Heico Corp 10-Q for FY2022 Q3
Heico Corp (HEI)
10-Q
2022-08-31
For: 2022-07-31
View Original
Added on
April 07, 2026
About this 10-Q
Heico Corp filed this 10-Q on August 31, 2022, covering the quarter ended July 31, 2022 (FY2022 Q3).
Headline figures
Quarter ended July 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $569.53M
- up 20.7% from $471.71M a year earlier
- Net income
- $82.54M
- up 7.3% from net income of $76.89M a year earlier
- Diluted EPS
- $0.60
- up 7.1% from $0.56 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended | ||||||||
| OR | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from ______ to _______ | ||||||||
Commission File Number: 001-04604
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(954 ) 987-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the registrant’s classes of common stock as of August 29, 2022 is as follows:
Common Stock, $ | shares | |||||||
Class A Common Stock, $ | shares | |||||||
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page | |||||||||||
| Part I. | Financial Information | ||||||||||
Item 1. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
| Part II. | Other Information | ||||||||||
Item 6. | |||||||||||
1
PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
| July 31, 2022 | October 31, 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Contract assets | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Trade accounts payable | ||||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net of current maturities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 11) | ||||||||||||||
| Redeemable noncontrolling interests (Note 3) | ||||||||||||||
| Shareholders’ equity: | ||||||||||||||
Preferred Stock, $ | ||||||||||||||
Common Stock, $ | ||||||||||||||
Class A Common Stock, $ | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Deferred compensation obligation | ||||||||||||||
| HEICO stock held by irrevocable trust | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Total HEICO shareholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
| Nine months ended July 31, | Three months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income | |||||||||||||||||||||||
Income before income taxes and noncontrolling interests | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income from consolidated operations | |||||||||||||||||||||||
Less: Net income attributable to noncontrolling interests | |||||||||||||||||||||||
| Net income attributable to HEICO | $ | $ | $ | $ | |||||||||||||||||||
Net income per share attributable to HEICO shareholders: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
| Nine months ended July 31, | Three months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income from consolidated operations | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
Amortization of unrealized loss on defined benefit pension plan, net of tax | |||||||||||||||||||||||
| Total other comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||
Comprehensive income from consolidated operations | |||||||||||||||||||||||
Net income attributable to noncontrolling interests | |||||||||||||||||||||||
Foreign currency translation adjustments attributable to noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income attributable to HEICO | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Nine Months Ended July 31, 2022 and 2021
(in thousands, except per share data)
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of October 31, 2021 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | ( | ( | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions of noncontrolling interests | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of July 31, 2022 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of October 31, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions of noncontrolling interests | ( | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contributions from noncontrolling interests | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of July 31, 2021 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Three Months Ended July 31, 2022 and 2021
(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 April 30, 2022 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions of noncontrolling interests | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of July 31, 2022 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2021 | $ | $ | $ | $ | $ | ($ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions of noncontrolling interests | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contributions from noncontrolling interests | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | ( | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of July 31, 2021 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| Nine months ended July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities: | |||||||||||
| Net income from consolidated operations | $ | $ | |||||||||
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Employer contributions to HEICO Savings and Investment Plan | |||||||||||
| Deferred income tax provision (benefit) | ( | ||||||||||
| (Decrease) increase in accrued contingent consideration, net | ( | ||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| (Increase) decrease in accounts receivable | ( | ||||||||||
| Increase in contract assets | ( | ( | |||||||||
| (Increase) decrease in inventories | ( | ||||||||||
| Increase in prepaid expenses and other current assets | ( | ( | |||||||||
| Increase in trade accounts payable | |||||||||||
| Increase in accrued expenses and other current liabilities | |||||||||||
| (Decrease) increase in income taxes payable | ( | ||||||||||
| Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | |||||||||||
| Other | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Investments related to HEICO Leadership Compensation Plan | ( | ( | |||||||||
| Other | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Borrowings on revolving credit facility | — | ||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Redemptions of common stock related to stock option exercises | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Acquisitions of noncontrolling interests | ( | ( | |||||||||
| Revolving credit facility issuance costs | ( | ( | |||||||||
| Proceeds from stock option exercises | |||||||||||
| Capital contributions from noncontrolling interests | — | ||||||||||
| Other | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2021. The October 31, 2021 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the nine months ended July 31, 2022 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. ("HFSC") and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
The Company's results of operations in fiscal 2022 continue to reflect the adverse impact from the COVID-19 global pandemic (the “Pandemic”), including its impact on the Company’s supply chain. Despite the aforementioned, the Company 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 its commercial aerospace products. The Flight 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.
