HEICO Corporation
HEICO CORP (Form: 10-Q, Received: 08/25/2017 17:09:18)
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 July 31 , 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 August 23, 2017 is as follows:
Common Stock, $.01 par value
33,770,329

shares
Class A Common Stock, $.01 par value
50,685,524

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)
 
 
July 31, 2017
 
October 31, 2016
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 

$49,489

 

$42,955

Accounts receivable, net
 
206,405

 
202,227

Inventories, net
 
340,471

 
286,302

Prepaid expenses and other current assets
 
16,294

 
11,674

Deferred income taxes
 
43,270

 
41,063

Total current assets
 
655,929

 
584,221

 
 
 
 
 
Property, plant and equipment, net
 
129,905

 
121,611

Goodwill
 
921,978

 
865,717

Intangible assets, net
 
390,926

 
366,863

Deferred income taxes
 

 
407

Other assets
 
124,985

 
100,656

Total assets
 

$2,223,723

 

$2,039,475

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

$450

 

$411

Trade accounts payable
 
78,795

 
73,335

Accrued expenses and other current liabilities
 
147,857

 
136,053

Income taxes payable
 

 
4,622

Total current liabilities
 
227,102

 
214,421

 
 
 
 
 
Long-term debt, net of current maturities
 
434,312

 
457,814

Deferred income taxes
 
106,866

 
105,962

Other long-term liabilities
 
131,893

 
114,061

Total liabilities
 
900,173

 
892,258

 
 
 
 
 
Commitments and contingencies (Note 10)
 

 

 
 
 
 
 
Redeemable noncontrolling interests (Note 3)
 
126,881

 
99,512

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common Stock, $.01 par value per share; 75,000 shares authorized; 33,770 and 33,715 shares issued and outstanding
 
338

 
270

Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 50,639 and 50,396 shares issued and outstanding
 
506

 
403

Capital in excess of par value
 
322,024

 
306,328

Deferred compensation obligation
 
2,320

 
2,460

HEICO stock held by irrevocable trust
 
(2,320
)
 
(2,460
)
Accumulated other comprehensive loss
 
(8,567
)
 
(25,326
)
Retained earnings
 
797,621

 
681,704

Total HEICO shareholders’ equity
 
1,111,922

 
963,379

Noncontrolling interests
 
84,747

 
84,326

Total shareholders’ equity
 
1,196,669

 
1,047,705

Total liabilities and equity
 

$2,223,723

 

$2,039,475

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 OPERATIONS – UNAUDITED
(in thousands, except per share data)
 
 
Nine months ended July 31,
 
Three months ended July 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net sales
 

$1,103,589

 

$1,012,959

 

$391,500

 

$356,084

 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales
 
688,893

 
633,151

 
242,603

 
222,501

Selling, general and administrative expenses
 
197,482

 
190,539

 
72,775

 
63,729

 
 
 
 
 
 
 
 
 
Total operating costs and expenses
 
886,375

 
823,690

 
315,378

 
286,230

 
 
 
 
 
 
 
 
 
Operating income
 
217,214

 
189,269

 
76,122

 
69,854

 
 
 
 
 
 
 
 
 
Interest expense
 
(6,376
)
 
(6,194
)
 
(2,447
)
 
(2,294
)
Other income
 
835

 
154

 
200

 
16

 
 
 
 
 
 
 
 
 
Income before income taxes and noncontrolling interests
 
211,673

 
183,229

 
73,875

 
67,576

 
 
 
 
 
 
 
 
 
Income tax expense
 
63,100

 
56,600

 
22,400

 
20,600

 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 
148,573

 
126,629

 
51,475

 
46,976

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
16,262

 
14,699

 
5,777

 
4,974

 
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$132,311

 

$111,930

 

$45,698

 

$42,002

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.57

 

$1.34

 

$.54

 

$.50

Diluted
 

$1.53

 

$1.32

 

$.53

 

$.49

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
84,235

 
83,718

 
84,343

 
83,908

Diluted
 
86,645

 
85,102

 
86,893

 
85,348

 
 
 
 
 
 
 
 
 
Cash dividends per share
 

$.152

 

$.128

 

$.080

 

$.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)
 
 
Nine months ended July 31,
 
Three months ended July 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 

$148,573

 

$126,629

 

$51,475

 

$46,976

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
17,854

 
2,909

 
17,620

 
(3,639
)
Amortization of unrealized loss on defined
benefit pension plan, net of tax
 
