HEICO Corporation
HEICO CORP (Form: 10-Q, Received: 08/31/2018 15:17:14)
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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 , 2018
 
 
 
 
 
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: 001-04604
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 29, 2018 is as follows:
Common Stock, $.01 par value
53,349,968

shares
Class A Common Stock, $.01 par value
79,542,004

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, 2018
 
October 31, 2017
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 

$66,981

 

$52,066

Accounts receivable, net
 
249,326

 
222,456

Inventories, net
 
391,788

 
343,628

Prepaid expenses and other current assets
 
20,063

 
13,742

Total current assets
 
728,158

 
631,892

 
 
 
 
 
Property, plant and equipment, net
 
154,614

 
129,883

Goodwill
 
1,102,352

 
1,081,306

Intangible assets, net
 
516,454

 
538,081

Other assets
 
153,261

 
131,269

Total assets
 

$2,654,839

 

$2,512,431

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

$929

 

$451

Trade accounts payable
 
99,955

 
89,724

Accrued expenses and other current liabilities
 
152,499

 
147,612

Income taxes payable
 
1,374

 
11,650

Total current liabilities
 
254,757

 
249,437

 
 
 
 
 
Long-term debt, net of current maturities
 
622,889

 
673,528

Deferred income taxes
 
46,469

 
59,026

Other long-term liabilities
 
166,803

 
151,025

Total liabilities
 
1,090,918

 
1,133,016

 
 
 
 
 
Commitments and contingencies (Note 10)
 

 

 
 
 
 
 
Redeemable noncontrolling interests (Note 3)
 
133,599

 
131,123

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued
 

 

Common Stock, $.01 par value per share; 150,000 and 75,000 shares authorized; 53,350 and 52,776 shares issued and outstanding
 
534

 
338

Class A Common Stock, $.01 par value per share; 150,000 and 75,000 shares authorized; 79,522 and 79,227 shares issued and outstanding
 
795

 
507

Capital in excess of par value
 
317,089

 
326,544

Deferred compensation obligation
 
3,118

 
3,118

HEICO stock held by irrevocable trust
 
(3,118
)
 
(3,118
)
Accumulated other comprehensive loss
 
(9,187
)
 
(10,556
)
Retained earnings
 
1,024,739

 
844,247

Total HEICO shareholders’ equity
 
1,333,970

 
1,161,080

Noncontrolling interests
 
96,352

 
87,212

Total shareholders’ equity
 
1,430,322

 
1,248,292

Total liabilities and equity
 

$2,654,839

 

$2,512,431

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


2

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,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net sales
 

$1,300,837

 

$1,103,589

 

$465,825

 

$391,500

 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales
 
796,580

 
688,893

 
284,216

 
242,603

Selling, general and administrative expenses
 
231,709

 
197,482

 
80,186

 
72,775

 
 
 
 
 
 
 
 
 
Total operating costs and expenses
 
1,028,289

 
886,375

 
364,402

 
315,378

 
 
 
 
 
 
 
 
 
Operating income
 
272,548

 
217,214

 
101,423

 
76,122

 
 
 
 
 
 
 
 
 
Interest expense
 
(14,841
)
 
(6,376
)
 
(5,212
)
 
(2,447
)
Other (expense) income
 
(2
)
 
835

 
(112
)
 
200

 
 
 
 
 
 
 
 
 
Income before income taxes and noncontrolling interests
 
257,705

 
211,673

 
96,099

 
73,875

 
 
 
 
 
 
 
 
 
Income tax expense
 
46,100

 
63,100

 
22,200

 
22,400

 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 
211,605

 
148,573

 
73,899

 
51,475

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
19,749

 
16,262

 
6,813

 
5,777

 
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$191,856

 

$132,311

 

$67,086

 

$45,698

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.45

 

$1.01

 

$.51

 

$.35

Diluted
 

$1.40

 

$.98

 

$.49

 

