HEICO Corporation — Q3 Fiscal 2021 Form 10-Q
Reporting period: Third quarter and first nine months ended July 31, 2021; comparisons are to the corresponding 2020 periods. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results continued to reflect COVID-19 effects, especially reduced commercial aviation demand.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $471.7 million | $386.4 million | $1,356.3 million | $1,360.8 million |
| Operating income | $100.8 million | $68.4 million | $277.9 million | $287.6 million |
| Operating margin | 21.4% | 17.7% | 20.5% | 21.1% |
| Net income attributable to HEICO | $76.9 million | $54.3 million | $218.2 million | $251.7 million |
| Diluted EPS | $0.56 | $0.40 | $1.58 | $1.83 |
| Operating cash flow | Not stated for quarter | $334.1 million | $299.0 million |
Q3 sales rose 22%, operating income rose 47%, and HEICO-attributable net income rose 42%. The FSG’s quarterly sales increased 33% and operating income increased 250%, reflecting commercial aerospace recovery and lower bad-debt expense. ETG sales rose 14% and operating income rose 11%. For the first nine months, FSG sales fell 9% and operating income fell 15%; ETG sales increased 11% to a record $706.2 million and operating income increased 8% to a record $200.4 million.
Nine-month consolidated gross margin was 38.6%, versus 38.2%; Q3 gross margin was 39.2%, versus 37.1%. Nine-month net income and diluted EPS declined despite nearly flat sales, principally reflecting lower FSG operating income and a higher effective tax rate. The prior-year period included a larger discrete tax benefit from stock-option exercises. Effective tax rates were 13.3% versus 3.5% for nine months and 15.7% versus 13.4% for Q3.
Cash, debt and liquidity
- Cash and equivalents were $269.8 million at July 31, 2021, down from $406.9 million at October 31, 2020.
- Long-term debt, including current maturities, was approximately $386.9 million, down from $739.8 million; revolving-credit borrowings were $375.0 million. The facility matures in fiscal 2024, and its weighted-average borrowing rate was 1.2%. HEICO reported compliance with all covenants and a debt-to-shareholders’ equity ratio of 17.4%.
- Nine-month cash flow: $334.1 million provided by operations; $68.9 million used in investing; and $403.2 million used in financing, principally reflecting $355.0 million of revolving-credit repayments. Management said operating cash flow and available facility borrowings should fund requirements for at least the next 12 months.
- Fiscal 2021 capital expenditures were expected to be approximately $35–$38 million. The company paid $23.0 million in dividends during the first nine months.
Outlook, risks and notable items
Management was cautiously optimistic that vaccine rollout would support commercial air travel, but said pandemic developments—including vaccination rates and new variants—made the outlook difficult to predict. HEICO declined to provide fiscal 2021 sales or earnings guidance. Management cited its balance sheet and liquidity as support for R&D investment and acquisitions. The filing describes four consecutive quarters of FSG sales and operating-income improvement since the pandemic-impacted Q3 2020.
Acquisitions included Camtronics and Pyramid Semiconductor in fiscal 2021; their reported-period contribution was not material. In August 2021, HEICO acquired 89% of Ridge Engineering and The Bechdon Company; the transaction was reported as a subsequent event and not material to the statements.
A subsidiary received a federal grand jury subpoena concerning its employment of an individual and work on certain Navy vessels during 2017–2019. HEICO said it was cooperating, but could not predict the outcome or reasonably estimate any loss or business impact. Other ordinary-course legal matters were not expected by management to have a material adverse effect.
Other exposures include $224.7 million of estimated redeemable noncontrolling interests, $43.9 million of contingent-consideration liabilities, and $16.6 million of standby letters of credit. Risks identified by the company include continued weakness in commercial aviation, pandemic uncertainty, customer credit, acquisition execution, competition, regulatory and defense-spending changes, and cost or product-development challenges.
Investor verification priorities
- Whether commercial aviation recovery persists and translates into sustained FSG sales, margins and cash generation.
- How earnings respond as unusually low prior-year tax benefits roll off, and whether performance-based compensation remains elevated.
- Developments in the Navy-related subpoena investigation and any eventual financial or operating consequences.
- Potential cash requirements from noncontrolling-interest put rights and acquisition-related contingent consideration.
- Progress on fiscal 2021 capital spending, acquisitions, debt repayment and liquidity versus management’s stated outlook.