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

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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 January 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 February 27, 2018 is as follows:
Common Stock, $.01 par value
42,227,721

shares
Class A Common Stock, $.01 par value
63,477,941

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

$65,688

 

$52,066

Accounts receivable, net
 
210,278

 
222,456

Inventories, net
 
367,395

 
343,628

Prepaid expenses and other current assets
 
19,071

 
13,742

Total current assets
 
662,432

 
631,892

 
 
 
 
 
Property, plant and equipment, net
 
133,115

 
129,883

Goodwill
 
1,090,864

 
1,081,306

Intangible assets, net
 
530,987

 
538,081

Other assets
 
153,044

 
131,269

Total assets
 

$2,570,442

 

$2,512,431

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

$485

 

$451

Trade accounts payable
 
81,129

 
89,724

Accrued expenses and other current liabilities
 
132,570

 
147,612

Income taxes payable
 
14,872

 
11,650

Total current liabilities
 
229,056

 
249,437

 
 
 
 
 
Long-term debt, net of current maturities
 
668,527

 
673,528

Deferred income taxes
 
42,526

 
59,026

Other long-term liabilities
 
167,964

 
151,025

Total liabilities
 
1,108,073

 
1,133,016

 
 
 
 
 
Commitments and contingencies (Note 10)
 

 

 
 
 
 
 
Redeemable noncontrolling interests (Note 3)
 
132,355

 
131,123

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common Stock, $.01 par value per share; 75,000 shares authorized; 42,228 and 42,221 shares issued and outstanding
 
422

 
338

Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 63,455 and 63,381 shares issued and outstanding
 
635

 
507

Capital in excess of par value
 
329,908

 
326,544

Deferred compensation obligation
 
3,118

 
3,118

HEICO stock held by irrevocable trust
 
(3,118
)
 
(3,118
)
Accumulated other comprehensive income (loss)
 
4,417

 
(10,556
)
Retained earnings
 
904,030

 
844,247

Total HEICO shareholders’ equity
 
1,239,412

 
1,161,080

Noncontrolling interests
 
90,602

 
87,212

Total shareholders’ equity
 
1,330,014

 
1,248,292

Total liabilities and equity
 

$2,570,442

 

$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)
 
 
Three months ended January 31,
 
 
2018
 
2017
 
 
 
 
 
Net sales
 

$404,410

 

$343,432

 
 
 
 
 
Operating costs and expenses:
 
 
 
 
Cost of sales
 
249,619

 
218,015

Selling, general and administrative expenses
 
75,231

 
60,867

 
 
 
 
 
Total operating costs and expenses
 
324,850

 
278,882

 
 
 
 
 
Operating income
 
79,560

 
64,550

 
 
 
 
 
Interest expense
 
(4,725
)
 
(1,969
)
Other income
 
360

 
484

 
 
 
 
 
Income before income taxes and noncontrolling interests
 
75,195

 
63,065

 
 
 
 
 
Income tax expense
 
3,500

 
16,800

 
 
 
 
 
Net income from consolidated operations
 
71,695

 
46,265

 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
6,543

 
5,338

 
 
 
 
 
Net income attributable to HEICO
 

$65,152

 

$40,927

 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
Basic
 

$.62

 

$.39

Diluted
 

$.60

 

$.38

 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
Basic
 
105,639

 
105,178

Diluted
 
109,112

 
108,005

 
 
 
 
 
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)
 
 
Three months ended January 31,
 
 
2018
 
2017
 
 
 
 
 
Net income from consolidated operations
 

$71,695

 

$46,265

Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustments
 
15,963

 
(1,524
)
Amortization of unrealized loss on defined benefit pension plan, net of tax
 
4

 
7

Total other comprehensive income (loss)
 
15,967

 
(1,517
)
Comprehensive income from consolidated operations
 
87,662

 
44,748

Net income attributable to noncontrolling interests
 
6,543

 
5,338

Foreign currency translation adjustments attributable to noncontrolling interests
 
