Heico Corporation

Certain statements in this conference call will constitute forward-looking statements which are subject to risks, uncertainties, and contingencies. HICO'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 or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services. Product specification costs and requirements, which could cause an increase in 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 reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development or manufacturing difficulties, which could increase our product development 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 the aviation, defense, space, medical, telecommunications, and electronics industries, which could negatively impact our costs and revenues, and defense spending or budget cuts. which could reduce our defense-related revenue. Parties listening to or reading a transcript of this call are encouraged to review all of HICO'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, further events, or otherwise, except to the extent required by applicable law. Ladies and gentlemen, thank you for standing by and welcome to the Physical Year 2020 First Quarter Earnings Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press Star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press Star 0. I will now turn the conference over to your speaker today, Lawrence Mendelsohn.

Thank you very much. Good morning to everyone on the call. We thank you for joining us and welcome you to the HICO first quarter fiscal 20 earnings teleconference. I'm Larry Mendelsohn. I'm chairman and CEO of HICO Corporation, and I'm joined here this morning by Eric Mendelsohn, HICO's co-president and president of HICO's Flight Support Group, Victor Mendelsohn, HICO's co-president and president of HICO's Electronic Technologies Group, and Carlos Macau, our Executive VP and CFO. Before reviewing our operating results in detail, I would like to take a moment to thank all of HICO's talented team members who, again, were responsible for our strong results. I am truly proud of this dedicated and loyal group, and they are the ones that continue to produce the highest quality products and services for our customers while maintaining our unique entrepreneurial culture and delivering outstanding returns to shareholders. I'd like to summarize the highlights of our first quarter results. Consolidated net income increased 54 percent to $121.9 million, or 89 cents per diluted share, in the first quarter of fiscal 20, and that was up from $79.3 million or 58 cents per diluted share in the first quarter of fiscal 19. The net income attributable to HICO in the first quarter of fiscal 20 and 19 were both favorably impacted by a discrete income tax benefit from stock option exercises. The benefit in the first quarter of fiscal 20 and fiscal 19 was approximately 46.3 million and 15.1 million respectively. These tax benefits were mainly driven by more stock options being exercised as they approached expiration, as well as the strong appreciation in HICO stock price during the optionese holding period. And the next comment I think is very critical because the tax benefit and the increase in taxes can be a little bit confusing to normal operating earnings. I want to point out that excluding the impact of tax benefit in both periods, 19 and 20, net income and diluted earnings per share increased 18% and 17% respectively in the first quarter of fiscal 20. And I think that's an amazing accomplishment that I credit our great team members with producing those results. And to me, that should be the clearest message that we send in this entire report. Consolidated operating income increased 13 percent to $111 million in the first quarter of fiscal 20, and that was up from $97.9 million in the first quarter of fiscal 19. Consolidated operating margin improved to 21.9 percent in the first quarter of fiscal 20, and that was up from 21% in the first quarter of fiscal 19. Consolidated net sales increased 9% to $506.3 million in the first quarter of fiscal 20, up from $466.1 million in the first quarter of fiscal 19. In summary, Our consolidated first quarter 2020 net sales increased 9%. Our operating income increased 13%. And our net income, excluding the stock option impact, increased 18%. And we are all very pleased with these results, and we hope all of our shareholders are, too. Our ETG Group's net sales and operating income in the first quarter of fiscal 20 are up 13 and 11% respectively over the first quarter of fiscal 19. Those increases reflect the impact from our very well managed and profitable fiscal 19 and 20 acquisitions, as well as strong double-digit organic growth for our defense product. Our flight support group net sales and operating income in the first quarter of fiscal 20 are up 5% and 17%, respectively, over the first quarter of fiscal 19. Reflect organic growth within all of our product lines, as well as improved gross profit margins. Cash flow. provided by operating activities increased 64 percent to a strong $81.1 million in the first quarter of fiscal 20, and that was up from $49.6 million in the first quarter of fiscal 19. We continue to forecast very strong cash flow from operations for the balance of fiscal 20. We also continue to generate significant cash flow for our shareholders