UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the quarterly period ended January 31, 20182019 |
| | |
| | OR |
| | |
¨ | | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the transition period from ______ to _______ |
Commission File Number: 001-04604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
Florida | | 65-0341002 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
3000 Taft Street, Hollywood, Florida | | 33021 |
(Address of principal executive offices) | | (Zip Code) |
(954) 987-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the registrant’s classes of common stock as of February 27, 201826, 2019 is as follows:
|
| | | |
Common Stock, $.01 par value | 42,227,72153,362,618 |
| shares |
Class A Common Stock, $.01 par value | 63,477,94179,604,916 |
| shares |
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
|
| | | |
| | | Page |
Part I. | Financial Information | |
| | | |
| Item 1. | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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| | | |
| Item 2. | | |
| | | |
| Item 3. | | |
| | | |
| Item 4. | | |
| | | |
Part II. | Other Information | |
| | | |
| Item 6. | | |
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| | |
PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data) | | | | January 31, 2018 | | October 31, 2017 | | January 31, 2019 | | October 31, 2018 |
ASSETS | Current assets: | | | | | | | | |
Cash and cash equivalents | |
| $65,688 |
| |
| $52,066 |
| |
| $57,856 |
| |
| $59,599 |
|
Accounts receivable, net | | 210,278 |
| | 222,456 |
| | 237,800 |
| | 237,286 |
|
Contract assets | | | 47,093 |
| | 14,183 |
|
Inventories, net | | 367,395 |
| | 343,628 |
| | 406,348 |
| | 401,553 |
|
Prepaid expenses and other current assets | | 19,071 |
| | 13,742 |
| | 30,328 |
| | 21,187 |
|
Total current assets | | 662,432 |
| | 631,892 |
| | 779,425 |
| | 733,808 |
|
| | | | | | | | |
Property, plant and equipment, net | | 133,115 |
| | 129,883 |
| | 169,279 |
| | 154,739 |
|
Goodwill | | 1,090,864 |
| | 1,081,306 |
| | 1,170,401 |
| | 1,114,832 |
|
Intangible assets, net | | 530,987 |
| | 538,081 |
| | 529,191 |
| | 506,360 |
|
Other assets | | 153,044 |
| | 131,269 |
| | 148,718 |
| | 143,657 |
|
Total assets | |
| $2,570,442 |
| |
| $2,512,431 |
| |
| $2,797,014 |
| |
| $2,653,396 |
|
| | | | | | | | |
LIABILITIES AND EQUITY | Current liabilities: | | | | | | | | |
Current maturities of long-term debt | |
| $485 |
| |
| $451 |
| |
| $865 |
| |
| $859 |
|
Trade accounts payable | | 81,129 |
| | 89,724 |
| | 89,545 |
| | 107,219 |
|
Accrued expenses and other current liabilities | | 132,570 |
| | 147,612 |
| | 133,705 |
| | 171,514 |
|
Income taxes payable | | 14,872 |
| | 11,650 |
| | — |
| | 2,837 |
|
Total current liabilities | | 229,056 |
| | 249,437 |
| | 224,115 |
| | 282,429 |
|
| | | | | | | | |
Long-term debt, net of current maturities | | 668,527 |
| | 673,528 |
| | 607,656 |
| | 531,611 |
|
Deferred income taxes | | 42,526 |
| | 59,026 |
| | 59,133 |
| | 46,644 |
|
Other long-term liabilities | | 167,964 |
| | 151,025 |
| | 165,360 |
| | 157,658 |
|
Total liabilities | | 1,108,073 |
| | 1,133,016 |
| | 1,056,264 |
| | 1,018,342 |
|
| | | | | | | | |
Commitments and contingencies (Note 10) | |
| |
| |
Commitments and contingencies (Note 11) | | |
| |
|
| | | | | | | | |
Redeemable noncontrolling interests (Note 3) | | 132,355 |
| | 131,123 |
| | 138,995 |
| | 132,046 |
|
| | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Common Stock, $.01 par value per share; 75,000 shares authorized; 42,228 and 42,221 shares issued and outstanding | | 422 |
| | 338 |
| |
Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 63,455 and 63,381 shares issued and outstanding | | 635 |
| | 507 |
| |
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued | | | — |
| | — |
|
Common Stock, $.01 par value per share; 150,000 shares authorized; 53,363 and 53,355 shares issued and outstanding | | | 534 |
| | 534 |
|
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 79,593 and 79,576 shares issued and outstanding | | | 796 |
| | 796 |
|
Capital in excess of par value | | 329,908 |
| | 326,544 |
| | 324,395 |
| | 320,994 |
|
Deferred compensation obligation | | 3,118 |
| | 3,118 |
| | 4,043 |
| | 3,928 |
|
HEICO stock held by irrevocable trust | | (3,118 | ) | | (3,118 | ) | | (4,043 | ) | | (3,928 | ) |
Accumulated other comprehensive income (loss) | | 4,417 |
| | (10,556 | ) | |
Accumulated other comprehensive loss | | | (11,069 | ) | | (15,256 | ) |
Retained earnings | | 904,030 |
| | 844,247 |
| | 1,174,811 |
| | 1,091,183 |
|
Total HEICO shareholders’ equity | | 1,239,412 |
| | 1,161,080 |
| | 1,489,467 |
| | 1,398,251 |
|
Noncontrolling interests | | 90,602 |
| | 87,212 |
| | 112,288 |
| | 104,757 |
|
Total shareholders’ equity | | 1,330,014 |
| | 1,248,292 |
| | 1,601,755 |
| | 1,503,008 |
|
Total liabilities and equity | |
| $2,570,442 |
| |
| $2,512,431 |
| |
| $2,797,014 |
| |
| $2,653,396 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
| | | | Three months ended January 31, | | Three months ended January 31, |
| | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | |
Net sales | |
| $404,410 |
| |
| $343,432 |
| |
| $466,146 |
| |
| $404,410 |
|
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Cost of sales | | 249,619 |
| | 218,015 |
| | 283,909 |
| | 249,619 |
|
Selling, general and administrative expenses | | 75,231 |
| | 60,867 |
| | 84,290 |
| | 75,231 |
|
| | | | | | | | |
Total operating costs and expenses | | 324,850 |
| | 278,882 |
| | 368,199 |
| | 324,850 |
|
| | | | | | | | |
Operating income | | 79,560 |
| | 64,550 |
| | 97,947 |
| | 79,560 |
|
| | | | | | | | |
Interest expense | | (4,725 | ) | | (1,969 | ) | | (5,489 | ) | | (4,725 | ) |
Other income | | 360 |
| | 484 |
| |
Other (expense) income | | | (332 | ) | | 360 |
|
| | | | | | | | |
Income before income taxes and noncontrolling interests | | 75,195 |
| | 63,065 |
| | 92,126 |
| | 75,195 |
|
| | | | | | | | |
Income tax expense | | 3,500 |
| | 16,800 |
| | 4,100 |
| | 3,500 |
|
| | | | | | | | |
Net income from consolidated operations | | 71,695 |
| | 46,265 |
| | 88,026 |
| | 71,695 |
|
| | | | | | | | |
Less: Net income attributable to noncontrolling interests | | 6,543 |
| | 5,338 |
| | 8,694 |
| | 6,543 |
|
| | | | | | | | |
Net income attributable to HEICO | |
| $65,152 |
| |
| $40,927 |
| |
| $79,332 |
| |
| $65,152 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $.62 |
| |
| $.39 |
| |
| $.60 |
| |
| $.49 |
|
Diluted | |
| $.60 |
| |
| $.38 |
| |
| $.58 |
| |
| $.48 |
|
| | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | |
Basic | | 105,639 |
| | 105,178 |
| | 132,933 |
| | 132,048 |
|
Diluted | | 109,112 |
| | 108,005 |
| | 136,978 |
| | 136,390 |
|
| | | | | | | | |
Cash dividends per share | |
| $.070 |
| |
| $.058 |
| |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
| | | | Three months ended January 31, | | Three months ended January 31, |
| | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | |
Net income from consolidated operations | |
| $71,695 |
| |
| $46,265 |
| |
| $88,026 |
| |
| $71,695 |
|
Other comprehensive income (loss): | | | | | |
Other comprehensive income: | | | | | |
Foreign currency translation adjustments | | 15,963 |
| | (1,524 | ) | | 4,374 |
| | 15,963 |
|
Amortization of unrealized loss on defined benefit pension plan, net of tax | | 4 |
| | 7 |
| | 6 |
| | 4 |
|
Total other comprehensive income (loss) | | 15,967 |
| | (1,517 | ) | |
Total other comprehensive income | | | 4,380 |
| | 15,967 |
|
Comprehensive income from consolidated operations | | 87,662 |
| | 44,748 |
| | 92,406 |
| | 87,662 |
|
Net income attributable to noncontrolling interests | | 6,543 |
| | 5,338 |
| | 8,694 |
| | 6,543 |
|
Foreign currency translation adjustments attributable to noncontrolling interests | | 994 |
| | (296 | ) | | 193 |
| | 994 |
|
Comprehensive income attributable to noncontrolling interests | | 7,537 |
| | 5,042 |
| | 8,887 |
| | 7,537 |
|
Comprehensive income attributable to HEICO | |
| $80,125 |
| |
| $39,706 |
| |
| $83,519 |
| |
| $80,125 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
(in thousands, except per share data)
| | | | | HEICO Shareholders' Equity | | | | | | | HEICO Shareholders' Equity | | | | |
| Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity | Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 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 |
| |
| $1,503,008 |
|
Cumulative effect from adoption of ASC 606 (see Note 1) | | 819 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,373 |
| | 326 |
| | 13,699 |
|
Comprehensive income | 3,952 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,973 |
| | 65,152 |
| | 3,585 |
| | 83,710 |
| 3,639 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,187 |
| | 79,332 |
| | 5,248 |
| | 88,767 |
|
Cash dividends ($.070 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,395 | ) | | — |
| | (7,395 | ) | |
Five-for-four common stock split | — |
| | 84 |
| | 127 |
