HEICO Corporation — FY2012 Form 10-K
Business and reporting period: The filing reports fiscal 2012, the year ended October 31, 2012; it also provides fourth-quarter results. HEICO operates through Flight Support Group (FSG), which designs, manufactures, repairs, overhauls and distributes aviation replacement parts and services, and Electronic Technologies Group (ETG), which makes electronic, microwave and electro-optical products for aviation, defense, space, medical and other markets.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net sales | $897.3 million | $764.9 million | +17% |
| Gross profit / margin | $327.4 million / 36.5% | $274.4 million / 35.9% | Margin +0.6 percentage points |
| Operating income / margin | $163.3 million / 18.2% | $138.4 million / 18.1% | Income +18% |
| Net income attributable to HEICO | $85.1 million | $72.8 million | +17% |
| Diluted EPS | $1.60 | $1.37 | +17% |
| Net cash from operations | $138.6 million | $125.5 million | +$13.1 million |
Fourth-quarter fiscal 2012 sales were $242.4 million, gross profit $89.7 million, and net income attributable to HEICO $23.8 million, compared with $208.9 million, $74.3 million and $18.5 million, respectively, in Q4 FY2011.
FSG sales rose 6% to $570.3 million and operating income increased 9% to $103.9 million. ETG sales increased 46% to $331.6 million and operating income rose 30% to $77.4 million. ETG sales growth included substantial contributions from acquisitions; management estimated organic growth at approximately 7% for ETG and 4% for FSG.
Cash and equivalents were $21.5 million at year-end, versus $17.5 million. Total debt was $131.8 million, up from $40.2 million; debt to total capitalization rose to 15% from 6%. The company reported approximately $541 million of unused revolving-credit availability at October 31, 2012. Current assets were $367.9 million and current liabilities $131.5 million. Capital expenditures were $15.3 million; FY2013 capex was estimated at $18–$20 million.
Material changes and notable items
- Acquisition cash spending increased to $197.3 million from $94.7 million in FY2011. Major additions included Switchcraft, plus Ramona Research, Moritz Aerospace, CSI Aerospace and Action Research. Acquisitions contributed importantly to ETG growth and increased goodwill and intangible assets.
- Consolidated gross margin improved, primarily on FSG product mix, while ETG margins declined. Acquired Switchcraft and 3D Plus experienced lower margins, including approximately $4.0 million of acquired-intangible amortization and inventory purchase-accounting effects in cost of sales. Related operating-margin effects were also noted.
- Interest expense rose to $2.4 million from $0.1 million, principally due to acquisition-related borrowings. The effective tax rate increased to 33.8% from 31.0%; FY2011 had benefited from tax credits and state tax adjustments.
- Backlog increased to $252 million from $224 million: FSG $80 million versus $75 million and ETG $172 million versus $149 million. The company cautions that much of FSG backlog is short-lead and excludes some estimated-use contracts.
Outlook, risks and contingencies
Management targeted higher full-year FY2013 net sales and net income than FY2012, while describing expected markets as generally stable with modest organic growth. It noted that economic uncertainty could temper commercial aviation growth and potential U.S. defense and space spending reductions could modestly reduce ETG organic growth. No specific numerical growth guidance was provided.
Principal risks include aviation-industry and airline-demand cycles; reductions in defense, space or homeland-security spending; regulatory and FAA approval requirements; foreign-market, currency and export-licensing exposure; intense OEM and other competition; acquisition integration and execution; supplier availability and costs; product-liability and environmental exposure; and dependence on key personnel. Foreign customers represented 33% of FY2012 sales. No single customer represented 10% or more of sales.
After year-end, the board declared a regular $0.06-per-share dividend and a special dividend increased to $2.14 per share, for approximately $117 million in total, payable by December 31, 2012 and funded with revolver borrowings. The credit facility was amended to extend maturity to December 2017 and accommodate the dividend. Management stated operating cash flow and available borrowings were expected to cover requirements for at least 12 months. Put rights for noncontrolling interests were estimated at approximately $67 million at year-end; a remaining 13.3% interest in one subsidiary was purchased in December 2012.
There were no goodwill impairment charges in FY2012; goodwill fair values significantly exceeded carrying values under the annual test. Routine litigation was assessed by management as not expected to materially affect results, financial position or cash flows. The auditor gave an unqualified opinion on the financial statements and internal controls; three recent acquisitions were excluded from management’s control assessment while integration continued.
Key facts for investors to verify
- How much of FY2012 growth and the FY2013 outlook is organic versus acquisition-driven, and whether the acquired businesses meet expected margin and earnings targets.
- The effect of the approximately $117 million special dividend and related revolver borrowing on subsequent debt, interest expense, liquidity and covenant headroom.
- Whether ETG margin pressure, acquired-intangible amortization and inventory purchase-accounting effects moderate as integration progresses.
- The sustainability of FSG and ETG backlog conversion, particularly given the short-lead nature of much FSG backlog.
- Potential effects of defense-budget changes, aviation-market weakness, acquisition integration, and redemption obligations for noncontrolling interests.