HEICO Corp (HEI.A) 2005 Q1 法說會逐字稿

Good morning and welcome to the HEICO Corporation fiscal 2005 first-quarter earnings conference call. I will now turn the call over to your host, Mr. Laurans Mendelson, Chairman, President and CEO of HEICO Corporation.

Thank you. Good morning to everyone on this call. We welcome you to the HEICO first-quarter fiscal '05 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 and HEICO's general counsel, as well as Tom Irwin, who is HEICO's Executive VP and CFO. Eric Mendelson who is normally with us on these calls is not here with us at the moment. He is attending a trade conference in the Far East. So before we begin Victor Mendelson will read a statement.

Thank you. Certain statements made in this conference call will constitute forward-looking statements which are subject to risks and 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 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 an increase to our costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense or space spending by U.S. and/or foreign customers, or competition from existing and new competitors which could reduce our sales, HEICO's ability to introduce new products and product pricing levels which could reduce our sales growth or our sales, HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest rates and economic conditions within and outside of the aviation defense space and electronics industries which could negatively impact our costs and revenues. And HEICO's ability to maintain effective internal controls which could adversely affect our business and the market price of our common stock.

Parties receiving this material and 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 forms 10-K, 10-Q and 8-K. Please note that 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, thank you. Now before reviewing our first-quarter operating results in detail I would like to take a few moments to summarize the highlights. I think that and management thinks that we had a very good quarter. I think business is looking strong and both our Flight Support Group and the Electronic Technologies Group reported higher sales in the first quarter of '05 and that combined for an overall 23% improvement in consolidated sales.

Consolidated operating margins we are very pleased to report increased by 1% in the first quarter of '05 over first quarter of last year. Higher sales and operating margins in Q1 of '05 contributed to a 32% increase in operating income, and a 37% increase in net income and we think that is quite good. During the first quarter of fiscal '05 we were happy to declare our 53rd consecutive cash dividend. We also completed our 23rd acquisition since 1990 with the addition of Connectronics Corporation which is a leading producer of specialty high-voltage interconnection devices and wire and that is primarily used in defense applications as well as other markets. We do believe these results are a further indication of the progress we have made towards medium and long-term sustainable growth at HEICO.

Now drilling down a little deeper into the specific items on our financial statements. In terms of revenue our consolidated sales in the first quarter of '05 increased by almost $11 million or 23% from the first quarter of '04 reflecting the revenue growth of 23 percent within Flight Support and 24% was in Electronic Technologies. Revenues of Flight Support increased 23% to 42.3 million in the first quarter up from 34.3 in the first quarter of '04. And the increase in Flight Support's revenue represents substantially all organic growth reflecting the continued recovery and aftermarket demand within the commercial airline industry, as well as our success in developing and bringing to market new products and services.

Revenues of Electronic Technologies increased 24% to 14.8 million in the first quarter of '05 up from 11.9 in the first quarter of '04 and primarily reflecting the acquisition of Connectronics in December of '04, as well as organic growth of about 11%. Moving down to the operating income line our consolidated operating income in the first quarter of '05 increased 32% to 8.7 million, up from 6.6 in the first quarter of '04. Operating income of Flight Support in the first quarter of '05 increased a whopping 43% to 7.6 million up from 5.3 in the first quarter of '04 and this reflects higher sales from organic growth as well as higher margins which reflect the operational efficiencies realized on the higher sales volume.

You probably recall that in earlier teleconferences that we had last year we had projected that the operating margins in Flight Support might increase and in fact, they have. Operating income of Electronic Technologies in the first quarter of '05 and the first quarter of '04 total 2.5 million. Operating income of Electronic Technologies was flat on increased net sales and this is primarily as a result of a slightly less favorable product mix. Based upon our current backlogs within Electronic Technologies during the balance of '05 we do expect operating margins to return to a level approximating the operating margins that we experienced in fiscal '04.

Corporate expenses in the first quarter of '05 were 1.4 million versus 1.2 in the year ago quarter but decreased as a percentage of net sales down to 2.5% from in the current quarter down from 2.7 in the first quarter of '04. Our operating margins totaled 15% in the first quarter of '05 versus 14% in the year ago quarter and were pretty much in line with the margin improvements that we have targeted for fiscal '05. The operating margins of Flight Support were in my opinion, quite good, 18% in the first quarter of '05 up from 16% in the first quarter of '04 and again, this is due to the operating efficiencies which we realized on higher sales volumes. This was not unexpected again. I mention (technical difficulty) had predicted an increase when we spoke to you last time.

