HEICO Corp (HEI.A) 2004 Q1 法說會逐字稿

Good morning and welcome to the HEICO Corporation first-quarter fiscal 2004 earnings conference call. I will now turn the call over to your host, Mr. Lawrence Mendelson, Chairman, President and CEO.

Thank you very much and good morning to everyone on this call. We welcome you to the HEICO first-quarter fiscal 2004 earnings announcement teleconference. I am Larry Mendelson, CEO of HEICO Corporation, and I am joined here this morning by Victor Mendelson, President of HEICO's Electronic Technologies Group, as well as the HEICO General Counsel; Tom Irwin, HEICO's Executive VP and CFO; and Eric Mendelson, who is President of HEICO's Flight Support Group, who is attending the conference via phone from the Asian Aerospace Airshow in Singapore.

Before we begin, Victor Mendelson will read a statement.

Thank you. Certain statements in this conference call will constitute forward-looking statements which are subject to risks and uncertainties and assumptions. HEICO's actual results could differ materially from those discussed in or implied by those forward-looking statements as a result of factors including but not limited to lower demand for commercial air travel or airline fleet changes which could cause lower demand for our goods and services; product specification costs and requirements, which could cause our costs to complete contracts to increase; governmental and regulatory demands; export policies and restrictions; military program funding by U.S. and nine U.S. government agencies or competition on military programs which could reduce our sales; HEICO's ability to introduce new products and product pricing levels which could reduce our sales or sales growth; HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses; competition from existing and new competitors, customer credit risk, interest rates, and economic conditions within and outside of the Aerospace defense electronics industries, which could negatively impact our costs and revenues.

Parties receiving or listening to this conference call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission including but not limited to filings on Forms 10-K, 10-Q, and 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.

Thank you, Victor. Now before reviewing our first-quarter operating results in detail, I would like to take a few moments to summarize the highlights of the first quarter. Both our Flight Support Group and our Electronic Technologies Groups reported higher sales in the first quarter of '04 and they combined for an overall 10 percent plus improvement in consolidated sales. Consolidated operating margins improved by one percent in the first quarter '04 versus the first quarter and full year of '03.

Next, higher sales and margins contributed to a quarter-over-quarter increase of 19 percent in operating income and a 14 percent increase in net income.

Cash flow generated by operating activities continues quite strong. During the first quarter of fiscal '04, the Company paid its 51st consecutive cash dividend, as well as a 10 percent stock dividend. We remind you that the cash dividend was also paid on the newly issued dividend shares, effectively increasing the cash portion of the regular dividend by 10 percent.

We also completed our 22nd acquisitions since 1991, with the addition of an 80 percent interest in the Sierra Microwave, a leading designer and manufacturer of certain niche microwave components used in satellites and military products. We believe that these results are a further indication of the progress that HEICO has made toward returning the Company to long-term sustainable growth.

Now our comments as we drill down a little further. Consolidated revenues in the first quarter increased by 4.4 million or 10 percent, up from the first quarter of '03, and this reflects revenue growth of 19 percent within Electronic Technologies and seven percent within the Flight Support. Revenues of Flight Support increased about 7.4 percent to 34.3 million in the first quarter of '04, up from 31.9 million in the first quarter of '03. That increase in Flight Supports revenue reflects improved demand for the Company's aftermarket replacement parts, as well as increased demand for repair and overhaul services. This reflects some recovery within the commercial airline industry, as well as increased sales of new products and services.

Our sales of non-JT8D DMA (ph) parts showed double-digit growth in the first quarter of '04 versus '03.

Revenues of Electronic Technologies increased 19 percent to 11.9 million in the first quarter of '04, up from 10 million in the first quarter of '03. This reflects mainly the acquisition of Sierra Microwave.

On the operating income side, operating income in the first quarter of '04 increased 19 percent to 6.6 million from 5.5 million in the first quarter of '03. The increase in operating income in the first quarter of '04 reflects higher earnings in Electronic Technologies attributable mainly to Sierra as well as improved sales of higher margin products.

Operating income of Flight Support in the first quarter of '04 approximated amounts in the first quarter of '03 but it did increase 10 percent over operating income in the fourth quarter of '03, reflecting both higher sales as well as improved margins.

