UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the quarterly period ended April 30, 20172018 |
| | |
| | OR |
| | |
¨
| | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the transition period from ______ to _______ |
Commission File Number: 1-4604001-04604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
Florida | | 65-0341002 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
3000 Taft Street, Hollywood, Florida | | 33021 |
(Address of principal executive offices) | | (Zip Code) |
(954) 987-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the registrant’s classes of common stock as of May 24, 201729, 2018 is as follows:
|
| | | |
Common Stock, $.01 par value | 33,762,81842,673,859 |
| shares |
Class A Common Stock, $.01 par value | 50,555,98163,538,812 |
| shares |
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
|
| | | |
| | | Page |
Part I. | Financial Information | |
| | | |
| Item 1. | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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| Item 2. | | |
| | | |
| Item 3. | | |
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| Item 4. | | |
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Part II. | Other Information | |
| | | |
| 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, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
ASSETS | Current assets: | | | | | | | | |
Cash and cash equivalents | |
| $36,732 |
| |
| $42,955 |
| |
| $48,227 |
| |
| $52,066 |
|
Accounts receivable, net | | 213,107 |
| | 202,227 |
| | 238,233 |
| | 222,456 |
|
Inventories, net | | 325,661 |
| | 286,302 |
| | 382,669 |
| | 343,628 |
|
Prepaid expenses and other current assets | | 12,810 |
| | 11,674 |
| | 25,597 |
| | 13,742 |
|
Deferred income taxes | | 41,525 |
| | 41,063 |
| |
Total current assets | | 629,835 |
| | 584,221 |
| | 694,726 |
| | 631,892 |
|
| | | | | | | | |
Property, plant and equipment, net | | 126,402 |
| | 121,611 |
| | 148,114 |
| | 129,883 |
|
Goodwill | | 912,539 |
| | 865,717 |
| | 1,104,555 |
| | 1,081,306 |
|
Intangible assets, net | | 388,366 |
| | 366,863 |
| | 532,263 |
| | 538,081 |
|
Deferred income taxes | | — |
| | 407 |
| |
Other assets | | 120,197 |
| | 100,656 |
| | 148,223 |
| | 131,269 |
|
Total assets | |
| $2,177,339 |
| |
| $2,039,475 |
| |
| $2,627,881 |
| |
| $2,512,431 |
|
| | | | | | | | |
LIABILITIES AND EQUITY | Current liabilities: | | | | | | | | |
Current maturities of long-term debt | |
| $407 |
| |
| $411 |
| |
| $480 |
| |
| $451 |
|
Trade accounts payable | | 73,625 |
| | 73,335 |
| | 94,373 |
| | 89,724 |
|
Accrued expenses and other current liabilities | | 135,376 |
| | 136,053 |
| | 135,200 |
| | 147,612 |
|
Income taxes payable | | 2,570 |
| | 4,622 |
| | — |
| | 11,650 |
|
Total current liabilities | | 211,978 |
| | 214,421 |
| | 230,053 |
| | 249,437 |
|
| | | | | | | | |
Long-term debt, net of current maturities | | 460,465 |
| | 457,814 |
| | 683,362 |
| | 673,528 |
|
Deferred income taxes | | 108,429 |
| | 105,962 |
| | 46,875 |
| | 59,026 |
|
Other long-term liabilities | | 132,804 |
| | 114,061 |
| | 164,050 |
| | 151,025 |
|
Total liabilities | | 913,676 |
| | 892,258 |
| | 1,124,340 |
| | 1,133,016 |
|
| | | | | | | | |
Commitments and contingencies (Note 10) | |
| |
| |
| |
|
| | | | | | | | |
Redeemable noncontrolling interests (Note 3) | | 125,132 |
| | 99,512 |
| | 134,034 |
| | 131,123 |
|
| | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Common Stock, $.01 par value per share; 75,000 shares authorized; 33,763 and 33,715 shares issued and outstanding | | 338 |
| | 270 |
| |
Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 50,554 and 50,396 shares issued and outstanding | | 506 |
| | 403 |
| |
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued | | | — |
| | — |
|
Common Stock, $.01 par value per share; 150,000 and 75,000 shares authorized; 42,665 and 42,221 shares issued and outstanding | | | 427 |
| | 338 |
|
Class A Common Stock, $.01 par value per share; 150,000 and 75,000 shares authorized; 63,523 and 63,381 shares issued and outstanding | | | 635 |
| | 507 |
|
Capital in excess of par value | | 317,049 |
| | 306,328 |
| | 311,710 |
| | 326,544 |
|
Deferred compensation obligation | | 2,320 |
| | 2,460 |
| | 3,118 |
| | 3,118 |
|
HEICO stock held by irrevocable trust | | (2,320 | ) | | (2,460 | ) | | (3,118 | ) | | (3,118 | ) |
Accumulated other comprehensive loss | | (25,002 | ) | | (25,326 | ) | | (1,516 | ) | | (10,556 | ) |
Retained earnings | | 756,408 |
| | 681,704 |
| | 964,571 |
| | 844,247 |
|
Total HEICO shareholders’ equity | | 1,049,299 |
| | 963,379 |
| | 1,275,827 |
| | 1,161,080 |
|
Noncontrolling interests | | 89,232 |
| | 84,326 |
| | 93,680 |
| | 87,212 |
|
Total shareholders’ equity | | 1,138,531 |
| | 1,047,705 |
| | 1,369,507 |
| | 1,248,292 |
|
Total liabilities and equity | |
| $2,177,339 |
| |
| $2,039,475 |
| |
| $2,627,881 |
| |
| $2,512,431 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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, | | Six months ended April 30, | | Three months ended April 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | | | | | | | | | |
Net sales | |
| $712,089 |
| |
| $656,875 |
| |
| $368,657 |
| |
| $350,648 |
| |
| $835,012 |
| |
| $712,089 |
| |
| $430,602 |
| |
| $368,657 |
|
| | | | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
Cost of sales | | 446,290 |
| | 410,650 |
| | 228,275 |
| | 216,619 |
| | 512,364 |
| | 446,290 |
| | 262,745 |
| | 228,275 |
|
Selling, general and administrative expenses | | 124,707 |
| | 126,810 |
| | 63,840 |
| | 67,235 |
| | 151,523 |
| | 124,707 |
| | 76,292 |
| | 63,840 |
|
| | | | | | | | | | | | | | | | |
Total operating costs and expenses | | 570,997 |
| | 537,460 |
| | 292,115 |
| | 283,854 |
| | 663,887 |
| | 570,997 |
| | 339,037 |
| | 292,115 |
|
| | | | | | | | | | | | | | | | |
Operating income | | 141,092 |
| | 119,415 |
| | 76,542 |
| | 66,794 |
| | 171,125 |
| | 141,092 |
| | 91,565 |
| | 76,542 |
|
| | | | | | | | | | | | | | | | |
Interest expense | | (3,929 | ) | | (3,900 | ) | | (1,960 | ) | | (2,333 | ) | | (9,629 | ) | | (3,929 | ) | | (4,904 | ) | | (1,960 | ) |
Other income | | 635 |
| | 138 |
| | 151 |
| | 568 |
| |
Other income (expense) | | | 110 |
| | 635 |
| | (250 | ) | | 151 |
|
| | | | | | | | | | | | | | | | |
Income before income taxes and noncontrolling interests | | 137,798 |
| | 115,653 |
| | 74,733 |
| | 65,029 |
| | 161,606 |
| | 137,798 |
| | 86,411 |
| | 74,733 |
|
| | | | | | | | | | | | | | | | |
Income tax expense | | 40,700 |
| | 36,000 |
| | 23,900 |
| | 21,300 |
| | 23,900 |
| | 40,700 |
| | 20,400 |
| | 23,900 |
|
| | | | | | | | | | | | | | | | |
Net income from consolidated operations | | 97,098 |
| | 79,653 |
| | 50,833 |
| | 43,729 |
| | 137,706 |
| | 97,098 |
| | 66,011 |
| | 50,833 |
|
| | | | | | | | | | | | | | | | |
Less: Net income attributable to noncontrolling interests | | 10,485 |
| | 9,725 |
| | 5,147 |
| | 5,072 |
| | 12,936 |
| | 10,485 |
| | 6,393 |
| | 5,147 |
|
| | | | | | | | | | | | | | | | |
Net income attributable to HEICO | |
| $86,613 |
| |
| $69,928 |
| |
| $45,686 |
| |
| $38,657 |
| |
| $124,770 |
| |
| $86,613 |
| |
| $59,618 |
| |
| $45,686 |
|
| | | | | | | | | | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | | | | | | | | | |
Basic | |
| $1.03 |
| |
| $.84 |
| |
| $.54 |
| |
| $.46 |
| |
| $1.18 |
| |
| $.82 |
| |
| $.56 |
| |
| $.43 |
|
Diluted | |
| $1.00 |
| |
| $.82 |
| |
| $.53 |
| |
| $.45 |
| |
| $1.14 |
| |
| $.80 |
| |
| $.55 |
| |
| $.42 |
|
| | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | 84,182 |
| | 83,624 |
| | 84,221 |
| | 83,653 |
| | 105,789 |
| | 105,227 |
| | 105,940 |
| | 105,276 |
|
Diluted | | 86,520 |
| | 84,980 |
| | 86,637 |
| | 85,035 |
| | 109,191 |
| | 108,150 |
| | 109,271 |
| | 108,296 |
|
| | | | | | | | | | | | | | | | |
Cash dividends per share | |
| $.072 |
| |
| $.064 |
| |
| $— |
| |
| $— |
| |
| $.070 |
| |
| $.058 |
| |
| $— |
| |
| $— |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
| | | | Six months ended April 30, | | Three months ended April 30, | | Six months ended April 30, | | Three months ended April 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | | | | | | | | | |
Net income from consolidated operations | |
| $97,098 |
| |
| $79,653 |
| |
| $50,833 |
| |
| $43,729 |
| |
| $137,706 |
| |
| $97,098 |
| |
| $66,011 |
| |
| $50,833 |
|
Other comprehensive income: | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | |
Foreign currency translation adjustments | | 234 |
| | 6,548 |
| | 1,758 |
| | 9,215 |
| | 9,390 |
| | 234 |
| | (6,573 | ) | | 1,758 |
|
Amortization of unrealized loss on defined benefit pension plan, net of tax | | 15 |
| | — |
| | 8 |
| | — |
| | 6 |
| | 15 |
| | 2 |
| | 8 |
|
Total other comprehensive income | | 249 |
| | 6,548 |
| | 1,766 |
| | 9,215 |
| |
Total other comprehensive income (loss) | | | 9,396 |
| | 249 |
| | (6,571 | ) | | 1,766 |
|
Comprehensive income from consolidated operations | | 97,347 |
| | 86,201 |
| | 52,599 |
| | 52,944 |
| | 147,102 |
| | 97,347 |
| | 59,440 |
| | 52,599 |
|
Less: Net income attributable to noncontrolling interests | | 10,485 |
| | 9,725 |
| | 5,147 |
| | 5,072 |
| |
Less: Foreign currency translation adjustments attributable to noncontrolling interests | | (75 | ) | | 554 |
| | 221 |
| | 758 |
| |
Net income attributable to noncontrolling interests | | | 12,936 |
| | 10,485 |
| | 6,393 |
| | 5,147 |
|
Foreign currency translation adjustments attributable to noncontrolling interests | | | 577 |
| | (75 | ) | | (417 | ) | | 221 |
|
Comprehensive income attributable to noncontrolling interests | | 10,410 |
| | 10,279 |
| | 5,368 |
| | 5,830 |
| | 13,513 |
| | 10,410 |
| | 5,976 |
| | 5,368 |
|
Comprehensive income attributable to HEICO | |
| $86,937 |
| |
| $75,922 |
| |
| $47,231 |
| |
| $47,114 |
| |
| $133,589 |
| |
| $86,937 |
| |
| $53,464 |
| |
| $47,231 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
(in thousands, except per share data)
| | | | | HEICO Shareholders' Equity | | | | | | | 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 | 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 |
| |
Balances as of October 31, 2017 | |
| $131,123 |
| |
| $338 |
| |
| $507 |
| |
| $326,544 |
| |
| $3,118 |
| |
| ($3,118 | ) | |
| ($10,556 | ) | |
| $844,247 |
| |
| $87,212 |
| |
| $1,248,292 |
|
Comprehensive income | 5,151 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 324 |
| | 86,613 |
| | 5,259 |
| | 92,196 |
| 6,636 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,819 |
| | 124,770 |
| | 6,877 |
| | 140,466 |
|
