Our company has two operating segments, the
(“FSG”) and the
The FSG consists of
HEICO Aerospace Holdings Corp.(" HEICO Aerospace"), which is 80% owned, and HEICO Flight Support Corp., which is wholly owned, and their collective subsidiaries, which primarily: •Designs, Manufactures, Repairs, Overhauls and Distributes Jet Engine and Aircraft Component Replacement Parts. The FSG designs and manufactures jet engine and aircraft component replacement parts, which are approved by the Federal Aviation Administration("FAA"). In addition, the FSG repairs, overhauls and distributes jet engine and aircraft components, avionics and instruments for domestic and foreign commercial air carriers and aircraft repair companies as well as military and business aircraft operators. The FSG also manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and the United States("U.S.") government. Additionally, the FSG is a leading supplier, distributor, and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the U.S.and a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation, defense and space applications. Further, the FSG engineers, designs and manufactures thermal insulation blankets and parts as well as removable/reusable insulation systems for aerospace, defense, commercial and industrial applications; manufactures expanded foil mesh for lightning strike protection in fixed and rotary wing aircraft; distributes aviation electrical interconnect products and electromechanical parts; overhauls industrial pumps, motors, and other hydraulic units with a focus on the support of legacy systems for the U.S. Navy; and performs tight-tolerance machining, brazing, fabricating and welding services for aerospace, defense and other industrial applications.
ETG is made up of
•Designs and Manufactures Electronic, Microwave and Electro-Optical Equipment, High-Speed Interface Products, High Voltage Interconnection Devices, EMI and
RFIShielding and Filters, High Voltage Advanced Power Electronics, Power ConversionProducts, Underwater Locator Beacons, Memory Products, Self-Sealing AuxiliaryFuel Systems, Active Antenna Systems and TSCM Equipment. The ETG collectively designs, manufactures and sells various types of electronic, data and microwave, and electro-optical products, including infrared simulation and test equipment, laser rangefinder receivers, electrical power supplies, back-up power supplies, power conversion products, underwater locator beacons, emergency locator transmission beacons, flight deck annunciators, panels 32
and indicators, electromagnetic and radio frequency interference shielding and filters, high power capacitor charging power supplies, amplifiers, traveling wave tube amplifiers, photodetectors, amplifier modules, microwave power modules, flash lamp drivers, laser diode drivers, arc lamp power supplies, custom power supply designs, cable assemblies, high voltage power supplies, high voltage interconnection devices and wire, high voltage energy generators, high frequency power delivery systems; memory products, including three-dimensional microelectronic and stacked memory, static random-access memory (SRAM) and electronically erasable programmable read-only memory (EEPROM); harsh environment electronic connectors and other interconnect products, RF and microwave amplifiers, transmitters, and receivers and integrated assemblies, sub-assemblies and components; RF sources, detectors and controllers, wireless cabin control systems, solid state power distribution and management systems, crashworthy and ballistically self-sealing auxiliary fuel systems, nuclear radiation detectors, communications and electronic intercept receivers and tuners, fuel level sensing systems, high-speed interface products that link devices, high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses; silicone material for a variety of demanding applications; precision power analog monolithic, hybrid and open frame components; high-reliability ceramic-to-metal feedthroughs and connectors, technical surveillance countermeasures (TSCM) equipment to detect devices used for espionage and information theft; and rugged small-form factor embedded computing solutions. Our results of operations in 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 as compared to pre-Pandemic levels. We experienced a significant improvement in operating results in the second half of fiscal 2021 as compared to the second half of fiscal 2020. The second half of fiscal 2020 was the period in which our results of operations were most negatively affected by the Pandemic's impact. Since then, the
Flight Support Grouphas reported five consecutive quarters of improvement in net sales and operating income resulting from signs of commercial air travel recovery in certain domestic travel markets, but only minimal recovery in international travel markets. Additionally, our results of operations in fiscal 2021 have been affected by recent acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.
