Heico Corp (HEI) Q2 2019 Earnings Call Transcript

HEI earnings call for the period ending May 29, 2019.

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Heico Corp (NYSE:HEI)
Q2 2019 Earnings Call
May 29, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

(Starts Abruptly) certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors, including lower demand for commercial air travel and airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.

Product specification costs and requirements, which could cause an increase to our 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 or competition from existing and new competitors, which could cause reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development and manufacturing difficulties, which could increase our product developmental costs and delay sales.

Our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues. In defense spending or budget cuts, which could reduce our defense-related revenue.

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

Ladies and gentlemen, my name is Lance, and I will be your operator for today's conference. At this time, I would like to welcome everyone to the Fiscal Year 2019 Second Quarter Earnings Results. All lines have been placed on a listen-only mode to prevent any background noise. Later we will conduct a question-and-answer session. (Operator Instructions).

And now I would like to turn the call over to Laurans Mendelson, you may begin.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you very much, and good morning to everyone on this call. We thank you for joining us and we welcome you to the HEICO second quarter fiscal '19 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO.

Now before reviewing our record second quarter operating results in detail, I'd like to take a moment to thank all of HEICO's team members. Their dedication to customers and mutual respect they show each of their co-workers creates the unique culture of entrepreneurial, excellence and success. We believe that this is a significant driver of HEICO's collective success. HEICO is simply the name on a facility wall, it's the team members that make HEICO special. They have our utmost respect and we are very proud to lead this exceptionally talented group of professionals.

Now I'll take a few minutes to summarize the highlights of the second quarter year-to-date results. Consolidated second quarter and first six months of fiscal '19 net income, operating income, net sales represent record results for HEICO, principally driven by record net sales and operating income in both segments of HEICO's operation. Consolidated net income increased 37% to a record $81.8 million, or $0.60 per diluted share in the second quarter of fiscal '19 and that was up from $59.6 million or $0.44 per diluted share in the second quarter of fiscal '18.

Consolidated net income increased 29% to a record $161.1 million or $1.18 per diluted share in the first six months of fiscal '19 and that was up from $124.8 million or $0.91 per diluted share in the first six months of fiscal '18. Consolidated operating margin improved to 23.1% in the second quarter of fiscal '19 and that was up nicely from 21.3% in the second quarter of fiscal '18. It also improved to 22.1% in the first six months of fiscal '19 again, up from 20.5% in the first six months of fiscal '18.

The ETG Group set all-time quarterly net sales and operating income records in the second quarter of fiscal '19 improving 27% and 40% respectively over the second quarter of fiscal '18. The increase is principally reflects strong double-digit organic growth mainly attributable to increased demand for certain defense, aerospace and space products. The Flight Support Group set all-time quarterly net sales and operating income records in the second quarter of fiscal '19 improving 15% and 21% respectively over the second quarter of fiscal '18. Those increases, principally reflect strong double-digit organic growth mainly attributable to increased demand and product offerings within the aftermarket replacement parts and specialty product lines.

Our total debt to shareholders' equity decreased to 33.5% as of April 30, '19 and that was down from 35.4% as of October 31, '18. Our net debt, which is debt less cash and cash equivalent of $492.3 million to shareholders' equity ratio decreased to 29.6% as of April 30, '19 and that was down from 31.5% as of October 31, '18. Net debt to EBITDA ratio decreased to 0.98 times, so that's less than one turn of EBITDA as of April 30, '19 and that was down from 1.04 times as of October 31, '18. As you can see we have very, very low debt outstanding.

During fiscal '19, we successfully completed four acquisitions and completed five acquisitions over the past year. We have no significant debt maturities until fiscal 2023 and we plan to utilize our financial flexibility to aggressively pursue high quality acquisitions in order to accelerate growth and maximize shareholder returns. This has been HEICO standard procedure for the past 25 years.

As previously announced in February '19 we acquired 80.1% of the membership interest of the Decavo LLC. Decavo designs and producers complex composite parts and assemblies incorporated into camera and related sensor assemblies and UAV airframes used in demanding defense and civilian application. Decavo is part of our Flight Support Group, and we expect the acquisition to be accretive to our earnings within the first 12 months following closing.

At this time, I would like to introduce Eric Mendelson Co-president of HEICO and President of HEICO's Flight Support Group and he will discuss the results of the Flight Support Group. Thank you.

Eric A. Mendelson -- Co-President and Director

Thank you. The Flight Support Group net sales increase 15% to a record $308.3 million in the second quarter of fiscal '19, up from $267.8 million in the second quarter of fiscal '18. The Flight Support Group's net sales increased 14% to a record $595.5 million in the first six months of fiscal '19 up from $522.6 million in the first six months of fiscal '18. The increase in the second quarter and first six months of fiscal '19 principally reflects strong organic growth of 15% and 14% respectively, mainly attributable to increased demand in new product offerings within our aftermarket replacement parts in specialty products products lines.

The Flight Support Group's operating income increased 21% to a record $62.2 million in the second quarter of fiscal '19, up from $51.5 million in the second quarter of fiscal '18. The Flight Support Group's operating income increased 18% to a record $115 million in the first six months of fiscal '19, up from $97.4 million in the first six months of fiscal '18. The increase in the second quarter and first six months of fiscal '19 principally reflects the previously mentioned net sales growth and the impact from an improved gross profit margin, mainly driven by a more favorable product mix within our specialty products product line.

The Flight Support Group's operating margin increased to 20.2% in the second quarter of fiscal '19, up from 19.2% in the second quarter of fiscal '18. The Flight Support Group's operating margin increased to 19.3% in the first six months of fiscal '19, up from 18.6% in the first six months of fiscal '18. The increase in the second quarter and first six months of fiscal '19 principally reflects the previously mentioned improved gross profit margin.

With respect to the remainder of fiscal '19, we now estimate full year net sales growth of approximately 10% over the prior year, up from the prior estimate of 7% to 9%. And we now estimate full year Flight Support Group operating margin to approximate 19% to 19.5% up from the prior estimate of 19% approximately. Further, we now estimate the Flight Support Group's full-year organic sales growth to be in the high single-digit, up from the prior estimate of mid to high-single digit. These estimates exclude additional acquired businesses if any.

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

Victor H. Mendelson -- Co-President and Director

Thank you, Eric. The Electronic Technologies Group's net sales increased 27% to a record $214.5 million in the second quarter of fiscal '19, up from $168.7 million in the second quarter of fiscal '18. The Electronic Technologies Group's net sales increased 23%, to a record $398.9 million in the first six months of fiscal '19 up from $324.4 million in the first six months of fiscal '18. These results -- these increases resulted from organic growth of 20% and 16% in the second quarter and first six months of fiscal '19 respectively and the favorable impact from our fiscal '19 acquisitions. The organic growth in the second quarter and first six months of fiscal '19 is mainly attributable to increased demand for certain defense, aerospace and space products.

The Electronic Technologies Group's operating income increased 40%, to a record $67.4 million in the second quarter of fiscal '19, up from $48.1 million in the second quarter of fiscal 2018. The Electronic Technologies Group's operating income increased 30% to a record $119 million in the first six months of fiscal '19, up from $91.4 million in the first six months of fiscal '18. The increase in the second quarter and first six months of fiscal '19 principally reflects the previously mentioned, net sales growth and an improved gross profit margin, mainly driven by increased net sales and a more favorable product mix for certain defense and aerospace products.

