Business context and reporting period
HEICO Corporation’s Form 10-K covers the fiscal year ended October 31, 2016; it is an annual report, not a standalone Q4 filing. HEICO operates through Flight Support Group (FSG), which makes up 64% of sales, and Electronic Technologies Group (ETG), 36%. FSG focuses on aviation aftermarket parts and services; ETG makes specialized electronics for defense, space, aviation and other markets.
Fiscal 2016 included the January acquisition of Robertson Fuel Systems. HEICO reported $263.8 million of acquisition cash outlays, including $253.0 million of net consideration for Robertson.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $1,376.3 million | $1,188.6 million | +16% |
| Gross profit margin | 37.5% | 36.5% | +1.0 percentage point |
| Operating income | $265.3 million | $229.7 million | +16% |
| Operating margin | 19.3% | 19.3% | Flat |
| Net income attributable to HEICO | $156.2 million | $133.4 million | +17% |
| Diluted EPS | $2.29 | $1.97 | +16% |
| Operating cash flow | $249.2 million | $172.9 million | +$76.3 million |
FY 2016 Q4 sales were $363.3 million, versus $328.7 million in Q4 FY 2015; net income attributable to HEICO was $44.3 million versus $38.3 million, and diluted EPS was $0.65 versus $0.56.
FSG sales increased 8% to $875.9 million and operating income rose 9% to $163.4 million. ETG sales increased 31% to $511.3 million and operating income rose 28% to $126.0 million. ETG sales growth included $107.3 million from FY 2016 and FY 2015 acquisitions and 4% organic growth; FSG growth included $40.6 million from FY 2015 acquisitions and 3% organic growth.
Gross margin improved mainly through stronger FSG aftermarket and specialty-products mix; ETG margin declined 0.5 percentage point due principally to mix in certain space products. SG&A rose to $250.1 million from $204.5 million, including acquisition-related costs, higher performance compensation and contingent-consideration adjustments. Interest expense increased to $8.3 million from $4.6 million as debt balances and interest rates rose. The effective tax rate was 31.5%, compared with 31.7%.
Cash, debt and liquidity
- Cash and equivalents were $43.0 million at year-end; total debt was $458.2 million and net debt was $415.3 million. Net debt to equity was 40%, up from 37%.
- Operating cash flow of $249.2 million less capital expenditures of $30.9 million implies approximate free cash flow of $218.3 million; this is a simple calculation, not a company-reported measure.
- At December 13, 2016, HEICO reported approximately $353 million of unused committed revolving-credit availability. Management said operating cash flow and available borrowings should cover requirements for at least 12 months.
- The unsecured revolving facility had an $800 million commitment, with maturity in December 2018 and financial covenants; HEICO said it was compliant at October 31, 2016. Fiscal 2017 capital expenditures were expected to be about $38 million.
Changes, outlook and material considerations
- Backlog rose to $497 million from $349 million. Most was expected to ship in FY 2017; increases reflected a multi-year FSG distribution contract and acquired and higher ETG orders.
- Management targeted FY 2017 growth in full-year sales and net income over FY 2016, excluding any additional acquisitions. It expected growth in FSG commercial aviation and defense and in ETG, driven by demand across most products.
- Robertson contributed approximately $84.1 million of FY 2016 sales and $12.3 million of net income attributable to HEICO, excluding acquisition costs. HEICO recorded $3.1 million of acquisition costs, reducing attributable net income by approximately $2.0 million after tax, or $0.03 per share. A retroactively extended federal R&D tax credit increased attributable net income by approximately $1.7 million after expenses.
- Key risks include aviation-cycle and airline demand, defense and space budget changes, regulation and export approvals, intense competition, acquisition integration and funding, supply constraints, product liability, environmental exposure, foreign-currency movements and reliance on key personnel. Foreign customers generated approximately 34% of FY 2016 sales; no single customer accounted for 10% or more.
- Goodwill and net intangible assets represented approximately 60% of total assets. HEICO reported no goodwill impairment in FY 2016 and said reporting-unit fair values significantly exceeded carrying values.
- Redeemable noncontrolling interests were estimated at $99.5 million. Approximately $17.6 million could be payable in FY 2017 if eligible holders exercised their puts, in addition to $4.0 million already payable in FY 2017 from previously exercised puts.
- Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal controls. Robertson, representing 12.4% of assets and 6.1% of sales, was excluded from the internal-control assessment during its first year after acquisition.
- Management and counsel considered ordinary-course litigation outcomes not expected to materially affect results, financial position or cash flows. The filing identifies $2.4 million of standby letters of credit and $56.9 million of operating lease commitments.
Important facts for investors to verify
- How much reported growth and earnings improvement came from acquisitions versus organic performance, especially Robertson and ETG.
- Whether backlog converts to FY 2017 revenue as expected, and whether its growth reflects durable demand rather than acquired or contract-specific orders.
- Debt repayment capacity and covenant headroom, including the impact of further acquisitions, interest-rate changes and potential noncontrolling-interest put exercises.
- Whether margin gains persist as product mix, performance compensation and amortization costs change.
- The assumptions supporting goodwill and intangible-asset valuations, given their substantial share of total assets.
- Whether FY 2017 sales and net-income growth targets are achieved; the filing does not provide specific numerical guidance.