994

 
(296
)
Comprehensive income attributable to noncontrolling interests
 
7,537

 
5,042

Comprehensive income attributable to HEICO
 

$80,125

 

$39,706

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) Income
 
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
3,952

 

 

 

 

 

 
14,973

 
65,152

 
3,585

 
83,710

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

 

 

 
980

 

 

 

 

 

 
980

Share-based compensation expense

 

 

 
2,165

 

 

 

 

 

 
2,165

Proceeds from stock option exercises

 

 
1

 
1,424

 

 

 

 

 

 
1,425

Distributions to noncontrolling interests
(1,688
)
 

 

 

 

 

 

 

 
(194
)
 
(194
)
Adjustments to redemption amount of redeemable noncontrolling interests
(2,026
)
 

 

 

 

 

 

 
2,026

 

 
2,026

Other
994

 

 

 
(994
)
 

 

 

 

 
(1
)
 
(995
)
Balances as of January 31, 2018

$132,355

 

$422

 

$635

 

$329,908

 

$3,118

 

($3,118
)
 

$4,417

 

$904,030

 

$90,602

 

$1,330,014

 
 
 
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 (loss)
2,294

 

 

 

 

 

 
(1,221
)
 
40,927

 
2,748

 
42,454

Cash dividends ($.058 per share)

 

 

 

 

 

 

 
(6,059
)
 

 
(6,059
)
Issuance of common stock to HEICO Savings and Investment Plan

 

 

 
893

 

 

 

 

 

 
893

Share-based compensation expense

 

 

 
1,451

 

 

 

 

 

 
1,451

Proceeds from stock option exercises

 

 
1

 
1,229

 

 

 

 

 

 
1,230

Distributions to noncontrolling interests
(1,712
)
 

 

 

 

 

 

 

 
(274
)
 
(274
)
Adjustments to redemption amount of redeemable noncontrolling interests
(1,192
)
 

 

 

 

 

 

 
1,192

 

 
1,192

Deferred compensation obligation

 

 

 

 
(140
)
 
140

 

 

 

 

Balances as of January 31, 2017

$98,902

 

$270

 

$404

 

$309,901

 

$2,320

 

($2,320
)
 

($26,547
)
 

$717,764

 

$86,800

 

$1,088,592

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




5


HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
 
Three months ended January 31,
 
2018
 
2017
Operating Activities:
 
 
 
Net income from consolidated operations

$71,695

 

$46,265

Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
19,024

 
15,248

Employer contributions to HEICO Savings and Investment Plan
1,860

 
1,714

Share-based compensation expense
2,168

 
1,451

(Decrease) increase in accrued contingent consideration
(3,195
)
 
537

Foreign currency transaction adjustments, net
75

 
(956
)
Deferred income tax benefit
(17,292
)
 
(346
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Decrease in accounts receivable
14,463

 
25,998

Increase in inventories
(18,301
)
 
(14,989
)
Increase in prepaid expenses and other current assets
(5,403
)
 
(1,563
)
Decrease in trade accounts payable
(9,734
)
 
(6,322
)
Decrease in accrued expenses and other current liabilities
(18,477
)
 
(18,908
)
Increase in income taxes payable
7,630

 
7,230

Other long-term assets and liabilities, net
492

 
616

Net cash provided by operating activities
45,005

 
55,975

 
 
 
 
Investing Activities:
 
 
 
Capital expenditures
(7,577
)
 
(6,422
)
Acquisitions, net of cash acquired
(6,126
)
 

Other
(2,790
)
 
419

Net cash used in investing activities
(16,493
)
 
(6,003
)
 
 
 
 
Financing Activities:
 
 
 
Payments on revolving credit facility
(5,000
)
 
(40,000
)
Cash dividends paid
(7,395
)
 
(6,059
)
Revolving credit facility issuance costs
(4,067
)
 

Distributions to noncontrolling interests
(1,882
)
 
