HEICO CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended | ||||||||
| OR | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from ______ to _______ | ||||||||
Commission File Number: 001-04604
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(954 ) 987-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the registrant’s classes of common stock as of February 23, 2022 is as follows:
Common Stock, $ | shares | |||||||
Class A Common Stock, $ | shares | |||||||
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page | |||||||||||
| Part I. | Financial Information | ||||||||||
Item 1. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
| Part II. | Other Information | ||||||||||
Item 6. | |||||||||||
1
PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
| January 31, 2022 | October 31, 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Contract assets | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Trade accounts payable | ||||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net of current maturities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 10) | ||||||||||||||
| Redeemable noncontrolling interests (Note 2) | ||||||||||||||
| Shareholders’ equity: | ||||||||||||||
Preferred Stock, $ | ||||||||||||||
Common Stock, $ | ||||||||||||||
Class A Common Stock, $ | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Deferred compensation obligation | ||||||||||||||
| HEICO stock held by irrevocable trust | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Total HEICO shareholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net sales | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||
| Cost of sales | ||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||
| Total operating costs and expenses | ||||||||||||||
Operating income | ||||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Other income | ||||||||||||||
Income before income taxes and noncontrolling interests | ||||||||||||||
| Income tax expense | ||||||||||||||
| Net income from consolidated operations | ||||||||||||||
Less: Net income attributable to noncontrolling interests | ||||||||||||||
| Net income attributable to HEICO | $ | $ | ||||||||||||
Net income per share attributable to HEICO shareholders: | ||||||||||||||
| Basic | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net income from consolidated operations | $ | $ | ||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||
Foreign currency translation adjustments | ( | |||||||||||||
Amortization of unrealized loss on defined benefit pension plan, net of tax | ||||||||||||||
| Total other comprehensive (loss) income | ( | |||||||||||||
Comprehensive income from consolidated operations | ||||||||||||||
| Net income attributable to noncontrolling interests | ||||||||||||||
Foreign currency translation adjustments attributable to noncontrolling interests | ( | |||||||||||||
Comprehensive income attributable to noncontrolling interests | ||||||||||||||
| Comprehensive income attributable to HEICO | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
(in thousands, except per share data)
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of October 31, 2021 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | ( | ( | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2022 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of October 31, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2021 | $ | $ | $ | $ | $ | ($ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| Three months ended January 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities: | |||||||||||
| Net income from consolidated operations | $ | $ | |||||||||
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Share-based compensation expense | |||||||||||
Employer contributions to HEICO Savings and Investment Plan | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
| (Decrease) increase in accrued contingent consideration, net | ( | ||||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Decrease in accounts receivable | |||||||||||
| (Increase) decrease in contract assets | ( | ||||||||||
| (Increase) decrease in inventories | ( | ||||||||||
| Increase in prepaid expenses and other current assets | ( | ( | |||||||||
| Increase in trade accounts payable | |||||||||||
| Decrease in accrued expenses and other current liabilities | ( | ( | |||||||||
| (Decrease) increase in income taxes payable | ( | ||||||||||
| Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | |||||||||||
Other | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Investments related to HEICO Leadership Compensation Plan | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Borrowings on revolving credit facility | |||||||||||
| Redemptions of common stock related to stock option exercises | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Revolving credit facility issuance costs | ( | ||||||||||
| Proceeds from stock option exercises | |||||||||||
| Other | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2021. The October 31, 2021 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the three months ended January 31, 2022 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. ("HFSC") and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
7
2. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| (in thousands) | January 31, 2022 | October 31, 2021 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Less: Allowance for doubtful accounts | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
Inventories
| (in thousands) | January 31, 2022 | October 31, 2021 | ||||||||||||
| Finished products | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Materials, parts, assemblies and supplies | ||||||||||||||
| Inventories, net of valuation reserves | $ | $ | ||||||||||||
Property, Plant and Equipment
| (in thousands) | January 31, 2022 | October 31, 2021 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and improvements | ||||||||||||||
| Machinery, equipment and tooling | ||||||||||||||
| Construction in progress | ||||||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
8
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $14.7 million as of January 31, 2022 and $13.2 million as of October 31, 2021. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2022 and 2021 was $1.7 million and $.8 million, respectively.