The Electronic Technologies Group's operating margin improved 31.4% in the second -- excuse me -- improved to 31.4% in the second quarter of fiscal '19, up from 28.5% in the second quarter of fiscal '18. The Electronic Technologies Group's operating margin improved to 29.8% in the first six months of fiscal 2019, up from 28.2% in the first six months of fiscal 2018. And as I always like to comment that is after of course, removing or deducting if you will, amortization -- intangibles amortizations from our acquisitions. So for the way that I evaluate and look at our businesses that margins actually higher on -- what I would consider to be a cash basis.

The increase in the second quarter and first six months of fiscal '19 principally reflects the previously mentioned improved gross profit margin. With respect to the remainder of fiscal '19 we now estimate full year net sales growth of approximately 15% to 17% over the prior year, up from the prior estimate of 11% to 13% and anticipate the full year Electronic Technologies Group's operating margin to approximate 29% to 29.5% up from the prior estimate of 28% to 29%. Further, we now estimate the Electronic Technologies Group's organic net sales growth rate to be in the high single digits, up from the prior estimate of mid-single digits. These estimates exclude additional acquired businesses if any.

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

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you, Victor. Moving onto diluted earnings per share, the consolidated net income per diluted share increased 36% to $0.60 in the second quarter of fiscal '19, up from $0.44 in the second quarter fiscal '18. It also increased 30% to $1.18 in the first six months of fiscal '18 and that was up from $0.91 in the first six months of fiscal '18, these increases reflect significant operating performance of both Flight Support and ETG. All fiscal '18 diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock split, which was distributed in June 18.

Depreciation and amortization expense totaled $20.5 million in the second quarter of fiscal '19, and that was up from $19.1 million in the second quarter of fiscal '18, and totaled $40.5 million in the first six months of fiscal '19 again up from $38.1 million in the first six months of fiscal '18. The increase in second quarter and first six months of fiscal '19 principally reflects incremental impact of higher depreciation and amortization expense of intangibles from our fiscal '19 acquisitions.

Research and development expense increased 21% to $16.8 million in the second quarter of fiscal '19 that was up from $14 million in the second quarter fiscal '18, and increased 20% to $32 million in the first six months of fiscal '19 up from $26.7 million in the first six months of '18 -- fiscal '18. Significant ongoing new product development efforts are continuing at both Flight Support and ETG and we continue to invest approximately 3% of each sales dollar into new product development, as all-time shareholders know this is a strategy that we have followed for the past 29 years and it permits us to grow our product line and develop new products for customers. It's a critical factor in our ability to grow the company.

SG&A expenses were $90.2 million and $76.3 million in the second quarter of fiscal '19 and fiscal '18 respectively. Consolidated SG&A expense were $174.5 million and $151.5 million in the first six months of fiscal '19 and fiscal '18 respectively. The increase in second quarter and first six months of fiscal '19 principally reflects the impact of our fiscal '19 and '18 acquisitions, higher performance-based compensation expense and changes in the estimated fair value of accrued contingent consideration expense.

Consolidated SG&A expense as a percentage of net sales decreased to 17.5% in the second quarter of fiscal '19, down from 17.7% in the second quarter of fiscal '18. Consolidated SG&A expense as a percentage of net sales decreased to 17.8% in the first six months of fiscal '19 and that was down from 18.1% in the first six months of fiscal '18. The decrease in consolidated SG&A expense as a percentage of net sales in the first six months of fiscal '19 principally reflects efficiencies realized from the net sales growth, partially offset by previously mentioned changes in estimated fair value of accrued contingent consideration. Interest expense was $5.5 million in the second quarter of fiscal '19 compared to $4.9 million in the second quarter of fiscal '18 and it was $11 million in the first six months of fiscal '19 compared to $9.6 million in the first six months of fiscal '18. The increase in the second quarter and first six months of fiscal '19 was principally due to higher interest rates due to increases in the LIBOR rate, partially offset by a lower weighted average balance outstanding under our revolving credit facility.

Other income and expense in the second quarter and first six months was not significant, so I won't go into detail. Our effective tax rate in the second quarter of fiscal '19 was 22.5% compared to 23.6% in the second quarter of fiscal '18 and this reflects the impact of the net benefit of tax reform. The effective tax rate in the first six months of fiscal '19 was 14.5% and that was comparable to effective tax rate of 14.8% in the first six months of fiscal '18. Net income attributable to non-controlling interest was $8.3 million in the second quarter of fiscal '19, and that compared to $6.4 million in the second quarter fiscal '18.

Net income attributable to non-controlling interest was $17 million in the first six months of fiscal '19 and that compared to $12.9 million in the first six months of fiscal '18. The increase in the second quarter and first six months of fiscal '19 principally reflects improved operating results of certain subsidiaries of Flight Support and ETG in which the non-controlling interest are held. For the full fiscal '19 year, we now estimate a combined effective tax rate and non-controlling interest rate of between 26% and 27% of pre-tax income.

Moving onto the balance sheet and cash flow. Obviously, our financial position and forecasted cash flow remain extremely strong. As we previously discussed, cash flow provided by operating activities remained strong totaling $178.3 million in the first six months of fiscal '19. Cash flow provided by operating activities increased 150% to $128.7 million in the second quarter of fiscal '19 and that was up from $51.5 million in the second quarter fiscal '18. We continue to forecast record cash flows from operation in fiscal '19. Our working capital ratio improved to 3.2 time as of April 30 and that was up from 2.6 time as of October 31, '18.

DSOs or Days Sales Outstanding of receivables improved to 45 days as of April 30, '19 down from 50 days as of April 30, '18 and we, of course, monitor all receivable collections very carefully in order to limit credit exposure -- historically, as most of you know HEICO has very few accounts receivable losses. No customer accounted for more than 10% of net sales and our top five -- top customers represented about 21% and 19% of consolidated net sales in the second quarter of fiscal '19 and '18.

Inventory turnover rate decreased to 126 days for the period ended April 30, '19 and that compared to 136 days for the period ending April 30, '18. Total debt to shareholders' equity was 33.5% as of April 30, '19 compared to 35.4% as of October 31, '18 also our net debt of $492.3 million to shareholders' equity ratio was 29.6% as of April 30, '19 compared to 31.5% as of October 31, '18.

Net debt-to-EBITDA ratio as I mentioned earlier was 0.98 times less than one turn as of April 30, '19 compared to 1.04 times as of 31, '18. As you know, our debt level is very, very low for a company that's able to grow and generate cash flow as quickly as we do. We have no significant debt maturities until fiscal '23 and we plan to utilize our fiscal financial flexibility to continue to aggressively pursue high quality acquisitions, and accelerate growth to maximize shareholder returns.

Looking forward, the outlook. We anticipate net sales growth within Flight Support and ETG resulting from increased demand across the majority of our product lines. We will also continue our commitments to develop new products and services. Further market trend penetration, strong cash flow generation, aggressive acquisition strategy while maintaining financial flexibility and strength, based upon our current economic visibility we now estimate our fiscal '19 year-over-year growth in net sales to be 12% to 13%, and a net income to be 17% to 18% and that's up from our prior growth estimates in net sales of 9% to 11% and net income of 11% to 13%. We now anticipate consolidated operating margin to approximate 21.5% to 22% and that's up from prior estimate of 21% to 21.5% and we continue to anticipate depreciation and amortization expense to approximate $84 million.

In addition, we anticipate cash flow from operations to be approximately $380 million, up from the prior estimate of $370 million and CapEx to approximate $38 million and that was down from our prior estimate of $43 million. Of course these estimates exclude additional acquired businesses, if any.

