.5%.
Further we now estimate the flight support group's full year organic net sales growth rate to be in the low double digits.
From the prior estimate of the high single digits.
These estimates exclude additional acquired businesses if any.
Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the results of the electronic technologies group.
Thank you Eric.
The electronic technologies group's net sales increased 16% to a record $216.1 million in the third quarter fiscal 19 up from a $186.4 million in the third quarter fiscal 18.
The electronic technologies group's net sales increased 20% to a record $615 million in the first nine months of fiscal 19 up from $510.8 million in the first nine months of fiscal 18.
These increases resulted from organic growth of 7% and 13% in the third quarter and first nine months of fiscal 19, respectively.
And the favorable impact from our fiscal 19 acquisitions, the organic growth in the third quarter and first nine months of fiscal 19 is mainly attributable to increased demand for certain defense and aerospace products.
The electronic technologies groups operating income increased 11% to $62.2 million in the third quarter of fiscal 19.
Up from $56 million in the third quarter of fiscal 18.
The increase in the third quarter of fiscal 19, principally reflects the previously mentioned net sales growth and an improved gross profit margin, mainly driven by higher net sales and a more favorable product mix for certain aerospace products.
The electronic technologies groups operating income increased 23% to a record $181.2 million in the first nine months of fiscal 19.
Up from $147.4 million in the first nine months of fiscal 18, the increase in the first nine months of fiscal 19, principally reflects the previously mentioned net sales growth and that improved profit improved gross profit margin, mainly driven by increased net sales and a more favorable product mix for certain aerospace and defense products.
The electronic technologies groups operating margin remained strong at 28.8% in the third quarter fiscal 19 as compared to 30.1% reported in the third quarter of fiscal 18.
The operating margin in the third quarter of fiscal 19 is inclusive by the way of higher acquisition related costs associated with one of our recent acquisitions.
The electronic technologies groups operating margin improved to 29.5% in the first nine months of fiscal 19 up from 28.9% in the first nine months of fiscal 18.
The increase in the first nine months of fiscal 19, principally reflects an improved gross profit margin, partially offset by higher performance based compensation expenses the impact of changes in the estimated fair value of accrued contingent consideration and.
The higher acquisition related cost as a percent of sales.
With respect to the remainder of fiscal 19, we now estimate full year net sales growth of approximately 18% to 19%.
Over the prior year up from our previous the previous estimate of 15% to 17% and anticipate the full year electronic technologies groups operating margin to approximate 29% as compared to our prior estimate of 29% to 29.5%.
Further we now estimate the electronic technologies group's organic net sales growth rate to be in the low double digits up from the prior estimate of high single digits and these estimates of course exclude additional acquired businesses if any.
Ill turn the call back over to Larry Mendelson.
Thank you Victor and Eric.
Moving on to earnings per share.
Consolidated net income per diluted share increased 20% to 59 cents in the third quarter fiscal 19 and that was up from 49 cents in the third quarter of fiscal 18 diluted earnings per share increased 26% to a record $1.76 cents in the first nine months of fiscal 19 up from one dollar and 40 cents in the first nine months of fiscal 18.
These increases reflect the strong operating performance of both segments flight support any TJ.
Depreciation and amortization expense totaled 21.1 million in the third quarter fiscal 19 up from 19.4 million third quarter of fiscal 18.
And totaled 61.7 million in the first nine months of 19 fiscal 19 up from 57.5 in the first nine months of fiscal 18.
The increase in the third quarter and first nine months of fiscal 19, principally reflects the incremental impact of higher depreciation and amortization expense of intangible assets.
From a fiscal 19 acquisitions further the increase in depreciation expense in the third quarter and first nine months of fiscal 19 reflects the impact of Capex expenditures attributable to the expansion at certain existing subsidiaries.
Research and development expense increased 19% to 16.6 million in the third quarter fiscal 19, and that was up from 14 million in the third quarter fiscal 18, and increased 20% to 48.7 million in the first nine months.
Fiscal 19 up from 40.7 in the first nine months of fiscal 18.
Significant ongoing new product development efforts continue at both flight support and VTG and we continue to invest approximately 3% of each sales dollar into new product development.
As shareholders a longstanding you know.
That we feel that R&D expenditures are critical to the future of the company, we will not cut back on R&D expenditure and we know that we get great returns.
From these expenditures.
Consolidated SGN, a expenses were 93.4 million and $80.2 million in the third quarter fiscal 19 of fiscal 18, respectively.
And the consolidated as DNA expenses were $267.9 million and 231.7 million in the first nine months of fiscal 19 and 18, respectively.
The increase in the third quarter and the first nine months of fiscal 19, principally reflects the impact of the fiscal 19, and 18 acquisitions higher performance based compensation expense changes in the estimated fair value of can accrued contingent consideration and higher acquisition related cost.
Consolidated SGN a expense as a percentage of net sales was 17.5% and 17.2% in the third quarter fiscal 18, and 19, respectively, 18, 19, and 18, respectively and consolidated SGN a expense as a percentage of net sales decreased slightly to 17.7% in the first nine months of fiscal 19 and that was down very slightly from 17.8% in the first nine months of fiscal 18.
The increase in consolidated SG expenses SGN, a expense as a percentage of net sales in the third quarter fiscal 19, principally reflects what I previously mentioned the higher acquisition related costs.
