HEICO CORP
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
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For the quarterly period ended
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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)
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer Identification No.) | |||||||
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| (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 | ||||||||||||
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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
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Emerging growth company
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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.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
☒
The number of shares outstanding of each of the registrant’s classes of common stock as of February 27, 2023 is as follows:
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Common Stock, $
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shares | ||||||
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Class A Common Stock, $
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shares | ||||||
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
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| Part I. | Financial Information | ||||||||||
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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| Part II. | Other Information | ||||||||||
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Item 6.
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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, 2023 | October 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents |
$
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$
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||||||||||||
| Accounts receivable, net |
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| Contract assets |
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| Inventories, net |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property, plant and equipment, net |
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| Goodwill |
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| Intangible assets, net |
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| Other assets |
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| Total assets |
$
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$
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| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt |
$
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$
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||||||||||||
| Trade accounts payable |
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| Accrued expenses and other current liabilities |
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| Income taxes payable |
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| Total current liabilities |
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| Long-term debt, net of current maturities |
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| Deferred income taxes |
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| Other long-term liabilities |
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| Total liabilities |
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| Commitments and contingencies (Note 11) |
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| Redeemable noncontrolling interests (Note 3) |
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| Shareholders’ equity: | ||||||||||||||
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Preferred Stock, $
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Common Stock, $
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Class A Common Stock, $
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| Capital in excess of par value |
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| Deferred compensation obligation |
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| HEICO stock held by irrevocable trust |
(
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(
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||||||||||||
| Accumulated other comprehensive loss |
(
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(
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| Retained earnings |
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| Total HEICO shareholders’ equity |
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| Noncontrolling interests |
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| Total shareholders’ equity |
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| Total liabilities and equity |
$
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$
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||||||||||||
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, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net sales |
$
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$
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||||||||||||
| Operating costs and expenses: | ||||||||||||||
| Cost of sales |
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| Selling, general and administrative expenses |
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| Total operating costs and expenses |
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Operating income
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| Interest expense |
(
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(
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| Other income |
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Income before income taxes and noncontrolling interests
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| Income tax expense |
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| Net income from consolidated operations |
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Less: Net income attributable to noncontrolling interests
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| Net income attributable to HEICO |
$
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$
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||||||||||||
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Net income per share attributable to HEICO shareholders:
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||||||||||||||
| Basic |
$
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$
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||||||||||||
| Diluted |
$
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$
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||||||||||||
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Weighted average number of common shares outstanding:
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||||||||||||||
| Basic |
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| Diluted |
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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, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net income from consolidated operations |
$
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$
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||||||||||||
| Other comprehensive income (loss): | ||||||||||||||
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Foreign currency translation adjustments
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(
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||||||||||||
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Amortization of unrealized loss on defined benefit pension plan, net of tax
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| Total other comprehensive income (loss) |
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(
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Comprehensive income from consolidated operations
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| Net income attributable to noncontrolling interests |
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Foreign currency translation adjustments attributable to noncontrolling interests
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(
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Comprehensive income attributable to noncontrolling interests
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| Comprehensive income attributable to HEICO |
$
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$
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||||||||||||
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, 2022 |
$
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$
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$
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$
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$
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($
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($
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$
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$
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$
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Comprehensive income
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— | — | — | — | — |
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Cash dividends ($
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— | — | — | — | — | — | — |
(
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— |
(
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| Issuance of common stock to HEICO Savings and Investment Plan | — | — | — |
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— | — | — | — | — |
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Share-based compensation expense
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— | — | — |
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— | — | — | — | — |
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Proceeds from stock option exercises
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— |
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— | — | — | — | — |
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Redemptions of common stock related to stock option exercises
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— | — | — |
(
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— | — | — | — | — |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions |
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— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
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Distributions to noncontrolling interests
|
(
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— | — | — | — | — | — | — |
(
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(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions of noncontrolling interests |
(
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— | — |
(
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— | — | — | — | — |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Adjustments to redemption amount of redeemable noncontrolling interests
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— | — | — | — | — | — |
(
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— |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | — | — |
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(