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the three months ended January 31, 2022 and 2021 is as follows (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| R&D expenses | $ | $ | ||||||||||||
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2032. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
| January 31, 2022 | October 31, 2021 | |||||||||||||
| Redeemable at fair value | $ | $ | ||||||||||||
| Redeemable based on a multiple of future earnings | ||||||||||||||
| Redeemable noncontrolling interests | $ | $ | ||||||||||||
9
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the three months ended January 31, 2022 are as follows (in thousands):
| Foreign Currency Translation | Defined Benefit Pension Plan | Accumulated Other Comprehensive Loss | ||||||||||||||||||
| Balances as of October 31, 2021 | ($ | ($ | ($ | |||||||||||||||||
| Unrealized loss | ( | — | ( | |||||||||||||||||
| Amortization of unrealized loss | — | |||||||||||||||||||
| Balances as of January 31, 2022 | ($ | ($ | ($ | |||||||||||||||||
3. GOODWILL AND OTHER INTANGIBLE ASSETS
| Segment | Consolidated Totals | |||||||||||||||||||
| FSG | ETG | |||||||||||||||||||
| Balances as of October 31, 2021 | $ | $ | $ | |||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | |||||||||||||||||
| Adjustments to goodwill | ( | ( | ( | |||||||||||||||||
| Balances as of January 31, 2022 | $ | $ | $ | |||||||||||||||||
Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2021 acquisitions.
10
Identifiable intangible assets consist of the following (in thousands):
| As of January 31, 2022 | As of October 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | ($ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||||
| Intellectual property | ( | ( | ||||||||||||||||||||||||||||||||||||
| Licenses | ( | ( | ||||||||||||||||||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | ||||||||||||||||||||||||||||||||||||
| Trade names | ( | ( | ||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| Non-Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Trade names | — | — | ||||||||||||||||||||||||||||||||||||
| $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||||||
Amortization expense related to intangible assets for the three months ended January 31, 2022 and 2021 was $15.0 million and $15.2 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2022 is estimated to be $43.0 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $52.3 million in fiscal 2023, $47.3 million in fiscal 2024, $42.9 million in fiscal 2025, $38.4 million in fiscal 2026, $35.5 million in fiscal 2027, and $131.2 million thereafter.
4. LONG-TERM DEBT
| January 31, 2022 | October 31, 2021 | |||||||||||||
| Borrowings under revolving credit facility | $ | $ | ||||||||||||
| Finance leases and note payable | ||||||||||||||
| Less: Current maturities of long-term debt | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
11
5. REVENUE
Contract Balances
Contract assets (unbilled receivables) represent revenue recognized on contracts using an over-time recognition model in excess of amounts invoiced to the customer. Contract liabilities (deferred revenue) represent customer advances and billings in excess of revenue recognized and are included within accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet.
| January 31, 2022 | October 31, 2021 | Change | |||||||||||||||
| Contract assets | $ | $ | $ | ||||||||||||||
| Contract liabilities | |||||||||||||||||
| Net contract assets | $ | $ | ($ | ||||||||||||||
The increase in the Company's contract liabilities during the first quarter of fiscal 2022 mainly occurred within the ETG and principally reflects the receipt of advance deposits on certain customer contracts.
The amount of revenue that the Company recognized during the first quarter of fiscal 2022 that was included in contract liabilities as of the beginning of fiscal 2022 was $13.5 million.
Remaining Performance Obligations
As of January 31, 2022, the Company had $474.4 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG as well as certain products of the FSG's specialty products and aftermarket replacement parts product lines. The Company will recognize net sales as these obligations are satisfied. The Company expects to recognize $273.9 million of this amount during the remainder of fiscal 2022 and $200.5 million thereafter, of which the majority is expected to occur in fiscal 2023.
