Welcome to the HEICO Corporation Fiscal 2012 Second Quarter Earnings Conference Call. 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, but not limited to, lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services; product specification cost and requirement, which could cause an increase to our costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers; competition from existing and new competitors, which could reduce our sales; HEICO's ability to introduce new products and product pricing levels, which could reduce our sales or sales growth; HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest and income tax rates and economic conditions within and outside of the aviation, defense, space, medical, telecommunication and electronic industries, which could negatively impact our costs and revenues. Those listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to the filings on Forms 10-K, 10-Q and 8-K. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise. The moderator for today's call is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation. Please go ahead, sir.

Thank you, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO Second Quarter Fiscal 2012 Earnings Announcement Teleconference. I'm Larry Mendelson, I'm the CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, who is 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 Tom Irwin, HEICO's Executive Vice President and CFO. Before reviewing our second quarter operating results in detail, I would like to take a few moments to just summarize the highlights of another record-setting quarter. Our consolidated second quarter net sales represent record quarterly results for HEICO, driven principally by all-time record net sales within our Electronic Technologies Group and continued strong net sales within our Flight Support Group. Additionally, our second quarter results marked the ninth consecutive quarter of sequential net sales growth. Our consolidated year-to-date net sales and operating income represent all-time record results for HEICO, and this has been driven principally by all-time record net sales and operating income within both of our segments: the Flight Support Group and our Electronic Technologies Group. Consolidated second quarter net income and operating income are up 13% and 14%, respectively, on a 17% increase in net sales over the second quarter of 2011. Consolidated net income and operating income for the first 6 months of 2012 are up 13% and 15%, respectively, on a 20% increase in net sales over the first 6 months of 2011. Electronic Technologies had a quarterly net sales record in the second quarter of '12 improving 48% over the second quarter of '11. The increase in net sales reflects organic growth approximating 5% and additional net sales contributed by 4 acquisitions in the second quarter…

[Operator Instructions] And your first question comes from Julie Yates of Credit Suisse.

A few questions on margins. One for Victor and one for Eric. Victor, on ETG margins, with the improvement at 3D Plus and some of the accounting adjustments, do you think that the segment can return to that targeted 25% to 26% level by the end of the year?

Yes, absolutely.

Okay, okay. And then Eric on FSG, what is driving the record margins of 18.9%? Is it mix, and then what are your expectations around the sustainability of that in the second half of the year?

Well, in terms of what's driving it, we've got a number of other business units. They were all run by very talented people, and the metrics that we primarily focus on is operating income. And sales is just not -- I mean, it's something obviously that we have to accomplish. But the thing that they're all evaluated on is the operating income. So that really is just a by-product of all the records, and we think represents a greater importance than the sales. So that's really the number that we are looking at, in so far as how it relates to sales and we drive the margin, they, frankly, are not compensated on, nor evaluated on, the percentage margins, really the total dollars of operating income based on the invested capital that they've got. So it's not something that we really can't evaluate. It moves around. It could go higher. It could go lower. Frankly, I don't know. It really just depends on product mix and what we're able to accomplish. So I wish I could provide greater clarity on that, but I really can't.

Julie, this is Tom Irwin. I think exactly what Eric mentioned, that's one of the reasons we don't give guidance particularly in the FSG segment, and he'd referenced that we can see improvements in ESG. But to lack of backlog visibility, you may recall, 50% or more of our orders each month are booked and shipped. So it's not like we have a larger backlog that we received projected margins on and as opposed to -- so for that reason, we don't give guidance, if you will, on margins, fluctuations we may have, and as Eric reported, that based on mix, we do target overall growth, but not specific margin targets.

Okay, great. And then can you guys break out the growth in Flight Support in the quarter between parts and services?

In the FSG group, by the quarter, the organic growth was, just recalling, exclusively in parts, the Service business second quarter, the second quarter was didn't have any substantial organic growth at the Service business in the second quarter. But first half of the year, they all had growth but quarter-over-quarter, basically not any organic growth in repairs services versus parts and specialty products.

Your next question comes from Arnie Ursaner of CJS Securities.

