HEICO (HEI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents HEICO Corporation's unaudited condensed consolidated financial statements for the period ended April 30, 2023, including balance sheets, statements of operations, comprehensive income, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, acquisitions, and other financial information Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | ASSETS | April 30, 2023 (in thousands) | October 31, 2022 (in thousands) | | :--------------------------------- | :------------- | :--------------- | | Total current assets | $1,366,639 | $1,152,730 | | Property, plant and equipment, net | 273,856 | 225,879 | | Goodwill | 2,031,235 | 1,672,425 | | Intangible assets, net | 844,319 | 733,327 | | Other assets | 354,150 | 311,135 | | Total assets | $4,870,199 | $4,095,496 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $466,828 | $420,859 | | Long-term debt, net | 735,779 | 288,620 | | Deferred income taxes | 94,468 | 71,162 | | Other long-term liabilities | 367,624 | 338,948 | | Total liabilities | 1,664,699 | 1,119,589 | | Redeemable noncontrolling interests| 345,833 | 327,601 | | Total shareholders' equity | 2,859,667 | 2,648,306 | | Total liabilities and equity | $4,870,199 | $4,095,496 | - Total assets increased by $774.7 million (18.9%) from October 31, 2022, to April 30, 2023, primarily driven by increases in goodwill, intangible assets, and inventories[9] - Total liabilities increased by $545.1 million (48.7%) over the six-month period, largely due to a significant increase in long-term debt[9] Condensed Consolidated Statements of Operations This section outlines the company's financial performance over periods, including net sales, operating income, and net income Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | Three months ended April 30, 2023 (in thousands) | Three months ended April 30, 2022 (in thousands) | | :------------------------------------- | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net sales | $1,308,756 | $1,029,156 | $687,841 | $538,813 | | Operating income | 286,524 | 221,599 | 157,090 | 122,777 | | Interest expense | (17,441) | (1,775) | (11,373) | (979) | | Income before income taxes | 270,065 | 220,364 | 146,060 | 122,112 | | Income tax expense | 52,000 | 33,000 | 31,000 | 29,000 | | Net income attributable to HEICO | $198,147 | $171,931 | $105,120 | $85,010 | | Diluted EPS | $1.43 | $1.25 | $.76 | $.62 | - Net sales increased by 27.2% for the six months ended April 30, 2023, and by 27.7% for the three months ended April 30, 2023, compared to the prior year periods[10] - Net income attributable to HEICO increased by 15.2% for the six months and 23.7% for the three months ended April 30, 2023, year-over-year[10] - Interest expense significantly increased for both periods, rising from $1.8 million to $17.4 million for the six-month period and from $1.0 million to $11.4 million for the three-month period, primarily due to higher interest rates[10] Condensed Consolidated Statements of Comprehensive Income This section details the company's comprehensive income, including net income and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | Three months ended April 30, 2023 (in thousands) | Three months ended April 30, 2022 (in thousands) | | :------------------------------------------ | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net income from consolidated operations | $218,065 | $187,364 | $115,060 | $93,112 | | Total other comprehensive income (loss) | 30,407 | (22,995) | 2,007 | (14,255) | | Comprehensive income attributable to HEICO | $227,020 | $149,929 | $106,852 | $71,418 | - Comprehensive income attributable to HEICO increased significantly by 51.4% for the six months and 49.6% for the three months ended April 30, 2023, primarily due to positive foreign currency translation adjustments compared to losses in the prior year[13] Condensed Consolidated Statements of Shareholders' Equity This section tracks changes in the company's shareholders' equity over time, reflecting contributions, distributions, and earnings Changes in HEICO Shareholders' Equity (in thousands) | Item | Balances as of Oct 31, 2022 (in thousands) | Six Months Ended Apr 30, 2023 Changes (in thousands) | Balances as of Apr 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------- | :------------------------------------ | :-------------------------- | | Redeemable Noncontrolling Interests | $327,601 | $18,232 | $345,833 | | Common Stock | $545 | $2 | $547 | | Class A Common Stock | $821 | $2 | $823 | | Capital in Excess of Par Value | $397,337 | $1,654 | $398,991 | | Accumulated Other Comprehensive Loss | ($46,499) | $28,873 | ($17,626) | | Retained Earnings | $2,253,932 | $181,223 | $2,435,155 | | Total HEICO Shareholders' Equity | $2,606,136 | $211,754 | $2,817,890 | - Total HEICO shareholders' equity increased by $211.8 million from October 31, 2022, to April 30, 2023, primarily driven by comprehensive income and share-based compensation, partially offset by cash dividends[15][16] Condensed Consolidated Statements of Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | | :------------------------------------------ | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $154,436 | $174,753 | | Net cash used in investing activities | (559,790) | (143,955) | | Net cash provided by (used in) financing activities | 388,765 | (18,105) | | Effect of exchange rate changes on cash | 4,246 | (3,673) | | Net (decrease) increase in cash and cash equivalents | (12,343) | 9,020 | | Cash and cash equivalents at end of period | $127,161 | $117,318 | - Net cash provided by operating activities decreased by $20.3 million (11.6%) year-over-year, primarily due to increased working capital needs, particularly in inventories[17][127] - Net cash used in investing activities significantly increased to $559.8 million from $144.0 million, mainly driven by higher acquisition spending ($524.2 million in 2023 vs $105.5 million in 2022)[17][129] - Net cash provided by financing activities dramatically shifted from a net use of $18.1 million in 2022 to a net provision of $388.8 million in 2023, largely due to increased borrowings on the revolving credit facility[17][130] Notes to Condensed Consolidated Financial Statements This section provides detailed notes on accounting policies, acquisitions, and other financial information 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section describes key accounting principles, segment reporting, and recent accounting standard adoptions - The financial statements are prepared in conformity with GAAP for interim financial information and should be read with the annual Form 10-K[18] - HEICO operates in two segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG)[19] - Operating results in fiscal 2023 continue to reflect lingering COVID-19 effects, including supply chain impacts, but show improved demand for commercial aerospace products and services[20] - The company adopted ASU 2021-08 in Q1 fiscal 2023, with no material effect on financial statements[22] 2. ACQUISITIONS This section details recent business acquisitions, including financial terms, strategic rationale, and their impact on results - In March 2023, HEICO Electronic acquired an exclusive license and assets for the Aircraft Emergency Locator Transmitter (ELT) product line from Honeywell International, paid in cash from operating activities[23] - On January 5, 2023, HEICO Electronic acquired 93.69% of Exxelia International SAS for $515.8 million cash (net $501.6 million), expanding its Hi-Rel electronic components for aerospace and defense, and gaining geographic diversity in Europe. The acquisition was financed by the revolving credit facility[24][25] Exxelia Acquisition Allocation (in thousands) | Assets acquired: | (in thousands) | | :--------------------------------- | :------- | | Goodwill | $332,033 | | Customer relationships | 64,935 | | Intellectual property | 44,044 | | Trade name | 21,703 | | Inventories | 55,922 | | Property, plant and equipment | 42,165 | | Accounts receivable | 41,113 | | Other assets | 11,254 | | Total assets acquired, excluding cash | 613,169 | | Liabilities assumed: | (in thousands) | | Deferred income taxes | 31,975 | | Accounts payable | 22,369 | | Accrued expenses | 18,383 | | Other liabilities | 24,231 | | Total liabilities assumed | 96,958 | | Noncontrolling interests | 14,660 | | Net assets acquired, excluding cash | $501,551 | - Exxelia contributed approximately $69.6 million to consolidated net sales for the six months ended April 30, 2023, and $54.6 million for the three months ended April 30, 2023[29] 3. SELECTED FINANCIAL STATEMENT INFORMATION This section provides additional details on specific financial statement line items such as accounts receivable, inventories, and R&D expenses Accounts Receivable (in thousands) | Metric | April 30, 2023 (in thousands) | October 31, 2022 (in thousands) | | :--------------- | :------------- | :--------------- | | Accounts receivable, net | $361,057 | $294,848 | Inventories (in thousands) | Metric | April 30, 2023 (in thousands) | October 31, 2022 (in thousands) | | :--------------- | :------------- | :--------------- | | Inventories, net | $721,569 | $582,471 | Research and Development Expenses (in thousands) | R&D expenses | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | Three months ended April 30, 2023 (in thousands) | Three months ended April 30, 2022 (in thousands) | | :------------- | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | | $43,134 | $37,147 | $22,896 | $18,751 | - Redeemable noncontrolling interests increased to $345.8 million as of April 30, 2023, from $327.6 million as of October 31, 2022, reflecting new acquisitions and adjustments[38] 4. GOODWILL AND OTHER INTANGIBLE ASSETS This section outlines the composition and changes in goodwill and other intangible assets, including acquisition-related increases and amortization Goodwill by Operating Segment (in thousands) | Segment | FSG (in thousands) | ETG (in thousands) | Consolidated Totals (in thousands) | | :-------------------------- | :-------- | :---------- | :------------------ | | Balances as of Oct 31, 2022 | $561,961 | $1,110,464 | $1,672,425 | | Goodwill acquired | — | 340,173 | 340,173 | | Foreign currency adjustments| 4,242 | 12,559 | 16,801 | | Adjustments to goodwill | (955) | 2,791 | 1,836 | | Balances as of Apr 30, 2023 | $565,248 | $1,465,987 | $2,031,235 | - Goodwill increased by $358.8 million to $2.03 billion as of April 30, 2023, primarily due to the Exxelia acquisition ($340.2 million)[43] Identifiable Intangible Assets (in thousands) | Asset Type | April 30, 2023 Net Carrying Amount (in thousands) | October 31, 2022 Net Carrying Amount (in thousands) | | :------------------- | :--------------------------------- | :----------------------------------- | | Amortizing Assets | $605,169 | $518,273 | | Non-Amortizing Assets| $239,150 | $215,054 | | Total Intangible Assets | $844,319 | $733,327 | - Amortization expense for intangible assets increased to $36.9 million for the six months ended April 30, 2023, from $30.2 million in the prior year, and is estimated to be $37.5 million for the remainder of fiscal 2023[47] 5. SHORT-TERM AND LONG-TERM DEBT This section details the company's debt structure, including revolving credit facilities and other long-term obligations, and associated interest rates Long-term Debt (in thousands) | Debt Type | April 30, 2023 (in thousands) | October 31, 2022 (in thousands) | | :-------------------------------- | :------------- | :--------------- | | Borrowings under revolving credit facility | $723,000 | $275,000 | | Finance leases and note payable | 14,397 | 15,274 | | Less: Current maturities | (1,618) | (1,654) | | Total Long-term debt, net | $735,779 | $288,620 | - Long-term debt significantly increased to $735.8 million as of April 30, 2023, from $288.6 million as of October 31, 2022, primarily due to increased borrowings under the revolving credit facility to fund acquisitions[49][130] - The weighted average interest rate on revolving credit facility borrowings increased to 6.1% as of April 30, 2023, from 4.6% as of October 31, 2022[50] 6. REVENUE This section provides a breakdown of net sales by operating segment, product line, and industry, along with contract balances Contract Balances (in thousands) | Item | April 30, 2023 (in thousands) | October 31, 2022 (in thousands) | Change (in thousands) | | :---------------- | :------------- | :--------------- | :----- | | Contract assets | $103,448 | $93,978 | $9,470 | | Contract liabilities | 85,381 | 58,757 | 26,624 | | Net contract assets | $18,067 | $35,221 | ($17,154) | - Remaining performance obligations for contracts with duration greater than one year totaled $606.7 million as of April 30, 2023, with $217.4 million expected to be recognized in the remainder of fiscal 2023 and $389.3 million thereafter (more than half in fiscal 2024)[54][55] Net Sales by Operating Segment and Product Line (in thousands) | Product Line | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | Three months ended April 30, 2023 (in thousands) | Three months ended April 30, 2022 (in thousands) | | :-------------------------------------------------------------------------------- | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | Flight