HEICO Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012; balance-sheet comparisons are with October 31, 2011. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results include recent acquisitions, notably Switchcraft, acquired November 22, 2011.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $212.7 million | $174.2 million | +22% |
| Gross margin | 36.8% | 36.7% | +0.1 percentage point |
| Operating income / margin | $37.6 million / 17.7% | $32.4 million / 18.6% | Income +16%; margin lower |
| Net income attributable to HEICO | $19.2 million | $17.1 million | +12% |
| Diluted EPS | $0.45 | $0.40 | +13% |
| Cash from operating activities | $(2.3) million | $23.5 million | Lower by $25.8 million |
| Capital expenditures | $3.8 million | $1.6 million |
FSG sales rose 15% to $138.9 million and operating income increased 25% to $25.5 million. ETG sales rose 38% to $74.5 million, while operating income increased 4% to $16.2 million. Consolidated SG&A increased to $40.6 million from $31.6 million, or 19.1% of sales versus 18.1%. Interest expense increased to $0.6 million from $0.1 million. The effective tax rate rose to 34.2% from 30.4%, principally reflecting the prior-year R&D tax credit and changes in the credit’s availability.
Financial position and liquidity
- Cash was $23.1 million at January 31, up from $17.5 million at October 31. Current assets were $348.5 million and current liabilities $99.7 million.
- Total debt was $190.8 million, including $187.0 million drawn on the revolving facility; net debt was $167.7 million. Net debt to shareholders’ equity was 25.9%.
- HEICO entered a new unsecured $670 million revolving credit facility, maturing in December 2016, with an option to increase it to $800 million. The company reported compliance with covenants at quarter-end.
- Operating cash flow was negative, primarily due to a $36.6 million working-capital increase, including timing of payments and changes in accrued liabilities. Investing cash outflow was $146.2 million, largely the $142.3 million Switchcraft acquisition. Financing cash inflow was $154.4 million, primarily net revolving-credit borrowings.
- Management expects FY2012 capital expenditures of approximately $20–$22 million and believes operating cash flow and available revolver borrowings will fund requirements for at least the next 12 months.
Material changes, outlook, and risks
- Switchcraft contributed approximately $10.7 million of quarterly sales and $0.9 million of HEICO-attributable net income. Its preliminary purchase-price allocation included $76.3 million of goodwill and $72.5 million of identifiable intangible assets. Acquisition-related amortization and inventory purchase-accounting adjustments weighed on ETG margins.
- Management attributed organic growth to stronger market penetration in specialty products and aerospace repair services in FSG, and medical and defense products in ETG. ETG organic growth was approximately 6.7%; FSG organic growth was approximately 9.8%.
- Management expected stable ETG demand, while noting government spending reductions could moderate defense demand. It anticipated continued airline capacity growth at a slower pace than in 2011 and warned that economic uncertainty could moderate commercial aviation growth. European economic uncertainty softened demand for certain 3D Plus products.
- Consolidated operating margin declined despite higher sales and gross margin, principally due to lower ETG operating margins, acquired-business costs, and higher SG&A. Management said ETG margins can vary with product mix and delivery timing; excluding 3D Plus, ETG’s Q1 operating margin would have been approximately 25%.
- The allowance for doubtful accounts increased by approximately $2.3 million, primarily due to potential collection difficulties following customer bankruptcy filings; the charge was partly offset by reversals of amounts otherwise payable to those customers.
- Estimated redemption value of subsidiary noncontrolling-interest put rights was approximately $66 million; actual amounts may differ. Potential contingent acquisition consideration included up to $10.1 million tied to a fiscal 2009 acquisition’s earnings objectives. For a fiscal 2007 acquisition, management said no additional payment was expected if earnings remained at comparable historical levels through June 2012.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Forward-looking risks include aviation demand, defense and government spending, competition, product costs, customer credit, economic conditions, and acquisition integration and performance.
Investor verification priorities
- Track cash conversion and working-capital movements, including receivables and the effects of customer bankruptcies.
- Assess whether Switchcraft and 3D Plus deliver expected growth and whether acquisition-related amortization, purchase accounting, and integration costs continue to pressure ETG margins.
- Monitor debt, revolver availability, covenant compliance, and the potential cash impact of noncontrolling-interest put rights and contingent purchase consideration.
- Compare management’s demand outlook with subsequent airline capacity, defense spending, and European-market conditions; Q1 results are not necessarily indicative of the full fiscal year.