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HEICO CORP - Quarter Report: 2020 April (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2020
OR
TRANSITION 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)
Florida65-0341002
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
3000 Taft Street, Hollywood, Florida33021
(Address of principal executive offices)(Zip Code)
(954) 987-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per share HEINew York Stock Exchange
Class A Common Stock, $.01 par value per share HEI.ANew York Stock Exchange
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes 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 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
The number of shares outstanding of each of the registrant’s classes of common stock as of May 26, 2020 is as follows:
Common Stock, $.01 par value54,182,069  shares
Class A Common Stock, $.01 par value80,569,960  shares


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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 1A.
Item 6.

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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, 2020October 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$346,786  $57,001  
Accounts receivable, net230,884  274,326  
Contract assets56,033  43,132  
Inventories, net457,819  420,319  
Prepaid expenses and other current assets33,991  18,953  
Total current assets1,125,513  813,731  
Property, plant and equipment, net171,399  173,345  
Goodwill1,300,187  1,268,703  
Intangible assets, net540,623  550,693  
Other assets227,113  162,739  
Total assets$3,364,835  $2,969,211  
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt$1,025  $906  
Trade accounts payable108,397  106,225  
Accrued expenses and other current liabilities145,345  178,957  
Income taxes payable1,586  3,050  
Total current liabilities256,353  289,138  
Long-term debt, net of current maturities739,188  561,049  
Deferred income taxes49,749  51,496  
Other long-term liabilities233,518  184,604  
Total liabilities1,278,808  1,086,287  
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests (Note 3)196,507  188,264  
Shareholders’ equity:
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued
—  —  
Common Stock, $.01 par value per share; 150,000 shares authorized; 54,182 and 54,143 shares issued and outstanding
542  541  
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 80,555 and 80,353 shares issued and outstanding
806  804  
Capital in excess of par value297,324  284,609  
Deferred compensation obligation4,232  4,232  
HEICO stock held by irrevocable trust(4,232) (4,232) 
Accumulated other comprehensive loss(23,804) (16,739) 
Retained earnings1,583,646  1,397,327  
Total HEICO shareholders’ equity1,858,514  1,666,542  
Noncontrolling interests31,006  28,118  
Total shareholders’ equity1,889,520  1,694,660  
Total liabilities and equity$3,364,835  $2,969,211  

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

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HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
Six months ended April 30,Three months ended April 30,
2020201920202019
Net sales$974,421  $981,794  $468,146  $515,648  
Operating costs and expenses:
Cost of sales597,484  590,170  289,256  306,261  
Selling, general and administrative expenses157,786  174,494  70,729  90,204  
Total operating costs and expenses755,270  764,664  359,985  396,465  
Operating income
219,151  217,130  108,161  119,183  
Interest expense(8,042) (10,973) (3,759) (5,484) 
Other income 302  2,152  107  2,484  
Income before income taxes and noncontrolling interests
211,411  208,309  104,509  116,183  
Income tax expense700  30,200  23,600  26,100  
Net income from consolidated operations210,711  178,109  80,909  90,083  
Less: Net income attributable to noncontrolling interests
13,370  16,995  5,456  8,301  
Net income attributable to HEICO$197,341  $161,114  $75,453  $81,782  
Net income per share attributable to HEICO shareholders:
Basic$1.47  $1.21  $.56  $.61  
Diluted$1.44  $1.18  $.55  $.60  
Weighted average number of common shares outstanding:
Basic134,596  133,123  134,669  133,313  
Diluted137,269  137,092  137,117  137,206  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
Six months ended April 30,Three months ended April 30,
2020201920202019
Net income from consolidated operations$210,711  $178,109  $80,909  $90,083  
Other comprehensive income:
Foreign currency translation adjustments(7,399) (1,262) (4,721) (5,636) 
Amortization of unrealized loss on defined benefit pension plan, net of tax
39  12  15   
Total other comprehensive loss(7,360) (1,250) (4,706) (5,630) 
Comprehensive income from consolidated operations
203,351  176,859  76,203  84,453  
Net income attributable to noncontrolling interests
13,370  16,995  5,456  8,301  
Foreign currency translation adjustments attributable to noncontrolling interests
(295) (154) (165) (347) 
Comprehensive income attributable to noncontrolling interests
13,075  16,841  5,291  7,954  
Comprehensive income attributable to HEICO$190,276  $160,018  $70,912  $76,499  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Six Months Ended April 30, 2020 and 2019
(in thousands, except per share data)
HEICO Shareholders' Equity
Redeemable Noncontrolling InterestsCommon StockClass A Common StockCapital in Excess of Par ValueDeferred Compensation ObligationHEICO Stock Held by Irrevocable TrustAccumulated Other Comprehensive LossRetained EarningsNoncontrolling InterestsTotal Shareholders' Equity
Balances as of October 31, 2019
$188,264  $541  $804  $284,609  $4,232  ($4,232) ($16,739) $1,397,327  $28,118  $1,694,660  
Comprehensive income
9,422  —  —  —  —  —  (7,065) 197,341  3,653  193,929  
Cash dividends ($.08 per share)
—  —  —  —  —  —  —  (10,762) —  (10,762) 
Issuance of common stock to HEICO Savings and Investment Plan
—  —  —  7,281  —  —  —  —  —  7,281  
Share-based compensation expense
—  —  —  5,275  —  —  —  —  —  5,275  
Proceeds from stock option exercises
—  —   2,390  —  —  —  —  —  2,392  
Redemptions of common stock related to stock option exercises
—  —  —  (2,567) —  —  —  —  —  (2,567) 
Noncontrolling interests assumed related to acquisitions
7,538  —  —  —  —  —  —  —  —  —  
Distributions to noncontrolling interests
(8,977) —  —  —  —  —  —  —  (765) (765) 
Adjustments to redemption amount of redeemable noncontrolling interests
260  —  —  —  —  —  —  (260) —  (260) 
Other
—   —  336  —  —  —  —  —  337  
Balances as of April 30, 2020
$196,507  $542  $806  $297,324  $4,232  ($4,232) ($23,804) $1,583,646  $31,006  $1,889,520  

