HEICO Corporation
HEICO CORP (Form: 10-Q, Received: 05/25/2017 17:14:15)
Index

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended April 30 , 2017
 
 
 
 
 
OR
 
 
 
¨
 
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from ______ to _______
Commission File Number: 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida
 
65-0341002
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3000 Taft Street, Hollywood, Florida
 
33021
(Address of principal executive offices)
 
(Zip Code)
(954) 987-4000
(Registrant’s telephone number, including area code)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x 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.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
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 x
The number of shares outstanding of each of the registrant’s classes of common stock as of May 24, 2017 is as follows:
Common Stock, $.01 par value
33,762,818

shares
Class A Common Stock, $.01 par value
50,555,981

shares


Index

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

Index

PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
 
 
April 30, 2017
 
October 31, 2016
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 

$36,732

 

$42,955

Accounts receivable, net
 
213,107

 
202,227

Inventories, net
 
325,661

 
286,302

Prepaid expenses and other current assets
 
12,810

 
11,674

Deferred income taxes
 
41,525

 
41,063

Total current assets
 
629,835

 
584,221

 
 
 
 
 
Property, plant and equipment, net
 
126,402

 
121,611

Goodwill
 
912,539

 
865,717

Intangible assets, net
 
388,366

 
366,863

Deferred income taxes
 

 
407

Other assets
 
120,197

 
100,656

Total assets
 

$2,177,339

 

$2,039,475

 
 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 

$407

 

$411

Trade accounts payable
 
73,625

 
73,335

Accrued expenses and other current liabilities
 
135,376

 
136,053

Income taxes payable
 
2,570

 
4,622

Total current liabilities
 
211,978

 
214,421

 
 
 
 
 
Long-term debt, net of current maturities
 
460,465

 
457,814

Deferred income taxes
 
108,429

 
105,962

Other long-term liabilities
 
132,804

 
114,061

Total liabilities
 
913,676

 
892,258

 
 
 
 
 
Commitments and contingencies (Note 10)
 

 

 
 
 
 
 
Redeemable noncontrolling interests (Note 3)
 
125,132

 
99,512

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common Stock, $.01 par value per share; 75,000 shares authorized; 33,763 and 33,715 shares issued and outstanding
 
338

 
270

Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 50,554 and 50,396 shares issued and outstanding
 
506

 
403

Capital in excess of par value
 
317,049

 
306,328

Deferred compensation obligation
 
2,320

 
2,460

HEICO stock held by irrevocable trust
 
(2,320
)
 
(2,460
)
Accumulated other comprehensive loss
 
(25,002
)
 
(25,326
)
Retained earnings
 
756,408

 
681,704

Total HEICO shareholders’ equity
 
1,049,299

 
963,379

Noncontrolling interests
 
89,232

 
84,326

Total shareholders’ equity
 
1,138,531

 
1,047,705

Total liabilities and equity
 

$2,177,339

 

$2,039,475

The accompanying notes are an integral part of these condensed consolidated financial statements.


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HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net sales
 

$712,089

 

$656,875

 

$368,657

 

$350,648

 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales
 
446,290

 
410,650

 
228,275

 
216,619

Selling, general and administrative expenses
 
124,707

 
126,810

 
63,840

 
67,235

 
 
 
 
 
 
 
 
 
Total operating costs and expenses
 
570,997

 
537,460

 
292,115

 
283,854

 
 
 
 
 
 
 
 
 
Operating income
 
141,092

 
119,415

 
76,542

 
66,794

 
 
 
 
 
 
 
 
 
Interest expense
 
(3,929
)
 
(3,900
)
 
(1,960
)
 
(2,333
)
Other income
 
635

 
138

 
151

 
568

 
 
 
 
 
 
 
 
 
Income before income taxes and noncontrolling interests
 
137,798

 
115,653

 
74,733

 
65,029

 
 
 
 
 
 
 
 
 
Income tax expense
 
40,700

 
36,000

 
23,900

 
21,300

 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 
97,098

 
79,653

 
50,833

 
43,729

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
10,485

 
9,725

 
5,147

 
5,072

 
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$86,613

 

$69,928

 

$45,686

 

$38,657

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.03

 

$.84

 

$.54

 

$.46

Diluted
 

$1.00

 

$.82

 

$.53

 

$.45

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
84,182

 
83,624

 
84,221

 
83,653

Diluted
 
86,520

 
84,980

 
86,637

 
85,035

 
 
 
 
 
 
 
 
 
Cash dividends per share
 

$.072

 

$.064

 

$—

 

$—

The accompanying notes are an integral part of these condensed consolidated financial statements.



