UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended | ||||||||
| OR | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from ______ to _______ | ||||||||
Commission File Number: 001-04604
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(954 ) 987-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the registrant’s classes of common stock as of February 24, 2021 is as follows:
Common Stock, $ | shares | |||||||
Class A Common Stock, $ | shares | |||||||
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page | |||||||||||
| Part I. | Financial Information | ||||||||||
Item 1. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
| Part II. | Other Information | ||||||||||
Item 6. | |||||||||||
1
PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
| January 31, 2021 | October 31, 2020 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Contract assets | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Trade accounts payable | ||||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net of current maturities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 10) | ||||||||||||||
| Redeemable noncontrolling interests (Note 2) | ||||||||||||||
| Shareholders’ equity: | ||||||||||||||
Preferred Stock, $ | ||||||||||||||
Common Stock, $ | ||||||||||||||
Class A Common Stock, $ | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Deferred compensation obligation | ||||||||||||||
| HEICO stock held by irrevocable trust | ( | ( | ||||||||||||
| Accumulated other comprehensive income (loss) | ( | |||||||||||||
| Retained earnings | ||||||||||||||
| Total HEICO shareholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||
| Cost of sales | ||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||
| Total operating costs and expenses | ||||||||||||||
Operating income | ||||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Other income | ||||||||||||||
Income before income taxes and noncontrolling interests | ||||||||||||||
| Income tax expense (benefit) | ( | |||||||||||||
| Net income from consolidated operations | ||||||||||||||
Less: Net income attributable to noncontrolling interests | ||||||||||||||
| Net income attributable to HEICO | $ | $ | ||||||||||||
Net income per share attributable to HEICO shareholders: | ||||||||||||||
| Basic | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Net income from consolidated operations | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||
Foreign currency translation adjustments | ( | |||||||||||||
Amortization of unrealized loss on defined benefit pension plan, net of tax | ||||||||||||||
| Total other comprehensive income (loss) | ( | |||||||||||||
Comprehensive income from consolidated operations | ||||||||||||||
| Net income attributable to noncontrolling interests | ||||||||||||||
Foreign currency translation adjustments attributable to noncontrolling interests | ( | |||||||||||||
Comprehensive income attributable to noncontrolling interests | ||||||||||||||
| Comprehensive income attributable to HEICO | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
(in thousands, except per share data)
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of October 31, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2021 | $ | $ | $ | $ | $ | ($ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of October 31, 2019 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($ | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments to redemption amount of redeemable noncontrolling interests | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| Three months ended January 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities: | |||||||||||
| Net income from consolidated operations | $ | $ | |||||||||
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Share-based compensation expense | |||||||||||
Employer contributions to HEICO Savings and Investment Plan | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
Increase in accrued contingent consideration | |||||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Decrease in accounts receivable | |||||||||||
| Decrease (increase) in contract assets | ( | ||||||||||
| Decrease (increase) in inventories | ( | ||||||||||
| Increase in prepaid expenses and other current assets | ( | ( | |||||||||
| Increase (decrease) in trade accounts payable | ( | ||||||||||
| Decrease in accrued expenses and other current liabilities | ( | ( | |||||||||
| Increase (decrease) in income taxes payable | ( | ||||||||||
| Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | |||||||||||
Other | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Investments related to HEICO Leadership Compensation Plan | ( | ( | |||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Borrowings on revolving credit facility | — | ||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Redemptions of common stock related to stock option exercises | ( | ( | |||||||||
| Revolving credit facility issuance costs | ( | — | |||||||||
| Proceeds from stock option exercises | |||||||||||
| Other | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2020. The October 31, 2020 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the three months ended January 31, 2021 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
The Company's 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 HEICO's commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market. Consolidated net sales for the Company's 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. Looking ahead to the remainder of fiscal 2021, the extent to which the Pandemic may have a material adverse effect on the Company's 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, the Company is cautiously optimistic that the recent vaccine progress may generate increased commercial air travel and result in a gradual recovery in demand for its commercial aerospace parts and services commencing toward the second-half of fiscal 2021.
7
2. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| (in thousands) | January 31, 2021 | October 31, 2020 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Less: Allowance for doubtful accounts | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
Inventories
| (in thousands) | January 31, 2021 | October 31, 2020 | ||||||||||||
| Finished products | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Materials, parts, assemblies and supplies | ||||||||||||||
| Inventories, net of valuation reserves | $ | $ | ||||||||||||
Property, Plant and Equipment
| (in thousands) | January 31, 2021 | October 31, 2020 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and improvements | ||||||||||||||
| Machinery, equipment and tooling | ||||||||||||||
| Construction in progress | ||||||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
8
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $16.0 million as of January 31, 2021 and $15.8 million as of October 31, 2020. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2021 and 2020 was $.8 million and $2.1 million, respectively.
