HEICO Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; comparative period ended January 31, 2013. Financial statements are unaudited. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $266.8 million | $216.5 million | +23% |
| Gross margin | 34.5% | 35.8% | Down 1.3 percentage points |
| Operating income | $50.4 million | $34.9 million | +44%; margin 18.9% vs. 16.1% |
| Net income attributable to HEICO | $27.5 million | $20.0 million | +38% |
| Diluted EPS | $0.41 | $0.30 | +37% |
| Operating cash flow | $33.5 million | $13.3 million | +$20.2 million |
FSG sales rose 31% to $181.6 million, including approximately 19% organic growth and $15.6 million from a fiscal 2013 acquisition. ETG sales rose to $87.5 million, including $8.1 million from an acquisition and approximately 1% organic growth. Operating income increased in both segments: FSG to $32.2 million and ETG to $22.9 million.
Gross margin declined primarily because of less favorable ETG product mix in certain defense and space products. Operating margin improved, aided by higher volumes and a $7.0 million reversal of contingent consideration recorded as a reduction to SG&A. The effective tax rate rose to 33.9% from 27.8%, principally because the prior-year quarter included larger R&D and employee-plan-related tax benefits. Interest expense increased to $1.3 million from $0.6 million, reflecting higher average revolving-credit borrowings.
Cash, debt and liquidity
- Cash and cash equivalents were $15.2 million at January 31, 2014, compared with $15.5 million at October 31, 2013.
- Total debt was $379.3 million, including $375.0 million outstanding under the revolving facility; management reported net debt of $364.0 million and net debt-to-equity of 50.0%.
- Operating cash flow was $33.5 million; investing activities used $4.6 million, mainly for capital expenditures, and financing activities used $29.0 million, primarily for dividends. Cash flow benefited from the timing of estimated tax payments and higher income taxes payable.
- Current assets were $434.6 million and current liabilities $144.6 million. The company said operating cash generation and available revolver borrowings should fund requirements for at least the next 12 months.
- The revolving facility was amended in November 2013: maturity extended to December 2018 and commitments increased to $800 million, with an option to increase to $1.0 billion. HEICO reported compliance with all covenants at quarter-end.
Material developments, outlook and risks
- HEICO paid a special cash dividend of $0.35 per share and its regular semiannual dividend of $0.06 per share in January, totaling $27.2 million, principally funded by revolver borrowings. The prior-year comparable quarter included $1.76 per share of dividends.
- Management maintained FY2014 estimates of 12%–14% year-over-year sales growth and 10%–12% net income growth. It expects continued organic growth in commercial aviation markets and ETG organic growth consistent with the prior year, with lower demand in certain defense-related products tempering ETG growth. Planned capital expenditures for FY2014 are approximately $25 million.
- On February 18, 2014, after quarter-end, HEICO acquired Lufthansa Technik AG’s 20% interest in four existing subsidiaries and transferred the businesses to a wholly owned subsidiary. The related approximately $67 million dividend to LHT is to be funded through the credit facility; LHT retains a 20% interest in HEICO Aerospace Holdings Corp. HEICO recorded no gain or loss on the transaction.
- An acquired ETG business missed calendar 2013 earnings objectives after unanticipated contract costs, triggering the $7.0 million contingent-consideration reversal. Management also cited approximately $3.0 million of lower-than-expected operating income at that business. Contract estimation changes had no material impact on quarterly net income.
- Key disclosed risks include commercial aviation demand and airline purchasing decisions; defense, space and homeland-security spending; product-development and contract costs; acquisition execution and synergies; customer credit risk; and interest rates and broader economic conditions. Management said ordinary-course litigation was not expected to have a material adverse effect. A $1.5 million standby letter of credit supports potential workers’ compensation claims.
Important facts for investors to verify
- Whether forecast FY2014 sales and earnings growth is supported by organic demand, particularly in commercial aviation and defense-related markets.
- How much operating-income growth reflects sustainable performance versus the $7.0 million contingent-consideration reversal, and whether the acquired ETG business resolves its contract-cost issues.
- Cash conversion and working-capital trends, including the role of tax-payment timing in the operating cash-flow improvement.
- Debt and interest costs after the dividend and the subsequent approximately $67 million LHT-related payment, including covenant headroom under the credit facility.
- Whether the lower gross margin persists and how acquisition-related amortization and the higher tax rate affect future earnings.