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HEICO CORP - Quarter Report: 2018 April (Form 10-Q)

Index

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended April 30, 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 May 29, 2018 is as follows:
Common Stock, $.01 par value
42,673,859

shares
Class A Common Stock, $.01 par value
63,538,812

shares

Index

HEICO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
 
 
Page
Part I.
Financial Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
Item 6.
 
 
 
 
 




1
Index

PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
 
 
April 30, 2018
 
October 31, 2017
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 

$48,227

 

$52,066

Accounts receivable, net
 
238,233

 
222,456

Inventories, net
 
382,669

 
343,628

Prepaid expenses and other current assets
 
25,597

 
13,742

Total current assets
 
694,726

 
631,892

 
 
 
 
 
Property, plant and equipment, net
 
148,114

 
129,883

Goodwill
 
1,104,555

 
1,081,306

Intangible assets, net
 
532,263

 
538,081

Other assets
 
148,223

 
131,269

Total assets
 

$2,627,881

 

$2,512,431

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

$480

 

$451

Trade accounts payable
 
94,373

 
89,724

Accrued expenses and other current liabilities
 
135,200

 
147,612

Income taxes payable
 
—

 
11,650

Total current liabilities
 
230,053

 
249,437

 
 
 
 
 
Long-term debt, net of current maturities
 
683,362

 
673,528

Deferred income taxes
 
46,875

 
59,026

Other long-term liabilities
 
164,050

 
151,025

Total liabilities
 
1,124,340

 
1,133,016

 
 
 
 
 
Commitments and contingencies (Note 10)
 

 

 
 
 
 
 
Redeemable noncontrolling interests (Note 3)
 
134,034

 
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; 42,665 and 42,221 shares issued and outstanding
 
427

 
338

Class A Common Stock, $.01 par value per share; 150,000 and 75,000 shares authorized; 63,523 and 63,381 shares issued and outstanding
 
635

 
507

Capital in excess of par value
 
311,710

 
326,544

Deferred compensation obligation
 
3,118

 
3,118

HEICO stock held by irrevocable trust
 
(3,118
)
 
(3,118
)
Accumulated other comprehensive loss
 
(1,516
)
 
(10,556
)
Retained earnings
 
964,571

 
844,247

Total HEICO shareholders’ equity
 
1,275,827

 
1,161,080

Noncontrolling interests
 
93,680

 
87,212

Total shareholders’ equity
 
1,369,507

 
1,248,292

Total liabilities and equity
 

$2,627,881

 

$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)
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net sales
 

$835,012

 

$712,089

 

$430,602

 

$368,657

 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales
 
512,364

 
446,290

 
262,745

 
228,275

Selling, general and administrative expenses
 
151,523

 
124,707

 
76,292

 
63,840

 
 
 
 
 
 
 
 
 
Total operating costs and expenses
 
663,887

 
570,997

 
339,037

 
292,115

 
 
 
 
 
 
 
 
 
Operating income
 
171,125

 
141,092

 
91,565

 
76,542

 
 
 
 
 
 
 
 
 
Interest expense
 
(9,629
)
 
(3,929
)
 
(4,904
)
 
(1,960
)
Other income (expense)
 
110

 
635

 
(250
)
 
151

 
 
 
 
 
 
 
 
 
Income before income taxes and noncontrolling interests
 
161,606

 
137,798

 
86,411

 
74,733

 
 
 
 
 
 
 
 
 
Income tax expense
 
23,900

 
40,700

 
20,400

 
23,900

 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 
137,706

 
97,098

 
66,011

 
50,833

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
12,936

 
10,485

 
6,393

 
5,147

 
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$124,770

 

$86,613

 

$59,618

 

$45,686

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.18

 

$.82

 

$.56

 

$.43

Diluted
 

$1.14

 

$.80

 

$.55

 

$.42

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
105,789

 
105,227

 
105,940

 
105,276

Diluted
 
109,191

 
108,150

 
109,271

 
108,296

 
 
 
 
 
 
 
 
 
Cash dividends per share
 

$.070

 

$.058

 

$—

 

$—

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)
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income from consolidated operations
 

$137,706

 

$97,098

 

$66,011

 

$50,833

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
9,390

 
234

 
(6,573
)
 
1,758

Amortization of unrealized loss on defined
benefit pension plan, net of tax
 
6

 
15

 
2

 
8

Total other comprehensive income (loss)
 
9,396

 
249

 
(6,571
)
 
1,766

Comprehensive income from consolidated operations
 
147,102

 
97,347

 
59,440

 
52,599

Net income attributable to noncontrolling interests
 
12,936

 
10,485

 
6,393

 
5,147

Foreign currency translation adjustments attributable to noncontrolling interests
 
577

 
(75
)
 
(417
)
 
221

Comprehensive income attributable to noncontrolling interests
 
13,513

 
10,410

 
5,976

 
5,368

Comprehensive income attributable to HEICO
 

$133,589

 

$86,937

 

$53,464

 

$47,231

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
6,636

 
—

 
—

 
—

 
—

 
—

 
8,819

 
124,770

 
6,877

 
140,466

Cash dividends ($.070 per share)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,395
)
 