HEICO Shareholders' Equity
Redeemable Noncontrolling InterestsCommon StockClass A Common StockCapital in Excess of Par ValueDeferred Compensation ObligationHEICO Stock Held by Irrevocable TrustAccumulated Other Comprehensive LossRetained EarningsNoncontrolling InterestsTotal Shareholders' Equity
Balances as of October 31, 2018
$132,046  $534  $796  $320,994  $3,928  ($3,928) ($15,256) $1,091,183  $104,757  $1,503,008  
Cumulative effect from adoption of ASC 606
819  —  —  —  —  —  —  13,373  326  13,699  
Comprehensive income
8,224  —  —  —  —  —  (1,096) 161,114  8,617  168,635  
Cash dividends ($.07 per share)
—  —  —  —  —  —  —  (9,305) —  (9,305) 
Issuance of common stock to HEICO Savings and Investment Plan
—  —  —  6,390  —  —  —  —  —  6,390  
Share-based compensation expense
—  —  —  4,987  —  —  —  —  —  4,987  
Proceeds from stock option exercises
—    5,517  —  —  —  —  —  5,528  
Redemptions of common stock related to stock option exercises
—  (3) —  (27,741) —  —  —  —  —  (27,744) 
Noncontrolling interests assumed related to acquisitions
13,079  —  —  —  —  —  —  —  2,382  2,382  
Distributions to noncontrolling interests
(7,384) —  —  —  —  —  —  —  (806) (806) 
Adjustments to redemption amount of redeemable noncontrolling interests
4,666  —  —  —  —  —  —  (4,666) —  (4,666) 
Deferred compensation obligation
—  —  —  —  115  (115) —  —  —  —  
Other
—  —  —  54  —  —  —  —   56  
Balances as of April 30, 2019
$151,450  $538  $800  $310,201  $4,043  ($4,043) ($16,352) $1,251,699  $115,278  $1,662,164  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Three Months Ended April 30, 2020 and 2019
(in thousands, except per share data)
HEICO Shareholders' Equity
Redeemable Noncontrolling InterestsCommon StockClass A Common StockCapital in Excess of Par ValueDeferred Compensation ObligationHEICO Stock Held by Irrevocable TrustAccumulated Other Comprehensive LossRetained EarningsNoncontrolling InterestsTotal Shareholders' Equity
Balances as of January 31, 2020
$195,893  $541  $805  $287,779  $4,232  ($4,232) ($19,263) $1,508,784  $30,601  $1,809,247  
Comprehensive income
4,655  —  —  —  —  —  (4,541) 75,453  636  71,548  
Issuance of common stock to HEICO Savings and Investment Plan
—  —  —  5,983  —  —  —  —  —  5,983  
Share-based compensation expense
—  —  —  2,629  —  —  —  —  —  2,629  
Proceeds from stock option exercises
—  —   863  —  —  —  —  —  864  
Redemptions of common stock related to stock option exercises
—  —  —  (5) —  —  —  —  —  (5) 
Noncontrolling interests assumed related to acquisitions
(2) —  —  —  —  —  —  —  —  —  
Distributions to noncontrolling interests
(4,630) —  —  —  —  —  —  —  (231) (231) 
Adjustments to redemption amount of redeemable noncontrolling interests
591  —  —  —  —  —  —  (591) —  (591) 
Other
—   —  75  —  —  —  —  —  76  
Balances as of April 30, 2020
$196,507  $542  $806  $297,324  $4,232  ($4,232) ($23,804) $1,583,646  $31,006  $1,889,520  

HEICO Shareholders' Equity
Redeemable Noncontrolling InterestsCommon StockClass A Common StockCapital in Excess of Par ValueDeferred Compensation ObligationHEICO Stock Held by Irrevocable TrustAccumulated Other Comprehensive LossRetained EarningsNoncontrolling InterestsTotal Shareholders' Equity
Balances as of January 31, 2019
$138,995  $534  $796  $324,395  $4,043  ($4,043) ($11,069) $1,174,811  $112,288  $1,601,755  
Comprehensive income
4,585  —  —  —  —  —  (5,283) 81,782  3,369  79,868  
Issuance of common stock to HEICO Savings and Investment Plan
—  —  —  5,344  —  —  —  —  —  5,344  
Share-based compensation expense
—  —  —  2,548  —  —  —  —  —  2,548  
Proceeds from stock option exercises
—    5,451  —  —  —  —  —  5,462  
Redemptions of common stock related to stock option exercises
—  (3) —  (27,591) —  —  —  —  —  (27,594) 
Noncontrolling interests assumed related to acquisitions
7,963  —  —  —  —  —  —  —  27  27  
Distributions to noncontrolling interests
(4,987) —  —  —  —  —  —  —  (408) (408) 
Adjustments to redemption amount of redeemable noncontrolling interests
4,894  —  —  —  —  —  —  (4,894) —  (4,894) 
Other
—  —  —  54  —  —  —  —   56  
Balances as of April 30, 2019
$151,450  $538  $800  $310,201  $4,043  ($4,043) ($16,352) $1,251,699  $115,278  $1,662,164  

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

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HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
Six months ended April 30,
20202019
Operating Activities:
Net income from consolidated operations$210,711  $178,109  
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
Depreciation and amortization43,276  40,548  
Share-based compensation expense5,275  4,987  
Employer contributions to HEICO Savings and Investment Plan4,811  4,601  
Increase in accrued contingent consideration1,167  3,104  
Deferred income tax (benefit) provision(5,137) 648  
Payment of contingent consideration (175) (67) 
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable44,419  (15,784) 
(Increase) decrease in contract assets (12,985) 5,699  
Increase in inventories(37,790) (26,724) 
(Increase) decrease in prepaid expenses and other current assets(15,603) 27  
Increase (decrease) in trade accounts payable2,627  (7,698) 
Decrease in accrued expenses and other current liabilities(47,673) (16,596) 
Decrease in income taxes payable(2,018) (1,141) 
Net changes in other long-term liabilities and assets related to
HEICO Leadership Compensation Plan
13,951  10,604  
Other1,026  (2,064) 
Net cash provided by operating activities205,882  178,253  
Investing Activities:
Acquisitions, net of cash acquired(45,343) (134,940) 
Investments related to HEICO Leadership Compensation Plan (13,600) (10,800) 
Capital expenditures(12,435) (12,596) 
Other473  636  
Net cash used in investing activities(70,905) (157,700) 
Financing Activities:
Borrowings on revolving credit facility245,000  129,000  
Payments on revolving credit facility(68,000) (105,000) 
Proceeds from stock option exercises2,392  5,528  
Cash dividends paid(10,762) (9,305) 
Distributions to noncontrolling interests(9,742) (8,190) 
Redemptions of common stock related to stock option exercises(2,567) (27,744) 
Payment of contingent consideration(325) (283) 
Other(444) (176) 
Net cash provided by (used in) financing activities155,552  (16,170) 
Effect of exchange rate changes on cash(744) 109  
Net increase in cash and cash equivalents289,785  4,492  
Cash and cash equivalents at beginning of year57,001  59,599  
Cash and cash equivalents at end of period$346,786  $64,091  
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The October 31, 2019 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, 2020 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.

HEICO's results of operations for the six and three months ended April 30, 2020 have been significantly affected by the COVID-19 outbreak, classified by the World Health Organization as a global pandemic in March 2020 (the “Outbreak”). The effects of the Outbreak and related actions by governments around the world to mitigate its spread have impacted the Company's employees, customers, suppliers and manufacturers. With respect to the Company’s results of operations, approximately half of HEICO’s net sales are derived from defense, space and other industrial markets including electronics, medical and telecommunications. Demand for products in that half of the Company’s business has not been fundamentally impacted and its operational results remain materially consistent with financial expectations prior to the commencement of the Outbreak. The remaining portion of HEICO’s net sales is derived from commercial aviation products and services. The Outbreak has caused significant volatility and a substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, HEICO’s businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020.