(1,986
)
Payment of contingent consideration
(300
)
 

Proceeds from stock option exercises
1,425

 
1,230

Other
(114
)
 
(108
)
Net cash used in financing activities
(17,333
)
 
(46,923
)
 
 
 
 
Effect of exchange rate changes on cash
2,443

 
(99
)
 
 
 
 
Net increase in cash and cash equivalents
13,622

 
2,950

Cash and cash equivalents at beginning of year
52,066

 
42,955

Cash and cash equivalents at end of period

$65,688

 

$45,905

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 three months ended January 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 March 2017, the Company's Board of Directors declared a 5-for-4 stock split on both classes of the Company's common stock. The stock split was effected as of April 19, 2017 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017. 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 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. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The Company is currently evaluating which transition method it will elect. In addition, the Company is currently identifying its various revenue streams and reviewing certain underlying customer contracts to determine the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
    
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. 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 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.




8

Index

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.     ACQUISITION

In November 2017, the Company, through a subsidiary of HEICO Electronic, acquired all 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.
    
The total consideration for the acquisition of IDC 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 assumed is preliminary until the company obtains final information regarding their fair values. The operating results of IDC were included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of IDC included in the Condensed Consolidated Statement of Operations for the three months ended January 31, 2018 is not material. Had the IDC acquisition 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 three months ended January 31, 2018 and 2017 would not have been materially different than the reported amounts.


3.     SELECTED FINANCIAL STATEMENT INFORMATION

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

$214,361

 

$225,462

Less: Allowance for doubtful accounts
 
(4,083
)
 
(3,006
)
Accounts receivable, net
 

$210,278

 

$222,456





9

Index

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

$31,275

 

$29,491

Estimated earnings
 
19,743

 
19,902

 
 
51,018

 
49,393

Less: Billings to date
 
(39,267
)
 
(41,262
)


 

$11,751

 

$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)
 

$13,186

 

$9,377

Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
 
(1,435
)
 
(1,246
)
 
 

$11,751

 

$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 three months ended January 31, 2018 and 2017.

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

$181,435

 

$173,559

Work in process
 
44,397

 
39,986

Materials, parts, assemblies and supplies
 
139,669

 
128,031

Contracts in process
 
1,985

 
2,415

Less: Billings to date
 
(91
)
 
(363
)
Inventories, net of valuation reserves
 

$367,395

 

$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.




10

Index

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

$5,443

 

$5,435

Buildings and improvements
 
93,280

 
91,916

Machinery, equipment and tooling
 
196,686

 
191,298

Construction in progress
 
8,193

 
5,553

 
 
303,602

 
294,202

Less: Accumulated depreciation and amortization
 
(170,487
)
 
(164,319
)
Property, plant and equipment, net
 

$133,115

 

$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 $14.2 million as of January 31, 2018 and $12.9 million as of October 31, 2017. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2018 and 2017 was $2.5 million and $2.4 million, respectively.

Research and Development Expenses

The amount of new product research and development ("R&D") expenses included in cost of sales for the three months ended January 31, 2018 and 2017 is as follows (in thousands):
 
 
Three months ended January 31,
 
 
2018
 
2017
R&D expenses
 

$12,707

 

$11,246


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):
 
 
January 31, 2018
 
October 31, 2017
Redeemable at fair value
 

$83,360

 

$82,128

Redeemable based on a multiple of future earnings
 
48,995

 
48,995

Redeemable noncontrolling interests
 

$132,355

 

$131,123





11

Index

Accumulated Other Comprehensive (Loss) Income

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

($9,533
)
 

($1,023
)
 

($10,556
)
Unrealized gain
 
14,969

 

 
14,969

Amortization of unrealized loss
 

 
4

 
4

Balances as of January 31, 2018
 

$5,436

 

($1,019
)
 

$4,417



4.     GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by operating segment for the three months ended January 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

Foreign currency translation adjustments
 
3,065

 
3,202

 
6,267

Goodwill acquired
 

 
3,078

 
3,078

Adjustments to goodwill
 
185

 
28

 
213

Balances as of January 31, 2018
 

$391,856

 

$699,008

 

$1,090,864


Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The goodwill acquired pertains to the fiscal 2018 acquisition described in Note 2, Acquisition, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed. The Company estimates that 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.



