HEICO Corporation — Q1 FY2018 10-Q
Reporting period: Three months ended January 31, 2018; comparative period is the three months ended January 31, 2017. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $404.4 | $343.4 | +18% |
| Operating income | $79.6 | $64.6 | +23% |
| Operating margin | 19.7% | 18.8% | +0.9 percentage points |
| Net income attributable to HEICO | $65.2 | $40.9 | +59% |
| Diluted earnings per share | $0.60 | $0.38 | +58% |
| Cash from operating activities | $45.0 | $56.0 | Down $11.0 |
Gross margin improved to 38.3% from 36.5%; SG&A rose to $75.2 million from $60.9 million. Reported net income growth benefited materially from tax-law changes, including a provisional $16.6 million deferred-tax remeasurement benefit, partly offset by a $4.7 million transition-tax expense. The effective tax rate was 4.7%, versus 26.6% a year earlier.
Segments and material changes
- FSG: Sales increased 15% to $254.7 million; management cited 4% organic growth and $25.5 million of sales from fiscal 2017 acquisitions. Operating income rose 11% to $45.9 million. Segment operating margin declined to 18.0% from 18.7%.
- ETG: Sales increased 23% to $155.7 million; management cited 6% organic growth and $19.8 million of sales from fiscal 2017 and 2018 acquisitions. Operating income rose 49% to $43.2 million, with segment margin increasing to 27.8% from 23.1%.
- Consolidated sales growth reflected acquisition contributions as well as organic growth; management said pricing was not a significant factor. Improved ETG product mix and sales supported the gross-margin increase. SG&A growth included acquisition costs and higher performance-based compensation.
- HEICO reported record quarterly net income attributable to the company. Share and per-share data were retrospectively adjusted for 5-for-4 stock splits in April 2017 and January 2018.
Cash, debt and liquidity
Cash and cash equivalents were $65.7 million at January 31, 2018, compared with $52.1 million at October 31, 2017. Operating cash flow was lower year over year, principally reflecting increased working capital; inventory rose $18.3 million during the quarter as HEICO prepared for expected demand. Capital expenditures were $7.6 million, and investing cash outflow was $16.5 million, including $6.1 million for acquisitions. Financing cash outflow was $17.3 million, including dividends of $7.4 million, $5.0 million of revolving-facility repayments and $4.1 million in facility issuance costs.
Long-term debt, net of current maturities, was $668.5 million; revolving-facility borrowings were $666.0 million. The weighted-average rate on those borrowings was 2.9%, versus 2.4% at October 31, 2017. HEICO entered a new $1.3 billion revolving credit facility in November 2017, which management said matures in November 2022; the debt note describes facility borrowings as maturing in fiscal 2023. The company reported compliance with all covenants and a total-debt-to-shareholders’ equity ratio of 50.3%. Management believes operating cash flow and available facility borrowings will fund requirements for at least the next 12 months. Planned fiscal 2018 capital expenditures were approximately $50 million.
Outlook, risks and notable items
- Management raised fiscal 2018 growth estimates to 12%–14% for net sales and 30%–32% for net income, from prior estimates of 10%–12%. It expected growth in FSG commercial aviation and defense product lines and across most ETG products.
- Management cited continued investment in new products and services, market penetration and an aggressive acquisition strategy, while seeking to maintain financial flexibility. The outlook is subject to risks including aviation demand and airline purchasing, defense and government spending, competition, product-development or contract-cost challenges, acquisition execution, customer credit, and interest, currency and tax rates.
- A February 2018 subsequent acquisition purchased 85% of Sensor Technology Engineering’s assets and business, principally using revolving-credit proceeds; the filing says consideration was not material to the financial statements. IDC was acquired in November 2017; its reported quarterly sales and earnings were not material.
- Put rights held by certain subsidiary noncontrolling owners could require cash purchases through fiscal 2025; the estimated aggregate redemption amount was $132.4 million. Contingent consideration liabilities were $24.9 million, with fair value estimates sensitive to assumptions about future subsidiary earnings and growth.
- HEICO recorded a provisional tax benefit and transition-tax expense under the Tax Cuts and Jobs Act and had not determined the impact of certain provisions effective in fiscal 2019. Adoption of the new revenue-recognition standard was still under evaluation. Litigation was described as arising in the normal course, with management not expecting a material adverse effect.
Investor verification points
- Assess how much reported sales and earnings growth is recurring organic growth versus acquisition contribution, particularly by segment.
- Separate the one-time tax benefit and transition tax from the underlying earnings outlook; confirm subsequent updates to provisional Tax Act accounting and the fiscal 2019 tax provisions.
- Track operating cash conversion, inventory levels and working-capital movements against management’s demand expectations and the $50 million capital-expenditure plan.
- Confirm the revolving-facility maturity wording, borrowing capacity and covenant headroom, and monitor interest expense and debt levels.
- Monitor potential cash obligations from noncontrolling-interest put rights, contingent consideration and acquisitions, as well as the risks and realized performance underlying management’s raised guidance.