HEICO Corporation — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended April 30, 2022. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Results continued to reflect COVID-19 effects, while commercial aerospace demand improved.
Financial performance
Amounts in millions of dollars, except per-share data. Comparisons are with the corresponding 2021 periods.
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $538.8 | $466.7 | $1,029.2 | $884.6 |
| Operating income | $122.8 | $96.7 | $221.6 | $177.0 |
| Operating margin | 22.8% | 20.7% | 21.5% | 20.0% |
| Net income attributable to HEICO | $85.0 | $70.7 | $171.9 | $141.3 |
| Diluted EPS | $0.62 | $0.51 | $1.25 | $1.03 |
| Operating cash flow | Not stated separately for the quarter | $174.8 | $210.1 |
- For the six months, FSG sales rose 35% to $579.0 million and operating income rose 93% to $118.6 million. ETG sales declined 1% to $459.7 million and operating income declined 7% to $121.6 million.
- Q2 FSG sales rose 33% to $306.3 million; ETG sales declined 2% to $237.4 million. FSG growth reflected recovering commercial air travel; ETG weakness principally reflected lower defense-product demand.
- Gross margin improved to 39.2% in Q2 and 39.0% for the six months. Higher FSG volume and margins were partly offset by softer ETG defense sales and higher R&D spending.
- Cash and cash equivalents were $117.3 million at April 30, 2022, versus $108.3 million at October 31, 2021. Total debt was $265.9 million, including $253.0 million drawn on the revolving facility. The company reported an 11.0% total-debt-to-shareholders’-equity ratio and compliance with facility covenants.
- Six-month operating cash flow fell $35.4 million year over year, chiefly due to an $87.4 million increase in net working capital, including a $42.8 million inventory build and $20.3 million increase in receivables. Investing cash use was $144.0 million, including $105.5 million for acquisitions. Financing cash use was $18.1 million.
- Current assets were $1,032.7 million and current liabilities $304.2 million. The filing states the company expects operating cash flow and available revolver borrowings to fund requirements for at least the next 12 months.
Changes, outlook and risks
- Consolidated sales increased 16% and operating income increased 25% for the first six months. HEICO attributed the improvement chiefly to commercial aerospace recovery and FSG growth. FSG had reported seven consecutive quarters of improving sales and operating income.
- Management expects global commercial air travel to continue growing but cited pandemic uncertainty, inflation and potential supply-chain disruption. It did not provide fiscal 2022 sales or earnings guidance, saying forecasting remained difficult. It anticipated approximately $40 million of FY2022 capital expenditures.
- Management said inflation and supply-chain issues could pressure costs and might lead to higher selling prices. It also identified risks from commercial-air-travel weakness, defense and space spending, product development, acquisitions, customer credit, interest and foreign-exchange rates, and broader economic conditions.
- Interest expense declined year over year, while effective tax rates increased to 23.7% in Q2 and 15.0% for the six months. Management attributed the tax-rate comparisons principally to tax-exempt unrealized losses on life-insurance policies related to its deferred compensation plan; the six-month rate also reflected a stock-option tax benefit.
- During the quarter, HEICO acquired Flight Microwave and acquired a 74% interest in Pioneer Industries. Acquisition contributions to reported sales and earnings were described as not material. Redeemable noncontrolling interests totaled $303.9 million; put rights may require future cash purchases of subsidiary interests.
- A subsidiary is cooperating with a federal grand-jury investigation concerning its employment of an individual and work on certain Navy vessels. The company says it cannot predict the outcome or reasonably estimate any possible loss or business impact. It reported no other legal matters expected to have a material adverse effect.
- The revolving-credit-facility maturity was extended by one year to November 2024, and the benchmark-rate provisions were amended to include Adjusted Term SOFR.
Investor verification points
- Track whether commercial aerospace recovery continues, particularly in international markets, and whether FSG growth and margin gains persist.
- Assess ETG defense demand, R&D spending and margin trends against the company’s other product markets.
- Monitor inventory and receivables growth, operating cash conversion, acquisition spending and revolver borrowings.
- Review the absence of FY2022 guidance alongside management’s cited pandemic, inflation and supply-chain uncertainties.
- Follow the Navy-related investigation, contingent-consideration obligations and subsidiary put rights that may require future cash payments.