Cash dividends ($.072 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,059 | ) | | — |
| | (6,059 | ) | |
Cash dividends ($.070 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,395 | ) | | — |
| | (7,395 | ) |
Five-for-four common stock split | — |
| | 68 |
| | 101 |
| | (169 | ) | | — |
| | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) | — |
| | 84 |
| | 127 |
| | (211 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | — |
| | — |
| | 5,484 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,484 |
| — |
| | 1 |
| | — |
| | 4,547 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,548 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 3,110 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,110 |
| — |
| | — |
| | — |
| | 4,459 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,459 |
|
Proceeds from stock option exercises | — |
| | — |
| | 1 |
| | 2,296 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,297 |
| — |
| | 7 |
| | 1 |
| | 1,985 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,993 |
|
Redemptions of common stock related to stock option exercises | | — |
| | (3 | ) | | — |
| | (24,620 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (24,623 | ) |
Distributions to noncontrolling interests | (3,544 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (353 | ) | | (353 | ) | (4,040 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (409 | ) | | (409 | ) |
Acquisitions of noncontrolling interests | (3,848 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Adjustments to redemption amount of redeemable noncontrolling interests | 5,826 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,826 | ) | | — |
| | (5,826 | ) | (3,170 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,170 |
| | — |
| | 3,170 |
|
Noncontrolling interests assumed related to acquisition | 22,035 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Deferred compensation obligation | — |
| | — |
| | — |
| | — |
| | (140 | ) | | 140 |
| | — |
| | — |
| | — |
| | — |
| |
Noncontrolling interests assumed related to acquisitions | | 2,491 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| 994 |
| | — |
| | — |
| | (994 | ) | | — |
| | — |
| | 221 |
| | (221 | ) | | — |
| | (994 | ) |
Balances as of April 30, 2017 |
| $125,132 |
| |
| $338 |
| |
| $506 |
| |
| $317,049 |
| |
| $2,320 |
| |
| ($2,320 | ) | |
| ($25,002 | ) | |
| $756,408 |
| |
| $89,232 |
| |
| $1,138,531 |
| |
Balances as of April 30, 2018 | |
| $134,034 |
| |
| $427 |
| |
| $635 |
| |
| $311,710 |
| |
| $3,118 |
| |
| ($3,118 | ) | |
| ($1,516 | ) | |
| $964,571 |
| |
| $93,680 |
| |
| $1,369,507 |
|
| | | | | HEICO Shareholders' Equity | | | | | | | 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 | Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2015 |
| $91,282 |
| |
| $269 |
| |
| $400 |
| |
| $286,220 |
| |
| $1,783 |
| |
| ($1,783 | ) | |
| ($25,080 | ) | |
| $548,054 |
| |
| $83,408 |
| |
| $893,271 |
| |
Balances as of October 31, 2016 | |
| $99,512 |
| |
| $270 |
| |
| $403 |
| |
| $306,328 |
| |
| $2,460 |
| |
| ($2,460 | ) | |
| ($25,326 | ) | |
| $681,704 |
| |
| $84,326 |
| |
| $1,047,705 |
|
Comprehensive income | 5,221 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,994 |
| | 69,928 |
| | 5,058 |
| | 80,980 |
| 5,151 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 324 |
| | 86,613 |
| | 5,259 |
| | 92,196 |
|
Cash dividends ($.064 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,350 | ) | | — |
| | (5,350 | ) | |
Cash dividends ($.058 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,059 | ) | | — |
| | (6,059 | ) |
Five-for-four common stock split | | — |
| | 68 |
| | 101 |
| | (169 | ) | | — |
| | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) |
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | 1 |
| | 1 |
| | 4,846 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,848 |
| — |
| | — |
| | — |
| | 5,484 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,484 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 3,286 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,286 |
| — |
| | — |
| | — |
| | 3,110 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,110 |
|
Proceeds from stock option exercises | — |
| | — |
| | — |
| | 1,471 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,471 |
| — |
| | — |
| | 1 |
| | 2,296 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,297 |
|
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 870 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 870 |
| |
Distributions to noncontrolling interests | (4,086 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,421 | ) | | (1,421 | ) | (3,544 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (353 | ) | | (353 | ) |
Acquisitions of noncontrolling interest | (3,599 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| (3,848 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Adjustments to redemption amount of redeemable noncontrolling interests | (438 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 438 |
| | — |
| | 438 |
| 5,826 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,826 | ) | | — |
| | (5,826 | ) |
Noncontrolling interests assumed related to acquisitions | | 22,035 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Deferred compensation obligation | — |
| | — |
| | — |
| | — |
| | (148 | ) | | 148 |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (140 | ) | | 140 |
| | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | 2 |
| | 50 |
| | 48 |
| — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
|
Balances as of April 30, 2016 |
| $88,380 |
| |
| $270 |
| |
| $401 |
| |
| $296,689 |
| |
| $1,635 |
| |
| ($1,635 | ) | |
| ($19,086 | ) | |
| $613,072 |
| |
| $87,095 |
| |
| $978,441 |
| |
Balances as of April 30, 2017 | |
| $125,132 |
| |
| $338 |
| |
| $506 |
| |
| $317,049 |
| |
| $2,320 |
| |
| ($2,320 | ) | |
| ($25,002 | ) | |
| $756,408 |
| |
| $89,232 |
| |
| $1,138,531 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| | | Six months ended April 30, | Six months ended April 30, |
| 2017 | | 2016 | 2018 | | 2017 |
Operating Activities: | | | | | | |
Net income from consolidated operations |
| $97,098 |
| |
| $79,653 |
|
| $137,706 |
| |
| $97,098 |
|
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 30,501 |
| | 29,183 |
| 38,089 |
| | 30,501 |
|
Employer contributions to HEICO Savings and Investment Plan | 3,679 |
| | 3,266 |
| 4,083 |
| | 3,679 |
|
Share-based compensation expense | 3,110 |
| | 3,286 |
| 4,459 |
| | 3,110 |
|
Increase in accrued contingent consideration | 1,148 |
| | 1,679 |
| |
(Decrease) increase in accrued contingent consideration, net | | (3,412 | ) | | 1,148 |
|
Foreign currency transaction adjustments, net | (280 | ) | | 2,186 |
| 117 |
| | (280 | ) |
Deferred income tax benefit | (2,909 | ) | | (1,168 | ) | (13,157 | ) | | (2,909 | ) |
Tax benefit from stock option exercises | — |
| | 870 |
| |
Excess tax benefit from stock option exercises | — |
| | (870 | ) | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Decrease in accounts receivable | 1,358 |
| | 7,875 |
| |
(Increase) decrease in accounts receivable | | (14,337 | ) | | 1,358 |
|
Increase in inventories | (14,251 | ) | | (9,855 | ) | (29,814 | ) | | (14,251 | ) |
Increase in prepaid expenses and other current assets | (225 | ) | | (2,616 | ) | (4,266 | ) | | (225 | ) |
Decrease in trade accounts payable | (7,567 | ) | | (4,860 | ) | |
Increase (decrease) in trade accounts payable | | 3,912 |
| | (7,567 | ) |
Decrease in accrued expenses and other current liabilities | (11,176 | ) | | (10,224 | ) | (14,534 | ) | | (11,176 | ) |
(Decrease) increase in income taxes payable | (2,023 | ) | | 5,489 |
| |
Decrease in income taxes payable | | (14,714 | ) | | (2,023 | ) |
Other long-term assets and liabilities, net | (750 | ) | | (1,189 | ) | 868 |
| | (750 | ) |
Net cash provided by operating activities | 97,713 |
| | 102,705 |
| 95,000 |
| | 97,713 |
|
| | | | | | |
Investing Activities: | | | | | | |
Acquisitions, net of cash acquired | (80,838 | ) | | (263,811 | ) | (39,364 | ) | | (80,838 | ) |
Capital expenditures | (13,538 | ) | | (15,546 | ) | (29,457 | ) | | (13,538 | ) |
Other | (944 | ) | | (3,241 | ) | (2,744 | ) | | (944 | ) |
Net cash used in investing activities | (95,320 | ) | | (282,598 | ) | (71,565 | ) | | (95,320 | ) |
| | | | | | |
Financing Activities: | | | | | | |
Borrowings on revolving credit facility | 87,000 |
| | 260,000 |
| 53,000 |
| | 87,000 |
|
Payments on revolving credit facility | (84,000 | ) | | (66,000 | ) | (43,000 | ) | | (84,000 | ) |
Redemptions of common stock related to stock option exercises | | (24,623 | ) | | — |
|
Cash dividends paid | (6,059 | ) | | (5,350 | ) | (7,395 | ) | | (6,059 | ) |
Distributions to noncontrolling interests | (3,897 | ) | | (5,507 | ) | (4,449 | ) | | (3,897 | ) |
Revolving credit facility issuance costs | | (4,067 | ) | | (270 | ) |
Acquisitions of noncontrolling interests | (3,848 | ) | | (3,599 | ) | — |
| | (3,848 | ) |
Payment of contingent consideration | | (300 | ) | | — |
|
Proceeds from stock option exercises | 2,297 |
| | 1,471 |
| 1,993 |
| | 2,297 |
|
Excess tax benefit from stock option exercises | — |
| | 870 |
| |
Revolving credit facility issuance costs | (270 | ) | | — |
| |
Other | (371 | ) | | (181 | ) | (232 | ) | | (371 | ) |
Net cash (used in) provided by financing activities | (9,148 | ) | | 181,704 |
| |
Net cash used in financing activities | | (29,073 | ) | | (9,148 | ) |
| | | | | | |
Effect of exchange rate changes on cash | 532 |
| | 1,375 |
| 1,799 |
| | 532 |
|
| | | | | | |
Net (decrease) increase in cash and cash equivalents | (6,223 | ) | | 3,186 |
| |
Net decrease in cash and cash equivalents | | (3,839 | ) | | (6,223 | ) |
Cash and cash equivalents at beginning of year | 42,955 |
| | 33,603 |
| 52,066 |
| | 42,955 |
|
Cash and cash equivalents at end of period |
| $36,732 |
| |
| $36,789 |
|
| $48,227 |
| |
| $36,732 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2016.2017. The October 31, 20162017 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, 20172018 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
Stock Split
In MarchDecember 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, 2017January 18, 2018 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017.January 3, 2018. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09, as amended, is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented (“full retrospective method”) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. application (“modified retrospective method”). The Company expects to use the modified retrospective method.