Corporate expenses in the first quarter of '04 were $1.2 million versus $616,000 in the first quarter of '03. The lower corporate expenses in the first quarter of '03 relates to the onetime reversal of accrued professional fees. That is that the corporate expenses in Q1 of '04 is a more normal number for the Company. '03 was unusual.

Operating margins, consolidated operating margins totaled 14 percent in the first quarter of '04, improving one full percentage point from the first quarter of '03, and this is due to higher electronic technology margins. The operating margins of Flight Support were 16 percent in the first quarter of '04, down slightly from 17 percent in the first quarter of '03, primarily due to higher costs from write-offs of some excess inventory, and this was partially offset by a reduction in product warranty reserves as well as slightly lower R&D expenses measured as a percentage of net sales.

The operating margins in Electronic Technologies were very strong at 21 percent in the first quarter of '04 versus 8 percent in the first quarter of '03, and this was due primarily to the addition of Sierra and improved sales of higher margin products. Operating margins in the first quarter of last year were unusually low due to some product delivery delays experienced through the first half of last year.

Diluted earnings per share improved to 13 cents in the first quarter of '04, up from 12 cents in the first quarter of '03, reflecting a 14 percent increase in net income partially reduced by the impact of an increase of 1.2 million shares in the weighted average diluted shares outstanding.

Depreciation and amortization expenses increased to 1.6 million in the first quarter of '04, up from 1.2 in the first-quarter of '03. This reflects higher tooling amortization in Flight Support and expansion of our production facilities and capabilities in the our Electronic Technologies businesses.

Total research and development expense in the quarter was $2.1 million, comparable to $2.2 million in the first quarter of '03. The addition of new FAA PMA approvals particularly for non-JT8D aircraft continues to be critical to our long-term growth in light of the retirements in the JT8D standard fleet in the aftermath of 9/11.

We currently have approximately 400 parts in our development pipeline, 99 percent of which are for non-JT8D engines. We now have approximately 3200 parts approved by the FAA, over 70 percent of which are non-JT8D.

New parts released by our R&D groups in the first quarter of '04 continued at a strong level and pretty much as budgeted for the period. We are budgeting approximately 300 new PMAs for fiscal '04 and this is equivalent to the new PMA certification levels of '02 and '03. We also have a number of new products under development in our Electronic Technologies Group.

SG&A expenses as a percentage of sales was 19 percent for the first-quarter '04, improving slightly from the 20 percent in the first quarter of '03. The increase in SG&A spending to 9 million for the first quarter of '04, up from 8.2 in the first-quarter of '03 is due principally to higher corporate expenses, which I discussed earlier.

Interest expense in the first-quarter of '04 and '03 were comparable because the average borrowings outstanding and the average interest rates remained approximately at the same level in both years. We incurred net borrowings of 22 million under our long-term revolving credit facility in the first quarter of '04, and this reflects the funds used to acquire our 80 percent interest in Sierra. Interest and other income for both years were pretty minimal.

The Company's effective tax rate decreased from 35.3 percent in the first quarter '03 to 34.5 percent in the first quarter '04. Since the portion of minority interest attributable to Sierra is not included in the Company's income subject to federal taxes and also due to higher foreign sales subject to benefits under federal tax provisions.

Minority interest of $844,000 in the first quarter '04 represent principally the minority interest of Lufthansa and American Airlines in our Flight Support Group and Sierra in our Electronic Technologies Group, and they increased primarily due to the addition of Sierra.

Moving on to the balance sheet and cash flow, I want to point out that our financial position remains extremely strong. Cash flow from operating activities remains strong and totaled 7.7 million in the first quarter '04 versus 6.7 million in the first quarter '03. This was a 16 percent increase and it approximated 239 percent of net income in the first quarter of '04.

Our working capital ratio strengthened to 4.8 as of January 31, '04 versus 4.2 at October 31, '03.

DSOs of Accounts Receivable as of January 31, '04 equaled 56 days, about the same as the DSO's at October 31, '03. We continue to closely manage receivable collection efforts and maximize cash flow from operations in the current business environment. We work diligently to manage our credit exposure in light of continued financial challenges facing some of our customers. No customer represents more than 10 percent of consolidated sales and the top five represent approximately 28 percent.

