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 inthe 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
Our business is comprised of two operating segments: theFlight Support Group ("FSG"), consisting ofHEICO Aerospace Holdings Corp. andHEICO Flight Support Corp. and their respective subsidiaries; and theElectronic Technologies Group ("ETG"), consisting ofHEICO 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"), including its impact on our supply chain. Despite the aforementioned, we experienced continued improvement in operating results in the first nine months and third quarter of fiscal 2022 as compared to the first nine months and third quarter of fiscal 2021 principally reflecting improved demand for our commercial aerospace products. TheFlight Support Group has reported eight 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 nine and three months endedJuly 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 endedOctober 31, 2021 and the fiscal 2022 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to the Condensed Consolidated Financial Statements of this quarterly report. 26
--------------------------------------------------------------------------------
Index
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): Nine months ended July 31, Three months ended July 31, 2022 2021 2022 2021 Net sales$1,598,684 $1,356,260 $569,528 $471,707 Cost of sales 976,308 833,336 348,591 286,990 Selling, general and administrative expenses 272,030 245,053 92,190 83,879 Total operating costs and expenses 1,248,338 1,078,389 440,781 370,869 Operating income$350,346 $277,871 $128,747 $100,838 Net sales by segment: Flight Support Group$909,253 $666,732 $330,259 $237,118 Electronic Technologies Group 703,932 706,182 244,203 239,543 Intersegment sales (14,501) (16,654) (4,934) (4,954)$1,598,684 $1,356,260 $569,528 $471,707 Operating income by segment: Flight Support Group$189,329 $103,357 $70,756 $42,059 Electronic Technologies Group 189,605 200,419 68,029 68,997 Other, primarily corporate (28,588) (25,905) (10,038) (10,218)$350,346 $277,871 $128,747 $100,838 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 38.9 % 38.6 % 38.8 % 39.2 % Selling, general and administrative expenses 17.0 % 18.1 % 16.2 % 17.8 % Operating income 21.9 % 20.5 % 22.6 % 21.4 % Interest expense .2 % .5 % .2 % .4 % Other income - % .1 % - % - % Income tax expense 4.2 % 2.7 % 6.0 % 3.3 % Net income attributable to noncontrolling interests 1.6 % 1.3 % 1.9 % 1.4 % Net income attributable to HEICO 15.9 % 16.1 % 14.5 % 16.3 % 27
--------------------------------------------------------------------------------
Index
Comparison of First Nine Months of Fiscal 2022 to First Nine Months of Fiscal 2021
Net Sales Our consolidated net sales in the first nine months of fiscal 2022 increased by 18% to a record$1,598.7 million , up from net sales of$1,356.3 million in the first nine months of fiscal 2021. The increase in consolidated net sales principally reflects an increase of$242.5 million (a 36% increase) to$909.3 million in net sales within the FSG, partially offset by a slight decrease of$2.3 million to$703.9 million in net sales within the ETG. The net sales increase in the FSG reflects strong organic growth of 26% as well as net sales of$71.3 million contributed by our fiscal 2021 and 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$94.9 million ,$41.2 million and$35.2 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 2% decrease in organic net sales, partially offset by$13.9 million contributed by our fiscal 2021 and 2022 acquisitions. The ETG's organic net sales decline is mainly attributable to decreased demand for our defense products resulting in a net sales decrease of$56.0 million , partially offset by increased demand for our other electronics, medical, space, telecommunications and aerospace products resulting in net sales increases of$14.4 million ,$13.9 million ,$7.6 million ,$3.5 million and$2.5 million respectively. Although sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first nine months of fiscal 2022, recent cost inflation and potential supply chain disruptions may lead to higher sales prices during the remainder of fiscal 2022.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 38.9% in the first nine months of fiscal 2022, up from 38.6% in the first nine months of fiscal 2021, principally reflecting a 3.0% improvement in the FSG's gross profit margin, partially offset by a .6% 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 reduction in the ETG's gross profit margin principally reflects the decrease in net sales of defense products. Total new product research and development expenses included within our consolidated cost of sales were$55.8 million in the first nine months of fiscal 2022, up from$52.2 million in the first nine months of fiscal 2021. Our consolidated selling, general and administrative ("SG&A") expenses were$272.0 million in the first nine months of fiscal 2022, as compared to$245.1 million in the first nine months 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$10.4 million and$5.4 million in selling expenses and general and administrative expenses, respectively. Additionally, the increase in consolidated SG&A expenses reflects$11.2 million attributable to our fiscal 2021 and 2022 acquisitions. 28
--------------------------------------------------------------------------------
Index
Our consolidated SG&A expenses as a percentage of net sales decreased to 17.0% in the first nine months of fiscal 2022, down from 18.1% in the first nine months of fiscal 2021. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects a .4% impact from lower intangible asset amortization expense and a .4% favorable impact from changes in the estimated fair value of accrued contingent consideration, as well as efficiencies realized from the higher net sales.