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Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 

$97,098

 

$79,653

 

$50,833

 

$43,729

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
234

 
6,548

 
1,758

 
9,215

Amortization of unrealized loss on defined
benefit pension plan, net of tax
 
15

 

 
8

 

Total other comprehensive income
 
249

 
6,548

 
1,766

 
9,215

Comprehensive income from consolidated operations
 
97,347

 
86,201

 
52,599

 
52,944

Less: Net income attributable to noncontrolling interests
 
10,485

 
9,725

 
5,147

 
5,072

Less: Foreign currency translation adjustments attributable to noncontrolling interests
 
(75
)
 
554

 
221

 
758

Comprehensive income attributable to noncontrolling interests
 
10,410

 
10,279

 
5,368

 
5,830

Comprehensive income attributable to HEICO
 

$86,937

 

$75,922

 

$47,231

 

$47,114

The accompanying notes are an integral part of these condensed consolidated financial statements.




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Index

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 Loss
 
Retained Earnings
 
Noncontrolling Interests
 
Total Shareholders' Equity
Balances as of October 31, 2016

$99,512

 

$270

 

$403

 

$306,328

 

$2,460

 

($2,460
)
 

($25,326
)
 

$681,704

 

$84,326

 

$1,047,705

Comprehensive income
5,151

 

 

 

 

 

 
324

 
86,613

 
5,259

 
92,196

Cash dividends ($.072 per share)

 

 

 

 

 

 

 
(6,059
)
 

 
(6,059
)
Five-for-four common stock split

 
68

 
101

 
(169
)
 

 

 

 
(23
)
 

 
(23
)
Issuance of common stock to HEICO Savings and Investment Plan

 

 

 
5,484

 

 

 

 

 

 
5,484

Share-based compensation expense

 

 

 
3,110

 

 

 

 

 

 
3,110

Proceeds from stock option exercises

 

 
1

 
2,296

 

 

 

 

 

 
2,297

Distributions to noncontrolling interests
(3,544
)
 

 

 

 

 

 

 

 
(353
)
 
(353
)
Acquisitions of noncontrolling interests
(3,848
)
 

 

 

 

 

 

 

 

 

Adjustments to redemption amount of redeemable noncontrolling interests
5,826

 

 

 

 

 

 

 
(5,826
)
 

 
(5,826
)
Noncontrolling interests assumed related to acquisition
22,035

 

 

 

 

 

 

 

 

 

Deferred compensation obligation

 

 

 

 
(140
)
 
140

 

 

 

 

Other

 

 
1

 

 

 

 

 
(1
)
 

 

Balances as of April 30, 2017

$125,132

 

$338

 

$506

 

$317,049

 

$2,320

 

($2,320
)
 

($25,002
)
 

$756,408

 

$89,232

 

$1,138,531

 
 
 
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, 2015

$91,282

 

$269

 

$400

 

$286,220

 

$1,783

 

($1,783
)
 

($25,080
)
 

$548,054

 

$83,408

 

$893,271

Comprehensive income
5,221

 

 

 

 

 

 
5,994

 
69,928

 
5,058

 
80,980

Cash dividends ($.064 per share)

 

 

 

 

 

 

 
(5,350
)
 

 
(5,350
)
Issuance of common stock to HEICO Savings and Investment Plan

 
1

 
1

 
4,846

 

 

 

 

 

 
4,848

Share-based compensation expense

 

 

 
3,286

 

 

 

 

 

 
3,286

Proceeds from stock option exercises

 

 

 
1,471

 

 

 

 

 

 
1,471

Tax benefit from stock option exercises

 

 

 
870

 

 

 

 

 

 
870

Distributions to noncontrolling interests
(4,086
)
 

 

 

 

 

 

 

 
(1,421
)
 
(1,421
)
Acquisitions of noncontrolling interest
(3,599
)
 

 

 

 

 

 

 

 

 

