HEICO CORPORATION Overview
Our business is comprised of two operating segments, the
The FSG consists ofHEICO Aerospace Holdings Corp. ("HEICO Aerospace "), which is 80% owned, andHEICO 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 theFederal 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 andthe United States ("U.S.") government. Additionally, the FSG is a leading supplier, distributor, and integrator of military aircraft parts and support services primarily to theU.S. Department of Defense , defense prime contractors, and foreign military organizations allied with theU.S. Further, the FSG is a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation, defense and space applications. The FSG also 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 theU.S. Navy ; and performs tight-tolerance machining, brazing, fabricating and welding services for aerospace, defense and other industrial applications.
The ETG consists of
•Designs and Manufactures Electronic, Microwave and Electro-Optical Equipment, High-Speed Interface Products, High Voltage Interconnection Devices, EMI andRFI Shielding and Filters,High Voltage Advanced Power Electronics ,Power Conversion Products, Underwater Locator Beacons, Memory Products,Self-Sealing Auxiliary Fuel Systems, Active Antenna Systems, Airborne Antennas, 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 32
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annunciators, panels 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 and airborne antennas for commercial and military 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; rugged small-form factor embedded computing solutions; custom high power filters and filter assemblies; test sockets and adapters for both engineering and production use of semiconductor devices, and radiation assurance services and products. Our results of operations in fiscal 2022 continued to reflect the adverse impact from the COVID-19 global pandemic (the "Pandemic"), including its impact on our supply chain. Despite the aforementioned, we experienced continued improvement in operating results in fiscal 2022 as compared to fiscal 2021 principally reflecting improved demand for our commercial aerospace products. TheFlight Support Group has reported nine consecutive quarters of improvement in net sales and operating income resulting from signs of commercial air travel recovery in certain domestic travel markets, moderated by a slower recovery in international travel markets. Additionally, our results of operations in fiscal 2022 have been affected by recent acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.
Presentation of Results of Operations and Liquidity and Capital Resources
The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal 2022 to fiscal 2021. A similar discussion and analysis that compares fiscal 2021 to fiscal 2020 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 endedOctober 31, 2021 . 33
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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,
2022 2021
Net sales $2,208,322 $1,865,682
Cost of sales 1,345,563 1,138,259
Selling, general and administrative expenses 365,915 334,523
Total operating costs and expenses 1,711,478 1,472,782
Operating income $496,844 $392,900
Net sales by segment:
Flight Support Group $1,255,212 $927,089
Electronic Technologies Group 972,475 959,170
Intersegment sales (19,365) (20,577)
$2,208,322 $1,865,682
Operating income by segment:
Flight Support Group $267,167 $151,930
Electronic Technologies Group 269,473 277,306
Other, primarily corporate (39,796) (36,336)
$496,844 $392,900
Net sales 100.0 % 100.0 %
Gross profit 39.1 % 39.0 %
Selling, general and administrative expenses 16.6 % 17.9 %
Operating income 22.5 % 21.1 %
Interest expense .3 % .4 %
Other income - % .1 %
Income tax expense 4.5 % 3.1 %
Net income attributable to noncontrolling interests 1.8 % 1.4 %
Net income attributable to HEICO 15.9 % 16.3 %
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Comparison of Fiscal 2022 to Fiscal 2021
Our consolidated net sales in fiscal 2022 increased by 18% to a record$2,208.3 million , up from net sales of$1,865.7 million in fiscal 2021. The increase in consolidated net sales principally reflects an increase of$328.1 million (a 35% increase) to a record$1,255.2 million within the FSG and an increase of$13.3 million (a 1% increase) to a record$972.5 million within the ETG. The net sales increase in the FSG reflects strong organic growth of 25% as well as net sales of$100.0 million contributed by our fiscal 2022 and 2021 acquisitions. The FSG's organic growth reflects increased demand for the majority of our commercial aerospace products and services resulting from continued recovery in global commercial air travel as compared to the prior year. As such, organic net sales increased by$118.5 million ,$58.0 million and$51.7 million within our aftermarket replacement parts, specialty products, and repair and overhaul parts and services product lines, respectively. The net sales increase in the ETG principally reflects$31.0 million contributed by our fiscal 2022 and 2021 acquisitions, partially offset by a 2% decrease in organic net sales. The ETG's organic net sales decline is mainly attributable to decreased demand for our defense products resulting in a net sales decrease of$70.3 million , partially offset by increased demand for our other electronics, medical and aerospace products resulting in net sales increases of$29.5 million ,$17.8 million and$4.3 million , respectively. Although sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in fiscal 2022, recent cost inflation and potential supply chain disruptions may lead to higher sales prices during fiscal 2023. Our net sales in fiscal 2022 and 2021 by market consisted of approximately 43% and 39% from the commercial aviation industry, respectively, 39% and 44% from the defense and space industries, respectively, and 18% and 17% from other industrial markets including electronics, medical and telecommunications, respectively.