Operating margins of Electronic Technologies were 17% in the first quarter down from 21% in the first quarter of '04 and that was due to a less favorable product mix. Again, we do expect for the full year that Electronic Technologies will be approximately the same operating margins as '04.

Our diluted earnings per share improved to $0.17 in the first quarter up from $0.13 in the year ago quarter and that reflected a 37% increase in net income and that was partially reduced by the impact of an increase in the weighted average number of diluted shares outstanding during the same period.

Depreciation and amortization increased slightly to 1.7 million in the current quarter up from 1.6 a year ago. In research and development we spent 2.4 million in the first quarter of '05; that is up over 10% from the 2.1 that we spent in the year ago quarter. The addition of new SAA PMA approvals particularly for non JT8D aircraft continues to be critical to our long-term growth strategy. Obviously in light of the retirements of JT8D in the aftermath of 9/11. We currently have approximately 400 parts in our development pipeline, substantially all of which are for non JT8D engines, and we have approximately 2700 parts approved by FAA that are actively being marketed and over 70% of these are non JT8D.

New parts released by our R&D groups in the first quarter of '05 continued at a very strong level and pretty much as budgeted for the period. For fiscal '05 we are budgeting 300 new PMAs and that is equivalent to the new PMA certification levels which we have done in the last three years. We also have a number of new products under development in our Electronic Technologies group.

Moving on to SG&A, the increase in SG&A to 11.6 million in the first quarter of '05 up from 9 million is due principally to higher sales volumes. And SG&A expense as a percentage of sales increased slightly to 20% versus 19% in the first quarter a year ago. Our interest expense in the first quarter of '05 was down slightly, it is almost immaterial. It was 233,000 versus 331, about $100,000 but down about 30%. That was because average borrowings decreased and partially offset by slightly higher interest rates.

We did incur net borrowings of 13 million under our revolving credit facility in the first quarter of '05 and that reflects principally the funds used to acquire Connectronics. Interest and other income in the first quarter of both years was really not material. Our effective tax rate of 34.5% of the current quarter was comparable to that of a year ago. Minority interests of 1.1 million in the current quarter and 800,000 in the first quarter of '04 represent principally the minority interest of Lufthansa and American Airlines and our Flight Support Group, as well as Sierra in our Electronic Technologies Group. The increase from the first quarter of '04 is of course attributable to the higher earnings of our Flight Support Group.

Moving over to the balance sheet and cash flow as you can all see our financial position remains extremely strong. Cash flow from operating activities was 4 million in the first quarter of '05 which was down from 7.7 in the first quarter of '04. This is primarily due to an investment in inventory which is required to meet the strong sales growth, as well as payments of current liabilities principally income tax payment.

Our working capital strengthened to 3.9, ratio of 3.9 as of January 31, versus 2.9 as of October 31, '04. DSO's of accounts receivables as of January 31, '05 were about 57 days compared to 56 days as of October 31, '04. We do monitor receivable collections and outstandings very carefully and we try to manage our credit exposure in light of continued financial challenges facing some of our customers. Our top five customers represent approximately 27% of consolidated sales in the first quarter of '05 but no single customer represented 10 percent or more of sales.

As I previously mentioned inventories did increase since October 31, and that was to meet the needs of strong sales growth as well as the acquisition of Connectronics. And for these reasons the inventory turnover rate is about 131 as of October, days as of October 31, '05 versus 113 days as of October 31, '04.

Long-term debt to capitalization increased to 11%, that is still extremely low, some people would say under leveraged as of January 31, '05, it was 7% at October 31, '04. This reflects the net borrowings of about 13 million under our revolving credit facility; of course our leverage again is very low. We do have just to remind you -- we do have $120 million line which we draw on generally to pay for acquisitions and then we pay it down with our cash flow. CapEx in the first quarter of '05 was about 944,000 and our net capital expenditure budget for the full year remains at 6 to 8 million.

Looking forward into the future we are pleased to report year-over-year sales increases in our two business segments, both reflecting organic growth and some growth through acquiring profitable and very well managed businesses. And both these strategies are fundamental to our long-term growth overall strategy. Our Flight Support Group continued to show an increase in sales in the first quarter of '05 when compared to the first quarter of '04, as we continue to add new products and further penetrate our markets. Demand from our commercial airline customers continues to show recovery and we expect the Flight Support Group operating margin to continue to show year-over-year improvement throughout the balance of fiscal '05.

Our Electronic Technologies Group also continued to show sales growth in the first quarter versus a year ago and we do expect operating margins to improve throughout the balance of '05. Based upon the current market conditions we continue to target fiscal '05 net sales growth in the range of 10% to 13% over '04, and fiscal '05 diluted net income per share in the range of $0.83 to $0.85. The net sales and earnings targets exclude the impact of any additional acquisitions.