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the three months ended January 31, 2021 and 2020 is as follows (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| R&D expenses | $ | $ | ||||||||||||
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2030. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
| January 31, 2021 | October 31, 2020 | |||||||||||||
| Redeemable at fair value | $ | $ | ||||||||||||
| Redeemable based on a multiple of future earnings | ||||||||||||||
| Redeemable noncontrolling interests | $ | $ | ||||||||||||
9
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive income (loss) for the three months ended January 31, 2021 are as follows (in thousands):
| Foreign Currency Translation | Defined Benefit Pension Plan | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||
| Balances as of October 31, 2020 | ($ | ($ | ($ | |||||||||||||||||
| Unrealized gain | — | |||||||||||||||||||
| Amortization of unrealized loss | — | |||||||||||||||||||
| Balances as of January 31, 2021 | $ | ($ | $ | |||||||||||||||||
3. GOODWILL AND OTHER INTANGIBLE ASSETS
| Segment | Consolidated Totals | |||||||||||||||||||
| FSG | ETG | |||||||||||||||||||
| Balances as of October 31, 2020 | $ | $ | $ | |||||||||||||||||
| Foreign currency translation adjustments | ||||||||||||||||||||
| Adjustments to goodwill | ( | |||||||||||||||||||
| Balances as of January 31, 2021 | $ | $ | $ | |||||||||||||||||
Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2020 acquisitions.
10
Identifiable intangible assets consist of the following (in thousands):
| As of January 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 | $ | ($ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||||
| Intellectual property | ( | ( | ||||||||||||||||||||||||||||||||||||
| Licenses | ( | ( | ||||||||||||||||||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | ||||||||||||||||||||||||||||||||||||
| Trade names | ( | ( | ||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| Non-Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Trade names | — | — | ||||||||||||||||||||||||||||||||||||
| $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||||||
Amortization expense related to intangible assets for the three months ended January 31, 2021 and 2020 was $15.2 million and $13.7 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2021 is estimated to be $44.7 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $53.1 million in fiscal 2022, $47.5 million in fiscal 2023, $42.6 million in fiscal 2024, $38.2 million in fiscal 2025, $33.8 million in fiscal 2026, and $138.8 million thereafter.
4. LONG-TERM DEBT
| January 31, 2021 | October 31, 2020 | |||||||||||||
| Borrowings under revolving credit facility | $ | $ | ||||||||||||
| Finance leases and note payable | ||||||||||||||
| Less: Current maturities of long-term debt | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
11
5. 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 Condensed Consolidated Balance Sheet.
| January 31, 2021 | October 31, 2020 | Change | |||||||||||||||
| Contract assets | $ | $ | ($ | ||||||||||||||
| Contract liabilities | |||||||||||||||||
| Net contract assets | $ | $ | ($ | ||||||||||||||
The decrease in the Company's contract assets during the first quarter of fiscal 2021 mainly occurred within the ETG and principally reflects billings on certain customer contracts made during the quarter in excess of amounts recorded as unbilled receivables on certain customer contracts using an over-time recognition model.
The increase in the Company's contract liabilities during the first quarter of fiscal 2021 mainly occurred within the ETG and principally reflects the receipt during the quarter of new customer deposits on certain customer contracts in excess of reductions to contract liabilities from customer deposits recognized as revenue.
The amount of revenue that the Company recognized during the first quarter of fiscal 2021 that was included in contract liabilities as of the beginning of fiscal 2021 was $11.2 million.
Remaining Performance Obligations
As of January 31, 2021, the Company had $486.2 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 $286.5 million of this amount during the remainder of fiscal 2021 and $199.7 million thereafter, of which the majority is expected to occur in fiscal 2022.
12
Disaggregation of Revenue
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Flight Support Group: | ||||||||||||||
Aftermarket replacement parts (1) | $ | $ | ||||||||||||
Repair and overhaul parts and services (2) | ||||||||||||||
Specialty products (3) | ||||||||||||||
| Total net sales | ||||||||||||||
| Electronic Technologies Group: | ||||||||||||||
Electronic component parts primarily for defense, space and aerospace equipment (4) | ||||||||||||||
Electronic component parts for equipment in various other industries (5) | ||||||||||||||
| Total net sales | ||||||||||||||
| Intersegment sales | ( | ( | ||||||||||||
| Total consolidated net sales | $ | $ | ||||||||||||
(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.
(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, three-dimensional microelectronic and stacked memory products, crashworthy and ballistically self-sealing auxiliary fuel systems, radio frequency (RF) and microwave amplifiers, transmitters and receivers, 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 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.
