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Acquisitions Are Paying Off for Heico Corp.

By Travis Hoium - Updated Aug 30, 2018 at 2:21PM

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Growth is better than expected in 2018.

Heico Corp (HEI 2.67%) continued its strong earnings run this week, reporting strong top- and bottom-line growth in the fiscal third quarter of 2018. Acquisitions made over the past year are paying off on the top line, while cost discipline and a lower tax rate are helping drive growth on the bottom line. 

Here's a look at the key figures from the quarter and what management sees for the future. 

Close up of an aircraft engine.

Image source: Getty Images.

Heico Corp: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Sales $465.8 million $391.5 million  19% 
Net income $67.1 million  $45.7 million  46.8% 
Diluted EPS $0.49  $0.34  44.1% 

Data Source: Heico Corp Q3 2018 earnings release.

What happened with Heico Corp this quarter? 

The headline numbers are great, but diving into the income statement and balance sheet tells us more about how the business is performing. Here are the highlights: 

  • Acquisitions in 2017 and early 2018 are helping drive revenue growth, and management has kept operating costs in check, which helps grow the bottom line faster than revenue. In the third quarter, operating margin was 21.8%, up from 19.4% a year ago
  • On a segment basis, flight support group net sales were up 11% to $285.1 million in the quarter, a record for the segment. Organic growth was 10% as acquisitions from 2017 had a positive impact on results. Operating income was up 17% to $54.7 million in the quarter as operating leverage from acquisitions helped margins. Full-year net sales are expected to grow 11% to 12% in fiscal 2018 for the flight support group. 
  • Electronic technologies group sales were up 35% to $186.4 million on 16% organic growth. Acquisitions over the last two years have accounted for over half of the segment's growth. Operating income jumped 45% to $56.0 million on increasing operating leverage. Management expects full-year sales to rise 20% to 21%. 
  • Heico's tax rate dropped from 29.8% a year ago to just 17.9% in the third quarter as a result of the tax bill passed late in 2017. The lower tax rate combined with the higher operating margin to drive a 46.8% jump in net income. 
  • Net debt was $556.8 million at the end of the third quarter, and with rising results the balance sheet looks a lot better than it did at the beginning of the year. The company's net debt to equity ratio is down from 49.8% to 38.9%, and debt to EBITDA is down from 1.67 times to 1.27 times

What management had to say

Momentum was strong in both the flight support and electronics businesses, and management has confidence in full-year growth. Here's how CEO Laurans Mendelson updated his outlook for the year: 

Based on our current economic visibility, we now estimate our consolidated fiscal 2018 year-over-year growth in net sales to be 15%-16% and in net income to be 35%-37%, up from our prior growth estimates in net sales of 13%-14% and in net income of 33%-35%.

The theme of the quarter is better than expected sales and improving operating leverage for the business. 

Looking forward

Not only are operations improving rapidly in 2018, the balance sheet is getting stronger and freeing up management to potentially acquire more companies over the next few years. Acquisitions have been a huge part of Heico's growth strategy over the years, and I wouldn't be surprised if some bold moves are in the works as the calendar nears 2019. 

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