HEICO Corporation — Q3 FY2022 Form 10-Q
Reporting period: Third quarter and first nine months ended July 31, 2022. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $569.5 | $471.7 | $1,598.7 | $1,356.3 |
| Operating income | $128.7 | $100.8 | $350.3 | $277.9 |
| Net income attributable to HEICO | $82.5 | $76.9 | $254.5 | $218.2 |
| Diluted EPS | $0.60 | $0.56 | $1.85 | $1.58 |
| Gross margin | 38.8% | 39.2% | 38.9% | 38.6% |
| Operating margin | 22.6% | 21.4% | 21.9% | 20.5% |
Q3 sales rose 21%, operating income 28%, and HEICO-attributable net income 7% year over year. For the first nine months, sales grew 18%, operating income 26%, and attributable net income 17%. The effective tax rate rose to 27.0% in Q3 from 15.7%, and to 19.4% for the nine months from 13.3%; management cited unrealized losses on life-insurance policies associated with its Leadership Compensation Plan and, for the quarterly comparison, a larger prior-year R&D tax credit.
Segments and operating changes
- FSG: Q3 sales increased 39% to $330.3 million and operating income rose 68% to $70.8 million. Nine-month sales grew 36% to $909.3 million and operating income increased 83% to $189.3 million. Growth reflected commercial aerospace recovery, acquisitions, and improved operating leverage.
- ETG: Q3 sales increased 2% to $244.2 million, while operating income decreased 1% to $68.0 million. Nine-month sales were down slightly to $703.9 million and operating income fell 5% to $189.6 million. Lower defense-product demand weighed on results; other electronics, medical, space, and aerospace demand partly offset the decline.
- Consolidated gross margin was slightly lower in Q3 but improved for the nine-month period. SG&A declined as a percentage of sales in both comparisons, aided by volume efficiencies and favorable changes in contingent-consideration estimates.
Cash, debt, and liquidity
- Nine-month operating cash flow was $323.9 million, versus $334.1 million a year earlier. Management attributed the decline principally to a $65.8 million increase in net working capital, including a $61.2 million inventory increase for strategic purchasing and backlog support.
- Investing cash outflow was $223.4 million, including $175.3 million for acquisitions and $24.4 million of capital expenditures. Financing cash outflow was $70.1 million; cash increased $25.3 million to $133.6 million.
- At July 31, 2022, total debt was $245.8 million, including $230.0 million drawn on the revolving facility; cash was $133.6 million. The revolver’s weighted-average rate was 3.3%. The company reported compliance with facility covenants and a total-debt-to-shareholders’-equity ratio of 9.9%.
- Management expects FY2022 capital expenditures of approximately $35 million and believes operating cash flow and available revolver borrowings will fund requirements for at least the next 12 months. The filing does not state the amount of undrawn revolver availability.
Outlook, transactions, and risks
Management expected commercial air travel to continue recovering but cited uncertainty from the pandemic and potential variants, supply-chain disruption, and inflation. It did not provide FY2022 sales or earnings guidance, citing difficulty forecasting these factors. The company noted that inflation and supply constraints could lead to higher selling prices.
HEICO acquired Accurate Metal Machining, Pioneer Industries, and Flight Microwave during FY2022; their reported contribution was not material. In August 2022 it also acquired Charter Engineering and Sensor Systems, each described as not material. A significant subsequent transaction is the agreement to acquire approximately 95% of Exxelia for €453 million in cash plus approximately €14 million of assumed liabilities. Closing was expected in Q1 FY2023, subject to customary conditions, including foreign approvals; the purchase was expected to be funded principally through the revolver. A 10% currency-rate movement could change the dollar-translated purchase price by approximately $46.3 million.
Other notable items include a $29.4 million nine-month foreign-currency translation loss and $451.3 million of remaining performance obligations, with $123.8 million expected to be recognized in the remainder of FY2022. HEICO disclosed an ongoing U.S. grand-jury investigation involving a subsidiary; it is cooperating, but cannot predict the outcome or reasonably estimate any potential loss. Management stated other ordinary-course legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether commercial aerospace recovery continues, particularly in international markets, and how pandemic-related uncertainty affects demand.
- Whether ETG defense-product demand stabilizes and whether margin pressure in that segment persists.
- Inventory, receivables, and other working-capital trends, given the inventory build and lower operating cash flow year over year.
- Exxelia closing conditions, financing, final purchase economics, and foreign-exchange exposure; also the integration and performance of recent acquisitions.
- Developments in the government investigation, contingent-consideration obligations, and the company’s ability to maintain covenant compliance and liquidity.