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— | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
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Other
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— | — | — |
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— | — | — |
(
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— |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2023 |
$
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$
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$
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$
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$
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($
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($
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$
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$
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$
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|||||||||||||||||||||||||||||||||||||||||||||||||
| 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 |
$
|
$
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$
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$
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$
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($
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($
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$
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$
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$
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) |
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— | — | — | — | — |
(
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Cash dividends ($
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— | — | — | — | — | — | — |
(
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— |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to HEICO Savings and Investment Plan | — | — | — |
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— | — | — | — | — |
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Share-based compensation expense
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— | — | — |
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— | — | — | — | — |
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Proceeds from stock option exercises
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— |
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— | — | — | — | — |
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Redemptions of common stock related to stock option exercises
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— |
(
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(
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(
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— | — | — | — | — |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions |
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— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
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Distributions to noncontrolling interests
|
(
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— | — | — | — | — | — | — |
(
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(
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Adjustments to redemption amount of redeemable noncontrolling interests
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— | — | — | — | — | — |
(
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— |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
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Other
|
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— | — |
(
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— | — | — | — | — |
(
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|||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2022 |
$
|
$
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$
|
$
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$
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($
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($
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$
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$
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$
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|||||||||||||||||||||||||||||||||||||||||||||||||
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities: | |||||||||||
| Net income from consolidated operations |
$
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$
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|||||||||
| Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization |
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|||||||||
| Employer contributions to HEICO Savings and Investment Plan |
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| Share-based compensation expense |
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| Increase (decrease) in accrued contingent consideration, net |
|
(
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| Deferred income tax provision (benefit) |
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(
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| Payment of contingent consideration |
(
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| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| (Increase) decrease in accounts receivable |
(
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| Increase in contract assets |
(
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(
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| Increase in inventories |
(
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(
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|||||||||
| Increase in prepaid expenses and other current assets |
(
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(
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|||||||||
| (Decrease) increase in trade accounts payable |
(
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|||||||||
| Decrease in accrued expenses and other current liabilities |
(
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(
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|||||||||
| Increase (decrease) in income taxes payable |
|
(
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|||||||||
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Net changes in other long-term liabilities and assets related to
HEICO Leadership Compensation Plan |
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|||||||||
| Other |
(
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| Net cash provided by operating activities |
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| Investing Activities: | |||||||||||
| Acquisitions, net of cash acquired |
(
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|||||||||
| Investments related to HEICO Leadership Compensation Plan |
(
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(
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|||||||||
| Capital expenditures |
(
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(
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|||||||||
| Other |
|
(
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| Net cash used in investing activities |
(
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(
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| Financing Activities: | |||||||||||
| Borrowings on revolving credit facility |
|
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|||||||||
| Payments on revolving credit facility |
(
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(
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| Redemptions of common stock related to stock option exercises |
(
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(
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| Cash dividends paid |
(
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(
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|||||||||
| Distributions to noncontrolling interests |
(
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(
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|||||||||
| Payment of contingent consideration |
(
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|||||||||
| Acquisitions of noncontrolling interests |
(
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|||||||||
| Proceeds from stock option exercises |
|
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|||||||||
| Other |
(
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|||||||||
| Net cash provided by (used in) financing activities |
|
(
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|||||||||
| Effect of exchange rate changes on cash |
|
(
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|||||||||
| Net increase in cash and cash equivalents |
|
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|||||||||
| Cash and cash equivalents at beginning of year |
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| 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, 2022. The October 31, 2022 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, 2023 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.
The Company’s results of operations in the first quarter of fiscal 2023 continued to reflect the adverse impact from the COVID-19 pandemic, including its impact on the Company's supply chain. Despite the aforementioned, the Company experienced continued improvement in operating results in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022 principally reflecting improved demand for its commercial aerospace products. The Flight Support Group has reported ten consecutive quarters of improvement in net sales and operating income resulting from commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets.
New Accounting Pronouncement
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with
7
2.
ACQUISITION
On January 5, 2023, the Company, through HEICO Electronic, acquired
93.69
% of the outstanding common stock and all of the preferred stock of
Exxelia International SAS
(“Exxelia”).
Exxelia designs, manufactures and sells high reliability (“Hi-Rel”), complex, passive electronic components and rotary joint assemblies for mostly aerospace and defense applications, in addition to other high-end applications, such as medical and energy uses, including emerging “clean energy” and electrification applications.
The Company believes that this acquisition will further HEICO's strategy of expanding its already wide range of mission-critical and Hi-Rel components for the most demanding applications, as well as provide HEICO with added broad geographic and product diversity, including in the important European market. The remaining
6.31
% interest continues to be owned by certain members of Exxelia's management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information). Additionally, as a result of this acquisition, the Company also obtained a
90
% ownership interest in
Alcon Electronics Pvt. Ltd.
(“Alcon”), which is an existing subsidiary of Exxelia. The remaining
10
% interest continues to be owned by a certain member of Alcon’s management team (See Note 3, Selected Financial Statement Information – Redeemable Noncontrolling Interests, for additional information). The purchase price of this acquisition was paid in cash, using proceeds from the Company's revolving credit facility.