Adjustments to redemption amount of redeemable noncontrolling interests
(438
)
 

 

 

 

 

 

 
438

 

 
438

Deferred compensation obligation

 

 

 

 
(148
)
 
148

 

 

 

 

Other

 

 

 
(4
)
 

 

 

 
2

 
50

 
48

Balances as of April 30, 2016

$88,380

 

$270

 

$401

 

$296,689

 

$1,635

 

($1,635
)
 

($19,086
)
 

$613,072

 

$87,095

 

$978,441

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)
 
Six months ended April 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income from consolidated operations

$97,098

 

$79,653

Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
30,501

 
29,183

Employer contributions to HEICO Savings and Investment Plan
3,679

 
3,266

Share-based compensation expense
3,110

 
3,286

Increase in accrued contingent consideration
1,148

 
1,679

Foreign currency transaction adjustments, net
(280
)
 
2,186

Deferred income tax benefit
(2,909
)
 
(1,168
)
Tax benefit from stock option exercises

 
870

Excess tax benefit from stock option exercises

 
(870
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Decrease in accounts receivable
1,358

 
7,875

Increase in inventories
(14,251
)
 
(9,855
)
Increase in prepaid expenses and other current assets
(225
)
 
(2,616
)
Decrease in trade accounts payable
(7,567
)
 
(4,860
)
Decrease in accrued expenses and other current liabilities
(11,176
)
 
(10,224
)
(Decrease) increase in income taxes payable
(2,023
)
 
5,489

Other long-term assets and liabilities, net
(750
)
 
(1,189
)
Net cash provided by operating activities
97,713

 
102,705

 
 
 
 
Investing Activities:
 
 
 
Acquisitions, net of cash acquired
(80,838
)
 
(263,811
)
Capital expenditures
(13,538
)
 
(15,546
)
Other
(944
)
 
(3,241
)
Net cash used in investing activities
(95,320
)
 
(282,598
)
 
 
 
 
Financing Activities:
 
 
 
Borrowings on revolving credit facility
87,000

 
260,000

Payments on revolving credit facility
(84,000
)
 
(66,000
)
Cash dividends paid
(6,059
)
 
(5,350
)
Distributions to noncontrolling interests
(3,897
)
 
(5,507
)
Acquisitions of noncontrolling interests
(3,848
)
 
(3,599
)
Proceeds from stock option exercises
2,297

 
1,471

Excess tax benefit from stock option exercises

 
870

Revolving credit facility issuance costs
(270
)
 

Other
(371
)
 
(181
)
Net cash (used in) provided by financing activities
(9,148
)
 
181,704

 
 
 
 
Effect of exchange rate changes on cash
532

 
1,375

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(6,223
)
 
3,186

Cash and cash equivalents at beginning of year
42,955

 
33,603

Cash and cash equivalents at end of period

$36,732

 

$36,789

The accompanying notes are an integral part of these condensed consolidated financial statements.



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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, 2016. The October 31, 2016 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 six months ended April 30, 2017 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.

Stock Split

In March 2017, the Company's Board of Directors declared a 5-for-4 stock split on both classes of the Company's common stock. The stock split was effected as of April 19, 2017 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional



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Index

disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09, as amended, is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The Company is currently evaluating which transition method it will elect. In addition, the Company is currently identifying its various revenue streams and will subsequently review certain underlying customer contracts to determine the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
    
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Under current guidance, inventories are measured at the lower of cost or market. ASU 2015-11 must be applied prospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes," which requires that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. ASU 2015-17 may be applied either prospectively or retrospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. Early adoption is permitted. The Company is currently evaluating which transition method it will elect. The adoption of this guidance will only effect the presentation of deferred taxes in the Company's consolidated statement of financial position.

In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects related to accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits and tax deficiencies are to be recognized in the statement of operations as a component of income tax expense rather than as capital in excess of par value. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017 resulting in the recognition of a $3.1 million discrete income tax benefit, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million . Additionally, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively



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excluded from the assumed future proceeds in the calculation of diluted shares, which increased the Company's weighted average number of diluted common shares outstanding by 712,000 shares and 747,000 shares in the first six months and second quarter of fiscal 2017, respectively. Further, ASU 2016-09 requires excess tax benefits be presented within the statement of cash flows as an operating activity rather than as a financing activity. The Company adopted this change on a prospective basis, which resulted in a $3.1 million increase in cash provided by operating activities and cash used in financing activities in the first six months of fiscal 2017.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated statement of cash flows.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.





