Q1 2020 Earnings Call
[music].
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 and implied.
Implied by those forward looking statements as a result of factors, including lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause gore demand for our goods and services.
Well that specification calls and requirements, which could cause an increase in 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 our foreign customers or complete competition from existing and new competitors.
Could reduce our sales our ability to introduce new products and services at profitable pricing levels, which could reduce our sales force sales growth.
<unk> development or manufacturing difficulties, which could increase our product development costs and delay sale.
Ability to make acquisitions and achieve operating synergies from acquired businesses customer credit risk interest.
And currency.
[noise] change and income tax rates economic conditions within and outside of the aviation defense space Medical telecommunications, and electronics industries, which could negatively impact our cost and revenues and defense spending our budget.
Which could reduce our defense related revenue.
Parties listening to or reading a transcript of 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.
Turning to publicly update or revise any forward looking statement.
Whether as a result of new information further events or otherwise except to the extent required by applicable law.
Ladies and gentlemen, thank you for standing by and welcome.
To the physical year Twentytwenty first quarter earnings results Conference call.
At this time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you would need to press star one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star Zero I will now turn the conference over to your speaker today.
Laurans Mendelson. Please go ahead Sir.
Thank you very much and a good morning to everyone on the cool we thank you for joining us and welcome you to the HEICO first quarter fiscal 20 earnings.
Teleconference, I'm, Larry Mendelson, I'm, 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.
Now our executive VP and CFO.
Before reviewing our operating results in detail I would like to take a moment to thing all of Heico's talented team members, who again were responsible for our strong results.
I am truly proud of this dedicated and loyal group and they are the ones that continue to produce the highest quality products and services.
Our our customers, while maintaining our unique entrepreneurial culture and delivering outstanding returns to shareholders.
I'd like to summarize the highlights of our first quarter results.
Consolidated net income increased 54% to $121.9 million or 89 cents per diluted share in the first quarter fiscal 20 and that was up from 79.3 million worth 58 cents per diluted share the first quarter fiscal nine.
She.
The net income attributable to hike go into first quarter fiscal <unk> 20 in 19 were both favorably impacted by a discrete income tax benefit from stock option exercises.
The benefit in the first quarter fiscal 20, and fiscal 19 was approximately 46.3 million and 15.1 million respectively.
These tax benefits were mainly driven by more stock options being exercised as they approach expiration as well is the strong appreciation in HEICO stock price during the attorneys holding period.
And the next comment it I think is very critical because the tax benefit in the increase in Texas.
Can be a little bit confusing to normal operating earnings.
So I wanted to point out that excluding the impact of tax benefit in both periods 19, and 20 net income and diluted earnings per share increased 18% and 17% respectively. In the first quarter fiscal 20.
And I think that's an amazing accomplishment that I credit Oh are great team members with producing those results and and to me that should be the clearest message or that we send and this entire report.
Consolidated operating income increased 13% to 111 million in the first quarter fiscal 20.
And that was up from 97.9 million in the first quarter fiscal 19.
Consolidated operating margin.
Proved to 21.9% in the first quarter fiscal Wendy and that was up from 21% in the first quarter fiscal 19.
Consolidated net sales increased 9% to 506.3 million in the first quarter fiscal 20.
Up from 466.1 million in the first quarter fiscal 19.
In summary.
Our consolidated first quarter Twentytwenty net sales increased 9%.
Our operating income increased 13%.
And our net income excluding the stock option impact increased 18%.
And we were all very pleased with these results and we hope all of our shareholders are true.
Our EG group's net sales and operating income in the first quarter fiscal 20.
Our up 13 and 11%.
Respectively over the first quarter fiscal 19.
Those increases reflect the impact from our very well manage unprofitable fiscal 19, and 20 acquisitions as well as strong double digit organic growth for our defense products.
Our flight support group net sales and operating income in the first quarter fiscal 20 or up 5% and 17% respectively over the first quarter fiscal 19.
Those.
Reflect organic growth within all of our product lines as well as improved gross profit margins.
Cash flow provided by operating activities increased 64%.
Who is strong $81.1 billion in the first quarter fiscal 20 and that was up from 49.6 million in the first quarter fiscal 19.
We continue to Fourq is very strong cash flow from operations for the balance of fiscal 20.
We also continued to generate significant cash flow for our shareholders by remaining focused on developing niche products and our strategic commitment to an entrepreneurial structure that minimizes bureaucracy and focus his team members.
On serving our customers.
Our total debt to shareholders equity decreased to 31.4% as of January 31, 20.
Down from 33.2% as of October 31, 19.
Our net debt, which we defined as total debt less cash and cash equivalents of $504.8 million as of January 31 20.
To shareholders equity ratio decreased to 27.9% as of January 31, 20, and that was down from 29.8% as of October 31 19.
Net debt to EBITDA ratio improved 2.9 times as of January 31, 20, and that was down from <unk> 0.93 times as of October 31, nothing team.
We're not a financially challenged company, we have a major fire power behind the line to do a really anything that we want to do and we are aggressively pursuing acquisitions and of course, our standard R&D development, we have no.
Second debt maturities until fiscal 2023, and we plan to you love our financial flexibility again to presume pursue those high quality acquisitions and maximize shareholder returns in January 2020.