The following table summarizes the total consideration for the acquisition of Exxelia (in thousands):
|
Cash paid
|
$
|
|||||||
|
Less: cash acquired
|
(
|
|||||||
| Total consideration paid, net |
$
|
|||||||
As noted above, the Company acquired all of the preferred stock of Exxelia. Pursuant to the terms of the acquisition, Exxelia’s preferred stock accrues dividends at
5.18
% per annum. Additionally, in connection with the acquisition,
HEICO issued Exxelia a ten-year €
150
million note, which accrues interest at
4.7
% per annum on the principal outstanding.
The Company records foreign currency transaction adjustments on the note receivable within selling, general and administrative ("SG&A") expenses in its Condensed Consolidated Statements of Operations.
8
The following table summarizes the allocation of the total consideration for the acquisition of Exxelia to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed (in thousands):
| Assets acquired: | ||||||||
| Goodwill |
$
|
|||||||
| Customer relationships |
|
|||||||
| Intellectual property |
|
|||||||
| Trade name |
|
|||||||
| Inventories |
|
|||||||
| Property, plant and equipment |
|
|||||||
| Accounts receivable |
|
|||||||
| Other assets |
|
|||||||
| Total assets acquired, excluding cash |
|
|||||||
| Liabilities assumed: | ||||||||
| Deferred income taxes |
|
|||||||
| Accounts payable |
|
|||||||
| Accrued expenses |
|
|||||||
| Other liabilities |
|
|||||||
| Total liabilities assumed |
|
|||||||
|
Noncontrolling interests in consolidated subsidiaries
|
|
|||||||
| Net assets acquired, excluding cash |
$
|
|||||||
The allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of Exxelia and the value of its assembled workforce that do not qualify for separate recognition, however, benefit both the Company and the noncontrolling interest holders. The fair value of the noncontrolling interests were determined based on the consideration paid by the Company for its controlling ownership interest adjusted for a lack of control that a market participant would consider when estimating the fair value of the noncontrolling interest. The amortization period of the customer relationships, intellectual property and trade name acquired is
18
years,
16
years and indefinite, respectively. Acquisition costs associated with the purchase of Exxelia totaled $
5.1
million for the three months ended January 31, 2023 and were recorded as a component of SG&A expenses in the Company's Condensed Consolidated Statement of Operations. The operating results of Exxelia were included in the Company’s results of operations from the effective acquisition date. For the three months ended January 31, 2023, the Company's consolidated net sales includes $
15.0
million from the acquisition of Exxelia, and the acquisition did not have a material impact on net income attributable to HEICO.
9
The following table presents unaudited pro forma financial information for the three months ended January 31, 2023 and January 31, 2022 as if the acquisition of Exxelia had occurred as of November 1, 2021 (in thousands, except per share data):
| Three months ended | |||||||||||
| January 31, 2023 | January 31, 2022 | ||||||||||
| Net sales |
$
|
$
|
|||||||||
|
Net income from consolidated operations
|
$
|
$
|
|||||||||
| Net income attributable to HEICO |
$
|
$
|
|||||||||
|
Net income per share attributable to HEICO shareholders:
|
|||||||||||
|
Basic
|
$
|
$
|
|||||||||
|
Diluted
|
$
|
$
|
|||||||||
The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2021. The unaudited pro forma financial information includes adjustments to historical amounts such as increased interest expense associated with borrowings to finance the acquisition, foreign currency transaction adjustments on the note receivable from Exxelia, the reclassification of acquisition costs associated with the purchase of Exxelia from fiscal 2023 to fiscal 2022, additional amortization expense related to the intangible assets acquired, and inventory purchase accounting adjustments charged to cost of sales as the inventory is sold.
3.
SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| (in thousands) | January 31, 2023 | October 31, 2022 | ||||||||||||
| Accounts receivable |
$
|
$
|
||||||||||||
| Less: Allowance for doubtful accounts |
(
|
(
|
||||||||||||
| Accounts receivable, net |
$
|
$
|
||||||||||||
Inventories
| (in thousands) | January 31, 2023 | October 31, 2022 | ||||||||||||
| Finished products |
$
|
$
|
||||||||||||
| Work in process |
|
|
||||||||||||
| Materials, parts, assemblies and supplies |
|
|
||||||||||||
| Inventories, net of valuation reserves |
$
|
$
|
||||||||||||
10
Property, Plant and Equipment
| (in thousands) | January 31, 2023 | October 31, 2022 | ||||||||||||
| Land |
$
|
$
|
||||||||||||
| Buildings and improvements |
|
|
||||||||||||
| Machinery, equipment and tooling |
|
|
||||||||||||
| Construction in progress |
|
|
||||||||||||
|
|
|
|||||||||||||
| Less: Accumulated depreciation and amortization |
(
|
(
|
||||||||||||
| Property, plant and equipment, net |
$
|
$
|
||||||||||||
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 $
19.3
million as of January 31, 2023 and $
17.9
million as of October 31, 2022. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2023 and 2022 was $
2.2
million and $
1.7
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, 2023 and 2022 is as follows (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| 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, 2023 | October 31, 2022 | |||||||||||||
| Redeemable at fair value |
$
|
$
|
||||||||||||
| Redeemable based on a multiple of future earnings |
|
|
||||||||||||
| Redeemable noncontrolling interests |
$
|
$
|
||||||||||||
11
As discussed in Note 2, Acquisition, the Company, through HEICO Electronic,
acquired
93.69
% of the common stock of Exxelia in January 2023. As part of the liquidity agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interest beginning in fiscal 2028, or sooner under certain conditions, and the Company has the right to purchase the same equity interest beginning in the same period.
As discussed in Note 2, Acquisition, the Company, as a result of its acquisition of Exxelia, acquired
90
% of the stock of Alcon in January 2023. As part of the shareholders' agreement, the noncontrolling interest holder has the right to cause the Company to purchase their equity interest beginning in fiscal 2025, or sooner under certain conditions, and the Company has the right to purchase the same equity interest beginning in the same period.
During fiscal 2022, the holder of a
19.9
% noncontrolling equity interest in a subsidiary of the FSG that was acquired in fiscal 2015 exercised their option to cause the Company to purchase their noncontrolling interest over a four-year period ending in fiscal 2026. Accordingly, the Company acquired one-fourth of such interest in December 2022, which increased the Company's ownership interest in the subsidiary to
85.1
%.
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the three months ended January 31, 2023 are as follows (in thousands):
| Foreign Currency Translation | Defined Benefit Pension Plan |
Accumulated
Other Comprehensive Loss |
||||||||||||||||||
| Balances as of October 31, 2022 |
($
|
($
|
($
|
|||||||||||||||||
| Unrealized gain |
|
— |
|
|||||||||||||||||
| Amortization of unrealized loss | — |
|
|
|||||||||||||||||
| Balances as of January 31, 2023 |
($
|
($
|
($
|
|||||||||||||||||
12
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
| Segment | Consolidated Totals | |||||||||||||||||||
| FSG | ETG | |||||||||||||||||||
| Balances as of October 31, 2022 |
$
|
$
|
$
|
|||||||||||||||||
| Goodwill acquired | — |
|
|
|||||||||||||||||
| Foreign currency translation adjustments |
|
|
|
|||||||||||||||||
| Adjustments to goodwill |
(
|
|
|
|||||||||||||||||
| Balances as of January 31, 2023 |
$
|
$
|
$
|
|||||||||||||||||
The goodwill acquired pertains to the fiscal 2023 acquisition described in Note 2, Acquisition, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. The Company is assessing how much, if any, of the goodwill acquired in fiscal 2023 will be deductible for income tax purposes. 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 consideration allocation of certain fiscal 2022 acquisitions.
Identifiable intangible assets consist of the following (in thousands):
| As of January 31, 2023 | As of October 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Customer relationships |
$
|
($
|
$
|
$
|
($
|
$
|
||||||||||||||||||||||||||||||||
| Intellectual property |
|
(
|
|
|
(
|
|
||||||||||||||||||||||||||||||||
| Other |
|
(
|
|
|
(
|
|
||||||||||||||||||||||||||||||||
|
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||||||
| Non-Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Trade names |
|
— |
|
|
— |
|
||||||||||||||||||||||||||||||||
|
$
|
($
|
$
|
$
|
($
|
$
|
|||||||||||||||||||||||||||||||||
The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of January 31, 2023 compared to October 31, 2022 principally relates to such intangible assets recognized in connection with the fiscal 2023 acquisition (see Note 2, Acquisition).
Amortization expense related to intangible assets for the three months ended January 31, 2023 and 2022 was $
17.8
million and $
15.0
million, respectively. Amortization expense related
13
5.
LONG-TERM DEBT
| January 31, 2023 | October 31, 2022 | |||||||||||||
| Borrowings under revolving credit facility |
$
|
$
|
||||||||||||
| Finance leases and note payable |
|
|
||||||||||||
|
|
|
|||||||||||||
| Less: Current maturities of long-term debt |
(
|
(
|
||||||||||||
|
$
|
$
|
|||||||||||||
6.
