Heico Corp 10-Q for FY2020 Q1
Heico Corp (HEI)
10-Q
2020-02-27
For: 2020-01-31
View Original
Added on
April 07, 2026
About this 10-Q
Heico Corp filed this 10-Q on February 27, 2020, covering the quarter ended January 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended January 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $506.28M
- up 8.6% from $466.15M a year earlier
- Net income
- $121.89M
- up 53.6% from net income of $79.33M a year earlier
- Diluted EPS
- $0.89
- up 53.4% from $0.58 a year earlier
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 January 31, 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 February 25, 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 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)
January 31, 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; 54,149 and 54,143 shares issued and outstanding | ||||||||
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 80,484 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)
Three months ended January 31, | ||||||||
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 (expense) | ( | ) | ||||||
Income before income taxes and noncontrolling interests | ||||||||
Income tax (benefit) 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)
Three months ended January 31, | ||||||||
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) income | ( | ) | ||||||
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
(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 January 31, 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 | — | — | — | — | ( | ) | — | — | — | — | |||||||||||||||||||||||||||||
Balances as of January 31, 2019 | $ | $ | $ | $ | $ | ($ | ) | ($ | ) | $ | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
Three months ended January 31, | |||||||
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 in accounts receivable | |||||||
(Increase) decrease in contract assets | ( | ) | |||||
Increase in inventories | ( | ) | ( | ) | |||
Increase in prepaid expenses and other current assets | ( | ) | ( | ) | |||
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 | ( | ) | ( | ) | |||
Cash dividends paid | ( | ) | ( | ) | |||
Distributions to noncontrolling interests | ( | ) | ( | ) | |||
Redemptions of common stock related to stock option exercises | ( | ) | ( | ) | |||
Payment of contingent consideration | ( | ) | ( | ) | |||
Proceeds from stock option exercises | |||||||
Other | ( | ) | |||||
Net cash (used in) provided by financing activities | ( | ) | |||||
Effect of exchange rate changes on cash | ( | ) | |||||
Net increase (decrease) 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.
6
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 three months ended January 31, 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.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, which, as amended, was codified as Accounting Standards Codification ("ASC") Topic 842, "Leases" ("ASC 842"). ASC 842 requires recognition of lease assets and lease liabilities on the balance sheet of lessees. The Company adopted ASC 842 as of November 1, 2019 using a modified retrospective transition approach with the election to apply the guidance as of the adoption date instead of at the beginning of the earliest comparative period presented. The adoption of this guidance resulted in an increase in the Company's assets and liabilities due to the recognition of right-of-use ("ROU") assets and corresponding lease liabilities for leases that are currently classified as operating leases.
Upon adoption, the Company elected the package of transitional practical expedients, which allowed the Company to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the Company elected the short-term lease practical expedient, which allows HEICO to not record an ROU asset and lease liability for any
7
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.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
2. 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
8
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 three months ended January 31, 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 three months ended January 31, 2020 and 2019 would not have been materially different than the reported amounts.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
(in thousands) | January 31, 2020 | October 31, 2019 | ||||||
Accounts receivable | $ | $ | ||||||
Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||||
Accounts receivable, net | $ | $ | ||||||
Inventories
(in thousands) | January 31, 2020 | October 31, 2019 | ||||||
Finished products | $ | $ | ||||||
Work in process | ||||||||
Materials, parts, assemblies and supplies | ||||||||
Inventories, net of valuation reserves | $ | $ | ||||||
(in thousands) | January 31, 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 | $ | $ | ||||||
9
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 $19.4 million as of January 31, 2020 and $18.0 million as of October 31, 2019. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2020 and 2019 was $2.1 million and $1.4 million, respectively.
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the three months ended January 31, 2020 and 2019 is as follows (in thousands):
Three months ended January 31, | ||||||||
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):
January 31, 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.