Presentation of operating results and cash and capital resources
The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal 2021 to fiscal 2020. A similar discussion and analysis that compares fiscal 2020 to fiscal 2019 may be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Form 10-K for the fiscal year ended
October 31, 2020. 33
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 Consolidated Statements of Operations (in thousands): Year ended October 31, 2021 2020 Net sales
$1,865,682 $1,787,009Cost of sales 1,138,259 1,104,882 Selling, general and administrative expenses 334,523 305,479 Total operating costs and expenses 1,472,782 1,410,361 Operating income $392,900 $376,648Net sales by segment: Flight Support Group $927,089 $924,812Electronic Technologies Group 959,170 874,987 Intersegment sales (20,577) (12,790) $1,865,682 $1,787,009Operating income by segment: Flight Support Group $151,930 $143,051Electronic Technologies Group 277,306 258,814 Other, primarily corporate (36,336) (25,217) $392,900 $376,648Net sales 100.0 % 100.0 % Gross profit 39.0 % 38.2 % Selling, general and administrative expenses 17.9 % 17.1 % Operating income 21.1 % 21.1 % Interest expense .4 % .7 % Other income .1 % .1 % Income tax expense 3.1 % 1.6 % Net income attributable to noncontrolling interests 1.4 % 1.2 % Net income attributable to HEICO 16.3 % 17.6 % 34
Comparison of fiscal year 2021 to fiscal year 2020
Our consolidated net sales in fiscal 2021 increased by 4% to
$1,865.7 million, up from net sales of $1,787.0 millionin fiscal 2020. The increase in consolidated net sales principally reflects an increase of $84.2 million(a 10% increase) to a record $959.2 millionin net sales within the ETG and an increase of $2.3 millionto $927.1 millionin net sales within the FSG. The net sales increase in the ETG principally reflects $48.9 millioncontributed by our fiscal 2020 and 2021 acquisitions as well as organic growth of 3%. The ETG's organic growth is mainly attributable to increased demand for our other electronic and medical products resulting in net sales increases of $32.4 millionand $6.3 million, respectively, partially offset by decreased demand for our commercial aerospace and space products resulting in net sales decreases of $4.7 millionand $4.4 million, respectively. The net sales increase in the FSG principally reflects $21.0 millioncontributed by our fiscal 2021 and 2020 acquisitions, partially offset by an $18.7 milliondecrease in organic net sales. The FSG's organic decrease is mainly attributable to lower demand for our specialty products product line resulting in a $32.9 milliondecrease in net sales, partially offset by increased demand within our repair and overhaul services product line resulting in a net sales increase of $12.7 million. Sales price changes were not a significant contributing factor to the change in net sales of the ETG and FSG in fiscal 2021.
Our net sales in fiscal 2021 and 2020 by market consisted of approximately 39% and 41% of the commercial aviation industry, respectively, 44% of the defense and space industries in the years. two periods, and 17% and 15% of other industrial markets, including electronics. , medical and telecommunications, respectively.
Gross profit and operating expenses
Our consolidated gross profit margin increased to 39.0% in fiscal 2021, up from 38.2% in fiscal 2020 principally reflecting an increase of 1.7% in the FSG's gross profit margin, partially offset by a decrease of .8% in the ETG's gross profit margin. The increase in the FSG's gross profit margin reflects a 1.1% benefit from a
$10.2 milliondecrease in inventory obsolescence expense. The FSG recognized higher inventory obsolescence expenses in fiscal 2020 following the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the Pandemic's financial impact. Additionally, the increase in the FSG's gross profit margin reflects a more favorable product mix and higher net sales within our repair and overhaul services and aftermarket replacement parts product lines, partially offset by the previously mentioned lower net sales within our specialty products product line. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales of defense and space products, partially offset by the previously mentioned increase in net sales of other electronic products. Total new product research and development expenses included within our consolidated cost of sales were $68.9 millionin fiscal 2021, up from $65.6 millionin fiscal 2020.
Our consolidated selling, general and administrative (“SG&A”) expenses have been
consolidated SG&A expenses reflects
$25.6 millionof higher performance-based compensation expense and $13.9 millionattributable to the fiscal 2020 and 2021 acquisitions, partially offset by an $11.6 millionreduction in bad debt expense. The Company recognized higher bad debt expense in fiscal 2020 due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 2020 as a result of the Pandemic's financial impact. Our consolidated SG&A expenses as a percentage of net sales was 17.9% in fiscal 2021, as compared to 17.1% in fiscal 2020. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a 1.4% impact from higher performance-based compensation expense, partially offset by a .6% decrease from lower bad debt expense.