Support Group: | | | | | | Aftermarket replacement parts | $426,986 | $324,882 | $218,343 | $173,981 | | Specialty products | 187,493 | 126,579 | 96,008 | 67,286 | | Repair and overhaul parts and services | 149,001 | 127,533 | 77,851 | 65,046 | | Total FSG net sales | 763,480 | 578,994 | 392,202 | 306,313 | | Electronic Technologies Group: | | | | | | Electronic component parts (defense, space, aerospace) | 395,320 | 319,909 | 220,742 | 162,441 | | Electronic component parts (other industries) | 161,498 | 139,820 | 81,017 | 74,952 | | Total ETG net sales | 556,818 | 459,729 | 301,759 | 237,393 | | Intersegment sales | (11,542) | (9,567) | (6,120) | (4,893) | | Total consolidated net sales | $1,308,756 | $1,029,156 | $687,841 | $538,813 | Net Sales by Industry for Operating Segments (in thousands) | Industry | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | Three months ended April 30, 2023 (in thousands) | Three months ended April 30, 2022 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | Flight Support Group: | | | | | | Aerospace | $523,893 | $417,724 | $269,353 | $215,319 | | Defense and Space | 196,909 | 136,258 | 101,267 | 77,603 | | Other | 42,678 | 25,012 | 21,582 | 13,391 | | Electronic Technologies Group:| | | | | | Defense and Space | 260,571 | 265,861 | 138,609 | 134,414 | | Other | 215,794 | 156,135 | 118,024 | 82,772 | | Aerospace | 80,453 | 37,733 | 45,126 | 20,207 | 7. INCOME TAXES This section explains the company's income tax expense and effective tax rates, highlighting factors influencing tax variations Effective Tax Rate | Period | Effective Tax Rate | | :-------------------------------- | :----------------- | | Six months ended April 30, 2023 | 19.3% | | Six months ended April 30, 2022 | 15.0% | | Three months ended April 30, 2023 | 21.2% | | Three months ended April 30, 2022 | 23.7% | - The effective tax rate for the six months ended April 30, 2023, increased to 19.3% from 15.0% in the prior year, mainly due to a smaller tax benefit ($6.2 million in 2023 vs $17.8 million in 2022) from stock option exercises[58] - The effective tax rate for the three months ended April 30, 2023, decreased to 21.2% from 23.7% in the prior year, reflecting a favorable impact from tax-exempt unrealized gains in life insurance policies related to the HEICO Leadership Compensation Plan[60] 8. FAIR VALUE MEASUREMENTS This section describes assets and liabilities measured at fair value, including contingent consideration and deferred compensation plans, and their valuation inputs Fair Value Measurements (in thousands) | Item | As of April 30, 2023 Total (in thousands) | As of October 31, 2022 Total (in thousands) | | :-------------------------------- | :------------------------- | :--------------------------- | | Assets: Deferred compensation plan | $236,918 | $204,716 | | Liabilities: Contingent consideration | $56,831 | $82,803 | - Contingent consideration liabilities decreased to $56.8 million as of April 30, 2023, from $82.8 million as of October 31, 2022, due to payments and the amendment/termination of an agreement related to a fiscal 2021 acquisition[61][66][71] Unobservable Inputs for Level 3 Contingent Consideration Liabilities (as of April 30, 2023) | Acquisition Date | Fair Value (in thousands) | Unobservable Input | Range | Weighted Average | | :--------------- | :----------------------- | :----------------- | :---------- | :--------------- | | 9-1-2022 | $6,296 | CAGR | 0% - 17% | 13% | | | | Discount rate | 7.6% - 7.6% | 7.6% | | 7-18-2022 | 16,068 | CAGR | 2% - 9% | 5% | | | | Discount rate | 7.6% - 7.6% | 7.6% | | 3-17-2022 | 6,513 | CAGR | (3%) - 5% | 0% | | | | Discount rate | 6.6% - 6.6% | 6.6% | | 8-18-2020 | 8,475 | CAGR | 15% - 24% | 22% | | | | Discount rate | 8.2% - 8.2% | 8.2% | | 9-15-2017 | 19,479 | CAGR | 4% - 5% | 5% | | | | Discount rate | 6.3% - 6.3% | 6.3% | 9. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS This section presents the calculation of basic and diluted net income per share attributable to HEICO shareholders Net Income Per Share Attributable to HEICO Shareholders | Metric | Six months ended April 30, 2023 (in thousands, except EPS) | Six months ended April 30, 2022 (in thousands, except EPS) | Three months ended April 30, 2023 (in thousands, except EPS) | Three months ended April 30, 2022 (in thousands, except EPS) | | :------------------------------------------ | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net income attributable to HEICO (thousands)| $198,147 | $171,931 | $105,120 | $85,010 | | Diluted EPS | $1.43 | $1.25 | $.76 | $.62 | | Weighted average common shares outstanding - diluted (thousands) | 138,590 | 137,916 | 138,600 | 137,867 | - Diluted EPS increased by 14.4% to $1.43 for the six months and 22.6% to $0.76 for the three months ended April 30, 2023, compared to the prior year periods[74] 10. OPERATING SEGMENTS This section provides detailed financial performance and asset information for the Flight Support Group and Electronic Technologies Group segments Segment Performance (in thousands) | Metric | FSG (6M 2023, in thousands) | ETG (6M 2023, in thousands) | FSG (6M 2022, in thousands) | ETG (6M 2022, in thousands) | | :---------------- | :------------ | :------------ | :------------ | :------------ | | Net sales | $763,480 | $556,818 | $578,994 | $459,729 | | Operating income | $183,521 | $124,516 | $118,573 | $121,576 | | Capital expenditures | $10,643 | $11,058 | $8,113 | $7,995 | - FSG net sales increased by 31.9% and operating income by 54.8% for the six months ended April 30, 2023, driven by strong commercial aerospace demand[75] - ETG net sales increased by 21.1% and operating income by 2.4% for the six months ended April 30, 2023, with consistent organic growth from acquisitions and other electronics, offset by decreased defense product demand[75] Total Assets by Operating Segment (in thousands) | Segment | FSG (Apr 30, 2023, in thousands) | ETG (Apr 30, 2023, in thousands) | FSG (Oct 31, 2022, in thousands) | ETG (Oct 31, 2022, in thousands) | | :-------- | :----------------- | :----------------- | :----------------- | :----------------- | | Total assets | $1,685,580 | $2,914,082 | $1,635,229 | $2,230,744 | 11. COMMITMENTS AND CONTINGENCIES This section discloses the company's various commitments, such as standby letters of credit, product warranty liabilities, and legal contingencies - The Company has $22.5 million in standby letters of credit, primarily for performance and payment guarantees[77] Product Warranty Liability (in thousands) | Item | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | | :-------------------- | :------------------------------ | :------------------------------ | | Balances at beginning of fiscal year | $3,296 | $3,379 | | Accruals for warranties | 1,222 | 622 | | Warranty claims settled | (1,074) | (1,012) | | Balances as of April 30 | $3,444 | $2,989 | - An indirect subsidiary of HFSC received a grand jury subpoena related to employment and work on Navy vessels, with the Company cooperating but unable to predict the outcome or financial impact[79] 12. SUBSEQUENT EVENT This section reports significant events occurring after the balance sheet date, notably the agreement to acquire Wencor Group - On May 15, 2023, HEICO agreed to acquire Wencor Group for $1.9 billion cash and 1,137,656 shares of HEICO Class A Common Stock. Wencor is a commercial and military aircraft aftermarket company[81] - The Wencor acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close by the end of calendar 2023[82] - HEICO secured financing commitments, including increasing its existing credit facility to $2.0 billion and a new $1.5 billion Bridge Facility, to fund the Wencor acquisition[83][84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on HEICO's financial performance and condition for the six and three months ended April 30, 2023, highlighting record net sales and operating income, segment-specific drivers, and the impact of acquisitions and macroeconomic factors. It also discusses the company's outlook, liquidity, capital resources, and the significant Wencor acquisition Overview This section provides a high-level summary of HEICO's business segments, operational performance, and key drivers for the reporting period - HEICO's operations are divided into two segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG)[88] - The company experienced continued improvement in operating results in the first six months and second quarter of fiscal 2023, driven by improved demand for commercial aerospace products and services, despite lingering COVID-19 supply chain effects[89] - FSG reported eleven consecutive quarters of sequential growth in net sales and operating income due to commercial air travel recovery[89] - ETG's results reflect consistent organic