HEICO Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended October 31, 2020. The filing also reports unaudited fourth-quarter results. HEICO operates through Flight Support Group (FSG), focused on aerospace parts, repair and related services, and Electronic Technologies Group (ETG), focused on engineered electronic products for defense, space and other markets.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $1,787.0 million | $2,055.6 million | Down 13% |
| Gross profit / margin | $682.1 million / 38.2% | $813.8 million / 39.6% | Margin down 1.4 percentage points |
| Operating income / margin | $376.6 million / 21.1% | $457.1 million / 22.2% | Income down 18% |
| Net income attributable to HEICO | $314.0 million | $327.9 million | Down 4% |
| Diluted EPS | $2.29 | $2.39 | Down 4% |
| Operating cash flow | $409.1 million | $437.4 million | Down $28.3 million |
FY2020 capital expenditures were $22.9 million; operating cash flow less capital expenditures was approximately $386.2 million. Cash and equivalents were $406.9 million at year-end, versus $57.0 million a year earlier. Total debt was $739.8 million, versus $562.0 million; debt represented 27% of total capitalization, compared with 25%. The company reported approximately $755 million of unused committed credit availability as of December 22, 2020, and compliance with facility covenants at year-end.
- FSG: Sales fell 25% to $924.8 million; operating income fell 41% to $143.1 million. Commercial aviation weakness drove the decline, and FSG recorded higher inventory obsolescence expense and bad-debt expense.
- ETG: Sales rose 5% to a record $875.0 million; operating income rose 5% to a record $258.8 million. Acquisitions and stronger defense demand contributed to growth.
- Commercial aviation accounted for approximately 41% of FY2020 sales, versus 52% in FY2019. Defense and space rose to 44% from 35%; other industrial markets accounted for 15%, versus 13%.
- Fourth-quarter sales were $426.2 million, versus $541.5 million a year earlier; net income attributable to HEICO was $62.3 million, versus $85.7 million.
Material changes, outlook and risks
COVID-19 materially affected commercial aerospace demand, beginning in March 2020. HEICO said sales from businesses operating in commercial aerospace declined approximately 32% for the year. Commercial aviation demand, airline financial distress and aircraft retirements also contributed to increased inventory reserves and doubtful-account allowances. By contrast, results from defense, space and other industrial markets were not materially affected overall, though supply-chain, staffing and facility disruptions continued.
FY2020 net income included a $48.3 million discrete tax benefit from stock-option exercises, increasing net income attributable to HEICO by $47.0 million, or $0.34 per diluted share. The effective tax rate was 7.9%, compared with 17.8% in FY2019. The reported earnings comparison therefore includes this significant tax item.
Management did not provide FY2021 sales or earnings guidance, citing pandemic uncertainty. It was cautiously optimistic that vaccine progress could support a gradual commercial aviation recovery during FY2021. Management cited liquidity, a healthy balance sheet, continued R&D investment and business diversity as strengths. The revolving credit facility was amended after year-end, extending maturity to November 2023 and increasing capacity to $1.5 billion. Expected FY2021 capital expenditures were approximately $40 million.
Other items to monitor include $844 million of year-end backlog, down from $900 million; approximately $82.0 million of redeemable noncontrolling interests currently or becoming puttable in FY2021, with about $50.9 million potentially payable during that year if eligible holders exercise; and goodwill and intangible assets, which together represented 55% of total assets. The annual impairment tests found no impairment. Management assessed internal controls as effective; the independent auditor issued unqualified opinions on the financial statements and internal controls, while identifying inventory valuation estimates as a critical audit matter. Management said ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- How quickly commercial aviation demand and FSG sales recover, and whether further aircraft retirements lead to additional inventory write-downs.
- Whether the FY2020 tax benefit from stock-option exercises distorts comparisons with future earnings and tax rates.
- Cash generation, debt levels, credit-facility capacity and covenant headroom as acquisitions and potential noncontrolling-interest put payments are funded.
- Whether ETG growth and backlog convert into revenue and profit, and whether supply-chain or customer-credit issues worsen.
- The assumptions supporting inventory reserves, goodwill and intangible-asset valuations, and contingent consideration obligations.