Our consolidated operating income increased by 4% to
$392.9 millionin fiscal 2021, up from $376.6 millionin fiscal 2020. The increase in consolidated operating income principally reflects an $18.5 millionincrease (a 7% increase) to a record $277.3 millionin operating income of the ETG as well as an $8.9 millionincrease (a 6% increase) to $151.9 millionin operating income of the FSG. 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. The increase in operating income of the FSG principally reflects the previously mentioned improved gross profit margin and an $11.5 milliondecrease in bad debt expense, partially offset by $16.2 millionof higher performance-based compensation expense. The increase in consolidated operating income was partially offset by $9.1 millionof higher corporate expenses mainly attributable to an increase in performance-based compensation expense. Our consolidated operating income as a percentage of net sales was 21.1% in both fiscal 2021 and 2020. The FSG's operating income as a percentage of net sales increased to 16.4% in fiscal 2021, up from 15.5% in fiscal 2020. The increase in the FSG's operating income as a percentage of net sales principally reflects a 2.3% aggregate impact from the previously mentioned decrease in bad debt expense and inventory obsolescence expense, partially offset by a 1.7% impact from the previously mentioned higher performance-based compensation expense. The ETG's operating income as a percentage of net sales was 28.9% in fiscal 2021, as compared to 29.6% in fiscal 2020. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin. Interest Expense Interest expense decreased to $7.3 millionin fiscal 2021, down from $13.2 millionin fiscal 2020. The decrease was principally due to a lower weighted average interest rate as well as a lower weighted average balance of borrowings outstanding under our revolving credit facility. 36
Other income for fiscal years 2021 and 2020 is not significant.
Income tax expense
Our effective tax rate in fiscal 2021 was 14.8%, as compared to 7.9% in fiscal 2020. We recognized a discrete tax benefit from stock option exercises in fiscal 2021 and 2020 of
$14.2 millionand $48.3 million, respectively. The tax benefit from stock option exercises in both years was the result of strong appreciation in HEICO's stock price during the optionees' holding periods and the $34.1 millionlarger benefit recognized in fiscal 2020 was the result of more stock options exercised. Additionally, our effective tax rate in fiscal 2021 reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan ("LCP").
Net income attributable to non-controlling interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by
Lufthansa Technik AGin 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 $25.5 millionin fiscal 2021, as compared to $21.9 millionin fiscal 2020. The increase in net income attributable to noncontrolling interests in fiscal 2021 principally reflects higher allocations of net income to noncontrolling interests as a result of certain fiscal 2020 and 2021 acquisitions as well as an increase in the 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 was
$304.2 million, or $2.21per diluted share, in fiscal 2021, as compared to $314.0 million, or $2.29per diluted share, in fiscal 2020, principally reflecting the previously mentioned higher income tax expense, partially offset by the previously mentioned increase in operating income of the ETG and FSG, and lower interest expense.
Looking ahead to fiscal 2022, we expect the commercial air travel recovery to continue, particularly in certain domestic travel markets, while less so in international markets, even though the Pandemic will likely continue to adversely impact the commercial aerospace industry and HEICO. International markets have not recovered to the extent of domestic markets, and while we are confident of their future recovery and the potential sales increase, the timing is uncertain. Additionally, recent cost inflation and potential supply chain disruptions stemming from the Pandemic may lead to higher material and labor costs. We remain cautiously optimistic that the ongoing worldwide rollout of COVID-19 vaccines, including boosters, will continue to positively influence 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 37
vaccination rates, 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 invest in new research and development, execute on our successful acquisition program, and position HEICO for market share gains. Inflation We have generally experienced increases in our costs of labor, materials and services consistent with overall rates of inflation. The impact of such increases on net income attributable to HEICO has been generally minimized by efforts to lower costs through manufacturing efficiencies and cost reductions as well as selective price increases.
Liquidity and capital resources
The following table summarizes our capitalization (in thousands):
October 31, 20212020 Cash and cash equivalents $108,298
Total debt (including current portion) 236,498
Shareholders' equity 2,296,939
Total capitalization (debt plus equity) 2,533,437
Total debt to total capitalization 9%
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 2022 are anticipated to approximate
$45 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. As of December 20, 2021, we had approximately $1,259 millionof unused committed availability under the terms of our revolving credit facility. 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.
