HEICO Corporation — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2015; comparative periods ended July 31, 2014. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $300.4M | $291.0M | $860.0M | $840.1M |
| Operating income | $58.5M | $50.1M | $160.7M | $149.7M |
| Operating margin | 19.5% | 17.2% | 18.7% | 17.8% |
| Gross margin | 36.0% | 35.5% | 35.7% | 35.2% |
| Net income attributable to HEICO | $34.4M | $33.4M | $95.1M | $89.2M |
| Diluted EPS | $0.51 | $0.49 | $1.40 | $1.32 |
- Q3 sales rose 3%; operating income rose 17% and HEICO net income rose 3%. Nine-month sales increased 2%, operating income 7%, and HEICO net income 7%.
- Q3 FSG sales increased 8% to $206.6M; ETG sales declined 5% to $97.2M. Nine-month FSG sales rose 4% to $591.4M; ETG sales declined 1% to $277.4M.
- Q3 and nine-month interest expense was $1.1M and $3.3M, respectively. Effective tax rates were 32.0% for Q3 and 30.6% for the nine-month period.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $121.3M, versus $127.2M a year earlier. Investing cash outflow was $69.8M, including $56.2M for acquisitions and $13.8M of capital expenditures. Financing cash outflow was $38.7M. Cash increased $11.5M to $31.7M.
- At July 31, 2015, total debt was $299.5M, down from $329.1M at October 31, 2014; net debt was $267.8M. The revolving-credit borrowing rate averaged 1.3%, and the company reported compliance with all covenants. Net debt to shareholders’ equity was 31.3%.
- Current assets were $462.9M and current liabilities $146.8M. Total assets were $1.588B and total liabilities $667.0M.
- Management said operating cash flow and available revolving-credit borrowings should meet cash needs for at least the next 12 months. FY2015 capital expenditures were expected to be approximately $20M.
Material changes and notable items
- FY2015 acquisitions included 80% of Aeroworks, 80.1% of Harter Aerospace, and all of Thermal Energy Products. Acquisitions contributed $32.3M of FSG sales in the first nine months and $16.2M in Q3; their earnings contribution was described as not material.
- FSG growth also benefited from aftermarket replacement parts and repair services, while lower industrial-product sales—following completion of a customer’s multi-year orders—reduced organic sales. ETG weakness reflected lower demand for certain space, medical and other electronics products and currency effects, partly offset by stronger defense and aerospace demand.
- Comparisons were affected by prior-year contingent-consideration reductions and $9.2M of intangible-asset impairment charges. Foreign-currency transaction gains and lower performance-based compensation also supported current-period SG&A and operating results.
- Foreign-currency translation losses were $17.2M for the nine months and reduced comprehensive income; accumulated other comprehensive loss was $24.6M at July 31.
- Redeemable noncontrolling interests were $64.8M, including put rights exercisable at varying dates through fiscal 2023. Fiscal 2015 acquisitions included contingent consideration, with a July 31 fair value of $20.6M.
- Subsequent to quarter-end, HEICO acquired ACT, Astroseal and an 80.1% interest in Midwest Microwave Solutions; purchase prices were reported as not material to the financial statements.
Outlook, risks and contingencies
- Management forecast FY2015 year-over-year growth of approximately 5% in consolidated net sales and 8% in net income. It expected organic growth in commercial aviation-related product lines, moderated by weaker industrial-related demand, and modest full-year organic ETG growth.
- Management cited continued focus on product development, market penetration, acquisitions and maintaining financial strength. These are forward-looking estimates, not guarantees.
- Risks identified include commercial aviation demand and airline purchasing, defense and government spending, foreign exchange and interest rates, customer credit, competition, product development and acquisition execution. A hypothetical 10% weakening of the U.S. dollar against the euro was estimated to increase the dollar value of euro debt and contingent consideration by $5.6M and reduce operating income by the same amount.
- Standby letters of credit totaled $2.3M. Management stated that ordinary-course litigation was not expected to have a material adverse effect. No material changes to contractual obligations were reported.
Investor verification priorities
- Check whether FY2015 sales and net-income growth guidance was achieved, particularly given industrial-product weakness and the forecast of modest ETG organic growth.
- Assess organic performance separately from acquisition contributions and review the ongoing performance of the newly acquired businesses.
- Monitor inventory and working-capital trends: inventory increased to $236.2M from $218.0M at October 31, 2014, while management cited working-capital use as a cash-flow headwind.
- Review the valuation and potential cash cost of contingent consideration and redeemable noncontrolling-interest put rights, as well as foreign-exchange exposure.
- Reconcile dividend disclosures when comparing periods: the income statement reports dividends per share of $0.14 for the nine months ended July 31, 2015 versus $0.47 in 2014, while cash dividends paid were $9.3M and $31.2M, respectively.