HEICO Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014. The filing also provides unaudited fourth-quarter results. HEICO designs and manufactures aerospace replacement parts and services, and electronic and electro-optical products. Flight Support Group (FSG) generated 67% of sales; Electronic Technologies Group (ETG) generated 33%.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $1,132.3 million | $1,008.8 million | +12% |
| Gross profit / margin | $398.3 million / 35.2% | $371.2 million / 36.8% | Margin down 1.6 percentage points |
| Operating income / margin | $203.4 million / 18.0% | $183.6 million / 18.2% | Income +11% |
| Net income attributable to HEICO | $121.3 million | $102.4 million | +18% |
| Diluted EPS | $1.80 | $1.53 | +18% |
| Cash from operating activities | $190.7 million | $131.8 million | +$58.9 million |
- FSG sales rose 15% to $762.8 million, with approximately 9% organic growth; segment operating income increased 12% to $136.5 million.
- ETG sales rose 8% to $379.4 million, with approximately 2% organic growth; segment operating income increased 7% to $88.9 million.
- At the fiscal fourth-quarter level, sales were $292.2 million versus $287.4 million, and HEICO-attributable net income was $32.1 million versus $29.8 million. Diluted EPS was $0.48 versus $0.44.
Cash, debt and liquidity
- Year-end cash was $20.2 million. Total debt, including current maturities and capital leases, was $329.1 million, down from $377.5 million; net debt was $308.9 million versus $362.0 million.
- Net debt to shareholders’ equity improved to 40% from 50%. The revolving facility had $326.0 million drawn at October 31, 2014; the company reported approximately $480 million of unused committed availability as of December 16, 2014.
- The company generated $190.7 million of operating cash flow, used $25.2 million in investing activities and used $160.1 million in financing activities. Capital expenditures were $16.4 million; fiscal 2015 capex was expected to be approximately $25 million.
- Management said operating cash flow and available revolving-credit borrowings should cover cash requirements for at least the next 12 months. HEICO was in compliance with credit-facility covenants at year-end.
Material changes and unusual items
- Sales growth reflected aftermarket replacement parts and repair/overhaul demand, acquisitions, new products and favorable aviation conditions. Commercial aviation represented approximately 56% of sales, defense and space 26%, and other markets 18%.
- Gross margin declined, principally due to less favorable ETG product mix and impairment charges. New-product R&D expense included in cost of sales rose to $37.4 million from $32.9 million.
- Fiscal 2014 included a $28.1 million reduction in accrued contingent acquisition consideration, partly offset by $15.0 million of intangible-asset impairments. These items increased HEICO-attributable net income by an estimated $10.2 million, or $0.15 per basic and diluted share. Management linked the reassessments to weaker projected market conditions and earnings at certain acquired ETG businesses.
- Acquisition-related cash spending was $8.7 million, compared with $222.6 million in FY2013. HEICO acquired Quest Aviation Supply in June 2014 and bought Lufthansa Technik’s 20% interest in four existing subsidiaries.
- Backlog declined to $291 million from $305 million. FSG backlog rose to $135 million from $115 million, while ETG backlog fell to $156 million from $190 million, principally due to reduced scope on a long-term defense-related contract.
- Cash dividends were $0.47 per share in FY2014, including a special $0.35 dividend and regular semiannual payments. FY2013’s $1.816 per-share amount included a much larger special dividend.
Outlook, risks and contingencies
- For FY2015, management targeted growth in full-year sales and net income. It expected continued FSG aftermarket and repair/overhaul growth, partly offset by lower demand in certain specialty industrial products, and improved demand with moderate growth in ETG.
- Principal risks include aviation-industry cyclicality and aircraft retirements; lower defense, space or homeland-security spending; regulatory approvals and export licensing; foreign-market exposure; intense competition; product development and supply-chain challenges; acquisition integration; product liability; environmental exposure; natural disasters and cybersecurity risks.
- Legal proceedings arose in the ordinary course; management did not expect them to materially affect results, financial position or cash flows. The filing reports no material adverse impact from environmental or government regulation.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- How much FY2014 earnings growth depended on contingent-consideration remeasurement benefits, and whether acquired ETG businesses meet revised expectations.
- Whether the gross-margin decline and lower ETG backlog stabilize, and whether FY2015 growth targets are achieved.
- Cash conversion and working-capital trends, alongside acquisition spending, dividends and debt repayment.
- Availability and covenant headroom under the variable-rate credit facility, and the potential cash requirements from redeemable noncontrolling-interest put rights; management estimated their aggregate redemption amount at approximately $40.0 million.
- Exposure to commercial aviation, defense and space markets, foreign sales (approximately 33% of consolidated sales), and future regulatory or export restrictions.