Net cash provided by operating activities was
$444.1 millionin fiscal 2021 and consisted primarily of net income from consolidated operations of $329.8 million, depreciation and amortization expense of $93.0 million(a non-cash item), net changes in other long-term liabilities and assets related to the LCP of $12.8 million(principally participant deferrals and employer contributions), $10.1 millionin employer contributions to the HEICO Savings and 38
Investment Plan (a non-cash item), and
$9.1 millionin share-based compensation expense (a non-cash item), partially offset by a $15.6 milliondeferred income tax benefit. Net cash provided by operating activities increased by $35.0 millionin fiscal 2021, up from $409.1 millionin fiscal 2020. The increase is principally attributable to a $50.1 milliondecrease in net working capital, partially offset by a $9.6 millionincrease in deferred income tax benefits and a $6.1 milliondecrease in net income from consolidated operations. The decrease in net working capital primarily resulted from the payment of less performance-based compensation expense in fiscal 2021 resulting from the lower fiscal 2020 operating results mainly attributable to the Pandemic, an increase in trade accounts payable resulting from the timing of payments, and a smaller increase in inventory during fiscal 2021 compared to the inventory growth in fiscal 2020 as a result of certain inventory purchase commitments based on pre-Pandemic net sales expectations and to support the backlog of certain of our business, partially offset by a net increase in accounts receivable and contract assets resulting from the timing of collections and customer billings. Net cash provided by operating activities was $409.1 millionin fiscal 2020 and consisted primarily of net income from consolidated operations of $335.9 million, depreciation and amortization expense of $88.6 million(a non-cash item), net changes in other long-term liabilities and assets related to the LCP of $14.8 million(principally participant deferrals and employer contributions), $10.1 millionin share-based compensation expense (a non-cash item), and $9.6 millionin employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $48.5 millionincrease in working capital.
Net cash used in investing activities totaled
$183.5 millionin fiscal 2021 and related primarily to acquisitions of $136.5 million(net of cash acquired), capital expenditures of $36.2 million, and investments related to the LCP of $14.0 million. Further details on acquisitions may be found in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.
Net cash used in investing activities totaled
Net cash used in financing activities in fiscal 2021 totaled
$559.0 million. During fiscal 2021, we made $505.0 millionin payments on our revolving credit facility, made $28.0 millionof distributions to noncontrolling interests, paid $23.0 millionin cash dividends on our common stock, redeemed common stock related to stock option exercises aggregating $3.8 million, paid $2.3 millionto acquire certain noncontrolling interests, and paid revolving credit facility issuance costs of $1.5 million, which were partially offset by $5.3 millionin proceeds from stock option exercises. 39
Net cash provided by financing activities in fiscal 2020 totaled
$137.7 million. During fiscal 2020, we borrowed $200.0 millionunder our revolving credit facility to provide a cushion of liquidity during the period of economic uncertainty resulting from the Pandemic and $45.0 millionto fund our fiscal 2020 acquisitions. A portion of the $200.0 milliondrawn was subsequently used to help fund certain of our fiscal 2020 acquisitions. We also received $14.3 millionin capital contributions from the noncontrolling interest holders of a subsidiary of HEICO Electronicrepresenting their share of the purchase price for a 25% interest in two acquisitions made by a subsidiary of HEICO Electronicin August 2020. (See Note 2, Acquisitions, of the Notes to Consolidated Financial Statements for further details). Additionally, we made $68.0 millionin payments on our revolving credit facility, paid $21.6 millionin cash dividends on our common stock, made $17.9 millionof distributions to noncontrolling interests, redeemed common stock related to stock option exercises aggregating $12.1 million, paid $7.5 millionto acquire certain noncontrolling interests and received $7.0 millionin proceeds from stock option exercises. In November 2017, we entered into a $1.3 billionRevolving Credit Facility Agreement ("Credit Facility") with a bank syndicate. The Credit Facility may be used to finance acquisitions and for working capital and other general corporate purposes, including capital expenditures. In December 2020, we entered into an amendment to extend the maturity date of the Credit Facility by one year to November 2023and to increase the capacity by $200 millionto $1.5 billion. The Credit Facility includes a feature that will allow us to increase the capacity by $350 millionto become a $1.85 billionfacility through increased commitments from existing lenders or the addition of new lenders and can be extended for an additional one-year period. Borrowings under the Credit Facility accrue interest at our election of the Base Rate or the Eurocurrency Rate, plus in each case, the Applicable Rate (based on our Total Leverage Ratio). The Base Rate for any day is a fluctuating rate per annum equal to the highest of (i) the Prime Rate; (ii) the Federal Funds Rate plus .50%; and (iii) the Eurocurrency Rate for an Interest Period of one month plus 100 basis points. The Eurocurrency Rate is the rate per annum obtained by dividing LIBOR for the applicable Interest Period by a percentage equal to 1.00 minus the daily average Eurocurrency Reserve Rate for such Interest Period, as such capitalized terms are defined in the Credit Facility. The Applicable Rate for Eurocurrency Rate Loans ranges from 1.00% to 2.00%. The Applicable Rate for Base Rate Loans ranges from 0% to 1.00%. A fee is charged on the amount of the unused commitment ranging from .125% to .30% (depending on our Total Leverage Ratio). The Credit Facility also includes $100 millionsublimits for borrowings made in foreign currencies and for swingline borrowings, and a $50 millionsublimit for letters of credit. Outstanding principal, accrued and unpaid interest and other amounts payable under the Credit Facility may be accelerated upon an event of default, as such events are described in the Credit Facility. The Credit Facility is unsecured and contains covenants that require, among other things, the maintenance of a Total Leverage Ratio and an Interest Coverage Ratio, as such capitalized terms are defined in the Credit Facility. We were in compliance with all financial and nonfinancial covenants of the Credit Facility as of October 31, 2021. 40