10
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the three months ended January 31, 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 January 31, 2020 | ($ | ) | ($ | ) | ($ | ) | ||||||
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment for the three months ended January 31, 2020 are as follows (in thousands):
Segment | Consolidated Totals | |||||||||||
FSG | ETG | |||||||||||
Balances as of October 31, 2019 | $ | $ | $ | |||||||||
Goodwill acquired | ||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||
Adjustments to goodwill | ||||||||||||
Balances as of January 31, 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 $10 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 January 31, 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 January 31, 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 three months ended January 31, 2020 and 2019 was $13.7 million and $12.8 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2020 is estimated to be $41.4 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $52.5 million in fiscal 2021, $46.0 million in fiscal 2022, $40.7 million in fiscal 2023, $36.2 million in fiscal 2024, $32.3 million in fiscal 2025, and $152.7 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
January 31, 2020 | October 31, 2019 | |||||||
Borrowings under revolving credit facility | $ | $ | ||||||
Finance leases and note payable | ||||||||
Less: Current maturities of long-term debt | ( | ) | ( | ) | ||||
$ | $ | |||||||
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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 Sheet.
Changes in the Company’s contract assets and liabilities for the three months ended January 31, 2020 are as follows (in thousands):
January 31, 2020 | October 31, 2019 | Change | |||||||||
Contract assets | $ | $ | $ | ||||||||
Contract liabilities | |||||||||||
Net contract assets | $ | $ | ($ | ) | |||||||
The increase in the Company's contract assets during the first quarter of fiscal 2020 mainly occurred within the ETG and principally reflects additional unbilled receivables on certain customer contracts using an over-time recognition model in excess of billings on certain customer contracts made during the quarter.
The increase in the Company's contract liabilities during the first quarter of fiscal 2020 mainly occurred within the FSG and principally reflects the receipt during the quarter of new customer deposits on certain customer contracts in excess of reductions to contract liabilities from customer deposits recognized as revenue.
The amount of revenue that the Company recognized during the first quarter of fiscal 2020 that was included in contract liabilities as of the beginning of fiscal 2020 was $13.4 million.
Remaining Performance Obligations
As of January 31, 2020, the Company had $403.8 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG and the FSG's specialty products and
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aftermarket replacement parts product lines. The Company will recognize net sales as these obligations are satisfied. The Company expects to recognize $214.9 million of this amount during the remainder of fiscal 2020 and $188.9 million thereafter, of which the majority is expected to occur in fiscal 2021.
Disaggregation of Revenue
The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
Three months ended January 31, | ||||||||
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) |
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(5) | Includes various component parts such as electromagnetic and radio interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies and silicone material for a variety of demanding applications. |
The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
Three months ended January 31, | ||||||||
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) |
(2) |
7. INCOME TAXES
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8. FAIR VALUE MEASUREMENTS
The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
As of January 31, 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 | $ | $ | $ | $ | ||||||||||||
Money market funds | ||||||||||||||||
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 | $ | $ | $ | $ | ||||||||||||
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 in the Company’s Condensed Consolidated Balance Sheets and have a value of $168.9 million as of January 31, 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
16
acquisition. As of January 31, 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 January 31, 2020, the estimated fair value of the contingent consideration was $17.1 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 January 31, 2020 were as follows:
Fiscal 2019 Acquisition | Fiscal 2017 Acquisition | ||||||||
Compound annual revenue growth rate range | ( | %) | - | ( | %) | - | |||
Weighted average discount rate | |||||||||
Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended January 31, 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 January 31, 2020 | $ | |||
The Company's contingent consideration liability is included in other long-term liabilities in its Condensed Consolidated Balance Sheet and the Company records changes in accrued contingent consideration within selling, general and administrative expenses in its Condensed Consolidated Statement of Operations.
