Index

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended JulyJanuary 31, 20192020
   
  OR
   
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ______ to _______
Commission File Number: 001-04604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class SymbolTrading Symbol(s) Name of each exchange on which registered
     
Common Stock, $.01 par value per share HEI New York Stock Exchange
Class A Common Stock, $.01 par value per share HEI.A New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the registrant’s classes of common stock as of August 27, 2019February 25, 2020 is as follows:
Common Stock, $.01 par value53,812,18754,149,118
shares
Class A Common Stock, $.01 par value80,340,87880,510,464
shares

Index

HEICO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

   Page
Part I.Financial Information 
    
 Item 1.
Financial Statements:
 
    
  
Condensed Consolidated Balance Sheets (unaudited)
as of JulyJanuary 31, 20192020 and October 31, 20182019
2
    
  
Condensed Consolidated Statements of Operations (unaudited)
for the nine and three months ended JulyJanuary 31, 20192020 and 20182019
3
    
  
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the nine and three months ended JulyJanuary 31, 20192020 and 20182019
4
    
  
Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the nine and three months ended JulyJanuary 31, 20192020 and 20182019
5
    
  
Condensed Consolidated Statements of Cash Flows (unaudited)
for the ninethree months ended JulyJanuary 31, 20192020 and 20182019
76
    
  
Notes to Condensed Consolidated Financial Statements (unaudited)
87
    
 Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
3123
    
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4131
    
 Item 4.
Controls and Procedures
4131
    
Part II.Other Information 
    
 Item 6.
Exhibits
4232
    
Signatures
 
4333



1
Index

PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
 July 31, 2019 October 31, 2018 January 31, 2020 October 31, 2019
ASSETS
Current assets:        
Cash and cash equivalents 
$59,023
 
$59,599
 
$63,971
 
$57,001
Accounts receivable, net 259,321
 237,286
 252,050
 274,326
Contract assets 47,238
 14,183
 44,823
 43,132
Inventories, net 416,314
 401,553
 441,250
 420,319
Prepaid expenses and other current assets 20,688
 21,187
 22,616
 18,953
Total current assets 802,584
 733,808
 824,710
 813,731
        
Property, plant and equipment, net 173,182
 154,739
 172,299
 173,345
Goodwill 1,263,473
 1,114,832
 1,301,316
 1,268,703
Intangible assets, net 561,547
 506,360
 556,718
 550,693
Other assets 159,502
 143,657
 242,078
 162,739
Total assets 
$2,960,288
 
$2,653,396
 
$3,097,121
 
$2,969,211
        
LIABILITIES AND EQUITY
Current liabilities:        
Current maturities of long-term debt 
$860
 
$859
 
$932
 
$906
Trade accounts payable 97,891
 107,219
 95,385
 106,225
Accrued expenses and other current liabilities 168,901
 171,514
 144,472
 178,957
Income taxes payable 1,484
 2,837
 2,742
 3,050
Total current liabilities 269,136
 282,429
 243,531
 289,138
        
Long-term debt, net of current maturities 639,304
 531,611
 567,864
 561,049
Deferred income taxes 51,626
 46,644
 29,835
 51,496
Other long-term liabilities 179,494
 157,658
 250,751
 184,604
Total liabilities 1,139,560
 1,018,342
 1,091,981
 1,086,287
        
Commitments and contingencies (Note 12) 

 

 

 

        
Redeemable noncontrolling interests (Note 3) 178,353
 132,046
 195,893
 188,264
        
Shareholders’ equity:        
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued —
 —
 —
 —
Common Stock, $.01 par value per share; 150,000 shares authorized; 53,812 and 53,355 shares issued and outstanding 538
 534
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 80,332 and 79,576 shares issued and outstanding 803
 796
Common Stock, $.01 par value per share; 150,000 shares authorized; 54,149 and 54,143 shares issued and outstanding 541
 541
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 80,484 and 80,353 shares issued and outstanding 805
 804
Capital in excess of par value 309,058
 320,994
 287,779
 284,609
Deferred compensation obligation 3,429
 3,928
 4,232
 4,232
HEICO stock held by irrevocable trust (3,429) (3,928) (4,232) (4,232)
Accumulated other comprehensive loss (16,783) (15,256) (19,263) (16,739)
Retained earnings 1,322,383
 1,091,183
 1,508,784
 1,397,327
Total HEICO shareholders’ equity 1,615,999
 1,398,251
 1,778,646
 1,666,542
Noncontrolling interests 26,376
 104,757
 30,601
 28,118
Total shareholders’ equity 1,642,375
 1,503,008
 1,809,247
 1,694,660
Total liabilities and equity 
$2,960,288
 
$2,653,396
 
$3,097,121
 
$2,969,211
The accompanying notes are an integral part of these condensed consolidated financial statements.


2
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
 Nine months ended July 31, Three months ended July 31, Three months ended January 31,
 2019 2018 2019 2018 2020 2019
            
Net sales 
$1,514,118
 
$1,300,837
 
$532,324
 
$465,825
 
$506,275
 
$466,146
            
Operating costs and expenses:            
Cost of sales 909,663
 796,580
 319,493
 284,216
 308,228
 283,909
Selling, general and administrative expenses 267,911
 231,709
 93,417
 80,186
 87,057
 84,290
            
Total operating costs and expenses 1,177,574
 1,028,289
 412,910
 364,402
 395,285
 368,199
            
Operating income 336,544
 272,548
 119,414
 101,423
 110,990
 97,947
            
Interest expense (16,496) (14,841) (5,523) (5,212) (4,283) (5,489)
Other income (expense) 2,420
 (2) 268
 (112) 195
 (332)
            
Income before income taxes and noncontrolling interests 322,468
 257,705
 114,159
 96,099
 106,902
 92,126
            
Income tax expense 55,300
 46,100
 25,100
 22,200
Income tax (benefit) expense (22,900) 4,100
            
Net income from consolidated operations 267,168
 211,605
 89,059
 73,899
 129,802
 88,026
            
Less: Net income attributable to noncontrolling interests 24,956
 19,749
 7,961
 6,813
 7,914
 8,694
            
Net income attributable to HEICO 
$242,212
 
$191,856
 
$81,098
 
$67,086
 
$121,888
 
$79,332
            
Net income per share attributable to HEICO shareholders:            
Basic 
$1.82
 
$1.45
 
$.61
 
$.51
 
$.91
 
$.60
Diluted 
$1.76
 
$1.40
 
$.59
 
$.49
 
$.89
 
$.58
            
Weighted average number of common shares outstanding:            
Basic 133,405
 132,422
 133,970
 132,794
 134,523
 132,933
Diluted 137,273
 136,570
 137,634
 136,733
 137,421
 136,978
    
The accompanying notes are an integral part of these condensed consolidated financial statements.


3
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
 Nine months ended July 31, Three months ended July 31, Three months ended January 31,
 2019 2018 2019 2018 2020 2019
            
Net income from consolidated operations 
$267,168
 
$211,605
 
$89,059
 
$73,899
 
$129,802
 
$88,026
Other comprehensive (loss) income:        
Other comprehensive income:    
Foreign currency translation adjustments (1,794) 1,209
 (532) (8,181) (2,678) 4,374
Amortization of unrealized loss on defined
benefit pension plan, net of tax
 18
 11
 6
 5
 24
 6
Total other comprehensive (loss) income (1,776) 1,220
 (526) (8,176) (2,654) 4,380
Comprehensive income from consolidated operations 265,392
 212,825
 88,533
 65,723
 127,148
 92,406
Net income attributable to noncontrolling interests 24,956
 19,749
 7,961
 6,813
 7,914
 8,694
Foreign currency translation adjustments attributable to noncontrolling interests (249) 72
 (95) (505) (130) 193
Comprehensive income attributable to noncontrolling interests 24,707
 19,821
 7,866
 6,308
 7,784
 8,887
Comprehensive income attributable to HEICO 
$240,685
 
$193,004
 
$80,667
 
$59,415
 
$119,364
 
$83,519
The accompanying notes are an integral part of these condensed consolidated financial statements.



4
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Nine Months Ended July 31, 2019 and 2018
(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' EquityRedeemable 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, 2018
$132,046
 
$534
 
$796
 
$320,994
 
$3,928
 
($3,928) 
($15,256) 
$1,091,183
 
$104,757
 
$1,503,008
Cumulative effect from adoption of ASC 606 (see Note 1)819
 —
 —
 —
 —
 —
 —
 13,373
 326
 13,699
Balances as of October 31, 2019
$188,264
 
$541
 
$804
 
$284,609
 
$4,232
 
($4,232) 
($16,739) 
$1,397,327
 
$28,118
 
$1,694,660
Comprehensive income13,232
 —
 —
 —
 —
 —
 (1,527) 242,212
 11,475
 252,160
4,767
 —
 —
 —
 —
 —
 (2,524) 121,888
 3,017
 122,381
Cash dividends ($.14 per share)—
 —
 —
 —
 —
 —
 —
 (18,691) —
 (18,691)
Cash dividends ($.08 per share)—
 —
 —
 —
 —
 —
 —
 (10,762) —
 (10,762)
Issuance of common stock to HEICO Savings and Investment Plan—
 —
 —
 7,656
 —
 —
 —
 —
 —
 7,656
—
 —
 —
 1,298
 —
 —
 —
 —
 —
 1,298
Share-based compensation expense—
 —
 —
 7,674
 —
 —
 —
 —
 —
 7,674
—
 —
 —
 2,646
 —
 —
 —
 —
 —
 2,646
Proceeds from stock option exercises—
 7
 8
 8,255
 —
 —
 —
 —
 —
 8,270
—
 —
 1
 1,527
 —
 —
 —
 —
 —
 1,528
Redemptions of common stock related to stock option exercises—
 (3) (1) (35,596) —
 —
 —
 —
 —
 (35,600)—
 —
 —
 (2,562) —
 —
 —
 —
 —
 (2,562)
Noncontrolling interests assumed related to acquisitions7,540
 —
 —
 —
 —
 —
 —
 —
 —
 —
Distributions to noncontrolling interests(12,134) —
 —
 —
 —
 —
 —
 —
 (92,565) (92,565)(4,347) —
 —
 —
 —
 —
 —
 —
 (534) (534)
Noncontrolling interests assumed related to acquisitions38,696
 —
 —
 —
 —
 —
 —
 —
 2,382
 2,382
Adjustments to redemption amount of redeemable noncontrolling interests5,694
 —
 —
 —
 —
 —
 —
 (5,694) —
 (5,694)(331) —
 —
 —
 —
 —
 —
 331
 —
 331
Deferred compensation obligation—
 —
 —
 —
 (499) 499
 —
 —
 —
 —
Other—
 —
 —
 75
 —
 —
 —
 —
 1
 76
—
 —
 —
 261
 —
 —
 —
 —
 —
 261
Balances as of July 31, 2019
$178,353
 
$538
 
$803
 
$309,058
 
$3,429
 
($3,429) 
($16,783) 
$1,322,383
 
$26,376
 
$1,642,375
Balances as of January 31, 2020
$195,893
 
$541
 
$805
 
$287,779
 
$4,232
 
($4,232) 
($19,263) 
$1,508,784
 
$30,601
 
$1,809,247
  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' EquityRedeemable Noncontrolling Interests Common Stock Class A Common Stock Capital in Excess of Par Value Deferred Compensation Obligation HEICO Stock Held by Irrevocable Trust Accumulated Other Comprehensive Loss Retained Earnings Noncontrolling Interests Total Shareholders' Equity
Balances as of October 31, 2017
$131,123
 