Inventories decreased slightly since October 31, '03 and the inventory turnover rate is up slightly, 149 versus 146 days at October 31, '03. We continue to review inventory levels to ensure capital allocation to inventories as adequate because it is most important that we meet our customers unforcasted needs but we don't want to have excessive inventories.

Long-term debt to capitalization increased to 19 percent as of January 31, '04 versus 13 percent as of October 31, '03. This reflects the net borrowings of 22 million (ph) under our revolving credit facility. As you all know, that leverage is very, very low.

Capital expenditures in the first quarter of '04 were approximately $1 million, somewhat below the projected 2 million under the 7 to $8 million budget for '04.

Looking forward, we are pleased to report year-over-year sales increases in both of our two business segments, and this reflects both organic growth and growth through acquiring profitable well-managed businesses. Both of these strategies are fundamental to our long-term and intermediate-term growth strategies.

Our Flight Support Group continued to show an increase in sales during the first quarter of '04 when compared with the first quarter '03, as well as the fourth quarter '03, and we continue to add new products and further penetrate our markets. Demand from commercial airline customers continues to show some recovery and we do expect flight supports operating margins to continue to improve during the balance of '04.

We also expect to maintain our strong operating margins in the Electronic Technologies Group on significantly higher sales during the balance of fiscal '04. This belief is based upon our current quarter backlog.

We believe our ongoing new product development efforts combined with strategic relationships with some of the world's major airlines have and will continue to have significant positive impact on our long-term and intermediate-term growth.

Based upon current market conditions, we continue to target fiscal '04 sales and earnings growth of at least 15 and 30 percent respectively over fiscal '03. I remind you that the Company does not his guidance on quarterly sales and earnings.

In the closing, we would like to continue to adhere to our long-term strategy of developing and marketing new products and services which provides our existing customers with substantial cost savings and allows us to expand our markets. We continue to believe that this strategy has resulted in our strong financial position as well as positioning us with the opportunity for substantial forward growth.

That concludes my prepared comments, and I would like to open the floor to any questions which you might have.

The lines are now open for questions. (OPERATOR INSTRUCTIONS) Tom Lewis.

Nice quarter. Just a couple of things. You covered most of the pertinent details pretty well. You said that the increase in the minority interest was primarily due to the addition of Sierra. Is there anything else in there that might be understood as a change? As the terms of your deals with the airlines changing over time or is it strictly volume-related?

I think it is pretty much volume-related. There are no changes in the terms of the deal. The deals, just to comment on it, the deals we think are actually getting stronger and our relationships and our ability to work with these airlines is improving. Those relationships are very good and it is just a question of the minority interest changes are strictly volume-related, income-related really, but volume and income.

My other question would be with respect to your inventory write-offs, should we understand this as something that happens more or less every quarter? Was it just on the high side and worth mentioning this quarter? Or is it more episodic, as in you only do every once in a great while?

I'm going to let Tom answer that because he is familiar with the details of it.

This is Tom Irwin and the answer is it was unusually high in the first quarter of this year and resulted in the lower margins. We do review what we consider slow-moving inventory on a regular basis at least quarterly and there was a group of parts within that analysis that we considered to be beyond our slow-moving definition, and therefore we wrote it off. And we don't expect to be continuing at that higher level on an ongoing basis. We do expect to continue to look at it, but it is unusually high.

We have a pretty draconian method for valuing inventory and after the 9/11 situation we valued inventory if it has not moved or if it is excess even though we believe that it will move but if it has not moved in a period of -- or if it is excess based upon our sales analysis, we just write it to zero. That I think is a very conservative approach to inventory, but it is one that we follow consistently, so if an inventory, if sales had been down for example, if JT8 sales fell off and we annualized the past periods and we look at it, even though the JT8D sales may be unusually low, and we think they are unusually low, we think they actually are going to pick -- we believe they are going to pick up based upon industry information and number of overhauls and so forth, but because they were low, if we project the inventory on the shelf based upon historical sales, we write it off if its excess and basically this is what happened. We really think some of that stuff is likely to come back in, but we are very conservative.

That is good but just one point of clarification there. A moment ago a when you were talking about JT8 sales getting better, were you speaking hypothetically or is that what you are thinking?

No, I am not speaking hypothetically. I think that our salespeople believe that there will be some -- I'm not talking about the old JT8Ds.

Just the 200s?