In closing, I would again like to thank HEICO's team members. They are the ones that delivered outstanding results and deserve the credit for the hard work and discipline it took to successfully navigate through another quarter. Executive management has the utmost respect for everything they do to make HEICO a great company. I also want to add all of the shareholders of course do not have the luxury of knowing the people that operate these subsidiaries of HEICO. I can assure you, these are the group with the most extraordinary individuals who are focused, hardworking, brilliant in their own fields and people who I know that anybody on this call will truly admire. They again are the ones that make this happen.

I just want to make one other comment, of course it's too early to actually predict what the final results will be for fiscal '19. As you know, management sets a target growth goal bottom line of 15% to 20%. We have given an estimate -- an official estimate based upon all the numbers that we have available to us at the moment. I still believe that I'm very confident that we will meet those goals and I'm hopeful, although, I can't promise that we will actually surpassed those goals, but we will find out as we move into the second half of the year.

That is the extent of my prepared comments -- our prepared comments and I would now like to open the floor for questions from all of you listeners. Thank you.


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Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Robert Spingarn from Credit Suisse. Your line is open.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, good morning.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Good morning, Rob.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, well, excellent numbers again here, and I guess I have a question similar to what I've asked you in the past, both for FSG, Eric, and Victor in your business. Are there certain business lines or driving the growth here or timing in either of the businesses that are contributing to what is really sector-leading growth from a lot of ways. I'm just curious to hear your answers.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Rob, this is Laurans, I give you my thoughts on that and then Victor can -- and Eric will fill in more color. In the 29 years that we have been running HEICO, I have never seen a business climate is positive and strong as this one. And I would say as a general comment, it's across the board and order continued very strong, but Eric and Victor can add their thoughts.

Eric A. Mendelson -- Co-President and Director

So. Hi, Rob. This is Eric. I think, I agree the orders in the business was strong across the board. I would say, in particular in our parts business which includes our proprietary PMA business as well as our distribution businesses, we were very strong. I believe that we are picking up market share from other PMA companies and we continue to really do very, very well and what I would say is an extremely competitive market.

I think people look at our numbers and they think that this is an easy business and that we just grab market share and we sell more parts and increase sales easily, and I'd say that is absolutely not the truth, we have to fight like -- you can't believe for each sale that we get, it's extremely competitive the OEMs are very, very fierce competitors and we of course we do nicely. But I would say the PMA market is an extremely competitive one and it's really due to our people picking up market share, I think that is permitting us to succeed as well as over in the distribution business. We're also picking up market share there because of our customer service levels and I think the way that we treat our principles. Also on the specialty...

Robert Spingarn -- Credit Suisse -- Analyst

Eric (inaudible)

Eric A. Mendelson -- Co-President and Director

Sure.

Robert Spingarn -- Credit Suisse -- Analyst

Yes. I just ask you on that market share is there that much share to capture from others, I mean is there a way for you to frame your current share or where you move -- moving from and to in terms of quantifying the share growth?

Eric A. Mendelson -- Co-President and Director

Yes, we are by far the largest PMA supplier in the world. We do have competition from some other smaller PMA companies and based on conversations that I've had with our people, with our customers, I believe that our customers are preferring to come over to us, as we continue to build out product line and do parts that we haven't done in the past.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And are we in any -- on the organic side or we in some kind of an overall period where there's just higher at a level of activity in parts demand, just based on the particular age of the fleet right now or the fact that we don't have as many new narrowbodies delivering due perhaps to the max or to some other elements that maybe somewhat timely this year (ph)?

Eric A. Mendelson -- Co-President and Director

At the moment, I really don't see it as an impact due to the max in my discussions with our people to date. And as a matter of fact, if you look at the repair area, the repair area is probably the lower area in terms of growth and that's been -- that's a particularly competitive market and if in fact there were increased demand as a result of the max. I'd expect to see it more in the repair area. Now, maybe we will be seeing that in the next couple of quarters, I don't know, but definitely the repair area has been a -- in terms of growth percentage has been lower than over on our part side and then also you'd asked about the various segments. Our specialty products businesses have done exceptionally well also in terms of picking up market share and their sales growth has been very good both on the commercial as well as the defense side.

Victor H. Mendelson -- Co-President and Director

And Rob, this is Victor, I would say it was already broad-based in the ETG businesses as well, of course there's always a pocket of weakness here and there, there's always a business that's suffering for reasons unique to that business, but market wise I would say overall it was -- as you say firing on pretty much firing on all cylinders.

Robert Spingarn -- Credit Suisse -- Analyst

So there is no specific, Victor not the all -- whether it's space or defense, is that particular programs that are creating a lift there?

Victor H. Mendelson -- Co-President and Director

Well, sometimes it's difficult to measure that, because we don't know (Technical Difficulty) where our products are going. We may have an idea or a sense of that, I would say that there are some businesses that are stronger than others, I think our organic growth in defense for example was strongest for the company this quarter and probably is looking like that for the year. There are a lot of places where we're seeing that on some precision guided munitions programs without being able to get into specific names, but we're seeing it on rotary wing, helicopter programs as well, somewhat broad based, but I'm sure if we dig into those will find out that some programs are particularly strong.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then just lastly for Carlos and I'll step aside. On the CapEx, and I don't know, if you might have got comments earlier, I might have missed it, but -- is the CapEx from your little under budget and might that offer some upside on the cash flow for the year?

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, How are you doing Rob? So we spent $12.5 million in the first six months and frankly our budget was double that for the first six months, and as I went back and looked at what our guys have asked for and procured versus what they estimated it would cost they -- as we've mentioned in the past, they're very frugal, every dollar that they spend on equipment is very personal to them. And so what I've found is they bought the equipment they've asked for, but they founded at much cheaper price points. So, in looking at that the judgment was as follows: I still think there is a bunch of needs out there that they've asked for the guidance that I've given a $38 million would present that we've spend about another $12.5 million each quarter going forward. My guess is that they'll probably under-spend that, but right now I have to go with those numbers given what they've asked for and that was really the impetus if you would for the reduction in the CapEx spend. As far as the (Multiple Speakers). No, no reason, the guys are getting everything they need to continue to grow their businesses, they've just are -- they are the most frugal business owners ever and operators have ever met my life and they are getting exactly what they need to make this done.

Robert Spingarn -- Credit Suisse -- Analyst

Perfect. But my point is you're not yet at the point where you want to call for higher cash flow?

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

Well, we did, we increased our cash flow by $10 million from operations and the reason I did that was because if you remember over the past, I guess starting in Q3 last year Rob, we started to see some really nice organic growth as of businesses in some -- really nice growth period for the overall consolidated company. As we talked about we had some inventory build to support that growth. Well, we've noticed -- what I've noticed over the past quarter to four months has been that some of that inventory is burned off in fact our inventory only grew 6% since October 31, and my observation is that they burn off some of that pre-buy if you were to support the growth and I have an expectation that some were going to have some working capital needs going forward. So what I did was I assumed, that we would we redeveloped some of those inventory balances to support the growth and that produces about $380 million cash flow from operation number. And Rob, we're conservative and how we make those estimates, we'll see how it all plays out, but we did increase that.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Thank you all so much.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Rob, just Larry again, as a comment Carlos normally and rightly so tends to be conservative. We -- when you talk about cash flow and earnings and so forth, we never want to get ahead of ourselves and promise something that may not happen, we would much rather under-promise in over-performance and that's pretty much our history. So if we don't want to count our chickens before they had, so we'd like to be a little careful on predictions.

