HEICO Corporation — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2012. Unless otherwise noted, amounts below are in millions of dollars. Share and per-share data reflect the 5-for-4 stock split effected in April 2012.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $216.3 | $184.5 | $429.0 | $358.7 |
| Operating income | $37.6 | $32.9 | $75.2 | $65.3 |
| Net income attributable to HEICO | $19.0 | $16.8 | $38.2 | $33.9 |
| Diluted EPS | $0.36 | $0.32 | $0.72 | $0.64 |
| Gross margin | 34.8% | 36.0% | 35.8% | 36.3% |
| Operating margin | 17.4% | 17.8% | 17.5% | 18.2% |
- Q2 sales increased 17.3%; six-month sales rose 20%. Q2 operating income increased 14.2%, while six-month operating income rose 15%.
- Sales growth reflected both acquisitions and organic expansion. For the six-month period, ETG sales increased 43% to $150.7 million and FSG sales increased 10% to $279.9 million. Management cited organic growth of approximately 5.7% in ETG and 7.5% in FSG.
- Profitability grew more slowly than revenue: consolidated gross and operating margins declined year over year. Acquired-company margins, inventory purchase accounting adjustments, acquired-intangible amortization and increased R&D spending weighed on ETG margins. Excluding Switchcraft and 3D Plus, management estimated ETG operating margins at approximately 25% for Q2 and 26% for the first half.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $45.3 million, down from $51.1 million a year earlier. The company attributed the decline principally to a $14.3 million increase in working capital, including payment timing; working capital was a $19.7 million use of cash.
- Investing cash outflow was $169.6 million, including $161.4 million for acquisitions and $8.1 million of capital expenditures. Financing cash inflow was $129.3 million, principally from net revolving-credit borrowings of $135.0 million. Cash ended the period at $22.3 million.
- At April 30, 2012, total debt was $174.7 million, including $171.0 million drawn on the revolving facility; cash was $22.3 million and net debt was $152.5 million. Management reported net debt to shareholders’ equity of 22.7%. Long-term debt had risen from $40.2 million at October 31, 2011, mainly to finance acquisitions.
- Current assets were $357.2 million and current liabilities $125.3 million. The company stated it was in compliance with credit-facility covenants and expected operating cash flow plus available borrowing capacity to cover requirements for at least 12 months.
- The new unsecured revolving facility is $670 million, matures in December 2016, and may be increased to $800 million under specified terms. It carries financial covenants and variable-rate borrowing costs; the weighted-average rate was 1.2% at April 30.
Material developments, outlook and risks
- Acquisitions included Switchcraft, acquired in November 2011 for approximately $143.2 million net of cash, plus Ramona Research and Moritz Aerospace in March and April 2012. Switchcraft contributed $25.5 million of first-half sales and $1.5 million of HEICO-attributable income; Q2 contributions were $14.8 million and $0.6 million. The acquired businesses enlarged goodwill and intangible assets and increased amortization.
- Management expected stable demand for most ETG products and continued moderate growth in FSG specialty product lines for the rest of FY2012. It cautioned that commercial aviation growth could moderate amid economic uncertainty and potential slower capacity growth; government deficits and defense-spending reductions could temper demand for some ETG products. No specific full-year sales or earnings forecast was provided. FY2012 capital expenditures were expected to be $20–$22 million.
- First-half effective tax rate increased to 34.5% from 31.7%, partly because the prior-year period included a retroactive R&D tax credit and because of state-tax effects and acquired businesses. Q2 rate was 34.7%, versus 33.0%.
- The allowance for doubtful accounts increased by $1.8 million, principally due to potential collection difficulties following customer bankruptcy filings. Inventories rose to $187.4 million from $165.0 million at fiscal year-end.
- Ramona Research acquisition terms include contingent consideration with a recorded fair value of $10.8 million and a maximum aggregate payment of $14.6 million, subject to earnings objectives. Separately, estimated subsidiary put-right redemption amounts were approximately $59 million; actual amounts may differ. The company did not expect payment under an older contingent-purchase arrangement of up to approximately $74 million by June 2012, based on earnings then achieved.
- Management said ordinary-course litigation was not expected to materially harm results, financial position or cash flows. Other stated risks include commercial-air-travel demand, defense and government spending, competition, product development and pricing, acquisitions and integration, customer credit, interest and tax rates, and broader economic conditions.
Investor verification priorities
- Separate organic growth from acquisition-driven growth, particularly in ETG, and assess whether acquired businesses improve margins after purchase-accounting and amortization effects.
- Track cash conversion and working-capital requirements alongside earnings, including inventory growth and customer-credit exposure.
- Review acquisition-related debt, facility covenants and variable-rate exposure; confirm borrowing capacity and planned capital spending.
- Monitor the performance conditions, valuation and potential cash timing of contingent consideration and subsidiary put rights.
- Compare subsequent commercial aviation, defense and specialty-product demand with management’s qualitative outlook; the filing gives no numerical revenue or earnings guidance.