Interest expense was five and a half million in the third quarter fiscal 19 compared to 5.2 million in the third quarter fiscal 18 and 16.5 in the first nine months of fiscal 19 compared to $14.8 million in the first nine months of fiscal 18.
The increase in the third quarter and first nine months of fiscal 19.
Was principally due to higher interest rates, partially offset by a lower weighted average balance outstanding under our revolving credit facility.
Our effective tax rate in the third quarter fiscal 19 was 22% compared to 23.1 in the third quarter fiscal 18.
And our effective tax rate in the first nine months of fiscal 18 was 17.1%.
As compared to 17.9 in the first nine months of fiscal 18, the decrease in our effective tax rate in the first nine months and third quarter fiscal 19 is mainly attributable to the reduction in the federal tax rate from a blended rate of 23.3% in fiscal 18% to 21% in fiscal 19, partially offset by the net effect of the provisions of the tax act that became effective for HEICO.
In fiscal 19.
Net income attributable to non controlling interest was $8 million in the third quarter fiscal 19.
Compared to $6.8 million in the third quarter fiscal 18.
And the net income attributable to non controlling interest was 25 million in the first nine months of fiscal 19.
Compared to 19.7 in the first nine months of fiscal 18.
The increase in the third quarter and first nine months of fiscal 19, principally reflects improved operating results of certain subsidiaries of the flight support and the TG groups in which non controlling interests are held.
For the full fiscal 19 year, we now estimate a combined effective tax rate and non controlling interest of 25% to 26% of pretax income.
Moving now to the balance sheet and cash flow.
Our financial position and forecasted cash flow remain extremely strong.
As previously mentioned cash flow provided by operating activities was a very strong.
Totalling 313.4 million in the first nine months of fiscal 19.
And that cash flow provided by the operating activities increased 21%.
235.1 million in the third quarter fiscal 19, and that was up from 111.4 in the third quarter fiscal 18.
And we continue to forecast record cash flows from operations in fiscal 19.
Our working capital ratio improved to three.
Times as of.
July 30, 119 up from 2.6 times as of October 30, 118.
Dsos days sales outstanding of receivables was constant at 45 days as of July 30, 119, and that was comparable to Dsos July 30, 118, we continue to closely monitor receivable collection efforts to limit credit exposure I remind you that we have very few.
If any credit losses from accounts receivable.
No one customer accounted for more than 10% of net sales in our top five customers represented approximately 21% of consolidated net sales in both the third quarter fiscal 19 and a team.
Inventory turnover of 125 days for the period ended July 30, 119 is comparable to the turnover rate in the period ending July 30 118.
Total debt to shareholders equity was 39% as of July 30, 119, compared to 35.4 as of October 30, 118, I mentioned that earlier also net debt of $581 million point 1 million to shareholders equity.
Was 35.4% as of July 31, compared to 31.5 as of October 30 118.
Our net debt to EBITDA ratio was 1.11 times as of July 30, 119 compared to 1.4.
As of October 30, 118, I commented that that still is a very very low.
Leverage ratio and we intend to keep relatively low leverage.
We have no significant debt maturities until fiscal 23, and we plan to utilize our financial strength and flexibility to continue to aggressively pursue high quality acquisition opportunities.
To accelerate growth and maximize shareholder.
Returns.
I want to mention that as something that many many investors have said too.
Yes, as we visit with them at various aerospace conferences and that is that they look at HEICO as a compounding and cash flow generating company and as you can see that is.
I think one of the reasons that we sell at a very high multiple personally.
I think that.
We do a very good job with that and that is the reason I think that we do sell it at a high multiple some people don't feel that such a high multiple is warranted of course, obviously management disagrees with that and obviously the market place those too so.
They set the price of HEICO, we don't.
As we look ahead to the remainder of fiscal 19, we anticipate net sales growth within flight support and the TG, resulting from increased demand across the majority of our product lines also we'll continue our commitments to developing new products and services.
Further market penetration and pursuing aggressive.
And net income growth to be 23% to 24% up.
From our prior growth estimate in net sales, which was 12% to 13% and net income of 17 to 18 I want to just repeat that the revision in net income in my opinion is very substantial based upon the success. So we're now estimating 23% to 24%.
Whereas before we were thinking 17 to 18, I think that indicates the strength of our business.
We now anticipate consolidated operating margin to approximate 22% and that was at the high end of the prior estimate of 21 and a half and 22.
We anticipate depreciation amortization expense to approximate $84 million.
And we anticipate cash flow from operations to approximate $405 million up from the prior estimate of $380 million.
And we estimate capex expenditure to approximate 31 million.
Thats a reduction from our prior estimate of 38 million.
These estimates exclude additional acquired businesses if any.
In closing Heico's team members have delivered these outstanding results and deserve credit for the hard work and discipline that it took to successfully navigate through another quarter.
Hi goes management team has the utmost respect for everything that our team members due to make their company and your company is success.
That is the extent of our planned remarks, and we would like to open the floor to any questions. Thank you very much.
Ladies and gentlemen.
At this time, if you would like to ask a question. Please press Star then the number one key on your telephone keypad again, if you would like to ask a question simply press Star then the number one on your telephone keypad. Your first question comes from the line of Robert Spingarn.
Credit Suisse.
Allied.
Hi, its audio question on for Rob Spingarn and congrats on another great quarter.
Thank you. Thank you.
All right. So I just wanted to check in first and ask on if you've seen any sort of growth is related to the accessories.
Then any sort of.
