# Heico Corp: Form 10-Q for the period ended Jul 31, 2023

- Company: [Heico Corp](/companies/hei.md) (CIK 46619)
- Form: 10-Q
- Filed: 2023-08-30
- Accepted by EDGAR: Aug 30, 2023, 16:25 ET
- Period: 2023-07-31
- Accession: 0000046619-23-000125
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/46619/000004661923000125/hei-20230731.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/46619/000004661923000125/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-07-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-05-01 to 2023-07-31 | $722.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-11-01 to 2023-07-31 | $2.03bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-05-01 to 2023-07-31 | $444.2m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2022-11-01 to 2023-07-31 | $1.24bn | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2023-05-01 to 2023-07-31 | $25.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-11-01 to 2023-07-31 | $68.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-05-01 to 2023-07-31 | $129.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-11-01 to 2023-07-31 | $353.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-05-01 to 2023-07-31 | $149.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-11-01 to 2023-07-31 | $435.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-05-01 to 2023-07-31 | $25.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-11-01 to 2023-07-31 | $77.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-05-01 to 2023-07-31 | $102.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-11-01 to 2023-07-31 | $300.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-05-01 to 2023-07-31 | $0.74 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-11-01 to 2023-07-31 | $2.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-05-01 to 2023-07-31 | $0.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-11-01 to 2023-07-31 | $2.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-05-01 to 2023-07-31 | 138,668,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-11-01 to 2023-07-31 | 138,616,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-11-01 to 2023-07-31 | $300.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-11-01 to 2023-07-31 | $34.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-11-01 to 2023-07-31 | $27.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-07-31 | $694.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-07-31 | $1.93bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-07-31 | $5.45bn | us-gaap:Assets |
| Current liabilities | at 2023-07-31 | $479.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-07-31 | $2.15bn | us-gaap:Liabilities |
| Current portion of debt | at 2023-07-31 | $1.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-07-31 | $2.91bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,034 characters.

### 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 in the 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 ended October 31, 2022. There have been no material changes to our critical accounting policies during the nine months ended July 31, 2023.

Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.

Although we have largely emerged from the COVID-19 pandemic, our results of operations in fiscal 2023 continue to reflect the pandemic's lingering impact, including its impact on our supply chain. Despite the aforementioned, we experienced continued improvement in operating results in the first nine months and third quarter of fiscal 2023 as compared to the first nine months and third quarter of fiscal 2022 principally reflecting improved demand for our commercial aerospace products and services. The FSG has reported twelve consecutive quarters of sequential growth in net sales resulting from commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets. Additionally, the ETG’s operating results in the first nine months of fiscal 2023 reflect consistent organic growth from increased demand for most of their other product offerings and the impact from the Company's January 2023 acquisition, offset by decreased demand for its defense products and the impact of acquisition costs related to our January 2023 acquisition. Further, the ETG’s overall backlog as of July 31, 2023, supports an expected increase in demand for its defense products at some point over the next twelve months.

Additionally, our results of operations for the nine and three months ended July 31, 2023 have been affected by the fiscal 2022 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 ended October 31, 2022 and the fiscal 2023 acquisitions as further detailed in Note 2,

Acquisitions, of the Notes to the Condensed Consolidated Financial Statements of this quarterly report.

### Recent Development

On August 4, 2023, we completed the acquisition of Wencor Group ("Wencor"), which we intend to integrate into the FSG ("Wencor Acquisition"). The aggregate purchase price consisted of $1.9 billion in cash, subject to certain working capital, debt and other customary adjustments, and 1,137,628 shares of HEICO Class A Common Stock. The cash consideration was paid using proceeds from the sale of senior notes and from the Company's revolving credit facility. See Note 5, Short-Term and Long-Term Debt, of the Notes to Condensed Consolidated Financial Statements for additional information. Wencor is a large commercial and military aircraft aftermarket company offering factory-new FAA-approved aircraft replacement parts, value-added distribution of high-use commercial & military aftermarket parts and aircraft & engine accessory component repair and overhaul services. See Note 12, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements for additional information.