Operating Income
Our consolidated operating income increased by 26% to a record$350.3 million in the first nine months of fiscal 2022, up from$277.9 million in the first nine months of fiscal 2021. The increase in consolidated operating income principally reflects an$86.0 million increase (an 83% increase) to a record$189.3 million in operating income of the FSG, partially offset by a$10.8 million decrease (a 5% decrease) to$189.6 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 decrease in operating income of the ETG principally reflects a lower level of efficiencies resulting from the net sales decrease and the previously mentioned lower gross profit margin, partially offset by a favorable impact from changes in the estimated fair value of accrued contingent consideration. Further, the increase in consolidated operating income was partially offset by$4.5 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 21.9% in the first nine months of fiscal 2022, up from 20.5% in the first nine months of fiscal 2021. The increase principally reflects an increase in the FSG's operating income as a percentage of net sales to 20.8% in the first nine months of fiscal 2022, up from 15.5% in the first nine months of fiscal 2021, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 26.9% in the first nine months of fiscal 2022, as compared to 28.4% in the first nine months 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 2.4% 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 .9% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lower level of efficiencies, partially offset by the changes in the estimated fair value of accrued contingent consideration; and, from the previously mentioned lower gross profit margin.
Interest Expense
Interest expense decreased to$3.2 million in the first nine months of fiscal 2022, down from$6.2 million in the first nine months of fiscal 2021. The decrease was principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility. 29
--------------------------------------------------------------------------------
Index
Other Income
Other income in the first nine months of fiscal 2022 and 2021 was not material.
Income Tax Expense
Our effective tax rate was 19.4% in the first nine months of fiscal 2022, as compared to 13.3% in the first nine months of fiscal 2021. The increase in our effective tax rate principally reflects a 4.9% unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan ("the LCP") recognized in the first nine months of fiscal 2022 as compared to the tax-exempt unrealized gains recognized on such policies in the first nine months of fiscal 2021.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held byLufthansa Technik AG inHEICO 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$26.0 million in the first nine months of fiscal 2022, as compared to$18.2 million in the first nine months of fiscal 2021. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG in which noncontrolling interests are held, inclusive of fiscal 2021 and 2022 acquisitions.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 17% to a record$254.5 million , or$1.85 per diluted share, in the first nine months of fiscal 2022, up from$218.2 million , or$1.58 per diluted share, in the first nine months of fiscal 2021 principally reflecting the previously mentioned higher consolidated operating income, partially offset by the increase in the effective tax rate. 30
--------------------------------------------------------------------------------
Index
Comparison of Third Quarter of Fiscal 2022 to Third Quarter of Fiscal 2021
Our consolidated net sales in the third quarter of fiscal 2022 increased by 21% to a record$569.5 million , up from net sales of$471.7 million in the third quarter of fiscal 2021. The increase in consolidated net sales principally reflects an increase of$93.1 million (a 39% increase) to a record$330.3 million in net sales within the FSG and an increase of$4.7 million (a 2% increase) to$244.2 million in net sales within the ETG. The net sales increase in the FSG reflects strong organic growth of 25% as well as net sales of$35.0 million contributed by our fiscal 2022 and 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$32.1 million ,$15.3 million and$10.7 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$3.4 million contributed by our fiscal 2021 and 2022 acquisitions and organic growth of 1%. The ETG's organic growth is mainly attributable to increased demand for our other electronics, space, and medical products resulting in net sales increases of$9.5 million ,$5.5 million and$4.6 million , respectively, partially offset by decreased demand for our defense products resulting in a net sales decrease of$19.3 million . Although sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the third quarter of fiscal 2022, recent cost inflation and potential supply chain disruptions may lead to higher sales prices during the remainder of fiscal 2022.