Of unexpected boost just from great utilization rates.
More or less across.
The existing fleet.
And then also moving forward.
If we were to see an uptick in retirement rates and potentially an increase in the supply of used serviceable material on the aftermarket could that potentially.
Impact.
Your your growth expectations going forward as well.
Hi, This is Eric I'll take that question with regard to the Max it's very difficult to determine exactly how that is impacting our sales, yes with regard to the aftermarket and the replacement parts business, because clearly cannot hurt us.
But how much it is helping us is a bit confusing because we are still seeing retirements of older product lines. For example, the MD 80 with the G. 200 engine that does continue to shrink in some of the older Cfmfifty six engines can continues to shrink. So it is very difficult not if you will stopping the retirement.
However, it may be slowing in some areas. The big question is if it is slowing them our airline inducting. The aircraft the engine components for meat and are they actually spending more money and it's very difficult to see what that is.
I guess that is helping us a little bit, but we really don't know frankly to what extent, we do know however in our specialty products business that it is actually hurting.
A little bit because we do supply some new equipment, which goes onto each Max aircraft and the demand for that has been reduced so when you put the two together I. My guess is it's not been a significant tailwind.
But that frankly is just the guess based on the current information that I forgot.
For the second part of your question with regard to the used serviceable.
Thats always been.
A.
An issue for us, we do participate a little bit.
In that industry through our primary subsidiaries that we do have pretty good.
Knowledge accessed as to what's going on in that business and there's a little bit of an offset there if that should.
Improve.
However at this moment, we really don't anticipate a significant impact to our business on either aftermarket replacement parts or repair and overhaul do too.
Any potential increase in retirement of aircraft. We've already taken if you will somewhat of a hit as a result of some of the maturing in the pulling out of these aircraft. So.
At this point, we really don't see anything significant in that area I don't know if that answers your questions I'd be happy to expand if you need more color.
Sure. Thanks, Thanks for the color on that.
And then a follow up for Eric.
And so you you pointed out that.
There is some pretty strong growth is related to your new products. So it was there anything in particular, that's driving any outsize growth or was it more broad based.
Across the portfolio.
I would say that it was fairly broad based across the portfolio there were specific products, which did very well.
And I wouldn't want to get into them.
On this call due to competitive reasons, but there are definitely areas of outperformance I think due to high goes market penetration and competitive advantages, but clearly there was also a very broad based.
Increase.
All right great. Okay. Congrats again on the quarter and I'll pass the line. Thanks. Thank you. Thank you.
Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line.
Hi, good morning, guys and great quarter.
Thank you Kayla.
Sure Victor maybe if I could start with you if that's okay.
We've seen great growth can you talk about what you're seeing in the defense and space and markets.
You're going to run into some comps and maybe where you think your revenue growth.
Outlays is there still a big lag.
I do think Sheila this is victor.
I do think that there remains a lag between orders and outlays and.
That will continue at least for some time.
We are doing our budgets for the next year right now our companies are preparing those so we don't we don't have those yet.
But the defense part of our business right now is strong there the general tenor with me on it is very strong they seem to be very pleased with what they are they develop what they have selling and.
What theyre quotation rates are and order rates et cetera. So so right now I am feeling pretty good about that and.
Well update more once we have the budgets for the next year.
But that's that's how it is at the moment.
Side.
On the space side.
I would say that's been.
In the in the third quarter kind of flattish to down a little bit, but it's not kind of unusual quarter to quarter to have those kinds of fluctuations I think sequentially I believe as we get into particularly the first quarter of the next year based on where I see orders.
At this point because that tends to be a longer lead business.
I see that to be a strengthening business for us at least at this point sequentially.
And just on defense one more question. If you don't mind is there anything you could talk about areas where trends accelerated or decelerated.
Where trends have accelerated or decelerated.
Theres nothing in particular, I would say, it's pretty much across the board.
On the growth for I mean, there is always a product to our product line, there's always somewhere in the company that's weaker for one reason or another.
But I would say I wouldn't I can't really think of anything that stands out on a material basis.
Okay and this is just the more general question. So for anyone I mean leverage is pretty low I guess I know you guys are disciplined than the deals and they've been fairly small of LCR. How do you think about potentially a larger transaction if theres anything thats an inhibitor did that.
So Sheila we look at the all comers, we look at all opportunities Big one small ones and as you know we're opportunistic we want things that are going to be accretive both cash flow wise earnings wise earnings per share was so it really depends on what comes along at a price that we feel is warranted again as I mentioned earlier, we are disciplined not to pay up these were not paying 12 14 times. So in many cases, we just drop out of the competition, because we're not going to do it but if an opportunity did come along.
We would use our leverage but we would the only time, we do it is where we felt very very confident that we could de lever pretty quickly and I mean within a year or two so we wouldn't we wouldn't that some companies will sit at.
567 times EBITDA leverage we don't intend to do that.
Okay. Thank you.
Your next question comes from the line Connor with Cowen you are now live.
Thank you.
Third quarter I'm, just curious if you could.
Speak to where we are PFM.
Parts development, if you've made any progress there or whether that be in the market selling those products commercially.
Hi, guys. This is Eric I'd be happy to answer that question I think you're referring to the Ida and GE settlement that they had which we believe provides opportunity for us.
We've been actually selling CFM parts into the market for over 20 years.
And we can add to it continues to be a successful part of our business, we don't like to comment on specific product lines.
