HEICO CORPORATION

HEI
Delayed Quote. Delayed  - 08/05 04:10:00 pm
100.08USD +2.56%

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

12/19/2019 | 04:39pm

Overview



Our business is comprised of two operating segments, the Flight Support Group
("FSG") and the Electronic Technologies Group ("ETG").



The Flight Support Group consists of HEICO Aerospace Holdings Corp. ("HEICO
Aerospace
"), which is 80% owned, and HEICO Flight Support Corp., which is wholly
owned, and their collective subsidiaries, which primarily:



• Designs, Manufactures, Repairs, Overhauls and Distributes Jet Engine and



Aircraft Component Replacement Parts. The Flight Support Group designs,



manufactures, repairs, overhauls and distributes jet engine and aircraft



component replacement parts. The parts and services are approved by the



Federal Aviation Administration ("FAA"). The Flight Support Group also



manufactures and sells specialty parts as a subcontractor for aerospace and



industrial original equipment manufacturers and the United States ("U.S.")



government. Additionally, the Flight Support Group is a leading supplier,



distributor, and integrator of military aircraft parts and support services



primarily to foreign military organizations allied with the U.S. and a



leading manufacturer of advanced niche components and complex composite



assemblies for commercial aviation, defense and space applications. Further,



the Flight Support Group 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 and is a distributor of aviation electrical
interconnect products and electromechanical parts.




The Electronic Technologies Group consists of HEICO Electronic Technologies
Corp.
("HEICO Electronic") and its subsidiaries, which primarily:



• Designs and Manufactures Electronic, Microwave and Electro-Optical



Equipment, High-Speed Interface Products, High Voltage Interconnection



Devices and High Voltage Advanced Power Electronics. The Electronic



Technologies Group collectively designs, manufactures and sells various



types of electronic, data and microwave, and electro-optical products,



including power supplies, laser rangefinder receivers, infrared simulation,



calibration and testing equipment; power conversion products serving the



high-reliability military, space and commercial avionics end-markets;



underwater locator beacons used to locate data and voice recorders utilized



on aircraft and marine vessels; emergency locator beacons utilized on



commercial and military aircraft; electromagnetic interference shielding for



commercial and military aircraft operators, electronics companies and
telecommunication equipment suppliers; traveling wave tube amplifiers and
microwave power modules used in radar, electronic warfare and on-board
jamming and countermeasure systems; advanced high-technology interface



products that link devices such as telemetry receivers, digital cameras,



high resolution scanners, simulation systems




31



--------------------------------------------------------------------------------



Index




and test systems to computers; high voltage energy generators, high voltage
interconnection devices, cable assemblies and wire for the medical equipment,
defense and other industrial markets; high voltage power supplies found in
satellite communications, CT scanners and in medical and industrial x-ray
systems; three-dimensional microelectronic and stacked memory products that are
principally integrated into larger subsystems equipping satellites and
spacecraft; harsh environment connectivity products and custom molded cable
assemblies; radio frequency ("RF") and microwave amplifiers, transmitters and
receivers used to support military communications on unmanned aerial systems,
other aircraft, helicopters and ground-based data/communications systems;
communications and electronic intercept receivers and tuners for military and
intelligence applications; wireless cabin control systems, solid state power
distribution and management systems and fuel level sensing systems for business
jets and for general aviation, as well as for the military/defense market;
microwave modules, units and integrated sub-systems for commercial and military
satellites; crashworthy and ballistically self-sealing auxiliary fuel systems
for military rotorcraft; nuclear radiation detectors for law enforcement,
homeland security and military applications; high performance active antenna
systems for commercial aircraft, precision guided munitions, other defense
applications and commercial uses; silicone material for a variety of demanding
applications; precision power analog monolithic, hybrid and open frame
components for a certain wide range of defense, industrial and medical
applications; high-reliability ceramic-to-metal feedthroughs and connectors used
in the industrial and medical markets; technical surveillance countermeasures
equipment to detect devices used for espionage and information theft; and RF
sources, detectors, and controllers for a certain wide range of aerospace and
defense applications.


Our results of operations 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 2019 to fiscal 2018. A
similar discussion and analysis that compares fiscal 2018 to fiscal 2017 may be
found in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," of our Form 10-K for the fiscal year ended October
31, 2018
.



