Business context and reporting period
HEICO Corporation’s unaudited Form 10-Q covers the three months ended January 31, 2016 (fiscal 2016 Q1), compared with the three months ended January 31, 2015. The company operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Results include the January 11, 2016 acquisition of Robertson Fuel Systems, a maker of specialized military rotorcraft fuel systems. Its reported-quarter contribution was not material; pro forma results are provided in the filing.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $306.2 million | $268.2 million | +14% |
| Gross margin | 36.6% | 35.0% | +1.6 percentage points |
| Operating income | $52.6 million | $46.4 million | +13% |
| Operating margin | 17.2% | 17.3% | -0.1 percentage points |
| Net income attributable to HEICO | $31.3 million | $27.6 million | +13% |
| Diluted EPS | $0.46 | $0.41 | +12% |
| Cash from operating activities | $45.2 million | $29.5 million | +$15.7 million |
At January 31, 2016, cash and equivalents were $29.9 million, total debt was $594.9 million, and net debt was $565.0 million. Net debt-to-shareholders’ equity was 61.3%. The company reported $45.2 million of operating cash flow, $269.5 million of investing cash outflow (including $264.3 million for acquisitions), and $220.8 million of financing cash inflow. Capital expenditures were $5.7 million in the quarter; fiscal 2016 spending was expected to be approximately $32 million. The revolving-credit weighted average rate was 1.5%; HEICO said it was compliant with facility covenants.
Material changes versus prior year
- FSG sales rose 12% to $204.6 million; ETG sales rose 17% to $104.2 million. Management reported organic growth of 1% in FSG (6% excluding repair and overhaul services) and 4% in ETG.
- Gross margin improved, supported by product mix and higher sales in specialty, aftermarket, space and defense products. Repair and overhaul sales declined $5.1 million amid less extensive repairs and softer South American demand.
- SG&A increased to $59.6 million from $47.4 million, including $9.3 million associated with fiscal 2016 and 2015 acquisitions (including $3.2 million of Robertson acquisition costs) and higher performance-based compensation. SG&A rose to 19.5% of sales from 17.7%.
- Operating margin was broadly flat despite higher gross margin, reflecting increased SG&A. Interest expense rose to $1.6 million from $1.1 million, principally due to acquisition-related borrowing.
- Robertson total consideration was $253.2 million, paid in cash using revolving-credit proceeds. The preliminary allocation included $91.8 million of goodwill and $123.1 million of identifiable intangible assets. Total debt increased from $367.6 million at October 31, 2015.
Outlook, risks and contingencies
Management raised its fiscal 2016 year-over-year growth estimates to 14%–16% for sales and 10%–13% for net income, from prior estimates of 8%–10% for each. It anticipated moderate organic growth in both segments and planned to continue new product development, market penetration and acquisitions. Management believed operating cash flow and available revolver borrowings would cover cash needs for at least the next 12 months.
Key risks cited include commercial aviation demand and airline purchasing, defense and government spending, competition, product development and manufacturing execution, acquisition integration and synergies, customer credit, interest and foreign-exchange rates, and broader economic conditions. Robertson was being integrated into HEICO’s internal-control processes. Management reported no material changes in internal control and considered disclosure controls effective.
Potential subsidiary-interest put rights were estimated at $91.1 million. Contingent consideration liabilities totaled $23.1 million, including $6.6 million expected to be paid in Q2 FY2016 based on an acquired business’s first-year earnings. The filing reports $2.6 million of standby letters of credit. Management did not expect pending ordinary-course litigation to have a material adverse effect. The filing also notes that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the raised fiscal 2016 growth outlook is achieved, and how much growth is organic versus acquisition-related.
- Robertson’s integration, acquired-business performance, purchase-price allocation and resulting amortization and debt burden.
- Whether gross-margin gains persist while SG&A and acquisition-related costs moderate, and whether operating margin improves.
- Cash generation, working-capital trends, planned capital spending, borrowing levels and continued compliance with credit-facility covenants.
- Actual contingent-consideration payments and subsidiary put-right obligations, including their timing and effect on liquidity.