HEICO Corporation — Q3 FY2010 Form 10-Q
Reporting period: Three and nine months ended July 31, 2010; filed September 1, 2010. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results are unaudited; per-share figures reflect the April 2010 5-for-4 stock split.
Financial performance
| Metric | Q3 FY2010 | Q3 FY2009 | 9M FY2010 | 9M FY2009 |
|---|---|---|---|---|
| Net sales | $158.3 million | $134.1 million | $447.7 million | $394.7 million |
| Operating income | $29.0 million | $21.4 million | $79.5 million | $64.2 million |
| Operating margin | 18.3% | 16.0% | 17.8% | 16.3% |
| Net income attributable to HEICO | $14.9 million | $11.1 million | $39.3 million | $33.0 million |
| Diluted EPS | $0.44 | $0.33 | $1.16 | $0.98 |
Gross margin increased to 36.4% in Q3 from 34.2%, and to 36.0% for the first nine months from 33.5%. The filing attributes improvement mainly to favorable FSG product mix. Nine-month SG&A rose to $81.8 million from $68.0 million; SG&A was 18.3% of sales versus 17.2%, reflecting acquisition costs, higher personnel costs, amortization and performance awards.
- Segment trends: Nine-month FSG sales were $301.1 million (+1.2%) and operating income $50.3 million (+8.7%). ETG sales were $147.2 million (+51.0%) and operating income $40.0 million (+50.8%); ETG growth included acquisitions and approximately 14% organic growth. Q3 ETG organic growth was approximately 22%; FSG sales increased 7.3%, with improved commercial aviation and industrial demand.
- Cash flow: Nine-month operating cash flow was $67.9 million, up from $43.7 million. Investing cash use was $45.8 million, including $39.1 million for acquisitions and $6.7 million in capital expenditures. Financing cash use was $18.3 million. Cash increased to $11.0 million from $7.2 million at October 31, 2009.
- Debt and liquidity: Total debt was $47.3 million, down from $55.4 million; net debt was $36.3 million and net debt/equity 6.8%. Revolver borrowings carried a 1.0% weighted average rate. No significant debt maturities were due until FY2013; the company reported compliance with facility covenants and $300 million of revolving credit capacity.
- Balance sheet: Current assets were $259.7 million against current liabilities of $68.0 million. Inventories were $140.7 million; total assets were $778.0 million.
Material changes and unusual items
- FY2010 nine-month sales rose 13.4% and HEICO-attributable income rose 19.1%; Q3 sales grew 18.0% and attributable income grew 34.2% year over year.
- The ETG acquired dB Control in February 2010. Its reported contribution was not material; acquisition and prior-acquisition payments contributed to $39.1 million of investing cash outflow. Goodwill increased to $380.7 million, including $12.9 million of acquired goodwill.
- The nine-month effective tax rate was 34.0% versus 30.3% in 2009. The prior-year rate benefited from an IRS settlement; the 2010 rate also reflected expiration of a research tax credit. A tax study reduced the unrecognized-tax-benefit liability and tax expense by $801,000.
- New accounting guidance adopted in FY2010 changed presentation and measurement of noncontrolling interests. Redeemable noncontrolling interests were $56.1 million at July 31; management’s estimated aggregate redemption amount may differ from actual amounts.
- Potential contingent purchase consideration for prior acquisitions could total up to approximately $94 million in FY2011–FY2012; management estimated approximately $11 million assuming earnings match comparable historical periods. Separately, the dB Control acquisition includes up to $2.0 million of contingent consideration, with $1.15 million fair-valued and recorded as a liability.
Outlook, risks and contingencies
Management raised its FY2010 targets to approximately 11% sales growth over FY2009, diluted EPS growth of 14%–16%, and operating cash flow growth of approximately 3%–8%. It reported moderate but apparently sustainable improvement in commercial aviation demand into FY2011; aviation represented over 60% of consolidated sales. Management said operating cash generation and available revolver borrowings should meet foreseeable cash needs.
Risks cited include weaker commercial air travel or airline fleet changes, product and contract costs, government and regulatory requirements, defense/space/security spending reductions, competition, product development and pricing, acquisition execution and synergies, customer credit risk, interest rates and broader economic conditions. The company reported ordinary-course litigation that management did not expect to materially affect results, financial position or cash flows. It also maintained a $1.5 million standby letter of credit for potential workers’ compensation claims.
Investor verification points
- Verify the durability and organic sources of ETG growth and the pace of recovery in commercial aviation demand.
- Track whether raised FY2010 sales, EPS and operating-cash-flow targets were achieved.
- Assess working-capital trends, especially receivables and inventory, alongside the improvement in operating cash flow.
- Monitor acquisition-related contingent payments, redeemable noncontrolling-interest put rights and their potential cash demands.
- Review tax-rate effects after expiration of the research credit and any changes in uncertain tax positions.