Heico Corporation

Ladies and gentlemen, thank you for standing by and welcome to the fiscal year 2020 fourth quarter and end of the year earnings results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, follow your question and answer session. To ask a question during the 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 zero. Certain statements in today's call will constitute forward-looking statements, which are subject to risk, uncertainties, and contingencies. HICO's actual results may differ materially from those expressed and or implied by those forward-looking statements as a result of factors including the severity, magnitude, and duration of the COVID-19 pandemic. high cost liquidity and the amount and timing of a cash generation, lower commercial air travel cost by the COVID-19 pandemic and its aftermath, airline fleet changes or airline purchasing decisions, which could cost lower demand for our goods and services, products specification cost and requirements, which could cost an increased or cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reduction 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 as profitable pricing levels, which could reduce our sales or sales crop, product development or manufacturing difficulties, which could increase our product development and manufacturing cost and delay sales. Our ability to make acquisition and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, economic condition within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries. which could negatively impact our cost and revenues, and defense spending or budget cuts, which could reduce our defense-related revenue. Parties receiving listening to this call or reading a transcript of this call are encouraged to review all of HICO's filing 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 statements, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. I now turn the call over to Lawrence A. Mendelson, High Coast Chairman and Chief Executive Officer. Thank you. Please go ahead.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HICO fourth quarter and full fiscal 20 earnings announcement teleconference. I'm Larry Mendelsohn, 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 Mendelson, HICO's Co-President and President of HICO's Electronic Technologies Group, and Carlos Macau, our Executive Vice President and CFO. Now, before reviewing our fourth quarter and full fiscal year results, I'd like to take a few moments to discuss the impact on HICO's operating results from the COVID-19 global pandemic. The results of operations in fiscal 20 were significantly affected by COVID-19 global pandemic. The effects of the pandemic and related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers, and manufacturers. Since the beginning of the pandemic in March 2020, we have implemented health and safety measures at our facilities in accordance with the CDC guidelines to protect team members and mitigate the spread of COVID-19. Most of our facilities are considered essential businesses and have remained operational during the pandemic. We are thankful for the outstanding commitment of our team members towards our customers, shareholders, and each other during these very challenging times. The Board of Directors and management of Heiko are truly humbled by the dedication of our team members to their company during these unprecedented times. Currently, we believe the recent vaccine progress will most notably result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal 21. As demand for air travel slowly recovers, we remain very confident in our ability to offer cost-saving solutions and robust product development programs that we expect to increase our market share and allow us to have even a stronger presence within the commercial aviation market. I'd like to take a few moments to summarize the highlights of our full fiscal 2020 and fourth quarter results. Despite the many challenges faced in fiscal 2020, HICO has continued to generate excellent cash flow. Our cash flow provided by operating activities was very strong at $409 million and $437.4 million in fiscal 2019, respectively. Cash flow provided by operating activities totaled $110.2 billion, or 177% of reported net income in the fourth quarter of fiscal 20, as compared to $124 million in the fourth quarter of fiscal 19. As all of you know, HICO's most important metric is cash flow. And I think that the results of 2020 operations, particularly the fourth quarter, are clearly indicative of the success. We are encouraged by the sequential improvements in our fiscal 20 consolidated fourth quarter operating results over the third quarter of fiscal 20. And during the fourth quarter, we experienced increases in consolidated operating income, net income, and net sales of 30 percent, 15 percent, and 10 percent, respectively. In fact, despite the continued impact for the pandemic on demand for our commercial aerospace parts and services, The flight support groups operating income and net sales in the fourth quarter of fiscal 20 improved sequentially by 78% and 9% respectively as compared to the third quarter of fiscal 20, a significant improvement. The electronic technologies group, and from now on I'll call it ETG, set all-time quarterly net sales and operating income records in the fourth quarter of fiscal 20, improving 8% and 14% respectively over the fourth quarter of fiscal 19. These increases principally reflect the excellent operating