—

 
(7,395
)
Five-for-four common stock split
—

 
84

 
127

 
(211
)
 
—

 
—

 
—

 
—

 
—

 
—

Issuance of common stock to HEICO Savings and Investment Plan
—

 
1

 
—

 
4,547

 
—

 
—

 
—

 
—

 
—

 
4,548

Share-based compensation expense
—

 
—

 
—

 
4,459

 
—

 
—

 
—

 
—

 
—

 
4,459

Proceeds from stock option exercises
—

 
7

 
1

 
1,985

 
—

 
—

 
—

 
—

 
—

 
1,993

Redemptions of common stock related to stock option exercises
—

 
(3
)
 
—

 
(24,620
)
 
—

 
—

 
—

 
—

 
—

 
(24,623
)
Distributions to noncontrolling interests
(4,040
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(409
)
 
(409
)
Adjustments to redemption amount of redeemable noncontrolling interests
(3,170
)
 
—

 
—

 
—

 
—

 
—

 
—

 
3,170

 
—

 
3,170

Noncontrolling interests assumed related to acquisitions
2,491

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
994

 
—

 
—

 
(994
)
 
—

 
—

 
221

 
(221
)
 
—

 
(994
)
Balances as of April 30, 2018

$134,034

 

$427

 

$635

 

$311,710

 

$3,118

 

($3,118
)
 

($1,516
)
 

$964,571

 

$93,680

 

$1,369,507

 
 
 
HEICO Shareholders' Equity
 
 
 
 
 
Redeemable Noncontrolling Interests
 
Common Stock
 
Class A Common Stock
 
Capital in Excess of Par Value
 
Deferred Compensation Obligation
 
HEICO Stock Held by Irrevocable Trust
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Noncontrolling Interests
 
Total Shareholders' Equity
Balances as of October 31, 2016

$99,512

 

$270

 

$403

 

$306,328

 

$2,460

 

($2,460
)
 

($25,326
)
 

$681,704

 

$84,326

 

$1,047,705

Comprehensive income
5,151

 
—

 
—

 
—

 
—

 
—

 
324

 
86,613

 
5,259

 
92,196

Cash dividends ($.058 per share)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(6,059
)
 
—

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

 
68

 
101

 
(169
)
 
—

 
—

 
—

 
(23
)
 
—

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

 
—

 
—

 
5,484

 
—

 
—

 
—

 
—

 
—

 
5,484

Share-based compensation expense
—

 
—

 
—

 
3,110

 
—

 
—

 
—

 
—

 
—

 
3,110

Proceeds from stock option exercises
—

 
—

 
1

 
2,296

 
—

 
—

 
—

 
—

 
—

 
2,297

Distributions to noncontrolling interests
(3,544
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(353
)
 
(353
)
Acquisitions of noncontrolling interest
(3,848
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Adjustments to redemption amount of redeemable noncontrolling interests
5,826

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,826
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Deferred compensation obligation
—

 
—

 
—

 
—

 
(140
)
 
140

 
—

 
—

 
—

 
—

Other
—

 
—

 
1

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

Balances as of April 30, 2017

$125,132

 

$338

 

$506

 

$317,049

 

$2,320

 

($2,320
)
 

($25,002
)
 

$756,408

 

$89,232

 

$1,138,531

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



5

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
 
Six months ended April 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net income from consolidated operations

$137,706

 

$97,098

Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,089

 
30,501

Employer contributions to HEICO Savings and Investment Plan
4,083

 
3,679

Share-based compensation expense
4,459

 
3,110

(Decrease) increase in accrued contingent consideration, net
(3,412
)
 
1,148

Foreign currency transaction adjustments, net
117

 
(280
)
Deferred income tax benefit
(13,157
)
 
(2,909
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
(Increase) decrease in accounts receivable
(14,337
)
 
1,358

Increase in inventories
(29,814
)
 
(14,251
)
Increase in prepaid expenses and other current assets
(4,266
)
 
(225
)
Increase (decrease) in trade accounts payable
3,912

 
(7,567
)
Decrease in accrued expenses and other current liabilities
(14,534
)
 
(11,176
)
Decrease in income taxes payable
(14,714
)
 
(2,023
)
Other long-term assets and liabilities, net
868

 
(750
)
Net cash provided by operating activities
95,000

 
97,713

 
 
 
 
Investing Activities:
 
 
 
Acquisitions, net of cash acquired
(39,364
)
 
(80,838
)
Capital expenditures
(29,457
)
 
(13,538
)
Other
(2,744
)
 
(944
)
Net cash used in investing activities
(71,565
)
 
(95,320
)
 
 
 
 
Financing Activities:
 
 
 
Borrowings on revolving credit facility
53,000

 
87,000

Payments on revolving credit facility
(43,000
)
 
(84,000
)
Redemptions of common stock related to stock option exercises
(24,623
)
 
—

Cash dividends paid
(7,395
)
 
(6,059
)
Distributions to noncontrolling interests
(4,449
)
 
(3,897
)
Revolving credit facility issuance costs
(4,067
)
 
(270
)
Acquisitions of noncontrolling interests
—

 
(3,848
)
Payment of contingent consideration
(300
)
 
—

Proceeds from stock option exercises
1,993

 
2,297

Other
(232
)
 
(371
)
Net cash used in financing activities
(29,073
)
 
(9,148
)
 
 
 
 
Effect of exchange rate changes on cash
1,799

 
532

 
 
 
 
Net decrease in cash and cash equivalents
(3,839
)
 
(6,223
)
Cash and cash equivalents at beginning of year
52,066

 
42,955

Cash and cash equivalents at end of period

$48,227

 

$36,732

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



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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 six months ended April 30, 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 Split

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. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.






