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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 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
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida65-0341002
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
3000 Taft Street, Hollywood, Florida
33021
(Address of principal executive offices)(Zip Code)
(954) 987-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per share HEINew York Stock Exchange
Class A Common Stock, $.01 par value per share HEI.ANew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $9,754,365,000 based on the closing price of HEICO Common Stock and Class A Common Stock as of April 30, 2020 as reported by the New York Stock Exchange.
The number of shares outstanding of each of the registrant’s classes of common stock as of December 22, 2020 is as follows:
Common Stock, $.01 par value54,195,165 shares
Class A Common Stock, $.01 par value81,026,674 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.


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HEICO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2020
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES



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PART I

Item 1.    BUSINESS

The Company

    HEICO Corporation through its subsidiaries (collectively, “HEICO,” “we,” “us,” “our” or the “Company”) believes it is the world’s largest manufacturer of Federal Aviation Administration (“FAA”)-approved jet engine and aircraft component replacement parts, other than the original equipment manufacturers (“OEMs”) and their subcontractors.  HEICO also believes it is a leading manufacturer of various types of electronic equipment for the aviation, defense, space, medical, telecommunications and electronics industries.

The Company was originally organized in 1957 as a holding company known as HEICO Corporation.  As part of a reorganization completed in 1993, the original holding company (formerly known as HEICO Corporation) was renamed as HEICO Aerospace Corporation and a new holding corporation known as HEICO Corporation was created.  The reorganization did not result in any change in the business of the Company, its consolidated assets or liabilities or the relative interests of its shareholders.
    
    Our business is comprised of two operating segments:

    The Flight Support Group. Our Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their collective subsidiaries, accounted for 52%, 60% and 62% of our net sales in fiscal 2020, 2019 and 2018, respectively.  The FSG uses proprietary technology to design and manufacture jet engine and aircraft component replacement parts for sale at lower prices than those manufactured by OEMs.  These parts are approved by the FAA and are the functional equivalent of parts sold by OEMs. In addition, the FSG repairs, overhauls and distributes jet engine and aircraft components, avionics and instruments for domestic and foreign commercial air carriers and aircraft repair companies as well as military and business aircraft operators. The FSG also manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and the United States ("U.S.") government. Additionally, the FSG is a leading supplier, distributor, and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the U.S. and a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation, defense and space applications. Further, the FSG engineers, designs and manufactures thermal insulation blankets and parts as well as removable/reusable insulation systems for aerospace, defense, commercial and industrial applications; manufactures expanded foil mesh for lightning strike protection in fixed and rotary wing aircraft; distributes aviation electrical interconnect products and electromechanical parts; and overhauls industrial pumps, motors, and other hydraulic units with a focus on the support of legacy systems for the U.S. Navy.

    The Electronic Technologies Group. Our Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries, accounted for 48%,
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40% and 38% of our net sales in fiscal 2020, 2019 and 2018, respectively.  The ETG derived approximately 66%, 64% and 65% of its net sales in fiscal 2020, 2019 and 2018, respectively, from the sale of products and services to U.S. and foreign military agencies, prime defense contractors and both commercial and defense satellite and spacecraft manufacturers. The ETG collectively designs, manufactures and sells various types of electronic, data and microwave, and electro-optical products, including infrared simulation and test equipment, laser rangefinder receivers, electrical power supplies, back-up power supplies, power conversion products, underwater locator beacons, emergency locator transmission beacons, flight deck annunciators, panels, and indicators, electromagnetic and radio frequency interference shielding and filters, high power capacitor charging power supplies, amplifiers, traveling wave tube amplifiers, photodetectors, amplifier modules, microwave power modules, flash lamp drivers, laser diode drivers, arc lamp power supplies, custom power supply designs, cable assemblies, high voltage power supplies, high voltage interconnection devices and wire, high voltage energy generators, high frequency power delivery systems, three-dimensional microelectronic and stacked memory products, harsh environment electronic connectors and other interconnect products, radio frequency ("RF") and microwave amplifiers, transmitters and receivers; RF sources, detectors and controllers, wireless cabin control systems, solid state power distribution and management systems, crashworthy and ballistically self-sealing auxiliary fuel systems, nuclear radiation detectors, communications and electronic intercept receivers and tuners, fuel level sensing systems, high-speed interface products that link devices, high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses; silicone material for a variety of demanding applications; precision power analog monolithic, hybrid and open frame components; high-reliability ceramic-to-metal feedthroughs and connectors, technical surveillance countermeasures (TSCM) equipment to detect devices used for espionage and information theft; and rugged small-form factor embedded computing solutions.
    HEICO has continuously operated in the aerospace industry for over 60 years. Since assuming control in 1990, our current management has achieved significant sales and profit growth through a broadened line of product offerings, an expanded customer base, increased research and development expenditures and the completion of a number of acquisitions.  As a result of internal growth and acquisitions, our net sales from continuing operations have grown from $26.2 million in fiscal 1990 to $1,787.0 million in fiscal 2020, representing a compound annual growth rate of approximately 15%.  During the same period, we improved our net income from $2.0 million to $314.0 million, representing a compound annual growth rate of approximately 18%.