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As a result of the Outbreak, HEICO has assessed various accounting estimates, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the Outbreak as of April 30, 2020 and through the date of filing this Quarterly Report. The accounting estimates assessed include, but were not limited to, the Company’s allowance for doubtful accounts, inventory reserves, contingent consideration arrangements, goodwill and other long-lived assets. Based on these assessments, no material impact was recorded to HEICO’s Condensed Consolidated Statement of Operations for the six and three months ended April 30, 2020.

New Accounting Pronouncements

        In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, which, as amended, was codified as Accounting Standards Codification ("ASC") Topic 842, "Leases" ("ASC 842"). ASC 842 requires recognition of lease assets and lease liabilities on the balance sheet of lessees. The Company adopted ASC 842 as of November 1, 2019 using a modified retrospective transition approach with the election to apply the guidance as of the adoption date instead of at the beginning of the earliest comparative period presented. The adoption of this guidance resulted in an increase in the Company's assets and liabilities due to the recognition of right-of-use ("ROU") assets and corresponding lease liabilities for leases that are currently classified as operating leases.

        Upon adoption, the Company elected the package of transitional practical expedients, which allowed the Company to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the Company elected the short-term lease practical expedient, which allows HEICO to not record an ROU asset and lease liability for any lease with a term of twelve months or less, and also elected the single component practical expedient for all asset classes, which allows the Company to include both lease and non-lease components associated with a lease as a single lease component when determining the value of the ROU asset and lease liability.

        The adoption of this guidance resulted in the Company recording ROU assets and corresponding lease liabilities of $63.4 million and $64.1 million, respectively, in the Company's Condensed Consolidated Balance Sheet. The adoption of ASC 842 did not have a material impact on the Company’s Condensed Consolidated Statement of Operations or Statement of Cash Flows. See Note 9, Leases, for additional information regarding the Company's accounting policy for leases and disclosures required by ASC 842.

        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
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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 December 2019, the Company, through a subsidiary of HEICO Electronic, acquired 100% of the business and assets of the Human-Machine Interface ("HMI") product line of Spectralux Corporation. HMI designs, manufactures, and repairs flight deck annunciators, panels, indicators, and illuminated keyboards, as well as lighting controls, and flight deck lighting.

In December 2019, the Company, through HEICO Electronic, acquired 80.1% of the stock of Quell Corporation ("Quell"). Quell designs and manufactures electromagnetic interference (EMI)/radio-frequency interference (RFI) and transient protection solutions for a wide variety of connectors that principally serve customers within the aerospace and defense markets. The remaining 19.9% continues to be owned by certain members of Quell's management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information).

        The purchase price of each fiscal 2020 acquisition was paid in cash, principally using proceeds from the Company's revolving credit facility, and is not material or significant to the Company's condensed consolidated financial statements. The allocation of the total consideration for the fiscal 2020 acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the fiscal 2020 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 2020 acquisitions included in the Condensed Consolidated Statement of Operations for the six and three months ended April 30, 2020 is not material. Had the fiscal 2020 acquisitions occurred as of November 1, 2018, 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, 2020 and 2019 would not have been materially different than the reported amounts.


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3.  SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands)April 30, 2020October 31, 2019
Accounts receivable$235,154  $277,992  
Less: Allowance for doubtful accounts(4,270) (3,666) 
Accounts receivable, net$230,884  $274,326  

Inventories
(in thousands)April 30, 2020October 31, 2019
Finished products$221,338  $199,880  
Work in process40,629  32,548  
Materials, parts, assemblies and supplies195,852  187,891  
Inventories, net of valuation reserves$457,819  $420,319  

Property, Plant and Equipment
(in thousands)April 30, 2020October 31, 2019
Land$6,817  $6,820  
Buildings and improvements118,933  116,997  
Machinery, equipment and tooling260,153  253,127  
Construction in progress10,380  8,382  
396,283  385,326  
Less: Accumulated depreciation and amortization(224,884) (211,981) 
Property, plant and equipment, net$171,399  $173,345  

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 $18.0 million as of April 30, 2020 and October 31, 2019. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2020 and 2019 was $3.8 million and $3.6 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended April 30, 2020 and 2019 was $1.7 million and $2.2 million, respectively.

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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, 2020 and 2019 is as follows (in thousands):
Six months ended April 30,Three months ended April 30,
2020201920202019
R&D expenses$33,855  $32,049  $16,752  $16,849  

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 2029. 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, 2020October 31, 2019
Redeemable at fair value $144,854  $136,611  
Redeemable based on a multiple of future earnings51,653  51,653  
Redeemable noncontrolling interests$196,507  $188,264  
        
As discussed in Note 2, Acquisitions, the Company, through HEICO Electronic, acquired 80.1% of the stock of Quell in December 2019. As part of the shareholders' agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interests over a four-year period beginning in fiscal 2025, or sooner under certain conditions, and the Company has the right to purchase the same equity interests over the same period.

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Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss for the six months ended April 30, 2020 are as follows (in thousands):
Foreign Currency TranslationDefined Benefit Pension PlanAccumulated
Other
Comprehensive Loss
Balances as of October 31, 2019($14,989) ($1,750) ($16,739) 
Unrealized loss(7,104) —  (7,104) 
Amortization of unrealized loss —  39  39  
Balances as of April 30, 2020($22,093) ($1,711) ($23,804) 


4.  GOODWILL AND OTHER INTANGIBLE ASSETS

        Changes in the carrying amount of goodwill by operating segment for the six months ended April 30, 2020 are as follows (in thousands):
SegmentConsolidated Totals
FSGETG
Balances as of October 31, 2019  $410,044  $858,659  $1,268,703  
Goodwill acquired—  34,173  34,173  
Foreign currency translation adjustments(569) (1,835) (2,404) 
Adjustments to goodwill—  (285) (285) 
Balances as of April 30, 2020  $409,475  $890,712  $1,300,187  
        
The goodwill acquired pertains to the fiscal 2020 acquisitions described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2019 acquisitions. The Company estimates that $9 million of the goodwill acquired in fiscal 2020 will be deductible for income tax purposes.


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Identifiable intangible assets consist of the following (in thousands):
As of April 30, 2020As of October 31, 2019
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Amortizing Assets:
Customer relationships$417,412  ($178,510) $238,902  $411,076  ($162,722) $248,354  
Intellectual property220,372  (76,021) 144,351  216,359  (70,169) 146,190  
Licenses6,559  (4,387) 2,172  6,559  (4,102) 2,457  
Patents996  (691) 305  986  (666) 320  
Non-compete agreements805  (805) —  813  (813) —  
Trade names450  (199) 251  450  (180) 270  
646,594  (260,613) 385,981  636,243  (238,652) 397,591  
Non-Amortizing Assets:
Trade names154,642  —  154,642  153,102  —  153,102  
$801,236  ($260,613) $540,623  $789,345  ($238,652) $550,693  
        
The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of April 30, 2020 compared to October 31, 2019 principally relates to such intangible assets recognized in connection with the fiscal 2020 acquisitions (see Note 2, Acquisitions).

