Heico Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Heichel Corporation Fiscal Year 2020 Second Quarter Earnings Results Conference Call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. Heichel's actual results may differ materially from those expressed in or implied by those forward-looking statements. as a result of factors including the severity, magnitude, and duration of the COVID-19 outbreak, high cost liquidity, and the amount and timing of cash generation, the continued decline in commercial air travel caused by the COVID-19 outbreak, lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for air goods and services, product specification costs and requirements. which could cause an increase to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and or foreign customers or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development, 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 electronic 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 High Court's filings with the Securities and Exchange Commission, including but not limited to filing 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, feature events, or otherwise, except to the extent required by applicable law. I would now like to hand the conference over to your speaker today, Mr. Lawrence Mendelson, High Court Chairman and Executive Officer. Please go ahead, sir.

Thank you, and good morning to everyone on the call, and we thank you for joining us. Welcome you to the HICO Second Quarter Fiscal 20 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HICO Corporation, and I'm joined here this morning by Eric Mendelson, HICO's Co-President and President of HICO's Flight Support Group, Victor Mendelson, HICO's Co-President and President of HICO's Electronic Technologies Group, excuse me, And Carlos Macau, our executive VP and CFO. Before reviewing our second quarter operating results in detail, I'd like to take a moment to thank all of HICO's talented team members. You have responded with distinction to the unprecedented challenge of serving our customers and your local communities during the onset of the COVID-19 global pandemic. I am humbled by your collective actions and unwavering commitment to HICO's success. I strongly believe your contributions to HICO's entrepreneurial values and ownership culture will continue to produce a winning formula in the marketplace, despite the near-term challenges that we face as a result of the COVID-19 outbreak. I'll now take a few moments to discuss our second quarter operating results. The results of operations for the six and three months ended April 30, 2020, have been affected by COVID-19. The effects of the outbreak and related actions by governments around the world to mitigate its spread have impacted our team members, customers, suppliers, and manufacturers. In response to the economic impact from the outbreak, we at HICO have implemented certain cost reductions, including layoffs, temporary reduced work hours, temporary pay reductions within various departments of our businesses, including our entire executive management team and our board of directors. Our response to the outbreak includes implementing varying health and safety measures at our facilities, including supplying and requiring the use of personal protective equipment, staggering work shifts, body temperature taking, increasing work from home capabilities, consistent and ongoing cleaning of workspaces, and high-touch areas, and establishing processes aligned with the Center for Disease and Control guidelines to work with any individual exposed to COVID-19 on their necessary quarantine period and the process for the individual to return to work. With respect to our results of operations, approximately half of our net sales are derived from defense, space, and other industrial markets, including electronics, medical, and communications. Demand for products in that half of our business has not been fundamentally impacted, and its operational results remain materially consistent with the financial expectations prior to the outbreak. However, we expect to continue experiencing periodic operational disruptions resulting from supply chain disturbances, staffing challenges, including in some of our customers, temporary facility closures, transportation interruptions, and other conditions which slow production or may increase cost. While these issues have not yet been material, it is possible to predict their future impact. It is impossible to predict their future impact. And our current experience indicates that the likely effect will be to delay orders and shipments measured in weeks and months. and to temporarily increase some costs, and this as opposed to profoundly changing our business overall. Fortunately, many of our defense and medical component design, manufacturing, and supply operations are believed to be crucial suppliers to markets with continuing strong needs. While it has not had a material impact on consolidated net sales, demand for our components used in medical equipment, such as ventilators, x-ray systems, sterilization equipment, personal protective equipment, all increased as a result of the outbreak. The remaining portion of our net sales is derived from commercial aviation products, and services. The outbreak has caused significant volatility and substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020. Once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers, and we do anticipate recovery in demand for our commercial aviation products which frequently provide aircraft operators with significant cost savings. Furthermore, we believe that our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within this market. Consolidated net income increased 22% to a record $197.3 million, or $1.44 per diluted share, in the first six months of fiscal 20. And that was up from $161.1 million, or $1.18 per diluted share, in the first six months of fiscal 19. Consolidated operating income increased 1% to $219.2 million in the first six months of fiscal 20, and that was up from $217.1 million in the first six months of fiscal 19. Our consolidated operating margin improved to 22.5% in the first six months of fiscal 20, and that was up from 22.1% in the first six months of fiscal 19. Cash flow provided by operating activities was strong, increasing 15% to $205.9 million in the first six months of fiscal 20, and that was up from 178.3% in the first six months of fiscal 19. we continue to forecast positive cash flow from operations for the remainder of fiscal 2020. Our net debt, which is total debt less cash and cash equivalents, of $393.4 million as of April 30, compared to shareholders' equity ratio, decreased to 20.8%. as of April 30th, 2020, and that was down from 29.8% as of October 31, 2019. Net debt to EBITDA ratio decreased to 0.72 times as of April 30, 20, and that was down from 0.93 times as of October 31, 19. During fiscal 20, we successfully completed two acquisitions, and we have completed five acquisitions over the past year. We have no significant debt maturities until fiscal 2023, and we pledge to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. At this time, I would like to introduce Ersk Mendelssohn, co-president of HEICO and president of HEICO's Flight Support Group, and he will discuss the results of this Flight Support Group. Thank you very much.

The Flight Support Group's net sales decreased 18% to $252 million in the second quarter of fiscal 20, as compared to $308 million in the second quarter of fiscal 19. The flight support group's net sales decreased 7% to $553.0 million in the first six months of fiscal 20, as compared to $595.5 million in the first six months of fiscal 19. The net sales decrease in the second quarter and first six months of fiscal 20 is principally organic and reflects lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020 due to the outbreak. The flight support group's operating income decreased 24% to $47.5 million in the second quarter of fiscal 20, as compared to $62.2 million in the second quarter of fiscal 19. The flight support group's operating income decreased 5% to $109.6 million in the first six months of fiscal 20, as compared to $115 million in the first six months of fiscal 19. The operating income decrease in the second quarter and first six months of fiscal 20 principally reflects the previously mentioned decrease in net sales and a lower gross profit margin mainly within our aftermarket replacement parts and repair and overhaul parts in service product lines, partially offset by a decrease in performance-based compensation expense. The flight support group's operating margin decreased to 18.9% in the second quarter of fiscal 20, as compared to 20.2% in the second quarter of fiscal 19. The decrease principally reflects the previously mentioned lower gross profit margin partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from the previously mentioned lower performance-based compensation expense. The flight support group's operating margin increased to 19.8% in the first six months of fiscal 2020, up from 19.3% in the first six months of fiscal 19. The increase principally reflects a decrease in SG&A expenses as a percentage of net sales, mainly from lower performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin. Now I would like to introduce Victor Mendelson, co-president of HEICO and president of HEICO's Electronic Technologies Group to discuss the Electronic Technologies Group results. Thank you, Eric.