This is actually Lee Jagoda for Arnie. So following up on the previous question, how much amortization and inventory accounting from the acquisitions remains in Q3 and/or Q4?

It's difficult to give an exact number, but to put a little more color on it, as Larry mentioned, it runs in the aggregate for Switchcraft and 3D roughly $3 million a quarter. Roughly, 1/3 of that is purchase accounting short-term, which typically rolls out in 6 to 9 months in those businesses. It may vary a little bit depending on what's actually shipped versus the inventory we acquire at the acquisition date. The remaining roughly 2/3 is amortization, which is a longer period. It wouldn't roll out within a year. So although we do use accelerated amortization method for a number of our intangibles, so it's a decreasing amount but it wouldn't typically go away immediately.

Okay, great. And then just switching gears a little to the Flight Support Group. You highlighted industrial as well as aerospace aftermarket for the 5% organic growth. Can you break that up between the industrial and the aerospace business?

For competitive reasons, we don't disclose specific within product line. They both were up. As we mentioned in the last few quarters, the industrial product is a small product line and so a relatively small aggregate dollar amount as a higher percentage growth, if you will. But it wasn't both of them.

Okay. But both of those were up in the quarter?

Both the industrial product and the aftermarket parts, yes.

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

The increase in the guidance. I mean, I'm guessing that's driven largely by the acquisitions that you've made?

JB, this is Tom Irwin. I would say it's a combination obviously of what Victor spoke about in terms of the opportunity to improve margins in ETG. A level of growth in FSG that we're comfortable with given overall market, again, we don't have the detailed visibility but there is a lot of caution, if you will. But it's the combination of all those things that leads to our full year forecast.

J. B., a little more color, continuing with exactly what Tom has said, we have mentioned in last quarter and again, now about 3D and the order flows and so forth. And we definitely do see a pickup in the order flows and it gives us more confidence. We are pretty confident that -- well, very confident in what we told everyone last quarter with the order flows and the earnings flowing through from 3D. 3D is a very good company. It started off in the first half of this year weak, but we knew that, and we are seeing very strong order flows, so that gives us additional confidence.

Okay. And Eric, is there a way within Flight Support to kind of gauge sort of the current demand or changes in customer order patterns -- ordering patterns? I know you don't have really a backlog so to speak of in FSG.

No. Correct, like you said, we don't have backlog. As Tom mentioned, most of our sales get booked and shipped in the same month. I mean I can tell you on a qualitative basis, the interest in our product, the airlines that want us to develop more parts, the enthusiasm for it, I'd say it's at a record high. I've been with HEICO now for 23 years, and I've never seen so much enthusiasm in the customer area about what we're working on and what we're doing, the capabilities. So I think that, that will continue. But in so far as specific order patterns, that's very difficult to say.

And then kind of when we think historically I mean, if we get a case where capacity would actually contract a little bit, I mean, historically have you been able to kind of grow through that with the combination of increased penetration, expansion of the catalog, pricing?

Yes, I would say that what's interesting this time and of course over the last couple of years, there were lot of questions about restocking and we repeatedly said that we did not see restocking, which we define as basically putting more parts on the shelf waiting to go into airplanes. In hindsight, what we did see was returning some aircraft into service, that basically there've been deferred maintenance through the recession and basically there was a catch-up roughly in 2011. In speaking with our folks, they still do not see any evidence of restocking. So if there were, to answer your question, if there were a slowdown, I don't think that we're going to see the burn off of the inventory to the levels that we saw it the last time. I mean, obviously the macroeconomic picture is what drives air travel, so we all know the impact of that. But you don't have those inventories that were out there in 2008 where people could basically live off a lot of inventories for a long period of time. The inventories we still maintain are very lean. The airlines are not putting a lot of parts on the shelf, and they're really watching the working capital very closely.

Your next question comes from Tyler Hojo of Sidoti & Company.

So just to kind of speak a little bit more on the commercial aftermarket, could you maybe talk a little bit about how things tracked in April? Was April stronger than March? And then maybe if you could talk a little bit about how things have tracked so far in May?