Gross Profit and Operating Expenses
Our consolidated gross profit margin improved to 39.1% in fiscal 2022, up from 39.0% in fiscal 2021 principally reflecting a 2.6% improvement in the FSG's gross profit margin, partially offset by a 1.0% decrease in the ETG's gross profit margin. The increase in the FSG's gross profit margin principally reflects the previously mentioned higher net sales within our specialty products and aftermarket replacement parts product lines. The reduction in the ETG's gross profit margin principally reflects the decrease in net sales of defense products, partially offset by a more favorable product mix in net sales of space products as well as the increases in net sales of medical, other electronics and aerospace products. Total new product research and development expenses included within our consolidated cost of sales were$76.1 million in fiscal 2022, up from$68.9 million in fiscal 2021.
Our consolidated selling, general and administrative ("SG&A") expenses were
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and 2022 acquisitions, increases of$11.8 million and$4.0 million in other selling and other general and administrative expenses, respectively, mainly incurred to support the previously mentioned net sales growth and a$6.1 million increase in performance-based compensation expense, partially offset by a$7.6 million impact from changes in the estimated fair value of accrued contingent consideration. Our consolidated SG&A expenses as a percentage of net sales decreased to 16.6% in fiscal 2022, down from 17.9% in fiscal 2021. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects efficiencies realized from the higher net sales, a .4% favorable impact from changes in the estimated fair value of accrued contingent consideration, as well as a .3% impact from lower intangible asset amortization expense.
Operating Income
Our consolidated operating income increased by 26% to a record$496.8 million in fiscal 2022, up from$392.9 million in fiscal 2021. The increase in consolidated operating income principally reflects a$115.2 million increase (a 76% increase) to a record$267.2 million in operating income of the FSG, partially offset by a$7.8 million decrease (a 3% decrease) to$269.5 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned net sales growth, improved gross profit margin and efficiencies realized from the higher net sales volume. The decrease in operating income of the ETG principally reflects the previously mentioned lower gross profit margin and a lower level of efficiencies resulting from the organic net sales decrease, partially offset by a favorable impact from changes in the estimated fair value of accrued contingent consideration. Further, the increase in consolidated operating income was partially offset by$5.6 million of higher corporate expenses mainly attributable to an increase in performance-based compensation expense and the suspension of corporate salary reductions as of the end of the first quarter of fiscal 2021. Our consolidated operating income as a percentage of net sales increased to 22.5% in fiscal 2022, up from 21.1% in fiscal 2021. The increase principally reflects an increase in the FSG's operating income as a percentage of net sales to 21.3% in fiscal 2022, up from 16.4% in fiscal 2021, partially offset by a decrease in the ETG's operating income as a percentage of net sales to 27.7% in fiscal 2022, as compared to 28.9% in fiscal 2021. The increase in the FSG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin, as well as a 2.3% impact from a decrease in SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned efficiencies. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin and a 1.0% impact from an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lower level of efficiencies, partially offset by a .8% favorable impact from changes in the estimated fair value of accrued contingent consideration. 36
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Interest Expense
Interest expense decreased to$6.4 million in fiscal 2022, down from$7.3 million in fiscal 2021. The decrease was principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility, partially offset by a higher weighted average interest rate.
Other Income
Other income in fiscal 2022 and 2021 was not material.