Robert Spingarn -- Credit Suisse -- Analyst

Right. Thank you, Larry.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you, Rob.

Operator

Your next question comes from the Sheila Kahyaoglu from Jefferies. Your line is open.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi good morning, guys and great quarter. Thank you for the time. Eric, Victor, you guys talked about this to Rob's question, but I guess given the business environment seems to be robust what truly surprised you guys with it. Victor for you precision (Technical Difficulty) better than expected or what kind of surprising and what's accounting for the deceleration in the second half?

Victor H. Mendelson -- Co-President and Director

I don't know, if I call it deceleration in the second half. I think we had a particularly strong second quarter. I think what we're expecting in the second half is actually pretty good and it was somewhat broad based, as I said, across a number of defense lines for us as well as some commercial aviation that was strong for us, where we do -- where we do a number of things in commercial aviation ranging from power supplies to locator transmitter to panels and bunch of other things. So, I would say that we were just kind of pleased with everything that happened in the quarter, and I think we'll be pleased with what transpires in the rest of the year.

Eric A. Mendelson -- Co-President and Director

And Sheila, as far as the Flight Support Group goes, again, I think was -- surprising was in particular over on the PMA and distribution side in the parts business. Those were very strong. I think one area in particular in our distribution businesses. I think we're doing exceptionally well picking up market share, I think we deliver a unique service, a unique product that frankly nobody else in the industry can offer. And we've been particularly successful in that area as well as I mentioned in Rob's question over on the PMA side.

As far as specialty products, that was very strong, we had expected that it would be strong, it had been weaker a couple of years ago. It's now doing particularly well, of course, the defense, a component of that is doing extraordinarily well. And that can be lumpy and sometimes, we don't know exactly when it is going to hit, but we did very well. And then probably, the only area where we had lesser organic growth I would say would be over on the repair side.

Sheila Kahyaoglu -- Jefferies -- Analyst

Got it. Thank you for the color. And then, Larry, maybe one for you. In terms of again, the business environment you said is the strongest you've seen in 29 years. How do you think about pricing in your overall portfolio -- you're kind of hesitant to increase price. But do you think the business environment months to that right now and as the OEMs which to next generation aircraft does that provide an opportunity?

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Well, I think that historically we have relied upon volume increases to grow the business. One of the things, our philosophy has been to try to be very fair with customers and not push the envelope, as you know in the aviation business, the OEMs really push the envelope and push price and so forth and we try to lay back and could we increase perhaps, but we really looking at volume. So I don't think we want to take advantage of the pricing environment. We would rather get increased volume and get more of our products in line then to push the price, but I'll let Eric and Victor can comment a little more on that, but that's generally our philosophy.

Eric A. Mendelson -- Co-President and Director

Yeah, Sheila, I echo what I did said about pricing. I think our philosophy is pretty well known. When we came to HEICO nearly 30 years ago the company was doing less than $25 million in sales and our philosophy was that the future had a lot more to give the company than the past and we wanted to make sure that we were always the supplier of choice, and we've adopted this very fair and conservative pricing ethos in the company where we don't want to take advantage of our customers and we instead want to run very lean and efficient operations and basically, be able to earn our profits that way as opposed to by adjusting prices. So that continues to be our philosophy in ethos in all parts of the Flight Support and the Electronic Technologies Group, Victor can answer, can talk about ETG.

Victor H. Mendelson -- Co-President and Director

I think that's well said.

Sheila Kahyaoglu -- Jefferies -- Analyst

Appreciate it. Thank you.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thanks, Sheila.

Operator

Your next question comes from the line of Gautam Khanna from Cowen and Company. Your line is open.

Gautam Khanna -- Cowen and Company -- Analyst

Yeah. Thank you, guys and congratulations on a great quarter.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you.

Gautam Khanna -- Cowen and Company -- Analyst

I was wondering if you could comment on any developments you guys have undertaken for PMA parts on the CFM engines, given the -- the agreement last year?

Eric A. Mendelson -- Co-President and Director

Yeah, we -- this is Eric. We try to stay away as a result of competitive reasons and our competitors, they see overall on the call, and we welcome them. But we think that there is opportunity for us. I think we've developed a lot of these parts in the past, we have a fairly large portfolio, then the tooling is already paid for. We've got inventory on the shelf. So I think we can go ahead and support our customers' needs. But I'm reluctant to a change any of our projections to reflect really a change, significant change in this area until we -- until we really see the results. I think the customers across the board want our services engines are no different. Of course, the newer engines are even you know are fairly expensive to operate.

I'd point out, I think that our engine competitors are used to be 15 years ago there was a big scare that PMA would decimate their businesses. I think that's absolutely not true, they got great businesses, they make a lot of money and I think we can continue to, if you will, nibble around the edges and do very nicely for HEICO, but they continue to have very good businesses. So hopefully, we can both drive together.

Gautam Khanna -- Cowen and Company -- Analyst

Got it. And in terms of lead times to develop those products you mentioned you have the tooling, you have a portfolio already that addresses other folks engines, is there, I mean is it a shorter development window just given relative to typical PMA parts just given you already have capability in the space?

Eric A. Mendelson -- Co-President and Director

Well, I think it's consistent, we've got a library of some 11,000 parts and we've got a lot of experience in doing many different sort of classifications of parts. So as we want to add more engine parts. I think it is fairly easy for us to do, because we've got so many similar ones already. We're not, if you will, reinventing the wheel. There's just a minor, a fewer changes that we're able to do that fairly quickly.

Gautam Khanna -- Cowen and Company -- Analyst

That's very helpful. Last question for me, just maybe Larry, if you could talk about the acquisition pipeline, how promising it is, what you're seeing with respect to the size of -- that's come of the more promising candidates and what -- in what segments those might actually, which segment is more right for M&A right now, for additional M&A. Thank you.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Well, I think that the pipeline is what I would call normal, we're looking at an awful lot of different deals. Some of them are priced out of our price scope we, again we don't pay 12, 14 times EBITDA. We want to stay in the lower range. So some deals that we might like, we're not going to reach for them because they don't work, let somebody else by them and we're going to stick to our strategy of buying high operating margin companies ones that generate cash flow, ones that are accretive within the first year, and we are looking at transactions in both segments in Flight Support and ETG. I think, I can't -- I can never predict whether a deal will close. I believe that we have some that will close in the near future, but I can't predict that they will, because I've seen deals blow up at the closing table. So -- but I -- all in all, I think it's normal and remember HEICO was a company that we try to balance our cash flow, because we don't want to get heavily embedded. And part of balancing the cash flow if you're growing bottomline at 15%, 20% annually which we are, you don't want to get ahead of yourself and make these acquisitions and pay crazy prices and suck up all your cash and then get stuck and buy a bad deal, will let other people do that. So if you look historically at our acquisition program, it's been extremely successful and we follow the same exact strategy all the time. So I would say, everything is normal, I would say that we probably can expect some transactions to closed and then over the next three, six months, maybe some sooner, but I think everything is very norm and it fits in to the way we want to control the growth of HEICO. We don't want to go like a sort to go up and down and up and down, we want to have continual growth 15%, 20% bottom line. So, and that's what we're scheduled to accomplish.