$.34

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
132,422

 
131,618

 
132,794

 
131,786

Diluted
 
136,570

 
135,382

 
136,733

 
135,771

 
 
 
 
 
 
 
 
 
Cash dividends per share
 

$.116

 

$.097

 

$.060

 

$.051

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



3

Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
 
 
Nine months ended July 31,
 
Three months ended July 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 

$211,605

 

$148,573

 

$73,899

 

$51,475

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
1,209

 
17,854

 
(8,181
)
 
17,620

Amortization of unrealized loss on defined
benefit pension plan, net of tax
 
11

 
22

 
5

 
7

Total other comprehensive income (loss)
 
1,220

 
17,876

 
(8,176
)
 
17,627

Comprehensive income from consolidated operations
 
212,825

 
166,449

 
65,723

 
69,102

Net income attributable to noncontrolling interests
 
19,749

 
16,262

 
6,813

 
5,777

Foreign currency translation adjustments attributable to noncontrolling interests
 
72

 
1,117

 
(505
)
 
1,192

Comprehensive income attributable to noncontrolling interests
 
19,821

 
17,379

 
6,308

 
6,969

Comprehensive income attributable to HEICO
 

$193,004

 

$149,070

 

$59,415

 

$62,133

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




4

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, 2017

$131,123

 

$338

 

$507

 

$326,544

 

$3,118

 

($3,118
)
 

($10,556
)
 

$844,247

 

$87,212

 

$1,248,292

Comprehensive income
9,913

 

 

 

 

 

 
1,148

 
191,856

 
9,908

 
202,912

Cash dividends ($.116 per share)

 

 

 

 

 

 

 
(15,363
)
 

 
(15,363
)
Five-for-four common stock splits

 
191

 
286

 
(477
)
 

 

 

 
(29
)
 

 
(29
)
Issuance of common stock to HEICO Savings and Investment Plan

 
1

 
1

 
6,993

 

 

 

 

 

 
6,995

Share-based compensation expense

 

 

 
6,933

 

 

 

 

 

 
6,933

Proceeds from stock option exercises

 
7

 
1

 
3,028

 

 

 

 

 

 
3,036

Redemptions of common stock related to stock option exercises

 
(3
)
 

 
(24,938
)
 

 

 

 

 

 
(24,941
)
Distributions to noncontrolling interests
(6,361
)
 

 

 

 

 

 

 

 
(768
)
 
(768
)
Adjustments to redemption amount of redeemable noncontrolling interests
(4,561
)
 

 

 

 

 

 

 
4,561

 

 
4,561

Noncontrolling interests assumed related to acquisitions
2,491

 

 

 

 

 

 

 

 

 

Other
994

 

 

 
(994
)
 

 

 
221

 
(533
)
 

 
(1,306
)
Balances as of July 31, 2018

$133,599

 

$534

 

$795

 

$317,089

 

$3,118

 

($3,118
)
 

($9,187
)
 

$1,024,739

 

$96,352

 

$1,430,322

 
 
 
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 ($.097 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 interest
(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

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,
 
2018
 
2017
Operating Activities:
 
 
 
Net income from consolidated operations

$211,605

 

$148,573

Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,523

 
46,912

Share-based compensation expense
6,933

 
5,207

Employer contributions to HEICO Savings and Investment Plan
6,015

 
5,732

Foreign currency transaction adjustments, net
183

 
3,316

(Decrease) increase in accrued contingent consideration, net
(3,789
)
 
1,227

Deferred income tax benefit
(13,485
)
 
(6,998
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
(Increase) decrease in accounts receivable
(26,315
)
 
13,343

Increase in inventories
(40,965
)
 
(22,415
)
Decrease (increase) in prepaid expenses and other current assets
1,026

 
(3,722
)
Increase (decrease) in trade accounts payable
10,048

 
(3,561
)
Increase (decrease) in accrued expenses and other current liabilities
8,078