$338
 
$507
 
$326,544
 
$3,118
 
($3,118) 
($10,556) 
$844,247
 
$87,212
 
$1,248,292
Balances as of October 31, 2018
$132,046
 
$534
 
$796
 
$320,994
 
$3,928
 
($3,928) 
($15,256) 
$1,091,183
 
$104,757
 
$1,503,008
Cumulative effect from adoption of ASC 606819
 —
 —
 —
 —
 —
 —
 13,373
 326
 13,699
Comprehensive income9,913
 —
 —
 —
 —
 —
 1,148
 191,856
 9,908
 202,912
3,639
 —
 —
 —
 —
 —
 4,187
 79,332
 5,248
 88,767
Cash dividends ($.116 per share)—
 —
 —
 —
 —
 —
 —
 (15,363) —
 (15,363)
Five-for-four common stock splits—
 191
 286
 (477) —
 —
 —
 (29) —
 (29)
Cash dividends ($.07 per share)—
 —
 —
 —
 —
 —
 —
 (9,305) —
 (9,305)
Issuance of common stock to HEICO Savings and Investment Plan—
 1
 1
 6,993
 —
 —
 —
 —
 —
 6,995
—
 —
 —
 1,046
 —
 —
 —
 —
 —
 1,046
Share-based compensation expense—
 —
 —
 6,933
 —
 —
 —
 —
 —
 6,933
—
 —
 —
 2,439
 —
 —
 —
 —
 —
 2,439
Proceeds from stock option exercises—
 7
 1
 3,028
 —
 —
 —
 —
 —
 3,036
—
 —
 —
 66
 —
 —
 —
 —
 —
 66
Redemptions of common stock related to stock option exercises—
 (3) —
 (24,938) —
 —
 —
 —
 —
 (24,941)—
 —
 —
 (150) —
 —
 —
 —
 —
 (150)
Noncontrolling interests assumed related to acquisitions5,116
 —
 —
 —
 —
 —
 —
 —
 2,355
 2,355
Distributions to noncontrolling interests(6,361) —
 —
 —
 —
 —
 —
 —
 (768) (768)(2,397) —
 —
 —
 —
 —
 —
 —
 (398) (398)
Adjustments to redemption amount of redeemable noncontrolling interests(4,561) —
 —
 —
 —
 —
 —
 4,561
 —
 4,561
(228) —
 —
 —
 —
 —
 —
 228
 —
 228
Noncontrolling interests assumed related to acquisitions2,491
 —
 —
 —
 —
 —
 —
 —
 —
 —
Other994
 —
 —
 (994) —
 —
 221
 (533) —
 (1,306)
Balances as of July 31, 2018
$133,599
 
$534
 
$795
 
$317,089
 
$3,118
 
($3,118) 
($9,187) 
$1,024,739
 
$96,352
 
$1,430,322
Deferred compensation obligation—
 —
 —
 —
 115
 (115) —
 —
 —
 —
Balances as of January 31, 2019
$138,995
 
$534
 
$796
 
$324,395
 
$4,043
 
($4,043) 
($11,069) 
$1,174,811
 
$112,288
 
$1,601,755
The accompanying notes are an integral part of these condensed consolidated financial statements.


5
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Three Months Ended July 31, 2019 and 2018
(in thousands, except per share data)
   HEICO Shareholders' Equity    
 Redeemable Noncontrolling Interests Common Stock Class A Common Stock Capital in Excess of Par Value Deferred Compensation Obligation HEICO Stock Held by Irrevocable Trust Accumulated Other Comprehensive Loss Retained Earnings Noncontrolling Interests Total Shareholders' Equity
Balances as of April 30, 2019
$151,450
 
$538
 
$800
 
$310,201
 
$4,043
 
($4,043) 
($16,352) 
$1,251,699
 
$115,278
 
$1,662,164
Comprehensive income5,008
 —
 —
 —
 —
 —
 (431) 81,098
 2,858
 83,525
Cash dividends ($.07 per share)—
 —
 —
 —
 —
 —
 —
 (9,386) —
 (9,386)
Issuance of common stock to HEICO Savings and Investment Plan—
 —
 —
 1,266
 —
 —
 —
 —
 —
 1,266
Share-based compensation expense—
 —
 —
 2,687
 —
 —
 —
 —
 —
 2,687
Proceeds from stock option exercises—
 —
 4
 2,738
 —
 —
 —
 —
 —
 2,742
Redemptions of common stock related to stock option exercises—
 —
 (1) (7,855) —
 —
 —
 —
 —
 (7,856)
Distributions to noncontrolling interests(4,750) —
 —
 —
 —
 —
 —
 —
 (91,759) (91,759)
Noncontrolling interests assumed related to acquisitions25,617
 —
 —
 —
 —
 —
 —
 —
 —
 —
Adjustments to redemption amount of redeemable noncontrolling interests1,028
 —
 —
 —
 —
 —
 —
 (1,028) —
 (1,028)
Deferred compensation obligation—
 —
 —
 —
 (614) 614
 —
 —
 —
 —
Other—
 —
 —
 21
 —
 —
 —
 —
 (1) 20
Balances as of July 31, 2019
$178,353
 
$538
 
$803
 
$309,058
 
$3,429
 
($3,429) 
($16,783) 
$1,322,383
 
$26,376
 
$1,642,375
   HEICO Shareholders' Equity    
 Redeemable Noncontrolling Interests Common Stock Class A Common Stock Capital in Excess of Par Value Deferred Compensation Obligation HEICO Stock Held by Irrevocable Trust Accumulated Other Comprehensive Loss Retained Earnings Noncontrolling Interests Total Shareholders' Equity
Balances as of April 30, 2018
$134,034
 
$427
 
$635
 
$311,710
 
$3,118
 
($3,118) 
($1,516) 
$964,571
 
$93,680
 
$1,369,507
Comprehensive income3,277
 —
 —
 —
 —
 —
 (7,671) 67,086
 3,031
 62,446
Cash dividends ($.06 per share)  —
 —
 —
 —
 —
 —
 (7,968) —
 (7,968)
Five-for-four common stock split  107
 159
 (266) —
 —
 —
 (29) —
 (29)
Issuance of common stock to HEICO Savings and Investment Plan—
 —
 1
 2,446
 —
 —
 —
 —
 —
 2,447
Share-based compensation expense—
 —
 —
 2,474
 —
 —
 —
 —
 —
 2,474
Proceeds from stock option exercises—
 —
 —
 1,043
 —
 —
 —
 —
 —
 1,043
Redemptions of common stock related to stock option exercises—
 —
 —
 (318) —
 —
 —
 —
 —
 (318)
Distributions to noncontrolling interests(2,321) —
 —
 —
 —
 —
 —
 —
 (359) (359)
Adjustments to redemption amount of redeemable noncontrolling interests(1,391) —
 —
 —
 —
 —
 —
 1,391
 —
 1,391
Other—
 —
 —
 —
 —
 —
 —
 (312) —
 (312)
Balances as of July 31, 2018
$133,599
 
$534
 
$795
 
$317,089
 
$3,118
 
($3,118) 
($9,187) 
$1,024,739
 
$96,352
 
$1,430,322
The accompanying notes are an integral part of these condensed consolidated financial statements.


65

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
Nine months ended July 31,Three months ended January 31,
2019 20182020 2019
Operating Activities:      
Net income from consolidated operations
$267,168
 
$211,605

$129,802
 
$88,026
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:      
Depreciation and amortization61,686
 57,523
21,583
 20,037
Share-based compensation expense7,674
 6,933
2,646
 2,439
Employer contributions to HEICO Savings and Investment Plan7,128
 6,015
2,613
 2,153
Increase (decrease) in accrued contingent consideration, net3,734
 (3,789)
Deferred income tax benefit(3,293) (13,485)
Increase in accrued contingent consideration408
 1,862
Deferred income tax (benefit) provision(25,718) 3,798
Payment of contingent consideration(3,105) —
(175) (67)
Changes in operating assets and liabilities, net of acquisitions:      
Increase in accounts receivable(14,820) (21,043)
Decrease (increase) in contract assets7,429
 (5,272)
Decrease in accounts receivable23,734
 4,982
(Increase) decrease in contract assets(1,719) 7,270
Increase in inventories(27,019) (40,965)(20,449) (24,284)
(Increase) decrease in prepaid expenses and other current assets(1,343) 1,026
(Decrease) increase in trade accounts payable(11,783) 10,048
Increase in accrued expenses and other current liabilities8,797
 8,078
Increase (decrease) in income taxes payable772
 (13,479)
Increase in prepaid expenses and other current assets(3,303) (7,921)
Decrease in trade accounts payable(10,678) (19,832)
Decrease in accrued expenses and other current liabilities(48,319) (34,537)
Decrease in income taxes payable(1,334) (3,636)
Net changes in other long-term liabilities and assets related to
HEICO Leadership Compensation Plan
11,295
 10,069
11,315
 9,143
Other(921) 1,489
730
 133
Net cash provided by operating activities313,399
 214,753
81,136
 49,566
      
Investing Activities:      
Acquisitions, net of cash acquired(235,174) (40,599)(45,343) (101,039)
Investments related to HEICO Leadership Compensation Plan(11,800) (8,700)
Capital expenditures(21,671) (35,898)(6,850) (5,907)
Investments related to HEICO Leadership Compensation Plan(10,800) (10,050)
Other628
 (2,736)439
 72
Net cash used in investing activities(267,017) (89,283)(63,554) (115,574)
      
Financing Activities:      
Borrowings on revolving credit facility288,000
 53,000
45,000
 93,000
Payments on revolving credit facility(180,000) (110,000)(38,000) (17,000)
Cash dividends paid(10,762) (9,305)
Distributions to noncontrolling interests(104,699) (7,129)(4,881) (2,795)
Redemptions of common stock related to stock option exercises(35,600) (24,941)(2,562) (150)
Cash dividends paid(18,691) (15,363)
Payments of contingent consideration(4,073) (5,425)
Revolving credit facility issuance costs—
 (4,067)
Payment of contingent consideration(325) (283)
Proceeds from stock option exercises8,270
 3,036
1,528
 66
Other(387) (376)(213) 29
Net cash used in financing activities(47,180) (111,265)
Net cash (used in) provided by financing activities(10,215) 63,562
      
Effect of exchange rate changes on cash222
 710
(397) 703
      
Net (decrease) increase in cash and cash equivalents(576) 14,915
Net increase (decrease) in cash and cash equivalents6,970
 (1,743)
Cash and cash equivalents at beginning of year59,599
 52,066
57,001
 59,599
Cash and cash equivalents at end of period
$59,023
 
$66,981

$63,971
 
$57,856
The accompanying notes are an integral part of these condensed consolidated financial statements.


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HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2018.2019. The October 31, 20182019 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 ninethree months ended JulyJanuary 31, 20192020 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. ("HEICO Aerospace") 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.

Certain prior year amounts have been reclassified to conform to the current year presentation principally to reflect the adoption of Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," in the first quarter of fiscal 2019 and the adoption of ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," in the fourth quarter of fiscal 2018.

