Heico Corporation

Welcome to the HICO Corporation Third Quarter Fiscal Earnings Conference Call. My name is Justin and I will be your conference operator for today. 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 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 the amount of and timing of cash generation, lower commercial air travel caused by the 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 to our 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 the 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 currencies, exchange, and income tax rates, economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical and telecommunication, and electronic industries, which could negatively impact our costs and revenues, and defense, spending, or budget cuts, which could reduce our defense-related revenues. Parties listening to this call are encouraged to review all of HIGO's filing with the Security and Exchange Commission, including but not limited to filing 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. As we begin the call, now I turn the call over to Lawrence Mendelson, HICO's chairman and chief executive officer.

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 third 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 Macau, our Executive Vice President and CFO. Before beginning my review of the operating results, I'd like to take a moment and recognize all of HICO's talented team members for their extraordinarily high performance during the challenging times brought on by COVID-19. The dedication to Heiko's customers and the safety of their fellow team members continues to be exceptional in our opinion. On behalf of our board of directors and management, I want to thank each and every member of Heiko's worldwide team for these efforts and the outstanding results that we are reporting today. I will now summarize the highlights of our third quarter and first nine months of fiscal 21. We were very pleased to report consolidated operating income and net sales in the third quarter of fiscal 21 improved 47 percent and 22 percent, respectively, as compared to the third quarter of fiscal 20. which was the quarter in which our operating results were most negatively affected by the pandemic. Our performance principally reflects quarterly consolidated organic net sales growth of 17 percent, as well as the favorable impact from our fiscal 20 and 21 acquisitions. The Flight Support Group reported quarterly increases of 250 percent and 33 percent in operating income and net sales, respectively, as compared to the third quarter fiscal 20. These substantial increases principally reflect increased demand for the majority of our commercial aerospace products and services, resulting from some recovery in global commercial air travel as compared to the prior year. In addition, this marks the fourth consecutive quarter of sequential growth in net sales and operating income at the Flight Support Group. We are very pleased with this trend, and we do expect to see it continue. The Electronic Technologies Group, reported quarterly increases of 14 and 11 percent in net sales and operating income, respectively, as compared to the third quarter of fiscal 20. These increases principally reflect the impact from our profitable fiscal 20 and 21 acquisitions, as well as strong organic net sales for the majority of our products. Our total debt to shareholders' equity improved to 17.4 percent as of July 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 $117.1 million as of July 31, compared to shareholders' equity ratio, improved to a very low 5.3% as of July 31, 21. And that was down from 16.6% as of October 31, 20. Obviously, we are not a heavily leveraged company, and we have a lot of debt capacity and ability for acquisition and growth. Our net debt to EBITDA ratio improved to 0.25% as of July 31, 21, down from 0.71 times as of October 31, 20. During fiscal 21, we successfully completed four acquisitions and have no significant debt maturities until fiscal 24. We plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes to accelerate growth and maximize shareholder returns. Cash flow provided by operating activities was very strong, increasing 33 percent to $124 billion in the third quarter of fiscal 21, and that was up from $93.1 million in the third quarter of fiscal 20. Cash flow provided by operating activities remained strong, increasing 12% to $334.1 million in the first nine months of fiscal 21, and that was up from $299 million in the first nine months of fiscal 20. In July 21, we paid a regular semiannual cash dividend of $0.09 per share, and this represented our 86th consecutive semiannual cash dividend, and it was 12.5% higher than the $0.08 per share cash dividend we paid in January 21. In June 21, we acquired 80.1% of the assets of Camtronics an FAA-certified Part 145 repair station with extensive proprietary FAA-designated engineering representative repairs. The remaining 19.9 percent interest continues to be owned by certain members of Camptronic's management team, as well as certain members of the management team of an existing HICO Flight Support subsidiary. Camptronics is part of HICO Flight Support, and we expect the acquisition to be accretive to earnings within the first 12 months following closing. Earlier this month, we acquired 89 percent of Ridge Engineering and the Becton Company. Ridge is a leader in performing tight tolerance machining and brazing of large-sized parts in mission-critical defense and aerospace applications. Becton provides machining, fabrication, and welding services for aerospace, defense, and other industrial applications. The remaining 11% interest continues to be owned by certain members of Ridge's and Becton management team. These companies are now part of Heiko's flight support group, and we expect these acquisitions to be accretive to our earnings per share within the first 12 months following closing. 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 this Flight Support Group.

Thank you very much. I'd like to start out by first thanking all of HICO's team members for their incredible dedication and, in particular, their sacrifice in 2020. our shareholders and the community at large expect phenomenal results from Heiko and they just automatically think that we're able to pump out these incredible results quarter after quarter but the truth is that all of the businesses that we're in are very competitive businesses and our people have to work incredibly hard and last year they went through tremendous sacrifices, tremendous personal sacrifices And in order to help HICO and looking at the results that we see now today, I believe is the result of that hard work and dedication. So I just personally thank all of the HICO team members for everything that they've done to make our company what it is today. Moving on to the prepared remarks. The flight support group's net sales increased 33% to $237.1 million in the third quarter of fiscal 21, up from $178.2 million in the third quarter of fiscal 20. The net sales increase in the third quarter of fiscal 21 is principally from organic growth of 32%. The organic growth is mainly attributable to increased demand for commercial aerospace products across all of our product lines. The Flight Support Group's net sales were $666.7 million in the first nine months of fiscal 21, as compared to $731.2 million in the first nine months of fiscal 20. The net sales decrease in the first nine months of fiscal 21 is principally organic and reflects lower demand for the majority of our commercial aerospace products and services, resulting from a decline in global commercial air travel attributable to the pandemic. The Flight Support Group's operating income increased 250% to $42.1 million in the third quarter of fiscal 21. up from $12 million in the third quarter of fiscal 20. The operating income increase in the third quarter of fiscal 21 principally reflects the previously mentioned net sales growth and an improved gross profit margin, mainly due to increased demand for our commercial aviation products. Additionally, we had a decrease in bad debt expense due to certain commercial aviation customers filing for bankruptcy protection in the third quarter of fiscal 20 last year as a result of the pandemic's financial impact. The flight support group's operating income was $103.4 million in the first nine months of fiscal 21 as compared to $121.6 million in the first nine months of fiscal 20. The operating income decrease in the first nine months of fiscal 21 principally reflects the previously mentioned lower net sales as well as higher performance-based compensation expense in the impact from lost fixed cost efficiencies stemming from the pandemic, partially offset by a decrease in bad expense. The flight support group's operating margin improved to 17.7% in the third quarter of fiscal 21, up from 6.7% in the third quarter of fiscal 20. The operating margin increase in the third quarter of fiscal 21 principally reflects the previously mentioned increase in net sales, improved gross profit margin, and lower bad debt expense. The flight support group's operating margin was 15.5% in the first nine months of fiscal 21, as compared to 16.6% in the first nine months of fiscal 20. The operating margin decrease in the first nine months of fiscal 21 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher performance-based compensation expense in lost fixed cost efficiencies, partly offset by the previously mentioned lower bad debt expense. Now I would like to introduce Victor Mendelson, Co-President of Heiko and President of Heiko's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.