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2.     ACQUISITION

On April 24, 2017 , the Company, through a subsidiary of HEICO Flight Support Corp., acquired 80.1% of the equity interests of LLP Enterprises, LLC, which owns all of the outstanding equity interests of the operating units of Air Cost Control ("A2C"). A2C is a leading aviation electrical interconnect product distributor of items such as connectors, wire, cable, protection and fastening systems, in addition to distributing a wide range of electromechanical parts. The remaining 19.9% interest continues to be owned by certain members of A2C's management team (see Note 3, Selected Financial Statement Information, for additional information).

The purchase price of A2C was paid in cash principally using proceeds from the Company’s revolving credit facility. The total consideration for the acquisition of A2C is not material or significant to the Company's condensed consolidated financial statements and the related allocation to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. The operating results of A2C were included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of A2C included in the Company's Condensed Consolidated Statements of Operations is not material.

Had the acquisition of A2C occurred as of November 1, 2015, net sales on a pro forma basis for the six months ended April 30, 2017 and 2016 would have been $753.2 million and $696.2 million , respectively, and net sales on a pro forma basis for the three months ended April 30, 2017 and 2016 would have been $389.1 million and $372.5 million , respectively. Net income from consolidated operations, net income attributable to HEICO and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the six and three months ended April 30, 2017 and 2016 would not have been materially different than the reported amounts. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2015.





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3.     SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands)
 
April 30, 2017
 
October 31, 2016
Accounts receivable
 

$216,697

 

$205,386

Less: Allowance for doubtful accounts
 
(3,590
)
 
(3,159
)
Accounts receivable, net
 

$213,107

 

$202,227


Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
(in thousands)
 
April 30, 2017
 
October 31, 2016
Costs incurred on uncompleted contracts
 

$18,033

 

$19,086

Estimated earnings
 
14,262

 
13,887

 
 
32,295

 
32,973

Less: Billings to date
 
(35,830
)
 
(39,142
)


 

($3,535
)
 

($6,169
)
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions:
 
 
 
 
Accounts receivable, net (costs and estimated earnings in excess of billings)
 

$2,344

 

$4,839

Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
 
(5,879
)
 
(11,008
)
 
 

($3,535
)
 

($6,169
)

Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the six and three months ended April 30, 2017 and 2016.

Inventories
(in thousands)
 
April 30, 2017
 
October 31, 2016
Finished products
 

$163,471

 

$131,008

Work in process
 
39,163

 
36,076

Materials, parts, assemblies and supplies
 
119,921

 
117,153

Contracts in process
 
4,198

 
3,253

Less: Billings to date
 
(1,092
)
 
(1,188
)
Inventories, net of valuation reserves
 

$325,661

 

$286,302


Contracts in process represents accumulated capitalized costs associated with fixed price contracts. Related progress billings and customer advances (“billings to date”) are classified as a reduction to contracts in process, if any, and any excess is included in accrued expenses and other liabilities.




11

Index

Property, Plant and Equipment
(in thousands)
 
April 30, 2017
 
October 31, 2016
Land
 

$5,097

 

$5,090

Buildings and improvements
 
84,278

 
79,205

Machinery, equipment and tooling
 
181,342

 
171,717

Construction in progress
 
11,357

 
10,453

 
 
282,074

 
266,465

Less: Accumulated depreciation and amortization
 
(155,672
)
 
(144,854
)
Property, plant and equipment, net
 

$126,402

 

$121,611


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 $12.6 million and $11.9 million as of April 30, 2017 and October 31, 2016, respectively. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2017 and 2016 was $5.4 million and $5.2 million , respectively. The total customer rebates and credits deducted within net sales for the three months ended April 30, 2017 and 2016 was $3.0 million and $2.9 million , respectively.

