UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended April 30, 2020 | ||||||||
| OR | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from ______ to _______ | ||||||||
Commission File Number: 001-04604
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 3000 Taft Street, Hollywood, Florida | ||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(954 ) 987-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the registrant’s classes of common stock as of May 26, 2020 is as follows:
| Common Stock, $.01 par value | shares | |||||||
| Class A Common Stock, $.01 par value | shares | |||||||
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page | |||||||||||
| Part I. | Financial Information | ||||||||||
Item 1. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
| Part II. | Other Information | ||||||||||
Item 1A. | |||||||||||
Item 6. | |||||||||||
1
PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
| April 30, 2020 | October 31, 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Contract assets | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Trade accounts payable | ||||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net of current maturities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 12) | ||||||||||||||
| Redeemable noncontrolling interests (Note 3) | ||||||||||||||
| Shareholders’ equity: | ||||||||||||||
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued | ||||||||||||||
Common Stock, $.01 par value per share; 150,000 shares authorized; 54,182 and 54,143 shares issued and outstanding | ||||||||||||||
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 80,555 and 80,353 shares issued and outstanding | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Deferred compensation obligation | ||||||||||||||
| HEICO stock held by irrevocable trust | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Total HEICO shareholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income | |||||||||||||||||||||||
Income before income taxes and noncontrolling interests | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income from consolidated operations | |||||||||||||||||||||||
Less: Net income attributable to noncontrolling interests | |||||||||||||||||||||||
| Net income attributable to HEICO | $ | $ | $ | $ | |||||||||||||||||||
Net income per share attributable to HEICO shareholders: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income from consolidated operations | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
Amortization of unrealized loss on defined benefit pension plan, net of tax | |||||||||||||||||||||||
| Total other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
Comprehensive income from consolidated operations | |||||||||||||||||||||||
Net income attributable to noncontrolling interests | |||||||||||||||||||||||
Foreign currency translation adjustments attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income attributable to HEICO | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Six Months Ended April 30, 2020 and 2019
(in thousands, except per share data)
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling 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, 2019 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($.08 per share) | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of April 30, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of October 31, 2018 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect from adoption of ASC 606 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($.07 per share) | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | ( | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred compensation obligation | — | — | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of April 30, 2019 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
For the Three Months Ended April 30, 2020 and 2019
(in thousands, except per share data)
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling 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 January 31, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests assumed related to acquisitions | ( | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of April 30, 2020 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| HEICO Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interests | Common Stock | Class A Common Stock | Capital in Excess of Par Value | Deferred Compensation Obligation | HEICO Stock Held by Irrevocable Trust | Accumulated Other Comprehensive Loss | Retained Earnings | Noncontrolling Interests | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of January 31, 2019 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to HEICO Savings and Investment Plan | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from stock option exercises | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemptions of common stock related to stock option exercises | — | ( | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests assumed related to acquisitions | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | ( | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to redemption amount of redeemable noncontrolling interests | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of April 30, 2019 | $ | $ | $ | $ | $ | ($ | ($ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
| Six months ended April 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating Activities: | |||||||||||
| Net income from consolidated operations | $ | $ | |||||||||
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Employer contributions to HEICO Savings and Investment Plan | |||||||||||
| Increase in accrued contingent consideration | |||||||||||
| Deferred income tax (benefit) provision | ( | ||||||||||
| Payment of contingent consideration | ( | ( | |||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Decrease (increase) in accounts receivable | ( | ||||||||||
| (Increase) decrease in contract assets | ( | ||||||||||
| Increase in inventories | ( | ( | |||||||||
| (Increase) decrease in prepaid expenses and other current assets | ( | ||||||||||
| Increase (decrease) in trade accounts payable | ( | ||||||||||
| Decrease in accrued expenses and other current liabilities | ( | ( | |||||||||
| Decrease in income taxes payable | ( | ( | |||||||||
| Net changes in other long-term liabilities and assets related to HEICO Leadership Compensation Plan | |||||||||||
| Other | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Investments related to HEICO Leadership Compensation Plan | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Borrowings on revolving credit facility | |||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Proceeds from stock option exercises | |||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Redemptions of common stock related to stock option exercises | ( | ( | |||||||||
| Payment of contingent consideration | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The October 31, 2019 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the six months ended April 30, 2020 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
HEICO's results of operations for the six and three months ended April 30, 2020 have been significantly affected by the COVID-19 outbreak, classified by the World Health Organization as a global pandemic in March 2020 (the “Outbreak”). The effects of the Outbreak and related actions by governments around the world to mitigate its spread have impacted the Company's employees, customers, suppliers and manufacturers. With respect to the Company’s results of operations, approximately half of HEICO’s net sales are derived from defense, space and other industrial markets including electronics, medical and telecommunications. Demand for products in that half of the Company’s business has not been fundamentally impacted and its operational results remain materially consistent with financial expectations prior to the commencement of the Outbreak. The remaining portion of HEICO’s net sales is derived from commercial aviation products and services. The Outbreak has caused significant volatility and a substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, HEICO’s businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020.
8
New Accounting Pronouncements
Upon adoption, the Company elected the package of transitional practical expedients, which allowed the Company to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the Company elected the short-term lease practical expedient, which allows HEICO to not record an ROU asset and lease liability for any lease with a term of twelve months or less, and also elected the single component practical expedient for all asset classes, which allows the Company to include both lease and non-lease components associated with a lease as a single lease component when determining the value of the ROU asset and lease liability.
