This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire. Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedOctober 31, 2020 . There have been no material changes to our critical accounting policies during the three months endedJanuary 31, 2021 . Our business is comprised of two operating segments: theFlight Support Group ("FSG"), consisting ofHEICO Aerospace Holdings Corp. andHEICO Flight Support Corp. and their respective subsidiaries; and theElectronic Technologies Group ("ETG"), consisting ofHEICO Electronic Technologies Corp. and its subsidiaries. Our results of operations in the first quarter of fiscal 2021 continue to reflect the adverse impact from the COVID-19 global pandemic (the "Pandemic"). Most notably, demand for our commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market. Consolidated net sales for our businesses that operate within the commercial aerospace industry decreased by approximately 43% during the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020. As we look ahead to the remainder of fiscal 2021, the extent to which the Pandemic may have a material adverse effect on our future business, financial condition and results of operations will depend on many factors that are not within HEICO's control, including but not limited to the duration, spread and severity of the Pandemic, the emergence of new coronavirus strain variants, the timing of distribution and effectiveness of COVID-19 vaccines, government responses and other actions to mitigate the spread of and to treat the Pandemic, and when and to what extent normal business, economic and social activity and conditions resume. However, we are cautiously optimistic that the recent vaccine progress may generate increased commercial air travel and result in a gradual recovery in demand for our commercial aerospace parts and services commencing toward the second-half of fiscal 2021. 21
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Additionally, our results of operations for the three months endedJanuary 31, 2021 have been affected by the fiscal 2020 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year endedOctober 31, 2020 . 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 Condensed Consolidated Statements of Operations (in thousands):
Three months ended
2021 2020 Net sales$417,902 $506,275 Cost of sales 259,468 308,228 Selling, general and administrative expenses 78,149 87,057 Total operating costs and expenses 337,617 395,285 Operating income$80,285 $110,990 Net sales by segment: Flight Support Group$199,334 $301,067 Electronic Technologies Group 223,550 208,411 Intersegment sales (4,982) (3,203)$417,902 $506,275 Operating income by segment: Flight Support Group$25,822 $62,045 Electronic Technologies Group 60,128 57,491 Other, primarily corporate (5,665) (8,546)$80,285 $110,990 Net sales 100.0 % 100.0 % Gross profit 37.9 % 39.1 % Selling, general and administrative expenses 18.7 % 17.2 % Operating income 19.2 % 21.9 % Interest expense (.6 %) (.8 %) Other income .2 % - % Income tax expense (benefit) .6 % (4.5 %) Net income attributable to noncontrolling interests 1.4 % 1.6 % Net income attributable to HEICO 16.9 % 24.1 % 22
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Comparison of First Quarter of Fiscal 2021 to First Quarter of Fiscal 2020
Our consolidated net sales in the first quarter of fiscal 2021 decreased by 17% to$417.9 million , as compared to net sales of$506.3 million in the first quarter of fiscal 2020. The decrease in consolidated net sales principally reflects a decrease of$101.7 million (a 34% decrease) to$199.3 million in net sales within the FSG, partially offset by an increase of$15.1 million (a 7% increase) to$223.6 million in net sales within the ETG. The net sales decrease in the FSG is principally organic and reflects lower demand for the majority of our commercial aerospace products and services resulting from the significant decline in global commercial air travel attributable to the Pandemic. As a result, organic net sales of our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines decreased by$52.6 million ,$26.9 million , and$25.0 million , respectively. The net sales increase in the ETG principally reflects$14.6 million contributed by our fiscal 2020 acquisitions. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first quarter of fiscal 2021.
