UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the quarterly period ended April 30, 2023January 31, 2024 |
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| | OR |
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☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the transition period from ______ to _______ |
Commission File Number: 001-04604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
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Florida | | 65-0341002 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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3000 Taft Street, Hollywood, Florida | | 33021 |
(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:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
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Common Stock, $.01 par value per share | | HEI | | New York Stock Exchange |
Class A Common Stock, $.01 par value per share | | HEI.A | | New York Stock Exchange |
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.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
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 May 22, 2023February 27, 2024 is as follows:
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Common Stock, $.01 par value | 54,705,93454,772,494 | | shares |
Class A Common Stock, $.01 par value | 82,298,20083,591,871 | | shares |
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
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Part I. | Financial Information | |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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Part II. | Other Information | |
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| Item 1A. | Risk Factors5. | | |
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| Item 6. | | |
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PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
| | | | | | | | | | | | | | |
| | April 30, 2023 | | October 31, 2022 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | | $127,161 | | | $139,504 | |
Accounts receivable, net | | 361,057 | | | 294,848 | |
Contract assets | | 103,448 | | | 93,978 | |
Inventories, net | | 721,569 | | | 582,471 | |
Prepaid expenses and other current assets | | 53,404 | | | 41,929 | |
Total current assets | | 1,366,639 | | | 1,152,730 | |
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Property, plant and equipment, net | | 273,856 | | | 225,879 | |
Goodwill | | 2,031,235 | | | 1,672,425 | |
Intangible assets, net | | 844,319 | | | 733,327 | |
Other assets | | 354,150 | | | 311,135 | |
Total assets | | $4,870,199 | | | $4,095,496 | |
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LIABILITIES AND EQUITY |
Current liabilities: | | | | |
Short-term debt and current maturities of long-term debt | | $18,860 | | | $1,654 | |
Trade accounts payable | | 147,708 | | | 116,551 | |
Accrued expenses and other current liabilities | | 296,159 | | | 290,199 | |
Income taxes payable | | 4,101 | | | 12,455 | |
Total current liabilities | | 466,828 | | | 420,859 | |
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Long-term debt, net of current maturities | | 735,779 | | | 288,620 | |
Deferred income taxes | | 94,468 | | | 71,162 | |
Other long-term liabilities | | 367,624 | | | 338,948 | |
Total liabilities | | 1,664,699 | | | 1,119,589 | |
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Commitments and contingencies (Note 11) | | | | |
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Redeemable noncontrolling interests (Note 3) | | 345,833 | | | 327,601 | |
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Shareholders’ equity: | | | | |
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued | | — | | | — | |
Common Stock, $.01 par value per share; 150,000 shares authorized; 54,701 and 54,519 shares issued and outstanding | | 547 | | | 545 | |
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 82,278 and 82,093 shares issued and outstanding | | 823 | | | 821 | |
Capital in excess of par value | | 398,991 | | | 397,337 | |
Deferred compensation obligation | | 6,171 | | | 5,297 | |
HEICO stock held by irrevocable trust | | (6,171) | | | (5,297) | |
Accumulated other comprehensive loss | | (17,626) | | | (46,499) | |
Retained earnings | | 2,435,155 | | | 2,253,932 | |
Total HEICO shareholders’ equity | | 2,817,890 | | | 2,606,136 | |
Noncontrolling interests | | 41,777 | | | 42,170 | |
Total shareholders’ equity | | 2,859,667 | | | 2,648,306 | |
Total liabilities and equity | | $4,870,199 | | | $4,095,496 | |
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| | January 31, 2024 | | October 31, 2023 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | | $196,323 | | | $171,048 | |
Accounts receivable, net | | 471,697 | | | 509,075 | |
Contract assets | | 108,888 | | | 111,702 | |
Inventories, net | | 1,068,735 | | | 1,013,680 | |
Prepaid expenses and other current assets | | 66,716 | | | 49,837 | |
Total current assets | | 1,912,359 | | | 1,855,342 | |
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Property, plant and equipment, net | | 327,661 | | | 321,848 | |
Goodwill | | 3,290,494 | | | 3,274,327 | |
Intangible assets, net | | 1,365,682 | | | 1,357,281 | |
Other assets | | 439,873 | | | 386,265 | |
Total assets | | $7,336,069 | | | $7,195,063 | |
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LIABILITIES AND EQUITY |
Current liabilities: | | | | |
Short-term debt and current maturities of long-term debt | | $4,739 | | | $17,801 | |
Trade accounts payable | | 194,894 | | | 205,893 | |
Accrued expenses and other current liabilities | | 381,837 | | | 433,101 | |
Income taxes payable | | 22,625 | | | 8,547 | |
Total current liabilities | | 604,095 | | | 665,342 | |
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Long-term debt, net of current maturities | | 2,495,726 | | | 2,460,277 | |
Deferred income taxes | | 128,203 | | | 131,846 | |
Other long-term liabilities | | 425,541 | | | 379,640 | |
Total liabilities | | 3,653,565 | | | 3,637,105 | |
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Commitments and contingencies (Note 11) | | | | |
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Redeemable noncontrolling interests (Note 3) | | 365,865 | | | 364,807 | |
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Shareholders’ equity: | | | | |
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued | | — | | | — | |
Common Stock, $.01 par value per share; 150,000 shares authorized; 54,772 and 54,721 shares issued and outstanding | | 548 | | | 547 | |
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 83,566 and 83,507 shares issued and outstanding | | 836 | | | 835 | |
Capital in excess of par value | | 585,888 | | | 578,809 | |
Deferred compensation obligation | | 6,318 | | | 6,318 | |
HEICO stock held by irrevocable trust | | (6,318) | | | (6,318) | |
Accumulated other comprehensive loss | | (25,962) | | | (40,180) | |
Retained earnings | | 2,705,128 | | | 2,605,984 | |
Total HEICO shareholders’ equity | | 3,266,438 | | | 3,145,995 | |
Noncontrolling interests | | 50,201 | | | 47,156 | |
Total shareholders’ equity | | 3,316,639 | | | 3,193,151 | |
Total liabilities and equity | | $7,336,069 | | | $7,195,063 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
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| Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
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Net sales | $1,308,756 | | | $1,029,156 | | | $687,841 | | | $538,813 | |
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Operating costs and expenses: | | | | | | | |
Cost of sales | 798,445 | | | 627,717 | | | 421,329 | | | 327,584 | |
Selling, general and administrative expenses | 223,787 | | | 179,840 | | | 109,422 | | | 88,452 | |
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Total operating costs and expenses | 1,022,232 | | | 807,557 | | | 530,751 | | | 416,036 | |
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Operating income | 286,524 | | | 221,599 | | | 157,090 | | | 122,777 | |
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Interest expense | (17,441) | | | (1,775) | | | (11,373) | | | (979) | |
Other income | 982 | | | 540 | | | 343 | | | 314 | |
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Income before income taxes and noncontrolling interests | 270,065 | | | 220,364 | | | 146,060 | | | 122,112 | |
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Income tax expense | 52,000 | | | 33,000 | | | 31,000 | | | 29,000 | |
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Net income from consolidated operations | 218,065 | | | 187,364 | | | 115,060 | | | 93,112 | |
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Less: Net income attributable to noncontrolling interests | 19,918 | | | 15,433 | | | 9,940 | | | 8,102 | |
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Net income attributable to HEICO | $198,147 | | | $171,931 | | | $105,120 | | | $85,010 | |
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Net income per share attributable to HEICO shareholders: | | | | | | | |
Basic | $1.45 | | | $1.27 | | | $.77 | | | $.63 | |
Diluted | $1.43 | | | $1.25 | | | $.76 | | | $.62 | |
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Weighted average number of common shares outstanding: | | | | | | | |
Basic | 136,786 | | | 135,763 | | | 136,916 | | | 135,891 | |
Diluted | 138,590 | | | 137,916 | | | 138,600 | | | 137,867 | |
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| | Three months ended January 31, |
| | 2024 | | 2023 |
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Net sales | | $896,363 | | | $620,915 | |
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Operating costs and expenses: | | | | |
Cost of sales | | 549,594 | | | 377,116 | |
Selling, general and administrative expenses | | 166,559 | | | 114,365 | |
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Total operating costs and expenses | | 716,153 | | | 491,481 | |
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Operating income | | 180,210 | | | 129,434 | |
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Interest expense | | (38,607) | | | (6,068) | |
Other income | | 679 | | | 639 | |
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Income before income taxes and noncontrolling interests | | 142,282 | | | 124,005 | |
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Income tax expense | | 16,800 | | | 21,000 | |
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Net income from consolidated operations | | 125,482 | | | 103,005 | |
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Less: Net income attributable to noncontrolling interests | | 10,784 | | | 9,978 | |
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Net income attributable to HEICO | | $114,698 | | | $93,027 | |
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Net income per share attributable to HEICO shareholders: | | | | |
Basic | | $.83 | | | $.68 | |
Diluted | | $.82 | | | $.67 | |
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Weighted average number of common shares outstanding: | | | | |
Basic | | 138,265 | | | 136,655 | |
Diluted | | 139,893 | | | 138,579 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
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| Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
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Net income from consolidated operations | $218,065 | | | $187,364 | | | $115,060 | | | $93,112 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 30,379 | | | (23,028) | | | 1,994 | | | (14,277) | |
Amortization of unrealized loss on defined benefit pension plan, net of tax | 28 | | | 33 | | | 13 | | | 22 | |
Total other comprehensive income (loss) | 30,407 | | | (22,995) | | | 2,007 | | | (14,255) | |
Comprehensive income from consolidated operations | 248,472 | | | 164,369 | | | 117,067 | | | 78,857 | |
Net income attributable to noncontrolling interests | 19,918 | | | 15,433 | | | 9,940 | | | 8,102 | |
Foreign currency translation adjustments attributable to noncontrolling interests | 1,534 | | | (993) | | | 275 | | | (663) | |
Comprehensive income attributable to noncontrolling interests | 21,452 | | | 14,440 | | | 10,215 | | | 7,439 | |
Comprehensive income attributable to HEICO | $227,020 | | | $149,929 | | | $106,852 | | | $71,418 | |
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| | Three months ended January 31, |
| | 2024 | | 2023 |
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Net income from consolidated operations | | $125,482 | | | $103,005 | |
Other comprehensive income: | | | | |
Foreign currency translation adjustments | | 14,761 | | | 28,385 | |
Amortization of unrealized loss on defined benefit pension plan, net of tax | | 13 | | | 15 | |
Total other comprehensive income | | 14,774 | | | 28,400 | |
Comprehensive income from consolidated operations | | 140,256 | | | 131,405 | |
Net income attributable to noncontrolling interests | | 10,784 | | | 9,978 | |
Foreign currency translation adjustments attributable to noncontrolling interests | | 556 | | | 1,259 | |
Comprehensive income attributable to noncontrolling interests | | 11,340 | | | 11,237 | |
Comprehensive income attributable to HEICO | | $128,916 | | | $120,168 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Six Months Ended April 30, 2023 and 2022
(in thousands, except per share data)
| | | HEICO Shareholders' Equity | |
| Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2022 | $327,601 | | | $545 | | | $821 | | | $397,337 | | | $5,297 | | | ($5,297) | | | ($46,499) | | | $2,253,932 | | | $42,170 | | | $2,648,306 | |
| | | HEICO Shareholders' Equity | |
| Redeemable Noncontrolling Interests | |
| Redeemable Noncontrolling Interests | |
| Redeemable Noncontrolling Interests | | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2023 | |
Comprehensive income | Comprehensive income | 15,356 | | | — | | | — | | | — | | | — | | | — | | | 28,873 | | | 198,147 | | | 6,096 | | | 233,116 | |
Cash dividends ($.10 per share) | Cash dividends ($.10 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,668) | | | — | | | (13,668) | |
Issuance of common stock to HEICO Savings and Investment Plan | Issuance of common stock to HEICO Savings and Investment Plan | — | | | — | | | — | | | 7,760 | | | — | | | — | | | — | | | — | | | — | | | 7,760 | |
Share-based compensation expense | Share-based compensation expense | — | | | — | | | — | | | 6,055 | | | — | | | — | | | — | | | — | | | — | | | 6,055 | |
Proceeds from stock option exercises | Proceeds from stock option exercises | — | | | 2 | | | 2 | | | 4,070 | | | — | | | — | | | — | | | — | | | — | | | 4,074 | |
Redemptions of common stock related to stock option exercises | Redemptions of common stock related to stock option exercises | — | | | — | | | — | | | (14,811) | | | — | | | — | | | — | | | — | | | — | | | (14,811) | |