New Accounting Pronouncements

In May 2014,February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,Accounting Standards Update ("ASU") 2016-02, which, as amended, was codified as Accounting Standards Codification (“ASC”("ASC") Topic 606, "Revenue from Contracts with Customers" (“842, "Leases" ("ASC 606”842"). ASC 606 provides a comprehensive new revenue recognition model that supersedes nearly all existing revenue recognition guidance. Under ASC 606, an entity recognizes 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 disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts.


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The Company adopted ASC 606 as of November 1, 2018 using the modified retrospective method and recognized the cumulative effect of initially applying ASC 606 to all uncompleted contracts on the date of adoption as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and remains as previously reported in accordance with ASC Topic 605, "Revenue Recognition."

ASC 606 impacts the timing of revenue recognition for certain contracts under which the Company produces products with no alternative use and for which it has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. ASC 606 also impacts the timing of revenue recognition for certain other contracts under which the Company creates or enhances customer-owned assets while performing repair and overhaul services. For these two types of contracts, the Company now recognizes revenue using an over-time recognition model as opposed to generally recognizing revenue at the time of shipment under previous guidance. See Note 6, Revenue, for additional information regarding the Company's revenue recognition policies and disclosures required by ASC 606.
The following table presents the cumulative effect of adopting ASC 606 on the Company's Condensed Consolidated Balance Sheet as of November 1, 2018 (in thousands):
 As Reported Impact of As Adjusted
 Under ASC 605 ASC 606 Under ASC 606
 October 31, 2018 Adoption November 1, 2018
Assets     
Contract assets
$14,183
 
$40,089
 
$54,272
Inventories, net401,553
 (29,412) 372,141
Prepaid expenses and other current assets21,187
 (489) 20,698
      
Liabilities     
Accrued expenses and other current
liabilities

$171,514
 
($8,588) 
$162,926
Deferred income taxes46,644
 4,258
 50,902
      
Redeemable noncontrolling interests
$132,046
 
$819
 
$132,865
      
Shareholders' equity     
Retained earnings
$1,091,183
 
$13,373
 
$1,104,556
Noncontrolling interests104,757
 326
 105,083



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The following table presents the impact of adopting ASC 606 on the Company's Condensed Consolidated Balance Sheet as of July 31, 2019 (in thousands):
 As of July 31, 2019
 As Reported Effect of As Adjusted
 Under ASC 606 ASC 606 Under ASC 605
Assets     
Contract assets
$47,238
 
($42,604) 
$4,634
Inventories, net416,314
 30,722
 447,036
Prepaid expenses and other current assets20,688
 1,100
 21,788
      
Liabilities     
Accrued expenses and other current
liabilities

$168,901
 
$6,141
 
$175,042
Deferred income taxes51,626
 (3,327) 48,299
      
Redeemable noncontrolling interests
$178,353
 
$53
 
$178,406
      
Shareholders' equity     
Retained earnings
$1,322,383
 
($13,295) 
$1,309,088
Noncontrolling interests26,376
 (354) 26,022


The impact of adopting ASC 606 on the Company's Condensed Consolidated Statement of Operations was not material for the nine and three months ended July 31, 2019.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which842 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.  ASU 2016-02,The Company adopted ASC 842 as amended, provides certain optional transition relief and shall be appliedof November 1, 2019 using a modified retrospective transition approach eitherwith the election to apply the guidance as of the adoption date instead of at the beginning of the earliest comparative period presented in the year of adoption or by recognizing a cumulative-effect adjustment as of the date of adoption.presented. The Company expects to use the cumulative-effect method.  The Company expects the adoption of this guidance will resultresulted in an increase in itsthe Company's assets and liabilities due to the recognition of right-to-useright-of-use ("ROU") assets and corresponding lease liabilities for leases that are currently classified as operating leases.  The

Upon adoption, the Company doeselected the package of transitional practical expedients, which allowed the Company to not expectreassess its prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the Company elected the short-term lease practical expedient, which allows HEICO to not record an ROU asset and lease liability for any


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Index

lease with a term of twelve months or less, and also elected the single component practical expedient for all asset classes, which allows the Company to include both lease and non-lease components associated with a lease as a single lease component when determining the value of the ROU asset and lease liability.

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

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value


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Index

exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.


2.     ACQUISITIONS

In JulyDecember 2019, the Company, jointly through a subsidiary of HEICO Electronic, and one of its subsidiaries, acquired substantially all100% of the business and assets and business of a France-based company and transferred the assets to a newly created subsidiary,Human-Machine Interface ("HMI") product line of Spectralux Corporation. Bernier Connect SAS ("Bernier")HMI designs, manufactures, and repairs flight deck annunciators, panels, indicators, and illuminated keyboards, as well as lighting controls, and flight deck lighting.. The acquisition is inclusive of Bernier's 70% equity interest in Moulages Plastiques Industriels De L'essonne, a plastics manufacturer. Bernier is a designer and manufacturer of interconnect products used in demanding defense, aerospace and industrial applications, primarily for communications-related purposes. The purchase price of this acquisition was paid in cash using cash provided by operating activities.

In JuneDecember 2019, the Company, through HEICO Electronic, acquired 75%80.1% of the membership interestsstock of Research Electronics International, LLC ("REI")Quell Corporation ("Quell"). REI isQuell designs and manufactures electromagnetic interference (EMI)/radio-frequency interference (RFI) and transient protection solutions for a designerwide variety of connectors that principally serve customers within the aerospace and manufacturer of Technical Surveillance Countermeasures (TCSM) equipment to detect devices used for espionage and information theft.defense markets. The remaining 25% interest19.9% continues to be owned by certain members of REI'sQuell's management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information).

In February 2019, the Company, through a subsidiary of HEICO Flight Support Corp., acquired 80.1% of the membership interests of Decavo, LLC ("Decavo"). Decavo designs and produces complex composite parts and assemblies incorporated into camera and related sensor assemblies and UAV airframes used in demanding defense and civilian applications. The remaining 19.9% interest continues to be owned by certain members of Decavo's management team (see Note 3, Selected Financial Statement Information, for additional information). The total consideration includes an accrual as of the acquisition date representing the estimated fair value of contingent consideration the Company may be obligated to pay should Decavo meet a certain earnings objective during the second and third years following the acquisition. See Note 8, Fair Value Measurements, for additional information regarding the Company's contingent consideration obligation. The purchase price of thiseach fiscal 2020 acquisition was paid in cash principally using cash provided by operating activities.

In February 2019, the Company, through HEICO Electronic, acquired 85% of the stock of Solid Sealing Technology, Inc. ("SST"). SST designs and manufactures high-reliability ceramic-to-metal feedthroughs and connectors for demanding environments within the defense, industrial, life science, medical, research, semiconductor, and other markets. The remaining 15% interest continues to be owned by certain members of SST's management team (see Note 3, Selected Financial Statement Information, for additional information).



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In November 2018, the Company, through a subsidiary of HEICO Electronic, acquired an additional equity interest in Freebird Semiconductor Corporation ("Freebird"), which increased the Company's aggregate equity interest in Freebird to greater than 50%. Accordingly, the Company began consolidating the operating results of Freebird as of the acquisition date. Prior to this transaction, the Company accounted for its investment in Freebird under the equity method. Freebird is a fabless design and manufacturing company that offers advanced high-reliability wide-band gap power switching technology. The purchase price of this acquisition was paid in cash using cash provided by operating activities.

In November 2018, the Company, through HEICO Electronic, acquired 92.7% of the stock of Apex Microtechnology, Inc. ("Apex"). Apex designs and manufactures precision power analog monolithic, hybrid and open frame components for a certain wide range of aerospace, defense, industrial, measurement, medical and test applications. The remaining 7.3% interest continues to be owned by certain members of Apex's management team (see Note 3, Selected Financial Statement Information, for additional information).
In November 2018, the Company, through HEICO Electronic, acquired all of the stock of Specialty Silicone Products, Inc. ("SSP"). SSP designs and manufactures silicone material for a variety of demanding applications used in aerospace, defense, research, oil and gas, testing, pharmaceuticals and other markets.

Unless otherwise noted, the purchase price of each of the fiscal 2019 acquisitions was paid in cash, principally using proceeds from the Company's revolving credit facility, and is not material or significant to the Company's condensed consolidated financial statements.

The following table summarizes the aggregate total consideration for the Company's fiscal 2019 acquisitions (in thousands):

Cash paid
$236,427
Less: cash acquired(1,253)
Cash paid, net235,174
Contingent consideration2,107
Fair value of existing equity interest1,416
Additional purchase consideration(335)
Total consideration
$238,362




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The following table summarizes the allocation of the aggregate total consideration for the Company's fiscal 2019 acquisitions to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed (in thousands):

Assets acquired:
Goodwill
$151,157
Customer relationships45,543
Intellectual property30,200
Trade names19,516
Property, plant and equipment17,778
Inventories17,057
Accounts receivable7,904
Other assets (including contract assets)845
Total assets acquired, excluding cash290,000
Liabilities assumed:
Deferred income taxes4,101
Accrued expenses3,309
Accounts payable2,582
Other liabilities568
Total liabilities assumed10,560
Noncontrolling interests in consolidated subsidiaries41,078
Net assets acquired, excluding cash
$238,362

The following table summarizes the weighted average amortization period of the definite-lived intangible assets acquired in connection with the Company's fiscal 2019 acquisitions (in years):
Customer relationships12
Intellectual property15


The allocation of the total consideration for the Company's fiscal 20192020 acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company


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obtains final information regarding their fair values. However, the Company does not expect any adjustmentsadjustment to such allocations to be material to the Company's consolidated financial statements. The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of the businesses acquired and the value of their assembled workforces that do not qualify for separate recognition, which, in the case of Bernier, REI, Decavo, SST, Freebird and Apex benefit both the


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Index

Company and the noncontrolling interest holders. The fair value of the noncontrolling interests in Bernier, REI, Decavo, SST, Freebird and Apex was determined based on the consideration paid by the Company for its controlling ownership interest adjusted for a lack of control that a market participant would consider when estimating the fair value of the noncontrolling interest.    

The operating results of the fiscal 20192020 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The amount of net sales and earnings of the fiscal 20192020 acquisitions included in the Condensed Consolidated StatementsStatement of Operations for the nine and three months ended JulyJanuary 31, 20192020 is not material. Had the fiscal 20192020 acquisitions occurred as of November 1, 2017,2018, net sales, on a pro forma basis for the nine and three months ended July 31, 2019 would not have been materially different than the reported amounts and net sales for the nine and three months ended July 31, 2018 would have been $1,373.1 million and $489.5 million, respectively. Net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the nine and three months ended JulyJanuary 31, 20192020 and 20182019 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 acquisitions had taken place as of November 1, 2017.


