HEICO CORPORATION

HEI
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HEICO : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

02/27/2020 | 05:32pm

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, 2019. There have been no
material changes to our critical accounting policies during the three months
ended January 31, 2020.



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.



Our results of operations for the three months ended January 31, 2020 have been
affected by the fiscal 2019 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, 2019.








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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 January 31,
2020 2019
Net sales $506,275 $466,146
Cost of sales 308,228 283,909
Selling, general and administrative expenses 87,057 84,290
Total operating costs and expenses 395,285 368,199
Operating income $110,990 $97,947

Net sales by segment:
Flight Support Group $301,067 $287,213
Electronic Technologies Group 208,411 184,429
Intersegment sales (3,203 ) (5,496 )
$506,275 $466,146

Operating income by segment:
Flight Support Group $62,045 $52,880
Electronic Technologies Group 57,491 51,602
Other, primarily corporate (8,546 ) (6,535 )
$110,990 $97,947

Net sales 100.0 % 100.0 %
Gross profit 39.1 % 39.1 %
Selling, general and administrative expenses 17.2 % 18.1 %
Operating income 21.9 % 21.0 %
Interest expense (.8 %) (1.2 %)
Other income (expense) - % (.1 %)
Income tax (benefit) expense (4.5 %) .9 %
Net income attributable to noncontrolling interests 1.6 % 1.9 %
Net income attributable to HEICO 24.1 % 17.0 %





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Index



Comparison of First Quarter of Fiscal 2020 to First Quarter of Fiscal 2019



Net Sales



Our consolidated net sales in the first quarter of fiscal 2020 increased by 9%
to $506.3 million, up from net sales of $466.1 million in the first quarter of
fiscal 2019. The increase in consolidated net sales principally reflects an
increase of $24.0 million (a 13% increase) to $208.4 million in net sales within
the ETG as well as an increase of $13.9 million (a 5% increase) to $301.1
million
in net sales within the FSG. The net sales increase in the ETG reflects
net sales of $14.9 million contributed by our fiscal 2019 and 2020 acquisitions
as well as organic growth of 6%. The ETG's organic growth is mainly attributable
to increased demand for our defense products resulting in a net sales increase
of $19.3 million partially offset by lower demand for our space products
resulting in a net sales decrease of $7.5 million. The net sales increase in the
FSG reflects organic growth of 4%. The FSG's organic growth is mainly
attributable to increased demand and new product offerings within our
aftermarket replacement parts, repair and overhaul parts and services, and
specialty products product lines resulting in net sales increases of $8.8
million
, $2.1 million and $1.5 million, respectively. Sales price changes were
not a significant contributing factor to the ETG and FSG net sales growth in the
first quarter of fiscal 2020.



Gross Profit and Operating Expenses



Our consolidated gross profit margin was 39.1% in both the first quarter of
fiscal 2020 and 2019 principally reflecting an increase of 1.1% in the FSG's
gross profit margin offset by a 1.5% decrease in the ETG's gross profit margin.
The increase in the FSG's gross profit margin principally reflects a more
favorable product mix within all of its product lines. The decrease in the ETG's
gross profit margin principally reflects a decrease in net sales of certain
space products partially offset by increased net sales of certain defense
products. Total new product research and development expenses included within
our consolidated cost of sales were $17.1 million in the first quarter of fiscal
2020 compared to $15.2 million in the first quarter of fiscal 2019.



Our consolidated selling, general and administrative ("SG&A") expenses were
$87.1 million and $84.3 million in the first quarter of fiscal 2020 and 2019,
respectively. The increase in consolidated SG&A expenses principally reflects
$4.2 million attributable to the fiscal 2019 and 2020 acquisitions partially
offset by $1.5 million of lower expenses related to changes in the estimated
fair value of accrued contingent consideration.



Our consolidated SG&A expenses as a percentage of net sales decreased to 17.2%
in the first quarter of fiscal 2020, down from 18.1% in the first quarter of
fiscal 2019. The decrease in consolidated SG&A expenses as a percentage of net
sales is mainly due to a .3% impact from the previously mentioned lower expenses
related to changes in the estimated fair value of accrued contingent
consideration as well as a .3% impact from a decrease in performance-based
compensation expense as a percentage of net sales and efficiencies realized from
the net sales growth.