The Company is currently evaluating which transition method it will elect. In addition,in the process of reviewing a representative sample of customer contracts across its identified revenue streams. Based on the work completed to-date, the Company is currently identifying its variousforesees two types of contracts for which ASU 2014-09 will impact the timing of revenue streamsrecognition. For certain contracts under which it produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle and for certain other contracts under which the Company creates or enhances customer-owned assets while performing repair and overhaul services, ASU 2014-09 will subsequently review certain underlying customer contractsrequire HEICO to determinerecognize revenue using an over time recognition model as opposed to the Company’s current policy of recognizing revenue at the time of shipment. The Company has not yet determined the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
In July 2015, the FASB issued ASU 2015-11, “Simplifying"Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Under current guidance,Previously, inventories arewere measured at the lower of cost or market. The Company adopted ASU 2015-11 must be applied prospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in the first quarter of fiscal 2018, for HEICO. Early adoption is permitted. The Company is currently evaluatingresulting in no material effect on the effect, if any, the adoption of this guidance will have on itsCompany's consolidated results of operations, financial position andor cash flows.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes," which requires that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. ASU 2015-17 may be applied either prospectively or retrospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. Early adoption is permitted. The Company is currently evaluating which transition method it will elect. The adoption of this guidance will only effect the presentation of deferred taxes in the Company's consolidated statement of financial position.
In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects related to accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits and tax deficiencies are to be recognized in the statement of operations as a component of income tax expense rather than as capital in excess of par value. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017 resulting in the recognition of a $3.1 million discrete income tax benefit, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million. Additionally, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively
excluded from the assumed future proceeds in the calculation of diluted shares, which increased the Company's weighted average number of diluted common shares outstanding by 712,000 shares and 747,000 shares in the first six months and second quarter of fiscal 2017, respectively. Further, ASU 2016-09 requires excess tax benefits be presented within the statement of cash flows as an operating activity rather than as a financing activity. The Company adopted this change on a prospective basis, which resulted in a $3.1 million increase in cash provided by operating activities and cash used in financing activities in the first six months of fiscal 2017.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which clarifies how certain cash receipts and cash payments are to be
presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated statement of cash flows.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
2. ACQUISITION
OnIn April 24, 2017,2018, the Company, through a subsidiary of HEICO Flight Support Corp.,Electronic, acquired 80.1% of the equity interests of LLP Enterprises, LLC, which owns all of the outstanding equity interestsassets and business of the Emergency Locator Transmitter Beacon product line ("ELT Product Line") of Instrumar Limited. The ELT Product Line designs and manufactures Emergency Locator Transmitter Beacons for the commercial aviation and defense markets, that upon activation, transmit a distress signal to alert search and rescue operations of the aircraft's location. The purchase price of this acquisition was paid using cash provided by operating unitsactivities.
In February 2018, the Company, through a subsidiary of Air Cost ControlHEICO Electronic, acquired 85% of the assets and business of Sensor Technology Engineering, Inc. ("A2C"Sensor Technology"). A2C is a leading aviation electrical interconnect product distributor of items such as connectors, wire, cable, protectionSensor Technology designs and fastening systems, in addition to distributing a wide range of electromechanical parts.manufactures sophisticated nuclear radiation detectors for law enforcement, homeland security and military applications. The remaining 19.9% interest15% continues to be owned by certain members of A2C'sSensory Technology's management team (see Note 3, Selected Financial Statement Information, for additional information).
team. The purchase price of A2Cthis acquisition was paid in cash, principally using proceeds from the Company’sCompany's revolving credit facility.
In November 2017, the Company, through a subsidiary of HEICO Electronic, acquired all of the stock of Interface Displays & Controls, Inc. ("IDC"). IDC designs and manufactures electronic products for aviation, marine, military fighting vehicles, and embedded computing markets. The purchase price of this acquisition was paid using cash provided by operating activities.
The total consideration for the acquisition of A2Cfiscal 2018 acquisitions is not material or significant to the Company'sCompany’s condensed consolidated financial statements and the related allocation to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. The operating results of A2Cthe fiscal 2018 acquisitions were included in the Company’s results of operations from each of the effective acquisition date.dates. The amount of net sales and earnings of A2Cthe fiscal 2018 acquisitions included in the Company's Condensed Consolidated StatementsStatement of Operations is not material.
Had the acquisition of A2C occurred as of November 1, 2015, net sales on a pro forma basis for the six months ended April 30, 2017 and 2016 would have been $753.2 million and $696.2 million, respectively, and net sales on a pro forma basis for the three months ended April 30, 2017 and2018 is not material. Had the fiscal 2018 acquisitions been consummated as of November 1, 2016, would have been $389.1 million and $372.5 million, respectively. Netnet 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, 20172018 and 20162017 would not have been materially different than the reported amounts. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2015.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| | (in thousands) | | April 30, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
Accounts receivable | |
| $216,697 |
| |
| $205,386 |
| |
| $241,665 |
| |
| $225,462 |
|
Less: Allowance for doubtful accounts | | (3,590 | ) | | (3,159 | ) | | (3,432 | ) | | (3,006 | ) |
Accounts receivable, net | |
| $213,107 |
| |
| $202,227 |
| |
| $238,233 |
| |
| $222,456 |
|
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts | | (in thousands) | | April 30, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
Costs incurred on uncompleted contracts | |
| $18,033 |
| |
| $19,086 |
| |
| $36,965 |
| |
| $29,491 |
|
Estimated earnings | | 14,262 |
| | 13,887 |
| | 20,980 |
| | 19,902 |
|
| | 32,295 |
| | 32,973 |
| | 57,945 |
| | 49,393 |
|
Less: Billings to date | | (35,830 | ) | | (39,142 | ) | | (44,621 | ) | | (41,262 | ) |
| |
| ($3,535 | ) | |
| ($6,169 | ) | |
| $13,324 |
| |
| $8,131 |
|
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: | | | | | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings) | |
| $2,344 |
| |
| $4,839 |
| |
| $15,238 |
| |
| $9,377 |
|
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) | | (5,879 | ) | | (11,008 | ) | | (1,914 | ) | | (1,246 | ) |
| |
| ($3,535 | ) | |
| ($6,169 | ) | |
| $13,324 |
| |
| $8,131 |
|
Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the six and three months ended April 30, 20172018 and 2016.2017.
Inventories
| | (in thousands) | | April 30, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
Finished products | |
| $163,471 |
| |
| $131,008 |
| |
| $185,987 |
| |
| $173,559 |
|
Work in process | | 39,163 |
| | 36,076 |
| | 45,077 |
| | 39,986 |
|
Materials, parts, assemblies and supplies | | 119,921 |
| | 117,153 |
| | 149,840 |
| | 128,031 |
|
Contracts in process | | 4,198 |
| | 3,253 |
| | 2,037 |
| | 2,415 |
|
Less: Billings to date | | (1,092 | ) | | (1,188 | ) | | (272 | ) | | (363 | ) |
Inventories, net of valuation reserves | |
| $325,661 |
| |
| $286,302 |
| |
| $382,669 |
| |
| $343,628 |
|
Contracts in process represents accumulated capitalized costs associated with fixed price contracts. Related progress billings and customer advances (“billings to date”) are classified as a reduction to contracts in process, if any, and any excess is included in accrued expenses and other liabilities.
Property, Plant and Equipment
| | (in thousands) | | April 30, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
Land | |
| $5,097 |
| |
| $5,090 |
| |
| $5,887 |
| |
| $5,435 |
|
Buildings and improvements | | 84,278 |
| | 79,205 |
| | 94,262 |
| | 91,916 |
|
Machinery, equipment and tooling | | 181,342 |
| | 171,717 |
| | 218,644 |
| | 191,298 |
|
Construction in progress | | 11,357 |
| | 10,453 |
| | 4,775 |
| | 5,553 |
|
| | 282,074 |
| | 266,465 |
| | 323,568 |
| | 294,202 |
|
Less: Accumulated depreciation and amortization | | (155,672 | ) | | (144,854 | ) | | (175,454 | ) | | (164,319 | ) |
Property, plant and equipment, net | |
| $126,402 |
| |
| $121,611 |
| |
| $148,114 |
| |
| $129,883 |
|
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $12.6$13.4 million as of April 30, 2018 and $11.912.9 million as of April 30, 2017 and October 31, 2016, respectively.2017. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2018 and 2017 and 2016 was $5.4$5.2 million and $5.2$5.4 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended April 30, 2018 and 2017 was $2.7 million and 2016 was $3.0 million, and $2.9 million, respectively.
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, 20172018 and 20162017 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Six months ended April 30, | | Three months ended April 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
R&D expenses | |
| $22,469 |
| |
| $19,992 |
| |
| $11,223 |
| |
| $10,985 |
|
|
| | | | | | | | | | | | | | | | |
| | Six months ended April 30, | | Three months ended April 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
R&D expenses | |
| $26,660 |
| |
| $22,469 |
| |
| $13,953 |
| |
| $11,223 |
|
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2025. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
| | | | April 30, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
Redeemable at fair value | |
| $81,495 |
| |
| $85,574 |
| |
| $85,039 |
| |
| $82,128 |
|
Redeemable based on a multiple of future earnings | | 43,637 |
| | 13,938 |
| | 48,995 |
| | 48,995 |
|
Redeemable noncontrolling interests | |
| $125,132 |
| |
| $99,512 |
| |
| $134,034 |
| |
| $131,123 |
|
As discussed in Note 2, Acquisition,Acquisitions, the Company, through a subsidiary of HEICO Electronic, acquired 85% of the FSG, acquired an 80.1% equity interestassets and business of Sensor Technology in A2C in April 2017.February 2018. As part of the Sensor Technology purchase agreement, the Company has the right to purchase the noncontrolling interest in the subsidiary over a two-year period beginning in fiscal 2022,2021, or sooner under certain conditions, and the noncontrolling interest holder hasholders have the right to cause the Company to purchase the same equity interest overat the same period.
Pursuant to the purchase agreement related to the acquisition of an 80.1% equity interestpoint in a subsidiary by the FSG in fiscal 2011, the holders of the 19.9% noncontrolling interest in the subsidiary exercised their option during fiscal 2016 to cause the Company to purchase their interest over a two-year period ending in fiscal 2017. During the second quarter of fiscal 2017, the Company acquired the remaining 9.95% noncontrolling interest in the subsidiary effective March 2017. The purchase price of the redeemable noncontrolling interest acquired was paid using cash provided by operating activities.time.