32



--------------------------------------------------------------------------------



Index



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,
2019 2018
Net sales $2,055,647 $1,777,721
Cost of sales 1,241,807 1,087,006
Selling, general and administrative expenses 356,743


314,470



Total operating costs and expenses 1,598,550 1,401,476
Operating income $457,097 $376,245

Net sales by segment:
Flight Support Group $1,240,183 $1,097,937
Electronic Technologies Group 834,522 701,827
Intersegment sales (19,058 ) (22,043 )
$2,055,647 $1,777,721

Operating income by segment:
Flight Support Group $242,029 $206,623
Electronic Technologies Group 245,743 204,508
Other, primarily corporate (30,675 ) (34,886 )
$457,097 $376,245

Net sales 100.0 % 100.0 %
Gross profit 39.6 % 38.9 %
Selling, general and administrative expenses 17.4 % 17.7 %
Operating income 22.2 % 21.2 %
Interest expense 1.1 % 1.1 %
Other income (expense) .1 % - %
Income tax expense 3.8 % 4.0 %
Net income attributable to noncontrolling interests 1.5 % 1.5 %
Net income attributable to HEICO 16.0 % 14.6 %




33



--------------------------------------------------------------------------------



Index



Comparison of Fiscal 2019 to Fiscal 2018



Net Sales




Our consolidated net sales in fiscal 2019 increased by 16% to a record $2,055.6
million
, up from net sales of $1,777.7 million in fiscal 2018. The increase in
consolidated net sales principally reflects an increase of $132.7 million (a 19%
increase) to a record $834.5 million in net sales within the ETG and an increase
of $142.2 million (a 13% increase) to a record $1,240.2 million in net sales
within the FSG. The net sales increase in the ETG reflects organic growth of 10%
and net sales of $66.1 million contributed by fiscal 2019 and 2018 acquisitions.
The ETG's organic growth is mainly attributable to increased demand for our
defense and aerospace products resulting in net sales increases of $60.6 million
and $14.0 million, respectively. The net sales increase in the FSG principally
reflects organic growth of 13%. The FSG's organic growth is mainly attributable
to increased demand and new product offerings within our aftermarket replacement
parts, specialty products and repair and overhaul services product lines
resulting in net sales increases of $95.4 million, $31.5 million and $10.8
million
, respectively. Sales price changes were not a significant contributing
factor to the ETG and FSG net sales growth in fiscal 2019.


Our net sales in fiscal 2019 and 2018 by market consisted of approximately 52%
and 53% from the commercial aviation industry, respectively, 35% from the
defense and space industries in both periods and and 13% and 12% from other
industrial markets including electronics, medical and telecommunications,
respectively.



Gross Profit and Operating Expenses




Our consolidated gross profit margin increased to 39.6% in fiscal 2019, up from
38.9% in fiscal 2018, principally reflecting an increase of .9% and .4% in the
ETG's and FSG's gross profit margins, respectively. The increase in the ETG's
gross profit margin is principally attributable to increased net sales and a
more favorable product mix for certain defense products. The increase in the
FSG's gross profit margin is principally attributable to the previously
mentioned higher net sales within our aftermarket replacement parts product
line. Total new product research and development expenses included within our
consolidated cost of sales were $66.6 million in fiscal 2019 compared to $57.5
million
in fiscal 2018.

Our consolidated selling, general and administrative ("SG&A") expenses were
$356.7 million and $314.5 million in fiscal 2019 and 2018, respectively. The
increase in consolidated SG&A expenses principally reflects $21.6 million
attributable to the fiscal 2019 and 2018 acquisitions, $9.1 million of higher
performance-based compensation expense and $3.8 million attributable to changes
in the estimated fair value of accrued contingent consideration.






34



--------------------------------------------------------------------------------



Index




Our consolidated SG&A expenses as a percentage of net sales decreased to 17.4%
in fiscal 2019, down from 17.7% in fiscal 2018. The decrease in consolidated
SG&A expenses as a percentage of net sales principally reflects efficiencies
realized from the net sales growth.


