HEICO

A Case Study In Capital Allocation

 

OWNER-OPERATOR “SQUARED”

  • HEICO’s senior management team and board collectively own ~10% of the company, while employees own a significant share as well
  • ~80% of HEICO’s acquisitions continue to be run by the sellers or management teams that operated the business prior to purchase
  • Companies that sell to HEICO retain, on average, a 10-20% equity stake in their business

“We do not believe that merely because we are the buyer, we can do their jobs better than they can.”

 

“We have a lot of different subsidiaries and managers running those facilities that have their roots as a sole proprietor, an entrepreneur…when they learned how to manage that business, it was their wallet, their checkbook.”

 

“And when we find good people who know what they’re doing, we don’t come up with all of this horsecrap buzzwords from the corporate office like so many companies do. And we instead let them focus on their business. We get on the same page; we get into the weeds, in the detail; we understand exactly how they’re operating; and we’re here to support them.”

PATIENT, DISCIPLINED, ADVANTAGED

  • Successful acquirers wait for and respond to opportunity; the temptation (or need) to buy growth often drives linear spending patterns that compromise strategic & financial discipline – we prefer to see teams responding tactically to dynamic opportunity sets

“… the companies we buy … normally pay for themselves in 7 to 10 years. By the time we get to the third or fourth year on a look back … we probably have them sitting in our portfolio at anywhere from two to four times EBITA. That is why we get the results that we get…it’s all about the cash flow return and that is more important than the earnings per share.”

  • Many of the 80 businesses HEICO has acquired were not for sale, reflecting the benefits of decentralized, entrepreneurial behavior on the part of its operating managers

“Companies that want to sell to us normally want to sell because of our culture…we tell people at the outset we’re not going to be the highest price…we intend to keep the company essentially forever and build it….what we are looking for is a management that wants to be in it for the longer term, that wants to continue running the company with minimal interference and pressure to get immediate profits today and tomorrow.”

 

“The M&A world knows that roughly 80% of acquisitions don’t work. So I’m not going to buy into the greater fool theory because I want to see my salary doubled from $1 million to $2 million and so forth. My family’s money and our investors’ money is hard on the line. And I want to see it paid back before I die rather than wait 50 years to get my money back. So that’s the way HEICO is structured.”

KNOW YOUR STRENGTHS

  • Most companies pursue growth, paying only lip service to the long-term durability of cash flows; while HEICO has generated plenty of the former, it unashamedly prioritizes the latter
  • Since 1990, HEICO has taken only $7.2 million in restructuring and impairment charges on $2.8 billion in cumulative M&A spending

“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.”

NEVER BET THE RANCH

  • HEICO has self-funded the vast majority of its growth – since its founding, net leverage has never exceeded 2x cash flow
  • Maintaining a prudent capital structure enables HEICO to navigate the unforeseen with an eye toward opportunity

 

“We plan to utilize our financial flexibility to aggressively pursue high quality acquisitions to accelerate growth and maximize shareholder returns.”

PLAY THE LONG GAME

  • Acting like rational business owners attracts other rational business owners and allows HEICO to attract and retain talent; these actions reinforce and enhance HEICO’s culture over time

“When times are tough like this, we stick by our people. We stick by our programs … when sellers look at HEICO, all business go through various cycles, but they want to be connected with somebody who is going to be patient … and not run them out the door the first time there’s a downturn…I think that is one of the reasons we continue to be the acquirer of choice.”

  • Shared success builds intangible “relationship capital” that compounds over

“Our philosophy really has been to maintain outstanding customer relationships and to leave a lot on the table to make sure that the customers want to come back for more…we want to share the benefits.”

  • Prioritizing customers over near-term profits

“… we think that demand right now [mid-pandemic] is a dislocation and we’re not willing to sacrifice customer service, new products … just to meet a short-term quarterly hurdle on our margins.”

  • Prudent capital allocation, in combination with a customer-oriented culture, creates a powerful mechanism for market share gains over long periods of time

 

“We are, in my opinion, gaining market share…And I think that it is as a result of us taking care of our people as times got tough, making sure that we maintained our inventory and actually grew our inventories to make sure that we can support our customers, the fact that we are not highly levered and we’re able to make all decisions for the long haul, or the fact that our leadership teams and our salespeople have been with the company for decades.”

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