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 Sheets.
| January 31, 2023 | October 31, 2022 | Change | |||||||||||||||
| Contract assets |
$
|
$
|
$
|
||||||||||||||
| Contract liabilities |
|
|
|
||||||||||||||
| Net contract assets |
$
|
$
|
($
|
||||||||||||||
The increase in the Company's contract assets during the first quarter of fiscal 2023 mainly reflects additional unbilled receivables on certain customer contracts using an over-time recognition model in excess of billings on certain customer contracts at both the ETG and FSG.
14
The increase in the Company's contract liabilities during the first quarter of fiscal 2023 principally reflects the receipt of advance deposits on certain customer contracts mainly at the FSG.
The amount of revenue that the Company recognized during the first quarter of fiscal 2023 that was included in contract liabilities as of the beginning of fiscal 2023 was $
20.3
million.
Remaining Performance Obligations
As of January 31, 2023, the Company had $
580.3
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 $
251.8
million of this amount during the remainder of fiscal 2023 and $
328.5
million thereafter, of which a little over half is expected to occur in fiscal 2024.
Disaggregation of Revenue
| Three months ended January 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Flight Support Group: | ||||||||||||||
|
Aftermarket replacement parts
(1)
|
$
|
$
|
||||||||||||
|
Specialty products
(2)
|
|
|
||||||||||||
|
Repair and overhaul parts and services
(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.
15
(2)
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.
(3)
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.
(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 airborne antennas, technical surveillance countermeasures (TSCM) equipment, custom high power filters and filter assemblies, radiation assurance services and products, and high-reliability, complex, passive electronic components and rotary joint assemblies.
| Three months ended January 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| 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 |
$
|
$
|
||||||||||||
16
7.
INCOME TAXES
The Company's effective tax rate was
16.9
% in the first quarter of fiscal 2023, as compared to
4.1
% in the first quarter of fiscal 2022. The increase in the Company's effective tax rate principally reflects a larger tax benefit from stock option exercises recognized in the first quarter of fiscal 2022. The Company recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2023 and 2022 of $
6.2
million and $
17.8
million, respectively.
8.
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, 2023 | ||||||||||||||||||||||||||
|
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 fund |
|
|
|
|
||||||||||||||||||||||
| Total assets |
$
|
$
|
$
|
$
|
||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration |
$
|
$
|
$
|
$
|
||||||||||||||||||||||
| As of October 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 fund |
|
|
|
|
||||||||||||||||||||||
| Total assets |
$
|
$
|
$
|
$
|
||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration |
$
|
$
|
$
|
$
|
||||||||||||||||||||||
17
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 $
232.9
million as of January 31, 2023 and $
203.0
million as of October 31, 2022.
As part of the agreement to acquire
80.36
% of the stock of a subsidiary by the ETG in fiscal 2022, the Company may be obligated to pay contingent consideration of up to $
12.1
million in fiscal 2027 based on the earnings of the acquired entity during fiscal years 2025 and 2026 provided the entity meets a certain earnings objective during each of fiscal years 2024 to 2026. As of January 31, 2023, the estimated fair value of the contingent consideration was $
6.1
million.
As part of the agreement to acquire
96
% of the stock of a subsidiary by the FSG in fiscal 2022, the Company may be obligated to pay contingent consideration of up to $
27.4
million in fiscal 2027 based on the earnings of the acquired entity during fiscal years 2025 and 2026 provided the entity meets certain earnings objectives during each of fiscal years 2022 to 2024. As of January 31, 2023, the estimated fair value of the contingent consideration was $
13.3
million.
As part of the agreement to acquire
74
% of the membership interests of a subsidiary by the FSG in fiscal 2022, the Company may be obligated to pay contingent consideration of $
14.1
million in fiscal 2027 should the acquired entity meet a certain earnings objective during the five-year period following the acquisition. As of January 31, 2023, the estimated fair value of the contingent consideration was $
9.5
million.
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, 2023, the estimated fair value of the contingent consideration was $
18.0
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 $
13.5
million, or $
10.0
million, in fiscal 2025 should the acquired entity meet certain earnings objectives during fiscal 2023 and 2024. As of January 31, 2023, the estimated fair
18
value of the contingent consideration was CAD $
11.1
million, or $
8.3
million. Additionally, the acquired entity achieved a required earnings objective during fiscal years 2021 and 2022 that entitled it to additional contingent consideration of CAD $
13.5
million, or $
10.0
million, which was paid in the first quarter of fiscal 2023.
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, 2023, the estimated fair value of the contingent consideration was $
19.2
million.