3.     SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands) July 31, 2019 October 31, 2018 January 31, 2020 October 31, 2019
Accounts receivable 
$263,645
 
$240,544
 
$256,678
 
$277,992
Less: Allowance for doubtful accounts (4,324) (3,258) (4,628) (3,666)
Accounts receivable, net 
$259,321
 
$237,286
 
$252,050
 
$274,326


Inventories
(in thousands) July 31, 2019 October 31, 2018
Finished products 
$197,463
 
$192,758
Work in process 34,884
 49,315
Materials, parts, assemblies and supplies 183,967
 158,039
Contracts in process —
 1,649
Less: Billings to date —
 (208)
Inventories, net of valuation reserves 
$416,314
 
$401,553

Prior to the adoption of ASC 606, contracts in process represented accumulated capitalized costs associated with fixed price contracts. Additionally, related progress billings and customer advances (“billings to date”) were classified as a reduction to contracts in process, if any, and any excess was included in accrued expenses and other liabilities. See Note 1,


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Summary of Significant Accounting Policies - New Accounting Pronouncements, and Note 6, Revenue, for additional information pertaining to the adoption of ASC 606.
(in thousands) January 31, 2020 October 31, 2019
Finished products 
$211,279
 
$199,880
Work in process 38,184
 32,548
Materials, parts, assemblies and supplies 191,787
 187,891
Inventories, net of valuation reserves 
$441,250
 
$420,319

Property, Plant and Equipment
(in thousands) July 31, 2019 October 31, 2018 January 31, 2020 October 31, 2019
Land 
$7,297
 
$5,864
 
$6,819
 
$6,820
Buildings and improvements 115,314
 101,424
 117,111
 116,997
Machinery, equipment and tooling 246,653
 230,108
 256,262
 253,127
Construction in progress 7,981
 5,044
 10,743
 8,382
 377,245
 342,440
 390,935
 385,326
Less: Accumulated depreciation and amortization (204,063) (187,701) (218,636) (211,981)
Property, plant and equipment, net 
$173,182
 
$154,739
 
$172,299
 
$173,345




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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 $17.4$19.4 million as of JulyJanuary 31, 20192020 and $16.9$18.0 million as of October 31, 2018. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2019 and 2018 was $6.5 million and $7.7 million, respectively.2019. The total customer rebates and credits deducted within net sales for the three months ended JulyJanuary 31, 2020 and 2019 and 2018 was $2.9$2.1 million and $2.5$1.4 million, respectively.

Research and Development Expenses

The amount of new product research and development ("R&D") expenses included in cost of sales for the nine and three months ended JulyJanuary 31, 20192020 and 20182019 is as follows (in thousands):
  Nine months ended July 31, Three months ended July 31,
  2019 2018 2019 2018
R&D expenses 
$48,697
 
$40,680
 
$16,648
 
$14,020
  Three months ended January 31,
  2020 2019
R&D expenses 
$17,103
 
$15,200


Redeemable Noncontrolling Interests

The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2029. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):


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 July 31, 2019 October 31, 2018 January 31, 2020 October 31, 2019
Redeemable at fair value 
$129,831
 
$83,524
 
$144,240
 
$136,611
Redeemable based on a multiple of future earnings 48,522
 48,522
 51,653
 51,653
Redeemable noncontrolling interests 
$178,353
 
$132,046
 
$195,893
 
$188,264


As discussed in Note 2, Acquisitions, the Company, through HEICO Electronic, acquired 75%80.1% of the membership interestsstock of REIQuell in JuneDecember 2019. As part of the REI operating agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interest over a four-year period beginning in fiscal 2024, or sooner under certain conditions, and the Company has the right to purchase the same equity interest over the same period.    

As discussed in Note 2, Acquisitions, the Company, through the FSG, acquired 80.1% of the membership interests of Decavo in February 2019. As part of the Decavo operating agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interests over a four-year period beginning in fiscal 2026, or sooner under certain conditions, and the Company has the right to purchase the same equity interests over the same period.

As discussed in Note 2, Acquisitions, the Company, through HEICO Electronic, acquired 85% of the stock of SST in February 2019. As part of the SST shareholders' agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interests over a four-year period beginning in fiscal 2024,2025, or sooner under certain conditions, and the Company has the right to purchase the same equity interests over the same period.

As discussed in Note 2, Acquisitions, the Company, through the ETG, acquired 92.7% of the stock of Apex in November 2018. As part of the Apex shareholders' agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interests over a four-year period beginning in fiscal 2023, or sooner under certain conditions, and the Company has the right to purchase the same equity interests over the same period.

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Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss for the ninethree months ended JulyJanuary 31, 20192020 are as follows (in thousands):
 Foreign Currency Translation Pension Benefit Obligation 
Accumulated
Other
Comprehensive Loss
 Foreign Currency Translation Defined Benefit Pension Plan 
Accumulated
Other
Comprehensive Loss
Balances as of October 31, 2018 
($14,370) 
($886) 
($15,256)
Balances as of October 31, 2019 
($14,989) 
($1,750) 
($16,739)
Unrealized loss (1,545) —
 (1,545) (2,548) —
 (2,548)
Amortization of unrealized loss —
 18
 18
 —
 24
 24
Balances as of July 31, 2019 
($15,915) 
($868) 
($16,783)
Balances as of January 31, 2020 
($17,537) 
($1,726) 
($19,263)





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4.     GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by operating segment for the ninethree months ended JulyJanuary 31, 20192020 are as follows (in thousands):
 Segment Consolidated Totals Segment Consolidated Totals
 FSG ETG  FSG ETG 
Balances as of October 31, 2018 
$398,694
 
$716,138
 
$1,114,832
Balances as of October 31, 2019 
$410,044
 
$858,659
 
$1,268,703
Goodwill acquired 12,912
 138,245
 151,157
 —
 33,268
 33,268
Foreign currency translation adjustments (1,535) (856) (2,391) (200) (540) (740)
Adjustments to goodwill (125) —
 (125) —
 85
 85
Balances as of July 31, 2019 
$409,946
 
$853,527
 
$1,263,473
Balances as of January 31, 2020 
$409,844
 
$891,472
 
$1,301,316


The goodwill acquired pertains to the fiscal 20192020 acquisitions described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 20182019 acquisitions. The Company estimates that $91$10 million of the goodwill acquired in fiscal 20192020 will be deductible for income tax purposes.




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Index

Identifiable intangible assets consist of the following (in thousands):
 As of July 31, 2019 As of October 31, 2018 As of January 31, 2020 As of October 31, 2019
 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 
$418,308
 
($162,231) 
$256,077
 
$373,946
 
($135,359) 
$238,587
 
$422,609
 
($172,037) 
$250,572
 
$411,076
 
($162,722) 
$248,354
Intellectual property 216,265
 (67,341) 148,924
 185,983
 (56,055) 129,928
 222,315
 (74,021) 148,294
 216,359
 (70,169) 146,190
Licenses 6,559
 (3,959) 2,600
 6,559
 (3,522) 3,037
 6,559
 (4,244) 2,315
 6,559
 (4,102) 2,457
Patents 958
 (649) 309
 927
 (609) 318
 992
 (680) 312
 986
 (666) 320
Non-compete agreements 813
 (813) —
 814
 (814) —
 812
 (812) —
 813
 (813) —
Trade names 466
 (186) 280
 466
 (157) 309
 450
 (190) 260
 450
 (180) 270
 643,369
 (235,179) 408,190
 568,695
 (196,516) 372,179
 653,737
 (251,984) 401,753
 636,243
 (238,652) 397,591
Non-Amortizing Assets:                        
Trade names 153,357
 —
 153,357
 134,181
 —
 134,181
 154,965
 —
 154,965
 153,102
 —
 153,102
 
$796,726
 
($235,179) 
$561,547
 
$702,876
 
($196,516) 
$506,360
 
$808,702
 
($251,984) 
$556,718
 
$789,345
 
($238,652) 
$550,693


The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of JulyJanuary 31, 20192020 compared to October 31, 20182019 principally relates to such intangible assets recognized in connection with the fiscal 20192020 acquisitions (see Note 2, Acquisitions).



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Amortization expense related to intangible assets for the nine months ended July 31, 2019 and 2018 was $39.6 million and $37.5 million, respectively. Amortization expense related to intangible assets for the three months ended JulyJanuary 31, 20192020 and 20182019 was $13.7 million and $12.7$12.8 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 20192020 is estimated to be $13.941.4 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $53.1 million in fiscal 2020, $50.252.5 million in fiscal 2021, $43.846.0 million in fiscal 2022, $38.540.7 million in fiscal 2023, $34.236.2 million in fiscal 2024, $32.3 million in fiscal 2025, and $174.5152.7 million thereafter.


5.     LONG-TERM DEBT

Long-term debt consists of the following (in thousands):
 July 31, 2019 October 31, 2018 January 31, 2020 October 31, 2019
Borrowings under revolving credit facility 
$631,000
 
$523,000
 
$560,000
 
$553,000
Capital leases and note payable 9,164
 9,470
Finance leases and note payable 8,796
 8,955
 640,164
 532,470
 568,796
 561,955
Less: Current maturities of long-term debt (860) (859) (932) (906)
 
$639,304
 
$531,611
 
$567,864
 
$561,049




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Index

The Company's borrowings under its revolving credit facility mature in fiscal 2023. As of JulyJanuary 31, 20192020 and October 31 2018,2019, the weighted average interest rate on borrowings under the Company’sCompany's revolving credit facility was 3.4%.2.7% and 3.0%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of JulyJanuary 31, 2019,2020, the Company was in compliance with all such covenants.


6.     REVENUE

The Company recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to receive in exchange for the good or service. The Company’s performance obligations are satisfied and control is transferred either at a point-in-time or over-time. The majority of the Company’s revenue is recognized at a point-in-time when control is transferred, which is generally evidenced by the shipment or delivery of the product to the customer, a transfer of title, a transfer of the significant risks and rewards of ownership, and customer acceptance. For certain contracts under which the Company produces products with no alternative use and for which it has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date and for certain other contracts under which the Company creates or enhances a customer-owned asset while performing repair and overhaul services, control is transferred to the customer over-time. The Company recognizes revenue using an over-time recognition model for these types of contracts.

Details of the products and services provided by the Company can be found within Disaggregation of Revenue which follows within this Note 6.


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Contracts with Customers and Performance Obligations

The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance, and it is probable that the Company will collect the consideration to which it is entitled to receive. Customer payment terms related to the sale of products and the rendering of services vary by Company subsidiary and product line. The time between receipt of payment and recognition of revenue for satisfaction of the related performance obligation is not significant.

A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing revenue. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. The majority of the Company’s contracts have a single performance obligation to transfer goods or services. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.
The Company accounts for contract modifications prospectively when the remaining goods or services are distinct and on a cumulative catch-up basis when the remaining goods or services are not distinct.

The Company provides assurance type warranties on many of its products and services. Since customers cannot purchase such warranties independently of the products or services under contract and they are not priced separately, warranties are not separate performance obligations.
Contract Estimates

The Company utilizes the cost-to-cost method as a measure of progress for performance obligations that are satisfied over-time as it believes this input method best represents the transfer of control to the customer. Under this method, revenue for the current period is recorded at an amount equal to the ratio of costs incurred to date divided by total estimated contract costs multiplied by (i) the transaction price, less (ii) cumulative revenue recognized in prior periods. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation.

Certain of the Company’s contracts give rise to variable consideration when they contain items such as customer rebates, credits, volume purchase discounts, penalties and other provisions that may impact the total consideration the Company will receive. The Company includes variable consideration in the transaction price generally by applying the most likely amount method of the consideration that it expects to be entitled to receive based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue


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Index

recognized will not occur when the uncertainty is resolved. The Company estimates variable consideration by applying the most likely amount method when there are a limited number of outcomes related to the resolution of the variable consideration.

Changes in estimates that result in adjustments to net sales and cost of sales are recognized as necessary in the period they become known on a cumulative catch-up basis. Changes in estimates did not have a material effect on net income from consolidated operations for the nine and three months ended July 31, 2019.