growth from increased demand for most product offerings and the impact of the January 2023 acquisition, partially offset by decreased demand for defense products[89] Recent Developments This section highlights significant recent events impacting the company, including major acquisition announcements - On May 15, 2023, HEICO agreed to acquire Wencor Group for $1.9 billion in cash and 1,137,656 shares of HEICO Class A Common Stock, a significant commercial and military aircraft aftermarket company[92] Results of Operations This section presents a summary of the company's consolidated and segment-level financial performance metrics, including net sales and operating income Consolidated and Segment Financial Highlights (in thousands, except percentages) | Metric | Six months ended April 30, 2023 (in thousands) | Six months ended April 30, 2022 (in thousands) | Three months ended April 30, 2023 (in thousands) | Three months ended April 30, 2022 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net sales | $1,308,756 | $1,029,156 | $687,841 | $538,813 | | Operating income | $286,524 | $221,599 | $157,090 | $122,777 | | FSG Net sales | $763,480 | $578,994 | $392,202 | $306,313 | | ETG Net sales | $556,818 | $459,729 | $301,759 | $237,393 | | FSG Operating income | $183,521 | $118,573 | $99,912 | $66,197 | | ETG Operating income | $124,516 | $121,576 | $67,979 | $65,988 | | Gross profit margin | 39.0% | 39.0% | 38.7% | 39.2% | | SG&A as % of net sales | 17.1% | 17.5% | 15.9% | 16.4% | | Operating income as % of net sales| 21.9% | 21.5% | 22.8% | 22.8% | Comparison of First Six Months of Fiscal 2023 to First Six Months of Fiscal 2022 This section analyzes the financial performance of the company for the first six months of fiscal 2023 compared to the prior year, detailing revenue and income changes - Consolidated net sales increased by 27% to a record $1,308.8 million, with FSG sales up 32% ($184.5 million) and ETG sales up 21% ($97.1 million)[95] - FSG's organic growth was 22%, driven by increased demand for commercial aerospace products and services, while ETG's organic net sales declined by 2% due to decreased demand for defense products, partially offset by other electronics and aerospace[95] - Consolidated gross profit margin remained flat at 39.0%, with FSG's margin increasing by 2.4% and ETG's decreasing by 2.6%[96] - Consolidated operating income increased by 29% to a record $286.5 million, with FSG operating income up 55% ($64.9 million) and ETG operating income up 2% ($2.9 million)[100] - Interest expense surged to $17.4 million from $1.8 million, primarily due to higher interest rates[102] - Net income attributable to HEICO increased by 15% to $198.1 million, or $1.43 per diluted share[107] Comparison of Second Quarter of Fiscal 2023 to Second Quarter of Fiscal 2022 This section analyzes the financial performance of the company for the second quarter of fiscal 2023 compared to the prior year, detailing revenue and income changes - Consolidated net sales increased by 28% to a record $687.8 million, with FSG sales up 28% ($85.9 million) and ETG sales up 27% ($64.4 million)[109] - FSG's organic growth was 20%, driven by commercial aerospace recovery, while ETG's organic net sales declined by 3% due to decreased defense product demand[109] - Consolidated gross profit margin decreased to 38.7% from 39.2%, reflecting a 2.0% improvement in FSG's margin offset by a 3.5% decrease in ETG's margin[110] - Consolidated operating income increased by 28% to a record $157.1 million, with FSG operating income up 51% ($33.7 million) and ETG operating income up 3% ($2.0 million)[114] - Interest expense increased to $11.4 million from $1.0 million due to higher interest rates[117] - Net income attributable to HEICO increased by 24% to $105.1 million, or $0.76 per diluted share[121] Outlook This section provides management's expectations for future financial performance, strategic priorities, and anticipated challenges - HEICO anticipates continued net sales growth in both FSG and ETG for the remainder of fiscal 2023, driven by product demand[122] - The company expects ongoing inflationary pressures and supply chain disruptions to lead to higher material and labor costs[122] - Strategic priorities include new product development, market penetration, and an aggressive acquisition strategy while maintaining financial strength[123] Liquidity and Capital Resources This section discusses