Well, we can't speak about May because, well, first of all, it's not done yet. And frankly, I wouldn't know and our people really don't know how we're going to do in a month until the month completes. Because, again, they're not evaluated based on -- I mean, obviously, they want to ship it as early as possible, but they're really evaluated on what the total month is, and so to talk to it out of our reporting period, we can't comment. But with regard to April, I don't think we provide specific guidance, month-to-month, but, yes Tom?

Tyler, this is Tom. I think particularly in the commercial aviation business, I don't know that 1 month being up or down versus the previous month is a meaningful measurement. We track it obviously. But I think in terms of trying to forecast something going forward based on whether April was up or down from March or February, that's why we report obviously on a quarterly basis and measure the organic growth and the acquisition growth, et cetera, et cetera on a quarterly basis is we don't want to sort of try to read too much into the tea leaves.

If you're looking, which I think you are, not so much from HEICO specific but the trend of what's happening in the aftermarket, I think at this point, it's really a little cloudy out there. It's not terrible. It's not fantastic. It's okay. It's not booming. We have tough comps compared to last year when people, I think, there was a catch-up period. And at this point, we're not sure exactly until we get a real hard reading when all the hard numbers come in. So we're unsure right now.

Tyler, I think I can tell you is we're trying to get to a trend that April was not materially different from the other months.

Yes, that's what I was trying to get at. And when I look at kind of your forecast for the second half of the year, are you basically expecting that growth kind of tracks in that 5% range that we saw in the second quarter?

Again, Tyler, this is Tom Irwin. We don't again give revenue target by segment or margin targets by segment. I would say what we do look at is -- most forecasts in terms of capacity growth, which is obviously the biggest organic driver that we -- not impacted by the number of new product we bring to market, I think most forecasts look for fiscal '12 capacity growth industry-wide something, somewhere in the 3% to 5%. So I mean I think that's the capacity or industry growth that we envision into our market. Again, historically, we outperform or capture market share and so we hope to do that as well. But that's the kind of the industry expectations that are driving our planning, if you will.

Okay. I know last quarter you talked about kind of de-emphasizing some of the lower-margin PMA products. Did that theme kind of recur here in the second quarter?

Tyler, it's Tom again. I would say it's an ongoing thing. But I think as a result of the number of questions that we have on the call, probably the magnitude was overstated in terms of perception. It's something that have a little impact in the first quarter, a little impact in the second quarter. It's an ongoing process. We're always looking to -- as Eric mentioned, we're always looking to maximize operating income, not sales. So you had that little effect but not in meaningful impact and no meaningful change in the trends and no meaningful impact to our business model within FSG.

I would say that's correct. Yes, there were some products that were de-emphasized. But it really got much more attention than we thought it really warranted.

Great. But I mean if capacity, if your expectation is that capacity grows 3% to 5% this year, and you did 5% or so organic growth this quarter, I mean wouldn't that imply that you expect some sort of strengthening in the back half?

Again, I think historically, we would expect going forward to outperform the market and capture market shares. But again, specific growth targets by segments and by quarter we don't issue those.

Truthfully, it's so difficult that we never try to guess. We have a strategy. We have a projection over, for example, a 3-year period. And we estimate what sales would normally be in that 3-year period, and we stock the shelves. So we have to have the inventory available to support our customers in the middle of the night, should they have an order. But aside from that, we really don't try to predict what the aftermarket will demand of us because it's impossible. We have asked airlines and MRO facilities to tell us what their schedules are, and they themselves either don't know or have significant changes throughout the month. So for us to speculate on it, it's really -- it's impossible for us to speculate. We know when there are major downturns and they put major aircraft back in service, we then feel highly confident that within a period of 3 to 6 months, we're going to see a big order inflow. Similarly, if we see lots of planes coming out of service, the opposite is true. But in between what they schedule and how they do it and switch engines and all these things, we cannot figure it out. So we don't want to mislead anybody or guess. We feel confident that it's a great industry, that the sales will come through. We can't just figure in what quarter and what month. We don't know.

