Heico Executive Insights: Record Margins, Q3/Q4 Color

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On Wednesday, Heico Corporation (NYSE:HEI) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Record Margins

Julie Yates – Credit Suisse: Few questions on margins one for Victor and one for Eric. Victor on ETG margins with the improvement at 3D Plus and then the end of some of the accounting adjustments do you think that the segments can return to that targeted 25% to 26% level, by the end of the year.

Victor H. Mendelson – Co-President: Yes, absolutely.

Julie Yates – Credit Suisse: Then Eric on FSG what is driving the record margins at 18.9% is it mix and then what are your expectations around the sustainability of that in the second half of the year.

Eric A. Mendelson – Co-President: Well in terms of what’s driving it, our, we’ve got a number of business units that are all run by very talented people and the metrics that we primarily focus on is operating income, and sales it’s just not, I mean it’s something obviously that we have to accomplish, but the thing that they’re all evaluated on is the operating income, so that really is just a byproduct of all their efforts and we think it represents a greater, it’s a greater important in terms of sales. So that’s really the number that we are looking at, and so far is how it relates to sales and we drive the margins. They frankly are not compensated on nor evaluated on percentage margin, really the total dollars of operating income based on the capital that they’ve got. So it’s not something that we really can evaluate. It moves around. It could go higher, it could go lower. Frankly, I don’t know. It really just depends on product mix and what we are able to accomplish. So, I wish I could provide greater clarity on that, but I really can’t.

Thomas S. Irwin – EVP and CFO: Julie, this is Tom Irwin. I think exactly what Eric mentioned, that’s one of the reasons we don’t give guidance particularly in FSG segment. We made reference that we do see improvement in ETG, but sort of the lack of backlog visibility you may recall to (1%) or more of our orders each month are booked and shipped, so it’s not like we have a larger backlog that we can see, but we’ve got margins on as opposed to ETG. So for that reason, we don’t give guidance if you will on margins fluctuation that may happen in there. We reported it based on mix. We do target overall growth, but not specific margins’ target.

Julie Yates – Credit Suisse: Then, can you guys break out the growth in Flight Support in the quarter between parts and services?

Thomas S. Irwin – EVP and CFO: In the FSG Group, by the quarter, the organic growth was recalling exclusively in parts. The service business second quarter to second quarter didn’t have any substantial organic growth, that’s the service business second quarter to second quarter. For the first half of the year, they all had growth, but quarter-over-quarter, basically not any organic growth in repair services versus parts and specialty products.

Q3/Q4 Color

Lee Jagoda – CJS Securities: This is actually Lee Jagoda for Arnie. So following up on the previous question, how much amortization and inventory accounting from the acquisitions remains in Q3 and/or Q4?

Eric A. Mendelson – Co-President: It’s difficult to give an exact number, but to put a little more color on it, as Larry mentioned it runs in the aggregate for Switchcraft and pretty roughly $3 million a quarter, roughly a third of that is purchase accounting short-term, which typically rolls out in six to nine months in those businesses. It may vary a little bit depending on what’s actually shipped versus the inventory we acquire at the acquisition date. The remaining roughly two-thirds is amortization which is a longer period and wouldn’t fall out within a year, so although we use accelerated amortization methods for a number of our intangibles. So it’s a decreasing amount, but it wouldn’t typically go away immediately.

Lee Jagoda – CJS Securities: Then just switching gears a little to the Flight Support Group. You highlighted industrial as well as aerospace aftermarket for the 5% organic growth. Can you break that up between the industrial and the aerospace pieces?

Eric A. Mendelson – Co-President: For competitive reasons we don’t disclose specifics within product lines. They both were up. As we have mentioned in the last few quarters the industrial product is a small product line, so a relatively small aggregate dollar amount has a higher percentage growth if you will, but it wasn’t both of them.

Lee Jagoda – CJS Securities: But both of those were up in the quarter?

Eric A. Mendelson – Co-President: Both the industrial products and the aftermarket parts, yes.

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