by remaining focused on developing niche products and our strategic commitment to an entrepreneurial structure that minimizes bureaucracy and focuses team members on serving our customers. Our total debt to shareholders' equity decreased to 31.4% as of January 31, 2020, down from 33.2% as of October 31, 2019. Our net debt, which we define as total debt less cash and cash equivalents of $504.8 million as of January 31, 2020, to shareholders' equity ratio decreased to 27.9% as of January 31, 20, and that was down from 29.8% as of October 31, 19. Net debt to EBITDA ratio improved to 0.9 times as of January 31, 20, and that was down from 0.93 times as of October 31, 19. We are not a financially challenged company. We have major firepower behind the lines to do really anything that we want to do, and we are aggressively pursuing acquisitions and, of course, our standard R&D development. We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial flexibility again to pursue those high-quality acquisitions and maximize shareholder returns. In January 2020, we paid an increased regular semiannual cash dividend of $0.08 per share, which represented our 83rd consecutive semiannual cash dividend since 1979, and it was a 14% increase over the prior semiannual per share amount. In December 2019, our Radiant Power subsidiary acquired 100% of the business and assets of the human-machine interface or product line of Spectralux. HMI designs, manufactures, repairs flight deck annunciators, panels, indicators, and illuminated keyboards, as well as lighting controls and flight deck lighting. Radiant Power is part of our ETG group, and we expect the acquisition to be accretive to earnings within the first 12 months following closing. In December 19, 2019, we acquired 80.1% of the stock of Quell Corporation, which designs and manufactures EMI, RFI, and transient protection solutions for a very wide variety of connector products in aerospace and defense. The acquisition successfully closed during the first quarter of fiscal 20 and has integrated well into our ETG group. And we expect that acquisition to be accretive to earnings within the first 12 months following closing. In January 2020, we reported that our 3D plus subsidiary supplied numerous mission critical and highly reliability components on the solar orbiter space mission. That mission will provide the first views of the sun's uncharted polar regions and investigate how intense radiation and energetic particles being blasted out from the sun and carried by the solar wind through the solar system will impact our home planet Earth. We congratulate the European Space Agency on leading this project, along with its partners at NASA, Airbus, 3D Plus, and the numerous other contributors to this effort. HEICO takes great pride in 3D Plus's involvement in this historic mission. Now, at this time, I'd like to introduce Eric Mendelson, co-president of HICO and president of HICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Good morning and thank you. The Flight Support Group's net sales increased 5% to $301.1 million in the first quarter of fiscal 20, up from $287.2 million in the first quarter of fiscal 19. The increase is attributable to 4% organic growth, mainly due to increased demand and new product offerings across all of our product lines. The flight support group's operating income increased 17% to $62 million in the first quarter of fiscal 20, up from $52.9 million in the first quarter of fiscal 19. I'd like to point out that our team members are incentivized and focused on operating income, not sales, and I consider a near 17% organic increase in operating income to be a phenomenal achievement, especially since it was accomplished while maintaining our long-term minimal price increase model and keeping the loyalty and appreciation of our customers. The increase principally reflects an improved gross profit margin, mainly attributable to a more favorable product mix within all of our product lines. The previously mentioned net sales growth and a favorable impact from lower expenses related to changes in the estimated fair value of accrued contingent consideration. The flight support group's operating margin increased to 20.6% in the first quarter of fiscal 20, up from 18.4% in the first quarter of fiscal 19. Again, this was accomplished by maintaining our low-price increase model. The increase principally reflects the previously mentioned improved post-profit market and the decrease in SGA expenses as a percentage in the sales, mainly from the policies realized from the net sales growth as well as the previously mentioned lower expenses related to changes in the estimated fair value of accrued contingency consideration. With respect to the remainder of fiscal 2020, we continue to estimate 7% to 8% net sales growth over the prior year, and now estimate the 5% to 11%. up from the prior operating margin estimate of 19.5 to 20%. Further, we continue to estimate mid to high single-digit organic growth in fiscal 20. These estimates exclude additional acquired businesses and the impact from the recent coronavirus outbreak, if any. Now I would like to introduce Victor Mendelson, President of HEICO and President of HEICO's Electronic Technologies Group to discuss the results of the Electronic Technologies Group.