Operating Income




Our consolidated operating income increased by 21% to a record $457.1 million in
fiscal 2019, up from $376.2 million in fiscal 2018. The increase in consolidated
operating income principally reflects a $41.2 million increase (a 20% increase)
to a record $245.7 million in operating income of the ETG and a $35.4 million
increase (a 17% increase) to a record $242.0 million in operating income of the
FSG. The increase in operating income of the ETG and FSG is principally
attributable to the previously mentioned net sales growth and improved gross
profit margins. Further, the operating income of the ETG in fiscal 2019 reflects
$5.4 million of higher performance-based compensation expense and $2.7 million
of higher acquisition-related costs.

Our consolidated operating income as a percentage of net sales improved to 22.2%
in fiscal 2019, up from 21.2% in fiscal 2018. The increase principally reflects
an increase in the FSG's operating income as a percentage of net sales to 19.5%
in fiscal 2019, up from 18.8% in fiscal 2018 and an increase in the ETG's
operating income as a percentage of net sales to 29.4% in fiscal 2019, up from
29.1% in fiscal 2018. The increase in the FSG's and ETG's operating income as a
percentage of net sales principally reflects the previously mentioned improved
gross profit margins and efficiencies realized from the net sales growth.
Further, the ETG's operating income as a percentage of net sales in fiscal 2019
reflects a .6% increase in SG&A expenses as a percentage of net sales mainly
from the previously mentioned higher performance-based compensation expense and
higher acquisition-related costs.


Interest Expense



Interest expense increased to $21.7 million in fiscal 2019, up from $19.9
million
in fiscal 2018. The increase was principally due to higher interest
rates partially offset by a lower weighted average balance outstanding under our
revolving credit facility.




Other Income (Expense)


Other income (expense) in fiscal 2019 and 2018 was not material.



Income Tax Expense




In December 2017, the United States ("U.S.") government enacted comprehensive
tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax
Act"). The Tax Act contains significant changes to previous tax law, some of
which became immediately effective in fiscal 2018 including, among other things,
a reduction in the U.S. federal statutory tax rate from 35% to 21% effective
January 1, 2018 resulting in a blended rate of 23.3% for fiscal 2018 and the
implementation of a territorial tax system resulting in a one-time transition
tax on the unremitted earnings of our foreign subsidiaries. Certain other
provisions of the Tax Act became


35



--------------------------------------------------------------------------------



Index




effective for HEICO in fiscal 2019 including a new tax on Global Intangible
Low-Taxed Income ("GILTI"), a new deduction for Foreign-Derived Intangible
Income ("FDII"), the repeal of the domestic production activity deduction and
increased limitations on the deductibility of certain executive compensation. As
a result of the Tax Act, we remeasured our U.S. federal net deferred tax
liabilities and recorded a discrete tax benefit of $16.5 million in fiscal 2018.
Further, we recorded a provisional discrete tax expense of $4.4 million in
fiscal 2018 related to a one-time transition tax on the unremitted earnings of
our foreign subsidiaries, which we intend to pay over the eight-year period
allowed for in the Tax Act.

Our effective tax rate in fiscal 2019 decreased to 17.8% from 19.8% in fiscal
2018. The decrease in our effective tax rate in fiscal 2019 is mainly
attributable to a $14.3 million larger tax benefit in fiscal 2019 from stock
option exercises compared to fiscal 2018 and the reduction in the federal tax
rate from a blended rate of 23.3% in fiscal 2018 to 21% in fiscal 2019,
partially offset by the net impact of the previously mentioned discrete tax
amounts recorded in fiscal 2018. The provisions of the Tax Act that became
effective for us in fiscal 2019 did not have a material net effect on our
effective tax rate.

Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20%
noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace Holdings
Corp.
and the noncontrolling interests held by others in certain subsidiaries of
the FSG and ETG. Net income attributable to noncontrolling interests was $31.8
million
in fiscal 2019 as compared to $26.5 million in fiscal 2018. The increase
in net income attributable to noncontrolling interests in fiscal 2019
principally reflects improved operating results of certain subsidiaries of the
FSG and ETG in which noncontrolling interests are held.


Net Income Attributable to HEICO




Net income attributable to HEICO increased to a record $327.9 million, or $2.39
per diluted share, in fiscal 2019, up from $259.2 million, or $1.90 per diluted
share, in fiscal 2018 principally reflecting the previously mentioned increased
net sales and operating income.


