HEICO CORPORATION

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

02/25/2021 | 03:24pm


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, 2020. There have been no
material changes to our critical accounting policies during the three months
ended January 31, 2021.

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 in the first quarter of fiscal 2021 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.
Consolidated net sales for our businesses that operate within the commercial
aerospace industry decreased by approximately 43% during the first quarter of
fiscal 2021, as compared to the first quarter of fiscal 2020. As we look ahead
to the remainder of fiscal 2021, the extent to which the Pandemic may have a
material adverse effect on our future business, financial condition and results
of operations will depend on many factors that are not within HEICO's control,
including but not limited to the duration, spread and severity of the Pandemic,
the emergence of new coronavirus strain variants, the timing of distribution and
effectiveness of COVID-19 vaccines, government responses and other actions to
mitigate the spread of and to treat the Pandemic, and when and to what extent
normal business, economic and social activity and conditions resume. However, we
are cautiously optimistic that the recent vaccine progress may generate
increased commercial air travel and result in a gradual recovery in demand for
our commercial aerospace parts and services commencing toward the second-half of
fiscal 2021.



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Additionally, our results of operations for the three months ended January 31,
2021
have been affected by the fiscal 2020 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, 2020.

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,



2021 2020
Net sales $417,902 $506,275
Cost of sales 259,468 308,228
Selling, general and administrative expenses 78,149 87,057
Total operating costs and expenses 337,617 395,285
Operating income $80,285 $110,990

Net sales by segment:
Flight Support Group $199,334 $301,067
Electronic Technologies Group 223,550 208,411
Intersegment sales (4,982) (3,203)
$417,902 $506,275

Operating income by segment:
Flight Support Group $25,822 $62,045
Electronic Technologies Group 60,128 57,491
Other, primarily corporate (5,665) (8,546)
$80,285 $110,990

Net sales 100.0 % 100.0 %
Gross profit 37.9 % 39.1 %
Selling, general and administrative expenses 18.7 % 17.2 %
Operating income 19.2 % 21.9 %
Interest expense (.6 %) (.8 %)
Other income .2 % - %
Income tax expense (benefit) .6 % (4.5 %)
Net income attributable to noncontrolling interests 1.4 % 1.6 %
Net income attributable to HEICO 16.9 % 24.1 %




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Comparison of First Quarter of Fiscal 2021 to First Quarter of Fiscal 2020



Net Sales




Our consolidated net sales in the first quarter of fiscal 2021 decreased by 17%
to $417.9 million, as compared to net sales of $506.3 million in the first
quarter of fiscal 2020. The decrease in consolidated net sales principally
reflects a decrease of $101.7 million (a 34% decrease) to $199.3 million in net
sales within the FSG, partially offset by an increase of $15.1 million (a 7%
increase) to $223.6 million in net sales within the ETG. The net sales decrease
in the FSG is principally organic and reflects lower demand for the majority of
our commercial aerospace products and services resulting from the significant
decline in global commercial air travel attributable to the Pandemic. As a
result, organic net sales of our aftermarket replacement parts, repair and
overhaul parts and services, and specialty products product lines decreased by
$52.6 million, $26.9 million, and $25.0 million, respectively. The net sales
increase in the ETG principally reflects $14.6 million contributed by our fiscal
2020 acquisitions. 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 2021.


Gross Profit and Operating Expenses




Our consolidated gross profit margin was 37.9% in the first quarter of fiscal
2021, as compared to 39.1% in the first quarter of fiscal 2020, principally
reflecting a decrease of 4.2% and 1.3% in the FSG's and ETG's gross profit
margin, respectively. The decrease in the FSG's gross profit margin principally
reflects the impact from the previously mentioned lower net sales of commercial
aerospace products and services across all of its product lines. The decrease in
the ETG's gross profit margin principally reflects a decrease in net sales of
commercial aerospace products and lower net sales and a less favorable product
mix of certain defense products, partially offset by an increase in net sales of
certain other electronics products. Total new product research and development
expenses included within our consolidated cost of sales were $16.2 million and
$17.1 million in the first quarter of fiscal 2021 and 2020, respectively.