        Amortization expense related to intangible assets for the six months ended April 30, 2020 and 2019 was $27.6 million and $25.9 million, respectively. Amortization expense related to intangible assets for the three months ended April 30, 2020 and 2019 was $13.9 million and $13.1 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2020 is estimated to be $27.5 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $52.4 million in fiscal 2021, $45.8 million in fiscal 2022, $40.6 million in fiscal 2023, $36.1 million in fiscal 2024, $32.2 million in fiscal 2025, and $151.4 million thereafter.


5.  LONG-TERM DEBT

        Long-term debt consists of the following (in thousands):
April 30, 2020October 31, 2019
Borrowings under revolving credit facility$730,000  $553,000  
Finance leases and note payable 10,213  8,955  
740,213  561,955  
Less: Current maturities of long-term debt(1,025) (906) 
$739,188  $561,049  
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The Company's borrowings under its revolving credit facility mature in fiscal 2023. As of April 30, 2020 and October 31 2019, the weighted average interest rate on borrowings under the Company's revolving credit facility was 1.6% and 3.0%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2020, the Company was in compliance with all such covenants.


6.  REVENUE
        
Contract Balances

        Contract assets (unbilled receivables) represent revenue recognized on contracts using an over-time recognition model in excess of amounts invoiced to the customer. Contract liabilities (deferred revenue) represent customer advances and billings in excess of revenue recognized and are included within accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets. 

        Changes in the Company’s contract assets and liabilities for the six months ended April 30, 2020 are as follows (in thousands):
April 30, 2020October 31, 2019Change
Contract assets $56,033  $43,132  $12,901  
Contract liabilities 26,928  23,809  3,119  
Net contract assets $29,105  $19,323  $9,782  
        
        The increase in the Company's contract assets during the first six months of fiscal 2020 occurred within the ETG and principally reflects additional unbilled receivables on certain customer contracts using an over-time recognition model in excess of billings on certain customer contracts.

        The increase in the Company's contract liabilities during the first six months of fiscal 2020 mainly occurred within the FSG and principally reflects the receipt of new customer deposits on certain customer contracts in excess of reductions to contract liabilities from customer deposits recognized as revenue.

        The amount of revenue that the Company recognized during the six and three months ended April 30, 2020 that was included in contract liabilities as of the beginning of fiscal 2020 was $16.5 million and $3.1 million, respectively.
        
Remaining Performance Obligations

        As of April 30, 2020, the Company had $394.4 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG and the FSG's specialty products and aftermarket replacement parts product lines. The Company will recognize net sales as these
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obligations are satisfied. The Company expects to recognize $168.0 million of this amount during the remainder of fiscal 2020 and $226.4 million thereafter, of which the majority is expected to occur in fiscal 2021.

Contract Estimates

        Changes in estimates did not have a material effect on net income from consolidated operations for the six and three months ended April 30, 2020.
        
Disaggregation of Revenue

        The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
Six months ended April 30,Three months ended April 30,
2020201920202019
Flight Support Group:
Aftermarket replacement parts (1)
$309,459  $326,722  $141,192  $167,225  
Repair and overhaul parts and services (2)
121,916  140,617  52,629  73,454  
Specialty products (3)
121,656  128,125  58,143  67,572  
Total net sales553,031  595,464  251,964  308,251  
Electronic Technologies Group:
Electronic component parts for defense,
space and aerospace equipment (4)
329,675  299,414  168,962  161,664  
Electronic component parts for equipment
in various other industries (5)
97,691  99,466  49,993  52,787  
Total net sales427,366  398,880  218,955  214,451  
Intersegment sales(5,976) (12,550) (2,773) (7,054) 
Total consolidated net sales$974,421  $981,794  $468,146  $515,648  

(1) Includes various jet engine and aircraft component replacement parts.
(2) Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(3) Includes primarily the sale of specialty components such as thermal insulation blankets, renewable/reusable insulation systems, advanced niche components, complex composite assemblies, and expanded foil mesh.
(4) Includes various component parts such as electro-optical infrared simulation and test equipment, electro-optical laser products, electro-optical, microwave and other power equipment, high-speed interface products, power conversion products, underwater locator beacons, emergency locator transmission beacons, traveling wave tube amplifiers, microwave power modules, three-dimensional
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microelectronic and stacked memory products, crashworthy and ballistically self-sealing auxiliary fuel systems, radio frequency (RF) and microwave amplifiers, transmitters and receivers, high performance communications and electronic intercept receivers and tuners, high performance active antenna systems, and technical surveillance countermeasures equipment.
(5) Includes various component parts such as electromagnetic and radio interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies and silicone material for a variety of demanding applications.

        The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
Six months ended April 30,Three months ended April 30,
2020201920202019
Flight Support Group:
Aerospace$428,578  $484,398  $188,655  $249,225  
Defense and Space 104,395  87,503  54,142  45,969  
Other (1)
20,058  23,563  9,167  13,057  
Total net sales553,031  595,464  251,964  308,251  
Electronic Technologies Group:
Defense and Space 272,601  251,171  139,491  135,952  
Other (2)
112,706  105,538  57,743  55,623  
Aerospace 42,059  42,171  21,721  22,876  
Total net sales427,366  398,880  218,955  214,451  
Intersegment sales (5,976) (12,550) (2,773) (7,054) 
Total consolidated net sales$974,421  $981,794  $468,146  $515,648  

(1) Principally industrial products.
(2) Principally other electronics and medical products.



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7.  INCOME TAXES
        
        The Company's effective tax rate in the first six months of fiscal 2020 was .3%, as compared to 14.5% in the first six months of fiscal 2019. The Company recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2020 and 2019 of $47.6 million and $16.6 million, respectively. The $31.0 million larger benefit from stock option exercises recognized in the first quarter of fiscal 2020 was the result of more stock options exercised and the strong appreciation in HEICO's stock price during the optionees' holding periods.

        The Company's effective tax rate in the second quarter of fiscal 2020 was 22.6%, as compared to 22.5% in the second quarter of fiscal 2019.


8. 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, 2020
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 plan:
Corporate-owned life insurance$—  $157,522  $—  $157,522  
Total assets$—  $157,522  $—  $157,522  
Liabilities:
Contingent consideration $—  $—  $18,993  $18,993  

As of October 31, 2019
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 plan:
Corporate-owned life insurance$—  $151,871  $—  $151,871  
Money market funds20  —  —  20  
Total assets$20  $151,871  $—  $151,891  
Liabilities:
Contingent consideration $—  $—  $18,326  $18,326  

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The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company, and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Condensed Consolidated Balance Sheets. The related liabilities of the LCP are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $156.3 million as of April 30, 2020 and $151.1 million as of October 31, 2019.

As part of the agreement to acquire a subsidiary by the FSG in fiscal 2019, the Company may be obligated to pay contingent consideration of $6.4 million in fiscal 2022 should the acquired entity meet a certain earnings objective during the second and third years following the acquisition. As of April 30, 2020, the estimated fair value of the contingent consideration was $1.2 million.