Eric A. Mendelson -- Co-President and Director

And just to add to that, this is Eric. Our very disciplined pricing model, I think is what permits our culture and what can permits this continued success in terms of treating our people right and treating our customers right, when people pay too much for companies they've got to jack up prices that has a long-term negative effect, we believe on the business, we want to remain very customer-friendly. And then also when we talk about our people and our culture and how we've got we believe the best people in the industry.

I think one of the things that permits them to behave that way and encourages that type of behavior and performance is that we don't have unrealistic goals and there are other buyers out there whether it's private equity or large corporate where they pay very high prices and they really hold a fire to the people and they cause them, they push them to do things that are A not in the long-term interest of the business and B, not really ethical or what the people want to do. And I think by the only way that we can continue this culture is by paying the prices that we pay and that permits us to in turn invest in the people and this whole thing becomes just a continuing self reinforcing program. So it's worked very well thus far -- you know we plan to continuing that.

Gautam Khanna -- Cowen and Company -- Analyst

Thank you very much.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Louis Raffetto from UBS. Your line is open.

Louis Raffetto -- UBS -- Analyst

Hey, good morning, guys.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Good morning.

Louis Raffetto -- UBS -- Analyst

So wanted to go back to Sheila's question on pricing and I know, Eric, you just sort of cover this, there's been a bit of a renewed push in Congress linear DoD supplier pricing. So if you had any discussions with anyone in Congress or any branch of the military about potentially used for PMA to save money, you guys have some exposure there, but I don't believe it's that large, I think you disclosed over the sale about $150 million or so, $160 million in FSG?

Eric A. Mendelson -- Co-President and Director

I don't have the defense numbers in front of me, but I can tell you that the Department of Defense remains a very important customer to us. I think that there is that a lot more product they can buy that they are not currently buying, i.e, it's an interesting paradox in that -- the DoD doesn't like the high prices that some people charged and yet when it comes to approving alternate sources, it's very difficult for them to commit the resources to be able to go ahead and do that. We succeed and I think that there's a lot more opportunity for us in that area. But the reason why they have to pay some of these very high price is because on the one hand, they say, -- I like value prices, but on the other hand, they don't do anything about it. And the DoD, I think you know particularly under this new administration is starting to wake up and become a lot more focus in that area. So I think that there is good opportunity for us.

Louis Raffetto -- UBS -- Analyst

All right. Great. Thank you. And then just within the aftermarket parts, I know engines used to be the majority, now I think it's still roughly 50%, but are you seeing strength sort of broad-based across the aircraft or is there any specific areas where it's stronger than others?

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

We say that the non-engine business actually has been well over 50% in the -- if you were the majority of our business for a number of years. I think our strength really is in all parts of the business, we're doing nicely in engines, but in particular in the non-engine area, we really, we see a lot of opportunity there as well. So I think where we want to continue to develop whatever our customers' needs. And I think we've got the technology to be able to do that.

Louis Raffetto -- UBS -- Analyst

All right. And then just one, last one Eric, just -- so MRO, I think it was negative last quarter, it sounds like, I guess it was at least some more positive this quarter -- number be on the queue, but just curious.

Eric A. Mendelson -- Co-President and Director

Yeah, it was positive. We had positive organic growth in the repair area and I anticipate continued strength as we move through the year.

Louis Raffetto -- UBS -- Analyst

All right. Great. Thank you guys.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you, Louis.

Operator

Your next question comes from the line of Larry Solow from CJS Securities. Your line is open.

Larry Solow -- CJS Securities -- Analyst

Great. Thanks guys. Most of my questions have answered. Just a couple of follow-ups on the -- Eric, on the repair piece, I think it was like sort of flat last quarter and a little bit growth this quarter. Any reason that you can identify real, it wouldn't grow as fast as the sort of that mid-teens plus rate, the other businesses, but why it's sort of been lackluster flattish?

Eric A. Mendelson -- Co-President and Director

Yeah, I think in particular, we're very strong in South America, and I think that area has been a little bit weak, don't get me wrong we're performing very nicely in that area, again it's an extremely competitive space. People look at HEICO and they see how we've grown from whatever $25 million to roughly 2 billion and they figure well that can't be too hard if those bone heads could do it, anybody could do it.

And in fact, it's really a very, very tough space and the component repair space is just very, very difficult to be able to win the business, to service it on time at a reasonable price for the customers and we've got the advantage we can use our parts, we can use OEM parts, surplus parts, serviceable parts, whatever it is, but it's just a very, very tough space. And I think that if you look around the industry, the component repair areas that have higher growth are the ones who have a lot of pricing and that typically is the OEM component repair. Ours is a lot more competitive and we provide a very good service, but it's just -- it's a very tough business. It's not easy and I'm proud of our team, and I think we're going to continue to see growth in that area, we are still very much committed to it, but it's just very difficult to execute.

Larry Solow -- CJS Securities -- Analyst

Right. And on the specialty products piece which I realize is a minority piece, but could sometimes -- moved out overall growth a lot. Obviously another strong quarter there, I know you mentioned, it could be a little bit choppy, but it's not mistaken, as you mentioned a lot of these are defense contracts and some of that touch on the -- some decent visibility of that at least for a few quarters out, is that fair to say?

Eric A. Mendelson -- Co-President and Director

We do, yeah, I would say that for the next number of quarters that we've got good visibility there. I think that we're going to continue to do well in that space. If you look at all of the emerging threats around the world, I think the defense companies are going to do very well. In particular China is announcing it seems daily a new technology that's coming out that the rest of the world needs to consider and develop alternatives for, so I anticipate, there's just going to be continued strength in missile defense in other areas. So I think we're going to do very nicely.

Larry Solow -- CJS Securities -- Analyst

Congrats. And just one quickly for Victor, you mentioned pretty broad based strength, if I'm not mistaken space had been lagging a little bit last few quarters, I assume you saw a rebound there as well.

Victor H. Mendelson -- Co-President and Director

Yes, space was been good for us, it wasn't bad, but in the prior periods we had to point out what was the weakest or had slight negative growth -- or you know (inaudible) and that had been because of geosynchronous earth orbit, commercial geosynchronous earth orbit satellite market, but the rest of our space business has been very strong and stayed strong throughout that time. So that really has been good for us. I mean I wouldn't -- I wouldn't expect commercial Geo-Sat could be -- strong for us for some time, but the rest of the commercial, I think at least as far as I can see out through this year should be fairly healthy.

Larry Solow -- CJS Securities -- Analyst

Got it. Okay. Great. Thanks guys. Appreciate it.

Victor H. Mendelson -- Co-President and Director

Welcome.

Operator

Your next question comes from the line of Peter Arment from Baird. Your line is open.

Peter Arment -- Baird -- Analyst

Yeah, thanks, good morning, everyone.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Good morning, Peter.

Victor H. Mendelson -- Co-President and Director

Good morning.

Peter Arment -- Baird -- Analyst

So most of my questions were answered. But maybe just one on just your international exposure. Just given all the daily headline risks that we see on the trade front, you've got about, I don't know -- I guess greater than 35% of your sales from a broad distribution most of the countries it's over a 100% I believe. But maybe either -- are there any -- anything that are jumping out either income and Eric, your business or Victor, that our loss items just on the growth front, that you're seeing any pause in activity.

Eric A. Mendelson -- Co-President and Director

I'm sorry, Peter what items?

Peter Arment -- Baird -- Analyst

Any loss items -- any areas, any particular countries that are -- you're seeing any slowing or anything that maybe in addition now, but -- you put it on the watch list or anything that I mentioned?