Our results of operations in fiscal 2020 were significantly affected by the COVID-19 global pandemic (the “Pandemic”). The effects of the Pandemic and related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers and manufacturers. See Item 7, Management's Discussion and Analysis, for additional details on the effects of the Pandemic on the Company.



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Disciplined Acquisition Strategy

    Acquisitions have been an important element of our growth strategy over the past thirty years, supplementing our organic growth.  Since 1990, we have completed approximately 82 acquisitions complementing the niche segments of the aviation, defense, space, medical, telecommunications and electronics industries in which we operate.  We typically target acquisition opportunities that allow us to broaden our product offerings, services and technologies while expanding our customer base and geographic presence.  Even though we have historically pursued an active acquisition policy, our disciplined acquisition strategy involves limiting acquisition candidates to businesses that we believe will continue to grow, offer strong cash flow and earnings potential, and are available at fair prices. See Note 2, Acquisitions, of the Notes to Consolidated Financial Statements for further information regarding our recent acquisitions.

Flight Support Group

    The Flight Support Group serves a broad spectrum of the aviation industry, including (i) commercial airlines and air cargo carriers; (ii) repair and overhaul facilities; (iii) OEMs; and (iv) U.S. and foreign governments.

    The FSG competes with the leading industry OEMs and, to a lesser extent, with a number of smaller, independent parts distributors.  Historically, the three principal jet engine OEMs, General Electric (including CFM International), Pratt & Whitney and Rolls Royce, have been the sole source of substantially all jet engine replacement parts for their jet engines.  Other OEMs have been the sole source of replacement parts for their aircraft component parts.  While we believe that we are the largest independent supplier of non-OEM jet engine and aircraft component replacement parts, we have in recent years been adding new products to our line at a rate of approximately 300 to 500 Parts Manufacturer Approvals (“PMA” or “PMAs”) per year.  We have developed for our customers approximately 11,500 parts for which PMAs have been received from the FAA.

    Jet engine and aircraft component replacement parts can be categorized by their ongoing ability to be repaired and returned to service.  The general categories in which we participate are as follows: (i) rotable; (ii) repairable; and (iii) expendable.  A rotable is a part which is removed periodically as dictated by an operator’s maintenance procedures or on an as needed basis and is typically repaired or overhauled and re-used an indefinite number of times.  An important subset of rotables is “life limited” parts.  A life limited rotable has a designated number of allowable flight hours and/or cycles (one take-off and landing generally constitutes one cycle) after which it is rendered unusable.  A repairable is similar to a rotable except that it can only be repaired a limited number of times before it must be discarded.  An expendable is generally a part which is used and not thereafter repaired for further use.

