HEICO Corporation — Q2 FY2015 Form 10-Q
Business context and period: Unaudited results for the three and six months ended April 30, 2015. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Amounts below are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $291.4 | $282.2 | $559.6 | $549.1 |
| Operating income | $55.8 | $49.2 | $102.2 | $99.6 |
| Operating margin | 19.1% | 17.4% | 18.3% | 18.1% |
| Net income attributable to HEICO | $33.1 | $28.4 | $60.7 | $55.8 |
| Diluted EPS | $0.49 | $0.42 | $0.90 | $0.83 |
- Gross margin rose to 36.2% in Q2 from 35.4%, and to 35.6% for the six months from 35.0%.
- Six-month operating cash flow was $64.8, versus $55.0 a year earlier. Investing used $58.9, including $49.5 for acquisitions and $9.5 in capital expenditures; financing used $4.6. Cash increased by $0.5 to $20.7.
- At April 30, cash was $20.7 and total debt was $326.8, for net debt of $306.1. Management reported net debt to shareholders’ equity of 37.0%; revolving-credit covenants were met. Current assets were $452.5 and current liabilities $141.0.
Changes and operating drivers
- Q2 sales increased 3% and six-month sales increased 2%. For the six months, FSG sales rose 2% and ETG sales rose 2%. Q2 operating income increased 13%; six-month operating income increased 3%.
- FSG growth included acquired sales and demand for aftermarket parts and repair services, partly offset by weaker industrial specialty-product demand, including the completion of a customer’s multiyear orders. FSG organic sales declined 2% for the six months and 3% in Q2; excluding that industrial-sales decline, management reported organic growth of about 3% and 1%, respectively.
- ETG sales growth reflected demand for certain medical, defense and aerospace products. Improved ETG product mix, particularly in space and defense, supported margin growth. Higher amortization from FY2015 acquisitions weighed on FSG operating income.
- January acquisitions included 80% of Aeroworks and 80.1% of Harter Aerospace; their reported-period sales and earnings were described as not material. HEICO acquired Thermal Energy Products in May, after quarter-end. Acquisition consideration was funded principally with revolving-credit borrowings.
Outlook, risks and notable items
- Management maintained its FY2015 estimate for consolidated year-over-year growth of approximately 8%–10% in both net sales and net income. It anticipated organic growth in commercial-aviation products, moderated by industrial-related weakness, and improved ETG organic growth versus the prior year. FY2015 capital expenditures were expected to be about $25 million.
- Management believed operating cash flow and available revolver borrowings would meet cash requirements for at least the next 12 months. Key risks cited include aviation demand and airline purchasing, industrial and defense spending, competition, product-development costs and execution, acquisitions and synergies, customer credit, and economic conditions.
- The six-month effective tax rate fell to 29.8% from 32.9%, principally due to a retroactive U.S. R&D tax credit and additional foreign R&D tax credits. Q2’s rate was 30.0% versus 31.8%.
- Foreign-currency translation produced a six-month comprehensive-income loss of $11.7; accumulated other comprehensive loss was $19.2 at April 30. A 10% weakening of the U.S. dollar against the euro was estimated to increase the dollar value of euro debt by $3.5 and reduce operating income by the same amount.
- Redeemable noncontrolling interests were $63.9, up from $40.0 at October 31, 2014; holders of certain subsidiary interests have put rights. Acquisition-related contingent consideration had an estimated fair value of $20.1. Management said ordinary-course litigation was not expected to materially adversely affect results, financial position or cash flows.
Important facts for investors to verify
- Whether the FY2015 8%–10% sales and net-income growth outlook remains achievable, particularly given continued industrial-product weakness.
- How much reported growth and earnings contribution comes from acquisitions versus organic performance, and whether acquired businesses meet earnout objectives.
- Cash conversion and working-capital needs: management attributed a $28.4 increase in working capital to the six-month operating cash flow discussion.
- Debt, euro exposure, covenant headroom and potential cash requirements from subsidiary put rights and contingent consideration.
- The effects of R&D tax credits and foreign tax items on reported earnings and the comparability of the effective tax rate.