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the six months ended April 30, 20172018 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2016 | |
| ($23,953 | ) | |
| ($1,373 | ) | |
| ($25,326 | ) |
Unrealized gain | | 309 |
| | — |
| | 309 |
|
Amortization of unrealized loss on defined benefit pension plan, net of tax | | — |
| | 15 |
| | 15 |
|
Balances as of April 30, 2017 | |
| ($23,644 | ) | |
| ($1,358 | ) | |
| ($25,002 | ) |
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2017 | |
| ($9,533 | ) | |
| ($1,023 | ) | |
| ($10,556 | ) |
Unrealized gain | | 8,813 |
| | 221 |
| | 9,034 |
|
Amortization of unrealized loss | | — |
| | 6 |
| | 6 |
|
Balances as of April 30, 2018 | |
| ($720 | ) | |
| ($796 | ) | |
| ($1,516 | ) |
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment for the six months ended April 30, 20172018 are as follows (in thousands):
| | | | Segment | | Consolidated Totals | | Segment | | Consolidated Totals |
| | FSG | | ETG | | | FSG | | ETG | |
Balances as of October 31, 2016 | |
| $336,681 |
| |
| $529,036 |
| |
| $865,717 |
| |
Balances as of October 31, 2017 | | |
| $388,606 |
| |
| $692,700 |
| |
| $1,081,306 |
|
Goodwill acquired | | 47,524 |
| | — |
| | 47,524 |
| | — |
| | 21,535 |
| | 21,535 |
|
Foreign currency translation adjustments | | (237 | ) | | (465 | ) | | (702 | ) | | 1,628 |
| | 1,547 |
| | 3,175 |
|
Balances as of April 30, 2017 | |
| $383,968 |
| |
| $528,571 |
| |
| $912,539 |
| |
Adjustments to goodwill | | | 972 |
| | (2,433 | ) | | (1,461 | ) |
Balances as of April 30, 2018 | | |
| $391,206 |
| |
| $713,349 |
| |
| $1,104,555 |
|
The goodwill acquired pertains to the fiscal 2017 acquisition2018 acquisitions described in Note 2, Acquisition,Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. The Company estimates that nearly all of the goodwill acquired in fiscal 2018 will be deductible for income tax purposes. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The Company estimates thatadjustments to goodwill represent immaterial measurement period adjustments to the majoritypurchase price allocation of the goodwill acquired incertain fiscal 2017 will be deductible for income tax purposes.acquisitions.
Identifiable intangible assets consist of the following (in thousands):
| | | | As of April 30, 2017 | | As of October 31, 2016 | | As of April 30, 2018 | | As of October 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | |
| $274,061 |
| |
| ($101,265 | ) | |
| $172,796 |
| |
| $248,271 |
| |
| ($88,829 | ) | |
| $159,442 |
| |
| $385,776 |
| |
| ($130,386 | ) | |
| $255,390 |
| |
| $379,966 |
| |
| ($117,069 | ) | |
| $262,897 |
|
Intellectual property | | 139,724 |
| | (38,593 | ) | | 101,131 |
| | 139,817 |
| | (33,291 | ) | | 106,526 |
| | 185,188 |
| | (49,573 | ) | | 135,615 |
| | 181,811 |
| | (44,861 | ) | | 136,950 |
|
Licenses | | 6,559 |
| | (2,627 | ) | | 3,932 |
| | 6,559 |
| | (2,325 | ) | | 4,234 |
| | 6,559 |
| | (3,227 | ) | | 3,332 |
| | 6,559 |
| | (2,928 | ) | | 3,631 |
|
Patents | | | 921 |
| | (592 | ) | | 329 |
| | 870 |
| | (551 | ) | | 319 |
|
Non-compete agreements | | 808 |
| | (808 | ) | | — |
| | 811 |
| | (811 | ) | | — |
| | 817 |
| | (817 | ) | | — |
| | 817 |
| | (817 | ) | | — |
|
Patents | | 817 |
| | (505 | ) | | 312 |
| | 779 |
| | (480 | ) | | 299 |
| |
Trade names | | 466 |
| | (97 | ) | | 369 |
| | 466 |
| | (77 | ) | | 389 |
| | 466 |
| | (138 | ) | | 328 |
| | 466 |
| | (118 | ) | | 348 |
|
| | 422,435 |
| | (143,895 | ) | | 278,540 |
| | 396,703 |
| | (125,813 | ) | | 270,890 |
| | 579,727 |
| | (184,733 | ) | | 394,994 |
| | 570,489 |
| | (166,344 | ) | | 404,145 |
|
Non-Amortizing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Trade names | | 109,826 |
| | — |
| | 109,826 |
| | 95,973 |
| | — |
| | 95,973 |
| | 137,269 |
| | — |
| | 137,269 |
| | 133,936 |
| | — |
| | 133,936 |
|
| |
| $532,261 |
| |
| ($143,895 | ) | |
| $388,366 |
| |
| $492,676 |
| |
| ($125,813 | ) | |
| $366,863 |
| |
| $716,996 |
| |
| ($184,733 | ) | |
| $532,263 |
| |
| $704,425 |
| |
| ($166,344 | ) | |
| $538,081 |
|
The increase in the gross carrying amount of customer relationships, intellectual property and non-amortizing trade names as of April 30, 20172018 compared to October 31, 20162017 principally relates to such intangible assets recognized in connection with the fiscal 2017 acquisition2018 acquisitions (see Note 2, Acquisition)Acquisitions). The weighted-average amortization period of the customer relationships and intellectual property acquired during fiscal 20172018 is 15 years.
7 and 11 years, respectively.
Amortization expense related to intangible assets for the six months ended April 30, 20172018 and 20162017 was $18.324.8 million and $17.618.3 million, respectively. Amortization expense related to intangible assets for the three months ended April 30, 2018 and 2017 and 2016 was $9.1$12.4 million and $9.3$9.1 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 20172018 is estimated to be $19.325.2 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $36.7 million in fiscal 2018, $34.548.6 million in fiscal 2019, $31.845.7 million in fiscal 2020, $29.243.0 million in fiscal 2021, $24.136.8 million in fiscal 2022, $31.8 million in fiscal 2023, and $102.9163.9 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| | | | April 30, 2017 | | October 31, 2016 | | April 30, 2018 | | October 31, 2017 |
Borrowings under revolving credit facility | |
| $457,852 |
| |
| $455,083 |
| |
| $681,000 |
| |
| $671,000 |
|
Capital leases and note payable | | 3,020 |
| | 3,142 |
| | 2,842 |
| | 2,979 |
|
| | 460,872 |
| | 458,225 |
| | 683,842 |
| | 673,979 |
|
Less: Current maturities of long-term debt | | (407 | ) | | (411 | ) | | (480 | ) | | (451 | ) |
| |
| $460,465 |
| |
| $457,814 |
| |
| $683,362 |
| |
| $673,528 |
|
The Company's borrowings under its revolving credit facility mature in fiscal 2019.2023. As of April 30, 20172018 and October 31, 2016,2017, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 2.0%3.0% and 1.6%2.4%, respectively. Borrowings under the revolving credit facility denominated in Euros were €32 million as of both April 30, 2017 and October 31, 2016 of which the U.S. dollar equivalent was $34.9 million and $35.1 million, respectively. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2017,2018, the Company was in compliance with all such covenants.
In April
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 increasedhas not yet determined the aggregate principal amountimpact 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 revolving credit facilityestimated annual effective federal statutory income tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, which results in a blended rate of 23.3% for HEICO in fiscal 2018. Additionally, the Company remeasured its U.S. federal net deferred tax liabilities and recorded a provisional discrete tax benefit of $16.6 million in the first quarter of fiscal 2018. Further, the Company recorded a provisional discrete tax expense of $4.7 million in the first quarter of fiscal 2018 related to a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. The Company intends to pay this tax over the eight-year period allowed for in the Tax Act.
The Company’s effective tax rate in the first six months of fiscal 2018 decreased to 14.8% from 29.5% in the first six months of fiscal 2017. The decrease principally reflects the previously mentioned discrete tax benefit from the remeasurement of the Company’s U.S. federal net deferred tax liabilities and the benefit of a lower federal statutory income tax rate, which were partially offset by $200 millionthe aforementioned one-time transition tax expense.
The Company's effective tax rate in the second quarter of fiscal 2018 decreased to $1.0 billion through increased commitments23.6% from existing lenders.32.0% in the second quarter of fiscal 2017. The decrease principally reflects the previously mentioned benefit of a lower federal statutory income tax rate.
6. INCOME TAXES
The Company’s effective tax rate in the first six months of fiscal 2017 decreased to 29.5% from 31.1% in the first six months of fiscal 2016. The decrease principally reflects a $3.1 million discrete income tax benefit related to stock option exercises resulting from the adoption of ASU 2016-09 in the first quarter of fiscal 2017 (see Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements) and the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan ("LCP"). These decreases were partially offset by the benefit recognized in the first six months of fiscal 2016 from the retroactive and permanent extension of the U.S. federal R&D tax credit that resulted in the recognition of additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015.
The Company's effective tax rate in the second quarter of fiscal 2017 decreased to 32.0% from 32.8% in the second quarter of fiscal 2016. The decrease principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the LCP.
