July 16, 2020: Pulling out nuggets from reading through HEICO’s shareholder letters from 2011 - 2019. HEICO’s known as a popular “compounder” and “high-performing conglomerate” so the mission was to see if management shared lessons on their decentralized organization structure.

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Episode Notes:

What is HEICO

• "HEICO Corporation is a rapidly growing global aerospace, defense and electronics company focused on niche markets and cost-saving solutions for its customers."

• "HEICO’s customers include most of the world’s airlines, overhaul shops, satellite manufacturers, commercial and defense equipment producers, medical equipment manufacturers, government agencies, telecommunications equipment suppliers and others."

Reflection on letters

• 2017 letter is their 60th anniversary letter (though the Mendelson family took over the business in 1990). It has an overview of HEICO’s guiding principles which is quite helpful. 

• Consistent format: 1 pager on financial metrics + dividend + stock splits followed by Q&A (occasionally helpful but brief and focused on acqusitions) and overview of key business segments

• M&A framework: niche (preferably dominant), mission-critical, highly reliable parts manufacturers.

• Decentralized/aligned ownership framework: Most acquisitions have HEICO acquiring ~80% with minority stake held by existing management. Equal ownership mentality. About 80% of acquisitions (75+) are run by incumbent management

• Employee shareholders through stock ownership program

• Excessive stock splits but no indication why this is a good strategy

• R&D is touted as key for organic growth and there is a key cash flow requirement for future internal investment but it seems investment is <10% of sales… maybe <5%

• Quality => trustworthy equipment with 0 issues from 70M+ parts delivered since 2002 + Value => $3B+ saved for customers since 2002 from selling cost-saving solutions… 

Metrics

2019 - Net sales, operating income, net income, net income per share diluted

• "We believe cash generation metrics are the most critical financial metrics for a business and are sure you would agree that our cash income growth was, again, extremely strong."

M&A

2011, 

• "be flexible as to products and services of acquired businesses, but our purchases will likely be of healthy profit margin companies that provide high reliability and mission critical products or services for our existing markets. These companies will need to be market leaders with strong managements that share our view holding quality, service and dependability for our customers above all else. We also won’t follow fads because they are momentarily popular, and we have never been afraid to make purchases in out-of-favor segments, like defense. We have done well buying in areas that were being shunned by others"

2012,

• “HEICO’s niche, mission-critical and high reliability acquisition strategy."

• “...we will only make acquisitions that are appropriate for HEICO, that means they must add to our earnings and have a management culture that is compatible with our approach to business, which requires intense focus on product development, customer service and fair dealing"

2016

• "On average, we forecast our revenue growth mix to consist of around 50% organic growth and 50% acquisitive growth. However, we will not pursue disadvantageous opportunities for the sake of meeting targets. We will continue to maintain rigorous thresholds for our internal projects, as well as potential acquisition opportunities."

2017

• "We believe HEICO’s post-acquisition operating philosophy of respecting and leaving intact a business’ team renders us the best buyer of businesses from owners who want a great home for their company. We value and honor the prior owner’s legacy and, often, that owner continues to have an ownership interest in the business. We will not stray from our principled investing strategy and will continue to invest in desirable assets at fair prices."

• "we will continue to be an acquisitive company. We have made 65 purchases since 1996 and hope to do another 65 in the next 20 years."

2018

• "On an organic basis, each of our subsidiaries goes through a detailed process before proceeding with any major investment or initiative. We analyze potential acquisitions in a similar analytical manner, while also taking into account the leadership teams and culture fit. Our acquisitions are long-term partnerships, so we do our best to make sure both sides are excited about the deal. As we have stated in the past, we view HEICO as a business through which we intend to ethically and honestly produce outsized cash flow returns."

2019

• "You will notice a common theme in all of our acquisitions — they are all highly specialized, high-quality designers and producers of mission-critical, high-reliability or harsh environment niche products. You will also notice that sellers and managers of businesses often retain an interest in the company when they sell the majority to us, as was the case with Apex Microtechnology, Solid Sealing Technology, Research Electronics International and Quell. This reflects our successful partnerships with numerous owner/managers and companies over the past nearly 20 years."

• “Around 80% of our acquisitions continue to be run by the sellers and management team that owned and ran the business before we purchased it. We highly value experienced and knowledgeable people and we do not believe that merely because we are the buyer, we can do their jobs better than they can."

Market Focus

2011, an emphasis on stable cash flow in niche markets

• "We continue to put great emphasis on niches in the commercial aviation aftermarket, some new commercial aircraft pro-duction, defense, space, medical and high reliability or harsh environment electronic component markets. We believe that, over time, all of these markets have unique characteristics which provide stability, growth and healthy cash flow generation.” 

• “Niche markets and products are what we’re all about. HEICO is not interested in being a “me too” producer—we want to provide what others can’t or won’t provide. Most people are focused on giant markets, which leaves lower production run markets under-served and, often, lacking creativity."