Practical Expedients and Optional Exemptions

The Company has elected the following practical expedients and optional exemptions allowed under ASC 606:

The majority of the Company’s performance obligations related to customer contracts are satisfied within one year. As such, the Company has elected to disclose remaining performance obligations only for contracts with an original duration of greater than one year.

The Company has elected to record all shipping and handling activities as fulfillment activities. When revenue is recognized in advance of incurring shipping and handling costs, the costs related to the shipping and handling activities are accrued.

For certain contracts with similar characteristics and for which revenue is recognized using an over-time model, the Company uses a portfolio approach to estimate the amount of revenue to recognize. For each portfolio of contracts, the respective work in process and/or finished goods inventory balances are identified and the portfolio-specific margin is applied to estimate the pro rata portion of the transaction price to recognize in relation to the costs incurred. This approach is utilized only when the resulting revenue recognition is not expected to be materially different than if the accounting was applied to the individual contracts.

The Company does not adjust the amount of revenue to be recognized under a customer contract for the effects of the time value of money when the timing difference between receipt of payment and recognition of revenue for satisfaction of the related performance obligation is less than one year.

Sales commissions and any other costs of obtaining a customer contract with a duration of one year or less are expensed as incurred.



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Contract Balances

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

Changes in the Company’s contract assets and liabilities for the ninethree months ended JulyJanuary 31, 20192020 are as follows (in thousands):
July 31, 2019 November 1, 2018 ChangeJanuary 31, 2020 October 31, 2019 Change
          
Contract assets
$47,238
 
$54,272
 
($7,034)
$44,823
 
$43,132
 
$1,691
Contract liabilities21,474
 19,674
 1,800
26,148
 23,809
 2,339
Net contract assets
$25,764
 
$34,598
 
($8,834)
$18,675
 
$19,323
 
($648)

    
The decreaseincrease in the Company's contract assets during the first nine monthsquarter of fiscal 20192020 mainly occurred within the ETG and principally reflects additional unbilled receivables on certain customer contracts using an over-time recognition model in excess of billings on certain customer contracts made during the period in excess of the amounts recorded as additional unbilled receivables for contracts using an over-time recognition model.quarter.

The increase in the Company's contract liabilities during the first nine monthsquarter of fiscal 20192020 mainly occurred within the FSG and principally reflects the receiptsreceipt during the quarter of new customer deposits on certain customer contracts in excess of reductions to contract liabilities from customer deposits recognized as revenue.

The amount of revenue that the Company recognized during the nine and three months ended July 31, 2019first quarter of fiscal 2020 that was included in contract liabilities as of the beginning of fiscal 20192020 was $14.5 million and $2.4 million, respectively.$13.4 million.
    
Remaining Performance Obligations

As of JulyJanuary 31, 2019,2020, the Company had $383.3$403.8 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG and the FSG's specialty products and


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Index

aftermarket replacement parts and specialty products product line.lines. The Company will recognize net sales as these obligations are satisfied. The Company expects to recognize $81.3$214.9 million of this amount during the remainder of fiscal 20192020 and $302.0$188.9 million thereafter, of which the majority is expected to occur in fiscal 2020.2021.
    


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Disaggregation of Revenue

The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
 Nine months ended July 31, Three months ended July 31, Three months ended January 31,
 2019 2018 2019 2018 2020 2019
Flight Support Group:            
Aftermarket replacement parts (1)
 
$500,714
 
$424,584
 
$173,992
 
$150,729
 
$168,267
 
$159,497
Repair and overhaul parts and services (2)
 216,887
 214,933
 76,270
 74,853
 69,287
 67,163
Specialty products (3)
 197,879
 168,166
 69,754
 59,544
 63,513
 60,553
Total net sales 915,480
 807,683
 320,016
 285,126
 301,067
 287,213
            
Electronic Technologies Group:            
Electronic component parts for defense,
space and aerospace equipment (4)
 459,445
 394,884
 160,031
 146,652
 160,713
 137,750
Electronic component parts for equipment
in various other industries (5)
 155,564
 115,866
 56,098
 39,718
 47,698
 46,679
Total net sales 615,009
 510,750
 216,129
 186,370
 208,411
 184,429
            
Intersegment sales (16,371) (17,596) (3,821) (5,671) (3,203) (5,496)
            
Total consolidated net sales 
$1,514,118
 
$1,300,837
 
$532,324
 
$465,825
 
$506,275
 
$466,146
            

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


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(5) 
Includes various component parts such as electromagnetic and radio interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies and silicone material for a variety of demanding applications and technical surveillance countermeasures equipment.applications.



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Index

The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
Nine months ended July 31, Three months ended July 31, Three months ended January 31,
2019 2018 2019 2018 2020 2019
Flight Support Group:           
Aerospace
$742,555
 
$660,307
 
$258,157
 
$230,633
 
$239,923
 
$235,173
Defense and Space137,272
 114,103
 49,769
 43,009
 50,253
 41,534
Other (1)
35,653
 33,273
 12,090
 11,484
 10,891
 10,506
Total net sales915,480
 807,683
 320,016
 285,126
 301,067
 287,213
           
Electronic Technologies Group:           
Defense and Space390,046
 331,587
 138,875
 125,375
 133,110
 115,219
Other (2)
162,063
 132,559
 56,525
 44,849
 54,963
 49,915
Aerospace62,900
 46,604
 20,729
 16,146
 20,338
 19,295
Total net sales615,009
 510,750
 216,129
 186,370
 208,411
 184,429
           
Other, primarily corporate and intersegment(16,371) (17,596) (3,821) (5,671)
Intersegment sales (3,203) (5,496)
           
Total consolidated net sales
$1,514,118
 
$1,300,837
 
$532,324
 
$465,825
 
$506,275
 
$466,146
           

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


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7.     INCOME TAXES

In December 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 previous tax law, some of which became immediately effective in fiscal 2018 including, among other things, a reduction in the U.S. federal statutory tax rate from 35% to 21% (effective January 1, 2018) 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. Certain other provisions of the Tax Act became 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’s effectiveCompany incurred an income tax ratebenefit of $22.9 million in the first nine monthsquarter of fiscal 2019 was 17.1% as2020 compared to 17.9%income tax expense of $4.1 million in the first nine months of fiscal 2018. The Company's effective tax rate in the third quarter of fiscal 2019 was 22.0% as compared to 23.1% in the third quarter of fiscal 2018.2019. The decrease in the Company's effectiveCompany recognized a discrete tax rate in the first nine months and third quarter of fiscal 2019 is mainly attributable to the reduction in the federal tax ratebenefit from a blended rate of 23.3% in fiscal 2018 to 21% in fiscal 2019, partially offset by the net effect of the provisions of the Tax Act that became effective for HEICO in fiscal 2019.

Income tax expensestock option exercises in both the first nine monthsquarter of fiscal 2020 and 2019 of $47.6 million and fiscal 2018 was favorably impacted as a result of discrete tax benefits.$16.6 million, respectively. The tax$31.0 million larger benefit from stock option exercises recognized in the first nine monthsquarter of fiscal 2019 increased by $14.5 million compared to2020 was the first nine monthsresult of fiscal 2018. Duringmore stock options exercised and the first nine months of fiscal 2018,strong appreciation in HEICO's stock price during the optionees' holding periods. The Company recognized a $25.7 million non-cash deferred income tax benefit in the first quarter of fiscal 2020 that is principally attributable to the tax benefit from stock option exercises, which it expects to realize during the remeasurementremainder of its U.S. federal net deferred tax liabilities that was partially offset by a tax expense related to a one-time transition tax on the unremitted earnings of its foreign subsidiaries that resulted in an $11.9 million net discrete tax benefit.

fiscal 2020.



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Index

8.    FAIR VALUE MEASUREMENTS

The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
 As of July 31, 2019 As of January 31, 2020
 
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 plan:                
Corporate-owned life insurance 
$—
 
$148,586
 
$���
 
$148,586
 
$—
 
$166,275
 
$—
 
$166,275
Money market funds 15
 —
 —
 15
 3,832
 —
 —
 3,832
Total assets 
$15
 
$148,586
 
$—
 
$148,601
 
$3,832
 
$166,275
 
$—
 
$170,107
                
Liabilities:                
Contingent consideration 
$—
 
$—
 
$19,430
 
$19,430
 
$—
 
$—
 
$18,234
 
$18,234
 As of October 31, 2018 As of October 31, 2019
 
Quoted Prices
in Active Markets for Identical Assets (Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 Total 
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:        
Deferred compensation plan:        
Corporate-owned life insurance 
$—
 
$123,255
 
$—
 
$123,255
 
$—
 
$151,871
 
$—
 
$151,871
Money market funds 3,560
 —
 —
 3,560
 20
 —
 —
 20
Equity securities 3,179
 —
 —
 3,179
Mutual funds 1,437
 —
 —
 1,437
Other 1,306
 —
 —
 1,306
Total assets 
$9,482
 
$123,255
 
$—
 
$132,737
 
$20
 
$151,871
 
$—
 
$151,891
                
Liabilities:                
Contingent consideration 
$—
 
$—
 
$20,875
 
$20,875
 
$—
 
$—
 
$18,326
 
$18,326


The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have a value of $148.6 million as of July 31, 2019 and $126.8 million as of October 31, 2018.Sheets. The related liabilities of the LCP plan are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have a value of $148.0$168.9 million as of JulyJanuary 31, 20192020 and $125.8$151.1 million as of October 31, 2018.2019.


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Index

The Company previously maintained another non-qualified deferred compensation plan. The assets and liabilities of this plan were each $5.9 million as of October 31, 2018 and classified within other assets and other long-term liabilities, respectively, in the Company's Condensed Consolidated Balance Sheet. During fiscal 2019, the plan's assets were liquidated and distribution payments were made to the remaining plan participants in accordance with their elections.
As part of the agreement to acquire a subsidiary by the FSG in fiscal 2019, the Company may be obligated to pay contingent consideration of $6.4 million in fiscal 2022 should the acquired entity meet a certain earnings objective during the second and third years following the


16
Index

acquisition. As of JulyJanuary 31, 2019,2020, the estimated fair value of the contingent consideration was $2.2$1.2 million.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet a certain earnings objective during the first six years following the acquisition. As of JulyJanuary 31, 2019,2020, the estimated fair value of the contingent consideration was $16.3$17.1 million. The increase in the fair value of the contingent consideration as of July 31, 2019 as compared to the $13.9 million accrued as of October 31, 2018 is principally attributable to a reduction in the discount rate used to present value the potential future obligation and higher than originally estimated earnings of the acquired entity during the earnout period.

As part of the agreement to acquire certain assets of a company by the ETG in fiscal 2016, the Company may be obligated to pay contingent consideration of up to $1.4 million in aggregate during the first three years following the second anniversary of the acquisition should the acquired entity meet certain earnings objectives during this same time period. During fiscal 2019, the Company paid $.3 million of contingent consideration based on the actual financial performance of the acquired entity during the third year following the acquisition. As of July 31, 2019, the estimated fair value of the remaining contingent consideration was $.9 million.    

