HEICO Corp (HEI) 2003 Q1 法說會逐字稿

Good morning and welcome to the HEICO First Quarter Results Conference Call. I will now turn the call over to Larry Mendelson, CEO of HEICO Corporation.

Thank you, and good morning to everyone on this call. We welcome you to the HEICO Corporation first quarter fiscal 2003 earnings announcement teleconference. This is Larry Mendelson. I am the CEO of HEICO Corporation, and I am joined here this morning by Eric Mendelson, who is President of HEICO's Flight Support Group; Victor Mendelson, President of HEICO Electronic Technologies Group and HEICO's General Council; and Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin I am going to ask Victor Mendelson to read a statement. Thank you. Certain matters discussed in this conference call include forward-looking statements which involve risks and uncertainties. HEICO's actual experience may differ materially from those discussed as a result of factors including but not limited to, demand for commercial air travel, product specification costs and requirements, governmental and regulatory demands, competition on military programs, HEICO's ability to introduce new products, product pricing levels, commercial airline passenger travel, airline fleet changes, customer credit risk, U.S. governmental export policies and restrictions, military program funding by U.S. and non-U.S. government agencies, HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, interest rates and economic conditions within and outside the aerospace defense and electronics industries. Parties 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. Thank you. Victor, thank you. Now, before reviewing our first quarter operating results in detail, I would like to take a few minutes to summarize the highlights. Our Flight Support Group reported higher sales and operating margins than the first quarter of fiscal '03 and that is despite the ongoing weakness in the commercial airline industry. Operating margins within Flight Support improved from 14.7 to 16.9% in the first quarter of fiscal '03 versus the first quarter of '02. We believe that these results are an indication of the progress that we are making towards returning HEICO to the great growth company that it was about two years ago prior to 9/11. Examples of this are a 31% increase in the sales of non-JT8D FA-8 replacement parts in the first quarter of '03 versus the first quarter of '02 and we expect overall PMA sales to return to the level of pre-9/11 prior to the end of fiscal '03.

Next, new product approvals, mainly for non-JT8D parts in the first quarter of '03 approximated our planned results and were on target to exceed 300 parts in fiscal '03.

Next, our recently announced strategic relationship with Delta Airlines, which brings the number of unique partner positions we have with major international airlines up to four. We continue to have discussions with major airlines, other major airlines regarding some form of strategic alliance with HEICO, and we are very optimistic with regard to the expected outcome.

Next, our first quarter fiscal '03 results were highlighted by continued, very strong cash flow which we believe demonstrates the high quality of our earnings, and this allowed us to reduce debt from $56 million to $51 million during the first quarter of '03. Since the dramatic decline in aviation parts sales immediately following 9/11, we have experienced a growth in sales, and we continue to expect to be back to pre-9/11 monthly PMA parts sales levels by the end of '03.

Now getting into the specifics. Consolidated sales in the first quarter of '03 increased by $776,000, or 2% from the first quarter of '02, and the increase primarily reflects higher commercial aftermarket parts and services sales in the company's Flight Support Group, partially offset by lower sales in the company's Electronic Technologies Group. Sales of the Flight Support Group increased 10% to $31.9 million in the first quarter of '03 from $29.1 million in the first quarter of '02, and this is reflecting an increase in our PMA sales. Sales of the Electronic Technologies Group decreased 18% to $10 million in the first quarter '03 versus 12.1 in the first quarter '02. The decrease reflects shipments that were deferred due to production delays in certain products, as well as some delays pursuant to customer requirements, and we believe that we've resolved these production delays and we do expect these shipments to be made during the balance of fiscal '03. So there's -- we don't think that there was any permanent loss.

Operating income on a consolidated basis in the first quarter of '03 was $5.5 million versus $5.8 in the first quarter '02. Operating income in the first quarter '03 reflects primarily improved sales and earnings within Flight Support and lower corporate expenses, offset by lower earnings in Electronic Technologies. The operating income of Flight Support increased 26% to $5.4 million in the first quarter of '03 versus $4.3 million in the first quarter '02, primarily reflecting the impact of higher sales related to new products and some strengthening in demand in the commercial airline industry, as well as lower new product development expenses. The reduction in corporate expenses in Q1 of '03 compared to Q1 of '02 primarily relates to the reversal in the current quarter of approximately $400,000 of professional fees that were accrued in Q4 '02 pursuant to a contingent fee structure for tax services and their elimination by renegotiation in the first quarter of '03. Operating income of Electronic Technologies was $768,000 in the first quarter '03 versus $2.7 million in the first quarter '02. The decrease primarily reflects the deferred shipments previously referred to.