Due to competitive reasons obviously.
But I can tell you that we continue to have conversations with airlines and.
Where.
I would say cautiously optimistic about our future for us in that space.
Okay is there anything you can say they are receptive to.
Purchasing a broader.
Portfolio parks.
Sure I think the the airlines are they recognize the monopolistic nature of the replacement parts industry and in conversation with those airlines Weve helped to educate them on how they pay very high prices and we show them physical examples of the parts and they are often shop in stunned when they see how expensive. These parts are so I think HEICO provides a very nice alternative our businesses are doing very well I think it's essential to the it cost control of the airlines to have HEICO in there if they understand very clearly that if heiko were not a competitor they would be paying even significantly higher prices than they're paying now.
So I think that our presence in the market is absolutely necessary.
And frankly, you could talk to any airline out there and I think that they would agree 100%. So the opportunities are vast where a very small part of the industry. We think that there is a lot of potential out there I mean, you can see from our growth rate over the years and the growth in earnings and the share price.
And the revenue of the company.
Sort of the the wind behind our backs and we anticipate that thats going to continue really regardless of the particular product. The I add at GE settlement I think was very important because it shows other manufacturers what is not accepted and also it shows the airlines that what we are doing is.
Endorse and absolutely need it so.
Frankly, I think we're going to continue to do very well as our results have shown.
Thank you and one last one for me if you could just comment on.
Aftermarket demand broadly maybe was there any major regional director.
Anything you could speak to within product portfolio more discretionary versus nondiscretionary.
Products anything you can give us some insight flavor on trends in the market. Thank you Ashar I would be happy to.
I would say that in the aftermarket replacement parts area.
The volume continued to be very strong in terms of developing.
Additional new products, we're finding a lot of opportunities out there it's very broad based its in engine. It's a non engine. It's in what all the airlines need in U.S. So we're continuing to find those opportunities and develop them very successfully and get them sold to our customers. So I would not say that it was really due to any regional area of particular strength or weakness there is always variability in those markets due to.
Maintenance cycles that occur.
Sometimes the one area is stronger than another due to a whole variety of reasons, but I would say that it really is extremely broad based.
We're doing well in all areas of the market and also on particularly encouraged with newer airlines, who havent had the.
Experience in.
Performing much maintenance I think we're gaining a.
Very nice amount of traction as they realize how expensive these assets are to operate.
So I think it's really across the board I am I'm really very pleased with our team and our businesses I think they're they're executing across the board very well.
Thank you. Thank you.
Your next question comes from the line of Ken Herbert with Canaccord.
You are now live.
Hi, good morning.
Morning here.
Okay.
I wanted to first start with a question for Carlos if I could can you.
Can you quantify what the impact was in the quarter within the EG margins from the accelerated amortization.
An accounting adjustments from the recent acquisitions.
Yes, I think for Q3, roughly can we had about $2 million worth of acquisition costs that we typically wouldn't pay we did a foreign acquisition and to deal with all the regulatory environment over in France. It was little bit more expenses Great company, we bought.
But the reason we call it out as the truth of matter as if you added that back in.
Which we don't do on our releases, but if you add that back into the to the operating income you see that our margins are pretty consistent period to period.
Okay, No that's helpful and as it does the guidance imply a similar amount in the fourth quarter or does it step down in the fourth quarter, assuming no other acquisitions, well we've assumed no other acquisitions in our guidance so.
No.
Maybe.
No we haven't in our guidance assumed any acquisitions in Q4.
Okay, Yeah, no it might I realize that but should we assume a similar 2 million headwind in terms of the margins within EPG no.
Okay. Okay. That's helpful.
And then we'll see we'll see.
I guess, the buyout or the acquisition of the minority interest held by.
Tons.
The technique what does that do I know you gave an assumption for sort of your full year tax and minority interest, but how should we think about that on on a steady state basis now.
I think.
You know it's interesting we.
We reduced our our estimate for combined tax and non controlling interest by about <unk> percent.
About half of that was related to changes in tax laws member with our fiscal year end, we had a higher tax rate than most other corporates at 21% last year re where that blended rate 23.
And the tics. So it's a combination of a decrease in the stat right on the federal side and then we will pick up the benefit from.
Those businesses coming onboard and not having to allocate their earnings.
To a non controlling partner and as businesses. However, you have to remember that we borrowed money to buy them out. So there is interest component to it also.
So net net for this year, it's not.
Two impactful.
As we do our budgets and we look forward to the following fiscal year I'll have a better answer for you, but right now with the interest charge against those earnings it's roughly that's roughly a wash.
Okay Thats helpful.
And if I could Eric I know you you stated in your remarks to react.
The change now with two tons. It doesn't have any implication for sort of long term strategic relationship, but can you just comment on on why now and was there anything in particular to to read into that and then second it sounds like it was really just within the repair businesses. I think you mentioned eight repair businesses. If you can provide any more color around.
Around that and the nature of the transaction that'd be helpful. Hi, Ken It's Eric I would be happy to do that to answer. Your question. Yes. It was primarily the repair businesses are really almost exclusively the repair businesses.
And we have an outstanding relationship with less tons and Lufthansa Technik. They invested originally about $50 million in HEICO approximately 22 years ago. The relationship is incredibly strong they are a great customer a great partner.
As the business has grown I would say look tons as percentage of our sales of course as we as we sell our products. Other people has decreased and that lift tons is you probably have read is having some challenging times over in the European market right now HEICO has.