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, 2023 ($ in thousands):
| Unobservable | Weighted | |||||||||||||||||||||||||
| Acquisition Date | Fair Value | Input | Range |
Average
(1)
|
||||||||||||||||||||||
| 9-1-2022 |
$
|
Compound annual revenue growth rate |
|
|
||||||||||||||||||||||
| Discount rate |
|
|
||||||||||||||||||||||||
| 7-18-2022 |
|
Compound annual revenue growth rate |
(
|
|
||||||||||||||||||||||
| Discount rate |
|
|
||||||||||||||||||||||||
| 3-17-2022 |
|
Compound annual revenue growth rate |
(
|
|
||||||||||||||||||||||
| Discount rate |
|
|
||||||||||||||||||||||||
| 8-4-2021 |
|
Compound annual revenue growth rate |
|
|
||||||||||||||||||||||
| Discount rate |
|
|
||||||||||||||||||||||||
| 8-18-2020 |
|
Compound annual revenue growth rate |
|
|
||||||||||||||||||||||
| Discount rate |
|
|
||||||||||||||||||||||||
| 9-15-2017 |
|
Compound annual revenue growth rate |
|
|
||||||||||||||||||||||
| Discount rate |
|
|
||||||||||||||||||||||||
19
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, 2023 are as follows (in thousands):
| Liabilities | ||||||||
| Balance as of October 31, 2022 |
$
|
|||||||
| Payment of contingent consideration |
(
|
|||||||
| Increase in accrued contingent consideration, net |
|
|||||||
| Foreign currency transaction adjustments |
|
|||||||
|
$
|
||||||||
|
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
in its Condensed Consolidated Statements of Operations.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of January 31, 2023 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
20
9.
NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
| Three months ended January 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| 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
|
|
|
||||||||||||
21
10.
OPERATING SEGMENTS
|
Other,
Primarily Corporate and Intersegment (1) |
Consolidated
Totals |
|||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Three months ended January 31, 2023: | ||||||||||||||||||||||||||
| Net sales |
$
|
$
|
($
|
$
|
||||||||||||||||||||||
| Depreciation |
|
|
|
|
||||||||||||||||||||||
| Amortization |
|
|
|
|
||||||||||||||||||||||
| Operating income |
|
|
(
|
|
||||||||||||||||||||||
| Capital expenditures |
|
|
|
|
||||||||||||||||||||||
| Three months ended January 31, 2022: | ||||||||||||||||||||||||||
| 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, 2023 |
$
|
$
|
$
|
$
|
||||||||||||||||||||||
| Total assets as of October 31, 2022 |
|
|
|
|
||||||||||||||||||||||
11.
COMMITMENTS AND CONTINGENCIES
Guarantees
As of January 31, 2023, the Company has arranged for standby letters of credit aggregating $
22.9
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.
22
Product Warranty
Changes in the Company’s product warranty liability for the three months ended January 31, 2023 and 2022, respectively, are as follows (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| 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.
23
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, 2022. There have been no material changes to our critical accounting policies during the three months ended January 31, 2023.
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 the first quarter of fiscal 2023 continued to reflect the adverse impact from the COVID-19 pandemic, including its impact on our supply chain. Despite the aforementioned, we experienced continued improvement in operating results in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022 principally reflecting improved demand for our commercial aerospace products. The Flight Support Group has reported ten consecutive quarters of improvement in net sales and operating income resulting from 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, 2023 have been affected by the fiscal 2022 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, 2022 and the fiscal 2023 acquisition as further detailed in Note 2, Acquisition, of the Notes to the Condensed Consolidated Financial Statements of this quarterly report.
