HEICO Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. Although the request refers to 2015 Q4, this is an annual filing; selected fourth-quarter figures are included below. HEICO designs, manufactures, repairs and distributes aerospace components and produces electronic technologies. Its two segments are Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $1,188.6 million | $1,132.3 million | +5% |
| Gross profit margin | 36.5% | 35.2% | +1.3 percentage points |
| Operating income | $229.7 million | $203.4 million | +13% |
| Operating margin | 19.3% | 18.0% | +1.3 percentage points |
| Net income attributable to HEICO | $133.4 million | $121.3 million | +10% |
| Diluted EPS | $1.97 | $1.80 | +9% |
| Cash from operating activities | $172.9 million | $190.7 million | −9% |
Fourth-quarter FY2015 sales were $328.7 million versus $292.2 million a year earlier; net income attributable to HEICO was $38.3 million versus $32.1 million.
FSG sales rose 6% to $809.7 million and segment operating income rose 10% to $149.8 million. ETG sales rose 3% to $391.0 million and segment operating income rose 11% to $98.8 million. Consolidated sales growth included $62.9 million from FY2015 acquisitions. FSG organic sales declined 1%, chiefly due to completion of large industrial customer orders; excluding that decline, FSG organic growth was 3%. ETG organic growth was 1%.
Cash, debt and liquidity
- Cash was $33.6 million at year-end; total debt was $367.6 million and net debt was $334.0 million, up from $308.9 million in FY2014.
- Net debt to shareholders’ equity was 37%, versus 40% in FY2014. Total debt to total capitalization was 29%, versus 30%.
- Operating cash flow of $172.9 million was below FY2014, mainly reflecting increased working capital, including higher receivables and inventory. Capital expenditures were $18.2 million; management anticipated approximately $30 million in FY2016.
- The $365.2 million revolving-credit borrowing balance was due in fiscal 2019. The company reported covenant compliance at October 31, 2015 and approximately $440 million of unused committed availability as of December 15, 2015.
- Current assets were $503.6 million and current liabilities $168.4 million. The filing states that operating cash flow and available borrowings should fund requirements for at least the next 12 months.
Changes, outlook and notable items
- Management targeted full-year FY2016 growth in net sales and net income. It expected growth in FSG commercial aviation and defense lines and certain industrial products; ETG growth was expected to be moderated by softer demand in some space products.
- HEICO completed several FY2015 acquisitions, including Astroseal, Midwest Microwave Solutions, ACT, Thermal Energy Products, Harter Aerospace and Aeroworks. Cash paid for acquisitions, net of cash acquired, was $166.8 million. Acquired businesses contributed approximately $62.9 million in sales and $7.9 million in net income attributable to HEICO during the year.
- FY2015 earnings included a $1.8 million, or $0.03 per diluted share, benefit from retroactive extension of the federal R&D tax credit. The effective tax rate increased to 31.7% from 30.1%.
- FY2014 results included $15.0 million of intangible-asset impairment charges and a $28.1 million reduction in accrued contingent consideration. These prior-year items materially affect year-over-year comparisons; FY2015 had no intangible impairment and a $0.3 million net increase in contingent consideration expense.
- Backlog was $349 million at year-end versus $291 million a year earlier; substantially all was expected to ship in FY2016. Management attributed increases in both segments principally to acquired businesses. FSG backlog includes short-lead orders and excludes certain customer forecasts that are not firm purchase orders.
- The board declared a regular semiannual dividend of $0.08 per share in December 2015, payable in January 2016. FY2015 dividends were $0.14 per share, excluding special dividends paid in prior years.
Risks, contingencies and controls
- Key exposures include aviation-market cyclicality and fleet retirements, competition from OEMs, defense and space budget reductions, regulatory approvals and export licensing, acquisition integration, supplier availability, product liability, environmental compliance, cybersecurity, foreign exchange and interest rates.
- Foreign customers generated approximately 34% of FY2015 consolidated sales. A hypothetical 10% weakening of the U.S. dollar against the euro was estimated to increase the U.S.-dollar value of net euro borrowings and contingent consideration by $5.3 million and reduce operating income by the same amount.
- Estimated redeemable noncontrolling interests were $91.3 million. Approximately $35.0 million was currently puttable or becoming puttable during FY2016; approximately $20.1 million could be payable in FY2016 if eligible holders exercised their rights.
- Management considered ordinary-course litigation outcomes not likely to have a material adverse effect. Standby letters of credit totaled $2.7 million. Goodwill impairment testing identified no impairment; the filing reports reporting-unit fair values significantly above carrying values.
- The independent auditor issued unqualified opinions on the financial statements and internal controls. Management concluded controls were effective, but the FY2015 acquisitions—representing 14.1% of assets and 5.3% of sales—were excluded from the internal-control assessment during their first year.
Investor verification priorities
- Separate organic growth from acquisition contributions, especially the FSG industrial decline and the acquired companies’ results.
- Review cash conversion and working-capital trends: operating cash flow fell despite higher reported earnings, while receivables and inventory increased.
- Assess debt capacity alongside acquisition plans, FY2016 capital spending, dividend commitments and potential noncontrolling-interest put payments.
- Examine backlog quality and timing, particularly the distinction between firm orders and excluded customer usage forecasts.
- Track integration of FY2015 acquisitions and the completion of internal-control integration for businesses excluded from the year-end controls assessment.