HEICO Corporation — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended April 30, 2016. Unaudited results; amounts below are in millions of dollars unless stated otherwise. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $350.6 | $291.4 | $656.9 | $559.6 |
| Gross margin | 38.2% | 36.2% | 37.5% | 35.6% |
| Operating income | $66.8 | $55.8 | $119.4 | $102.2 |
| Operating margin | 19.0% | 19.1% | 18.2% | 18.3% |
| Net income attributable to HEICO | $38.7 | $33.1 | $69.9 | $60.7 |
| Diluted EPS | $0.57 | $0.49 | $1.03 | $0.90 |
- Q2 sales rose 20%; management described quarterly sales and HEICO net income as records. Six-month sales increased 17% and HEICO net income increased 15%.
- Q2 sales growth included organic growth of 12% in ETG and 4% in FSG, plus contributions from acquisitions. Six-month organic growth was 8% in ETG and 3% in FSG. Excluding FSG repair and overhaul, FSG organic growth was 7% in Q2 and 6% for the half.
- Gross margin improved, supported by higher sales and favorable product mix, while SG&A rose faster than sales. SG&A was 19.2% of sales in Q2 versus 17.1% a year earlier, reflecting acquisition costs and expenses, foreign-currency effects, higher performance compensation, and contingent-consideration changes. Operating margin was slightly lower year over year.
- Q2 interest expense was $2.3 million versus $1.1 million; six-month interest expense was $3.9 million versus $2.3 million, reflecting higher acquisition-related borrowings and interest rates. Effective tax rates were 32.8% for Q2 and 31.1% for the half, above prior-year comparable rates.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $102.7 million, up from $64.8 million. Capital expenditures were $15.5 million; operating cash flow less capital expenditures was approximately $87.2 million.
- Investing cash outflow was $282.6 million, principally including $263.8 million for acquisitions. Financing cash inflow was $181.7 million. Cash increased by $3.2 million to $36.8 million.
- At April 30, 2016, total debt was $562.9 million, compared with $367.6 million at October 31, 2015; net debt was $526.1 million and net debt to shareholders’ equity was 53.8%. Revolver borrowings carried a 1.6% weighted-average rate. HEICO reported compliance with all credit-facility covenants.
- Current assets were $546.0 million and current liabilities were $161.8 million. Inventory increased to $282.1 million from $243.5 million at fiscal year-end.
- Management said operating cash flow and available revolver borrowings should be sufficient for cash requirements for at least the next 12 months. Fiscal 2016 capital expenditures were expected to be approximately $32 million.
Acquisitions, outlook and risks
- In January 2016, HEICO acquired Robertson Fuel Systems for $253.0 million net consideration, funded with revolver borrowings. Robertson contributed approximately $29.5 million of six-month sales and $3.8 million of HEICO net income, excluding acquisition costs. The purchase-price allocation was preliminary and included $91.7 million of goodwill and $123.1 million of identifiable intangible assets.
- Management raised its FY2016 year-over-year growth outlook: sales growth to 15%–17% from 14%–16%, and net income growth to 12%–14% from 10%–13%. It anticipated growth in aftermarket replacement parts and specialty products, moderated by softer repair and overhaul demand; ETG demand was expected to increase for most products.
- Management cited softer repair and overhaul demand, including in South America, and product-mix effects. Disclosed broader risks include commercial aviation demand and airline purchasing, defense and regulatory spending, competition, product development and manufacturing execution, acquisitions and synergies, customer credit, interest and currency rates, and general economic conditions.
- Potential subsidiary noncontrolling-interest put rights were estimated at $88.4 million, exercisable on varying dates through fiscal 2025. A separate prior-acquisition contingent-consideration liability was part of the $25.2 million total fair-value contingent-consideration liability; $7.0 million was paid in May 2016 based on acquired-entity earnings. Management said ordinary-course litigation was not expected to materially adversely affect results, financial position or cash flows.
Important facts for investors to verify
- Whether raised full-year sales and net-income growth targets are achieved, and how much growth is organic versus acquisition-driven.
- Whether repair and overhaul demand, especially in South America, stabilizes and whether favorable margins persist as product mix changes.
- Robertson integration, realized contribution, and final purchase-price allocation, including acquired intangibles and goodwill.
- Debt reduction and interest expense after acquisition financing, alongside working-capital and inventory trends.
- Timing and cash cost of noncontrolling-interest put rights and contingent consideration, including the assumptions underlying their fair-value estimates.