Operating margins, consolidated margins, operating margins were 13% in Q1 '03, down slightly from 14% in Q1 of '02. This was due to lower ETG margins, Electronic Technologies. The operating margins within Flight Support, 17% in the first quarter of '03 versus 15% in the first quarter '02 are principally due to higher sales volumes and to a lesser extent, lower new product development expenses. The lower operating margins within Electronic Technologies reflect the deferred shipments and a slightly less favorable product mix. With improved sales volumes, we do expect Electronic Technologies margins to return to the 20% range in the balance of '03. Earnings per share diluted was 13 cents in both the first quarter '03 and '02.

Depreciation and amortization total were $1.2 million in Q1 of '03 and that was comparable to $1.1 million in the first quarter of '02.

Research and development expense was $2.2 million in the first quarter of '03 compared to $2.5 million in the first quarter of '02. The first quarter year-over-year decrease in R&D which is approximately $300,000, is in line with a small budgeted decrease within our Flight Support Group for fiscal '03. And we do not expect this budgeted decrease to negatively affect our new product development results. The addition of new FAA PMA approval for non-JT8D aircraft continue to be critical to our long-term growth in light of the retirements in the JT8D standard fleet after 9/11. We currently have approximately 900 parts in development, over 95% of which are for non-JT8D engines. We now have 2700 parts approximately approved by the FAA and two thirds of those are non-JT8D. New parts released by our research and development groups in the first quarter of '02 continued at a strong level and pretty much as budgeted for the period. I think that should be '03, for the first quarter of '03, not '02.

SG&A expenses as a percentage of sales was 20% for the first quarter of '03 down from 22% in the first quarter '02. It reflects the reduction in corporate expenses which I've previously mentioned, as well as lower commission-related expenses in our Electronic Technologies Group due to the lower sales.

Interest expense in the first quarter of '03 decreased by $443,000, or 56% compared to Q1 of '02. That decrease was principally due to lower interest rates and a lower weighted average balance outstanding under the company's credit facility. Our strong cash flow from operations has allowed us to pay down our balance on our credit facility by about $19 million over the past 12 months.

Interest and other income in the first quarter '03 approximated amounts in the first quarter '02 . Our effective tax rate increased slightly from 35.1 in Q1 of '02 to 35.3 in Q1 of '03. Minority interest of $574,000 in the first quarter '03 represent principally a minority interest of LHG, Lufthansa and AMR in our Flight Support Group and increased primarily due to the higher earnings of the Flight Support Group.

Our financial position remains extremely strong. The cash flow from operations totaled $6.7 million in Q1 of '03 versus $4 million in Q1 of '02, and exceeded net income in the first quarter of '03 by more than 135%. Our working capital ratio decreased to 3.1 times as of January 31st, '03 versus 3.4 at October '02 and this was a result of the inclusion of a part of the borrowings under our revolving credit facility as current.

We expect to refinance the credit facility on a long-term basis prior to July when the present revolver expires. Just a note that assuming the debt is refinanced on a long-term basis, which we do expect the working capital ratio would have been 5.25 times as of January 31st versus 4.4 as of October 31. The point being that financially we think that we are doing extremely well. We are, as you all know, a very conservatively run company. We have low debt and we have high cash flow, and in these difficult times we do think that's the way to manage the company. DSOs of accounts receivable as of January 31st improved by six days to 51 days compared to 57 at October 31, '02 and that reflects our continuing efforts to closely manage receivable collection and maximize cash flow from operations in the current business environment. We continue to work very diligently to manage our credit exposure in light of the financial challenges facing some of our customers. No customer represented more than 10% of consolidated sales in the first quarter of '03, and the top five represented about 27%.

Inventories increased very, very slightly since October 31st, '02, and the inventory turnover rate is up about seven days to 179 on January 31st, compared to 172 in October. This increase is mainly the result of the deferred shipments within the Electronic Technologies previously discussed.

Long-term debt-to-capitalization decreased one percentage point to 20% as of January 31st versus -- I'm sorry, 21% as of October 31st. As we used our positive cash to reduce the revolver loan balance by $5 million during the first quarter. $49 million was drawn as of January 31st compared to $54 million on October 31st. Cap ex in the first quarter were $1.3 million, pretty much in line with our budget of $5 million to $6 million for fiscal '03.

Looking forward, we see an outlook pretty much. We're pleased to report the results in Flight Support Group which, like most companies supplying the airline industry, has been impacted by the events of 9/11, coupled with a weak economy. So those improved results were very heartening and they were budgeted. We also believe that our ongoing new product development efforts, combined with strategic relationship with some of the world's major airlines, contributed to the strengthening that we saw in the first quarter. With our recently announced strategic relationship with Delta Airlines, we now have four unique partner positions with major international airlines and we continue to have discussions with other major airlines as well, and we are optimistic with regard to the expected outcome.

