HEICO Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended October 31, 2022. This is an annual report, not a Q4-only filing; comparisons below are primarily with fiscal 2021. HEICO designs, manufactures, repairs and distributes aerospace, defense and electronic products through its Flight Support Group (FSG) and Electronic Technologies Group (ETG).
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $2,208.3 million | $1,865.7 million | +18% |
| Gross margin | 39.1% | 39.0% | +0.1 percentage point |
| Operating income | $496.8 million | $392.9 million | +26%; margin 22.5% vs. 21.1% |
| Net income attributable to HEICO | $351.7 million | $304.2 million | +16% |
| Diluted EPS | $2.55 | $2.21 | +15% |
| Cash from operating activities | $467.9 million | $444.1 million | +$23.8 million |
| Cash and cash equivalents | $139.5 million | $108.3 million | +$31.2 million |
| Total debt | $290.3 million | $236.5 million | +$53.8 million |
Segments: FSG sales rose 35% to $1,255.2 million and operating income increased 76% to $267.2 million, reflecting commercial aerospace recovery, acquisitions and improved margins. ETG sales increased 1% to $972.5 million, but operating income declined 3% to $269.5 million; organic sales fell 2%, largely due to weaker defense-product demand. Sales mix was approximately 43% commercial aviation, 39% defense and space, and 18% other markets.
Liquidity and capital: Operating cash flow was partly offset by a $61.4 million increase in net working capital, including an $89.2 million rise in inventories. Investing activities used $395.8 million, including $347.3 million for acquisitions and $32.0 million for capital expenditures. Debt was 10% of total capitalization, versus 9% a year earlier. HEICO reported $1.202 billion of unused committed revolver availability as of December 20, 2022, and stated that operating cash flow and available borrowing capacity should fund requirements for at least 12 months. It was in compliance with credit-facility covenants at year-end.
Material changes and notable items
- Consolidated sales reached a record, driven chiefly by FSG’s recovery in commercial aerospace demand; the FSG reported nine consecutive quarters of improving sales and operating income.
- FSG backlog increased to $674 million from $397 million; ETG backlog rose to $709 million from $580 million. Total backlog increased 42% to $1.383 billion, most of which was expected to ship in FY2023.
- The effective tax rate rose to 20.4% from 14.8%, principally because of tax-exempt unrealized losses on life-insurance investments associated with the Leadership Compensation Plan, compared with gains in FY2021.
- Fiscal 2022 acquisitions used $347.3 million of cash net of cash acquired; HEICO also issued $75.0 million of Class A shares in connection with the Sensor Systems acquisition. The filing identifies several acquisitions completed during the year.
- Inventory reached $582.5 million, up from $478.1 million. Inventory valuation and demand estimates were identified as a critical audit matter.
- HEICO paid $0.18 per share in FY2022 dividends, up 6% from FY2021, and declared a subsequent semiannual dividend of $0.10 per share in December 2022.
Outlook, risks and contingencies
Management anticipated sales growth in both segments in FY2023, primarily from demand for most products. It expected inflation and lingering supply-chain disruption to pressure material and labor costs and said price increases might be needed. Planned priorities included new-product development, market penetration and acquisitions, while maintaining financial flexibility. FY2023 capital expenditures were estimated at approximately $40 million; no specific earnings or EPS guidance was provided.
- Acquisition commitment: HEICO agreed to acquire approximately 95% of Exxelia International for €453 million plus assumption of approximately €14 million of liabilities. Closing was expected in FY2023 Q1, subject to customary conditions, including regulatory clearances; the purchase price was subject to euro-dollar exchange-rate movements.
- Potential noncontrolling-interest payments: Put rights had an estimated aggregate redemption amount of $327.6 million. Approximately $56.3 million could be payable in FY2023 if eligible holders exercised their rights.
- Legal investigation: A subsidiary received a U.S. grand jury subpoena concerning its employment of an individual and work on Navy vessels. HEICO said it was cooperating but could not predict the outcome or estimate a possible loss.
- Key risks: Commercial aviation cycles, defense and space spending, supply-chain constraints and inflation, acquisition execution and integration, competition, regulatory and export approvals, foreign-currency exposure, product liability, cybersecurity, and the value of goodwill and other intangible assets. Goodwill and intangible assets represented 59% of total assets; no impairment was recorded for FY2022.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. The audit opinion on internal controls excluded specified FY2022 acquisitions, which represented 13.6% of consolidated assets and 3.3% of net sales.
Investor verification priorities
- Check whether FSG’s commercial-aerospace recovery and the substantial backlog converted into shipments, revenue and margins in FY2023.
- Assess the persistence of ETG’s weaker organic defense sales and the effect of segment mix on profitability.
- Track inventory growth, obsolescence reserves, supplier lead times and working-capital cash conversion.
- Verify Exxelia’s closing, financing and integration, along with acquisition-related debt and returns.
- Monitor put-right exercises, contingent-consideration payments, and the outcome of the Navy-related investigation.
- Review the impact of inflation, pricing actions, interest rates and foreign exchange on costs and earnings.