Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire. Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedOctober 31, 2021 . There have been no material changes to our critical accounting policies during the three months endedJanuary 31, 2022 . Our business is comprised of two operating segments: theFlight Support Group ("FSG"), consisting ofHEICO Aerospace Holdings Corp. andHEICO Flight Support Corp. and their respective subsidiaries; and theElectronic Technologies Group ("ETG"), consisting ofHEICO Electronic Technologies Corp. and its subsidiaries. Our results of operations in fiscal 2022 continue to reflect the adverse impact from the COVID-19 global pandemic (the "Pandemic"). Most notably, demand for our commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market as compared to pre-Pandemic levels. We experienced a significant improvement in operating results in the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021 principally reflecting greatly improved demand for our commercial aerospace products. TheFlight Support Group has reported six consecutive quarters of improvement in net sales and operating income resulting from signs of commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets. Additionally, our results of operations for the three months endedJanuary 31, 2022 have been affected by the fiscal 2021 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year endedOctober 31, 2021 . 21
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Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
Three months ended
2022 2021 Net sales$490,343 $417,902 Cost of sales 300,133 259,468 Selling, general and administrative expenses 91,388 78,149 Total operating costs and expenses 391,521 337,617 Operating income$98,822 $80,285 Net sales by segment: Flight Support Group$272,681 $199,334 Electronic Technologies Group 222,336 223,550 Intersegment sales (4,674) (4,982)$490,343 $417,902 Operating income by segment: Flight Support Group$52,376 $25,822 Electronic Technologies Group 55,588 60,128 Other, primarily corporate (9,142) (5,665)$98,822 $80,285 Net sales 100.0 % 100.0 % Gross profit 38.8 % 37.9 % Selling, general and administrative expenses 18.6 % 18.7 % Operating income 20.2 % 19.2 % Interest expense (.2 %) (.6 %) Other income - % .2 % Income tax expense .8 % .6 % Net income attributable to noncontrolling interests 1.5 % 1.4 % Net income attributable to HEICO 17.7 % 16.9 % 22
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Comparison of First Quarter of Fiscal 2022 to First Quarter of Fiscal 2021
Our consolidated net sales in the first quarter of fiscal 2022 increased by 17% to$490.3 million , up from net sales of$417.9 million in the first quarter of fiscal 2021. The increase in consolidated net sales principally reflects an increase of$73.3 million (a 37% increase) to$272.7 million in net sales within the FSG, partially offset by a decrease of$1.2 million (a 1% decrease) to$222.3 million in net sales within the ETG. The net sales increase in the FSG reflects strong organic growth of 30% as well as net sales of$13.5 million contributed by our fiscal 2021 acquisitions. The FSG's organic growth reflects increased demand for the majority of our commercial aerospace products and services resulting from continued recovery in global commercial air travel as compared to the prior year. As such, organic net sales increased by$32.5 million ,$18.3 million and$9.0 million within our aftermarket replacement parts, repair and overhaul parts and services and specialty products product lines, respectively. The net sales decrease in the ETG principally reflects a 3% decrease in organic net sales, partially offset by$5.2 million contributed by our fiscal 2021 acquisitions. The ETG's organic net sales decline is mainly attributable to decreased demand for our defense and space products resulting in net sales decreases of$14.6 million and$2.3 million , respectively, partially offset by increased demand for our medical and other electronics products resulting in net sales increases of$5.0 million and$2.8 million , respectively. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first quarter of fiscal 2022.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 38.8% in the first quarter of fiscal 2022, up from 37.9% in the first quarter of fiscal 2021, principally reflecting a 4.3% improvement in the FSG's gross profit margin, partially offset by a .8% decrease in the ETG's gross profit margin. The increase in the FSG's gross profit margin principally reflects the previously mentioned higher net sales across all product lines. The decrease in the ETG's gross profit margin principally reflects a .6% increase in new product research and development expenses as a percentage of net sales to support ongoing new product research and development activities. Total new product research and development expenses included within our consolidated cost of sales were$18.4 million in the first quarter of fiscal 2022, up from$16.2 million in the first quarter of fiscal 2021. Our consolidated selling, general and administrative ("SG&A") expenses were$91.4 million in the first quarter of fiscal 2022, as compared to$78.1 million in the first quarter of fiscal 2021. The increase in consolidated SG&A expenses principally reflects costs incurred to support the previously mentioned net sales growth resulting in increases of$7.4 million and$3.0 million in general and administrative expenses and selling expenses, respectively. Additionally, the increase in consolidated SG&A expenses reflects$2.9 million attributable to our fiscal 2021 acquisitions. 23
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Our consolidated SG&A expenses as a percentage of net sales decreased to 18.6% in the first quarter of fiscal 2022, down from 18.7% in the first quarter of fiscal 2021. Operating Income Our consolidated operating income increased by 23% to$98.8 million in the first quarter of fiscal 2022, up from$80.3 million in the first quarter of fiscal 2021. The increase in consolidated operating income principally reflects a$26.6 million increase (a 103% increase) to$52.4 million in operating income of the FSG, partially offset by a$4.5 million decrease (an 8% decrease) to$55.6 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned improved gross profit margin, net sales growth, and efficiencies realized from the higher net sales volume. The decrease in operating income of the ETG principally reflects a lower level of efficiencies resulting from the net sales decrease, as well as the previously mentioned lower gross profit margin. Further, the increase in consolidated operating income was partially offset by$3.8 million of higher corporate expenses mainly attributable to an increase in performance-based compensation expense and the suspension of corporate salary reductions as of the end of the first quarter of fiscal 2021. Our consolidated operating income as a percentage of net sales increased to 20.2% in the first quarter of fiscal 2022, up from 19.2% in the first quarter of fiscal 2021. The increase principally reflects an increase in the FSG's operating income as a percentage of net sales to 19.2% in the first quarter of fiscal 2022, up from 13.0% in the first quarter of fiscal 2021, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 25.0% in the first quarter of fiscal 2022, as compared to 26.9% in the first quarter of fiscal 2021. The increase in the FSG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin, as well as a 1.9% impact from a decrease in SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned efficiencies. The decrease in the ETG's operating income as a percentage of net sales principally reflects a 1.1% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lower level of efficiencies, as well as the previously mentioned lower gross profit margin.
