HEICO (US:HEI)2023-12-19 16:00Part I Business HEICO manufactures FAA-approved aerospace parts and electronic equipment, growing through organic development and strategic acquisitions across its FSG and ETG segments Flight Support Group (FSG) The FSG is the largest independent supplier of FAA-approved non-OEM aircraft parts, providing sales, repair, and distribution services - The FSG is the largest independent supplier of non-OEM jet engine and aircraft component replacement parts and develops approximately 350 to 550 new PMA parts per year2434 - The group has developed approximately 19,500 parts for which PMAs have been received from the FAA24 FSG Research & Development Expenditures | Fiscal Year | R&D Expense (approx.) | | :--- | :--- | | 2023 | $26.4 million | | 2022 | $22.2 million | | 2021 | $18.3 million | Electronic Technologies Group (ETG) The ETG designs and manufactures mission-critical electronic subcomponents for defense, space, medical, and telecommunications industries - In fiscal 2023, approximately 49% of ETG's net sales were from products and services to U.S. and foreign military agencies, prime defense contractors, and satellite/spacecraft manufacturers18 ETG Research & Development Expenditures | Fiscal Year | R&D Expense | | :--- | :--- | | 2023 | $69.4 million | | 2022 | $53.9 million | | 2021 | $50.6 million | Backlog As of October 31, 2023, HEICO's total backlog increased 35% year-over-year to $1.863 billion, driven by acquisitions Backlog Comparison (in millions) | Segment | Oct 31, 2023 | Oct 31, 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Total Backlog | $1,863 | $1,383 | +35% | | Flight Support Group (FSG) | $1,013 | $674 | +50% | | Electronic Technologies Group (ETG) | $850 | $709 | +20% | Human Capital As of October 31, 2023, HEICO employed approximately 9,600 individuals, split evenly between its two segments - As of October 31, 2023, the company had approximately 9,600 employees86 - The workforce is split with approximately 4,800 employees in the Flight Support Group and 4,800 in the Electronic Technologies Group86 - None of the company's U.S. domestic employees are represented by a union, and management believes employee relations are good86 Information About Our Executive Officers The executive team is led by Laurans A. Mendelson and his sons, Eric and Victor, who head the FSG and ETG respectively - Laurans A. Mendelson serves as Chairman of the Board and CEO95 - Eric A. Mendelson is Co-President and leads the HEICO Flight Support Group9596 - Victor H. Mendelson is Co-President and leads the HEICO Electronic Technologies Group9599 Net Sales Contribution by Segment (Fiscal 2023) | Operating Segment | FY 2023 Net Sales % | FY 2022 Net Sales % | FY 2021 Net Sales % | | :--- | :--- | :--- | :--- | | Flight Support Group (FSG) | 60% | 57% | 50% | | Electronic Technologies Group (ETG) | 40% | 43% | 50% | - The company's growth strategy combines internal product development with a disciplined acquisition approach, resulting in the completion of approximately 98 acquisitions since 199022 Long-Term Growth (Fiscal 1990 vs. 2023) | Metric | Fiscal 1990 | Fiscal 2023 | Compound Annual Growth Rate | | :--- | :--- | :--- | :--- | | Net Sales | $26.2 million | $2,968.1 million | ~15% | | Net Income | $2.0 million | $403.6 million | ~18% | Risk Factors The company faces risks from acquisition execution, new product development, intense competition, aviation industry cyclicality, and potential asset impairment - Key risks include the ability to execute its acquisition strategy, dependence on new product development, and intense competition104106109 - The business is highly dependent on the performance of the aviation industry and is subject to risks from public health emergencies like the COVID-19 pandemic128132 - Goodwill and other intangible assets represented 64% of total assets as of October 31, 2023, posing a risk of impairment charges124 Properties HEICO operates numerous owned and leased facilities across its FSG and ETG segments, totaling approximately 4.7 million square feet Facility Space by Segment (Square Footage) | Segment | Leased | Owned | Total | | :--- | :--- | :--- | :--- | | Flight Support Group | 2,111,000 | 533,000 | 2,644,000 | | Electronic Technologies Group | 1,203,000 | 925,000 | 2,128,000 | | Corporate | — | 10,000 | 10,000 | Legal Proceedings An FSG subsidiary is cooperating with a grand jury investigation, with other