Heico Corporation

Welcome to the HICO Corporation third quarter and full year fiscal 2022 financial results call. My name is Connie and I will be the operator assisting you 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, but not limited to, the severity, magnitude, and duration of the COVID-19 pandemic, HICO's liquidity and amount of 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 specifications, costs and requirements, which could cause an increase to our cost to complete contracts. Government 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 and sales growth. Product development or manufacturing difficulties, which could increase our product development and manufacturing costs and daily sales, our ability to make acquisitions Parties listening to this call are encouraged to review all of the HICO's filings with the Securities and Exchange Commission, including but not limited to filings from the 10-K, Form 10-Q, and Forms 8-K. We undertake no obligation to publicity, update, or revise any forward-looking statements, whether as a result of new information, future events, or otherwise accept the extended requirements by applicable law. I now turn the call over to Lawrence Mendelson, HICO's Chairman and Chief Executive Officer. Please go ahead.

Lawrence Mendelson Connie, thank you, and good morning to everyone on the call. We thank you all for joining us and welcome you to the HICO third quarter fiscal 22 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 VP and CFO. Today, my comments will address our consolidated Q3 results, acquisitions, and accomplishments, followed by a presentation of the segment results from Eric and Victor, Heiko's co-presidents. Now, before reviewing the quarterly results, I would like to take a moment to thank all of Heiko's talented team members for their contributions to another remarkable quarter. Their commitment to producing the highest quality products for customers resulted in excellent quarterly financial results for all Heiko shareholders, and I remain very optimistic in the future for our company. Summarizing the highlights of our third quarter, I will tell you that consolidated third quarter fiscal 22 net sales and operating income represent record results for Heiko, driven principally by record operating results within the flight support group, mainly rising from continued strong rebound in demand for our commercial aerospace products and services. In addition, this marks the eighth consecutive quarter of sequential growth in net sales and operating income for the flight support group. Consolidated operating income. and net sales in the third quarter of fiscal 22 improved 28 percent and 21 percent, respectively, as compared to the third quarter of fiscal 21. These results mainly reflect 13 percent quarterly consolidated organic net sales growth, as well as the favorable impact from our fiscal 22 and 21 acquisitions. Consolidated operating margin improved to 22.6% in the third quarter of fiscal 22, and that was up from 21.4% in the third quarter of fiscal 21. Net income attributable to non-controlling interests was $10.5 million in the third quarter of fiscal 22, as compared to $6.8 million in the third quarter of fiscal 21. And of course, the increase principally reflects improved operating results of certain subsidiaries in which non-controlling interests are held. We continue to estimate the annual allocation of earnings to non-controlling interest partners to approximate 7% to 8% of percentage of pre-tax income. ICO's effective tax rate was 27% in the third quarter of fiscal 22, and that compared to 15.7% in the third quarter of fiscal 21. I want to comment on this tax rate because it's a major issue. And later in this call, Carlos Macau will explain the complexities between actual tax that we pay in cash and the tax provision required for GAAP. But suffice it to say, from an operating point of view, in my mind and management mind, our tax rate is really 21 percent. And for the analysts out there who are on the phone, if you apply the 21 percent, which is what we estimate to be our annual tax rate, you will find that the earnings per share for the quarter would be 65 to 66 cents. In my opinion, and Carlos is too, and he'll go into detail, the additional 7% difference between 21 and 27 will most likely never have to be paid. And Carlos will explain why that is. And I just wanted to point it out very, very clearly. The increase in our tax rate reflected a 5.3% increase unfavorable impact from tax-exempt unrealized losses in the cash surrender value of life insurance policies related to the HICO leadership compensation plan, and that was recognized in the third quarter of fiscal 22. And that compared to the tax-exempt unrealized gains recognized in the third quarter of fiscal 21, plus a 2.6 percent unfavorable impact from a larger income tax credit recognized in the third quarter of fiscal 21 due to higher qualifying R&D expenses as compared to the third quarter of fiscal 22. And that's a big mouthful. It's very complicated. But the simplistic answer, as we look at it, again, is the real tax, in my opinion, and management is 21% for the quarter. We now expect the full year effective tax rate to be between 20% and 