| | (211 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Cash dividends ($.07 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,305 | ) | | — |
| | (9,305 | ) |
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | — |
| | — |
| | 980 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 980 |
| — |
| | — |
| | — |
| | 1,046 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,046 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 2,165 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,165 |
| — |
| | — |
| | — |
| | 2,439 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,439 |
|
Proceeds from stock option exercises | — |
| | — |
| | 1 |
| | 1,424 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,425 |
| — |
| | — |
| | — |
| | 66 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 66 |
|
Redemptions of common stock related to share-based compensation | | — |
| | — |
| | — |
| | (150 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (150 | ) |
Noncontrolling interests assumed related to acquisitions | | 5,116 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,355 |
| | 2,355 |
|
Distributions to noncontrolling interests | (1,688 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (194 | ) | | (194 | ) | (2,397 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (398 | ) | | (398 | ) |
Adjustments to redemption amount of redeemable noncontrolling interests | (2,026 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,026 |
| | — |
| | 2,026 |
| (228 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 228 |
| | — |
| | 228 |
|
Other | 994 |
| | — |
| | — |
| | (994 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (995 | ) | |
Balances as of January 31, 2018 |
| $132,355 |
| |
| $422 |
| |
| $635 |
| |
| $329,908 |
| |
| $3,118 |
| |
| ($3,118 | ) | |
| $4,417 |
| |
| $904,030 |
| |
| $90,602 |
| |
| $1,330,014 |
| |
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 |
|
| | | | | HEICO Shareholders' Equity | | | | | | | HEICO Shareholders' Equity | | | | |
| Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity | Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2016 |
| $99,512 |
| |
| $270 |
| |
| $403 |
| |
| $306,328 |
| |
| $2,460 |
| |
| ($2,460 | ) | |
| ($25,326 | ) | |
| $681,704 |
| |
| $84,326 |
| |
| $1,047,705 |
| |
Comprehensive income (loss) | 2,294 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,221 | ) | | 40,927 |
| | 2,748 |
| | 42,454 |
| |
Cash dividends ($.058 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,059 | ) | | — |
| | (6,059 | ) | |
Balances as of October 31, 2017 | |
| $131,123 |
| |
| $338 |
| |
| $507 |
| |
| $326,544 |
| |
| $3,118 |
| |
| ($3,118 | ) | |
| ($10,556 | ) | |
| $844,247 |
| |
| $87,212 |
| |
| $1,248,292 |
|
Comprehensive income | | 3,952 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,973 |
| | 65,152 |
| | 3,585 |
| | 83,710 |
|
Cash dividends ($.056 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,395 | ) | | — |
| | (7,395 | ) |
Five-for-four common stock split | | — |
| | 84 |
| | 127 |
| | (211 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | — |
| | — |
| | 893 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 893 |
| — |
| | — |
| | — |
| | 980 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 980 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 1,451 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,451 |
| — |
| | — |
| | — |
| | 2,165 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,165 |
|
Proceeds from stock option exercises | — |
| | — |
| | 1 |
| | 1,229 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,230 |
| — |
| | — |
| | 1 |
| | 1,424 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,425 |
|
Distributions to noncontrolling interests | (1,712 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (274 | ) | | (274 | ) | (1,688 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (194 | ) | | (194 | ) |
Adjustments to redemption amount of redeemable noncontrolling interests | (1,192 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,192 |
| | — |
| | 1,192 |
| (2,026 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,026 |
| | — |
| | 2,026 |
|
Deferred compensation obligation | — |
| | — |
| | — |
| | — |
| | (140 | ) | | 140 |
| | — |
| | — |
| | — |
| | — |
| |
Balances as of January 31, 2017 |
| $98,902 |
| |
| $270 |
| |
| $404 |
| |
| $309,901 |
| |
| $2,320 |
| |
| ($2,320 | ) | |
| ($26,547 | ) | |
| $717,764 |
| |
| $86,800 |
| |
| $1,088,592 |
| |
Other | | 994 |
| | — |
| | — |
| | (994 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (995 | ) |
Balances as of January 31, 2018 | |
| $132,355 |
| |
| $422 |
| |
| $635 |
| |
| $329,908 |
| |
| $3,118 |
| |
| ($3,118 | ) | |
| $4,417 |
| |
| $904,030 |
| |
| $90,602 |
| |
| $1,330,014 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| | | Three months ended January 31, | Three months ended January 31, |
| 2018 | | 2017 | 2019 | | 2018 |
Operating Activities: | | | | | | |
Net income from consolidated operations |
| $71,695 |
| |
| $46,265 |
|
| $88,026 |
| |
| $71,695 |
|
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 19,024 |
| | 15,248 |
| 20,037 |
| | 19,024 |
|
Share-based compensation expense | | 2,439 |
| | 2,168 |
|
Employer contributions to HEICO Savings and Investment Plan | 1,860 |
| | 1,714 |
| 2,153 |
| | 1,860 |
|
Share-based compensation expense | 2,168 |
| | 1,451 |
| |
(Decrease) increase in accrued contingent consideration | (3,195 | ) | | 537 |
| |
Foreign currency transaction adjustments, net | 75 |
| | (956 | ) | |
Deferred income tax benefit | (17,292 | ) | | (346 | ) | |
Increase (decrease) in accrued contingent consideration | | 1,862 |
| | (3,195 | ) |
Deferred income tax provision (benefit) | | 3,798 |
| | (17,292 | ) |
Payment of contingent consideration | | (67 | ) | | — |
|
Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Decrease in accounts receivable | 14,463 |
| | 25,998 |
| 4,982 |
| | 18,272 |
|
Decrease (increase) in contract assets | | 7,270 |
| | (3,809 | ) |
Increase in inventories | (18,301 | ) | | (14,989 | ) | (24,284 | ) | | (18,301 | ) |
Increase in prepaid expenses and other current assets | (5,403 | ) | | (1,563 | ) | (7,921 | ) | | (5,403 | ) |
Decrease in trade accounts payable | (9,734 | ) | | (6,322 | ) | (19,832 | ) | | (9,734 | ) |
Decrease in accrued expenses and other current liabilities | (18,477 | ) | | (18,908 | ) | (34,537 | ) | | (18,477 | ) |
Increase in income taxes payable | 7,630 |
| | 7,230 |
| |
Other long-term assets and liabilities, net | 492 |
| | 616 |
| |
(Decrease) increase in income taxes payable | | (3,636 | ) | | 7,630 |
|
Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | | 9,143 |
| | 6,696 |
|
Other | | 133 |
| | 771 |
|
Net cash provided by operating activities | 45,005 |
| | 55,975 |
| 49,566 |
| | 51,905 |
|
| | | | | | |
Investing Activities: | | | | | | |
Acquisitions, net of cash acquired | | (101,039 | ) | | (6,126 | ) |
Investments related to HEICO Leadership Compensation Plan | | (8,700 | ) | | (6,900 | ) |
Capital expenditures | (7,577 | ) | | (6,422 | ) | (5,907 | ) | | (7,577 | ) |
Acquisitions, net of cash acquired | (6,126 | ) | | — |
| |
Other | (2,790 | ) | | 419 |
| 72 |
| | (2,790 | ) |
Net cash used in investing activities | (16,493 | ) | | (6,003 | ) | (115,574 | ) | | (23,393 | ) |
| | | | | | |
Financing Activities: | | | | | | |
Borrowings on revolving credit facility | | 93,000 |
| | — |
|
Payments on revolving credit facility | (5,000 | ) | | (40,000 | ) | (17,000 | ) | | (5,000 | ) |
Cash dividends paid | (7,395 | ) | | (6,059 | ) | (9,305 | ) | | (7,395 | ) |
Revolving credit facility issuance costs | (4,067 | ) | | — |
| — |
| | (4,067 | ) |
Distributions to noncontrolling interests | (1,882 | ) | | (1,986 | ) | (2,795 | ) | | (1,882 | ) |
Payment of contingent consideration | (300 | ) | | — |
| (283 | ) | | (300 | ) |
Redemptions of common stock related to stock option exercises | | (150 | ) | | — |
|
Proceeds from stock option exercises | 1,425 |
| | 1,230 |
| 66 |
| | 1,425 |
|
Other | (114 | ) | | (108 | ) | 29 |
| | (114 | ) |
Net cash used in financing activities | (17,333 | ) | | (46,923 | ) | |
Net cash provided by (used in) financing activities | | 63,562 |
| | (17,333 | ) |
| | | | | | |
Effect of exchange rate changes on cash | 2,443 |
| | (99 | ) | 703 |
| | 2,443 |
|
| | | | | | |
Net increase in cash and cash equivalents | 13,622 |
| | 2,950 |
| |
Net (decrease) increase in cash and cash equivalents | | (1,743 | ) | | 13,622 |
|
Cash and cash equivalents at beginning of year | 52,066 |
| | 42,955 |
| 59,599 |
| | 52,066 |
|
Cash and cash equivalents at end of period |
| $65,688 |
| |
| $45,905 |
|
| $57,856 |
| |
| $65,688 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2017.2018. The October 31, 20172018 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the three months ended January 31, 20182019 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
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.