8
2. ACQUISITIONS
In July 2022, the Company, through a subsidiary of HFSC, acquired 96 % of the stock of Accurate Metal Machining, Inc. ("Accurate"). Accurate is a manufacturer of high-reliability components and assemblies. The remaining 4 % interest continues to be owned by certain members of Accurate’s management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual of $13.1 million as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should Accurate meet certain earnings objectives following the acquisition. See Note 8, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation. The purchase price of this acquisition was paid in cash, principally using proceeds from the Company's revolving credit facility.
In March 2022, the Company, through a subsidiary of HFSC, acquired 74 % of the membership interests of Pioneer Industries, LLC ("Pioneer"). Pioneer is a specialty distributor of spares for military aviation, marine, and ground platforms. The remaining 26 % interest continues to be owned by certain members of Pioneer's management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual of $9.8 million as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should Pioneer meet a certain earnings objective following the acquisition. See Note 8, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation. The purchase price of this acquisition was paid in cash, principally using proceeds from the Company's revolving credit facility.
In March 2022, the Company, through a subsidiary of HEICO Electronic, acquired 100 % of the stock of Flight Microwave Corporation ("Flight Microwave"). Flight Microwave is a designer and manufacturer of custom high power filters and filter assemblies used in space and
9
The individual purchase price of Accurate, Pioneer and Flight Microwave is not material or significant to the Company's condensed consolidated financial statements. The allocation of the total consideration for the fiscal 2022 acquisitions 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. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the fiscal 2022 acquisitions were included in the Company’s results of operations as of each effective acquisition date. The amount of net sales and earnings of the fiscal 2022 acquisitions included in the Condensed Consolidated Statements of Operations for the nine and three months ended July 31, 2022 is not material.
Had the fiscal 2022 acquisitions occurred as of November 1, 2020, net sales and net income from consolidated operations on a pro forma basis for the nine and three months ended July 31, 2022 would not have been materially different than the reported amounts, and net sales on a pro forma basis for the nine and three months ended July 31, 2021 would have been $1,448.0 million and $504.1 million, respectively, and net income from consolidated operations on a pro forma basis for the nine and three months ended July 31, 2021 would have been $248.5 million and $88.1 million, respectively. Had the fiscal 2022 acquisitions occurred as of November 1, 2020, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the nine and three months ended July 31, 2022 and 2021 would not have been materially different than the reported amounts. 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 acquisitions had taken place as of November 1, 2020. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to the intangible assets acquired and increased interest expense associated with borrowings to finance the acquisitions.
On July 26, 2022, the Company, through HEICO Electronic, entered into a Put Option Agreement with IK Partners and certain other parties thereto (collectively, the “Sellers”). Pursuant to the Put Option Agreement and a Stock Purchase Agreement attached to the Put Option Agreement (the “Purchase Agreement” and, together with the Put Option Agreement, the “Acquisition Agreements”), the Company has committed to acquire Exxelia International (“Exxelia”) from an affiliate of IK Partners and the Sellers for €453 million, or approximately $463.1 million as of July 31, 2022, in cash to be paid at closing plus the assumption of approximately €14 million, or approximately $14.3 million as of July 31, 2022, of liabilities pursuant to the terms, and subject to the conditions, set forth in the Acquisition Agreements. On August 5, 2022, pursuant to the exercise of the Put Option Agreement, the Company entered into the Purchase Agreement to purchase 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.
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Exxelia's management and team members are expected to continue to own a minority interest of around 5 % of the business. The purchase price of this acquisition is expected to be paid in cash, principally using proceeds from the Company's revolving credit facility. 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.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| (in thousands) | July 31, 2022 | October 31, 2021 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Less: Allowance for doubtful accounts | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
Inventories
| (in thousands) | July 31, 2022 | October 31, 2021 | ||||||||||||
| Finished products | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Materials, parts, assemblies and supplies | ||||||||||||||
| Inventories, net of valuation reserves | $ | $ | ||||||||||||
Property, Plant and Equipment
| (in thousands) | July 31, 2022 | October 31, 2021 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and improvements | ||||||||||||||
| Machinery, equipment and tooling | ||||||||||||||
| Construction in progress | ||||||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
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 $17.5 million as of July 31, 2022 and $13.2 million as of October 31, 2021. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2022 and 2021 was $5.9 million and $2.5 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2022 and 2021 was $2.2 million and $.7 million, respectively.