Tremendous cash generation frankly, the company built up a lot of cash and it was time to pay it out and.
HEICO was happy.
Two.
We did not need the cash I think frankly lift on to it would be helpful and they don't need it they are doing extremely well and I think they are going to continue to do well, but probably to have this cash in a game is probably helpful to them as well this does not impact our.
Partnership and our strategic relationship on our PM a business that continues.
Were very aggressive in development of new parts for Lufthansa.
But frankly, the repair business was not as core to that and.
It just sorta continues on basically the same thing that we did roughly five years ago and some other.
Non pmeight core businesses.
That we acquired as a result of another dividend.
In HEICO Aerospace Holdings Corp.
I don't know if that answers your question.
No thats very helpful. I appreciate the color.
Thank you very much.
Thank you.
Your next question comes from the line as Michael Saylor Molly.
With Suntrust.
Lives.
Hey, good morning, guys. Thanks for taking the question nice quarter.
Maybe just to stay on top on that topic. I mean, do you guys consider buying out the remaining portion of a lufthansa's interest over time I mean is that a consideration as you look at capital deployment look at.
Certainly market multiples, what's out there what might be the best.
Sort of accretive move for you guys can make.
Yes, Mike it at this moment, we are not having any discussions with lufthansa about repurchasing of their remaining stake.
I think they're very happy with it we're very happy with it I might add I think that there were our relationship with Lufthansa goes well beyond their investment in the company they've been a great customer of heico's for over 40 years. So I anticipate that continues to move forward.
And continues to develop.
I suppose anything is possible in the future, but it's not something that were.
Contemplating I think they're very happy they recognized the strategic nature of the PMC business, we always said that the PMC business their investment.
With us or with a lot more strategic.
In nature than the other businesses. The other businesses were great and it was very helpful to have them as a partner and a customer but it was really the pmeight area, which had the most interest from them and frankly, they've we've done well and they've done extraordinarily well they've they've gotten huge dividends and I think they are very very happy with their relationship with tyco.
Hey, Ken Ken This is Carlos I, just wanted to just make one point.
Just because we.
We were required those those interest doesn't mean that lufthansa still doesn't.
Send business and utilize the services in the <unk>.
That we have in that repair group that relationship is not impacted by this no. This is Eric pointed out was a dividend to reward them for.
Many years of partnership with Us and we chose to take our dividend in kind, which which were certain businesses. So so I wouldn't I wouldn't view that as.
Is it relationship impacting move at all in fact, it's probably.
It's probably neutral to the whole thing got it and then just maybe to follow up I think from a market share perspective, I think last quarter. You guys noted that youre picking up some share in distribution picking up some share from other providers.
I guess, how should we think about potential opportunities for pmeight within the department of defense given that one of the larger.
Players there has come under some scrutiny and investigation for their pricing does that does that create some some opportunities to gain real share in the view of the world with PM airports.
Hi, This is Eric I think that it does yeah weve solid parts to the department of defense than offer tremendous savings opportunities to them. We continue to do very well in that area.
Video the understands what opportunities exist and if they want to do more they clearly can go ahead and do more.
I think one of the things that's been talked about is if the audio the wants to encourage competition they need to approve the use of other material and if they restrict themselves to a single supplier then of course that has.
Pricing implications and they pay higher prices and I think intelligently. So other suppliers have said hey, you know our prices are price and if you want to buy these parts elsewhere. You have to go ahead and approve other people and go ahead and do so and it's a free world in the depot, the either very smart and I think the inner they've got that option if they want to do it they can do it and if not they can stick with their current practice, but I think we're going to continue to do very well.
Got it and then just Eric the process for getting Pmeight ports approved I mean is it is it similar to the commercial world is it easier and the DRD World I mean, just trying to get a sense of.
If you came to you today I mean, how long does it take for you guys to Pmeight apart.
Are there is there more regulation less regulation, how do you how do you look at that side, yes, I would say that it's somewhat similar nothing in our business is easy.
You know we offer a great savings opportunities to a lot of people and if it were easy I think that.
They would take greater advantage of it right away.
It's extremely difficult they want to be very very careful I mean these platforms have to work obviously just as commercial aircraft to have to work just as you know rocket engines and missile defense systems have to work. So they are very very careful I think that they are very confident in HEICO and.
They need to decide to really allocate the resources to.
Approve these alternatives so I think that we're going to do well it's different.
But I would say.
In general consistent with what we do with commercial airlines.
Got it and then just last one from me here and I'll get out of the way just on the margins in SSG. I mean, you guys are getting great incremental margins in the upper 20% range is that.
I know you guys kind of breakout 55% of that group or so give or take is parts. I mean is it all volume from parts or are you actually getting some margin lift on the repair and overhaul side as well.
I I Echo, let Carlos answer it but I can tell you that we are getting both I would say, though it's more coming from the parts in the specialty products business. The roof repair is a very competitive.
Area, you don't have some of that if you will the same efficiencies that you would have the volume efficiencies that you would get over on the parts side.
But I would say that it's really.
One is mix, but the other we continue to focus and develop proprietary repairs and parts, which generate significant value to our customers. So I think that we're able to capture slightly higher margins. When we're able to do that and the customers seem to be really if you will clamoring for a lot of the new products that we have coming out. We just had a sales meeting last week and it's not for this call due to competitive reasons, but I can tell you that a lot of the products that we are coming out with are really.
