HEICO Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended January 31, 2013; comparisons are with the three months ended January 31, 2012 unless stated otherwise. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 / comparison |
|---|---|---|
| Net sales | $216.5 million | $212.7 million; up 2% |
| Operating income / margin | $34.9 million / 16.1% | $37.6 million / 17.7%; operating income down 7% |
| Gross margin | 35.8% | 36.8% |
| Net income attributable to HEICO | $20.0 million | $19.2 million; up about 4% |
| Diluted EPS | $0.37 | $0.36 |
| Operating cash flow | $13.3 million | $(2.3) million |
| Capital expenditures | $4.5 million | $3.8 million |
| Cash and total debt at January 31 | $19.1 million cash; $254.9 million debt | Cash was $21.5 million and debt $131.8 million at October 31, 2012 |
Net debt was $235.8 million and net debt to shareholders’ equity was 37.3%. The revolving facility’s weighted average rate was 1.2%; the company reported compliance with its covenants. Current assets were $359.7 million and current liabilities $102.6 million at quarter-end.
Changes and drivers
- ETG sales increased 6% to $78.8 million, including $4.2 million from FY2012 acquisitions and nominal organic growth. Higher space-product demand was partly offset by weaker defense and industrial product demand.
- FSG sales were essentially flat at $139.0 million. Acquisition sales were offset by lower aftermarket, repair and overhaul, and specialty-product sales.
- Operating income declined in both segments: FSG to $24.2 million from $25.5 million and ETG to $15.5 million from $16.2 million. Management cited less favorable FSG mix and specialty-product sales, and higher ETG research and development and acquisition-related amortization.
- SG&A rose to $42.7 million from $40.6 million; as a share of sales it increased to 19.7% from 19.1%. The gross-margin decline reflected higher ETG R&D as a percentage of sales and weaker FSG mix.
- The effective tax rate fell to 27.8% from 34.2%, principally due to $1.6 million of additional R&D tax credits, including credits for prior fiscal 2012 months recognized after the retroactive extension of the credit, and a tax deduction related to the special dividend. This boosted net income despite lower operating income.
- Operating cash flow improved from a deficit, mainly due to working-capital timing, including receivable collections and payments related to year-end and first-quarter accruals. Management reported a $22.4 million working-capital increase during the quarter.
Liquidity, capital allocation and unusual items
In December 2012, HEICO paid a $2.14-per-share special dividend and an accelerated regular $0.06-per-share dividend, totaling $116.6 million, funded with revolving-credit borrowings. It also borrowed to acquire the remaining 13.3% interest in a subsidiary; $16.6 million was paid for noncontrolling interests during the quarter. Revolver borrowings rose by $123 million to $250 million. The facility maturity was extended to December 2017 and covenants were amended to permit the special dividend.
Management estimated capital expenditures of $18–$20 million for FY2013 and said operating cash flow plus available revolver borrowings should fund requirements for at least the next 12 months. Estimated subsidiary put-right redemptions were approximately $51 million, with actual amounts potentially different. Acquisition-related contingent consideration had a $10.7 million estimated fair value, with up to $14.6 million potentially payable under the relevant acquisition terms.
Outlook, commentary and risks
Management forecast FY2013 sales and operating-income growth of 6%–8% over FY2012, operating margins approximating FY2012’s 18%, and net-income growth of approximately 9%–11%. It anticipated improving demand and moderate organic growth in both segments principally in the second half, while noting uncertainty over timing. Commercial aviation capacity growth could support FSG demand; U.S. defense-spending uncertainty could restrain some ETG demand. FY2013 results are not necessarily indicative of full-year results.
Risks identified include commercial-air-travel demand and airline fleet changes; defense, space and homeland-security spending; economic uncertainty; competition and product pricing; product requirements and contract costs; acquisition execution and synergies; customer credit risk; and interest and tax rates. Management said ordinary-course litigation was not expected to have a material adverse effect. The company also disclosed a $1.5 million standby letter of credit for potential workers’ compensation claims.
Important facts for investors to verify
- Whether second-half organic growth materializes and FY2013 guidance is achieved, particularly given defense-market uncertainty and weak first-quarter operating margins.
- How much earnings growth depends on the lower effective tax rate and whether operating performance improves independently of tax benefits.
- Debt, covenant headroom and liquidity after the debt-funded $116.6 million dividend; management’s liquidity statement assumes continued operating cash flow and available revolver capacity.
- Cash requirements and valuation assumptions for the estimated $51 million of put rights and $10.7 million contingent consideration.
- The timing and durability of working-capital cash-flow improvement; first-quarter operating cash flow benefited from collection and payment timing.