And Tyler, this is Eric. Just to add and emphasize on what Tom said. We do believe that we're going to grow in excess of the capacity growth like we have in the past, which means we are going to capture market share. So we do feel confident about that but again, with our people focused frankly on operating income and not sales, it's just not -- we try to keep them laser-focused on the important things. There are 20 metrics they could report on, like many big companies, but we try not to tie them up in that kind of stuff. And we seem to pull up the number quarter after quarter, I think, because of, frankly, the quality of our people and the focus, their focus on the business.

Your next question comes from Rama Bondada of Royal Bank of Canada.

I'd start off on the ETG side. I just want to make sure I understood this correctly. Victor, you'd said that you expected margins to get back to 25% to 26% on the back half of the year. But I think you -- or is that including the potential $3 million per quarter charges from 3D Plus and Switchcraft?

I'm going to let Tom answer the question as to the amortization impact and the inventory accounting -- acquisition accounting and inventory.

Yes, Rama. I think the short answer is the operating margins that we're referring to are as reported, so it will be after deductions and things. But as a clarification though, given the fact that we're obviously well below those ranges for the first half of the year, I think by, again, by the fourth quarter we're targeting to get back to that range. But for the full year, we may not average that. But again I think we're talking about getting back to a normalized rate on a quarterly basis, as reported, which would be after amortization. And again, we would expect, certainly by the fourth quarter for the purchase accounting adjustments to rollout or finish, if you will.

Okay. And then I went back and I looked at following some of your acquisitions and I couldn't find more than once or twice that you had these type of charges following an acquisition. But to have 2 of them at the same time, I don't think that's happened at least in the last 4, 5 years that I went back and looked. Has there been any changes to the way the metrics that you're using when you make acquisitions or the process or procedure that you guys are doing?

No, no. I don't think we change at all. We have a kind of a proven methodology, so we are not changing, no. The answer is no. It's just, it's opportunity. And we can never predict when that opportunity -- we're not going to reach outside of our area of confidence. We're not going to reach outside of our price ranges. So when these transactions come up, that's when we work on it.

Rama, this is Victor, also add a little bit of a background on that, the amount of inventory essentially that sort of disappears, the amount of profit that disappears because of the acquisition accounting varies by acquisition depending upon the level of -- the types of inventory and the level of that type of inventory. So in a company with more inventory and especially more inventory of finished goods, let's say, will suffer that dilution in margin more than one that keeps less finished goods inventory on hand or has less inventory. And so essentially under the rules, we wind up having to give up, to eliminate profit that, in my opinion, shouldn't be eliminated but for accounting reasons only and not for cash reasons, of course. Cash is the same. And that can last for a longer period of time depending upon the inventory level and so on and so forth. So it will just vary by acquisition. And in the case of these 2 acquisitions, we have more of that kind of inventory on the shelves at the close of the acquisition. In terms of intangibles accounting and write-offs, which is pure intangibles, that's a headwind that we've been experiencing on our acquisitions since these rules really started to come into play somewhere around 2005 or 2006.

Okay, all right. And then switching gears over to FSG. In the past, you guys have looked at bringing in to market about 500 or 700 new parts and services. It looks like R&D is up about 27% this quarter. Is that number moving up in the 500 and 700 new parts per year?

I think, we have stopped quoting 500 to 700 in numbers because it can be a little confusing. We can get the revenue out of 300 that we might get out of 500. It all depends on the parts selection. So I would say that the projection is similar to prior years where we projected internally where we wanted the growth to be up from the new part development.

Your next question comes from Michael Ciarmoli of KeyBanc Capital Markets.

Just to maybe follow up here on FSG and looking at the trends, I mean the revenues from, I guess, the third quarter of '11 to present are basically sequentially flat. And I guess you mentioned, can you give us sort of some of the underlying trends? The services appear to not grow I guess at all this quarter. Are you seeing pressure on one side of the business over the other given kind of the presence of the airline bankruptcies and other kind of weakening industry metrics out there? Is there any color or read-throughs, what you can give us on the sequentially flat nature of those FSG revenues?

