HEICO Corporation — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended July 31, 2020. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results were significantly affected by the COVID-19 pandemic, particularly the commercial aviation downturn.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | First 9 months FY2020 | First 9 months FY2019 |
|---|---|---|---|---|
| Net sales | $386.4 million | $532.3 million | $1,360.8 million | $1,514.1 million |
| Operating income | $68.4 million | $119.4 million | $287.6 million | $336.5 million |
| Net income attributable to HEICO | $54.3 million | $81.1 million | $251.7 million | $242.2 million |
| Diluted EPS | $0.40 | $0.59 | $1.83 | $1.76 |
| Gross margin | 37.1% | 40.0% | 38.2% | 39.9% |
| Operating margin | 17.7% | 22.4% | 21.1% | 22.2% |
- Cash flow: Operating cash flow was $299.0 million for the first nine months, versus $313.4 million a year earlier. Investing cash outflow was $98.0 million, including $66.3 million for acquisitions and $17.5 million in capital expenditures. Financing cash inflow was $134.6 million. Cash increased to $395.3 million from $57.0 million at October 31, 2019.
- Debt and liquidity: Total debt was $740.1 million, including $730.0 million drawn on the revolving credit facility; cash less total debt was approximately $344.8 million net debt. The facility matures in fiscal 2023 and its weighted average borrowing rate was 1.3%. HEICO reported compliance with covenants and a total-debt-to-shareholders’-equity ratio of 37.9%. Management said cash, operating cash generation and available borrowing capacity should cover requirements for at least 12 months.
- Balance sheet: Current assets were $1,140.7 million and current liabilities $229.6 million at July 31, 2020. Inventories were $473.1 million; the allowance for doubtful accounts rose to $12.0 million from $3.7 million at October 31, 2019.
Changes versus prior comparable periods
- Third-quarter sales fell 27% and operating income fell 43%; HEICO-attributable net income declined 33%. The FSG recorded a 44% sales decline and an 81% operating-income decline. ETG sales decreased 2%, while operating income was nearly flat.
- For the first nine months, sales declined 10%, primarily due to a 20% decline in FSG sales. ETG sales rose 4% to a record $638.3 million, supported by acquisitions and defense demand. HEICO-attributable net income increased 4% despite lower operating income.
- Commercial-aerospace business sales declined approximately 54% in Q3. The filing attributes lower FSG demand to reduced commercial air travel, grounded aircraft and weaker product mix. ETG also faced weaker demand in some aerospace, defense and other electronics products.
- Operating margins narrowed, especially in FSG. Lower performance-based compensation and other expense reductions partly offset the sales decline, but higher bad-debt expense and unfavorable product mix weighed on results.
Outlook, risks and notable items
- Management forecast positive operating cash flow for the remainder of FY2020 but gave no specific sales or earnings guidance. It said the timing and magnitude of the pandemic’s impact and a return of commercial aerospace demand to pre-pandemic levels could not be predicted.
- Management expects commercial aviation demand to recover over time and believes its cost-saving products and product development may support market-share gains. Defense, space and other industrial demand was broadly resilient, though the company cited supply-chain, staffing, facility and transportation disruptions.
- The first nine months’ effective tax rate was 3.5%, versus 17.1% a year earlier, including a $47.6 million discrete tax benefit from stock-option exercises, as well as larger FDII and R&D tax benefits. The unusually low rate materially supported reported net income and EPS; it should not be assumed to recur at the same level.
- Bad-debt expense increased due principally to commercial aviation customers entering bankruptcy protection; the allowance for doubtful accounts increased $8.4 million. Management reported no material pandemic-related impairment impact in the period, but estimates were assessed amid significant uncertainty.
- Redeemable noncontrolling interests were $204.1 million, reflecting potential future put-right payments through fiscal 2030. The filing also disclosed $4.5 million of standby letters of credit. Management stated pending litigation was not expected to have a material adverse effect.
- FY2020 acquisitions included Rocky Mountain Hydrostatics, HMI and Quell, among others; their reported-period sales and earnings were not material. In August 2020, HEICO made two additional acquisitions, also described as not material to the financial statements.
- COVID-19, commercial air travel, customer credit, supply-chain continuity, defense spending, acquisition integration and future cash generation were identified as risks that could affect results.
Important facts for investors to verify
- Whether commercial aviation demand and FSG margins recover, and how long aircraft grounding and lower air travel persist.
- Whether the $47.6 million stock-option tax benefit and other tax advantages are nonrecurring, and the resulting normalized tax rate and earnings.
- Further customer bankruptcies, bad-debt expense and collection performance, alongside inventory levels and working-capital needs.
- Cash generation, revolving-facility borrowings, covenant headroom and the timing and amount of potential noncontrolling-interest put payments.
- Operational disruption, acquisition performance, and the conversion of remaining performance obligations into revenue; the filing reported $363.8 million of such obligations at July 31, 2020.