    Jet engine and aircraft component replacement parts are classified within the industry as (i) factory-new; (ii) new surplus; (iii) overhauled; (iv) repairable; and (v) as removed.  A factory-new or new surplus part is one that has never been installed or used.  Factory-new parts are
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purchased from FAA-approved manufacturers (such as HEICO or OEMs) or their authorized distributors.  New surplus parts are purchased from excess stock of airlines, repair facilities or other redistributors.  An overhauled part is one that has been completely repaired and inspected by a licensed repair facility such as ours.  An aircraft spare part is classified as “repairable” if it can be repaired by a licensed repair facility under applicable regulations.  A part may also be classified as “repairable” if it can be removed by the operator from an aircraft or jet engine while operating under an approved maintenance program and is airworthy and meets any manufacturer or time and cycle restrictions applicable to the part.  A “factory-new,” “new surplus” or “overhauled” part designation indicates that the part can be immediately utilized on an aircraft.  A part in “as removed” or “repairable” condition requires inspection and possibly functional testing, repair or overhaul by a licensed facility prior to being returned to service in an aircraft.

    Factory-New Jet Engine and Aircraft Component Replacement Parts.  The FSG engages in the research and development, design, manufacture and sale of FAA-approved replacement parts that are sold to domestic and foreign commercial air carriers and aircraft repair and overhaul companies.  Our principal competitors are aircraft engine and aircraft component manufacturers.  The FSG's factory-new replacement parts include various jet engine and aircraft component replacement parts.  A key element of our growth strategy is the continued design and development of an increasing number of PMA replacement parts in order to further penetrate our existing customer base and obtain new customers.  We select the jet engine and aircraft component replacement parts to design and manufacture through a selection process which analyzes industry information to determine which replacement parts are suitable candidates.

    Repair and Overhaul Services.  The FSG provides repair and overhaul services on selected jet engine and aircraft component parts, as well as on avionics, instruments, composites and flight surfaces of commercial aircraft operated by domestic and foreign commercial airlines.  The FSG also provides repair and overhaul services including avionics and navigation systems as well as subcomponents and other instruments utilized on military aircraft operated by the U.S. government and foreign military agencies and for aircraft repair and overhaul companies.  Our repair and overhaul operations require a high level of expertise, advanced technology and sophisticated equipment.  Services include the repair, refurbishment and overhaul of numerous accessories and parts mounted on gas turbine engines and airframes.  Components overhauled include fuel pumps, generators, fuel controls, pneumatic valves, starters and actuators, turbo compressors and constant speed drives, hydraulic pumps, valves and actuators, wheels and brakes, composite flight controls, electro-mechanical equipment, auxiliary power unit accessories and thrust reverse actuation systems.  Some of the repair and overhaul services provided by the FSG are proprietary repairs approved by an FAA-qualified designated engineering representative (“DER”) and/or by the owner/operator.  Such proprietary repairs typically create cost savings or provide engineering flexibility.  The FSG also provides commercial airlines, regional operators, asset management companies and Maintenance, Repair and Overhaul (“MRO”) providers with high quality and cost effective niche accessory component exchange services as an alternative to OEMs’ spares services.

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    Distribution.  The FSG distributes FAA-approved parts including hydraulic, pneumatic, structural, interconnect, mechanical and electro-mechanical components for the commercial, regional and general aviation markets.  The FSG also is a leading supplier, distributor, and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the U.S. Further, we believe the FSG is a leading provider of products and services necessary to maintain up-to-date F-16 fighter aircraft operational capabilities.

    Manufacture of Specialty Aircraft/Defense Related Parts and Subcontracting for OEMs.  The FSG engineers, designs and manufactures thermal insulation blankets and parts as well as renewable/reusable insulation systems primarily for aerospace, defense, commercial and industrial applications.  The FSG also manufactures specialty components for sale as a subcontractor for aerospace and industrial original equipment manufacturers and the U.S. government. Additionally, the FSG manufactures advanced niche components and complex composite assemblies for commercial aviation, defense and space applications, and manufactures expanded foil mesh, which is integrated into composite aerospace structures for lightning strike protection in fixed and rotary wing aircraft.