Tremendous value generators for our customers and I think a lot of stuff that people would not really have expected us to do and we're really doing well, we're winning a lot of business.
So I I feel very good about our margins got it got it.
Good Thanks, a lot guys I'll jump back in queue. Thank you.
Your next question comes from the line of Collyn.
Do talk with.
Sterling capital.
In our lives.
Hi, Thanks, guys I had a quick question for Carlos if you could just please offer a little bit of anecdotal color, perhaps from the subsidiary level on two line items in the cash flow statement, one on the inventories and the other on the Capex.
You're getting pretty good.
Kind of parental there year on year and I'm, just trying to understand what's informing that and then I had a quick follow up.
Well I would say on the on the inventory line, specifically I think our subsidiaries are experts at managing working capital if you recall from our prior.
Conference calls.
We bulked up on inventory a little bit towards the end of our fiscal 18 period, because we knew coming into 19, we'd have high demand.
And we did that intentionally and so what you see now as you see sunlight, what I would say it maybe a little bit more normalization in our in our inventory levels relative to the growth in the company and we think thats good thats not something that.
They were sitting here at corporate and pushing buttons, that's the guys down the field managing.
Okay, and managing the working capital. So we're very proud of them I'm glad you pointed that out.
That particular issue out which is a good thing to have.
Additionally, you asked about Capex.
You know thats still going to be honest with you I know these numbers inside now an upside down and sideways, but the one area that always surprises me is our capex spend.
Our guys in the field, our entrepreneurial is at heart nature and from birth and.
If they don't have to spend a penny they don't do it and by the way when they have to spend that penny. They contemplate do I buy a new machine or do I buy maybe one its a few years old and put a few bucks into it and it will operate and do exactly what the new machine does.
They tend to gravitate towards a more favorable.
Standpoint, and they'll typically buy some used equipment must seen everybody does that but that's that's a conundrum my face when I look at our Capex the guys budget for new equipment as I would want them to and we give them everything they need to grow their businesses and be successful they tend to understand they tend to gravitate to a.
You know a less expensive piece of equipment, not pay less effective or lower quality piece of equipment, but.
They tend to gravitate towards the lower cost choice and that's just in their nature, So thats, where our capex spend was a little bit lower than what we had anticipated this year and that's why we brought guidance down I would say, it's you know maybe for the year I think roughly <unk> percent half of our revenues and that historically has been about the spend on field back many years over time. So so thats. The hope that answers. Your question. That's that's my comments on that topic, yes. Thank you very much and then just as a quick follow up I wanted to just kind of pull the management team from.
New business growth perspective, and perhaps I can kind of cut it both ways and I don't know who is best positioned to kind of cover this.
But here goes from M&A standpoint, you guys.
To move the needle going forward are going to some larger deals.
Stock has had a great run.
The multiple can you remind us.
Your stance on using stock as currency to perhaps widen the aperture for for incremental M&A.
And then secondarily I was curious on the on the.
Upward potential opportunity to penetrate more DMT business.
Eric had some good comments, there and I guess my thought is before you would perhaps have the opportunity to the PMA parts or something like that could you perhaps have an easier on tray with a service based business like.
Distribution or something like that as an initial tip of the spear before kind of.
Parts through the dorm. Thank you very much for the time. So let me answer your first question about using stock or cash for acquisition, we have traditionally like to use cash.
Because all of our acquisitions are accretive.
In the first year.
And that's our style and our discipline and if you have accretive acquisitions by giving cash and having strong cash flow.
We'd rather not give out stock because we feel that the accretion in the acquisition is going to make the stock more valuable. So it's for US it's not a good strategy has not been a good strategy to give out stock now you could save selling at our multiple it might be a good idea to give out stock and so in future acquisitions, we always consider the benefit between cash and stock and we make a decision as to part of the decision is what.
Does the seller won historically a seller is looking for liquidity event and because we can give them a liquidity event without saying your deal is subject to us getting financing. It gives us a big leg up when competing with somebody else, who says well, let me get the financing if up up up up and we can just sign a contract. So cash has been a great tool.
The seller likes it and we like it so it's a win win for both of us but in the future again, we would consider giving stock.
For the right transaction so.
Every deal is a different there are no to deals the same and every deal is analyzed from a cash or stock perspective. So now the hope that answers. Your question is that okay.
Yes, Thanks, and then just on the DRD penetration certainly.
So Eric Eric I'll take that so yes, we that's a very good question and we are very active with video the supporting them over on our distribution in defense Sustainment component repair as well as the parts aftermarket parts side. So we continue to do very well we have many avenues into the audio d.
And many different touch points. There. So I think that does offer us very good opportunity to increase our penetration with the as well as with other militaries around the world. We're also very strong typically we are licensed by the original manufacturers of the defense platforms and we do sell to.
Many of the us allies worldwide.
As well offer them offering them these products.
So if that answers your question.
Okay.
All right operator.
Okay. Your next question comes from the line of Louise Raffetto with you, Yes, Youre now line.
Hey, good morning, guys.
Good morning.
So just wanted to follow up on Ken's question about the implied margins for MTG in the fourth quarter. There is no.
I mean, obviously there is no other costs so well.
Is there anything you see bringing those margins down even more from where they were this quarter that was impacted.
Louis This Carlos there's there's nothing you know.
Were assuming for the rest of year, it's going to be 29% range.
We are.
Generally speaking we are satisfied with those kind of margins.