12
Disaggregation of Revenue
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Flight Support Group: | ||||||||||||||
Aftermarket replacement parts (1) | $ | $ | ||||||||||||
Repair and overhaul parts and services (2) | ||||||||||||||
Specialty products (3) | ||||||||||||||
| Total net sales | ||||||||||||||
| Electronic Technologies Group: | ||||||||||||||
Electronic component parts primarily for defense, space and aerospace equipment (4) | ||||||||||||||
Electronic component parts for equipment in various other industries (5) | ||||||||||||||
| Total net sales | ||||||||||||||
| Intersegment sales | ( | ( | ||||||||||||
| Total consolidated net sales | $ | $ | ||||||||||||
(1) Includes various jet engine and aircraft component replacement parts.
(2) Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(3) Includes primarily the sale of specialty components such as thermal insulation blankets, renewable/reusable insulation systems, advanced niche components, complex composite assemblies, and expanded foil mesh as well as machining, brazing, fabricating and welding services generally to original equipment manufacturers.
(4) Includes various component parts such as electro-optical infrared simulation and test equipment, electro-optical laser products, electro-optical, microwave and other power equipment, high-speed interface products, power conversion products, underwater locator beacons, emergency locator transmission beacons, traveling wave tube amplifiers, microwave power modules, a wide variety of memory products and radio frequency (RF) and microwave products, crashworthy and ballistically self-sealing auxiliary fuel systems, high performance communications and electronic intercept receivers and tuners, high performance active antenna systems and technical surveillance countermeasures (TSCM) equipment.
(5) Includes various component parts such as electromagnetic and radio frequency interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies, silicone material for a variety of demanding applications and rugged small form-factor embedded computing solutions.
13
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Flight Support Group: | ||||||||||||||
| Aerospace | $ | $ | ||||||||||||
| Defense and Space | ||||||||||||||
Other (1) | ||||||||||||||
| Total net sales | ||||||||||||||
| Electronic Technologies Group: | ||||||||||||||
| Defense and Space | ||||||||||||||
Other (2) | ||||||||||||||
| Aerospace | ||||||||||||||
| Total net sales | ||||||||||||||
| Intersegment sales | ( | ( | ||||||||||||
| Total consolidated net sales | $ | $ | ||||||||||||
(1) Principally industrial products.
6. INCOME TAXES
14
7. FAIR VALUE MEASUREMENTS
The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
| As of January 31, 2022 | ||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Deferred compensation plan: | ||||||||||||||||||||||||||
| Corporate-owned life insurance | $ | $ | $ | $ | ||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
| As of October 31, 2021 | ||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Deferred compensation plan: | ||||||||||||||||||||||||||
| Corporate-owned life insurance | $ | $ | $ | $ | ||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company, and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Condensed Consolidated Balance Sheets. The related liabilities of the LCP are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $240.5 million as of January 31, 2022 and $244.3 million as of October 31, 2021.
15
As part of the agreement to acquire 89 % of the membership interests of a subsidiary by the FSG in fiscal 2021, the Company may be obligated to pay contingent consideration of $8.9 million as early as in fiscal 2024 should the acquired entity meet a certain earnings objective during the three-year period following the acquisition. Additionally, the Company may be obligated to pay contingent consideration of up to $17.8 million as early as in fiscal 2026 should the acquired entity meet a certain earnings objective during the three-year period following the second anniversary of the acquisition. As of January 31, 2022, the estimated fair value of the contingent consideration was $18.2 million.