    FAA Approvals and Product Design.  Non-OEM manufacturers of jet engine and aircraft component replacement parts must receive a PMA from the FAA to sell the replacement part.  The PMA approval process includes the submission of sample parts, drawings and testing data to one of the FAA’s Aircraft Certification Offices where the submitted data are analyzed.  We believe that an applicant’s ability to successfully complete the PMA process is limited by several factors, including (i) the agency’s confidence level in the applicant; (ii) the complexity of the part; (iii) the volume of PMAs being filed; and (iv) the resources available to the FAA.  We also believe that companies such as HEICO that have demonstrated their advanced design engineering and manufacturing capabilities, including an established favorable track record with the FAA, generally receive a faster turnaround time in the processing of PMA applications.  Finally, we believe that the PMA process creates a significant barrier to entry in this market niche through both its technical demands and its limits on the rate at which competitors can bring products to market.

    As part of our growth strategy, we have continued to increase our research and development activities.  Research and development expenditures by the FSG, which were approximately $.3 million in fiscal 1991, increased to approximately $19.1 million in fiscal 2020, $23.8 million in fiscal 2019 and $21.3 million in fiscal 2018.  We believe that our FSG's research and development capabilities are a significant component of our historical success and an integral part of our growth strategy.  In recent years, the FAA granted us PMAs for approximately 300 to 500 new parts and we develop approximately 250 to 350 new proprietary repairs per year; however, no assurance can be given that the FAA will continue to grant PMAs or DER-approved repairs or that we will achieve acceptable levels of net sales and gross profits on such parts or repairs in the future.

    We benefit from our proprietary rights relating to certain design, engineering and manufacturing processes and repair and overhaul procedures.  Customers often rely on us to provide initial and additional components, as well as to redesign, re-engineer, replace or repair
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and provide overhaul services on such aircraft components at every stage of their useful lives.  In addition, for some products, our unique manufacturing capabilities are required by the customer’s specifications or designs, thereby necessitating reliance on us for production of such designed products.
    
We have no material patents for the proprietary techniques, including software and manufacturing expertise, we have developed to manufacture jet engine and aircraft component replacement parts and instead, we primarily rely on trade secret protection.  Although our proprietary techniques and software and manufacturing expertise are subject to misappropriation or obsolescence, we believe that we take appropriate measures to prevent misappropriation or obsolescence from occurring by developing new techniques and improving existing methods and processes, which we will continue on an ongoing basis as dictated by the technological needs of our business.

    We believe that, based on our competitive pricing, reputation for high quality, short lead time requirements, strong relationships with domestic and foreign commercial air carriers and repair stations (companies that overhaul aircraft engines and/or components), and successful track record of receiving PMAs and repair approvals from the FAA and commercial air carriers, we are uniquely positioned to continue to increase the products and services offered and gain market share.

Electronic Technologies Group

    Our Electronic Technologies Group’s strategy is to design and manufacture highly-engineered, mission-critical subcomponents that must successfully operate in the harshest environments, for smaller, niche markets, but which are utilized in larger systems – systems like power, targeting, tracking, identification, simulation, testing, communications, lighting, surgical, medical imaging, baggage scanning, telecom and computer systems.  These systems are, in turn, often located on another platform, such as aircraft, rotorcraft, satellites, ships, spacecraft, land vehicles, handheld devices and other platforms.

    Electro-Optical Infrared Simulation and Test Equipment.  The ETG is a designer and manufacturer of niche state-of-the-art simulation, testing and calibration equipment used in the development of missile seeking technology, airborne targeting and reconnaissance systems, shipboard targeting and reconnaissance systems, space-based sensors as well as ground vehicle-based systems. These products include infrared scene projector equipment, such as our MIRAGE IR Scene Simulator, high precision blackbody sources, software and integrated calibration systems.

    Simulation equipment allows the U.S. government and allied foreign military to save money on missile testing as it allows infrared-based missiles to be tested on a multi-axis, rotating table instead of requiring the launch of a complete missile.  In addition, several large military prime contractors have elected to purchase such equipment from us instead of maintaining internal staff to do so because we can offer a more cost-effective solution.  Our customers include major U.S. Department of Defense weapons laboratories and defense prime contractors.    
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Electro-Optical Laser Products.  The ETG is a designer and maker of laser rangefinder receivers and other photodetectors used in airborne, vehicular and handheld targeting systems manufactured by major prime military contractors.  Most of our rangefinder receiver product offering consists of complex and patented products which detect reflected light from laser targeting systems and allow the systems to confirm target accuracy and calculate target distances prior to discharging a weapon system.  Some of these products are also used in laser eye surgery systems for tracking ocular movement.
    