Gross Profit and Operating Expenses
Our consolidated gross profit margin was 37.9% in the first quarter of fiscal 2021, as compared to 39.1% in the first quarter of fiscal 2020, principally reflecting a decrease of 4.2% and 1.3% in the FSG's and ETG's gross profit margin, respectively. The decrease in the FSG's gross profit margin principally reflects the impact from the previously mentioned lower net sales of commercial aerospace products and services across all of its product lines. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales of commercial aerospace products and lower net sales and a less favorable product mix of certain defense products, partially offset by an increase in net sales of certain other electronics products. Total new product research and development expenses included within our consolidated cost of sales were$16.2 million and$17.1 million in the first quarter of fiscal 2021 and 2020, respectively. Our consolidated selling, general and administrative ("SG&A") expenses decreased by 10% to$78.1 million in the first quarter of fiscal 2021, as compared to$87.1 million in the first quarter of fiscal 2020. The decrease in consolidated SG&A expenses reflects a$2.6 million decrease in performance-based compensation expense, a$4.3 million reduction in other selling expenses including outside sales commissions, marketing and travel, and a$5.9 million reduction in other general and administrative expenses, partially offset by$3.8 million attributable to the fiscal 2020 acquisitions. Our consolidated SG&A expenses as a percentage of net sales was 18.7% in the first quarter of fiscal 2021, as compared to 17.2% in the first quarter of fiscal 2020. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a 1.0% increase from higher other general and administrative expenses as a percentage of net sales and a .6% impact from higher intangible asset amortization expense. 23
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Operating Income
Our consolidated operating income decreased by 28% to$80.3 million in the first quarter of fiscal 2021, as compared to$111.0 million in the first quarter of fiscal 2020. The decrease in consolidated operating income principally reflects a$36.2 million decrease (a 58% decrease) to$25.8 million in operating income of the FSG, partially offset by a$2.6 million increase (a 5% increase) to$60.1 million in operating income of the ETG. The decrease in operating income of the FSG principally reflects the previously mentioned decrease in net sales, lower gross profit margin and the impact from lost fixed cost efficiencies stemming from the Pandemic. The increase in operating income of the ETG principally reflects the previously mentioned net sales growth. Further, the decrease in consolidated operating income was partially offset by$3.1 million of lower corporate expenses mainly attributable to a decrease in performance-based compensation expense. Our consolidated operating income as a percentage of net sales was 19.2% in the first quarter of fiscal 2021, as compared to 21.9% in the first quarter of fiscal 2020. The decrease principally reflects a decrease in the FSG's operating income as a percentage of net sales to 13.0% in the first quarter of fiscal 2021, as compared to 20.6% in the first quarter of fiscal 2020 and a decrease in the ETG's operating income as a percentage of net sales to 26.9% in the first quarter of fiscal 2021, as compared to 27.6% in the first quarter of fiscal 2020. The decrease in the FSG's operating income as a percentage of net sales reflects the previously mentioned lower gross profit margin and a 3.4% increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lost fixed cost efficiencies and the effect of the previously mentioned higher intangible asset amortization expense. The decrease in the ETG's operating income as a percentage of net sales reflects the previously mentioned lower gross profit margin, partially offset by a .6% decrease in SG&A expenses as a percentage of net sales mainly from efficiencies gained from the previously mentioned net sales growth.
Interest Expense
Interest expense decreased to$2.4 million in the first quarter of fiscal 2021, down from$4.3 million in the first quarter of fiscal 2020. The decrease was principally due to a lower weighted average interest rate partially offset by a higher weighted average balance of borrowings under our revolving credit facility.
Other Income
Other income in the first quarter of fiscal 2021 and 2020 was not material.
Income Tax Expense (Benefit)
Income tax expense was$2.3 million in the first quarter of fiscal 2021, as compared to an income tax benefit of$22.9 million in the first quarter of fiscal 2020. HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2021 and 2020 of$13.5 million and$47.6 million , respectively. The tax benefit from stock option exercises in 24
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both periods was the result of strong appreciation in our stock price during the optionees' holding periods and the$34.1 million larger benefit recognized in the first quarter of fiscal 2020 was the result of more stock options exercised. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held byLufthansa Technik AG inHEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was$5.7 million in the first quarter of fiscal 2021 as compared to$7.9 million in the first quarter of fiscal 2020. The decrease in net income attributable to noncontrolling interests in the first quarter of fiscal 2021 principally reflects a decrease in operating results of certain subsidiaries of the FSG in which noncontrolling interests are held.
Net Income Attributable to HEICO
Net income attributable to HEICO was$70.6 million , or$.51 per diluted share, in the first quarter of fiscal 2021, as compared to$121.9 million , or$.89 per diluted share, in the first quarter of fiscal 2020 principally reflecting the previously mentioned lower operating income of the FSG and higher income tax expense, partially offset by less net income attributable to noncontrolling interests and lower interest expense.