Noncontrolling interests assumed related to acquisitions | 14,642 | | | — | | | — | | | — | | | —�� | | | — | | | — | | | — | | | — | | | — | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | (16,161) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,489) | | | (6,489) | |
Acquisitions of noncontrolling interests | Acquisitions of noncontrolling interests | (1,059) | | | — | | | — | | | (1,674) | | | — | | | — | | | — | | | — | | | — | | | (1,674) | |
Adjustments to redemption amount of redeemable noncontrolling interests | Adjustments to redemption amount of redeemable noncontrolling interests | 3,103 | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,103) | | | — | | | (3,103) | |
| Deferred compensation obligation | — | | | — | | | — | | | — | | | 874 | | | (874) | | | — | | | — | | | — | | | — | |
Other | Other | 2,351 | | | — | | | — | | | 254 | | | — | | | — | | | — | | | (153) | | | — | | | 101 | |
Balances as of April 30, 2023 | $345,833 | | | $547 | | | $823 | | | $398,991 | | | $6,171 | | | ($6,171) | | | ($17,626) | | | $2,435,155 | | | $41,777 | | | $2,859,667 | |
Balances as of January 31, 2024 | |
| | | 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 | $252,587 | | | $543 | | | $812 | | | $320,747 | | | $5,297 | | | ($5,297) | | | ($8,552) | | | $1,949,521 | | | $33,868 | | | $2,296,939 | |
Comprehensive income (loss) | 9,262 | | | — | | | — | | | — | | | — | | | — | | | (22,002) | | | 171,931 | | | 5,178 | | | 155,107 | |
Cash dividends ($.09 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,227) | | | — | | | (12,227) | |
| | | HEICO Shareholders' Equity | |
| Redeemable Noncontrolling Interests | |
| Redeemable Noncontrolling Interests | |
| Redeemable Noncontrolling Interests | | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2022 | |
Comprehensive income | |
Cash dividends ($.10 per share) | |
Issuance of common stock to HEICO Savings and Investment Plan | Issuance of common stock to HEICO Savings and Investment Plan | — | | | — | | | — | | | 7,739 | | | — | | | — | | | — | | | — | | | — | | | 7,739 | |
Share-based compensation expense | Share-based compensation expense | — | | | — | | | — | | | 6,855 | | | — | | | — | | | — | | | — | | | — | | | 6,855 | |
Proceeds from stock option exercises | Proceeds from stock option exercises | — | | | 3 | | | 3 | | | 1,604 | | | — | | | — | | | — | | | — | | | — | | | 1,610 | |
Redemptions of common stock related to stock option exercises | Redemptions of common stock related to stock option exercises | — | | | (1) | | | (1) | | | (23,690) | | | — | | | — | | | — | | | — | | | — | | | (23,692) | |
Noncontrolling interests assumed related to acquisitions | Noncontrolling interests assumed related to acquisitions | 39,235 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | (9,968) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (608) | | | (608) | |
Acquisitions of noncontrolling interests | |
Adjustments to redemption amount of redeemable noncontrolling interests | Adjustments to redemption amount of redeemable noncontrolling interests | 9,047 | | | — | | | — | | | — | | | — | | | — | | | — | | | (9,047) | | | — | | | (9,047) | |
| Deferred compensation obligation | |
Other | Other | 3,764 | | | — | | | — | | | (2,202) | | | — | | | — | | | — | | | — | | | — | | | (2,202) | |
Balances as of April 30, 2022 | $303,927 | | | $545 | | | $814 | | | $311,053 | | | $5,297 | | | ($5,297) | | | ($30,554) | | | $2,100,178 | | | $38,438 | | | $2,420,474 | |
Balances as of January 31, 2023 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Three Months Ended April 30, 2023 and 2022
(in thousands, except per share data)
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| | | HEICO Shareholders' Equity | | | | |
| Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of January 31, 2023 | $340,287 | | | $547 | | | $822 | | | $388,603 | | | $6,171 | | | ($6,171) | | | ($19,358) | | | $2,328,523 | | | $45,037 | | | $2,744,174 | |
Comprehensive income | 7,376 | | | — | | | — | | | — | | | — | | | — | | | 1,732 | | | 105,120 | | | 2,839 | | | 109,691 | |
Issuance of common stock to HEICO Savings and Investment Plan | — | | | — | | | — | | | 5,796 | | | — | | | — | | | — | | | — | | | — | | | 5,796 | |
Share-based compensation expense | — | | | — | | | — | | | 3,243 | | | — | | | — | | | — | | | — | | | — | | | 3,243 | |
Proceeds from stock option exercises | — | | | — | | | 1 | | | 1,228 | | | — | | | — | | | — | | | — | | | — | | | 1,229 | |
Redemptions of common stock related to stock option exercises | — | | | — | | | — | | | (6) | | | — | | | — | | | — | | | — | | | — | | | (6) | |
Noncontrolling interests assumed related to acquisitions | 2,592 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Distributions to noncontrolling interests | (5,260) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,099) | | | (6,099) | |
Adjustments to redemption amount of redeemable noncontrolling interests | (1,513) | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,513 | | | — | | | 1,513 | |
Other | 2,351 | | | — | | | — | | | 127 | | | — | | | — | | | — | | | (1) | | | — | | | 126 | |
Balances as of April 30, 2023 | $345,833 | | | $547 | | | $823 | | | $398,991 | | | $6,171 | | | ($6,171) | | | ($17,626) | | | $2,435,155 | | | $41,777 | | | $2,859,667 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 January 31, 2022 | $258,289 | | | $545 | | | $814 | | | $302,104 | | | $5,297 | | | ($5,297) | | | ($16,962) | | | $2,018,990 | | | $36,565 | | | $2,342,056 | |
Comprehensive income (loss) | 5,121 | | | — | | | — | | | — | | | — | | | — | | | (13,592) | | | 85,010 | | | 2,318 | | | 73,736 | |
Issuance of common stock to HEICO Savings and Investment Plan | — | | | — | | | — | | | 6,069 | | | — | | | — | | | — | | | — | | | — | | | 6,069 | |
Share-based compensation expense | — | | | — | | | — | | | 3,241 | | | — | | | — | | | — | | | — | | | — | | | 3,241 | |
Proceeds from stock option exercises | — | | | — | | | — | | | 841 | | | — | | | — | | | — | | | — | | | — | | | 841 | |
Redemptions of common stock related to stock option exercises | — | | | — | | | — | | | (69) | | | — | | | — | | | — | | | — | | | — | | | (69) | |
Noncontrolling interests assumed related to acquisitions | 39,063 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Distributions to noncontrolling interests | (4,085) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (445) | | | (445) | |
Adjustments to redemption amount of redeemable noncontrolling interests | 3,822 | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,822) | | | — | | | (3,822) | |
Other | 1,717 | | | — | | | — | | | (1,133) | | | — | | | — | | | — | | | — | | | — | | | (1,133) | |
Balances as of April 30, 2022 | $303,927 | | | $545 | | | $814 | | | $311,053 | | | $5,297 | | | ($5,297) | | | ($30,554) | | | $2,100,178 | | | $38,438 | | | $2,420,474 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| | Six months ended April 30, |
| 2023 | | 2022 |
| Three months ended January 31, | | | Three months ended January 31, |
| 2024 | | | 2024 | | 2023 |
Operating Activities: | Operating Activities: | | | |
Net income from consolidated operations | |
Net income from consolidated operations | |
Net income from consolidated operations | Net income from consolidated operations | $218,065 | | | $187,364 | |
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 56,784 | | | 46,707 | |
Depreciation and amortization | |
Depreciation and amortization | |
Employer contributions to HEICO Savings and Investment Plan | Employer contributions to HEICO Savings and Investment Plan | 6,533 | | | 5,364 | |
Share-based compensation expense | Share-based compensation expense | 6,055 | | | 6,855 | |
Increase (decrease) in accrued contingent consideration, net | 1,842 | | | (1,773) | |
Amendment and termination of contingent consideration agreement | (9,057) | | | — | |
Increase in accrued contingent consideration, net | |
Deferred income tax (benefit) provision | |
Payment of contingent consideration | Payment of contingent consideration | (6,299) | | | — | |
Deferred income tax (benefit) provision | (9,596) | | | 2,080 | |
Changes in operating assets and liabilities, net of acquisitions: | Changes in operating assets and liabilities, net of acquisitions: | |
Increase in accounts receivable | (21,222) | | | (20,263) | |
(Increase) decrease in contract assets | (9,267) | | | 1,778 | |
Decrease (increase) in accounts receivable | |
Decrease (increase) in accounts receivable | |
Decrease (increase) in accounts receivable | |
Decrease (increase) in contract assets | |
Increase in inventories | Increase in inventories | (75,251) | | | (42,766) | |
Decrease (increase) in prepaid expenses and other current assets | 1,738 | | | (8,974) | |
Increase in trade accounts payable | 6,797 | | | 8,137 | |
Increase in prepaid expenses and other current assets | |
Decrease in trade accounts payable | |
Decrease in accrued expenses and other current liabilities | Decrease in accrued expenses and other current liabilities | (2,671) | | | (15,946) | |
Decrease in income taxes payable | (13,824) | | | (9,343) | |
Increase in income taxes payable | |
Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | 10,563 | | | 13,356 | |
Other | Other | (6,754) | | | 2,177 | |
Net cash provided by operating activities | Net cash provided by operating activities | 154,436 | | | 174,753 | |
| Investing Activities: | Investing Activities: | |
Investing Activities: | |
Investing Activities: | |
Acquisitions, net of cash acquired | |
Acquisitions, net of cash acquired | |
Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | (524,231) | | | (105,533) | |
Capital expenditures | Capital expenditures | (21,921) | | | (16,211) | |
Investments related to HEICO Leadership Compensation Plan | Investments related to HEICO Leadership Compensation Plan | (14,000) | | | (11,700) | |
Other | Other | 362 | | | (10,511) | |
Net cash used in investing activities | Net cash used in investing activities | (559,790) | | | (143,955) | |
| Financing Activities: | Financing Activities: | |
Financing Activities: | |
Financing Activities: | |
Borrowings on revolving credit facility | |
Borrowings on revolving credit facility | |
Borrowings on revolving credit facility | Borrowings on revolving credit facility | 556,000 | | | 93,000 | |
Payments on revolving credit facility | Payments on revolving credit facility | (108,000) | | | (65,000) | |
Distributions to noncontrolling interests | (22,650) | | | (10,576) | |
Redemptions of common stock related to stock option exercises | (14,811) | | | (23,692) | |
Payments on short-term debt, net | |
Cash dividends paid | Cash dividends paid | (13,668) | | | (12,227) | |
Payment of contingent consideration | Payment of contingent consideration | (12,610) | | | — | |
Distributions to noncontrolling interests | |
Acquisitions of noncontrolling interests | Acquisitions of noncontrolling interests | (2,733) | | | — | |
Redemptions of common stock related to stock option exercises | |
Proceeds from stock option exercises | Proceeds from stock option exercises | 4,074 | | | 1,610 | |
Other | Other | 3,163 | | | (1,220) | |
Net cash provided by (used in) financing activities | 388,765 | | | (18,105) | |
Net cash (used in) provided by financing activities | |
| Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | 4,246 | | | (3,673) | |
Effect of exchange rate changes on cash | |
Effect of exchange rate changes on cash | |
| Net (decrease) increase in cash and cash equivalents | (12,343) | | | 9,020 | |
Net increase in cash and cash equivalents | |
Net increase in cash and cash equivalents | |
Net increase in cash and cash equivalents | |
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 139,504 | | | 108,298 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $127,161 | | | $117,318 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2022.2023. The October 31, 20222023 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 sixthree months ended
April 30, 2023 January 31, 2024 are not necessarily indicative of the results which may be expected for the entire
fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. ("HFSC") and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Although the Company has largely emerged from the COVID-19 pandemic, HEICO’s results of operations in fiscal 2023 continue to reflect some of the pandemic’s lingering effects, including its impact on the Company's supply chain. Despite the aforementioned, the Company experienced continued improvement in operating results in the first six months and second quarter of fiscal 2023 as compared to the first six months and second quarter of fiscal 2022 principally reflecting improved demand for its commercial aerospace products and services. The FSG has reported eleven consecutive quarters of sequential growth in net sales and operating income resulting from commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets.
New Accounting PronouncementPronouncements
In October 2021,November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations2023-07, “Segment Reporting (Topic 805)280): Accounting for Contract AssetsImprovements to Reportable Segment Disclosures,” which expands reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and Contract Liabilities from Contracts with Customers," whichincluded within each reported measure of a segment's profit or loss. The ASU also requires contractdisclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment's profit or loss in assessing segment performance and deciding how to allocate resources. Additionally, ASU 2023-07 requires all segment profit or loss and assets and contract liabilities acquired in a business combinationdisclosures to be recognizedprovided on an annual and measured byinterim basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, or in fiscal 2025 for HEICO, and interim periods within fiscal years beginning one year later. Early adoption is permitted and the amendments must be applied retrospectively to all prior periods presented. The adoption of this guidance will not affect the Company's consolidated results of operations, financial position or
cash flows and the Company is currently evaluating the effect the guidance will have on its disclosures.
acquirer onIn December 2023, the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. The Company adoptedFASB issued ASU 2021-082023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disclosure of specific categories in the first quarterannual effective tax rate reconciliation table and further disaggregation for reconciling items that meet a quantitative threshold. The ASU also requires the disaggregation of income taxes paid by jurisdiction. ASU 2023-09 may be applied either prospectively or retrospectively and is effective for fiscal 2023, resultingyears beginning after December 15, 2024, or in no material effect onfiscal 2026 for HEICO. Early adoption is permitted. The adoption of this guidance will not affect the Company's consolidated results of operations, financial position or cash flows.flows and the Company is currently evaluating the effect the guidance will have on its disclosures.