The adoption of this guidance resulted in the Company recording ROU assets and corresponding lease liabilities of $63.4 million and $64.1 million, respectively, in the Company's Condensed Consolidated Balance Sheet. The adoption of ASC 842 did not have a material impact on the Company’s Condensed Consolidated Statement of Operations or Statement of Cash Flows. See Note 9, Leases, for additional information regarding the Company's accounting policy for leases and disclosures required by ASC 842.
9
2. ACQUISITIONS
In December 2019, the Company, through a subsidiary of HEICO Electronic, acquired 100 % of the business and assets of the Human-Machine Interface ("HMI") product line of Spectralux Corporation. HMI designs, manufactures, and repairs flight deck annunciators, panels, indicators, and illuminated keyboards, as well as lighting controls, and flight deck lighting.
In December 2019, the Company, through HEICO Electronic, acquired 80.1 % of the stock of Quell Corporation ("Quell"). Quell designs and manufactures electromagnetic interference (EMI)/radio-frequency interference (RFI) and transient protection solutions for a wide variety of connectors that principally serve customers within the aerospace and defense markets. The remaining 19.9 % continues to be owned by certain members of Quell's management team (see Note 3, Selected Financial Statement Information - Redeemable Noncontrolling Interests, for additional information).
The purchase price of each fiscal 2020 acquisition was paid in cash, principally using proceeds from the Company's revolving credit facility, and is not material or significant to the Company's condensed consolidated financial statements. The allocation of the total consideration for the fiscal 2020 acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the fiscal 2020 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The amount of net sales and earnings of the fiscal 2020 acquisitions included in the Condensed Consolidated Statement of Operations for the six and three months ended April 30, 2020 is not material. Had the fiscal 2020 acquisitions occurred as of November 1, 2018, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the six and three months ended April 30, 2020 and 2019 would not have been materially different than the reported amounts.
10
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| (in thousands) | April 30, 2020 | October 31, 2019 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Less: Allowance for doubtful accounts | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
Inventories
| (in thousands) | April 30, 2020 | October 31, 2019 | ||||||||||||
| Finished products | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Materials, parts, assemblies and supplies | ||||||||||||||
| Inventories, net of valuation reserves | $ | $ | ||||||||||||
Property, Plant and Equipment
| (in thousands) | April 30, 2020 | October 31, 2019 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and improvements | ||||||||||||||
| Machinery, equipment and tooling | ||||||||||||||
| Construction in progress | ||||||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $18.0 million as of April 30, 2020 and October 31, 2019. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2020 and 2019 was $3.8 3.6 1.7 2.2
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Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the six and three months ended April 30, 2020 and 2019 is as follows (in thousands):
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| R&D expenses | $ | $ | $ | $ | |||||||||||||||||||
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2029. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
| April 30, 2020 | October 31, 2019 | ||||||||||
| Redeemable at fair value | $ | $ | |||||||||
| Redeemable based on a multiple of future earnings | |||||||||||
| Redeemable noncontrolling interests | $ | $ | |||||||||
As discussed in Note 2, Acquisitions, the Company, through HEICO Electronic, acquired 80.1 % of the stock of Quell in December 2019. As part of the shareholders' agreement, the noncontrolling interest holders have the right to cause the Company to purchase their equity interests over a four-year period beginning in fiscal 2025, or sooner under certain conditions, and the Company has the right to purchase the same equity interests over the same period.
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Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the six months ended April 30, 2020 are as follows (in thousands):
| Foreign Currency Translation | Defined Benefit Pension Plan | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balances as of October 31, 2019 | ($ | ($ | ($ | ||||||||||||||
| Unrealized loss | ( | — | ( | ||||||||||||||
| Amortization of unrealized loss | — | ||||||||||||||||
| Balances as of April 30, 2020 | ($ | ($ | ($ | ||||||||||||||
4. GOODWILL AND OTHER INTANGIBLE ASSETS
| Segment | Consolidated Totals | ||||||||||||||||
| FSG | ETG | ||||||||||||||||
| Balances as of October 31, 2019 | $ | $ | $ | ||||||||||||||
| Goodwill acquired | — | ||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||
| Adjustments to goodwill | — | ( | ( | ||||||||||||||
| Balances as of April 30, 2020 | $ | $ | $ | ||||||||||||||
The goodwill acquired pertains to the fiscal 2020 acquisitions described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2019 acquisitions. The Company estimates that $9 million of the goodwill acquired in fiscal 2020 will be deductible for income tax purposes.
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Identifiable intangible assets consist of the following (in thousands):
| As of April 30, 2020 | As of October 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | ($ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||||
| Intellectual property | ( | ( | ||||||||||||||||||||||||||||||||||||
| Licenses | ( | ( | ||||||||||||||||||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | ||||||||||||||||||||||||||||||||||||
| Trade names | ( | ( | ||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| Non-Amortizing Assets: | ||||||||||||||||||||||||||||||||||||||
| Trade names | — | — | ||||||||||||||||||||||||||||||||||||
| $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||||||
The increase in the gross carrying amount of customer relationships, intellectual property and trade names as of April 30, 2020 compared to October 31, 2019 principally relates to such intangible assets recognized in connection with the fiscal 2020 acquisitions (see Note 2, Acquisitions).
Amortization expense related to intangible assets for the six months ended April 30, 2020 and 2019 was $27.6 million and $25.9 million, respectively. Amortization expense related to intangible assets for the three months ended April 30, 2020 and 2019 was $13.9 million and $13.1 27.5 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $52.4 million in fiscal 2021, $45.8 million in fiscal 2022, $40.6 million in fiscal 2023, $36.1 million in fiscal 2024, $32.2 million in fiscal 2025, and $151.4 million thereafter.