Other obligations and commitments
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that require the Company to provide cash consideration for their equity interests (the "Redemption Amount") at fair value or at a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. As of
October 31, 2021, management's estimate of the aggregate Redemption Amount of all Put Rights that we could be required to pay is approximately $252.6 million, which is reflected within redeemable noncontrolling interests in our Consolidated Balance Sheet. The estimated aggregate Redemption Amount of the Put Rights that are currently puttable or becoming puttable during fiscal 2022 is approximately $113.0 million, of which approximately $68.0 millionwould be payable in fiscal 2022 should all of the eligible associated noncontrolling interest holders elect to exercise their Put Rights during fiscal 2022. See Note 13, Redeemable Noncontrolling Interests, of the Notes to Consolidated Financial Statements for further information.
See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements for information on our long-term debt obligations.
See Note 8, Fair Value Measurements, of the Notes to Consolidated Financial Statements for information on contingent consideration obligations.
See Note 9, Leases, of the notes to the consolidated financial statements for information on future minimum lease payments related to the Company’s operating and finance lease obligations.
Critical accounting policies
We believe the following are our most critical accounting policies, which require management to make judgments on matters that are inherently uncertain.
Assumptions utilized to determine fair value in connection with business combinations, contingent consideration arrangements and in goodwill and intangible assets impairment tests are highly judgmental. If there is a material change in such assumptions or if there is a material change in the conditions or circumstances influencing fair value, we could be required to recognize a material impairment charge. See Item 1A., Risk Factors, for a list of factors which may cause our actual results to differ materially from anticipated results.
HEICO recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to receive in exchange for the good or service. Our performance obligations are satisfied and control is transferred either at a point-in-time or over-time. The majority of our revenue is recognized at a point-in-time when control is transferred, which is generally evidenced by the shipment or delivery of the product to the customer, a transfer of title, a transfer of the significant risks and rewards of ownership, and 41
customer acceptance. For certain contracts under which we produce products with no alternative use and for which we have an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date and for certain other contracts under which we create or enhance a customer-owned asset while performing repair and overhaul services, control is transferred to the customer over-time. HEICO recognizes revenue using an over-time recognition model for these types of contracts. We utilize the cost-to-cost method as a measure of progress for performance obligations that are satisfied over-time as we believe this input method best represents the transfer of control to the customer. Under this method, revenue for the current period is recorded at an amount equal to the ratio of costs incurred to date divided by total estimated contract costs multiplied by (i) the transaction price, less (ii) cumulative revenue recognized in prior periods. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Under the cost-to-cost method, the extent of progress toward completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead, capital costs, and manufacturing efficiency. We review our cost estimates on a periodic basis, or when circumstances change and warrant a modification to a previous estimate. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. For certain contracts with similar characteristics and for which revenue is recognized using an over-time model, we use a portfolio approach to estimate the amount of revenue to recognize. For each portfolio of contracts, the respective work in process and/or finished goods inventory balances are identified and the portfolio-specific margin is applied to estimate the pro rata portion of the transaction price to recognize in relation to the costs incurred. This approach is utilized only when the resulting revenue recognition is not expected to be materially different than if the accounting was applied to the individual contracts. Certain of our contracts give rise to variable consideration when they contain items such as customer rebates, credits, volume purchase discounts, penalties and other provisions that may impact the total consideration we will receive. We include variable consideration in the transaction price generally by applying the most likely amount method of the consideration that we expect to be entitled to receive based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty is resolved. We estimate variable consideration by applying the most likely amount method when there are a limited number of outcomes related to the resolution of the variable consideration.
