HEICO Corporation — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended April 30, 2020. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results were materially affected by the COVID-19 outbreak, particularly the collapse in commercial air travel. Unless stated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $468.1 | $515.6 | $974.4 | $981.8 |
| Operating income | $108.2 | $119.2 | $219.2 | $217.1 |
| Operating margin | 23.1% | 23.1% | 22.5% | 22.1% |
| Net income attributable to HEICO | $75.5 | $81.8 | $197.3 | $161.1 |
| Diluted EPS | $0.55 | $0.60 | $1.44 | $1.18 |
| Operating cash flow | Not reported separately | Not reported separately | $205.9 | $178.3 |
- Q2 sales fell 9% year over year; operating income and HEICO-attributable net income each declined about 9%, while diluted EPS fell 8%. Gross margin decreased to 38.2% from 40.6%.
- For the first six months, sales were down 1%, while operating income rose 1%. Net income attributable to HEICO increased 22%, substantially aided by a $47.6 million discrete tax benefit from stock-option exercises; the effective tax rate was 0.3%, versus 14.5% a year earlier. The Q2 effective tax rate was 22.6%, versus 22.5%.
- Q2 FSG sales fell 18% to $252.0 million and operating income fell 24% to $47.5 million. ETG sales rose 2% to $219.0 million, including acquisition contribution, while operating income declined 3% to $65.5 million. For the six-month period, FSG sales fell 7% to $553.0 million; ETG sales rose 7% to $427.4 million.
- Lower performance-based compensation and selling costs reduced SG&A, cushioning the sales decline. Q2 SG&A fell 22% year over year; management attributed much of the reduction to lower performance-based compensation.
- At April 30, cash and equivalents were $346.8 million, versus $57.0 million at October 31, 2019. Long-term debt was $739.2 million, including $730.0 million drawn on the revolving facility; total debt including current maturities and finance leases was $740.2 million. Debt-to-shareholders’ equity was 39.2%. The revolver matures in fiscal 2023; HEICO reported covenant compliance.
- Operating cash flow of $205.9 million included a $69.0 million working-capital increase. Investing cash use was $70.9 million, including $45.3 million for acquisitions and $12.4 million of capital expenditures. Financing provided $155.6 million, including net revolver borrowing.
- Current assets were $1.13 billion and current liabilities were $256.4 million at April 30. Management said cash, operating cash flow, and available revolver borrowings should cover requirements for at least the next 12 months.
Material changes and unusual items
- The commercial aviation business was materially affected by the decline in global air travel beginning in March. Defense, space, and other industrial markets—about half of sales—were not fundamentally affected as of the filing, although ETG space-product demand weakened.
- In Q2, FSG’s aftermarket replacement parts, repair and overhaul, and specialty-products sales all declined. ETG’s organic sales declined 2%, partly offset by acquisitions and stronger defense demand.
- Cash rose following precautionary borrowing: HEICO said it borrowed $200 million on its revolver to bolster liquidity amid uncertainty, alongside borrowing to fund acquisitions. Acquisitions, net of acquired cash, used $45.3 million in the six-month period.
- Fiscal 2020 acquisitions included Spectralux’s Human-Machine Interface product line and an 80.1% interest in Quell Corporation. Their reported-period sales and earnings were not material.
- Redeemable noncontrolling interests were $196.5 million at April 30. Certain holders have put rights exercisable on varying dates through fiscal 2029; Quell’s minority holders generally have rights beginning in fiscal 2025, with specified earlier conditions.
- HEICO adopted lease accounting (ASC 842) on November 1, 2019, recording $63.4 million of right-of-use assets and $64.1 million of lease liabilities at adoption; management reported no material effect on earnings or cash flows.
Outlook, risks, and contingencies
- HEICO withdrew its fiscal 2020 financial guidance in April because of COVID-19 and said first-half results should not be viewed as indicative of full-year results. Management could not estimate the outbreak’s duration or predict when commercial aerospace demand would return to pre-outbreak levels.
- Management described the company as favorably positioned for long-term success and expected its cost-saving aviation products and product development programs could support market-share gains as travel recovers. This is forward-looking and dependent on recovery.
- Management reported temporary layoffs, reduced work hours and pay, and health and safety measures. It warned of possible supply-chain, staffing, facility, and transportation disruptions, delayed orders and shipments, and temporary cost increases.
- COVID-19-related accounting estimate reviews—including receivables, inventory, contingent consideration, goodwill, and long-lived assets—produced no material income-statement impact through April 30, 2020. Future effects remained uncertain.
- Other risks include airline purchasing and fleet decisions, customer credit, defense and space spending, regulatory and export restrictions, product development and manufacturing execution, acquisitions, and interest, currency, and tax rates.
- Standby letters of credit totaled $4.8 million. Management said normal-course litigation was not expected to have a material adverse effect. No material change in contractual obligations was reported.
Investor verification points
- Track commercial aviation demand and FSG sales, margins, backlog, and recovery timing; the filing provides no current fiscal-year guidance.
- Assess the sustainability of earnings after the unusually large stock-option tax benefit and lower performance-based compensation.
- Monitor cash generation and working capital, particularly inventory levels, contract assets, and accrued liabilities amid lower demand.
- Review revolver availability, debt levels, covenant headroom, and the timing and potential value of noncontrolling-interest put rights.
- Check subsequent filings for COVID-19-related impairments, credit or inventory reserves, supply disruptions, and changes in acquisition performance or contingent consideration.