5. LONG-TERM DEBT
| April 30, 2020 | October 31, 2019 | ||||||||||
| Borrowings under revolving credit facility | $ | $ | |||||||||
| Finance leases and note payable | |||||||||||
| Less: Current maturities of long-term debt | ( | ( | |||||||||
| $ | $ | ||||||||||
14
6. REVENUE
Contract Balances
Contract assets (unbilled receivables) represent revenue recognized on contracts using an over-time recognition model in excess of amounts invoiced to the customer. Contract liabilities (deferred revenue) represent customer advances and billings in excess of revenue recognized and are included within accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets.
| April 30, 2020 | October 31, 2019 | Change | |||||||||||||||
| Contract assets | $ | $ | $ | ||||||||||||||
| Contract liabilities | |||||||||||||||||
| Net contract assets | $ | $ | $ | ||||||||||||||
The increase in the Company's contract assets during the first six months of fiscal 2020 occurred within the ETG and principally reflects additional unbilled receivables on certain customer contracts using an over-time recognition model in excess of billings on certain customer contracts.
The increase in the Company's contract liabilities during the first six months of fiscal 2020 mainly occurred within the FSG and principally reflects the receipt of new customer deposits on certain customer contracts in excess of reductions to contract liabilities from customer deposits recognized as revenue.
The amount of revenue that the Company recognized during the six and three months ended April 30, 2020 that was included in contract liabilities as of the beginning of fiscal 2020 was $16.5 million and $3.1 million, respectively.
Remaining Performance Obligations
As of April 30, 2020, the Company had $394.4 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG and the FSG's specialty products and aftermarket replacement parts product lines. The Company will recognize net sales as these
15
obligations are satisfied. The Company expects to recognize $168.0 million of this amount during the remainder of fiscal 2020 and $226.4 million thereafter, of which the majority is expected to occur in fiscal 2021.
Contract Estimates
Changes in estimates did not have a material effect on net income from consolidated operations for the six and three months ended April 30, 2020.
Disaggregation of Revenue
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Flight Support Group: | |||||||||||||||||||||||
Aftermarket replacement parts (1) | $ | $ | $ | $ | |||||||||||||||||||
Repair and overhaul parts and services (2) | |||||||||||||||||||||||
Specialty products (3) | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Electronic Technologies Group: | |||||||||||||||||||||||
Electronic component parts for defense, space and aerospace equipment (4) | |||||||||||||||||||||||
Electronic component parts for equipment in various other industries (5) | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Intersegment sales | ( | ( | ( | ( | |||||||||||||||||||
| Total consolidated net sales | $ | $ | $ | $ | |||||||||||||||||||
(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
16
(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.
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Flight Support Group: | |||||||||||||||||||||||
| Aerospace | $ | $ | $ | $ | |||||||||||||||||||
| Defense and Space | |||||||||||||||||||||||
Other (1) | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Electronic Technologies Group: | |||||||||||||||||||||||
| Defense and Space | |||||||||||||||||||||||
Other (2) | |||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Intersegment sales | ( | ( | ( | ( | |||||||||||||||||||
| Total consolidated net sales | $ | $ | $ | $ | |||||||||||||||||||
(1) Principally industrial products.
17
7. INCOME TAXES
The Company's effective tax rate in the first six months of fiscal 2020 was .3 %, as compared to 14.5 % in the first six months of fiscal 2019. The Company recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2020 and 2019 of $47.6 million and $16.6 million, respectively. The $31.0 million larger benefit from stock option exercises recognized in the first quarter of fiscal 2020 was the result of more stock options exercised and the strong appreciation in HEICO's stock price during the optionees' holding periods.
8. FAIR VALUE MEASUREMENTS
The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
| As of April 30, 2020 | ||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Deferred compensation plan: | ||||||||||||||||||||||||||
| Corporate-owned life insurance | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
| As of October 31, 2019 | ||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Deferred compensation plan: | ||||||||||||||||||||||||||
| Corporate-owned life insurance | $ | $ | $ | $ | ||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||||||||||||
18
The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company, and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Condensed Consolidated Balance Sheets. The related liabilities of the LCP are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $156.3 million as of April 30, 2020 and $151.1 million as of October 31, 2019.
As part of the agreement to acquire a subsidiary by the FSG in fiscal 2019, the Company may be obligated to pay contingent consideration of $6.4 million in fiscal 2022 should the acquired entity meet a certain earnings objective during the second and third years following the acquisition. As of April 30, 2020, the estimated fair value of the contingent consideration was $1.2 million.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet a certain earnings objective during the first six years following the acquisition. As of April 30, 2020, the estimated fair value of the contingent consideration was $17.8 million.
The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were determined using probability-based scenario analyses. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of HEICO. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's condensed consolidated statements of operations.
The Level 3 inputs used to derive the estimated fair value of the Company's contingent consideration liability as of April 30, 2020 were as follows:
| Fiscal 2019 Acquisition | Fiscal 2017 Acquisition | ||||||||||||||||||||||
| Compound annual revenue growth rate range | ( | %) | - | % | ( | %) | - | % | |||||||||||||||
| Weighted average discount rate | % | % | |||||||||||||||||||||
19
Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended April 30, 2020 are as follows (in thousands):
| Liabilities | ||||||||
| Balance as of October 31, 2019 | $ | |||||||
| Increase in accrued contingent consideration | ||||||||
| Payment of contingent consideration | ( | |||||||
| Balance as of April 30, 2020 | $ | |||||||
The Company's contingent consideration liability is included in other long-term liabilities in its Condensed Consolidated Balance Sheets and the Company records changes in accrued contingent consideration within selling, general and administrative expenses in its Condensed Consolidated Statements of Operations.