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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. 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 (“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 reviewing a representative sample of customer contracts across its identified revenue streams. 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. The Company has not yet determined 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 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 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



8
Index

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 markets. The purchase price of this acquisition was paid using cash provided by operating activities.
    



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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. 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 six and three months ended April 30, 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 six and three months ended April 30, 2018 and 2017 would not have been materially different than the reported amounts.


3.     SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands)
 
April 30, 2018
 
October 31, 2017
Accounts receivable
 

$241,665

 

$225,462

Less: Allowance for doubtful accounts
 
(3,432
)
 
(3,006
)
Accounts receivable, net
 

$238,233

 

$222,456


Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
(in thousands)
 
April 30, 2018
 
October 31, 2017
Costs incurred on uncompleted contracts
 

$36,965

 

$29,491

Estimated earnings
 
20,980

 
19,902

 
 
57,945

 
49,393

Less: Billings to date
 
(44,621
)
 
(41,262
)


 

$13,324

 

$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)
 

$15,238

 

$9,377

Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
 
(1,914
)
 
(1,246
)
 
 

$13,324

 

$8,131


Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the six and three months ended April 30, 2018 and 2017.





10
Index

Inventories
(in thousands)
 
April 30, 2018
 
October 31, 2017
Finished products
 

$185,987

 

$173,559

Work in process
 
45,077

 
39,986

Materials, parts, assemblies and supplies
 
149,840

 
128,031

Contracts in process
 
2,037

 
2,415

Less: Billings to date
 
(272
)
 
(363
)
Inventories, net of valuation reserves
 

$382,669

 

$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)
 
April 30, 2018
 
October 31, 2017
Land
 

$5,887

 

$5,435

Buildings and improvements
 
94,262

 
91,916

Machinery, equipment and tooling
 
218,644

 
191,298

Construction in progress
 
4,775

 
5,553

 
 
323,568

 
294,202

Less: Accumulated depreciation and amortization
 
(175,454
)
 
(164,319
)
Property, plant and equipment, net
 

$148,114

 

$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 $13.4 million as of April 30, 2018 and $12.9 million as of October 31, 2017. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2018 and 2017 was $5.2 million and $5.4 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended April 30, 2018 and 2017 was $2.7 million and $3.0 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 six and three months ended April 30, 2018 and 2017 is as follows (in thousands):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
R&D expenses
 

$26,660

 

$22,469

 

$13,953

 

$11,223


Redeemable Noncontrolling Interests

The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2025. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
 
 
April 30, 2018
 
October 31, 2017
Redeemable at fair value
 

$85,039

 

$82,128

Redeemable based on a multiple of future earnings
 
48,995

 
48,995

Redeemable noncontrolling interests
 

$134,034

 

$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 six months ended April 30, 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
 
8,813

 
221

 
9,034

Amortization of unrealized loss
 
—

 
6

 
6

Balances as of April 30, 2018
 

($720
)
 

($796
)
 

($1,516
)



12
Index

4.     GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by operating segment for the six months ended April 30, 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
 
—

 
21,535

 
21,535

Foreign currency translation adjustments
 
1,628

 
1,547

 
3,175

Adjustments to goodwill
 
972

 
(2,433
)
 
(1,461
)
Balances as of April 30, 2018
 

$391,206

 

$713,349

 

$1,104,555


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. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2017 acquisitions.

Identifiable intangible assets consist of the following (in thousands):
 
 
As of April 30, 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
 

$385,776

 

($130,386
)
 

$255,390

 

$379,966

 

($117,069
)
 

$262,897

Intellectual property
 
185,188

 
(49,573
)
 
135,615

 
181,811

 
(44,861
)
 
136,950

Licenses
 
6,559

 
(3,227
)
 
3,332

 
6,559

 
(2,928
)
 
3,631

Patents
 
921

 
(592
)
 
329

 
870

 
(551
)
 
319

Non-compete agreements
 
817

 
(817
)
 
—

 
817

 
(817
)
 
—

Trade names
 
466

 
(138
)
 
328

 
466

 
(118
)
 
348

 
 
579,727

 
(184,733
)
 
394,994

 
570,489

 
(166,344
)
 
404,145

Non-Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
137,269

 
—

 
137,269

 
133,936

 
—

 
133,936

 
 

$716,996

 

($184,733
)
 

$532,263

 

$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 April 30, 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 11 years, respectively.



