HEICO Corporation — Q2 Fiscal 2018 Form 10-Q
Period: Second quarter and six months ended April 30, 2018. Figures are unaudited; dollar amounts are in millions unless noted. Comparisons are with the corresponding fiscal 2017 periods.
Business context
HEICO operates through the Flight Support Group (FSG), serving aviation and defense markets, and the Electronic Technologies Group (ETG), serving defense, space and other electronics markets. Fiscal 2018 results include acquisitions made in fiscal 2017 and 2018. A five-for-four stock split was effected in January 2018; share and per-share information is adjusted retrospectively.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $430.6 | $368.7 | $835.0 | $712.1 |
| Operating income | $91.6 | $76.5 | $171.1 | $141.1 |
| Operating margin | 21.3% | 20.8% | 20.5% | 19.8% |
| Net income attributable to HEICO | $59.6 | $45.7 | $124.8 | $86.6 |
| Diluted EPS | $0.55 | $0.42 | $1.14 | $0.80 |
| Gross margin | 39.0% | 38.1% | 38.6% | 37.3% |
- Q2 net sales and operating income each rose 17% and 20%, respectively, as reported by management; six-month sales rose 17% and operating income rose 21%.
- Six-month segment sales: FSG $522.6, up 15%; ETG $324.4, up 21%, before intersegment eliminations. FSG six-month organic growth was 4% (6% excluding specialty products); ETG organic growth was 3%. Q2 FSG organic growth was 5%; ETG Q2 sales included $25.3 million from acquisitions.
- Six-month operating income was $97.4 for FSG and $91.4 for ETG. ETG operating margin improved to 28.2% from 25.4%; FSG margin eased to 18.6% from 19.0%.
- Six-month R&D expense included in cost of sales was $26.7, versus $22.5. SG&A rose to $151.5 from $124.7, reflecting acquisition costs and higher performance-based compensation.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $95.0, versus $97.7 a year earlier. Investing cash outflow was $71.6, including $39.4 for acquisitions and $29.5 of capital expenditures. Financing cash outflow was $29.1; cash declined $3.8 to $48.2.
- Working capital absorbed cash, including increases in inventory of $29.8 and receivables of $14.3, and decreases in income taxes payable and accrued liabilities of $14.7 and $14.5, respectively.
- At April 30, 2018, total debt was $683.8, primarily revolving-credit borrowings; cash was $48.2. Debt-to-shareholders’ equity was 50.0%. Revolver borrowings carried a 3.0% weighted-average rate, compared with 2.4% at October 31, 2017.
- Current assets were $694.7 and current liabilities $230.1. The $1.3 billion revolving credit facility matures in November 2022; HEICO reported compliance with its covenants and believed operating cash flow and available borrowing capacity would fund requirements for at least 12 months.
- Inventory was $382.7, up from $343.6 at fiscal year-end; goodwill was $1,104.6 and net intangible assets $532.3. Six-month dividends were $0.07 per share.
Changes, outlook and notable items
- Management raised fiscal 2018 growth estimates to 13%–14% for net sales and 33%–35% for net income, from prior estimates of 12%–14% and 30%–32%, respectively. It expected continued growth in FSG commercial aviation and defense and in most ETG product lines, alongside product development and acquisitions.
- The Tax Cuts and Jobs Act reduced the federal statutory rate to 21%; HEICO estimated a blended fiscal 2018 rate of 23.3%. Six-month effective tax rate fell to 14.8% from 29.5%, including a provisional $16.6 tax benefit from deferred-tax remeasurement, partly offset by a $4.7 transition-tax expense. Q2 effective tax rate was 23.6%, versus 32.0%. Some tax effects remained under review.
- Fiscal 2018 acquisitions included the ELT Product Line, Sensor Technology (85% acquired), and IDC. Their reported-period sales and earnings were not material, according to the filing. Acquisition goodwill was $21.5.
- ASU 2014-09 revenue recognition, expected to be adopted in fiscal 2019 using the modified retrospective method, may shift recognition to over time for certain production and repair contracts. The financial effect had not been determined. Lease accounting adoption is expected in fiscal 2020; effects were also under evaluation.
- Redeemable noncontrolling interests were $134.0, with put rights exercisable through fiscal 2025. Contingent consideration liabilities totaled $24.4; valuation depends on future subsidiary performance and estimates. Standby letters of credit totaled $4.3. Management said pending ordinary-course litigation was not expected to have a material adverse effect.
- Risks identified include aviation demand and airline purchasing, defense and government spending, competition, product development and manufacturing execution, acquisitions and synergies, customer credit, and interest, currency and tax rates. Management cautioned that forward-looking statements are subject to uncertainty.
Key facts for investors to verify
- Whether the raised fiscal 2018 sales and net-income growth outlook is achieved, and how much growth is organic versus acquisition-related.
- How much reported earnings growth reflects the Tax Act’s provisional benefit, and the expected normalized tax rate and remaining tax-accounting adjustments.
- Whether working-capital investment—particularly inventory and receivables—converts into operating cash flow as anticipated.
- Debt levels, borrowing costs, covenant headroom and available revolver capacity as acquisitions and investment continue.
- The eventual financial and timing effects of the new revenue-recognition standard and other pending accounting changes.