HEICO Corporation — Q1 FY2023 10-Q
Reporting period: Three months ended January 31, 2023. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Comparisons below are with the three months ended January 31, 2022 unless otherwise noted.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $620.9 million | $490.3 million | +27% |
| Operating income | $129.4 million | $98.8 million | +31% |
| Net income attributable to HEICO | $93.0 million | $86.9 million | +7% |
| Diluted EPS attributable to HEICO | $0.67 | $0.63 | +$0.04 |
| Gross margin | 39.3% | 38.8% | +0.5 percentage points |
| Operating margin | 20.8% | 20.2% | +0.6 percentage points |
FSG sales rose 36% to $371.3 million, including $31.5 million from fiscal 2022 acquisitions; organic growth was 25%. ETG sales increased 15% to $255.1 million, principally reflecting $32.8 million from fiscal 2022 and 2023 acquisitions; organic sales were approximately flat. FSG operating income grew 60% to $83.6 million, while ETG operating income rose 2% to $56.5 million.
Net cash provided by operating activities was $76.7 million, versus $78.0 million. The company cited a $63.0 million increase in net working capital, including inventory growth of $52.0 million. Investing activities used $526.0 million, primarily for acquisitions; financing activities provided $449.2 million. Cash and cash equivalents were $142.6 million at quarter-end.
Long-term debt, including current maturities, was $782.8 million at January 31, compared with $290.3 million at October 31, 2022. Revolver borrowings were $768.0 million; the weighted-average rate was 5.5%, up from 4.6%. HEICO reported compliance with credit-facility covenants and a total debt-to-shareholders’ equity ratio of 28.5%. Current assets were $1.319 billion and current liabilities were $453.5 million.
Material changes and notable items
- HEICO acquired 93.69% of Exxelia International SAS on January 5, 2023, for $501.5 million net of cash acquired. Exxelia contributed $15.0 million of quarterly sales; management said the acquisition did not materially affect HEICO-attributable net income. The purchase price allocation is preliminary.
- Interest expense rose to $6.1 million from $0.8 million, principally due to higher interest rates and acquisition-related borrowing.
- The effective tax rate increased to 16.9% from 4.1%, mainly because the prior-year quarter included a larger tax benefit from stock-option exercises ($17.8 million versus $6.2 million).
- Inventory increased to $697.5 million from $582.5 million at October 31, 2022. Contract liabilities increased $25.1 million to $83.9 million, principally reflecting customer advance deposits.
- Redeemable noncontrolling interests were $340.3 million. Put rights may require purchases of subsidiary interests on varying dates through fiscal 2032.
Outlook, risks and contingencies
Management anticipated sales growth in both FSG and ETG for the remainder of fiscal 2023, driven principally by demand for most products. It expected inflation and lingering supply-chain disruption could raise material and labor costs, and planned continued investment in product development, market penetration and acquisitions. Fiscal 2023 capital expenditures were projected at approximately $45–$50 million. Management said operating cash generation and available revolver borrowings should fund requirements for at least the next 12 months.
Management cited commercial-air-travel recovery, particularly in domestic markets, while international recovery remained slower. COVID-19-related supply-chain effects continued. Risks disclosed include travel demand, inflation, supply constraints, defense spending, acquisition execution, interest and foreign-exchange rates, and customer credit risk. A subsidiary is cooperating with a federal grand jury investigation concerning work on Navy vessels and employment of an individual; HEICO said it could not predict the outcome or estimate a possible loss.
In connection with Exxelia, HEICO issued a ten-year €150 million note bearing 4.7% interest. Management disclosed that a hypothetical 10% strengthening of the U.S. dollar against the euro would reduce the note’s U.S.-dollar equivalent by approximately $16.3 million and reduce operating income by the same amount. The filing reports $580.3 million of remaining performance obligations for contracts with original durations over one year, with $251.8 million expected to be recognized during the rest of fiscal 2023.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, particularly after Exxelia’s preliminary purchase accounting is finalized.
- Whether inventory growth, working-capital use and supply constraints normalize as backlog is fulfilled.
- How higher borrowing costs and the increased debt balance affect interest expense, liquidity and acquisition capacity.
- Developments in the federal investigation and potential cash requirements from subsidiary put rights and contingent consideration.
- Whether management’s growth outlook holds amid uneven commercial-air-travel recovery, inflation and defense-market demand.