### 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):

|  | Nine months ended July 31, 2023 | 2022 | Three months ended July 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $2,031,658 | $1,598,684 | $722,902 | $569,528 |
| Cost of sales | 1,242,613 | 976,308 | 444,168 | 348,591 |
| Selling, general and administrative expenses | 353,154 | 272,030 | 129,367 | 92,190 |
| Total operating costs and expenses | 1,595,767 | 1,248,338 | 573,535 | 440,781 |
| Operating income | $435,891 | $350,346 | $149,367 | $128,747 |
| Net sales by segment: |  |  |  |  |
| Flight Support Group | $1,168,520 | $909,253 | $405,040 | $330,259 |
| Electronic Technologies Group | 882,685 | 703,932 | 325,867 | 244,203 |
| Intersegment sales | (19,547) | (14,501) | (8,005) | (4,934) |
|  | $2,031,658 | $1,598,684 | $722,902 | $569,528 |
| Operating income by segment: |  |  |  |  |
| Flight Support Group | $272,693 | $189,329 | $89,172 | $70,756 |
| Electronic Technologies Group | 198,673 | 189,605 | 74,157 | 68,029 |
| Other, primarily corporate | (35,475) | (28,588) | (13,962) | (10,038) |
|  | $435,891 | $350,346 | $149,367 | $128,747 |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Gross profit | 38.8% | 38.9% | 38.6% | 38.8% |
| Selling, general and administrative expenses | 17.4% | 17.0% | 17.9% | 16.2% |
| Operating income | 21.5% | 21.9% | 20.7% | 22.6% |
| Interest expense | 1.5% | .2% | 1.7% | .2% |
| Other income | .1% | —% | .1% | —% |
| Income tax expense | 3.8% | 4.2% | 3.5% | 6.0% |
| Net income attributable to noncontrolling interests | 1.5% | 1.6% | 1.5% | 1.9% |
| Net income attributable to HEICO | 14.8% | 15.9% | 14.1% | 14.5% |

32

### Comparison of First Nine Months of Fiscal 2023 to First Nine Months of Fiscal 2022

#### Net Sales

Our consolidated net sales in the first nine months of fiscal 2023 increased by 27% to a record $2,031.7 million, up from net sales of $1,598.7 million in the first nine months of fiscal 2022. The increase in consolidated net sales principally reflects an increase of $259.3 million (a 29% increase) to a record $1,168.5 million in net sales of the FSG and an increase of $178.8 million (a 25% increase) to a record $882.7 million in net sales of the ETG. The net sales increase in the FSG reflects strong organic growth of 21% as well as net sales of $65.2 million contributed by fiscal 2022 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 $129.9 million, $36.0 million and $28.1 million within our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines, respectively. The net sales increase in the ETG principally reflects $177.5 million contributed by fiscal 2023 and 2022 acquisitions, partially offset by a 1% decrease in organic net sales. The ETG's organic net sales decline is mainly attributable to decreased demand for our defense products resulting in a net sales decrease of $42.1 million, partially offset by increased demand for our other electronics and aerospace products resulting in net sales increases of $18.8 million and $18.1 million, respectively. Although we believe sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first nine months of fiscal 2023, recent cost inflation may lead to higher sales prices during the remainder of fiscal 2023.

#### Gross Profit and Operating Expenses

Our consolidated gross profit margin was 38.8% in the first nine months of fiscal 2023, as compared to 38.9% in the first nine months of fiscal 2022, principally reflecting a 2.7% decrease in the ETG's gross profit margin, partially offset by a 2.1% improvement in the FSG's gross profit margin. The reduction in the ETG's gross profit margin principally reflects the previously mentioned decrease in net sales of our defense products, partially offset by the previously mentioned increase in net sales of our aerospace and other electronics products. The increase in the FSG's gross profit margin principally reflects the previously mentioned higher net sales within our aftermarket replacement parts and specialty products product lines, and lower inventory obsolescence expenses in the first nine months of fiscal 2023 mainly due to increased demand within our aftermarket replacement parts product line. Total new product research and development expenses included within our consolidated cost of sales were $68.5 million in the first nine months of fiscal 2023, up from $55.8 million in the first nine months of fiscal 2022.