22

 

 
7

 

Total other comprehensive income
 
17,876

 
2,909

 
17,627

 
(3,639
)
Comprehensive income from consolidated operations
 
166,449

 
129,538

 
69,102

 
43,337

Less: Net income attributable to noncontrolling interests
 
16,262

 
14,699

 
5,777

 
4,974

Less: Foreign currency translation adjustments attributable to noncontrolling interests
 
1,117

 
201

 
1,192

 
(353
)
Comprehensive income attributable to noncontrolling interests
 
17,379

 
14,900

 
6,969

 
4,621

Comprehensive income attributable to HEICO
 

$149,070

 

$114,638

 

$62,133

 

$38,716

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 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
9,127

 

 

 

 

 

 
16,759

 
132,311

 
8,252

 
157,322

Cash dividends ($.152 per share)

 

 

 

 

 

 

 
(12,807
)
 

 
(12,807
)
Five-for-four common stock split

 
68

 
101

 
(169
)
 

 

 

 
(23
)
 

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

 

 

 
6,489

 

 

 

 

 

 
6,489

Share-based compensation expense

 

 

 
5,207

 

 

 

 

 

 
5,207

Proceeds from stock option exercises

 

 
2

 
4,169

 

 

 

 

 

 
4,171

Noncontrolling interests assumed related to acquisitions
23,618

 

 

 

 

 

 

 

 

 

Distributions to noncontrolling interests
(5,093
)
 

 

 

 

 

 

 

 
(7,831
)
 
(7,831
)
Acquisitions of noncontrolling interests
(3,848
)
 

 

 

 

 

 

 

 

 

Adjustments to redemption amount of redeemable noncontrolling interests
3,565

 

 

 

 

 

 

 
(3,565
)
 

 
(3,565
)
Deferred compensation obligation

 

 

 

 
(140
)
 
140

 

 

 

 

Other

 

 

 

 

 

 

 
1

 

 
1

Balances as of July 31, 2017

$126,881

 

$338

 

$506

 

$322,024

 

$2,320

 

($2,320
)
 

($8,567
)
 

$797,621

 

$84,747

 

$1,196,669

 
 
 
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
7,431

 

 

 

 

 

 
2,708

 
111,930

 
7,469

 
122,107

Cash dividends ($.128 per share)

 

 

 

 

 

 

 
(10,724
)
 

 
(10,724
)
Issuance of common stock to HEICO Savings and Investment Plan

 
1

 
1

 
5,913

 

 

 

 

 

 
5,915

Share-based compensation expense

 

 

 
4,905

 

 

 

 

 

 
4,905

Proceeds from stock option exercises

 

 
2

 
4,829

 

 

 

 

 

 
4,831

Tax benefit from stock option exercises

 

 

 
867

 

 

 

 

 

 
867

Distributions to noncontrolling interests
(7,337
)
 

 

 

 

 

 

 

 
(8,819
)
 
(8,819
)
Acquisitions of noncontrolling interests
(3,599
)
 

 

 

 

 

 

 

 

 

Adjustments to redemption amount of redeemable noncontrolling interests
129

 

 

 

 

 

 

 
(129
)
 

 
(129
)
Deferred compensation obligation

 

 

 

 
(148
)
 
148

 

 

 

 

Other

 

 

 
(4
)
 

 

 

 

 
50

 
46

Balances as of July 31, 2016

$87,906

 

$270

 

$403

 

$302,730

 

$1,635

 

($1,635
)
 

($22,372
)
 

$649,131

 

$82,108

 

$1,012,270

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)
 
Nine months ended July 31,
 
2017
 
2016
Operating Activities:
 
 
 
Net income from consolidated operations

$148,573

 

$126,629

Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
46,912

 
44,603

Employer contributions to HEICO Savings and Investment Plan
5,732

 
5,219

Share-based compensation expense
5,207

 
4,905

Increase in accrued contingent consideration
1,227

 
2,635

Foreign currency transaction adjustments, net
3,316

 
876

Deferred income tax benefit
(6,998
)
 
(6,053
)
Tax benefit from stock option exercises

 
867

Excess tax benefit from stock option exercises

 
(880
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Decrease (increase) in accounts receivable
13,343

 
(2,974
)
Increase in inventories
(22,415
)
 
(13,914
)
Increase in prepaid expenses and other current assets
(3,722
)
 
