Heico Corporation

Welcome to HICO's Fiscal Year 2022 First Quarter Earnings Results Conference Call. My name is Polly and I will be the operator assisting today. Certain statements made during this 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 but not limited to the severity, magnitude, and duration of the pandemic, high cost liquidity and the amount and timing of cash generation, lower commercial air travel caused by the 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, expert 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 acquisition and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign and current exchange, and income tax rates. Economic conditions, including the effects of inflation within and outside of the aviation defense space, medical and telecommunications, 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 HICO's filing with the Securities and Exchange Commissions, 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, I turn the call over to Lawrence Mendelson, HICO's Chairman and Chief Executive Officer. You may begin, sir.

Polly, thank you, and good morning to everyone on this call. We thank you for joining us and welcome you to HICO's first quarter fiscal 22 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of Heiko Corporation, and I'm joined here this morning by Eric Mendelson, Heiko's Co-President and President of Heiko's Flight Support Group, Victor Mendelson, Heiko'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 would like to take a moment to thank all of HEICO's talented team members for delivering another strong quarter. Your continued focus on exceeding customer expectations and operational excellence has translated into excellent results for shareholders, and I'm encouraged by the steady improvement in the operating results over the past 18 months. I'm also optimistic that this trend will continue during the remainder of fiscal year, this fiscal year. I will now summarize the highlights of the first quarter fiscal 22 results. Consolidated operating income and net sales in the first quarter of fiscal 22 improved 23% and 17 percent, respectively, as compared to the first quarter of fiscal 21, driven mainly by our 13 percent quarterly consolidated organic net sales growth, as well as the favorable impact from our fiscal 21 acquisitions. The Flight Support Group reported quarterly increases of 103 percent and 37 percent in operating income and net sales, respectively, as compared to the first quarter of fiscal 21. These results principally reflect strong 48 percent quarterly organic growth for commercial aerospace parts and services. Additionally, this marks the sixth consecutive quarter of sequential growth in net sales and operating income at flight support. Our total debt to shareholders' equity improved to 10.1 percent as of January 31-22, and that was down slightly from 10.3 percent as of October 31-21. Our net debt, which we define as total debt less cash and cash equivalents of $112.3 million, at January 31, 22, compared to shareholders' equity ratio improved to 4.8% as of January 31, 22, and that was down slightly from 5.6% as of October 31, 21. Our net debt to EBITDA ratio improved to 0.22 times as of January 31, 22, and that was down slightly again from 0.26 times as of October 31, 21. 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 growth and maximize shareholder returns. Cash flow provided by operating activities was $78 million in the first quarter of fiscal 22, and that compared to $107.2 million in the first quarter of fiscal 21. The decrease is principally attributable to an investment $54.8 million in working capital, partially offset by $18 million increase in net income from consolidated operations. The investment in working capital includes $29.6 million increase in inventories, which reflect strategic buys within distribution businesses and to support an increase in the consolidated backlog as well as a decrease in accrued expenses resulting from the payment of fiscal 21 accrued performance-based compensation. A little bit of color. We added to inventory, as you know, to prevent inventory shortages so our companies would not be running out of stock and could complete their manufacturing and processes and ship. We think that that was a very wise decision. In January 22, we paid our regular semiannual cash dividend of nine cents per share. This represented our 87th consecutive semiannual cash dividend since 1979. In January 22, we reported that our Sierra Microwave subsidiary designed and manufactured flight critical components in the James Webb Space Telescope, which is considered to be the premier observatory of the next decade. As always, we thank Sierra Microwave for their outstanding accomplishments, great quality, and we take great pride in their involvement in this amazing feat. Moving over to recent acquisition activity, February 22, we announced Flight Support had entered into an agreement to acquire 74% of the membership interest of Pioneer Industries, LLC, a specialty distributor of spares for military, aviation, marine, and ground platforms. The remaining 26% will continue to be owned by certain members of Pioneer's management team, and closing is expected to occur in the second quarter of fiscal 22. We expect this acquisition to be accretive to earnings within the first 12 months following closing. My own comment, which was not prepared, is that in my own mind, this was a very timely acquisition because of the events taking place in Ukraine and possibly in the future in the Far East. We think our military budget clearly, I read this morning, that Congress is probably going to pass some additional measures military budgets, and I would not be surprised to see that. My comment is that's a good idea. We continue to vet excellent M&A opportunities, which meet our high standards for acquisition. Due diligence is ongoing on many of these opportunities, and I'm optimistic that we will be successful in closing additional transactions in fiscal 22, all of which I believe will be accretive to earnings. At this time, I'd like to introduce Eric Mendelsohn, co-president of HICO and president of HICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Eric Mendelsohn, Co-President, HICO Thank you. The flight support group's net sales increased 37% to $272.7 million in the first quarter of fiscal 22, up from $199.3 million in the first quarter of fiscal 21. The net sales increase reflects strong organic growth of 30%, as well as the impact from our profitable fiscal 21 acquisitions. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued recovery in global commercial air travel as compared to the first quarter of fiscal 21. The Flight Support Group's operating income increased 103% to $52.4 million in the first quarter of fiscal 22, up from $25.8 million in the first quarter of fiscal 21. The operating income increase principally reflects an improved gross profit margin, mainly from the previously mentioned net sales increase, which was across all of our product lines. Additionally, the operating income increase reflects the previously mentioned net sales growth and the benefit of SG&A efficiencies realized from higher net sales volume. The flight support group's operating margin increased to 19.2% in the first quarter of fiscal 22, up from 13% in the first quarter of fiscal 21. The operating margin increase principally reflects the previously mentioned improved gross profit margin, as well as a decrease in SG&A expenses as a percentage of sales as a percentage of net sales, mainly reflecting the previously mentioned efficiencies. 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.