We paid an increased regular semiannual cash dividend of eight cents per share.
Which represented our 80 threerd consecutive semiannual cash dividend since 1979, and it was a 14% increase over the prior semiannual per share amount.
In December nine 2019.
Our radian power subsidiary acquired 100% of the business and assets.
The human machine interface.
For product line of spectral looks.
HM I designs manufactures repairs flight deck, negotiators' panels indicators and illuminated keyboards, as well as lighting controls and flight deck lighting.
Radian power is part of our E. G group and we expect the acquisition to be accretive to earnings within the first 12 months following closing.
In December 19, 2019, we acquired 80.1% of the stock of quell Corporation.
Designs and manufactures M.L.A. RF by and transient protection solutions.
We're very wide variety of connector products in aerospace and defense. The acquisition successfully closed during the first quarter fiscal 20 and has integrated well into our he TG group.
And we expect that acquisition to be accretive to earnings within the first 12 months following closing.
In January 2020, we reported that our three D. plus subsidiary supplied numerous mission critical and highly reliability.
Components on the solar orbiter space mission.
That mission will provide the first views of the Sun's uncharted polar regions and investigate how intense radiation and energetic particles being blast that out from the Sun and carried by the solar wind through the solar system will impact our home planet Earth.
We congratulate the European Space Agency on leading this project along with his partners at NASA Airbus three D. plus and the numerous other contributors to this effort HEICO takes great pride in three D plus his involvement in this historic mission.
Now at this time I'd like to introduce Eric Mendelson co President of HEICO and President of Heico's flight support group and he will discuss the results of the flight support group.
Good morning, and thank you.
The flight support group net sales increased 5% to 301.1 million in the first quarter fiscal 20 up from 287.2 million in the first quarter fiscal 19.
The increase is attributable to 4% organic growth, mainly due to increased demand and new product offering across all of our product line.
The flight support group operating income increased 17% the 62 million in the first quarter fiscal 2000.
From 52.9 million in the first quarter.
I'd like to point out that our team members are incentivized and focused on operating income not sales and I consider a knee or 17% organic increase in operating income to be a phenomenal achievement, especially since it was accomplished while maintaining our long term minimal.
Price increase model and keeping the loyalty and appreciation of our customers.
The increase principally reflects an improved gross profit margin mainly attributable to a more favorable product mix within all of our product line. The previously mentioned net sales growth in a favorable impact from lower expenses related to changes in the estimated fair value of.
Accrued contingent consideration.
The flight support groups operating margin increased.
0.6% in the first quarter fiscal 2000.
From 18.4% in the first quarter fiscal 19 again this was accomplished by maintaining our low price increase model.
The increase principally reflects the previously mentioned improved gross profit margin and a decrease in SDMA expenses as a percentage of net sales mainly from efficiencies realized from the net sales growth as well as the previously mentioned lower expenses related to changes in the estimated.
Fair value of accrued contingent consideration.
With respect to the remainder of fiscal 20, we continue to estimate 7% to 8% net sales growth over the prior year and now estimate the full year flight support group operating margin to approximate 20%.
During the prior operating margin estimate of 19.5% to 20%.
Further we consider we continue to estimate mid to single mid to high single digit organic growth in fiscal 2000.
These estimate.
Exclude additional acquired businesses and the impact from the recent Corona virus outbreak if any.
Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the result, you electronic technologies group.
Thank you Eric.
Electronic technologies group's net sales increased 13% to $208.4 million in the first quarter fiscal 20 up from $184.4 million in the first quarter fiscal 19.
The increase is attributable to the favorable impact from our fiscal 19, and 20 acquisitions as well as 6% organic growth mainly due to increased demand for our defense products, partially offset by lower sales for some of our space products, which was within our planning and expectations in the first quarter and.
Which we expect to level up.
During the balance of the year the electronic technologies groups operating income increased 11% to $57.5 million in the first quarter fiscal 20.
Up from $51.6 million in the first quarter fiscal 19, the increase principally reflects the previously mentioned net sales growth, partially offset by a lower gross margin gross profit margin, mainly due to a decrease in the previously mentioned net sales of our space products.
Partially offset by the increased net sales of our defense products.
The electronic technologies groups operating margin was 27.6% in the first quarter fiscal 20 as compared to 28% in the first quarter fiscal 19.
The decrease is mainly due to the previously mentioned lower gross profit margin, partially offset by a decrease in SG any expenses as a percentage of net sales mainly due to a decrease in performance based compensation expense as well as efficiencies realized from the net sales growth with respect to the remainder of FIS.
20, we now estimate approximately 6% to 7% net sales growth.
Over the prior year up from our prior estimate of 5% to 6% and continue to anticipate the full year electronic technologies groups operating margin to approximate 28% to 29%.
Further we continue to estimate mid to low.
Single digit organic growth in fiscal 20. These estimates exclude additional acquired businesses and the impact from the Corona virus outbreak if any.
Turn the call back over to Larry Mems.
Thank you Victor.
Moving on to diluted earnings per share a consolidated net income per diluted share increased 53% to 89 cents in the first quarter fiscal 20 and that was up from 58 cents in the first quarter fiscal 19.