 
(1,476
)
Decrease in income taxes payable
(13,479
)
 
(5,423
)
Other long-term assets and liabilities, net
1,325

 
(1,412
)
Net cash provided by operating activities
204,703

 
179,303

 
 
 
 
Investing Activities:
 
 
 
Acquisitions, net of cash acquired
(40,599
)
 
(95,759
)
Capital expenditures
(35,898
)
 
(20,445
)
Other
(2,736
)
 
(685
)
Net cash used in investing activities
(79,233
)
 
(116,889
)
 
 
 
 
Financing Activities:
 
 
 
Payments on revolving credit facility
(110,000
)
 
(113,000
)
Borrowings on revolving credit facility
53,000

 
87,000

Redemptions of common stock related to stock option exercises
(24,941
)
 

Cash dividends paid
(15,363
)
 
(12,807
)
Distributions to noncontrolling interests
(7,129
)
 
(12,924
)
Payment of contingent consideration
(5,425
)
 
(7,039
)
Revolving credit facility issuance costs
(4,067
)
 
(270
)
Acquisitions of noncontrolling interests

 
(3,848
)
Proceeds from stock option exercises
3,036

 
4,171

Other
(376
)
 
(241
)
Net cash used in financing activities
(111,265
)
 
(58,958
)
 
 
 
 
Effect of exchange rate changes on cash
710

 
3,078

 
 
 
 
Net increase in cash and cash equivalents
14,915

 
6,534

Cash and cash equivalents at beginning of year
52,066

 
42,955

Cash and cash equivalents at end of period

$66,981

 

$49,489

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



6

Index

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, 2017. The October 31, 2017 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, 2018 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 Splits

In December 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 January 18, 2018 in the form of a 25% stock dividend distributed to shareholders of record as of January 3, 2018. In June 2018, 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 June 28, 2018 in the form of a 25% stock dividend distributed to shareholders of record as of June 21, 2018. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock splits.






7

Index

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 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. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented (“full retrospective method”) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application (“modified retrospective method”). The Company expects to use the modified retrospective method.

The Company is in the process of assessing the overall impact of adopting ASU 2014-09. Based on the work completed to date, the Company foresees two types of contracts for which ASU 2014-09 will impact the timing of revenue recognition. For certain contracts under which it produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle and for certain other contracts under which the Company creates or enhances customer-owned assets while performing repair and overhaul services, ASU 2014-09 will require HEICO to recognize revenue using an over time recognition model as opposed to the Company’s current policy of recognizing revenue at the time of shipment. For impacted customer contracts, the adoption of ASU 2014-09 will accelerate revenue recognition and the associated cost of sales. The Company is continuing to quantify 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. Previously, inventories were measured at the lower of cost or market. The Company adopted ASU 2015-11 in the first quarter of fiscal 2018, resulting in no material effect on the Company's consolidated results of operations, financial position or cash flows.

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, as amended, provides certain optional transition relief and shall be applied either at the beginning of the earliest comparative period presented in the year of adoption using a modified retrospective transition approach or by recognizing a cumulative effect adjustment at the date of adoption. 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.



8

Index

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.


2.     ACQUISITIONS

In April 2018, the Company, through a subsidiary of HEICO Electronic, acquired all of the assets and business of the Emergency Locator Transmitter Beacon product line ("ELT Product Line") of Instrumar Limited. The ELT Product Line designs and manufactures Emergency Locator Transmitter Beacons for the commercial aviation and defense markets, that upon activation, transmit a distress signal to alert search and rescue operations of the aircraft's location. The purchase price of this acquisition was paid using cash provided by operating activities.
    
In February 2018, the Company, through a subsidiary of HEICO Electronic, acquired 85% of the assets and business of  Sensor Technology Engineering, Inc. ("Sensor Technology") . Sensor Technology designs and manufactures sophisticated nuclear radiation detectors for law enforcement, homeland security and military applications. The remaining 15% continues to be owned by certain members of Sensory Technology's management team. The purchase price of this acquisition was paid in cash, principally using proceeds from the Company's revolving credit facility.

