HEICO (HEI_A) - 2023 Q1 - Quarterly Report

Part I. Financial Information Financial Statements Q1 2023 financial statements reflect significant revenue and asset growth, primarily driven by the Exxelia acquisition Condensed Consolidated Balance Sheets Total assets increased to $4.80 billion due to a major acquisition, significantly impacting goodwill and long-term debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Jan 31, 2023 | Oct 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,318,799 | $1,152,730 | | Goodwill | $1,994,347 | $1,672,425 | | Intangible assets, net | $873,722 | $733,327 | | Total assets | $4,804,620 | $4,095,496 | | Total current liabilities | $453,496 | $420,859 | | Long-term debt, net | $781,174 | $288,620 | | Total liabilities | $1,720,159 | $1,119,589 | | Total shareholders' equity | $2,744,174 | $2,648,306 | Condensed Consolidated Statements of Operations Q1 2023 saw record net sales of $620.9 million (up 27%) and operating income growth of 31%, with net income up 7% Quarterly Operating Results (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net sales | $620,915 | $490,343 | +26.6% | | Operating income | $129,434 | $98,822 | +31.0% | | Net income attributable to HEICO | $93,027 | $86,921 | +7.0% | | Diluted EPS | $0.67 | $0.63 | +6.3% | Condensed Consolidated Statements of Cash Flows Operating cash flow remained stable, while investing activities saw a major outflow of $526.0 million for an acquisition, funded by increased borrowings Cash Flow Summary (in thousands) | Cash Flow Activity | Three months ended Jan 31, 2023 | Three months ended Jan 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76,686 | $77,980 | | Net cash used in investing activities | ($525,980) | ($19,959) | | Net cash provided by (used in) financing activities | $449,175 | ($39,920) | | Net increase in cash and cash equivalents | $3,115 | $16,520 | Notes to Condensed Consolidated Financial Statements Notes detail the Exxelia acquisition, strong FSG revenue growth, increased debt, and a higher effective tax rate - The company operates through two segments: the Flight Support Group (FSG) and the Electronic Technologies Group (ETG). Operating results in Q1 2023 improved due to recovering demand for commercial aerospace products, despite supply chain impacts from the COVID-19 pandemic[21][22] - On January 5, 2023, the company acquired 93.69% of Exxelia International SAS for $515.8 million in cash, financed by its revolving credit facility. The acquisition contributed $15.0 million to net sales in the quarter[25][26][27] - Goodwill increased by $320.4 million during the quarter, primarily due to $306.4 million from the Exxelia acquisition[40] - Borrowings under the revolving credit facility increased from $275.0 million to $768.0 million to finance the Exxelia acquisition. The weighted average interest rate rose to 5.5% from 4.6%[44] Net Sales by Operating Segment (in thousands) | Segment | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Flight Support Group | $371,278 | $272,681 | +36.2% | | Electronic Technologies Group | $255,059 | $222,336 | +14.7% | - The effective tax rate for Q1 2023 was 16.9%, up from 4.1% in Q1 2022. The increase is mainly because the tax benefit from stock option exercises was smaller in 2023 ($6.2 million) compared to 2022 ($17.8 million)[53] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes record Q1 2023 net sales growth to strong organic and acquisition contributions, anticipating continued growth despite inflation risks Results of Operations Q1 2023 consolidated net sales rose 27% to $620.9 million, driven by FSG's 36% growth and ETG's 15% increase, boosting operating income by 31% - FSG's net sales increase was driven by strong organic growth of 25% due to increased demand for commercial aerospace products and services, reflecting the continued recovery in global commercial air travel[82] - ETG's net sales increase was principally driven by $32.8 million from fiscal 2022 and 2023 acquisitions. Organic sales were flat as increased demand for electronics, aerospace, and medical products was offset by a decrease in defense product sales[82] - Consolidated gross profit margin improved to 39.3% from 38.8%, reflecting a 2.7% improvement in the FSG's margin, partially offset by a 1.5% decrease in the ETG's margin[83] Operating Income by Segment (in thousands) | Segment | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Flight Support Group | $83,609 | $52,376 | +59.6% | | Electronic Technologies Group | $56,537 | $55,588 | +1.7% | | Consolidated Operating Income | $129,434 | $98,822 | +31.0% | Liquidity and Capital Resources Cash was primarily used for acquisitions, funded by borrowings, with operating cash flow at $76.7 million and a debt-to-equity ratio of 28.5% - Net cash from operating activities was $76.7 million, slightly down from $78.0 million YoY, impacted by an increase in net working capital, particularly inventories, to support a larger backlog[98][99] - Net cash used in investing activities was $526.0 million, primarily for an acquisition costing $503.7 million[100] - Net cash from financing activities was $449.2 million, mainly from borrowing $531.0 million under the revolving credit facility[101] - The company was in compliance with all debt covenants as of January 31, 2023, with a total debt to shareholders' equity ratio of 28.5%[96] Outlook Management anticipates continued sales growth for fiscal 2023, focusing on new products and acquisitions, while monitoring inflation and supply chain risks - The company anticipates continued net sales growth in both the FSG and ETG for the remainder of fiscal 2023, driven by demand for the majority of its products[94] - The company plans to continue its commitment to new product development, market penetration, and an aggressive acquisition strategy[94] - Management acknowledges that continued inflationary pressures and lingering supply chain disruptions may lead to higher material and labor costs[94] Quantitative and Qualitative Disclosures About Market Risk The Exxelia acquisition introduced new foreign currency risk from a €150 million note, impacting operating income with exchange rate fluctuations - A new market risk has emerged from a ten-year €150 million note receivable issued to Exxelia as part of its acquisition[107] - A hypothetical 10% strengthening of the U.S. dollar against the Euro would decrease the value of the note receivable and operating income by approximately $16.3 million[107] Controls and Procedures Disclosure controls and procedures were effective as of January 31, 2023, with no material changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective as of the end of the quarter[108] - There were no material changes in internal control over financial reporting during the first quarter of fiscal 2023[109] Part II. Other Information Exhibits This section lists Form 10-Q exhibits, including CEO/CFO certifications and Inline XBRL documents - The report includes certifications from the CEO and CFO under Rule 13a-14(a)/15d-14(a) and Section 1350[112] - Inline XBRL instance, schema, calculation, definition, label, and presentation documents are filed as exhibits[112] Signatures