HEICO Corporation — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended April 30, 2019. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $515.6 | $430.6 | $981.8 | $835.0 |
| Gross margin | 40.6% | 39.0% | 39.9% | 38.6% |
| Operating income | $119.2 | $91.6 | $217.1 | $171.1 |
| Operating margin | 23.1% | 21.3% | 22.1% | 20.5% |
| Net income attributable to HEICO | $81.8 | $59.6 | $161.1 | $124.8 |
| Diluted EPS | $0.60 | $0.44 | $1.18 | $0.91 |
- Quarterly growth: Sales rose 20%, operating income 30%, and HEICO-attributable net income 37%. Q2 sales increased 15% in FSG and 27% in ETG; segment operating income increased 21% and 40%, respectively.
- Six-month growth: Sales increased 18%, operating income 27%, and HEICO-attributable net income 29%. Management cited organic growth in both segments, increased demand, and favorable product mix; acquisitions also contributed to ETG sales.
- Cash flow: Six-month operating cash flow was $178.3, versus $103.4 a year earlier. Capital expenditures were $12.6, implying operating cash flow less capex of $165.7, compared with $73.9. Working capital increased $62.2, including higher inventory and receivables.
- Liquidity and debt: Cash was $64.1 at April 30, 2019. Total debt was $556.4, including $547.0 drawn on the revolving credit facility; net debt was approximately $492.3. Current assets were $802.6 and current liabilities $250.9. The revolver matures in fiscal 2023; its weighted-average borrowing rate was 3.6%. HEICO reported compliance with all debt covenants and a total-debt-to-shareholders’-equity ratio of 33.5%.
- Balance sheet: Total assets were $2,853.6 and shareholders’ equity $1,662.2. Goodwill was $1,187.3 and net intangible assets $533.4.
Changes, outlook, and notable items
- Management raised fiscal 2019 growth estimates to 12%–13% for sales and 17%–18% for net income, from prior estimates of 9%–10% and approximately 11%–13%, respectively. It anticipated continued growth in FSG commercial aviation and defense and in ETG demand. Planned priorities include product development, market penetration, and acquisitions. Fiscal 2019 capital expenditures were estimated at approximately $38 million.
- Fiscal 2019 acquisitions included Decavo, SST, Apex, Specialty Silicone Products, and an additional interest in Freebird. Aggregate consideration was $138.1; acquisition cash outflow, net of cash acquired, was $134.9. The acquired businesses’ reported-period sales and earnings were not material, according to the filing.
- HEICO adopted ASC 606 using the modified retrospective method on November 1, 2018. The adoption changed timing of recognition for certain contracts and increased opening retained earnings by $13.4; management said the effect on current-period operating results was not material. Comparative periods were not restated.
- Six-month effective tax rate was 14.5%, versus 14.8%; both periods benefited from discrete tax items, including increased stock-option-exercise tax benefits in FY2019. Q2 rate was 22.5%, versus 23.6%.
- Redeemable noncontrolling interests were $151.5; related put rights could require future cash purchases of subsidiary interests. Level 3 contingent consideration liabilities were $25.6, with fair-value changes recorded in SG&A.
- Management said operating cash flow and available revolver borrowings should fund requirements for at least the next 12 months. It assessed ordinary-course litigation as not expected to have a material adverse effect. Forward-looking risks include aviation demand and airline purchasing, defense and space spending, competition, product development and manufacturing execution, acquisitions and integration, customer credit, interest and currency rates, taxes, and broader economic conditions.
Important facts for investors to verify
- Whether the raised FY2019 growth outlook is achieved, and how much growth is organic versus acquisition-related.
- Whether margin expansion persists and how performance-based compensation, contingent consideration revaluations, and higher R&D affect expenses.
- Whether working-capital needs, acquisition spending, and subsidiary put rights affect future cash generation, borrowing, and liquidity.
- How ASC 606 contract assets and liabilities, remaining performance obligations of $344.4, and related revenue timing develop.
- Future debt levels, interest costs, and compliance with revolver covenants; management’s stated outlook is subject to the risks listed in the filing.