HEICO Corporation — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2014. Financial statements are unaudited; amounts below are in millions of dollars except per-share data. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $282.2 | $237.7 | $549.1 | $454.2 |
| Operating income | $49.2 | $44.7 | $99.6 | $79.6 |
| Net income attributable to HEICO | $28.4 | $23.7 | $55.8 | $43.7 |
| Diluted EPS | $0.42 | $0.35 | $0.83 | $0.65 |
| Gross margin | 35.4% | 37.6% | 35.0% | 36.8% |
| Operating margin | 17.4% | 18.8% | 18.1% | 17.5% |
For the six months, revenue rose 21%, operating income 25%, and HEICO-attributable net income 28%. Q2 revenue increased 19%, while operating income increased 10%. Six-month sales growth reflected FSG growth of 28% (about 17% organic) and ETG growth of 9% (about 1% organic), alongside contributions from fiscal 2013 acquisitions.
Six-month operating cash flow was $55.0, versus $44.5 a year earlier. Investing used $8.1, including $7.5 of capital expenditures; financing used $41.1. Cash increased to $21.4 from $15.5 at October 31, 2013.
At April 30, 2014, total debt was $436.6, including $433.0 drawn on the revolving credit facility, compared with $377.5 at October 31, 2013. Net debt was $415.2 and net debt to shareholders’ equity was 57.9%. Current assets were $462.7 and current liabilities $136.9. The revolver had an $800 facility limit, extendible to $1.0 billion, with maturity in December 2018; the weighted-average borrowing rate was 1.3%. HEICO reported compliance with all covenants and expects operating cash flow and available borrowing capacity to cover requirements for at least 12 months.
Material changes and notable items
- FSG sales growth reflected improving market conditions and new offerings, including higher aftermarket replacement-parts and repair-and-overhaul sales. ETG sales increased, but less favorable product mix in space and defense products pressured margins.
- Gross margin fell year over year in both the quarter and six-month period. Q2 operating margin also declined, principally due to ETG product mix and increased FSG amortization from an acquisition. Six-month operating margin improved, partly reflecting higher sales volumes and a reduction in contingent-consideration expense.
- HEICO recorded a $9.3 reduction in contingent-consideration liabilities in the six months, reducing SG&A; $2.3 of that reduction was recorded in Q2. The adjustment reflected an acquired business missing 2013 earnout targets and less favorable projected market conditions and earnings.
- In February, HEICO acquired Lufthansa Technik’s 20% interests in four subsidiaries for a $67.4 cash distribution to LHT, funded principally with revolver borrowings. LHT remains a 20% owner of HEICO Aerospace. Net income attributable to noncontrolling interests declined to $9.5 for the six months from $10.4, partly due to prior and current-period purchases of interests.
- HEICO paid $27.2 in January dividends, including a special $0.35 per-share dividend and the regular $0.06 per-share dividend. Six-month financing cash use also included $71.1 of distributions to noncontrolling interests.
Outlook, risks, and contingencies
Management maintained its fiscal 2014 sales-growth outlook of 12%–14% and raised expected year-over-year net-income growth to 12%–14%, from 10%–12%. It anticipates continued organic growth in commercial aviation markets and ETG growth broadly consistent with the prior year, with higher demand for most products partly offset by lower demand for certain defense products. Fiscal 2014 capital expenditures were expected to approximate $25 million. Management cited focus on product development, market penetration, acquisitions, and financial strength.
Risks identified include weaker commercial aviation demand or changes in airline fleets and purchasing, defense and government spending reductions, export restrictions, competition, product-development costs or delays, acquisition execution and synergies, customer credit risk, interest and tax rates, and broader economic conditions. Contingent-consideration valuations depend on projected revenue, earnings, and discount-rate assumptions and could change materially. Litigation is described as arising in the normal course, with management not expecting a material adverse effect. A $1.5 standby letter of credit supports potential workers’ compensation claims.
Important facts for investors to verify
- Whether sales growth and the elevated commercial-aviation demand persist, and whether acquisitions account for a substantial portion of reported growth.
- Whether weaker product mix, R&D spending, and acquisition-related amortization continue to weigh on gross and operating margins.
- How contingent-consideration estimates and future earnout outcomes affect reported SG&A, earnings, and cash needs.
- Debt levels, revolver availability, covenant compliance, and the effect of distributions, dividends, and further acquisitions on leverage.
- Progress against the raised 12%–14% net-income growth outlook and planned capital expenditures.