Stock SplitsSplit
In March 2017, the Company's Board of Directors declared a 5-for-4 stock split on both classes of the Company's common stock. The stock split was effected as of April 19, 2017 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017. In December 2017, the Company's Board of Directors declared a 5-for-4 stock split on both classes of the Company's common stock. The stock split was effected as of January 18, 2018 in the form of a 25% stock dividend distributed to shareholders of record as of January 3, 2018. All applicable fiscal 2018 share and per share information has been adjusted retrospectively to give effect to thereflect a 5-for-4 stock splits.split effected in June 2018.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, which, as amended, was codified as Accounting Standards Update ("ASU"Codification (“ASC”) 2014-09, “RevenueTopic 606, "Revenue from Contracts with Customers,” whichCustomers" (“ASC 606”). ASC 606 provides a comprehensive
new revenue recognition model that will supersedesupersedes nearly all existing revenue recognition guidance. Under ASU 2014-09,ASC 606, an entity will recognizerecognizes 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 disclosuredisclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09,
The Company adopted ASC 606 as amended, is effective for fiscal yearsof November 1, 2018 using the modified retrospective method and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented or retrospectively withrecognized the cumulative effect of initially applying ASU 2014-09 recognized atASC 606 to all uncompleted contracts on the date of initial application.adoption as an adjustment to the opening balance of retained earnings. The Company is currently evaluatingcomparative 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 transition method it will elect. In addition, the Company is currently identifying its variousproduces 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 streamsrecognition for certain other contracts under which the Company creates or enhances customer-owned assets while performing repair and reviewing certain underlying customeroverhaul services. For these two types of contracts, the Company now recognizes revenue using an over-time recognition model as opposed to determinegenerally recognizing revenue at the effecttime of shipment under previous guidance. See Note 6, Revenue, for additional information regarding the adoption of this guidance will have on its consolidated results of operations, financial positionCompany's revenue recognition policies and cash flows.disclosures required by ASC 606.
In July 2015,The following table presents the FASB issued ASU 2015-11, "Simplifying the Measurementcumulative effect of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Previously, inventories were measured at the lower of cost or market. The Company adopted ASU 2015-11 in the first quarter of fiscal 2018, resulting in no material effectadopting ASC 606 on the Company's consolidated resultsCondensed Consolidated Balance Sheet as of operations, financial position or cash flows.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, net | 401,553 |
| | (29,412 | ) | | 372,141 |
|
Prepaid expenses and other current assets | 21,187 |
| | (489 | ) | | 20,698 |
|
| | | | | |
Liabilities | | | | | |
Accrued expenses and other current liabilities |
| $171,514 |
| |
| ($8,588 | ) | |
| $162,926 |
|
Deferred income taxes | 46,644 |
| | 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 interests | 104,757 |
| | 326 |
| | 105,083 |
|
The following table presents the impact of adopting ASC 606 on the Company's Condensed Consolidated Balance Sheet as of January 31, 2019 (in thousands):
|
| | | | | | | | | | | |
| As of January 31, 2019 |
| As Reported | | Effect of | | As Adjusted |
| Under ASC 606 | | ASC 606 | | Under ASC 605 |
Assets | | | | | |
Contract assets |
| $47,093 |
| |
| ($39,757 | ) | |
| $7,336 |
|
Inventories, net | 406,348 |
| | 30,292 |
| | 436,640 |
|
Prepaid expenses and other current assets | 30,328 |
| | 323 |
| | 30,651 |
|
| | | | | |
Liabilities | | | | | |
Accrued expenses and other current liabilities |
| $133,705 |
| |
| $8,263 |
| |
| $141,968 |
|
Deferred income taxes | 59,133 |
| | (3,988 | ) | | 55,145 |
|
| | | | | |
Redeemable noncontrolling interests |
| $138,995 |
| |
| ($797 | ) | |
| $138,198 |
|
| | | | | |
Shareholders' equity | | | | | |
Retained earnings |
| $1,174,811 |
| |
| ($12,203 | ) | |
| $1,162,608 |
|
Noncontrolling interests | 112,288 |
| | (417 | ) | | 111,871 |
|
The impact of adopting ASC 606 on the Company's Condensed Consolidated Statement of Operations was not material for the three months ended January 31, 2019.
In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02, requiresas amended, provides certain optional transition relief and shall be applied either at the beginning of the earliest comparative period presented in the year of adoption using a modified retrospective transition approach and provides certain optional transition relief.or by recognizing a cumulative effect adjustment at the date of adoption. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated statement of cash flows.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is
permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
2. ACQUISITIONACQUISITIONS
In November 2017,2018, the Company, through a subsidiary of HEICO Electronic, acquired allan additional equity interest in Freebird Semiconductor Corporation ("Freebird"), which increased the stockCompany's aggregate equity interest in Freebird to greater than 50%. Accordingly, the Company began consolidating the operating results of Interface Displays & Controls, Inc. ("IDC"). IDC designsFreebird 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 manufactures electronic products for aviation, marine, military fighting vehicles, and embedded computing markets.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, Redeemable Noncontrolling Interests, for additional information). The purchase price of this acquisition was paid in cash using proceeds from the Company's revolving credit facility.
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. The purchase price of this acquisition was paid in cash principally using proceeds from the Company's revolving credit facility.
The following table summarizes the aggregate total consideration for the acquisitionCompany's fiscal 2019 acquisitions (in thousands):
|
| | | |
Cash paid |
| $102,491 |
|
Less: cash acquired | (1,452 | ) |
Cash paid, net | 101,039 |
|
Fair value of existing equity interest | 1,443 |
|
Additional purchase consideration | (134 | ) |
Total consideration |
| $102,348 |
|
The following table summarizes the allocation of IDC is not material or significantthe aggregate total consideration for the Company's fiscal 2019 acquisitions to the Company’s condensed consolidated financial statementsestimated fair values of the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed (in thousands): |
| | | |
| |
| |
Assets acquired: | |
Goodwill |
| $55,020 |
|
Customer relationships | 15,710 |
|
Property, plant and equipment | 14,905 |
|
Intellectual property | 11,923 |
|
Inventories | 8,403 |
|
Trade names | 7,190 |
|
Accounts receivable | 5,176 |
|
Other assets | 296 |
|
Total assets acquired, excluding cash | 118,623 |
|
| |
Liabilities assumed: | |
Deferred income taxes | 4,284 |
|
Accrued expenses | 2,173 |
|
Accounts payable | 1,840 |
|
Other liabilities | 506 |
|
Total liabilities assumed | 8,803 |
|
| |
Noncontrolling interests in consolidated subsidiaries | 7,472 |
|
| |
Net assets acquired, excluding cash |
| $102,348 |
|
The following table summarizes the relatedweighted average amortization period of the definite-lived intangible assets acquired in connection with the Company's fiscal 2019 acquisitions (in years):
|
| |
| |
Customer relationships | 11 |
Intellectual property | 17 |
The allocation of the total consideration for the Company's fiscal 2019 acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the companyCompany obtains final information regarding their fair values. However, the Company does not expect any adjustments 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 Apex and Freebird benefit both the Company and the noncontrolling interest holders. The fair value of the noncontrolling interest in Apex and Freebird 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 IDCthe fiscal 2019 acquisitions were included in the Company’s results of operations from each of the effective acquisition date.dates. The amount of net sales and earnings of IDCthe fiscal 2019 acquisitions included in the Condensed Consolidated Statement of Operations for the three months ended January 31, 20182019 is not material. Had the IDC acquisition been consummatedfiscal 2019 acquisitions occurred as of November 1, 2016,2017, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the three months ended January 31, 20182019 and 20172018 would not have been materially different than the reported amounts.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
|
| | | | | | | | |
(in thousands) | | January 31, 2019 | | October 31, 2018 |
Accounts receivable | |
| $241,739 |
| |
| $240,544 |
|
Less: Allowance for doubtful accounts | | (3,939 | ) | | (3,258 | ) |
Accounts receivable, net | |
| $237,800 |
| |
| $237,286 |
|
|
| | | | | | | | |
(in thousands) | | January 31, 2018 | | October 31, 2017 |
Accounts receivable | |
| $214,361 |
| |
| $225,462 |
|
Less: Allowance for doubtful accounts | | (4,083 | ) | | (3,006 | ) |
Accounts receivable, net | |
| $210,278 |
| |
| $222,456 |
|
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts |
| | | | | | | | |
(in thousands) | | January 31, 2018 | | October 31, 2017 |
Costs incurred on uncompleted contracts | |
| $31,275 |
| |
| $29,491 |
|
Estimated earnings | | 19,743 |
| | 19,902 |
|
| | 51,018 |
| | 49,393 |
|
Less: Billings to date | | (39,267 | ) | | (41,262 | ) |
| |
| $11,751 |
| |
| $8,131 |
|
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings) | |
| $13,186 |
| |
| $9,377 |
|
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) | | (1,435 | ) | | (1,246 | ) |
| |
| $11,751 |
| |
| $8,131 |
|
Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the three months ended January 31, 2018 and 2017.
Inventories
| | (in thousands) | | January 31, 2018 | | October 31, 2017 | | January 31, 2019 | | October 31, 2018 |
Finished products | |
| $181,435 |
| |
| $173,559 |
| |
| $196,224 |
| |
| $192,758 |
|
Work in process | | 44,397 |
| | 39,986 |
| | 35,692 |
| | 49,315 |
|
Materials, parts, assemblies and supplies | | 139,669 |
| | 128,031 |
| | 174,432 |
| | 158,039 |
|
Contracts in process | | 1,985 |
| | 2,415 |
| | — |
| | 1,649 |
|
Less: Billings to date | | (91 | ) | | (363 | ) | | — |
| | (208 | ) |
Inventories, net of valuation reserves | |
| $367,395 |
| |
| $343,628 |
| |
| $406,348 |
| |
| $401,553 |
|
ContractsPrior to the adoption of ASC 606, contracts in process representsrepresented accumulated capitalized costs associated with fixed price contracts. RelatedAdditionally, related progress billings and customer advances (“billings to date”) arewere classified as a reduction to contracts in process, if any, and any excess iswas included in accrued expenses and other liabilities. See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, and Note 6, Revenue, for additional information pertaining to the adoption of ASC 606.
