HEICO Corporation (NYSE:HEI) Q1 2024 Earnings Call Transcript
HEICO Corporation (NYSE:HEI) Q1 2024 Earnings Call Transcript February 27, 2024
HEICO Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the HEICO Corporation First Quarter 2024 Financial Results Call. My name is Samara and I'll be today's operator. Certain statements in this conference 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. Factors that could cause such differences include the severity, magnitude and duration of public health threats such as the COVID-19 pandemic, HEICO's liquidity and the amount and timing of cash generation; lower commercial air travels, 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 creditors 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, including obtaining any applicable domestic and/or foreign governmental approvals and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign currency exchange and income tax rates; and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications and electronic industries which could negatively impact our costs and revenues.
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. Now, I'll turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.
Laurans Mendelson: Thank you, Samara and welcome to everybody on this call. We thank you for joining us and we welcome you to the HEICO first quarter fiscal 2024 earnings announcement teleconference. I am Larry Mendelson and Chairman and CEO of HEICO Corporation. I am 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 would like to take a moment and thank all of HEICO's talented team members for delivering another very, very strong quarter. Your continued focus on exceeding customer expectations and operating at peak performance level continued to fuel our excellent financial results.
I personally have never been more optimistic about the future of HEICO. I would now like to summarize the highlights of our first quarter fiscal '24 record results. Consolidated operating income and net sales in the first quarter of fiscal '24, improved by 39% and 44%, respectively as compared to the first quarter of fiscal '23. These results reflect mainly a 12% organic net sales growth in Flight Support, commercial aerospace products and services as well as the impact from our profitable fiscal '23 and '24 acquisitions. Consolidated net income increased 23% to $114.7 million or $0.82 per diluted share in the first quarter of fiscal '24 and that was up from $93 million or $0.67 per diluted share in the first quarter of fiscal '23. Net income attributable to HEICO in the first quarter of fiscal '24 and '23 were both favorably impacted by a discrete income tax benefit from stock option exercises.
The benefit in the first quarter of fiscal '24, net of controlling interest, was $13.3 million and that was up from $6.1 million in the first quarter of fiscal '23. Consolidated EBITDA increased 43% to $224.4 million in the first quarter of fiscal '24 and that was up from $157.1 million in the first quarter of fiscal '23. I mean that is an enormous increase, if I say so myself. The Flight Support Group set an all-time quarterly net sales and operating income record in the first quarter of fiscal '24, improving 67% and 63% respectively, over the first quarter of fiscal '23. The increases principally reflect the impact from our fiscal '23 acquisition of Wencor and 12% organic growth mainly attributable to increased demand within our aftermarket replacement parts and repair and overhaul parts and services.
Our net debt-to-EBITDA was 2.79x as of January 31, '24 and that was down from 3.0x as of August 31, '23. When we acquired Wencor, our pro forma leverage ratio was slightly above 3x. And we had projected pro forma leverage to be 2x within 12 to 18 months post-acquisition. At this time, I am pleased to report that we continue to remain on track to achieve this target. Cash flow provided by operating activities increased 46% to $111.7 million in the first quarter fiscal '24 and that was up from $76.7 million in the first quarter of fiscal '23. We continue to forecast strong cash flow from operations for fiscal '24. In January '24, we paid our regular semi-annual cash dividend of $0.10 per share and this represented our 91st consecutive semi-annual cash dividend since 1979.
In January '24, we were honored to announce that I received the Kenn Ricci Lifetime Aviation Entrepreneur Award from the Living Legends of the Aviation Organization. The Living Legends of Aviation recognition is given to remarkable people of extraordinary accomplishment in aviation, including entrepreneurs, innovators, industry leaders, astronauts, record breakers, pilots who become celebrities and celebrities who have become pilots. I was profoundly humbled and honored that this storied and a unique organization would include me with such aviation and space pioneers for this special honor. However, in my opinion, the honor really belongs to HEICO's 10,000-plus team members who are the ones that make HEICO the great company that it is. Now let me discuss our recent acquisition activity.
In December '23, we entered into an exclusive license and acquired certain assets for the capability to support Boeing 737NG/777 cockpit display and legacy display products line from Honeywell International. We do expect the exclusive license and asset acquisition to be accretive to our earnings in the year following closing. The acquisition broadens our avionics capability and it's another example of ways that HEICO has grown into adjacent markets to increase our overall value proposition to customers and the industry. At this time, I would now like to introduce Eric Mendelson who is Co-President of HEICO and President of HEICO's Flight Support Group. He will discuss the first quarter results of the Flight Support Group. Eric?
Eric Mendelson: The Flight Support Group's net sales increased 67% to a record $618.7 million in the first quarter of fiscal '24, up from $371.3 million in the first quarter of fiscal '23. The net sales increase in the first quarter of fiscal '24 reflects the impact from our profitable fiscal '23 acquisition of Wencor which continues to perform above our expectations as well as strong 12% organic growth. The organic net sales growth mainly reflects high teens organic net sales growth from both our aftermarket replacement parts and repair and overhaul parts and services product lines. The Flight Support Group's operating income increased 63% to a record $136 million in the first quarter of fiscal '24, up from $83.6 million in the first quarter of fiscal '23.