Our consolidated selling, general and administrative ("SG&A") expenses decreased
by 10% to $78.1 million in the first quarter of fiscal 2021, as compared to
$87.1 million in the first quarter of fiscal 2020. The decrease in consolidated
SG&A expenses reflects a $2.6 million decrease in performance-based compensation
expense, a $4.3 million reduction in other selling expenses including outside
sales commissions, marketing and travel, and a $5.9 million reduction in other
general and administrative expenses, partially offset by $3.8 million
attributable to the fiscal 2020 acquisitions.

Our consolidated SG&A expenses as a percentage of net sales was 18.7% in the
first quarter of fiscal 2021, as compared to 17.2% in the first quarter of
fiscal 2020. The increase in consolidated SG&A expenses as a percentage of net
sales principally reflects a 1.0% increase from higher other general and
administrative expenses as a percentage of net sales and a .6% impact from
higher intangible asset amortization expense.


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Operating Income




Our consolidated operating income decreased by 28% to $80.3 million in the first
quarter of fiscal 2021, as compared to $111.0 million in the first quarter of
fiscal 2020. The decrease in consolidated operating income principally reflects
a $36.2 million decrease (a 58% decrease) to $25.8 million in operating income
of the FSG, partially offset by a $2.6 million increase (a 5% increase) to $60.1
million
in operating income of the ETG. The decrease in operating income of the
FSG principally reflects the previously mentioned decrease in net sales, lower
gross profit margin and the impact from lost fixed cost efficiencies stemming
from the Pandemic. The increase in operating income of the ETG principally
reflects the previously mentioned net sales growth. Further, the decrease in
consolidated operating income was partially offset by $3.1 million of lower
corporate expenses mainly attributable to a decrease in performance-based
compensation expense.

Our consolidated operating income as a percentage of net sales was 19.2% in the
first quarter of fiscal 2021, as compared to 21.9% in the first quarter of
fiscal 2020. The decrease principally reflects a decrease in the FSG's operating
income as a percentage of net sales to 13.0% in the first quarter of fiscal
2021, as compared to 20.6% in the first quarter of fiscal 2020 and a decrease in
the ETG's operating income as a percentage of net sales to 26.9% in the first
quarter of fiscal 2021, as compared to 27.6% in the first quarter of fiscal
2020. The decrease in the FSG's operating income as a percentage of net sales
reflects the previously mentioned lower gross profit margin and a 3.4% increase
in SG&A expenses as a percentage of net sales mainly from the previously
mentioned lost fixed cost efficiencies and the effect of the previously
mentioned higher intangible asset amortization expense. The decrease in the
ETG's operating income as a percentage of net sales reflects the previously
mentioned lower gross profit margin, partially offset by a .6% decrease in SG&A
expenses as a percentage of net sales mainly from efficiencies gained from the
previously mentioned net sales growth.


Interest Expense




Interest expense decreased to $2.4 million in the first quarter of fiscal 2021,
down from $4.3 million in the first quarter of fiscal 2020. The decrease was
principally due to a lower weighted average interest rate partially offset by a
higher weighted average balance of borrowings under our revolving credit
facility.


Other Income



Other income in the first quarter of fiscal 2021 and 2020 was not material.



Income Tax Expense (Benefit)




Income tax expense was $2.3 million in the first quarter of fiscal 2021, as
compared to an income tax benefit of $22.9 million in the first quarter of
fiscal 2020. HEICO recognized a discrete tax benefit from stock option exercises
in both the first quarter of fiscal 2021 and 2020 of $13.5 million and $47.6
million
, respectively. The tax benefit from stock option exercises in

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both periods was the result of strong appreciation in our stock price during the
optionees' holding periods and the $34.1 million larger benefit recognized in
the first quarter of fiscal 2020 was the result of more stock options exercised.


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 $5.7
million
in the first quarter of fiscal 2021 as compared to $7.9 million in the
first quarter of fiscal 2020. The decrease in net income attributable to
noncontrolling interests in the first quarter of fiscal 2021 principally
reflects a decrease in operating results of certain subsidiaries of the FSG in
which noncontrolling interests are held.


Net Income Attributable to HEICO




Net income attributable to HEICO was $70.6 million, or $.51 per diluted share,
in the first quarter of fiscal 2021, as compared to $121.9 million, or $.89 per
diluted share, in the first quarter of fiscal 2020 principally reflecting the
previously mentioned lower operating income of the FSG and higher income tax
expense, partially offset by less net income attributable to noncontrolling
interests and lower interest expense.