Property, Plant and Equipment
|
| | | | | | | | |
(in thousands) | | January 31, 2019 | | October 31, 2018 |
Land | |
| $7,297 |
| |
| $5,864 |
|
Buildings and improvements | | 110,860 |
| | 101,424 |
|
Machinery, equipment and tooling | | 236,337 |
| | 230,108 |
|
Construction in progress | | 6,821 |
| | 5,044 |
|
| | 361,315 |
| | 342,440 |
|
Less: Accumulated depreciation and amortization | | (192,036 | ) | | (187,701 | ) |
Property, plant and equipment, net | |
| $169,279 |
| |
| $154,739 |
|
|
| | | | | | | | |
(in thousands) | | January 31, 2018 | | October 31, 2017 |
Land | |
| $5,443 |
| |
| $5,435 |
|
Buildings and improvements | | 93,280 |
| | 91,916 |
|
Machinery, equipment and tooling | | 196,686 |
| | 191,298 |
|
Construction in progress | | 8,193 |
| | 5,553 |
|
| | 303,602 |
| | 294,202 |
|
Less: Accumulated depreciation and amortization | | (170,487 | ) | | (164,319 | ) |
Property, plant and equipment, net | |
| $133,115 |
| |
| $129,883 |
|
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $14.2 million as of January 31, 20182019 and $12.9$16.9 million as of October 31, 2017.2018. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2019 and 2018 was $1.4 million and 2017 was $2.5 million, and $2.4 million, respectively.
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the three months ended January 31, 20182019 and 20172018 is as follows (in thousands):
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2019 | | 2018 |
R&D expenses | |
| $15,200 |
| |
| $12,707 |
|
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2018 | | 2017 |
R&D expenses | |
| $12,707 |
| |
| $11,246 |
|
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2025.2026. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
|
| | | | | | | | |
| | January 31, 2019 | | October 31, 2018 |
Redeemable at fair value | |
| $90,473 |
| |
| $83,524 |
|
Redeemable based on a multiple of future earnings | | 48,522 |
| | 48,522 |
|
Redeemable noncontrolling interests | |
| $138,995 |
| |
| $132,046 |
|
|
| | | | | | | | |
| | January 31, 2018 | | October 31, 2017 |
Redeemable at fair value | |
| $83,360 |
| |
| $82,128 |
|
Redeemable based on a multiple of future earnings | | 48,995 |
| | 48,995 |
|
Redeemable noncontrolling interests | |
| $132,355 |
| |
| $131,123 |
|
As discussed in Note 2, Acquisitions, the Company, through a subsidiary of HEICO Electronic, acquired 92.7% of the stock of Apex in November 2018. As part of the shareholders' agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interests over a four-year period beginning in fiscal 2023, or sooner under certain conditions, and the Company has the right to purchase the same equity interests over the same period.
Accumulated Other Comprehensive (Loss) IncomeLoss
Changes in the components of accumulated other comprehensive (loss) incomeloss for the three months ended January 31, 20182019 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2018 | |
| ($14,370 | ) | |
| ($886 | ) | |
| ($15,256 | ) |
Unrealized gain | | 4,181 |
| | — |
| | 4,181 |
|
Amortization of unrealized loss | | — |
| | 6 |
| | 6 |
|
Balances as of January 31, 2019 | |
| ($10,189 | ) | |
| ($880 | ) | |
| ($11,069 | ) |
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive (Loss) Income |
Balances as of October 31, 2017 | |
| ($9,533 | ) | |
| ($1,023 | ) | |
| ($10,556 | ) |
Unrealized gain | | 14,969 |
| | — |
| | 14,969 |
|
Amortization of unrealized loss | | — |
| | 4 |
| | 4 |
|
Balances as of January 31, 2018 | |
| $5,436 |
| |
| ($1,019 | ) | |
| $4,417 |
|
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment for the three months ended January 31, 20182019 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Segment | | Consolidated Totals |
| | FSG | | ETG | |
Balances as of October 31, 2018 | |
| $398,694 |
| |
| $716,138 |
| |
| $1,114,832 |
|
Goodwill acquired | | — |
| | 55,020 |
| | 55,020 |
|
Foreign currency translation adjustments | | 186 |
| | 488 |
| | 674 |
|
Adjustments to goodwill | | (125 | ) | | — |
| | (125 | ) |
Balances as of January 31, 2019 | |
| $398,755 |
| |
| $771,646 |
| |
| $1,170,401 |
|
|
| | | | | | | | | | | | |
| | Segment | | Consolidated Totals |
| | FSG | | ETG | |
Balances as of October 31, 2017 | |
| $388,606 |
| |
| $692,700 |
| |
| $1,081,306 |
|
Foreign currency translation adjustments | | 3,065 |
| | 3,202 |
| | 6,267 |
|
Goodwill acquired | | — |
| | 3,078 |
| | 3,078 |
|
Adjustments to goodwill | | 185 |
| | 28 |
| | 213 |
|
Balances as of January 31, 2018 | |
| $391,856 |
| |
| $699,008 |
| |
| $1,090,864 |
|
Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The goodwill acquired pertains to the fiscal 2018 acquisition2019 acquisitions described in Note 2, Acquisition,Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. The Company estimates that allForeign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of the goodwill acquired in fiscal 2018 will be deductible for income tax purposes.Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 20172018 acquisitions. The Company estimates that $17 million of the goodwill acquired in fiscal 2019 will be deductible for income tax purposes.
Identifiable intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of January 31, 2019 | | As of October 31, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
| $390,027 |
| |
| ($144,444 | ) | |
| $245,583 |
| |
| $373,946 |
| |
| ($135,359 | ) | |
| $238,587 |
|
Intellectual property | | 198,400 |
| | (59,982 | ) | | 138,418 |
| | 185,983 |
| | (56,055 | ) | | 129,928 |
|
Licenses | | 6,559 |
| | (3,669 | ) | | 2,890 |
| | 6,559 |
| | (3,522 | ) | | 3,037 |
|
Patents | | 1,027 |
| | (628 | ) | | 399 |
| | 927 |
| | (609 | ) | | 318 |
|
Non-compete agreements | | 814 |
| | (814 | ) | | — |
| | 814 |
| | (814 | ) | | — |
|
Trade names | | 466 |
| | (167 | ) | | 299 |
| | 466 |
| | (157 | ) | | 309 |
|
| | 597,293 |
| | (209,704 | ) | | 387,589 |
| | 568,695 |
| | (196,516 | ) | | 372,179 |
|
Non-Amortizing Assets: | | | | | | | | | | | | |
Trade names | | 141,602 |
| | — |
| | 141,602 |
| | 134,181 |
| | — |
| | 134,181 |
|
| |
| $738,895 |
| |
| ($209,704 | ) | |
| $529,191 |
| |
| $702,876 |
| |
| ($196,516 | ) | |
| $506,360 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of January 31, 2018 | | As of October 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
| $383,294 |
| |
| ($126,803 | ) | |
| $256,491 |
| |
| $379,966 |
| |
| ($117,069 | ) | |
| $262,897 |
|
Intellectual property | | 183,997 |
| | (48,888 | ) | | 135,109 |
| | 181,811 |
| | (44,861 | ) | | 136,950 |
|
Licenses | | 6,559 |
| | (3,078 | ) | | 3,481 |
| | 6,559 |
| | (2,928 | ) | | 3,631 |
|
Patents | | 912 |
| | (580 | ) | | 332 |
| | 870 |
| | (551 | ) | | 319 |
|
Non-compete agreements | | 824 |
| | (824 | ) | | — |
| | 817 |
| | (817 | ) | | — |
|
Trade names | | 466 |
| | (128 | ) | | 338 |
| | 466 |
| | (118 | ) | | 348 |
|
| | 576,052 |
| | (180,301 | ) | | 395,751 |
| | 570,489 |
| | (166,344 | ) | | 404,145 |
|
Non-Amortizing Assets: | | | | | | | | | | | | |
Trade names | | 135,236 |
| | — |
| | 135,236 |
| | 133,936 |
| | — |
| | 133,936 |
|
| |
| $711,288 |
| |
| ($180,301 | ) | |
| $530,987 |
| |
| $704,425 |
| |
| ($166,344 | ) | |
| $538,081 |
|
The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of January 31, 2019 compared to October 31, 2018 principally relates to such intangible assets recognized in connection with the fiscal 2019 acquisitions (see Note 2, Acquisitions).
Amortization expense related to intangible assets for the three months ended January 31, 2019 and 2018 and 2017 was $12.4$12.8 million and $9.2$12.4 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 20182019 is estimated to be $36.438.6 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $46.548.7 million in fiscal 2019, $43.6 million in fiscal 2020, $40.945.9 million in fiscal 2021, $35.539.5 million in fiscal 2022, $31.334.4 million in fiscal 2023, $30.2 million in fiscal 2024, and $161.6150.3 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
| | | | | | | | |
| | January 31, 2019 | | October 31, 2018 |
Borrowings under revolving credit facility | |
| $599,000 |
| |
| $523,000 |
|
Capital leases and note payable | | 9,521 |
| | 9,470 |
|
| | 608,521 |
| | 532,470 |
|
Less: Current maturities of long-term debt | | (865 | ) | | (859 | ) |
| |
| $607,656 |
| |
| $531,611 |
|
|
| | | | | | | | |
| | January 31, 2018 | | October 31, 2017 |
Borrowings under revolving credit facility | |
| $666,000 |
| |
| $671,000 |
|
Capital leases and note payable | | 3,012 |
| | 2,979 |
|
| | 669,012 |
| | 673,979 |
|
Less: Current maturities of long-term debt | | (485 | ) | | (451 | ) |
| |
| $668,527 |
| |
| $673,528 |
|
The Company's borrowings under its revolving credit facility mature in fiscal 2023. As of January 31, 20182019 and October 31 2017,2018, the weighted average interest rate on borrowings under the Company's revolving credit facility was 2.9%3.6% and 2.4%3.4%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2018,2019, 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.