legal actions not expected to materially impact financials - An indirect subsidiary received a grand jury subpoena related to work on Navy vessels for a period prior to its acquisition by HEICO, and the company is cooperating with the investigation148 - Management does not believe the outcome of this matter or other legal actions will have a material adverse effect on its financial position or cash flows149 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities HEICO's common stock trades on the NYSE, with the company paying semi-annual dividends and no share repurchases in Q4 FY2023 - The company's Class A Common Stock and Common Stock trade on the NYSE under symbols HEI.A and HEI, respectively152 - Paid an aggregate cash dividend of $0.20 per share in fiscal 2023, an 11% increase over the $0.18 per share paid in fiscal 2022161 - There were no issuer purchases of equity securities during the fourth quarter of fiscal 2023159 Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw record sales and net income, driven by strong FSG and ETG performance, acquisitions, and commercial aerospace recovery, despite increased debt Results of Operations Fiscal 2023 consolidated net sales increased 34% to $2.97 billion, driven by strong FSG and ETG growth from organic sales and acquisitions Net Sales by Segment (FY 2023 vs FY 2022, in millions) | Segment | FY 2023 Net Sales | FY 2022 Net Sales | % Change | | :--- | :--- | :--- | :--- | | Flight Support Group | $1,770.2 | $1,255.2 | +41% | | Electronic Technologies Group | $1,225.2 | $972.5 | +26% | | Total | $2,968.1 | $2,208.3 | +34% | Operating Income by Segment (FY 2023 vs FY 2022, in millions) | Segment | FY 2023 Op. Income | FY 2022 Op. Income | % Change | | :--- | :--- | :--- | :--- | | Flight Support Group | $387.3 | $267.2 | +45% | | Electronic Technologies Group | $285.1 | $269.5 | +6% | | Total | $625.3 | $496.8 | +26% | - SG&A expenses increased to $528.1 million from $365.9 million, primarily due to $96.8 million from acquisitions, $15.8 million in higher performance-based compensation, and a $20.0 million increase in acquisition-related costs175176 Liquidity and Capital Resources Fiscal 2023 saw significant changes in liquidity due to major acquisitions, increasing total debt to $2.48 billion and raising the debt-to-capitalization ratio to 44% Capitalization Summary (in thousands) | Metric | As of Oct 31, 2023 | As of Oct 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $171,048 | $139,504 | | Total debt | $2,478,078 | $290,274 | | Shareholders' equity | $3,193,151 | $2,648,306 | | Total debt to total capitalization | 44% | 10% | - Net cash provided by operating activities was $448.7 million in FY2023, a decrease from $467.9 million in FY2022, mainly due to a larger increase in net working capital192193 - Net cash used in investing activities was $2.48 billion, primarily for acquisitions of $2.42 billion, while financing activities provided $2.07 billion, mainly from $1.2 billion in senior notes and net borrowings of $975 million on the credit facility195197 Critical Accounting Estimates Critical accounting estimates involve revenue recognition, inventory valuation, and the fair value determination of assets acquired in business combinations - Key estimates involve revenue recognition for over-time contracts, which requires assumptions about costs, labor productivity, and manufacturing efficiency217219 - Valuation of inventory requires estimates of future demand and sales patterns to assess slow-moving or obsolete items225 - Business combinations require significant estimates for the fair value of acquired assets, liabilities, and contingent consideration, which is re-measured each period with changes impacting SG&A expenses228229 Fiscal 2023 vs. 2022 Key Financials (in millions) | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,968.1 | $2,208.3 | +34% | | Operating Income | $625.3 | $496.8 | +26% | | Net Income to HEICO | $403.6 | $351.7 | +15% | | Diluted EPS | $2.91 | $2.55 | +14% | - FSG net sales grew 41% to a record $1.77 billion, reflecting 21% organic growth and contributions from acquisitions, while ETG net sales grew 26% to a record $1.23 billion, driven by acquisitions and 1% organic growth172 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on variable-rate debt and foreign currency exposure, primarily the Euro - Primary market risks are interest rate risk from its variable-rate debt and foreign