This is Tom. I would say there has been some growth, excluding the fourth quarter, which was an unusually strong quarter, I think, in FSG. And I think as Eric mentioned, we definitely, at this point, realize that we benefited from some catch-up or some deferred maintenance that the airlines apparently took opportunities to spend the money, if you will, in 2011. So there has been some sequential growth. But again the challenge for FSG in terms of the pure numbers is that organic growth was 20% or more in each of the quarters last year. So we do have the challenging comps to deal with. And again, as Larry mentioned, I think overall economic uncertainty has caused us to be cautious. And I think, particular to the airline industry, the economic uncertainty and oil cost, fuel cost has caused them to at least potentially decelerate capacity growth.

Michael, this is Eric. In looking at last year's third and fourth quarters, there were some pretty big jump sequentially there from the first quarter to second, third, fourth. In looking back, we now see that in probably last year's third and fourth quarter that there was a catch-up in deferred maintenance, again not restocking, but in deferred maintenance. And that did not continue into this year, into 2012. So I think you are seeing growth in there. And you really -- look at the third quarter or the second half of this year compared to what we did last year, last year's numbers were helped tremendously by this deferred maintenance. So I think qualitatively, our businesses are doing better, we're getting more parts approved, we're getting more parts developed and so on. But it's just the comps are being very difficult because we have this, if you will, onetime bump in the second half of last year, which we didn't notice at that time. As you receive the orders, you just ship the parts, and you only find out really after the fact that there's been some fluctuations. I don't want you to think at all that the business is flatlining or anything like that. I mean, we continue to grow. We continue to ship more parts, develop more parts. But unfortunately, we've just gotten some -- the deferred maintenance pick-up last year which we didn't fully understand at that time.

That's extremely helpful. And then just the last one, Eric. You mentioned a lot of interest and enthusiasm in new products from customers. Can you give us sort of a sense of what types of products? I mean, are those engine-specific, or are they more around other parts of the airframe?

Yes, I would say that they're around everything. As you know for competitive reasons, we're reluctant to go into too much details. But I can tell you in all of the areas in which we operate, engines, components, there's tremendous excitement, airframe, repair services, there's a lot of excitement in what we are doing. It's important to know that the way the OEM maximize their profitability is by jacking up prices year-over-year, and they've got this incredible monopolies, incredible pricing power and where we're not present in the market they've got 100% in the market share. Maybe where we're present they've got 70% or 80% of the market share, so still a great number. And the way fundamentally that these folks can maximize their profitability, the best business model for them is to continue to jack up prices. And by definition, that really upsets the customers. And so they typically are really at a -- they have a distressed relationship with their customers because of their ability to maximize profit through pricing. And that's the way unfortunately they have to do it. We, on the other hand, build up a lot of customer goodwill and we view it as an investment by keeping our prices reasonable. And the airlines see great opportunity in working with us, and it's really across the broad spectrum of everything we offer, including distribution services as well. I mean we're offering product, competitive products, which can save these folks a lot of money, and I would say the enthusiasm is around really everything that we're doing. It's not centered in any one area.

Your next question comes from Ken Herbert of Wedbush.

Eric, just a first question on FSG. I just wanted to follow up on that. I mean it looks like you gained, you had another quarter where you likely took some nice share, especially on the engine side within the parts market considering some of the growth rates from the OEMs. Can you just -- 2 questions. One, did you see any particular growth or better growth than you expected in any particular region? And then second, is there anything you'd comment on or are you seeing anything different in reaction or response from the OEMs in the last few months above and beyond obviously the normal issues and the normal competitive threats?

Yes, I would say with regard to the first part of your question on region, definitely, Europe has been unique, I think not only for us but for the entire industry. We're all very familiar with what's going on there. Europe is definitely, I think, pulling everybody down. We're doing very well in Asia. But compensating for the weakness in Europe is a tough thing to do. With regard to the competitive dynamic, I would say that the OEMs when they came out with a new equipment, particular on the 787, and the airlines got a sneak peek at what that stuff is going to cost, they are really scared because of the lack of competition on this stuff. And I would have to say frankly that the OEM arrogance is at an all-time high. And that really is a very good dynamic for us because, I mean just don't get me wrong, I mean the airlines don't necessarily make this entirely easy on us, and we're still a supplier and they want to get the best price possible, but I think the OEMs are really setting up a good, a very good opportunity for us to continue to develop parts and grow, and that's why this enthusiasm exist.