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The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the three months ended January 31, 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 January 31, 2020 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
9. LEASES
The Company’s lease arrangements primarily pertain to manufacturing facilities, office buildings, equipment, land and vehicles. The Company evaluates whether a contractual arrangement that provides it with control over the use of an asset is, or contains, a lease at the inception date. The term of a lease is inclusive of any option to renew, extend, or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company classifies a lease as operating or finance using the classification criteria set forth in ASC 842. Finance leases are not material to the Company's condensed consolidated financial statements. HEICO recognizes operating lease right-of-use (“ROU”) assets and corresponding lease liabilities as of the lease commencement date based on the present value of the lease payments over the lease term. The discount rate used to calculate the present value of the Company’s leases is based on HEICO’s incremental borrowing rate and considers credit risk, the lease term and other available information as of the commencement date since the leases do not provide a readily determinable implicit rate. Variable lease payments that depend on an index or a rate are included in the determination of operating ROU assets and lease liabilities using the index or rate at the lease commencement date. Variable lease payments that do not depend on an index or rate or resulting from changes in an index or rate subsequent to the lease commencement date, are recorded as lease expense in the period in which the obligation for the payment is incurred. The Company’s operating ROU assets are increased by any prepaid lease payments and initial direct costs and reduced by any lease incentives. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.
HEICO’s operating lease ROU assets represent its right to use an underlying asset during the lease term and its operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. HEICO’s operating lease ROU assets are included within other assets and its operating lease liabilities are included within both accrued expenses and other current liabilities and other long-term liabilities in the Company’s Condensed Consolidated Balance Sheet. For additional information on the Company’s finance leases, see Note 5, Long-term Debt, of the Notes to Condensed Consolidated Financial Statements of this quarterly report and Note 5, Long-term Debt, and Note 3, Selected Financial Statement Information - Property, Plant and Equipment, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The following table presents the Company’s operating lease ROU assets and lease liabilities as of January 31, 2020 (in thousands):
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January 31, 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 three months ended January 31, 2020 (in thousands):
Three months ended | |||
January 31, 2020 | |||
Operating lease expense | $ | ||
Variable lease expense | |||
Total operating lease expense (1) | $ | ||
(1) | Excludes short-term lease expense, which is not material. |
The following table presents a maturity analysis of the Company's operating lease liabilities as of January 31, 2020 for the remainder of fiscal 2020 and the next five fiscal years and thereafter (in thousands):
Year ending October 31, | |||
2020 | $ | ||
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.
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The Company does not have any material leases that have been signed but have yet to commence as of January 31, 2020.
The following table presents the weighted average remaining lease term and discount rate of the Company’s operating leases as of January 31, 2020:
January 31, 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 three months ended January 31, 2020 (in thousands):
Three months ended | |||
January 31, 2020 | |||
Cash paid for amounts included in the measurement of lease liabilities | $ | ||
Right-of-use assets obtained in exchange for new lease liabilities | $ | ||
10. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
Three months ended January 31, | ||||||||
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 | ||||||||
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11. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the three months ended January 31, 2020 and 2019, respectively, is as follows (in thousands):
Other, Primarily Corporate and Intersegment (1) | Consolidated Totals | |||||||||||||||
Segment | ||||||||||||||||
FSG | ETG | |||||||||||||||
Three months ended January 31, 2020: | ||||||||||||||||
Net sales | $ | $ | ($ | ) | $ | |||||||||||
Depreciation | ||||||||||||||||
Amortization | ||||||||||||||||
Operating income | ( | ) | ||||||||||||||
Capital expenditures | ||||||||||||||||
Three months ended January 31, 2019: | ||||||||||||||||
Net sales | $ | $ | ($ | ) | $ | |||||||||||
Depreciation | ||||||||||||||||
Amortization | ||||||||||||||||
Operating income | ( | ) | ||||||||||||||
Capital expenditures | ||||||||||||||||
(1) Intersegment activity principally consists of net sales from the ETG to the FSG.
Total assets by operating segment are as follows (in thousands):
Other, Primarily Corporate | Consolidated Totals | |||||||||||||||
Segment | ||||||||||||||||
FSG | ETG | |||||||||||||||
Total assets as of January 31, 2020 | $ | $ | $ | $ | ||||||||||||
Total assets as of October 31, 2019 | ||||||||||||||||
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12. COMMITMENTS AND CONTINGENCIES
Guarantees
As of January 31, 2020, the Company has arranged for standby letters of credit aggregating $4.8 million, which are supported by its revolving credit facility and pertain to payment guarantees related to potential workers' compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries.