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.
13
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 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 three months ended January 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.
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.
The Company’s contract assets and liabilities consisted of the following:
|
| | | | | | | | | | | |
| January 31, 2019 | | November 1, 2018 | | Change |
| | | | | |
Contract assets |
| $47,093 |
| |
| $54,272 |
| |
| ($7,179 | ) |
Contract liabilities | 26,715 |
| | 19,674 |
| | 7,041 |
|
Net contract assets |
| $20,378 |
| |
| $34,598 |
| |
| ($14,220 | ) |
The decrease in the Company's contract assets during the first quarter of fiscal 2019 mainly occurred within the ETG and principally reflects billings on certain customer contracts made during the quarter in excess of the amounts recorded as additional unbilled receivables for contracts using an over-time recognition model.
The increase in the Company's contract liabilities during the first quarter of fiscal 2019 mainly occurred within the ETG and principally reflects the receipt 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 first quarter of fiscal 2019 that was included in contract liabilities as of the beginning of fiscal 2019 was not material.
Remaining Performance Obligations
As of January 31, 2019, the Company had $308.2 million of remaining performance obligations pertaining to contracts with an original duration of greater than one year. The Company will recognize net sales as these obligations are satisfied. The Company expects to recognize $183.7 million of this amount during the remainder of fiscal 2019 and $124.5 million thereafter, of which the majority is expected to occur in fiscal 2020. As of January 31, 2019, the remaining performance obligations under contracts with an original duration of one year or less pertain to the majority of the products offered by the Electronic Technologies Group and the Flight Support Group's specialty products product line and repair and overhaul parts and services product line.
Disaggregation of Revenue
The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2019 | | 2018 |
Flight Support Group: | | | | |
Aftermarket replacement parts (1) | |
| $159,497 |
| |
| $134,288 |
|
Repair and overhaul parts and services (2) | | 67,163 |
| | 68,324 |
|
Specialty products (3) | | 60,553 |
| | 52,109 |
|
Total net sales | | 287,213 |
| | 254,721 |
|
| | | | |
Electronic Technologies Group: | | | | |
Electronic component parts for defense, space and aerospace equipment (4) | | 137,750 |
| | 117,341 |
|
Electronic component parts for equipment in various other industries (5) | | 46,679 |
| | 38,317 |
|
Total net sales | | 184,429 |
| | 155,658 |
|
| | | | |
Other, primarily corporate and intersegment | | (5,496 | ) | | (5,969 | ) |
| | | | |
Total consolidated net sales | |
| $466,146 |
| |
| $404,410 |
|
| | | | |
| |
(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. |
| |
(5) | Includes various component parts such as electromagnetic and radio interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies and silicone material for a variety of demanding applications. |
The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2019 | | 2018 |
Flight Support Group: | | | | |
Aerospace | |
| $235,173 |
| |
| $209,591 |
|
Defense and Space | | 41,534 |
| | 34,782 |
|
Other (1) | | 10,506 |
| | 10,348 |
|
Total net sales | | 287,213 |
| | 254,721 |
|
| | | | |
Electronic Technologies Group: | | | | |
Defense and Space | | 115,219 |
| | 97,082 |
|
Other (2) | | 49,915 |
| | 43,053 |
|
Aerospace | | 19,295 |
| | 15,523 |
|
Total net sales | | 184,429 |
| | 155,658 |
|
| | | | |
Other, primarily corporate and intersegment | | (5,496 | ) | | (5,969 | ) |
| | | | |
Total consolidated net sales | |
| $466,146 |
| |
| $404,410 |
|
| | | | |
| |
(1) | Principally industrial products. |
| |
(2) | Principally other electronics and medical products. |
6.7. INCOME TAXES
OnIn December 22, 2017, the United States (U.S.("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 existingprevious 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% 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. TheCertain other provisions of the Tax Act also contains additional provisions that will becomebecame effective for HEICO in fiscal 2019 including a new tax on Global Intangible Low-Taxed Income (“GILTI”), a new deduction for Foreign-Derived Intangible Income (“FDII”), the repeal of the domestic production activity deduction and increased limitations on the deductibility of certain executive compensation. The Company has not yet determined the impact of the provisions of the Tax Act which do not becomethat became effective for HEICO until fiscal 2019.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on the accounting for the tax effects of the Tax Act. This guidance provides companies with a measurement period not to exceed one year from the enactment of the Tax Act to complete their accounting for the related tax effects. SAB 118 further states that during the measurement period, companies who are able to make reasonable estimates of the tax effects of the Tax Act should include those amounts in their financial statements as provisional amounts and reflect any adjustments in subsequent periods as they refine their estimates or complete their accounting of such tax effects.
As a result of the Tax Act, the Company has revised its estimated annual effective federal statutory income tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, which results in a blended rate of 23.3% for HEICO in fiscal 2018. Additionally,2019 did not have a material effect on the Company remeasured its U.S. federal net deferredCompany's income tax liabilities and recorded a provisional discrete tax benefit of $16.6 million inexpense for the first quarter of fiscal 2018. Further, the Company recorded a provisional discrete tax expense of $4.7 million in the first quarter of fiscal 2018 related to a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. The Company intends to pay this tax over the eight-year period allowed for in the Tax Act.2019.
The Company’s effective tax rate in the first quarter of fiscal 2018 decreased2019 was 4.5% as compared to 4.7% from 26.6% in the first quarter of fiscal 2017.2018. Income tax expense in both the first quarter of fiscal 2019 and fiscal 2018 was favorably impacted as a result of discrete tax benefits. The decrease principally reflectstax benefit from stock option exercises recognized in the previously mentionedfirst quarter of fiscal 2019 increased by $14.4 million compared to the first quarter of fiscal 2018. During the first quarter of fiscal 2018, the Company recognized a discrete tax benefit from the remeasurement of the Company’sits U.S. federal net deferred tax liabilities and the benefit of a lower federal statutory income tax rate, which werethat was partially offset by the aforementioneda discrete tax expense related to a one-time transition tax expense.on the unremitted earnings of its foreign subsidiaries that resulted in an $11.9 million net discrete tax benefit.
7.8. 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 January 31, 2018 | | As of January 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: | | | | | | | | | | | | | | | | |
Corporate-owned life insurance | |
| $— |
| |
| $126,715 |
| |
| $— |
| |
| $126,715 |
| |
| $— |
| |
| $125,750 |
| |
| $— |
| |
| $125,750 |
|
Money market funds | | 4,890 |
| | — |
| | — |
| | 4,890 |
| | 12,287 |
| | — |
| | — |
| | 12,287 |
|
Equity securities | | 3,167 |
| | — |
| | — |
| | 3,167 |
| | 736 |
| | — |
| | — |
| | 736 |
|
Mutual funds | | 1,683 |
| | — |
| | — |
| | 1,683 |
| | 92 |
| | — |
| | — |
| | 92 |
|
Other | | 1,379 |
| | — |
| | — |
| | 1,379 |
| | 443 |
| | — |
| | — |
| | 443 |
|
Total assets | |
| $11,119 |
| |
| $126,715 |
| |
| $— |
| |
| $137,834 |
| |
| $13,558 |
| |
| $125,750 |
| |
| $— |
| |
| $139,308 |
|
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $24,931 |
| |
| $24,931 |
| |
| $— |
| |
| $— |
| |
| $22,462 |
| |
| $22,462 |
|
|
| | | | | | | | | | | | | | | | |
| | As of October 31, 2018 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Deferred compensation plans: | | | | | | | | |
Corporate-owned life insurance | |
| $— |
| |
| $123,255 |
| |
| $— |
| |
| $123,255 |
|
Money market funds | | 3,560 |
| | — |
| | — |
| | 3,560 |
|
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 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $20,875 |
| |
| $20,875 |
|
|
| | | | | | | | | | | | | | | | |
| | As of October 31, 2017 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Deferred compensation plans: | | | | | | | | |
Corporate-owned life insurance | |
| $— |
| |
| $113,220 |
| |
| $— |
| |
| $113,220 |
|
Money market funds | | 3,972 |
| | — |
| | — |
| | 3,972 |
|
Equity securities | | 2,895 |
| | — |
| | — |
| | 2,895 |
|
Mutual funds | | 1,541 |
| | — |
| | — |
| | 1,541 |
|
Other | | 1,246 |
| | — |
| | — |
| | 1,246 |
|
Total assets | |
| $9,654 |
| |
| $113,220 |
| |
| $— |
| |
| $122,874 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $27,573 |
| |
| $27,573 |
|
The Company maintains two non-qualified deferred compensation plans. The assets of the HEICO Corporation Leadership Compensation Plan (the "LCP"("HEICO 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 HEICO LCP represent investments in money market funds that are classified within Level 1. The assets of the Company’s other deferred compensation plan are principally invested in equity securities and mutual funds that are classified within Level 1. The assets of both plans are held within irrevocable trusts and
classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $137.8$139.3 million as of January 31, 20182019 and $122.9132.7 million as of October 31, 2017,2018, of which the LCP related assets were $131.6$138.0 million and $117.2126.8 million as of January 31, 20182019 and October 31, 2017,2018, respectively. The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $136.5$138.7 million as of January 31, 20182019 and $121.7131.7 million as of October 31, 2017,2018, of which the LCP related liability was $130.3$137.4 million and $116.0125.8 million as of January 31, 20182019 and October 31, 2017,2018, respectively.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet certain earnings objectives during the first six years following the acquisition. As of January 31, 2018,2019, the estimated fair value of the contingent consideration was $13.2$14.5 million.
