HEICO Corporation (NYSE:HEI) Q4 2023 Earnings Call Transcript
HEICO Corporation (NYSE:HEI) Q4 2023 Earnings Call Transcript December 19, 2023
HEI 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 Fourth Quarter Year End 2023 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 or health emergencies; HEICO’s liquidity and the amount 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, 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 electronics 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 statement, 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. Good morning to everyone on this call, and we thank you very much for joining us, and we welcome you to the HEICO fourth quarter fiscal ‘23 earnings announcement teleconference. I am 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 would like to take a moment to thank all of HEICO’s talented team members for delivering another strong quarter and strong year.
Your continued focus on exceeding customer expectations and operational excellence has translated into superb results for the shareholders. I would also like to congratulate and thank the Wencor team for a terrific quarter within the HEICO family. We could not be more pleased with their performance and their results. I personally continue to be very optimistic about the future for HEICO. And as a matter of fact, I have never been more optimistic about HEICO’s future than I am today. I will now summarize the highlights of our fourth quarter fiscal ‘23 record results. Consolidated fourth quarter fiscal ‘23 operating income and net sales represent record results for HEICO, driven principally by record net sales within the Flight Support Group and Electronic Technologies Group, mainly arising from continued strong demand for our commercial aerospace products and services and the contributions from our fiscal ‘23 and ‘22 acquisitions.
Consolidated operating income and net sales in the fourth quarter of fiscal ‘23 improved by 29% and 54% respectively as compared to the fourth quarter of fiscal ‘22. These results mainly reflect 14% quarterly consolidated organic net sales growth as well as the impact from the acquisitions. Consolidated net income increased 6% to $103.4 million or $0.74 per diluted share in the fourth quarter of fiscal ‘23 and that was up from $97.2 million or $0.70 per diluted share in the fourth quarter of fiscal ‘22. In connection with the Wencor acquisition, HEICO incurred acquisition cost during the fourth quarter of fiscal ‘23 and they decreased net income attributable to HEICO by approximately $13.6 million or $0.10 per diluted share. Our consolidated operating margins before the Wencor related non-recurring deal expenses remain strong and are consistent with the expectations we have previously communicated.
These margins are extremely healthy, even though our product mix this year has meant lower overall margins than in prior year. In the fourth quarter of fiscal ‘23, excluding the Wencor acquisition cost, consolidated net income increased 20% to $117 million or $0.84 per diluted share. Our net debt to EBITDA ratio was 3.04x as of October 31, ‘23 and that compares to 0.25x as of October 31, ‘22. The net debt to EBITDA ratio increased in the fiscal year ending October 31, ‘23 principally reflects our successful offering of $1.2 billion in senior unsecured notes and increased borrowings on our revolving credit facility. We used the net proceeds from the sale of the notes and additional borrowings on our revolving credit facility to fund the acquisition of Wencor.
Cash flow provided by operating activities improved to $148.4 million in the fourth quarter of fiscal ‘23 and that was up from $143.9 million in the fourth quarter of fiscal ‘22. Cash flow provided by operating activities in the fourth quarter of fiscal ‘23 reflects an increase in working capital, principally driven by an increase in inventories to support our increased consolidated backlog. The continued excellent cash flow generation by HEICO permitted our Board of Directors to recently declare a $0.10 per share semiannual dividend, which represents our 91st consecutive dividend payment. 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 fourth quarter results of the Flight Support Group.
Eric Mendelson: Thank you very much. I would like to take a moment to recognize and welcome the Wencor team members to the HEICO family. The Wencor team is a perfect and highly complementary fit with the HEICO culture and I am extremely optimistic about the future of Wencor’s contributions to the Flight Support Group’s future. I must say that over the last number of months, I have gotten the chance to visit most of the Wencor facilities. And I’ve been incredibly impressed with the caliber of team members that Wencor has. We had very high expectations for them prior to closing the acquisition, but they continue to amaze everyone and really perform outstandingly well. It really is a privilege and an honor to have gotten to know these people.
And also I’d like to thank the HEICO team members for being so welcoming to their new Wencor brothers and sisters and bringing them into the board, because as a team, we can accomplish so much more than we can individually. The HEICO team members have been phenomenally excited about the Wencor acquisitions. We have done about 100 acquisitions, but I can say that this one really has generated incredible enthusiasm and excitement. And I am just absolutely honored to work with both the HEICO and the Wencor team members. We have got a phenomenal group. And I think the results really speak for themselves with a lot more to come. So, again, thank you very much to all of our HEICO Flight Support team members for an incredible performance in the fourth quarter and full 2023.