12

Index

Identifiable intangible assets consist of the following (in thousands):
 
 
As of January 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
 

$383,294

 

($126,803
)
 

$256,491

 

$379,966

 

($117,069
)
 

$262,897

Intellectual property
 
183,997

 
(48,888
)
 
135,109

 
181,811

 
(44,861
)
 
136,950

Licenses
 
6,559

 
(3,078
)
 
3,481

 
6,559

 
(2,928
)
 
3,631

Patents
 
912

 
(580
)
 
332

 
870

 
(551
)
 
319

Non-compete agreements
 
824

 
(824
)
 

 
817

 
(817
)
 

Trade names
 
466

 
(128
)
 
338

 
466

 
(118
)
 
348

 
 
576,052

 
(180,301
)
 
395,751

 
570,489

 
(166,344
)
 
404,145

Non-Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
135,236

 

 
135,236

 
133,936

 

 
133,936

 
 

$711,288

 

($180,301
)
 

$530,987

 

$704,425

 

($166,344
)
 

$538,081


Amortization expense related to intangible assets for the three months ended January 31, 2018 and 2017 was $12.4 million and $9.2 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2018 is estimated to be $36.4 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $46.5 million in fiscal 2019, $43.6 million in fiscal 2020, $40.9 million in fiscal 2021, $35.5 million in fiscal 2022, $31.3 million in fiscal 2023, and $161.6 million thereafter.


5.     LONG-TERM DEBT

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

$666,000

 

$671,000

Capital leases and note payable
 
3,012

 
2,979

 
 
669,012

 
673,979

Less: Current maturities of long-term debt
 
(485
)
 
(451
)
 
 

$668,527

 

$673,528


The Company's borrowings under its revolving credit facility mature in fiscal 2023. As of January 31, 2018 and October 31 2017, the weighted average interest rate on borrowings under the Company's revolving credit facility was 2.9% and 2.4%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2018, the Company was in compliance with all such covenants.





13

Index

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 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 quarter of fiscal 2018 decreased to 4.7% from 26.6% in the first quarter 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.
     





14

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 January 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
 

$—

 

$126,715

 

$—

 

$126,715

Money market funds
 
4,890

 

 

 
4,890

Equity securities
 
3,167

 

 

 
3,167

Mutual funds
 
1,683

 

 

 
1,683

Other
 
1,379

 

 

 
1,379

Total assets
 

$11,119

 

$126,715

 

$—

 

$137,834

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$24,931

 

$24,931

 
 
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



15

Index

classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $137.8 million as of January 31, 2018 and $122.9 million as of October 31, 2017, of which the LCP related assets were $131.6 million and $117.2 million as of January 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 $136.5 million as of January 31, 2018 and $121.7 million as of October 31, 2017, of which the LCP related liability was $130.3 million and $116.0 million as of January 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 January 31, 2018, the estimated fair value of the contingent consideration was $13.2 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. 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 January 31, 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 January 31, 2018, the estimated fair value of the contingent consideration was €8.6 million, or $10.7 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 second 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.




16

Index

The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of January 31, 2018 were as follows:
 
Fiscal 2017 Acquisition
 
Fiscal 2016 Acquisition
 
Fiscal 2015 Acquisition
Compound annual revenue growth rate range
(8
%)
-
4%
 
4
%
-
12%
 
9
%
-
13%
Weighted average discount rate
5.5%
 
4.7%
 
.8%

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

$27,573

Decrease in accrued contingent consideration
 
(3,195
)
Payment of contingent consideration
 
(300
)
Foreign currency transaction adjustments
 
853

Balance as of January 31, 2018
 

$24,931

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

$7,262

Other long-term liabilities
 
17,669

 
 

$24,931


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 three months ended January 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 January 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.