Interest Expense
Interest expense decreased to$.8 million in the first quarter of fiscal 2022, down from$2.4 million in the first quarter of fiscal 2021. The decrease was principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility.
Other Income
Other income in the first quarter of fiscal 2022 and 2021 was not material.
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Income Tax Expense
Our effective tax rate was 4.1% in the first quarter of fiscal 2022, as compared to 2.9% in the first quarter of fiscal 2021. The increase in our effective tax rate reflects an unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan ("LCP") in the first quarter of fiscal 2022 as compared to tax-exempt unrealized gains recognized on such policies in the first quarter of fiscal 2021, partially offset by a larger tax benefit from stock option exercises recognized in the first quarter of fiscal 2022. We recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2022 and 2021 of$17.8 million and$13.5 million , respectively. The tax benefit from stock option exercises in both periods was the result of strong appreciation in HEICO's stock price during the optionees' holding periods.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held byLufthansa Technik AG inHEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was$7.3 million in the first quarter of fiscal 2022 as compared to$5.7 million in the first quarter of fiscal 2021. The increase in net income attributable to noncontrolling interests in the first quarter of fiscal 2022 principally reflects an aggregate increase in the operating results of subsidiaries in which noncontrolling interests are held. Net Income Attributable to HEICO Net income attributable to HEICO increased by 23% to$86.9 million , or$.63 per diluted share, in the first quarter of fiscal 2022, up from$70.6 million , or$.51 per diluted share, in the first quarter of fiscal 2021 principally reflecting the previously mentioned higher consolidated operating income.
Outlook
As we look ahead to the remainder of fiscal 2022, we expect global commercial air travel to continue on a path to recovery despite the potential for additional Pandemic variants, such as the recent emergence of Omicron. We remain cautiously optimistic that the ongoing worldwide rollout of Pandemic vaccines, including boosters, will continue to positively influence global commercial air travel and benefit the markets we serve. But, it still remains very difficult to predict the Pandemic's path and effect, including factors like new variants and vaccination rates, potential supply chain disruptions and inflation, which can impact our key markets. Therefore, we feel it would not be responsible to provide fiscal 2022 net sales and earnings guidance at this time. However, we believe our ongoing conservative policies, strong balance sheet, and high degree of liquidity enable us to continuously invest in new research and development, take advantage of periodic strategic inventory purchasing opportunities, and execute on our successful acquisition program, which collectively position HEICO for market share gains. 25
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Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. We continue to anticipate fiscal 2022 capital expenditures to be approximately$45 million . We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As ofJanuary 31, 2022 , we were in compliance with all such covenants and our total debt to shareholders' equity ratio was 10.1%. Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund our cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was$78.0 million in the first quarter of fiscal 2022 and consisted primarily of net income from consolidated operations of$94.3 million , depreciation and amortization expense of$23.2 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO LCP of$11.6 million (principally participant deferrals and employer contributions),$3.6 million in share-based compensation expense (a non-cash item), and$3.2 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a$57.9 million increase in net working capital. The increase in net working capital is inclusive of a$38.7 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2021 accrued performance-based compensation, a$27.0 million increase in inventories reflecting strategic buys within our distribution businesses and to support an increase in consolidated backlog, and a$9.0 million increase in prepaid expenses and other current assets, partially offset by a$16.2 million decrease in accounts receivable resulting from the timing of collections. Net cash provided by operating activities decreased by$29.2 million in the first quarter of fiscal 2022 from$107.2 million in the first quarter of fiscal 2021. The decrease is principally attributable to a$54.8 million increase in net working capital, partially offset by an$18.0 million increase in net income from consolidated operations and an$8.0 million decrease in deferred income tax benefits. The increase in net working capital primarily resulted from the previously mentioned increase in inventories and the payment of a larger amount of accrued performance-based compensation in the first quarter of fiscal 2022 resulting from the much improved fiscal 2021 operating results. 26
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Investing Activities
Net cash used in investing activities totaled$20.0 million in the first quarter of fiscal 2022 and related primarily to investments related to the HEICO LCP of$10.1 million and capital expenditures of$8.7 million .
Financing Activities
Net cash used in financing activities in the first quarter of fiscal 2022 totaled$39.9 million . During the first quarter of fiscal 2022, we made$25.0 million in payments on our revolving credit facility, redeemed common stock related to stock option exercises aggregating$23.6 million , paid$12.2 million in cash dividends on our common stock and made$6.0 million of distributions to noncontrolling interests, which were partially offset by$26.0 million of borrowings under our revolving credit facility and$.8 million in proceeds from stock option exercises.
Other Obligations and Commitments
There have not been any material changes to our other obligations and
commitments that were included in our Annual Report on Form 10-K for the year
ended
New Accounting Pronouncement
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.
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Forward-Looking Statements
Certain statements in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words "anticipate," "believe," "expect," "estimate" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with theSecurities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management's estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: the severity, magnitude and duration of the Pandemic; our liquidity and the amount and timing of cash generation; lower commercial air travel caused by the Pandemic and its aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending byU.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions, including the effects of inflation, within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. 28
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