2. ACQUISITIONSACQUISITION
In MarchDecember 2023, the Company, through a subsidiary of HEICO Electronic,HFSC, entered into an exclusive license and acquired certain assets for the Aircraft Emergency Locator Transmitter (“ELT”)capability to support the Boeing 737NG/777 Cockpit Display and Legacy Displays product linelines from Honeywell International. ELTs provide critical emergency transmission signals in the event of aircraft impact on land or water to enable first responders to locate the aircraft. The transaction provides the HEICO ElectronicHFSC subsidiary with all rightsthe exclusive capability to produce, sell, and repair both fixed and portable Honeywell ELTs,Boeing 737NG/777 Cockpit Displays as well as various support equipment. The purchase price of this acquisition was paid in cash using cash provided by operating activitiesother Legacy Displays for Boeing 717, ATR, and is not material or significant to the Company's condensed consolidated financial statements.
On January 5, 2023, the Company, through HEICO Electronic, acquired 93.69% of the outstanding common stockselect business and all of the preferred stock of Exxelia International SAS (“Exxelia”). Exxelia designs, manufactures and sells high reliability (“Hi-Rel”), complex, passive electronic components and rotary joint assemblies for mostly aerospace and defense applications, in addition to other high-end applications, such as medical and energy uses, including emerging “clean energy” and electrification applications. The Company believes that this acquisition will further HEICO's strategy of expanding its already wide range of mission-critical and Hi-Rel components for the most demanding applications, as well as provide HEICO with added broad geographic and product diversity, including in the important European market. The remaining 6.31% interest is owned by certain members of Exxelia's management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information). Additionally, as a result of this acquisition, the Company also obtained a 90% ownership interest in Alcon Electronics Pvt. Ltd. (“Alcon”), which is an existing subsidiary of Exxelia. The remaining 10% interest continues to be owned by a certain member of Alcon’s management team (See Note 3, Selected Financial Statement Information – Redeemable Noncontrolling Interests, for additional information).general aviation aircraft. The purchase price of this acquisition was paid in cash using proceeds from the Company's revolving credit facility.
The following table summarizes the total consideration for the acquisition of Exxelia (in thousands):
| | | | | | | | |
Cash paid | | $515,785 | |
Less: cash acquired | | (14,234) | |
Total consideration paid, net | | $501,551 | |
As noted above, the Company acquired all of the preferred stock of Exxelia. Pursuantfacility, and is not material or significant to the terms of the acquisition, Exxelia’s preferred stock accrues dividends at 5.18% per annum. Additionally, in connection with the acquisition, HEICO issued Exxelia a ten-year, €150 million note, which accrues interest at 4.7% per annum on the principal outstanding. The Company records foreign currency transaction adjustments on the note receivable within selling, general and administrative ("SG&A") expenses in its Condensed Consolidated Statements of Operations.
The following table summarizes the allocation of the total consideration for the acquisition of Exxelia to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed (in thousands):
| | | | | | | | |
Assets acquired: | | |
Goodwill | | $332,033 | |
Customer relationships | | 64,935 | |
Intellectual property | | 44,044 | |
Trade name | | 21,703 | |
Inventories | | 55,922 | |
Property, plant and equipment | | 42,165 | |
Accounts receivable | | 41,113 | |
Other assets | | 11,254 | |
Total assets acquired, excluding cash | | 613,169 | |
| | |
Liabilities assumed: | | |
Deferred income taxes | | 31,975 | |
Accounts payable | | 22,369 | |
Accrued expenses | | 18,383 | |
Other liabilities | | 24,231 | |
Total liabilities assumed | | 96,958 | |
| | |
Noncontrolling interests in consolidated subsidiaries | | 14,660 | |
| | |
Net assets acquired, excluding cash | | $501,551 | |
Company's condensed consolidated financial statements.
The allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. The primary items that generated the goodwill recognized were the premiums paid byHowever, the Company for the future earnings potential of Exxelia and the value of its assembled workforce that dodoes not qualify for separate recognition, however, benefit both the Company and the noncontrolling interest holders. The fair value of the noncontrolling interests were determined based on the consideration paid by the Company for its controlling ownership interest adjusted for a lack of control that a market participant would consider when estimating the fair value of the noncontrolling interest. The weighted-average amortization periods of the customer relationships, intellectual property and trade names
acquired are 15 years, 15 years and indefinite, respectively. Acquisition costs associated with the purchase of Exxelia totaled $5.2 million for the six months ended April 30, 2023 and were recorded as a component of SG&A expenses inexpect any adjustment to such allocation to be material to the Company's Condensed Consolidated Statement of Operations. Theconsolidated financial statements. This acquisition’s operating results of Exxelia were included in the Company’s results of operations from the effective acquisition date. The Company's consolidatedamount of net sales and earnings of this acquisition included in the Condensed Consolidated Statement of Operations for the six and three months ended April 30, 2023, includes approximately $69.6 million and $54.6 million, respectively, from theJanuary 31, 2024 is not material. Had this acquisition of Exxelia. Net income attributable to HEICO for the six and three months ended April 30, 2023, was not materially impacted by the acquisition of Exxelia.
The following table presents unaudited pro forma financial information for the six and three months ended April 30, 2023 and April 30, 2022 as if the acquisition of Exxelia had occurred as of November 1, 2021 (in thousands, except2022, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net sales | $1,348,159 | | | $1,125,052 | | | $687,841 | | | $586,039 | |
Net income from consolidated operations | $234,185 | | | $173,002 | | | $115,568 | | | $85,883 | |
Net income attributable to HEICO | $213,969 | | | $157,855 | | | $105,544 | | | $77,901 | |
Net income per share attributable to HEICO shareholders: | | | | | | | |
Basic | $1.56 | | | $1.16 | | | $.77 | | | $.57 | |
Diluted | $1.54 | | | $1.14 | | | $.76 | | | $.57 | |
| | | | | | | |
| | | | | | | |
Theattributable to HEICO shareholders on a pro forma financial information is presentedbasis for comparative purposes onlythe three months ended January 31, 2024 and is2023 would not necessarily indicative of the results of operations that actually would have been achieved ifmaterially different than the acquisition had taken place as of November 1, 2021. The unaudited pro forma financial information includes adjustments to historical amounts such as increased interest expense associated with borrowings to finance the acquisition, foreign currency transaction adjustments on the note receivable from Exxelia, the reclassification of acquisition costs associated with the purchase of Exxelia from fiscal 2023 to fiscal 2022, additional amortization expense related to the intangible assets acquired, and inventory purchase accounting adjustments charged to cost of sales as the inventory is sold. Additionally, the pro forma information presented above reflects HEICO's initial ownership interest of 93.69% of Exxelia's common stock as of the date of acquisition. During the second quarter of fiscal 2023, the Company sold an additional 2.72% of the common stock of Exxelia to its existing noncontrolling interest holders and certain members of Exxelia's management team, which decreased the Company's ownership interest in the subsidiary to 90.97% (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information).
reported amounts.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| (in thousands) | (in thousands) | | April 30, 2023 | | October 31, 2022 | (in thousands) | | January 31, 2024 | | October 31, 2023 |
Accounts receivable | Accounts receivable | | $371,708 | | | $303,181 | |
Less: Allowance for doubtful accounts | Less: Allowance for doubtful accounts | | (10,651) | | | (8,333) | |
Accounts receivable, net | Accounts receivable, net | | $361,057 | | | $294,848 | |
Inventories
| (in thousands) | (in thousands) | | April 30, 2023 | | October 31, 2022 | (in thousands) | | January 31, 2024 | | October 31, 2023 |
Finished products | Finished products | | $353,668 | | | $285,024 | |
Work in process | Work in process | | 69,700 | | | 59,739 | |
Materials, parts, assemblies and supplies | Materials, parts, assemblies and supplies | | 298,201 | | | 237,708 | |
Inventories, net of valuation reserves | Inventories, net of valuation reserves | | $721,569 | | | $582,471 | |
Property, Plant and Equipment
| (in thousands) | (in thousands) | | April 30, 2023 | | October 31, 2022 | (in thousands) | | January 31, 2024 | | October 31, 2023 |
Land | Land | | $19,232 | | | $17,579 | |
Buildings and improvements | Buildings and improvements | | 168,689 | | | 148,598 | |
Machinery, equipment and tooling | Machinery, equipment and tooling | | 360,894 | | | 322,252 | |
Construction in progress | Construction in progress | | 23,578 | | | 14,533 | |
| 572,393 | | | 502,962 | |
| | 653,948 | |
Less: Accumulated depreciation and amortization | Less: Accumulated depreciation and amortization | | (298,537) | | | (277,083) | |
Property, plant and equipment, net | Property, plant and equipment, net | | $273,856 | | | $225,879 | |
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $19.5$27.5 million as of April 30, 2023January 31, 2024 and $17.9$24.5 million as of October 31, 2022. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2023 and 2022 was $4.2 million and $3.7 million, respectively.2023. The total customer rebates and credits deducted within net sales for the three months ended April 30,January 31, 2024 and 2023 and 2022 was $2.0$3.5 million and $2.0$2.2 million, respectively.
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the six and three months ended April 30,January 31, 2024 and 2023 and 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
R&D expenses | $43,134 | | | $37,147 | | | $22,896 | | | $18,751 | |
| | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2024 | | 2023 |
R&D expenses | | $25,096 | | | $20,238 | |
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):
| | April 30, 2023 | | October 31, 2022 |
| | January 31, 2024 | | | | January 31, 2024 | | October 31, 2023 |
Redeemable at fair value | Redeemable at fair value | $300,756 | | | $300,693 | |
Redeemable based on a multiple of future earnings | Redeemable based on a multiple of future earnings | 45,077 | | | 26,908 | |
Redeemable noncontrolling interests | Redeemable noncontrolling interests | $345,833 | | | $327,601 | |
As discussed in Note 2, Acquisitions, the Company, through HEICO Electronic,
acquired 93.69% of the common stock of Exxelia in January 2023. During the second quarter of fiscal 2023, the Company sold an additional 2.72% of the common stock of Exxelia to its existing noncontrolling interest holders and certain members of Exxelia's management team, which decreased the Company's ownership interest in the common stock of the subsidiary to 90.97%. As part of the liquidity agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interest beginning in fiscal 2028, or sooner under certain conditions, and the Company has the right to purchase the same equity interest beginning in the same period.
As discussed in Note 2, Acquisitions, the Company, as a result of its acquisition of Exxelia, acquired 90% of the stock of Alcon in January 2023. As part of the shareholders' agreement, the noncontrolling interest holder has the right to cause the Company to purchase their equity interest beginning in fiscal 2025, or sooner under certain conditions, and the Company has the right to purchase the same equity interest beginning in the same period.
During fiscal 2022, the holder of a 19.9% noncontrolling equity interest in a subsidiary of the FSG that was acquired in fiscal 2015 exercised their option to cause the Company to purchase their noncontrolling interest over a four-year period ending in fiscal 2026. Accordingly,In December 2023, the Company acquired an additional one-fourth of such interest, in December 2022, which increased the Company's ownership interest in the subsidiary to 85.1%90.1%.
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the sixthree months ended April 30, 2023January 31, 2024 are as follows (in thousands):
| | Foreign Currency Translation | | Defined Benefit Pension Plan | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2022 | ($45,369) | | | ($1,130) | | | ($46,499) | |
| | Foreign Currency Translation | | | | Foreign Currency Translation | | Defined Benefit Pension Plan | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2023 | |
Unrealized gain | Unrealized gain | 28,845 | | | — | | | 28,845 | |
Amortization of unrealized loss | Amortization of unrealized loss | — | | | 28 | | | 28 | |
Balances as of April 30, 2023 | ($16,524) | | | ($1,102) | | | ($17,626) | |
Balances as of January 31, 2024 | |
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment for the sixthree months ended April 30, 2023January 31, 2024 are as follows (in thousands):
| | Segment | | Consolidated Totals |
| FSG | | ETG | |
Balances as of October 31, 2022 | $561,961 | | | $1,110,464 | | | $1,672,425 | |
| | Segment | | | | Segment | | Consolidated Totals |
| | FSG | |
Balances as of October 31, 2023 | |
Balances as of October 31, 2023 | |
Balances as of October 31, 2023 | |
Goodwill acquired | Goodwill acquired | — | | | 340,173 | | | 340,173 | |
Foreign currency translation adjustments | Foreign currency translation adjustments | 4,242 | | | 12,559 | | | 16,801 | |
Adjustments to goodwill | Adjustments to goodwill | (955) | | | 2,791 | | | 1,836 | |
Balances as of April 30, 2023 | $565,248 | | | $1,465,987 | | | $2,031,235 | |
Balances as of January 31, 2024 | |
The goodwill acquired pertains to the fiscal 2023 acquisitions2024 acquisition described in Note 2, Acquisitions,Acquisition, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed.acquired. The Company estimates that $21$7 million of the goodwill acquired in fiscal 20232024 will be deductible for income tax purposes. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the allocation of the purchase consideration allocation of certain fiscal 20222023 acquisitions.
