Investors in aviation product and service company Heico Corp. (NYSE:HEI) must have been perplexed by the stock's recent price movements. As shown in the chart below, the stock shot up more than 10% in trading after Heico released its fiscal second-quarter earnings on Tuesday. However, that came after the share price declined significantly in the weeks before the results were released. Essentially, the earnings numbers confirmed the company's positive trajectory and the market rewarded the stock accordingly.

Earnings came in better than anticipated, but sales growth was a bit weaker than expected. Let's take a closer look at what happened.

HEI Chart

HEI data by YCharts.

Electronic technologies segment margin
Net sales increased 3%, but the real story was the 13% increase in operating income. This growth was led by margin expansion in the company's electronic technologies segment, as shown in the chart below. Here is how management explained it in the earnings release: "The increase in operating income principally reflects a more favorable product mix for certain of the Electronic Technologies Group's space and defense products, a constant focus on efficiency and lower amortization expense of intangible assets."


Flight Support Group

Electronic Technologies Group

Sales ($millions)






Operating income









Margin growth



Indeed, this is the first quarter in this budget year in which the underlying margin expansion can be easily seen in the segment. Essentially, the segment faced a difficult comparison against the first half of Heico's last fiscal year, when the company realized an "$8.1 million reduction in accrued contingent consideration recognized in the prior year." This was effectively a reduction in an amount payable by Heico in relation to a previous acquisition. You can think of it as a nonrecurring benefit for Heico last year -- one that makes this year's comparison tougher.

All told, the margin in Heico's electronic technologies segment in the first half of this fiscal year was similar to last year's; operating income was $41.6 million in the first half, compared to $41 million in the first six months of last year. However, considering the tougher comparison caused by the reduction noted above, it's actually an impressive underlying margin expansion.

Overall cost-cutting
Underlying improvement in sales, general, and administrative, or SG&A, expenses was also masked by the accrued contingent consideration in the first half. A reduction in SG&A spending results in increased operating income. As such, SG&A expenses as a share of total sales fell to 17.1% in the second quarter from 18% in last year's second quarter. That's the good news.

However, SG&A expenses as a share of total sales actually increased to 17.4% in the first six months of this fiscal year from 16.8% in last year's first half. Here again, CEO Laurans Mendelson said during the earnings call, "[the] increase in the first six months of fiscal 2015 principally reflects the large reduction in the accrued contingent consideration recognized in the prior year, again, partially offset by lower corporate expense."

In other words, despite the increase in SG&A expenses as a share of sales in the first half, the improvement in underlying SG&A expenses was apparent in the second quarter. If the trend continues, the company could expand its margins in future quarters.

Sales growth
While the underlying margin expansion and income growth was good news, sales growth was somewhat disappointing in the quarter. The headline segmental sales growth is highlighted in the table above, but a deeper look demonstrates some even more moderate sale growth. For example, the flight support group experienced a 3% organic (growth from existing operations) revenue decline in the second quarter. Meanwhile, the electronic technologies segment generated a 1% organic sales increase.

These figures are concerning, especially given management's guidance for flight support group organic sales to increase by mid-to-high single digits in its fiscal 2015. Similarly, electronic technologies segment sales are forecast to grow in the "low to mid single-digit" range.

The takeaway
All told, the whiplash moves in Heico's stock price can largely be ignored as noise, as management did no more than reaffirm full-year guidance. The results revealed good underlying margin expansion, but sales growth was a bit disappointing. Management's guidance indicates a pickup in sales growth in the second half; investors should monitor events on that front.