In November 2017, the Company, through a subsidiary of HEICO Electronic, acquired all of the stock of Interface Displays & Controls, Inc. ("IDC"). IDC designs and manufactures electronic products for aviation, marine, military fighting vehicles, and embedded computing



9

Index

markets. The purchase price of this acquisition was paid using cash provided by operating activities.
    
The total consideration for the fiscal 2018 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. However, the Company does not expect any adjustments to such allocations to be material to the Company's consolidated financial statements. The operating results of the fiscal 2018 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The amount of net sales and earnings of the fiscal 2018 acquisitions included in the Condensed Consolidated Statement of Operations for the nine and three months ended July 31, 2018 is not material. Had the fiscal 2018 acquisitions been consummated as of November 1, 2016, net sales, 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, 2018 and 2017 would not have been materially different than the reported amounts.


3.     SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands)
 
July 31, 2018
 
October 31, 2017
Accounts receivable
 

$252,885

 

$225,462

Less: Allowance for doubtful accounts
 
(3,559
)
 
(3,006
)
Accounts receivable, net
 

$249,326

 

$222,456



Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
(in thousands)
 
July 31, 2018
 
October 31, 2017
Costs incurred on uncompleted contracts
 

$33,848

 

$29,491

Estimated earnings
 
16,565

 
19,902

 
 
50,413

 
49,393

Less: Billings to date
 
(37,334
)
 
(41,262
)


 

$13,079

 

$8,131

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

$14,649

 

$9,377

Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
 
(1,570
)
 
(1,246
)
 
 

$13,079

 

$8,131






10

Index

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, 2018 and 2017.


Inventories
(in thousands)
 
July 31, 2018
 
October 31, 2017
Finished products
 

$189,145

 

$173,559

Work in process
 
48,068

 
39,986

Materials, parts, assemblies and supplies
 
152,458

 
128,031

Contracts in process
 
2,171

 
2,415

Less: Billings to date
 
(54
)
 
(363
)
Inventories, net of valuation reserves
 

$391,788

 

$343,628


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.

Property, Plant and Equipment
(in thousands)
 
July 31, 2018
 
October 31, 2017
Land
 

$5,875

 

$5,435

Buildings and improvements
 
101,128

 
91,916

Machinery, equipment and tooling
 
222,502

 
191,298

Construction in progress
 
5,569

 
5,553

 
 
335,074

 
294,202

Less: Accumulated depreciation and amortization
 
(180,460
)
 
(164,319
)
Property, plant and equipment, net
 

$154,614

 

$129,883



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 $15.1 million as of July 31, 2018 and $12.9 million as of October 31, 2017. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2018 and 2017 was $7.7 million and $8.1 million , respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2018 and 2017 was $2.5 million and $2.7 million , respectively.




11

Index

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, 2018 and 2017 is as follows (in thousands):
 
 
Nine months ended July 31,
 
Three months ended July 31,
 
 
2018
 
2017
 
2018
 
2017
R&D expenses
 

$40,680

 

$33,889

 

$14,020

 

$11,420



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, 2018
 
October 31, 2017
Redeemable at fair value
 

$84,604

 

$82,128

Redeemable based on a multiple of future earnings
 
48,995

 
48,995

Redeemable noncontrolling interests
 

$133,599

 

$131,123



As discussed in Note 2, Acquisitions, the Company, through a subsidiary of HEICO Electronic, acquired 85% of the assets and business of Sensor Technology in February 2018. As part of the Sensor Technology purchase agreement, the Company has the right to purchase the noncontrolling interest in fiscal 2021, or sooner under certain conditions, and the noncontrolling interest holders have the right to cause the Company to purchase the same equity interest at the same point in time.

Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss for the nine months ended July 31, 2018 are as follows (in thousands):
 
 
Foreign Currency Translation
 
Pension Benefit Obligation
 
Accumulated
Other
Comprehensive Loss
Balances as of October 31, 2017
 

($9,533
)
 

($1,023
)
 

($10,556
)
Unrealized gain
 
1,137

 
221

 
1,358

Amortization of unrealized loss
 

 
11

 
11

Balances as of July 31, 2018
 

($8,396
)
 

($791
)
 

($9,187
)




12

Index

4.     GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by operating segment for the nine months ended July 31, 2018 are as follows (in thousands):
 
 
Segment
 
Consolidated Totals
 
 
FSG
 
ETG
 
Balances as of October 31, 2017
 

$388,606

 

$692,700

 

$1,081,306

Goodwill acquired
 

 
22,831

 
22,831

Adjustments to goodwill
 
972

 
(3,091
)
 
(2,119
)
Foreign currency translation adjustments
 
270

 
64

 
334

Balances as of July 31, 2018
 

$389,848

 

$712,504

 

$1,102,352



The goodwill acquired pertains to the fiscal 2018 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. The Company estimates that nearly all of the goodwill acquired in fiscal 2018 will be deductible for income tax purposes. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2017 acquisitions. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income.

Identifiable intangible assets consist of the following (in thousands):
 
 
As of July 31, 2018
 
As of October 31, 2017
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 

$381,090

 

($134,855
)
 

$246,235

 

$379,966

 

($117,069
)
 

$262,897

Intellectual property
 
184,626

 
(52,757
)
 
131,869

 
181,811

 
(44,861
)
 
136,950

Licenses
 
6,559

 
(3,375
)
 
3,184

 
6,559

 
(2,928
)
 
3,631

Patents
 
932

 
(600
)
 
332

 
870

 
(551
)
 
319

Non-compete agreements
 
815

 
(815
)
 

 
817

 
(817
)
 

Trade names
 
466

 
(148
)
 
318

 
466

 
(118
)
 
348

 
 
574,488

 
(192,550
)
 
381,938

 
570,489

 
(166,344
)
 
404,145

Non-Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
134,516

 

 
134,516

 
133,936

 

 
133,936

 
 

$709,004

 

($192,550
)
 

$516,454

 

$704,425

 

($166,344
)
 

$538,081



The increase in the gross carrying amount of customer relationships, intellectual property and non-amortizing trade names as of July 31, 2018 compared to October 31, 2017 principally relates to such intangible assets recognized in connection with the fiscal 2018 acquisitions (see Note 2, Acquisitions). The weighted-average amortization period of the customer relationships and intellectual property acquired during fiscal 2018 is 7 and 10 years, respectively.



13

Index

Amortization expense related to intangible assets for the nine months ended July 31, 2018 and 2017 was $37.5 million and $28.2 million , respectively. Amortization expense related to intangible assets for the three months ended July 31, 2018 and 2017 was $12.7 million and $9.9 million , respectively. Amortization expense related to intangible assets for the remainder of fiscal 2018 is estimated to be $12.5 million . Amortization expense for each of the next five fiscal years and thereafter is estimated to be $48.7 million in fiscal 2019, $45.8 million in fiscal 2020, $43.0 million in fiscal 2021, $36.7 million in fiscal 2022, $31.7 million in fiscal 2023, and $163.5 million thereafter.


5.     LONG-TERM DEBT

Long-term debt consists of the following (in thousands):
 
 
July 31, 2018
 
October 31, 2017
Borrowings under revolving credit facility
 

$614,000

 

$671,000

Capital leases and note payable
 
9,818

 
2,979

 
 
623,818

 
673,979

Less: Current maturities of long-term debt
 
(929
)
 
(451
)
 
 

$622,889

 

$673,528



The Company's borrowings under its revolving credit facility mature in fiscal 2023. As of July 31, 2018 and October 31, 2017, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 3.2% and 2.4% , respectively. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 2018, the Company was in compliance with all such covenants.
    
