HEICO Corporation — FY2013 Form 10-K Summary
Business context and reporting period
HEICO designs, manufactures, repairs and distributes aerospace replacement parts and services, and produces electronic, microwave and electro-optical products. The two operating segments are Flight Support Group (FSG) and Electronic Technologies Group (ETG). This annual report covers the fiscal year ended October 31, 2013; fiscal 2013 fourth-quarter figures are also reported below. Financial statements were audited by Deloitte & Touche, which issued an unqualified opinion.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $1,008.8 million | $897.3 million | +12% |
| Gross profit / margin | $371.2 million / 36.8% | $327.4 million / 36.5% | Margin +0.3 percentage points |
| Operating income / margin | $183.6 million / 18.2% | $163.3 million / 18.2% | +12%; margin unchanged |
| Net income attributable to HEICO | $102.4 million | $85.1 million | +20% |
| Diluted EPS | $1.53 | $1.28 | +20% |
| Cash provided by operations | $131.8 million | $138.6 million | −5% |
| Capital expenditures | $18.3 million | $15.3 million | +20% |
FSG sales were $665.1 million (+17%) and operating income was $122.1 million (+17%). ETG sales were $350.0 million (+6%) and operating income was $83.1 million (+7%). Annual gross margin improved, while SG&A rose to 18.6% of sales from 18.3%, partly due to performance awards and acquisition-related costs.
Fourth-quarter sales were $287.4 million versus $242.4 million a year earlier; net income attributable to HEICO was $29.8 million versus $23.8 million. Fourth-quarter diluted EPS was $0.44 versus $0.36.
Liquidity, debt and capital allocation
At October 31, 2013, cash was $15.5 million, total debt was $377.5 million (including $373.0 million under the revolving facility), and total shareholders’ equity was $723.2 million. Debt to total capitalization increased to 34% from 15%. Current assets were $441.5 million and current liabilities were $161.3 million. Operating cash flow less capital expenditures was approximately $113.5 million, a derived measure.
Operating cash flow declined primarily as working capital rose $30.9 million, including higher receivables and inventory associated with sales growth. Acquisitions used $222.6 million in cash during FY2013. HEICO paid $120.4 million in dividends, including a special and extraordinary dividend funded with revolving-facility borrowings. In November 2013, the credit facility was increased to $800 million and extended to December 2018, with an option to expand by another $200 million. The company reported approximately $431 million of unused availability as of December 17, 2013 and compliance with covenants at year-end.
Changes, outlook and notable items
- FY2013 sales growth reflected approximately 9% organic growth in FSG and 3% in ETG, with the remainder principally from acquisitions. Commercial aviation represented about 54% of sales; defense and space 26%; other industrial markets 20%.
- Acquisitions included Reinhold Industries, acquired in May 2013 for approximately $133 million net of cash acquired, and Lucix Corporation in October 2013. FY2013 acquisition spending totaled $222.6 million. Goodwill increased to $688.5 million from $542.1 million, and intangible assets to $241.6 million from $154.3 million.
- Management targeted growth in FY2014 full-year sales and net income over FY2013. It expected continued organic growth in commercial aviation and overall ETG organic growth, tempered by weaker demand for certain defense products amid uncertainty about U.S. budget cuts. Management also cited continued product development, market penetration, acquisition opportunities and maintaining financial strength.
- The effective tax rate fell to 31.1% from 33.8%. FY2013 HEICO net income included approximately $1.8 million, or $0.03 per diluted share, of net tax benefits, principally from research and development credits and related tax items.
- Other significant exposures include aviation-market cyclicality, reductions in defense and space spending, competition, FAA and export regulation, acquisition integration and valuation, supplier availability, product liability, environmental obligations, foreign-market risks and interest-rate changes. About 35% of FY2013 consolidated sales were to foreign customers. Management said pending litigation was not expected to have a material effect.
Most important facts for investors to verify
- Whether FY2014 organic growth and earnings targets were achieved, particularly given defense-budget uncertainty.
- How much growth and margin performance came from organic operations versus acquisitions, and whether acquired businesses met expected returns.
- Debt reduction, cash conversion and working-capital trends after substantial acquisition spending and the special dividend.
- The assumptions and potential payout timing for $29.3 million of accrued contingent acquisition consideration and approximately $59 million of estimated redeemable noncontrolling interests.
- The sustainability of tax benefits, and integration of Reinhold and Lucix; those acquisitions, representing 19.5% of year-end assets and 3.4% of FY2013 sales, were excluded from management’s internal-control assessment for the first year.