As part of the agreement to acquire 89.99 % of the equity interests of a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to CAD $27.0 million, or $21.2 million, in fiscal 2025 should the acquired entity meet certain earnings objectives during fiscal 2023 and 2024. However, should the acquired entity achieve a certain earnings objective over any two consecutive fiscal years beginning in fiscal 2021 and ending in fiscal 2023, half of the contingent consideration obligation, or CAD $13.5 million, would be payable in the following year. As of January 31, 2022, the estimated fair value of the contingent consideration was CAD $14.9 million, or $11.7 million.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to $35.0 million in fiscal 2025 based on the earnings of the acquired entity during calendar years 2023 and 2024 provided the entity meets certain earnings objectives during each of calendar years 2021 to 2024. As of January 31, 2022, the estimated fair value of the contingent consideration was $13.3 million. The obligation to pay any contingent consideration would be payable by a consolidated subsidiary of HEICO that is 75 % owned by HEICO Electronic.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet a certain earnings objective during the first six years following the acquisition. As of January 31, 2022, the estimated fair value of the contingent consideration was $18.6 million.
16
The following unobservable inputs were used to derive the estimated fair value of the Company's Level 3 contingent consideration liabilities as of January 31, 2022 ($ in thousands):
| Unobservable | Weighted | |||||||||||||||||||||||||
| Acquisition Date | Fair Value | Input | Range | Average (1) | ||||||||||||||||||||||
| 8-4-2021 | $ | Compound annual revenue growth rate | ||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
| 8-18-2020 | Compound annual revenue growth rate | |||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
| 8-11-2020 | Compound annual revenue growth rate | |||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
| 9-15-2017 | Compound annual revenue growth rate | ( | ||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
Changes in the Company’s contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended January 31, 2022 are as follows (in thousands):
| Liabilities | ||||||||
| Balance as of October 31, 2021 | $ | |||||||
| Decrease in accrued contingent consideration, net | ( | |||||||
| Foreign currency transaction adjustments | ( | |||||||
| Balance as of January 31, 2022 | $ | |||||||
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | ||||||||
| Accrued expenses and other current liabilities | $ | |||||||
| Other long-term liabilities | ||||||||
| $ | ||||||||
The Company records changes in accrued contingent consideration and foreign currency transaction adjustments within selling, general and administrative expenses in its Condensed Consolidated Statement of Operations.
17
8. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||
Net income attributable to HEICO | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||
Weighted average common shares outstanding - basic | ||||||||||||||
| Effect of dilutive stock options | ||||||||||||||
Weighted average common shares outstanding - diluted | ||||||||||||||
Net income per share attributable to HEICO shareholders: | ||||||||||||||
| Basic | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
Anti-dilutive stock options excluded | ||||||||||||||
18
9. OPERATING SEGMENTS
Other, Primarily Corporate and Intersegment (1) | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Three months ended January 31, 2022: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Three months ended January 31, 2021: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
| Other, Primarily Corporate | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Total assets as of January 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets as of October 31, 2021 | ||||||||||||||||||||||||||
10. COMMITMENTS AND CONTINGENCIES
Guarantees
As of January 31, 2022, the Company has arranged for standby letters of credit aggregating $16.1 million, which are supported by its revolving credit facility and principally pertain to performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries as well as payment guarantees related to potential workers' compensation claims and a facility lease.
19
Product Warranty
Changes in the Company’s product warranty liability for the three months ended January 31, 2022 and 2021, respectively, are as follows (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Balances as of beginning of fiscal year | $ | $ | ||||||||||||
| Accruals for warranties | ||||||||||||||
| Warranty claims settled | ( | ( | ||||||||||||
| Balances as of January 31 | $ | $ | ||||||||||||
Litigation
On April 20, 2021, an indirect subsidiary of HFSC, which was acquired in June 2020, received a grand jury subpoena from the United States District Court for the Southern District of California requiring the production of documents for the time period December 1, 2017 through February 4, 2019 related to the subsidiary's employment of a certain individual and its performance of work on certain Navy vessels during that time period. The Company is cooperating with the investigation. The Company has completed its production of documents responsive to the subpoena, although the Company has a continuing obligation to produce such documents should any be located. At this early stage in the investigation, the Company cannot predict the outcome of the investigation or when the investigation will ultimately be resolved; nor can the Company reasonably estimate the possible range of loss or impact to its business, if any, that may result from this matter.