17

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):
 
 
Three months ended January 31,
 
 
2018
 
2017
Numerator:
 
 
 
 
Net income attributable to HEICO
 

$65,152

 

$40,927

 
 
 
 
 
Denominator:
 
 
 
 
Weighted average common shares outstanding - basic
 
105,639

 
105,178

Effect of dilutive stock options
 
3,473

 
2,827

Weighted average common shares outstanding - diluted
 
109,112

 
108,005

 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
Basic
 

$.62

 

$.39

Diluted
 

$.60

 

$.38

 
 
 
 
 
Anti-dilutive stock options excluded
 
616

 
213






18

Index

9.    OPERATING SEGMENTS

Information on the Company’s two operating segments, the FSG and the ETG, for the three months ended January 31, 2018 and 2017, respectively, is as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate and
Intersegment
(1)
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Three months ended January 31, 2018:
 
 
 
 
 
 
 
 
Net sales
 

$254,721

 

$155,658

 

($5,969
)
 

$404,410

Depreciation
 
3,292

 
2,274

 
62

 
5,628

Amortization
 
4,947

 
8,104

 
345

 
13,396

Operating income
 
45,869

 
43,220

 
(9,529
)
 
79,560

Capital expenditures
 
2,297

 
1,743

 
3,537

 
7,577

 
 
 
 
 
 
 
 
 
Three months ended January 31, 2017:
 
 
 
 
 
 
 
 
Net sales
 

$220,901

 

$126,165

 

($3,634
)
 

$343,432

Depreciation
 
3,148

 
2,043

 
53

 
5,244

Amortization
 
4,104

 
5,735

 
165

 
10,004

Operating income
 
41,363

 
29,084

 
(5,897
)
 
64,550

Capital expenditures
 
3,872

 
2,504

 
46

 
6,422

 
 
 
 
 
 
 
 
 

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

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

$1,051,527

 

$1,357,992

 

$160,923

 

$2,570,442

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 January 31, 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.



19

Index

Product Warranty
Changes in the Company’s product warranty liability for the three months ended January 31, 2018 and 2017, respectively, are as follows (in thousands):
 
 
Three months ended January 31,
 
 
2018
 
2017
Balances as of beginning of fiscal year
 

$2,921

 

$3,351

Accruals for warranties
 
798

 
782

Acquired warranty liabilities
 
280

 

Warranty claims settled
 
(832
)
 
(619
)
Balances as of January 31
 

$3,167

 

$3,514


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.


11. SUBSEQUENT EVENT
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 and the total consideration for the acquisition is not material or significant to the Company’s condensed consolidated financial statements.



20

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 three months ended January 31, 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 three months ended January 31, 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 January 31, 2018 and 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.

All share and per share information has been adjusted retrospectively to reflect 5-for-4 stock splits effected in April 2017 and January 2018. See Note 1, Summary of Significant Accounting Policies – Stock Splits, of the Notes to Condensed Consolidated Financial Statements for additional information regarding these stock splits.




21

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):
 
 
Three months ended January 31,
 
 
2018
 
2017
Net sales
 

$404,410

 

$343,432

Cost of sales
 
249,619

 
218,015

Selling, general and administrative expenses
 
75,231

 
60,867

Total operating costs and expenses
 
324,850

 
278,882

Operating income
 

$79,560

 

$64,550

 
 
 
 
 
Net sales by segment:
 
 
 
 
Flight Support Group
 

$254,721

 

$220,901

Electronic Technologies Group
 
155,658

 
126,165

Intersegment sales
 
(5,969
)
 
(3,634
)
 
 

$404,410

 

$343,432

 
 
 
 
 
Operating income by segment:
 
 
 
 
Flight Support Group
 

$45,869

 