the company's cash flow, funding sources, capital expenditures, and ability to meet its financial obligations - Principal uses of cash include acquisitions, capital expenditures, dividends, distributions to noncontrolling interests, and working capital[124] - Fiscal 2023 capital expenditures are anticipated to be $45 to $50 million[124] - Net cash provided by operating activities was $154.4 million for the first six months of fiscal 2023, a decrease of $20.3 million (11.6%) from the prior year, mainly due to increased working capital (inventories)[126][127] - Net cash used in investing activities totaled $559.8 million, primarily for acquisitions ($524.2 million)[129] - Net cash provided by financing activities was $388.8 million, driven by $556.0 million in revolving credit facility borrowings, partially offset by payments and distributions[130] - Committed credit facilities and cash on hand are sufficient to fund the Wencor Acquisition and other cash requirements for at least the next twelve months[125][132] Forward-Looking Statements This section cautions readers about inherent risks and uncertainties associated with forward-looking statements, including those related to acquisitions and market conditions - The report contains forward-looking statements subject to risks and uncertainties, including public health threats, supply chain issues, demand fluctuations, regulatory demands, acquisition integration, and economic conditions[135] - Specific risks related to the Wencor acquisition include financing challenges, regulatory approval delays, and the potential for the business not to perform as expected[135] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section updates the company's market risk disclosures, specifically noting a new foreign currency exposure related to a Euro-denominated note issued as part of the Exxelia acquisition - A new market risk relates to a ten-year, €150 million note issued for the Exxelia acquisition, accruing interest at 4.7% per annum[137] - A hypothetical 10% strengthening of the U.S. dollar against the Euro would decrease the U.S. dollar equivalent of the Euro note receivable by approximately $16.8 million and decrease operating income by the same amount[137] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that HEICO's disclosure controls and procedures were effective as of April 30, 2023, and reported no material changes in internal control over financial reporting during the second quarter - Disclosure controls and procedures were evaluated and deemed effective as of April 30, 2023[138] - No material changes in internal control over financial reporting occurred during the second quarter ended April 30, 2023[139] PART II. OTHER INFORMATION Item 1A. Risk Factors This section outlines updated risk factors, primarily focusing on those related to the pending Wencor Acquisition, including conditions for completion, potential negative impacts if the acquisition fails, substantial associated costs, and increased indebtedness - Completion of the Wencor Acquisition is subject to various conditions, including regulatory approvals (Hart-Scott-Rodino Antitrust Improvements Act), and the absence of certain legal impediments or material adverse changes[143] - Failure to complete the Wencor Acquisition could negatively impact stock price, incur significant transaction costs (including a $143.5 million termination fee under specified circumstances), and divert management resources[145][146] - The Wencor Acquisition will involve substantial transaction and regulatory costs, and the company will incur additional indebtedness, increasing interest expense and potentially reducing financial flexibility[147][148] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Merger Agreement for the Wencor acquisition, financing commitment letters, and certifications from the Chief Executive Officer and Chief Financial Officer - Exhibit 2.1 is the Agreement and Plan of Merger for the Wencor acquisition[149] - Exhibit 10.1 is the Commitment letter for financing related to the Wencor acquisition[149] - Certifications from the CEO and CFO (Rule 13a-14(a)/15d-14(a) and Section 1350) are included as Exhibits 31.1, 31.2, 32.1, and 32.2[149] SIGNATURES - The report was signed on May 24, 2023, by Carlos L. Macau, Jr., Executive Vice President - Chief Financial Officer and Treasurer, and Steven M. Walker, Chief Accounting Officer and Assistant Treasurer[154]