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HEICO Corporation (NYSE:HEI) Q1 2023 Earnings Call Transcript

HEICO Corporation (NYSE:HEI) Q1 2023 Earnings Call Transcript February 28, 2023

Operator: Welcome to the HEICO Corporation First Quarter Fiscal 2023 Financial Results Call. My name is Samara and I'll be today's operator. Certain statements in today's call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO'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 public health threats such as the COVID-19 pandemic or health emergencies; HEICO's liquidity and the amount of and timing of cash generation, lower commercial air travel caused by health emergencies and their 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, 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 cost and revenues, and defense spending or budget cuts, which could reduce our defense-related revenue.

Parties listening to this call are encouraged to review all of HEICO'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 Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.

Laurans Mendelson: Thank you, Samara, and thank you all on this call. Good morning to everyone and we thank you again for joining us. Welcome you to this HEICO first quarter fiscal 2023 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation; and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO. Before reviewing our operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members for delivering another very strong quarter. The growth and profitability of our operating companies continues to exceed my expectations.

It's the people at our companies that make us exceptional and produce these outstanding results. Again thank you for another record-breaking quarter, and I continue to be optimistic that our growth will continue throughout fiscal 2023 and beyond. Summarizing the highlights of our first quarter fiscal 2023 record results. Consolidated first quarter fiscal 2023 net sales represent record results for HEICO, driven principally by record net sales within the Flight Support Group, mainly arising from continued rebound in the demand for our commercial aerospace products and services. Consolidated operating income and net sales in the first quarter of fiscal 2023 improved 31% and 27%, respectively, as compared to the first quarter of fiscal 2022. These results mainly reflect 14% quarterly consolidated organic net sales growth and the impact from our fiscal 2022 and 2023 acquisitions.

Consolidated operating margin improved to 20.8% and in the first quarter of fiscal 2023 and that was up from 20.2% in the first quarter of fiscal 2022. Consolidated net income increased 7% to $93 million or $0.67 per diluted share in the first quarter of fiscal 2023, and that was up from $86.9 million, or $0.63 per diluted share, in the first quarter of fiscal 2022. It should be noted that net income attributable to HEICO in the first quarter of fiscal 2023 and 2022, were both favorably impacted by a discrete net income tax benefit from stock option exercises. The benefit in the first quarter of fiscal 2023, net of control €“ non-controlling interest was $6.1 million, or $0.04 per diluted share, down from $17.5 million, or $0.13 per diluted share, in the first quarter of fiscal 2022.

This information should be considered when analyzing the results, the comparative results between fiscal 2022 and 2023. In addition, the company incurred $5.1 million of acquisition costs related to the closing the Exxelia International acquisition in January 2023. And that decreased net income attributable to HEICO in the first quarter of fiscal 2023 by approximately $4.3 million or $0.03 per diluted share. In my opinion, that should also be considered when analyzing the results of our first quarter. The comparatively lower tax benefit from stock option exercises and the onetime Exxelia acquisition costs reduced our diluted earnings by approximately $0.11. Our net debt, which is total debt less cash and cash equivalents of $640.2 million as of January 31, 2023 compared to shareholders' equity, was 23.3% as of January 31, 2023 and that compared to €“ sorry, 5.7% as of October 31, 2022.

Obviously, the increase was the debt that we incurred to acquire Exxelia. Our net debt-to-EBITDA ratio was 1.02 times as of January 31, 2023, and that compared to 0.25 times as of October 2022, still a very, very low debt-to-EBITDA ratio. The increase in our net debt ratios in the first quarter of fiscal 2023 principally reflect the impact again from the purchase of Exxelia in January 2023 and that was HEICO's largest ever acquisition in terms of purchase price. Cash flow provided by operating activities remained strong, totaling $76.7 million in the first quarter of fiscal 2023 and that compared to $78 million in the first quarter of fiscal 2022. The cash flow provided by operating activities in the first quarter of fiscal 2023, reflects an increase in working capital, principally driven by an increase in inventories to support our increased consolidated backlog we continue to forecast strong cash flow from operations for fiscal 2023.

Aircraft, Engineering, Technology
Aircraft, Engineering, Technology

Photo by John McArthur on Unsplash

In January 2023, we increased our regular semiannual cash dividend by 11% to $0.10 per share. This represented our 89th consecutive semiannual cash dividend, which we have paid since 1979. Let me now discuss our recent acquisition activity. As mentioned previously, in January 2023, we acquired Exxelia International, our largest ever in terms of purchase price and revenue. We are excited about the European defense and aerospace opportunities, which Exxelia brings to HEICO, and we look forward to supporting their continued growth plans. This acquisition is expected to be accretive to HEICO's earnings per share within the first year of the transaction closing. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the first quarter results of the Flight Support Group.

Eric?

Eric Mendelson: Thank you. The Flight Support Group's net sales increased 36% to a record $371.3 million in the first quarter of fiscal 2023, up from $272.7 million in the first quarter of fiscal 2022. The net sales increase in the first quarter of fiscal 2023 reflects strong 25% organic growth as well as the impact from our profitable fiscal 2022 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 2022. The Flight Support Group's operating income increased 60% to a record $83.6 million in the first quarter of fiscal 2023, up from $52.4 million in the first quarter of fiscal 2022.