21% of pre-tax earnings. The increase in our estimated annual effective tax rate, up from prior year estimates of 18% to 20%, is directly attributable to overall stock market declines causing unfavorable investment results within the HICO Leadership Compensation Plan during the third quarter of fiscal 22. Consolidated net income increased 7 percent to $82.5 million, or 60 cents, per diluted share in the third quarter of fiscal 22 and that was up from 76.9 million or 56 cents per diluted share in the third quarter of fiscal 21. Liquidity and cash generation was very strong. Cash flow provided by operating activities increased 20% to $149.2 million in the third quarter of fiscal 22. and that was up from $124 million in the third quarter of fiscal 21. This despite our continued investments in working capital to support strong orders and our increased consolidated backlog. We now expect capital expenditures for the full fiscal 22 to approximate $35 million, and this is down from prior estimates of $40 million. ICO's total debt to shareholders' equity ratio improved to 9.9 percent as of July 31, 22, and that was down from 10.3 percent as of October 31, 21. Our net debt, which is total debt less cash and cash equivalent, of $112.2 million as of July 31, 22, compared to shareholders' equity ratio improved to 4.5 percent as of July 31-22, and that compared to 5.6 percent as of October 31-21. Our balance sheet is very, very strong. Net debt to EBITDA ratio improved to 0.2 times as of July 31-22, down from 0.26 as of October 31, 21. We have no significant debt maturities until fiscal 25, and we plan to utilize our financial strength and flexibility to continue aggressively pursuing high-quality acquisitions of various sizes to accelerate growth and to maximize shareholder returns. In July 22, We paid our regular semiannual cash dividend of nine cents per share, which represented our 88th consecutive semiannual cash dividend. In July 22, our flight support group acquired Accurate Metal Machining, a leading manufacturer of high reliability components and assemblies in the aerospace defense and semiconductor equipment subsystem supplier markets. Accurate employs approximately 250 people at its Cleveland, Ohio production facility. In July 22, we announced an agreement for our ETG group to purchase Accelia International, which represents Hanco's largest ever acquisition. Accelia is headquartered in Paris, France, and is a global leader in the design, manufacture, and sales of high reliability, complex passive electronic components, and rotary joint assemblies, or mostly aerospace and defense products. Excellia is expected to generate approximately 190 million euros in revenue during calendar year 22, and has 11 advanced locations worldwide to support its over 3,000 customers. The transaction is expected to be completed in the first quarter of fiscal 23. In August 22, a subsidiary of the ETG Group acquired Charter Engineering, located in Pinellas Park, Florida. charter designs and manufactures RF and microwave coaxial switches for the aerospace defense commercial and automated test equipment and instrumentation markets. In August 22, we announced the ETG Group acquired Sensor Systems, and that's based in Chatworth, California, and is one of the world's largest leading designers and manufacturers of airborne antennas for commercial and military applications. Sensors antennas are found on nearly all large commercial transport aircraft built in the last 50 years, along with numerous business and military aircraft. We expect all of these acquisitions to be accretive to our earnings within the year following their respective closed date. At this time, I'd like to introduce Eric Mendelson, co-president of HICO and president of HICO's Flight Support Group, to discuss third quarter results of the Flight Support Group.

Thank you. The Flight Support Group net sales increased 39% to a record $330.3 million in the third quarter of fiscal 22, up from $237.1 million in the third quarter of fiscal 21. The net sales increase in the third quarter of fiscal 22 reflects strong organic growth of 25% as well as the impact from our profitable fiscal 22 and 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 third quarter of fiscal 21. The flight support group's operating income increased 68%. to a record 70.8 million in the third quarter of fiscal 22, up from 42.1 million in the third quarter of fiscal 21. The operating income increase in the third quarter of fiscal 22 principally reflects an improved gross profit margin, mainly from increased net sales across all product lines, and efficiencies realized from the higher net sales volume. The flight support group's operating margin improved to 21.4% in the third quarter of fiscal 22, up from 17.7% in the third quarter of fiscal 21. The operating margin increase in the third quarter of fiscal 22 principally reflects a decrease in SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned efficiencies, as well as the previously mentioned improved gross profit margin. Now I would like to introduce Victor Mendelson, co-president of Heiko and president of Heiko's Electronic Technologies Group, to discuss the third quarter results of the Electronic Technologies Group.