(1,943
)
Decrease in trade accounts payable
(3,561
)
 
(2,629
)
(Decrease) increase in accrued expenses and other current liabilities
(1,476
)
 
15,630

(Decrease) increase in income taxes payable
(5,423
)
 
1,775

Other long-term assets and liabilities, net
(1,412
)
 
(2,330
)
Net cash provided by operating activities
179,303

 
172,416

 
 
 
 
Investing Activities:
 
 
 
Acquisitions, net of cash acquired
(95,759
)
 
(263,811
)
Capital expenditures
(20,445
)
 
(23,113
)
Other
(685
)
 
(3,005
)
Net cash used in investing activities
(116,889
)
 
(289,929
)
 
 
 
 
Financing Activities:
 
 
 
Borrowings on revolving credit facility
87,000

 
260,000

Payments on revolving credit facility
(113,000
)
 
(118,000
)
Distributions to noncontrolling interests
(12,924
)
 
(16,156
)
Cash dividends paid
(12,807
)
 
(10,724
)
Payment of contingent consideration
(7,039
)
 
(6,960
)
Acquisitions of noncontrolling interests
(3,848
)
 
(3,599
)
Proceeds from stock option exercises
4,171

 
4,831

Excess tax benefit from stock option exercises

 
880

Revolving credit facility issuance costs
(270
)
 

Other
(241
)
 
(272
)
Net cash (used in) provided by financing activities
(58,958
)
 
110,000

 
 
 
 
Effect of exchange rate changes on cash
3,078

 
1,101

 
 
 
 
Net increase (decrease) in cash and cash equivalents
6,534

 
(6,412
)
Cash and cash equivalents at beginning of year
42,955

 
33,603

Cash and cash equivalents at end of period

$49,489

 

$27,191

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 nine months ended July 31, 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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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 reviewing 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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Index

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 745,000 shares and 808,000 shares in the first nine months and third 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 nine 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.     ACQUISITIONS

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.

In June 2017 , the Company, through a subsidiary of the HEICO Flight Support Corp., acquired all of the ownership interests of Carbon by Design ("CBD"). CBD is a manufacturer of composite components for UAVs, rockets, spacecraft and other specialized applications. The purchase price of CBD was paid using cash provided by operating activities.

The total consideration for the fiscal 2017 acquisitions 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 the fiscal 2017 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The Company's consolidated net sales for the nine and three months ended July 31, 2017 include approximately $24.6 million and $23.1 million , respectively, from the fiscal 2017 acquisitions. The amount of earnings of the fiscal 2017 acquisitions included in the Company's Condensed Consolidated Statements of Operations for the nine and three months ended July 31, 2017 is not material.

Had the fiscal 2017 acquisitions occurred as of November 1, 2015, net sales on a pro forma basis for the nine and three months ended July 31, 2017 would not have been materially different than the reported amounts and net sales on a pro forma basis for the nine and three months ended July 31, 2016 would have been $1,076.8 million and $378.6 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 nine and three months ended July 31, 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 acquisitions had taken place as of November 1, 2015.





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3.     SELECTED FINANCIAL STATEMENT INFORMATION

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

$209,873

 

$205,386

Less: Allowance for doubtful accounts
 
(3,468
)
 
(3,159
)
Accounts receivable, net
 

$206,405

 

$202,227


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

$24,114

 

$19,086

Estimated earnings
 
17,463

 
13,887

 
 
41,577

 
32,973

Less: Billings to date
 
(43,652
)
 
(39,142
)


 

($2,075
)
 

($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)
 

$3,730

 

$4,839

Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
 
(5,805
)
 
(11,008
)
 
 

($2,075
)
 

($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 nine and three months ended July 31, 2017 and 2016.

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

$171,587

 

$131,008

Work in process
 
39,893

 
36,076

Materials, parts, assemblies and supplies
 
126,246

 
117,153

Contracts in process
 
3,536

 
3,253

Less: Billings to date
 
(791
)
 
(1,188
)
Inventories, net of valuation reserves
 

$340,471

 

$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)
 
July 31, 2017
 
October 31, 2016
Land
 

$5,099

 

$5,090

Buildings and improvements
 
86,592

 
79,205

Machinery, equipment and tooling
 
189,577

 
171,717

Construction in progress
 
9,887

 
10,453

 
 
291,155

 
266,465

Less: Accumulated depreciation and amortization
 
(161,250
)
 
(144,854
)
Property, plant and equipment, net
 

$129,905

 

$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 $11.9 million as of both July 31, 2017 and October 31, 2016. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2017 and 2016 was $8.1 million and $8.3 million , respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2017 and 2016 was $2.7 million and $3.1 million , respectively.