Outlook
As we look ahead to the remainder of fiscal 2021, the Pandemic will likely continue to negatively impact the commercial aerospace industry and HEICO. Given this uncertainty, HEICO cannot provide fiscal 2021 net sales and earnings guidance at this time. However, we believe our ongoing fiscal conservative policies, healthy balance sheet, and increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers. In addition, our time-tested strategy of maintaining low debt and acquiring and operating high cash generating businesses across a diverse base of industries beyond commercial aerospace, such as defense, space and other high-end markets including electronics and medical, puts us in a good financial position to weather this uncertain economic period. Further, we are cautiously optimistic that the vaccine progress may generate increased commercial air travel and result in a gradual recovery in demand for our commercial aerospace parts and services commencing primarily in the second-half of fiscal 2021. 25
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Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. We continue to anticipate fiscal 2021 capital expenditures to be approximately$40 million . We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As ofJanuary 31, 2021 , we were in compliance with all such covenants and our total debt to shareholders' equity ratio was 32.2%. Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was$107.2 million in the first quarter of fiscal 2021 and consisted primarily of net income from consolidated operations of$76.2 million , depreciation and amortization expense of$23.0 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan ("LCP") of$12.0 million (principally participant deferrals and employer contributions),$2.8 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), and$2.2 million in share-based compensation expense (a non-cash item), partially offset by an$8.3 million deferred income tax benefit and a$3.1 million increase in net working capital. The increase in net working capital is inclusive of a$19.2 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2020 accrued performance-based compensation, partially offset by an$11.9 million decrease in accounts receivable and contract assets resulting from the timing of collections and a$2.6 million decrease in inventories. The deferred income tax benefit principally reflects an increase in the cash surrender value of life insurance policies related to the LCP. Net cash provided by operating activities increased by$26.1 million in the first quarter of fiscal 2021, up from$81.1 million in the first quarter of fiscal 2020. The increase is principally attributable to a$58.9 million decrease in net working capital and a$17.4 million decrease in deferred income tax benefits, partially offset by a$53.6 million decrease in net income from consolidated operations. The decrease in net working capital primarily resulted from the payment of a smaller amount of accrued performance-based compensation expense in the first quarter of fiscal 2021 resulting from the lower fiscal 2020 operating results mainly attributable to the Pandemic, and a slight decrease in inventory during the first quarter of fiscal 2021 compared to pre-Pandemic inventory growth in the first quarter of fiscal 2020. The decrease in deferred income tax benefits is mainly attributable to the previously mentioned larger income tax benefit from stock option exercises in the first quarter of fiscal 2020. 26
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Investing Activities
Net cash used in investing activities totaled$25.3 million in the first quarter of fiscal 2021 and related primarily to capital expenditures of$15.5 million and investments related to the HEICO LCP of$10.4 million .
Financing Activities
Net cash used in financing activities in the first quarter of fiscal 2021 totaled$91.4 million . During the first quarter of fiscal 2021, we made$70.0 million in payments on our revolving credit facility, paid$10.8 million in cash dividends on our common stock, made$7.7 million of distributions to noncontrolling interests, redeemed common stock related to stock option exercises aggregating$3.6 million and paid revolving credit facility issuance costs of$1.5 million , which were partially offset by$2.5 million in proceeds from stock option exercises. Contractual Obligations There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year endedOctober 31, 2020 .
Off-Balance Sheet Arrangements
Guarantees
As ofJanuary 31, 2021 , we have arranged for standby letters of credit aggregating$15.6 million , which are supported by our revolving credit facility and principally pertain to performance guarantees related to customer contracts entered into by certain of our subsidiaries as well as payment guarantees related to potential workers' compensation claims and a facility lease.
New Accounting Pronouncement
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.
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Forward-Looking Statements Certain statements in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words "anticipate," "believe," "expect," "estimate" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with theSecurities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management's estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: the severity, magnitude and duration of the Pandemic; our liquidity and the amount and timing of cash generation; lower commercial air travel caused by the Pandemic and its aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending byU.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 and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions 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. 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. 28
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