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the six months ended April 30, 2020.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of April 30, 2020 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
9. LEASES
20
costs and reduced by any lease incentives. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
HEICO’s operating lease ROU assets represent its right to use an underlying asset during the lease term and its operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. HEICO’s operating lease ROU assets are included within other assets and its operating lease liabilities are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet. For additional information on the Company’s finance leases, see Note 5, Long-term Debt, of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report and Note 5, Long-term Debt, and Note 3, Selected Financial Statement Information - Property, Plant and Equipment, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The following table presents the Company’s operating lease ROU assets and lease liabilities as of April 30, 2020 (in thousands):
| April 30, 2020 | |||||
| Right-of-use assets | $ | ||||
| Current lease liabilities | $ | ||||
| Long-term lease liabilities | |||||
| Total operating lease liabilities | $ | ||||
The Company’s operating lease expense is recorded as a component of cost of sales and/or selling, general, and administrative expenses in the Company’s Condensed Consolidated Statements of Operations. The following table presents the components of operating lease expense for the six and three months ended April 30, 2020 (in thousands):
| Six months ended | Three months ended | |||||||||||||
| April 30, 2020 | April 30, 2020 | |||||||||||||
| Operating lease expense | $ | $ | ||||||||||||
| Variable lease expense | ||||||||||||||
Total operating lease expense (1) | $ | $ | ||||||||||||
(1) Excludes short-term lease expense, which is not material.
21
The following table presents a maturity analysis of the Company's operating lease liabilities as of April 30, 2020 for the remainder of fiscal 2020 and the next five fiscal years and thereafter (in thousands):
| Year ending October 31, | |||||
| 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total minimum lease payments | |||||
| Less: amount representing interest | ( | ||||
| Present value of minimum lease payments | $ | ||||
Prior to the adoption of ASC 842, the Company's future minimum lease payments under non-cancelable operating leases on an undiscounted basis as of October 31, 2019 were $15.5 million in fiscal 2020, $15.6 million in fiscal 2021, $13.8 million in fiscal 2022, $8.5 million in fiscal 2023, $4.7 million in fiscal 2024 and $18.8 million thereafter.
The Company does not have any material leases that have been signed but have yet to commence as of April 30, 2020.
| April 30, 2020 | |||||
| Weighted average remaining lease term (years) | |||||
| Weighted average discount rate | |||||
The following table presents supplemental disclosures of cash flow information associated with the Company's operating leases for the six months ended April 30, 2020 (in thousands):
| Six months ended | |||||
| April 30, 2020 | |||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | ||||
| Right-of-use assets obtained in exchange for new lease liabilities | |||||
22
10. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income attributable to HEICO | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted average common shares outstanding - basic | |||||||||||||||||||||||
| Effect of dilutive stock options | |||||||||||||||||||||||
Weighted average common shares outstanding - diluted | |||||||||||||||||||||||
Net income per share attributable to HEICO shareholders: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Anti-dilutive stock options excluded | |||||||||||||||||||||||
23
11. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the six and three months ended April 30, 2020 and 2019, respectively, is as follows (in thousands):
Other,
Primarily Corporate and
Intersegment (1) | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Six months ended April 30, 2020: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Six months ended April 30, 2019: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Three months ended April 30, 2020: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
| Three months ended April 30, 2019: | ||||||||||||||||||||||||||
| Net sales | $ | $ | ($ | $ | ||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization | ||||||||||||||||||||||||||
| Operating income | ( | |||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
24
Total assets by operating segment are as follows (in thousands):
| Other, Primarily Corporate | Consolidated Totals | |||||||||||||||||||||||||
| Segment | ||||||||||||||||||||||||||
| FSG | ETG | |||||||||||||||||||||||||
| Total assets as of April 30, 2020 | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets as of October 31, 2019 | ||||||||||||||||||||||||||
12. COMMITMENTS AND CONTINGENCIES
Guarantees
As of April 30, 2020, the Company has arranged for standby letters of credit aggregating $4.8
Product Warranty
Changes in the Company’s product warranty liability for the six months ended April 30, 2020 and 2019, respectively, are as follows (in thousands):
| Six months ended April 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Balances as of beginning of fiscal year | $ | $ | ||||||||||||
| Accruals for warranties | ||||||||||||||
| Acquired warranty liabilities | — | |||||||||||||
| Warranty claims settled | ( | ( | ||||||||||||
| Balances as of April 30 | $ | $ | ||||||||||||
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.
25
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2019. There have been no material changes to our critical accounting policies during the six months ended April 30, 2020.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Our results of operations for the six and three months ended April 30, 2020 have been significantly affected by the COVID-19 outbreak, classified by the World Health Organization as a global pandemic in March 2020 (the “Outbreak”). The effects of the Outbreak and related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers and manufacturers. In response to the economic impact from the Outbreak, we have implemented certain cost reduction efforts, including layoffs, temporary reduced work hours and temporary pay reductions within various departments of our business, including within our executive management team. Additionally, our response to the Outbreak has included the implementation of varying health and safety measures at our facilities, including: supplying and requiring the use of personal protective equipment; body temperature taking; staggering work shifts; increasing work-from-home capabilities; consistent and ongoing cleaning of work spaces and high-touch areas; and establishing processes aligned with the Centers for Disease and Control guidelines to work with any individual exposed to COVID-19 on their necessary quarantine period and the process for the individual to return to work.