Electro-Optical, Microwave and Other Power Equipment.  The ETG produces power supplies, amplifiers and flash lamp drivers used in laser systems for military, medical and other applications that are sometimes utilized with our rangefinder receivers.  We also produce emergency back-up power supplies and batteries used on commercial aircraft and business jets for services such as emergency exit lighting, emergency fuel shut-off, power door assists, cockpit voice recorders and flight computers. Additionally, we design, manufacture and repair flight deck annunciators, panels and indicators. We design and manufacture next generation wireless cabin control systems, solid state power distribution and management systems and fuel level sensing systems for business jets and for general aviation, as well as for the military/defense market. We offer custom or standard designs that solve challenging OEM requirements and meet stringent safety and emissions requirements.  Our power electronics products include capacitor charger power supplies, laser diode drivers, arc lamp power supplies and custom power supply designs.

    Our microwave products are used in both commercial and military satellites, spacecraft and in electronic warfare systems.  These products, which include isolators, bias tees, circulators, latching ferrite switches and waveguide adapters, are used in satellites and spacecraft to control or direct energy according to operator needs. As satellites are frequently used as sensors for stand-off warfare, we believe this product line further supports our goal of increasing our activity in the stand-off market. Additionally, our microwave products include converters, receivers, transmitters, amplifiers, frequency sources and related sub-systems that address the majority of major satellite frequencies. We believe we are a leading supplier of the niche products which we design and manufacture for this market, a market that includes commercial satellites.  Our customers for these products include satellite and spacecraft manufacturers.

    Electromagnetic Interference (EMI) and Radio-Frequency Interference (RFI) Shielding and Suppression Filters.  The ETG designs and manufactures shielding used to prevent electromagnetic energy and radio frequencies from interfering with other devices, such as computers, telecommunication devices, avionics, weapons systems and other electronic equipment.  The ETG designs and manufactures EMI/RFI and transient protection solutions for a wide variety of connectors that principally serve customers within the aerospace and defense markets. Our products include a patented line of shielding applied directly to circuit boards and a line of gasket-type shielding applied to computers and other electronic equipment.  Our customers consist essentially of medical, electronics, telecommunications and defense equipment producers.

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    High-Speed Interface Products.  The ETG designs and manufactures advanced high-technology, high-speed interface products utilized in homeland security, defense, medical research, astronomical and other applications across numerous industries.

    High Voltage Interconnection Devices.  The ETG designs and manufactures high and very high voltage interconnection devices, cable assemblies and wire for the medical equipment, defense and other industrial markets.  Among others, our products are utilized in aircraft missile defense, fighter pilot helmet displays, avionic systems, medical applications, wireless communications, and industrial applications including high voltage test equipment and underwater monitoring systems.
    
High Voltage Advanced Power Electronics.  The ETG designs and manufactures a patented line of high voltage energy generators for medical, baggage inspection and industrial imaging systems.  We also produce high voltage power supplies found in satellite communications, CT scanners and in medical and industrial x-ray systems.
    
Power Conversion Products.  The ETG designs and provides innovative power conversion products principally serving the high-reliability military, space and commercial avionics end-markets. These high density, low profile and lightweight DC-to-DC converters and electromagnetic interference filters, which include thick film hermetically sealed hybrids, military commercial-off-the-shelf and custom designed and assembled products, have become the primary specified components of their kind on a generation of complex military, space and avionics equipment.

    Underwater Locator Beacons and Emergency Locator Transmission Beacons.  The ETG designs and manufactures Underwater Locator Beacons (“ULBs”) used to locate aircraft Cockpit Voice Recorders and Flight Data Recorders, marine ship Voyage Recorders and various other devices which have been submerged under water.  ULBs are required equipment on all U.S. FAA and European Aviation Safety Agency (“EASA”) approved Flight Data and Cockpit Voice Recorders used in aircraft and on similar systems utilized on large marine shipping vessels. The ETG also designs and manufactures Emergency Locator Transmission Beacons for the commercial aviation and defense markets. Upon activation, these safety-critical devices transmit a distress signal to alert search and rescue operations of the aircraft's location.