The earnings target compares favorably to the $0.80 per diluted share reported in '04 and that is because the '04 results included the net impact of $0.13 per diluted share which came from life insurance proceeds reduced by some restructuring expenses and litigation-related expenses. The life insurance was $0.16 and the restructuring and litigation about $0.03 so the net was $0.13. I look at it on a recurring basis about $0.67 in '04.

Please note that the Company does not give guidance on quarterly sales or earnings and we do continue to target cash flow from operating activities to be in the range of 40 million for the full year with a net CapEx budget of approximately 6 to 8 million in '05. In closing we continue to adhere to the long-term and mid-term strategy of developing and marketing new products and services which provide our existing customers with substantial cost savings and allows us to expand our markets. We are confident that this strategy has resulted in our strong financial position and also permits us the opportunity for substantial forward growth.

With that, those are my prepared comments and I would like to open the floor for any questions which you all may have. And thank you very much.

(OPERATOR INSTRUCTIONS) Chris Donaghey from SunTrust.

Real quick question and I apologize if I missed this, but you mentioned that greater than 70% of your approved parts are non JT8D but just in the quarter did you talk about the revenue mix between JT8D related parts and non JT8D?

We didn't report it specifically but generally that amount as a percentage of replacement parts sales has now fallen below a third of parts sales which puts it well below 15% of consolidated sales. Because again we feel like it is clearly (technical difficulty) insignificant of HEICO revenue.

I just want to add one thing. The JT8D fleet is still a rather significant fleet; it is probably the second most used engine in the commercial fleet. It is still a very good market but our activity in non JT8D has just grown so much that it has shrunken the rest of it. We probably hit the bottom in JT8D after 9/11 and it leveled out; in some cases it pops up a little bit, it actually increases. But it is the big growth that we have seen because of our development of new parts and that was part of the strategy as you know. JT8D is still very good but it is just the others are growing much, much faster and that one is standing still or maybe growing a little bit.

Okay, thanks. Just a little commentary on acquisition outlook for 2005?

As we always say we probably have 15 different transactions in the pipeline that we are looking at which is not unusual. We are very, very conservative and cautious when we make these acquisitions. We do extensive due diligence and I can assure you we won't make fifteen but we have a lot of things that we are looking at that look potentially very, very positive. I can't predict, I never try to, which ones will close and which ones won't close. But we are optimistic that we are going to make a number of these but we can't guarantee it.

One more question along that front. Is there some type of an overall portfolio strategy that you are looking for product placement or product groupings or is this more an opportunistic approach?

I think that ideally we would probably like to see roughly 50/50 Commercial/Electronic Technologies; I mean Aerospace/Electronic Technologies revenue mix. At the moment Electric Technologies for the full year of '04 had a higher operating margin. There is no magic in 50-50; it is just that we don't want to have one side of the business overwhelm the other. We think it is a very good balance in our overall operation and it gives the Company great stability to do that. I would say that we are trying to increase Electronic Technologies a little more. We look for niche businesses. Victor can comment more about Electronic Technologies in aerospace finding companies that do what we do is quite difficult. There aren't very many out there that we could really acquire. We are very cautious in the MRO area because traditionally MRO is not a high margin business, and we only want companies that have relatively high margin so we look at niche opportunities. I would say in aerospace pretty much what we do, we try to get additional revenues of companies along those lines and Electronic Technologies, it is opportunistic. We have a strategy generally of high margin well-managed companies that have niche markets and Victor can comment more about. Do you want any more color on the detail of what we look for or that is enough?

That is enough.

Okay.

J.B. Groh with D.A. Davidson.

Just to kind of follow-up on that acquisition question, on Flight Support would you ever consider going outside the engine area or are you pretty satisfied with that?

The answer is we are very satisfied with that. We are, in fact, slightly -- we do other things besides engines. We do accessories now and we have developed a very nice business in the accessory business. As far as going into the actual aircraft, Boeing or Airbus product, it is probably unlikely at this point. I think the engine and the accessory side and we have lots of opportunity in those two areas, and the margins are quite good. At this point we have no active program to do that that, but I don't want to preclude it. We may see an opportunistic situation and grab it but at this point there is really nothing on the platter.

Secondly, just on flight support I was really pleasantly surprised by the margin in this quarter. I modeled in a pretty nice improvement. Do you expect it to continue to go up from here over the course of the year? I know you don't want to give quarterly guidance but do you expect kind of sequential steady improvement over the remainder of the year?