Research and Development Expenses

The amount of new product research and development ("R&D") expenses included in cost of sales for the six and three months ended April 30, 2017 and 2016 is as follows (in thousands):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2017
 
2016
 
2017
 
2016
R&D expenses
 

$22,469

 

$19,992

 

$11,223

 

$10,985





12

Index

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 2025. 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):
 
 
April 30, 2017
 
October 31, 2016
Redeemable at fair value
 

$81,495

 

$85,574

Redeemable based on a multiple of future earnings
 
43,637

 
13,938

Redeemable noncontrolling interests
 

$125,132

 

$99,512


As discussed in Note 2, Acquisition, the Company, through the FSG, acquired an 80.1% equity interest in A2C in April 2017. As part of the purchase agreement, the Company has the right to purchase the noncontrolling interest in the subsidiary over a two-year period beginning in fiscal 2022, or sooner under certain conditions, and the noncontrolling interest holder has the right to cause the Company to purchase the same equity interest over the same period.
    
Pursuant to the purchase agreement related to the acquisition of an 80.1% equity interest in a subsidiary by the FSG in fiscal 2011, the holders of the 19.9% noncontrolling interest in the subsidiary exercised their option during fiscal 2016 to cause the Company to purchase their interest over a two-year period ending in fiscal 2017. During the second quarter of fiscal 2017, the Company acquired the remaining 9.95% noncontrolling interest in the subsidiary effective March 2017. The purchase price of the redeemable noncontrolling interest acquired was paid using cash provided by operating activities.

Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss for the six months ended April 30, 2017 are as follows (in thousands):
 
 
Foreign Currency Translation
 
Pension Benefit Obligation
 
Accumulated
Other
Comprehensive Loss
Balances as of October 31, 2016
 

($23,953
)
 

($1,373
)
 

($25,326
)
Unrealized gain
 
309

 

 
309

Amortization of unrealized loss on
defined benefit pension plan,
net of tax
 

 
15

 
15

Balances as of April 30, 2017
 

($23,644
)
 

($1,358
)
 

($25,002
)



13

Index

4.     GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by operating segment for the six months ended April 30, 2017 are as follows (in thousands):
 
 
Segment
 
Consolidated Totals
 
 
FSG
 
ETG
 
Balances as of October 31, 2016
 

$336,681

 

$529,036

 

$865,717

Goodwill acquired
 
47,524

 

 
47,524

Foreign currency translation adjustments
 
(237
)
 
(465
)
 
(702
)
Balances as of April 30, 2017
 

$383,968

 

$528,571

 

$912,539


The goodwill acquired pertains to the fiscal 2017 acquisition described in Note 2, Acquisition, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The Company estimates that the majority of the goodwill acquired in fiscal 2017 will be deductible for income tax purposes.

Identifiable intangible assets consist of the following (in thousands):
 
 
As of April 30, 2017
 
As of October 31, 2016
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 

$274,061

 

($101,265
)
 

$172,796

 

$248,271

 

($88,829
)
 

$159,442

Intellectual property
 
139,724

 
(38,593
)
 
101,131

 
139,817

 
(33,291
)
 
106,526

Licenses
 
6,559

 
(2,627
)
 
3,932

 
6,559

 
(2,325
)
 
4,234

Non-compete agreements
 
808

 
(808
)
 

 
811

 
(811
)
 

Patents
 
817

 
(505
)
 
312

 
779

 
(480
)
 
299

Trade names
 
466

 
(97
)
 
369

 
466

 
(77
)
 
389

 
 
422,435

 
(143,895
)
 
278,540

 
396,703

 
(125,813
)
 
270,890

Non-Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
109,826

 

 
109,826

 
95,973

 

 
95,973

 
 

$532,261

 

($143,895
)
 

$388,366

 

$492,676

 

($125,813
)
 

$366,863


The increase in the gross carrying amount of customer relationships and non-amortizing trade names as of April 30, 2017 compared to October 31, 2016 principally relates to such intangible assets recognized in connection with the fiscal 2017 acquisition (see Note 2, Acquisition). The amortization period of the customer relationships acquired during fiscal 2017 is 15 years.




14

Index

Amortization expense related to intangible assets for the six months ended April 30, 2017 and 2016 was $18.3 million and $17.6 million , respectively. Amortization expense related to intangible assets for the three months ended April 30, 2017 and 2016 was $9.1 million and $9.3 million , respectively. Amortization expense related to intangible assets for the remainder of fiscal 2017 is estimated to be $19.3 million . Amortization expense for each of the next five fiscal years and thereafter is estimated to be $36.7 million in fiscal 2018, $34.5 million in fiscal 2019, $31.8 million in fiscal 2020, $29.2 million in fiscal 2021, $24.1 million in fiscal 2022, and $102.9 million thereafter.