13
Index

Amortization expense related to intangible assets for the six months ended April 30, 2018 and 2017 was $24.8 million and $18.3 million, respectively. Amortization expense related to intangible assets for the three months ended April 30, 2018 and 2017 was $12.4 million and $9.1 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2018 is estimated to be $25.2 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $48.6 million in fiscal 2019, $45.7 million in fiscal 2020, $43.0 million in fiscal 2021, $36.8 million in fiscal 2022, $31.8 million in fiscal 2023, and $163.9 million thereafter.


5.     LONG-TERM DEBT

Long-term debt consists of the following (in thousands):
 
 
April 30, 2018
 
October 31, 2017
Borrowings under revolving credit facility
 

$681,000

 

$671,000

Capital leases and note payable
 
2,842

 
2,979

 
 
683,842

 
673,979

Less: Current maturities of long-term debt
 
(480
)
 
(451
)
 
 

$683,362

 

$673,528


The Company's borrowings under its revolving credit facility mature in fiscal 2023. As of April 30, 2018 and October 31, 2017, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 3.0% and 2.4%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2018, the Company was in compliance with all such covenants.


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 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



14
Index

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 six months of fiscal 2018 decreased to 14.8% from 29.5% in the first six 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 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 second quarter of fiscal 2018 decreased to 23.6% from 32.0% in the second quarter of fiscal 2017. The decrease principally reflects the previously mentioned benefit of a lower federal statutory income tax rate.





15
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 April 30, 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
 

$—

 

$126,979

 

$—

 

$126,979

Money market funds
 
439

 
—

 
—

 
439

Equity securities
 
3,108

 
—

 
—

 
3,108

Mutual funds
 
1,624

 
—

 
—

 
1,624

Other
 
1,289

 
—

 
—

 
1,289

Total assets
 

$6,460

 

$126,979

 

$—

 

$133,439

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$24,428

 

$24,428

 
 
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 $133.4 million as of April 30, 2018 and $122.9 million as of October 31, 2017, of which the LCP related assets were $127.4 million and $117.2 million as of April 30, 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 $132.3 million as of April 30, 2018 and $121.7 million as of October 31, 2017, of which the LCP related liability was $126.3 million and $116.0 million as of April 30, 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 April 30, 2018, the estimated fair value of the contingent consideration was $13.4 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 April 30, 2018, the estimated fair value of the remaining contingent consideration was $1.1 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. As of April 30, 2018, the estimated fair value of the contingent consideration was €8.2 million, or $9.9 million, as compared to €10.8 million, or $12.6 million, as of October 31, 2017. The decrease in the fair value of the contingent consideration is principally attributed to 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 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.



17
Index

The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of April 30, 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
6.4%
 
5.6%
 
.8%

Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended April 30, 2018 are as follows (in thousands):
 
 
 
Balance as of October 31, 2017
 

$27,573

Decrease in accrued contingent consideration, net
 
(3,412
)
Payment of contingent consideration
 
(300
)
Foreign currency transaction adjustments
 
567

Balance as of April 30, 2018
 

$24,428

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

$6,516

Other long-term liabilities
 
17,912

 
 

$24,428


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 six months ended April 30, 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 April 30, 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.





18
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):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to HEICO
 

$124,770

 

$86,613

 

$59,618

 

$45,686

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
105,789

 
105,227

 
105,940

 
105,276

Effect of dilutive stock options
 
3,402

 
2,923

 
3,331

 
3,020

Weighted average common shares outstanding - diluted
 
109,191

 
108,150

 
109,271

 
108,296

 
 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
 
Basic
 

$1.18

 

$.82

 

$.56

 

$.43

Diluted
 

$1.14

 

$.80

 

$.55

 

$.42

 
 
 
 
 
 
 
 
 
Anti-dilutive stock options excluded
 
492

 
395

 
369

 
577






19
Index

9.    OPERATING SEGMENTS

Information on the Company’s two operating segments, the FSG and the ETG, for the six and three months ended April 30, 2018 and 2017, respectively, is as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate and
Intersegment (1)
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Six months ended April 30, 2018:
 
 
 
 
 
 
 
 
Net sales
 

$522,557

 

$324,380

 

($11,925
)
 

$835,012

Depreciation
 
6,582

 
4,584

 
186

 
11,352

Amortization
 
9,879

 
16,267

 
591

 
26,737

Operating income
 
97,357

 
91,350

 
(17,582
)
 
171,125

Capital expenditures
 
6,206

 
3,985

 
19,266

 
29,457

 
 
 
 
 
 
 
 
 
Six months ended April 30, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$452,710

 

$267,334

 

($7,955
)
 

$712,089

Depreciation
 
6,276

 
4,136

 
106

 
10,518

Amortization
 
8,203

 
11,436

 
344

 
19,983

Operating income
 
86,107

 
67,910

 
(12,925
)
 
141,092

Capital expenditures
 
8,560

 
4,834

 
144

 
13,538

 
 
 
 
 
 
 
 
 
Three months ended April 30, 2018:
 
 
 
 
 
 
 
 
Net sales
 

$267,836

 

$168,722

 

($5,956
)
 

$430,602

Depreciation
 
3,290

 
2,310

 
124

 
5,724

Amortization
 
4,932

 
8,163

 
246

 
13,341

Operating income
 
51,488

 
48,130

 
(8,053
)
 