Identifiable intangible assets consist of the following (in thousands):
| | As of April 30, 2023 | | As of October 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | As of January 31, 2024 | | | | As of January 31, 2024 | | As of October 31, 2023 |
| | Gross Carrying Amount | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
Customer relationships | |
Customer relationships | Customer relationships | | $611,547 | | | ($229,884) | | | $381,663 | | | $539,529 | | | ($208,127) | | | $331,402 | |
Intellectual property | Intellectual property | | 333,249 | | | (111,233) | | | 222,016 | | | 284,171 | | | (98,983) | | | 185,188 | |
Other | Other | | 8,681 | | | (7,191) | | | 1,490 | | | 8,700 | | | (7,017) | | | 1,683 | |
| 953,477 | | | (348,308) | | | 605,169 | | | 832,400 | | | (314,127) | | | 518,273 | |
| | 1,445,102 | |
Non-Amortizing Assets: | Non-Amortizing Assets: | |
Trade names | Trade names | | 239,150 | | | — | | | 239,150 | | | 215,054 | | | — | | | 215,054 | |
| $1,192,627 | | | ($348,308) | | | $844,319 | | | $1,047,454 | | | ($314,127) | | | $733,327 | |
Trade names | |
Trade names | |
| | $1,735,028 | |
The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of April 30, 2023 compared to October 31, 2022 principally relates to such intangible assets recognized in connection with the fiscal 2023 acquisitions (see Note 2, Acquisitions).
Amortization expense related to intangible assets for the sixthree months ended April 30,January 31, 2024 and 2023 and 2022 was $36.9$30.2 million and $30.2$17.8 million, respectively. Amortization expense for the three months ended April 30, 2023 and 2022 was $19.1 million and $15.2 million, respectively. Amortization expenserelated to intangible assets for the remainder of fiscal 20232024 is estimated to be $37.5$91.1 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $71.5 million in fiscal 2024, $66.7$116.4 million in fiscal 2025, $61.8$110.6 million in fiscal 2026, $58.5$106.2 million in fiscal 2027, $54.1$100.7 million in fiscal 2028, $95.2 million in fiscal 2029, and $255.1$455.6 million thereafter.
5. SHORT-TERM AND LONG-TERM DEBT
A subsidiary of the Company acquired in the first quarter of fiscal 2023 has aended its short-term borrowing arrangement with a balancein the first quarter of $15.1 million asfiscal 2024 during which it made net payments of the acquisition date and $17.2 million as of April 30, 2023.$13.9 million.
Long-term debt consists of the following (in thousands):
| | April 30, 2023 | | October 31, 2022 |
| | January 31, 2024 | | | | January 31, 2024 | | October 31, 2023 |
Borrowings under revolving credit facility | Borrowings under revolving credit facility | $723,000 | | | $275,000 | |
Finance leases and note payable | 14,397 | | | 15,274 | |
| 737,397 | | | 290,274 | |
2028 senior unsecured notes | |
2033 senior unsecured notes | |
Finance leases and notes payable | |
Less: Debt discount and debt issuance costs | |
| | 2,500,465 | |
Less: Current maturities of long-term debt | Less: Current maturities of long-term debt | (1,618) | | | (1,654) | |
| $735,779 | | | $288,620 | |
| | $2,495,726 | |
Revolving Credit FacilityThe Company's borrowings under its revolving credit facility mature in fiscal 2025.2028. As of April 30, 2023January 31, 2024 and October 31 2022,2023, the weighted average interest rate on borrowings under the Company's revolving credit facility ("Credit Facility") was 6.1%6.9% and 4.6%6.7%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2023,January 31, 2024, the Company was in compliance with all such covenants.
Senior Unsecured Notes
The Company's senior unsecured notes consist of $600 million principal amount of 5.25% Senior Notes due August 1, 2028 (the "2028 Notes") and $600 million principal amount of 5.35% Senior Notes due August 1, 2033 (the "2033 Notes" and, collectively with the 2028 Notes, the "Notes"). Interest on the Notes is payable semi-annually in arrears on February 1 and August 1 of each year, and commenced on February 1, 2024. The 2028 Notes and 2033 Notes each have an effective interest rate of 5.5%. The Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company's existing and future subsidiaries that guarantee the Company's obligations under the Credit Facility (the "Guarantor Group"). As of January 31, 2024 the Company was in compliance with all covenants related to the Notes.
The following table sets forth the carrying value and estimated fair value of the Company’s Notes, which are classified as Level 1 financial instruments in the fair value hierarchy (in thousands). The Company estimated the fair value of the Notes by taking the weighted average of market quotes for the exact security that was actively traded on January 31, 2024 and October 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2024 | | October 31, 2023 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2028 Notes | $594,428 | | | $611,262 | | | $594,158 | | | $579,762 | |
2033 Notes | 592,512 | | | 610,080 | | | 592,364 | | | 552,594 | |
Total | $1,186,940 | | | $1,221,342 | | | $1,186,522 | | | $1,132,356 | |
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.
Changes in the Company’s contract assets and liabilities for the sixthree months ended April 30, 2023January 31, 2024 are as follows (in thousands):
| | April 30, 2023 | | October 31, 2022 | | Change |
| January 31, 2024 | | | January 31, 2024 | | October 31, 2023 | | Change |
Contract assets | Contract assets | $103,448 | | | $93,978 | | | $9,470 | |
Contract liabilities | Contract liabilities | 85,381 | | 58,757 | | | 26,624 | |
Net contract assets | Net contract assets | $18,067 | | | $35,221 | | | ($17,154) | |
The increase in the Company's contract assets during the first six months of fiscal 2023 mainly reflects additional unbilled receivables on certain customer contracts using an over-time recognition model in excess of billings on certain customer contracts at both the FSG and ETG.
The increase in the Company's contract liabilities during the first six monthsquarter of fiscal 20232024 principally reflects the receipt of advance deposits on certain customer contracts, mainly at the FSG.
The amount of revenue that the Company recognized during the six and three months ended April 30, 2023first quarter of fiscal 2024 that was included in contract liabilities as of the beginning of fiscal 20232024 was $30.1 million and $9.8 million, respectively.$26.7 million.
Remaining Performance Obligations
Backlog, which the Company believes to be the equivalent of its remaining performance obligations, represents contractually committed or firm customer orders. As of April 30, 2023,January 31, 2024, the Company had $606.7$1,444.3 million of remaining performance obligations associated with firm contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG as well as certain products of the FSG's specialty products and aftermarket replacement parts product lines.FSG. The Company
will recognize net sales as these obligations are satisfied. The Company expects to recognize $217.4$952.6 million of
this amount during the remainder of fiscal 20232024 and $389.3$491.7 million thereafter, of which more than halfthe majority is expected to occur in fiscal 2024. 2025.
Disaggregation of Revenue
The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
| | Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | Three months ended January 31, | | | | Three months ended January 31, |
| | 2024 | | | | 2024 | | 2023 |
Flight Support Group: | Flight Support Group: | | | | | | | |
Aftermarket replacement parts (1) | Aftermarket replacement parts (1) | $426,986 | | | $324,882 | | | $218,343 | | | $173,981 | |
Aftermarket replacement parts (1) | |
Aftermarket replacement parts (1) | |
Repair and overhaul parts and services (2) | |
Specialty products (2)(3) | Specialty products (2)(3) | 187,493 | | | 126,579 | | | 96,008 | | | 67,286 | |
Repair and overhaul parts and services (3) | 149,001 | | | 127,533 | | | 77,851 | | | 65,046 | |
Total net sales | Total net sales | 763,480 | | | 578,994 | | | 392,202 | | | 306,313 | |
| Electronic Technologies Group: | Electronic Technologies Group: | |
Electronic Technologies Group: | |
Electronic Technologies Group: | |
Electronic component parts primarily for defense, space and aerospace equipment (4) | |
Electronic component parts primarily for defense, space and aerospace equipment (4) | |
Electronic component parts primarily for defense, space and aerospace equipment (4) | Electronic component parts primarily for defense, space and aerospace equipment (4) | 395,320 | | | 319,909 | | | 220,742 | | | 162,441 | |
Electronic component parts for equipment in various other industries (5) | Electronic component parts for equipment in various other industries (5) | 161,498 | | | 139,820 | | | 81,017 | | | 74,952 | |
Total net sales | Total net sales | 556,818 | | | 459,729 | | | 301,759 | | | 237,393 | |
| Intersegment sales | Intersegment sales | (11,542) | | | (9,567) | | | (6,120) | | | (4,893) | |
Intersegment sales | |
Intersegment sales | |
| Total consolidated net sales | Total consolidated net sales | $1,308,756 | | | $1,029,156 | | | $687,841 | | | $538,813 | |
Total consolidated net sales | |
Total consolidated net sales | |
|
(1) Includes various jet engine and aircraft component replacement parts.
(2)Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(3) Includes primarily the sale of specialty components such as thermal insulation blankets, renewable/reusable insulation systems, advanced niche components, complex composite assemblies, and expanded foil mesh as well as machining, brazing, fabricating and welding services generally to original equipment manufacturers.
(3) Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(4) Includes various component parts such as electro-optical infrared simulation and test equipment, electro-optical laser products, electro-optical, microwave and other power equipment, high-speed interface products, power conversion products, underwater locator beacons, emergency locator transmission beacons, traveling wave tube amplifiers, microwave power modules, a wide variety of memory products and radio frequency (RF) and microwave products, crashworthy and ballistically self-sealing auxiliary fuel systems, high performance communications and electronic intercept receivers and tuners, high performance active antenna systems and airborne antennas, technical surveillance countermeasures (TSCM) equipment, custom high power filters and filter assemblies,
radiation assurance services and products, and high-reliability, complex, passive electronic components and rotary joint assemblies.
(5) Includes various component parts such as electromagnetic and radio frequency interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies, silicone material for a variety of demanding applications, and rugged small form-factor embedded computing solutions, and high performance test sockets and adaptors.
The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
| | Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | Three months ended January 31, | | | | Three months ended January 31, |
| | 2024 | | | | 2024 | | 2023 |
Flight Support Group: | Flight Support Group: | | | | | | | |
Aerospace | |
Aerospace | |
Aerospace | Aerospace | $523,893 | | | $417,724 | | | $269,353 | | | $215,319 | |
Defense and Space | Defense and Space | 196,909 | | | 136,258 | | | 101,267 | | | 77,603 | |
Other (1) | Other (1) | 42,678 | | | 25,012 | | | 21,582 | | | 13,391 | |
Total net sales | Total net sales | 763,480 | | | 578,994 | | | 392,202 | | | 306,313 | |
| Electronic Technologies Group: | Electronic Technologies Group: | |
Electronic Technologies Group: | |
Electronic Technologies Group: | |
Defense and Space | |
Defense and Space | |
Defense and Space | Defense and Space | 260,571 | | | 265,861 | | | 138,609 | | | 134,414 | |
Other (2) | Other (2) | 215,794 | | | 156,135 | | | 118,024 | | | 82,772 | |
Aerospace | Aerospace | 80,453 | | | 37,733 | | | 45,126 | | | 20,207 | |
Total net sales | Total net sales | 556,818 | | | 459,729 | | | 301,759 | | | 237,393 | |
| Intersegment sales | Intersegment sales | (11,542) | | | (9,567) | | | (6,120) | | | (4,893) | |
Intersegment sales | |
Intersegment sales | |
| Total consolidated net sales | Total consolidated net sales | $1,308,756 | | | $1,029,156 | | | $687,841 | | | $538,813 | |
Total consolidated net sales | |
Total consolidated net sales | |
|
(1) Principally industrial products.
(2) Principally other electronics and medical products.
7. INCOME TAXES
The Company's effective tax rate was 19.3%decreased to 11.8% in the first six monthsquarter of fiscal 2023, as compared to 15.0%2024, down from 16.9% in the first six monthsquarter of fiscal 2022.2023. The increasedecrease in the Company's effective tax rate principally reflects a larger tax benefit from stock option exercises recognized in the first quarter of fiscal 2022.2024. The Company recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2024 and 2023 of $13.6 million and 2022 of $6.2 million, and $17.8 million, respectively. This was partially offset by a favorable impact from tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan, net of the non-deductible portion related to executive
compensation, in the first six months of fiscal 2023 as compared tax-exempt unrealized losses recognized in the first six months of fiscal 2022.
The Company's effective tax rate decreased to 21.2% in the second quarter of fiscal 2023, as compared to 23.7% in the second quarter of fiscal 2022. The decrease in the Company's effective tax rate principally reflects a favorable impact from tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan, net of the non-deductible portion related to executive compensation, in the second quarter of fiscal 2023 as compared to tax-exempt unrealized losses recognized in the second quarter of fiscal 2022.