7. FAIR VALUE MEASUREMENTS
The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | |
| | As of April 30, 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 | |
| $— |
| |
| $106,337 |
| |
| $— |
| |
| $106,337 |
|
Money market funds | | 559 |
| | — |
| | — |
| | 559 |
|
Equity securities | | 2,286 |
| | — |
| | — |
| | 2,286 |
|
Mutual funds | | 1,925 |
| | — |
| | — |
| | 1,925 |
|
Other | | 1,228 |
| | 50 |
| | — |
| | 1,278 |
|
Total assets | |
| $5,998 |
| |
| $106,387 |
| |
| $— |
| |
| $112,385 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $19,671 |
| |
| $19,671 |
|
|
| | | | | | | | | | | | | | | | |
| | As of April 30, 2018 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Deferred compensation plans: | | | | | | | | |
Corporate-owned life insurance | |
| $— |
| |
| $126,979 |
| |
| $— |
| |
| $126,979 |
|
Money market funds | | 439 |
| | — |
| | — |
| | 439 |
|
Equity securities | | 3,108 |
| | — |
| | — |
| | 3,108 |
|
Mutual funds | | 1,624 |
| | — |
| | — |
| | 1,624 |
|
Other | | 1,289 |
| | — |
| | — |
| | 1,289 |
|
Total assets | |
| $6,460 |
| |
| $126,979 |
| |
| $— |
| |
| $133,439 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $24,428 |
| |
| $24,428 |
|
| | | | As of October 31, 2016 | | 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 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | | | | | | | | | |
Deferred compensation plans: | | | | | | | | | | | | | | | | |
Corporate-owned life insurance | |
| $— |
| |
| $86,004 |
| |
| $— |
| |
| $86,004 |
| |
| $— |
| |
| $113,220 |
| |
| $— |
| |
| $113,220 |
|
Money market funds | | 2,515 |
| | — |
| | — |
| | 2,515 |
| | 3,972 |
| | — |
| | — |
| | 3,972 |
|
Equity securities | | 1,832 |
| | — |
| | — |
| | 1,832 |
| | 2,895 |
| | — |
| | — |
| | 2,895 |
|
Mutual funds | | 1,758 |
| | — |
| | — |
| | 1,758 |
| | 1,541 |
| | — |
| | — |
| | 1,541 |
|
Other | | 1,043 |
| | 50 |
| | — |
| | 1,093 |
| | 1,246 |
| | — |
| | — |
| | 1,246 |
|
Total assets | |
| $7,148 |
| |
| $86,054 |
| |
| $— |
| |
| $93,202 |
| |
| $9,654 |
| |
| $113,220 |
| |
| $— |
| |
| $122,874 |
|
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $18,881 |
| |
| $18,881 |
| |
| $— |
| |
| $— |
| |
| $27,573 |
| |
| $27,573 |
|
The Company maintains two non-qualified deferred compensation plans. The assets of the LCPHEICO 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
classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $112.4$133.4 million as of April 30, 20172018 and $93.2122.9 million as of October 31, 2016,2017, of which the LCP related assets were $106.9$127.4 million and $88.5117.2 million as of April 30, 20172018 and October 31, 2016,2017, 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 $111.2$132.3 million as of April 30, 20172018 and $92.6121.7 million as of October 31, 2016,2017, of which the LCP related liability was $105.7$126.3 million and $87.9116.0 million as of April 30, 20172018 and October 31, 2016,2017, respectively.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet certain earnings objectives during the first six years following the acquisition. As of April 30, 2018, the estimated fair value of the contingent consideration was $13.4 million.
As part of the agreement to acquire certain assets of a company by the ETG in fiscal 2016, the Company may be obligated to pay contingent consideration of up to $2.0$1.7 million in aggregate during the five year periodfirst four years following the first anniversary of the acquisition. As of October 31, 2017, the estimated fair value of the contingent consideration was $1.4 million. During the second quarter of fiscal 2017,2018, the Company paid $.3 million of contingent consideration based on the actual financial performance of the acquired entity during the firstsecond year following the acquisition. As of April 30, 2017,2018, the estimated fair value of the remaining contingent consideration was $1.3$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 €18.3€12.2 million in aggregate, should the acquired entity meet certain earnings objectives during each of the first threetwo years following the firstsecond anniversary of the acquisition. As of April 30, 2017,2018, the estimated
fair value of the contingent consideration was €16.9€8.2 million, or $18.4$9.9 million, of which €6.1as compared to €10.8 million, or $6.7$12.6 million, representsas of October 31, 2017. The decrease in the portion paid in May 2017 based on the actual earningsfair value of the acquired entity duringcontingent consideration is principally attributed to revised earnings estimates for the secondfinal year followingof the acquisition.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 a market participant.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, 20172018 were as follows:
| | | Fiscal 2016 Acquisition | | Fiscal 2015 Acquisition | Fiscal 2017 Acquisition | | Fiscal 2016 Acquisition | | Fiscal 2015 Acquisition |
Compound annual revenue growth rate range | 0 | % | - | 12% | | 4 | % | - | 20% | (4 | %) | - | 7% | | 4 | % | - | 12% | | 8 | % | - | 11% |
Weighted average discount rate | 4.7% | | 1.7% | 6.4% | | 5.6% | | .8% |
Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended April 30, 20172018 are as follows (in thousands):
|
| | | | |
| | |
Balance as of October 31, 20162017 | |
| $18,88127,573 |
|
IncreaseDecrease in accrued contingent consideration, net | | 1,148(3,412 | ) |
Payment of contingent consideration | | (250300 | ) |
Foreign currency transaction adjustments | | (108567 | )
|
Balance as of April 30, 20172018 | |
| $19,67124,428 |
|
| | |
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | | |
Accrued expenses and other current liabilities | |
| $6,9446,516 |
|
Other long-term liabilities | | 12,72717,912 |
|
| |
| $19,67124,428 |
|
The Company recorded the increasedecrease in accrued contingent consideration and foreign currency transaction adjustments set forth in the table above within selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations.
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the six months ended April 30, 2017.2018.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of April 30, 20172018 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
8. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
| | | | Six months ended April 30, | | Three months ended April 30, | | Six months ended April 30, | | Three months ended April 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | | | | | | | | | | |
Net income attributable to HEICO | |
| $86,613 |
| |
| $69,928 |
| |
| $45,686 |
| |
| $38,657 |
| |
| $124,770 |
| |
| $86,613 |
| |
| $59,618 |
| |
| $45,686 |
|
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding - basic | | 84,182 |
| | 83,624 |
| | 84,221 |
| | 83,653 |
| | 105,789 |
| | 105,227 |
| | 105,940 |
| | 105,276 |
|
Effect of dilutive stock options | | 2,338 |
| | 1,356 |
| | 2,416 |
| | 1,382 |
| | 3,402 |
| | 2,923 |
| | 3,331 |
| | 3,020 |
|
Weighted average common shares outstanding - diluted | | 86,520 |
| | 84,980 |
| | 86,637 |
| | 85,035 |
| | 109,191 |
| | 108,150 |
| | 109,271 |
| | 108,296 |
|
| | | | | | | | | | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | | | | | | | | | |
Basic | |
| $1.03 |
| |
| $.84 |
| |
| $.54 |
| |
| $.46 |
| |
| $1.18 |
| |
| $.82 |
| |
| $.56 |
| |
| $.43 |
|
Diluted | |
| $1.00 |
| |
| $.82 |
| |
| $.53 |
| |
| $.45 |
| |
| $1.14 |
| |
| $.80 |
| |
| $.55 |
| |
| $.42 |
|
| | | | | | | | | | | | | | | | |
Anti-dilutive stock options excluded | | 316 |
| | 907 |
| | 462 |
| | 921 |
| | 492 |
| | 395 |
| | 369 |
| | 577 |
|
9. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the six and three months ended April 30, 20172018 and 2016,2017, respectively, is as follows (in thousands):
| | | | | | | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals | | | | | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals |
| | Segment | | | Segment | |
| | | FSG | | ETG | |
Six months ended April 30, 2018: | | | | | | | | | |
Net sales | | |
| $522,557 |
| |
| $324,380 |
| |
| ($11,925 | ) | |
| $835,012 |
|
Depreciation | | | 6,582 |
| | 4,584 |
| | 186 |
| | 11,352 |
|
Amortization | | | 9,879 |
| | 16,267 |
| | 591 |
| | 26,737 |
|
Operating income | | | 97,357 |
| | 91,350 |
| | (17,582 | ) | | 171,125 |
|
Capital expenditures | | | 6,206 |
| | 3,985 |
| | 19,266 |
| | 29,457 |
|
| | FSG | | ETG | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals | | | | | | | | |
Six months ended April 30, 2017: | | | | | | | | | | | | | |
Net sales | |
| $452,710 |
| |
| td67,334 |
| | |
| $452,710 |
| |
| td67,334 |
| |
| ($7,955 | ) | |
| $712,089 |
|
Depreciation | | 6,276 |
| | 4,136 |
| | 106 |
| | 10,518 |
| | 6,276 |
| | 4,136 |
| | 106 |
| | 10,518 |
|
Amortization | | 8,203 |
| | 11,436 |
| | 344 |
| | 19,983 |
| | 8,203 |
| | 11,436 |
| | 344 |
| | 19,983 |
|
Operating income | | 86,107 |
| | 67,910 |
| | (12,925 | ) | | 141,092 |
| | 86,107 |
| | 67,910 |
| | (12,925 | ) | | 141,092 |
|
Capital expenditures | | 8,560 |
| | 4,834 |
| | 144 |
| | 13,538 |
| | 8,560 |
| | 4,834 |
| | 144 |
| | 13,538 |
|
| | | | | | | | | | | | | | | | |
Six months ended April 30, 2016: | | | | | | | | | |
Three months ended April 30, 2018: | | | | | | | | | |
Net sales | |
| $424,866 |
| |
| $236,718 |
| |
| ($4,709 | ) | |
| $656,875 |
| |
| $267,836 |
| |
| $168,722 |
| |
| ($5,956 | ) | |
| $430,602 |
|
Depreciation | | 5,924 |
| | 3,976 |
| | 112 |
| | 10,012 |
| | 3,290 |
| | 2,310 |
| | 124 |
| | 5,724 |
|
Amortization | | 8,245 |
| | 10,595 |
| | 331 |
| | 19,171 |
| | 4,932 |
| | 8,163 |
| | 246 |
| | 13,341 |
|
Operating income | | 76,788 |
| | 55,671 |
| | (13,044 | ) | | 119,415 |
| | 51,488 |
| | 48,130 |
| | (8,053 | ) | | 91,565 |
|
Capital expenditures | | 8,415 |
| | 6,741 |
| | 390 |
| | 15,546 |
| | 3,909 |
| | 2,242 |
| | 15,729 |
| | 21,880 |
|
| | | | | | | | | | | | | | | | |
Three months ended April 30, 2017: | | | | | | | | | | | | | | | | |
Net sales | |
| $231,809 |
| |
| $141,169 |
| |
| ($4,321 | ) | |
| $368,657 |
| |
| $231,809 |
| |
| $141,169 |
| |
| ($4,321 | ) | |
| $368,657 |
|
Depreciation | | 3,128 |
| | 2,093 |
| | 53 |
| | 5,274 |
| | 3,128 |
| | 2,093 |
| | 53 |
| | 5,274 |
|
Amortization | | 4,099 |
| | 5,701 |
| | 179 |
| | 9,979 |
| | 4,099 |
| | 5,701 |
| | 179 |
| | 9,979 |
|
Operating income | | 44,744 |
| | 38,826 |
| | (7,028 | ) | | 76,542 |
| | 44,744 |
| | 38,826 |
| | (7,028 | ) | | 76,542 |
|
Capital expenditures | | 4,688 |
| | 2,330 |
| | 98 |
| | 7,116 |
| | 4,688 |
| | 2,330 |
| | 98 |
| | 7,116 |
|
| | | | | | | | | |
Three months ended April 30, 2016: | | | | | | | | | |
Net sales | |
| $220,290 |
| |
| $132,566 |
| |
| ($2,208 | ) | |
| $350,648 |
| |
Depreciation | | 2,974 |
| | 2,124 |
| | 56 |
| | 5,154 |
| |
Amortization | | 4,117 |
| | 5,825 |
| | 166 |
| | 10,108 |
| |
Operating income | | 41,308 |
| | 33,402 |
| | (7,916 | ) | | 66,794 |
| |
Capital expenditures | | 4,710 |
| | 5,058 |
| | 88 |
| | 9,856 |
| |
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
Total assets by operating segment as of April 30, 20172018 and October 31, 20162017 are as follows (in thousands): |
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of April 30, 2017 | |
| $1,013,546 |
| |
| $1,003,535 |
| |
| $160,258 |
| |
| $2,177,339 |
|
Total assets as of October 31, 2016 | | 878,674 |
| | 1,017,827 |
| | 142,974 |
| | 2,039,475 |
|
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of April 30, 2018 | |
| $1,061,310 |
| |
| $1,391,902 |
| |
| $174,669 |
| |
| $2,627,881 |
|
Total assets as of October 31, 2017 | | 1,042,925 |
| | 1,339,363 |
| | 130,143 |
| | 2,512,431 |
|
10. COMMITMENTS AND CONTINGENCIES
Guarantees
As of April 30, 2017,2018, the Company has arranged for standby letters of credit aggregating $4.0$4.3 million, which are supported by its revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries.