As previously mentioned the increase in diluted earnings per share reflects the discrete tax benefit net of non controlling interest from stock option exercises recognized in the first quarter fiscal 20 in fiscal 19.
Excluding again I read Pete excluding the impact of tax benefits in both periods. The 18% increase in diluted earnings per share reflects the strong performance within the both flight support and electronic technologies group.
Somehow or other I think a number of analysts kind of missed that and I want to we'd like to point that out to them because some analysts didnt mentioned this in their report and I think it's a very important item for shareholders to focus on.
Depreciation and amortization expense totaled 21.6 million in the first quarter fiscal 20 that was up from 20 million in the first quarter fiscal 19.
And the increase in the first quarter fiscal 20, principally reflects the incremental impact from our fiscal 19 and 20 acquisitions.
Research and development expense increased 13% to 17.1 million in the first quarter fiscal 20 and that was up from 15.2 million in the first quarter fiscal 19.
Significant ongoing new product development efforts are continuing.
Both flight support any TG as we continue to invest approximately 3% of each sales dollar and new product development.
SGN they consolidated expenses.
Increased and principally reflects the impact of our fiscal 19 and 20 acquisitions.
Partially offset by lower expenses related to changes in the estimated fair value of accrued contingent consideration.
Carlos can explain the details to you later on if you want to know that.
Consolidated SGN a expense as a percentage of net in sales.
Decreased to 17.2% in the first quarter and that was down four quarter 20 down from 18.1 in the first quarter fiscal 19 that of course is a very positive.
Change and that decrease in consolidated as Gionee expense as a percentage of net sales is mainly due to efficiencies, which we realized from net sales growth.
The previously mentioned lower expenses related to changes in the estimated fair value, but can crude contingent consideration and a decrease in performance based compensation expense as a.
Percentage of net sales.
Interest expense decreased to 4.3 million in the first quarter fiscal 20 down from 5.5 million of first quarter fiscal 19, and that was decrease was due mainly to a lower weighted average interest rate on borrowings outstanding under there weve already.
Moving credit agreements.
Other income and expense in both years was not significant.
[laughter].
HEICO incurred an income tax benefit of $22.9 million in the first quarter fiscal 20 compared to an income tax expense of 4.1 million in the first quarter fiscal 19.
We recognized the discrete tax benefits from stock option exercises in both the first quarter fiscal 20, and 19 of $47.6 million and nice 16.6 million respectively.
The larger benefit from stock option exercises.
At recognized in the first quarter fiscal 20 was the result of more stock options being exercised as well as the strong appreciation and HEICO stock price during the option is holding period.
The majority of the options exercise, which generated this cash windfall for HEICO, we're approaching their tenure expiration date.
I have a personal comment which I'll mention.
According to the accounting rules.
We do not.
They're not permitted to accrue those increases over the approximately 10 years that those options were vesting.
Had we accrued them year by year.
We wouldn't have had this big windfall all in one year in my personal opinion and I don't run the accounting board they should make a change and the permit companies to adjust those items to a fair market on an annual basis and that would eliminate a little bit of the confusion that.
Folks seem to have with this all the sudden this one when fuel oil at one moment.
Net income attributable to non controlling interest was 7.9 million in the first quarter fiscal 20.
Down from 8.7 million the first quarter fiscal 19 and that decrease principally reflects the impact of a dividend paid by HEICO Aerospace in June 19.
That effectively resulted in the transfer of the 20% Noncontrolling interest held by Lufthansa technique in eight of our existing subsidiaries and back to the HEICO flight support group and that was partially offset by improved operating results of certain subsidiaries of flight support.
And EPG in which non controlling interest our hill.
For the full fiscal year 20, we continue to estimated combined effective tax rate the end noncontrolling interest rate of approximately 19% to 20% the pre tax income.
Moving on to balance sheet and cash flow.
Cash flow provided by operating activities with very very strong increasing 64% to 81.1 million in the first quarter fiscal 20 up from 49.6 million in the first quarter fiscal 19.
Oh, we're working capital ratio improved to 3.4 times as of.
January 31, 20 compared to 2.8 as of October 31, 19.
Our daily.
So those are day sales outstanding of receivables improved to 46 days as of January 31, 20, and that compared to 47 days as of January 31 thing team. We continue to closely monitor all receivable collection efforts in order to limit credit exposure.
We have very little a loss and accounts receivable historically.
No one customer accounted for more than 10% of net sales our top five customers represented approximately 22 and 20% of consolidated net sales in the first quarter fiscal 20 in 19, respectively.
Inventory turnover rate of 132 days as of January 31 was the same.
As the rate for the period January 31 19.
Now for the outlook [noise].
As we look ahead to the remainder of fiscal 20, we anticipate continued net sales growth within flight support commercial aviation and defense product lines.
We also anticipate growth within the T G principally driven by demand for the majority of our products.
During fiscal 20, we plan to continue our commitments to developing new products and services further market penetration and aggressive acquisition strategy.
While at the same time, maintaining our financial strength and flexibility.
Based upon our current economic visibility, we now estimate 14% to 15% growth in full year net income.
And that was up from our prior growth estimate of 13% to 14%.
