HEICO Corporation — Q3 FY2017 Form 10-Q
Reporting period: Third quarter and nine months ended July 31, 2017; interim financial statements are unaudited. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Unless noted otherwise, amounts are in millions of dollars.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $391.5 | $356.1 | $1,103.6 | $1,013.0 |
| Operating income | $76.1 | $69.9 | $217.2 | $189.3 |
| Net income attributable to HEICO | $45.7 | $42.0 | $132.3 | $111.9 |
| Diluted EPS | $0.53 | $0.49 | $1.53 | $1.32 |
| Gross margin | 38.0% | 37.5% | 37.6% | 37.5% |
| Operating margin | 19.4% | 19.6% | 19.7% | 18.7% |
Third-quarter sales rose 10%, operating income 9%, and HEICO-attributable net income 9% year over year. Nine-month sales rose 9%, operating income 15%, and HEICO-attributable net income 18%. Per-share amounts reflect the April 2017 five-for-four stock split.
- Segment performance: Q3 FSG sales increased 16% to $258.0 million, including $23.1 million from FY2017 acquisitions; organic growth was 6%. ETG sales increased 1% to $137.9 million. Nine-month sales increased 10% in FSG and 9% in ETG. Defense-related sales were weaker, particularly in ETG, due to customer delays in placing anticipated orders.
- Profitability: Nine-month operating margin improved, supported by sales growth, SG&A leverage, lower prior-year acquisition and legal costs, and improved ETG margin. Q3 operating margin edged down as SG&A rose faster than sales; management cited foreign-currency effects, acquisition-related costs, and increased corporate expenses.
- Cash flow: Nine-month operating cash flow was $179.3 million, versus $172.4 million. Investing used $116.9 million, mainly for acquisitions ($95.8 million) and capital expenditures ($20.4 million). Financing used $59.0 million. Cash increased $6.5 million to $49.5 million.
- Balance sheet and liquidity: At July 31, cash was $49.5 million, current assets $655.9 million, and current liabilities $227.1 million. Long-term debt, including current maturities, was $434.8 million. The revolving facility had $431.7 million outstanding, a 2.2% weighted-average rate, and a fiscal 2019 maturity. Its commitment was increased to $1.0 billion in April; HEICO reported covenant compliance and a 36.3% debt-to-equity ratio. Management said operating cash flow and available facility borrowings should meet requirements for at least 12 months.
Material changes, outlook, and risks
- Management raised FY2017 year-over-year growth estimates to 9%–11% for sales and 14%–16% for net income, from prior ranges of 8%–10% and 12%–14%. Estimates include the pending AeroAntenna Technology acquisition and exclude other potential acquisitions.
- Fiscal 2017 acquisitions A2C and Carbon by Design contributed approximately $24.6 million of nine-month sales and $23.1 million of Q3 sales; their included earnings were not material. Acquisition allocations remained preliminary.
- After quarter-end, HEICO agreed to acquire AeroAntenna Technology for approximately $317 million in cash plus up to approximately $20 million of contingent consideration. Closing was expected in Q4 FY2017, subject to regulatory approval and customary conditions; funding was expected principally from the revolving facility.
- Working capital increased, including a $22.4 million inventory increase, which management said was to support anticipated demand. Capital expenditures for FY2017 were expected to be approximately $31 million.
- An adopted accounting standard generated a $3.1 million discrete tax benefit in the first quarter, adding $2.6 million to HEICO-attributable net income after noncontrolling interests. Nine-month effective tax rate was 29.8%, versus 30.9%.
- Redeemable noncontrolling interests were $126.9 million, up from $99.5 million at October 31, 2016; put rights may require cash purchases through FY2025. Contingent consideration liabilities were $14.0 million. Standby letters of credit totaled $4.0 million.
- Management identified risks including delayed or reduced commercial aerospace and defense demand, customer order delays, defense spending and regulatory changes, product development and contract costs, acquisition execution, customer credit, and interest and foreign-exchange movements. Management stated pending litigation was not expected to materially affect results, financial position, or cash flows.
Important facts for investors to verify
- Whether anticipated defense orders materialize and how organic growth develops in both segments.
- Completion, financing, integration, and performance of the AeroAntenna acquisition, including contingent consideration.
- Inventory conversion and working-capital needs relative to management’s demand expectations.
- Debt levels, borrowing costs, covenant compliance, and potential cash requirements from noncontrolling-interest put rights.
- The contribution of the one-time tax benefit and currency-related items to reported earnings and margins.