performance of our fiscal 20 acquisitions, as well as continued disciplined cost management on the part of our operating teams. We recently entered into an amendment to extend the maturity date of our revolving credit agreement by one year to November 23, and to increase the committed capital to $1.5 billion. In addition, our credit facility continues to include a feature that will allow the company to increase the capacity by $350 million or become a $1.85 billion facility through increased commitments from existing lenders or the addition of new lenders and can be extended for an additional one-year period. We are very thankful for the continued support of our existing bank group. Their loyalty to HICO as demonstrated by this credit facility amendment further offers us the financial flexibility to pursue our disciplined strategy of acquiring high-quality businesses at fair prices. Our net debt, which we define as total debt less cash and cash equivalents, of $333 million, compared to shareholders' equity ratio, improved to 16.6% as of October 31, 2020, and this was down from 29.8% as of October 31, 2019. Our net debt to EBITDA ratio improved to 0.71 times as of October 31, 2020, down from 0.93 times as of October 31, 19. Keep in mind, this is after making six acquisitions during the year. During fiscal 20, we successfully completed six acquisitions, four of which were completed since the pandemic start. We have no significant debt maturities until fiscal 24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes and accelerate growth to maximize shareholder returns. As we reported yesterday, we declared an 8-cent-per-share regular semiannual cash dividend on both classes of common stock payable January 21, 2021, to shareholders of record as of January 7, 2021. This cash dividend will be our 85th consecutive semiannual cash dividend since 1979. Heiko's strength in the face of challenging business conditions, coupled with our optimism of the future, gave our board of directors the confidence to continue paying our normal cash dividend. While this is very important to all of our shareholders, it is especially important to our team members, the vast majority of whom are fellow HICO shareholders through the personal holdings in their 401k plan. Let's talk about some of the new fourth quarter acquisitions. As I discussed during the third quarter teleconference, we completed three acquisitions in August through our ETG group. First, we acquired a 75 percent of the equity interest in transformational security and intelligent devices. These two companies design and develop and manufacture state-of-the-art technical surveillance countermeasures equipment. Next, we acquired approximately 90% of the equity interest of Connect Tech. Connect Tech designs and manufactures rugged small form factor embedded computing solutions used in rugged commercial and industrial aerospace and defense, transportation, and smart energy applications. These acquisitions are expected to be accretive to earnings within the first 12 months following closing. At this time, I would like to introduce Eric Mendelsohn, co-president of HEICO and president of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Eric Mendelsohn, Thank you. The Flight Support Group's net sales were $924.8 million in fiscal year 20, as compared to $1,240.2 million in fiscal year 19. The flight support group's net sales were $193.6 million in the fourth quarter of fiscal 20, as compared to $324.7 million in the fourth quarter of fiscal 19. The net sales decreases are principally organic and reflect 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 pandemic. Net sales in fiscal 20 follows the 13% and 12% organic growth reported in the year and fourth quarter of fiscal 19, respectively. The flight support group's operating income was $143.1 million in fiscal 20, as compared to 242 million in the fiscal year 19. The flight support group's operating income was 21.5 million in the fourth quarter of fiscal 20, as compared to 62.2 million in the fourth quarter of fiscal 19. The operating income decreases principally reflect the previously mentioned decrease in net sales, a lower gross profit margin, and an increase in bad debt expense due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 20 as a result of the pandemic's financial impact, partially offset by a decrease in performance-based compensation expense. The lower gross profit margin principally reflects an increase in inventory obsolescence expense mainly resulting from the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the pandemic's financial impact. Additionally, the lower gross profit margin reflects the impact from lower net sales within our repair and overhaul parts and services and aftermarket replacement parts product lines. The place of work group's operating margin was 15.5% in fiscal 20 as compared to 19.5% in fiscal 19. The flight support group's operating margin was 11.1% in the fourth quarter of fiscal 20 as compared to 19.2% in the fourth quarter of fiscal 19. The operating margin decreases principally reflect the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher bad debt expense and fixed cost efficiencies loss resulting from the pandemic's impact, partially offset by lower performance-based compensation expense. Now, I would like to introduce Victor Mendelson, co-president of HICO, and President of Heiko's Electronic Technologies Group to discuss the results of the Electronic Technologies Group.