Okay, that's helpful. Having said that, as you look then for the corporation, do you see potential opportunities organically that would justify, within FSG, maybe some more capital being deployed or put to work to further accelerate product line development or, obviously, I know the hurdle continues to be approval at the airlines and you have significant bottlenecks but are you seeing any desire there to maybe you significantly step up efforts from that front?

No, I think we remain comfortable with the level that we're working at. We increase R&D annually by similar percentages and or similar amounts. And I think that we're at a good level right now. Some of the airlines have reduced their personnel and staff. So even though they want to buy more parts, sometimes by the time they get stuff approved, it takes longer. And I think we're at good level right now. I don't see -- yes, we could go out and increase our expenditures and develop a lot more products, stick this stuff on the shelf, but unless we're able to sell it and get it out there, it really wouldn't make sense. So I think we'll sort of stay where we are.

Okay, great. And just one final question, Victor, when you look at the recent acquisitions, specifically Switchcraft and 3D Plus, it sounds good that you're comfortable with getting margins back up to sort of the normal rate. As you look at these businesses, do you see opportunities longer-term to maybe get -- are these businesses that will be accretive to the traditional ETG margins when we go out a year or 2? Or how do you think the upside plays out for the recent acquisitions in particular?

I want to be careful on that because I don't want to commit to something that you'd later be disappointed on. I think there's a possibility for it, and we're hoping to see that on these acquisitions. But time will tell. And I'm more comfortable right now telling you to look more to the historical range.

Your next question comes from Steve Levenson of Stifel, Nicolaus.

Just in relation to the acquisitions recently, it seems like there's been more electronic technologies rather than flight systems. Is that by design or is it just that's where the more attractive opportunities are right now?

I think the latter clearly. As I mentioned earlier, the transactions we're looking at right now are on both fields. And we're really opportunistic buyers, so that's where the opportunity was.

With the most fragmented portion of the supply chain in aerostructures, do you feel that, that's outside your wheelhouse, or is that something you'd look more into in the future?

When you say aero, we really are not in -- we don't do anything in aerostructures. Are you talking about acquisitions in the aerostructures area?

Yes.

I don't think we're really focused on aerostructures for a whole bunch of reasons, but it's not a focus of our business, aerostructures.

We don't rule it out, though.

No, I wouldn't rule it out. It's possible but at this point we have no aerostructures activity. There are issues that, that really is not -- as we look at that particular part of the industry, it's not something that we are too focused. Quite honestly, we don't favor that type of business.

Okay, good enough. As more of the deliveries skew away from North America and Europe over to Asia and I guess, Latin America as well, are you making any additional investments to get into those markets even more than now?

Steve, this is Eric. Yes, we are. I mean we're very focused on South and Central America, as well as Asia, so we're doing quite nicely. And we see those as very good opportunities for us.

Okay. And last, there are some stories out yesterday and today. I don't think it really affects commercial right now but stories about some counterfeit parts popping up again from sources outside the U.S. Are you lobbying for regulations or restrictions that would help your business and help to defeat that sort of activity?

At this moment, this is Victor, at this moment, we're not involved with those activities. We're aware of them, and maybe in the future and probably some of the trade groups we belong to are active in that, but it's not a major focus for us.

And Steve, this is Eric. To be clear, I'm not aware of that kind of behavior in the commercial aviation market. I think you may be referring to defense.

Right now, that's where it seems to be.

Got it.

Your next question comes from Eric Hugel of Stephens Inc.

Eric, the margins in the FSG group, 18.9% were really solid this quarter. Where was the business in terms of sort of the mix, and sort of how sustainable are those margins? Should we be thinking about something in the mid- to high-18% is sustainable ongoing?

Yes, this is Tom. Again, specific to segments, we don't give operating margin guidance. I think on a historical basis, it was up, and it was up based on principally favorable product mix, product mixes that have higher margins in the industrial and the commercial aftermarket parts as I made reference earlier, the service business, which is a lower-margin business or -- as an industry, and lower for HEICO relative to parts businesses. But again, typically, we do have higher margins in our Service business than sort of industry-wide. But that being said, the MRO services were relatively flat quarter-over-quarter. So the growth in organic growth was principally in the higher-margin product lines. And that could switch, it may not switch, and that's one of the reasons, again, that we don't give margin guidance by segment.