The increase in capital leases and note payable as of July 31, 2018 compared to October 31, 2017 principally relates to a 14-year capital lease for a manufacturing facility that a subsidiary of HEICO Flight Support Corp. became party to during the third quarter of fiscal 2018.


6.     INCOME TAXES

On December 22, 2017, the United States (U.S.) government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act contains significant changes to existing tax law including, among other things, a reduction in the U.S. federal statutory tax rate from 35% to 21% and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of the Company’s foreign subsidiaries. The Tax Act also contains additional provisions that will become effective for HEICO in fiscal 2019 including a new tax on Global Intangible Low-Taxed Income (“GILTI”), a new deduction for Foreign-Derived Intangible Income (“FDII”), the repeal of the domestic production activity deduction and increased limitations on the deductibility of certain executive



14

Index

compensation. The Company has not yet determined the impact of the provisions of the Tax Act which do not become effective for HEICO until fiscal 2019.
    
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on the accounting for the tax effects of the Tax Act. This guidance provides companies with a measurement period not to exceed one year from the enactment of the Tax Act to complete their accounting for the related tax effects. SAB 118 further states that during the measurement period, companies who are able to make reasonable estimates of the tax effects of the Tax Act should include those amounts in their financial statements as provisional amounts and reflect any adjustments in subsequent periods as they refine their estimates or complete their accounting of such tax effects.
    
As a result of the Tax Act, the Company has revised its estimated annual effective federal statutory income tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, which results in a blended rate of 23.3% for HEICO in fiscal 2018. Additionally, the Company remeasured its U.S. federal net deferred tax liabilities and recorded a provisional discrete tax benefit of $16.6 million in the first quarter of fiscal 2018. Further, the Company recorded a provisional discrete tax expense of $4.7 million in the first quarter of fiscal 2018 related to a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. The Company intends to pay this tax over the eight-year period allowed for in the Tax Act.

The Company’s effective tax rate in the first nine months of fiscal 2018 decreased to 17.9% from 29.8% in the first nine months of fiscal 2017. The decrease principally reflects the previously mentioned discrete tax benefit from the remeasurement of the Company’s U.S. federal net deferred tax liabilities and the net benefit of a lower federal statutory income tax rate, which were partially offset by the aforementioned one-time transition tax expense.

The Company's effective tax rate in the third quarter of fiscal 2018 decreased to 23.1% from 30.3% in the third quarter of fiscal 2017. The decrease principally reflects the previously mentioned net benefit of a lower federal statutory income tax rate.





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Index

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, 2018
 
 
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
 

$—

 

$131,170

 

$—

 

$131,170

Money market funds
 
2,092

 

 

 
2,092

Equity securities
 
3,406

 

 

 
3,406

Mutual funds
 
1,616

 

 

 
1,616

Other
 
1,363

 

 

 
1,363

Total assets
 

$8,477

 

$131,170

 

$—

 

$139,647

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$18,565

 

$18,565

 
 
As of October 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
 

$—

 

$113,220

 

$—

 

$113,220

Money market funds
 
3,972

 

 

 
3,972

Equity securities
 
2,895

 

 

 
2,895

Mutual funds
 
1,541

 

 

 
1,541

Other
 
1,246

 

 

 
1,246

Total assets
 

$9,654

 

$113,220

 

$—

 

$122,874

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$27,573

 

$27,573



The Company maintains two non-qualified deferred compensation plans. The assets of the HEICO Corporation Leadership Compensation Plan (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



16

Index

classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $139.6 million as of July 31, 2018 and $122.9 million as of October 31, 2017, of which the LCP related assets were $133.2 million and $117.2 million as of July 31, 2018 and October 31, 2017, 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 $138.5 million as of July 31, 2018 and $121.7 million as of October 31, 2017, of which the LCP related liability was $132.1 million and $116.0 million as of July 31, 2018 and October 31, 2017, respectively.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet certain earnings objectives during the first six years following the acquisition. As of July 31, 2018, the estimated fair value of the contingent consideration was $13.9 million .