With respect to our results of operations, approximately half of our net sales are derived from defense, space and other industrial markets including electronics, medical and telecommunications. Demand for products in that half of our business has not been
26
fundamentally impacted and its operational results remain materially consistent with financial expectations prior to the commencement of the Outbreak. However, we have experienced, and expect to continue experiencing, periodic operational disruptions resulting from supply chain disturbances, staffing challenges, temporary facility closures, transportation interruptions and other conditions which slow production or increase costs. While these issues have not yet been material, it is impossible to predict their future impact and our current experience indicates that the likely effect will be to delay orders and shipments measured in weeks and months, and to temporarily increase some costs, as opposed to profoundly changing our business overall. Fortunately, many of our defense and medical component design, manufacturing and supply operations are believed to be crucial suppliers to markets with continuing strong needs. While it has not had a material impact on our consolidated net sales, demand for our components used in medical equipment, such as ventilators, x-ray systems, sterilization equipment and personal protective equipment, has increased as a result of the Outbreak.
The remaining portion of our net sales is derived from commercial aviation products and services. The Outbreak has caused significant volatility and a substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020. Once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers and we anticipate recovery in demand for our commercial aviation products, which frequently provide aircraft operators with significant savings. Furthermore, we believe our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within this market.
Additionally, our results of operations for the six and three months ended April 30, 2020 have been affected by the fiscal 2019 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2019.
27
Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
| Six months ended April 30, | Three months ended April 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | $974,421 | $981,794 | $468,146 | $515,648 | |||||||||||||||||||
| Cost of sales | 597,484 | 590,170 | 289,256 | 306,261 | |||||||||||||||||||
Selling, general and administrative expenses | 157,786 | 174,494 | 70,729 | 90,204 | |||||||||||||||||||
| Total operating costs and expenses | 755,270 | 764,664 | 359,985 | 396,465 | |||||||||||||||||||
| Operating income | $219,151 | $217,130 | $108,161 | $119,183 | |||||||||||||||||||
| Net sales by segment: | |||||||||||||||||||||||
| Flight Support Group | $553,031 | $595,464 | $251,964 | $308,251 | |||||||||||||||||||
| Electronic Technologies Group | 427,366 | 398,880 | 218,955 | 214,451 | |||||||||||||||||||
| Intersegment sales | (5,976) | (12,550) | (2,773) | (7,054) | |||||||||||||||||||
| $974,421 | $981,794 | $468,146 | $515,648 | ||||||||||||||||||||
| Operating income by segment: | |||||||||||||||||||||||
| Flight Support Group | $109,576 | $115,046 | $47,531 | $62,166 | |||||||||||||||||||
| Electronic Technologies Group | 123,017 | 118,954 | 65,526 | 67,352 | |||||||||||||||||||
| Other, primarily corporate | (13,442) | (16,870) | (4,896) | (10,335) | |||||||||||||||||||
| $219,151 | $217,130 | $108,161 | $119,183 | ||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Gross profit | 38.7 | % | 39.9 | % | 38.2 | % | 40.6 | % | |||||||||||||||
Selling, general and administrative expenses | 16.2 | % | 17.8 | % | 15.1 | % | 17.5 | % | |||||||||||||||
| Operating income | 22.5 | % | 22.1 | % | 23.1 | % | 23.1 | % | |||||||||||||||
| Interest expense | .8 | % | 1.1 | % | .8 | % | 1.1 | % | |||||||||||||||
| Other income | — | % | .2 | % | — | % | .5 | % | |||||||||||||||
| Income tax expense | .1 | % | 3.1 | % | 5.0 | % | 5.1 | % | |||||||||||||||
Net income attributable to noncontrolling interests | 1.4 | % | 1.7 | % | 1.2 | % | 1.6 | % | |||||||||||||||
| Net income attributable to HEICO | 20.3 | % | 16.4 | % | 16.1 | % | 15.9 | % | |||||||||||||||
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Comparison of First Six Months of Fiscal 2020 to First Six Months of Fiscal 2019
Net Sales
Our consolidated net sales in the first six months of fiscal 2020 decreased by 1% to $974.4 million, as compared to net sales of $981.8 million in the first six months of fiscal 2019. The decrease in consolidated net sales principally reflects a decrease of $42.4 million (a 7% decrease) to $553.0 million in net sales within the FSG partially offset by an increase of $28.5 million (a 7% increase) to a record $427.4 million in net sales within the ETG. The net sales decrease in the FSG is principally organic and reflects lower demand for the majority of our products and services resulting from the significant decline in global commercial air travel beginning in March 2020 due to the Outbreak. As a result, net sales of our repair and overhaul parts and services, aftermarket replacement parts, and specialty products product lines decreased by $18.7 million, $17.2 million, and $6.5 million, respectively. The net sales increase in the ETG reflects net sales of $28.2 million contributed by our fiscal 2019 and 2020 acquisitions as well as organic growth of 2%. The ETG's organic growth is mainly attributable to increased demand for our defense products resulting in a net sales increase of $22.0 million partially offset by lower demand for our space products resulting in a net sales decrease of $14.8 million. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the first six months of fiscal 2020.