Outlook




As we look ahead to fiscal 2020, we anticipate net sales growth within the FSG's
commercial aviation and defense product lines. We also expect growth within the
ETG, principally driven by demand for the majority of our products. During
fiscal 2020, 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. Overall, we are
targeting growth in fiscal 2020 full year net sales and net income over fiscal
2019 levels. This outlook excludes the impact of additional acquired businesses,
if any.



36



--------------------------------------------------------------------------------



Index



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.


Liquidity and Capital Resources



The following table summarizes our capitalization (in thousands):



As of October 31,
2019 2018
Cash and cash equivalents $57,001 $59,599


Total debt (including current portion) 561,955 532,470
Shareholders' equity


1,694,660 1,503,008


Total capitalization (debt plus equity) 2,256,615 2,035,478
Total debt to total capitalization


25% 26%



Our principal uses of cash include acquisitions, capital expenditures, cash
dividends, distributions to noncontrolling interests and working capital needs.
Capital expenditures in fiscal 2020 are anticipated to approximate $42 million.
We finance our activities primarily from our operating and financing activities,
including borrowings under our revolving credit facility.

As of December 17, 2019, we had approximately $741 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 $437.4 million in fiscal 2019 and
consisted primarily of net income from consolidated operations of $359.7
million
, depreciation and amortization expense of $83.5 million (a non-cash
item), net changes in other long-term liabilities and assets related to the
HEICO Leadership Compensation Plan ("LCP") of $12.9 million (principally
participant deferrals and employer contributions) and $10.3 million in
share-based compensation expense (a non-cash item), partially offset by a $32.3
million
increase in working capital. Net cash provided by operating activities
increased by $108.9 million in fiscal 2019 from $328.5 million in fiscal 2018.
The increase is principally attributable to a $74.1 million increase in net
income from consolidated operations, an $18.4 million decrease in net working
capital, a $6.6 million decrease in deferred income tax benefits, and a $6.3
million
increase in depreciation and amortization expense. The decrease in net
working capital mainly


37



--------------------------------------------------------------------------------



Index



resulted from decreases in inventories and contract assets and an increase in
income taxes payable, partially offset by a decrease in trade accounts payable.




Net cash provided by operating activities was $328.5 million in fiscal 2018 and
consisted primarily of net income from consolidated operations of $285.7
million
, depreciation and amortization expense of $77.2 million (a non-cash
item) and net changes in other long-term liabilities and assets related to the
HEICO LCP of $11.6 million (principally participant deferrals and employer
contributions), partially offset by a $50.6 million increase in working capital
mainly reflecting an increase in inventories to support the growth of our
businesses and anticipated higher demand during fiscal 2019.


Investing Activities




Net cash used in investing activities totaled $280.6 million in fiscal 2019 and
related primarily to acquisitions of $240.8 million (net of cash acquired),
capital expenditures of $28.9 million and investments related to the HEICO LCP
of $13.7 million. Further details on acquisitions may be found in Note 2,
Acquisitions, of the Notes to Consolidated Financial Statement.

Net cash used in investing activities totaled $113.5 million in fiscal 2018 and
related primarily to acquisitions of $59.8 million (net of cash acquired),
capital expenditures of $41.9 million and investments related to the HEICO LCP
of $11.5 million. Further details on acquisitions may be found in Note 2,
Acquisitions, of the Notes to Consolidated Financial Statement.


Financing Activities




Net cash used in financing activities in fiscal 2019 totaled $159.7 million.
During fiscal 2019, we made $283.0 million in payments on our revolving credit
facility, paid $110.9 million in distributions to noncontrolling interests,
redeemed common stock related to stock option exercises aggregating $64.0
million
and paid $18.7 million in cash dividends on our common stock.
Additionally, we borrowed $313.0 million under our revolving credit facility to
fund certain of our fiscal 2019 acquisitions and a certain distribution to a
noncontrolling interest holder.

Net cash used in financing activities in fiscal 2018 totaled $207.5 million.
During fiscal 2018, we made payments on our revolving credit facility
aggregating $204.0 million, redeemed common stock related to stock option
exercises aggregating $25.0 million, paid $15.4 million in cash dividends on our
common stock and made distributions to noncontrolling interests aggregating
$13.1 million. Additionally, we borrowed $56.0 million on our revolving credit
facility principally for tax payments, to fund a fiscal 2018 acquisition and for
capital expenditures.