Our consolidated selling, general and administrative ("SG&A") expenses were $353.2 million in the first nine months of fiscal 2023, as compared to $272.0 million in the first nine months of fiscal 2022. The increase in consolidated SG&A expenses principally reflects $48.3 million attributable to our fiscal 2023 and 2022 acquisitions, costs incurred to support the previously mentioned net sales growth resulting in increases of $16.7 million and $7.4 million in other general and administrative expenses and other selling expenses, respectively, a $10.4 million increase in performance-based compensation expense and a $7.5 million increase in acquisition costs mainly related to fiscal 2023 acquisitions, including Wencor, partially offset by a $9.1 million impact from the amendment and termination of a contingent consideration agreement pertaining to a fiscal 2021 acquisition.

Our consolidated SG&A expenses as a percentage of net sales were 17.4% in the first nine months of fiscal 2023, as compared to 17.0% in the first nine months of fiscal 2022. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a .4% impact from the previously mentioned increase in acquisition costs, and a .3% impact from changes in the estimated fair value of contingent consideration, partially offset by a .4% impact from the previously mentioned amendment and termination of a contingent consideration agreement.

#### Operating Income

Our consolidated operating income increased by 24% to a record $435.9 million in the first nine months of fiscal 2023, up from $350.3 million in the first nine months of fiscal 2022. The increase in consolidated operating income principally reflects an $83.4 million increase (a 44% increase) to a record $272.7 million in operating income of the FSG and a $9.1 million increase (a 5% increase) to $198.7 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned net sales growth, improved gross profit margin, efficiencies realized from the higher net sales volume, and the previously mentioned amendment and termination of a contingent consideration agreement, partially offset by a $13.2 million increase in performance-based compensation expense. The increase in operating income of the ETG principally reflects the previously mentioned net sales increase, partially offset by the previously mentioned lower gross profit margin and higher costs from the impact of our January 2023 acquisition.

Our consolidated operating income as a percentage of net sales was 21.5% in the first nine months of fiscal 2023, as compared to 21.9% in the first nine months of fiscal 2022. Our consolidated operating income as a percentage of net sales in the first nine months of fiscal 2023 principally reflects a decrease in the ETG's operating income as a percentage of net sales to 22.5% in the first nine months of fiscal 2023, as compared to 26.9% in the first nine months of fiscal 2022, partially offset by an increase in the FSG’s operating income as a percentage of net sales to 23.3% in the first nine months of fiscal 2023, up from 20.8% in the first nine months of fiscal 2022. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin and a 1.8% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned higher costs from the impact of our January 2023 acquisition. The increase in the FSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin, efficiencies realized from the higher net sales volume, and a .8% impact from the amendment and termination of a contingent consideration agreement, partially offset by a .5% impact from higher performance-based compensation expense.

#### Interest Expense

Interest expense increased to $29.6 million in the first nine months of fiscal 2023, as compared to $3.2 million in the first nine months of fiscal 2022. The increase in interest expense was due to higher interest rates as well as an increase in the amount of outstanding debt.

#### Other Income

Other income in the first nine months of fiscal 2023 and 2022 was not material.

#### Income Tax Expense

Our effective tax rate decreased to 19.0% in the first nine months of fiscal 2023, down from 19.4% in the first nine months of fiscal 2022. The decrease in our effective tax rate principally reflects a favorable impact from tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan in the first nine months of fiscal 2023 as compared to tax-exempt unrealized losses recognized in the first nine months of fiscal 2022. This was 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 2023 and 2022 of $6.2 million and $17.8 million, respectively.

#### Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO 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 $30.6 million in the first nine months of fiscal 2023, as compared to $26.0 million in the first nine months of fiscal 2022. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.

#### Net Income Attributable to HEICO

Net income attributable to HEICO increased by 18% to a record $300.2 million, or $2.17 per diluted share, in the first nine months of fiscal 2023, up from $254.5 million, or $1.85 per diluted share, in the first nine months of fiscal 2022 principally reflecting the previously mentioned higher consolidated operating income, partially offset by the increase in interest expense.