Sure. Larry, in terms of M&A, obviously, you continue to do more. I don't know if this is sort of an issue per se, but you've got good cash flow. But if you do more acquisitions, your debt-to-cap is probably going to go up. Where would you feel comfortable or is that really an issue because of your strong cash flow? I mean where do you feel comfortable taking the balance?

Well, I have said, at this point our debt is give or take 1x EBITDA or so, or less than 1x EBITDA. So we really don't have any pressure. Our interest rates are extremely low, maybe a little over 1%. So I would feel extremely comfortable if we were at 2, maybe 2.5x EBITDA, not to say that we're going to push to make that happen because we're not going to force anything. We're just going to do it when we have opportunistic acquisitions, we're going to make them. We're not going to force the issue by paying up prices. That's not been our strategy, and we don't believe in it. But I personally would like to put out a lot more money on our line because interest rates are so low and with our strong cash flow, we pay that back very quickly. And we look at HEICO as a mechanism to generate cash. It's true we generate earnings per share, but we want real earnings and real cash. And we don't want to be a company that reports earnings per share but no cash coming out of it because we're building receivables, inventory, plans and all kinds of stuffs. So there's nothing left. We want the cash to come out of the operation. And that's why we run the company to create an entity that generates a lot of cash. So we want to put money out, and we're trying very hard. And we would put out a lot more money if we have the right opportunity. And again, we're all looking at the number of transactions. As usual, I cannot predict which ones we will make, which ones we won't make. You don't know till you kick the tires. I've never seen a seller tell us that our company is not too good and earnings are going to fall off. We only discover that when we kick the tires and we find out that it's very often it's not what it was presented to begin with. So we walk away.

And I guess, lastly, Victor, with regards to the 3D Plus business. What is it exactly? Can you remind us, what exactly in that business is so economically sensitive that, sort of, last fall it sort of dropped off with the European, sort of, economy? And maybe sort of if potentially we're on the verge of sort of all the these news in Europe is that taking another step down, what would stop it from dropping off again?

Well, I think it probably had more to do with the satellite production and procurements cycle than it has to do with anything else now that we've had some time to really look at it and understand it a little bit better. It was really a matter of much lower orders, and there's a lead time on those 5, 6 months, let's say. And then as I said on our last conference call, we started to see that improve in December, and that has continued and it continues for now. So I think at this point, that hopefully, that trend will continue. I suppose it is possible that the same thing will happen again. But at this point, I'm not seeing that.

Your next question comes from Jim Larkins of Wasatch.

Tom, my question for you, can you give me what the amortization was for the quarter? I see D&A but could you break out the amortization and help me understand where that drops off? I think, it sounds like it's maybe 2 or 3 quarters out, the inventory adjustments will drop out of that number?

Yes, you are correct. The inventory adjustments will roll out in the second half of this year. In terms of the total D&A, we're forecasting somewhere approximating $30 million. And the amortization portion of that in the current year will be roughly $16 million. How quickly that will roll out, well I think the answer is, with additional acquisitions that number could actually go up, the amortization numbers but if we did no acquisition, I have to check, with rollouts slowly over 3 to 7-year period, some of this with longer life, some with shorter life, but again, some of it is on an accelerated basis. But the actual roll forward is an item that's now under the SEC rules is within our 10-Q. So there will be a forecast, there is a forecast in each Q as to what the amortization is by year, or I think it's 5 years.

Okay. So not necessarily a big ball that's rolling off next year then?

No, no it's not. Again the $16 million is still going to be a big number next year, and again, as we would expect to continue acquisitions, it could actually grow.

Okay. And then on your acquisitions in ETG, I haven't been keeping track of these real well, but $22 million of acquired growth this quarter. Does that level of acquisition contribution sort of stay with us for a couple, I guess, 2 more quarters before it starts to roll off, assuming there's no new acquisitions?