91,565

Capital expenditures
 
3,909

 
2,242

 
15,729

 
21,880

 
 
 
 
 
 
 
 
 
Three months ended April 30, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$231,809

 

$141,169

 

($4,321
)
 

$368,657

Depreciation
 
3,128

 
2,093

 
53

 
5,274

Amortization
 
4,099

 
5,701

 
179

 
9,979

Operating income
 
44,744

 
38,826

 
(7,028
)
 
76,542

Capital expenditures
 
4,688

 
2,330

 
98

 
7,116


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



20
Index

Total assets by operating segment as of April 30, 2018 and October 31, 2017 are as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Total assets as of April 30, 2018
 

$1,061,310

 

$1,391,902

 

$174,669

 

$2,627,881

Total assets as of October 31, 2017
 
1,042,925

 
1,339,363

 
130,143

 
2,512,431



10. COMMITMENTS AND CONTINGENCIES
Guarantees
As of April 30, 2018, the Company has arranged for standby letters of credit aggregating $4.3 million, which are supported by its revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries.
Product Warranty
Changes in the Company’s product warranty liability for the six months ended April 30, 2018 and 2017, respectively, are as follows (in thousands):
 
 
Six months ended April 30,
 
 
2018
 
2017
Balances as of beginning of fiscal year
 

$2,921

 

$3,351

Accruals for warranties
 
1,466

 
1,107

Acquired warranty liabilities
 
300

 
—

Warranty claims settled
 
(1,431
)
 
(1,250
)
Balances as of April 30
 

$3,256

 

$3,208


Litigation
The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.





21
Index

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview

This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.

Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2017. There have been no material changes to our critical accounting policies during the six months ended April 30, 2018.

Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.

Our results of operations for the six months ended April 30, 2018 have been affected by the Tax Cuts and Jobs Act as further detailed within Income Tax Expense of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this quarterly report for the period ended April 30, 2018. Further, our results of operation for the six and three months ended April 30, 2018 have been effected by the fiscal 2017 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2017 and by the fiscal 2018 acquisitions as further detailed in Note 2, acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report.

All share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in January 2018. See Note 1, Summary of Significant Accounting Policies – Stock Split, of the Notes to Condensed Consolidated Financial Statements for additional information regarding the stock split.





22
Index

Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 

$835,012

 

$712,089

 

$430,602

 

$368,657

Cost of sales
 
512,364

 
446,290

 
262,745

 
228,275

Selling, general and administrative expenses
 
151,523

 
124,707

 
76,292

 
63,840

Total operating costs and expenses
 
663,887

 
570,997

 
339,037

 
292,115

Operating income
 

$171,125

 

$141,092

 

$91,565

 

$76,542

 
 
 
 
 
 
 
 
 
Net sales by segment:
 
 
 
 
 
 
 
 
Flight Support Group
 

$522,557

 

$452,710

 

$267,836

 

$231,809

Electronic Technologies Group
 
324,380

 
267,334

 
168,722

 
141,169

Intersegment sales
 
(11,925
)
 
(7,955
)
 
(5,956
)
 
(4,321
)
 
 

$835,012

 

$712,089

 

$430,602

 

$368,657

 
 
 
 
 
 
 
 
 
Operating income by segment:
 
 
 
 
 
 
 
 
Flight Support Group
 

$97,357

 

$86,107

 

$51,488

 

$44,744

Electronic Technologies Group
 
91,350

 
67,910

 
48,130

 
38,826

Other, primarily corporate
 
(17,582
)
 
(12,925
)
 
(8,053
)
 
(7,028
)
 
 

$171,125

 

$141,092

 

$91,565

 

$76,542

 
 
 
 
 
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Gross profit
 
38.6
%
 
37.3
%
 
39.0
%
 
38.1
%
Selling, general and administrative expenses
 
18.1
%
 
17.5
%
 
17.7
%
 
17.3
%
Operating income
 
20.5
%
 
19.8
%
 
21.3
%
 
20.8
%
Interest expense
 
1.2
%
 
.6
%
 
1.1
%
 
.5
%
Other income (expense)
 
—
%
 
.1
%
 
(.1
%)
 