$41,363

Electronic Technologies Group
 
43,220

 
29,084

Other, primarily corporate
 
(9,529
)
 
(5,897
)
 
 

$79,560

 

$64,550

 
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
Gross profit
 
38.3
%
 
36.5
%
Selling, general and administrative expenses
 
18.6
%
 
17.7
%
Operating income
 
19.7
%
 
18.8
%
Interest expense
 
(1.2
%)
 
(.6
%)
Other income
 
.1
%
 
.1
%
Income tax expense
 
.9
%
 
4.9
%
Net income attributable to noncontrolling interests
 
1.6
%
 
1.6
%
Net income attributable to HEICO
 
16.1
%
 
11.9
%




22

Index

Comparison of First Quarter of Fiscal 2018 to First Quarter of Fiscal 2017

Net Sales

Our consolidated net sales in the first quarter of fiscal 2018 increased by 18% to $404.4 million, as compared to net sales of $343.4 million in the first quarter of fiscal 2017. The increase in consolidated net sales principally reflects an increase of $29.5 million (a 23% increase) to $155.7 million in net sales within the ETG as well as an increase of $33.8 million (a 15% increase) to $254.7 million in net sales within the FSG. The net sales increase in the ETG reflects $19.8 million of aggregate net sales contributed by a fiscal 2017 and a fiscal 2018 acquisition, and organic growth of 6%. The ETG's organic growth is mainly attributable to increased demand for our space and defense products resulting in net sales increases of $4.6 million and $2.3 million, respectively. The net sales increase in the FSG reflects net sales of $25.5 million contributed by our fiscal 2017 acquisitions as well as organic growth of 4%. The FSG's organic growth is mainly 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 $7.3 million and $3.0 million, respectively. These increases were partially offset by lower net sales of $2.0 million within our specialty products product line principally related to certain defense products. Excluding the net sales decrease in our specialty products product line, the FSG experienced organic growth of 6%, principally in our aftermarket replacement parts product line. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the first quarter of fiscal 2018.

Gross Profit and Operating Expenses

Our consolidated gross profit margin increased to 38.3% in the first quarter of fiscal 2018, up from 36.5% in the first quarter of fiscal 2017, principally reflecting an increase of 3.9% in the ETG's gross profit margin. 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 products. Total new product research and development expenses included within our consolidated cost of sales were $12.7 million in the first quarter of fiscal 2018 compared to $11.2 million in the first quarter of fiscal 2017.

Our consolidated selling, general and administrative ("SG&A") expenses were $75.2 million and $60.9 million in the first quarter of fiscal 2018 and 2017, respectively. The increase in consolidated SG&A expenses principally reflects $8.9 million attributable to the fiscal 2017 and 2018 acquisitions and $2.2 million of higher performance-based compensation expense.

Our consolidated SG&A expenses as a percentage of net sales were 18.6% and 17.7% in the first quarter of fiscal 2018 and 2017, respectively. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a .3% 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.




23

Index

Operating Income

Our consolidated operating income increased by 23% to $79.6 million in the first quarter of fiscal 2018, up from $64.6 million in the first quarter of fiscal 2017. The increase in consolidated operating income reflects a $14.1 million increase (a 49% increase) to $43.2 million in operating income of the ETG as well as a $4.5 million increase (an 11% increase) to $45.9 million in operating income of the FSG. The increase in operating income of the ETG mainly reflects the previously mentioned net sales growth and improved gross profit margin. The increase in operating income of the FSG is principally attributed to the previously mentioned net sales growth partially offset by $1.0 million of higher performance-based compensation expense and a $.8 million increase in intangible asset amortization expense mainly resulting from the fiscal 2017 acquisitions. Additionally, our corporate expenses increased by $2.9 million principally due to a $1.7 million increase in accrued performance-based compensation expense and higher operating costs in support of the overall growth of our business.