As part of the agreement to acquire certain assets of a company by the ETG in fiscal 2016, the Company may be obligated to pay contingent consideration of up to $1.7$1.4 million in aggregate during the first fourthree years following the firstsecond anniversary of the acquisition.acquisition should the acquired entity meet certain earnings objectives during this same time period. During fiscal 2018,2019, the Company paid $.3 million of contingent consideration based on the actual financial performance of the acquired entity during the secondthird year following the acquisition. As of January 31, 2018,2019, the estimated fair value of the remaining contingent consideration was $1.1$.9 million.
As part of the agreement to acquire a subsidiary by the FSG in fiscal 2015, the Company may beis obligated to pay contingent consideration of up to €6.1 million, per year, or €12.2$7.0 million, in aggregate, shouldbased on the actual operating results of the acquired entity meet certain earnings objectives during each of the first two yearsfourth year following the acquisition, which it expects to pay in the second anniversaryquarter of the acquisition. As of January 31, 2018, the estimated fair value of the contingent consideration was €8.6 million, or $10.7 million, as compared to €10.8 million, or $12.6 million, as of October 31, 2017.fiscal 2019. The decreaseincrease in the fair value of the contingent consideration as of January 31, 2019 as compared to the €5.1 million, or $5.8 million, accrued as of October 31, 2018 is principally attributed to revisedbased on the higher actual than anticipated earnings estimates for the second year of the earnout period that reflect less favorable projected market conditions.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. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of HEICO. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's condensed consolidated statements of operations.
The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of January 31, 20182019 were as follows:
|
| | | | | | | | | |
| Fiscal 2017 Acquisition | | Fiscal 2016 Acquisition |
Compound annual revenue growth rate range | (4 | %) | - | 7% | | 4 | % | - | 13% |
Weighted average discount rate | 5.7% | | 4.9% |
|
| | | | | | | | | | | | | | |
| Fiscal 2017 Acquisition | | Fiscal 2016 Acquisition | | Fiscal 2015 Acquisition |
Compound annual revenue growth rate range | (8 | %) | - | 4% | | 4 | % | - | 12% | | 9 | % | - | 13% |
Weighted average discount rate | 5.5% | | 4.7% | | .8% |
Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended January 31, 20182019 are as follows (in thousands):
|
| | | | |
| | Liabilities |
Balance as of October 31, 20172018 | |
| $27,57320,875 |
|
DecreaseIncrease in accrued contingent consideration | | (3,1951,862 | )
|
Payment of contingent consideration | | (300350 | ) |
Foreign currency transaction adjustments | | 85375 |
|
Balance as of January 31, 20182019 | |
| $24,93122,462 |
|
| | |
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | | |
Accrued expenses and other current liabilities | |
| $7,2627,489 |
|
Other long-term liabilities | | 17,66914,973 |
|
| |
| $24,93122,462 |
|
The Company recorded the decreaseincrease in accrued contingent consideration and foreign currency transaction adjustments set forth in the table above within selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations.
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the three months ended January 31, 2018.2019.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of January 31, 20182019 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
8.9. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2019 | | 2018 |
Numerator: | | | | |
Net income attributable to HEICO | |
| $79,332 |
| |
| $65,152 |
|
| | | | |
Denominator: | | | | |
Weighted average common shares outstanding - basic | | 132,933 |
| | 132,048 |
|
Effect of dilutive stock options | | 4,045 |
| | 4,342 |
|
Weighted average common shares outstanding - diluted | | 136,978 |
| | 136,390 |
|
| | | | |
Net income per share attributable to HEICO shareholders: | | | | |
Basic | |
| $.60 |
| |
| $.49 |
|
Diluted | |
| $.58 |
| |
| $.48 |
|
| | | | |
Anti-dilutive stock options excluded | | 760 |
| | 770 |
|
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2018 | | 2017 |
Numerator: | | | | |
Net income attributable to HEICO | |
| $65,152 |
| |
| $40,927 |
|
| | | | |
Denominator: | | | | |
Weighted average common shares outstanding - basic | | 105,639 |
| | 105,178 |
|
Effect of dilutive stock options | | 3,473 |
| | 2,827 |
|
Weighted average common shares outstanding - diluted | | 109,112 |
| | 108,005 |
|
| | | | |
Net income per share attributable to HEICO shareholders: | | | | |
Basic | |
| $.62 |
| |
| $.39 |
|
Diluted | |
| $.60 |
| |
| $.38 |
|
| | | | |
Anti-dilutive stock options excluded | | 616 |
| | 213 |
|
9.10. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the three months ended January 31, 20182019 and 2017,2018, respectively, is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Three months ended January 31, 2019: | | | | | | | | |
Net sales | |
| $287,213 |
| |
| $184,429 |
| |
| ($5,496 | ) | |
| $466,146 |
|
Depreciation | | 3,355 |
| | 2,606 |
| | 251 |
| | 6,212 |
|
Amortization | | 4,803 |
| | 8,776 |
| | 246 |
| | 13,825 |
|
Operating income | | 52,880 |
| | 51,602 |
| | (6,535 | ) | | 97,947 |
|
Capital expenditures | | 2,849 |
| | 3,058 |
| | — |
| | 5,907 |
|
| | | | | | | | |
Three months ended January 31, 2018: | | | | | | | | |
Net sales | |
| $254,721 |
| |
| $155,658 |
| |
| ($5,969 | ) | |
| $404,410 |
|
Depreciation | | 3,292 |
| | 2,274 |
| | 62 |
| | 5,628 |
|
Amortization | | 4,947 |
| | 8,104 |
| | 345 |
| | 13,396 |
|
Operating income | | 45,869 |
| | 43,220 |
| | (9,529 | ) | | 79,560 |
|
Capital expenditures | | 2,297 |
| | 1,743 |
| | 3,537 |
| | 7,577 |
|
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Three months ended January 31, 2018: | | | | | | | | |
Net sales | |
| $254,721 |
| |
| $155,658 |
| |
| ($5,969 | ) | |
| $404,410 |
|
Depreciation | | 3,292 |
| | 2,274 |
| | 62 |
| | 5,628 |
|
Amortization | | 4,947 |
| | 8,104 |
| | 345 |
| | 13,396 |
|
Operating income | | 45,869 |
| | 43,220 |
| | (9,529 | ) | | 79,560 |
|
Capital expenditures | | 2,297 |
| | 1,743 |
| | 3,537 |
| | 7,577 |
|
| | | | | | | | |
Three months ended January 31, 2017: | | | | | | | | |
Net sales | |
| $220,901 |
| |
| $126,165 |
| |
| ($3,634 | ) | |
| $343,432 |
|
Depreciation | | 3,148 |
| | 2,043 |
| | 53 |
| | 5,244 |
|
Amortization | | 4,104 |
| | 5,735 |
| | 165 |
| | 10,004 |
|
Operating income | | 41,363 |
| | 29,084 |
| | (5,897 | ) | | 64,550 |
|
Capital expenditures | | 3,872 |
| | 2,504 |
| | 46 |
| | 6,422 |
|
| | | | | | | | |
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
Total assets by operating segment as of January 31, 20182019 and October 31, 20172018 are as follows (in thousands): |
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of January 31, 2019 | |
| $1,098,267 |
| |
| $1,522,291 |
| |
| $176,456 |
| |
| $2,797,014 |
|
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, 2018 | |
| $1,051,527 |
| |
| $1,357,992 |
| |
| $160,923 |
| |
| $2,570,442 |
|
Total assets as of October 31, 2017 | | 1,042,925 |
| | 1,339,363 |
| | 130,143 |
| | 2,512,431 |
|
10.11. COMMITMENTS AND CONTINGENCIES
Guarantees
As of January 31, 2018,2019, the Company has arranged for standby letters of credit aggregating $4.3 million, which are supported by its revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries.
Product Warranty
Changes in the Company’s product warranty liability for the three months ended January 31, 20182019 and 2017,2018, respectively, are as follows (in thousands):
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2019 | | 2018 |
Balances as of beginning of fiscal year | |
| $3,306 |
| |
| $2,921 |
|
Accruals for warranties | | 694 |
| | 798 |
|
Acquired warranty liabilities | | — |
| | 280 |
|
Warranty claims settled | | (829 | ) | | (832 | ) |
Balances as of January 31 | |
| $3,171 |
| |
| $3,167 |
|
|
| | | | | | | | |
| | Three months ended January 31, |
| | 2018 | | 2017 |
Balances as of beginning of fiscal year | |
| $2,921 |
| |
| $3,351 |
|
Accruals for warranties | | 798 |
| | 782 |
|
Acquired warranty liabilities | | 280 |
| | — |
|
Warranty claims settled | | (832 | ) | | (619 | ) |
Balances as of January 31 | |
| $3,167 |
| |
| $3,514 |
|
Litigation
The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
11.12. SUBSEQUENT EVENTEVENTS
In February 2018,2019, the Company, through a subsidiary of HEICO Electronic, acquired 85% of the assets and businessstock of SensorSolid Sealing Technology, Engineering, Inc. ("Sensor Technology"SST"). Sensor TechnologySST designs and manufactures sophisticated nuclear radiation detectorshigh-reliability ceramic-to-metal feedthroughs and connectors for law enforcement, homeland securitydemanding environments within the defense, industrial, life science, medical, research, semiconductor, and military applications. The remaining 15% continues to be owned by certain members of Sensory Technology's management team.other markets. The purchase price of this acquisition was paid in cash principally using proceeds from the Company's revolving credit facility and the total consideration for the acquisition is not material or significant to the Company’s condensed consolidated financial statements.