### Comparison of Third Quarter of Fiscal 2023 to Third Quarter of Fiscal 2022

#### Net Sales

Our consolidated net sales in the third quarter of fiscal 2023 increased by 27% to a record $722.9 million, up from net sales of $569.5 million in the third quarter of fiscal 2022. The increase in consolidated net sales principally reflects an increase of $81.7 million (a 33% increase) to a record $325.9 million in net sales of the ETG and an increase of $74.8 million (a 23% increase) to a record $405.0 million in net sales of the FSG. The net sales increase in the ETG principally reflects $74.5 million contributed by fiscal 2023 and 2022 acquisitions and organic growth of 2%. The ETG's organic growth is mainly attributable to increased demand for our aerospace and other electronics products resulting in net sales increases of $9.7 million and $3.4 million, respectively, partially offset by decreased demand for our defense products resulting in a net sales decrease of $8.9 million. The net sales increase in the FSG reflects strong organic growth of 19% as well as net sales of $10.6 million contributed by a fiscal 2022 acquisition. 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 $51.5 million and $14.5 million within our aftermarket replacement parts and repair and overhaul parts and services product lines, respectively. Although we believe sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the third quarter of fiscal 2023, recent cost inflation may lead to higher sales prices during the remainder of fiscal 2023.

#### Gross Profit and Operating Expenses

Our consolidated gross profit margin was 38.6% in the third quarter of fiscal 2023, as compared to 38.8% in the third quarter of fiscal 2022, principally reflecting a 2.8% decrease in the ETG's gross profit margin, partially offset by a 1.5% improvement in the FSG's gross profit margin. The reduction in the ETG's gross profit margin principally reflects the previously mentioned decrease in net sales of our defense products, partially offset by the previously mentioned increase in net sales of our aerospace and other electronics products. The increase in the FSG's gross profit margin principally reflects the previously mentioned higher net sales and a favorable product mix. Total new product research and development expenses included within our consolidated cost of sales were $25.4 million in the third quarter of fiscal 2023, up from $18.7 million in the third quarter of fiscal 2022.

Our consolidated SG&A expenses were $129.4 million in the third quarter of fiscal 2023, as compared to $92.2 million in the third quarter of fiscal 2022. The increase in consolidated SG&A expenses principally reflects $20.2 million attributable to our fiscal 2023 and 2022 acquisitions, costs incurred to support the previously mentioned net sales growth resulting in increases of $11.5 million and $2.9 million in other general and administrative expenses and selling expenses, respectively, and a $2.6 million increase in acquisition costs mainly related to our acquisition of Wencor in August 2023.

Our consolidated SG&A expenses as a percentage of net sales were 17.9% in the third quarter of fiscal 2023, as compared to 16.2% in the third quarter of fiscal 2022. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a lower level of efficiencies mainly resulting from the impact of our January 2023 acquisition, a .3% impact from the previously mentioned increase in acquisition costs and a .3% impact from changes in the estimated fair value of contingent consideration.

#### Operating Income

Our consolidated operating income increased by 16% to $149.4 million in the third quarter of fiscal 2023, up from $128.7 million in the third quarter of fiscal 2022. The increase in consolidated operating income principally reflects an $18.4 million increase (a 26% increase) to $89.2 million in operating income of the FSG and a $6.1 million increase (a 9% increase) to $74.2 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned net sales growth and improved gross profit margin, partially offset by a $3.3 million increase in acquisition costs mainly related to the previously mentioned Wencor Acquisition. The increase in operating income of the ETG principally reflects the previously mentioned net sales increase, partially offset by the previously mentioned lower gross profit margin and higher costs from the impact of our January 2023 acquisition.