Victor H. Mendelson -- Co-President and Director

And there's nothing about -- nothing that I can think of, this is Victor. There's nothing that I can think of in terms of country watching that we're particularly concerned with at this point, I mean, no more than the usual noise level. And I wouldn't call country risk either -- I generally, we tend to look at the individual customers.

Eric A. Mendelson -- Co-President and Director

And then also typically the products that we're supplying needs to be obtained from a U.S. based company. So we have not seen any issues or any problems. As a matter of fact, in our distribution business a -- I don't have the numbers in front of me, but quite a lot of our sales occur from European subsidiaries. So, but we haven't seen any problems and we don't.

Peter Arment -- Baird -- Analyst

Okay.

Victor H. Mendelson -- Co-President and Director

And we're not -- as a rule of thumb. We're not really selling to, not as a rule of thumb, we are not selling period to any of which you would consider the suspect countries that the U.S. does not want to selling to, so I'm not worried about selling a risk of sales to America's enemies or something like that.

Peter Arment -- Baird -- Analyst

Understood. I appreciate the color. Thanks guys.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

You're welcome.

Victor H. Mendelson -- Co-President and Director

Thank you.

Operator

Your next question comes from the line of George Godfrey from CLK. Your line is open.

George Godfrey -- CLK -- Analyst

Thank you. Good morning and thank you for taking my question. Really nice travel in the quarter.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Thank you, George.

George Godfrey -- CLK -- Analyst

You're welcome. Just a question for Victor as much as he can and I heard the comments about pricing really hasn't been the driving factor. It's been volume and if I look at ETGs operating margin. Just 2.5 years ago was 24 at least by my numbers 24.7%, and now this quarter and it really impressive 31.4% is almost 700 basis points of margin in just 2.5 years. Can you comment what product mix, manufacturing process might have improved or a 700 basis point margin improvement is such a short space of time really impressive and not like it was coming from a depressed level to begin with, it was pretty high. So I'm just trying to get a sense of what is just driving such really great profit expansion. Thanks.

Victor H. Mendelson -- Co-President and Director

George, this is Victor. That is a good question. It's a variety of factors, of course it's mix and it's mix-sensitive. So there's been more of a shift to higher margin products, some of that is the result of acquisitions. Also some of the margin shift is driven by volume increases, which leads to significant efficiency gains in a number of the businesses where it just so happens we have fairly repeatable processes and we're able to do things on less of a customized basis. So we're really able to capture those efficiencies. And some of it is a result of some things that we've done on the SG&A side in some of our businesses, when I say we, I mean our individual businesses have done. We've had a few facility consolidations along the way and that has also help reduce some of the overhead burden on there. And so that's really kind of -- if you look at you've got this combination of all these factors that lead to it.

George Godfrey -- CLK -- Analyst

Understood. Thanks for taking my question, Victor.

Victor H. Mendelson -- Co-President and Director

Thank you.

Operator

Your next question comes from the line of Michael Ciarmoli from SunTrust. Your line is open.

Michael Ciarmoli -- SunTrust -- Analyst

Hey, good morning, gentlemen. Real nice quarter and thanks for taking the questions here.

Victor H. Mendelson -- Co-President and Director

Thank you.

Michael Ciarmoli -- SunTrust -- Analyst

In business conditions everything so optimistic, forgive me I'm going to kind of maybe try and take a more negative view here. Just maybe stress test things, but historically, especially I guess in FSG, you know, after you guys have seen growth really accelerate to these levels. We've seen a fall off and some of that comes from tougher comps, but do you get the sense that anything is different this time, certainly airlines seemed to be a little bit more deliberate in their inventory purchasing, but it's visibility better. I know you keep saying the trends are about is good as you've seen in 29 years, but has the visibility expanded, do you think these trends can be sustained?

Eric A. Mendelson -- Co-President and Director

Yeah, I think the numbers are certainly phenomenal. I don't think this for example in Flight Support 15% organic growth for every single quarter. I think that's a bit aggressive to expect, however, I do really believe that our culture and our value proposition is catching on and it will swing up and down, but I really do believe that we're able, as a result of fair paying, fair prices compensating people properly, not having unrealistic expectations being able to treat our customers, right. I think this is what permits the long-term growth that we've had the organic growth far in excess of what the industry does, especially when you look and see we're not even pushing the pricing ladder. I mean, we've got 15% organic growth, and it's not pricing and that really is a result of the culture and the customers wanting more from us -- let's not to say that they're not incredibly demanding because they are and it's very difficult for our people to satisfy them, but I think we do frankly an amazing job at it. So I anticipate this really just continuing and I think that we will continue to perform in the upper quartile, if you will, of Companies out there, because we're competing companies because of this culture. So, I think that we should continue to do quite nicely.

Michael Ciarmoli -- SunTrust -- Analyst

Understood.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

This is Carlos, just want to make one other observation on that -- my observation is just fall as we've broadened our SKUs (ph) and the FSG has become more than just an engine shop or structure shop or an interior shop, we really do provide to our customers now a much broader blanket and parts that they can rely on. The debt is also increase the appeal, if you will, to our customer base to do business with HEICO and that's part of our strategy and I think as long as we continue down that path broaden that -- broaden that product mix and continue to penetrate those customers of product that they are not currently buying there we should be able to continue as Eric pointed out top quartile industry growth.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. That's helpful. And maybe a good segue to Carlos. I mean, Eric, you mentioned distribution picking up share. Can you -- what do you attribute the share pickup to, do you think there's any residual impact from KLX getting scooped up by Boeing or any of the other M&A or consolidation that's taken place in the market?

Eric A. Mendelson -- Co-President and Director

Yeah, you know, there's been a lot of consolidation and we operate our businesses as a separate stand-alone independent companies and that permits them to have the flexibility in the entrepreneurial maintain their entrepreneurial culture and not have bureaucracy. There is no, if you will central HEICO number to calls for all of our distribution services, our companies are focused on their niches and they're able, I think to deliver best value in their niche. And I think they deliver the best value both in terms of increased market share for the companies for whom we distributed. So when somebody comes to HEICO and trust us with one of their product line, they know that HEICO is going to focus on the detail and figure out specifically had to get the market share higher and we showed them exactly what those results are. We're not, if you will and order fulfillment half. We have a 30 year culture in the distribution area is really focusing in those areas and giving a demonstrated market share increases to our principals.

So, I think we do extremely well in that area, in all of -- that's the thing that all of the HEICO distribution and defense payment businesses have in common. And so that is what permitting us to pick up additional principles, I mean it's gotten to the point where we have so many people who are wanting to sign up with us that we are having to not be able to access a certain product lines because we want to make sure that we continue to do really an outstanding job for anybody who trust with their product lines and we need to make sure that we've got the bandwidth to be able to go ahead and do that -- it's not a low cost operation, our distribution business spend a lot of money because we've got to be able to deliver those services as opposed to just straight for the fulfillment, which we're also quite good with. So, I think all of that stuffs put together.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

I'd like to put, this is Larry, I'd like to point something out to you in the way just think about HEICO and at least give you the way I look at HEICO, I look at HEICO as an orchestra and I don't look at it's the trombone player, better than the base player and this is the Violin doing better than the trumpet and all that. We focus on HEICO growing bottomline as I've said many times 15% to 20% bottom line, and that is what we key on, so whether one division does a little bit better than has a higher margin or something else, we work with that throughout the orchestra so to speak. So and that's a very important and trying to coordinate the results of the company, because we could announce that one division or one distribution or space or something did great, but all the other companies did terribly that's not how we manage the company.