As part of the agreement to acquire a subsidiary by the FSG in fiscal 2015, the Company paid contingent consideration of €6.1 million, or $6.8 million, during the third quarter of fiscal 2019 based on the actual operating results of the acquired entity during the fourth year following the acquisition. The increase in the amount paid as compared to the €5.1 million, or $5.8 million, accrued as of October 31, 2018 was principally due to the higher actual than anticipated earnings of the acquired entity.

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.analyses. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of HEICO. Changes in either the revenue growth rates, related


26
Index

earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's condensed consolidated statements of operations.

The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of JulyJanuary 31, 20192020 were as follows:
Fiscal 2019 Acquisition Fiscal 2017 Acquisition Fiscal 2016 AcquisitionFiscal 2019 Acquisition Fiscal 2017 Acquisition
Compound annual revenue growth rate range(8%)-9% (5%)-12% 4%-13%(7%)-9% (3%)-10%
Weighted average discount rate5.9% 4.9% 4.2%5.4% 4.3%


Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the ninethree months ended JulyJanuary 31, 20192020 are as follows (in thousands):
  Liabilities
Balance as of October 31, 20182019 
$20,87518,326
Increase in accrued contingent consideration 3,734408
Contingent consideration related to acquisition2,107
PaymentsPayment of contingent consideration (7,178)
Foreign currency transaction adjustments(108500)
Balance as of JulyJanuary 31, 20192020 
$19,430
Included in the accompanying Condensed Consolidated Balance Sheet
under the following captions:
Accrued expenses and other current liabilities
$491
Other long-term liabilities18,939

$19,43018,234


The Company's contingent consideration liability is included in other long-term liabilities in its Condensed Consolidated Balance Sheet and the Company recorded the increaserecords changes in accrued contingent consideration and foreign currency transaction adjustments set forth in the table above within selling, general and administrative expenses in the Company'sits Condensed Consolidated Statement of Operations.



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Index

The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the ninethree months ended JulyJanuary 31, 2019.2020.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of JulyJanuary 31, 20192020 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.


9.     LEASES

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

HEICO’s operating lease ROU assets represent its right to use an underlying asset during the lease term and its operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. HEICO’s operating lease ROU assets are included within other assets and its operating lease liabilities are included within both accrued expenses and other current liabilities and other long-term liabilities in the Company’s Condensed Consolidated Balance Sheet. For additional information on the Company’s finance leases, see Note 5, Long-term Debt, of the Notes to Condensed Consolidated Financial Statements of this quarterly report and Note 5, Long-term Debt, and Note 3, Selected Financial Statement Information - Property, Plant and Equipment, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The following table presents the Company’s operating lease ROU assets and lease liabilities as of January 31, 2020 (in thousands):



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9.     SHAREHOLDERS' EQUITY
January 31, 2020
Right-of-use assets
$62,114
Current lease liabilities
$13,114
Long-term lease liabilities49,797
Total operating lease liabilities
$62,911


The Company’s operating lease expense is recorded as a component of cost of sales and/or selling, general, and administrative expenses in the Company’s Condensed Consolidated Statements of Operations. The following table presents the components of operating lease expense for the three months ended January 31, 2020 (in thousands):    

Three months ended
January 31, 2020
Operating lease expense
$4,260
Variable lease expense615
Total operating lease expense (1)

$4,875
(1)
Excludes short-term lease expense, which is not material.
The following table presents a maturity analysis of the Company's operating lease liabilities as of January 31, 2020 for the remainder of fiscal 2020 and the next five fiscal years and thereafter (in thousands):
Year ending October 31, 
2020
$11,759
202115,776
202213,859
20238,536
20244,755
20253,998
Thereafter18,055
Total minimum lease payments76,738
Less: amount representing interest(13,827)
Present value of minimum lease payments
$62,911

Prior to the adoption of ASC 842, the Company's future minimum lease payments under non-cancelable operating leases on an undiscounted basis as of October 31, 2019 were $15.5 million in fiscal 2020, $15.6 million in fiscal 2021, $13.8 million in fiscal 2022, $8.5 million in fiscal 2023, $4.7 million in fiscal 2024 and $18.8 million thereafter.
    
Consistent with

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The Company does not have any material leases that have been signed but have yet to commence as of January 31, 2020.
The following table presents the Company’s past practice of increasing its ownership in certain non-wholly owned subsidiaries, on June 28, 2019, HEICO Aerospace paid dividends to HEICOweighted average remaining lease term and Lufthansa Technik AG (“LHT”) in proportion to their ownership interest in HEICO Aerospace of 80% and 20%, respectively (the “Transaction”).  LHT received a cash dividend of $91.5 million that was funded principally using proceeds from the Company’s revolving credit facility.  HEICO effectively received as its dividend the 20% noncontrolling interest held by LHT in eightdiscount rate of the Company’s existing subsidiaries within its HEICO Aerospace subsidiary that are principally partoperating leases as of the FSG’s repair and overhaul parts and services product line.  HEICO did not record any gain or loss in connectionJanuary 31, 2020:
January 31, 2020
Weighted average remaining lease term (years)7.1
Weighted average discount rate5.2%


The following table presents supplemental disclosures of cash flow information associated with the Transaction.  Immediately followingCompany's operating leases for the Transaction, HEICO transferred the eight businesses to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO.  LHT remains a 20% owner in HEICO Aerospace, a designer and manufacturer of jet engine and aircraft component replacement parts.three months ended January 31, 2020 (in thousands):
Three months ended
January 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
$4,243
Right-of-use assets obtained in exchange for new lease liabilities
$5,162



10.    NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
 Nine months ended July 31, Three months ended July 31, Three months ended January 31,
 2019 2018 2019 2018 2020 2019
Numerator:            
Net income attributable to HEICO 
$242,212
 
$191,856
 
$81,098
 
$67,086
 
$121,888
 
$79,332
            
Denominator:            
Weighted average common shares outstanding - basic 133,405
 132,422
 133,970
 132,794
 134,523
 132,933
Effect of dilutive stock options 3,868
 4,148
 3,664
 3,939
 2,898
 4,045
Weighted average common shares outstanding - diluted 137,273
 136,570
 137,634
 136,733
 137,421
 136,978
            
Net income per share attributable to HEICO shareholders:            
Basic 
$1.82
 
$1.45
 
$.61
 
$.51
 
$.91
 
$.60
Diluted 
$1.76
 
$1.40
 
$.59
 
$.49
 
$.89
 
$.58
            
Anti-dilutive stock options excluded 439
 547
 88
 410
 117
 760





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11.    OPERATING SEGMENTS

Information on the Company’s two operating segments, the FSG and the ETG, for the nine and three months ended JulyJanuary 31, 20192020 and 2018,2019, 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  FSG ETG 
Nine months ended July 31, 2019:        
Three months ended January 31, 2020:        
Net sales 
$915,480
 
$615,009
 
($16,371) 
$1,514,118
 
$301,067
 
$208,411
 
($3,203) 
$506,275
Depreciation 10,225
 8,117
 754
 19,096
 3,617
 2,928
 255
 6,800
Amortization 14,714
 27,138
 738
 42,590
 4,859
 9,678
 246
 14,783
Operating income 179,843
 181,160
 (24,459) 336,544
 62,045
 57,491
 (8,546) 110,990
Capital expenditures 12,600
 9,008
 63
 21,671
 4,118
 2,727
 5
 6,850
                
Nine months ended July 31, 2018:        
Three months ended January 31, 2019:        
Net sales 
$807,683
 
$510,750
 
($17,596) 
$1,300,837
 
$287,213
 
$184,429
 
($5,496) 
$466,146
Depreciation 9,819
 6,841
 439
 17,099
 3,355
 2,606
 251
 6,212
Amortization 14,729
 24,858
 837
 40,424
 4,803
 8,776
 246
 13,825
Operating income 152,069
 147,371
 (26,892) 272,548
 52,880
 51,602
 (6,535) 97,947
Capital expenditures 9,710
 6,922
 19,266
 35,898
 2,849
 3,058
 —
 5,907
                
Three months ended July 31, 2019:        
Net sales 
$320,016
 
$216,129
 
($3,821) 
$532,324
Depreciation 3,467
 2,722
 251
 6,440
Amortization 4,991
 9,461
 246
 14,698
Operating income 64,797
 62,206
 (7,589) 119,414
Capital expenditures 6,024
 2,996
 55
 9,075
        
Three months ended July 31, 2018:        
Net sales 
$285,126
 
$186,370
 
($5,671) 
$465,825
Depreciation 3,237
 2,257
 253
 5,747
Amortization 4,850
 8,591
 246
 13,687
Operating income 54,712
 56,021
 (9,310) 101,423
Capital expenditures 3,504
 2,937
 —
 6,441


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


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Total assets by operating segment as of July 31, 2019 and October 31, 2018 are as follows (in thousands):
      Other,
Primarily Corporate		 Consolidated
Totals
  Segment  
  FSG ETG  
Total assets as of July 31, 2019 
$1,140,187
 
$1,646,623
 
$173,478
 
$2,960,288
Total assets as of October 31, 2018 1,093,858
 1,391,997
 167,541
 2,653,396
      Other,
Primarily Corporate		 Consolidated
Totals
  Segment  
  FSG ETG  
Total assets as of January 31, 2020 
$1,182,947
 
$1,712,901
 
$201,273
 
$3,097,121
Total assets as of October 31, 2019 1,149,737
 1,643,032
 176,442
 2,969,211





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12.     COMMITMENTS AND CONTINGENCIES
Guarantees
As of JulyJanuary 31, 2019,2020, the Company has arranged for standby letters of credit aggregating $3.7$4.8 million, which are supported by its revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries.
Product Warranty
Changes in the Company’s product warranty liability for the ninethree months ended JulyJanuary 31, 20192020 and 2018,2019, respectively, are as follows (in thousands):
 Nine months ended July 31, Three months ended January 31,
 2019 2018 2020 2019
Balances as of beginning of fiscal year 
$3,306
 
$2,921
 
$2,810
 
$3,306
Accruals for warranties 1,652
 2,132
 1,007
 694
Acquired warranty liabilities —
 300
 50
 —
Warranty claims settled (1,974) (2,084) (459) (829)
Balances as of July 31 
$2,984
 
$3,269
Balances as of January 31 
$3,408
 
$3,171


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




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

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

Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2018.2019. There have been no material changes to our critical accounting policies during the ninethree months ended JulyJanuary 31, 2019 other than the adoption of Accounting Standards Update 2014-09, which, as amended, was codified as Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers" (“ASC 606”). ASC 606 principally impacts the timing of revenue recognition for two types of our customer contracts. See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, and Note 6, Revenue, of the Notes to Condensed Consolidated Financial Statements for additional information.2020.

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

Our results of operations for the nine and three months ended JulyJanuary 31, 20192020 have been affected by the fiscal 2019 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report.

our Annual Report on Form 10-K for the year ended October 31, 2019.





