HEICO CORPORATION 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 endedOctober 31, 2022 . There have been no material changes to our critical accounting policies during the three months endedJanuary 31, 2023 . 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 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. TheFlight 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 endedJanuary 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 endedOctober 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
-------------------------------------------------------------------------------- Inde x 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
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 %
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-------------------------------------------------------------------------------- Inde x Comparison of First Quarter of Fiscal 2023 to First Quarter of Fiscal 2022
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 -------------------------------------------------------------------------------- Inde x 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
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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 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$10.0 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.
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-------------------------------------------------------------------------------- Inde x 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 ofJanuary 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
-------------------------------------------------------------------------------- Inde x 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
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.
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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.
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