We manage the company as an orchestra and the total sound of the orchestra has that come out and that's when I talk about the 15% or 20% bottom line. And I think that we can continue to do that over the next three to five years, we can't guarantee it, but that is how we manage the company and that is how we focus. So this a little color in the way we do things.

Michael Ciarmoli -- SunTrust -- Analyst

Now, understood, good analogy. And then maybe last one just housekeeping, Victor, within Electronic Technologies I know we'll get it in the queue on the revenue for Space, Defense and Aero, but do you just have what the defense revenue growth was, if you could parse that out and I know it might be tough, I know you've got some defense that flows through FSG as well, but any color as to what just your defense market did just this quarter?

Victor H. Mendelson -- Co-President and Director

Well, as a percent of the EPG business, defense is just under half of the business. And in terms of the growth in defense and space, well -- we're growing, breaking that out. So I want to be careful what we break out of -- I'm going to let Carlos answer it.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

So we don't -- for competitive reasons, we don't bust out of the different buckets like that, to Victor's point space, I'm sorry defense has been high grower for us, it's become a larger portion of the ETG in the high '40s as a percent of the overall business, that business has grown very nicely -- the commercial aerospace business actually this quarter for the six months has been very well within ETG that could be anywhere in trailing 12% to 15%, let's say of the segments sometimes higher 15% to 20%.

And space to Victor's earlier point has grown this year, in this quarter in particular it did very well and I think that's due to all of the other space activity besides with Victor mentioned what the Geo-Sats being a little softer. So while we don't break it out individually, Michael, we do have a nice growth across broadly across all those sectors.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. Thanks a lot, guys.

Operator

Your next question comes from the line of Ken Herbert from Canaccord. Your line is open.

Ken Herbert -- Canaccord -- Analyst

Hi, good morning.

Eric A. Mendelson -- Co-President and Director

Good morning, Ken.

Ken Herbert -- Canaccord -- Analyst

Eric, I just wanted to first start off with a question on FSG, if I could. As I think about your PMA sales, you've got phenomenal penetration with Legacy Airlines both here and in Europe and North Asia, obviously the fleets are migrating more to emerging markets, Middle East, Southeast Asia, China, other areas. Can you just talk about what kind of reception you're seeing to PMA in some of these emerging markets which have historically been largely OEM customers and maybe what you're doing structurally with the business or any changes to the business to try and position yourself to better capture this growth in the emerging markets as I'm -- as I would expect to eventually open up similar to what we've seen with other airlines?

Eric A. Mendelson -- Co-President and Director

Right, I agree with you, Ken that, we anticipate that it will open up similar to other regions. What we found with PMA acceptance is directly correlated to the sort of the age of the airline, the age in sophistication, when airlines are taking a lot of deliveries of new equipment, they get a lot of attention from the OEMs and they don't really see that the need or the value proposition in the beginning. And then of course as those deliveries as a percentage of the fleet go down they sort to get less attention and they realized that these machines are extraordinarily expensive to maintain. And that's where we get in there and we're able to show our value.

So I -- in history over the last 30 years that absolutely been the case, I mean without mentioning names, but I can tell you that airlines in all regions of the world, whether it's North America, South America, Europe, Asia where in the beginning they were refusing and not interested in using PMA parts and then as time went on you know we go in -- and show why this makes sense and they become very good customers. So I anticipate that will continue and we are making headway around the world, we're also making headway with leasing companies in terms of the acceptance of our engine material. So I anticipate that -- this is the continuing education effort, but I anticipate it will continue to bear fruit.

Ken Herbert -- Canaccord -- Analyst

Okay. That's great. And you don't anticipate that the sort of the varying degree of maybe regulatory sophistication for lack of a better word might slow the adoption of some of these parts in other regions or you don't see any structural sort of headwinds or tailwinds or other issues as you think about the natural sort of opportunity in this emerging markets?

Eric A. Mendelson -- Co-President and Director

We see the continued opportunity, in general the FAA approval is accepted around the world and it's due to the bilateral. So I think that it's sufficient more just continue to do well and continue to educate people around the world.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

One thing Ken, that I might add to that is, and Eric is probably going to blush when I say this, but I think he has done a good job and exceptional job of educating airlines around the world on the value of our parts. And I think part of getting into the market you're referring to at some point at the right entrance point will not only be what product do we have to deliver, but how good are we at education and selling into that market. And I think we have a proven track record of doing that and I think we'll have a heads up on the competition when it comes to break into their market at the right time when that fleet is ready for parts that we produce.

Ken Herbert -- Canaccord -- Analyst

Great. That's very helpful. And if I could Carlos either you or Victor, just one final one on ETG, seasonally you typically see a stronger margins in the second half of the year. And I know it's not every year, but often your fiscal fourth quarter can be one of the higher margin quarters of the year. Is there any reason you shouldn't continue to see sort of a seasonal strains? I know maybe sounds like there was clearly some nice mix tailwind in the second quarter, but any reason you don't see the typical pattern in ETG margins in the second half of this year that we've seen in prior year?

Victor H. Mendelson -- Co-President and Director

Well, you know -- I'm not sure that to be honest, that I feel there is, this is Victor, that I feel there's a pattern, I think we feel good about the guidance we've given and so that -- that I think we would stick with you know what I said in the comments or early. Carlos, is there anything to add.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I think -- the one thing I would add to that, Ken. As you know, we do have a little bit more visibility into ETG through a backlog perspective as opposed to some of the FSG business we do and then looking at the backlog, it looks to me more consistent, maybe with what we've had over the last four quarters. I would say, the only exception to that is Q2 was really strong and as Victor mentioned earlier, all our businesses, we're hitting on all cylinders, the defense business was really outstanding for us that could continue. I mean if we can continue what I'll call the new optimal mix because I know last quarter, I said I felt like we are in optical -- optimal product mix, listen if what we had in Q2 continues, that's great. We could post some stellar margins, but based on backlog based on what the guys in the field are telling us. We feel like, you know 29% to 29.5% for the rest -- for the full year is probably the right margin to be thinking about on the operating income line.

And by the way, we are proud of that -- that's not, you know, we are proud of the 31 plus percent margins versus quarter, but I think if the company can sustain over a 12-month period 29%, 29.5% margins, that's a GAAP margin that doesn't even include five points of amortization, you could stick on top of that, we're very proud of that. So that's how we're looking at it right now and we'll see how the rest of the year plays out.

Ken Herbert -- Canaccord -- Analyst

Great. Phenomenal quarter and thanks for the color.

Victor H. Mendelson -- Co-President and Director

Thank you.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome. Thanks, Ken.

Operator

(Operator Instructions) Our next question comes from the line of Colin Ducharme from Sterling capital. Your line is open.

Colin Ducharme -- Sterling capital -- Analyst

Hi, thank you for taking my question. I had a couple of quick ones for each person Carlos, just very quickly, could you remind us of the materiality if any on tariff impacts of subsidiary input costs. And then secondarily the leverage today is very, very low. I understand the hierarchy use for cash flows M&A driven, to what extent use shareholder return and increased focus now, especially given where the balance sheet is today. And then for Eric, if you could just kind of help us. I know that kind of code of conduct with the CFM, OEM couple of months ago applies to a single engine manufacturer. But in practice, I'm curious as the industry it's kind of digested this are we seeing the effect on other OEMs over time in terms of market conduct. And then finally for Victor, as you've had incredible growth as you think about the M&A and trajectory for ETG from here, are you fairly well set in terms of the verticals, and by that I mean your end market exposures or you're just trying to better increase the depth of your penetration in your verticals or are you also considering entering new verticals over time. And I had a follow-up for Larry, which I'll hold off.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

Right, who wants to go first.