Research and Development Expenses

The amount of new product research and development ("R&D") expenses included in cost of sales for the nine and three months ended July 31, 2017 and 2016 is as follows (in thousands):
 
 
Nine months ended July 31,
 
Three months ended July 31,
 
 
2017
 
2016
 
2017
 
2016
R&D expenses
 

$33,889

 

$32,666

 

$11,420

 

$12,674





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):
 
 
July 31, 2017
 
October 31, 2016
Redeemable at fair value
 

$83,244

 

$85,574

Redeemable based on a multiple of future earnings
 
43,637

 
13,938

Redeemable noncontrolling interests
 

$126,881

 

$99,512


As discussed in Note 2, Acquisitions, 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 nine months ended July 31, 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
 
16,737

 

 
16,737

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

 
22

 
22

Balances as of July 31, 2017
 

($7,216
)
 

($1,351
)
 

($8,567
)



13

Index

4.     GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by operating segment for the nine months ended July 31, 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
 
49,297

 

 
49,297

Foreign currency translation adjustments
 
3,389

 
3,575

 
6,964

Balances as of July 31, 2017
 

$389,367

 

$532,611

 

$921,978


The goodwill acquired pertains to the fiscal 2017 acquisitions described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's 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 July 31, 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
 

$280,377

 

($109,195
)
 

$171,182

 

$248,271

 

($88,829
)
 

$159,442

Intellectual property
 
143,001

 
(41,888
)
 
101,113

 
139,817

 
(33,291
)
 
106,526

Licenses
 
6,559

 
(2,778
)
 
3,781

 
6,559

 
(2,325
)
 
4,234

Patents
 
853

 
(537
)
 
316

 
779

 
(480
)
 
299

Non-compete agreements
 
821

 
(821
)
 

 
811

 
(811
)
 

Trade names
 
466

 
(108
)
 
358

 
466

 
(77
)
 
389

 
 
432,077

 
(155,327
)
 
276,750

 
396,703

 
(125,813
)
 
270,890

Non-Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
114,176

 

 
114,176

 
95,973

 

 
95,973

 
 

$546,253

 

($155,327
)
 

$390,926

 

$492,676

 

($125,813
)
 

$366,863


The increase in the gross carrying amount of customer relationships, non-amortizing trade names and intellectual property as of July 31, 2017 compared to October 31, 2016 principally relates to such intangible assets recognized in connection with the fiscal 2017 acquisitions (see Note 2, Acquisitions). The weighted-average amortization period of the customer relationships and intellectual property acquired during fiscal 2017 is 12 and 13 years , respectively.




14

Index

Amortization expense related to intangible assets for the nine months ended July 31, 2017 and 2016 was $28.2 million and $27.0 million , respectively. Amortization expense related to intangible assets for the three months ended July 31, 2017 and 2016 was $9.9 million and $9.4 million , respectively. Amortization expense related to intangible assets for the remainder of fiscal 2017 is estimated to be $10.0 million . Amortization expense for each of the next five fiscal years and thereafter is estimated to be $38.2 million in fiscal 2018, $35.9 million in fiscal 2019, $33.2 million in fiscal 2020, $30.5 million in fiscal 2021, $25.3 million in fiscal 2022, and $103.7 million thereafter.


5.     LONG-TERM DEBT

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

$431,660

 

$455,083

Capital leases and note payable
 
3,102

 
3,142

 
 
434,762

 
458,225

Less: Current maturities of long-term debt
 
(450
)
 
(411
)
 
 

$434,312

 

$457,814


The Company's borrowings under its revolving credit facility mature in fiscal 2019. As of July 31, 2017 and October 31, 2016, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 2.2% and 1.6% , respectively. Borrowings under the revolving credit facility denominated in Euros were €32 million as of both July 31, 2017 and October 31, 2016 of which the U.S. dollar equivalent was $37.7 million and $35.1 million , respectively. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 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 nine months of fiscal 2017 decreased to 29.8% from 30.9% in the first nine 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 nine 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 third quarter of fiscal 2017 decreased slightly to 30.3% from 30.5% in the third quarter of fiscal 2016.


