HEICO Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2013; fiscal year ends October 31. Amounts below are in millions except per-share data.
Business context
HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results reflect organic growth and contributions from fiscal 2012 acquisitions.
Financial results and liquidity
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $237.7 | $216.3 | $454.2 | $429.0 |
| Operating income | $44.7 | $37.6 | $79.6 | $75.2 |
| Net income attributable to HEICO | $23.7 | $19.0 | $43.7 | $38.2 |
| Diluted EPS | $0.44 | $0.36 | $0.82 | $0.72 |
| Gross margin | 37.6% | 34.8% | 36.8% | 35.8% |
| Operating margin | 18.8% | 17.4% | 17.5% | 17.5% |
- Q2 sales rose 10%; operating income increased 19% and HEICO-attributable net income increased about 24%. For the six-month period, sales rose 6%, operating income 6% and attributable net income 14%.
- Q2 sales increased 10% in both FSG and ETG. Six-month sales increased 5% in FSG and 8% in ETG. Management cited commercial aftermarket demand and space-product sales as growth drivers; certain defense-product sales declined.
- Six-month operating cash flow was $44.5, versus $45.3 a year earlier. Capital expenditures were $9.3; cash used in investing was $10.5. Cash declined to $16.9 from $21.5 at October 31, 2012.
- At April 30, total debt was $228.5, including $224.0 drawn on the revolving facility; net debt was $211.7. Net debt to shareholders’ equity was 32.1%. The facility matures in December 2017; the company reported covenant compliance.
- Current assets were $380.1 and current liabilities $118.4. Total assets were $1,209.2 and total shareholders’ equity $658.7.
Material changes and unusual items
- HEICO paid $116.6 in December 2012 for a special and extraordinary $2.14-per-share dividend and an accelerated regular dividend. The payment was funded with revolving-credit borrowings and materially increased debt.
- SG&A rose faster than sales, to 18.8% of Q2 sales from 17.4%; the company cited performance awards, sales commissions, acquisition-related costs and intangible amortization. The six-month SG&A ratio also increased, to 19.2% from 18.2%.
- The six-month effective tax rate fell to 31.3% from 34.5%, mainly from retroactive R&D tax credits and a tax deduction related to the special dividend. Q2 rate was 34.1%, compared with 34.7%.
- A $1.2 decrease in estimated contingent consideration was recorded in SG&A, principally reflecting lower actual and forecast earnings at an acquired subsidiary amid U.S. defense-spending reductions. Remaining estimated contingent consideration was $9.7.
Outlook, risks and contingencies
- Management forecast fiscal 2013 year-over-year sales growth of 8%–10% and net income growth of 11%–13%. Estimates include the pending Reinhold Industries acquisition and exclude other potential acquisitions.
- Management expects commercial airline capacity growth to support FSG demand, and generally stable ETG demand; it cautioned that governmental budget reductions may continue to pressure certain defense products. Capital expenditures for fiscal 2013 were expected to be about $20.
- In May 2013, HEICO announced an agreement to acquire Reinhold for approximately $130 in cash, principally using revolver proceeds. Closing was expected in Q3 FY2013, subject to governmental approval and customary conditions.
- Management said operating cash flow and available revolver borrowings should cover needs for at least 12 months. Key risks disclosed include commercial aviation demand, defense and space budget reductions, acquisition execution, competition, product development, customer credit and economic conditions.
- Put rights over subsidiary noncontrolling interests had an estimated aggregate redemption amount of about $51; actual payments may differ. The company reported ordinary-course litigation and did not expect it to have a material adverse effect. No material changes in market-risk assessment or internal controls were reported.
Important facts for investors to verify
- Whether revenue and earnings growth continues organically, especially in FSG aftermarket activity and ETG space products, and whether defense weakness worsens.
- Progress, final financing and integration costs for the approximately $130 Reinhold acquisition, and the resulting effect on leverage and covenant headroom.
- Cash conversion and working-capital needs: operating cash flow was slightly lower year over year while receivables and inventory increased.
- Durability of margins given higher SG&A, performance-related costs and acquisition amortization; also assess earnings’ reliance on tax benefits.
- The precise basis of the reported six-month cash dividends per share: the filing describes the December payment as $2.14 special plus $0.06 regular per share.