8. FAIR VALUE MEASUREMENTS
The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of January 31, 2024 |
| | 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 | | $— | | | $258,100 | | | $— | | | $258,100 | |
Money market fund | | 18,637 | | | — | | | — | | | 18,637 | |
Total assets | | $18,637 | | | $258,100 | | | $— | | | $276,737 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | | $— | | | $— | | | $52,514 | | | $52,514 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of April 30, 2023 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Deferred compensation plan: | | | | | | | | |
Corporate-owned life insurance | | $— | | | $229,241 | | | $— | | | $229,241 | |
Money market fund | | 7,677 | | | — | | | — | | | 7,677 | |
Total assets | | $7,677 | | | $229,241 | | | $— | | | $236,918 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | | $— | | | $— | | | $56,831 | | | $56,831 | |
| | As of October 31, 2022 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | As of October 31, 2023 | | | | As of October 31, 2023 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | Assets: | | | | | | | | |
Deferred compensation plan: | Deferred compensation plan: | |
Deferred compensation plan: | |
Deferred compensation plan: | |
Corporate-owned life insurance | |
Corporate-owned life insurance | |
Corporate-owned life insurance | Corporate-owned life insurance | | $— | | | $201,239 | | | $— | | | $201,239 | |
Money market fund | Money market fund | | 3,477 | | | — | | | — | | | 3,477 | |
Total assets | Total assets | | $3,477 | | | $201,239 | | | $— | | | $204,716 | |
| Liabilities: | Liabilities: | |
Liabilities: | |
Liabilities: | |
Contingent consideration | Contingent consideration | | $— | | | $— | | | $82,803 | | | $82,803 | |
Contingent consideration | |
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 investmentsan investment in a money market fundsfund that areis classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Condensed Consolidated Balance Sheets. The related liabilities of the LCP are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $235.0$274.1 million as of April 30, 2023January 31, 2024 and $203.0$226.2 million as of October 31, 2022.2023.
In connection with a fiscal 2023 acquisition that is part of the FSG, the Company assumed an agreement which now obligates it to pay contingent consideration of $17.5 million as certain operating entities of the acquired company met a calendar year 2023 earnings objective and obtained a certain level of new orders with deliveries scheduled in calendar year 2024, of which both targets were tied to a specific customer contract. The $17.5 million of contingent consideration accrued as of January 31, 2024 is expected to be paid in the second quarter of fiscal 2024.
As part of the agreement to acquire 80.36% of the stock of a subsidiary by the ETG in fiscal 2022, the Company may be obligated to pay contingent consideration of up to $12.1 million in fiscal 2027 based on the earnings of the acquired entity during fiscal years 2025 and 2026 provided the entity meets a certain earnings objective during each of fiscal years 2024 to 2026. As of April 30, 2023,January 31, 2024, the estimated fair value of the contingent consideration was $6.3$5.6 million.
As part of the agreement to acquire 96% of the stock of a subsidiary by the FSG in fiscal 2022, the Company may be obligated to pay contingent consideration of up to $27.4 million in fiscal 2027 based on the earnings of the acquired entity during fiscal years 2025 and 2026 provided the entity meets certain earnings objectives during each of fiscal years 2022 to 2024. As of April 30, 2023,January 31, 2024, the estimated fair value of the contingent consideration was $16.1$20.3 million.
As part of the agreement to acquire 74% of the membership interests of a subsidiary by the FSG in fiscal 2022, the Company maywould be obligated to pay contingent consideration of $14.1 million in fiscal 2027 shouldonly if the acquired entity meetmet a certain earnings objective during the five-year period following the acquisition. AsBased on the actual earnings of April 30,the acquired entity subsequent to the acquisition and forecasted earnings over the remainder of the earnout period, the Company does not expect that the required earnings objective will be met. Accordingly, as of January 31, 2024 and October 31, 2023, the estimated fair value of the contingent consideration was $6.5$0.0 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 have been obligated to pay contingent consideration of up to $26.7 million should the acquired entity have met certain earnings objectives following the acquisition. In March 2023, at the request of the noncontrolling interest holders, the agreement was amended and the Company paid $8.9 million to the noncontrolling interest holders in consideration for the termination of the contingent consideration arrangement. Accordingly, of the $18.0 million estimated fair value of contingent consideration as of October 31, 2022, the remaining $9.1 million (after the $8.9 million payment) was reversed in the second quarter of fiscal 2023.
As part of the agreement to acquire 89.99% of the equity interests of a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to CAD $13.5 million, or $10.0$10.1 million, in fiscal 2025 should the acquired entity meet certain earnings objectives during fiscal 2023 and 2024. As of April 30, 2023,January 31, 2024, the estimated fair value
of the contingent consideration was CAD $11.5$12.3 million, or $8.5$9.1 million. Additionally, the acquired entity achieved a required earnings objective during fiscal years 2021 and 2022 that obligated the Company to pay additional contingent consideration of CAD $13.5 million, or $10.0 million, which was paid in the first quarter of fiscal 2023.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to paypaid contingent consideration of $20.0 million in fiscalDecember 2023 shouldas the acquired entity meetmet a certain earnings objective during the first six years following the acquisition. As of April 30, 2023, the estimated fair value of the contingent consideration was $19.5 million.
The following unobservable inputs were used to derive the estimated fair value of the Company's Level 3 contingent consideration liabilities as of April 30, 2023January 31, 2024 ($ in thousands):
| | | | | Unobservable | | | | | | Unobservable | | | | Weighted |
Acquisition Date | | Acquisition Date | | Fair Value | | Input | | Range | | Average (1) |
8-4-2023 | | 8-4-2023 | | $17,500 | | Discount rate | | 0.0% - 0.0% | | 0.0% |
| | Unobservable | | Weighted |
Acquisition Date | | Fair Value | | Input | | Range | | Average (1) |
9-1-2022 | 9-1-2022 | | $6,296 | | Compound annual revenue growth rate | | 0% - 17% | | 13% |
| | | Discount rate | | 7.6% - 7.6% | | 7.6% |
9-1-2022 | |
9-1-2022 | | | 5,577 | | Compound annual revenue growth rate | | 9% - 22% | | 17% |
| | | | Discount rate | | | | | | Discount rate | | 8.6% - 8.6% | | 8.6% |
| 7-18-2022 | 7-18-2022 | | 16,068 | | Compound annual revenue growth rate | | 2% - 9% | | 5% |
| | | Discount rate | | 7.6% - 7.6% | | 7.6% |
| 3-17-2022 | | 6,513 | | Compound annual revenue growth rate | | (3%) - 5% | | 0% |
| Discount rate | | 6.6% - 6.6% | | 6.6% |
7-18-2022 | |
7-18-2022 | | | 20,295 | | Compound annual revenue growth rate | | 1% - 11% | | 6% |
| | | | Discount rate | | | | | | Discount rate | | 8.6% - 8.6% | | 8.6% |
| 8-18-2020 | 8-18-2020 | | 8,475 | | Compound annual revenue growth rate | | 15% - 24% | | 22% |
8-18-2020 | |
8-18-2020 | | | 9,142 | | Compound annual revenue growth rate | | 11% - 20% | | 17% |
| | | | Discount rate | | | | | | Discount rate | | 9.5% - 9.5% | | 9.5% |
| | Discount rate | | 8.2% - 8.2% | | 8.2% |
| 9-15-2017 | | 19,479 | | Compound annual revenue growth rate | | 4% - 5% | | 5% |
| Discount rate | | 6.3% - 6.3% | | 6.3% |
|
(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability.
Changes in the Company’s contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the sixthree months ended April 30, 2023January 31, 2024 are as follows (in thousands):
| | | | | | | | |
| | Liabilities |
Balance as of October 31, 20222023 | | $82,80371,136 | |
Payment of contingent consideration | | (18,909)(20,000) | |
Amendment and termination of contingent consideration agreement | | (9,057) | |
Increase in accrued contingent consideration net | | 1,8431,095 | |
Foreign currency transaction adjustments | | 151283 | |
Balance as of April 30, 2023 | | $56,83152,514 | |
| | |
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | | |
Accrued expenses and other current liabilities | | $19,47926,642 | |
Other long-term liabilities | | 37,35225,872 | |
| | $56,83152,514 | |
| | |
| | |
| | |
| | |
| | |
The Company records changes in accrued contingent consideration and foreign currency transaction adjustments within SG&A expenses in its Condensed Consolidated Statements of Operations.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of April 30, 2023January 31, 2024 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debtborrowings under the Company's credit facility approximates fair value due to its variable interest rates.rate. See Note 5, Short-Term and Long-Term Debt, for the estimated fair value of the Company’s senior unsecured notes.
9. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
| | Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | Three months ended January 31, | | | | Three months ended January 31, |
| | 2024 | | | | 2024 | | 2023 |
Numerator: | Numerator: | | | | | | | |
Net income attributable to HEICO | |
Net income attributable to HEICO | |
Net income attributable to HEICO | Net income attributable to HEICO | $198,147 | | | $171,931 | | | $105,120 | | | $85,010 | |
| Denominator: | Denominator: | |
Denominator: | |
Denominator: | |
Weighted average common shares outstanding - basic | |
Weighted average common shares outstanding - basic | |
Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 136,786 | | | 135,763 | | | 136,916 | | | 135,891 | |
Effect of dilutive stock options | Effect of dilutive stock options | 1,804 | | | 2,153 | | | 1,684 | | | 1,976 | |
Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 138,590 | | | 137,916 | | | 138,600 | | | 137,867 | |
| Net income per share attributable to HEICO shareholders: | Net income per share attributable to HEICO shareholders: | |
Net income per share attributable to HEICO shareholders: | |
Net income per share attributable to HEICO shareholders: | |
Basic | |
Basic | |
Basic | Basic | $1.45 | | | $1.27 | | | $.77 | | | $.63 | |
Diluted | Diluted | $1.43 | | | $1.25 | | | $.76 | | | $.62 | |
| Anti-dilutive stock options excluded | Anti-dilutive stock options excluded | 1,045 | | | 739 | | | 1,340 | | | 749 | |
Anti-dilutive stock options excluded | |
Anti-dilutive stock options excluded | |
10. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the six and three months ended April 30,January 31, 2024 and 2023 and 2022, respectively, is as follows (in thousands):
| | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals |
| Segment | |
| FSG | | ETG | |
Six months ended April 30, 2023: | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment (1) | | | | | | | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals |
| | Segment | |
| | FSG | |
| | FSG | |
| | FSG | |
Three months ended January 31, 2024: | |
Three months ended January 31, 2024: | |
Three months ended January 31, 2024: | |
Net sales | |
Net sales | |
Net sales | Net sales | | $763,480 | | | $556,818 | | | ($11,542) | | | $1,308,756 | |
Depreciation | Depreciation | | 8,152 | | | 9,461 | | | 535 | | | 18,148 | |
Amortization | Amortization | | 13,286 | | | 24,802 | | | 548 | | | 38,636 | |
Operating income | Operating income | | 183,521 | | | 124,516 | | | (21,513) | | | 286,524 | |
Capital expenditures | Capital expenditures | | 10,643 | | | 11,058 | | | 220 | | | 21,921 | |
| Six months ended April 30, 2022: | |
Three months ended January 31, 2023: | |
Three months ended January 31, 2023: | |
Three months ended January 31, 2023: | |
Net sales | |
Net sales | |
Net sales | Net sales | | $578,994 | | | $459,729 | | | ($9,567) | | | $1,029,156 | |
Depreciation | Depreciation | | 7,411 | | | 6,792 | | | 493 | | | 14,696 | |
Amortization | Amortization | | 11,262 | | | 20,179 | | | 570 | | | 32,011 | |
Operating income | Operating income | | 118,573 | | | 121,576 | | | (18,550) | | | 221,599 | |
Capital expenditures | Capital expenditures | | 8,113 | | | 7,995 | | | 103 | | | 16,211 | |
| Three months ended April 30, 2023: | |
Net sales | | $392,202 | | | $301,759 | | | ($6,120) | | | $687,841 | |
Depreciation | | 3,974 | | | 5,523 | | | 265 | | | 9,762 | |
Amortization | | 6,555 | | | 13,133 | | | 274 | | | 19,962 | |
Operating income | | 99,912 | | | 67,979 | | | (10,801) | | | 157,090 | |
Capital expenditures | | 3,990 | | | 6,969 | | | 116 | | | 11,075 | |
| Three months ended April 30, 2022: | |
Net sales | | $306,313 | | | $237,393 | | | ($4,893) | | | $538,813 | |
Depreciation | | 3,693 | | | 3,426 | | | 247 | | | 7,366 | |
Amortization | | 5,749 | | | 10,087 | | | 283 | | | 16,119 | |
Operating income | | 66,197 | | | 65,988 | | | (9,408) | | | 122,777 | |
Capital expenditures | | 4,531 | | | 2,925 | | | 64 | | | 7,520 | |
|
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
Total assets by operating segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of April 30, 2023 | | $1,685,580 | | | $2,914,082 | | | $270,537 | | | $4,870,199 | |
Total assets as of October 31, 2022 | | 1,635,229 | | | 2,230,744 | | | 229,523 | | | 4,095,496 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of January 31, 2024 | | $4,093,956 | | | $2,889,878 | | | $352,235 | | | $7,336,069 | |
Total assets as of October 31, 2023 | | 4,006,748 | | | 2,915,300 | | | 273,015 | | | 7,195,063 | |
11. COMMITMENTS AND CONTINGENCIES
Guarantees
As of April 30, 2023,January 31, 2024, the Company has arranged for standby letters of credit aggregating $22.5$10.8 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.claims.
