HEICO Corporation — Fiscal 2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017. HEICO designs, manufactures, repairs and distributes aerospace replacement parts and services, and produces electronic, microwave and electro-optical products. Its two segments are Flight Support Group (FSG) and Electronic Technologies Group (ETG). Amounts below are in U.S. dollars; financial statements are audited.
Key financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $1,524.8 million | $1,376.3 million | +11% |
| Gross profit / margin | $574.7 million / 37.7% | $515.5 million / 37.5% | Margin +0.2 percentage points |
| Operating income / margin | $306.7 million / 20.1% | $265.3 million / 19.3% | Income +16% |
| Net income attributable to HEICO | $186.0 million | $156.2 million | +19% |
| Diluted EPS | $2.14 | $1.83 | +17% |
| Cash from operating activities | $274.9 million | $249.2 million | +$25.7 million |
| Capital expenditures | $26.0 million | $30.9 million | -$4.9 million |
| Cash and cash equivalents at year-end | $52.1 million | $43.0 million | +$9.1 million |
| Total debt | $674.0 million | $458.2 million | +$215.8 million |
| Net debt | $621.9 million | $415.3 million | +$206.6 million |
The effective tax rate was 30.3%, down from 31.5%. Fiscal 2017 included a $3.1 million discrete tax benefit from stock-option exercises; after noncontrolling interests, this increased HEICO net income by $2.6 million. Cash from operations also benefited from higher earnings, while working-capital needs increased.
Segments and material changes
- FSG: Sales rose 10% to $967.5 million; operating income increased 10% to $179.3 million. Organic growth was 5%, supported by aftermarket replacement parts and repair/overhaul demand. Specialty-products sales declined, contributing to a slightly lower segment gross margin and operating margin.
- ETG: Sales rose 12% to $574.3 million; operating income increased 25% to $157.5 million. Organic sales growth was 7%, driven mainly by space, aerospace and other electronics demand. Operating margin improved to 27.4% from 24.7%.
- Growth included acquisition contributions: $49.0 million of FSG sales and $23.3 million of ETG sales from fiscal 2017 and 2016 acquisitions. Overall, commercial aviation represented about 53% of sales, defense and space 34%, and other industrial markets 13%.
- Acquisition cash outlays were $418.3 million in FY2017. Acquisitions included AeroAntenna Technology, Carbon by Design and Air Cost Control. Goodwill and net intangible assets reached $1.62 billion, about 64% of total assets; the company reported no goodwill or intangible impairment for the year.
- Backlog increased to $654 million from $497 million, with most expected to ship in FY2018. FSG backlog was $236 million and ETG backlog $418 million; increases partly reflected acquired businesses.
Liquidity, debt and capital allocation
Current assets were $631.9 million and current liabilities $249.4 million at year-end. The company reported net debt-to-shareholders’ equity of 50%, versus 40% a year earlier, and total debt-to-total capitalization of 35%, versus 30%. Debt consisted principally of variable-rate revolving-credit borrowings; the weighted-average rate was 2.4%. Management said operating cash flow and available credit were expected to fund requirements for at least the next 12 months.
After year-end, HEICO replaced its prior facility with a $1.3 billion unsecured revolving credit facility maturing in November 2022, with an option to increase commitments by $350 million. About $625 million of committed availability was reported as of December 19, 2017. Management anticipated approximately $50 million of FY2018 capital expenditures.
Outlook, risks and unusual items
- Management targeted FY2018 growth in full-year net sales and net income over FY2017, anticipating FSG commercial aviation and defense growth and ETG growth across most products. This outlook excluded any additional acquisitions.
- Key risks include aviation-market cyclicality and aircraft retirements; changes in defense, space or homeland-security spending; competition, including from OEMs; regulatory approvals and export licensing; international exposure (34% of FY2017 sales were to foreign customers); supply availability and costs; product liability; and execution and integration of acquisitions.
- Potential cash demands include estimated subsidiary noncontrolling-interest put rights of $131.1 million, with approximately $21.0 million potentially payable in FY2018 if eligible holders exercised their rights. Actual redemption amounts may differ.
- Interest-rate and foreign-currency sensitivities were assessed by management as not material under the disclosed hypothetical 10% changes. Legal matters were described as ordinary-course matters not expected to materially affect results, financial position or cash flows.
- The November 2017 credit agreement and December 2017 dividend and stock-split declarations occurred after the reporting date. The board declared a $0.0875-per-share semiannual dividend and another 5-for-4 split; FY2017 reported share and per-share figures reflect the April 2017 split, not the pending split.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded three fiscal 2017 acquisitions from the internal-control assessment during their first year; those businesses represented 19.7% of assets and 3.9% of sales.
Most important facts for investors to verify
- How much reported growth and backlog converts to organic, recurring revenue and cash generation, especially after acquisitions.
- Whether acquired businesses meet expected earnings and cash-flow targets, and how acquisition spending, leverage and put-right payments affect financial flexibility.
- Whether margins hold as FSG specialty-product performance, product mix, acquisition integration and rising amortization evolve.
- The assumptions supporting goodwill and intangible-asset valuations, which together represented about 64% of assets, and the potential for impairment if expectations weaken.
- The durability of FY2018 growth targets and the impact of airline demand, defense budgets, export restrictions, supply constraints and interest rates.