In February 2019, the Company through the Flight Support Group, acquired 80.1% of the stock 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 purchase price of this acquisition was paid in cash principally using cash provided by operating activities and the total consideration for the acquisition is not material or significant to the Company’s condensed consolidated financial statements.
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2017.2018. There have been no material changes to our critical accounting policies during the three months ended January 31, 2018.2019 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.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Our results of operations for the three months ended January 31, 20182019 have been affected by the Tax Cuts and Jobs Act as further detailed within Income Tax Expense of Management’s Discussion and Analysis of Financial Condition and Results of Operations of this quarterly report for the period ended January 31, 2018 and by the fiscal 20172019 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2017.this quarterly report.
All applicable fiscal 2018 share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock splitssplit effected in April 2017 and JanuaryJune 2018. See Note 1, Summary of Significant Accounting Policies – Stock Splits, of the Notes to Condensed Consolidated Financial Statements for additional information regarding these stock splits.
Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
| | | | Three months ended January 31, | | Three months ended January 31, |
| | 2018 | | 2017 | | 2019 | | 2018 |
Net sales | |
| $404,410 |
| |
| $343,432 |
| |
| $466,146 |
| |
| $404,410 |
|
Cost of sales | | 249,619 |
| | 218,015 |
| | 283,909 |
| | 249,619 |
|
Selling, general and administrative expenses | | 75,231 |
| | 60,867 |
| | 84,290 |
| | 75,231 |
|
Total operating costs and expenses | | 324,850 |
| | 278,882 |
| | 368,199 |
| | 324,850 |
|
Operating income | |
| $79,560 |
| |
| $64,550 |
| |
| $97,947 |
| |
| $79,560 |
|
| | | | | | | | |
Net sales by segment: | | | | | | | | |
Flight Support Group | |
| $254,721 |
| |
| $220,901 |
| |
| $287,213 |
| |
| $254,721 |
|
Electronic Technologies Group | | 155,658 |
| | 126,165 |
| | 184,429 |
| | 155,658 |
|
Intersegment sales | | (5,969 | ) | | (3,634 | ) | | (5,496 | ) | | (5,969 | ) |
| |
| $404,410 |
| |
| $343,432 |
| |
| $466,146 |
| |
| $404,410 |
|
| | | | | | | | |
Operating income by segment: | | | | | | | | |
Flight Support Group | |
| $45,869 |
| |
| $41,363 |
| |
| $52,880 |
| |
| $45,869 |
|
Electronic Technologies Group | | 43,220 |
| | 29,084 |
| | 51,602 |
| | 43,220 |
|
Other, primarily corporate | | (9,529 | ) | | (5,897 | ) | | (6,535 | ) | | (9,529 | ) |
| |
| $79,560 |
| |
| $64,550 |
| |
| $97,947 |
| |
| $79,560 |
|
| | | | | | | | |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | | 38.3 | % | | 36.5 | % | | 39.1 | % | | 38.3 | % |
Selling, general and administrative expenses | | 18.6 | % | | 17.7 | % | | 18.1 | % | | 18.6 | % |
Operating income | | 19.7 | % | | 18.8 | % | | 21.0 | % | | 19.7 | % |
Interest expense | | (1.2 | %) | | (.6 | %) | | (1.2 | %) | | (1.2 | %) |
Other income | | .1 | % | | .1 | % | |
Other (expense) income | | | (.1 | %) | | .1 | % |
Income tax expense | | .9 | % | | 4.9 | % | | .9 | % | | .9 | % |
Net income attributable to noncontrolling interests | | 1.6 | % | | 1.6 | % | | 1.9 | % | | 1.6 | % |
Net income attributable to HEICO | | 16.1 | % | | 11.9 | % | | 17.0 | % | | 16.1 | % |
Comparison of First Quarter of Fiscal 20182019 to First Quarter of Fiscal 20172018
Net Sales
Our consolidated net sales in the first quarter of fiscal 20182019 increased by 18%15% to $404.4$466.1 million, as compared toup from net sales of $343.4$404.4 million in the first quarter of fiscal 2017.2018. The increase in consolidated net sales principally reflects an increase of $29.5$28.8 million (a 23%(an 18% increase) to $155.7$184.4 million in net sales within the ETG as well as an increase of $33.8$32.5 million (a 15%13% increase) to $254.7$287.2 million in net sales within the FSG. The net sales increase in the ETG reflects $19.8organic growth of 12% and $10.8 million of aggregatein net sales contributed by aour fiscal 20172019 and a fiscal 2018 acquisition, and organic growth of 6%.acquisitions. The ETG's organic growth is mainly attributable to increased demand for our spacedefense, aerospace and defensespace products resulting in net sales increases of $4.6$14.1 million, $3.2 million and $2.3 million, respectively. The net sales increase in the FSG principally reflects net sales of $25.5 million contributed by our fiscal 2017 acquisitions as well as organic growth of 4%13%. The FSG's organic growth is mainly attributable to increased demand and new product offerings within our aftermarket replacement parts and repair and overhaul parts and servicesspecialty products product lines resulting in net sales increases of $7.3$25.2 million and $3.0$8.4 million, respectively. These increases were partially offset by lower net sales of $2.0 million within our specialty products product line principally related to certain defense products. Excluding the net sales decrease in our specialty products product line, the FSG experienced organic growth of 6%, principally in our aftermarket replacement parts product line. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the first quarter of fiscal 2018.2019.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 39.1% in the first quarter of fiscal 2019, up from 38.3% in the first quarter of fiscal 2018, up from 36.5% in the first quarter of fiscal 2017, principally reflecting an increase of 3.9%.7% in the ETG'sFSG's gross profit margin. The increase in the ETG’sFSG's gross profit margin is principally attributable to increased net sales and a more favorable product mix for certain ofwithin our defensespecialty products partially offset by a less favorable product mix for certain of our space products.line. Total new product research and development expenses included within our consolidated cost of sales were $15.2 million in the first quarter of fiscal 2019 compared to $12.7 million in the first quarter of fiscal 2018 compared to $11.2 million in the first quarter of fiscal 2017.2018.
Our consolidated selling, general and administrative ("SG&A") expenses were $75.2$84.3 million and $60.9$75.2 million in the first quarter of fiscal 20182019 and 2017,2018, respectively. The increase in consolidated SG&A expenses principally reflects $8.9$4.3 million attributable to changes in the estimated fair value of accrued contingent consideration associated with prior year acquisitions, $3.5 million attributable to the fiscal 20172019 and 2018 acquisitions and $2.2$1.7 million of higher performance-based compensation expense.
Our consolidated SG&A expenses as a percentage of net sales were 18.6% and 17.7%decreased to 18.1% in the first quarter of fiscal 2018 and 2017, respectively.2019, down from 18.6% in the first quarter of fiscal 2018. The increasedecrease in consolidated SG&A expenses as a percentage of net sales principally reflects efficiencies realized from the net sales growth partially offset by a .3%1.0% impact from higher performance-based compensation expense and a .3% impact from an increasethe previously mentioned changes in intangible asset amortization expense mainly resulting from our fiscal 2017 acquisitions.the estimated fair value of accrued contingent consideration.
Operating Income
Our consolidated operating income increased by 23% to $97.9 million in the first quarter of fiscal 2019, up from $79.6 million in the first quarter of fiscal 2018, up from $64.6 million in the first quarter of fiscal 2017.2018. The increase in consolidated operating income principally reflects a $14.1an $8.4 million increase (a 49%19% increase) to $43.2$51.6 million in operating income of the ETG as well as a $4.5$7.0 million increase (an 11%(a 15% increase) to $45.9$52.9 million in operating income of the FSG. The increase in operating income of the ETG and FSG mainly reflects the previously mentioned net sales growth and improved gross profit margin.growth. The increase in operating income of the FSG is principally attributed toalso reflects the previously mentioned net sales growth partially offset by $1.0 million of higher performance-based compensation expense and a $.8 million increase in intangible asset amortization expense mainly resulting from the fiscal 2017 acquisitions. Additionally, our corporate expenses increased by $2.9 million principally due to a $1.7 million increase in accrued performance-based compensation expense and higher operating costs in support of the overall growth of our business.improved gross profit margin.
Our consolidated operating income as a percentage of net sales improved to 21.0% in the first quarter of fiscal 2019, up from 19.7% in the first quarter of fiscal 2018, up from 18.8%2018. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to 18.4% in the first quarter of fiscal 2017. The increase principally reflects2019, up from 18.0% in the first quarter of fiscal 2018 and an increase in the ETG’s operating income as a percentage of net sales to 28.0% in the first quarter of fiscal 2019, up slightly from 27.8% in the first quarter of fiscal 2018, up from 23.1% in the first quarter of fiscal 2017, partially offset by a decrease in the FSG’s operating income as a percentage of net sales to 18.0% in the first quarter of fiscal 2018 from 18.7% in the first quarter of fiscal 2017.2018. The increase in the ETG’sFSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin. The decreasemargin and SG&A efficiencies, partially offset by a 1.2% impact from changes in the FSG’s operating income as a percentageestimated fair value of net sales principally reflects a .4% and .3% impact from the previously mentioned higher performance-based compensation expense and increase in intangible amortization expense, respectively.accrued contingent consideration.
Interest Expense
Interest expense increased to $5.5 million in the first quarter of fiscal 2019, up from $4.7 million in the first quarter of fiscal 2018, up from $2.0 million in the first quarter of fiscal 2017.2018. The increase was principally due to higher interest rates as well aspartially offset by a higherlower weighted average balance outstanding under our revolving credit facility associated with our fiscal 2017 acquisitions.facility.
Other (Expense) Income
Other (expense) income in the first quarter of fiscal 20182019 and 20172018 was not material.