Product Warranty
Changes in the Company’s product warranty liability for the three months ended January 31, 2020 and 2019, respectively, are as follows (in thousands):
Three months ended January 31, | ||||||||
2020 | 2019 | |||||||
Balances as of beginning of fiscal year | $ | $ | ||||||
Accruals for warranties | ||||||||
Acquired warranty liabilities | — | |||||||
Warranty claims settled | ( | ) | ( | ) | ||||
Balances as of January 31 | $ | $ | ||||||
Litigation
The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2019. There have been no material changes to our critical accounting policies during the three months ended January 31, 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 three months ended January 31, 2020 have been affected by the fiscal 2019 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2019.
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Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands):
Three months ended January 31, | ||||||||
2020 | 2019 | |||||||
Net sales | $506,275 | $466,146 | ||||||
Cost of sales | 308,228 | 283,909 | ||||||
Selling, general and administrative expenses | 87,057 | 84,290 | ||||||
Total operating costs and expenses | 395,285 | 368,199 | ||||||
Operating income | $110,990 | $97,947 | ||||||
Net sales by segment: | ||||||||
Flight Support Group | $301,067 | $287,213 | ||||||
Electronic Technologies Group | 208,411 | 184,429 | ||||||
Intersegment sales | (3,203 | ) | (5,496 | ) | ||||
$506,275 | $466,146 | |||||||
Operating income by segment: | ||||||||
Flight Support Group | $62,045 | $52,880 | ||||||
Electronic Technologies Group | 57,491 | 51,602 | ||||||
Other, primarily corporate | (8,546 | ) | (6,535 | ) | ||||
$110,990 | $97,947 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Gross profit | 39.1 | % | 39.1 | % | ||||
Selling, general and administrative expenses | 17.2 | % | 18.1 | % | ||||
Operating income | 21.9 | % | 21.0 | % | ||||
Interest expense | (.8 | %) | (1.2 | %) | ||||
Other income (expense) | — | % | (.1 | %) | ||||
Income tax (benefit) expense | (4.5 | %) | .9 | % | ||||
Net income attributable to noncontrolling interests | 1.6 | % | 1.9 | % | ||||
Net income attributable to HEICO | 24.1 | % | 17.0 | % | ||||
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Comparison of First Quarter of Fiscal 2020 to First Quarter of Fiscal 2019
Net Sales
Our consolidated net sales in the first quarter of fiscal 2020 increased by 9% to $506.3 million, up from net sales of $466.1 million in the first quarter of fiscal 2019. The increase in consolidated net sales principally reflects an increase of $24.0 million (a 13% increase) to $208.4 million in net sales within the ETG as well as an increase of $13.9 million (a 5% increase) to $301.1 million in net sales within the FSG. The net sales increase in the ETG reflects net sales of $14.9 million contributed by our fiscal 2019 and 2020 acquisitions as well as organic growth of 6%. The ETG's organic growth is mainly attributable to increased demand for our defense products resulting in a net sales increase of $19.3 million partially offset by lower demand for our space products resulting in a net sales decrease of $7.5 million. The net sales increase in the FSG reflects organic growth of 4%. The FSG's organic growth is mainly attributable to increased demand and new product offerings within our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines resulting in net sales increases of $8.8 million, $2.1 million and $1.5 million, respectively. Sales price changes were not a significant contributing factor to the ETG and FSG net sales growth in the first quarter of fiscal 2020.
Gross Profit and Operating Expenses
Our consolidated gross profit margin was 39.1% in both the first quarter of fiscal 2020 and 2019 principally reflecting an increase of 1.1% in the FSG's gross profit margin offset by a 1.5% decrease in the ETG's gross profit margin. The increase in the FSG's gross profit margin principally reflects a more favorable product mix within all of its product lines. The decrease in the ETG's gross profit margin principally reflects a decrease in net sales of certain space 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 $17.1 million in the first quarter of fiscal 2020 compared to $15.2 million in the first quarter of fiscal 2019.