Product Warranty
Changes in the Company’s product warranty liability for the sixthree months ended April 30,January 31, 2024 and 2023 and 2022, respectively, are as follows (in thousands):
| | Six months ended April 30, |
| 2023 | | 2022 |
| | Three months ended January 31, | | | | Three months ended January 31, |
| | 2024 | | | | 2024 | | 2023 |
Balances as of beginning of fiscal year | Balances as of beginning of fiscal year | | $3,296 | | | $3,379 | |
Accruals for warranties | Accruals for warranties | | 1,222 | | | 622 | |
| Warranty claims settled | Warranty claims settled | | (1,074) | | | (1,012) | |
Balances as of April 30 | | $3,444 | | | $2,989 | |
Warranty claims settled | |
Warranty claims settled | |
Balances as of January 31 | |
Litigation
On April 20, 2021, an indirect subsidiary of HFSC, which was acquired in June 2020, received a grand jury subpoena from the United States District Court for the Southern District of California requiring the production of documents for the pre-acquisition time period of 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. In connection with this investigation, the individual pled guilty to a charge of a misdemeanor conflict of interest, and has been suspended by the Company pending determination by the Navy whether the suspended employee should be debarred from government contracting. The Company is cooperating with the investigation.investigation, and is cooperating with the Navy. 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, theThe Company cannot predict the outcome of the investigation or when the investigation will ultimately be resolved; nor can the Company reasonably estimate the possible range of loss or impact to its business, if any, that may result from this matter.
With the exception of the matter noted above, the Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
12. SUBSEQUENT EVENT21
Wencor Acquisition
On May 15, 2023, the Company and its newly formed wholly owned subsidiary, Magnolia Merge Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire Jazz Parent, Inc., a Delaware corporation, the owner of Wencor Group (the “Target” or "Wencor"), with the Target and Jazz Topco GP LLC, a Delaware limited liability company, solely in its capacity as representative for purposes of certain provisions of the Merger Agreement. Merger Sub will merge with and into the Target, with the Target continuing as the surviving entity and a wholly owned subsidiary of the Company (the “Merger”), for an aggregate purchase price of $1.9 billion in cash (the “Cash Consideration”), subject to certain working capital, debt and other customary adjustments set forth in the Merger Agreement, and 1,137,656 shares of HEICO Class A Common Stock. Wencor is a large commercial and military aircraft aftermarket company offering factory-new FAA-approved aircraft replacement parts, value-added distribution of high-use commercial & military aftermarket parts and aircraft & engine accessory component repair and overhaul services. Subject to the satisfaction of the closing conditions, the Merger is expected to close by the end of calendar 2023.
The completion of the Merger is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain other regulatory approvals. The Merger Agreement contains customary termination rights for the parties thereto, including by mutual consent of the Company and the representative and under certain other circumstances, including by the Company or the representative if the Merger has not occurred on or before the nine-month anniversary of the signing of the Merger Agreement subject to up to two 90-day extensions if on such date a closing condition related to regulatory approvals has not been satisfied or waived. The Company is required to pay Target a termination fee of $143.5 million in cash upon termination of the Merger Agreement under specified circumstances, including the failure to obtain regulatory approvals or, among others, if the Company materially breaches its regulatory covenants such that there is a failure of certain conditions to the Merger.
Wencor Acquisition Financing
In connection with the Merger, on May 14, 2023, the Company entered into an engagement letter with Truist Securities, Inc. to, among other things, increase the commitments under its existing credit facility from $1.5 billion to $2.0 billion and to extend the maturity date
thereunder to a date that is five years from the closing date, and has also entered into a commitment letter (the “Commitment Letter”) with Truist Bank (the “Bridge Lender”) and Truist Securities, Inc., pursuant to which the Bridge Lender has committed to provide a senior unsecured credit facility to the Company, as the borrower, in an aggregate amount of up to $1.5 billion (the “Bridge Facility”), with a maturity date of 364 days following the closing date. The obligation to fund the Bridge Facility is subject to the satisfaction of certain conditions set forth in the Commitment Letter. The Company's currently committed credit facilities, together with cash on hand, are sufficient to fund the purchase price for the Merger.
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”Estimates” in our Annual Report on Form 10-K for the year ended October 31, 2022.2023. There have been no material changes to our critical accounting policies during the sixthree months ended April 30, 2023.January 31, 2024.
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.
Although we have largely emerged from the COVID-19 pandemic, our results of operations in fiscal 2023 continue to reflect the pandemic's lingering impact, including its impact on our supply chain. Despite the aforementioned, we experienced continued improvement in operating results in the first six months and second quarter of fiscal 2023 as compared to the first six months and second quarter of fiscal 2022 principally reflecting improved demand for its commercial aerospace products and services. The FSG has reported eleven consecutive quarters of sequential growth in net sales and operating income resulting from commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets. Additionally, the ETG’s operating results in the first six months of fiscal 2023 reflect consistent organic growth from increased demand for most of their other product offerings and the impact from the Company's January 2023 acquisition, offset by decreased demand for its defense products and the impact of acquisition costs related to our January 2023 acquisition. Further, the ETG’s overall backlog as of April 30, 2023, supports an expected increase in demand for its defense products at some point over the next twelve months.
Additionally, ourOur results of operations for the six and three months ended April 30, 2023January 31, 2024 have been affected by the fiscal 20222023 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, 2023.
ended October 31, 2022 and the fiscal 2023 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to the Condensed Consolidated Financial Statements of this quarterly report.
Recent Developments
On May 15, 2023, the Company entered into an agreement to acquire Wencor Group (“Wencor”) from affiliates of Warburg Pincus LLC and Wencor’s management for $1.9 billion in cash and 1,137,656 shares of HEICO Class A Common Stock (the “Wencor Acquisition”). Wencor is a large commercial and military aircraft aftermarket company offering factory-new FAA-approved aircraft replacement parts, value-added distribution of high-use commercial & military aftermarket parts and aircraft & engine accessory component repair and overhaul services. See Note 12, Subsequent Event, of the Notes to Condensed Consolidated Financial Statements for additional information.
Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
| | | | | | | | | | | | | | |
| | Three months ended January 31, |
| | 2024 | | 2023 |
Net sales | | $896,363 | | | $620,915 | |
Cost of sales | | 549,594 | | | 377,116 | |
Selling, general and administrative expenses | | 166,559 | | | 114,365 | |
Total operating costs and expenses | | 716,153 | | | 491,481 | |
Operating income | | $180,210 | | | $129,434 | |
| | | | |
Net sales by segment: | | | | |
Flight Support Group | | $618,716 | | | $371,278 | |
Electronic Technologies Group | | 285,942 | | | 255,059 | |
Intersegment sales | | (8,295) | | | (5,422) | |
| | $896,363 | | | $620,915 | |
| | | | |
Operating income by segment: | | | | |
Flight Support Group | | $136,091 | | | $83,609 | |
Electronic Technologies Group | | 55,328 | | | 56,537 | |
Other, primarily corporate | | (11,209) | | | (10,712) | |
| | $180,210 | | | $129,434 | |
| | | | |
Net sales | | 100.0 | % | | 100.0 | % |
Gross profit | | 38.7 | % | | 39.3 | % |
Selling, general and administrative expenses | | 18.6 | % | | 18.4 | % |
Operating income | | 20.1 | % | | 20.8 | % |
Interest expense | | (4.3 | %) | | (1.0 | %) |
Other income | | .1 | % | | .1 | % |
Income tax expense | | 1.9 | % | | 3.4 | % |
Net income attributable to noncontrolling interests | | 1.2 | % | | 1.6 | % |
Net income attributable to HEICO | | 12.8 | % | | 15.0 | % |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended April 30, | | Three months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net sales | $1,308,756 | | | $1,029,156 | | | $687,841 | | | $538,813 | |
Cost of sales | 798,445 | | | 627,717 | | | 421,329 | | | 327,584 | |
Selling, general and administrative expenses | 223,787 | | | 179,840 | | | 109,422 | | | 88,452 | |
Total operating costs and expenses | 1,022,232 | | | 807,557 | | | 530,751 | | | 416,036 | |
Operating income | $286,524 | | | $221,599 | | | $157,090 | | | $122,777 | |
| | | | | | | |
Net sales by segment: | | | | | | | |
Flight Support Group | $763,480 | | | $578,994 | | | $392,202 | | | $306,313 | |
Electronic Technologies Group | 556,818 | | | 459,729 | | | 301,759 | | | 237,393 | |
Intersegment sales | (11,542) | | | (9,567) | | | (6,120) | | | (4,893) | |
| $1,308,756 | | | $1,029,156 | | | $687,841 | | | $538,813 | |
| | | | | | | |
Operating income by segment: | | | | | | | |
Flight Support Group | $183,521 | | | $118,573 | | | $99,912 | | | $66,197 | |
Electronic Technologies Group | 124,516 | | | 121,576 | | | 67,979 | | | 65,988 | |
Other, primarily corporate | (21,513) | | | (18,550) | | | (10,801) | | | (9,408) | |
| $286,524 | | | $221,599 | | | $157,090 | | | $122,777 | |
| | | | | | | |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | 39.0 | % | | 39.0 | % | | 38.7 | % | | 39.2 | % |
Selling, general and administrative expenses | 17.1 | % | | 17.5 | % | | 15.9 | % | | 16.4 | % |
Operating income | 21.9 | % | | 21.5 | % | | 22.8 | % | | 22.8 | % |
Interest expense | (1.3 | %) | | (.2 | %) | | (1.7 | %) | | (.2 | %) |
Other income | .1 | % | | .1 | % | | — | % | | .1 | % |
Income tax expense | 4.0 | % | | 3.2 | % | | 4.5 | % | | 5.4 | % |
Net income attributable to noncontrolling interests | 1.5 | % | | 1.5 | % | | 1.4 | % | | 1.5 | % |
Net income attributable to HEICO | 15.1 | % | | 16.7 | % | | 15.3 | % | | 15.8 | % |
Comparison of First Six MonthsQuarter of Fiscal 20232024 to First Six MonthsQuarter of Fiscal 20222023
Net Sales
Our consolidated net sales in the first six monthsquarter of fiscal 20232024 increased by 27%44% to a record $1,308.8$896.4 million, up from net sales of $1,029.2$620.9 million in the first six monthsquarter of fiscal 2022.2023. The increase in consolidated net sales principally reflects an increase of $184.5$247.4 million (a 32%67% increase) to a record $763.5$618.7 million in net sales within the FSG and an increase of $97.1$30.9 million (a 21%12% increase) to a record $556.8$285.9 million within the ETG. The net sales increase in the FSG reflects $202.0 million contributed by a fiscal 2023 acquisition as well as strong organic growth of 22% as well as net sales of $54.6 million contributed by our fiscal 2022 acquisitions.12%. The FSG's organic net sales 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 $78.4 million, $30.0 million and $21.5 million within ourits aftermarket replacement parts specialty products, and repair and overhaul parts and services product lines resulting in net sales increases of $37.9 million and $11.0 million, respectively. The net sales increase in the ETG principally reflects $103.0net sales of $39.4 million contributed by oura fiscal 2023 and 2022 acquisitions,acquisition, partially offset by a 2% decrease in5% organic net sales.sales decline. The ETG's organic net sales decline is mainly attributable to decreased demand for our defenseits other electronics, medical and space products resulting in net sales decreases of $7.3 million, $4.7 million and $2.8 million, respectively, partially offset by increased demand for its aerospace products resulting in a net sales decreaseincrease of $33.2 million, partially offset by increased demand for our other electronics, aerospace, space, and medical products resulting in net sales increases of $15.5 million, $8.4 million, $1.6 million, and $1.5 million respectively.$3.3 million. Although sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first six monthsquarter of fiscal 2023, recent2024, continued cost inflation and potential supply chain disruptions may lead to higher sales prices during the remainder of fiscal 2023.2024.
Gross Profit and Operating Expenses
Our consolidated gross profit margin was 39.0% in both the first six months of fiscal 2023 and 2022. The gross profit margin38.7% in the first six monthsquarter of fiscal 2024, as compared to 39.3% in the first quarter of fiscal 2023 principally reflects a 2.4% increasereflecting decreases of .3% and .2% in the FSG's and ETG's gross profit margin, offset by a 2.6%respectively. The decrease in the ETG's gross profit margin. The increase in the FSG's gross profit margin principally reflects a .9% impact from higher inventory obsolescence expense, partially offset by the previously mentioned higher net sales within our aftermarket replacement parts and specialty products product lines, and lower inventory obsolescence expenses in the first six months of fiscal 2023 mainly due to increased demand within our aftermarket replacement parts product line.sales. The reduction in the ETG's gross profit margin principally reflects a .5% impact from an increase in new product research and development expenses as well as the previously mentioned decreasedecreases in net sales of our defensefor its other electronics, space and medical products, partially offset by the previously mentioned increase in net sales of our other electronics andincreased demand for its aerospace products. Total new product research and development expenses included within our consolidated cost of sales were $43.1$25.1 million in the first six monthsquarter of fiscal 2023,2024, up from $37.1$20.2 million in the first six monthsquarter of fiscal 2022.2023.