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Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
 Nine months ended July 31, Three months ended July 31, Three months ended January 31,
 2019 2018 2019 2018 2020 2019
Net sales 
$1,514,118
 
$1,300,837
 
$532,324
 
$465,825
 
$506,275
 
$466,146
Cost of sales 909,663
 796,580
 319,493
 284,216
 308,228
 283,909
Selling, general and administrative expenses 267,911
 231,709
 93,417
 80,186
 87,057
 84,290
Total operating costs and expenses 1,177,574
 1,028,289
 412,910
 364,402
 395,285
 368,199
Operating income 
$336,544
 
$272,548
 
$119,414
 
$101,423
 
$110,990
 
$97,947
            
Net sales by segment:            
Flight Support Group 
$915,480
 
$807,683
 
$320,016
 
$285,126
 
$301,067
 
$287,213
Electronic Technologies Group 615,009
 510,750
 216,129
 186,370
 208,411
 184,429
Intersegment sales (16,371) (17,596) (3,821) (5,671) (3,203) (5,496)
 
$1,514,118
 
$1,300,837
 
$532,324
 
$465,825
 
$506,275
 
$466,146
            
Operating income by segment:            
Flight Support Group 
$179,843
 
$152,069
 
$64,797
 
$54,712
 
$62,045
 
$52,880
Electronic Technologies Group 181,160
 147,371
 62,206
 56,021
 57,491
 51,602
Other, primarily corporate (24,459) (26,892) (7,589) (9,310) (8,546) (6,535)
 
$336,544
 
$272,548
 
$119,414
 
$101,423
 
$110,990
 
$97,947
            
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 39.9% 38.8% 40.0% 39.0% 39.1% 39.1%
Selling, general and administrative expenses 17.7% 17.8% 17.5% 17.2% 17.2% 18.1%
Operating income 22.2% 21.0% 22.4% 21.8% 21.9% 21.0%
Interest expense 1.1% 1.1% 1.0% 1.1% (.8%) (1.2%)
Other income (expense) .2% —% .1% —% —% (.1%)
Income tax expense 3.7% 3.5% 4.7% 4.8%
Income tax (benefit) expense (4.5%) .9%
Net income attributable to noncontrolling interests 1.6% 1.5% 1.5% 1.5% 1.6% 1.9%
Net income attributable to HEICO 16.0% 14.7% 15.2% 14.4% 24.1% 17.0%



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Comparison of First Nine MonthsQuarter of Fiscal 20192020 to First Nine MonthsQuarter of Fiscal 20182019

Net Sales

Our consolidated net sales in the first nine monthsquarter of fiscal 20192020 increased by 16%9% to a record $1,514.1$506.3 million, up from net sales of $1,300.8$466.1 million in the first nine monthsquarter of fiscal 2018.2019. The increase in consolidated net sales principally reflects an increase of $104.3$24.0 million (a 20%13% increase) to a record $615.0$208.4 million in net sales within the ETG andas well as an increase of $107.8$13.9 million (a 13%5% increase) to a record $915.5$301.1 million in net sales within the FSG. The net sales increase in the ETG reflects net sales of $14.9 million contributed by our fiscal 2019 and 2020 acquisitions as well as organic growth of 13% and net sales of $42.4 million contributed by fiscal 2019 and 2018 acquisitions.6%. The ETG's organic growth is mainly attributable to increased demand for our defense aerospace andproducts resulting in a net sales increase of $19.3 million partially offset by lower demand for our space products resulting in a net sales increasesdecrease of $45.8 million, $15.0 million and $4.7 million, respectively.$7.5 million. The net sales increase in the FSG principally reflects organic growth of 13%4%. The FSG's organic growth is mainly attributable to increased demand and new product offerings within our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines resulting in net sales increases of $76.1$8.8 million, $2.1 million and $28.0$1.5 million, respectively. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the first nine monthsquarter of fiscal 2019.2020.

Gross Profit and Operating Expenses

Our consolidated gross profit margin increased to 39.9%was 39.1% in both the first nine monthsquarter of fiscal 2020 and 2019 up from 38.8% in the first nine months of fiscal 2018, principally reflecting an increase of 1.3% and .8%1.1% in the FSG's gross profit margin offset by a 1.5% decrease in the ETG's and FSG's gross profit margins, respectively. The increase in the ETG’s gross profit margin is principally attributable to increased net sales and a more favorable product mix for certain defense and aerospace products.margin. The increase in the FSG's gross profit margin is principally attributable toreflects a more favorable product mix within our specialtyall of its product lines. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales of certain space products product line.partially offset by increased net sales of certain defense products. Total new product research and development expenses included within our consolidated cost of sales were $48.7$17.1 million in the first nine monthsquarter of fiscal 20192020 compared to $40.7$15.2 million in the first nine monthsquarter of fiscal 2018.2019.

Our consolidated selling, general and administrative (“("SG&A”&A") expenses were $267.9$87.1 million and $231.7$84.3 million in the first nine monthsquarter of fiscal 20192020 and 2018,2019, respectively. The increase in consolidated SG&A expenses principally reflects $13.1$4.2 million attributable to the fiscal 2019 and 20182020 acquisitions $8.6partially offset by $1.5 million of higher performance-based compensation expense, $7.2 million attributablelower expenses related to changes in the estimated fair value of accrued contingent consideration.

Our consolidated SG&A expenses as a percentage of net sales decreased to 17.2% in the first quarter of fiscal 2020, down from 18.1% in the first quarter of fiscal 2019. The decrease in consolidated SG&A expenses as a percentage of net sales is mainly due to a .3% impact from the previously mentioned lower expenses related to changes in the estimated fair value of accrued contingent consideration and $2.1 million of higher acquisition-related costs. Our consolidated SG&A expensesas well as a .3% impact from a decrease in performance-based compensation expense as a percentage of net sales decreased slightly to 17.7% inand efficiencies realized from the first nine months of fiscal 2019 from 17.8% in the first nine months of fiscal 2018.net sales growth.



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Index

Operating Income

Our consolidated operating income increased by 23%13% to a record $336.5$111.0 million in the first nine monthsquarter of fiscal 2019,2020, up from $272.5$97.9 million in the first nine monthsquarter of fiscal 2018.2019. The increase in consolidated operating income principally reflects a $33.8$9.2 million increase (a


33
Index

23% 17% increase) to a record $181.2$62.0 million in operating income of the ETGFSG and a $27.8$5.9 million increase (an 18%11% increase) to a record $179.8$57.5 million in operating income of the FSG.ETG. The increase in operating income of the ETG and FSG is principally attributable toreflects the previously mentioned improved gross profit margin and net sales growth and improved gross profit margins. Further, the operating income of the ETG in the first nine months of fiscal 2019 reflects $6.1as well as a $1.2 million of higher performance-based compensation expense, $2.1 million of expense attributablefavorable impact from lower expenses related to changes in the estimated fair value of accrued contingent consideration and $1.8 millionconsideration. The increase in operating income of higher acquisition-related costs.the ETG principally reflects the previously mentioned net sales growth partially offset by the previously mentioned lower gross profit margin.

Our consolidated operating income as a percentage of net sales improved to 22.2%21.9% in the first nine monthsquarter of fiscal 2019,2020, up from 21.0% in the first nine monthsquarter of fiscal 2018.2019. The increase principally reflects an increase in the FSG'sFSG’s operating income as a percentage of net sales to 19.6%20.6% in the first nine monthsquarter of fiscal 2020, up from 18.4% in the first quarter of fiscal 2019 up from 18.8% in the first nine months of fiscal 2018 and in increasepartially offset by a decrease in the ETG’s operating income as a percentage of net sales to 29.5%27.6% in the first nine monthsquarter of fiscal 2019, up from 28.9%2020 as compared to 28.0% in the first nine monthsquarter of fiscal 2018.2019. The increase in the FSG's and ETG'sFSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin. Further,margin and a 1.1% decrease in SG&A expenses as a percentage of net sales mainly from the previously mentioned efficiencies realized from the net sales growth and lower expenses related to changes in the estimated fair value of accrued contingent consideration. The decrease in the ETG's operating income as a percentage of net sales inprincipally reflects the first nine months of fiscal 2019 reflectspreviously mentioned lower gross profit margin partially offset by a .7% increase1.1% decrease in SG&A expenses as a percentage of net sales inclusive of the previously mentioned highermainly from a decrease in performance-based compensation expense changes inand efficiencies realized from the estimated fair value of accrued contingent consideration and higher acquisition-related costs.net sales growth.

Interest Expense

Interest expense increaseddecreased to $16.5$4.3 million in the first nine monthsquarter of fiscal 2019, up2020, down from $14.8$5.5 million in the first nine monthsquarter of fiscal 2018.2019. The increasedecrease was principally due to higher interest rates partially offset by a lower weighted average balanceinterest rate on borrowings outstanding under our revolving credit facility.

Other Income (Expense)

Other income (expense) in the first nine monthsquarter of fiscal 20192020 and 20182019 was not material.

Income Tax (Benefit) Expense

In December 2017, the United States ("U.S.") government enacted comprehensiveHEICO incurred an income tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act contains significant changes to previous tax law, somebenefit of which became immediately effective in fiscal 2018 including, among other things, a reduction in the U.S. federal statutory tax rate from 35% to 21% (effective January 1, 2018) and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of our foreign subsidiaries. Certain other provisions of the Tax Act became 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.


34
Index

Our effective tax rate$22.9 million in the first nine monthsquarter of fiscal 2019 was 17.1% as2020 compared to 17.9%income tax expense of $4.1 million in the first nine monthsquarter of fiscal 2018. The decrease is mainly attributable to the reduction in the federal2019. We recognized a discrete tax ratebenefit from a blended rate of 23.3% in fiscal 2018 to 21% in fiscal 2019, partially offset by the net effect of the provisions of the Tax Act that became effective for HEICO in fiscal 2019.
Income tax expensestock option exercises in both the first nine monthsquarter of fiscal 2020 and 2019 of $47.6 million and fiscal 2018 was favorably impacted as a result of discrete tax benefits.$16.6 million, respectively. The tax$31.0 million larger benefit from stock option exercises recognized in the first nine monthsquarter of fiscal 2019 increased by $14.5 million compared to2020 was the first nine monthsresult of fiscal 2018. Duringmore


26
Index

stock options exercised and the first nine months of fiscal 2018, we recognized a tax benefit fromstrong appreciation in HEICO's stock price during the remeasurement of our U.S. federal net deferred tax liabilities that was partially offset by a tax expense related to a one-time transition tax on the unremitted earnings of our foreign subsidiaries that resulted in an $11.9 million net discrete tax benefit.optionees' holding periods.     

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG ("LHT") in HEICO Aerospace Holdings Corp. ("HEICO Aerospace") and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $25.0$7.9 million in the first nine monthsquarter of fiscal 20192020 as compared to $19.7$8.7 million in the first nine monthsquarter of fiscal 2018.2019. The increasedecrease in net income attributable to noncontrolling interests in the first nine monthsquarter of fiscal 20192020 principally reflects the impact of a dividend paid by HEICO Aerospace in June 2019 that effectively resulted in the transfer of the 20% noncontrolling interest held by LHT in eight of our existing subsidiaries within HEICO Aerospace that are principally part of the FSG's repair and overhaul parts and services product line to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO, partially offset by 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 $242.2$121.9 million, or $1.76$.89 per diluted share, in the first nine monthsquarter of fiscal 2019,2020, up from $191.9$79.3 million, or $1.40$.58 per diluted share, in the first nine monthsquarter of fiscal 20182019 principally reflecting the previously mentioned income tax benefit and increased net sales and operating income.