Our consolidated selling, general and administrative ("SG&A") expenses were $87.1 million and $84.3 million in the first quarter of fiscal 2020 and 2019, respectively. The increase in consolidated SG&A expenses principally reflects $4.2 million attributable to the fiscal 2019 and 2020 acquisitions partially offset by $1.5 million of lower expenses related to changes in the estimated fair value of accrued contingent consideration.
Our consolidated SG&A expenses as a percentage of net sales decreased to 17.2% in the first quarter of fiscal 2020, down from 18.1% in the first quarter of fiscal 2019. The decrease in consolidated SG&A expenses as a percentage of net sales is mainly due to a .3% impact from the previously mentioned lower expenses related to changes in the estimated fair value of accrued contingent consideration as well as a .3% impact from a decrease in performance-based compensation expense as a percentage of net sales and efficiencies realized from the net sales growth.
25
Operating Income
Our consolidated operating income increased by 13% to $111.0 million in the first quarter of fiscal 2020, up from $97.9 million in the first quarter of fiscal 2019. The increase in consolidated operating income principally reflects a $9.2 million increase (a 17% increase) to $62.0 million in operating income of the FSG and a $5.9 million increase (an 11% increase) to $57.5 million in operating income of the ETG. The increase in operating income of the FSG principally reflects the previously mentioned improved gross profit margin and net sales growth as well as a $1.2 million favorable impact from lower expenses related to changes in the estimated fair value of accrued contingent consideration. The increase in operating income of the ETG principally reflects the previously mentioned net sales growth partially offset by the previously mentioned lower gross profit margin.
Our consolidated operating income as a percentage of net sales improved to 21.9% in the first quarter of fiscal 2020, up from 21.0% in the first quarter of fiscal 2019. The increase principally reflects an increase in the FSG’s operating income as a percentage of net sales to 20.6% in the first quarter of fiscal 2020, up from 18.4% in the first quarter of fiscal 2019 partially offset by a decrease in the ETG’s operating income as a percentage of net sales to 27.6% in the first quarter of fiscal 2020 as compared to 28.0% in the first quarter of fiscal 2019. The increase in the FSG’s operating income as a percentage of net sales principally reflects the previously mentioned improved gross profit margin and a 1.1% decrease in SG&A expenses as a percentage of net sales mainly from the previously mentioned efficiencies realized from the net sales growth and lower expenses related to changes in the estimated fair value of accrued contingent consideration. The decrease in the ETG's operating income as a percentage of net sales 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 a decrease in performance-based compensation expense and efficiencies realized from the net sales growth.
Interest Expense
Interest expense decreased to $4.3 million in the first quarter of fiscal 2020, down from $5.5 million in the first 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 (Expense)
Other income (expense) in the first quarter of fiscal 2020 and 2019 was not material.
Income Tax (Benefit) Expense
HEICO incurred an income tax benefit of $22.9 million in the first quarter of fiscal 2020 compared to income tax expense of $4.1 million in the first quarter of fiscal 2019. We 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
26
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 $7.9 million in the first quarter of fiscal 2020 as compared to $8.7 million in the first quarter of fiscal 2019. The decrease in net income attributable to noncontrolling interests in the first 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 principally part of the FSG's repair and overhaul parts and services product line to HEICO Flight Support Corp., a wholly owned subsidiary of HEICO, partially offset by improved operating results of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held.
Net Income Attributable to HEICO
Net income attributable to HEICO increased to a record $121.9 million, or $.89 per diluted share, in the first quarter of fiscal 2020, up from $79.3 million, or $.58 per diluted share, in the first quarter of fiscal 2019 principally reflecting the previously mentioned income tax benefit and increased net sales and operating income.