24
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, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net sales | $620,915 | $490,343 | ||||||||||||
| Cost of sales | 377,116 | 300,133 | ||||||||||||
|
Selling, general and administrative expenses
|
114,365 | 91,388 | ||||||||||||
| Total operating costs and expenses | 491,481 | 391,521 | ||||||||||||
| Operating income | $129,434 | $98,822 | ||||||||||||
| Net sales by segment: | ||||||||||||||
| Flight Support Group | $371,278 | $272,681 | ||||||||||||
| Electronic Technologies Group | 255,059 | 222,336 | ||||||||||||
| Intersegment sales | (5,422) | (4,674) | ||||||||||||
| $620,915 | $490,343 | |||||||||||||
| Operating income by segment: | ||||||||||||||
| Flight Support Group | $83,609 | $52,376 | ||||||||||||
| Electronic Technologies Group | 56,537 | 55,588 | ||||||||||||
| Other, primarily corporate | (10,712) | (9,142) | ||||||||||||
| $129,434 | $98,822 | |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | ||||||||||
| Gross profit | 39.3 | % | 38.8 | % | ||||||||||
|
Selling, general and administrative expenses
|
18.4 | % | 18.6 | % | ||||||||||
| Operating income | 20.8 | % | 20.2 | % | ||||||||||
| Interest expense | (1.0 | %) | (.2 | %) | ||||||||||
| Other income | .1 | % | — | % | ||||||||||
| Income tax expense | 3.4 | % | .8 | % | ||||||||||
|
Net income attributable to noncontrolling interests
|
1.6 | % | 1.5 | % | ||||||||||
| Net income attributable to HEICO | 15.0 | % | 17.7 | % | ||||||||||
25
Comparison of First Quarter of Fiscal 2023 to First Quarter of Fiscal 2022
Net Sales
Our consolidated net sales in the first quarter of fiscal 2023 increased by 27% to a record $620.9 million, up from net sales of $490.3 million in the first quarter of fiscal 2022. The increase in consolidated net sales principally reflects an increase of $98.6 million (a 36% increase) to a record $371.3 million within the FSG and an increase of $32.7 million (a 15% increase) to $255.1 million within the ETG. The net sales increase in the FSG reflects strong organic growth of 25% as well as net sales of $31.5 million contributed by our fiscal 2022 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 $41.6 million, $16.9 million and $8.7 million within our aftermarket replacement parts, specialty products, and repair and overhaul parts and services product lines, respectively. The net sales increase in the ETG principally reflects $32.8 million contributed by our fiscal 2022 and 2023 acquisitions. The ETG's organic net sales were consistent with the prior year and principally reflected increased demand for our other electronics, aerospace and medical products resulting in net sales increases of $11.2 million, $4.5 million and $1.8 million, respectively, offset by decreased demand for our defense products resulting in a net sales decrease of $18.2 million. Although 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 2023, recent cost inflation and potential supply chain disruptions may lead to higher sales prices during the remainder of fiscal 2023.
Gross Profit and Operating Expenses
Our consolidated gross profit margin improved to 39.3% in the first quarter of fiscal 2023, up from 38.8% in the first quarter of fiscal 2022 principally reflecting a 2.7% improvement in the FSG's gross profit margin, partially offset by a 1.5% decrease in the ETG's gross profit margin. The increase in the FSG's gross profit margin principally reflects lower inventory obsolescence expenses in the first quarter of fiscal 2023 mainly due to increased demand within our aftermarket replacement parts product line, and the previously mentioned higher net sales within our aftermarket replacement parts and specialty products product lines. The reduction in the ETG's gross profit margin principally reflects the previously mentioned decrease in net sales for our defense products, partially offset by the previously mentioned increase in net sales for our other electronics and aerospace products. Total new product research and development expenses included within our consolidated cost of sales were $20.2 million in the first quarter of fiscal 2023, up from $18.4 million in the first quarter of fiscal 2022.
Our consolidated selling, general and administrative ("SG&A") expenses were $114.4 million in the first quarter of fiscal 2023, as compared to $91.4 million in the first quarter of fiscal 2022. The increase in consolidated SG&A expenses principally reflects $9.9 million attributable to our fiscal 2022 and 2023 acquisitions, a $4.8 million increase in acquisition costs mainly related to the fiscal 2023 acquisition and a $3.9 million increase in performance-based compensation expense.
26
Our consolidated SG&A expenses as a percentage of net sales decreased to 18.4% in the first quarter of fiscal 2023, down from 18.6% in the first quarter of fiscal 2022. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects efficiencies realized from the higher net sales, partially offset by a .8% impact from the previously mentioned increase in acquisition costs.
Operating Income
Our consolidated operating income increased by 31% to $129.4 million in the first quarter of fiscal 2023, up from $98.8 million in the first quarter of fiscal 2022. The increase in consolidated operating income principally reflects a $31.2 million increase (a 60% increase) to a record $83.6 million in operating income of the FSG and a $.9 million increase (a 2% increase) to $56.5 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned net sales growth, improved gross profit margin and efficiencies realized from the higher net sales volume. The increase in operating income of the ETG principally reflects the previously mentioned net sales increase, partially offset by a $5.1 million increase in acquisition costs related to the fiscal 2023 acquisition, and the previously mentioned lower gross profit margin.
Our consolidated operating income as a percentage of net sales increased to 20.8% in the first quarter of fiscal 2023, up from 20.2% in the first quarter of fiscal 2022. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to 22.5% in the first quarter of fiscal 2023, up from 19.2% in the first quarter of fiscal 2022, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 22.2% in the first quarter of fiscal 2023, as compared to 25.0% in the first quarter of fiscal 2022. The increase in the FSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin and a .6% 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 the previously mentioned lower gross profit margin and a 1.3% impact from an increase in SG&A expenses as a percentage of net sales mainly from a 2.0% impact from the previously mentioned higher acquisition costs, partially offset by a .4% favorable impact from a decrease in performance-based compensation expense.