With the exception of the matter noted above, the Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
11. SUBSEQUENT EVENT
20
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2021. There have been no material changes to our critical accounting policies during the three months ended January 31, 2022.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Our results of operations in fiscal 2022 continue to reflect the adverse impact from the COVID-19 global pandemic (the “Pandemic”). Most notably, demand for our commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market as compared to pre-Pandemic levels. We experienced a significant improvement in operating results in the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021 principally reflecting greatly improved demand for our commercial aerospace products. The Flight Support Group has reported six consecutive quarters of improvement in net sales and operating income resulting from signs of commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets.
Additionally, our results of operations for the three months ended January 31, 2022 have been affected by the fiscal 2021 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2021.
21
Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net sales | $490,343 | $417,902 | ||||||||||||
| Cost of sales | 300,133 | 259,468 | ||||||||||||
Selling, general and administrative expenses | 91,388 | 78,149 | ||||||||||||
| Total operating costs and expenses | 391,521 | 337,617 | ||||||||||||
| Operating income | $98,822 | $80,285 | ||||||||||||
| Net sales by segment: | ||||||||||||||
| Flight Support Group | $272,681 | $199,334 | ||||||||||||
| Electronic Technologies Group | 222,336 | 223,550 | ||||||||||||
| Intersegment sales | (4,674) | (4,982) | ||||||||||||
| $490,343 | $417,902 | |||||||||||||
| Operating income by segment: | ||||||||||||||
| Flight Support Group | $52,376 | $25,822 | ||||||||||||
| Electronic Technologies Group | 55,588 | 60,128 | ||||||||||||
| Other, primarily corporate | (9,142) | (5,665) | ||||||||||||
| $98,822 | $80,285 | |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | ||||||||||
| Gross profit | 38.8 | % | 37.9 | % | ||||||||||
Selling, general and administrative expenses | 18.6 | % | 18.7 | % | ||||||||||
| Operating income | 20.2 | % | 19.2 | % | ||||||||||
| Interest expense | (.2 | %) | (.6 | %) | ||||||||||
| Other income | — | % | .2 | % | ||||||||||
| Income tax expense | .8 | % | .6 | % | ||||||||||
Net income attributable to noncontrolling interests | 1.5 | % | 1.4 | % | ||||||||||
| Net income attributable to HEICO | 17.7 | % | 16.9 | % | ||||||||||
22
Comparison of First Quarter of Fiscal 2022 to First Quarter of Fiscal 2021
Net Sales
Our consolidated net sales in the first quarter of fiscal 2022 increased by 17% to $490.3 million, up from net sales of $417.9 million in the first quarter of fiscal 2021. The increase in consolidated net sales principally reflects an increase of $73.3 million (a 37% increase) to $272.7 million in net sales within the FSG, partially offset by a decrease of $1.2 million (a 1% decrease) to $222.3 million in net sales within the ETG. The net sales increase in the FSG reflects strong organic growth of 30% as well as net sales of $13.5 million contributed by our fiscal 2021 acquisitions. The FSG's organic growth reflects increased demand for the majority of our commercial aerospace products and services resulting from continued recovery in global commercial air travel as compared to the prior year. As such, organic net sales increased by $32.5 million, $18.3 million and $9.0 million within our aftermarket replacement parts, repair and overhaul parts and services and specialty products product lines, respectively. The net sales decrease in the ETG principally reflects a 3% decrease in organic net sales, partially offset by $5.2 million contributed by our fiscal 2021 acquisitions. The ETG's organic net sales decline is mainly attributable to decreased demand for our defense and space products resulting in net sales decreases of $14.6 million and $2.3 million, respectively, partially offset by increased demand for our medical and other electronics products resulting in net sales increases of $5.0 million and $2.8 million, respectively. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first quarter of fiscal 2022.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 38.8% in the first quarter of fiscal 2022, up from 37.9% in the first quarter of fiscal 2021, principally reflecting a 4.3% improvement in the FSG's gross profit margin, partially offset by a .8% decrease in the ETG's gross profit margin. The increase in the FSG's gross profit margin principally reflects the previously mentioned higher net sales across all product lines. The decrease in the ETG's gross profit margin principally reflects a .6% increase in new product research and development expenses as a percentage of net sales to support ongoing new product research and development activities. Total new product research and development expenses included within our consolidated cost of sales were $18.4 million in the first quarter of fiscal 2022, up from $16.2 million in the first quarter of fiscal 2021.
