HEICO Corporation — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 31, 2011; comparisons are with the three months ended January 31, 2010. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change / context |
|---|---|---|---|
| Net sales | $174.2 million | $135.5 million | Up 29% |
| Gross margin | 36.7% | 37.0% | Down 0.3 percentage points |
| Operating income | $32.4 million | $24.5 million | Up 32%; margin 18.6% vs. 18.1% |
| Net income, consolidated | $22.5 million | $16.0 million | Up 40% |
| Net income attributable to HEICO | $17.1 million | $11.8 million | Up 45%; diluted EPS $0.50 vs. $0.35 |
| Operating cash flow | $23.5 million | $20.3 million | Up $3.2 million |
FSG sales rose 29% to $120.6 million, including approximately 24% organic growth and about $3 million from the December acquisition. ETG sales rose 28% to $53.9 million, reflecting approximately 12% organic growth and about $7 million from a fiscal 2010 acquisition. Operating income increased in both segments; ETG operating margin improved to 28.8% from 26.6%, while FSG margin fell to 16.9% from 17.8% year over year.
Cash, debt and liquidity
Cash and cash equivalents were $13.9 million at January 31, 2011, up from $6.5 million at October 31, 2010. Total debt was $24.2 million, including $24.0 million drawn on the $300 million revolving credit facility; net debt was $10.3 million. Management reported a net-debt-to-equity ratio of 1.8%, covenant compliance, and no significant debt maturities until fiscal 2013. It expects operating cash flow and available revolver capacity to meet cash requirements for at least the next 12 months.
Operating cash flow of $23.5 million was more than offset by $24.2 million of investing outflows, primarily $22.6 million for acquisitions, and was supplemented by $8.0 million of financing cash flow, including net revolver borrowings of $10.0 million. Capital expenditures were $1.6 million. Inventories increased to $149.4 million from $138.2 million at October 31, 2010.
Material changes and notable items
- December 2010 acquisition: HEICO Aerospace acquired 80.1% of Blue Aerospace LLC, a supplier and integrator of military aircraft parts and support services. The purchase was principally funded from the revolving credit facility; its included sales and earnings were not material.
- Gross margin eased from the prior-year period, primarily because prior-year FSG results benefited from sales of products previously written down as slow-moving. Improved ETG product mix partly offset this.
- SG&A rose to $31.6 million from $25.6 million, mainly due to acquired businesses, while SG&A as a share of sales declined to 18.1% from 18.9% on higher volume.
- The effective tax rate declined to 30.4% from 34.8%. A retroactive R&D tax credit for the last ten months of FY2010 increased HEICO-attributable net income by approximately $0.8 million, or $0.02 per diluted share, in the quarter.
- Quarterly cash dividends increased to $0.060 per share from $0.048. Stock repurchases described in the filing were to settle employee taxes on option exercises, not purchases under the existing repurchase program.
Outlook, risks and contingencies
Management expected continued year-over-year sales and earnings growth for the remainder of FY2011, citing expectations for continued commercial airline capacity increases and stable or rising demand in ETG markets. The filing gives no specific numerical full-year guidance.
Key disclosed risks include weaker commercial air travel or airline fleet changes; defense and government spending, export restrictions and regulation; competition, pricing and product-development requirements; acquisition execution and synergies; customer credit risk; and broader economic conditions. Management said legal proceedings arising in the normal course were not expected to have a material adverse effect.
- Estimated redemption amount for subsidiary noncontrolling-interest put rights was approximately $61 million at January 31, 2011, up from approximately $55 million at October 31, 2010; actual amounts may differ.
- Potential additional contingent acquisition consideration has an aggregate maximum of approximately $92 million, payable over periods beginning in FY2011 through FY2012. Management estimated approximately $16 million would be payable if acquired businesses perform at historical comparable earnings levels; actual consideration may differ.
- A $1.5 million standby letter of credit supports potential workers’ compensation claims. The filing also reports warranty liabilities of $1.7 million.
Investor verification priorities
- Confirm how much of sales and earnings growth was organic versus acquisition-related, particularly across FSG and ETG.
- Assess whether gross-margin pressure in FSG persists and whether ETG’s margin improvement is sustainable.
- Track inventory, working-capital needs, operating cash conversion, and revolver borrowings as acquisition and growth spending continues.
- Review the timing and potential cash cost of the approximately $61 million put rights and contingent acquisition payments, including the $92 million maximum exposure.
- Separate recurring earnings from the approximately $0.8 million benefit of the retroactive R&D tax credit.