HEICO Corporation — Q3 FY2018 Form 10-Q
Period: Three and nine months ended July 31, 2018; fiscal year ends October 31. Results are unaudited. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $465.8 | $391.5 | $1,300.8 | $1,103.6 |
| Operating income | $101.4 | $76.1 | $272.5 | $217.2 |
| Net income attributable to HEICO | $67.1 | $45.7 | $191.9 | $132.3 |
| Diluted EPS | $0.49 | $0.34 | $1.40 | $0.98 |
| Gross margin | 39.0% | 38.0% | 38.8% | 37.6% |
| Operating margin | 21.8% | 19.4% | 21.0% | 19.7% |
Q3 sales rose 19%, operating income 33%, and HEICO-attributable net income 47% year over year. Nine-month sales increased 18%, operating income 25%, and HEICO-attributable net income 45%. Segment sales for the nine months were $807.7 million in Flight Support (FSG) and $510.8 million in Electronic Technologies (ETG); ETG growth included acquisitions and 8% organic growth, while FSG included acquisitions and 6% organic growth. Q3 organic growth was 10% in FSG and 16% in ETG.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $204.7 million, versus $179.3 million a year earlier. Working capital increased by $61.6 million, including inventory growth of $41.0 million and receivables growth of $26.3 million.
- Investing cash outflow was $79.2 million, including $40.6 million for acquisitions and $35.9 million for capital expenditures. Financing cash outflow was $111.3 million. Cash increased $14.9 million from fiscal year-end to $67.0 million.
- At July 31, cash was $67.0 million; current assets were $728.2 million and current liabilities $254.8 million. Total debt was $623.8 million, including $614.0 million drawn on the revolving facility, compared with $674.0 million total debt at October 31, 2017. The facility’s weighted-average rate was 3.2%; its maturity is in 2022/2023 (the filing gives November 2022 for the facility agreement and fiscal 2023 for borrowings).
- Management reported a debt-to-shareholders’ equity ratio of 43.6%, compliance with all credit covenants, and expected operating cash flow plus available revolver capacity to meet cash needs for at least 12 months. Fiscal 2018 capital expenditures were estimated at approximately $45 million.
Material changes and unusual items
- The Tax Cuts and Jobs Act reduced the federal statutory rate and drove a provisional $16.6 million tax benefit from remeasuring deferred tax liabilities, partly offset by a $4.7 million transition-tax expense. The nine-month effective tax rate fell to 17.9% from 29.8%; Q3 was 23.1% versus 30.3%. Fiscal 2019 tax provisions, including GILTI and FDII, were not yet quantified.
- Acquisitions contributed to growth and expenses. Fiscal 2018 acquisitions included the ELT product line, 85% of Sensor Technology Engineering, and IDC; management said their reported-period sales and earnings were not material. An August 2018 acquisition of ODE was also described as not material.
- Interest expense increased to $5.2 million in Q3 and $14.8 million for nine months, principally from higher rates and debt balances associated with prior acquisitions. Two 5-for-4 stock splits were effected in January and June 2018; share and per-share data are retrospectively adjusted.
- Contingent consideration fair value declined to $18.6 million from $27.6 million at October 31, 2017, including a reduction associated with lower-than-anticipated acquired-business earnings and revised market expectations. Q3 SG&A and FSG operating results benefited from contingent-consideration remeasurement.
Guidance, commentary, and risks
Management raised its FY2018 growth estimates to 15%–16% for sales and 35%–37% for net income, from prior estimates of 13%–14% and 33%–35%, respectively. It expected growth in FSG commercial aviation and defense and in most ETG products, while maintaining investment in product development, market penetration, and acquisitions.
Key stated risks include weaker commercial air travel or airline purchasing, defense and government budget reductions, competition, product-development or manufacturing difficulties, contract-cost requirements, acquisition execution and synergies, customer credit, interest and currency rates, tax changes, and broader economic conditions across served industries. The company had $4.5 million of standby letters of credit; management said ordinary-course litigation was not expected to have a material adverse effect. Revenue-recognition guidance effective for HEICO in FY2019 was expected to accelerate recognition for certain production and repair contracts; the impact remained under assessment.
Investor verification priorities
- Check whether FY2018 sales and net-income growth guidance was achieved and how the tax-law effects affected comparability.
- Monitor organic growth, segment margins, product mix, and the contribution and integration of acquisitions.
- Track working-capital conversion, especially inventory and receivables, alongside capital spending and cash generation.
- Review debt, interest costs, covenant headroom, and the timing and potential cost of redeemable noncontrolling interests.
- Confirm the eventual quantified effects of revenue-recognition adoption and FY2019 tax provisions.