Income Tax Expense
OnIn December 22, 2017, the United States (U.S.("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 existingprevious 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% and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of our foreign
subsidiaries. TheCertain other provisions of the Tax Act also contains additional provisions that will becomebecame effective for HEICO in fiscal 2019 including a new tax on Global Intangible Low-Taxed Income (“GILTI”), a new deduction for Foreign-Derived Intangible Income (“FDII”), the repeal of the domestic production activity deduction and increased limitations on the deductibility of certain executive compensation. We have not yet determined the impact of theThe provisions of the Tax Act which do not becomethat became effective for HEICO until fiscal 2019.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on the accounting for the tax effects of the Tax Act. This guidance provides companies with a measurement period not to exceed one year from the enactment of the Tax Act to complete their accounting for the related tax effects. SAB 118 further states that during the measurement period, companies who are able to make reasonable estimates of the tax effects of the Tax Act should include those amounts in their financial statements as provisional amounts and reflect any adjustments in subsequent periods as they refine their estimates or complete their accounting of such tax effects.
As a result of the Tax Act, we have revised our estimated annual effective federal statutory income tax rate to reflect a reduction in the rate from 35% to 21% effective January 1, 2018, which results in a blended rate of 23.3% for HEICO in fiscal 2018. Additionally, we remeasured2019 did not have a material effect on our U.S. federal net deferredincome tax liabilities and recorded a provisional discrete tax benefit of $16.6 million inexpense for the first quarter of fiscal 2018. Further, we recorded a provisional discrete tax expense of $4.7 million in the first quarter of fiscal 2018 related to a one-time transition tax on the unremitted earnings of our foreign subsidiaries. We intend to pay this tax over the eight-year period allowed for in the Tax Act.2019.
Our effective tax rate in the first quarter of fiscal 2018 decreased2019 was 4.5% as compared to 4.7% from 26.6% in the first quarter of fiscal 2017.2018. Income tax expense in both the first quarter of fiscal 2019 and fiscal 2018 was favorably impacted as a result of discrete tax benefits. The decrease principally reflectstax benefit from stock option exercises recognized in the previously mentionedfirst quarter of fiscal 2019 increased by $14.4 million compared to the first quarter of fiscal 2018. During the first quarter of fiscal 2018, we recognized a discrete tax benefit from the remeasurement of our U.S. federal net deferred tax liabilities and the benefit of a lower federal statutory income tax rate, which werethat was partially offset by the aforementioneda discrete tax expense related to a one-time transition tax expense.on the unremitted earnings of our foreign subsidiaries that resulted in an $11.9 million net discrete tax benefit.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace Holdings Corp. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $6.5$8.7 million in first quarter of fiscal 2018 as2019 and inclusive of a tax benefit from stock option exercises recognized in the first quarter of fiscal 2019 that increased by $1.4 million compared to $5.3the first quarter of fiscal 2018. Net income attributable to noncontrolling interests was $6.5 million in the first quarter of fiscal 2017.2018. The increase in net income attributable to noncontrolling interests in the first quarter of fiscal 20182019 principally reflects the impact of the Tax Actlarger aforementioned tax benefit as well as improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.
Net Income Attributable to HEICO
Net income attributable to HEICO increased to a record $79.3 million, or $.58 per diluted share, in the first quarter of fiscal 2019, up from $65.2 million, or $.60$.48 per diluted share, in the first quarter of fiscal 2018 up from $40.9 million, or $.38 per diluted share, in the first quarter of fiscal 2017 principally reflecting the previously mentioned decrease in our effective tax rate and increased net sales and operating income.
Outlook
As we look ahead to the remainder of fiscal 2018,2019, 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 willplan 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 are increasing our estimated consolidated fiscal 20182019 year-over-year growth in net sales to 12%be 9% - 14%11% and in net income to 30%be 11% - 32%13%, up from our prior growth estimates in net sales of 8% - 10% and in net income of approximately 10% - 12%.
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 20182019 are now anticipated to be approximately $50$43 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2018,2019, we were in compliance with all such covenants. As of January 31, 2018,2019, our total debt to shareholders’ equity ratio was 50.3%38.0%.
In November 2017, we entered into a new $1.3 billion revolving credit facility agreement, which matures in November 2022 and replaced our previous revolving credit agreement. Additional information about the new and previous revolving credit agreements may be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading, "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended October 31, 2017.
Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was $45.0$49.6 million in the first quarter of fiscal 20182019 and consisted primarily of net income from consolidated operations of $71.7$88.0 million, and depreciation and amortization expense of $19.0$20.0 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan ("LCP") of $9.1 million (principally participant deferrals and employer contributions), a $3.8 million deferred income tax provision, $2.4 million in share-based compensation expense (a non-cash item) and $2.2 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $29.8$78.0 million increase in working capital and a deferred income tax benefit of $17.3 million.
capital. The increase in working capital is inclusive of an $18.5a $34.5 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 20172018 accrued performance-based compensation, and an $18.3a $24.3 million increase in inventoryinventories to support the growth of our businesses and anticipated higher demand during the remainder of fiscal 2018, partially offset by2019 and a $4.7$19.8 million net impact from decreasesdecrease in both accounts receivable and trade accounts payable. The deferred income tax benefit principally reflectspayable reflecting the impact from the remeasurementtiming of our U.S. federal net deferred tax liabilities.payments.
Net cash provided by operating activities decreased by $11.0$2.3 million in the first quarter of fiscal 20182019 from $56.0$51.9 million in the first quarter of fiscal 2017.2018. The decrease is principally attributable to a $21.3$48.1 million increase in net working capital partially offset by higher net income from consolidated operations excluding the non-cash increasea decrease of $16.9$21.1 million in deferred income tax benefits, as a result of$16.3 million increase in net income from consolidated operations, a $5.1 million increase in accrued contingent consideration, a $2.4 million increase in net changes in other long-term liabilities and assets related to the Tax Act.HEICO LCP and a $1.0 million increase in depreciation and amortization expense. The increase in net working capital primarily resulted from the timing associated with the payments of accrued expenses and other current liabilities, the collection of accounts receivable and the payment of income taxes and trade accounts payable as well aspayable. The decrease in deferred income tax benefits is principally attributable to the aforementioned increaseremeasurement of our U.S. federal net deferred tax liabilities under the Tax Act in inventories.the first quarter of fiscal 2018.
Investing Activities
Net cash used in investing activities totaled $16.5$115.6 million in the first quarter of fiscal 20182019 and related primarily to acquisitions of $101.0 million (net of cash acquired), investments related to the HEICO LCP of $8.7 million and capital expenditures of $7.6 million as well as acquisitions, net of cash acquired of $6.1$5.9 million. Further details regarding our fiscal 2018 acquisition2019 acquisitions may be found in Note 2, Acquisition,Acquisitions, of the Notes to Condensed Consolidated Financial Statements.
Financing Activities
Net cash used inprovided by financing activities in the first quarter of fiscal 20182019 totaled $17.3$63.6 million. During the first quarter of fiscal 2018,2019, we borrowed $93.0 million under our revolving credit facility to fund certain of our fiscal 2019 acquisitions. Additionally, we made $17.0 million in payments on our revolving credit facility, paid $7.4$9.3 million in cash dividends on our common stock, and made $5.0$2.8 million in payments on our revolving credit facility and incurred $4.1 million in issuance costs associated with our new revolving credit facility.of distributions to noncontrolling interests.
Contractual Obligations
There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2017.2018.
Off-Balance Sheet Arrangements
Guarantees
As of January 31, 2018,2019, we have arranged for standby letters of credit aggregating $4.3 million, which are supported by our revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of our subsidiaries.
New Accounting Pronouncements
In May 2014, the FinancialSee Note 1, Summary of Significant Accounting Standards Board ("FASB") issuedPolicies - New Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09, as amended, is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We are currently evaluating which transition method we will elect. In addition, we are currently identifying our various revenue streams and reviewing certain underlying customer contracts to determine the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Previously, inventories were measured at the lower of cost or market. We adopted ASU 2015-11 in the first quarter of fiscal 2018, resulting in no material effect on our consolidated results of operations, financial position or cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. We are currently evaluating the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. We are currently evaluating the effect the adoption of this guidance will have on our consolidated statement of cash flows.
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 valuePronouncements, of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognizedNotes to Condensed Consolidated Financial Statements for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. We are currently evaluating the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows.additional information.
Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2017.2018.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting duringDuring the first quarter ended January 31, 2018 that2019, we adopted Accounting Standards Update 2014-09, which as amended, was codified as Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers" (“ASC 606”). 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. While the adoption of ASC 606 was not material to our Condensed Consolidated Statement of Operations, the future impact of ASC 606 is dependent on the mix and nature of specific customer contracts. As such, we have materially affected, or are reasonably likelyimplemented certain changes to materially affect, HEICO'sour internal controls over financial reporting to support the recognition and disclosure requirements under ASC 606, including changes to our accounting policies and internal control over financial reporting.procedures.
PART II. OTHER INFORMATION
Item 6. EXHIBITS
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Exhibit | | Description |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | The Instance Document Does Not Appear in the Interactive Data File Because its XBRL InstanceTags Are Embedded Within the Inline XBRL Document. * |
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101.SCH | | XBRL Taxonomy Extension Schema Document. * |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. * |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. * |
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101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. * |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. * |
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** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | HEICO CORPORATION |
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Date: | March 1, 2018February 28, 2019 | By: | /s/ CARLOS L. MACAU, JR. |
| | | Carlos L. Macau, Jr. Executive Vice President - Chief Financial Officer and Treasurer (Principal Financial Officer) |
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| | By: | /s/ STEVEN M. WALKER |
| | | Steven M. Walker Chief Accounting Officer and Assistant Treasurer (Principal Accounting Officer) |