Our consolidated operating income as a percentage of net sales was 20.7% in the third quarter of fiscal 2023, as compared to 22.6% in the third quarter of fiscal 2022. Our consolidated operating income as a percentage of net sales in the third quarter of fiscal 2023 principally reflects a decrease in the ETG's operating income as a percentage of net sales to 22.8% in the third quarter of fiscal 2023, as compared to 27.9% in the third quarter of fiscal 2022, partially offset by an increase in the FSG's operating income as a percentage of net sales to 22.0% in the third quarter of fiscal 2023, up from 21.4% in the third quarter of fiscal 2022. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin and a 2.3% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned higher costs from the impact of our January 2023 acquisition. The increase in the FSG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin, partially offset by an .8% impact from the previously mentioned increase in acquisition costs.

#### Interest Expense

Interest expense increased to $12.1 million in the third quarter of fiscal 2023, as compared to $1.4 million in the third quarter of fiscal 2022. The increase in interest expense was due to higher interest rates as well as an increase in the amount of outstanding debt.

#### Other Income

Other income in the third quarter of fiscal 2023 and 2022 was not material.

#### Income Tax Expense

Our effective tax rate decreased to 18.4% in the third quarter of fiscal 2023, down from 27.0% in the third quarter of fiscal 2022. The decrease in our effective tax rate principally reflects a favorable impact from tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan in the third quarter of fiscal 2023 as compared to tax-exempt unrealized losses recognized in the third quarter of fiscal 2022. Additionally, we recognized a larger income tax credit for qualified research and development activities in the third quarter of fiscal 2023 mainly upon the filing and completion of our fiscal 2022 U.S. federal and state tax returns.

#### Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO 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 $10.7 million in the third quarter of fiscal 2023, as compared to $10.5 million in the third quarter of fiscal 2022. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held, inclusive of fiscal 2022 and 2023 acquisitions.

#### Net Income Attributable to HEICO

Net income attributable to HEICO increased by 24% to $102.0 million, or $.74 per diluted share, in the third quarter of fiscal 2023, up from $82.5 million, or $.60 per diluted share, in the third quarter of fiscal 2022 principally reflecting the previously mentioned higher consolidated operating income and lower effective tax rate, partially offset by the increase in interest expense.

### Outlook

As we look ahead to the remainder of fiscal 2023, we continue to anticipate net sales growth in both the FSG and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-19 pandemic may lead to higher material and labor costs. Further, we plan to actively work on the integration of Wencor into our business and operations, continue our commitment to developing new products and services and further market penetration, while maintaining our financial strength and flexibility.

### Liquidity and Capital Resources

Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests, financing costs, and working capital needs. We now anticipate fiscal 2023 capital expenditures to be approximately $50 to $55 million, inclusive of the Wencor Acquisition. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility and senior notes contain both financial and non-financial covenants. As of July 31, 2023, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 41.1%.

On July 14, 2023, we entered into a third amendment to our revolving credit facility ("Credit Facility"), to, among other things, (i) increase the capacity by $500 million to $2.0 billion, (ii) extend the maturity date to July 14, 2028, and (iii) increase the applicable rate with respect to certain total leverage ratio tiers in the pricing grid. The Credit Facility includes a feature that will allow us to increase the capacity by $750 million to become a $2.75 billion facility through increased commitments from existing lenders.

Based on our current outlook, we believe that 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 $300.4 million in the first nine months of fiscal 2023 and consisted primarily of net income from consolidated operations of $330.8 million, depreciation and amortization expense of $86.3 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO LCP of $11.7 million (principally participant deferrals and employer contributions), $10.6 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), and $10.4 million in share-based compensation expense (a non-cash item), partially offset by a $103.3 million increase in net working capital, a $23.0 million deferred income tax benefit, a $9.1 million impact from the amendment and termination of a contingent consideration agreement and $6.3 million of contingent consideration payments. The increase in net working capital is inclusive of an $86.7 million increase in inventories to support an increase in consolidated backlog and a $15.6 million increase in accounts receivable resulting from the previously mentioned higher net sales and the timing of collections.