That's right. I think on the 200 side we are and people in the industry are telling us that they also believe this will pick up. I was speaking to Eric this morning from Singapore and we had this basic conversation. We think it is not built into our projections, it is not built into our estimates. The industry is telling us that somewhere along the line, n that probably should pick up. Now will it? I don't know. We are not predicting in our estimates and our forecasts for '04 that it will, but we are optimistic that it will and there are a lot of people out there who think it will.

Well for what it's worth I've seen just enough signs to make me think it is more likely than not. Last question, it has been my understanding that Asian carriers have been relatively slow to embrace PMA. Eric, any thoughts on that possibly changing based on your experience over there?

Actually we have had considerable success in Asia. I would say that ten years ago they were slow to embrace PMAs, but we have had very good success. There is still a lot of opportunity for us in Asia to sell existing product, which is not currently being sold to those customers, but we do derive very good sales from the Asian region and I think as those customers become more educated as to the opportunity and realize that the products that HEICO offers are as good as those offered by our OEM competitors that they will take advantage of the savings. Of course when they see that Lufthansa has invested $50 million in HEICO, that gives them great comfort in deciding to use our parts, because Lufthansa, as you know, has an impeccable technical as well as overall reputation.

So to answer your question, we do have the sales here currently and I do seem more opportunity for growth.

Great. I will let somebody else jump in. Keep up the good work.

Jim Larkin (ph) .

I wondered if you could tell me how much Sierra Microwave helped in the quarters in revenues?

Good morning, Jim. Tom --?

As Larry mentioned, the revenue growth in the ETG Group was 11.9 versus 10 million or 1.9 million, substantially all of which was associated with Sierra. So somewhere around 2 million approximately.

All right. And does that run rate reflect more or less where they are on an annualized basis?

Well, I think all our acquisition opportunities we look for potential internal growth on a longer-term basis, that is something somewhere between the historically 10 to $11 million annually or so.

To be very direct, we expect and we hope that they're going to do better than that.

(Indescernible) but that's roughly what you acquired is about $10 million in revenue?

Approximately.

And given the tax rate this quarter, what should we use for the year?

Our current estimate is consistent with the first quarter. That is we currently would expect the annualized rate to be equivalent to the first quarter of 34.5 percent, which would be down from last year for the full year as well.

Okay, and on the share count, what was the increase in the share from?

The share count was about 1.2 million shares. About 700,000 you can see from looking at basic shares outstanding is due to increase in shares, which is both options exercised as well as some shares that were issued as reported in connection with the Sierra transaction. The remaining 0.5 million (technical difficulty) weighted average shares is associated with the dilution under the (technical difficulty) stock option exercises.

Okay, very good. Thank you.

Chris Quilty.

Good morning, gentlemen. Nice quarter. A follow-up question on that earlier round on the JT8 200s. Would most of that additional business come in from cargo activity or are those JT8s that have found their way into the passenger fleet in Latin America and Asia and other regions?

Chris, good morning. I'm going to ask Eric to respond.

I would say that the increase would be due almost solely to increased utilization and increased overhauls by the passenger airlines that are operating those aircraft. After 9/11 a lot of maintenance on the MD80s and JT8D 200 in particular was delayed and of course there was a drop from '01 to '02, and then of course '02 to '03, and we think that the maintenance could only be deferred for so long and there will be increased demand from our air carrier or passenger existing airlines, not coming from a smaller South American operators or cargo carriers.

Okay because that is where the old straight JT8s went. 200s are still in service domestically.

That is correct. We're not anticipating a big increase in MD80s being converted to cargo use due to do the width of the fuselage. It does not seem to make a great cargo aircraft so we are not anticipating that additional demand.

Okay and you mentioned again 300 parts this year, which is about the same as the last couple of years. Can you give us an idea of your projected value of those parts relative on absolute basis and relative to the last couple of years?

For competitive purposes we typically don't give out that information. Also of course it is highly dependent on our market penetration at various customers. Tom, I don't know if we have given that out so I would defer that question to you.

I don't think we have ever disclosed the revenue value of a particular family of parts, but I think we can say that it is approximately comparable to the previous levels of revenues generated by new parts approvals.