38



--------------------------------------------------------------------------------



Index




In November 2017, we entered into a $1.3 billion Revolving Credit Facility
Agreement ("Credit Facility") with a bank syndicate, which matures in November
2022
. Under certain circumstances, the maturity of the Credit Facility may be
extended for two one-year periods. The Credit Facility also includes a feature
that will allow us to increase the capacity by $350 million to become a $1.65
billion
facility through increased commitments from existing lenders or the
addition of new lenders. Borrowings under the Credit Facility may be used to
finance acquisitions and for working capital and other general corporate
purposes, including capital expenditures.

Borrowings under the Credit Facility accrue interest at our election of the Base
Rate or the Eurocurrency Rate, plus in each case, the Applicable Rate (based on
our Total Leverage Ratio). The Base Rate for any day is a fluctuating rate per
annum equal to the highest of (i) the Prime Rate; (ii) the Federal Funds Rate
plus .50%; and (iii) the Eurocurrency Rate for an Interest Period of one month
plus 100 basis points. The Eurocurrency Rate is the rate per annum obtained by
dividing LIBOR for the applicable Interest Period by a percentage equal to 1.00
minus the daily average Eurocurrency Reserve Rate for such Interest Period, as
such capitalized terms are defined in the Credit Facility. The Applicable Rate
for Eurocurrency Rate Loans ranges from 1.00% to 2.00%. The Applicable Rate for
Base Rate Loans ranges from 0% to 1.00%. A fee is charged on the amount of the
unused commitment ranging from .125% to .30% (depending on our Total Leverage
Ratio). The Credit Facility also includes $100 million sublimits for borrowings
made in foreign currencies and for swingline borrowings, and a $50 million
sublimit for letters of credit. Outstanding principal, accrued and unpaid
interest and other amounts payable under the Credit Facility may be accelerated
upon an event of default, as such events are described in the Credit Facility.
The Credit Facility is unsecured and contains covenants that require, among
other things, the maintenance of a Total Leverage Ratio and an Interest Coverage
Ratio, as such capitalized terms are defined in the Credit Facility. We were in
compliance with all financial and nonfinancial covenants of the Credit Facility
as of October 31, 2019.




39



--------------------------------------------------------------------------------



Index



Contractual Obligations




The following table summarizes our contractual obligations as of October 31,
2019

(in thousands):
Payments due by fiscal period
Total 2020 2021 - 2022 2023 - 2024 Thereafter
Long-term debt
obligations (1)
$553,320 $62 $129 $553,106 $23
Estimated interest
payments (1) 50,310 16,724 33,358 228 -
Capital lease
obligations (2) 10,962 1,213 2,415 1,738 5,596
Operating lease
obligations (3) 76,947 15,508 29,371 13,256 18,812
Purchase obligations (4)
(5) (6) 21,666 2,711 2,253 16,702 -
Other long-term
liabilities (7) 8,052 1,976 2,448 1,756 1,872
Total contractual
obligations $721,257 $38,194 $69,974 $586,786 $26,303


__________________



(1) Estimated interest payments assumes the $553.0 million outstanding balance



under our revolving credit facility and related interest rate of 3.0% as of



October 31, 2019, will remain constant through the credit facility's maturity



date in fiscal 2023. Actual interest payments may vary significantly based on



future borrowings, repayments and interest rate fluctuations. See Note 5,



Long-Term Debt, of the Notes to Consolidated Financial Statements and



"Liquidity and Capital Resources," above for additional information regarding



our long-term debt obligations.



(2) Inclusive of $2.3 million in interest charges. See Note 5, Long-Term Debt, of



the Notes to Consolidated Financial Statements for additional information



regarding our capital lease obligations.



(3) See Note 16, Commitments and Contingencies - Lease Commitments, of the Notes



to Consolidated Financial Statements for additional information regarding our



operating lease obligations.



(4) Includes contingent consideration aggregating $18.3 million related to a



fiscal 2016, 2017 and 2019 acquisition. See Note 8, Fair Value Measurements,



of the Notes to Consolidated Financial Statements for additional information.