5.     LONG-TERM DEBT

Long-term debt consists of the following (in thousands):
 
 
April 30, 2017
 
October 31, 2016
Borrowings under revolving credit facility
 

$457,852

 

$455,083

Capital leases and note payable
 
3,020

 
3,142

 
 
460,872

 
458,225

Less: Current maturities of long-term debt
 
(407
)
 
(411
)
 
 

$460,465

 

$457,814


The Company's borrowings under its revolving credit facility mature in fiscal 2019. As of April 30, 2017 and October 31, 2016, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 2.0% and 1.6% , respectively. Borrowings under the revolving credit facility denominated in Euros were €32 million as of both April 30, 2017 and October 31, 2016 of which the U.S. dollar equivalent was $34.9 million and $35.1 million , respectively. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2017, the Company was in compliance with all such covenants.

In April 2017, the Company increased the aggregate principal amount of its revolving credit facility by $200 million to $1.0 billion through increased commitments from existing lenders.





15

Index

6.     INCOME TAXES

The Company’s effective tax rate in the first six months of fiscal 2017 decreased to 29.5% from 31.1% in the first six months of fiscal 2016. The decrease principally reflects a $3.1 million discrete income tax benefit related to stock option exercises resulting from the adoption of ASU 2016-09 in the first quarter of fiscal 2017 (see Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements) and the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan ("LCP"). These decreases were partially offset by the benefit recognized in the first six months of fiscal 2016 from the retroactive and permanent extension of the U.S. federal R&D tax credit that resulted in the recognition of additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015.

The Company's effective tax rate in the second quarter of fiscal 2017 decreased to 32.0% from 32.8% in the second quarter of fiscal 2016. The decrease principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the LCP.


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 April 30, 2017
 
 
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 plans:
 
 
 
 
 
 
 
 
Corporate-owned life insurance
 

$—

 

$106,337

 

$—

 

$106,337

Money market funds
 
559

 

 

 
559

Equity securities
 
2,286

 

 

 
2,286

Mutual funds
 
1,925

 

 

 
1,925

Other
 
1,228

 
50

 

 
1,278

Total assets
 

$5,998

 

$106,387

 

$—

 

$112,385

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$19,671

 

$19,671




16

Index

 
 
As of October 31, 2016
 
 
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 plans:
 
 
 
 
 
 
 
 
Corporate-owned life insurance
 

$—

 

$86,004

 

$—

 

$86,004

Money market funds
 
2,515

 

 

 
2,515

Equity securities
 
1,832

 

 

 
1,832

Mutual funds
 
1,758

 

 

 
1,758

Other
 
1,043

 
50

 

 
1,093

Total assets
 

$7,148

 

$86,054

 

$—

 

$93,202

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$18,881

 

$18,881


The Company maintains two non-qualified deferred compensation plans. 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 Company’s other deferred compensation plan are principally invested in equity securities and mutual funds that are classified within Level 1. The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $112.4 million as of April 30, 2017 and $93.2 million as of October 31, 2016, of which the LCP related assets were $106.9 million and $88.5 million as of April 30, 2017 and October 31, 2016, respectively. The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $111.2 million as of April 30, 2017 and $92.6 million as of October 31, 2016, of which the LCP related liability was $105.7 million and $87.9 million as of April 30, 2017 and October 31, 2016, respectively.

As part of the agreement to acquire certain assets of a company by the ETG in fiscal 2016, the Company may be obligated to pay contingent consideration of up to $2.0 million in aggregate during the five year period following the acquisition. During the second quarter of fiscal 2017, the Company paid $.3 million of contingent consideration based on the actual financial performance of the acquired entity during the first year following the acquisition. As of April 30, 2017, the estimated fair value of the remaining contingent consideration was $1.3 million .    

As part of the agreement to acquire a subsidiary by the FSG in fiscal 2015, the Company may be obligated to pay contingent consideration of up to €6.1 million per year, or €18.3 million in aggregate, should the acquired entity meet certain earnings objectives during each of the first three years following the first anniversary of the acquisition. As of April 30, 2017, the estimated



17

Index

fair value of the contingent consideration was €16.9 million , or $18.4 million , of which €6.1 million , or $6.7 million , represents the portion paid in May 2017 based on the actual earnings of the acquired entity during the second year following the acquisition.