Product Warranty
Changes in the Company’s product warranty liability for the six months ended April 30, 20172018 and 2016,2017, respectively, are as follows (in thousands):
| | | | Six months ended April 30, | | Six months ended April 30, |
| | 2017 | | 2016 | | 2018 | | 2017 |
Balances as of beginning of fiscal year | |
| $3,351 |
| |
| $3,203 |
| |
| $2,921 |
| |
| $3,351 |
|
Accruals for warranties | | 1,107 |
| | 1,068 |
| | 1,466 |
| | 1,107 |
|
Acquired warranty liabilities | | | 300 |
| | — |
|
Warranty claims settled | | (1,250 | ) | | (1,150 | ) | | (1,431 | ) | | (1,250 | ) |
Balances as of April 30 | |
| $3,208 |
| |
| $3,121 |
| |
| $3,256 |
| |
| $3,208 |
|
Litigation
The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
| |
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, 2016.2017. There have been no material changes to our critical accounting policies during the six months ended April 30, 2017.2018.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Our results of operations for the six months ended April 30, 2018 have been affected by the Tax Cuts and Jobs Act as further detailed within Income Tax Expense of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this quarterly report for the period ended April 30, 2018. Further, our results of operation for the six and three months ended April 30, 20172018 have been
affected effected by the fiscal 20162017 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, 20162017 and by the fiscal 2017 acquisition2018 acquisitions as further detailed in Note 2, Acquisition,acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report.
All share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in April 2017.January 2018. See Note 1, Summary of Significant Accounting Policies – Stock Split, of the Notes to Condensed Consolidated Financial Statements for additional information regarding thisthe stock split.
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, | | Six months ended April 30, | | Three months ended April 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | |
| $712,089 |
| |
| $656,875 |
| |
| $368,657 |
| |
| $350,648 |
| |
| $835,012 |
| |
| $712,089 |
| |
| $430,602 |
| |
| $368,657 |
|
Cost of sales | | 446,290 |
| | 410,650 |
| | 228,275 |
| | 216,619 |
| | 512,364 |
| | 446,290 |
| | 262,745 |
| | 228,275 |
|
Selling, general and administrative expenses | | 124,707 |
| | 126,810 |
| | 63,840 |
| | 67,235 |
| | 151,523 |
| | 124,707 |
| | 76,292 |
| | 63,840 |
|
Total operating costs and expenses | | 570,997 |
| | 537,460 |
| | 292,115 |
| | 283,854 |
| | 663,887 |
| | 570,997 |
| | 339,037 |
| | 292,115 |
|
Operating income | |
| $141,092 |
| |
| $119,415 |
| |
| $76,542 |
| |
| $66,794 |
| |
| $171,125 |
| |
| $141,092 |
| |
| $91,565 |
| |
| $76,542 |
|
| | | | | | | | | | | | | | | | |
Net sales by segment: | | | | | | | | | | | | | | | | |
Flight Support Group | |
| $452,710 |
| |
| $424,866 |
| |
| $231,809 |
| |
| $220,290 |
| |
| $522,557 |
| |
| $452,710 |
| |
| $267,836 |
| |
| $231,809 |
|
Electronic Technologies Group | | 267,334 |
| | 236,718 |
| | 141,169 |
| | 132,566 |
| | 324,380 |
| | 267,334 |
| | 168,722 |
| | 141,169 |
|
Intersegment sales | | (7,955 | ) | | (4,709 | ) | | (4,321 | ) | | (2,208 | ) | | (11,925 | ) | | (7,955 | ) | | (5,956 | ) | | (4,321 | ) |
| |
| $712,089 |
| |
| $656,875 |
| |
| $368,657 |
| |
| $350,648 |
| |
| $835,012 |
| |
| $712,089 |
| |
| $430,602 |
| |
| $368,657 |
|
| | | | | | | | | | | | | | | | |
Operating income by segment: | | | | | | | | | | | | | | | | |
Flight Support Group | |
| $86,107 |
| |
| $76,788 |
| |
| $44,744 |
| |
| $41,308 |
| |
| $97,357 |
| |
| $86,107 |
| |
| $51,488 |
| |
| $44,744 |
|
Electronic Technologies Group | | 67,910 |
| | 55,671 |
| | 38,826 |
| | 33,402 |
| | 91,350 |
| | 67,910 |
| | 48,130 |
| | 38,826 |
|
Other, primarily corporate | | (12,925 | ) | | (13,044 | ) | | (7,028 | ) | | (7,916 | ) | | (17,582 | ) | | (12,925 | ) | | (8,053 | ) | | (7,028 | ) |
| |
| $141,092 |
| |
| $119,415 |
| |
| $76,542 |
| |
| $66,794 |
| |
| $171,125 |
| |
| $141,092 |
| |
| $91,565 |
| |
| $76,542 |
|
| | | | | | | | | | | | | | | | |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | | 37.3 | % | | 37.5 | % | | 38.1 | % | | 38.2 | % | | 38.6 | % | | 37.3 | % | | 39.0 | % | | 38.1 | % |
Selling, general and administrative expenses | | 17.5 | % | | 19.3 | % | | 17.3 | % | | 19.2 | % | | 18.1 | % | | 17.5 | % | | 17.7 | % | | 17.3 | % |
Operating income | | 19.8 | % | | 18.2 | % | | 20.8 | % | | 19.0 | % | | 20.5 | % | | 19.8 | % | | 21.3 | % | | 20.8 | % |
Interest expense | | .6 | % | | .6 | % | | .5 | % | | .7 | % | | 1.2 | % | | .6 | % | | 1.1 | % | | .5 | % |
Other income | | .1 | % | | — | % | | — | % | | .2 | % | |
Other income (expense) | | | — | % | | .1 | % | | (.1 | %) | | — | % |
Income tax expense | | 5.7 | % | | 5.5 | % | | 6.5 | % | | 6.1 | % | | 2.9 | % | | 5.7 | % | | 4.7 | % | | 6.5 | % |
Net income attributable to noncontrolling interests | | 1.5 | % | | 1.5 | % | | 1.4 | % | | 1.4 | % | | 1.5 | % | | 1.5 | % | | 1.5 | % | | 1.4 | % |
Net income attributable to HEICO | | 12.2 | % | | 10.6 | % | | 12.4 | % | | 11.0 | % | | 14.9 | % | | 12.2 | % | | 13.8 | % | | 12.4 | % |
Comparison of First Six Months of Fiscal 20172018 to First Six Months of Fiscal 20162017
Net Sales
Our consolidated net sales in the first six months of fiscal 20172018 increased by 8%17% to a record $712.1$835.0 million, up from net sales of $656.9$712.1 million in the first six months of fiscal 2016.2017. The increase in consolidated net sales principally reflects an increase of $30.6$69.8 million (a 13%15% increase) to a record $267.3$522.6 million in net sales within the ETGFSG as well as an increase of $27.8$57.0 million (a 7%21% increase) to a record $452.7$324.4 million in net sales within the FSG. The net sales increase in the ETG reflects organic growth of 6% as well as net sales of $13.1 million contributed by our fiscal 2016 acquisition. The ETG's organic growth is mainly attributed to increased demand for certain other electronics, aerospace and medical products resulting in net sales increases of $7.5 million, $6.1 million and $2.3 million, respectively.ETG. The net sales increase in the FSG reflects net sales of $50.6 million contributed by our fiscal 2017 acquisitions as well as organic growth of 6% principally attributed4%. The FSG's organic growth is attributable to increased demand and new product offerings within our aftermarket replacement parts and repair and overhaul parts and services product lines, resulting in net sales increases of $19.2$12.1 million and $11.3$8.1 million, respectively. Further, theseThese increases were partially offset by lower net sales of $4.1$1.0 million within our specialty products product line. Excluding the net sales decrease in our specialty products product line, principally relatedthe FSG experienced organic growth of 6%. The net sales increase in the ETG reflects net sales of $45.1 million contributed by our fiscal 2017 and 2018 acquisitions as well as organic growth of 3%. The ETG's organic growth is mainly attributable to increased demand for certain industrial products.defense and space products resulting in net sales increases of $7.0 million and $4.9 million, respectively. Sales price changes were not a significant contributing factor to the FSG and ETG net sales growth in the first six months of fiscal 2017.2018.
Gross Profit and Operating Expenses
Our consolidated gross profit margin wasincreased to 38.6% in the first six months of fiscal 2018, up from 37.3% in the first six months of fiscal 2017, whichprincipally reflecting an increase of 2.7% and .2% in the ETG's and FSG's gross profit margins, respectively. The increase in the ETG’s gross profit margin is comparableprincipally attributable to 37.5%increased net sales and a more favorable product mix for the first six monthscertain of fiscal 2016.our defense products partially offset by a less favorable product mix for certain of our space and other electronics products. Total new product research and development expenses included within our consolidated cost of sales were $26.7 million in the first six months of fiscal 2018 compared to $22.5 million in the first six months of fiscal 2017 compared to $20.0 million in the first six months of fiscal 2016.2017.
Our consolidated selling, general and administrative (“SG&A”) expenses decreased to$124.7were $151.5 million and $124.7 million in the first six months of fiscal 2018 and 2017, down from $126.8 million in the first six months of fiscal 2016.respectively. The decreaseincrease in consolidated SG&A expenses principally reflects $3.1$17.4 million attributable to fiscal 2017 and 2018 acquisitions and $4.8 million of acquisition costs recorded in the first six months of fiscal 2016 associated with a fiscal 2016 acquisition and a $1.6 million impact from foreign currency transaction adjustments on borrowings denominated in Euros under our revolving credit facility, partially offset by a $2.8 million increase inhigher performance-based compensation expense.
Our consolidated SG&A expenses as a percentage of net sales decreased towere 18.1% and 17.5% in the first six months of fiscal 2018 and 2017, down from 19.3% in the first six months of fiscal 2016.respectively. The decreaseincrease in consolidated SG&A expenses as a percentage of net sales principally reflects efficiencies realized from the benefit of our growth in net sales on relatively consistent period-over-period SG&A expenses as well as a .5%.4% impact from the aforementioned decreasehigher performance-based compensation expense and a .3% impact from an increase in acquisition costs.
intangible asset amortization expense mainly resulting from our fiscal 2017 acquisitions.