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Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the nine and three months ended July 31, 2022 and 2021 is as follows (in thousands):
| Nine months ended July 31, | Three months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| R&D expenses | $ | $ | $ | $ | |||||||||||||||||||
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2032. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
| July 31, 2022 | October 31, 2021 | ||||||||||
| Redeemable at fair value | $ | $ | |||||||||
| Redeemable based on a multiple of future earnings | |||||||||||
| Redeemable noncontrolling interests | $ | $ | |||||||||
As discussed in Note 2, Acquisitions, the Company, through a subsidiary of HFSC, acquired 96 % of the stock of Accurate in July 2022. As part of the operating agreement, the noncontrolling interest holders have the right to cause the Company to purchase their membership interest over a four-year period beginning in fiscal 2029, or sooner under certain conditions, and the Company has the right to purchase the same membership interest over the same period.
As discussed in Note 2, Acquisitions, the Company, through a subsidiary of HFSC, acquired 74 % of the membership interests of Pioneer in March 2022. As part of the operating agreement, the noncontrolling interest holders have the right to cause the Company to purchase their membership interest over a four-year period beginning in fiscal 2029, or sooner under certain conditions, and the Company has the right to purchase the same membership interest over 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 2017 exercised its option to cause the Company to purchase one-half of the noncontrolling interest in fiscal 2022 and the remaining one-half in fiscal 2024. Accordingly, the Company acquired an additional 9.95 % equity interest in May 2022, which increased the Company's ownership interest in the subsidiary to 90.05 %.
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During fiscal 2022, the Company sold a 3 % equity interest in a subsidiary of the FSG that was acquired in fiscal 2015, which decreased the Company's ownership interest in the subsidiary to 82 %. As part of the operating agreement, the noncontrolling interest holder has the right to cause the Company to purchase one-fifth of its equity interest beginning in fiscal 2028, or sooner under certain conditions, and each remaining one-fifth equity interest following the first anniversary of the most recent put option exercise. The Company has the right to purchase the same equity interest over the same period.
During fiscal 2022, the Company sold 10 % of the membership interests of a subsidiary of the FSG that was acquired in fiscal 2018, which decreased the Company's ownership interest in the subsidiary to 90 %. As part of the operating agreement, the noncontrolling interest holder has the right to cause the Company to purchase its membership interest over a four-year period beginning in fiscal 2027, or sooner under certain conditions, and the Company has the right to purchase the same membership interest over the same period.
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the nine months ended July 31, 2022 are as follows (in thousands):
| Foreign Currency Translation | Defined Benefit Pension Plan | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balances as of October 31, 2021 | ($ | ($ | ($ | ||||||||||||||
| Unrealized loss | ( | — | ( | ||||||||||||||
| Amortization of unrealized loss | — | ||||||||||||||||
| Balances as of July 31, 2022 | ($ | ($ | ($ | ||||||||||||||
4. GOODWILL AND OTHER INTANGIBLE ASSETS
| Segment | Consolidated Totals | ||||||||||||||||
| FSG | ETG | ||||||||||||||||
| Balances as of October 31, 2021 | $ | $ | $ | ||||||||||||||
| Goodwill acquired | |||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||
| Adjustments to goodwill | ( | ( | ( | ||||||||||||||
| Balances as of July 31, 2022 | $ | $ | $ | ||||||||||||||
The goodwill acquired pertains to the fiscal 2022 acquisitions described in Note 2, Acquisitions, 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
13
assumed. 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 principally reflect a measurement period adjustment of the write-up to fair value of property, plant and equipment associated with a fiscal 2021 acquisition. The Company estimates that $108 million of the goodwill acquired in fiscal 2022 will be deductible for income tax purposes.
Identifiable intangible assets consist of the following (in thousands):
| As of July 31, 2022 | As of October 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | ($ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||||
| Intellectual property | ( | ( | ||||||||||||||||||||||||||||||||||||
| Licenses | ( | ( | ||||||||||||||||||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | ||||||||||||||||||||||||||||||||||||
| Trade names | ( | ( | ||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| Non-Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Trade names | — | — | ||||||||||||||||||||||||||||||||||||
| $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||||||
Amortization expense related to intangible assets for the nine months ended July 31, 2022 and 2021 was $45.4 million and $45.5 million, respectively. Amortization expense related to intangible assets for the three months ended July 31, 2022 and 2021 was $15.2 15.5 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $58.3 million in fiscal 2023, $53.3 million in fiscal 2024, $48.9 million in fiscal 2025, $44.4 million in fiscal 2026, $41.5 million in fiscal 2027, and $180.3 million thereafter.