—
%
Income tax expense
 
2.9
%
 
5.7
%
 
4.7
%
 
6.5
%
Net income attributable to noncontrolling interests
 
1.5
%
 
1.5
%
 
1.5
%
 
1.4
%
Net income attributable to HEICO
 
14.9
%
 
12.2
%
 
13.8
%
 
12.4
%




23
Index

Comparison of First Six Months of Fiscal 2018 to First Six Months of Fiscal 2017

Net Sales

Our consolidated net sales in the first six months of fiscal 2018 increased by 17% to a record $835.0 million, up from net sales of $712.1 million in the first six months of fiscal 2017. The increase in consolidated net sales principally reflects an increase of $69.8 million (a 15% increase) to a record $522.6 million in net sales within the FSG as well as an increase of $57.0 million (a 21% increase) to a record $324.4 million in net sales within the ETG. The net sales increase in the FSG reflects net sales of $50.6 million contributed by our fiscal 2017 acquisitions as well as organic growth of 4%. The FSG's organic growth is attributable to increased demand and new product offerings within our aftermarket replacement parts and repair and overhaul parts and services product lines, resulting in net sales increases of $12.1 million and $8.1 million, respectively. These increases were partially offset by lower net sales of $1.0 million within our specialty products product line. Excluding the net sales decrease in our specialty products product line, the FSG experienced organic growth of 6%. The net sales increase in the ETG reflects net sales of $45.1 million contributed by our fiscal 2017 and 2018 acquisitions as well as organic growth of 3%. The ETG's organic growth is mainly attributable to increased demand for certain defense and space products resulting in net sales increases of $7.0 million and $4.9 million, respectively. Sales price changes were not a significant contributing factor to the FSG and ETG net sales growth in the first six months of fiscal 2018.

Gross Profit and Operating Expenses

Our consolidated gross profit margin increased to 38.6% in the first six months of fiscal 2018, up from 37.3% in the first six months of fiscal 2017, principally reflecting an increase of 2.7% and .2% in the ETG's and FSG's gross profit margins, respectively. The increase in the ETG’s gross profit margin is principally attributable to increased net sales and a more favorable product mix for certain of our defense products partially offset by a less favorable product mix for certain of our space and other electronics products. Total new product research and development expenses included within our consolidated cost of sales were $26.7 million in the first six months of fiscal 2018 compared to $22.5 million in the first six months of fiscal 2017.

Our consolidated selling, general and administrative (“SG&A”) expenses were $151.5 million and $124.7 million in the first six months of fiscal 2018 and 2017, respectively. The increase in consolidated SG&A expenses principally reflects $17.4 million attributable to fiscal 2017 and 2018 acquisitions and $4.8 million of higher performance-based compensation expense.

Our consolidated SG&A expenses as a percentage of net sales were 18.1% and 17.5% in the first six months of fiscal 2018 and 2017, respectively. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a .4% impact from higher performance-based compensation expense and a .3% impact from an increase in intangible asset amortization expense mainly resulting from our fiscal 2017 acquisitions.




24
Index

Operating Income

Our consolidated operating income increased by 21% to a record $171.1 million in the first six months of fiscal 2018, up from $141.1 million in the first six months of fiscal 2017. The increase in consolidated operating income principally reflects a $23.4 million increase (a 35% increase) to a record $91.4 million in operating income of the ETG as well as an $11.3 million increase (a 13% increase) to a record $97.4 million in operating income of the FSG. The increase in operating income of the ETG is principally attributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $4.9 million increase in intangible asset amortization expense mainly from the fiscal 2017 and 2018 acquisitions. The increase in operating income of the FSG is principally attributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $3.8 million increase in performance-based compensation expense and a $1.6 million increase in intangible asset amortization expense mainly resulting from the fiscal 2017 acquisitions. Additionally, our corporate expenses increased by $3.8 million principally due to a $2.2 million increase in performance-based compensation expense and higher operating costs in support of the overall growth of our business.

As a percentage of net sales, our consolidated operating income increased to 20.5% in the first six months of fiscal 2018, up from 19.8% in the first six months of fiscal 2017. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 28.2% in the first six months of fiscal 2018, up from 25.4% in the first six months of fiscal 2017, partially offset by a decrease in the FSG’s operating income as a percentage of net sales to 18.6% in the first six months of fiscal 2018 compared to 19.0% in the first six months of fiscal 2017. The increase in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin partially offset by a .8% impact from the previously mentioned increase in intangible asset amortization expense. The decrease in the FSG’s operating income as a percentage of net sales principally reflects an aggregate .5% impact from the previously mentioned increases in performance-based compensation expense and intangible asset amortization expense, partially offset by the previously mentioned improved gross profit margin.
    
Interest Expense

Interest expense increased to $9.6 million in the first six months of fiscal 2018, up from $3.9 million in the first six months of fiscal 2017. The increase was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal 2017 acquisitions.
  
Other Income

Other income in the first six months of fiscal 2018 and 2017 was not material.



25
Index

Income Tax Expense

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 our 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 compensation. We have 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, we have revised our 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, we remeasured our 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, we 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 our foreign subsidiaries. We intend to pay this tax over the eight-year period allowed for in the Tax Act.
Our effective tax rate in the first six months of fiscal 2018 decreased to 14.8% from 29.5% in the first six months of fiscal 2017. The decrease principally reflects the previously mentioned discrete tax benefit from the remeasurement of our U.S. federal net deferred tax liabilities and the benefit of a lower federal statutory income tax rate, which were partially offset by the aforementioned one-time transition tax expense.
Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $12.9 million in the first six months of fiscal 2018 as compared to $10.5 million in the first six months of fiscal 2017. The increase in the first six months of fiscal 2018 principally reflects the impact of the Tax Act as well as improved



26
Index

operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.

Net Income Attributable to HEICO

Net income attributable to HEICO increased to a record $124.8 million, or $1.14 per diluted share, in the first six months of fiscal 2018, up from $86.6 million, or $.80 per diluted share, in the first six months of fiscal 2017 principally reflecting the previously mentioned decrease in our effective tax rate and increased net sales and operating income.

