HEICO Corporation (HEI) — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended April 30, 2011; unaudited. Comparisons are with the corresponding 2010 periods. Per-share data reflects the April 2011 five-for-four stock split.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $184.5m | $153.8m | $358.7m | $289.4m |
| Operating income | $32.9m | $26.0m | $65.3m | $50.5m |
| Operating margin | 17.8% | 16.9% | 18.2% | 17.5% |
| Net income attributable to HEICO | $16.8m | $12.6m | $33.9m | $24.4m |
| Diluted EPS | $0.40 | $0.30 | $0.80 | $0.58 |
- Gross margin rose to 36.0% in Q2 from 34.9%, and to 36.3% for the first half from 35.9%. SG&A was 18.1% of sales in both Q2 periods and 18.1% for the half versus 18.4%.
- First-half operating cash flow was $51.1m, up from $40.3m. Investing used $31.8m, including $27.9m for acquisitions and $3.8m for capital expenditures; financing used $18.2m. Cash ended at $7.8m.
- At April 30, total debt was $7.1m and management reported no net debt. Current assets were $288.2m and current liabilities $90.4m. The company had a $300m revolving credit facility and was compliant with its covenants.
Changes and business context
- First-half sales increased 24%; Q2 sales increased 20%. Management attributed growth to organic demand and acquisitions, particularly in the Flight Support Group (FSG). FSG first-half sales grew 29%, including approximately $14m from Blue Aerospace; Electronic Technologies Group (ETG) sales grew 13%, including approximately $7m from a fiscal 2010 acquisition.
- FSG organic growth was approximately 22% for the first half and 20% for Q2, supported by new products and services, aftermarket parts and repair activity, and increased airline capacity. ETG first-half organic growth was approximately 6%, while Q2 sales were up 1%.
- Operating income growth and margin expansion reflected higher sales volumes and improved segment margins. The filing reports a $0.8m, or $0.02 per diluted share, first-quarter benefit from the retroactive R&D tax credit for prior-period activity; the lower effective tax rate also reflected a state tax filing change.
Outlook, risks and unusual items
- Management expected continued year-over-year sales and earnings growth through the remainder of FY2011, citing anticipated airline capacity increases and stable or rising demand in ETG markets. This is a qualitative outlook, not quantified guidance.
- Potential contingent acquisition consideration could reach approximately $95m in FY2012; management estimated about $14m under performance assumptions based on comparable historical periods. Actual payments depend on acquired businesses meeting earnings targets and may differ.
- Redeemable noncontrolling-interest put rights had an estimated aggregate redemption amount of approximately $54m; the actual amount may differ and exercise dates generally begin in FY2012 through FY2018.
- Other disclosed exposures include a $1.5m standby letter of credit for workers’ compensation claims and ordinary-course litigation, which management did not expect to have a material adverse effect. Key risks include weaker airline demand, changes in defense and government spending, competition, product costs, acquisition execution and broader economic conditions.
- HEICO acquired an 80.1% interest in Blue Aerospace in December 2010. The acquisition’s reported-period sales and earnings were described as not material. Management said operating cash flow and available credit were sufficient for cash requirements for at least the next 12 months.
Investor facts to verify
- Whether demand and airline capacity supported the company’s stated expectation of continued FY2011 growth, especially given Q2 ETG sales growth of only 1%.
- Acquired-business performance and possible FY2012 contingent consideration, including the difference between the approximately $95m maximum and management’s approximately $14m historical-performance estimate.
- Future cash demands from put rights, acquisitions, working capital and distributions, relative to cash generation and revolving-credit availability.
- The sustainability of margin improvement and the effects of R&D tax credits and state tax changes on reported earnings.