And we continue to estimate approximately 6% to 8% growth in full year net sales over fiscal 19.
In addition, we continue to anticipate our fiscal 20 consolidated operating margin.
To approximate 21.5% to 22%.
Depreciation and amortization expense of about $89 million Capex approximate 42 million and cash flow from operations to approximate $475 million.
These estimates exclude additional acquired businesses if any.
They also exclude any potential impact from the recent Corona virus outbreak as the impact to our business is uncertain and difficult to predict.
In closing.
We intend to continue to focus on intermediate and long term growth strategies with a laser focus on growing our earnings and cash flow, while executing our disciplined acquisition strategy of acquiring profitable businesses at fair prices or.
So this is made possible by the dedication and hard work.
Of our 65 Proximately 6500 team members worldwide.
That continue to exceed customer expectations and deliver these outstanding results again, Heico's management team, thanks to them for making their company a success and I want to emphasize the their company because we consider the team members as.
The ones, who really make it happen and they look upon HEICO as their company and we believe that is the culture that makes our success Pos.
Possible.
With that those are the extensive Mike our prepared remarks, and we'd like to open the floor for questions.
Thank you as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the culinary roster.
Your first question comes from the line of Robert Springer with Credit Suisse.
Hi, good morning.
Good morning.
Oh, I think I'll start Eric.
On your side and talk about these margins the margin strength you talked about earlier I mean, I think the incremental margins, 66% if I'm doing the math right and you did raise the guide and talked about the mix could you give us a little more color on what is happening.
What's the mix there.
Yeah, I wouldn't be happy to web Rob good morning.
As you know and I think most of our shareholders know our team members and our leadership are incentivized focused on operating try to keep thing very simple and they're not focused on ready they don't get compensated on revenue they get compensated on earnings.
So I think what we continue to see is a shift.
Where we deemphasize lower margin products, and we focus more on higher margin products and I think that really is the driver of the improvement in the operating income that we see.
And our particularly happy as I mentioned in my comment that we are able to drive this increase in margin without alienating our customers. We continue to maintain a very low price increase model. So we make sure that our customers appreciate it and that they want to come back in one.
Where the vendor of choice and they want to develop more items with us.
So I'm very happy that we were able to accomplish that by focusing on these new products and increasing the March.
The margin increase wasn't in any one particular area I would say that it was very broad base and consistent with basically how we operate the company.
Okay, and then just switching to the topic. It was brought up earlier I know Corona virus is tough to we don't how this is going to play out you don't habit in the guide, but have you seen any evidence yet of a slowdown in your spare parts demand either in the late part of the first quarter or even early here in the beginning in the second.
Water.
No actually so far and I've gotten report that late this morning, we have not seen any material change in our orders or delivery. We are watching a few customers and I don't want to mention which customer names, but a few customers that have been reported in the press is having some.
Financial challenges. So we just want to make sure that we do the intelligent then we'll make sure that we take care of and continue to support them.
In a sense I think the timing for HEICO is fairly good because as you know February 1st was the start of our second quarter. So we're now going to be able to have another two month before we report to be able to see what the impact is but we're watching this.
Very closely there has not been a change to date I mean, clearly in my opinion. This will impact the industry. There's no question that this will impact the math, but it is so difficult to estimate at this point, especially given the strong order pattern that we've seen to date that we just think that it.
Be irresponsible for us if you will take a flag at what it could be really depends on what happens with the virus and what continues to have.
With aircraft will but Meanwhile, our people are very much focused on their supply chains as well as their customers.
We're of course that keeping our year to the ground.
And just on that I think your 10-K says that outside the U.S. no country no single country accounts for more than 10% of total company sales, but is there any way to calibrate how much FNFG sells into the Asia Pacific region.
Hey, Rob this is Carlos.
You're right. We don't we don't disclose that specifically I will tell you that consolidated because something like this.
Doesnt just affect the flight support group it can have impacts on HPG also so when you think about on a consolidated basis.
Our sales into Asia, and particularly the Chinese areas are in a low single digits were not dependent on that market. In fact, we've stated before that that's a growth opportunity for us in the future and I just want to emphasize another thing because it may be the next question you posed on the supply chain side of things one of the benefits that I.
I guess HEICO is enjoying right now is that when Trump president Trump what is tariffs on China, a lot of our guys that we're sourcing product from that region had to find alternatives and so or at least look for second sources and so right now as product is not moving out of China's quickly. We do have backup plans in our guys.
Actually executing on that so that it's not as dramatic have an impact to the company.
Okay. Thank you and then just quickly Victor on your side I was wondering if you just elaborate a little bit more on the extra strengths in defense and then some of the headwinds space I think you said will reverse.
Over time and it looks like this might have had a slight impact on the margin.
Yeah that the definitely did.
We were expecting that even in our budgets and in our planning with orders picking up as the year, whereas on which just programmatic and timing of when programs are hitting and when orders are shipping.
And we're still expecting that more in the back half of the year.
I would say yet still back half not first half but back half.
Okay, great. Thank you all.
Well by the way Rob This is Derek just to finish up on one thing just to add on what Carlos was saying I met with our heads of sales last week to do an in depth review on.
