HEICO Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended October 31, 2010. This annual filing also reports fourth-quarter results. HEICO operates through Flight Support Group (FSG), which makes and services FAA-approved aircraft replacement parts, and Electronic Technologies Group (ETG), which supplies electronic, microwave and electro-optical products to aviation, defense, space and other markets.
Financial results
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales | $617.0 million | $538.3 million | +14.6% |
| Gross profit / margin | $222.3 million / 36.0% | $181.0 million / 33.6% | Margin +2.4 points |
| Operating income / margin | $109.2 million / 17.7% | $88.3 million / 16.4% | +23.7%; margin +1.3 points |
| Net income attributable to HEICO | $54.9 million | $44.6 million | +23.1% |
| Diluted earnings per share | $1.62 | $1.32 | +22.7% |
| Cash from operating activities | $101.7 million | $75.8 million | +$25.9 million |
Consolidated net income before noncontrolling interests was $72.4 million, compared with $59.8 million. Interest expense was $0.5 million. FY2010 effective tax rate was 33.7%, versus 31.9% in FY2009; the prior-year rate benefited from an IRS research-credit settlement.
FSG sales rose 4.3% to $412.3 million, entirely from organic growth; segment operating income rose 13.2% to $67.9 million. ETG sales increased 43.4% to $205.6 million, reflecting acquisitions and approximately 12% organic growth; segment operating income increased 40.4% to $56.1 million. ETG operating margin eased to 27.3% from 27.9%, partly reflecting acquired-business mix.
Cash used in investing was $48.3 million, including $39.1 million for acquisitions and $8.9 million in capital expenditures. Cash used in financing was $54.2 million. Year-end cash was $6.5 million, total debt $14.2 million (down from $55.4 million), and shareholders’ equity $554.8 million. Debt was 2% of total capitalization, versus 10% a year earlier. HEICO reported approximately $284 million of unused revolving-credit availability under its $300 million facility and said operating cash flow and available borrowing capacity should cover needs for at least 12 months.
Material changes and notable items
- Sales rebounded from the FY2009 decline of 7.6%; management cited stronger commercial airline capacity late in FY2010, industrial-product demand, and growth in ETG medical, defense, electronic and satellite products.
- Gross and operating margins improved, principally due to a more favorable FSG product mix. SG&A increased to $113.2 million from $92.8 million, including acquisition-related and personnel costs and higher performance awards.
- Acquisitions cost $39.1 million in FY2010. The February 2010 dB Control acquisition contributed to ETG growth; acquired businesses overall contributed about $40 million in ETG sales during the year.
- Year-end backlog was $142.5 million, up from $104.5 million; substantially all was expected to ship in FY2011. ETG backlog growth principally reflected an acquired business.
- FY2010 included $1.4 million of intangible-asset impairment losses, reducing HEICO-attributable net income by $0.9 million. Fourth-quarter impairments reduced attributable net income by $0.7 million, or $0.02 per diluted share. No goodwill impairment was reported.
- The April 2010 5-for-4 stock split is reflected retrospectively in share and per-share figures. The semiannual dividend rose 25% to $0.06 per share; a further $0.06 dividend was declared for January 2011.
Outlook, risks and contingencies
Management targeted growth in FY2011 full-year sales and net income over FY2010, citing expected commercial-airline capacity growth, increasing demand for some commercial products, and stable defense demand. The company also planned to pursue product development, market penetration and acquisitions. This is a target, not a quantified forecast.
Principal risks include aviation-industry cyclicality and airline fleet changes; reduced defense, space or homeland-security spending; intense OEM and aftermarket competition; dependence on FAA approvals and regulatory compliance; product-development execution; supplier availability and costs; international sales and export licensing; product-liability and environmental exposure; natural disasters, particularly hurricanes affecting Florida facilities; and acquisition integration, funding and growth-management risks.
Potential cash claims include approximately $55 million estimated for redeemable noncontrolling interests, with put rights exercisable from FY2011 through FY2018; actual redemption amounts may differ. Certain acquisition earn-outs could total as much as approximately $91 million through FY2012, although management estimated about $9 million based on comparable historical earnings. The contractual-obligations table excludes some contingent payments and put rights because payment timing or amount is conditional. Routine litigation was not expected by management to materially affect results, financial position or cash flows.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of October 31, 2010.
Important facts for investors to verify
- Whether FY2011 sales and earnings growth targets were achieved, and whether commercial aviation recovery persisted.
- How much of ETG’s rapid growth and backlog reflects acquisitions versus sustainable organic demand, and the effect of acquired-business margins.
- Future cash requirements from redeemable noncontrolling-interest put rights and acquisition earn-outs, including amounts and timing as earnings objectives are measured.
- Cash conversion and working-capital trends, particularly receivables, inventory and accrued expenses, alongside acquisition spending and debt repayment.
- Whether FAA approvals, export permissions, customer concentration, product-liability exposure or environmental and disaster risks changed materially after the filing date.