Operating Income
Our consolidated operating income increased by 18%21% to a record $171.1 million in the first six months of fiscal 2018, up from $141.1 million in the first six months of fiscal 2017, up from $119.4 million in the first six months of fiscal 2016.2017. The increase in consolidated operating income principally reflects a $12.2$23.4 million increase (a 22%35% increase) to a record $67.9$91.4 million in operating income of the ETG as well as a $9.3an $11.3 million increase (a 12%13% increase) to a record $86.1$97.4 million in operating income of the FSG. The increase in operating income of the ETG and FSG is principally attributedattributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $4.9 million increase in intangible asset amortization expense mainly from the fiscal 2017 and 2018 acquisitions. The increase in operating income of the FSG is principally attributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $3.8 million increase in performance-based compensation expense and a $1.6 million increase in intangible asset amortization expense mainly resulting from the fiscal 2017 acquisitions. Additionally, our corporate expenses increased by $3.8 million principally due to a $2.2 million increase in performance-based compensation expense and higher operating costs in support of the overall growth of our business.
As a percentage of net sales, our consolidated operating income increased to 20.5% in the first six months of fiscal 2018, up from 19.8% in the first six months of fiscal 2017. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 28.2% in the first six months of fiscal 2018, up from 25.4% in the first six months of fiscal 2017, partially offset by a decrease in the FSG’s operating income as a percentage of net sales to 18.6% in the first six months of fiscal 2018 compared to 19.0% in the first six months of fiscal 2017. The increase in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin partially offset by a .8% impact from the previously mentioned increase in intangible asset amortization expense. The decrease in the FSG’s operating income as a percentage of net sales principally reflects an aggregate .5% impact from the previously mentioned increases in performance-based compensation expense and intangible asset amortization expense, partially offset by the previously mentioned improved gross profit margin.
Interest Expense
Interest expense increased to $9.6 million in the first six months of fiscal 2018, up from $3.9 million in the first six months of fiscal 2017. The increase was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal 2017 acquisitions.
Other Income
Other income in the first six months of fiscal 2018 and 2017 was not material.
Income Tax Expense
On December 22, 2017, the United States (U.S.) government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act contains significant changes to existing tax law including, among other things, a reduction in the U.S. federal statutory tax rate from 35% to 21% and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of our foreign subsidiaries. The Tax Act also contains additional provisions that will become effective for HEICO in fiscal 2019 including a new tax on Global Intangible Low-Taxed Income (“GILTI”), a new deduction for Foreign-Derived Intangible Income (“FDII”), the repeal of the domestic production activity deduction and increased limitations on the deductibility of certain executive compensation. We have not yet determined the impact of the provisions of the Tax Act which do not become effective for HEICO until fiscal 2019.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on the accounting for the tax effects of the Tax Act. This guidance provides companies with a measurement period not to exceed one year from the enactment of the Tax Act to complete their accounting for the related tax effects. SAB 118 further states that during the measurement period, companies who are able to make reasonable estimates of the tax effects of the Tax Act should include those amounts in their financial statements as provisional amounts and reflect any adjustments in subsequent periods as they refine their estimates or complete their accounting of such tax effects.
As a result of the Tax Act, we have revised our estimated annual effective federal statutory income tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, which results in a blended rate of 23.3% for HEICO in fiscal 2018. Additionally, we remeasured our U.S. federal net deferred tax liabilities and recorded a provisional discrete tax benefit of $16.6 million in the first quarter of fiscal 2018. Further, we recorded a provisional discrete tax expense of $4.7 million in the first quarter of fiscal 2018 related to a one-time transition tax on the unremitted earnings of our foreign subsidiaries. We intend to pay this tax over the eight-year period allowed for in the Tax Act.
Our effective tax rate in the first six months of fiscal 2018 decreased to 14.8% from 29.5% in the first six months of fiscal 2017. The decrease principally reflects the previously mentioned discrete tax benefit from the remeasurement of our U.S. federal net deferred tax liabilities and the benefit of a lower federal statutory income tax rate, which were partially offset by the aforementioned one-time transition tax expense.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $12.9 million in the first six months of fiscal 2018 as compared to $10.5 million in the first six months of fiscal 2017. The increase in the first six months of fiscal 2018 principally reflects the impact of the Tax Act as well as improved
operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.
Net Income Attributable to HEICO
Net income attributable to HEICO increased to a record $124.8 million, or $1.14 per diluted share, in the first six months of fiscal 2018, up from $86.6 million, or $.80 per diluted share, in the first six months of fiscal 2017 principally reflecting the previously mentioned decrease in our effective tax rate and increased net sales and operating income.
Comparison of Second Quarter of Fiscal 2018 to Second Quarter of Fiscal 2017
Net Sales
Our consolidated net sales in the second quarter of fiscal 2018 increased by 17% to a record $430.6 million, as compared to net sales of $368.7 million in the second quarter of fiscal 2017. The increase in consolidated net sales principally reflects an increase of $36.0 million (a 16% increase) to a record $267.8 million in net sales within the FSG as well as an increase of $27.6 million (a 20% increase) to $168.7 million in net sales within the ETG. The net sales increase in the FSG reflects net sales of $25.1 million contributed by our fiscal 2017 acquisitions as well as organic growth of 5%. The FSG's organic growth is mainly attributable to increased demand and new product offerings within our repair and overhaul parts and services and aftermarket replacement parts product lines, resulting in net sales increases of $5.1 million and $4.8 million, respectively. The net sales increase in the ETG reflects net sales of $25.3 million contributed by our fiscal 2017 and 2018 acquisitions. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the second quarter of fiscal 2018.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 39.0% in the second quarter of fiscal 2018, up from 38.1% in the second quarter of fiscal 2017, principally reflecting an increase of 1.5% and .3% in the ETG's and FSG's gross profit margin, respectively. The increase in the ETG’s gross profit margin is principally attributable to increased net sales and a more favorable product mix for certain of our defense products, partially offset by a less favorable product mix for certain of our space and other electronics products. Total new product research and development expenses included within our consolidated cost of sales were $14.0 million in the second quarter of fiscal 2018 compared to $11.2 million in the second quarter of fiscal 2017.
Our consolidated SG&A efficiencies realized within eachexpenses increased to $76.3 million in the second quarter of fiscal 2018, up from $63.8 million in the second quarter of fiscal 2017. The increase in consolidated SG&A expenses principally reflects $8.4 million attributable to fiscal 2017 and 2018 acquisitions and $2.6 million of higher performance-based compensation expense.
Our consolidated SG&A expenses as a percentage of net sales were 17.7% and 17.3% in the second quarter of fiscal 2018 and 2017, respectively. The increase in consolidated SG&A
expenses as a percentage of net sales principally reflects a .6% impact from higher performance-based compensation expense.
Operating Income
Our consolidated operating segment. Further,income increased by 20% to a record $91.6 million in the second quarter of fiscal 2018, up from $76.5 million in the second quarter of fiscal 2017. The increase in consolidated operating income principally reflects a $9.3 million increase (a 24% increase) to $48.1 million in operating income of the ETG as well as a $6.7 million increase (a 15% increase) to a record $51.5 million in operating income of the FSG. The increase in operating income of the ETG reflectsis principally attributable to the previously mentioned decrease in acquisition costsnet sales growth and improved gross profit margin, partially offset by a $3.4$2.5 million increase in intangible asset amortization expense mainly from the fiscal 2017 and 2018 acquisitions. The increase in operating income of the FSG is principally attributable to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $2.8 million increase in performance-based compensation expense.
As a percentage of net sales, our consolidated operating income increased to 19.8%21.3% in the first six monthssecond quarter of fiscal 2017,2018, up from 18.2%20.8% in the first six monthssecond quarter of fiscal 2016.2017. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 25.4%28.5% in the first six monthssecond quarter of fiscal 2017,2018, up from 23.5%27.5% in the first six monthssecond quarter of fiscal 2016, and an increase in the FSG’s operating income as a percentage of net sales to 19.0% in the first six months of fiscal 2017, up from 18.1% in the first six months of fiscal 2016.2017. The increase in the ETG’s and FSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin partially offset by a .8% impact from the previously mentioned increase in intangible asset amortization expense. The FSG's operating income as a percentage of net sales growth and SG&A efficiencies realized within each operating segment.was 19.2% in the second quarter of fiscal 2018 compared to 19.3% in the second quarter of fiscal 2017.
Interest Expense
Interest expense was $3.9increased to $4.9 million in both the first six monthssecond quarter of fiscal 2018, up from $2.0 million in the second quarter of fiscal 2017. The increase was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal 2017 and fiscal 2016.acquisitions.
Other (Expense) Income
Other (expense) income in the first six monthssecond quarter of fiscal 20172018 and 20162017 was not material.
Income Tax Expense
Our effective tax rate in the first six monthssecond quarter of fiscal 20172018 decreased to 29.5%23.6% from 31.1%32.0% in the first six monthssecond quarter of fiscal 2016.2017. The decrease principally reflects the benefit of a $3.1 million discretelower federal statutory income tax benefit related to stock option exercises resulting from the adoption of ASU 2016-09 in the first quarter of fiscal 2017 (see Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements) and the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan ("LCP"). These decreases were partially offset by the benefit recognized in the six months of fiscal 2016 from the retroactive and permanent extensionrate as a result of the U.S. federal R&D tax credit that resulted in the recognition of additional income tax credits for qualified R&D actives related to the last ten months of fiscal 2015.Tax Act.
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 $10.5$6.4 million in the first six monthssecond quarter of fiscal 20172018 compared to $9.7$5.1 million in the first six monthssecond quarter of fiscal 2016.2017. The increase in the second quarter of fiscal 2018 principally reflects the impact of the Tax Act as well as improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.
Net Income Attributable to HEICO
Net income attributable to HEICO increased to a record $86.6$59.6 million, or $1.00 per diluted share, in the first six months of fiscal 2017, up from $69.9 million, or $.82 per diluted share, in the first six months of fiscal 2016 principally reflecting the previously mentioned increased net sales and operating income.
Comparison of Second Quarter of Fiscal 2017 to Second Quarter of Fiscal 2016
Net Sales
Our consolidated net sales in the second quarter of fiscal 2017 increased by 5% to a record $368.7 million, as compared to net sales of $350.6 million in the second quarter of fiscal 2016. The increase in consolidated net sales principally reflects an increase of $8.6 million (a 6% increase) to a record $141.2 million in net sales within the ETG as well as an increase of $11.5 million (a 5% increase) to a record $231.8 million in net sales within the FSG. The net sales increase in the ETG reflects organic growth of 5% principally attributed to increased demand for certain aerospace, other electronics and medical products resulting in net sales increases of $3.5 million, $3.4 million and $1.0 million, respectively. The net sales increase in the FSG reflects organic growth of 5% principally attributed 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 $8.1 million and $5.4 million, respectively. Further, these increases were partially offset by lower net sales of $3.4 million within our specialty products product line principally related to certain defense and industrial products. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the second quarter of fiscal 2017.