Sales and earnings of Electronic Technologies did fall short of our expectations. We have worked diligently to overcome the production delays experienced with certain of our more technologically advanced products and to meet the revised customer requirements. As I previously stated, we do expect to make these delayed shipments during the balance of '03. As we look forward to the balance of '03, we can expect continued improvement in our operating results. This is despite some softness in the commercial aviation markets. Based on current market conditions, we continued to target '03 earnings, full year earnings at levels consistent with our previous expected range of 68 to 75 cents per share, and sales growth of 12-15% internally over our fiscal '02 sales, internally without any acquisitions.

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

That is the end of my planned comments, and I would now like to open the floor for any questions which you may have. And also I remind you that Eric Mendelson, Victor Mendelson, and Tom Irwin are here, and they are specialists in their area and they are prepared to respond to your questions also.

This is a reminder. If you would like to ask a question, you can do so by pressing "star," "1" on your telephone keypad. I do have several questions on the board. Our first question is from Tom Lewis.

Yeah, good morning.

Good morning.

I was wondering if -- very impressive results in the Flight Support Group there, but clearly a lot of that sales increase came from doing the right thing, which is offering more parts. Can we dig a little deeper and try to get a sense of how much of that might have come from an increase in demand for certain products?

Tom, I'm going to ask Eric to respond to that. Thank you. Tom, this is Eric Mendelson. In the JT8D business, we saw a little bit of a firming in demand for the first quarter, but I would say that the increase was driven almost entirely due to the sales of new products. We are not budgeting an increase in demand for our mature products. It's basically all coming from new products which we've had such a heavy emphasis on development for and that's what's powered the first quarter improvement and what we expect to power the remaining quarters of the year improvement. Incidentally, Tom, just to add to that, as you know, that is our basic strategy and that's what we've been doing for the last 10-12 years. It's the emphasis on new parts that pushes us forward in general.

Okay. And I guess my other question would be within the -- with respect to the delays in the Electronic Technologies Group, are we talking about delays that -- or issues where there's still a need for some technical resolution or something to figure out, or do you have that down and it's just a matter of getting it out?

Tom, this is Victor Mendelson. The answer is it's mostly production-related, a matter of getting it out where we had some sub components that came in from suppliers that had problems with them. Some of them are technical delays in receiving certain specifications from customers and agreeing on the appropriate specs, but by and large we don't see any show stoppers in any of them at this point.

Okay. I'll defer to somebody else. Thanks.

Thank you, Tom.

Our next question is from Steve Wartman.

Good morning, guys.

Good morning, Steve.

I was wondering if you can touch on the new Delta relationship. Is it structured similar to the way United was? And touching on United, I was hoping maybe you could give us some clarity to them in F-'02 and your forecast based on united survival in F-'03.

I would say that the structure is similar to -- it's more similar to the United. The Delta is more similar to the united than it is obviously to the Lufthansa structure. With regard to United, United continues to be an excellent customer for us. They were pre there chapter 11 and they continued after it. We were not seriously hurt by their receivables as the result of the Chapter 11, and at this point we continue to do business with them and ship them and carefully watch the account, of course, but I don't think we know anything more about United's situation than everybody else. Probably you guys probably know more about it than we do, but we're careful. We do believe that in the event -- and at this point we have no reason to believe that they are not going to make it except for the rumors and, you know, we're careful, but ultimately we believe that in the industry, for the United States to operate as a high-tech, advanced economy, we need an airline system. I think everybody agrees to that, and if it's not United, it's Son of United or American or Delta, or somebody is going to fly those routes and they are going to fly them with aircraft. The other airlines don't have the capacity, and now they are over capacity but if United disappeared, they would be undercapacity to cover their route. So somewhere, some way those planes are going to be flying and it's our job to sell the successor to United if there is one. And again, we have no reason to believe anything more than anybody else does that they will not succeed and we certainly hope that they continue.

So your EPS forecast, though, is based on just a continuing status quo with united at this point?

It is, it is.

Thanks a lot.

Okay. Thank you. Hello?

Our next question is from Sue Sismer.

Hello?

Sue?

Hi, from Merrill Lynch. I just wanted to dig deeper into all the previous questions. One, you guys did mention that there was some firming in the commercial aerospace market and I was wondering maybe, Eric, if you can touch on which areas specifically are doing better than others?