The operating income increase in the first quarter of fiscal '24 principally reflects the pre-mentioned net sales growth, partially offset by higher, as expected, intangible asset amortization expenses due to the Wencor acquisition well as increased inventory obsolescence expense. The Flight Support Group's operating margin was 22% in the first quarter of fiscal '24 as compared to 22.5% in the first quarter of fiscal '23. The Flight Support Group's operating margin before intangible amortization expense was 24.8% in the first quarter of fiscal '24 versus 24.3% in the first quarter of fiscal '23. The small decrease in operating margin principally reflects a slightly lower gross profit margin in the previously mentioned higher expected intangible asset amortization expense due to the Wencor acquisition partially offset by lower 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 first quarter results of the Electronic Technologies Group.
Victor Mendelson: Thank you, Eric. The Electronic Technologies Group's operating income was $55.3 million in the first quarter of fiscal '24 -- excuse me, jumped ahead. The Electronic Technologies Group's net sales increased 12% to $285.9 million in the first quarter of fiscal '24 up from $255.1 million in the first quarter of fiscal '23. The net sales increase is mainly attributable to the impact from our fiscal '23 acquisitions and a double-digit increase in organic net sales of our aerospace products, partially offset by lower organic net sales of our other electronics, medical and space products. We continue to forecast strong net sales and earnings growth for the remainder of fiscal '24. The Electronic Technologies Group's operating income was $55.3 million in the first quarter of fiscal '24 as compared to $56.5 million in the first quarter of fiscal '23.
We expect higher net sales and profit margins in the quarters ahead and over the long term. This is due to our shipment schedule supported by our near-record backlog, combined with the revenues we expect because of our new product research and development activities. The slight operating income decreased principally resulted from our subsidiary shipment schedules of our record backlogs with fewer shipment in the first quarter than scheduled in future quarters, something that was scheduled prior to the quarter start and is in line with our internal plan. For those familiar with our last earnings call and our public interaction since then, you will remember that we said to expect high results variability quarter to quarter this year with the first quarter being our weakest quarter.
So this proceeded just as expected. Naturally the less favorable product sales mix resulted in lower SG&A efficiencies also recognizing our large record backlogs and our forward growth potential, we increased new product research and development investment which increased expenses in the quarter so that we can gain revenue in future quarters. As I sit here today, I'm very pleased that we made those investments and that we continue to fully fund these activities which provide the important forward growth. Importantly our net sales increased an acquisition cost in the first quarter of fiscal '23 related to the closing of an acquisition were beneficial to our results. The ETG's operating margin was 19.3% in the first quarter of fiscal '24 as compared to 22.2% in the first quarter of fiscal '23.
This acquisition related amortization was around 400 basis point what we and others to be -- consider to be our true margin was closer to 23.5%. Again we expect the margin, both before and after amortization to improve materially in the quarters ahead. The lower margin principally reflects what I just discussed namely the product sales mix due to the shipment schedule, higher new product research and development expenses as well as increased selling, general and administrative expenses as a percent of net sales which supports our forecasted strong net sales and earnings growth for the remainder of fiscal '24, partially offset by the previously mentioned lower acquisition costs. For the full year, we expect SG&A expenses to decrease as a percentage of net sales as our net sales increase.
I now turn the call back over to Larry Mendelson.
Laurans Mendelson: Thank you, Victor. I think it should be clear to everyone on this call that Victor and we are expecting a quite different result from ETG from the second quarter through the end of the year. And in the first quarter, some people, I think, misunderstood and they said, "Oh, ETG is not doing well." And I think Victor explained it very well. So you understand that it is a lumpy business and the sales and earnings should come through from the second to the fourth quarter. As we look ahead to the remainder of fiscal '24, we continue to anticipate net sales growth in both the Flight Support and ETG principally driven by contributions from our fiscal '23 and '24 acquisitions as well as demand for the majority of our products.
Notably, we fully expect future ETG quarters to be materially stronger than the first quarter. In addition, we plan to continue our commitment to developing new products and services with further market penetration as well as maintaining our financial strength and our flexibility. In closing, I would again like to thank our incredible team members for their continued support and commitment to HEICO. Our strategy of growing a highly diversified portfolio of excellent businesses continues to produce favorable results for all shareholders. Our end markets are very healthy and fiscal '24 is looking to be another great year. Thank you for your continued confidence. And as I said before, I have never been more bullish about HEICO's future. One other comment.
We do not now give any guidance. Some analysts have asked us to give guidance. We prefer not to. However, I have said publicly that our goal is to grow net income 15% to 20% annually compounded. Over the last 30 to 33 years, I think, we have done that and the actual growth has been somewhere around 18% or 19%. I can tell you that based on everything that I know at this moment and based upon our -- what we expect for the future of this year. I clearly am highly confident that we will attain that 15% to 20% growth in the current year and that without any future acquisitions which we might make. So with that, I would like to turn the call back to our operator, Samara and open the call for questions from listeners. I thank you again very much. Samara?
Operator: [Operator Instructions] We'll take our first question from Robert Spingarn with Melius Research.
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