On to the results. The Flight Support Group’s net sales increased 74% to a record $601.7 million in the fourth quarter of fiscal ‘23, up from $346 million in the fourth quarter of fiscal ‘22. The net sales increase in the fourth quarter of fiscal ‘23 reflects $185.7 million from Wencor and strong organic growth of 20%. The Flight Support Group’s operating income increased 47% to a record $114.6 million in the fourth quarter of fiscal ‘23, up from $77.8 million in the fourth quarter of fiscal ‘22. Wencor’s operating income in the fourth quarter of fiscal ‘23 was $29.3 million. The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by $12.7 million of Wencor acquisition costs and $11.8 million of Wencor’s intangible asset amortization expense and higher performance-based compensation expense.
The improved gross profit margin principally reflects higher net sales within our aftermarket replacement parts and repair and overhaul parts and services product lines. The Fight Support Group’s operating margin was 19% in the fourth quarter of fiscal ‘23 as compared to 22.5% in the fourth quarter of fiscal ‘22. The operating margin decrease in the fourth quarter of fiscal ‘23 principally reflects the previously mentioned Wencor acquisition cost and intangible asset amortization expense. Excluding the Wencor acquisition cost and intangible asset amortization expense, the Flight Support Group’s operating income increased 79% to $139.1 million in the fourth quarter of fiscal ‘23 and the operating margin was 23.1%. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO’s Electronic Technologies Group, to discuss the fourth quarter results of the Electronic Technologies Group.
Victor Mendelson: Thank you, Eric. The Electronic Technologies Group’s net sales increased 28% to a record $342.5 million in the fourth quarter of fiscal ‘23, up from $268.5 million in the fourth quarter of fiscal ‘22. The net sales increase principally reflects the impact from our fiscal ‘23 and ‘22 acquisitions as well as 6% organic growth. The organic net sales increase in the fourth quarter of fiscal ‘23 mainly resulted from increased net sales of defense, space and commercial aviation products, partially offset by lower net sales of other electronics products. We are pleased to see 26% sequential growth in defense product net sales in the fourth quarter of fiscal ‘23 over the prior quarter, which now marks our third consecutive quarter of defense-related net sales growth.
The Electronic Technologies Group’s operating income increased 8% to a record $86.4 million in the fourth quarter of fiscal ‘23, up from $79.9 million in the fourth quarter of fiscal ‘22. The operating income increase in the fourth quarter of fiscal ‘23 principally reflects the previously mentioned higher net sales volume, partially offset by higher costs from the Exxelia acquisition, higher performance-based compensation expense and unfavorable changes in the estimated fair value of accrued contingent compensation. The Electronic Technologies Group’s operating margin was 25.2% in the fourth quarter of fiscal ‘23 as compared to 29.7% in the fourth quarter of fiscal ‘22. As acquisitions intangible amortization is equal to approximately 400 basis points from our sales, we view that our ETG businesses achieved a roughly 29% margin from their, what we consider to be their true operational activities, which is excellent by any measure.
And we are very happy with it even if it is not as high as it was before. I also note that in last year’s fourth quarter, we recorded a $3 million gain from contingent consideration reversal. So last year’s fourth quarter operating income included that gain, while this year, we had the opposite effect, which reduced the operating margin in total between the 2 years by around 140 basis points from last year’s fourth quarter. All of this is why I look at what we consider to be the businesses’ actual performance before non-cash acquisition accounting. And that, as I said before, is excellent in absolute terms. The lower operating margin in the fourth quarter of fiscal ‘23, as we said, principally reflects the previously mentioned higher costs from the Exxelia acquisition, the unfavorable changes in the estimated fair value of contingent compensation and higher performance-based compensation.
I turn the call back over to Larry Mendelson.
Laurans Mendelson: Thank you, Victor. Now for the outlook. As we look ahead to fiscal ‘24, we anticipate net sales growth in both the Flight Support Group and the Electronic Technologies Group and that will be driven by contributions from our fiscal ‘23 acquisitions as well as the demand for the majority of our products. Additionally, continued inflationary pressures may lead to higher material and labor costs. We plan to actively work on Wencor’s ongoing integration into our business and operations, continue our commitment to developing new products and services and further market penetration while maintaining our financial strength and flexibility. Our operating margins, especially before non-recurring acquisition expenses remain extremely healthy and reflect our strong business operations.
We believe that our ongoing conservative policies and strong cash flow enable us to continuously invest in new research and development and to take advantage of strategic acquisition opportunities, which collectively position HEICO for success in the markets that we serve. In closing, I would like to again thank our incredible team members for their continued support and commitment to HEICO. Their persistent drive and determination to win in the marketplace has resulted in another quarter of outstanding results. Thank you all team members for everything you do to make HEICO a great company. And now, Samantha, I’d like to open the floor for questions.
Operator: Thank you. [Operator Instructions] And we’ll take our first question from Robert Spingarn with Melius Research. Please go ahead.
Robert Spingarn: Hi, good morning everybody.
See also 17 High Growth Large-Cap Stocks To Invest In and 13 Most Profitable Oil Stocks in the World.
To continue reading the Q&A session, please click here.