Good morning, sue. The JT8D market was slightly stronger than planned for -- than what we had season in the final quarters of last year. The results have just been general firming in the non-JT8D business, but again most of our revenue increase was due to the sales of new products.

Was it any specific market more than others or was it just basically across the board?

It was really across the board. We were particularly strong in the regional jet market, as well as really all of the newer engine and airplane components we've been developing over the last couple of years.

Okay. And can you touch a little bit more on Delta? You know, they do have Delta tech ops and is there any, I guess higher demand that you are expecting from Delta than from the other carriers that have signed up thus far?

Well, our deal with Delta includes a wide range of our current products as well as a whole bunch of stuff which we will be bringing out online over the next couple of years. Delta needs these products to be able to reduce their cost and compete in the marketplace. Delta tech ops have done a great job of bringing in third-party work and they need the cost advantage that Lufthansa, American, and United have been able to work out as a result of using our parts. So we're going to continue to develop products for their expanding place. We are not going after stuff which they are going to be putting down over the next couple of years, and I expect Delta to -- they have been a great customer for 30 years and I expect them to become an even bigger customer as we go forward, similar to our relationship with the other three carriers.

Okay. So should we expect research and development to go up throughout the year as the Delta agreement kicks in, or should we expect R&D to stay basically flattish with this quarter's performance?

You should expect it to stay flattish. We've become very efficient in the R&D process and we're able to generate these new parts for Delta staying within the budgeted R&D dollars which are which were similar to last year's numbers.

Okay. Perfect. Thanks a lot.

Sue, may I -- this is Larry Mendelson. I would like to add just two points. You saw our press release yesterday on Delta?

Yes.

And we were particularly pleased with their Senior Vice President's quote. We did not make up that quote, and we were given that quote by Delta, and, you know, we felt very good when we read it because it shows the level of confidence and trust that they do have in us. And I think, number two is, as you know, HEICO is always driven by new parts, and even though there is some weakness in the purchases of airline parts, by the new product constantly coming on, that's where the driver is for HEICO. It's always been that way, and we expect it, you know, whether it's Delta or any of the other airlines that we deal with, it's the new product that we believe will continue to drive it.

Okay. Thanks a lot.

Thank you, Sue.

Our next question is from Chris Kolti.

Morning, gentlemen.

Good morning.

A question --

how are you doing?

Good. A question for you on the PMA process. Have there been any discernible changes with the FAA process or is everything pretty much status quo?

I think it's pretty much status quo. It's going along quite well and as you know, we're generating about 300 parts, new parts a year, and I think we have gotten a little bit more efficient. You know, if you do it enough times, you learn. So we're probably cutting our cost so we can cut the R&D budget and still get the same result. As you also know, the number of parts is not necessarily indicative of the dollar volume going forward. We try to get higher volumes. If we do 300 parts, we would try to hope that those 300 parts would deliver higher volumes than the 300 parts of the prior year. At least that's what we target.

Okay. And can you talk to us a little bit about the military business that you have which I think last quarter you said was about 30% of sales, and elaborate maybe on a little bit of the strategy because most of the properties, as I recall, are sort of a hodge podge of acquisitions that you've done over the course of time and do you see that as any sort of a defining central strategy that you want to create or does the military business come along as a by-product of the focus on a commercial business?

I'm going to ask Victor to respond to that, Chris.

Okay.

Chris, this is Victor Mendelson. The strategy we have for the defense-related businesses really runs along two lines. One of them is an electro-optical strategy which we have, and that's in our, both infrared and laser-related businesses.

That's the old Santa Barbara infrared acquisition?

And Analog Modules in Orlando, exactly. And the strategy we have is a very similar customer base. We deal with a lot of the same customers. Much of the technology is similar, although it is not the same in all cases. A lot of the programs are the same programs, and it's an opportunity we believe to build on the kind of transformational side of the defense budget that the Pentagon is pursuing. So that's why we're in those businesses primarily. On the other side of our defense-related businesses is really repair and overhaul, and we think that that's a good market. It's actually very similar to the commercial repair and overhaul business and often will have the same customers in the commercial business pop up and will sell to them in the defense side and they are essentially the same types of products. They might be different part number but they are essentially the same types of products. So that's really the strategy on that side is to take advantage of the maintenance and operations portions of the defense budgets.

Okay. And maybe dove tailing into this, maybe not, but perhaps an update on the acquisition strategy? You guys have been unusually quiet here for the past year.