Gross Profit and Operating Expenses
Our consolidated gross profit margin was 38.8% in the third quarter of fiscal 2022, as compared to 39.2% in the third quarter of fiscal 2021, principally reflecting a .5% decrease in the ETG's gross profit margin, partially offset by a 1.4% improvement in the FSG's gross profit margin. The reduction in the ETG's gross profit margin principally reflects the decrease in net sales of defense products. The increase in the FSG's gross profit margin principally reflects the previously mentioned higher net sales across all product lines. Total new product research and development expenses included within our consolidated cost of sales were$18.7 million in the third quarter of fiscal 2022, up from$18.0 million in the third quarter of fiscal 2021. Our consolidated SG&A expenses were$92.2 million in the third quarter of fiscal 2022, as compared to$83.9 million in the third quarter of fiscal 2021. The increase in consolidated SG&A expenses principally reflects$4.9 million attributable to our fiscal 2021 and 2022 acquisitions and an increase of$4.3 million in selling expenses to support the previously mentioned net sales growth, partially offset by a$.9 million decrease in general and administrative expenses. Our consolidated SG&A expenses as a percentage of net sales decreased to 16.2% in the third quarter of fiscal 2022, down from 17.8% in the third quarter of fiscal 2021. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects efficiencies 31
--------------------------------------------------------------------------------
Index
realized from the higher net sales, as well as a .6% favorable impact from changes in the estimated fair value of accrued contingent consideration and a .4% impact from lower intangible asset amortization expense.
Operating Income
Our consolidated operating income increased by 28% to a record$128.7 million in the third quarter of fiscal 2022, up from$100.8 million in the third quarter of fiscal 2021. The increase in consolidated operating income principally reflects a$28.7 million increase (a 68% increase) to a record$70.8 million in operating income of the FSG, partially offset by a$1.0 million decrease (a 1% decrease) to$68.0 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 decrease in operating income of the ETG principally reflects the previously mentioned lower gross profit margin. Our consolidated operating income as a percentage of net sales increased to 22.6% in the third quarter of fiscal 2022, up from 21.4% in the third quarter of fiscal 2021. The increase principally reflects an increase in the FSG's operating income as a percentage of net sales to 21.4% in the third quarter of fiscal 2022, up from 17.7% in the third quarter of fiscal 2021, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 27.9% in the third quarter of fiscal 2022, as compared to 28.8% in the third quarter of fiscal 2021. The increase in the FSG's operating income as a percentage of net sales principally reflects a 2.3% impact from a decrease in SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned efficiencies, as well as the improved gross profit margin. 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 .4% impact from an increase in SG&A expenses as a percentage of net sales inclusive of an increase in performance-based compensation expense and the previously mentioned changes in the estimated fair value of accrued contingent consideration.
Interest Expense
Interest expense decreased to$1.4 million in the third quarter of fiscal 2022, down from$1.7 million in the third quarter of fiscal 2021. The decrease was principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility, partially offset by a higher weighted average interest rate.
Other Income
Other income in the third quarter of fiscal 2022 and 2021 was not material.