Gross Profit and Operating Expenses
Our consolidated gross profit margin decreased to 38.7% in the first six months of fiscal 2020, as compared to 39.9% in the first six months of fiscal 2019, principally reflecting a decrease of 2.2% and 1.1% in the ETG's and FSG's gross profit margin, respectively. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales of certain space products and a less favorable product mix of certain aerospace products, partially offset by increased net sales of certain defense products. The decrease in the FSG's gross profit margin principally reflects a decrease in net sales and less favorable product mix within our repair and overhaul parts and services product line as well as a less favorable product mix within our aftermarket replacement parts product line. Total new product research and development expenses included within our consolidated cost of sales were $33.9 million in the first six months of fiscal 2020, up from $32.0 million in the first six months of fiscal 2019.
Our consolidated selling, general and administrative ("SG&A") expenses decreased by 10% to $157.8 million in the first six months of fiscal 2020, as compared to $174.5 million in the first six months of fiscal 2019. The decrease in consolidated SG&A expenses principally reflects an $18.6 million decrease in performance-based compensation expense and a $4.3 million reduction in other selling expenses including outside sales commissions, marketing and travel, partially offset by $7.5 million attributable to the fiscal 2019 and 2020 acquisitions.
Our consolidated SG&A expenses as a percentage of net sales decreased to 16.2% in the first six months of fiscal 2020, down from 17.8% in the first six months of fiscal 2019. The
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decrease in consolidated SG&A expenses as a percentage of net sales is mainly due to a 1.9% impact from the previously mentioned lower performance-based compensation expense.
Operating Income
Our consolidated operating income increased by 1% to a record $219.2 million in the first six months of fiscal 2020, up from $217.1 million in the first six months of fiscal 2019. The increase in consolidated operating income principally reflects a $4.1 million increase (a 3% increase) to a record $123.0 million in operating income of the ETG partially offset by a $5.5 million decrease (a 5% decrease) to $109.6 million in operating income of the FSG. The increase in operating income of the ETG principally reflects the previously mentioned net sales growth and a $4.3 million decrease in performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin. The decrease in operating income of the FSG principally reflects the previously mentioned decrease in net sales and lower gross profit margin, partially offset by an $11.8 million decrease in performance-based compensation expense. Further, the increase in consolidated operating income reflects $2.1 million of lower corporate expenses mainly attributable to a decrease in performance-based compensation expense.
Our consolidated operating income as a percentage of net sales improved to 22.5% in the first six months of fiscal 2020, up from 22.1% in the first six months of fiscal 2019. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to 19.8% in the first six months of fiscal 2020, up from 19.3% in the first six months of fiscal 2019 and the previously mentioned lower corporate expenses, partially offset by a decrease in the ETG’s operating income as a percentage of net sales to 28.8% in the first six months of fiscal 2020 as compared to 29.8% in the first six months of fiscal 2019. The increase in the FSG’s operating income as a percentage of net sales principally reflects a 1.6% decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin. The decrease in the ETG's operating income as a percentage of net sales principally reflects the previously mentioned lower gross profit margin partially offset by a 1.1% decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense.
Interest Expense
Interest expense decreased to $8.0 million in the first six months of fiscal 2020, down from $11.0 million in the first six months of fiscal 2019. The decrease was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.
Other Income
Other income in the first six months of fiscal 2020 and 2019 was not material.
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Income Tax Expense
Our effective tax rate in the first six months of fiscal 2020 was .3%, as compared to 14.5% in the first six months of fiscal 2019. HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2020 and 2019 of $47.6 million and $16.6 million, respectively. The $31.0 million larger benefit from stock option exercises recognized in the first quarter of fiscal 2020 was the result of more stock options exercised and the strong appreciation in HEICO's stock price during the optionees' holding periods.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG ("LHT") in HEICO Aerospace Holdings Corp. ("HEICO Aerospace") and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $13.4 million in the first six months of fiscal 2020, as compared to $17.0 million in the first six months of fiscal 2019. The decrease in net income attributable to noncontrolling interests in the first six months of fiscal 2020 principally reflects the impact of a dividend paid by HEICO Aerospace in June 2019 that effectively resulted in the transfer of the 20% noncontrolling interest held by LHT in eight of our existing subsidiaries within HEICO Aerospace that are principally part of the FSG's repair and overhaul parts and services product line to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO.
Net Income Attributable to HEICO
Net income attributable to HEICO increased to a record $197.3 million, or $1.44 per diluted share, in the first six months of fiscal 2020, up from $161.1 million, or $1.18 per diluted share, in the first six months of fiscal 2019 principally reflecting the previously mentioned income tax benefit, increased operating income and lower interest expense.
Comparison of Second Quarter of Fiscal 2020 to Second Quarter of Fiscal 2019
Net Sales
Our consolidated net sales in the second quarter of fiscal 2020 decreased by 9% to $468.1 million, as compared to net sales of $515.6 million in the second quarter of fiscal 2019. The decrease in consolidated net sales principally reflects a decrease of $56.3 million (an 18% decrease) to $252.0 million in net sales within the FSG partially offset by an increase of $4.5 million (a 2% increase) to $219.0 million in net sales within the ETG. The net sales decrease in the FSG is principally organic and reflects lower demand for the majority of our products and services resulting from the significant decline in global commercial air travel beginning in March 2020 due to the Outbreak. As a result, net sales of our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines decreased by $26.0 million, $20.8 million, and $9.5 million, respectively. The net sales increase in the ETG reflects net sales of $13.3 million contributed by our fiscal 2019 and 2020 acquisitions, partially offset by an
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organic net sales decrease of 2%. The ETG's decrease in organic net sales is mainly attributable to lower shipments of our space products resulting in a net sales decrease of $7.3 million partially offset by increased demand for our defense products resulting in a net sales increase of $2.7 million. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the second quarter of fiscal 2020.