Any potential impact as a result of the Corona virus and I can tell you and while I don't want to go into information on specific regions countries Airlines or products I can tell you that there is a significant increase in our cost saving.
Solutions.
A number of customers and our sales vps have speculated that part of this may be due to the corona virus and that.
There are getting very serious we've seen historically whenever there is.
Supply demand imbalance that our customers become a lot more focused on cost saving opportunities. So we have definitely seen that.
Again, I don't want to due to competitive reasons and I welcome our competitors on this call I can't get into what regions, while customers what type of products, but there has been a definite increase in interest and.
Where I would say, we're hopeful that it will turn into something good Friday.
Okay. Thanks for the extra color on the market share and this is Victor I just make one other comment on.
Cobiz 19.
With which is you know I think people are expecting this spread beyond Asian beyond China and.
Nobody knows where and how how that will play out but ultimately it gets under control and it all in over some period of time affect different places and different companies in different ways, but eventually it gets under control and it becomes whats effectively we believe a a short term effect and that.
Thats the way we look at it.
Sure. Thank you well.
Your next question comes from the line of she local high I'm little with Jefferies.
Hi, Good morning, everyone. Thank you for the time good morning Bill.
Hi, Eric I wanted to ask you to expand on a few comments you made just now with Rob One I guess can you talk about your lead time on your order book and you know what sort of visibility you have just given Corona and then how do you think airlines are going to react you know given the capacity has been tightened the market do they take this time to do maintenance work.
And you could talk a little bit about that and then you also mentioned deemphasizing low margin products.
And why FSC incrementals for through the ramp. So you know how you think about how that impacts sales growth for the airport is minimal. Thank you.
Okay, I I'd be happy Sheila so with regard to the order patterns I would say that in our parts business. Both Pmeight distribution. We received most of the orders in that time of ship.
I'm sorry in the month of ship.
So the visibility there.
Probably 30 to 60 days out within repair, it's probably another 30 days on top of that and specialty products. It's probably say another 60 days on top of that.
So.
You know I think that win.
There is an impact on the.
The order demand we will see it.
Rather quickly.
And so it is somewhat interesting that we havent seen it to date.
Going to your other question with regard to maintenance, yes, I think that they're taking this opportunity now to perform additional maintenance number of airlines have come out with that position. So we think that that is going to happen. So perhaps that's one of the reasons why we haven't seen a haven't seen an impact.
With regard to the margin improvement I.
I think this is just the continuing ongoing focus that heiko.
As I mentioned our team members are focused on margin. We do business reviews were talking about profitability, we try to keep people focused on the single most important thing rather than 20 metrics.
And of course will go over all those metrics, we talk about them and make sure that.
The company's are developing in the right way, but this focus on margin is pervasive.
So on really very happy about the outperformance if you noticed we estimated at 20% for the year, whereas in the quarter I think we were 20.6% so I'm not saying that we're going to maintain sort of this incredible level that we're at right now, but I do think that it's just to continuing.
Focusing.
Trickle up in the margin activity, while making sure that we keep our customers happy and not doing this on the backs of our customers in terms of price increases.
Right, Okay I'll jump back in the queue. Thank you very much. Thank you Sheila.
Your next question comes from the line of Robert Stallard with vertical research.
Thanks, so much good morning, good morning.
I'm not to belabor this whole virus. Thanks, but some I was wondering if you could remind us what the company went through in the SaaS period, and how you sold customers respond then and how this might be different.
That's a very good question Robert this is Eric.
I would say that into Sars period, we saw more of an immediate impact to which we haven't seen to date and perhaps the Sars.
You know pattern is giving people confident that.
You know that they need to maintain a quarterly flow of business.
Number one number two the airlines are significantly better financial shape today than they were then of course they were at that time coming off the bottom I mean, just as we were really in Nevada. After 911 events of the economic shock that followed in 2002 Sars happened in 2003.
For the airlines were very ill prepared to be able to if you will hold inventory in sort of take the longview. So thus far I think we've seen a lot more maturity and stability in the market again, we do believe there will be an impact, but we're just sort of try.
Turning to figure out where that impact is one of the other unique things going on now of course is that the Max fleet is out of service. So.
They perhaps don't have that.
If you will that added capacity that they've got to think about so I think all of those things put together.
Our keeping the airline.
Pretty confident right now also I'd have to say that economic activity.
Strong I think confident in the United States is strong so I think overall things are moving in the right direction.
Robert There's one other this is Larry I'd like to Ed one other thing back in Sars time in 2003, we were highly concentrated in one essentially one product and that was J.T.A. the engine.
Since then as a result of that we have diversified both through aerospace and through eat TG. So we have a much broader footprint and the impact individual impact the.
I think will be much less than it was for us than it was during the Sars probable.
That's very helpful and just a quick follow up on that if you look across many of you have hundreds and hundreds of different products, but if you look at your product and say how much of this is say discretionary versus Nondiscretionary is it fair to say that most of this is required by the airlines to continue their operation does not a huge element to say retrofits and upgrades and you, yes, I would definitely say.
That does that you're correct also it we're also talking about the defense component. So as you know our company in total defense is like 25% I don't see any change really coming from that and so that absorbs 25% of our revenue.