Our consolidated selling, general and administrative ("SG&A") expenses were $223.8$166.6 million in the first six monthsquarter of fiscal 2023,2024, as compared to $179.8$114.4 million in the first six monthsquarter of fiscal 2022.2023. The increase in consolidated SG&A expenses principally reflects $28.1$49.1 million attributable to our fiscal 2023 and 2022 acquisitions an $8.1 million increase in performance-based compensation expense,and costs incurred to support the previously mentioned
net sales growth resulting in increases of $7.3$5.5 million and $4.6$2.6 million in other general and administrative expenses and other selling expenses, respectively, and a $4.9 million increase in acquisition costs mainly related to a fiscal 2023 acquisition, partially offset by a $9.1$5.0 million impact from the amendment and termination of a contingent consideration agreement pertaining to a fiscal 2021 acquisition.reduction in acquisition costs.
Our consolidated SG&A expenses as a percentage of net sales decreased to 17.1%were 18.6% in the first six monthsquarter of fiscal 2023, down from 17.5%2024, as compared to 18.4% in the first six monthsquarter of fiscal 2022.2023. The decreaseincrease in consolidated SG&A expenses as a percentage of net sales principally reflects a .7%.6% impact from higher intangible asset amortization expense and depreciation expense, partially offset by an .8% impact from the previously mentioned amendment and termination of a contingent consideration agreement, partially offset by a .4% impact from the previously mentioned increase inlower acquisition costs.
Operating Income
Our consolidated operating income increased by 29%39% to a record $286.5$180.2 million in the first six monthsquarter of fiscal 2023,2024, up from $221.6$129.4 million in the first six monthsquarter of fiscal 2022.2023. The increase in consolidated operating income principally reflects a $64.9$52.5 million increase (a 55%63% increase) to a record $183.5$136.1 million in operating income of the FSG, andpartially offset by a $2.9$1.2 million increasedecrease (a 2% increase)decrease) to $124.5$55.3 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 marginpartially offset by an $11.1 million increase in intangible asset amortization expense and efficiencies realized from the higher net sales volume.a $5.0 million increase in inventory obsolescence expense. The increasedecrease in operating income of the ETG principally reflects a lower level of SG&A efficiencies, partially offset by the previously mentioned net sales increase partially offset by the previously mentioned lower gross profit margin and a $5.1$5.0 million increasedecrease in acquisition costs related to a fiscal 2023 acquisition.costs.
Our consolidated operating income as a percentage of net sales increased to 21.9%was 20.1% in the first six monthsquarter of fiscal 2023, up from 21.5%2024, as compared to 20.8% in the first six monthsquarter of fiscal 2022.2023. The increasedecrease principally reflects an increase in the FSG’s operating income as a percentage of net sales to 24.0% in the first six months of fiscal 2023, up from 20.5% in the first six months of fiscal 2022, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 22.4%19.3% in the first six monthsquarter of fiscal 2024, as compared to 22.2% in the first quarter of fiscal 2023 as compared to 26.4% in the first six months of fiscal 2022. The increaseand a decrease in the FSG’s operating income as a percentage of net sales to 22.0% in the first quarter of fiscal 2024, as compared to 22.5% in the first quarter of fiscal 2023. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin and a 1.2%2.7% impact from a decreasean increase in SG&A expenses as a percentage of net sales mainly reflectingas well as the previously mentioned efficiencies.decrease in gross profit margin. The increase in the ETG's SG&A expenses as a percentage of net sales mainly reflects the previously mentioned lower level of efficiencies, partially offset by a 2.0% impact from the previously mentioned lower acquisition costs. The decrease in the ETG'sFSG’s operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin and a 1.5% impact from an increase in SG&A expenses as a percentage of net sales mainly from a .9% impact from the previously mentioned higher acquisition costs.intangible asset amortization expense, partially offset by a .9% impact from lower performance-based compensation expense.
Interest Expense
Interest expense increased to $17.4$38.6 million in the first six monthsquarter of fiscal 2023, as compared to $1.82024, up from $6.1 million in the first six monthsquarter of fiscal 2022.2023. The increase in interest expense was principally due to higher interest rates.
Indexan increase in the amount of outstanding debt related to fiscal 2023 acquisitions.
Other Income
Other income in the first six monthsquarter of fiscal 20232024 and 20222023 was not material.
Income Tax Expense
Our effective tax rate was 19.3%decreased to 11.8% in the first six monthsquarter of fiscal 2023, as compared to 15.0%2024, down from 16.9% in the first six monthsquarter of fiscal 2022.2023. The increasedecrease in our effective tax rate principally reflects a larger tax benefit from stock option exercises recognized in the first quarter of fiscal 2022.2024. We recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2024 and 2023 of $13.6 million and 2022 of $6.2 million, and $17.8 million, respectively. This was partially offset by a favorable impact from tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan, net of the non-deductible portion related to executive compensation, in the first six months of fiscal 2023 as compared tax-exempt unrealized losses recognized in the first six months of fiscal 2022.
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 $19.9$10.8 million in the first six monthsquarter of fiscal 2023,2024, as compared to $15.4$10.0 million in the first six monthsquarter of fiscal 2022.2023. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held, inclusive of fiscal 2022 and 2023 acquisitions.held.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 15%23% to a record $198.1$114.7 million, or $1.43$.82 per diluted share, in the first six monthsquarter of fiscal 2023,2024, up from $171.9$93.0 million, or $1.25$.67 per diluted share, in the first six monthsquarter of fiscal 20222023 principally reflecting the previously mentioned higher consolidated operating income and lower effective tax rate, partially offset by the increasespreviously mentioned higher interest expense.
Outlook
As we look ahead to the remainder of fiscal 2024, we continue to anticipate net sales growth in interest expenseboth the FSG and ETG, principally driven by contributions from our fiscal 2023 acquisitions and demand for the effective tax rate.majority of our products. Additionally, we plan to continue our commitment to developing new products and services and further market penetration, while maintaining our financial strength and flexibility.
Comparison of Second Quarter of Fiscal 2023 to Second Quarter of Fiscal 2022
Net Sales
Our consolidated net sales in the second quarter of fiscal 2023 increased by 28% to a record $687.8 million, up from net sales of $538.8 million in the second quarter of fiscal 2022. The increase in consolidated net sales principally reflects an increase of $85.9 million (a 28% increase) to a record $392.2 million in net sales within the FSG and an increase of $64.4 million (a 27% increase) to a record $301.8 million within the ETG. The net sales increase in the FSG reflects strong organic growth of 20% as well as net sales of $23.1 million contributed by our fiscal 2022 acquisitions. The FSG's organic growth reflects increased demand for the majority of our commercial aerospace products and services resulting from continued recovery in global commercial air travel as compared to the prior year. As such, organic net sales increased by $36.9 million, $13.1 million and $12.8 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 $70.2 million contributed by our fiscal 2023 and 2022 acquisitions, partially offset by a 3% decrease in organic net sales. The ETG's organic net sales decline is mainly attributable to decreased demand for our defense products resulting in a net sales decrease of $15.0 million, partially offset by increased demand for our other electronics, aerospace, and space products resulting in net sales increases of $4.2 million, $3.9 million, and $1.2 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 second quarter of fiscal 2023, recent cost inflation and potential supply chain disruptions may lead to higher sales prices during the remainder of fiscal 2023.
Gross Profit and Operating Expenses
Our consolidated gross profit margin was 38.7% in the second quarter of fiscal 2023, as compared to 39.2% in the second quarter of fiscal 2022, principally reflecting a 2.0% improvement in the FSG's gross profit margin, offset by a 3.5% 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 within our aftermarket replacement parts and specialty products product lines. The reduction in the ETG's gross profit margin principally reflects the previously mentioned decrease in net sales of our defense products, partially offset by the previously mentioned increase in net sales of our other electronics and aerospace products. Total new product research and development expenses included within our consolidated cost of sales were $22.9 million in the second quarter of fiscal 2023, up from $18.8 million in the second quarter of fiscal 2022.
Our consolidated SG&A expenses were $109.4 million in the second quarter of fiscal 2023, as compared to $88.5 million in the second quarter of fiscal 2022. The increase in consolidated SG&A expenses principally reflects $18.2 million attributable to our fiscal 2022 and 2023 acquisitions, costs incurred to support the previously mentioned net sales growth resulting in increases of $5.1 million and $2.6 million in other general and administrative expenses and other selling expenses, respectively, and a $4.2 million increase in performance-
based compensation expense, partially offset by a $9.1 million impact from the amendment and termination of a contingent consideration agreement pertaining to a fiscal 2021 acquisition.
Our consolidated SG&A expenses as a percentage of net sales decreased to 15.9% in the second quarter of fiscal 2022, down from 16.4% in the second quarter of fiscal 2022. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects a 1.3% impact from the previously mentioned amendment and termination of a contingent consideration agreement, partially offset by a .4% impact from changes in the estimated fair value of contingent consideration.
Operating Income
Our consolidated operating income increased by 28% to a record $157.1 million in the second quarter of fiscal 2023, up from $122.8 million in the second quarter of fiscal 2022. The increase in consolidated operating income principally reflects a $33.7 million increase (a 51% increase) to a record $99.9 million in operating income of the FSG and a $2.0 million increase (a 3% increase) 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, the impact from the amendment and termination of a contingent consideration agreement and the improved gross profit margin, partially offset by an increase in performance-based compensation expense. The increase in operating income of the ETG principally reflects the previously mentioned net sales increase, partially offset by the previously mentioned lower gross profit margin and a lower level of efficiencies mainly resulting from the impact of our January 2023 acquisition.
Our consolidated operating income as a percentage of net sales was 22.8% in both the second quarter of fiscal 2023 and 2022. Our consolidated operating income as a percentage of net sales in the second quarter of fiscal 2023, principally reflects an increase in the FSG's operating income as a percentage of net sales to 25.5%, up from 21.6% in the second quarter of fiscal 2022, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 22.5%, as compared to 27.8% in the second quarter of fiscal 2022. The increase in the FSG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin and a 1.8% impact from a decrease in SG&A expenses as a percentage of net sales mainly reflecting a 2.3% impact from the previously mentioned amendment and termination of a contingent consideration agreement, partially offset by a .9% impact from higher performance-based compensation expense. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin and a 1.7% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lower efficiencies.
Interest Expense
Interest expense increased to $11.4 million in the second quarter of fiscal 2023, as compared to $1.0 million in the second quarter of fiscal 2022. The increase was principally due to higher interest rates.
Other Income
Other income in the second quarter of fiscal 2023 and 2022 was not material.
Income Tax Expense
Our effective tax rate decreased to 21.2% in the second quarter of fiscal 2023, as compared to 23.7% in the second quarter of fiscal 2022. The decrease in our effective tax rate principally reflects a favorable impact from tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan, net of the non-deductible portion related to executive compensation, in the second quarter of fiscal 2023 as compared to tax-exempt unrealized losses recognized in the second quarter of fiscal 2022.
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 $9.9 million in the second quarter of fiscal 2023, as compared to $8.1 million in the second quarter of fiscal 2022. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held, inclusive of fiscal 2022 and 2023 acquisitions.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 24% to $105.1 million, or $.76 per diluted share, in the second quarter of fiscal 2023, up from $85.0 million, or $.62 per diluted share, in the second quarter of fiscal 2022 principally reflecting the previously mentioned higher consolidated operating income, partially offset by the increase in interest expense.
Outlook
As we look ahead to the remainder of fiscal 2023, we continue to anticipate net sales growth in both the FSG and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-19 pandemic may lead to higher material and labor costs. During fiscal 2023, we plan to continue our commitments to developing new products and services, further market
penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility.
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, interest payments, cash dividends, distributions to noncontrolling interests and working capital needs. We continue to anticipate fiscal 20232024 capital expenditures to be approximately $45 to $50$65 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility containsand senior unsecured notes contain both financial and non-financial covenants. As of April 30, 2023,January 31, 2024, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 26.4%75.4%.
Based on our current outlook, we believe that net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund our cash requirements for at least the next twelve months, except for the pending Wencor Acquisition. Our currently committed credit facilities, together with cash on hand, are sufficient to fund the purchase price for the Wencor Acquisition.months.
Operating Activities
Net cash provided by operating activities was $154.4$111.7 million in the first six monthsquarter of fiscal 20232024 and consisted primarily of net income from consolidated operations of $218.1$125.5 million, depreciation and amortization expense of $56.8$43.5 million (a non-cash item), and net changes in other long-term liabilities and assets related to the HEICO LCP of $10.6$14.8 million (principally participant deferrals and employer contributions), $6.5 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), and $6.1 million in share-based compensation expense (a non-cash item), partially offset by a $113.7$71.8 million increase in net working capital, a $9.6 million deferred income tax benefit, a $9.1 million impact from the amendment and termination of a contingent consideration agreement and $6.3 million of contingent consideration payments.capital. The increase in net working capital is inclusive of a $75.3$50.5 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2023 accrued performance-based compensation, a $49.8 million increase in inventories to support an increase in consolidated backlog, and a $13.8$15.8 million increase in prepaid expenses and other current assets, partially offset by a $38.9 million decrease in income taxes payable, and a $21.2 million increase in accounts receivable resulting from the previously mentioned higher net sales and the timing of collections.