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Operating Income



Our consolidated operating income increased by 13% to $111.0 million in the
first quarter of fiscal 2020, up from $97.9 million in the first quarter of
fiscal 2019. The increase in consolidated operating income principally reflects
a $9.2 million increase (a 17% increase) to $62.0 million in operating income of
the FSG and a $5.9 million increase (an 11% increase) to $57.5 million in
operating income of the ETG. The increase in operating income of the FSG
principally reflects the previously mentioned improved gross profit margin and
net sales growth as well as a $1.2 million favorable impact from lower expenses
related to changes in the estimated fair value of accrued contingent
consideration. The increase in operating income of the ETG principally reflects
the previously mentioned net sales growth partially offset by the previously
mentioned lower gross profit margin.



Our consolidated operating income as a percentage of net sales improved to 21.9%
in the first quarter of fiscal 2020, up from 21.0% in the first quarter of
fiscal 2019. The increase principally reflects an increase in the FSG's
operating income as a percentage of net sales to 20.6% in the first quarter of
fiscal 2020, up from 18.4% in the first quarter of fiscal 2019 partially offset
by a decrease in the ETG's operating income as a percentage of net sales to
27.6% in the first quarter of fiscal 2020 as compared to 28.0% in the first
quarter of fiscal 2019. The increase in the FSG's operating income as a
percentage of net sales principally reflects the previously mentioned improved
gross profit margin and a 1.1% decrease in SG&A expenses as a percentage of net
sales mainly from the previously mentioned efficiencies realized from the net
sales growth and lower expenses related to changes in the estimated fair value
of accrued contingent consideration. The decrease in the ETG's operating income
as a percentage of net sales principally reflects the previously mentioned lower
gross profit margin partially offset by a 1.1% decrease in SG&A expenses as a
percentage of net sales mainly from a decrease in performance-based compensation
expense and efficiencies realized from the net sales growth.



Interest Expense



Interest expense decreased to $4.3 million in the first quarter of fiscal 2020,
down from $5.5 million in the first quarter of fiscal 2019. The decrease was
principally due to a lower weighted average interest rate on borrowings
outstanding under our revolving credit facility.



Other Income (Expense)



Other income (expense) in the first quarter of fiscal 2020 and 2019 was not
material.



Income Tax (Benefit) Expense



HEICO incurred an income tax benefit of $22.9 million in the first quarter of
fiscal 2020 compared to income tax expense of $4.1 million in the first quarter
of fiscal 2019. We recognized a discrete tax benefit from stock option exercises
in both the first quarter of fiscal 2020 and 2019 of $47.6 million and $16.6
million
, respectively. The $31.0 million larger benefit from stock option
exercises recognized in the first quarter of fiscal 2020 was the result of more





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stock options exercised and the 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 by Lufthansa Technik AG ("LHT") in HEICO Aerospace
Holdings Corp.
("HEICO Aerospace") and the noncontrolling interests held by
others in certain subsidiaries of the FSG and ETG. Net income attributable to
noncontrolling interests was $7.9 million in the first quarter of fiscal 2020 as
compared to $8.7 million in the first quarter of fiscal 2019. The decrease in
net income attributable to noncontrolling interests in the first quarter of
fiscal 2020 principally reflects the impact of a dividend paid by HEICO
Aerospace
in June 2019 that effectively resulted in the transfer of the 20%
noncontrolling interest held by LHT in eight of our existing subsidiaries within
HEICO Aerospace that are principally part of the FSG's repair and overhaul parts
and services product line to HEICO Flight Support Corp., a wholly owned
subsidiary of HEICO, partially offset by 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 to a record $121.9 million, or $.89
per diluted share, in the first quarter of fiscal 2020, up from $79.3 million,
or $.58 per diluted share, in the first quarter of fiscal 2019 principally
reflecting the previously mentioned income tax benefit and increased net sales
and operating income.