And then the other parts as Eric pointed out that I really so far.
Again in Sars, we saw it as Eric said very immediate.
Now.
It's not so immediate we haven't seen it or else we would tell you.
Yes, Hi, Robert.
This is Carlos just want to add one or the five point here Eric made this point earlier, but I don't want it to get lost in the discussion.
HEICO is a value proposition to our customers, we as Eric pointed out.
Provided service whereby airlines save money, hence if this corona virus does actually impact the financial health of the industry I do believe that that puts cycling unique position to serve our customers and allow them to save money on their spend to which you point out is really not discretion.
That's great. Thank you very much.
Thank you.
Your next question kind of trying to line up Peter Arment with Baird.
Yeah. Thanks, Good morning, Larry Eric Victor Ross.
Hey, so Eric I feel like we give you. This question every quarter for the last year about regarding the Max you just mentioned at the grounding persisting and it sounds like it's going to persist a lot longer than anticipated. This year are you seeing or can you have you had been able to see any kind of net benefit that you've been able to quantify or any color around that.
Yeah, we.
You know with regard to the aftermarket they're definitely has been some sort of benefit it's very hard to be able to put a number with that.
We are clearly we've been help but you know I've tried to get some definition around that and really can't.
However, I do if dimension that while our aftermarket has been helped with that our specialty products business has been hurt because we do have content on new aircraft and.
That has definitely been impacted in the first quarter and is continue to estimate to be impacted.
The balance of this year so.
Overall for HEICO, while it's a net positive it definitely did suppressed our organic growth in the.
First quarter this year.
Okay, and then if I could just call up by Larry on the on the M&A pipeline and obviously the H. in my product line sounds like it's a very good fit for radian.
Just in general have Theres been a few private equity kind of deals I didn't get done press regarding because of the Max are you seeing any change in kind of.
The the pricing or anything regarding it deals that you're looking at.
No not yet we really have not seen it we're looking at lots of deals were looking as you know we're looking a big ones. We're looking at smaller ones, where we're looking a lot and the we're spending a lot of time doing to do deal, but we really haven't seen much change in pricing not yet.
Appreciate the color. Thanks.
Your next question comes from the line.
Larry follow Whats CJS Securities.
Hi, good morning, its Peter Lugers for Larry.
You guys. Most hi, you guys covered most everything just had one quick question Eightd, sorry, EPG was strong this quarter driven by prior acquisitions and defense, but you mentioned space was down and expect that to level off just wondering if you could give us any more color on visibility for this space segment going forward.
Yeah, Hi, this is victor.
You know, we've we've seen orders picking up for some of the Geo sat market, we've seen an increase [noise].
It killer in quoting activity.
And indications from customers that a lead us to believe those will.
Turn into orders those quotations will turn into order.
Also the timing indications from orders from customers as to when they would be placing orders.
Hello.
Let us to believe that we would start to see those things materialize as the year went on.
And that was the case you were putting our budgets together last year. So that's that's why we think.
It's a back half of the year event for us we can't be certain of that but that's what it's looking like in indications remains the same.
Very helpful. Thank you you're welcome thank you.
Your next question comes from the line of Ken Herbert with Canaccord.
Hi, Good morning, good morning, Ken.
Eric I just wanted to first start with you you're you've obviously maintains the mid to high single digit organic growth outlook for for the FSRU segment.
You know comps are still very tough for the second quarter, maybe get a little easier the back half of the year is there anything you'd call out or point to that maybe gives you we should watch out for isn't inflection or confidence that you'll see the you know the driving the implied step up inorganic growth in the segment for the remainder of the or.
Hi, Good morning can that's a good point I'm glad you you mentioned this I mentioned on our fourth quarter call that in the fourth quarter 2019 fights aboard had organic growth of 12%.
Which followed.
The year prior 2018 organic growth of 13% and I commented that 25% organic growth over a two year period is really incredible.
And probably a unsustainable at that 0.1 would the first quarter numbers came in we realize that perhaps some of and I think I may have mentioned this on the fourth quarter recall that the fourth quarter was so strong that we wondered if a little bit of business was pulled in by our customers not by us.
From the first quarter into the fourth quarter of last year, and I think in hindsight, perhaps I speculate that some of that has happened so as a result.
We think that perhaps the fourth quarter was a little bit.
Larger in terms of organic growth then perhaps that otherwise would have been in as result of first quarter with a little bit smaller. So I think that gives me. Some if you will confidence and visibility into.
The balance of the year and why we think that organic growth.
It's going to be at the numbers that we projected.
Okay. That's helpful. So so if you normalize it you you know there's no specific one thing you'd point to but sort of a normalization as you go through the year it sounds like that didn't occur.
And I just wanted to follow up obviously would get the details in the queue, but you called out maybe some weakness in specialty products I know repair was very strong in the a in the fourth quarter for you partially you don't match related but other trends is there anything else you'd call out specifically in the in the first quarter up 4% organic growth.
Or any of the puts and takes there.
Yes, I think what I was referring to in the specialty products in the first quarter. This year was not weakness, but instead.
Yes, while it's still grew and it did nicely.
It would have grown more had it not been for the Max grounding in the curtailment of production. So we got hurt by those activities, but we still posted good numbers there.