I'm going to let Tom Irwin respond to that.

As Larry mentioned we do look for year-over-year improvement, which last year was somewhere around 17% consolidated Flight Support Group, with the first quarter being at 18%. I would say that we are not necessarily saying sequentially over the 18 but rather sequentially over that which was recorded in the first, second, third, fourth quarter on a consolidated basis. So 18 is pretty strong at this point.

Let's say second quarter to second quarter you would expect it to improve but just not sequentially?

Yes, exactly. Year-over-year.

And on Electronic Technologies I know sometimes those are large orders that can slip from one quarter to the next. Was there any of that going on this quarter and could that be a potential reason for the margin decline?

The answer is, yes, that is part of it. Also I think if you look within the group historically you will see that generally the back end of the year is stronger margin wise than the first part of the year. And that often relates to some of these large shipments that wind up moving out because a customer doesn't get in to do the final approval, or because we will have a shortage of a critical part or a technical issue that pops up or something like that.

If my math is correct to get to the 24% that you were at last year you would have to average above 26% for the remaining three quarters, is that what you guys are saying in terms of back half of the year?

Part of it has to do with volume because as the volume -- I can let Tom answer but you would be right if it was equal volume every quarter. But we expect kind of knowing what the backlog is, to more or less have backend loaded volume so as we go through the year the higher volumes will bring up the first quarter average and we would expect that to happen.

Okay, thank you very much.

Chris Quilty, Raymond James & Associates.

Can you give us an idea of the relative contribution you have seen from some of your recently added airline partners and then as a second part to the question, are you still pursuing other partnerships? And I guess the derivative of that is, what is the likelihood of adding a low-cost airline any time soon?

As far as the first question, the relationship with our partner airlines is very good. We have very strong revenue from them but we have good revenue throughout the industry. I would have to say though that partner airlines look at us very differently and they have really bought into the alternative parts business and revenues from them are quite strong. That is not just Lufthansa, it is all of them. That is a very positive -- we don't give revenue as you know, revenue figures but I think growth from individual customers. It is a very good strategy, we like that strategy and to answer the second question; we are pursuing it with other airlines. That is why for example Eric and probably eight of our people are over in the Far East working that part of the world and we do have one as you know, JAL, and we are hoping to get more. As far as will they be the low-cost carriers? Statistically the low-cost carriers don't do their own overhaul and repair.

So a direct partnership with them is a little bit more difficult. Number two, if you look at the total miles flown with the low-cost carriers, although they are a significant factor, it is almost minuscule compared to the legacy carriers. We think that the low-cost carriers certainly have an excellent future but I am not sure that we can have that same relationship because the major volumes are done with the MRO, the carriers that do MRO for themselves and others, and that market is really much bigger than the low-cost carrier. I can tell you that low-cost carriers are customers but we don't have that relationship. Very often they have their MRO done by a Pico partner major airline. Example, Lufthansa. Lufthansa does work for 200 other operators. We would be servicing the LCC's through our major relationships. Does that answer your question, Chris?

Yes, it does. Circling back to the ETG segment don't remember whether you give this on a quarterly basis, I know you give it on an annual, can you give us an idea of the mix in the quarter between the commercial aviation, the military space and the others? I think that you have traditionally segmented it.

Yes, we do on an annual basis give it fairly specifically. If there is any major changes from time to time we will update it. At this time through the first quarter, two things, one, three months is a pretty short period. But at this point we have seen no major shifts in our commercial versus defense space versus other categories. So to the extent that it changes dramatically we will update it and certainly later on in the year when we have more months if you will, but no dramatic changes.

Okay. Final question, Sierra Microwave which was your prior most recent acquisition, how has that been coming along for you?

Overall Sierra has been an excellent acquisition for us. It has a cyclicality to it that I guess the last few months were slower than the prior few months, but we are seeing the bookings there pickup again. It has been a very good company.

Can you just remind real quick do they have any higher exposure toward Boeing, (indiscernible) Lockheed or another prime contractor?

I would say it is all pretty evenly split up there. It is well split up and there is -- again there is an ebb and flow to it. Sometimes they will have much more exposure to one customer at a particular time and then that switches off. But overall I think if you were to average it out which you would have to do over time, it averages out pretty well.

Very good, thank you, gentlemen.

I have no further questions.

In that case again I want to thank all of you for your interest in HEICO. We are available if you do have other questions, give us a call. We will try to respond to them. We will look forward to speaking to you on the second-quarter teleconference. Again, have a great day and a good weekend and thank you all.