Victor H. Mendelson -- Co-President and Director

Carlos, go ahead.

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

So your question about tariffs. We get asked that question, quite a bit you know about a third of our sales are exported, and I think, Eric made a point earlier, lot of those either exported or foreign manufactured and sold to foreign countries. When we think about that, we're not terribly concerned about the tariffs as it relates to our products being sold. On the intake, if you would on raw materials and things along that nature, keep in mind HEICO, yes, we have metals that we use in our products, but a lot of the stuff we're doing particularly in ETG and even in a lot of the aircraft metals they are very specialized you know we're using things like gold and on precious metals if you would, for conductivity and in the aerospace area, we're using the highly specialized metals things that aren't source typically from China, and are often procured locally by our subsidiaries in the local marketplace.

So we haven't seen pressure to date on that front. Yes, raw materials are inching up, but very slightly. And the way we deal with that frankly is, if we haven't seen it today, but to the extent that pricing in the market goes up. For example, our only competitors raised prices since we use their pricing umbrella to set our prices we follow them up. We do not have a cost plus profit we're setting our prices on a lot of stuff we manufacture. So I don't have any great expectations that the tariffs are going to impact cycle on a material way.

Eric A. Mendelson -- Co-President and Director

And then with regard to the CFMI and GE conduct principles, we believe that other manufacturers have looked at that and are aware of those principles and are basically falling in line as well and recognize that competition is here to say and that they've got to give continue to give their customers the choice.

Victor H. Mendelson -- Co-President and Director

This is Victor, what was the question. I kidding.

Colin Ducharme -- Sterling capital -- Analyst

Just curious (inaudible).

Victor H. Mendelson -- Co-President and Director

I got you. I'm kidding, I remember the question. The answer is, I mean we're always looking to increase penetration in the existing markets that we're in and for the different products and the different apologies that we offer up of those products. However, we do widen our aperture and we're continuing to do that both within our existing subsidiaries, as well as in acquisitions. The key to the acquisition strategy, you'll notice that over the years we have widened the base of products that we've offered and they're not adjacent products right in our adjacent designs or utilization, if you will. And so the key to us, is whether they are niche products found that a certain level within the supply chain that have a certain amount of design, upfront design engineering that's required as well as on the production side a certain amount of complexity to the production.

So those are kind of the keys to us and those generally -- higher margin products though where we are interestingly enough, able to offer them at a very competitive price to our customers very often a cost saving price much less than their alternatives. So those are the kinds of things, we look to do and as long as it remains within those rounds, then we will do them and that will mean in all likelihood product type expansion.

Colin Ducharme -- Sterling capital -- Analyst

Okay. Thanks. And final follow-up for Larry, and I'll pass the baton here, your best in 29 years you highlighted was fantastic color. You've touched on it once or twice already on the call, but if you could just help educate me through the arc of your experience over that timeframe the broader trends that are informing that view. I mean, I can't think of a couple nationalistic headlines, stealing defense or development of emerging markets or consolidation of the domestic airline industry to a healthier landscape. What are the key themes in your mind from again that 30,000 level that are informing such a great environment for HEICO? Thank you.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Well, I think you did a very good job in mentioning some of the items that I would have mentioned, in addition to that we perceive a -- an administrative, forget about getting into politics and whether you like Trump or not and the -- but clearly, we have an administration, which is very pro business. We have an administration that reduced taxes on corporations, permitting much, much stronger cash flow and our ability to really function, a very, very efficiently with cash and reducing the tax rate from 35% to 21%. I think the -- you mentioned the military buildup under the Obama administration, you had all kinds of problems cutting military spending and so forth. I think we and other companies like us involved in defense, our beneficiaries of that, I think in spite of, you take a look at the backlog for Boeing and Airbus, Boeing has it's problem with the maths. I'm sure that they're going to get it fixed, but by the sheer number of aircraft on order, you can see that the industry is very strong and the flying public. I mean you have so many people flying -- developing nations, China, India, the Far East and so the entire business atmosphere is just incredible. I also think, we're seeing the results of lower unemployment, people are spending money. I read reports that people are optimistic on the economy. So all of these things go in, the other thing that's happening with HEICO is as you heard on this call, more airlines are buying into our value proposition, it was -- it's a very tough as Eric told you, very tough to get the airlines to focus and so forth, but we are making tremendous headway, so that's happening.

The other thing is HEICO as a company is -- I think the -- Victor got into this, where he said the volume increase is reducing as a percentage, the overhead expenses, the SG&A expenses, so we're becoming a much more efficient operation as we increase. We also have interchange between all of the subsidiaries where we have meetings, constantly meetings in different companies within the HEICO Group get together and talk about using the resources of one another if they have products that they buy from the outside, they can now buy it from a HEICO Company. So we keep the business in house.

So I think from an operating point of view, from where I sit, everything just seems to be going in the right direction and it's an incredible the demand out there for our products is extremely strong. The other thing is, I mentioned earlier the group of people that we have running these subsidiaries, these are really extraordinary people and I can say Eric, Victor and I and Carlos picked these people when we made acquisitions, but they are just an amazing group of people who are honest driven and love what they're doing and basically what we do in the corporate office to say how can we help you, but and they don't need much help, but if they do, if they make a request for CapEx or something else or introduction and there's a lot of cross-fertilization within the HEICO Group. So you put all these things together, and I think you get the results that we showed in the second quarter and honestly for this year and that's why I have tremendous confidence in going forward and I made a comment that I said we should for 15% to 20%.

And I don't want to promise that and we're not going to give guidance of that, but in my heart of heart I believe that we should exceed that. And I think we're clicking on all cylinders. So I think it's all of the above it's not one single thing, but everything pulling together. Hello?

Operator

There are no questions at the moment. You may continue.

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

So, I don't -- are there any other questions, anybody in line for any questions? So as there -- if there (Technical Difficulty) I just want to remind everybody on the call that Eric, Victor, Carlos and I remain available if you have -- do have questions you -- that you didn't ask at this call get in touch with us. You know where to reach us and -- we've -- again thank you very much for your interest in HEICO.

And we as management we are doing everything possible to run a great company and have greater profitability and if anybody's looked at the stock price, you could see that somebody out there believes that we have a great future, because I think we were hitting over $113 a share. So that kind of makes me happy and I'm happy that probably everybody on this call is happy with their HEICO shares. We look forward to talking to you for our third quarter, which will be sometime in late August. So have a good summer all of you and we'll be in touch and speak with you when you contact us. Thank you. That's the extent of the quarter.

Operator

Thank you for joining. This concludes today's conference call. You may now disconnect.

Duration: 96 minutes

Call participants:

Laurans A. Mendelson -- Chairman of the Board and Chief Executive Officer

Eric A. Mendelson -- Co-President and Director

Victor H. Mendelson -- Co-President and Director

Carlos L. Macau -- Executive Vice President, Chief Financial Officer and Treasurer

Robert Spingarn -- Credit Suisse -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Louis Raffetto -- UBS -- Analyst

Larry Solow -- CJS Securities -- Analyst

Peter Arment -- Baird -- Analyst

George Godfrey -- CLK -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Ken Herbert -- Canaccord -- Analyst

Colin Ducharme -- Sterling capital -- Analyst

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