32
--------------------------------------------------------------------------------
Index
Income Tax Expense
Our effective tax rate was 27.0% in the third quarter of fiscal 2022, as compared to 15.7% in the third quarter of fiscal 2021. The increase in our effective tax rate principally reflects a 5.3% unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the LCP recognized in the third quarter of fiscal 2022 as compared to the tax-exempt unrealized gains recognized on such policies in the third quarter of fiscal 2021. The increase also reflects a 2.6% unfavorable impact as the third quarter of fiscal 2021 benefited from a larger income tax credit due to higher qualifying R&D expenditures.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held byLufthansa Technik AG inHEICO 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$10.5 million in the third quarter of fiscal 2022, as compared to$6.8 million in the third quarter of fiscal 2021. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the ETG and FSG in which noncontrolling interests are held, inclusive of fiscal 2021 and 2022 acquisitions.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 7% to$82.5 million , or$.60 per diluted share, in the third quarter of fiscal 2022, up from$76.9 million , or$.56 per diluted share, in the third quarter of fiscal 2021 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 2022, we expect global commercial air travel to continue growing despite the potential for additional Pandemic variants. 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. 33
--------------------------------------------------------------------------------
Index
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 2022 capital expenditures to be approximately$35 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 ofJuly 31, 2022 , we were in compliance with all such covenants and our total debt to shareholders' equity ratio was 9.9%. OnApril 7, 2022 , we entered into an amendment to extend the maturity date of our Revolving Credit Facility Agreement ("Credit Facility") by one year toNovember 2024 and to replace the Eurocurrency Rate with Adjusted Term SOFR as an election in which borrowings under the Credit Facility accrue interest, as such capitalized terms are defined in the Credit Facility. 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 cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was$323.9 million in the first nine months of fiscal 2022 and consisted primarily of net income from consolidated operations of$280.5 million , depreciation and amortization expense of$70.5 million (a non-cash item), net changes in other long-term liabilities and assets related to the LCP of$13.7 million (principally participant deferrals and employer contributions),$9.8 million in share-based compensation expense (a non-cash item), and$8.9 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a$65.8 million increase in net working capital. The increase in net working capital principally reflects a$61.2 million increase in inventories reflecting strategic buys within our distribution businesses and to support an increase in consolidated backlog. Net cash provided by operating activities decreased by$10.2 million in the first nine months of fiscal 2022 from$334.1 million in the first nine months of fiscal 2021. The decrease is principally attributable to an$82.6 million increase in net working capital, partially offset by a$44.0 million increase in net income from consolidated operations, a$24.8 million decrease in deferred income tax benefits and a$3.5 million increase in share-based compensation expense. The increase in net working capital primarily resulted from the previously mentioned increase in inventories. 34
--------------------------------------------------------------------------------
Index
Investing Activities
Net cash used in investing activities totaled$223.4 million in the first nine months of fiscal 2022 and related primarily to acquisitions of$175.3 million , capital expenditures of$24.4 million , investments related to the LCP of$13.4 million , and$10.3 million of other investing activities. Further details regarding our fiscal 2022 acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements.
Financing Activities
Net cash used in financing activities in the first nine months of fiscal 2022 totaled$70.1 million . During the first nine months of fiscal 2022, we made$157.0 million in payments on our revolving credit facility, redeemed common stock related to stock option exercises aggregating$25.8 million , paid$24.5 million in cash dividends on our common stock, made$16.8 million of distributions to noncontrolling interests and paid$8.7 million to acquire certain noncontrolling interests, which were partially offset by$162.0 million of borrowings under our revolving credit facility.
Other Obligations and Commitments
Except for the pending acquisition discussed below, 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
As discussed in Note 2, Acquisitions, onAugust 5, 2022 , we entered into a purchase agreement to acquire approximately 95% of the stock ofExxelia International for €453 million plus the assumption of approximately €14 million of liabilities. The closing of the transaction, which is expected to occur in the first quarter of fiscal 2023, is subject to customary closing conditions, including, among others, obtaining a required foreign antitrust clearance and foreign investment authorizations. Changes in the exchange rate between the Euro and theU.S. dollar will either favorably or unfavorably affect the purchase price as translated intoU.S. dollars upon closing. A hypothetical 10% weakening or strengthening in the exchange rate of the Euro to theU.S. dollar as ofJuly 31, 2022 would decrease or increase the purchase price as translated intoU.S. dollars by$46.3 million . New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.
35
--------------------------------------------------------------------------------
Index
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 theSecurities 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 byU.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. 36
--------------------------------------------------------------------------------
Index
© Edgar Online, source