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 a certain earnings objective during the first six years following the acquisition. As of April 30, 2020, the estimated fair value of the contingent consideration was $17.8 million.
        
        The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were determined using probability-based scenario analyses. 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.

The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of April 30, 2020 were as follows:
Fiscal 2019 AcquisitionFiscal 2017 Acquisition
Compound annual revenue growth rate range  (7 %) %(3 %) 10 %
Weighted average discount rate4.3%3.4%

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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, 2020 are as follows (in thousands):
Liabilities
Balance as of October 31, 2019  $18,326  
Increase in accrued contingent consideration1,167  
Payment of contingent consideration  (500) 
Balance as of April 30, 2020  $18,993  

The Company's contingent consideration liability is included in other long-term liabilities in its Condensed Consolidated Balance Sheets and the Company records changes in accrued contingent consideration within selling, general and administrative expenses in its Condensed Consolidated Statements 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, 2020.

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, 2020 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.


9.  LEASES

        The Company’s lease arrangements primarily pertain to manufacturing facilities, office buildings, equipment, land and vehicles. The Company evaluates whether a contractual arrangement that provides it with control over the use of an asset is, or contains, a lease at the inception date. The term of a lease is inclusive of any option to renew, extend, or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company classifies a lease as operating or finance using the classification criteria set forth in ASC 842. Finance leases are not material to the Company's condensed consolidated financial statements. HEICO recognizes operating lease right-of-use (“ROU”) assets and corresponding lease liabilities as of the lease commencement date based on the present value of the lease payments over the lease term. The discount rate used to calculate the present value of the Company’s leases is based on HEICO’s incremental borrowing rate and considers credit risk, the lease term and other available information as of the commencement date since the leases do not provide a readily determinable implicit rate. Variable lease payments that depend on an index or a rate are included in the determination of operating ROU assets and lease liabilities using the index or rate at the lease commencement date. Variable lease payments that do not depend on an index or rate or resulting from changes in an index or rate subsequent to the lease commencement date, are recorded as lease expense in the period in which the obligation for the payment is incurred. The Company’s operating ROU assets are increased by any prepaid lease payments and initial direct
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costs and reduced by any lease incentives. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.

        HEICO’s operating lease ROU assets represent its right to use an underlying asset during the lease term and its operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. HEICO’s operating lease ROU assets are included within other assets and its operating lease liabilities are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet. For additional information on the Company’s finance leases, see Note 5, Long-term Debt, of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report and Note 5, Long-term Debt, and Note 3, Selected Financial Statement Information - Property, Plant and Equipment, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The following table presents the Company’s operating lease ROU assets and lease liabilities as of April 30, 2020 (in thousands):
April 30, 2020
Right-of-use assets $60,056  
Current lease liabilities $13,365  
Long-term lease liabilities 47,570  
Total operating lease liabilities $60,935  
        
The Company’s operating lease expense is recorded as a component of cost of sales and/or selling, general, and administrative expenses in the Company’s Condensed Consolidated Statements of Operations. The following table presents the components of operating lease expense for the six and three months ended April 30, 2020 (in thousands): 
Six months ended Three months ended
April 30, 2020April 30, 2020
Operating lease expense $8,544  $4,284  
Variable lease expense 1,323  708  
Total operating lease expense (1)
$9,867  $4,992  

(1) Excludes short-term lease expense, which is not material.
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The following table presents a maturity analysis of the Company's operating lease liabilities as of April 30, 2020 for the remainder of fiscal 2020 and the next five fiscal years and thereafter (in thousands):
Year ending October 31,
2020$7,762  
202116,101  
202214,192  
20238,834  
20245,006  
20254,136  
Thereafter18,004  
Total minimum lease payments74,035  
Less: amount representing interest(13,100) 
Present value of minimum lease payments$60,935  
        
Prior to the adoption of ASC 842, the Company's future minimum lease payments under non-cancelable operating leases on an undiscounted basis as of October 31, 2019 were $15.5 million in fiscal 2020, $15.6 million in fiscal 2021, $13.8 million in fiscal 2022, $8.5 million in fiscal 2023, $4.7 million in fiscal 2024 and $18.8 million thereafter.
        
        The Company does not have any material leases that have been signed but have yet to commence as of April 30, 2020.
         
        The following table presents the weighted average remaining lease term and discount rate of the Company’s operating leases as of April 30, 2020:
April 30, 2020
Weighted average remaining lease term (years)7
Weighted average discount rate 5.2%
        
The following table presents supplemental disclosures of cash flow information associated with the Company's operating leases for the six months ended April 30, 2020 (in thousands):
Six months ended
April 30, 2020
Cash paid for amounts included in the measurement of lease liabilities $8,448  
Right-of-use assets obtained in exchange for new lease liabilities6,824  

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10. 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,
2020201920202019
Numerator:
Net income attributable to HEICO
$197,341  $161,114  $75,453  $81,782  
Denominator:
Weighted average common shares outstanding - basic
134,596  133,123  134,669  133,313  
Effect of dilutive stock options2,673  3,969  2,448  3,893  
Weighted average common shares outstanding - diluted
137,269  137,092  137,117  137,206  
Net income per share attributable to HEICO shareholders:
Basic$1.47  $1.21  $.56  $.61  
Diluted$1.44  $1.18  $.55  $.60  
Anti-dilutive stock options excluded
283  615  448  470  
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11. OPERATING SEGMENTS

Information on the Company’s two operating segments, the FSG and the ETG, for the six and three months ended April 30, 2020 and 2019, respectively, is as follows (in thousands):
Other, 
Primarily Corporate and 
Intersegment (1)
Consolidated
Totals
Segment
FSGETG
Six months ended April 30, 2020:
Net sales$553,031  $427,366  ($5,976) $974,421  
Depreciation7,245  5,809  511  13,565  
Amortization9,611  19,608  492  29,711  
Operating income109,576  123,017  (13,442) 219,151  
Capital expenditures6,765  5,665   12,435  
Six months ended April 30, 2019:
Net sales$595,464  $398,880  ($12,550) $981,794  
Depreciation6,758  5,395  503  12,656  
Amortization9,723  17,677  492  27,892  
Operating income115,046  118,954  (16,870) 217,130  
Capital expenditures6,576  6,012   12,596  
Three months ended April 30, 2020:
Net sales$251,964  $218,955  ($2,773) $468,146  
Depreciation3,628  2,881  256  6,765  
Amortization4,752  9,930  246  14,928  
Operating income47,531  65,526  (4,896) 108,161  
Capital expenditures2,647  2,938  —  5,585  
Three months ended April 30, 2019:
Net sales$308,251  $214,451  ($7,054) $515,648  
Depreciation3,403  2,789  252  6,444  
Amortization4,920  8,901  246  14,067  
Operating income62,166  67,352  (10,335) 119,183  
Capital expenditures3,727  2,954   6,689  

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

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Total assets by operating segment are as follows (in thousands):
Other,
Primarily Corporate
Consolidated
Totals
Segment
FSGETG
Total assets as of April 30, 2020  $1,201,852  $1,827,060  $335,923  $3,364,835  
Total assets as of October 31, 2019  1,149,737  1,643,032  176,442  2,969,211  


12.  COMMITMENTS AND CONTINGENCIES

Guarantees

As of April 30, 2020, the Company has arranged for standby letters of credit aggregating $4.8 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, 2020 and 2019, respectively, are as follows (in thousands):
Six months ended April 30,
20202019
Balances as of beginning of fiscal year$2,810  $3,306  
Accruals for warranties1,194  1,264  
Acquired warranty liabilities50  —  
Warranty claims settled(952) (1,543) 
Balances as of April 30$3,102  $3,027  

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.