5. LONG-TERM DEBT
| July 31, 2022 | October 31, 2021 | ||||||||||
| Borrowings under revolving credit facility | $ | $ | |||||||||
| Finance leases and notes payable | |||||||||||
| Less: Current maturities of long-term debt | ( | ( | |||||||||
| $ | $ | ||||||||||
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The Company's borrowings under its revolving credit facility mature in fiscal 2025 as discussed further below. As of July 31, 2022 and October 31, 2021, the weighted average interest rate on borrowings under the Company's revolving credit facility was 3.3 % and 1.1 %, respectively. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 2022, the Company was in compliance with all such covenants.
On April 7, 2022, the Company entered into an amendment to extend the maturity date of its Revolving Credit Facility Agreement ("Credit Facility") by one year to November 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.
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.
| July 31, 2022 | October 31, 2021 | Change | |||||||||||||||
| Contract assets | $ | $ | $ | ||||||||||||||
| Contract liabilities | |||||||||||||||||
| Net contract assets | $ | $ | ($ | ||||||||||||||
The increase in the Company's contract liabilities during the first nine months of fiscal 2022 principally reflects the receipt of advance deposits on certain customer contracts at both the ETG and FSG.
The amount of revenue that the Company recognized during the nine and three months ended July 31, 2022 that was included in contract liabilities as of the beginning of fiscal 2022 was $22.7 million and $3.1 million, respectively.
Remaining Performance Obligations
As of July 31, 2022, the Company had $451.3 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 product line. The Company will recognize net sales as these obligations are
15
satisfied. The Company expects to recognize $123.8 million of this amount during the remainder of fiscal 2022 and $327.5 million thereafter, of which the majority is expected to occur in fiscal 2023.
Disaggregation of Revenue
| Nine months ended July 31, | Three months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Flight Support Group: | |||||||||||||||||||||||
Aftermarket replacement parts (1) | $ | $ | $ | $ | |||||||||||||||||||
Repair and overhaul parts and services (2) | |||||||||||||||||||||||
Specialty products (3) | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Electronic Technologies Group: | |||||||||||||||||||||||
Electronic component parts primarily for defense, space and aerospace equipment (4) | |||||||||||||||||||||||
Electronic component parts for equipment in various other industries (5) | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Intersegment sales | ( | ( | ( | ( | |||||||||||||||||||
| Total consolidated net sales | $ | $ | $ | $ | |||||||||||||||||||
(1) Includes primarily various jet engine and aircraft component replacement parts.
(2) Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(3) Includes primarily the sale of specialty components such as thermal insulation blankets, renewable/reusable insulation systems, advanced niche components, complex composite assemblies, and expanded foil mesh as well as machining, brazing, fabricating and welding services generally to original equipment manufacturers.
(4) Includes various component parts such as electro-optical infrared simulation and test equipment, electro-optical laser products, electro-optical, microwave and other power equipment, high-speed interface products, power conversion products, underwater locator beacons, emergency locator transmission beacons, traveling wave tube amplifiers, microwave power modules, a wide variety of memory products and radio frequency (RF) and microwave products, crashworthy and ballistically self-sealing auxiliary fuel systems, high performance communications and electronic intercept receivers and tuners, high performance active antenna systems and technical surveillance countermeasures (TSCM) equipment.
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| Nine months ended July 31, | Three months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Flight Support Group: | |||||||||||||||||||||||
| Aerospace | $ | $ | $ | $ | |||||||||||||||||||
| Defense and Space | |||||||||||||||||||||||
Other (1) | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Electronic Technologies Group: | |||||||||||||||||||||||
| Defense and Space | |||||||||||||||||||||||
Other (2) | |||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Intersegment sales | ( | ( | ( | ( | |||||||||||||||||||
| Total consolidated net sales | $ | $ | $ | $ | |||||||||||||||||||
(1) Principally industrial products.
7. INCOME TAXES
The Company's 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 the Company's 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.