Let's see. Well, the biggest acquisition of the ones completed this year, of course, is Switchcraft which was completed in November. So yes, that would roll off, obviously the big comp impact would roll off the first quarter of next year.

Okay, all right. So you pretty much have this level of acquisition revenue embedded for the next 2 quarters then?

Yes.

Your next question comes from Ron Epstein of Bank of America Merrill Lynch.

It's actually Elizabeth in for Ron. I know you've touched a bit on M&A opportunities but how are you seeing that pipeline from a multiple perspective?

Probably the same as we have historically. There's a little bit more pressure to the pricing upside. People are asking a little bit more, but it's not a significant thing. So we are seeing opportunities within our normal 5x to 7x EBIT price range. Once deals go with 10x, 12x, we kind of step out anyway so, they're not potential deals for us.

Your next question comes from Chris Quilty of Raymond James.

Yes, I actually still do have a question, this one for Victor. You mentioned the pick-up in certain defense products, and I was wondering how sustainable you think that is over the sort of near to midterm? And second of all, can you just tell us given the overall mix of the ETG business, are there any areas where you are particularly concerned or excited by opportunities?

Well, I think, taking sort of in reverse order, you're talking about, when you say an opportunity, you mean acquisition opportunities?

Either acquisition or generically what business or product areas in terms of vertical markets you're serving?

Yes. Well, I think we are probably most excited by the space end of our business. That seems to be -- we do some unique things there, as you know. And that seems to be, I think, a growing business internationally. And we're growing internationally as well outside the U.S. which is important. So I think we're excited about that business. We are excited about in the defense realm, businesses that are more tied to obviously the UAV market and standoff activities like that. We are less excited, of course, by things that are tied to the operation tempo. So less excited by, let's say, things related to ground equipment, ground-related equipment that's not linking up to something that slides. And I think that has been softer for us, and will continue to be softer, things that, say, electro-optical devices, that are used on handheld or on tanks or army vehicles, things of that sort, so kind of in the general mix, that's where we see things. And with the defense business has, overall, been pretty good, pretty strong. We don't know, of course, what's going to happen with all the sequestration and talk about the overall budget. But overall, it's been pretty good except for things that are weighted to the ground side.

Your next question comes from Jim Foung of Gabelli & Company.

I just got 2 brief questions here. Larry, I guess, now that you have kind of 3D more in place, are you guys step up your acquisition activities or you want to just see how 3D pans out in second half of this year?

No, the answer is whatever happens to -- first of all, we're highly confident that 3D will pan out the way we thought because of the order flow, which I mentioned earlier. And that order flow is very strong, and that's one of the reasons we feel confident to up the guidance, so that's number one. Number two, our acquisition program has very little to do with 3D. We are aggressively looking to acquire other good companies in our area of expertise and we're trying to do it. So no, we have plenty of firepower. I think as you well know, on our credit facility, interest rates are very tempting, so we would like to make any acquisitions that fall within our area.

I know you're seeing the past is very opportunistic, but you did 4 acquisitions in just the last 12 months. And are you looking to kind of match that type of number in terms of acquisitions?

Well, the answer is, no, not necessarily. Because some of the acquisitions that we made were really tiny. One of -- the Moritz was a product line, in fact, the acquisition, for us, we think it will be a great acquisition because we tucked it in. It just works, the product, it's very synergistic. It's a great thing. But this is really a small thing. 3D was larger. But it's not the number of acquisitions, it's really the size.

Okay, very good. And then just question on Victor. As you come out the fourth quarter with a 25% margin in the ETG segment, should we look at fiscal 2013 with the higher margin as the 4 acquisitions you have -- operations thus improved there?

Well, for 2013, I really prefer to wait until we've done our budget and gone through our internal process. I'll get back to you at that time.

And at this time, there are no further questions.

Okay. Well, I want to thank all of you for your interest in HEICO Corporation. We remain available by phone or personal visit to answer your questions or show you what we are doing. If we hear from you, we'll be happy to be very responsive. And if not, we look forward to speaking to you in another 3 months for the third quarter update. So with that, this call has ended, and I wish you all a good day.

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