Gross Profit and Operating Expenses
Our consolidated gross profit margin decreased to 38.2% in the second quarter of fiscal 2020, as compared to 40.6% in the second quarter of fiscal 2019, principally reflecting a decrease of 3.5% and 2.7% in the FSG's and ETG's gross profit margin, respectively. The decrease in the FSG's gross profit margin principally reflects a decrease in net sales and a less favorable product mix within our repair and overhaul parts and services and aftermarket replacement parts product lines. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales and less favorable product mix of certain space and commercial aerospace products partially offset by increased net sales of certain defense products. Total new product research and development expenses included within our consolidated cost of sales were $16.8 million in both the second quarter of fiscal 2020 and 2019.
Our consolidated SG&A expenses decreased by 22% to $70.7 million in the second quarter of fiscal 2020, as compared to $90.2 million in the second quarter of fiscal 2019. The decrease in consolidated SG&A expenses principally reflects an $18.2 million decrease in performance-based compensation expense and a $3.7 million reduction in other selling expenses including outside sales commissions, marketing and travel, partially offset by $3.3 million attributable to the fiscal 2019 and 2020 acquisitions.
Our consolidated SG&A expenses as a percentage of net sales decreased to 15.1% in the second quarter of fiscal 2020, down from 17.5% in the second quarter of fiscal 2019. The decrease in consolidated SG&A expenses as a percentage of net sales is mainly due to a 3.5% impact from the previously mentioned lower performance-based compensation expense partially offset by some inefficiencies resulting from the overall impacts of the Outbreak.
Operating Income
Our consolidated operating income decreased by 9% to $108.2 million in the second quarter of fiscal 2020, as compared to operating income of $119.2 million in the second quarter of fiscal 2019. The decrease in consolidated operating income principally reflects a $14.6 million decrease (a 24% decrease) to $47.5 million in operating income of the FSG and a $1.8 million decrease (a 3% decrease) to $65.5 million in operating income of the ETG. The decrease in operating income of the FSG principally reflects the previously mentioned decrease in net sales and lower gross profit margin, partially offset by an $11.5 million decrease in performance-based compensation expense. The decrease in operating income of the ETG principally reflects the previously mentioned lower gross profit margin partially offset by a $4.0 million decrease in performance-based compensation expense and the previously mentioned increase in net sales.
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Further, the decreases in operating income of the FSG and ETG were partially moderated by lower corporate expenses of $4.1 million mainly attributable to a decrease in performance-based compensation expense.
Our consolidated operating income as a percentage of net sales was 23.1% in both the second quarter of fiscal 2020 and 2019 principally reflecting a 1.5% and 1.3% decrease in the ETG's and FSG's operating income as a percentage of net sales, respectively, offset by the previously mentioned lower corporate expenses. The decrease in the ETG's operating income as a percentage of net sales to 29.9% in the second quarter of fiscal 2020 from 31.4% in the second quarter of fiscal 2019 principally reflects the previously mentioned lower gross profit margin partially offset by a 1.2% decrease in SG&A expenses as a percentage of net sales mainly reflecting lower performance-based compensation expense. The decrease in the FSG's operating income as a percentage of net sales to 18.9% in the second quarter of fiscal 2020 from 20.2% in the second quarter of fiscal 2019 principally reflects the previously mentioned lower gross profit margin partially offset by a 2.2% decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense partially offset by some inefficiencies resulting from the overall impacts of the Outbreak.
Interest Expense
Interest expense decreased to $3.8 million in the second quarter of fiscal 2020, down from $5.5 million in the second quarter of fiscal 2019. The decrease was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.
Other Income
Other income in the second quarter of fiscal 2020 and 2019 was not material.
Income Tax Expense
Our effective tax rate in the second quarter of fiscal 2020 was 22.6%, as compared to 22.5% in the second quarter of fiscal 2019.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by LHT in HEICO Aerospace and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $5.5 million in the second quarter of fiscal 2020, as compared to $8.3 million in the second quarter of fiscal 2019. The decrease in net income attributable to noncontrolling interests in the second quarter of fiscal 2020 principally reflects the impact of a dividend paid by HEICO Aerospace in June 2019 that effectively resulted in the transfer of the 20% noncontrolling interest held by LHT in eight of our existing subsidiaries within HEICO Aerospace that are
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principally part of the FSG's repair and overhaul parts and services product line to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO.
Net Income Attributable to HEICO
Net income attributable to HEICO was $75.5 million, or $.55 per diluted share, in the second quarter of fiscal 2020, as compared to $81.8 million, or $.60 per diluted share, in the second quarter of fiscal 2019 principally reflecting the previously mentioned lower operating income, partially offset by less net income attributable to noncontrolling interests and lower interest expense.
Outlook
In our Quarterly Report on Form 10-Q for the three months ended January 31, 2020, we provided net sales and net income estimates for fiscal 2020, but noted that it excluded any impact from the coronavirus outbreak as it was at such an early stage. As noted within our Form 8-K, filed on April 15, 2020, we withdrew our fiscal 2020 financial guidance due to the COVID-19 outbreak, classified by the World Health Organization as a global pandemic in March 2020 (the “Outbreak”). The Outbreak has resulted in a significant reduction in global demand for commercial air travel beginning in March 2020. As such, the results of operations for the six and three months ended April 30, 2020 are not indicative of the results to be expected for the full fiscal 2020 year.