(5) Also includes an aggregate $3.3 million of commitments principally for



capital expenditures and inventory. All purchase obligations of inventory and



supplies in the ordinary course of business (i.e., with deliveries scheduled



within the next year) are excluded from the table.



(6) The holders of equity interests in certain of our subsidiaries have rights



("Put Rights") that may be exercised on varying dates causing us to purchase



their equity interests through fiscal 2029. The Put Rights provide that cash



consideration be paid for their equity interests (the "Redemption Amount").



As of October 31, 2019, management's estimate of the aggregate Redemption



Amount of all Put Rights that we could be required to pay is approximately



$188.3 million, which is reflected within redeemable noncontrolling interests



in our Consolidated Balance Sheet. The amounts in the table do not include



Put Right obligations as none of the noncontrolling interest holders have



exercised their Put Rights as of October 31, 2019. See Note 12, Redeemable



Noncontrolling Interests, of the Notes to Consolidated Financial Statements



for further information.



(7) The amounts in the table do not include liabilities related to the HEICO LCP



as they are fully supported by assets held within irrevocable trusts. See



Note 3, Selected Financial Statement Information - Other Long-Term Assets and



Liabilities, of the Notes to Consolidated Financial Statements for further



information about this deferred compensation plan.




40



--------------------------------------------------------------------------------



Index



Off-Balance Sheet Arrangements



Guarantees




As of October 31, 2019, we have arranged for standby letters of credit
aggregating $4.1 million, which are supported by our revolving credit facility
and pertain to payment guarantees related to potential workers' compensation
claims and a facility lease as well as performance guarantees related to
customer contracts entered into by certain of our subsidiaries.


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




During fiscal 2019, we adopted Accounting Standards Update 2014-09, which, as
amended, was codified as Accounting Standard Codification ("ASC") Topic 606,
"Revenue from Contracts with Customers" ("ASC 606"). Pursuant to ASC 606, HEICO
recognizes revenue when it transfers control of a promised good or service to a
customer in an amount that reflects the consideration it expects to receive in
exchange for the good or service. Our performance obligations are satisfied and
control is transferred either at a point-in-time or over-time. The majority of
our revenue is recognized at a point-in-time when control is transferred, which
is generally evidenced by the shipment or delivery of the product to the
customer, a transfer of title, a transfer of the significant risks and rewards
of ownership, and 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


41



--------------------------------------------------------------------------------



Index



include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation.




Under the cost-to-cost method, the extent of progress toward completion is
measured based on the proportion of costs incurred to date to the total
estimated costs at completion of the performance obligation. These projections
require management to make numerous assumptions and estimates relating to items
such as the complexity of design and related development costs, performance of
subcontractors, availability and cost of materials, labor productivity and cost,
overhead, capital costs, and manufacturing efficiency. We review our cost
estimates on a periodic basis, or when circumstances change and warrant a
modification to a previous estimate. Cost estimates are largely based on
negotiated or estimated purchase contract terms, historical performance trends
and other economic projections.

For certain contracts with similar characteristics and for which revenue is
recognized using an over-time model, we use a portfolio approach to estimate the
amount of revenue to recognize. For each portfolio of contracts, the respective
work in process and/or finished goods inventory balances are identified and the
portfolio-specific margin is applied to estimate the pro rata portion of the
transaction price to recognize in relation to the costs incurred. This approach
is utilized only when the resulting revenue recognition is not expected to be
materially different than if the accounting was applied to the individual
contracts.

Certain of our contracts give rise to variable consideration when they contain
items such as customer rebates, credits, volume purchase discounts, penalties
and other provisions that may impact the total consideration we will receive. We
include variable consideration in the transaction price generally by applying
the most likely amount method of the consideration that we expect to be entitled
to receive based on an assessment of all available information (i.e., historical
experience, current and forecasted performance) and only to the extent it is
probable that a significant reversal of revenue recognized will not occur when
the uncertainty is resolved. We estimate variable consideration by applying the
most likely amount method when there are a limited number of outcomes related to
the resolution of the variable consideration.


Changes in 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 2019, 2018 and 2017.