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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, 2019. There have been no material changes to our critical accounting policies during the six months ended April 30, 2020.

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 and three months ended April 30, 2020 have been significantly affected by the COVID-19 outbreak, classified by the World Health Organization as a global pandemic in March 2020 (the “Outbreak”). The effects of the Outbreak and related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers and manufacturers. In response to the economic impact from the Outbreak, we have implemented certain cost reduction efforts, including layoffs, temporary reduced work hours and temporary pay reductions within various departments of our business, including within our executive management team. Additionally, our response to the Outbreak has included the implementation of varying health and safety measures at our facilities, including: supplying and requiring the use of personal protective equipment; body temperature taking; staggering work shifts; increasing work-from-home capabilities; consistent and ongoing cleaning of work spaces and high-touch areas; and establishing processes aligned with the Centers for Disease and Control guidelines to work with any individual exposed to COVID-19 on their necessary quarantine period and the process for the individual to return to work.
With respect to our results of operations, approximately half of our net sales are derived from defense, space and other industrial markets including electronics, medical and telecommunications. Demand for products in that half of our business has not been
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fundamentally impacted and its operational results remain materially consistent with financial expectations prior to the commencement of the Outbreak. However, we have experienced, and expect to continue experiencing, periodic operational disruptions resulting from supply chain disturbances, staffing challenges, temporary facility closures, transportation interruptions and other conditions which slow production or increase costs. While these issues have not yet been material, it is impossible to predict their future impact and our current experience indicates that the likely effect will be to delay orders and shipments measured in weeks and months, and to temporarily increase some costs, as opposed to profoundly changing our business overall. Fortunately, many of our defense and medical component design, manufacturing and supply operations are believed to be crucial suppliers to markets with continuing strong needs. While it has not had a material impact on our consolidated net sales, demand for our components used in medical equipment, such as ventilators, x-ray systems, sterilization equipment and personal protective equipment, has increased as a result of the Outbreak.

The remaining portion of our net sales is derived from commercial aviation products and services. The Outbreak has caused significant volatility and a substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020. Once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers and we anticipate recovery in demand for our commercial aviation products, which frequently provide aircraft operators with significant savings. Furthermore, we believe our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within this market.

Additionally, our results of operations for the six and three months ended April 30, 2020 have been affected by the fiscal 2019 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, 2019.
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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,
2020201920202019
Net sales$974,421  $981,794  $468,146  $515,648  
Cost of sales597,484  590,170  289,256  306,261  
Selling, general and administrative expenses
157,786  174,494  70,729  90,204  
Total operating costs and expenses755,270  764,664  359,985  396,465  
Operating income$219,151  $217,130  $108,161  $119,183  
Net sales by segment:
Flight Support Group$553,031  $595,464  $251,964  $308,251  
Electronic Technologies Group427,366  398,880  218,955  214,451  
Intersegment sales(5,976) (12,550) (2,773) (7,054) 
$974,421  $981,794  $468,146  $515,648  
Operating income by segment:
Flight Support Group$109,576  $115,046  $47,531  $62,166  
Electronic Technologies Group123,017  118,954  65,526  67,352  
Other, primarily corporate(13,442) (16,870) (4,896) (10,335) 
$219,151  $217,130  $108,161  $119,183  
Net sales100.0 %100.0 %100.0 %100.0 %
Gross profit38.7 %39.9 %38.2 %40.6 %
Selling, general and administrative expenses
16.2 %17.8 %15.1 %17.5 %
Operating income22.5 %22.1 %23.1 %23.1 %
Interest expense.8 %1.1 %.8 %1.1 %
Other income — %.2 %— %.5 %
Income tax expense.1 %3.1 %5.0 %5.1 %
Net income attributable to noncontrolling interests
1.4 %1.7 %1.2 %1.6 %
Net income attributable to HEICO20.3 %16.4 %16.1 %15.9 %
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Comparison of First Six Months of Fiscal 2020 to First Six Months of Fiscal 2019

Net Sales

Our consolidated net sales in the first six months of fiscal 2020 decreased by 1% to $974.4 million, as compared to net sales of $981.8 million in the first six months of fiscal 2019. The decrease in consolidated net sales principally reflects a decrease of $42.4 million (a 7% decrease) to $553.0 million in net sales within the FSG partially offset by an increase of $28.5 million (a 7% increase) to a record $427.4 million in net sales within the ETG. The net sales decrease in the FSG is principally organic and reflects lower demand for the majority of our products and services resulting from the significant decline in global commercial air travel beginning in March 2020 due to the Outbreak. As a result, net sales of our repair and overhaul parts and services, aftermarket replacement parts, and specialty products product lines decreased by $18.7 million, $17.2 million, and $6.5 million, respectively. The net sales increase in the ETG reflects net sales of $28.2 million contributed by our fiscal 2019 and 2020 acquisitions as well as organic growth of 2%. The ETG's organic growth is mainly attributable to increased demand for our defense products resulting in a net sales increase of $22.0 million partially offset by lower demand for our space products resulting in a net sales decrease of $14.8 million. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first six months of fiscal 2020.

Gross Profit and Operating Expenses

Our consolidated gross profit margin decreased to 38.7% in the first six months of fiscal 2020, as compared to 39.9% in the first six months of fiscal 2019, principally reflecting a decrease of 2.2% and 1.1% in the ETG's and FSG's gross profit margin, respectively. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales of certain space products and a less favorable product mix of certain aerospace products, partially offset by increased net sales of certain defense products. The decrease in the FSG's gross profit margin principally reflects a decrease in net sales and less favorable product mix within our repair and overhaul parts and services product line as well as a less favorable product mix within our aftermarket replacement parts product line. Total new product research and development expenses included within our consolidated cost of sales were $33.9 million in the first six months of fiscal 2020, up from $32.0 million in the first six months of fiscal 2019.

Our consolidated selling, general and administrative ("SG&A") expenses decreased by 10% to $157.8 million in the first six months of fiscal 2020, as compared to $174.5 million in the first six months of fiscal 2019. The decrease in consolidated SG&A expenses principally reflects an $18.6 million decrease in performance-based compensation expense and a $4.3 million reduction in other selling expenses including outside sales commissions, marketing and travel, partially offset by $7.5 million attributable to the fiscal 2019 and 2020 acquisitions.