Comparison of Second Quarter of Fiscal 2018 to Second Quarter of Fiscal 2017

Net Sales

Our consolidated net sales in the second quarter of fiscal 2018 increased by 17% to a record $430.6 million, as compared to net sales of $368.7 million in the second quarter of fiscal 2017. The increase in consolidated net sales principally reflects an increase of $36.0 million (a 16% increase) to a record $267.8 million in net sales within the FSG as well as an increase of $27.6 million (a 20% increase) to $168.7 million in net sales within the ETG. The net sales increase in the FSG reflects net sales of $25.1 million contributed by our fiscal 2017 acquisitions as well as organic growth of 5%. The FSG's organic growth is mainly attributable to increased demand and new product offerings within our repair and overhaul parts and services and aftermarket replacement parts product lines, resulting in net sales increases of $5.1 million and $4.8 million, respectively. The net sales increase in the ETG reflects net sales of $25.3 million contributed by our fiscal 2017 and 2018 acquisitions. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the second quarter of fiscal 2018.

Gross Profit and Operating Expenses

Our consolidated gross profit margin increased to 39.0% in the second quarter of fiscal 2018, up from 38.1% in the second quarter of fiscal 2017, principally reflecting an increase of 1.5% and .3% in the ETG's and FSG's gross profit margin, respectively. The increase in the ETG’s gross profit margin is principally attributable to increased net sales and a more favorable product mix for certain of our defense products, partially offset by a less favorable product mix for certain of our space and other electronics products. Total new product research and development expenses included within our consolidated cost of sales were $14.0 million in the second quarter of fiscal 2018 compared to $11.2 million in the second quarter of fiscal 2017.
 
Our consolidated SG&A expenses increased to $76.3 million in the second quarter of fiscal 2018, up from $63.8 million in the second quarter of fiscal 2017. The increase in consolidated SG&A expenses principally reflects $8.4 million attributable to fiscal 2017 and 2018 acquisitions and $2.6 million of higher performance-based compensation expense.

Our consolidated SG&A expenses as a percentage of net sales were 17.7% and 17.3% in the second quarter of fiscal 2018 and 2017, respectively. The increase in consolidated SG&A



27
Index

expenses as a percentage of net sales principally reflects a .6% impact from higher performance-based compensation expense.

Operating Income

Our consolidated operating income increased by 20% to a record $91.6 million in the second quarter of fiscal 2018, up from $76.5 million in the second quarter of fiscal 2017. The increase in consolidated operating income principally reflects a $9.3 million increase (a 24% increase) to $48.1 million in operating income of the ETG as well as a $6.7 million increase (a 15% increase) to a record $51.5 million in operating income of the FSG. The increase in operating income of the ETG is principally attributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $2.5 million increase in intangible asset amortization expense mainly from the fiscal 2017 and 2018 acquisitions. The increase in operating income of the FSG is principally attributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $2.8 million increase in performance-based compensation expense.

As a percentage of net sales, our consolidated operating income increased to 21.3% in the second quarter of fiscal 2018, up from 20.8% in the second quarter of fiscal 2017. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 28.5% in the second quarter of fiscal 2018, up from 27.5% in the second quarter of fiscal 2017. The increase in the ETG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin partially offset by a .8% impact from the previously mentioned increase in intangible asset amortization expense. The FSG's operating income as a percentage of net sales was 19.2% in the second quarter of fiscal 2018 compared to 19.3% in the second quarter of fiscal 2017.

Interest Expense

Interest expense increased to $4.9 million in the second quarter of fiscal 2018, up from $2.0 million in the second quarter of fiscal 2017. The increase was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal 2017 acquisitions.
 
Other (Expense) Income

Other (expense) income in the second quarter of fiscal 2018 and 2017 was not material.

Income Tax Expense

Our effective tax rate in the second quarter of fiscal 2018 decreased to 23.6% from 32.0% in the second quarter of fiscal 2017. The decrease principally reflects the benefit of a lower federal statutory income tax rate as a result of the Tax Act.





28
Index

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $6.4 million in the second quarter of fiscal 2018 compared to $5.1 million in the second quarter of fiscal 2017. The increase in the second quarter of fiscal 2018 principally reflects the impact of the Tax Act as well as improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.

Net Income Attributable to HEICO

Net income attributable to HEICO increased to a record $59.6 million, or $.55 per diluted share, in the second quarter of fiscal 2018 from $45.7 million, or $.42 per diluted share, in the second quarter of fiscal 2017 principally reflecting the previously mentioned increased net sales and operating income.

Outlook

As we look ahead to the remainder of fiscal 2018, we anticipate net sales growth within the FSG's commercial aviation and defense product lines. We also expect growth within the ETG, principally driven by demand for the majority of our products. Also, we will continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility. Based on our current economic visibility, we now estimate our consolidated fiscal 2018 year-over-year growth in net sales to be 13% - 14% and in net income to be 33% - 35%, as compared to our prior growth estimates in net sales of 12% - 14% and in net income of 30% - 32%.