Our consolidated operating income as a percentage of net sales improved to 19.7% in the first quarter of fiscal 2018, up from 18.8% in the first quarter of fiscal 2017. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 27.8% in the first quarter of fiscal 2018, up from 23.1% in the first quarter of fiscal 2017, partially offset by a decrease in the FSG’s operating income as a percentage of net sales to 18.0% in the first quarter of fiscal 2018 from 18.7% in the first 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. The decrease in the FSG’s operating income as a percentage of net sales principally reflects a .4% and .3% impact from the previously mentioned higher performance-based compensation expense and increase in intangible amortization expense, respectively.

Interest Expense

Interest expense increased to $4.7 million in the first quarter of fiscal 2018, up from $2.0 million in the first 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 Income

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

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



24

Index

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 quarter of fiscal 2018 decreased to 4.7% from 26.6% in the first quarter 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 $6.5 million in first quarter of fiscal 2018 as compared to $5.3 million in the first quarter of fiscal 2017. The increase in the first 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.




25

Index

Net Income Attributable to HEICO

Net income attributable to HEICO increased to a record $65.2 million, or $.60 per diluted share, in the first quarter of fiscal 2018, up from $40.9 million, or $.38 per diluted share, in the first quarter of fiscal 2017 principally reflecting the previously mentioned decrease in our effective tax rate and 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 are increasing our estimated consolidated fiscal 2018 year-over-year growth in net sales to 12% - 14% and net income to 30% - 32%, up from prior growth estimates in net sales and net income of 10% - 12%.

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 January 31, 2018, we were in compliance with all such covenants. As of January 31, 2018, our total debt to shareholders’ equity ratio was 50.3%.

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.

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 $45.0 million in the first quarter of fiscal 2018 and consisted primarily of net income from consolidated operations of $71.7 million and depreciation and amortization expense of $19.0 million (a non-cash item), partially offset by a $29.8 million increase in working capital and a deferred income tax benefit of $17.3 million.



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The increase in working capital is inclusive of an $18.5 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2017 accrued performance-based compensation and an $18.3 million increase in inventory to support anticipated higher demand during the remainder of fiscal 2018, partially offset by a $4.7 million net impact from decreases in both accounts receivable and trade accounts payable. The deferred income tax benefit principally reflects the impact from the remeasurement of our U.S. federal net deferred tax liabilities.

Net cash provided by operating activities decreased by $11.0 million in the first quarter of fiscal 2018 from $56.0 million in the first quarter of fiscal 2017. The decrease is principally attributable to a $21.3 million increase in net working capital partially offset by higher net income from consolidated operations excluding the non-cash increase of $16.9 million in deferred income tax benefits as a result of the Tax Act. The increase in net working capital primarily resulted from the timing associated with the collection of accounts receivable and payment of trade accounts payable as well as the aforementioned increase in inventories.

Investing Activities

Net cash used in investing activities totaled $16.5 million in the first quarter of fiscal 2018 and related primarily to capital expenditures of $7.6 million as well as acquisitions, net of cash acquired of $6.1 million. Further details regarding our fiscal 2018 acquisition may be found in Note 2, Acquisition, of the Notes to Condensed Consolidated Financial Statements.

Financing Activities

Net cash used in financing activities in the first quarter of fiscal 2018 totaled $17.3 million. During the first quarter of fiscal 2018, we paid $7.4 million in cash dividends on our common stock, made $5.0 million in payments on our revolving credit facility and incurred $4.1 million in issuance costs associated with our new revolving credit facility.

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 January 31, 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.




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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 or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We are currently evaluating which transition method we will elect. In addition, we are currently identifying our various revenue streams and reviewing certain underlying customer contracts to determine 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.




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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.

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.



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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the first quarter ended January 31, 2018 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.





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PART II. OTHER INFORMATION
Item 6.    EXHIBITS
Exhibit
 
Description
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
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. *
 
 
*
Filed herewith.
**    Furnished herewith.




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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HEICO CORPORATION
 
 
 
 
Date:
March 1, 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)



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