We entered the Outbreak with a healthy balance sheet that included a strong cash position and nominal debt. We cannot estimate the duration and magnitude of the Outbreak and cannot confidently predict when demand for our commercial aerospace products will return to pre-Outbreak levels. However, we believe HEICO is favorably positioned for long-term success despite the short-term challenges created by the Outbreak in the global economy.
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Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. At the onset of the Outbreak, we borrowed $200.0 million on our revolving credit facility as a precautionary measure to ensure we have additional cash on hand to pay our employees and vendors and for potential acquisition opportunities. As a result of this borrowing and through net cash provided by operating activities, our cash and cash equivalents increased to $346.8 million as of April 30, 2020, up from $57.0 million as of October 31, 2019. We finance our business activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2020, we were in compliance with all such covenants and our total debt to shareholders’ equity ratio was 39.2%.
Based on our current outlook, we believe that our net cash provided by operating activities, available borrowings under our revolving credit facility and cash and cash equivalents on hand will be sufficient to fund cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was $205.9 million in the first six months of fiscal 2020 and consisted primarily of net income from consolidated operations of $210.7 million, depreciation and amortization expense of $43.3 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan of $14.0 million (principally participant deferrals and employer contributions), $5.3 million in share-based compensation expense (a non-cash item), and $4.8 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $69.0 million increase in working capital and a $5.1 million deferred income tax benefit. The increase in working capital is inclusive of a $47.7 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2019 accrued performance-based compensation; a $37.8 million increase in inventories as a result of certain inventory purchase commitments based on pre-Outbreak net sales expectations and to support the backlog of certain of our businesses; a $15.6 million increase in prepaid expenses and other current assets due to the timing of income tax payments; and a $13.0 million increase in contract assets, partially offset by a $44.4 million decrease in accounts receivable resulting from strong cash collections and lower net sales.
Net cash provided by operating activities increased by $27.6 million in the first six months of fiscal 2020, up from $178.3 million in the first six months of fiscal 2019. The increase is principally attributable to a $32.6 million increase in net income from consolidated operations partially offset by a $6.8 million increase in net working capital.
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Investing Activities
Net cash used in investing activities totaled $70.9 million in the first six months of fiscal 2020 and related primarily to acquisitions of $45.3 million (net of cash acquired), investments related to the HEICO LCP of $13.6 million and capital expenditures of $12.4 million. Further details regarding our fiscal 2020 acquisitions may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements.
Financing Activities
Net cash provided by financing activities in the first six months of fiscal 2020 totaled $155.6 million. During the first six months of fiscal 2020, we borrowed $200.0 million under our revolving credit facility to provide a cushion of liquidity during this period of economic uncertainty resulting from the Outbreak and $45.0 million to fund our fiscal 2020 acquisitions. Additionally, we made $68.0 million in payments on our revolving credit facility, paid $10.8 million in cash dividends on our common stock, and made $9.7 million of distributions to noncontrolling interests.
Contractual Obligations
There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2019.
Off-Balance Sheet Arrangements
Guarantees
As of April 30, 2020, we have arranged for standby letters of credit aggregating $4.8 million, which are supported by our revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of our subsidiaries.
New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements for additional information.
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Forward-Looking Statements
Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: the severity, magnitude and duration of the Outbreak; our liquidity and the amount and timing of cash generation; the continued decline in commercial air travel caused by the Outbreak, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2019.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the second quarter ended April 30, 2020 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting
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PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
The following supplements the risk factors described in Item 1A., "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019.
The Company is subject to risks arising from the recent COVID-19 outbreak (the "Outbreak").
The recent Outbreak has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that HEICO or its employees, customers, suppliers, manufacturers and other commercial partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. While it is not possible at this time to estimate the full impact that the Outbreak could have on HEICO's business, the continued spread of COVID-19 could disrupt its customers' businesses, supply chain and the manufacture or shipment of its products, and its other activities, which could have a material adverse effect on its business, financial condition and results of operations.
Item 6. EXHIBITS
| Exhibit | Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document. * | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. * | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. * | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. * | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). * | |||||||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEICO CORPORATION | |||||||||||
| Date: | May 28, 2020 | By: | /s/ CARLOS L. MACAU, JR. | ||||||||
| Carlos L. Macau, Jr. Executive Vice President - Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||||||
| By: | /s/ STEVEN M. WALKER | ||||||||||
| Steven M. Walker Chief Accounting Officer and Assistant Treasurer (Principal Accounting Officer) | |||||||||||
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Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Laurans A. Mendelson, certify that:
(1)I have reviewed this Quarterly Report on Form 10-Q of HEICO Corporation;
(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 28, 2020 | /s/ LAURANS A. MENDELSON | ||||||
| Laurans A. Mendelson | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Carlos L. Macau, Jr., certify that:
(1)I have reviewed this Quarterly Report on Form 10-Q of HEICO Corporation;
(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 28, 2020 | /s/ CARLOS L. MACAU, JR. | ||||||
| Carlos L. Macau, Jr. | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
Exhibit 32.1
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the “Company”) on Form 10-Q for the period ended April 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Laurans A. Mendelson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | May 28, 2020 | /s/ LAURANS A. MENDELSON | ||||||
| Laurans A. Mendelson | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 32.2
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the “Company”) on Form 10-Q for the period ended April 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carlos L. Macau, Jr., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | May 28, 2020 | /s/ CARLOS L. MACAU, JR. | ||||||
| Carlos L. Macau, Jr. | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||