Our consolidated selling, general and administrative ("SG&A") expenses were $91.4 million in the first quarter of fiscal 2022, as compared to $78.1 million in the first quarter of fiscal 2021. The increase in consolidated SG&A expenses principally reflects costs incurred to support the previously mentioned net sales growth resulting in increases of $7.4 million and $3.0 million in general and administrative expenses and selling expenses, respectively. Additionally, the increase in consolidated SG&A expenses reflects $2.9 million attributable to our fiscal 2021 acquisitions.
23
Our consolidated SG&A expenses as a percentage of net sales decreased to 18.6% in the first quarter of fiscal 2022, down from 18.7% in the first quarter of fiscal 2021.
Operating Income
Our consolidated operating income increased by 23% to $98.8 million in the first quarter of fiscal 2022, up from $80.3 million in the first quarter of fiscal 2021. The increase in consolidated operating income principally reflects a $26.6 million increase (a 103% increase) to $52.4 million in operating income of the FSG, partially offset by a $4.5 million decrease (an 8% decrease) to $55.6 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned improved gross profit margin, net sales growth, and efficiencies realized from the higher net sales volume. The decrease in operating income of the ETG principally reflects a lower level of efficiencies resulting from the net sales decrease, as well as the previously mentioned lower gross profit margin. Further, the increase in consolidated operating income was partially offset by $3.8 million of higher corporate expenses mainly attributable to an increase in performance-based compensation expense and the suspension of corporate salary reductions as of the end of the first quarter of fiscal 2021.
Our consolidated operating income as a percentage of net sales increased to 20.2% in the first quarter of fiscal 2022, up from 19.2% in the first quarter of fiscal 2021. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to 19.2% in the first quarter of fiscal 2022, up from 13.0% in the first quarter of fiscal 2021, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 25.0% in the first quarter of fiscal 2022, as compared to 26.9% in the first quarter of fiscal 2021. The increase in the FSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin, as well as a 1.9% impact from a decrease in SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned efficiencies. The decrease in the ETG's operating income as a percentage of net sales principally reflects a 1.1% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lower level of efficiencies, as well as the previously mentioned lower gross profit margin.
Interest Expense
Interest expense decreased to $.8 million in the first quarter of fiscal 2022, down from $2.4 million in the first quarter of fiscal 2021. The decrease was principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility.
Other Income
Other income in the first quarter of fiscal 2022 and 2021 was not material.
24
Income Tax Expense
Our effective tax rate was 4.1% in the first quarter of fiscal 2022, as compared to 2.9% in the first quarter of fiscal 2021. The increase in our effective tax rate reflects an unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan ("LCP") in the first quarter of fiscal 2022 as compared to tax-exempt unrealized gains recognized on such policies in the first quarter of fiscal 2021, partially offset by a larger tax benefit from stock option exercises recognized in the first quarter of fiscal 2022. We recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2022 and 2021 of $17.8 million and $13.5 million, respectively. The tax benefit from stock option exercises in both periods was the result of strong appreciation in HEICO's stock price during the optionees' holding periods.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $7.3 million in the first quarter of fiscal 2022 as compared to $5.7 million in the first quarter of fiscal 2021. The increase in net income attributable to noncontrolling interests in the first quarter of fiscal 2022 principally reflects an aggregate increase in the operating results of subsidiaries in which noncontrolling interests are held.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 23% to $86.9 million, or $.63 per diluted share, in the first quarter of fiscal 2022, up from $70.6 million, or $.51 per diluted share, in the first quarter of fiscal 2021 principally reflecting the previously mentioned higher consolidated operating income.
