HEICO Corporation — Q1 Fiscal 2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; comparisons are with the three months ended January 31, 2016, unless otherwise noted. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results were affected by fiscal 2016 acquisitions.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $343.4 million | $306.2 million | +12% |
| Operating income | $64.6 million | $52.6 million | +23% |
| Net income attributable to HEICO | $40.9 million | $31.3 million | +31% |
| Diluted EPS | $0.59 | $0.46 | +28% |
| Gross margin | 36.5% | 36.6% | Down 0.1 percentage point |
| Operating margin | 18.8% | 17.2% | Up 1.6 percentage points |
| Net cash from operating activities | $56.0 million | $45.2 million | +$10.8 million |
FSG sales rose 8% to $220.9 million, with 8% organic growth; FSG operating income increased 17% to $41.4 million. ETG sales rose 21% to $126.2 million, including $13.1 million from fiscal 2016 acquisitions and 8% organic growth; ETG operating income increased 31% to $29.1 million. Intersegment sales are excluded from consolidated sales.
Cash and cash equivalents were $45.9 million at January 31, 2017, versus $43.0 million at October 31, 2016. Long-term debt, including current maturities, was $417.3 million, down from $458.2 million; revolving-credit borrowings were $414.3 million. Operating cash flow included a net working-capital increase of $8.6 million. Investing activities used $6.0 million, mainly $6.4 million of capital expenditures; financing activities used $46.9 million, mainly $40.0 million of revolver repayments and $6.1 million of dividends. The quarterly dividend was $0.09 per share, compared with $0.08 a year earlier.
Material changes, outlook, and risks
- Management raised its fiscal 2017 growth estimates to 6%–8% for consolidated net sales and 9%–11% for net income, from prior estimates of 5%–7% and 7%–10%, respectively. It cited expected demand growth across most product lines. Fiscal 2017 capital expenditures are expected to be approximately $38 million.
- Operating-margin improvement reflected sales growth and lower SG&A as a share of sales, including lower prior-year acquisition costs. Gross margin was nearly flat: ETG margin declined, partly due to product mix and higher R&D, while FSG margin improved. R&D expense was $11.2 million, versus $9.0 million.
- The effective tax rate fell to 26.6% from 29.0%. Adoption of ASU 2016-09 produced a $3.1 million discrete tax benefit, increasing HEICO-attributable net income by $2.6 million; diluted weighted-average shares also increased by 543,000. The new accounting treatment increased reported operating cash flow and cash used in financing by $3.1 million, so the cash-flow classification affects period comparison.
- Management said operating cash flow and available revolver borrowings should cover cash requirements for at least the next 12 months. HEICO reported compliance with its credit-facility covenants and a total debt-to-shareholders’ equity ratio of 38.3%.
- Potential risks identified include changes in commercial air travel and airline purchasing, defense and government spending, competition, product-development or manufacturing difficulties, acquisition execution and synergies, customer credit, and interest-rate, foreign-exchange and tax changes. Management said ordinary-course litigation is not expected to have a material adverse effect.
- Commitments include $2.9 million of standby letters of credit. Redeemable noncontrolling interests were estimated at $98.9 million; related put rights may require purchases through fiscal 2025. Contingent consideration was $19.0 million, with valuation sensitive to subsidiary earnings assumptions. The filing reports no material change to contractual obligations.
Important facts for investors to verify
- Whether the raised full-year sales and net-income growth outlook is being achieved, and what assumptions support it.
- How much growth is organic versus acquisition-related, and whether segment demand and margins remain on track.
- The sustainability of margin gains given ETG product mix, rising R&D, performance-based compensation, and acquisition-related costs.
- The effect of the $3.1 million discrete tax benefit and ASU 2016-09 cash-flow reclassification when comparing earnings and cash generation across periods.
- Debt repayment, liquidity, covenant compliance, and the timing and potential cash cost of put rights and contingent consideration.