Outlook
As we look ahead to the remainder of fiscal 2020, we anticipate net sales growth within the FSG's commercial aviation and defense product lines. We also expect growth within the ETG, principally driven by demand for the majority of our products. Also, we plan to continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility. Based on our current economic visibility, we are continuing to estimate our consolidated fiscal 2020 year-over-year growth in net sales to be 6% - 8% and increasing our estimate of fiscal 2020 year-over-year growth in net income to be 14% - 15%, up from our prior growth estimate of 13% - 14%. This outlook excludes the impact of additional acquired businesses, if any. Additionally, this outlook excludes any potential impact from the recent coronavirus outbreak as the impact to our businesses is uncertain and difficult to predict.
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Liquidity and Capital Resources
Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. We continue to anticipate fiscal 2020 capital expenditures to be approximately $42 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2020, we were in compliance with all such covenants. As of January 31, 2020, our total debt to shareholders’ equity ratio was 31.4%.
Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was $81.1 million in the first quarter of fiscal 2020 and consisted primarily of net income from consolidated operations of $129.8 million, depreciation and amortization expense of $21.6 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan ("LCP") of $11.3 million (principally participant deferrals and employer contributions), $2.6 million in share-based compensation expense (a non-cash item), and $2.6 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $62.1 million increase in working capital and a $25.7 million deferred income tax benefit. The increase in working capital is inclusive of a $48.3 million decrease in accrued expenses and other current liabilities mainly reflecting the payment of fiscal 2019 accrued performance-based compensation, a $20.4 million increase in inventories to support the growth of our businesses and backlog, and a $10.7 million decrease in trade accounts payable partially offset by a $23.7 million decrease in accounts receivable resulting from the timing of payments and collections, respectively. The deferred income tax benefit principally reflects the previously mentioned income tax benefit from stock option exercises, which the Company expects to realize during the remainder of fiscal 2020.
Net cash provided by operating activities increased by $31.6 million in the first quarter of fiscal 2020 from $49.6 million in the first quarter of fiscal 2019. The increase is principally attributable to a $41.8 million increase in net income from consolidated operations and a $15.9 million decrease in net working capital partially offset by a $29.5 million increase in deferred income tax benefits. The decrease in net working capital primarily resulted from the timing associated with the collection of accounts receivable and payment of trade accounts payable and accrued expenses and other current liabilities. The increase in deferred income tax benefits is attributable to the previously mentioned income tax benefit from stock option exercises.
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Investing Activities
Net cash used in investing activities totaled $63.6 million in the first quarter of fiscal 2020 and related primarily to acquisitions of $45.3 million (net of cash acquired), investments related to the HEICO LCP of $11.8 million and capital expenditures of $6.9 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 used in financing activities in the first quarter of fiscal 2020 totaled $10.2 million. During the first quarter of fiscal 2020, we made $38.0 million in payments on our revolving credit facility, paid $10.8 million in cash dividends on our common stock, made $4.9 million of distributions to noncontrolling interests and redeemed common stock related to stock option exercises aggregating $2.6 million. Additionally, we borrowed $45.0 million under our revolving credit facility to fund our fiscal 2020 acquisitions and received $1.5 million in proceeds from stock option exercises.
Contractual Obligations
There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2019.
Off-Balance Sheet Arrangements
Guarantees
As of January 31, 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: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; defense spending or budget cuts, which could reduce our defense related revenue; and any impact from the recent coronavirus outbreak. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 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
During the first quarter ended January 31, 2020, we adopted Accounting Standards Update 2016-02, which, as amended, was codified as Accounting Standards Codification (“ASC”) Topic 842, "Leases" (“ASC 842”). See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, and Note 9, Leases, of the Notes to Condensed Consolidated Financial Statements for additional information. As a result of adopting ASC 842, we have implemented certain changes to our internal controls over financial reporting to support the recognition and disclosure requirements under ASC 842, including changes to our accounting policies and internal control procedures.
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PART II. OTHER INFORMATION
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: | February 27, 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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