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 $1.7 million in aggregate during the first four years following the first anniversary of the acquisition. As of October 31, 2017, the estimated fair value of the contingent consideration was $1.4 million . During fiscal 2018, the Company paid $.3 million of contingent consideration based on the actual financial performance of the acquired entity during the second year following the acquisition. As of July 31, 2018, the estimated fair value of the remaining contingent consideration was $1.2 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 €12.2 million in aggregate, should the acquired entity meet certain earnings objectives during each of the first two years following the second anniversary of the acquisition. During the third quarter of fiscal 2018, the Company paid €4.4 million , or $5.1 million , of contingent consideration based on the actual earnings of the acquired entity during the third year following the acquisition. As of July 31, 2018, the estimated fair value of the remaining contingent consideration was €3.0 million , or $3.5 million , as compared to €10.8 million , or $12.6 million , as of October 31, 2017. The decrease in the f air value of the contingent consideration is principally attributable to the payment made in the third quarter of fiscal 2018 which was based on lower actual than anticipated earnings as well as revised earnings estimates for the final year of the earnout period that reflect less favorable projected market conditions.

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 HEICO. Changes in either the revenue growth rates, related



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Index

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, 2018 were as follows:
 
Fiscal 2017 Acquisition
 
Fiscal 2016 Acquisition
 
Fiscal 2015 Acquisition
Compound annual revenue growth rate range
(4
%)
-
7%
 
4
%
-
12%
 
8
%
-
11%
Weighted average discount rate
6.1%
 
5.0%
 
.9%


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, 2018 are as follows (in thousands):
 
 
 
Balance as of October 31, 2017
 

$27,573

Payment of contingent consideration
 
(5,425
)
Decrease in accrued contingent consideration, net
 
(3,789
)
Foreign currency transaction adjustments
 
206

Balance as of July 31, 2018
 

$18,565

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

$3,886

Other long-term liabilities
 
14,679

 
 

$18,565



The Company recorded the decrease 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.

The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended July 31, 2018.

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, 2018 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.





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Index

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,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$191,856

 

$132,311

 

$67,086

 

$45,698

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
132,422

 
131,618

 
132,794

 
131,786

Effect of dilutive stock options
 
4,148

 
3,764

 
3,939

 
3,985

Weighted average common shares outstanding - diluted
 
136,570

 
135,382

 
136,733

 
135,771

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.45

 

$1.01

 

$.51

 

$.35

Diluted
 

$1.40

 

$.98

 

$.49

 

$.34

 
 
 
 
 
 
 
 
 
Anti-dilutive stock options excluded
 
547

 
697

 
410

 
1,104







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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, 2018 and 2017, respectively, is as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate and
Intersegment
(1)
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Nine months ended July 31, 2018:
 
 
 
 
 
 
 
 
Net sales
 

$807,683

 

$510,750

 

($17,596
)
 

$1,300,837

Depreciation
 
9,819

 
6,841

 
439

 
17,099

Amortization
 
14,729

 
24,858

 
837

 
40,424

Operating income
 
152,069

 
147,371

 
(26,892
)
 
272,548

Capital expenditures
 
9,710

 
6,922

 
19,266

 
35,898

 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
Three months ended July 31, 2018:
 
 
 
 
 
 
 
 
Net sales
 

$285,126

 

$186,370

 

($5,671
)
 

$465,825

Depreciation
 
3,237

 
2,257

 
253

 
5,747

Amortization
 
4,850

 
8,591

 
246

 
13,687

Operating income
 
54,712

 
56,021

 
(9,310
)
 
101,423

Capital expenditures
 
3,504

 
2,937