Comparison of Third Quarter of Fiscal 2019 to Third Quarter of Fiscal 2018

Net Sales

Our consolidated net sales in the third quarter of fiscal 2019 increased by 14% to a record $532.3 million, up from net sales of $465.8 million in the third quarter of fiscal 2018. The increase in consolidated net sales principally reflects an increase of $34.9 million (a 12% increase) to a record $320.0 million in net sales within the FSG and an increase of $29.8 million (a 16% increase) to a record $216.1 million in net sales within the ETG. The net sales increase in the FSG principally reflects organic growth of 12%. The FSG's organic growth is mainly attributable to increased demand and new product offerings within our aftermarket replacement parts and specialty products product lines resulting in net sales increases of $23.3 million and $9.1 million, respectively. The net sales increase in the ETG reflects net sales of $19.1 million


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Index

contributed by fiscal 2019 acquisitions and organic growth of 7%. The ETG's organic growth is mainly attributable to increased demand for our defense and aerospace products resulting in net sales increases of $9.7 million and $6.0 million, respectively. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the third quarter of fiscal 2019.

Gross Profit and Operating Expenses

Our consolidated gross profit margin increased to 40.0% in the third quarter of fiscal 2019, up from 39.0% in the third quarter of fiscal 2018, principally reflecting an increase of 1.1% and .8% in the FSG's and ETG's gross profit margin, respectively. The increase in the FSG's gross profit margin is principally attributable to higher net sales and a more favorable product mix within our aftermarket replacement parts product line. The increase in the ETG’s gross profit margin is principally attributable to increased net sales and a more favorable product mix for certain aerospace products. Total new product research and development expenses included within our consolidated cost of sales were $16.6 million in the third quarter of fiscal 2019 compared to $14.0 million in the third quarter of fiscal 2018.
Our consolidated SG&A expenses were $93.4 million and $80.2 million in the third quarter of fiscal 2019 and 2018, respectively. The increase in consolidated SG&A expenses principally reflects $5.6 million attributable to the fiscal 2019 and 2018 acquisitions, $1.6 million of higher acquisition-related costs, $1.5 million of higher performance-based compensation expense and $1.4 million attributable to changes in the estimated fair value of accrued contingent consideration.

Our consolidated SG&A expenses as a percentage of net sales were 17.5% and 17.2% in the third quarter of fiscal 2019 and 2018, respectively. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a .3% impact from the previously mentioned higher acquisition-related costs.
Operating Income

Our consolidated operating income increased by 18% to a record $119.4 million in the third quarter of fiscal 2019, up from $101.4 million in the third quarter of fiscal 2018. The increase in consolidated operating income principally reflects a $10.1 million increase (an 18% increase) to a record $64.8 million in operating income of the FSG and a $6.2 million increase (an 11% increase) to $62.2 million in operating income of the ETG. The increase in operating income of the FSG and ETG is principally attributable to the previously mentioned net sales growth and improved gross profit margins. Further, the ETG's operating income in the third quarter of fiscal 2019 reflects $1.7 million of higher performance-based compensation expense and $1.6 million of higher acquisition-related costs.

Our consolidated operating income as a percentage of net sales increased to 22.4% in the third quarter of fiscal 2019, up from 21.8% in the third quarter of fiscal 2018. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to


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20.2% in the third quarter of fiscal 2019, up from 19.2% in the third quarter of fiscal 2018 partially offset by a decrease in the ETG's operating income as a percentage of net sales to 28.8% in the third quarter of fiscal 2019 as compared to 30.1% in the third quarter of fiscal 2018. The increase in the FSG's operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margins. The decrease in the ETG's operating income as a percentage of net sales reflects a 2.1% impact from an increase in SG&A expenses as a percentage of net sales, inclusive of higher acquisition-related costs and performance-based compensation expense, partially offset by the previously mentioned improved gross profit margin.

Interest Expense

Interest expense increased to $5.5 million in the third quarter of fiscal 2019, up from $5.2 million in the third quarter of fiscal 2018. The increase was principally due to higher interest rates partially offset by a lower weighted average balance outstanding under our revolving credit facility.
Other Income (Expense)

Other income (expense) in the third quarter of fiscal 2019 and 2018 was not material.

Income Tax Expense

Our effective tax rate in the third quarter of fiscal 2019 was 22.0% as compared to 23.1% in the third quarter of fiscal 2018. The decrease is mainly attributable to the reduction in the federal tax rate from a blended rate of 23.3% in fiscal 2018 to 21% in fiscal 2019, partially offset by the net effect of the provisions of the Tax Act that became effective for HEICO in fiscal 2019.

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 $8.0 million in the third quarter of fiscal 2019 as compared to $6.8 million in the third quarter of fiscal 2018. The increase in net income attributable to noncontrolling interests in the third quarter of fiscal 2019 principally reflects 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 $81.1 million, or $.59 per diluted share, in the third quarter of fiscal 2019, up from $67.1 million, or $.49 per diluted share, in the third quarter of fiscal 2018 principally reflecting the previously mentioned increased net sales and operating income.


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Outlook

As we look ahead to the remainder of fiscal 2019,2020, we anticipate net sales growth within the FSG's commercial aviation and defense product lines. We also expect growth within the ETG, principally driven by demand for the majority of our products. Also, we plan to continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility. Based on our current economic visibility, we noware continuing to estimate our consolidated fiscal 20192020 year-over-year growth in net sales to be 14%6% - 15%8% and increasing our estimate of fiscal 2020 year-over-year growth in net income to be 23%14% - 24%15%, up from our prior growth estimates in net salesestimate of 12%13% - 13%14%. This outlook excludes the impact of additional acquired businesses, if any. Additionally, this outlook excludes any potential impact from the recent coronavirus outbreak as the impact to our businesses is uncertain and in net income of 17% - 18%.difficult to predict.



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Liquidity and Capital Resources

Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. CapitalWe continue to anticipate fiscal 2020 capital expenditures in fiscal 2019 are now anticipated to be approximately $31$42 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of JulyJanuary 31, 2019,2020, we were in compliance with all such covenants. As of JulyJanuary 31, 2019,2020, our total debt to shareholders’ equity ratio was 39.0%31.4%.

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 $313.4$81.1 million in the first nine monthsquarter of fiscal 20192020 and consisted primarily of net income from consolidated operations of $267.2$129.8 million, depreciation and amortization expense of $61.7$21.6 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan ("LCP") of $11.3 million (principally participant deferrals and employer contributions), $7.7$2.6 million in share-based compensation expense (a non-cash item), and $7.1$2.6 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $38.0$62.1 million increase in working capital.capital and a $25.7 million deferred income tax benefit. The increase in working capital is inclusive of a $27.0$48.3 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2019 accrued performance-based compensation, a $20.4 million increase in inventories to support the growth of our businesses and backlog, and a $14.8 million increase in accounts receivable reflecting the strong organic net sales growth in each of our operating segments and an $11.8$10.7 million decrease in trade accounts payable reflectingpartially offset by a $23.7 million decrease in accounts receivable resulting from the timing of payments partially offset by an $8.8 million increase in accrued expenses and other current liabilities.collections, respectively. The deferred income tax benefit principally reflects the previously mentioned income tax benefit from stock option exercises, which the Company expects to realize during the remainder of fiscal 2020.

Net cash provided by operating activities increased by $98.6$31.6 million in the first nine monthsquarter of fiscal 20192020 from $214.8$49.6 million in the first nine monthsquarter of fiscal 2018.2019. The increase is principally attributable to a $55.6$41.8 million increase in net income from consolidated operations and a $23.6$15.9 million decrease in net working capital partially offset by a $10.2$29.5 million decreaseincrease in deferred income tax benefits. The decrease in net working capital primarily resulted from the timing associated with the collection of accounts receivable and payment of trade accounts payable and accrued expenses and other current liabilities. The increase in deferred income tax benefits is attributable to the previously mentioned income tax benefit from stock option exercises.


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benefits, and a $7.5 million increase in accrued contingent consideration. The decrease in net working capital mainly resulted from an increase in income taxes payable and decreases in inventories and contract assets, partially offset by a decrease in trade accounts payable. The decrease in deferred income tax benefits is principally attributable to the remeasurement of our U.S. federal net deferred tax liabilities under the Tax Act in the first nine months of fiscal 2018.
Investing Activities

Net cash used in investing activities totaled $267.0$63.6 million in the first nine monthsquarter of fiscal 20192020 and related primarily to acquisitions of $235.2$45.3 million (net of cash acquired), capital expenditures of $21.7 million and investments related to the HEICO LCP of $10.8$11.8 million and capital expenditures of $6.9 million. Further details regarding our fiscal 20192020 acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements.

Financing Activities

Net cash used in financing activities in the first nine monthsquarter of fiscal 20192020 totaled $47.2$10.2 million. During the first nine monthsquarter of fiscal 2019,2020, we made $180.0$38.0 million in payments on our revolving credit facility, paid $104.7$10.8 million in cash dividends on our common stock, made $4.9 million of distributions to noncontrolling interests and redeemed common stock related to stock option exercises aggregating $35.6 million and paid $18.7 million in cash dividends on our common stock.$2.6 million. Additionally, we borrowed $288.0$45.0 million under our revolving credit facility to fund certain of our fiscal 20192020 acquisitions and received $8.3$1.5 million in proceeds from stock option exercises in the first nine months of fiscal 2019.exercises.

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, 2018.2019.



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Off-Balance Sheet Arrangements

Guarantees

As of JulyJanuary 31, 2019,2020, we have arranged for standby letters of credit aggregating $3.7$4.8 million, which are supported by our revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of our subsidiaries.

New Accounting Pronouncements

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



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Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: 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


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our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue.defense related revenue; and any impact from the recent coronavirus outbreak. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2018.2019.


Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

ThereDuring the first quarter ended January 31, 2020, we adopted Accounting Standards Update 2016-02, which, as amended, was codified as Accounting Standards Codification (“ASC”) Topic 842, "Leases" (“ASC 842”). See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, and Note 9, Leases, of the Notes to Condensed Consolidated Financial Statements for additional information. As a result of adopting ASC 842, we have been noimplemented certain changes into our internal controlcontrols over financial reporting duringto support the third quarter ended July 31, 2019 that have materially affected, or are reasonably likelyrecognition and disclosure requirements under ASC 842, including changes to materially affect, HEICO'sour accounting policies and internal control over financial reporting.procedures.




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PART II. OTHER INFORMATION
Item 6.    EXHIBITS
Exhibit Description
31.1 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. *
   
31.2 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. *
   
32.1 
Section 1350 Certification of Chief Executive Officer. **
   
32.2 
Section 1350 Certification of Chief Financial Officer. **
   
101.INS The
Inline XBRL Instance Document Does Not Appear- The instance document does not appear in the Interactive Data File Becausebecause its XBRL Tags Are Embedded Withintags are embedded within the Inline XBRL Document. *

   
101.SCH Inline XBRL Taxonomy Extension Schema Document. *
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. *
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. *
   
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. *
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. *
   
104 Cover Page Interactive Data File (XBRL Tags Are Embedded Within the Inline(formatted as inline XBRL Document)and contained in Exhibit 101). *
  
*Filed herewith.
**    Furnished herewith.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  HEICO CORPORATION
    
Date:August 29, 2019February 27, 2020By:/s/ CARLOS L. MACAU, JR.
   
Carlos L. Macau, Jr.
Executive Vice President - Chief Financial Officer and Treasurer
(Principal Financial Officer)
    
  By:/s/ STEVEN M. WALKER
   
Steven M. Walker
Chief Accounting Officer
and Assistant Treasurer
(Principal Accounting Officer)


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