        Our consolidated SG&A expenses as a percentage of net sales decreased to 16.2% in the first six months of fiscal 2020, down from 17.8% in the first six months of fiscal 2019. The
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decrease in consolidated SG&A expenses as a percentage of net sales is mainly due to a 1.9% impact from the previously mentioned lower performance-based compensation expense.

Operating Income

        Our consolidated operating income increased by 1% to a record $219.2 million in the first six months of fiscal 2020, up from $217.1 million in the first six months of fiscal 2019. The increase in consolidated operating income principally reflects a $4.1 million increase (a 3% increase) to a record $123.0 million in operating income of the ETG partially offset by a $5.5 million decrease (a 5% decrease) to $109.6 million in operating income of the FSG. The increase in operating income of the ETG principally reflects the previously mentioned net sales growth and a $4.3 million decrease in performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin. The decrease in operating income of the FSG principally reflects the previously mentioned decrease in net sales and lower gross profit margin, partially offset by an $11.8 million decrease in performance-based compensation expense. Further, the increase in consolidated operating income reflects $2.1 million of lower corporate expenses mainly attributable to a decrease in performance-based compensation expense.

Our consolidated operating income as a percentage of net sales improved to 22.5% in the first six months of fiscal 2020, up from 22.1% in the first six months of fiscal 2019. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to 19.8% in the first six months of fiscal 2020, up from 19.3% in the first six months of fiscal 2019 and the previously mentioned lower corporate expenses, partially offset by a decrease in the ETG’s operating income as a percentage of net sales to 28.8% in the first six months of fiscal 2020 as compared to 29.8% in the first six months of fiscal 2019. The increase in the FSG’s operating income as a percentage of net sales principally reflects a 1.6% decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin partially offset by a 1.1% decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense.

Interest Expense

Interest expense decreased to $8.0 million in the first six months of fiscal 2020, down from $11.0 million in the first six months of fiscal 2019. The decrease was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.

Other Income

Other income in the first six months of fiscal 2020 and 2019 was not material.
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Income Tax Expense

Our effective tax rate in the first six months of fiscal 2020 was .3%, as compared to 14.5% in the first six months of fiscal 2019. HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2020 and 2019 of $47.6 million and $16.6 million, respectively. The $31.0 million larger benefit from stock option exercises recognized in the first quarter of fiscal 2020 was the result of more stock options exercised and the strong appreciation in HEICO's stock price during the optionees' holding periods.  

Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG ("LHT") in HEICO Aerospace Holdings Corp. ("HEICO Aerospace") and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $13.4 million in the first six months of fiscal 2020, as compared to $17.0 million in the first six months of fiscal 2019. The decrease in net income attributable to noncontrolling interests in the first six months of fiscal 2020 principally reflects the impact of a dividend paid by HEICO Aerospace in June 2019 that effectively resulted in the transfer of the 20% noncontrolling interest held by LHT in eight of our existing subsidiaries within HEICO Aerospace that are principally part of the FSG's repair and overhaul parts and services product line to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO.

Net Income Attributable to HEICO

Net income attributable to HEICO increased to a record $197.3 million, or $1.44 per diluted share, in the first six months of fiscal 2020, up from $161.1 million, or $1.18 per diluted share, in the first six months of fiscal 2019 principally reflecting the previously mentioned income tax benefit, increased operating income and lower interest expense.

Comparison of Second Quarter of Fiscal 2020 to Second Quarter of Fiscal 2019

Net Sales

Our consolidated net sales in the second quarter of fiscal 2020 decreased by 9% to $468.1 million, as compared to net sales of $515.6 million in the second quarter of fiscal 2019. The decrease in consolidated net sales principally reflects a decrease of $56.3 million (an 18% decrease) to $252.0 million in net sales within the FSG partially offset by an increase of $4.5 million (a 2% increase) to $219.0 million in net sales within the ETG. The net sales decrease in the FSG is principally organic and reflects lower demand for the majority of our products and services resulting from the significant decline in global commercial air travel beginning in March 2020 due to the Outbreak. As a result, net sales of our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines decreased by $26.0 million, $20.8 million, and $9.5 million, respectively. The net sales increase in the ETG reflects net sales of $13.3 million contributed by our fiscal 2019 and 2020 acquisitions, partially offset by an
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organic net sales decrease of 2%. The ETG's decrease in organic net sales is mainly attributable to lower shipments of our space products resulting in a net sales decrease of $7.3 million partially offset by increased demand for our defense products resulting in a net sales increase of $2.7 million. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the second quarter of fiscal 2020.

Gross Profit and Operating Expenses

Our consolidated gross profit margin decreased to 38.2% in the second quarter of fiscal 2020, as compared to 40.6% in the second quarter of fiscal 2019, principally reflecting a decrease of 3.5% and 2.7% in the FSG's and ETG's gross profit margin, respectively. The decrease in the FSG's gross profit margin principally reflects a decrease in net sales and a less favorable product mix within our repair and overhaul parts and services and aftermarket replacement parts product lines. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales and less favorable product mix of certain space and commercial aerospace products partially offset by increased net sales of certain defense products. Total new product research and development expenses included within our consolidated cost of sales were $16.8 million in both the second quarter of fiscal 2020 and 2019.

Our consolidated SG&A expenses decreased by 22% to $70.7 million in the second quarter of fiscal 2020, as compared to $90.2 million in the second quarter of fiscal 2019. The decrease in consolidated SG&A expenses principally reflects an $18.2 million decrease in performance-based compensation expense and a $3.7 million reduction in other selling expenses including outside sales commissions, marketing and travel, partially offset by $3.3 million attributable to the fiscal 2019 and 2020 acquisitions.

        Our consolidated SG&A expenses as a percentage of net sales decreased to 15.1% in the second quarter of fiscal 2020, down from 17.5% in the second quarter of fiscal 2019. The decrease in consolidated SG&A expenses as a percentage of net sales is mainly due to a 3.5% impact from the previously mentioned lower performance-based compensation expense partially offset by some inefficiencies resulting from the overall impacts of the Outbreak.

Operating Income

        Our consolidated operating income decreased by 9% to $108.2 million in the second quarter of fiscal 2020, as compared to operating income of $119.2 million in the second quarter of fiscal 2019. The decrease in consolidated operating income principally reflects a $14.6 million decrease (a 24% decrease) to $47.5 million in operating income of the FSG and a $1.8 million decrease (a 3% decrease) to $65.5 million in operating income of the ETG. The decrease in operating income of the FSG principally reflects the previously mentioned decrease in net sales and lower gross profit margin, partially offset by an $11.5 million decrease in performance-based compensation expense. The decrease in operating income of the ETG principally reflects the previously mentioned lower gross profit margin partially offset by a $4.0 million decrease in performance-based compensation expense and the previously mentioned increase in net sales.

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Further, the decreases in operating income of the FSG and ETG were partially moderated by lower corporate expenses of $4.1 million mainly attributable to a decrease in performance-based compensation expense.