Interest Expense
Interest expense increased to $6.1 million in the first quarter of fiscal 2023, up from $.8 million in the first quarter of fiscal 2022. The increase was principally due to higher interest rates.
27
Other Income
Other income in the first quarter of fiscal 2023 and 2022 was not material.
Income Tax Expense
Our effective tax rate was 16.9% in the first quarter of fiscal 2023, as compared to 4.1% in the first quarter of fiscal 2022. The increase in our effective tax rate principally reflects 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 2023 and 2022 of $6.2 million and $17.8 million, respectively.
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 $10.0 million in the first quarter of fiscal 2023, as compared to $7.3 million in the first quarter of fiscal 2022. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held, inclusive of fiscal 2022 and 2023 acquisitions.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 7% to $93.0 million, or $.67 per diluted share, in the first quarter of fiscal 2023, up from $86.9 million, or $.63 per diluted share, in the first quarter of fiscal 2022 principally reflecting the previously mentioned higher consolidated operating income, partially offset by the increase in the effective tax rate.
Outlook
As we look ahead to the remainder of fiscal 2023, we continue to anticipate net sales growth in both the FSG and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-19 pandemic may lead to higher material and labor costs. During fiscal 2023, we plan to continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility.
28
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. We now anticipate fiscal 2023 capital expenditures to be approximately $45 to $50 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, 2023, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 28.5%.
Based on our current outlook, we believe that 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 $76.7 million in the first quarter of fiscal 2023 and consisted primarily of net income from consolidated operations of $103.0 million, depreciation and amortization expense of $27.1 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO LCP of $8.9 million (principally participant deferrals and employer contributions), $3.8 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), and $2.8 million in share-based compensation expense (a non-cash item), partially offset by a $63.0 million increase in net working capital and a $6.3 million payment of contingent consideration. The increase in net working capital is inclusive of a $52.0 million increase in inventories to support an increase in consolidated backlog, a $7.3 million increase in contract assets and a $7.1 million increase in accounts receivable resulting from the timing of collections.
Net cash provided by operating activities decreased by $1.3 million in the first quarter of fiscal 2023 from $78.0 million in the first quarter of fiscal 2022. The decrease is principally attributable to a $6.3 million payment of contingent consideration and a $5.1 million increase in net working capital, partially offset by an $8.8 million increase in net income from consolidated operations. The increase in net working capital primarily resulted from the previously mentioned increases in inventories and accounts receivable, partially offset by increases in accrued expenses and other current liabilities and income taxes payable.
Investing Activities
Net cash used in investing activities totaled $526.0 million in the first quarter of fiscal 2023 and related primarily to acquisitions of $503.7 million, investments related to the LCP of $11.8 million and capital expenditures of $10.8 million. Further details regarding our fiscal 2023 acquisition may be found in Note 2, Acquisition, of the Notes to Condensed Consolidated Financial Statements.
29
Financing Activities
Net cash provided by financing activities in the first quarter of fiscal 2023 totaled $449.2 million. During the first quarter of fiscal 2023, we borrowed $531.0 million under our revolving credit facility, which was partially offset by $38.0 million in payments made on our revolving credit facility, redemptions of common stock related to stock option exercises aggregating $14.8 million, $13.7 million of cash dividends on our common stock, $11.3 million of distributions to noncontrolling interests and $3.7 million of contingent consideration payments.
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, 2022.
New Accounting Pronouncement
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncement, of the Notes to Condensed Consolidated Financial Statements for additional information.
30
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 as a result of factors including, but not limited to: the severity, magnitude and duration of public health threats, such as the COVID-19 pandemic ("Health Emergencies"); HEICO's liquidity and the amount and timing of cash generation; lower commercial air travel caused by Health Emergencies and their 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, including obtaining any applicable domestic and/or foreign governmental approvals, 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.
31
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, 2022, except as discussed below:
In connection with our acquisition of Exxelia, we issued Exxelia a ten-year €150 million note, which accrues interest at 4.7% per annum on the principal outstanding. A hypothetical 10% strengthening of the United States ("U.S.") dollar in comparison to the Euro as of January 31, 2023 would decrease the U.S. dollar equivalent of our Euro note receivable by approximately $16.3 million and decrease operating income by the same amount.
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, 2023 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.
32
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.
33
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: | March 1, 2023 | 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) |
|||||||||||
34
TABLE OF CONTENTS
Part I. Financial Information; Item 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About MarketprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 6. Exhibitsprint