HEICO Corporation — Q3 Fiscal 2019 Form 10-Q
Reporting period: Three and nine months ended July 31, 2019. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Amounts below are U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $532.3m | $465.8m | $1,514.1m | $1,300.8m |
| Operating income | $119.4m | $101.4m | $336.5m | $272.5m |
| Net income attributable to HEICO | $81.1m | $67.1m | $242.2m | $191.9m |
| Diluted EPS | $0.59 | $0.49 | $1.76 | $1.40 |
| Gross margin | 40.0% | 39.0% | 39.9% | 38.8% |
| Operating margin | 22.4% | 21.8% | 22.2% | 21.0% |
Q3 sales rose 14%, operating income 18%, and HEICO-attributable net income 21% year over year. For the first nine months, sales rose 16%, operating income 23%, and HEICO-attributable net income 26%. Management cited organic growth, stronger product mix and improved gross margins; sales price changes were not a significant growth factor. Nine-month revenue increased in both segments: FSG sales rose 13% and ETG sales rose 20%.
Interest expense was $5.5m in Q3 and $16.5m for the first nine months, versus $5.2m and $14.8m in the comparable 2018 periods. Effective tax rates were 22.0% for Q3 and 17.1% for the first nine months, compared with 23.1% and 17.9%, respectively. Management attributed the lower rates mainly to the federal tax rate reduction, partly offset by other Tax Act provisions; stock-option tax benefits also affected the nine-month comparison.
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $313.4m, versus $214.8m in 2018. Investing used $267.0m, principally for $235.2m of acquisitions net of cash acquired and $21.7m of capital expenditures. Financing used $47.2m, including $104.7m of distributions to noncontrolling interests, $35.6m of stock redemptions and $18.7m of dividends. Cash ended the period at $59.0m, compared with $59.6m at October 31, 2018. Capital expenditures for fiscal 2019 were expected to be approximately $31m.
Long-term debt, including current maturities, was $640.2m at July 31, 2019, compared with $532.5m at October 31, 2018; revolving-facility borrowings were $631.0m. The facility matures in fiscal 2023, carried a 3.4% weighted-average interest rate, and all covenants were met. Management reported a total-debt-to-shareholders’-equity ratio of 39.0% and expected operating cash flow plus available revolving-credit borrowings to cover requirements for at least 12 months.
Material changes, outlook and risks
- Management raised fiscal 2019 growth estimates to 14%–15% for sales and 23%–24% for net income, from prior estimates of 12%–13% and 17%–18%. It anticipated growth in FSG commercial aviation and defense and in ETG demand across most products.
- Fiscal 2019 acquisitions involved total consideration of $238.4m, including acquisitions in aerospace, defense, electronics and related markets. Acquired businesses’ reported-period sales and earnings were described as not material. Acquisition activity contributed to goodwill, which increased to $1,263.5m from $1,114.8m.
- In June, HEICO Aerospace paid Lufthansa Technik $91.5m in cash as part of a transaction in which HEICO effectively acquired LHT’s 20% interests in eight subsidiaries; HEICO funded the payment principally with revolving-credit borrowings. LHT remained a 20% owner of HEICO Aerospace.
- HEICO adopted ASC 606 in fiscal 2019 using the modified retrospective method. It changed revenue timing for certain contracts recognized over time; the company said the impact on reported-period income statements was not material. Comparative periods were not restated, so balance-sheet and contract-revenue comparisons may be affected.
- Redeemable noncontrolling interests were $178.4m, including put rights exercisable through fiscal 2029. Contingent consideration liabilities were $19.4m, with fair value dependent on estimated future subsidiary earnings and discount rates. Standby letters of credit totaled $3.7m.
- Management said ordinary-course litigation was not expected to materially adversely affect results, financial position or cash flows. Disclosed risks include commercial aviation demand, airline purchasing and fleet changes, defense and government spending, regulation and export restrictions, competition, product development and manufacturing, acquisitions, customer credit, and interest, currency and tax rates.
Important facts for investors to verify
- Whether raised fiscal 2019 sales and net income growth estimates were achieved, and the assumptions behind management’s outlook.
- How much reported growth was organic versus acquisition-related, particularly in ETG, and whether margin gains persisted.
- Cash conversion and working-capital needs: management cited a $38.0m working-capital increase during the first nine months.
- Debt, interest costs and capacity for acquisitions, including potential future payments under noncontrolling-interest put rights and contingent consideration.
- Effects of ASC 606 on revenue timing and contract assets, and the timing of recognition of $383.3m in remaining performance obligations.
- Exposure to commercial aviation and defense demand, and the effect of nonrecurring tax benefits and acquisition-related items on earnings comparisons.