Sure I don't think that there isn't any implied decrease or anything like that in the guidance that we've given them I think that we're going to continue to have the same type of growth and performance we've had throughout the year, which.
Well principally maintain the margins that we have in Q3 going forward and just to add to what Carlos has to say lose this is Victor to me I don't see any difference between 29 and 29.5% margins.
As a practical matter I mean, they're they're incredible the performance our people put in.
It's nothing less than remarkable and you've heard me say this before I mean, I, just don't watch that closely and split the hairs like that.
And I'll also point out that we have what Carlos probably 400.
4.7 to 400 basis points of amortization of amortization. So that number is really like 33, or so percent, whether it's 30, 333.5% I just to be honest, we just don't run the company that way.
Sure.
Thank you guys and then one other follow up question I guess, the organic growth has been shown across both businesses. I guess one question I had was more for FSP I know you did the acquisition about a year ago was $20 million you did the Cabo back in.
February I guess it is they're both pretty small businesses over the last four quarters, you've only had about 4 million of sales.
So seems a little bit light just wasn't sure if there was anything.
Specific going on there I know you had some issues early on but.
No were right the numbers are I suppose as you point out.
Both businesses are doing very nicely OTI did have some issues when the.
Shut down roughly a year ago, there was a delay on getting some of the licenses moved over all of Thats been completed for a while now the business is doing very well.
And I'm very very happy with with both of those acquisitions I think that we've got great opportunities, we take the long view in these businesses.
Sometimes there are short term fluctuations and we stand by our management teams and I can tell you that I am.
Really really excited without getting into specifics.
On those businesses and the future of those businesses, we've got products coming out that are.
Frankly remarkable and I feel really really good about them sometimes.
There can be a longer period that it takes for something to come to fruition.
But we still very much believe in those companies and I would definitely do them again.
Okay, great well not one last cleanup Carlos I know you mentioned, the anti will likely come down as a result of the Lufthansa stake is that the same for on the balance sheet I guess side are we going to see that.
That number drop I guess, no you won't see that you'll see it on the balance sheet and equity Louis because there.
Their ownership interest in HEICO aerospace was a permanent investment.
And so you will see the you'll see the dividend come out through our permanent equity not the redeemable non controlling interest so we'll show up there.
And so we're not through the redeemable certain after the redeemable anti but the non controlling interest that any equity line. It's okay perfect.
And then as far as the we'll see I. We were still were budgeting process right now so we'll see how that plays out for next year.
What we're what we're seeing right now is that our partnership businesses are knocking on all cylinders right. Now so we've had pretty good lift in that non controlling interest charge going out as a result of the success that we're having in the marketplace.
So that's driving that's actually working that's working against me, it's taking away earnings as a result of the success that they're having and then of course, we have this.
Earnings add back if you would for the businesses that we just took back through our dividend, but as I mentioned earlier the impact of that because of the interest carry on on that particular acquisition or being a dividend that we took.
Roughly going to be a push for this year and then ill give you don't have to give guidance for next year, it's going to be positive by the way I just until we get our budgets that are we know what the business is going to do it would be irresponsible for me to try and estimate that right now on the call.
Sounds good thank you guys.
Your next question comes from the line of George Godfrey with CHS. James You are now live.
Thank you good morning, gentlemen, once again fantastic quarter.
Thank you George.
And.
Carlson, Eric I heard you said about the margin and I agree on 29 half versus 29.
50 basis points really not that big a deal.
And I'm going to nitpick here, So just bear with me if I look at Q2.
In EPG the margin was 31.4 and based on your guidance here for the full year implies that.
Q4 is going to be roughly around 27, and a half so about a 400 basis points linked can I ask what what moves around within EPG, maybe within the space defense or other industries that the product mix would or pricing or what have you would switch the margins around like that and again great quarter, just trying to understand what some of the profit variances might be within EPG. Thanks. So George its look so good question, it's similar to the one that Louis S. A while ago.
As we have always had within the electronic technologies group, it's a lumpy business, primarily because the businesses.
Heavily weighted towards defense, we do a lot of work for a lot of big primes, and sometimes those orders push out on time, sometimes they get delayed not for anything that were delaying but because of their schedules and so based on our backlog and based on what we see that's what drives. These estimates of these forecasts that were giving to you. So you know I think you're always going to see I think it's very difficult and if you bear with us for a while is following the company its very difficult on a quarterly basis to analyze and project based on a quarter you have to look at EPG based on the year and you know as you probably noticed over the last three or four years that margin has crept up it's crept up to his script up as a result of leverage on some of our fixed costs and our Martin our margin has improved because of our gross margin has improved because of product mix those things as victors pointed out I look relatively sustainable in a very positive we're in a very good environment market for the company.
But to try and look at an individual quarter.
Given the types of businesses, we have and then assume that thats going to be the norm.
Due to the Lumpiness of the business I think is the wrong way to look at the TG. So thats My two Sara Yes, and this is Victor let me just add to that I mean, if you go back and you look at our first quarter of the year.
I think it was a 28% operating margin in the first quarter of the year. So.
And you go back and you look at 18, the first quarter 18 was 20.
Between 27, and a half in 28 and you see that a lot and you go back over time, it's one of the things that I've tried to guide people to expect is you'll see that variability and it's been the case historically in the margin, we really focus on the year and producing efficiently throughout the course of the year. So we really don't take any steps to manage or smooth it out.
We try to maximize profitability and it just where things were things tend to fall.
And that'll be the case going forward as I've said in the past its best is prelude with this business.
And that will I believe always.
Always be the case, and it's where the customers want shipments it may be where our components.
Arrive it may be other factors, but generally thats, that's what we're looking to do on our I would say, we would expect to do year over year and again, if you look at our full year guidance on the margin was held back by a couple of million dollars on transaction cost.
Which.
Which one.
Acquisition transaction costs onetime.
Acquisition transaction costs.
Understood. Thank you Victor Thank you Carlos Thank you. It's a good question by the way and so it's a very good question I'm glad you asked it.
Good chance to explain it.
Your next question comes from the line of John Frank.
With 40 acre capital you are now live.
Hi, and thanks for taking my question.
And our job well done on another set of a very impressive results.
All my question you have havent.
Sure.
All my questions have been.
Have been answered, but just wanted to circle back on the discussion between the two.
Sure classes.
It just is there any what's the reason for the the a shares to be trading at over a 30% discount to.
Hi.
So the answer is we don't know.
Sure we don't understand that either we've had many invest the biggest investment banking firms in the country have looked at it they claim that the difference is the liquidity and the people prefer to buy the.
Hi, and they pay a premium for the liquidity that is there thats the investment bankers answer.
I suspect that something a little bit different and that is that.
As a result of heico's success and so forth.
Many of funds in many large investment funds and institutional investors have owned the stock.
For close to 20 years.
And when we came out with eight a. in.
1999, we did an offering.
HM Okay was actually trading at a higher price than each year.
A lot of institutional investors have held and you can just check the records go on Yahoo, or Google or wherever you want.
And you see that these institutions have held onto it won't sell as a matter of fact like it occasionally I get traders, calling me and say no we like to buy a block of acreage and where it can get 500000, or so forth and I don't know so I think it's just the fact that some people have such large profits. They don't want to give it up they want to continue their interest in the company and that's my own belief, but maybe the investment bankers are right. We remember we don't set the price of eight a. and on day one.
The derivation of H, Hey was.
That in 1998.
We distributed one share of a for every.
Two shares of 18 so.
And at that moment, everybody had exactly the same thing so it was up to the marketplace to differentiate the price, but the answer is we really don't know.
And by the way. This is Eric I also like to point out to our shareholders and our team members that if they like the company and they like AG API, there's an opportunity to buy a AA added 20% savings. So I think 30, yet so I think it provides really a great opportunity for people to be able to to buy they to buy the stock at a 20% discount and then to make just sorry to interrupt to make sure that the economics are exactly the same between the two securities.
That is correct they are identical.
The only difference is the vote. The common has one boat per share in the AG has one tent both per share so unless somebody assigned such a value to the comment you. They can buy the same thing at a 20% discount that seems like a no brainer to me.
Sure and given the concentration of the.
Hi, good.
Struggling to put much value on on on the value of a vote.
Right. We agree okay. All right. That's all I have thanks very much. Thank you very much. Thank you.
We have a follow up question for Doug.
Gautam Khanna with Cowen your line.
Yes. Thank you actually have a follow up to the prior question.
Have you guys ever contemplated just repurchasing hey.
Either issuing more common because that would just be accretive.
Out of the gate.
Well.
Okay.
The problem with that is that.
To issue common the bite class say that we can do but to issue common of course is a is a process a laborious process and so on.
And that could potentially put pressure on the comment right introducing more supply of the common stock. So I'm not so sure that the common holders would be thrilled to hear we were issuing common and buying in the class eight.
And.
Particularly you have a lot of common holders, saying well Gee class eight holders have bought the stock lets say of laid over the last few years added discount and then you're you're doing that to sort of push up the class a and b potentially the expense of the comments so.
It's something we looked at them.
Not the first time, we've had that suggestion, but we just don't think that that would be the right. There's another thing too.
We are in the mode to expand HEICO and make it a larger company more profitable more cash flow and you can't do that by buying your shares and shrinking the company. So it's really a choice do we want to spend money by buying shares would drill suggesting by one and sell the other and what Victor suggest would happen I believe is true and that's also that to us sort of smacks of financial manipulation. We are not in the business of financial we have never done financial manipulation with HEICO. Some companies do we dumped and the market sets the price and they buy it the a because it's 20 or 30 whenever it is less and we just let the free market said its own price. So all of those things go against the way we have decided to run the company I think it's more important for us.
Shareholders to look at the gains and the very significant gains on whatever shares they own rather than to be thinking about oh, if they buy this in and sell that thing and dual his financial engineering.
That's why we're buying heiko because of financial engineering, we really want to run a very very strong company.
And not be financial engineers.
Alright, thank you.
Okay.
Thank you.
Once again, if you would like to ask a question concrete brisk Star then the number one on your telephone keypad.
At this time during no further question on queue presenters you may continue.
Okay. So I do want to thank everybody, who tuned in to this call and we appreciate.
Your interest in HEICO, we are available to answer questions Carlos Eric Victor myself.
If you have any specific questions. We are we are available to answer them again, we thank you for all your interest and we look forward to speaking to you.
On the.
Actually our fourth quarter I guess will be in December sometime in December when we have year end and the fourth quarter. So thank you enjoy your labor day holiday and we will all be in touch. Thank you.
Thank you and that concludes HEICO Corporation third quarter 2019 earnings Conference call you may now disconnect.