FOR THE PAST TWO YEARS, HEICO Corp. has been recognized in Forbes as one of the 200 best small companies. It also was named among the magazine's 200 "hotshot stocks." It has two main divisions: HEICO Aerospace Holdings (aka Flight Support) and Electronics Technologies. Beneath HEICO Aerospace are three smaller divisions: HEICO Parts Group, HEICO Component Repair and HEICO Distribution.
HPG is the world's largest independent supplier of FAA-approved engine and component replacement parts. Based in Hollywood, Fla., it supplies everything from nuts and bolts to combustors, large rings, rotating airfoils and fuel pump gears. Each year it delivers more than 3 million of these kinds of parts to the world's major aircraft operators.
It specializes in reverse engineering of OEM parts and through rigorous testing and demonstration regularly wins approval for its products from US FAA and other regulatory bodies. The company has products for most engine platforms and ATA Chapters--the industry standard for how you look at an aircraft--says Kate Shaeffer, senior VP-marketing and sales for the parts group. HPG holds more than 5,000 FAA-approved PMAs and produces more than 400 new and highly engineered parts each year.
HEICO is no small fish, and executives there will tell you why they're a force to be reckoned with. "We provide the only real competition in the parts business," says HEICO Aerospace President Eric Mendelson. "Once an aircraft, aircraft engine or propeller receives a type certificate, the only initial provider of spares is the OEM. HEICO has developed a proprietary process whereby we receive FAA approval. We submit a data package to them and they okay it."
Mendelson says once FAA approval is secured, HEICO takes one-third of the market share and provides its customers with a competitive advantage on the products it develops. That leaves the OEM with a two-thirds market share on each part number.
So how does this translate into numbers? According to HEICO, its customers are saving more than $20 million a year on material costs. Given today's economic climate, this is especially appealing for airlines and MRO outfits.
HEICO Corp. began operating in 1957 and last year celebrated its 50th anniversary. The company has more than 200 customers, including the world's largest airlines. Lufthansa Technik owns 20% of HEICO Aerospace. Other international clients include American Airlines, United Airlines, Delta Air Lines, Air Canada and Japan Airlines.
The company's recent acquisition of Arger Enterprises, a major distributor of FAA-approved aircraft and engine parts, has helped it expand HPG's scope of operation and strengthened its distribution activities. "HEICO is the perfect partner for Arger," Antony Ricketts, Arger's president, remarks. "HEICO's impeccable reputation, record of innovation, financial strength and existing presence in the industry will help Arger and its highly regarded principals grow their respective businesses. HEICO brings strategic product breadth and technical expertise required to succeed in today's marketplace."
In May 2007 HEICO Aerospace signed a long-term agreement with British Airways to manage exclusively the airline's alternative parts program. In view of the carrier's fleet of 250-plus Airbus and Boeing aircraft and various MRO shops, the deal seems particularly promising from a financial standpoint. At the time of the partnership, BA Materials Management and Component Overhaul GM Raj Mehta said the strategic partnership forms a key element of the airline's business strategy while maintaining the "highest levels of safety and reliability."
In 2006 HPG entered into a joint cooperation agreement with China Aviation Supplies Import and Export Group Corp. for the promotion of FAA-approved aircraft and engine replacement products in China. The accord is unique to the industry and, according to Mendelson, will allow HPG to access markets in China for the first time. "We expect this cooperation will effectively position [us] for the tremendous aviation expansion occurring in China," he says. A state-owned company, CASGC imports and exports aviation-related products including aircraft, engines, spares, ground support and safety equipment.
HEICO also has extended its strategic alliance with Japan Airlines. The carrier has agreed to purchase newly developed parts and the most applicable HPG FAA-approved replacement parts on an exclusive basis. Additionally, JAL designated HPG as its largest and premier supplier of non-OEM FAA-approved replacement parts.
Additionally, HEICO has a contract with American Airlines to provide repair and overhaul services for the thrust reverser actuation system on 777s. The agreement has been especially helpful in allowing it to expand offerings in new-generation aircraft component repair.
HEICO Corp. has achieved significant compound annual growth since 1990--roughly 19% in sales and earnings and about 24% in the stock price, say company executives. It has two classes of stock traded on the NYSE, both nearly identical save for one small detail: Voting rights. Its Class A stock receives 1/10 vote per share and the common stock carries one vote per share.
Last May the company reported record numbers across the board, particularly in sales and operating income, for the second quarter of FY08 ended April 30. Net income rose 27% to $11.9 million, or 44 cents per diluted share, compared with $9.4 million/35 cents per diluted share in the same period last year. During the first six months of FY08, net income increased 27% to a record $22 million (81 cents per diluted share) from $17.3 million (65 cents per diluted share) in the 2007 period.
Operating income was up 25% to a record $26.3 million for the second quarter. Year-to-date operating income rose 30% to $49.6 million from $38.2 million in the first six months of FY07. Net sales grew 19% to a high of $144 million. Year-to-date net sales through April increased 18% to a record $278.3 million from $234.9 million. Mendelson says HEICO Aerospace estimates roughly $430 million in sales this year. So what's the key to all this success? He says it's the people.
THE SUCCESS FACTOR
HEICO Aerospace employs about 1,600 people worldwide. Among the newest appointments to the executive team is HPG President Frederick Stine. Before this promotion, Stine was head of operations for HPG. "We've got very talented people," says Mendelson, who has served as president and CEO of HEICO Aerospace for 15 of the last 18 years. "It's a decentralized structure: We trust our people to do their thing and give them the resources they need to succeed."
HEICO's corporate operating philosophy is to not locate everyone in one physical office. While there are central finance, sales and marketing teams, the company essentially breaks down each unit into its smallest operating groups and gives them the tools it needs to run its own business.
The HPG sales team has a big role helping clients with their PMA programs. This includes aiding customers with interpreting complicated international regulations and engineering presentations to explain the PMA process to groups.
HPG itself consists of nine operating units that repair, design and manufacture aircraft components and engine parts. Annually it invests more than $8.5 million in research and development and it maintains a state-of-the-art engineering and design facility in Hollywood. At its central laboratory, precision measurement equipment, including optical and scanning electron microscopy and coordinate measuring machines to perform dimensional engineering, is put to productive use every day.
A customer has at least three main options for parts: New, repair or exchange. HEICO's flexible total part support program allows clients to send removed nonserviceable parts to the laboratory and in exchange receive serviceable products in various forms including repaired OEM parts, repaired HEICO PMA parts and new HEICO PMA parts. Customers also get peace of mind knowing the parts are being restored to factory standards and are good as new.