HEICO Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended October 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the filing provides unaudited Q4 figures as part of its quarterly table.
Business context
HEICO designs, manufactures, repairs and distributes aerospace, defense and electronic products through two groups: Flight Support Group (FSG), 60% of FY2019 sales, and Electronic Technologies Group (ETG), 40%. Its strategy emphasizes organic product development and acquisitions. No customer represented 10% or more of sales; sales to the five largest customers were approximately 20%.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $2,055.6 million | $1,777.7 million | +16% |
| Gross profit / margin | $813.8 million / 39.6% | $690.7 million / 38.9% | Margin +0.7 percentage points |
| Operating income / margin | $457.1 million / 22.2% | $376.2 million / 21.2% | +21% |
| Net income attributable to HEICO | $327.9 million | $259.2 million | +26% |
| Diluted EPS | $2.39 | $1.90 | +26% |
| Cash from operations | $437.4 million | $328.5 million | +$108.9 million |
FY2019 net income from consolidated operations was $359.7 million; interest expense was $21.7 million. The effective tax rate fell to 17.8% from 19.8%. FSG sales rose 13% to $1,240.2 million and segment operating income increased 17% to $242.0 million. ETG sales rose 19% to $834.5 million and segment operating income increased 20% to $245.7 million. Growth reflected higher demand, new offerings and acquisitions; management said price changes were not a significant sales-growth driver.
Q4 FY2019: Sales were $541.5 million versus $476.9 million in Q4 FY2018; gross profit was $209.4 million versus $186.5 million; net income attributable to HEICO was $85.7 million versus $67.4 million; diluted EPS was $0.62 versus $0.49. The filing does not provide clear standalone Q4 cash flow or operating income figures in its quarterly summary.
Cash, debt and liquidity
At October 31, 2019, cash was $57.0 million and total debt was $562.0 million, compared with $59.6 million and $532.5 million a year earlier. Debt was 25% of total capitalization, versus 26%. Current assets were $813.7 million and current liabilities $289.1 million. Operating cash flow of $437.4 million funded, in part, $240.8 million of acquisition spending and $28.9 million of capital expenditures. The company reported $741 million of unused committed revolver availability as of December 17, 2019 and stated available operating cash flow and borrowing capacity should meet requirements for at least 12 months. Its $1.3 billion unsecured revolving facility matures in November 2022; HEICO reported compliance with covenants.
Changes, outlook and notable items
- Backlog increased to $900 million from $783 million; most was expected to ship in FY2020. ETG backlog was $575 million and FSG backlog $325 million.
- Management targeted FY2020 growth in full-year sales and net income, anticipating growth in FSG commercial aviation and defense lines and across most ETG products. Outlook excludes potential additional acquisitions; FY2020 capital expenditures were expected to be about $42 million.
- FY2019 included a $16.5 million discrete tax benefit from stock-option exercises, increasing HEICO-attributable income by $15.0 million, or $0.11 per basic and diluted share. This is a notable contributor to reported earnings.
- HEICO adopted ASC 606 in FY2019. The standard changed timing for certain contract revenue; its impact on FY2019 operating results was not material. The filing records a $13.7 million increase to opening retained earnings on adoption.
- FY2019 acquisition cash spending was substantially higher than FY2018. In June 2019, HEICO also paid Lufthansa Technik $91.5 million in a distribution connected with a transaction that transferred interests in eight FSG subsidiaries to a wholly owned subsidiary.
- Redeemable noncontrolling interests were $188.3 million. Approximately $47.8 million could be payable in FY2020 if all eligible holders exercised put rights that year; aggregate currently puttable or becoming-puttable interests were estimated at $106.7 million.
- The auditor issued unqualified opinions on the financial statements and internal controls. Inventory valuation was identified as a critical audit matter because estimates depend on future demand and sales patterns. Goodwill and intangible assets represented 61% of total assets; no impairment was recorded.
Risks and contingencies
Key risks include aviation-market cyclicality and aircraft retirements; defense and space spending changes; competition, regulation and export-license restrictions; international and currency exposure; supply availability and cost; product liability and environmental exposure; cyber disruption; acquisition integration and goodwill impairment; and reliance on key personnel. Foreign sales were approximately 36% of consolidated sales. Management considered ordinary-course litigation not likely to have a material adverse effect. Operating lease commitments totaled $76.9 million, and the company expected adoption of the new lease standard to add approximately $60–$75 million of right-of-use assets and lease liabilities.
Important facts for investors to verify
- How much of sales, earnings and EPS growth was organic versus acquisition-related, and how the stock-option tax benefit affects comparisons.
- Whether backlog converts to revenue on the expected schedule, particularly the shorter-lead-time FSG backlog.
- Inventory reserve adequacy and demand assumptions, given inventory of $420.3 million and the auditor’s critical audit matter.
- Potential cash requirements from noncontrolling-interest put rights and acquisition-related contingent consideration.
- Whether FY2020 growth targets are achieved amid aviation, defense-budget, regulatory and integration risks.