Income Tax Expense
Our effective tax rate was 20.4% in fiscal 2022, as compared to 14.8% in fiscal 2021. The increase in our effective tax rate principally reflects a 5.7% unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan (the "LCP") recognized in fiscal 2022 as compared to the tax-exempt unrealized gains recognized on such policies in fiscal 2021.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held byLufthansa Technik AG inHEICO 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$38.9 million in fiscal 2022, as compared to$25.5 million in fiscal 2021. The increase in net income attributable to noncontrolling interests principally reflects improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held, inclusive of fiscal 2021 and 2022 acquisitions.
Net Income Attributable to HEICO
Net income attributable to HEICO increased by 16% to a record$351.7 million , or$2.55 per diluted share, in fiscal 2022, up from$304.2 million , or$2.21 per diluted share, in fiscal 2021 principally reflecting the previously mentioned higher consolidated operating income, partially offset by the increase in the effective tax rate. Outlook As we look ahead to fiscal 2023, we anticipate net sales growth in both the FSG and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the Pandemic may lead to higher material and labor costs. During fiscal 2023, we plan to continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility. 37
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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, as was done in fiscal 2022. However, continued cost inflation and supply chain disruptions during fiscal 2023 may require additional sales price increases in order to mitigate their impact on net income attributable to HEICO.
Liquidity and Capital Resources
The following table summarizes our capitalization (in thousands):
As of October 31,
2022 2021
Cash and cash equivalents $139,504 Total debt (including current portion) 290,274
236,498
Shareholders' equity 2,648,306
2,296,939
Total capitalization (debt plus equity) 2,938,580
2,533,437
Total debt to total capitalization 10% 9% Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 2023 are anticipated to approximate$40 million . We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. As ofDecember 20, 2022 , we had approximately$1,202 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$467.9 million in fiscal 2022 and consisted primarily of net income from consolidated operations of$390.6 million , depreciation and amortization expense of$96.3 million (a non-cash item), net changes in other long-term liabilities and assets related to the LCP of$15.4 million (principally participant deferrals and employer contributions),$12.6 million in share-based compensation expense (a non-cash item), and$12.2 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a$61.4 million increase in net working capital. The increase in net working capital principally reflects an$89.2 million increase in inventories to support the increase in our consolidated backlog, partially offset by a$34.1 million increase in accrued 38
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expenses and other current liabilities mainly reflecting an increase in contingent consideration and contract liabilities.
Net cash provided by operating activities increased by$23.8 million in fiscal 2022, up from$444.1 million in fiscal 2021. The increase is principally attributable to a$60.9 million increase in net income from consolidated operations and a$24.5 million decrease in deferred income tax benefits, partially offset by a$62.9 million increase in net working capital principally reflecting the previously mentioned increase in inventories. The decrease in deferred income tax benefits reflects the impact of tax deferred unrealized losses in LCP participant account balances in fiscal 2022 as compared to tax deferred unrealized gains recognized on such account balances in fiscal 2021. 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 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.
Investing Activities
Net cash used in investing activities totaled$395.8 million in fiscal 2022 and related primarily to acquisitions of$347.3 million , capital expenditures of$32.0 million , and investments related to the LCP of$15.3 million . Further details regarding our acquisitions may be found in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements. 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 . Financing Activities Net cash used in financing activities in fiscal 2022 totaled$33.8 million . During fiscal 2022, we made$212.0 million in payments on our revolving credit facility, redeemed common stock related to stock option exercises aggregating$25.9 million , made$25.1 million of distributions to noncontrolling interests, paid$24.5 million in cash dividends on our common stock and paid$8.7 million to acquire certain noncontrolling interests, which were partially offset by$262.0 million of borrowings under our revolving credit facility. 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 39
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issuance costs of
InNovember 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. InDecember 2020 , we entered into an amendment 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. InApril 2022 , we entered into an amendment to extend the maturity date of our Credit Facility by one year toNovember 2024 and to replace the Eurocurrency Rate with Adjusted Term SOFR as an election in which borrowings under the Credit Facility accrue interest, as such capitalized terms are defined in the Credit Facility. Borrowings under the Credit Facility accrue interest at our election of the Base Rate or Adjusted Term SOFR, plus in each case, the Applicable Rate (based on the Company's 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) Adjusted Term SOFR for an Interest Period of one month plus 100 basis points. Adjusted Term SOFR is the rate per annum equal to Term SOFR plus a Term SOFR Adjustment of .10%; provided that Adjusted Term SOFR as so determined shall never be less than 0%, as such capitalized terms are defined in the Credit Facility. The Applicable Rate for SOFR 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 the Company's 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 ofOctober 31, 2022 .
