HEICO Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
HEICO designs, manufactures, repairs and distributes aerospace, defense and electronic products through two operating segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG). FSG contributed 62% of FY2018 sales and ETG 38%. Commercial aviation represented approximately 53% of sales; defense and space, 35%; and other industrial markets, 12%. About 37% of consolidated sales were to customers outside the U.S.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $1,777.7 million | $1,524.8 million | +17% |
| Gross profit margin | 38.9% | 37.7% | +1.2 percentage points |
| Operating income | $376.2 million | $306.7 million | +23% |
| Operating margin | 21.2% | 20.1% | +1.1 percentage points |
| Net income attributable to HEICO | $259.2 million | $186.0 million | +39% |
| Diluted EPS | $1.90 | $1.37 | +39% |
| Net cash from operating activities | $328.5 million | $288.3 million | +$40.2 million |
FSG sales rose 13% to $1,097.9 million and segment operating income increased 15% to $206.6 million. ETG sales grew 22% to $701.8 million and segment operating income rose 30% to $204.5 million. Management attributed growth to organic demand and acquisitions; acquired businesses contributed $53.1 million of FSG sales and $88.3 million of ETG sales. Consolidated R&D expense included in cost of sales increased to $57.5 million from $46.5 million.
Fourth quarter: Sales were $476.9 million versus $421.2 million; gross profit was $186.5 million versus $160.0 million; net income attributable to HEICO was $67.4 million versus $53.7 million; diluted EPS was $0.49 versus $0.39.
Cash, debt and liquidity
Cash and equivalents were $59.6 million at year-end, versus $52.1 million. Total debt fell to $532.5 million from $674.0 million, and net debt to $472.9 million from $621.9 million. Net debt to shareholders’ equity declined to 31% from 50%. Interest expense increased to $19.9 million from $9.8 million, reflecting higher rates and borrowing associated with acquisitions. Operating cash flow included a $50.6 million working-capital increase, principally from receivables and inventory.
Capital expenditures were $41.9 million; management anticipated approximately $48 million in FY2019. The $1.3 billion revolving credit facility matures in November 2022; HEICO reported covenant compliance at year-end and approximately $680 million of unused committed availability as of December 18, 2018. The filing states that operating cash flow and available borrowings should cover requirements for at least the next 12 months.
Changes, outlook and notable items
- FY2018 growth reflected both organic expansion and acquisitions. Cash acquisition spending was $59.8 million, compared with $418.3 million in FY2017.
- The effective tax rate fell to 19.8% from 30.3%. Tax reform produced a $16.5 million deferred-tax remeasurement benefit, partly offset by a $4.4 million provisional transition-tax expense. The net tax impact increased FY2018 HEICO-attributable income by $12.1 million, or $0.09 per diluted share. Management did not expect the Tax Act provisions taking effect in FY2019 to materially affect results, cash flows or financial position.
- Management targeted FY2019 growth in full-year sales and net income, excluding any additional acquisitions. It expected growth in FSG commercial aviation and defense and in ETG, principally from demand for most products; it also planned continued product development and an active acquisition strategy.
- Unshipped-order backlog increased to $783 million from $654 million; most year-end backlog was expected to ship in FY2019. Backlog includes firm orders and may not be a complete indicator of future sales, particularly for some FSG contracts based on estimated usage.
- HEICO planned to adopt the new revenue-recognition standard in FY2019 using the modified retrospective method. It expected earlier recognition for certain production and repair contracts, with no material ongoing consolidated impact anticipated; the actual effect depends on contract mix.
- Redeemable noncontrolling interests were $132.0 million. Management estimated about $61.3 million of put rights were currently exercisable or would become exercisable in FY2019; approximately $27.7 million could be payable during FY2019 if all eligible holders exercised.
- Goodwill and net intangible assets totaled about 61% of assets. The company reported no goodwill or intangible impairment in FY2018, and goodwill reporting-unit fair values significantly exceeded carrying values.
Risks and contingencies
Key disclosed risks include aviation-market cycles and aircraft retirements; changes in defense, space and homeland-security spending; export approvals and international exposure; intense competition; product development and regulatory approval; supply availability and cost; acquisition execution and integration; and product liability, environmental, cybersecurity and natural-disaster events. Litigation arising in the ordinary course was not expected by management to have a material adverse effect. The filing also notes that acquisition-related goodwill and intangibles are subject to impairment judgments. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; several FY2018 acquisitions were excluded from management’s control assessment during their first year.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus acquisition-driven, and whether segment margins remain sustainable.
- Whether FY2019 sales and net-income growth targets are achieved, including the effect of revenue-recognition timing changes.
- Cash conversion and working-capital trends, especially receivables and inventory relative to sales and backlog.
- Debt, borrowing costs, covenant headroom and the potential timing and amount of subsidiary put-right payments.
- The recurring earnings and tax-rate baseline after the one-time FY2018 tax benefit and transition-tax expense.
- Acquisition integration, goodwill and intangible-asset valuation assumptions, and any subsequent impairment indicators.