The Company's 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 the Company's effective tax rate principally reflects a 5.3 % unfavorable impact from tax-exempt unrealized losses in the
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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 July 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 | $ | $ | $ | $ | ||||||||||||||||||||||
| As of October 31, 2021 | ||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Deferred compensation plan: | ||||||||||||||||||||||||||
| Corporate-owned life insurance | $ | $ | $ | $ | ||||||||||||||||||||||
| Money market fund | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company, and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are
18
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 $218.2 million as of July 31, 2022 and $244.3 million as of October 31, 2021.
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 July 31, 2022, the estimated fair value of the contingent consideration was $13.1 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 July 31, 2022, the estimated fair value of the contingent consideration was $9.7 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 July 31, 2022, the estimated fair value of the contingent consideration was $17.4 million.
As part of the agreement to acquire 89.99 % of the equity interests of a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to CAD $27.0 million, or $21.1 million, in fiscal 2025 should the acquired entity meet certain earnings objectives during fiscal 2023 and 2024. However, should the acquired entity achieve a certain earnings objective over any two consecutive fiscal years beginning in fiscal 2021 and ending in fiscal 2023, half of the contingent consideration obligation, or CAD $13.5 million, would be payable in the following year. As of July 31, 2022, the estimated fair value of the contingent consideration was CAD $18.5 million, or $14.4 million, of which $10.4 million was included in accrued expenses and other current liabilities in the Company's Condensed Consolidated Balance Sheet.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to $35.0 million in fiscal 2025 based on the earnings of the acquired entity during calendar years 2023 and 2024 provided the entity meets certain earnings objectives during each of calendar years 2021 to 2024. As of July 31, 2022, the estimated fair value of the contingent consideration was $7.4 million as compared to $13.3 million as of October 31, 2021. The decrease in the fair value of the contingent consideration is principally attributable to an increased probability that the required earnings
19
objective for each of calendar years 2022 to 2024 is not met as forecasted sales and earnings growth is delayed reflecting the lower demand that the subsidiary is currently experiencing for its defense products. The obligation to pay any contingent consideration would be payable by a consolidated subsidiary of HEICO that is 75 % owned by HEICO Electronic.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet a certain earnings objective during the first six years following the acquisition. As of July 31, 2022, the estimated fair value of the contingent consideration was $18.6 million.
The following unobservable inputs were used to derive the estimated fair value of the Company's Level 3 contingent consideration liabilities as of July 31, 2022 ($ in thousands):
| Unobservable | Weighted | |||||||||||||||||||||||||
| Acquisition Date | Fair Value | Input | Range | Average (1) | ||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||
| 8-11-2020 | Compound annual revenue growth rate | ( | ||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
| 9-15-2017 | Compound annual revenue growth rate | ( | ||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
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Changes in the Company’s contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the nine months ended July 31, 2022 are as follows (in thousands):
| Liabilities | ||||||||
| Balance as of October 31, 2021 | $ | |||||||
| Contingent consideration related to acquisitions | ||||||||
| Decrease in accrued contingent consideration, net | ( | |||||||
| Foreign currency transaction adjustments | ( | |||||||
| Balance as of July 31, 2022 | $ | |||||||
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | ||||||||
| Accrued expenses and other current liabilities | $ | |||||||
| Other long-term liabilities | ||||||||
| $ | ||||||||
The Company records changes in accrued contingent consideration and foreign currency transaction adjustments within in its Condensed Consolidated Statement 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 July 31, 2022 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.
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9. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
| Nine months ended July 31, | Three months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income attributable to HEICO | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted average common shares outstanding - basic | |||||||||||||||||||||||
| Effect of dilutive stock options | |||||||||||||||||||||||
Weighted average common shares outstanding - diluted | |||||||||||||||||||||||
Net income per share attributable to HEICO shareholders: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Anti-dilutive stock options excluded | |||||||||||||||||||||||
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10. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the nine and three months ended July 31, 2022 and 2021, respectively, is as follows (in thousands):
Other, Primarily Corporate and Intersegment (1) | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Nine months ended July 31, 2022: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Nine months ended July 31, 2021: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Three months ended July 31, 2022: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Three months ended July 31, 2021: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
(1) Intersegment activity principally consists of net sales from the ETG to the FSG .
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Total assets by operating segment are as follows (in thousands):
| Other, Primarily Corporate | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Total assets as of July 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets as of October 31, 2021 | ||||||||||||||||||||||||||
11. COMMITMENTS AND CONTINGENCIES
Guarantees
As of July 31, 2022, the Company has arranged for standby letters of credit aggregating $21.3 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.