Way back a year or two ago I guess before you got burned by giving out specific information you did give out at one point I remember the value of the new parts were basically doubling your market -- addressable market and I'm sure given your relatively larger revenue base it's probably not that large. But I am presuming this is enough to meet the topline growth statistic - topline growth that you're providing on a go forward basis just from the new parts introduction and the offset to JT8 declines?

Yes, Chris. Basically our revenue growth targets are fundamentally based on the Flight Support Group the new products coming to market and their penetration.

And what are you using now for your rate of decline on the JT8 internal model?

It would be somewhere around on average probably about 15 percent per year on the JT8D family.

And it used to be 10 percent, so you increased the rate of declines?

Somewhat, yes. I think we used 10 to 15 percent. I think probably going forward we are using the higher range of that.

Okay, can you give us an idea of whether you see any net impact from the increased emphasis on low fare airlines either from the majors like United and Delta introducing their own low fare offshoots or from the pure low fares and their share gains? Is it positive? Negative? I mean aside the issue you're not on Southwest and obviously that would be a good addition, but do any of the other changes in there amongst low fares make any difference to your business or is it really just the number of takeoffs and landings?

I am going to ask Eric to respond to that because he is closer to --.

Actually, Chris, we do have a number of applications, a number of sales going to the Southwest Airlines through people who do overhaul work for them. But yes, on the new low fare carriers we do see them as customers. Of course the major airlines such as United or Delta who have gotten into the low fare market segment continue to buy our parts for their low fare operations. I would say our parts become even more important and what we're seeing now is the low fare carriers have products which are maturing. Some of them had some newer fleets. There is increased demand coming from them for our parts. So we don't anticipate this having a significant impact on us.

Again, the world realizes that we are able to get FAA certification and when 80 percent of the world's top 20 airlines are purchasing from us, they realize that they really need to take advantage of that savings opportunities themselves.

Any kind of an update on the RJ market? Any developments with the prior acquisition or future direction you would go there?

I would say we're doing quite well on that market. We're very excited about it. Those aircraft use a lot of parts. Of course there is a big bubble of demand that will be coming over the next few years as those aircraft hit certain critical dates, and we expect very good sales as a result.

Okay and shifting over to the ETG Group, you've had a large foreign military order that I think you backed out of your projections a quarter or two ago because it was pending for so long. Any sort of an update on that?

Some of that did ship and we have seen a little bit of it, but at this point we're going to keep it out of projections because there's just -- it's been so long and there's just so much uncertainty.

Okay, but you did mention a larger backlog of orders in the ETG that gave you improved visibility.

Correct, in a different part of the business. The foreign military sales really have been -- where if fell off was in our inertial (ph) navigation repair operation, but we have seen healthy backlogs in pretty much the rest of the business, the rest of the Electronic Technologies Group.

Okay and how about the Leader Tech business? I know you bought that at the down end of the cycle. That's got more of the commercial exposure. Have you gotten any kind of an uptick there?

Yes, we have. In fact the history was we bought it, it did extraordinarily well for the first year, year and a half that we owned it. And then we were hit by the downturn, and we have seen so far a pretty steady recovery more or less over the last two or three quarters. And we're hoping that continues although we can't of course guarantee it.

You should get some pretty to operating leverage out of that, right?

That is correct.

Okay and let's see -- final questions. Just a final question here on the performance to date and obviously you haven't had it for long on Sierra and given the fact that there is not a lot of product crossover with existing ETG products, does that mean it is in the Satellite Microwave is an increased area of emphasis in terms of acquisition in order to gain some economies of scale?

Definitely, Chris, we're focusing in that area and looking for opportunities there. We've looked at a couple in fact already, but I guess we have set the bar high because Sierra is really a very high-quality company that the management there is just top-notch. And they have gotten great operating leverage as time has passed, so it is not easy but we're hoping to find some to increase the economies there.

Okay, very good. Thank you, gentlemen.

I have no further questions at this time.

Okay, well I remind you anybody on this call or anybody else, any shareholders if you do have questions, we are all available to try to respond to them within the limits of what the SEC permits us to disclose. And we cannot have selective disclosure of course, but if you need clarification we will be happy to try to give it to you, so give us a call or e-mail us. And I want to thank you very much for your attention and your interest in HEICO, and we look forward to the rest of '04 with enthusiasm and optimism. So that ends our call, and we will be talking to you next quarter.