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


42



--------------------------------------------------------------------------------



Index



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 amount of contingent consideration accrued.
As of October 31, 2019, 2018 and 2017, $18.3 million, $20.9 million and $27.6
million
of contingent consideration was accrued within our Consolidated Balance
Sheets, respectively. During fiscal 2019, 2018 and 2017, such fair value
measurement adjustments resulted in net increases (decreases) to SG&A expenses
of $2.6 million, ($1.4) million and $1.1 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 Goodwill and Other Intangible Assets




We test goodwill for impairment annually as of October 31, or more frequently if
events or changes in circumstances indicate that the carrying amount of goodwill
may not be fully recoverable. In evaluating the recoverability of goodwill, we
compare the fair value of each of our reporting units to its carrying value to
determine potential impairment. If the carrying value


43



--------------------------------------------------------------------------------



Index




of a reporting unit exceeds its fair value, the implied fair value of that
reporting unit's goodwill is to be calculated and an impairment loss is
recognized in the amount by which the carrying value of the reporting unit's
goodwill exceeds its implied fair value, if any. The fair values of our
reporting units were determined using a weighted average of a market approach
and an income approach. Under the market approach, fair values are estimated
using published market multiples for comparable companies. We calculate fair
values under the income approach by taking estimated future cash flows that are
based on internal projections and other assumptions deemed reasonable by
management and discounting them using an estimated weighted average cost of
capital. Based on the annual goodwill impairment test as of October 31, 2019,
2018 and 2017, we determined there was no impairment of our goodwill. The fair
value of each of our reporting units as of October 31, 2019 significantly
exceeded its carrying value.

We test each non-amortizing intangible asset (principally trade names) for
impairment annually as of October 31, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. To derive the fair
value of our trade names, we utilize an income approach, which relies upon
management's assumptions of royalty rates, projected revenues and discount
rates. We also test each amortizing intangible asset for impairment if events or
circumstances indicate that the asset might be impaired. The test consists of
determining whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows. If the total of the undiscounted future
cash flows is less than the carrying amount of those assets, we recognize an
impairment loss based on the excess of the carrying amount over the fair value
of the assets. The determination of fair value requires us to make a number of
estimates, assumptions and judgments of underlying factors such as projected
revenues and related earnings as well as discount rates. Based on the intangible
asset impairment tests conducted, we did not recognize any impairment losses in
fiscal 2019, 2018 and 2017.

New Accounting Pronouncements



See Note 1, Summary of Significant Accounting Policies - New Accounting
Pronouncements, of the Notes to Consolidated Financial Statements for additional
information.




Forward-Looking Statements

Certain statements in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature may be
forward-looking and the words "anticipate," "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Any forward-looking statement contained herein, in press releases,
written statements or other documents filed with the Securities and Exchange
Commission
or in communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and conference
calls, concerning our operations, economic performance and financial condition
are subject to risks, uncertainties and contingencies. We have based these
forward-looking statements on our current expectations and projections about
future events. All forward-looking statements involve risks and uncertainties,
many of which are beyond our control, which may cause actual results,
performance or


44



--------------------------------------------------------------------------------



Index



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:



• Lower demand for commercial air travel or airline fleet changes or airline



purchasing decisions, which could cause lower demand for our goods and
services;


• Product specification costs and requirements, which could cause an
increase to our costs to complete contracts;




• Governmental and regulatory demands, export policies and restrictions,



reductions in defense, space or homeland security spending by U.S. and/or



foreign customers or competition from existing and new competitors, which



could reduce our sales;




• Our ability to introduce new products and services at profitable pricing



levels, which could reduce our sales or sales growth;




• Product development or manufacturing difficulties, which could increase



our product development costs and delay sales;



• Our ability to make acquisitions and achieve operating synergies from



acquired businesses; customer credit risk; interest, foreign currency



exchange and income tax rates; economic conditions within and outside of



the aviation, defense, space, medical, telecommunications and electronics



industries, which could negatively impact our costs and revenues; and




• Defense spending or budget cuts, which could reduce our defense-related



revenue.



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.




45



--------------------------------------------------------------------------------



Index

© Edgar Online, source Glimpses

Acquiremedia 2020
Copier lien
Latest news on HEICO CORPORATION
13h ago
6d ago
7d ago
06/30
06/11