The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were determined using a probability-based scenario analysis approach. 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 a market participant. 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 condensed consolidated statements of operations.

The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of April 30, 2017 were as follows:
 
Fiscal 2016 Acquisition
 
Fiscal 2015 Acquisition
Compound annual revenue growth rate range
0
%
-
12%
 
4
%
-
20%
Weighted average discount rate
4.7%
 
1.7%

Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended April 30, 2017 are as follows (in thousands):
 
 
 
Balance as of October 31, 2016
 

$18,881

Increase in accrued contingent consideration
 
1,148

Payment of contingent consideration
 
(250
)
Foreign currency transaction adjustments
 
(108
)
Balance as of April 30, 2017
 

$19,671

 
 
 
Included in the accompanying Condensed Consolidated Balance Sheet
under the following captions:
 
 
Accrued expenses and other current liabilities
 

$6,944

Other long-term liabilities
 
12,727

 
 

$19,671


The Company recorded the increase in accrued contingent consideration and foreign currency transaction adjustments set forth in the table above within selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations.




18

Index

The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the six months ended April 30, 2017.

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 April 30, 2017 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.


8.     NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$86,613

 

$69,928

 

$45,686

 

$38,657

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
84,182

 
83,624

 
84,221

 
83,653

Effect of dilutive stock options
 
2,338

 
1,356

 
2,416

 
1,382

Weighted average common shares outstanding - diluted
 
86,520

 
84,980

 
86,637

 
85,035

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.03

 

$.84

 

$.54

 

$.46

Diluted
 

$1.00

 

$.82

 

$.53

 

$.45

 
 
 
 
 
 
 
 
 
Anti-dilutive stock options excluded
 
316

 
907

 
462

 
921






19

Index

9.    OPERATING SEGMENTS

Information on the Company’s two operating segments, the FSG and the ETG, for the six and three months ended April 30, 2017 and 2016, respectively, is as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate and
Intersegment
(1)
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Six months ended April 30, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$452,710

 

$267,334

 

($7,955
)
 

$712,089

Depreciation
 
6,276

 
4,136

 
106

 
10,518

Amortization
 
8,203

 
11,436

 
344

 
19,983

Operating income
 
86,107

 
67,910

 
(12,925
)
 
141,092

Capital expenditures
 
8,560

 
4,834

 
144

 
13,538

 
 
 
 
 
 
 
 
 
Six months ended April 30, 2016:
 
 
 
 
 
 
 
 
Net sales
 

$424,866

 

$236,718

 

($4,709
)
 

$656,875

Depreciation
 
5,924

 
3,976

 
112

 
10,012

Amortization
 
8,245

 
10,595

 
331

 
19,171

Operating income
 
76,788

 
55,671

 
(13,044
)
 
119,415

Capital expenditures
 
8,415

 
6,741

 
390

 
15,546

 
 
 
 
 
 
 
 
 
Three months ended April 30, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$231,809

 

$141,169

 

($4,321
)
 

$368,657

Depreciation
 
3,128

 
2,093

 
53

 
5,274

Amortization
 
4,099

 
5,701

 
179

 
9,979

Operating income
 
44,744

 
38,826

 
(7,028
)
 
76,542

Capital expenditures
 
4,688

 
2,330

 
98

 
7,116

 
 
 
 
 
 
 
 
 
Three months ended April 30, 2016:
 
 
 
 
 
 
 
 
Net sales
 

$220,290

 

$132,566

 

($2,208
)
 

$350,648

Depreciation
 
2,974

 
2,124

 
56

 
5,154

Amortization
 
4,117

 
5,825

 
166

 
10,108

Operating income
 
41,308

 
33,402

 
(7,916
)
 
66,794

Capital expenditures
 
4,710

 
5,058

 
88

 
9,856


(1) Intersegment activity principally consists of net sales from the ETG to the FSG.



20

Index

Total assets by operating segment as of April 30, 2017 and October 31, 2016 are as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Total assets as of April 30, 2017
 

$1,013,546

 

$1,003,535