But what I meant was absent the Max problem, we would have been even higher in that area I wouldn't say that theres really any particular area of strength.
We're really seeing good strength very very much broad based across the entire flight support product line. So I'm I'm really quite encouraged with everything that we're doing they're very strong support from our customers in every area, whether it said parts repair.
Specialty products.
And you just speaking with our team we seem to be winning more business in increasing market penetration as a result, frankly the way we treat our customers.
That's great and if I could just one final question for Carlos really good obviously cash generation in the quarter Oh I know obviously you know you. It's a high focus for the company you kept the full year guidance intact is there anything you'd highlight specifically Carlo said, the first quarter or anything else operationally.
Maybe that you're doing a little different which is contributing to choose a better cash profile as we as we think about things moving forward.
Okay. This Carlos I think that I think we're not doing anything unique or special here HEICO. The fact that we maintain high margin businesses.
And we were expanding ever so slightly as margins as we continue to grow our sales and catch efficiencies and leverage our has today and then also gross margin improvement that does drop to the bottom line and ultimately turns into cash. So so thats been helpful. I.
Hi can be candid with you you know if wouldn't be for the uncertainty as the of the outlook for this corona virus, we might have a different view on or outlook in our cash generation fifth year, but right now I chose to keep things relative relatively stagnant. If you would with the December guidance until we get on more visibility into how this is.
You can impact the airline industry.
That sounds reasonable thank you very much thanks, Ken.
Your next question comes from the line of Watson Kahan with column and Cowen.
A couple of questions.
First I was wondering could you quantify the accrued contingent consideration benefit year over year was 1.4 million.
Yes.
It's a it's a pretty damn good guess yeah. That's that's that's about right. We had in Q1 of 19, we had a about a million as close to a million for contingent earn out expense.
We had to take on one of the SSG companies and in fact that was the last earn out payment we made on that particular a.
Subsidiary and this year, we didnt have any of that so ultimately what you want to patterning is no expense issuing some last year, hence the less expense. Your guess is one point for us is pretty close to what it was okay.
And maybe could you talk a little bit about.
How how things are going on the CFO.
Parts rollout, where you are in that process and if we're actually starting to see some.
Some parts get approved and.
In the system, if you will.
Yes, we.
As I mentioned when that settlement came out that we said that directionally it within a what's good for us and that we felt that it would it could only help that business.
I would say that.
While we are very careful for competitive reasons, you can imagine not to comment on particular products customers region than anything like that I would say that I'm encouraged with what I've seen so far it and I do think there.
Opportunity.
For us in that space.
Okay.
And.
Last one I mean, you did mention the valuations are a little rich on the M&A pipeline, but can you characterize the pipeline for us.
I mean does this look like a more promised last year was a big here, but you know.
Could you characterize maybe.
A lot of mid sized targets big target sure.
Yeah. This is Derek I I would be happy to tell you about what we're seeing over in the flight support side.
Theres a tremendous amount of interest in.
Businesses that were in particular the aftermarket.
And the new build market.
While we've seen prices I would say at an elevated level. We are also seeing that many deals are not printing and there are I would say a host of.
Lesser quality businesses.
I think that frankly, some of the buyers out there have gotten a little bit confused and are not or in the past had differentiated and I think perhaps in certain businesses have not traded that that's a sign that either pricing is starting to come down.
Or that people are no longer able to pass off lower quality businesses.
As higher quality businesses, so I would say that I'm encouraged.
HEICO remains the in our opinion the buyer of choice we hear this from entrepreneurs all the time.
And we worked very hard to have a.
Buyer friendly entrepreneurial culture whereby.
Those folks really want to be part of HEICO for the long term in it you know it's not if you will.
A quick private equity ring, the business dry jackup, the prices and run out the door.
And for people, who appreciate our motto I think we remain a great home for those businesses.
[noise] and Vic Victor together.
Thanks, Sam well I think that applies across the board to all of HEICO equally.
One last one for Carlos just tax rate any update to that in the guidance.
Today, Yes, certainly so we still estimate for the full year, we kinda give a non controlling interest and tax rate is somewhere between 19 and 20% I think.
Well, we gave guidance in December that's saying that same statement I may just now was with the statement I made in December you should assume for the remainder of the year that our tax rate will normalize.
My guess is somewhere in the neighborhood at least way, we moderated out of 22 and a half the 23% for the next three quarters and that will bring us at aligned with that 19% to 20% overall tax and NCR rate.
Perfect. Thank you guys appreciate that welcome.
[noise] [noise] as a reminder to ask a question you want me to press Star one on your telephone.
Your next question comes from the line on the list for federal with the yes.
Good morning, gentlemen.
Morning running on it.
So I just want to follow up on the M&A given the sort of the current environment that we are in the aerospace side, obviously the OEM.
Theres a lot of sort of uncertainty over the next several years there aftermarket maybe in the near term some uncertainty and then if you switch over defense.
Depending on what happens with the election, a lot of the Democrats are talking about cutting defense spending. So just how are you taking that.
Environment with maybe prices that aren't really changing right now.
And and that's a role that up to potential M&A.