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 July 31, 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
 

$—

 

$109,713

 

$—

 

$109,713

Money market funds
 
2,267

 

 

 
2,267

Equity securities
 
2,430

 

 

 
2,430

Mutual funds
 
1,498

 

 

 
1,498

Other
 
1,368

 

 

 
1,368

Total assets
 

$7,563

 

$109,713

 

$—

 

$117,276

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$14,041

 

$14,041




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 $117.3 million as of July 31, 2017 and $93.2 million as of October 31, 2016, of which the LCP related assets were $112.0 million and $88.5 million as of July 31, 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 $116.1 million as of July 31, 2017 and $92.6 million as of October 31, 2016, of which the LCP related liability was $110.8 million and $87.9 million as of July 31, 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 July 31, 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. During the third quarter of fiscal



17

Index

2017, the Company paid €6.1 million , or $6.8 million , of contingent consideration based on the actual earnings of the acquired entity during the second year following the acquisition. As of July 31, 2017, the estimated fair value of the remaining contingent consideration was €10.8 million , or $12.7 million .

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 July 31, 2017 were as follows:
 
Fiscal 2016 Acquisition
 
Fiscal 2015 Acquisition
Compound annual revenue growth rate range
0
%
-
12%
 
4
%
-
20%
Weighted average discount rate
4.8%
 
1.6%

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

$18,881

Payment of contingent consideration
 
(7,039
)
Increase in accrued contingent consideration
 
1,227

Foreign currency transaction adjustments
 
972

Balance as of July 31, 2017
 

$14,041

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

$7,014

Other long-term liabilities
 
7,027

 
 

$14,041


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 nine months ended July 31, 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 July 31, 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):
 
 
Nine months ended July 31,
 
Three months ended July 31,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$132,311

 

$111,930

 

$45,698

 

$42,002

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
84,235

 
83,718

 
84,343

 
83,908

Effect of dilutive stock options
 
2,410

 
1,384

 
2,550

 
1,440

Weighted average common shares outstanding - diluted
 
86,645

 
85,102

 
86,893

 
85,348

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.57

 

$1.34

 

$.54

 

$.50

Diluted
 

$1.53

 

$1.32

 

$.53

 

$.49

 
 
 
 
 
 
 
 
 
Anti-dilutive stock options excluded
 
446

 
844

 
706

 
717






19

Index

9.    OPERATING SEGMENTS

Information on the Company’s two operating segments, the FSG and the ETG, for the nine and three months ended July 31, 2017 and 2016, respectively, is as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate and
Intersegment
(1)
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Nine months ended July 31, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$710,676

 

$405,194

 

($12,281
)
 

$1,103,589

Depreciation
 
9,654

 
6,304

 
160

 
16,118

Amortization
 
13,088

 
17,158

 
548

 
30,794

Operating income
 
132,771

 
106,453

 
(22,010
)
 
217,214

Capital expenditures
 
12,305

 
7,920

 
220

 
20,445

 
 
 
 
 
 
 
 
 
Nine months ended July 31, 2016:
 
 
 
 
 
 
 
 
Net sales
 

$647,419

 

$372,933

 

($7,393
)
 

$1,012,959

Depreciation
 
8,973

 
5,854

 
166

 
14,993

Amortization
 
12,414

 
16,700

 
496

 
29,610

Operating income
 
118,757

 
89,280

 
(18,768
)
 
189,269

Capital expenditures
 
13,449

 
9,257

 
407

 
23,113

 
 
 
 
 
 
 
 
 
Three months ended July 31, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$257,966

 

$137,860

 

($4,326
)
 

$391,500

Depreciation
 
3,378

 
2,168

 
54

 
5,600

Amortization
 
4,885

 
5,722

 
204

 
10,811

Operating income
 
46,664

 
38,543

 
(9,085
)
 
76,122

Capital expenditures
 
3,745

 
3,086

 
76

 
6,907

 
 
 
 
 
 
 
 
 
Three months ended July 31, 2016:
 
 
 
 
 
 
 
 
Net sales
 

$222,553

 

$136,215

 

($2,684
)
 

$356,084

Depreciation
 
3,049

 
1,878

 
54

 
4,981

Amortization
 
4,169

 
6,105

 
165

 
10,439

Operating income
 
41,969

 
33,609

 
(5,724
)
 
69,854

Capital expenditures
 
5,034

 
2,516

 
17

 
7,567


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



20

Index

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

$1,040,802

 

$1,015,645