Heico Corporation

Ladies and gentlemen, thank you for standing by and welcome to the HICO's fiscal year 2021 first quarter earnings results call. Certain statements in today's 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 the severity, magnitude and duration of the COVID-19 pandemic, high cost liquidity and amount and timing of cash generation, lower commercial air travel cost by COVID-19 pandemic and its aftermath, 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 or costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security, spending by US 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 and manufacturing 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 our 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 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 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 you, Mr. Lawrence A. Mendelson, High Coast Chairman and CEO. Thank you, sir.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to HICO's first quarter fiscal 21 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, and Carlos Macal, our Executive Vice President and CFO. Before I get into some of the detail, I would like to thank all of Heiko's extraordinary team members who have really performed in the most admirable way during this pandemic, which is now into about a year. As management looks at the company, we really believe that our success and the ability to keep our head well above water not to get into any financial binds, not to struggle to sell debt at 8% and 10% and so forth, and to be fiscally sound, is all attributed to the unbelievable talent and brilliance of the team members. And I can tell you, senior management and the board holds these people in the highest regard. So I thank them, and our hats are off to the entire team. Before reviewing our operating results in detail, I'd like to take a few minutes to discuss the impact on HICO's operating results from the COVID pandemic. Results of operations in the first quarter of fiscal 21 continue to reflect adverse impact from COVID-19. Most notably, demand for commercial aviation products and services continues to be moderated and impacted negatively by ongoing depressed commercial aerospace markets. We continue to focus on health and safety measures at our facilities in accordance with the CDC guidelines in order to protect the global team members and mitigate the spread of COVID-19 while serving our customers' needs. Keep in mind that almost all of our facilities were open continually since the start of the COVID pandemic. And very, very few members of our teams came down with this miserable disease. And that was because of the safety measures and health measures that we employed throughout the company. Consolidated net sales for businesses that operate within the commercial aerospace industry decreased by about 43% in the first quarter of fiscal 21 as compared to the first quarter of fiscal 20. As we move further into fiscal 21, we acknowledge that factors such as the duration, spread, and severity of the pandemic, the emergence of new corona strain variants, and distribution and effectiveness of COVID-19 vaccines will largely determine the timing and pace at which commercial aerospace will recover. As we mentioned in prior calls, we anticipate that as the pandemic vaccine becomes more widely available, consumer interest in commercial air travel should begin to reemerge. As such, We cautiously anticipate improved demand for our commercial aerospace products to slowly recover towards the second half of fiscal 21. Summarizing the highlights of our first quarter of fiscal 21 results, I would tell you that despite continuing difficult operating environment created by the pandemic, HICO continues to generate excellent cash flow, and the cash flow provided by operating activities was very strong, increasing 32 percent to $107.2 million in the first quarter of fiscal 21, and that was up from $81.1 million in the first quarter of fiscal 20. We are encouraged by the second consecutive quarter of sequential improvement in net sales and operating income at our flight support group. Operating income and net sales at flight support increased 20 percent and 3 percent, respectively, in the first quarter of fiscal 21 as compared to the fourth quarter of fiscal 20. Clearly, an improvement that's obvious. Net sales for ETG and electronics products grew organically by a very strong 19 and 14 percent, respectively, in the first quarter of fiscal 21, while the ongoing pandemic's impact resulted in softer demand for its commercial aerospace products. In January 21, we paid our regular semiannual cash dividend of eight cents per share, and this represented our 85th consecutive semiannual cash dividend since 1979. HICO's strength in the face of ongoing challenging conditions, coupled with our optimism for HICO's future, gave our board the confidence to continue paying a cash dividend through the current health pandemic. Total debt to shareholders' equity improved to 32.2 percent as of January 31, 21, and that compared to 36.8 percent as of October 31, 20. Our net debt, which is total debt less cash and cash equivalents of 270.3 million as of January 31, 21, to shareholders' equity ratio improved to 13% as of January 31, 21, and that was down from 16.6% as of October 31, 20. Our net debt to EBITDA ratio improved to 0.62 times as of January 31, 21, and that was down from 0.71% on October 31, 2020. 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 to accelerate the growth and maximize shareholder return. Last week, we publicly and proudly extended our congratulations to both NASA and Jet Propulsion Laboratories, or known as JPL, on their successful Mars Perseverance rover landing. Our APEX Micro Technologies, Sierra Microwave 3D Plus, and DPT subsidiaries supplied mission-critical hardware for the mission. Once again, NASA and JPL demonstrated remarkable talent and capabilities despite a year of great challenges for the world's population, and they remain a beacon of optimism for all people. And we are extremely proud of Heiko companies and team members who contributed to this effort. I think we want to focus on the extreme technical ability and unbelievable quality that our subsidiaries built into the electronics that they supplied for that Mars Perseverance rover landing. At this time, I would 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.

Thank you. The Flight Support Group's net sales were 199.3 million in the first quarter of fiscal 21, as compared to 301.1 million in the first quarter of fiscal 20. The net sales decrease is principally organic and reflects lower demand for the majority of our commercial aerospace products and services, resulting from the significant decline in global commercial air travel attributable to the pandemic. The Flight Support Group's operating income was $25.8 million in the first quarter of fiscal 21, as compared to $62 million in the first quarter of fiscal 20. The operating income decrease principally reflects the previously mentioned decrease in net sales as well as a lower gross profit margin and the impact from lost fixed cost deficiencies stemming from the pandemic. The lower gross profit margin principally reflects the impact from lower net sales of commercial aerospace products and services across all of its product lines. The flight support group's operating margin was 13.0% in the first quarter of fiscal 21 as compared to 20.6% in the first quarter of fiscal 20. The operating margin decrease principally reflects 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 lost fixed cost efficiencies in the effect of higher intangible asset amortization expense. I would like to point out that the full impact of the pandemic began to affect the FSG operating segment at the beginning of our third quarter of fiscal 20. Through practical and disciplined cost management, we have delivered sequential quarterly improvements in our FSG operating margin. The FSG operating margin was just 6.7% in the third quarter of fiscal 20 and has since steadily increased to 11.1% in the fourth quarter of fiscal 2020 and to 13% in the first quarter of fiscal 21. Our team members and assembled workforce is our most valuable asset. Our team members engage primarily in commercial aviation sacrificed greatly during the pandemic through limited layoffs, moderate furloughs, and wage reductions for nearly all others not impacted by layoffs or furloughs. These team members sacrificed a tremendous amount, and we owe our loyalty to them as we held on to a much higher percentage of our workforce than most others. Thus, we decided to operate with higher overhead, which reduced our gross margins and increased our SG&A. A lot of companies speak about how their team members are important, but Heiko demonstrates it through actions, including by maintaining our 401 matching contributions in granting our team members their maximum potential 401 profit-sharing contributions, even though we missed our budgets due to the pandemic. We could have sacrificed the future in order to have better current period results, but that is not what HICO is about. That's the luxury of being part of the HICO family, as we don't feel pressured to make short-term decisions that hurt future performance. We also treated our customers, suppliers, principals, partners, and acquisitions extremely well, and truly believe this helps us grow faster than the industry, as people prefer dealing with us due to our culture. We are confident that our motivated and assembled workforce will propel us to new heights as the pandemic passes. 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.