Net cash provided by operating activities decreasedincreased by $20.3$35.0 million in the first six monthsquarter of fiscal 20232024, up from $174.8$76.7 million in the first six monthsquarter of fiscal 2022.2023. The decreaseincrease is principally attributable to a $26.3 million increase in net working capital, an $11.7 million increase in deferred income tax benefits, a $9.1 million impact from the amendment and termination of a contingent consideration agreement and $6.3 million of contingent consideration payments, partially offset by a $30.7$22.5 million increase in net income from consolidated operations. Theoperations and a $16.4 million increase in net working capital primarily resulted from the previously mentioned increase in inventories.depreciation and amortization expense.
Investing Activities
Net cash used in investing activities totaled $559.8$71.1 million in the first six monthsquarter of fiscal 20232024 and related primarily to acquisitions of $524.2$46.2 million, capital expenditures of $21.9$13.4 million and investments related to the LCP of $14.0$12.7 million. Further details regarding our fiscal 2023 acquisitions2024 acquisition may be found in Note 2, Acquisitions,Acquisition, of the Notes to Condensed Consolidated Financial Statements.
Financing Activities
Net cash provided byused in financing activities in the first six monthsquarter of fiscal 20232024 totaled $388.8$16.7 million. During the first six monthsquarter of fiscal 2023,2024, we borrowed $556.0$50.0 million under our revolving credit facility, and received $4.1 million in proceeds from stock option exercises, which werewas partially offset by $108.0$15.0 million in payments made on our revolving credit facility, $22.7$13.9 million of distributions to noncontrolling interests, redemptions of common stock related to stock option exercises aggregating $14.8 million, $13.7net payments on short-term debt, $13.8 million of cash dividends paid on our common stock, $12.6$13.8 million of contingent consideration payments and $2.7$8.8 million paidof distributions to acquire certain noncontrolling interests.
Other Obligations and Commitments
Except for the pending acquisition discussed below, thereThere have not been any material changes to our other obligations and commitments that were included in our Annual Report on Form 10-K for the year ended October 31, 2022.2023.
On May 15, 2023, the Company entered into an agreement to acquire Wencor from affiliates of Warburg Pincus LLC and Wencor’s management for $1.9 billion in cash and 1,137,656 shares of HEICO Class A Common Stock. The Company’s currently committed credit facilities, together with cash on hand, are sufficient to fund the purchase price for the acquisition. Subject to the satisfaction of the closing conditions, the Wencor Acquisition is expected to close by the end of calendar 2023.
New Accounting Pronouncements
See Note 12, Subsequent Event,1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.
New Accounting PronouncementGuarantor Group Summarized Financial Information
See NoteOn July 27, 2023, we completed the public offer and sale of senior unsecured notes, which consisted of $600 million principal amount of 5.25% Senior Notes due August 1, Summary2028 (the "2028 Notes") and $600 million principal amount of Significant Accounting Policies - New Accounting Pronouncement,5.35% Senior Notes due August 1, 2033 (the "2033 Notes" and, collectively with the 2028 Notes, the "Notes"). The Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Notes to Condensed Consolidated Financial Statements for additional information.our existing and future subsidiaries that guarantee our obligations under our revolving credit facility ("Credit Facility") (the “Guarantor Group”).
The Notes were issued pursuant to an Indenture, dated as of July 27, 2023 (the “Base Indenture”), between HEICO and certain of its subsidiaries (collectively, the "Subsidiary Guarantors") and Truist Bank, as trustee (the “Trustee”), as supplemented by a First Supplemental Indenture, dated as of July 27, 2023 (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), between us, the Subsidiary Guarantors and the Trustee. The Notes are direct, unsecured senior obligations of HEICO and rank equally in right of payment with all of our existing and future senior unsecured indebtedness. Each Subsidiary Guarantor is owned either directly or indirectly by the Company and jointly and severally guarantee our obligations under the Notes. None of the Subsidiary Guarantors are organized outside of the U.S.
Under the Indenture, holders of the Notes will be deemed to have consented to the release of a subsidiary guarantee provided by a subsidiary guarantor, without any action required on the part of the Trustee or any holder of the Notes, upon such subsidiary guarantor ceasing to guarantee or to be an obligor with respect to the Credit Facility. Accordingly, if the lenders under the Credit Facility release a subsidiary guarantor from its guarantee of, or obligations as a borrower under, the Credit Facility, the obligations of the subsidiary guarantors to guarantee the Notes will immediately terminate. If any of our future subsidiaries incur obligations under the Credit Facility while the Notes are outstanding, then such subsidiary will be required to guarantee the Notes.
In addition, a subsidiary guarantor will be released and relieved from all its obligations under its subsidiary guarantee in the following circumstances, each of which is permitted by the indenture:
•upon the sale or other disposition (including by way of consolidation or merger), in one transaction or a series of related transactions, of a majority of the total voting stock of such subsidiary guarantor (other than to us or any of our affiliates); or
•upon the sale or disposition of all or substantially all the property of such subsidiary guarantor (other than to any of our affiliates or another subsidiary guarantor);
provided, however, that, in each case, such transaction is permitted by the Credit Facility and after giving effect to such transaction, such subsidiary guarantor is no longer liable for any subsidiary guarantee or other obligations in respect of the Credit Facility. The subsidiary guarantee of a subsidiary guarantor also will be released if we exercise our legal defeasance, covenant defeasance option or discharge the Indenture.
We conduct our operations almost entirely through our subsidiaries. Accordingly, the Guarantor Group’s cash flow and ability to service any guaranteed registered debt securities will depend on the earnings of our subsidiaries and the distribution of those earnings to the Guarantor Group, including the earnings of the non-guarantor subsidiaries, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities will have a direct claim only against the Guarantor Group.
The following tables include summarized financial information for the Guarantor Group (in thousands). The information for the Guarantor Group is presented on a combined basis, excluding intercompany balances and transactions between us and the Guarantor Group and excluding investments in and equity in the earnings of non-guarantor subsidiaries. The Guarantor Group’s amounts due from, amounts due to, and transactions with non-guarantor subsidiaries have been presented in separate line items. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.
Forward-Looking Statements | | | | | | | | | | | |
| As of | | As of |
| January 31, 2024 | | October 31, 2023 |
Current assets (excluding net intercompany receivable from non-guarantor subsidiaries) | $1,500,432 | | | $1,440,062 | |
Noncurrent assets | 4,557,886 | | | 4,490,490 | |
Net intercompany receivable from/ (payable to) non-guarantor subsidiaries | 203,923 | | | 182,795 | |
Current liabilities (excluding net intercompany payable to non-guarantor subsidiaries) | 491,650 | | | 531,466 | |
Noncurrent liabilities | 2,978,330 | | | 2,895,592 | |
Redeemable noncontrolling interests | 250,046 | | | 252,013 | |
Noncontrolling interests | 40,663 | | | 37,786 | |
| | | | | | | |
| Three months ended | | |
| January 31, 2024 | | |
Net sales | $734,097 | | | |
Gross profit | 275,205 | | | |
Operating income | 150,301 | | | |
Net income from consolidated operations | 111,617 | | | |
Net income attributable to HEICO | 103,945 | | | |
| | | | | | | |
| Three months ended | | |
| January 31, 2024 | | |
Intercompany net sales | $557 | | | |
Intercompany management fee | 616 | | | |
Intercompany interest income | 2,156 | | | |
Intercompany dividends | 8,239 | | | |
Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also,
forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to: thestatements. Factors that could cause such differences include:
•The severity, magnitude and duration of public health threats, such as the COVID-19 pandemic ("Health Emergencies"); HEICO'spandemic;
•Our liquidity and the amount and timing of cash generation; lower
•Lower commercial air travel, caused by Health Emergencies and their aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product
•Product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental
•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
•Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product
•Product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; ourand
•Our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals, and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; and 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. With regard to the pending acquisition of Wencor, capital markets and economic conditions could adversely affect HEICO's ability to obtain debt financing on the terms and timing contemplated, regulatory approvals may delay or otherwise impact the acquisition, and Wencor's business may not perform as expected due to the same factors listed above that may affect HEICO's business. revenues.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2022, except as discussed below:
In connection with our acquisition of Exxelia, we issued Exxelia a ten-year, €150 million note, which accrues interest at 4.7% per annum on the principal outstanding. A hypothetical 10% strengthening of the United States ("U.S.") dollar in comparison to the Euro as of April 30, 2023 would decrease the U.S. dollar equivalent of our Euro note receivable by approximately $16.8 million and decrease operating income by the same amount.2023.
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 secondfirst quarter ended April 30, 2023January 31, 2024 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.
32
PART II. OTHER INFORMATION
Item 1A. Risk Factors.5. Other Events.
Our business, financial condition, operating results and cash flows may be impacted byNone of our directors or officers adopted, modified or terminated a number“Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of factors, many of which are beyond our control, including those set forth in our Annual Report on Form 10-K forRegulation S-K, during the yearfirst quarter ended OctoberJanuary 31, 2022, any one of which may cause our actual results to differ materially from anticipated results. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended October 31, 2022, except as set forth below.2024.
Risks Related to the Wencor Acquisition
Completion of the Wencor Acquisition is subject to the conditions contained in the Merger Agreement and if these conditions are not satisfied, the Wencor Acquisition will not be completed.
The completion of the Wencor Acquisition is subject to various closing conditions, including, among others: (a) the absence of certain legal impediments to the consummation of the acquisition; (b) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain other regulatory approvals; (c) in the case of the Company’s and Wencor’s obligations to complete the acquisition, the accuracy of Wencor’s and the Company’s, respectively, representations and warranties contained in the Merger Agreement subject to customary materiality standards; (d) material compliance by the Company, Wencor and Jazz Topco GP LLC, solely in its capacity as representative for purposes of certain provisions of the Merger Agreement, with certain pre-closing covenants; and (e) no material adverse change in Wencor’s business since the date of the Merger Agreement.
Many of the conditions to the closing of the Wencor Acquisition are not within our control, and we cannot predict with certainty when or if these conditions will be satisfied. The failure to satisfy any of the required conditions could delay the completion of the Wencor Acquisition or prevent it from occurring. Any delay in completing the Wencor Acquisition could cause us not to realize some or all of the benefits that we expect to achieve if the Wencor Acquisition is successfully completed within the expected timeframe. There can be no assurance that the conditions to the closing of the Wencor Acquisition will be satisfied or that the Wencor Acquisition will be completed or that if completed we will realize the anticipated benefits.
Failure to complete the Wencor Acquisition could negatively impact our stock price and our future business and financial results.
If the Wencor Acquisition is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Wencor Acquisition, we could be subject to a number of negative consequences, including, among others: (i) we may experience negative reactions from the financial markets, including negative impacts on our stock price; (ii) we will still be required to pay certain significant costs relating to
the Wencor Acquisition, including legal, accounting, and financial advisor costs; and (iii) matters related to the Wencor Acquisition (including integration planning) require substantial commitments of our time and resources, which could result in our inability to pursue other opportunities that could be beneficial to us. Also, the Company is required to pay Target a termination fee of $143.5 million in cash upon termination of the Merger Agreement under specified circumstances, including the failure to obtain regulatory approvals or, among others, if the Company materially breaches its regulatory covenants such that there is a failure of certain conditions to the Merger. If the Wencor Acquisition is not completed or if completion of the Wencor Acquisition is delayed, any of these risks could occur and may adversely affect our business, financial condition, financial results, and stock price.
The Wencor Acquisition will involve substantial costs.
We have incurred, and expect to continue to incur, a number of costs associated with the Wencor Acquisition. The substantial majority of these costs will consist of transaction and regulatory costs related to the Wencor Acquisition. We will also incur transaction fees and costs related to formulating and implementing integration plans, including system consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred from the Wencor Acquisition and integration. Although we anticipate that the elimination of duplicative costs and the realization of other efficiencies and synergies related to the integration should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
In connection with the Wencor Acquisition, we will incur additional indebtedness, which could adversely affect us, including our business flexibility and will increase our interest expense.
We will have increased indebtedness following completion of the Wencor Acquisition, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our interest expense. We will also incur various costs and expenses related to the financing of the Wencor Acquisition. The amount of cash required to pay interest on our increased indebtedness following completion of the Wencor Acquisition and thereby the demands on our cash resources will be greater than the amount of cash flow required to service our indebtedness prior to the Wencor Acquisition. The increased levels of indebtedness following completion of the Wencor Acquisition could also reduce funds available for working capital, capital expenditures, and other general corporate purposes, and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected synergies and cost savings from the Wencor Acquisition, or if our financial performance after the Wencor Acquisition does not meet our current expectations, then our ability to service the indebtedness may be adversely impacted.
Item 6. EXHIBITS
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Exhibit | | Description |
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2.122.1 | | |
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10.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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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. *
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document. * |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. * |
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101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document. * |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). * |
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* Filed herewith.
** Furnished herewith.
*** Previously filed.
# Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The33
registrant hereby undertakes to furnish copies of any of the omitted schedules upon
request by the Securities and Exchange Commission.
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: | May 24, 2023February 28, 2024 | 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) |