Product Warranty
Changes in the Company’s product warranty liability for the nine months ended July 31, 2022 and 2021, respectively, are as follows (in thousands):
| Nine months ended July 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Balances as of beginning of fiscal year | $ | $ | ||||||||||||
| Accruals for warranties | ||||||||||||||
| Acquired warranty liabilities | — | |||||||||||||
| Warranty claims settled | ( | ( | ||||||||||||
| Balances as of July 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.
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12. SUBSEQUENT EVENTS
In August 2022, the Company, through a subsidiary of HEICO Electronic, acquired 100 % of the stock of Charter Engineering, Inc. ("Charter"). Charter designs and manufactures a complete line of RF and Microwave coaxial switches for the aerospace, defense, commercial, Automated Test Equipment ("ATE"), and instrumentation markets. The purchase price of this acquisition was paid in cash using cash provided by operating activities and is not material or significant to the Company's condensed consolidated financial statements.
In August 2022, the Company acquired 100 % of the stock of Sensor Systems, Inc. ("Sensor"). Sensor designs and manufactures airborne antennas for commercial and military applications. The purchase price of this acquisition was paid for with a proportional combination of cash using proceeds from the Company's revolving credit facility and 576,338 shares of HEICO Class A Common Stock. The purchase price is not material or significant to the Company's condensed consolidated financial statements.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2021. There have been no material changes to our critical accounting policies during the nine months ended July 31, 2022.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Our results of operations in fiscal 2022 continue to reflect the adverse impact from the COVID-19 global pandemic (the “Pandemic”), 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. The Flight 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 ended July 31, 2022 have been affected by the fiscal 2021 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2021 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.
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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 | % | |||||||||||||||
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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.
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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.
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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 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 $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.
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Comparison of Third Quarter of Fiscal 2022 to Third Quarter of Fiscal 2021
Net Sales
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
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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.
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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 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 $10.5 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.
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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 of July 31, 2022, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 9.9%.
On April 7, 2022, we entered into an amendment to extend the maturity date of our Revolving Credit Facility Agreement ("Credit Facility") by one year to November 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.
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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 October 31, 2021.
As discussed in Note 2, Acquisitions, on August 5, 2022, we entered into a purchase agreement to acquire approximately 95% of the stock of Exxelia 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 the U.S. dollar will either favorably or unfavorably affect the purchase price as translated into U.S. dollars upon closing. A hypothetical 10% weakening or strengthening in the exchange rate of the Euro to the U.S. dollar as of July 31, 2022 would decrease or increase the purchase price as translated into U.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.
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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. Factors that could cause such differences include: the severity, magnitude and duration of the Pandemic; our liquidity and the amount and timing of cash generation; lower commercial air travel caused by the Pandemic and its aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions, including the effects of inflation, within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2021.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the third quarter ended July 31, 2022 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS
| Exhibit | Description | |||||||
| 10.1 | ||||||||
| 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.
*** Previously filed.
38
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: | August 31, 2022 | By: | /s/ CARLOS L. MACAU, JR. | ||||||||
| Carlos L. Macau, Jr. Executive Vice President - Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||||||
| By: | /s/ STEVEN M. WALKER | ||||||||||
| Steven M. Walker Chief Accounting Officer and Assistant Treasurer (Principal Accounting Officer) | |||||||||||
39
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Laurans A. Mendelson, certify that:
(1)I have reviewed this Quarterly Report on Form 10-Q of HEICO Corporation;
(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | August 31, 2022 | /s/ LAURANS A. MENDELSON | ||||||
| Laurans A. Mendelson | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Carlos L. Macau, Jr., certify that:
(1)I have reviewed this Quarterly Report on Form 10-Q of HEICO Corporation;
(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | August 31, 2022 | /s/ CARLOS L. MACAU, JR. | ||||||
| Carlos L. Macau, Jr. | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
Exhibit 32.1
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the “Company”) on Form 10-Q for the period ended July 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Laurans A. Mendelson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | August 31, 2022 | /s/ LAURANS A. MENDELSON | ||||||
| Laurans A. Mendelson | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 32.2
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the “Company”) on Form 10-Q for the period ended July 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carlos L. Macau, Jr., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | August 31, 2022 | /s/ CARLOS L. MACAU, JR. | ||||||
| Carlos L. Macau, Jr. | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||