HEICO CORP MANAGEMENT DISCUSSION AND ANALYSIS OF THE FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

Overview

Our company has two operating segments, the Flight support group
(“FSG”) and the Electronic Technologies Group (“ETG”).


  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 HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries, which mainly:


•Designs and Manufactures Electronic, Microwave and Electro-Optical Equipment,
High-Speed Interface Products, High Voltage Interconnection Devices, EMI and RFI
Shielding and Filters, High Voltage Advanced Power Electronics, Power Conversion
Products, Underwater Locator Beacons, Memory Products, Self-Sealing Auxiliary
Fuel 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
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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 Group has 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.

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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 Consolidated Statements of Operations (in thousands):
                                                                              Year ended October 31,
                                                                       2021                             2020
Net sales                                                                $1,865,682                       $1,787,009
Cost 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                         $376,648

Net sales by segment:
Flight Support Group                                                       $927,089                         $924,812
Electronic Technologies Group                                               959,170                          874,987
Intersegment sales                                                          (20,577)                         (12,790)
                                                                         $1,865,682                       $1,787,009

Operating income by segment:
Flight Support Group                                                       $151,930                         $143,051
Electronic Technologies Group                                               277,306                          258,814
Other, primarily corporate                                                  (36,336)                         (25,217)
                                                                           $392,900                         $376,648

Net 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  %


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Comparison of fiscal year 2021 to fiscal year 2020

Net sales


  Our consolidated net sales in fiscal 2021 increased by 4% to $1,865.7 million,
up from net sales of $1,787.0 million in fiscal 2020. The increase in
consolidated net sales principally reflects an increase of $84.2 million (a 10%
increase) to a record $959.2 million in net sales within the ETG and an increase
of $2.3 million to $927.1 million in net sales within the FSG. The net sales
increase in the ETG principally reflects $48.9 million contributed 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 million and $6.3
million, respectively, partially offset by decreased demand for our commercial
aerospace and space products resulting in net sales decreases of $4.7 million
and $4.4 million, respectively. The net sales increase in the FSG principally
reflects $21.0 million contributed by our fiscal 2021 and 2020 acquisitions,
partially offset by an $18.7 million decrease 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 million decrease 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 million decrease 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 million in fiscal 2021, up from $65.6 million in fiscal
2020.

Our consolidated selling, general and administrative (“SG&A”) expenses have been
$ 334.5 million during fiscal year 2021, compared to $ 305.5 million during fiscal year 2020. The increase

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consolidated SG&A expenses reflects $25.6 million of higher performance-based
compensation expense and $13.9 million attributable to the fiscal 2020 and 2021
acquisitions, partially offset by an $11.6 million reduction 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.

Operating result


Our consolidated operating income increased by 4% to $392.9 million in fiscal
2021, up from $376.6 million in fiscal 2020. The increase in consolidated
operating income principally reflects an $18.5 million increase (a 7% increase)
to a record $277.3 million in operating income of the ETG as well as an $8.9
million increase (a 6% increase) to $151.9 million in 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 million decrease in bad debt expense, partially offset by $16.2 million
of higher performance-based compensation expense. The increase in consolidated
operating income was partially offset by $9.1 million of 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 million in fiscal 2021, down from $13.2
million in 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.


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Other income

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 million and $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
million larger 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 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 $25.5
million in fiscal 2021, as compared to $21.9 million in 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 $2.21 per diluted share,
in fiscal 2021, as compared to $314.0 million, or $2.29 per 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.

Outlook


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
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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):

                                                    As of October 31,
                                               2021                    2020
Cash and cash equivalents                   $108,298                

$ 406,852

Total debt (including current portion)       236,498                 

739,831

Shareholders' equity                       2,296,939               

2,010,607

Total capitalization (debt plus equity)    2,533,437               

2,750,438

Total debt to total capitalization                    9%                    

27%




  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 million of 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.

Operating activities


Net cash provided by operating activities was $444.1 million in 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 million in employer contributions to the HEICO Savings and
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Investment Plan (a non-cash item), and $9.1 million in share-based compensation
expense (a non-cash item), partially offset by a $15.6 million deferred income
tax benefit.

Net cash provided by operating activities increased by $35.0 million in fiscal
2021, up from $409.1 million in fiscal 2020. The increase is principally
attributable to a $50.1 million decrease in net working capital, partially
offset by a $9.6 million increase in deferred income tax benefits and a $6.1
million decrease 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 million in 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 million in share-based compensation expense (a non-cash item), and $9.6
million in employer contributions to the HEICO Savings and Investment Plan (a
non-cash item), partially offset by a $48.5 million increase in working capital.

Investment activities


Net cash used in investing activities totaled $183.5 million in 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 $ 199.0 million during fiscal year 2020 and mainly related to the acquisitions of $ 163.9 million (net of cash acquired), capital expenditure of $ 22.9 million and the investments linked to the LCP of
$ 15.9 million. Further details on the acquisitions can be found in Note 2, Acquisitions, of the notes to the consolidated financial statements.

Fundraising activities


Net cash used in financing activities in fiscal 2021 totaled $559.0 million.
During fiscal 2021, we made $505.0 million in payments on our revolving credit
facility, made $28.0 million of distributions to noncontrolling interests, paid
$23.0 million in cash dividends on our common stock, redeemed common stock
related to stock option exercises aggregating $3.8 million, paid $2.3 million to
acquire certain noncontrolling interests, and paid revolving credit facility
issuance costs of $1.5 million, which were partially offset by $5.3 million in
proceeds from stock option exercises.
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Net cash provided by financing activities in fiscal 2020 totaled $137.7 million.
During fiscal 2020, we borrowed $200.0 million under our revolving credit
facility to provide a cushion of liquidity during the period of economic
uncertainty resulting from the Pandemic and $45.0 million to fund our fiscal
2020 acquisitions. A portion of the $200.0 million drawn was subsequently used
to help fund certain of our fiscal 2020 acquisitions. We also received $14.3
million in capital contributions from the noncontrolling interest holders of a
subsidiary of HEICO Electronic representing their share of the purchase price
for a 25% interest in two acquisitions made by a subsidiary of HEICO Electronic
in August 2020. (See Note 2, Acquisitions, of the Notes to Consolidated
Financial Statements for further details). Additionally, we made $68.0 million
in payments on our revolving credit facility, paid $21.6 million in cash
dividends on our common stock, made $17.9 million of distributions to
noncontrolling interests, redeemed common stock related to stock option
exercises aggregating $12.1 million, paid $7.5 million to acquire certain
noncontrolling interests and received $7.0 million in proceeds from stock option
exercises.

In November 2017, we entered into a $1.3 billion Revolving 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 2023 and to increase the capacity by $200 million to $1.5 billion. The
Credit Facility includes a feature that will allow us to increase the capacity
by $350 million to become a $1.85 billion facility 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 million sublimits
for borrowings made in foreign currencies and for swingline borrowings, and a
$50 million sublimit 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.


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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 million would 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.

Revenue recognition


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
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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.

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The changes in estimates did not have a material impact on the net income from consolidated activities for fiscal years 2021, 2020 and 2019.

Inventory valuation

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.

Business combinations


  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 million and $18.3
million of contingent consideration was accrued within our
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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 million and $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.

Assessment of Good will and other intangible assets


  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 Goodwill
Impairment." 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, 2021 significantly 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.

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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, 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 internal security spend by we 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 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
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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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