Outlook



As we look ahead to the remainder of fiscal 2020, we anticipate net sales growth
within the FSG's commercial aviation and defense product lines. We also expect
growth within the ETG, principally driven by demand for the majority of our
products. Also, we plan to continue our commitments to developing new products
and services, further market penetration, and an aggressive acquisition strategy
while maintaining our financial strength and flexibility. Based on our current
economic visibility, we are continuing to estimate our consolidated fiscal 2020
year-over-year growth in net sales to be 6% - 8% and increasing our estimate of
fiscal 2020 year-over-year growth in net income to be 14% - 15%, up from our
prior growth estimate of 13% - 14%. This outlook excludes the impact of
additional acquired businesses, if any. Additionally, this outlook excludes any
potential impact from the recent coronavirus outbreak as the impact to our
businesses is uncertain and difficult to predict.








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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 2020 capital expenditures to be approximately
$42 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 of January 31, 2020, we were in compliance with all such
covenants. As of January 31, 2020, our total debt to shareholders' equity ratio
was 31.4%.



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 cash requirements for at least the next twelve months.



Operating Activities



Net cash provided by operating activities was $81.1 million in the first quarter
of fiscal 2020 and consisted primarily of net income from consolidated
operations of $129.8 million, depreciation and amortization expense of $21.6
million
(a non-cash item), net changes in other long-term liabilities and assets
related to the HEICO Leadership Compensation Plan ("LCP") of $11.3 million
(principally participant deferrals and employer contributions), $2.6 million in
share-based compensation expense (a non-cash item), and $2.6 million in employer
contributions to the HEICO Savings and Investment Plan (a non-cash item),
partially offset by a $62.1 million increase in working capital and a $25.7
million
deferred income tax benefit. The increase in working capital is
inclusive of a $48.3 million decrease in accrued expenses and other current
liabilities mainly reflecting the payment of fiscal 2019 accrued
performance-based compensation, a $20.4 million increase in inventories to
support the growth of our businesses and backlog, and a $10.7 million decrease
in trade accounts payable partially offset by a $23.7 million decrease in
accounts receivable resulting from the timing of payments and collections,
respectively. The deferred income tax benefit principally reflects the
previously mentioned income tax benefit from stock option exercises, which the
Company expects to realize during the remainder of fiscal 2020.



Net cash provided by operating activities increased by $31.6 million in the
first quarter of fiscal 2020 from $49.6 million in the first quarter of fiscal
2019. The increase is principally attributable to a $41.8 million increase in
net income from consolidated operations and a $15.9 million decrease in net
working capital partially offset by a $29.5 million increase in deferred income
tax benefits. The decrease in net working capital primarily resulted from the
timing associated with the collection of accounts receivable and payment of
trade accounts payable and accrued expenses and other current liabilities. The
increase in deferred income tax benefits is attributable to the previously
mentioned income tax benefit from stock option exercises.






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Investing Activities



Net cash used in investing activities totaled $63.6 million in the first quarter
of fiscal 2020 and related primarily to acquisitions of $45.3 million (net of
cash acquired), investments related to the HEICO LCP of $11.8 million and
capital expenditures of $6.9 million. Further details regarding our fiscal 2020
acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed
Consolidated Financial Statements.



Financing Activities



Net cash used in financing activities in the first quarter of fiscal 2020
totaled $10.2 million. During the first quarter of fiscal 2020, we made $38.0
million
in payments on our revolving credit facility, paid $10.8 million in cash
dividends on our common stock, made $4.9 million of distributions to
noncontrolling interests and redeemed common stock related to stock option
exercises aggregating $2.6 million. Additionally, we borrowed $45.0 million
under our revolving credit facility to fund our fiscal 2020 acquisitions and
received $1.5 million in proceeds from stock option exercises.



Contractual Obligations



There have not been any material changes to the amounts presented in the table
of contractual obligations that was included in our Annual Report on Form 10-K
for the year ended October 31, 2019.



Off-Balance Sheet Arrangements



Guarantees



As of January 31, 2020, we have arranged for standby letters of credit
aggregating $4.8 million, which are supported by our revolving credit facility
and pertain to payment guarantees related to potential workers' compensation
claims and a facility lease as well as performance guarantees related to
customer contracts entered into by certain of our subsidiaries.



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.






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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 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. Factors that
could cause such differences include: lower demand for commercial air travel or
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 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 within and outside
of the aviation, defense, space, medical, telecommunications and electronics
industries, which could negatively impact our costs and revenues; defense
spending or budget cuts, which could reduce our defense related revenue; and any
impact from the recent coronavirus outbreak. 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.







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