HEICO Corporation — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended July 31, 2013. Figures are unaudited; dollar amounts below are in millions unless noted.
Business context and results
HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results include acquisitions, notably Reinhold Industries, acquired May 31, 2013 for approximately $133 million net of cash acquired.
| Metric | Q3 FY2013 | Q3 FY2012 | First 9 months FY2013 | First 9 months FY2012 |
|---|---|---|---|---|
| Net sales | $267.1 | $226.0 | $721.3 | $654.9 |
| Operating income | $48.4 | $42.5 | $128.0 | $117.7 |
| Net income attributable to HEICO | $28.9 | $23.1 | $72.6 | $61.4 |
| Diluted EPS | $0.54 | $0.43 | $1.36 | $1.15 |
| Operating margin | 18.1% | 18.8% | 17.7% | 18.0% |
| Gross margin | 36.5% | 37.3% | 36.7% | 36.3% |
Financial position and cash flow
- For the first nine months, operating cash flow was $92.3 million, investing cash flow was negative $147.9 million (including $134.4 million for acquisitions and $13.5 million of capital expenditures), and financing cash flow was positive $46.9 million. Cash declined $8.7 million to $12.8 million.
- At July 31, 2013, total debt was $319.5 million, including $315.0 million drawn on the revolving credit facility, versus total debt of $131.8 million at October 31, 2012. Net debt was $306.8 million; management reported net debt to shareholders’ equity of 44.4%. The facility’s weighted average borrowing rate was 1.3%, and HEICO was in compliance with its covenants.
- Current assets were $408.1 million and current liabilities $141.9 million. Total assets were $1.387 billion; shareholders’ equity was $690.9 million. Inventories rose to $216.3 million from $189.7 million at fiscal year-end.
- Management said operating cash flow and available revolving-credit borrowings should fund cash requirements for at least the next 12 months. Capital expenditures for fiscal 2013 were expected to approximate $20 million.
Material changes and management commentary
- Year-to-date sales rose 10%; Q3 sales rose 18%. FSG sales increased 13% year to date and 29% in Q3, supported by organic growth, new products, improving conditions, and acquisitions. ETG sales increased 5% year to date but only 1% in Q3; space-product demand was partly offset by weaker defense-product demand.
- Operating income increased 9% year to date and 14% in Q3, but operating margin declined in both periods. Management attributed pressure principally to FSG product mix and acquisition-related amortization. Q3 consolidated gross margin also fell, mainly due to FSG mix.
- HEICO acquired Reinhold for approximately $133 million net of acquired cash, primarily funded with revolver borrowings. Reinhold contributed approximately $12.6 million of sales and $1.2 million of HEICO-attributable net income in the nine-month period. Purchase-price allocation remained preliminary; the acquisition added $76.8 million of goodwill and $66.5 million of identifiable intangible assets.
- The company paid a special and extraordinary cash dividend in December 2012, funded with revolver borrowings. The filing describes the payment as $2.14 per share plus an accelerated regular $0.06 dividend, or $2.20 per share in total. The income statement reports $2.270 per share of dividends for the nine-month period; investors should reconcile this reported figure with the narrative.
Outlook, risks, and unusual items
- Management raised fiscal 2013 growth estimates to 10%–11% for sales and 15%–16% for net income, from prior estimates of 8%–10% and 11%–13%, respectively. It expected moderate FSG growth from airline capacity and maintenance spending, and anticipated non-defense demand supporting ETG growth.
- Management cited uncertainty from government budget reductions and slower defense-related demand. Other disclosed risks include commercial air-travel and airline spending trends, defense and space spending, competition, product-development costs and execution, acquisitions and integration, customer credit risk, interest and tax rates, and broader economic conditions.
- The effective tax rate declined to 29.5% for the first nine months from 33.3% a year earlier, and to 26.6% in Q3 from 31.4%. Research credits, a tax deduction associated with the special dividend, and foreign-tax credits contributed to the reduction; these benefits supported reported earnings.
- Estimated contingent consideration liability was $9.1 million, based on uncertain future subsidiary earnings; management linked a reduction in its estimated value partly to lower earnings expectations amid U.S. defense-spending reductions. Redeemable noncontrolling interests were estimated at approximately $52 million.
- Management said ordinary-course litigation was not expected to have a material adverse effect. No material changes to market-risk disclosures were reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile the $2.270 per-share dividend shown in the financial statements with the $2.20-per-share December payment described in the notes and MD&A.
- Track whether increased fiscal 2013 growth guidance was achieved, and distinguish organic growth from acquisition contributions.
- Monitor FSG and ETG margins, defense-related demand, and whether the recent operating-margin declines persist.
- Assess debt repayment, working-capital needs, acquisition integration and returns, and the effects of amortization and contingent consideration.
- Evaluate how much of earnings growth depended on lower effective tax rates and other tax benefits.