13
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Flight Support Group: | ||||||||||||||
| Aerospace | $ | $ | ||||||||||||
| Defense and Space | ||||||||||||||
Other (1) | ||||||||||||||
| Total net sales | ||||||||||||||
| Electronic Technologies Group: | ||||||||||||||
| Defense and Space | ||||||||||||||
Other (2) | ||||||||||||||
| Aerospace | ||||||||||||||
| Total net sales | ||||||||||||||
| Intersegment sales | ( | ( | ||||||||||||
| Total consolidated net sales | $ | $ | ||||||||||||
(1) Principally industrial products.
6. INCOME TAXES
14
7. 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 January 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 | $ | $ | $ | $ | ||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
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 Condensed Consolidated Balance Sheets. The related liabilities of the LCP are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $212.2 million as of January 31, 2021 and $178.3 million as of October 31, 2020.
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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 $21.1 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 January 31, 2021, the estimated fair value of the contingent consideration was CAD $13.0 million, or $10.2 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 January 31, 2021, the estimated fair value of the contingent consideration was $14.4 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 January 31, 2021, the estimated fair value of the contingent consideration was $18.3 million.
The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were determined using probability-based scenario analyses. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of HEICO. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's consolidated statements of operations.
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The following unobservable inputs were used to derive the estimated fair value of the Company's Level 3 contingent consideration liabilities as of January 31, 2021 ($ in thousands):
| Unobservable | Weighted | |||||||||||||||||||||||||
| Acquisition Date | Fair Value | Input | Range | Average (1) | ||||||||||||||||||||||
| 8-18-2020 | $ | Compound annual revenue growth rate | ||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
| 8-11-2020 | Compound annual revenue growth rate | |||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
| 9-15-2017 | Compound annual revenue growth rate | ( | ||||||||||||||||||||||||
| Discount rate | ||||||||||||||||||||||||||
Changes in the Company’s contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended January 31, 2021 are as follows (in thousands):
| Liabilities | ||||||||
| Balance as of October 31, 2020 | $ | |||||||
| Increase in accrued contingent consideration | ||||||||
| Foreign currency transaction adjustments | ||||||||
| Balance as of January 31, 2021 | $ | |||||||
The Company's contingent consideration liabilities are included in other long-term liabilities in its Condensed Consolidated Balance Sheet and the Company records changes in accrued contingent consideration and foreign currency transaction adjustments within selling, general and administrative expenses in its Condensed Consolidated Statement 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 January 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.
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8. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||
Net income attributable to HEICO | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||
Weighted average common shares outstanding - basic | ||||||||||||||
| Effect of dilutive stock options | ||||||||||||||
Weighted average common shares outstanding - diluted | ||||||||||||||
Net income per share attributable to HEICO shareholders: | ||||||||||||||
| Basic | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
Anti-dilutive stock options excluded | ||||||||||||||
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9. OPERATING SEGMENTS
Other, Primarily Corporate and Intersegment (1) | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Three months ended January 31, 2021: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Three months ended January 31, 2020: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
| Other, Primarily Corporate | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Total assets as of January 31, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets as of October 31, 2020 | ||||||||||||||||||||||||||
10. COMMITMENTS AND CONTINGENCIES
Guarantees
As of January 31, 2021, the Company has arranged for standby letters of credit aggregating $15.6 million, which are supported by its revolving credit facility and principally pertain to performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries as well as payment guarantees related to potential workers' compensation claims and a facility lease.
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Product Warranty
Changes in the Company’s product warranty liability for the three months ended January 31, 2021 and 2020, respectively, are as follows (in thousands):
| Three months ended January 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Balances as of beginning of fiscal year | $ | $ | ||||||||||||
| Accruals for warranties | ||||||||||||||
| Acquired warranty liabilities | ||||||||||||||
| Warranty claims settled | ( | ( | ||||||||||||
| Balances as of January 31 | $ | $ | ||||||||||||
Litigation
The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
20
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 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 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 ended October 31, 2020. There have been no material changes to our critical accounting policies during the three months ended January 31, 2021.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO 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.
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Additionally, our results of operations for the three months ended January 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 ended October 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 January 31, | ||||||||||||||
| 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 | % | ||||||||||
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Comparison of First Quarter of Fiscal 2021 to First Quarter of Fiscal 2020
Net Sales
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
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
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 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 $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
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 of January 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
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 ended October 31, 2020.
Off-Balance Sheet Arrangements
Guarantees
As of January 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.
27
Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: the severity, 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 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 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2020.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the first quarter ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS
| Exhibit | Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document. * | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. * | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. * | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. * | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). * | |||||||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEICO CORPORATION | |||||||||||
| Date: | February 25, 2021 | By: | /s/ CARLOS L. MACAU, JR. | ||||||||
| Carlos L. Macau, Jr. Executive Vice President - Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||||||
| By: | /s/ STEVEN M. WALKER | ||||||||||
| Steven M. Walker Chief Accounting Officer and Assistant Treasurer (Principal Accounting Officer) | |||||||||||
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