Net cash provided by operating activities decreased by $23.6 million in the first nine months of fiscal 2023 from $323.9 million in the first nine months of fiscal 2022. The decrease is principally attributable to a $37.5 million increase in net working capital, a $30.8 million increase in deferred income tax benefits, and a $9.1 million impact from the amendment and termination of a contingent consideration agreement, partially offset by a $50.4 million increase in net income from consolidated operations. The increase in net working capital primarily resulted from the previously mentioned increase in inventories and a decrease in trade accounts payable, partially offset by a decrease in prepaid expenses and other current assets.

#### Investing Activities

Net cash used in investing activities totaled $574.2 million in the first nine months of fiscal 2023 and related primarily to acquisitions of $526.7 million, capital expenditures of $34.2 million and investments related to the LCP of $14.0 million. Further details regarding our fiscal 2023 acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements.

#### Financing Activities

Net cash provided by financing activities in the first nine months of fiscal 2023 totaled $824.1 million. During the first nine months of fiscal 2023, we received $1,189.5 million in proceeds from the issuance of senior notes and borrowed $564.0 million under our revolving credit facility, which were partially offset by $839.0 million in payments made on our revolving credit facility, $29.9 million of distributions to noncontrolling interests, $27.4 million of cash dividends on our common stock, redemptions of common stock related to stock option exercises aggregating $14.8 million, $12.6 million of contingent consideration payments, and $9.1 million paid of debt issuance costs.

### Other Obligations and Commitments

Except as noted below, 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 October 31, 2022.

On July 27, 2023, we completed the public offer and sale of senior unsecured notes, which consisted of $600 million principal amount of 5.25% Senior Notes due August 1, 2028 (the "2028 Notes") and $600 million principal amount of 5.35% Senior Notes due August 1, 2033 (the "2033 Notes" and, collectively with the 2028 Notes, the "Notes"). We used the net proceeds from the sale of the Notes to repay the outstanding borrowings under our Credit Facility and to fund a portion of the purchase price of the Wencor Acquisition. See Note 5, Short-Term and Long-Term Debt, and Note 12, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements, for additional information. Interest on the Notes is payable semi-annually in arrears on February 1 and August 1 of each year, commencing February 1, 2024. The 2028 Notes and 2033 Notes each have an effective interest rate of 5.5%.

### New Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.

### Guarantor Group Summarized Financial Information

On July 27, 2023, we completed the public offer and sale of the Notes. See Note 5, Short-Term and Long-Term Debt of the Notes to Condensed Consolidated Financial Statements, for additional information. The Notes are fully and unconditionally guaranteed on a senior unsecured basis by all of our existing and future subsidiaries (including any member of Wencor Group following consummation of the Wencor Acquisition) that guarantee our obligations under the Credit Facility (the “Guarantor Group”).

The Notes were issued pursuant to an Indenture, dated as of July 27, 2023 (the “Base Indenture”), between HEICO and certain of its subsidiaries (collectively, the "Subsidiary Guarantors") and Truist Bank, as trustee (the “Trustee”), as supplemented by a First Supplemental Indenture, dated as of July 27, 2023 (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), between us, Subsidiary Guarantors and the Trustee. The Notes are direct, unsecured senior obligations of HEICO and rank equally in right of payment with all of our existing and future senior unsecured indebtedness. Each Subsidiary Guarantor is owned either directly or indirectly by the Company and jointly and severally guarantee our obligations under the Notes. None of the Subsidiary Guarantors are organized outside of the U.S.

Under the Indenture, holders of the Notes will be deemed to have consented to the release of a subsidiary guarantee provided by a subsidiary guarantor, without any action required on the part of the Trustee or any holder of the Notes, upon such subsidiary guarantor ceasing to guarantee or to be an obligor with respect to the Credit Facility. Accordingly, if the lenders under the Credit Facility release a subsidiary guarantor from its guarantee of, or obligations as a borrower under, the Credit Facility, the obligations of the subsidiary guarantors to guarantee the Notes will immediately terminate. If any of our future subsidiaries incur obligations under the Credit Facility while the Notes are outstanding, then such subsidiary will be required to guarantee the Notes.