Outlook




As we look ahead to the remainder of fiscal 2021, the Pandemic will likely
continue to negatively impact the commercial aerospace industry and HEICO. Given
this uncertainty, HEICO cannot provide fiscal 2021 net sales and earnings
guidance at this time. However, we believe our ongoing fiscal conservative
policies, healthy balance sheet, and increased liquidity will permit us to
invest in new research and development and gain market share as the industry
recovers.

In addition, our time-tested strategy of maintaining low debt and acquiring and
operating high cash generating businesses across a diverse base of industries
beyond commercial aerospace, such as defense, space and other high-end markets
including electronics and medical, puts us in a good financial position to
weather this uncertain economic period. Further, we are cautiously optimistic
that the vaccine progress may generate increased commercial air travel and
result in a gradual recovery in demand for our commercial aerospace parts and
services commencing primarily in the second-half of fiscal 2021.



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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 2021 capital expenditures to be approximately
$40 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, 2021, we were in compliance with all such covenants
and our total debt to shareholders' equity ratio was 32.2%.

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 $107.2 million in the first
quarter of fiscal 2021 and consisted primarily of net income from consolidated
operations of $76.2 million, depreciation and amortization expense of $23.0
million
(a non-cash item), net changes in other long-term liabilities and assets
related to the HEICO Leadership Compensation Plan ("LCP") of $12.0 million
(principally participant deferrals and employer contributions), $2.8 million in
employer contributions to the HEICO Savings and Investment Plan (a non-cash
item), and $2.2 million in share-based compensation expense (a non-cash item),
partially offset by an $8.3 million deferred income tax benefit and a $3.1
million
increase in net working capital. The increase in net working capital is
inclusive of a $19.2 million decrease in accrued expenses and other current
liabilities mainly reflecting the payment of fiscal 2020 accrued
performance-based compensation, partially offset by an $11.9 million decrease in
accounts receivable and contract assets resulting from the timing of collections
and a $2.6 million decrease in inventories. The deferred income tax benefit
principally reflects an increase in the cash surrender value of life insurance
policies related to the LCP.

Net cash provided by operating activities increased by $26.1 million in the
first quarter of fiscal 2021, up from $81.1 million in the first quarter of
fiscal 2020. The increase is principally attributable to a $58.9 million
decrease in net working capital and a $17.4 million decrease in deferred income
tax benefits, partially offset by a $53.6 million decrease in net income from
consolidated operations. The decrease in net working capital primarily resulted
from the payment of a smaller amount of accrued performance-based compensation
expense in the first quarter of fiscal 2021 resulting from the lower fiscal 2020
operating results mainly attributable to the Pandemic, and a slight decrease in
inventory during the first quarter of fiscal 2021 compared to pre-Pandemic
inventory growth in the first quarter of fiscal 2020. The decrease in deferred
income tax benefits is mainly attributable to the previously mentioned larger
income tax benefit from stock option exercises in the first quarter of fiscal
2020.

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Investing Activities




Net cash used in investing activities totaled $25.3 million in the first quarter
of fiscal 2021 and related primarily to capital expenditures of $15.5 million
and investments related to the HEICO LCP of $10.4 million.


Financing Activities




Net cash used in financing activities in the first quarter of fiscal 2021
totaled $91.4 million. During the first quarter of fiscal 2021, we made $70.0
million
in payments on our revolving credit facility, paid $10.8 million in cash
dividends on our common stock, made $7.7 million of distributions to
noncontrolling interests, redeemed common stock related to stock option
exercises aggregating $3.6 million and paid revolving credit facility issuance
costs of $1.5 million, which were partially offset by $2.5 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, 2020.


Off-Balance Sheet Arrangements



Guarantees




As of January 31, 2021, we have arranged for standby letters of credit
aggregating $15.6 million, which are supported by our revolving credit facility
and principally pertain to performance guarantees related to customer contracts
entered into by certain of our subsidiaries as well as payment guarantees
related to potential workers' compensation claims and a facility lease.


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 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: 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 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 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; 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.



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