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, 2022 ,
management's estimate of the aggregate Redemption Amount of all Put Rights that
we could be required to pay is approximately $327.6 million , which is included
within redeemable noncontrolling interests in our Consolidated Balance Sheet.
The estimated aggregate Redemption Amount of the Put Rights that are currently
puttable, previously put, or becoming puttable during fiscal 2023 is
approximately $103.2 million , of which approximately
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$56.3 million would be payable in fiscal 2023 should all of the eligible associated noncontrolling interest holders elect to exercise their Put Rights during fiscal 2023. See Note 13, Redeemable Noncontrolling Interests, of the Notes to Consolidated Financial Statements for further information. As discussed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements, onAugust 5, 2022 , we entered into a purchase agreement to acquire approximately 95% of the stock ofExxelia International for €453 million plus the assumption of approximately €14 million of liabilities. The closing of the transaction, which is expected to occur in the first quarter of fiscal 2023, is subject to customary closing conditions, including, among others, obtaining a required foreign antitrust clearance and foreign investment authorizations. Changes in the exchange rate between the Euro and theU.S. dollar will either favorably or unfavorably affect the purchase price as translated intoU.S. dollars upon closing. A hypothetical 10% weakening or strengthening in the exchange rate of the Euro to theU.S. dollar as ofOctober 31, 2022 would decrease or increase the purchase price as translated intoU.S. dollars by$44.9 million .
See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements for information regarding our long-term debt obligations.
See Note 8, Fair Value Measurements, of the Notes to Consolidated Financial Statements for information pertaining to contingent consideration obligations. As ofOctober 31, 2022 , the estimated fair value of contingent consideration payable in fiscal 2023 was$28.8 million .
See Note 9, Leases, of the Notes to Consolidated Financial Statements for information pertaining to future minimum lease payments relating to the Company's operating and finance lease obligations.
Critical Accounting Policies
We believe that the following are our most critical accounting policies, which require management to make judgments about 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
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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 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.
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Changes in estimates that result in adjustments to net sales and cost of sales are recognized as necessary in the period they become known on a cumulative catch-up basis. Changes in estimates did not have a material effect on net income from consolidated operations in fiscal 2022, 2021 and 2020.
Valuation of Inventory
Inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out or the average cost basis. Losses, if any, are recognized fully in the period when 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 a current asset including portions with long production cycles, some of which may not be realized within one 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
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amount of contingent consideration accrued. As ofOctober 31, 2022 and 2021,$82.8 million and$62.3 million of contingent consideration was accrued within our Consolidated Balance Sheets, respectively. During fiscal 2022, 2021 and 2020, such fair value measurement adjustments resulted in net (decreases) increases to SG&A expenses of($7.6) million ,$1.2 million and$.5 million , respectively. For further information regarding our contingent consideration arrangements, see Note 8, Fair Value Measurements, of the Notes to Consolidated Financial Statements.
Valuation of
We test goodwill for impairment annually as ofOctober 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 and an impairment loss is recognized in the amount by which the carrying value of a reporting unit's goodwill exceeds its 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 ofOctober 31, 2022 , 2021 and 2020, we determined there was no impairment of our goodwill. The fair value of each of our reporting units as ofOctober 31, 2022 significantly exceeded its carrying value. We test each non-amortizing intangible asset (principally trade names) for impairment annually as ofOctober 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 2022, 2021 and 2020. New Accounting Pronouncement
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncement, of the Notes to 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 theSecurities 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, including supply chain disruptions and inflationary pressures;
•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
•Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth;
•Product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales;
•Our ability to make acquisitions, including obtaining any applicable domestic
and/or foreign governmental approvals, and achieve operating synergies from
acquired businesses; customer credit risk; interest, foreign currency exchange
and income tax
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rates; economic conditions, including the effects of inflation, within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and
•Defense spending or budget cuts, which could reduce our defense-related revenue. 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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