In addition, a subsidiary guarantor will be released and relieved from all its obligations under its subsidiary guarantee in the following circumstances, each of which is permitted by the indenture:

- upon the sale or other disposition (including by way of consolidation or merger), in one transaction or a series of related transactions, of a majority of the total voting stock of such subsidiary guarantor (other than to us or any of our affiliates); or
- upon the sale or disposition of all or substantially all the property of such subsidiary guarantor (other than to any of our affiliates or another subsidiary guarantor);

provided, however, that, in each case, such transaction is permitted by the Credit Facility and after giving effect to such transaction, such subsidiary guarantor is no longer liable for any subsidiary guarantee or other obligations in respect of the Credit Facility. The subsidiary guarantee of a subsidiary guarantor also will be released if we exercise our legal defeasance, covenant defeasance option or discharge the Indenture.

We conduct our operations almost entirely through our subsidiaries. Accordingly, the Guarantor Group’s cash flow and ability to service any guaranteed registered debt securities will depend on the earnings of our subsidiaries and the distribution of those earnings to the Guarantor Group, including the earnings of the non-guarantor subsidiaries, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities will have a direct claim only against the Guarantor Group.

The following tables include summarized financial information for the Guarantor Group (in thousands). The information for the Guarantor Group is presented on a combined basis, excluding intercompany balances and transactions between us and the Guarantor and excluding investments in and equity in the earnings of non-guarantor subsidiaries. The Guarantor Group’s amounts due from, amounts due to, and transactions with non-guarantor subsidiaries have been presented in separate line items. The consolidating schedules are provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and guarantor subsidiaries.

|  | As of July 31, 2023 | As of October 31, 2022 |
| --- | ---: | ---: |
| Current assets (excluding net intercompany receivable from non-guarantor subsidiaries) | $1,524,929 | $898,522 |
| Noncurrent assets | 2,654,288 | 2,612,503 |
| Net intercompany receivable from/ (payable to) non-guarantor subsidiaries | 170,219 | (10,836) |
| Current liabilities (excluding net intercompany payable to non-guarantor subsidiaries) | 346,560 | 327,700 |
| Noncurrent liabilities | 1,590,962 | 662,948 |
| Redeemable noncontrolling interests | 251,320 | 254,348 |
| Noncontrolling interests | 35,497 | 33,993 |

|  | Nine months ended July 31, 2023 |
| --- | ---: |
| Net sales | $1,591,258 |
| Gross profit | 596,251 |
| Operating income | 348,233 |
| Net income from consolidated operations | 264,456 |
| Net income attributable to HEICO | 242,760 |

|  | Nine months ended July 31, 2023 |
| --- | ---: |
| Intercompany net sales | $1,381 |
| Intercompany management fee | 1,853 |
| Intercompany interest income | 5,015 |
| Intercompany dividends | 41,080 |

42

### 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 the Securities 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 as a result of factors including, but not limited to: the severity, magnitude and duration of public health threats, such as the COVID-19 pandemic ("Health Emergencies"); HEICO's liquidity and the amount and timing of cash generation; lower commercial air travel caused by Health Emergencies and their 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 by U.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, including obtaining any applicable domestic and/or foreign governmental approvals, 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.

## Market risk

As filed, 722 characters.

There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2022, except as discussed below:

In connection with our acquisition of Exxelia, we issued Exxelia a ten-year, €150 million note, which accrues interest at 4.7% per annum on the principal outstanding. A hypothetical 10% strengthening of the United States ("U.S.") dollar in comparison to the Euro as of July 31, 2023 would decrease the U.S. dollar equivalent of our Euro note receivable by approximately $17.0 million and decrease operating income by the same amount.

## Controls and procedures

As filed, 874 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

### Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the third quarter ended July 31, 2023 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.

## Risk factors

As filed, 483 characters.

Our business, financial condition, operating results and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Annual Report on Form 10-K for the year ended October 31, 2022, any one of which may cause our actual results to differ materially from anticipated results. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended October 31, 2022.

Filed Aug 30, 2023.
Source: SEC EDGAR, the filing index for accession 0000046619-23-000125. Last ingested by Listed: Oct 29, 2026, 04:34 ET. No prices; not investment advice.