HEICO Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015. Financial statements are unaudited. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $268.2 million | $266.8 million | Up 1% |
| Gross margin | 35.0% | 34.5% | Up 0.5 percentage points |
| Operating income / margin | $46.4 million / 17.3% | $50.4 million / 18.9% | Down 8%; margin down 1.6 points |
| Net income attributable to HEICO | $27.6 million | $27.5 million | Up 1% |
| Diluted EPS | $0.41 | $0.41 | Flat |
| Operating cash flow | $29.5 million | $33.5 million | Down $4.0 million |
Consolidated net income was $32.1 million, versus $32.6 million a year earlier. The effective tax rate fell to 29.5% from 33.9%, principally reflecting recognition of an R&D tax credit retroactively extended in December 2014. Interest expense was $1.1 million, compared with $1.3 million.
FSG sales were $182.1 million, approximately flat, and operating income was $30.7 million versus $32.2 million. ETG sales rose 2% to $89.2 million, while operating income declined to $19.4 million from $22.9 million. ETG operating margin was 21.8%, down from 26.2%; FSG margin was 16.9%, down from 17.7%.
Liquidity, debt and cash flows
Cash was $18.4 million at January 31, 2015, compared with $20.2 million at October 31, 2014. Total debt was $354.9 million, including $352.2 million under the revolving credit facility; debt was $329.1 million at fiscal year-end. Management reported net debt of $336.5 million and a net-debt-to-shareholders’ equity ratio of 42.9%. The company was in compliance with its credit-facility covenants.
Operating activities provided $29.5 million. Investing activities used $53.5 million, primarily for $49.3 million of acquisitions and $4.3 million of capital expenditures. Financing activities provided $23.3 million; revolving-facility borrowings were $56.7 million and repayments were $29.0 million. Cash dividends paid were $4.7 million. Management believes operating cash flow and available facility borrowings will cover requirements for at least the next 12 months. Fiscal 2015 capital expenditures were expected to approximate $25 million.
Material changes and unusual items
- January acquisitions: HEICO acquired 80% of Aeroworks International Holdings and 80.1% of Harter Aerospace. Their reported Q1 sales and earnings were not material. Purchase-price allocations remained preliminary.
- The acquisitions contributed $33.4 million of goodwill; goodwill rose to $712.8 million and net intangible assets to $231.1 million. Acquisition funding contributed to higher revolving debt.
- Operating income fell despite slightly higher sales. Management cited a prior-year $7.0 million reduction in accrued contingent consideration that benefited the comparison period, along with approximately $3.0 million of lower-than-expected operating income at an acquired business, principally due to unanticipated costs on certain percentage-of-completion contracts.
- FSG organic sales declined 1%, primarily because of lower specialty industrial-product demand following completion of a customer’s multi-year orders. Excluding that decline, FSG organic growth was approximately 5%. ETG organic sales grew approximately 2%.
- Foreign-currency translation loss was $11.7 million, contributing to accumulated other comprehensive loss of $19.2 million. A hypothetical 10% weakening of the U.S. dollar against the euro would increase the dollar value of the euro borrowing by $3.6 million and reduce operating income by the same amount.
- Redeemable noncontrolling interests rose to $64.4 million from $40.0 million, including interests associated with the new acquisitions. Acquisition-related contingent consideration was recorded at an estimated fair value of $20.5 million; total contingent-consideration liabilities were $21.7 million.
- Cash dividends per share were reported as $0.07 for Q1 FY2015 and $0.41 for Q1 FY2014. The filing does not explain this substantial year-over-year difference in the statement line; cash dividends paid were $4.7 million and $27.2 million, respectively.
Outlook, risks and contingencies
Management continued to estimate fiscal 2015 year-over-year growth of 8%–10% in both net sales and net income. It anticipated organic growth in commercial aviation-related product lines, moderated by weaker demand for certain industrial products, and expected improved ETG organic growth versus the prior year. Management cited product development, market penetration, acquisitions and maintaining financial strength as priorities.
Risks identified include commercial aviation demand and airline purchasing decisions; defense and government spending, export restrictions and competition; product-development costs and delays; acquisition execution and synergies; customer credit risk; and interest rates, taxes and broader economic conditions. The company reported $2.3 million of standby letters of credit. Management did not expect ongoing litigation to have a material adverse effect. ASU 2014-09 revenue-recognition guidance was expected to apply beginning in fiscal 2018; HEICO was evaluating its impact and transition method.
Investor verification points
- Verify whether the fiscal 2015 growth outlook remains achievable, particularly given industrial-product demand and the Q1 operating-income decline.
- Track margins and contract execution at the acquired business, including the costs that reduced expected operating income.
- Assess acquisition integration, contingent consideration and put rights attached to noncontrolling interests, as well as their potential cash requirements.
- Monitor revolving debt, cash generation, covenant compliance and foreign-currency exposure.
- Clarify the reason for the reported $0.41 prior-year quarterly dividend per share versus $0.07 in Q1 FY2015.