HEICO Corporation — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2021. HEICO operates through the Flight Support Group (FSG) and Electronic Technologies Group (ETG). Unless noted otherwise, figures are in millions of dollars.
Financial results and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $466.7 | $468.1 | $884.6 | $974.4 |
| Gross margin | 38.5% | 38.2% | 38.2% | 38.7% |
| Operating income | $96.7 | $108.2 | $177.0 | $219.2 |
| Operating margin | 20.7% | 23.1% | 20.0% | 22.5% |
| Net income attributable to HEICO | $70.7 | $75.5 | $141.3 | $197.3 |
| Diluted EPS | $0.51 | $0.55 | $1.03 | $1.44 |
| Interest expense | $2.1 | $3.8 | $4.5 | $8.0 |
- Cash flow: Six-month operating cash flow was $210.1, versus $205.9 a year earlier. Investing activities used $52.0; financing activities used $181.4. Cash declined $21.4 to $385.4.
- Debt and liquidity: Long-term debt, including current maturities, was $584.5 at April 30, down from $739.8 at October 31, 2020; cash was $385.4. HEICO reported a 27.1% total-debt-to-shareholders’ equity ratio, compliance with credit-facility covenants, and sufficient operating cash flow and available borrowing capacity for at least 12 months. Revolver borrowings mature in fiscal 2024.
- Other balance-sheet data: Total assets were $3,595.2 and shareholders’ equity was $2,159.9. The current ratio was approximately 4.5, based on reported current assets and liabilities.
Changes versus prior comparable periods
- Q2 sales were nearly flat, but operating income fell 11% and HEICO-attributable net income fell 6%. The six-month declines were 9% in sales, 19% in operating income and 28% in HEICO-attributable net income.
- FSG remained pressured by weak commercial aviation demand. Q2 FSG sales fell 9% and operating income fell 25%; for the six months, sales fell 22% and operating income fell 44%. Management cited lower demand, product mix, reduced fixed-cost efficiency and higher performance-based compensation.
- ETG provided growth: Q2 sales rose 11% and operating income 9%; six-month sales rose 9% and operating income 7%. Growth reflected acquisitions and demand in selected electronic, defense and space products.
- Consolidated gross margin improved modestly year over year in Q2, partly because ETG represented a larger share of sales, but declined for the six-month period. SG&A rose to 17.8% of Q2 sales from 15.1%, largely because performance-based compensation resumed; the prior-year quarter included no such expense.
- The six-month effective tax rate was 12.0% versus 0.3% in the prior year, which included a larger discrete tax benefit from stock-option exercises. Q2 rates were 19.5% and 22.6%, respectively.
Outlook, risks and unusual items
- Management was cautiously optimistic that vaccine rollout could support commercial air travel, but said recovery timing was difficult to predict and could be affected by new COVID-19 variants and differing vaccine adoption. HEICO did not provide FY2021 sales or earnings guidance.
- Management cited its conservative financial policies, strong balance sheet and liquidity as supporting continued R&D investment, acquisitions and potential market-share gains. FY2021 capital expenditures were expected to be approximately $40 million.
- COVID-19 continued to depress commercial aerospace demand. Sales in HEICO businesses serving commercial aerospace declined approximately 14% in Q2 and 30% in the first six months year over year.
- Remaining performance obligations on qualifying contracts totaled $451.2: $219.6 was expected to be recognized in the remainder of FY2021 and $231.6 thereafter, mostly in FY2022.
- In March 2021, HEICO acquired Pyramid Semiconductor; its reported contribution was not material. Six-month acquisition spending, net of cash acquired, was $20.2.
- A subsidiary received a grand jury subpoena concerning its employment of an individual and work on certain Navy vessels during 2017–2019. HEICO said it was cooperating and could not predict the outcome or estimate a possible loss. The filing also disclosed $17.0 of standby letters of credit and $223.3 of redeemable noncontrolling interests.
Key facts for investors to verify
- Whether commercial aviation demand and FSG margins recover, and how long COVID-related market effects persist.
- Whether ETG growth and acquisition contributions continue to offset FSG weakness.
- The impact of performance-based compensation, product mix and fixed-cost absorption on margins.
- Cash generation, debt reduction, acquisition spending and compliance with credit-facility covenants.
- Developments in the Navy-related subpoena investigation and any resulting financial or business impact.