2014

• I’ve been noticing a consistent reference to addressing the defence market annually since 2011. Despite the segment only representing 20% of sales. 

2017, Not an aerospace company but a cash flow generating business. Reminds me of CSU’s approach to always keeping an eye out for other industries

• "With regard to different industries, we continually assess and explore investing in complementary end markets. We have always said that we do not view HEICO solely as an aerospace company, but equally as a cash flow generating business. If an opportunity arises to make an investment in an adjacent industry and it fits with our stringent criteria, then we would take a serious look."

People & R&D

2011

• "Talented people—especially well educated and trained engineers—are the key to our success. We are extremely proud of our engineering base and emphasis."

2012

• “The vast majority of our Team Members are shareholders, which aligns the interests of owners and employees"

2016

• "We employ more than 500 engineers and engineering professionals company-wide, and currently expect to invest close to 3.5% of net sales on research and development"

2017

• “In 1985 HEICO established a 401K Plan, called the HEICO Savings and Investment Plan, with the intent of allowing the Company’s Team Members to plan for retirement. At that time, the Company provided approximately 6% of its shares to the Plan. In 1992, we added another roughly 13% of the Company’s shares to the Plan. At the time the shares were provided, their aggregate value was $5.7 million. Today, those same shares are worth around $1 billion."

• "In acquisitions, we like to retain management and have minimal employee turnover – we believe this upfront loyalty has saved us much of the difficulty other companies experience. We do not need to find theoretical “best-in-class” operators and implement bureaucratic “corporate guidelines” because our businesses are already the best in their fields, as they possess unique talents and deep expertise."

2018

• “We remain committed to the entrepreneurial spirit and small-business mindset that has served us well since taking over the company in 1990. We strongly believe that our lack of bureaucracy, flat organizational structure and transparent culture have been large drivers of our success. By empowering our Team Members and making them true owners (via our 401(k) Stock Ownership Plan), we have recruited and retained the best people into the HEICO Family. These talented and driven Team Members are aligned with HEICO’s overall goals and that is a key ingredient that we must foster as HEICO grows."

2019

• "With our conservative financial management framework, our businesses know that, if they present a thorough plan to future cash flow, HEICO will supply the cash needed to invest in the future. This philosophy allows us to develop our capabilities in markets that our competitors are not yet operating in."

• "The key to successful capital investment is developing the “owner’s mindset” in our Team Members. Through investment in the HEICO Savings and Investment Plan and Company-sponsored contribution matching, our Team Members are truly shareholders of this business. Their ownership incentivizes risk-reward analysis and decisions that promote our Company’s long-term success."

• "Whether it’s Customers, Team Members or Shareholders, our number one priority will always be to create a culture where people are treated right…….As part of our corporate culture, we eschew corporate bureaucracy and red-tape. Instead, our passionate, self-motivated Team Members are focused on getting the job done and satisfying our customers."

Dividends + Stock Splits

2012

• “The April 2012 5-for-4 stock split was the company’s 13th stock split or stock dividend since 1995."

2013

• “HEICO completed a 5-for-4 stock-split in October 2013, which was the Company’s 14th stock-split or stock dividend since 1995"

2017

• “..we completed one 5-for-4 stock split and declared another, which became effective in January 2018."

2018

• “…completed two 5-for-4 stock splits in 2018"

2019

• "This most recent increased dividend is HEICO’s 83rd consecutive semi-annual dividend paid since 1979."

Long-term focus

2012 - similar reference of impact of long-term compounding is mentioned in future letters but little variation from this. 

• "We plan to follow the same pattern of organic growth and acquisitions that has propelled Heico in its compound annual growth rate of 17% in sales and earnings over the past 22 years. During the same period, our shares returned a compound annual growth rate of more than 21%, including dividends, which means that $100,000 invested in HEICO on October 31, 1990 became worth roughly $6,900,000 on December 31, 2012."

Customer Focus: Quality & Reliability

2016

• “As of 2016, HEICO holds over 10,000 FAA-approvals for parts on nearly every large commercial aircraft in production, while producing around 500 new and highly engineered parts each year. Additionally, we have shipped over 68 million parts and have a record of zero service bulletins, zero airworthiness directives and zero in-flight shutdowns"

• "HEICO’s low-cost, high-reliability solutions save each of our airline partners an average of $25 million annually."

2017

• "First, our customers are our highest priority. After all, without customers, we have no business. HEICO succeeds when we deliver value to our customers, often by providing a lower cost alternative. Our heritage is deeply entrenched in developing cost-saving solutions for our aerospace and defense partners."

• “In the close to 70 million parts delivered, we have a record of zero service bulletins, zero airworthiness directives and zero in-flight shutdowns."

• "We anticipate that our growing PMA portfolio, combined with HEICO’s repair operations, will save airlines roughly $1.5 billion over the next five years. In fact, since 2002, our customers have saved an estimated nearly $3.0 billion"