Heico Corporation

Welcome to the HICO Corporation Fourth Quarter and Full Year Fiscal 2021 Financial Results Call. My name is Renz and I'll be your operator for today's 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 the amount 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 or 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 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, including the effects of inflation, 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 listening to 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, 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, High Coast Chairman and Chief Executive Officer.

Thank you, Renz, and good morning to everybody on this call. We thank you for joining us, and we welcome you to HICO's fourth quarter and full year 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 Heiko's Electronic Technologies Group, and Carlos Macau, our executive vice president and CFO. Before reviewing operating results in detail, I'd like to take a moment to thank all of Heiko's talented team members for delivering another outstanding year. Your continued focus on exceeding customer expectations and operational excellence has translated into another year of outstanding results for shareholders. I am encouraged that our success will continue into the next fiscal year, and that will be driven by the confidence and respect that I have for all of HICO's exceptional team members. Now summarizing the highlights of our fourth quarter and full year fiscal results, we are pleased to report much improved quarterly operating results within both flight support and electronic technologies. Consolidated operating income and net sales in the fourth quarter of fiscal 21 improved 29 and 20% respectively, as compared to the fourth quarter of fiscal 20. Our performance principally reflects quarterly consolidated organic net sales growth of 16%, and the favorable impact from our fiscal 21 and 20 acquisitions. The Flight Support Group reported quarterly increases of 126% and 34% in operating income and net sales, respectively, as compared to the fourth quarter of 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 with the prior year. This marks the fifth consecutive quarter of sequential growth in net sales and operating income at the Flight Support Group. ETG reported quarterly increases of 7% and 4% in net sales and operating income, respectively, compared to the fourth quarter of fiscal 20. These record results principally reflect the impact from our profitable fiscal 21 and 20 acquisitions, as well as strong organic net sales growth for the majority of our products. Our total debt to shareholders' equity improved to 10.3 percent as of October 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 128.2 million as of October 31, 21, compared to shareholders' equity ratio improved to a very low 5.6% as of October 31, 21, and that was down from 16.6% as of October 31, 20. Our net debt to EBITDA ratio improved to 0.26 times as of October 31, 21, and that was down from 0.2%. seven one times as of October 31, 20. During fiscal 21, we successfully completed six acquisitions and we 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 to maximize shareholder returns. Cash flow provided by operating activities remained strong, totaling about $110 million in both the fourth quarter of fiscal 21 and 20. Cash flow provided by operating activities increased 9 percent to $444.1 million in fiscal 21 and that was up from $409.1 million in fiscal 20. I'd like to now discuss recent acquisition activity. In October 21, we acquired all of the outstanding stock of Passiwave, which is a designer and manufacturer of radio frequency and microwave components and integrated assemblies specializing particularly in pin diode switches, pin attenuators, pin limiters, switching assemblies, and integrated subsystem found in defense and other complex electronic applications. PassyWave is part of the ETG group, and we expect this acquisition to be accretive to our earnings per share within the first 12 months following closing. In September 21, we acquired 80.1% of the stock of RH Labs, which designs and manufactures state-of-the-art radio frequency and microwave integrated assemblies, sub-assemblies, and components used in a broad range of demanding defense applications operating in harsh environments, including space. The remaining 19.9 percent interest continues to be owned by certain members of RH Labs' management team. RH is part of the ETG group, and we expect this acquisition to be accretive to our earnings per share within the first 12 months following closing. As I discussed during the third quarter earnings teleconference, in August 21, we acquired 89 percent of the equity interests of Ridge Holdco, which owns all of Ridge Engineering and Becton Company. They perform tight tolerance machining and raising of large-sized parts in mission-critical defense and aerospace applications. Becton provides machining, fabricating, and welding services for aerospace defense and other industrial applications. The remaining 11 percent interest continued to be owned by certain members of Bridges and Beckman's management teams. These companies are part of Flight Support Group, and we expect the acquisitions of these companies to be accretive to our earnings per share within the first 12 months following closing. Later on, we will comment on the pipeline for acquisitions, which at this moment I can tell you is very strong. and we're optimistic on that score and the outlook for additional acquisitions. We cannot predict with certainty when they will be closed because we are in substantial due diligence. 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.

Thank you. The Flight Support Group's net sales increased 34% to $260.4 million in the fourth quarter of fiscal 21, up from $193.6 million in the fourth quarter of fiscal 20. The net sales increase in the fourth quarter of fiscal 21 is principally from organic growth of 28%, as well as the impact from our profitable fiscal 21 acquisitions. The organic growth is mainly attributable to increased demand for our commercial aerospace products across all of our product lines. The flight support group's net sales increased to $927.1 million in fiscal year 21, up from $924.8 million in fiscal year 20. The net sales increase in fiscal year 21 principally reflects the impact from our profitable fiscal 21 and 20 acquisitions, partially offset by 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 126% to $48.6 million in the fourth quarter of fiscal 21, up from $21.5 million in the fourth quarter of fiscal 20. The operating income increase in the fourth quarter of fiscal 21 principally reflects the previously mentioned net sales growth and an improved gross profit margin. The improved gross profit margin principally reflects the higher net sales, a more favorable product mix across all of our product lines, and a decrease in inventory obsolescence expense. The Flight Support Group recognized higher inventory obsolescence expense in the fourth and third quarters of fiscal 2020 following the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the pandemic's financial impact. The Flight Support Group's operating income increased 6% to $151.9 million in fiscal year 21, up from $143.1 million in fiscal year 20. The operating income increase in fiscal year 21 principally reflects lower bad debt expense due to certain commercial aviation customers filing for bankruptcy protection in fiscal 20. As a result of the pandemic's financial impact, The previously mentioned decrease in inventory obsolescence expense and an improved gross profit margin partially offset by higher performance-based compensation expense. The flight support group's operating margin improved to 18.7% in the fourth quarter of fiscal 21, up from 11.1% in the fourth quarter of fiscal 20. The operating margin increase in the fourth quarter of fiscal 21 principally reflects the previously mentioned higher net sales, improved gross profit margin, and lower inventory obsolescence expense. The flight support group's operating margin improved to 16.4% in fiscal year 21, up from 15.5% in fiscal year 20. The operating margin increase in fiscal year 21 principally reflects the previously mentioned lower bad debt expense and inventory obsolescence expense, partially offset by higher performance-based compensation expense. 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.