The operating income increase in the first quarter of fiscal 2023, principally reflects the previously mentioned net sales growth, improved gross profit margin and efficiencies realized from the higher net sales volume. The improved gross profit margin in the first quarter of fiscal 2023 principally reflects higher net sales within our aftermarket replacement parts and specialty products product lines and the impact of lower inventory obsolescence expenses primarily due to increased demand. The Fly Support Group's operating margin improved to 22.5% in the first quarter of fiscal 2023 up from 19.2% in the first quarter of fiscal 2022. The operating margin increase in the first quarter of fiscal 2023 principally reflects the previously mentioned improved gross profit margin and decreased SG&A expenses 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 to discuss the first quarter results of the Electronic Technologies Group.

Victor Mendelson: Thank you, Eric. The Electronic Technologies Group's net sales increased 15% to $255.1 million in the first quarter of fiscal 2023, up from $222.3 million in the first quarter of fiscal 2022. The net sales increase is mainly attributable to the impact from our fiscal 2022 and 2023 acquisitions. The Electronic Technologies Group's organic net sales in the first quarter of fiscal 2023 were consistent with the prior year and principally reflected increased other electronics, commercial aviation and medical products net sales offset by decreased defense products net sales. The Electronic Technologies Group's operating income increased 2% to $56.5 million in the first quarter of fiscal 2023, up from $55.6 million in the first quarter of fiscal 2022.

The increase in operating income principally reflects the previously mentioned higher net sales volume, partially offset by higher acquisition costs and fees related to the Exxelia acquisition and a lower gross profit margin. The lower gross profit margin in the first quarter of fiscal 2023 principally reflects decreased net sales of defense products, partially offset by increased net sales of our other electronics and commercial aviation products. The Electronic Technologies Group's operating margin was 22.2% in the first quarter of fiscal 2023 as compared to 25% in the first quarter of fiscal 2022. The lower operating margin principally reflects the Exxelia acquisition costs, along with the lower gross profit margin and increased SG&A expenses as a percentage of net sales partially offset by lower performance-based compensation expense.

Although as we anticipated, our defense net sales have been lower, the ETG's backlog remains at record levels, even factoring out Exxelia. Each ETG subsidiary is a unique business with unique drivers, but they are supplying mission-critical, high-reliability or harsh environment products which are required for their customers' products to operate. This remains a very positive dynamic and materially explains our strong backlog and our confidence going forward. While I don't have a crystal ball, as I previously mentioned, we expect our commercial aviation demand to remain strong this year and beyond, and the defense sales should strengthen in the later part of this year or even early next year, as higher defense budgets and defense spending kicks in.

We also expect that our high-end other non-aerospace and defense markets, which have been very strong and continue to report record sales will become softer ahead due to what at least I believe, will be a reversion to normal ordering patterns by manufacturers as general supply chain conditions ameliorate. Hopefully, this coincides with the defense upturn though we can't be certain on the timing of each. Consistent with what we've often said and our experience over literally decades we believe the ETG should be a mid- to low single-digit organic sales grower over time with meaningful variations on that growth rate during individual quarters. This has been the ETG pattern since the business was formed in 1996. When asked on these calls what I believe our operating margins will be.

You've heard me remark that I felt our cash margin which is the operating margin before acquisition accounting, which is the true economic margin business realizes would stay within the ranges we are now seeing obviously before considering the impact from future and unknown acquisitions. Keeping in mind that our noncash amortization expense is around 500 basis points. And that we had meaningful transaction expenses in the quarter from the Exxelia acquisition, which trimmed our operating margin by another couple of hundred basis points. Our companies continue to report excellent margins in the expected range. I'm often asked what impact Exxelia, which is a strong margin business, but has lower margins than our overall average should have an overall ETG margins, I would say it will probably be around 200, will probably trim around 200 basis points of consolidated margins going forward.

before, of course, taking into effect any future and unknown acquisitions, still great margins overall. As we anticipated in our last conference call and other settings, our business has made material progress reducing supply chain delays, which we expect to continue, though unevenly throughout the year. By the way, in the first quarter, we roughly estimate that somewhere around a little shy of $30 million of shipments were delayed mostly into our second quarter versus over $40 million of delays during fiscal 2022's fourth quarter. Overall, we remain very excited about the ETG's prospects over time and are thrilled to have the irreplaceable set of businesses we operate in this group with strong margins and reasonable growth prospects. I'll turn the call back over to Larry Mendelson.

Laurans Mendelson: Thank you, Victor. And as for the outlook, we look ahead to the remainder of fiscal 2023 and continue to anticipate net sales growth in both Flight Support and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-19 pandemic, mainly to higher material and labor costs. During fiscal 2023, we plan to continue our commitments to developing new products and services, further market penetration and an aggressive acquisition strategy while maintaining our financial strength and flexibility. In closing, I would like to again thank our incredible team members for their continued support and commitment to HEICO.

The remainder of fiscal 2023 looks promising, and I believe our unique culture of ownership and entrepreneurial spirit will continue to provide for outstanding operating results for our shareholders. Thank you all for what you do to make HEICO a great company. And with that, I would like to open the floor and the line for questions.

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