HEICO Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended October 31, 2011. This is an annual filing; fourth-quarter figures are included where disclosed. HEICO operates through its Flight Support Group (FSG), which makes and services FAA-approved aerospace replacement parts, and its Electronic Technologies Group (ETG), which supplies electronic, microwave and electro-optical products.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $764.9 million | $617.0 million |
| Gross profit / margin | $274.4 million / 35.9% | $222.3 million / 36.0% |
| Operating income / margin | $138.4 million / 18.1% | $109.2 million / 17.7% |
| Net income attributable to HEICO | $72.8 million | $54.9 million |
| Diluted earnings per share | $1.71 | $1.30 |
| Cash provided by operating activities | $125.5 million | $101.7 million |
| Cash and cash equivalents, year-end | $17.5 million | $6.5 million |
| Total debt, year-end | $40.2 million | $14.2 million |
- FSG sales rose 31% to $539.6 million, including about $37 million from Blue Aerospace and approximately 21% organic growth. FSG operating income increased 40% to $95.0 million.
- ETG sales increased 11% to $227.8 million, with approximately 10% organic growth. ETG operating income rose 6% to $59.5 million; its operating margin declined to 26.1% from 27.3%, partly reflecting intangible-asset impairment charges.
- Net income from consolidated operations was $95.5 million; $22.6 million was attributable to noncontrolling interests. Interest expense was immaterial.
- Quarterly FY2011 fourth-quarter sales were $208.9 million and net income attributable to HEICO was $18.5 million, compared with $169.4 million and $15.6 million, respectively, in Q4 FY2010.
Liquidity, cash flow and capital allocation
- Operating cash flow increased to $125.5 million. Investing activities used $103.9 million, including $94.7 million for acquisitions and $9.4 million for capital expenditures. Financing activities used $10.7 million.
- Year-end debt was 6% of total capitalization, versus 2% a year earlier. HEICO reported approximately $262 million of unused availability under its then-current revolving facility at October 31, 2011.
- In December 2011, HEICO replaced its $300 million facility with a $670 million unsecured revolving credit facility maturing in December 2016, with an option to increase commitments by $130 million. As of December 16, 2011, borrowings were $179.2 million and unused availability was $489.1 million.
- Fiscal 2011 cash dividends were $0.108 per share; the Board declared a $0.06-per-share semiannual dividend in December 2011. Management said operating cash flow and available credit were expected to cover requirements for at least the next 12 months.
Material changes, unusual items and outlook
- Sales increased 24% and operating income increased 27% year over year, both to records. Management attributed growth to higher product and service demand, increased airline capacity, new products and acquisitions. Commercial aviation represented about 60% of sales; defense and space 24%; other industrial markets 16%.
- FY2011 included $5.0 million of intangible-asset impairment losses, partly offset by a $1.2 million reduction in contingent consideration, for a net operating-income reduction of $3.8 million. The impairment reduced HEICO-attributable net income by $2.4 million, or $0.06 per share.
- The effective tax rate fell to 31.0% from 33.7%. Tax-related benefits increased FY2011 net income attributable to HEICO by approximately $2.8 million, or $0.07 per diluted share; investors should distinguish these benefits from recurring earnings.
- Acquisitions included Blue Aerospace and 3D Plus in FY2011. Subsequent to year-end, HEICO acquired Switchcraft for approximately $143 million, principally funded with revolving-credit borrowings.
- Backlog rose to $224 million from $142 million. ETG backlog included a five-year contract worth approximately $50 million; substantially all other year-end backlog was expected to ship in FY2012.
- Management targeted FY2012 growth in full-year sales and net income over FY2011. It cautioned that economic uncertainty could moderate commercial aviation growth, while expecting generally stable ETG markets; no specific numerical growth guidance was provided.
Risks and contingencies
- Key risks include aviation-market cycles and reduced air travel, aircraft retirements, defense and space budget cuts, intense competition, regulatory approvals, export licensing, foreign-market exposure, supply availability and costs, product liability, and execution and integration of acquisitions.
- Redeemable noncontrolling interests were $65.4 million at year-end. Management estimated aggregate put-right redemption amounts of approximately $65 million, with exercise timing extending from FY2012 through FY2018; actual amounts may differ and some depend on future earnings.
- Contractual obligations totaled $105.3 million, excluding certain contingent items. Management also estimated up to $10.1 million of additional acquisition consideration could be payable in FY2012 if earnings targets are met. A separate potential payment of up to approximately $74 million tied to an older acquisition was not expected under the subsidiary’s then-current earnings trajectory.
- Management judged ordinary-course litigation not material. The filing reports material compliance with environmental requirements and no material adverse financial-statement effect from government or environmental regulation. Product-liability claims, environmental liabilities, natural disasters and future regulatory changes remain risks.
- Goodwill impairment testing found no goodwill impairment; however, FY2011 included impairment of certain ETG intangible assets. Deloitte issued unqualified opinions on the financial statements and internal controls. The internal-control assessment excluded 3D Plus, acquired shortly before year-end.
Investor verification priorities
- Reconcile reported earnings growth with the $2.8 million tax benefit and the net $3.8 million operating impact from impairment and contingent-consideration adjustments.
- Review the sustainability of FSG organic growth and ETG margins, and the extent to which backlog converts to shipments and revenue—particularly the long-term ETG contract.
- Assess the funding and covenant implications of the Switchcraft acquisition, subsequent borrowing increase and new credit facility.
- Confirm potential cash requirements from redeemable noncontrolling interests and contingent acquisition consideration, including the timing and performance conditions.
- Monitor integration of acquisitions, intangible-asset valuation assumptions, and the scope of the year-end internal-control review, which excluded 3D Plus.