Gross Profit and Operating Expenses
Our consolidated gross profit margin was 38.1% in the second quarter of fiscal 2017, which is comparable to 38.2% for the second quarter of fiscal 2016. Total new product research and development expenses included within our consolidated cost of sales were $11.2 million in the second quarter of fiscal 2017 compared to $11.0 million in the second quarter of fiscal 2016.
Our consolidated SG&A expenses decreased to $63.8 million in the second quarter of fiscal 2017, down from $67.2 million in the second quarter of fiscal 2016. The decrease in consolidated SG&A expenses principally reflects a $1.5 million impact from foreign currency
transaction adjustments on borrowings denominated in Euros under our revolving credit facility and a $1.2 million impact from changes in the estimated fair value of accrued contingent consideration associated with prior year acquisitions.
Our consolidated SG&A expenses as a percentage of net sales decreased to 17.3% in the second quarter of fiscal 2017, down from 19.2% in the second quarter of fiscal 2016. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects efficiencies realized from the benefit of our growth in net sales on relatively consistent period-over-period SG&A expenses as well as a .4% impact from each of the previously mentioned foreign currency transaction adjustments and changes in the estimated fair value of accrued contingent consideration.
Operating Income
Our consolidated operating income increased by 15% to a record $76.5 million in the second quarter of fiscal 2017, up from $66.8 million in the second quarter of fiscal 2016. The increase in consolidated operating income principally reflects a $5.4 million increase (a 16% increase) to a record $38.8 million in operating income of the ETG as well as a $3.4 million increase (an 8% increase) to a record $44.7 million in operating income of the FSG. The increase in the ETG's and FSG's operating income is principally attributed to the previously mentioned net sales growth and SG&A efficiencies realized within each operating segment.
As a percentage of net sales, our consolidated operating income increased to 20.8% in the second quarter of fiscal 2017, up from 19.0% in the second quarter of fiscal 2016. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 27.5% in the second quarter of fiscal 2017, up from 25.2% in the second quarter of fiscal 2016, and an increase in the FSG’s operating income as a percentage of net sales to 19.3% in the second quarter of fiscal 2017, up from 18.8% in the second quarter of fiscal 2016. The increase in the ETG’s and FSG’s operating income as a percentage of net sales principally reflects the previously mentioned net sales growth and SG&A efficiencies realized within each operating segment.
Interest Expense
Interest expense was $2.0 million in the second quarter of fiscal 2017 compared to $2.3 million in the second quarter of fiscal 2016.
Other Income
Other income in the second quarter of fiscal 2017 and 2016 was not material.
Income Tax Expense
Our effective tax rate in the second quarter of fiscal 2017 decreased to 32.0% from 32.8% in the second quarter of fiscal 2016. The decrease principally reflects the favorable impact of
higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the LCP.
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 $5.1 million in both the second quarter of fiscal 2017 and 2016.
Net Income Attributable to HEICO
Net income attributable to HEICO increased to a record $45.7 million, or $.53$.55 per diluted share, in the second quarter of fiscal 20172018 from $38.7$45.7 million, or $.45$.42 per diluted share, in the second quarter of fiscal 20162017 principally reflecting the previously mentioned increased net sales and operating income.
Outlook
As we look ahead to the remainder of fiscal 2017,2018, we anticipate net sales growth within the FSGFSG's commercial aviation and defense product lines. We also expect growth within the ETG, resulting from increasedprincipally driven by demand acrossfor the majority of our product lines. During the remainder of fiscal 2017,products. Also, we plan towill continue our focus oncommitments to developing new product development,products and services, further market penetration, executing ourand an aggressive acquisition strategies andstrategy while maintaining our financial strength.strength and flexibility. Based on our current economic visibility, we are increasingnow estimate our estimated consolidated fiscal 20172018 year-over-year growth in net sales to 8%be 13% - 10%14% and in net income to 12%be 33% - 14%35%, up fromas compared to our prior growth estimates in net sales of 6%12% - 8%14% and in net income of 9%30% - 11%32%.
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 20172018 are anticipated to approximate $35be approximately $50 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility.
In April 2017, we increased the aggregate principal amount of our revolving credit facility by $200 million to $1.0 billion through increased commitments from existing lenders. Additionally, theThe revolving credit facility contains both financial and non-financial covenants. As of April 30, 2017,2018, we were in compliance with all such covenants. As of April 30, 2017,2018, our total debt to shareholders’ equity ratio was 40.5%50.0%.
In November 2017, we entered into a new $1.3 billion revolving credit facility agreement, which matures in November 2022 and replaced our previous revolving credit agreement. Additional information about the new and previous revolving credit agreements may be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading, "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended October 31, 2017.
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 $97.7$95.0 million in the first six months of fiscal 20172018 and consisted primarily of net income from consolidated operations of $97.1$137.7 million, depreciation and amortization expense of $30.5$38.1 million (a non-cash item), and $3.7share-based compensation expense of $4.5 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by ana $73.8 million increase in working capital principally due to anand a deferred income tax benefit of $13.2 million (a non-cash item). The increase in working capital is inclusive of $14.3a $29.8 million increase in inventory to support the growth of our businesses and anticipated higher demand during the remainder of fiscal 2017 and2018, a reduction$14.7 million decrease in income taxes payable principally reflecting a change in the timing of certain estimated tax payments due to Hurricane Irma, a $14.5 million decrease in accrued expenses and trade accounts payableother current liabilities reflecting the timing of $18.7accrued performance-based compensation for the first six months of fiscal 2018 and the payment of such compensation for the twelve months of fiscal 2017, and a $14.3 million in aggregate dueincrease related to the timing in collections of payments and accruals for certain items such as accrued performance-based compensation. Componentsaccounts receivable. The deferred income tax benefit principally reflects the impact from the remeasurement of our working capital may be impacted by some or allU.S. federal net deferred tax liabilities as a result of the aforementioned factors in future periods, the amounts and timing of which are variable.Tax Act.
Net cash provided by operating activities decreased by $5.0$2.7 million in the first six months of fiscal 20172018 from $102.7$97.7 million in the first six months of fiscal 2016.2017. The decrease is principally attributedattributable to ana $39.9 million increase in net working capital of $19.7and a $10.2 million mainly resulting from the timing of certain tax payments, the timing of collections on accounts receivables and an increase in inventory to support anticipated higher demand overdeferred income tax benefits as a result of the remainder of fiscal 2017,Tax Act, partially offset by a $17.4$40.6 million increase in net income from consolidated operations and a $2.5$7.6 million impactincrease in depreciation and amortization expense. The increase in net working capital primarily resulted from foreign currency transaction adjustments (a non-cash item).the aforementioned timing associated with the collection of accounts receivable and the payment of income taxes as well as the increase in inventories.
Investing Activities
Net cash used in investing activities totaled $95.3$71.6 million in the first six months of fiscal 20172018 and related primarily to acquisitions netof $39.4 million (net of cash acquired of $80.8 millionacquired) as well as capital expenditures of $13.5$29.5 million. Further details regarding our fiscal 2017 acquisition2018 acquisitions may be found in Note 2, Acquisition,Acquisitions, of the Notes to Condensed Consolidated Financial Statements.
Financing Activities
Net cash used in financing activities in the first six months of fiscal 20172018 totaled $9.1$29.1 million. During the first six months of fiscal 2017,2018, we made payments on our revolving credit facility aggregating $84.0$43.0 million, redeemed common stock related to stock option exercises aggregating $24.6 million, paid $6.1$7.4 million in cash dividends on our common stock, made distributions to noncontrolling interests aggregating $3.9$4.4 million and paid $3.8 million to acquire certain noncontrolling interests.revolving credit facility issuance costs of $4.1 million. Additionally, we borrowed $87.0$53.0 million on our revolving
credit facility principally to fund an acquisitionour fiscal 2018 acquisitions and for working capital needs and received $2.3$2.0 million in proceeds from stock option exercises in the first six months of fiscal 2017.2018.
Contractual Obligations
There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2016.2017.
Off-Balance Sheet Arrangements
Guarantees
As of January 31, 2017,April 30, 2018, we have arranged for standby letters of credit aggregating $4.0$4.3 million, which are supported by our revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of our subsidiaries.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09, as amended, is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented (“full retrospective method”) or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. application (“modified retrospective method”). We expect to use the modified retrospective method.
We are currently evaluating which transition method we will elect. In addition, we are currently identifying our various revenue streams and will subsequently review certain underlyingin the process of reviewing a representative sample of customer contracts across our identified revenue streams. Based on the work completed to-date, we foresee two types of contracts for which ASU 2014-09 will impact the timing of revenue recognition. For certain contracts under which we produce products with no alternative use and for which we have an enforceable right to determinepayment during the production cycle and for certain other contracts under which we create or enhance customer-owned assets while performing repair and overhaul services, ASU 2014-09 will require us to recognize revenue using an over time recognition model as opposed to our current policy of recognizing revenue at the time of shipment. We have
not yet determined the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.
In July 2015, the FASB issued ASU 2015-11, “Simplifying"Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Under current guidance,Previously, inventories arewere measured at the lower of cost or market. We adopted ASU 2015-11 must be applied prospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in the first quarter of fiscal 2018, for HEICO. Early adoption is permitted. We are currently evaluating theresulting in no material effect if any, the adoption of this guidance will have on our consolidated results of operations, financial position andor cash flows.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes," which requires that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. ASU 2015-17 may be applied either prospectively or
retrospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. Early adoption is permitted. We are currently evaluating which transition method we will elect. The adoption of this guidance will only effect the presentation of deferred taxes in our consolidated statement of financial position.
In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. 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 March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects related to accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits and tax deficiencies are to be recognized in the statement of operations as a component of income tax expense rather than as capital in excess of par value. We adopted ASU 2016-09 in the first quarter of fiscal 2017 resulting in the recognition of a $3.1 million discrete income tax benefit, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million. Additionally, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, which increased our weighted average number of diluted common shares outstanding by 712,000 shares and 747,000 shares in the first six months and second quarter of fiscal 2017, respectively. Further, ASU 2016-09 requires excess tax benefits be presented within the statement of cash flows as an operating activity rather than as a financing activity. We adopted this change on a prospective basis, which resulted in a $3.1 million increase in cash provided by operating activities and cash used in financing activities in the first six months of fiscal 2017.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. We are currently evaluating the effect the adoption of this guidance will have on our consolidated statement of cash flows.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill
impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. We are currently evaluating the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.
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 inby those forward-looking statements. Factors that could cause such differences include: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2016.2017.
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 second quarter ended April 30, 20172018 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. EXHIBITS
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Exhibit | | Description |
3.1 | | |
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10.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document. *** |
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101.SCH | | XBRL Taxonomy Extension Schema Document. *** |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. *** |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. *** |
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101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. *** |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. *** |
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*** Furnished herewith.
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.
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| | HEICO CORPORATION |
| | | |
Date: | May 25, 201731, 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) |
EXHIBIT INDEX
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| | |
Exhibit | | Description |
| | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1 | | Section 1350 Certification of Chief Executive Officer. |
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32.2 | | Section 1350 Certification of Chief Financial Officer. |
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101.INS | | XBRL Instance Document. |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |