NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
HEICO Corporation, through its principal subsidiaries consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”), HEICO Flight Support Corp. ("HFSC") and HEICO Electronic Technologies Corp. (“HEICO Electronic”) and their respective subsidiaries (collectively, the “Company”), is principally engaged in the design, manufacture and sale of aerospace, defense and electronic related products and services throughout the United States ("U.S.") and internationally. The Company’s customer base is primarily the aviation, defense, space, medical, telecommunications and electronics industries.
Basis of Presentation
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace and HFSC and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic and its subsidiaries.
The consolidated financial statements include the financial accounts of HEICO Corporation and its direct subsidiaries, all of which are wholly owned except for HEICO Aerospace, which is 20% owned by Lufthansa Technik AG ("LHT"), the technical services subsidiary of Lufthansa German Airlines. HFSC consolidates five subsidiaries which are 70%, 84%, 85%, 89% and 90%, owned, respectively, and seven subsidiaries that are each 80.1% owned. In addition, HEICO Aerospace consolidates a joint venture, which is 84% owned. HEICO Electronic consolidates four subsidiaries that are each 80.1% owned, two subsidiaries that are each 75% owned, and five subsidiaries which are 82.5%, 85%, 90%, 92.7% and 95.9% owned, respectively. Certain subsidiaries of HEICO Electronic consolidate subsidiaries that are less than wholly owned. See Note 13, Redeemable Noncontrolling Interests. All intercompany balances and transactions are eliminated.
The Company's results of operations in fiscal 2021 continued to reflect the adverse impact from the COVID-19 global pandemic (the “Pandemic”). Most notably, demand for HEICO's commercial aviation products and services were moderated by the ongoing depressed commercial aerospace market as compared to pre-Pandemic levels. The Company 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 the Company's results of operations were most negatively affected by the Pandemic’s impact. Since then, the FSG has reported five consecutive quarters of improvement in net sales and operating income resulting from signs of commercial air travel recovery.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company considers all highly liquid investments such as U.S. Treasury bills and money market funds with an original maturity of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable consist of amounts billed and currently due from customers. The valuation of accounts receivable requires that the Company set up an allowance for estimated uncollectible accounts and record a corresponding charge to bad debt expense. The Company estimates uncollectible receivables based on such factors as its prior experience, its appraisal of a customer’s ability to pay, age of receivables outstanding and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries.
Contract Assets
Contract assets (unbilled receivables) represent revenue recognized on contracts using an over-time recognition model in excess of amounts invoiced to the customer. See Note 6, Revenue, for additional information regarding the Company's contract assets.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographical regions. The Company performs ongoing credit evaluations of its customers, but does not generally require collateral to support customer receivables.
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. The Company periodically evaluates 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.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation and amortization is generally provided on the straight-line method over the estimated useful lives of the various assets. The Company’s property, plant and equipment is generally depreciated over the following estimated useful lives:
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Buildings and improvements
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10
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to
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40
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years
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Machinery and equipment
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3
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to
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10
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years
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Leasehold improvements
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2
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to
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20
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years
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Tooling
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2
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to
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5
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years
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|
The costs of major additions and improvements are capitalized. Leasehold improvements are amortized over the shorter of the leasehold improvement’s useful life or the lease term.
Repairs and maintenance costs are expensed as incurred. Upon an asset's disposition, its cost and related accumulated depreciation are removed from the financial accounts and any resulting gain or loss is reflected within earnings.
Leases
During fiscal 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-02, which, as amended, was codified as Accounting Standards Codification (“ASC”) Topic 842, “Leases” (“ASC 842”).
The Company’s lease arrangements primarily pertain to manufacturing facilities, office buildings, equipment, land and vehicles. The Company evaluates whether a contractual arrangement that provides it with control over the use of an asset is, or contains, a lease at the inception date. The term of a lease is inclusive of any option to renew, extend, or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company classifies a lease as operating or finance using the classification criteria set forth in ASC 842. HEICO recognizes lease right-of-use (“ROU”) assets and corresponding lease liabilities as of the
lease commencement date based on the present value of the lease payments over the lease term. The discount rate used to calculate the present value of the Company’s leases is based on HEICO’s incremental borrowing rate and considers credit risk, the lease term and other available information as of the commencement date since the leases do not provide a readily determinable implicit rate. Variable lease payments that depend on an index or a rate are included in the determination of ROU assets and lease liabilities using the index or rate at the lease commencement date. Variable lease payments that do not depend on an index or rate or resulting from changes in an index or rate subsequent to the lease commencement date, are recorded as lease expense in the period in which the obligation for the payment is incurred. The Company’s ROU assets are increased by any prepaid lease payments and initial direct costs and reduced by any lease incentives. The Company’s leases do not contain any material residual value guarantees or restrictive covenants. See Note 9, Leases, for additional information regarding the Company’s accounting policy for leases.
Business Combinations
The Company allocates 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. The operating results of acquired businesses are included in the Company’s results of operations beginning as of their effective acquisition dates. Acquisition costs were not material in fiscal 2021, 2020 and 2019.
For contingent consideration arrangements, a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. Additional information regarding the Company's contingent consideration arrangements may be found in Note 2, Acquisitions, and Note 8, Fair Value Measurements.
Goodwill and Other Intangible Assets
The Company tests 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, the Company compares the fair value of each of its reporting units to its carrying value to determine potential impairment. During fiscal 2021, the Company adopted 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 the Company's reporting units are determined by 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. The Company calculates 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.
The Company’s intangible assets not subject to amortization consist principally of its trade names. The Company’s intangible assets subject to amortization are amortized on the straight-line method (except for certain customer relationships amortized on an accelerated method) over the following estimated useful lives:
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Customer relationships
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4
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to
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15
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years
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Intellectual property
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4
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to
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22
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years
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Licenses
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10
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to
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11
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years
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Patents
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5
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to
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20
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years
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Trade names
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8
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to
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15
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years
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Amortization expense of intellectual property, licenses and patents is recorded as a component of cost of sales, and amortization expense of customer relationships, non-compete agreements and trade names is recorded as a component of selling, general and administrative ("SG&A") expenses in the Company’s Consolidated Statements of Operations. The Company tests each non-amortizing intangible asset 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 its trade names, the Company utilizes an income approach, which relies upon management's assumptions of royalty rates, projected revenues and discount rates. The Company also tests 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, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. The determination of fair value requires management to make a number of estimates, assumptions and judgments of such factors as projected revenues and earnings and discount rates.
Customer Rebates and Credits
The Company records accrued customer rebates and credits as a component of accrued expenses and other current liabilities in its Consolidated Balance Sheets. These amounts generally relate to discounts negotiated with customers as part of certain sales contracts that are usually tied to sales volume thresholds. The Company accrues customer rebates and credits as a reduction within net sales as the revenue is recognized based on the estimated level of discount rate expected to be earned by each customer over the life of the contractual rebate period (generally one year). Accrued customer rebates and credits are monitored by management and discount levels are updated at least quarterly.
Product Warranties
Product warranty liabilities are estimated at the time of shipment and recorded as a component of accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets. The amount recognized is based on historical claims experience.
Defined Benefit Pension Plan
In connection with a prior year acquisition, the Company assumed a frozen qualified defined benefit pension plan (the "Plan"). The Plan's benefits are based on employee compensation and years of service; however, the accrued benefit for Plan participants was fixed as of the date of acquisition. The Company uses an actuarial valuation to determine the projected benefit obligation of the Plan and records the difference between the fair value of the Plan's assets and the projected benefit obligation as of October 31 in other long-term liabilities in its Consolidated Balance Sheets. Additionally, any actuarial gain or loss that arises during a fiscal year that is not recognized as a component of net periodic pension income or expense is recorded as a component of other comprehensive income or (loss), net of tax. The following table presents the fair value of the Plan's assets and projected benefit obligation as of October 31, for each of the last two fiscal years (in thousands):
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As of October 31,
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2021
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2020
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Fair value of plan assets
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$13,116
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$11,581
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Projected benefit obligation
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13,979
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14,519
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Funded status
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($863)
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($2,938)
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Revenue Recognition
The Company 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. The Company’s performance obligations are satisfied and control is transferred either at a point-in-time or over-time. The majority of the Company’s 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 customer acceptance. For certain contracts under which the Company produces products with no alternative use and for which it has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date and for certain other contracts under which the Company creates or enhances a customer-owned asset while performing repair and overhaul services, control is transferred to the customer over-time. The Company recognizes revenue using an over-time recognition model for these types of contracts.
The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance, and it is probable that the Company will collect the consideration to which it is entitled to receive. Customer payment terms related to the sale of products and the rendering of services vary by Company subsidiary and product line. The time between receipt of payment and recognition of revenue for satisfaction of the related performance obligation is not significant.
A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing
revenue. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. The majority of the Company’s contracts have a single performance obligation to transfer goods or services. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.
The Company accounts for contract modifications prospectively when the remaining goods or services are distinct and on a cumulative catch-up basis when the remaining goods or services are not distinct.
The Company provides assurance type warranties on many of its products and services. Since customers cannot purchase such warranties independently of the products or services under contract and they are not priced separately, warranties are not separate performance obligations.
The Company utilizes the cost-to-cost method as a measure of progress for performance obligations that are satisfied over-time as it believes 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 the Company 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. The Company reviews its 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, the Company uses 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 the Company’s 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 the Company will receive. The Company includes variable consideration in the transaction price generally by applying the most likely amount method of the consideration that it expects 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. The Company estimates 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. See Note 6, Revenue, for additional information regarding the Company’s revenue recognition policy.
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 2021, 2020 and 2019.
Stock-Based Compensation
The Company records compensation expense associated with stock options in its Consolidated Statements of Operations based on the grant date fair value of those awards. The fair value of each stock option on the date of grant is estimated using the Black-Scholes pricing model based on certain valuation assumptions. Expected stock price volatility is based on the Company’s historical stock prices over the expected life of the option grant and other factors. The risk-free interest rate used is based on the published U.S. Treasury yield curve in effect at the time of the option grant for instruments with a similar life. The dividend yield reflects the Company’s expected dividend yield at the date of grant. The expected option life represents the period of time that the stock options are expected to be outstanding, taking into consideration the contractual term of the option grant and employee historical exercise behavior. The Company’s historical rate of forfeiture is nominal and therefore not included when estimating the grant date fair value of stock option awards. As such, the Company recognizes the impact of forfeitures when they occur. The Company generally recognizes stock option compensation expense ratably over the award’s vesting period.
Income Taxes
Income tax expense includes U.S. and foreign income taxes. Deferred income taxes are provided on elements of income that are recognized for financial reporting purposes in periods different from when recognized for income tax purposes. Deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and income tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense and to treat any tax on Global Intangible Low-Taxed Income ("GILTI") as a current period income tax expense. Further information regarding income taxes can be found in Note 7, Income Taxes.
Redeemable Noncontrolling Interests
As further detailed in Note 13, Redeemable Noncontrolling Interests, 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. The Put Rights are embedded in the shares owned by the noncontrolling interest holders and are not freestanding.
The Company tracks the carrying cost of such redeemable noncontrolling interests at historical cost plus an allocation of subsidiary earnings based on ownership interest, less dividends paid to the noncontrolling interest holders. Redeemable noncontrolling interests are recorded outside of permanent equity at the higher of their carrying cost or management’s estimate of the Redemption Amount. The initial adjustment to record redeemable noncontrolling interests at the Redemption Amount results in a corresponding decrease to retained earnings. Subsequent adjustments to the Redemption Amount of redeemable noncontrolling interests may result in corresponding decreases or increases to retained earnings, provided any increases to retained earnings may only be recorded to the extent of decreases previously recorded. Adjustments to Redemption Amounts based on fair value will have no effect on net income per share attributable to HEICO shareholders whereas the portion of periodic adjustments to the carrying amount of redeemable noncontrolling interests based solely on a multiple of future earnings that reflect a redemption amount in excess of fair value will affect net income per share attributable to HEICO shareholders. Acquisitions of redeemable noncontrolling interests are treated as equity transactions.
Net Income per Share Attributable to HEICO Shareholders
Basic net income per share attributable to HEICO shareholders is computed by dividing net income attributable to HEICO by the weighted average number of common shares outstanding during the period. Diluted net income per share attributable to HEICO shareholders is computed by dividing net income attributable to HEICO by the weighted average number of common shares outstanding during the period plus potentially dilutive common shares arising from the assumed exercise of stock options, if dilutive. The dilutive impact of potentially dilutive common shares is determined by applying the treasury stock method.
Foreign Currency
All assets and liabilities of foreign subsidiaries that do not utilize the U.S. dollar as its functional currency are translated at period-end exchange rates, while revenue and expenses are translated using average exchange rates for the period. Unrealized translation gains or losses are reported as foreign currency translation adjustments through other comprehensive income or (loss) in shareholders’ equity. Transaction gains or losses related to monetary balances denominated in a currency other than the functional currency are recorded in the Company's Consolidated Statements of Operations.
Contingencies
Losses for contingencies such as product warranties, litigation and environmental matters are recognized in income when they are probable and can be reasonably estimated. Gain contingencies are not recognized in income until they have been realized.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which simplifies the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted ASU 2017-04 in the first quarter of fiscal 2021 and began applying the guidance prospectively when assessing its goodwill for impairment.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022, or in fiscal 2024 for HEICO. Early adoption is permitted and ASU 2021-08 shall be applied on a prospective basis to business combinations that occur on or after the adoption date. The Company is currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
2. ACQUISITIONS
In October 2021, the Company, through a subsidiary of HEICO Electronic, acquired all of the outstanding stock of Paciwave, Inc. ("Paciwave"). Paciwave is a designer and manufacturer of Radio Frequency (RF) and microwave components and integrated assemblies specializing particularly in PIN Diode Switches, PIN Attenuators, PIN Limiters, Switching Assemblies and integrated subsystems found in defense and other complex electronic applications. The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In September 2021, the Company, through HEICO Electronic, acquired 80.1% of the stock of R.H. Laboratories, Inc. ("RH Labs"). RH Labs designs and manufactures state-of-the-art RF and microwave integrated assemblies, sub-assemblies and components used in a broad range of demanding defense applications operating in harsh environments including Space. The remaining 19.9% interest continues to be owned by certain members of RH Lab's management
team (see Note 13, Redeemable Noncontrolling Interests, for additional information). The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In August 2021, the Company, through HFSC, acquired 89% of the equity interests of Ridge HoldCo, LLC, which owns all of Ridge Engineering, Inc. ("Ridge") and The Bechdon Company, Inc. ("Bechdon"). Ridge performs tight-tolerance machining and brazing of large-sized parts in mission-critical defense and aerospace applications. Bechdon provides machining, fabrication and welding services for aerospace, defense and other industrial applications. The remaining 11% interests continue to be owned by certain members of Ridge’s and Bechdon's management teams (see Note 13, Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual of $18.3 million as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should Ridge and Bechdon meet certain earnings objectives following the acquisition. See Note 8, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation. The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In June 2021, the Company, through HFSC, acquired certain assets and liabilities of Camtronics, LLC ("Camtronics"). Camtronics is a Federal Aviation Administration ("FAA")-certified Part 145 repair station with extensive proprietary FAA-designated engineering representative repairs for a variety of domestic and international commercial and cargo airlines. As a result of the transaction, HFSC has an 80.1% interest in Camtronics. Additionally, the noncontrolling interest holders of an 84% owned subsidiary of HFSC have a 9.9% interest in Camtronics and the remaining 10% interest continues to be owned by certain members of Camtronics' management team (see Note 13, Redeemable Noncontrolling Interests, for additional information). The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In March 2021, the Company, through HEICO Electronic, acquired all of the business, assets and certain liabilities of Pyramid Semiconductor LLC ("Pyramid"). Pyramid is a specialty semiconductor designer and manufacturer offering a well-developed line of processors, static random-access memory (SRAM), electronically erasable programmable read-only memory (EEPROM) and Logic products on a diverse array of military, space and medical platforms. The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In August 2020, the Company, through HEICO Electronic, acquired 89.99% of the equity interests of Connect Tech Inc. ("Connect Tech"). Connect Tech designs and manufacturers rugged, small-form-factor embedded computing solutions. Connect Tech's components are designed for very harsh environments and are primarily used in rugged commercial and industrial, aerospace and defense, transportation, and smart energy applications. The remaining 10.01% interest continues to be owned by a certain member of Connect Tech's management team (see Note 13, Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual of $9.7 million as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should Connect Tech meet certain earnings objectives following the acquisition. See Note 8, Fair Value
Measurements, for additional information regarding the Company’s contingent consideration obligation.
In August 2020, the Company, through a newly formed subsidiary of HEICO Electronic, acquired all of the equity interests of Transformational Security, LLC and Intelligent Devices, Inc. (collectively, "TSID"). TSID develops and manufactures state-of-the-art Technical Surveillance Countermeasures ("TSCM") equipment used to protect critical spaces from exploitation via wireless transmissions, technical surveillance and listening devices. The subsidiary of HEICO Electronic that completed the acquisition is 75% owned by HEICO Electronic and 25% owned by the noncontrolling interest holders of a subsidiary of HEICO Electronic that is also a designer and manufacturer of TSCM equipment (see Note 13, Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual of $14.0 million as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should TSID meet certain earnings objectives following the acquisition. See Note 8, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation.
In June 2020, the Company, through HFSC, acquired 70% of the membership interests of Rocky Mountain Hydrostatics, LLC ("Rocky Mountain"). Rocky Mountain overhauls industrial pumps, motors, and other hydraulic units with a focus on the support of legacy systems for the U.S. Navy. The remaining 30% interest continues to be owned by certain members of Rocky Mountain's management team (see Note 13, Redeemable Noncontrolling Interests, for additional information).
In May 2020, a subsidiary of HEICO Electronic obtained 100% ownership of the assets and liabilities of Freebird Semiconductor Corporation ("Freebird"), an entity in which the subsidiary held a controlling financial interest since November 2018. In June 2020, the HEICO Electronic subsidiary contributed the assets and liabilities of Freebird in exchange for a 49% equity interest in EPC Space LLC ("EPC”), which the Company accounts for under the equity method. As the fair value of the net assets contributed approximated the fair value of the equity interest received in EPC, no material gain or loss was recorded as a result of this transaction. EPC designs, develops, promotes, markets and sells radiation-hardened gallium nitride power solutions packaged for use in outer space and other high reliability applications.
In December 2019, the Company, through a subsidiary of HEICO Electronic, acquired 100% of the business and assets of the Human-Machine Interface ("HMI") product line of Spectralux Corporation. HMI designs, manufactures, and repairs flight deck annunciators, panels, indicators, and illuminated keyboards, as well as lighting controls, and flight deck lighting.
In December 2019, the Company, through HEICO Electronic, acquired 80.1% of the stock of Quell Corporation ("Quell"). Quell designs and manufactures electromagnetic interference (EMI)/radio-frequency interference (RFI) and transient protection solutions for a wide variety of connectors that principally serve customers within the aerospace and defense markets. The remaining 19.9% interest continues to be owned by certain members of Quell's
management team (see Note 13, Redeemable Noncontrolling Interests, for additional information).
In September 2019, the Company, through a subsidiary of HEICO Electronic, acquired all of the outstanding stock of TTT-Cubed, Inc. ("TTT"). TTT is a designer and manufacturer of RF Sources, Detectors, and Controllers for a certain wide range of aerospace and defense applications. The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In July 2019, the Company, jointly through HEICO Electronic and one of its subsidiaries, acquired substantially all of the assets and business of a France-based company and transferred the assets to a newly created subsidiary, Bernier Connect SAS ("Bernier"). At the time of acquisition, the purchase of Bernier was inclusive of Bernier's 70% equity interest in Moulages Plastiques Industriels de L'essonne SARL ("MPI"), a plastics manufacturer ("MPI"). In June 2021, Bernier acquired the remaining 30% equity interest in MPI. Bernier is a designer and manufacturer of interconnect products used in demanding defense, aerospace and industrial applications, primarily for communications-related purposes. The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In June 2019, the Company, through HEICO Electronic, acquired 75% of the membership interests of Research Electronics International, LLC ("REI"). REI is a designer and manufacturer of TSCM equipment to detect devices used for espionage and information theft. The remaining 25% interest continues to be owned by certain members of REI's management team (see Note 13, Redeemable Noncontrolling Interests, for additional information).
In February 2019, the Company, through HFSC, acquired 80.1% of the membership interests of Decavo LLC ("Decavo"). Decavo designs and produces complex composite parts and assemblies incorporated into camera and related sensor assemblies and unmanned aerial vehicle ("UAV") airframes used in demanding defense and civilian applications. The remaining 19.9% interest continues to be owned by certain members of Decavo's management team (see Note 13, Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual of $2.1 million as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should Decavo meet a certain earnings objective during the second and third years following the acquisition. See Note 8, Fair Value Measurements, for additional information regarding the Company's contingent consideration obligation. The purchase price of this acquisition was paid in cash principally using cash provided by operating activities.
In February 2019, the Company, through HEICO Electronic, acquired 85% of the stock of Solid Sealing Technology, Inc. ("SST"). SST designs and manufactures high-reliability ceramic-to-metal feedthroughs and connectors for demanding environments within the defense, industrial, life science, medical, research, semiconductor, and other markets. The remaining 15% interest continues to be owned by certain members of SST's management team (see Note 13, Redeemable Noncontrolling Interests, for additional information).
In November 2018, the Company, through a subsidiary of HEICO Electronic, acquired an additional equity interest in Freebird, which increased the Company's aggregate equity interest in Freebird to greater than 50%. Accordingly, the Company began consolidating the operating results of Freebird as of the acquisition date. Prior to this transaction, the Company accounted for its investment in Freebird under the equity method. Freebird is a fabless design and manufacturing company that offers advanced high-reliability wide-band gap power switching technology. The purchase price of this acquisition was paid in cash using cash provided by operating activities.
In November 2018, the Company, through HEICO Electronic, acquired 92.7% of the stock of Apex Microtechnology, Inc. ("Apex"). Apex designs and manufactures precision power analog monolithic, hybrid and open frame components for a certain wide range of aerospace, defense, industrial, measurement, medical and test applications. The remaining 7.3% interest continues to be owned by certain members of Apex's management team (see Note 13, Redeemable Noncontrolling Interests, for additional information).
In November 2018, the Company, through HEICO Electronic, acquired all of the stock of Specialty Silicone Products, Inc. ("SSP"). SSP designs and manufactures silicone material for a variety of demanding applications used in aerospace, defense, research, oil and gas, testing, pharmaceuticals and other markets.
Unless otherwise noted, the purchase price of each of the above referenced acquisitions was paid in cash, principally using proceeds from the Company's revolving credit facility, and is not material or significant to the Company's consolidated financial statements.
The following table summarizes the aggregate total consideration for the Company's acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Cash paid
|
$136,995
|
|
|
$165,290
|
|
|
$243,550
|
|
Less: cash acquired
|
(639)
|
|
|
(1,323)
|
|
|
(2,466)
|
|
Cash paid, net
|
136,356
|
|
|
163,967
|
|
|
241,084
|
|
Contingent consideration
|
18,334
|
|
|
23,719
|
|
|
2,107
|
|
Fair value of existing equity interest
|
—
|
|
|
—
|
|
|
1,417
|
|
Additional purchase consideration
|
56
|
|
|
144
|
|
|
—
|
|
Total consideration
|
$154,746
|
|
|
$187,830
|
|
|
$244,608
|
|
The following table summarizes the allocation of the aggregate total consideration for the Company's acquisitions to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Assets acquired:
|
|
|
|
|
|
Goodwill
|
$66,450
|
|
|
$114,391
|
|
|
$155,892
|
|
Customer relationships
|
30,910
|
|
|
44,740
|
|
|
47,553
|
|
Intellectual property
|
23,920
|
|
|
27,120
|
|
|
31,459
|
|
Trade names
|
9,920
|
|
|
12,410
|
|
|
19,216
|
|
Contract assets
|
18,399
|
|
|
2,530
|
|
|
362
|
|
Property, plant and equipment
|
17,949
|
|
|
4,000
|
|
|
18,013
|
|
Inventories
|
6,743
|
|
|
10,902
|
|
|
18,046
|
|
Accounts receivable
|
6,895
|
|
|
7,124
|
|
|
8,673
|
|
Other assets
|
1,129
|
|
|
980
|
|
|
545
|
|
Total assets acquired, excluding cash
|
182,315
|
|
|
224,197
|
|
|
299,759
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Deferred income taxes
|
413
|
|
|
10,434
|
|
|
7,427
|
|
Accrued expenses
|
5,433
|
|
|
2,787
|
|
|
2,971
|
|
Accounts payable
|
2,487
|
|
|
726
|
|
|
2,879
|
|
Other liabilities
|
266
|
|
|
197
|
|
|
627
|
|
Total liabilities assumed
|
8,599
|
|
|
14,144
|
|
|
13,904
|
|
|
|
|
|
|
|
Noncontrolling interests in consolidated subsidiaries
|
18,970
|
|
|
22,223
|
|
|
41,247
|
|
|
|
|
|
|
|
Net assets acquired, excluding cash
|
$154,746
|
|
|
$187,830
|
|
|
$244,608
|
|
The following table summarizes the weighted average amortization period of the definite-lived intangible assets acquired in connection with the Company's fiscal 2021, 2020 and 2019 acquisitions (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Customer relationships
|
12
|
|
10
|
|
11
|
Intellectual property
|
13
|
|
11
|
|
15
|
The allocation of the total consideration for the fiscal 2021 acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The allocation of the total consideration for the fiscal 2020
acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is final and inclusive of any measurement period adjustments made during fiscal 2021, which were immaterial. The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of the businesses acquired and the value of their assembled workforces that do not qualify for separate recognition, which, in the case of RH Labs, Ridge, Bechdon and Camtronics benefit both the Company and the noncontrolling interest holders. The fair value of the noncontrolling interests in RH Labs, Ridge, Bechdon and Camtronics was determined based on the consideration paid by the Company for its controlling ownership interest adjusted for a lack of control that a market participant would consider when estimating the fair value of the noncontrolling interest.
The operating results of the fiscal 2021, 2020, and 2019 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The amount of net sales and earnings of the fiscal 2021, 2020, and 2019 acquisitions included in the Consolidated Statement of Operations for the respectful fiscal year is not material. Had the fiscal 2021, 2020, and 2019 acquisitions occurred as of the beginning of the respective prior fiscal year, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for fiscal 2021 and 2020, fiscal 2020 and 2019, and fiscal 2019, respectively, would not have been materially different than the reported amounts.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Accounts receivable
|
|
$255,793
|
|
|
$223,171
|
|
Less: Allowance for doubtful accounts
|
|
(10,874)
|
|
|
(12,738)
|
|
Accounts receivable, net
|
|
$244,919
|
|
|
$210,433
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Finished products
|
|
$238,867
|
|
|
$235,501
|
|
Work in process
|
|
44,887
|
|
|
37,957
|
|
Materials, parts, assemblies and supplies
|
|
194,296
|
|
|
189,747
|
|
Inventories, net of valuation reserves
|
|
$478,050
|
|
|
$463,205
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Land
|
|
$11,363
|
|
|
$6,678
|
|
Buildings and improvements
|
|
134,150
|
|
|
120,769
|
|
Machinery, equipment and tooling
|
|
297,297
|
|
|
265,408
|
|
Construction in progress
|
|
7,784
|
|
|
8,487
|
|
|
|
450,594
|
|
|
401,342
|
|
Less: Accumulated depreciation and amortization
|
|
(256,956)
|
|
|
(232,494)
|
|
Property, plant and equipment, net
|
|
$193,638
|
|
|
$168,848
|
|
The amounts set forth above include tooling costs having a net book value of $6.8 million and $8.3 million as of October 31, 2021 and 2020, respectively. Amortization expense on capitalized tooling was $2.8 million, $3.2 million and $3.1 million in fiscal 2021, 2020 and 2019, respectively.
Depreciation and amortization expense, exclusive of tooling, on property, plant and equipment was $27.8 million, $27.1 million and $25.8 million in fiscal 2021, 2020 and 2019, respectively.
Accrued Expenses and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Accrued employee compensation and related payroll taxes
|
|
$121,200
|
|
|
$83,055
|
|
Contract liabilities
|
|
32,738
|
|
|
25,631
|
|
Accrued customer rebates and credits
|
|
13,237
|
|
|
15,813
|
|
Current operating lease liabilities
|
|
13,874
|
|
|
14,180
|
|
Other
|
|
25,808
|
|
|
23,553
|
|
Accrued expenses and other current liabilities
|
|
$206,857
|
|
|
$162,232
|
|
The increase in accrued employee compensation and related payroll taxes principally reflects a lower level of accrued performance-based compensation expense in fiscal 2020 resulting from lower consolidated operating results mainly attributable to the Pandemic. The total customer rebates and credits deducted within net sales in fiscal 2021, 2020 and 2019 was $3.3 million, $4.6 million and $9.0 million, respectively.
Other Long-Term Assets and Liabilities
The Company provides eligible employees, officers and directors of the Company the opportunity to voluntarily defer base salary, bonus payments, commissions, long-term incentive awards and directors fees, as applicable, on a pre-tax basis through the HEICO Corporation Leadership Compensation Plan (“LCP”), a nonqualified deferred compensation plan that
conforms to Section 409A of the Internal Revenue Code. The Company matches 50% of the first 6% of base salary deferred by each participant. Director fees that would otherwise be payable in Company common stock may be deferred into the LCP, and, when distributable, are distributed in actual shares of Company common stock. The deferred compensation obligation associated with Company common stock is recorded as a component of shareholders’ equity at cost and subsequent changes in fair value are not reflected in operations or shareholders’ equity of the Company. Further, while the Company has no obligation to do so, the LCP also provides the Company the opportunity to make discretionary contributions. The Company’s matching contributions and any discretionary contributions are subject to vesting and forfeiture provisions set forth in the LCP. Company contributions to the LCP charged to income in fiscal 2021, 2020 and 2019 totaled $7.1 million, $4.7 million and $6.1 million, respectively. The aggregate liabilities of the LCP were $244.3 million and $178.3 million as of October 31, 2021 and 2020, respectively, and are classified within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets. The assets of the LCP, totaling $245.6 million and $180.1 million as of October 31, 2021 and 2020, respectively, are classified within other assets in the Company's Consolidated Balance Sheets and principally represent cash surrender values of life insurance policies that are held within an irrevocable trust that may be used to satisfy the obligations of the LCP. Additional information regarding the assets of the LCP may be found in Note 8, Fair Value Measurements.
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
R&D expenses
|
$68,877
|
|
|
$65,559
|
|
|
$66,630
|
|
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss during fiscal 2021 and 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Defined Benefit Pension Plan
|
|
Accumulated
Other Comprehensive
Loss
|
Balances as of October 31, 2019
|
($14,989)
|
|
|
($1,750)
|
|
|
($16,739)
|
|
Unrealized gain (loss)
|
8,529
|
|
|
(1,012)
|
|
|
7,517
|
|
Amortization of unrealized loss
|
—
|
|
|
73
|
|
|
73
|
|
Balances as of October 31, 2020
|
(6,460)
|
|
|
(2,689)
|
|
|
(9,149)
|
|
Unrealized (loss) gain
|
(529)
|
|
|
991
|
|
|
462
|
|
Amortization of unrealized loss
|
—
|
|
|
135
|
|
|
135
|
|
Balances as of October 31, 2021
|
($6,989)
|
|
|
($1,563)
|
|
|
($8,552)
|
|
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment during fiscal 2021 and 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
Consolidated
|
|
FSG
|
|
ETG
|
|
Totals
|
Balances as of October 31, 2019
|
$410,044
|
|
|
$858,659
|
|
|
$1,268,703
|
|
Goodwill acquired
|
14,979
|
|
|
99,401
|
|
|
114,380
|
|
Foreign currency translation adjustments
|
2,542
|
|
|
2,076
|
|
|
4,618
|
|
Deconsolidation of subsidiary
|
—
|
|
|
(4,249)
|
|
|
(4,249)
|
|
Adjustments to goodwill
|
—
|
|
|
(285)
|
|
|
(285)
|
|
Balances as of October 31, 2020
|
427,565
|
|
|
955,602
|
|
|
1,383,167
|
|
Goodwill acquired
|
40,308
|
|
|
26,142
|
|
|
66,450
|
|
Foreign currency translation adjustments
|
227
|
|
|
540
|
|
|
767
|
|
Adjustments to goodwill
|
188
|
|
|
(177)
|
|
|
11
|
|
Balances as of October 31, 2021
|
$468,288
|
|
|
$982,107
|
|
|
$1,450,395
|
|
The goodwill acquired during fiscal 2021 and 2020 pertains to the acquisitions consummated in those respective years as described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Consolidated Statements of Comprehensive Income. Deconsolidation of subsidiary reflects the value of goodwill associated with an entity that the Company previously consolidated but subsequently contributed the net assets of the former entity to a new entity in which the Company holds a noncontrolling interest and accounts for under the equity method (See Note 2, Acquisitions, for additional information). The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2020 and 2019 acquisitions. The Company estimates that $61 million and $46 million of the goodwill acquired in fiscal 2021 and 2020, respectively, will be deductible for income tax purposes. Based on the annual test for goodwill impairment as of October 31, 2021, the Company determined there is no impairment of its goodwill and the fair value of each of the Company’s reporting units significantly exceeded their carrying value.
Identifiable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2021
|
|
As of October 31, 2020
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortizing Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$464,506
|
|
|
($221,098)
|
|
|
$243,408
|
|
|
$443,143
|
|
|
($188,919)
|
|
|
$254,224
|
|
Intellectual property
|
255,011
|
|
|
(94,313)
|
|
|
160,698
|
|
|
240,725
|
|
|
(84,686)
|
|
|
156,039
|
|
Licenses
|
6,559
|
|
|
(5,072)
|
|
|
1,487
|
|
|
6,559
|
|
|
(4,670)
|
|
|
1,889
|
|
Patents
|
1,110
|
|
|
(793)
|
|
|
317
|
|
|
1,071
|
|
|
(746)
|
|
|
325
|
|
Non-compete agreements
|
722
|
|
|
(722)
|
|
|
—
|
|
|
811
|
|
|
(811)
|
|
|
—
|
|
Trade names
|
450
|
|
|
(257)
|
|
|
193
|
|
|
450
|
|
|
(219)
|
|
|
231
|
|
|
728,358
|
|
|
(322,255)
|
|
|
406,103
|
|
|
692,759
|
|
|
(280,051)
|
|
|
412,708
|
|
Non-Amortizing Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
176,204
|
|
|
—
|
|
|
176,204
|
|
|
166,333
|
|
|
—
|
|
|
166,333
|
|
|
$904,562
|
|
|
($322,255)
|
|
|
$582,307
|
|
|
$859,092
|
|
|
($280,051)
|
|
|
$579,041
|
|
The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of October 31, 2021 compared to October 31, 2020 principally relates to such intangible assets recognized in connection with the fiscal 2021 acquisitions (see Note 2, Acquisitions).
Amortization expense related to intangible assets was $61.3 million, $57.4 million and $53.7 million in fiscal 2021, 2020 and 2019, respectively. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $58.1 million in fiscal 2022, $52.4 million in fiscal 2023, $47.4 million in fiscal 2024, $42.9 million in fiscal 2025, $38.5 million in fiscal 2026 and $166.8 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
2021
|
|
2020
|
Borrowings under revolving credit facility
|
$225,000
|
|
|
$730,000
|
|
Finance leases and note payable (1)
|
11,498
|
|
|
9,831
|
|
|
236,498
|
|
|
739,831
|
|
Less: Current maturities of long-term debt
|
(1,515)
|
|
|
(1,045)
|
|
|
$234,983
|
|
|
$738,786
|
|
|
|
|
|
|
(1) See Note 9, Leases, for additional information regarding the Company's finance leases.
The Company's borrowings under its revolving credit facility mature in fiscal 2024. As of October 31, 2021 and 2020, the weighted average interest rate on borrowings under the
Company's revolving credit facility was 1.1% and 1.3%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of October 31, 2021, the Company was in compliance with all such covenants.
Revolving Credit Facility
In November 2017, the Company 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, the Company 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 the Company 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 the Company’s election of the Base Rate or the Eurocurrency Rate, 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) 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 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.
6. REVENUE
Contract Balances
Contract assets (unbilled receivables) represent revenue recognized on contracts using an over-time recognition model in excess of amounts invoiced to the customer. Contract liabilities (deferred revenue) represent customer advances and billings in excess of revenue recognized and are included within accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheet.
Changes in the Company’s contract assets and liabilities during fiscal 2021 and 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
October 31, 2020
|
|
Change
|
Contract assets
|
$80,073
|
|
|
$60,429
|
|
|
$19,644
|
|
Contract liabilities
|
32,738
|
|
|
25,631
|
|
|
7,107
|
|
Net contract assets
|
$47,335
|
|
|
$34,798
|
|
|
$12,537
|
|
The increase in the Company's contract assets during fiscal 2021 principally reflects the contract assets of certain businesses acquired during fiscal 2021. The increase in the Company's contract liabilities during fiscal 2021 principally reflects the receipt of customer deposits on certain long-term customer contracts as well as the contract liabilities of certain businesses acquired during fiscal 2021.
The amount of revenue that the Company recognized during fiscal 2021 that was included in contract liabilities as of the beginning of fiscal 2021 was $20.7 million.
Remaining Performance Obligations
As of October 31, 2021, the Company had $461.0 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG as well as certain products of the FSG's specialty products and aftermarket replacement parts product lines. The Company will recognize net sales as these obligations are satisfied. The Company expects to recognize $344.7 million of this amount during fiscal 2022 and $116.3 million thereafter, of which the majority is expected to occur in fiscal 2023.
Disaggregation of Revenue
The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Flight Support Group:
|
|
|
|
|
|
Aftermarket replacement parts (1)
|
$535,217
|
|
|
$525,636
|
|
|
$678,001
|
|
Repair and overhaul parts and services (2)
|
208,215
|
|
|
193,164
|
|
|
299,323
|
|
Specialty products (3)
|
183,657
|
|
|
206,012
|
|
|
262,859
|
|
Total net sales
|
927,089
|
|
|
924,812
|
|
|
1,240,183
|
|
|
|
|
|
|
|
Electronic Technologies Group:
|
|
|
|
|
|
Electronic component parts primarily for
defense, space and aerospace equipment (4)
|
709,621
|
|
|
679,901
|
|
|
633,685
|
|
Electronic component parts for equipment
in various other industries (5)
|
249,549
|
|
|
195,086
|
|
|
200,837
|
|
Total net sales
|
959,170
|
|
|
874,987
|
|
|
834,522
|
|
|
|
|
|
|
|
Intersegment sales
|
(20,577)
|
|
|
(12,790)
|
|
|
(19,058)
|
|
|
|
|
|
|
|
Total consolidated net sales
|
$1,865,682
|
|
|
$1,787,009
|
|
|
$2,055,647
|
|
|
|
|
|
|
|
(1) Includes various jet engine and aircraft component replacement parts.
(2) Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(3) Includes primarily the sale of specialty components such as thermal insulation blankets, renewable/reusable insulation systems, advanced niche components, complex composite assemblies, and expanded foil mesh as well as machining, brazing, fabricating and welding services generally to original equipment manufacturers.
(4) Includes various component parts such as electro-optical infrared simulation and test equipment, electro-optical laser products, electro-optical, microwave and other power equipment, high-speed interface products, power conversion products, underwater locator beacons, emergency locator transmission beacons, traveling wave tube amplifiers, microwave power modules, a wide variety of memory products and radio frequency (RF) and microwave products, crashworthy and ballistically self-sealing auxiliary fuel systems, high performance communications and electronic intercept receivers and tuners, high performance active antenna systems and technical surveillance countermeasures (TSCM) equipment.
(5) Includes various component parts such as electromagnetic and radio frequency interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies, silicone material for a variety of demanding applications and rugged small form-factor embedded computing solutions.
The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Flight Support Group:
|
|
|
|
|
|
Aerospace
|
$660,867
|
|
|
$669,194
|
|
|
$1,004,088
|
|
Defense and Space
|
224,236
|
|
|
213,273
|
|
|
190,076
|
|
Other (1)
|
41,986
|
|
|
42,345
|
|
|
46,019
|
|
Total net sales
|
927,089
|
|
|
924,812
|
|
|
1,240,183
|
|
|
|
|
|
|
|
Electronic Technologies Group:
|
|
|
|
|
|
Defense and Space
|
599,570
|
|
|
577,581
|
|
|
531,029
|
|
Other (2)
|
284,834
|
|
|
225,749
|
|
|
217,889
|
|
Aerospace
|
74,766
|
|
|
71,657
|
|
|
85,604
|
|
Total net sales
|
959,170
|
|
|
874,987
|
|
|
834,522
|
|
|
|
|
|
|
|
Intersegment sales
|
(20,577)
|
|
|
(12,790)
|
|
|
(19,058)
|
|
|
|
|
|
|
|
Total consolidated net sales
|
$1,865,682
|
|
|
$1,787,009
|
|
|
$2,055,647
|
|
|
|
|
|
|
|
(1) Principally industrial products.
(2) Principally other electronics and medical products.
7. INCOME TAXES
The components of income before income taxes and noncontrolling interests are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Domestic
|
$345,733
|
|
|
$327,754
|
|
|
$386,584
|
|
Foreign
|
41,325
|
|
|
37,101
|
|
|
51,257
|
|
Income before taxes and noncontrolling interests
|
$387,058
|
|
|
$364,855
|
|
|
$437,841
|
|
The components of the provision for income taxes on income before income taxes and noncontrolling interests are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Current:
|
|
|
|
|
|
Federal
|
$47,839
|
|
|
$17,730
|
|
|
$56,670
|
|
State
|
11,639
|
|
|
4,167
|
|
|
12,795
|
|
Foreign
|
13,457
|
|
|
13,101
|
|
|
15,027
|
|
|
72,935
|
|
|
34,998
|
|
|
84,492
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(10,097)
|
|
|
(3,364)
|
|
|
(3,140)
|
|
State
|
(3,251)
|
|
|
(55)
|
|
|
(1,263)
|
|
Foreign
|
(2,287)
|
|
|
(2,579)
|
|
|
(1,989)
|
|
|
(15,635)
|
|
|
(5,998)
|
|
|
(6,392)
|
|
Total income tax expense
|
$57,300
|
|
|
$29,000
|
|
|
$78,100
|
|
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State taxes, net of federal income tax benefit
|
2.9
|
%
|
|
3.7
|
%
|
|
3.0
|
%
|
Tax benefit related to stock option exercises
|
(3.7
|
%)
|
|
(13.3
|
%)
|
|
(3.8
|
%)
|
Tax-exempt gains on corporate-owned life insurance policies
|
(2.9
|
%)
|
|
(0.7
|
%)
|
|
(0.6
|
%)
|
Research and development tax credits
|
(2.5
|
%)
|
|
(2.4
|
%)
|
|
(1.7
|
%)
|
Foreign derived intangible income deduction
|
(1.9
|
%)
|
|
(1.6
|
%)
|
|
(1.4
|
%)
|
Nondeductible compensation
|
1.2
|
%
|
|
.4
|
%
|
|
.8
|
%
|
Other, net
|
.7
|
%
|
|
.8
|
%
|
|
.5
|
%
|
Effective tax rate
|
14.8
|
%
|
|
7.9
|
%
|
|
17.8
|
%
|
The Company's effective tax rate in fiscal 2021 was 14.8%, as compared to 7.9% in fiscal 2020. The Company 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, the 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 LCP.
The Company's effective tax rate in fiscal 2020 was 7.9%, as compared to 17.8% in fiscal 2019. The decrease in the Company's effective tax rate in fiscal 2020 is mainly attributable to a $31.8 million larger tax benefit recognized in fiscal 2020 from stock option exercises compared to fiscal 2019 as a result of more stock options exercised and the strong appreciation in HEICO's stock price during the optionees' holding periods.
The Company files income tax returns in the U.S. federal jurisdiction and in multiple state jurisdictions. The Company is also subject to income taxes in certain jurisdictions outside the U.S., none of which are individually material to the accompanying consolidated financial statements. Generally, the Company is no longer subject to U.S. federal, state or foreign examinations by tax authorities for years prior to fiscal 2017. One of the Company's foreign subsidiaries files income tax returns in The Netherlands and Thailand where the statute of limitations is open for its fiscal 2015 returns.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than not that it will generate sufficient future taxable income to utilize all of its deferred tax assets and has therefore not recorded a valuation allowance on any such asset.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
2021
|
|
2020
|
Deferred tax assets:
|
|
|
|
Deferred compensation plan liability
|
$54,726
|
|
|
$41,744
|
|
Inventories
|
41,354
|
|
|
36,414
|
|
Operating lease liabilities
|
16,483
|
|
|
12,980
|
|
Share-based compensation
|
8,759
|
|
|
8,746
|
|
Performance-based compensation accrual
|
4,615
|
|
|
2,539
|
|
Allowance for doubtful accounts receivable
|
2,532
|
|
|
2,966
|
|
Deferred payroll taxes
|
2,372
|
|
|
1,754
|
|
Customer rebates accrual
|
2,236
|
|
|
2,667
|
|
Vacation accrual
|
1,910
|
|
|
1,840
|
|
Other
|
9,102
|
|
|
8,952
|
|
Total deferred tax assets
|
144,089
|
|
|
120,602
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Goodwill and other intangible assets
|
(145,024)
|
|
|
(141,152)
|
|
Property, plant and equipment
|
(19,580)
|
|
|
(16,130)
|
|
Operating lease right-of-use assets
|
(15,941)
|
|
|
(12,327)
|
|
Adoption of ASC 606 (revenue recognition)
|
(2,677)
|
|
|
(4,733)
|
|
Other
|
(1,628)
|
|
|
(1,918)
|
|
Total deferred tax liabilities
|
(184,850)
|
|
|
(176,260)
|
|
Net deferred tax liability
|
($40,761)
|
|
|
($55,658)
|
|
As of October 31, 2021 and 2020, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $4.1 million and $2.9 million, respectively, of which $3.2 million and $2.3 million, respectively, would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits during fiscal 2021 and 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
Balances as of beginning of year
|
$2,946
|
|
|
$2,670
|
|
Increases related to current year tax positions
|
710
|
|
|
489
|
|
Increases related to prior year tax positions
|
839
|
|
|
32
|
|
Decreases related to prior year tax positions
|
—
|
|
|
(18)
|
|
Lapses of statutes of limitations
|
(423)
|
|
|
(227)
|
|
Balances as of end of year
|
$4,072
|
|
|
$2,946
|
|
8. FAIR VALUE MEASUREMENTS
The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2021
|
|
|
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation plan:
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance
|
|
$—
|
|
|
$245,580
|
|
|
$—
|
|
|
$245,580
|
|
Money market funds
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Total assets
|
|
$4
|
|
|
$245,580
|
|
|
$—
|
|
|
$245,584
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$—
|
|
|
$—
|
|
|
$62,286
|
|
|
$62,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
|
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation plan:
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance
|
|
$—
|
|
|
$180,128
|
|
|
$—
|
|
|
$180,128
|
|
Money market funds
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total assets
|
|
$11
|
|
|
$180,128
|
|
|
$—
|
|
|
$180,139
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$—
|
|
|
$—
|
|
|
$41,974
|
|
|
$41,974
|
|
The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company, and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Consolidated Balance Sheets.
As part of the agreement to acquire 89% of the equity interests of a subsidiary by the FSG in fiscal 2021, the Company may be obligated to pay contingent consideration of
$8.9 million as early as in fiscal 2024 should the acquired entity meet a certain earnings objective during the three-year period following the acquisition. Additionally, the Company may be obligated to pay contingent consideration of up to $17.8 million as early as in fiscal 2026 should the acquired entity meet a certain earnings objective during the three-year period following the second anniversary of the acquisition. As of October 31, 2021, the estimated fair value of the contingent consideration was $18.3 million.
As part of the agreement to acquire 89.99% of the equity interests of a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to CAD $27.0 million, or $21.8 million, in fiscal 2025 should the acquired entity meet certain earnings objectives during fiscal 2023 and 2024. However, should the acquired entity achieve a certain earnings objective over any two consecutive fiscal years beginning in fiscal 2021 and ending in fiscal 2023, half of the contingent consideration obligation, or CAD $13.5 million, would be payable in the following year. As of October 31, 2021, the estimated fair value of the contingent consideration was CAD $14.9 million, or $12.0 million.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to $35.0 million in fiscal 2025 based on the earnings of the acquired entity during calendar years 2023 and 2024 provided the entity meets certain earnings objectives during each of calendar years 2021 to 2024. As of October 31, 2021, the estimated fair value of the contingent consideration was $13.3 million. The obligation to pay any contingent consideration would be payable by a consolidated subsidiary of HEICO that is 75% owned by HEICO Electronic.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet a certain earnings objective during the first six years following the acquisition. As of October 31, 2021, the estimated fair value of the contingent consideration was $18.6 million.
The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were determined using probability-based scenario analyses. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of HEICO. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's consolidated statements of operations.
The following unobservable inputs were used to derive the estimated fair value of the Company's Level 3 contingent consideration liabilities as of October 31, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
Acquisition Date
|
|
Fair Value
|
|
Unobservable Input
|
|
Range
|
|
Average (1)
|
8-4-2021
|
|
$18,324
|
|
Compound annual revenue growth rate
|
|
0% - 9%
|
|
7%
|
|
|
|
|
Discount rate
|
|
5.0% - 5.2%
|
|
5.1%
|
|
|
|
|
|
|
|
|
|
8-18-2020
|
|
11,995
|
|
Compound annual revenue growth rate
|
|
6% - 17%
|
|
11%
|
|
|
|
|
Discount rate
|
|
4.3% - 5.0%
|
|
4.5%
|
|
|
|
|
|
|
|
|
|
8-11-2020
|
|
13,335
|
|
Compound annual revenue growth rate
|
|
2% - 16%
|
|
10%
|
|
|
|
|
Discount rate
|
|
5.0% - 5.0%
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
9-15-2017
|
|
18,632
|
|
Compound annual revenue growth rate
|
|
(3%) - 7%
|
|
4%
|
|
|
|
|
Discount rate
|
|
3.7% - 3.7%
|
|
3.7%
|
|
|
|
|
|
|
|
|
|
(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability.
Changes in the Company’s contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) during fiscal 2021 and 2020 are as follows (in thousands):
|
|
|
|
|
|
|
Liabilities
|
Balance as of October 31, 2019
|
$18,326
|
|
Contingent consideration related to acquisitions
|
23,719
|
|
Increase in accrued contingent consideration, net
|
515
|
|
Payment of contingent consideration
|
(500)
|
|
Foreign currency transaction adjustments
|
(86)
|
|
Balance as of October 31, 2020
|
41,974
|
|
Contingent consideration related to acquisitions
|
18,334
|
|
Increase in accrued contingent consideration, net
|
1,246
|
|
Foreign currency transaction adjustments
|
732
|
|
Balance as of October 31, 2021
|
$62,286
|
|
The Company's contingent consideration liabilities as of October 31, 2021 are included in other long-term liabilities in its Consolidated Balance Sheet and the Company records changes in accrued contingent consideration and foreign currency transaction adjustments within SG&A expenses in its Consolidated Statements of Operations.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of October 31, 2021 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
9. LEASES
HEICO’s lease ROU assets represent its right to use an underlying asset during the lease term and its lease liabilities represent the Company’s obligation to make lease payments arising from the lease. HEICO’s operating lease ROU assets are included within other assets and its operating lease liabilities are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheet. HEICO's finance lease ROU assets are included within property, plant and equipment, net and its finance lease liabilities are included within long-term debt, net of current maturities and current maturities of long-term debt within the Company's Consolidated Balance Sheet. The following table presents the Company’s lease ROU assets and lease liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
As of October 31,
|
|
Finance Leases
As of October 31,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
$74,609
|
|
|
$57,103
|
|
|
$12,250
|
|
|
$10,512
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
$13,874
|
|
|
$14,180
|
|
|
$1,481
|
|
|
$1,034
|
|
Long-term lease liabilities
|
61,829
|
|
|
44,114
|
|
|
9,764
|
|
|
8,533
|
|
Total lease liabilities
|
$75,703
|
|
|
$58,294
|
|
|
$11,245
|
|
|
$9,567
|
|
The Company’s operating lease expenses are recorded within cost of sales and/or SG&A expenses in the Company’s Consolidated Statements of Operations. The Company's finance lease expenses consist of amortization of ROU assets and interest on lease liabilities, which are included within cost of sales and/or SG&A expenses, and interest expense, respectively, in the Company's Consolidated Statements of Operations. Further, interest expense on finance leases is recognized using the effective interest method based on the discount rate determined at lease commencement. The following table presents the components of lease expense for fiscal 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
|
2021
|
|
2020
|
Operating Leases:
|
|
|
|
|
Operating lease expense
|
|
$18,103
|
|
|
$17,317
|
|
Variable lease expense
|
|
3,165
|
|
|
3,225
|
|
Total operating lease expense (1)
|
|
$21,268
|
|
|
$20,542
|
|
|
|
|
|
|
Finance Leases:
|
|
|
|
|
Amortization on finance lease ROU assets
|
|
$1,110
|
|
|
$874
|
|
Interest on finance lease liabilities
|
|
453
|
|
|
416
|
|
Variable lease expense
|
|
750
|
|
|
—
|
|
Total finance lease expense
|
|
$2,313
|
|
|
$1,290
|
|
|
|
|
|
|
(1) Excludes short-term lease expense, which is not material.
The following table presents a maturity analysis of the Company's lease liabilities as of October 31, 2021 for the next five fiscal years and thereafter (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
Year ending October 31,
|
|
|
|
2022
|
$16,853
|
|
|
$1,956
|
|
2023
|
12,729
|
|
|
1,629
|
|
2024
|
9,785
|
|
|
1,521
|
|
2025
|
8,662
|
|
|
1,458
|
|
2026
|
7,153
|
|
|
1,440
|
|
Thereafter
|
39,113
|
|
|
5,806
|
|
Total minimum lease payments
|
94,295
|
|
|
13,810
|
|
Less: imputed interest
|
(18,592)
|
|
|
(2,565)
|
|
Present value of minimum lease payments
|
$75,703
|
|
|
$11,245
|
|
The Company does not have any material leases that have been signed but have yet to commence as of October 31, 2021.
The following table presents the weighted average remaining lease term and discount rate of the Company’s leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
As of October 31,
|
|
Finance Leases
As of October 31,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
9.1
|
|
7.0
|
|
9.2
|
|
10.8
|
Weighted average discount rate
|
4.7
|
%
|
|
5.1
|
%
|
|
4.6
|
%
|
|
4.5
|
%
|
The following table presents supplemental disclosures of cash flow information associated with the Company's leases for fiscal 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
As of October 31,
|
|
Finance Leases
As of October 31,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
Operating cash flows
|
$17,999
|
|
|
$16,965
|
|
|
$453
|
|
|
$416
|
|
Financing cash flows
|
—
|
|
|
—
|
|
|
1,187
|
|
|
921
|
|
Right-of-use assets obtained in exchange for new lease liabilities, net of terminations
|
31,351
|
|
|
8,648
|
|
|
2,861
|
|
|
1,808
|
|
Prior to the adoption of ASC 842, total rent expense charged to operations for operating leases in fiscal 2019 amounted to $20.0 million.
10. SHAREHOLDERS’ EQUITY
Common Stock and Class A Common Stock
The Company has two classes of common stock that are virtually identical in all economic respects except voting rights. Each share of Common Stock is entitled to one vote per share. Each share of Class A Common Stock is entitled to a 1/10 vote per share. Holders of the Company’s common stock are entitled to receive dividends and other distributions payable in cash, property, stock or otherwise, when and if declared by the Board of Directors. In the event of liquidation, after payment of debts and other liabilities of the Company, the remaining assets of the Company will be distributable ratably among the holders of both classes of common stock.
Share Repurchases
In 1990, the Company's Board of Directors authorized a share repurchase program, which allows the Company to repurchase shares of Company common stock in the open market or in privately negotiated transactions at the Company's discretion, subject to certain restrictions included in the Company's revolving credit agreement. As of October 31, 2021, the maximum number of shares that may yet be purchased under this program was 4,886,353 of either or both of the Company's Class A Common Stock and the Company's Common Stock. The repurchase program does not have a fixed termination date. During fiscal 2021, 2020 and 2019, the Company did not repurchase any shares of Company common stock under this program.
During fiscal 2021, the Company repurchased an aggregate 32,355 shares of Class A Common Stock at a total cost of $3.8 million. During fiscal 2020, the Company repurchased an aggregate 127,851 shares of Class A Common Stock at a total cost of $12.1 million. During fiscal 2019, the Company repurchased an aggregate 476,586 shares and 111,730 shares of
Common Stock and Class A Common Stock, respectively, at a total cost of $53.1 million and $10.9 million, respectively. The shares repurchased represent shares tendered as payments to satisfy employee withholding taxes due upon exercises of stock option awards. The shares repurchased in fiscal 2021, 2020 and 2019 did not impact the number of shares authorized for future purchase under the Company’s share repurchase program and are reflected as redemptions of common stock related to stock option exercises in the Company's Consolidated Statements of Shareholders' Equity and Consolidated Statements of Cash Flows.
Noncontrolling Interests
Consistent with the Company’s past practice of increasing its ownership in certain non-wholly owned subsidiaries, on June 28, 2019, HEICO Aerospace paid dividends to HEICO and Lufthansa Technik AG (“LHT”) in proportion to their ownership interest in HEICO Aerospace of 80% and 20%, respectively (the “Transaction”). LHT received a cash dividend of $91.5 million that was funded principally using proceeds from the Company’s revolving credit facility. HEICO effectively received as its dividend the 20% noncontrolling interest held by LHT in eight of the Company’s existing subsidiaries within its HEICO Aerospace subsidiary that are principally part of the FSG’s repair and overhaul parts and services product line. HEICO did not record any gain or loss in connection with the Transaction. Immediately following the Transaction, HEICO transferred the eight businesses to HFSC, a wholly owned subsidiary of HEICO. LHT remains a 20% owner in HEICO Aerospace, a designer and manufacturer of jet engine and aircraft component replacement parts.