You know lose this is victor it's something that we've been used to doing in dealing with uncertainty now when our acquisition program. Since we started doing acquisitions in 96 than we've had elections every four years.
Since then and we've had changes in the defense budget during those times and we've had changes in commercial aviation spending and we adjust the strategy as we go when we look at the transactions. We look at the companies and we buy companies that we think are appropriate for us and for both the.
Long term and the short term and it's worked out very well. So we're very confident around our ability to continue to do that and we're going to manage the business in the same way that we've always done it and I would also add that HEICO is a very educated buyer when we go in and do due diligence we understand has been extremely well we.
Understand their supply chains their customers the product on whereas I think other buyers may not be as a sophisticated and knowledgeable and frankly can be fool than we see this all the time.
HEICO is.
Where in this for the long haul we're not in it to for get Rich quick Gamer to hurry up and flip something and when we find the right type of seller in there in the right type of business than we act, we don't feel like we're under any pressure to meet a specific number.
Number of acquisitions and I think it's proven to be true with nearly 80 acquisitions over a 23 year period look if you have this is Larry if you are in the business that we're in for the long run and not from a just day to day, we believe that the commercial aerospace industry is a wonderful and.
History to be in so if we buy something today, we don't expect and do the due diligence that we normally do and our understanding we understand what's going to be around from now until the next 10 years. So I think we're pretty sophisticated buyers. When you talk about defense you got a similar situation no matter who was elected the defense.
Budget is not going to go away it may shrink, but when you focus I hope you're aware of the kind of products that we make and supplied to the defense industry. We don't supply tanks bombs guns, and we supply very high tech electronic type of components and things like that.
Which they need whether we're at war or piece just listening to every enemy that's out there on the field. So if you really have delve into the kind of defense business that we're in you will see that we're we're not something that is going to be buffeted by whether the Democrats get in there the Republic.
Maybe a little stronger a little weaker, but it's not something that we believe that affects US you have to look at our growth pattern in the last.
30 years, we've grown it bottom line at 19% I don't know many companies that have done that and I think we continue to focus on being able to grow with somewheres, 15% to 20%. So I'm not worried about that.
Thats right I appreciate the color and just one quick one for Carlos I noticed that other noncurrent assets and liabilities jumped up anything specific or just curious what that was.
No we had.
We had to implement the new accounting standard on leases, so basically and every other company. Most at December 31, you've probably seen at all so we had to put about $64 million worth of leases up on our books as both as liabilities and assets. It's just a great. So the balance sheet.
So just the Lisa alright, perfect. Thank you Carlos you are.
Your next question comes from the line of calling the charm, let's start lane capital.
Good morning, Thanks for taking my question most of my others been sort already just maybe a quick easy ones.
For both Eric and Victor can you remind us.
What if any are the most important macro.
Okay.
That you deem relevant.
Being linked or order pattern over time.
Im just asking in the context of as we all try to assess and monitor the potential impact of outbreak of Corona.
Ah things that are you perhaps have on your data for.
And are looking at.
Yeah. This is Victor you know when it when it comes to the Gronemeyer is well of course watching it closely and as you know is very difficult to anticipate where it's going I mean personally I believe that it will spread further it'll be in this country.
Deeper.
In the not too distant future, but that's just my opinion, we all read the press and read the same sorts of things to the question becomes how do you deal with it how does that affect your business, how how to you prepare for it we surveyed our company's this week and asked them.
How there what they're seeing and so far the effect that has really been immaterial or de Minimis in fact, almost across the board. We've had a few cases a couple of companies where they've said they've had maybe one company factor they've said, it's had some more material effect basically it's been fairly immaterial so far.
When they talk about what they're trying to do to diversify their supply chains.
And to stock up on extra material things like that what they might do with if they have people out of the plant than they have people for safety and I think it's going to be that kind of.
Flexibility, which HEICO is really good that we're kind of known for being flexible one bobbing and weaving.
When when were.
When we're running on an ordinary basis anyway, and that's how.
We're going to have to deal with it.
And there's just no telling at this point, where this this thing is going to go for for anybody in any industry. So flexibility is going to me to keep my hand.
I think Victor brings up a great point than flexibility and.
Making sure that we figure out how to get the job done regardless of the market condition as specifically with device support clearly in the aftermarket space.
Available seat miles. They have then is the I would say the closest correlation that the only thing that you've got to be a little bit careful on is theres been in general a shortage of a certain maintenance capacity.
As the economy has been pretty strong and travel has increased.
So as some of the other analysts mentioned.
Airlines are taking the opportunity if you will end this lower period to perform some needed maintenance.
So I think that will mitigate at least in the short term any potential impact of the virus.
But long term asked them so really the driver for the aftermarket.
With regard to our specialty product it is.
Both defense spending in new build however, we are on I would say very good programs that are very much needed and missile defense area as well as very narrow body new build programs. So I think that.
We should be pretty well in that area as well.
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Any further questions.
At this time there are no further questions I would now like to turn the call back over to men Smith for any closing remarks. Thank you all very much for participating and listening and for your interest in high go and we look forward to speaking to you a at our second.
Quarter, a conference call all of which will be a little bit later this year.
Thank you all and that the is the extensive the conference call.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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