HEICO Corporation — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended July 31, 2011; unaudited. Comparisons are with the corresponding 2010 periods. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Net sales | $197.3 million | $158.3 million | $556.0 million | $447.7 million |
| Operating income | $35.7 million | $29.0 million | $101.0 million | $79.5 million |
| Net income attributable to HEICO | $20.4 million | $14.9 million | $54.3 million | $39.3 million |
| Diluted earnings per share | $0.48 | $0.35 | $1.28 | $0.93 |
| Gross margin | 35.4% | 36.4% | 36.0% | 36.0% |
| Operating margin | 18.1% | 18.3% | 18.2% | 17.8% |
- Q3 sales increased 25%, operating income 23%, and HEICO-attributable net income 37% year over year. For the nine months, sales rose 24%, operating income 27%, and HEICO-attributable net income 38%.
- FSG drove most of the growth: nine-month sales rose 31% to $395.2 million, including approximately 22% organic growth and $24 million from Blue Aerospace. ETG sales increased 10% to $162.5 million, including approximately 6% organic growth.
- For the nine months, gross margin was unchanged despite improvements within both segments, reflecting a greater sales mix from FSG, whose margins are lower than ETG’s. Q3 gross margin declined primarily because of less favorable ETG product mix. Nine-month SG&A was 17.8% of sales versus 18.3%; Q3 was 17.3% versus 18.0%.
- Operating cash flow was $85.0 million, up from $67.9 million. Capital expenditures were $5.7 million; operating cash flow less capital expenditures was approximately $79.3 million. Investing cash outflow was $34.7 million, including $29.2 million of acquisitions. Financing cash outflow was $29.3 million. Cash increased to $27.6 million from $6.5 million at fiscal year-end.
- At July 31, cash was $27.6 million and total debt was approximately $0.1 million, with no borrowings under the $300 million revolving facility (maturing May 2013). Current assets were $309.9 million and current liabilities $93.9 million. The company reported compliance with facility covenants.
- Total assets were $854.7 million, up from $781.6 million at October 31, 2010. Inventories rose to $155.6 million from $138.2 million; goodwill increased to $392.4 million from $385.0 million.
Material changes, outlook and risks
- Blue Aerospace, acquired in December 2010, contributed approximately $24 million of nine-month sales and $10 million in Q3. HEICO acquired 80.1%; management characterized the acquisition’s financial statement impact as not material or significant. The company also announced a pending agreement to acquire 3D Plus, subject to approvals and customary conditions, with closing expected in Q4 FY2011; the purchase price was not expected to be material or significant.
- Management expected continued year-over-year sales and earnings growth for the remainder of FY2011, based on then-current visibility. It cited expectations for commercial airline capacity growth in the second half of calendar 2011, but at a slower rate than in the first half, and generally stable ETG demand. This is a contemporaneous outlook, not a quantified earnings forecast.
- Tax benefits increased HEICO-attributable net income by approximately $2.8 million, or $0.07 per diluted share, for the nine months; approximately $2.0 million, or $0.05 per diluted share, was recognized in Q3. Benefits principally reflected R&D tax credits and state income apportionment updates. Effective tax rates were 29.7% for the nine months and 26.0% for Q3, versus 34.0% and 32.3%, respectively, in 2010.
- Potential additional acquisition consideration payable in FY2012 had a maximum aggregate amount of approximately $93 million; management estimated approximately $16 million assuming acquired businesses perform at comparable historical earnings levels. Actual amounts could differ. Separately, estimated subsidiary put-right redemptions totaled approximately $54 million, with exercise dates spanning FY2012–FY2018; actual redemption amounts may differ.
- Other disclosed exposures include a $1.5 million standby letter of credit for workers’ compensation security and ordinary-course litigation, which management did not expect to have a material adverse effect. Key stated risks include reduced airline demand, changes in defense and government spending, competition, product and contract costs, acquisition integration and synergies, customer credit, and broader economic conditions.
- Management said operating cash flow and available revolver capacity should fund cash requirements for at least the next 12 months. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether reported growth and management’s FY2011 outlook were sustained, particularly as airline capacity growth slowed and given the reliance on FSG.
- How Q3 ETG product mix and margin trends developed, and whether consolidated margins improved or weakened.
- The realized tax rate excluding the approximately $2.8 million nine-month tax benefit, and whether similar tax benefits recur.
- The eventual amount and timing of contingent acquisition payments and put-right redemptions, including the FY2012 maximum contingent consideration exposure.
- 3D Plus closing status and subsequent acquisition funding, alongside working-capital and cash-flow trends.