Chris, on that strategy we are very active in terms of looking. There are lots of problems with it. Some of the people who are sellers are looking back three years ago and thinking of the values then based upon higher earnings and they are still looking for the same price. They haven't gotten used to the fact that the values of their companies have dropped. So we are having a difficult time. The other thing is that some of the properties are just not too interesting at this time. We have -- we are probably looking at more companies today than we have ever looked at before. I have a list that Bill Harlow gave me and went over yesterday. It's probably the longest list of companies in negotiation, discussion, but we're being very careful because cash is king and we are conservative and we're looking very, very long and hard. There's one other thing I would like to mention that, with regard to the military business and new products are also the driver there. You know, it's the same basic strategy that we have throughout the company and constantly new products.

Okay. By the way, Victor, you forgot the space aliens clause on your warning, your fair disclosure there.

The space? He also didn't mention the coming Iraqi situation. We have to amend it.

Oh, actually --

We figure you should know about that.

Do you have any comments on -- I mean, obviously it's not good for the airline industry, but beyond that is there anything specific to the business that you would see as unique to you?

No.

Okay. And actually one other question. Anything else in terms of seasonality or international fleet, you know, the changing of, you know, the disposition of what the fleet looked like that you see as an issue here in the coming year?

At this point we do not, Chris.

Okay. Very good. Thank you.

Chris, thank you.

Our next question is from Keith Hughes.

Thank you. On the balance sheet, can you break out for me the accounts receivable -- excuse me, the accounts payable number? Would that be possible, Tom?

At this moment. It will be in our queue which will will be broken out next week, but it has not changed significantly from year end.

So the accrueds, is that what the big difference is that you see on the cash flow segment?

That's correct, and that's primarily due to, as you'll recall, a component of our other liabilities are accrued customer rebates. Many of those programs are calendar year programs. So we accrue the rebates and then typically pay them very often in the first quarter, you know, January. So that is a big component.

Okay. And switching to R&D, with the with the number coming down a little bit, is this starting to signal that you've gotten a good enough inventory of the non-JT8D parts that that's going to be a declining number going down or maybe a more consistent number moving forward, or am I reading much into the decline in this quarter?

I think you are reading much into the decline. Earlier I did mention that we think that we're learning more. We've done it so much now that we're more efficient and we probably can get the same output with a little less cost. So we've -- it's really more efficiency but we don't expect to be cutting down on the number of parts. If anything, we would like to increase the number of parts. And we think we can do it because of efficiency.

Okay. Thank you.

Okay.

Our next question is from Jim Largon.

Yes, I got dropped off the call for a minute. I wondered if there's a few things that you covered that I missed. One was, did you give some revenue guidance for the year?

Yes, we did. And let me see. Yeah, we also included it in the press release. It's targeted revenue growth is consistent with our previous expectations which are 12% to 15% over the FY '02 numbers which mathematically equates to somewhere in $190 to under $200 million revenue.

Okay.

Jim, that's internal revenue growth only.

Okay. Great. And then did you say what the dollars were for R&D this quarter?

Jim, this is Tom Irwin. Yes, the R&D number in the first quarter was $2.2 million.

That's net to you?

That's correct, yes.

That's right.

Okay. And if you were to characterize your relationships with, say, United or American, how fast have those ramped up or would you say that, you know, are they 100% kind of in place, parts being bought, or is there still some ramp-up occurring in those -- I guess they are not that mature, but is there still a material ramp-up occurring in those customers as they reduce their inventories in their own parts and start to buy HEICO parts?

Jim, this is Eric Mendelson. Those customers have been good customers for many years and we have committed to developing new parts on a schedule for them. So therefore, yes, the sales to each of those customers continues to increase pretty much quarterly as we develop new parts for them.

Okay. And I believe you guys announced that you had a buyback in place. I wondered if you did any this quarter and any thoughts on that?

Yes, we do have a buyback program. We, -- , in the quarter ended January 31, did not buy any shares.

And any thoughts on your posturing going forward on that?

The thoughts on -- we had the buyback program and I think when, you know, the shares -- we balanced that against the desirability of acquisitions, using cash for that and if the shares get to the point that we think that it's in the best interest of all the shareholders, we will start to execute on the buyback.

Okay. And then your tax rate, what's the guidance for the year on that?

Our tax rate for the first quarter was in the 35% range. Our guidance or our estimates for the full year still fall within the range of 35% to just under 36%. So they should not vary significantly, the balance of the year.

Okay. Great. All right. Thank you very much.

Thank you.

I have no further questions at this time.

Thank you very much, everybody on this call, and again we remind you that if you do have questions or thoughts that Eric, Victor, Tom, and I are available to try to respond to your questions. So give us a call or an E-mail. Thank you all and we'll talk to you next quarter. Bye-bye.