Outlook
As we look ahead to the remainder of fiscal 2022, we expect global commercial air travel to continue on a path to recovery despite the potential for additional Pandemic variants, such as the recent emergence of Omicron. We remain cautiously optimistic that the ongoing worldwide rollout of Pandemic vaccines, including boosters, will continue to positively influence global commercial air travel and benefit the markets we serve. But, it still remains very difficult to predict the Pandemic's path and effect, including factors like new variants and vaccination rates, potential supply chain disruptions and inflation, which can impact our key markets. Therefore, we feel it would not be responsible to provide fiscal 2022 net sales and earnings guidance at this time. However, we believe our ongoing conservative policies, strong balance sheet, and high degree of liquidity enable us to continuously invest in new research and development, take advantage of periodic strategic inventory purchasing opportunities, and execute on our successful acquisition program, which collectively position HEICO for market share gains.
25
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. We continue to anticipate fiscal 2022 capital expenditures to be approximately $45 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2022, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 10.1%.
Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund our cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was $78.0 million in the first quarter of fiscal 2022 and consisted primarily of net income from consolidated operations of $94.3 million, depreciation and amortization expense of $23.2 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO LCP of $11.6 million (principally participant deferrals and employer contributions), $3.6 million in share-based compensation expense (a non-cash item), and $3.2 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $57.9 million increase in net working capital. The increase in net working capital is inclusive of a $38.7 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2021 accrued performance-based compensation, a $27.0 million increase in inventories reflecting strategic buys within our distribution businesses and to support an increase in consolidated backlog, and a $9.0 million increase in prepaid expenses and other current assets, partially offset by a $16.2 million decrease in accounts receivable resulting from the timing of collections.
Net cash provided by operating activities decreased by $29.2 million in the first quarter of fiscal 2022 from $107.2 million in the first quarter of fiscal 2021. The decrease is principally attributable to a $54.8 million increase in net working capital, partially offset by an $18.0 million increase in net income from consolidated operations and an $8.0 million decrease in deferred income tax benefits. The increase in net working capital primarily resulted from the previously mentioned increase in inventories and the payment of a larger amount of accrued performance-based compensation in the first quarter of fiscal 2022 resulting from the much improved fiscal 2021 operating results.
26
Investing Activities
Net cash used in investing activities totaled $20.0 million in the first quarter of fiscal 2022 and related primarily to investments related to the HEICO LCP of $10.1 million and capital expenditures of $8.7 million.
Financing Activities
Net cash used in financing activities in the first quarter of fiscal 2022 totaled $39.9 million. During the first quarter of fiscal 2022, we made $25.0 million in payments on our revolving credit facility, redeemed common stock related to stock option exercises aggregating $23.6 million, paid $12.2 million in cash dividends on our common stock and made $6.0 million of distributions to noncontrolling interests, which were partially offset by $26.0 million of borrowings under our revolving credit facility and $.8 million in proceeds from stock option exercises.
Other Obligations and Commitments
There have not been any material changes to our other obligations and commitments that were included in our Annual Report on Form 10-K for the year ended October 31, 2021.
New Accounting Pronouncement
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.
27
Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: the severity, magnitude and duration of the Pandemic; our liquidity and the amount and timing of cash generation; lower commercial air travel caused by the Pandemic and its aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions, including the effects of inflation, within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
28
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2021.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the first quarter ended January 31, 2022 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.
29
PART II. OTHER INFORMATION
Item 6. EXHIBITS
| Exhibit | Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document. * | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. * | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. * | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. * | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). * | |||||||
* Filed herewith.
** Furnished herewith.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEICO CORPORATION | |||||||||||
| Date: | February 25, 2022 | By: | /s/ CARLOS L. MACAU, JR. | ||||||||
| Carlos L. Macau, Jr. Executive Vice President - Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||||||
| By: | /s/ STEVEN M. WALKER | ||||||||||
| Steven M. Walker Chief Accounting Officer and Assistant Treasurer (Principal Accounting Officer) | |||||||||||
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TABLE OF CONTENTS
Part I. Financial Information; Item 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 6. Exhibits