Liquidity and Capital Resources

Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 2018 are anticipated to be approximately $50 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2018, we were in compliance with all such covenants. As of April 30, 2018, our total debt to shareholders’ equity ratio was 50.0%.
    
In November 2017, we entered into a new $1.3 billion revolving credit facility agreement, which matures in November 2022 and replaced our previous revolving credit agreement. Additional information about the new and previous revolving credit agreements may be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading, "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended October 31, 2017.




29
Index

Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund cash requirements for at least the next twelve months.

Operating Activities

Net cash provided by operating activities was $95.0 million in the first six months of fiscal 2018 and consisted primarily of net income from consolidated operations of $137.7 million, depreciation and amortization expense of $38.1 million (a non-cash item), and share-based compensation expense of $4.5 million (a non-cash item), partially offset by a $73.8 million increase in working capital and a deferred income tax benefit of $13.2 million (a non-cash item). The increase in working capital is inclusive of a $29.8 million increase in inventory to support the growth of our businesses and anticipated higher demand during the remainder of fiscal 2018, a $14.7 million decrease in income taxes payable principally reflecting a change in the timing of certain estimated tax payments due to Hurricane Irma, a $14.5 million decrease in accrued expenses and other current liabilities reflecting the timing of accrued performance-based compensation for the first six months of fiscal 2018 and the payment of such compensation for the twelve months of fiscal 2017, and a $14.3 million increase related to the timing in collections of accounts receivable. The deferred income tax benefit principally reflects the impact from the remeasurement of our U.S. federal net deferred tax liabilities as a result of the Tax Act.

Net cash provided by operating activities decreased by $2.7 million in the first six months of fiscal 2018 from $97.7 million in the first six months of fiscal 2017. The decrease is principally attributable to a $39.9 million increase in net working capital and a $10.2 million increase in deferred income tax benefits as a result of the Tax Act, partially offset by a $40.6 million increase in net income from consolidated operations and a $7.6 million increase in depreciation and amortization expense. The increase in net working capital primarily resulted from the aforementioned timing associated with the collection of accounts receivable and the payment of income taxes as well as the increase in inventories.
    
Investing Activities

Net cash used in investing activities totaled $71.6 million in the first six months of fiscal 2018 and related primarily to acquisitions of $39.4 million (net of cash acquired) as well as capital expenditures of $29.5 million. Further details regarding our fiscal 2018 acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements.

Financing Activities

Net cash used in financing activities in the first six months of fiscal 2018 totaled $29.1 million. During the first six months of fiscal 2018, we made payments on our revolving credit facility aggregating $43.0 million, redeemed common stock related to stock option exercises aggregating $24.6 million, paid $7.4 million in cash dividends on our common stock, made distributions to noncontrolling interests aggregating $4.4 million and paid revolving credit facility issuance costs of $4.1 million. Additionally, we borrowed $53.0 million on our revolving



30
Index

credit facility principally to fund our fiscal 2018 acquisitions and for working capital needs and received $2.0 million in proceeds from stock option exercises in the first six months of fiscal 2018.

Contractual Obligations

There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2017.

Off-Balance Sheet Arrangements

Guarantees

As of April 30, 2018, we have arranged for standby letters of credit aggregating $4.3 million, which are supported by our revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of our subsidiaries.

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. 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 (“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”). We expect to use the modified retrospective method.

We are in the process of reviewing a representative sample of customer contracts across our identified revenue streams. Based on the work completed to-date, we foresee two types of contracts for which ASU 2014-09 will impact the timing of revenue recognition. For certain contracts under which we produce products with no alternative use and for which we have an enforceable right to payment during the production cycle and for certain other contracts under which we create or enhance customer-owned assets while performing repair and overhaul services, ASU 2014-09 will require us to recognize revenue using an over time recognition model as opposed to our current policy of recognizing revenue at the time of shipment. We have



31
Index

not yet determined the effect the adoption of this guidance will have on our 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. We adopted ASU 2015-11 in the first quarter of fiscal 2018, resulting in no material effect on our 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 requires a modified retrospective transition approach and provides certain optional transition relief. We are currently evaluating the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.

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. We are currently evaluating the effect the adoption of this guidance will have on our 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. We are currently evaluating the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.




32
Index

Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2017.





33
Index

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the second quarter ended April 30, 2018 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.    



34
Index

PART II. OTHER INFORMATION
Item 6.    EXHIBITS
Exhibit
 
Description
3.1
 
 
 
 
10.1
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document. **
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document. **
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document. **
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. **
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document. **
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document. **
 
 
*
Previously filed.    
**
Filed herewith.
***    Furnished herewith.




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Index

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HEICO CORPORATION
 
 
 
 
Date:
May 31, 2018
By:
/s/ CARLOS L. MACAU, JR.
 
 
 
Carlos L. Macau, Jr.
Executive Vice President - Chief Financial Officer and Treasurer
(Principal Financial Officer)
 
 
 
 
 
 
By:
/s/ STEVEN M. WALKER
 
 
 
Steven M. Walker
Chief Accounting Officer
and Assistant Treasurer
(Principal Accounting Officer)



36