Our consolidated operating income as a percentage of net sales was 23.1% in both the second quarter of fiscal 2020 and 2019 principally reflecting a 1.5% and 1.3% decrease in the ETG's and FSG's operating income as a percentage of net sales, respectively, offset by the previously mentioned lower corporate expenses. The decrease in the ETG's operating income as a percentage of net sales to 29.9% in the second quarter of fiscal 2020 from 31.4% in the second quarter of fiscal 2019 principally reflects the previously mentioned lower gross profit margin partially offset by a 1.2% decrease in SG&A expenses as a percentage of net sales mainly reflecting lower performance-based compensation expense. The decrease in the FSG's operating income as a percentage of net sales to 18.9% in the second quarter of fiscal 2020 from 20.2% in the second quarter of fiscal 2019 principally reflects the previously mentioned lower gross profit margin partially offset by a 2.2% decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense partially offset by some inefficiencies resulting from the overall impacts of the Outbreak.

Interest Expense

Interest expense decreased to $3.8 million in the second quarter of fiscal 2020, down from $5.5 million in the second quarter of fiscal 2019. The decrease was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.

Other Income

Other income in the second quarter of fiscal 2020 and 2019 was not material.

Income Tax Expense

        Our effective tax rate in the second quarter of fiscal 2020 was 22.6%, as compared to 22.5% in the second quarter of fiscal 2019.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by LHT in HEICO Aerospace and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $5.5 million in the second quarter of fiscal 2020, as compared to $8.3 million in the second quarter of fiscal 2019. The decrease in net income attributable to noncontrolling interests in the second quarter of fiscal 2020 principally reflects the impact of a dividend paid by HEICO Aerospace in June 2019 that effectively resulted in the transfer of the 20% noncontrolling interest held by LHT in eight of our existing subsidiaries within HEICO Aerospace that are

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principally part of the FSG's repair and overhaul parts and services product line to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO.

Net Income Attributable to HEICO

Net income attributable to HEICO was $75.5 million, or $.55 per diluted share, in the second quarter of fiscal 2020, as compared to $81.8 million, or $.60 per diluted share, in the second quarter of fiscal 2019 principally reflecting the previously mentioned lower operating income, partially offset by less net income attributable to noncontrolling interests and lower interest expense.

Outlook

In our Quarterly Report on Form 10-Q for the three months ended January 31, 2020, we provided net sales and net income estimates for fiscal 2020, but noted that it excluded any impact from the coronavirus outbreak as it was at such an early stage. As noted within our Form 8-K, filed on April 15, 2020, we withdrew our fiscal 2020 financial guidance due to the COVID-19 outbreak, classified by the World Health Organization as a global pandemic in March 2020 (the “Outbreak”). The Outbreak has resulted in a significant reduction in global demand for commercial air travel beginning in March 2020. As such, the results of operations for the six and three months ended April 30, 2020 are not indicative of the results to be expected for the full fiscal 2020 year.

We entered the Outbreak with a healthy balance sheet that included a strong cash position and nominal debt. We cannot estimate the duration and magnitude of the Outbreak and cannot confidently predict when demand for our commercial aerospace products will return to pre-Outbreak levels. However, we believe HEICO is favorably positioned for long-term success despite the short-term challenges created by the Outbreak in the global economy.


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Liquidity and Capital Resources

Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. At the onset of the Outbreak, we borrowed $200.0 million on our revolving credit facility as a precautionary measure to ensure we have additional cash on hand to pay our employees and vendors and for potential acquisition opportunities. As a result of this borrowing and through net cash provided by operating activities, our cash and cash equivalents increased to $346.8 million as of April 30, 2020, up from $57.0 million as of October 31, 2019. We finance our business 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, 2020, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 39.2%.

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

Operating Activities

Net cash provided by operating activities was $205.9 million in the first six months of fiscal 2020 and consisted primarily of net income from consolidated operations of $210.7 million, depreciation and amortization expense of $43.3 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan of $14.0 million (principally participant deferrals and employer contributions), $5.3 million in share-based compensation expense (a non-cash item), and $4.8 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $69.0 million increase in working capital and a $5.1 million deferred income tax benefit. The increase in working capital is inclusive of a $47.7 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2019 accrued performance-based compensation; a $37.8 million increase in inventories as a result of certain inventory purchase commitments based on pre-Outbreak net sales expectations and to support the backlog of certain of our businesses; a $15.6 million increase in prepaid expenses and other current assets due to the timing of income tax payments; and a $13.0 million increase in contract assets, partially offset by a $44.4 million decrease in accounts receivable resulting from strong cash collections and lower net sales.

Net cash provided by operating activities increased by $27.6 million in the first six months of fiscal 2020, up from $178.3 million in the first six months of fiscal 2019. The increase is principally attributable to a $32.6 million increase in net income from consolidated operations partially offset by a $6.8 million increase in net working capital.

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Investing Activities

Net cash used in investing activities totaled $70.9 million in the first six months of fiscal 2020 and related primarily to acquisitions of $45.3 million (net of cash acquired), investments related to the HEICO LCP of $13.6 million and capital expenditures of $12.4 million. Further details regarding our fiscal 2020 acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements.

Financing Activities

Net cash provided by financing activities in the first six months of fiscal 2020 totaled $155.6 million. During the first six months of fiscal 2020, we borrowed $200.0 million under our revolving credit facility to provide a cushion of liquidity during this period of economic uncertainty resulting from the Outbreak and $45.0 million to fund our fiscal 2020 acquisitions. Additionally, we made $68.0 million in payments on our revolving credit facility, paid $10.8 million in cash dividends on our common stock, and made $9.7 million of distributions to noncontrolling interests.

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, 2019.

Off-Balance Sheet Arrangements

Guarantees

As of April 30, 2020, we have arranged for standby letters of credit aggregating $4.8 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

        See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.

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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: the severity, magnitude and duration of the Outbreak; our liquidity and the amount and timing of cash generation; the continued decline in commercial air travel caused by the Outbreak, 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 and manufacturing 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, 2019.


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, 2020 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 1A. RISK FACTORS

The following supplements the risk factors described in Item 1A., "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019.

The Company is subject to risks arising from the recent COVID-19 outbreak (the "Outbreak").

The recent Outbreak has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that HEICO or its employees, customers, suppliers, manufacturers and other commercial partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. While it is not possible at this time to estimate the full impact that the Outbreak could have on HEICO's business, the continued spread of COVID-19 could disrupt its customers' businesses, supply chain and the manufacture or shipment of its products, and its other activities, which could have a material adverse effect on its business, financial condition and results of operations.

Item 6. EXHIBITS

ExhibitDescription
31.1  
31.2  
32.1  
32.2  
101.INSInline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document. *
101.SCHInline XBRL Taxonomy Extension Schema Document. *
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document. *
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document. *
101.LABInline XBRL Taxonomy Extension Labels Linkbase Document. *
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document. *
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). *
* 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:May 28, 2020By:/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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