Changes in estimate that result in adjustments to net sales and cost of sales are recognized if necessary in the period in which they are known on a cumulative catch-up basis.
The changes in estimates did not have a material impact on the net income from consolidated activities for fiscal years 2021, 2020 and 2019.
Inventories are valued at the lower of cost or net realizable value, cost being determined on the basis of first in, first out or average cost. Losses, if any, are recognized in full in the period in which they are identified.
We periodically evaluate the carrying value of inventory, giving consideration to factors such as its physical condition, sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
In accordance with industry practice, all inventories are classified as current assets, including portions with long production runs, some of which may not be completed within a year.
We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities and any noncontrolling interests assumed based on their estimated fair values, with any excess recorded as goodwill. Determining the fair value of assets acquired and liabilities and noncontrolling interests assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. As part of the agreement to acquire certain subsidiaries, we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition. As of the acquisition date, contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach. Under this method, a set of discrete potential future subsidiary earnings is determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood is then assigned to each discrete potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate reflecting the credit risk of HEICO. Subsequent to the acquisition date, the fair value of such contingent consideration is measured each reporting period and any changes are recorded to SG&A expenses within our Consolidated Statements of Operations. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued. As of
October 31, 2021, 2020 and 2019, $62.3 million, $42.0 millionand $18.3 millionof contingent consideration was accrued within our 43
Consolidated Balance Sheets, respectively. During fiscal 2021, 2020 and 2019, such fair value measurement adjustments resulted in net increases to SG&A expenses of
$1.2 million, $.5 millionand $2.6 million, respectively. For further information regarding our contingent consideration arrangements, see Note 8, Fair Value Measurements, of the Notes to Consolidated Financial Statements.
We test goodwill for impairment annually as of
October 31, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable. In evaluating the recoverability of goodwill, we compare the fair value of each of our reporting units to its carrying value to determine potential impairment. During fiscal 2021, we adopted Accounting Standards Update ("ASU") 2017-04, "Simplifying the Test for GoodwillImpairment." Pursuant to ASU 2017-04, an impairment loss is recognized in the amount by which the carrying value of a reporting unit's goodwill exceeds its fair value. Prior to the adoption of ASU 2017-04, an impairment loss was recognized in the amount by which the carrying value of a reporting unit's goodwill exceeded its implied fair value. The fair values of our reporting units were determined using a weighted average of a market approach and an income approach. Under the market approach, fair values are estimated using published market multiples for comparable companies. We calculate fair values under the income approach by taking estimated future cash flows that are based on internal projections and other assumptions deemed reasonable by management and discounting them using an estimated weighted average cost of capital. Based on the annual goodwill impairment test as of October 31, 2021, 2020 and 2019, we determined there was no impairment of our goodwill. The fair value of each of our reporting units as of October 31, 2021significantly exceeded its carrying value. We test each non-amortizing intangible asset (principally trade names) for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. To derive the fair value of our trade names, we utilize an income approach, which relies upon management's assumptions of royalty rates, projected revenues and discount rates. We also test each amortizing intangible asset for impairment if events or circumstances indicate that the asset might be impaired. The test consists of determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. The determination of fair value requires us to make a number of estimates, assumptions and judgments of underlying factors such as projected revenues and related earnings as well as discount rates. Based on the intangible asset impairment tests conducted, we did not recognize any impairment losses in fiscal 2021, 2020 and 2019. New Accounting Pronouncements
See note 1, Summary of significant accounting policies – New accounting pronouncements, in the notes to the consolidated financial statements for more information.
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 Commissionor 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, extent 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;
• Costs and product specification requirements, which could result in an increase in our costs to complete contracts;
• Government and regulatory requirements, export policies and restrictions, reductions in defense, space or
• Our ability to introduce new products and services at profitable price points, which could reduce our sales or our 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 45
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. For further information on these and other factors that potentially could materially affect our financial results, see Item 1A, Risk Factors. 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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