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.





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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




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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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