currency risk from international operations239241 - As of October 31, 2023, the company had $1.25 billion in outstanding variable-rate debt239 Financial Statements and Supplementary Data This section presents HEICO's audited consolidated financial statements for FY2021-2023, with an unqualified auditor's opinion and detailed notes Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion, highlighting critical audit matters related to inventory and intangible asset valuations - The auditor issued an unqualified opinion on the financial statements245 - Critical Audit Matters identified were: 1) Valuation of inventories, net, and 2) Fair value of intangible assets acquired in business combinations (Exxelia and Wencor)250251255 Consolidated Financial Statements Consolidated financial statements reflect significant growth in assets, liabilities, and equity in FY2023, driven by acquisitions and new debt Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 31, 2023 | Oct 31, 2022 | | :--- | :--- | :--- | | Total Assets | $7,195,063 | $4,095,496 | | Goodwill | $3,274,327 | $1,672,425 | | Total Liabilities | $3,637,105 | $1,119,589 | | Total HEICO shareholders' equity | $3,145,995 | $2,606,136 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $2,968,105 | $2,208,322 | $1,865,682 | | Operating Income | $625,339 | $496,844 | $392,900 | | Net Income Attributable to HEICO | $403,596 | $351,675 | $304,220 | Notes to Consolidated Financial Statements Notes detail accounting policies, the impact of major acquisitions, new debt structure, revenue disaggregation, and other financial disclosures - On August 4, 2023, HEICO acquired Wencor Group for total consideration of approximately $2.05 billion, consisting of $1.9 billion in cash and 1.14 million shares of Class A Common Stock324325 - On January 5, 2023, HEICO acquired Exxelia International for approximately $504 million in cash332333 - In July 2023, the company issued $1.2 billion in senior unsecured notes ($600 million due 2028 at 5.25% and $600 million due 2033 at 5.35%) to help fund the Wencor acquisition382 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective, excluding recent acquisitions, with an unqualified auditor's opinion - Management concluded that disclosure controls and procedures and internal control over financial reporting (ICFR) were effective as of October 31, 2023476479 - The assessment of ICFR excluded the Wencor Group and Exxelia acquisitions, which were completed in fiscal 2023, representing 9.0% of total assets (excluding goodwill/intangibles) and 12.3% of net sales for the year480486 - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the company's internal control over financial reporting484 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming proxy statement - This section incorporates information by reference from the company's forthcoming definitive proxy statement496 Executive Compensation Detailed executive compensation information is incorporated by reference from the forthcoming definitive proxy statement - This section incorporates information by reference from the company's forthcoming definitive proxy statement499 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference from the proxy statement Equity Compensation Plan Information (as of Oct 31, 2023) | Description | Value (in thousands, except price) | | :--- | :--- | | Securities to be issued upon exercise of outstanding options | 4,054 | | Weighted-average exercise price of outstanding options | $83.74 | | Securities remaining available for future issuance | 2,362 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the forthcoming proxy statement - This section incorporates information by reference from the company's forthcoming definitive proxy statement502 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the forthcoming definitive proxy statement - This section incorporates information by reference from the company's forthcoming definitive proxy statement503 Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements and certifications - Lists all financial statements, schedules, and exhibits filed with the 10-K505 - Includes key agreements such as the Wencor merger agreement (Exhibit 2.2), the Indenture for the senior notes (Exhibit 4.2), and the amended Revolving Credit Agreement (Exhibit 10.13)508512 Form 10-K Summary This item indicates that no Form 10-K summary is provided - No summary is provided under this item514