    Traveling Wave Tube Amplifiers (“TWTAs”) and Microwave Power Modules (“MPMs”).  The ETG designs and manufactures TWTAs and MPMs predominately used in radar, electronic warfare, on-board jamming and countermeasure systems in aircraft, ships and detection platforms deployed by U.S. and allied non-U.S. military forces.

    Three-Dimensional Microelectronic and Stacked Memory Products.  The ETG designs, manufactures and markets three-dimensional microelectronic and stacked memory products including memories, Point of Load (“POL”) voltage converters and peripherals, industrial memories, and complex System-in-Package (“SiP”) solutions.  The products’ patented designs provide high reliability memory and circuitry in a unique and stacked form which saves space
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and weight.  These products are principally integrated into larger subsystems equipping satellites and spacecraft and are also utilized in medical equipment.
    
Harsh Environment Connectivity Products and Custom Molded Cable Assemblies.  The ETG designs and manufactures high performance, high reliability and harsh environment electronic connectors and other interconnect products.  These products include connectors, jacks and plugs, cables, patch panels and switches utilized in aviation, broadcast/audio, defense, industrial, medical and other equipment.    

RF and Microwave Amplifiers, Transmitters and Receivers. The ETG designs and manufactures RF and microwave amplifiers, transmitters and receivers to support military communications on unmanned aerial systems, other aircraft, helicopters and ground-based data/communications systems.

    High Performance Communications and Electronic Intercept Receivers and Tuners. The ETG designs and manufactures innovative, high performance receiver and radio frequency digitizer products for military and intelligence applications.
    
Crashworthy and Ballistically Self-Sealing Auxiliary Fuel Systems. The ETG designs and manufactures mission-extending, crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft.

    High Performance Active Antenna Systems. The ETG designs and produces high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses.

    Nuclear Radiation Detectors. The ETG designs and manufactures highly sensitive, reliable and easy-to-use nuclear radiation detectors for law enforcement, homeland security and military applications.

    Specialty Silicone Products. The ETG designs and manufactures silicone material for a variety of demanding applications used in aerospace, defense, research, oil and gas, testing, pharmaceuticals and other markets.

    High-End Power Amplifiers. The ETG designs and manufactures precision power analog monolithic, hybrid and open frame components for a certain wide range of defense, industrial, measurement, medical and test applications.

    High-Reliability Ceramic-to-Metal Feedthroughs and Connectors. The ETG designs and manufactures high-reliability ceramic-to-metal feedthroughs and connectors for demanding environments within the industrial, life science, medical, research, semiconductor, and other markets.
    
Technical Surveillance Countermeasures ("TSCM") Equipment. The ETG designs and manufactures TSCM equipment to detect devices used for espionage and information theft
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serving government agencies, law enforcement, corporate security personnel and TSCM professionals worldwide.

    High-end Radio Frequency Receivers and Sources. The ETG designs and manufactures RF Sources, Detectors and Controllers for a certain wide range of aerospace and defense applications.    

Rugged, Small-Form-Factor Embedded Computing Solutions. The ETG designs and manufactures rugged, small-form-factor embedded computing solutions that are primarily used in rugged commercial and industrial, aerospace and defense, transportation, and smart energy applications.

    As part of our growth strategy, we have continued to invest in our research and development activities.  Research and development expenditures by the ETG were $46.5 million in fiscal 2020, $42.8 million in fiscal 2019 and $36.2 million in fiscal 2018.  We believe that our ETG's research and development capabilities are a significant component of our historical success and an integral part of our growth strategy.

Distribution, Sales, Marketing and Customers

    Each of our operating segments independently conducts distribution, sales and marketing efforts directed at their respective customers and industries and, in some cases, collaborates with other operating divisions and subsidiaries within its group for cross-marketing efforts.  Sales and marketing efforts are conducted primarily by in-house personnel and, to a lesser extent, by independent manufacturers’ representatives.  Generally, our in-house sales personnel receive a base salary plus commissions and manufacturers’ representatives receive a commission based on sales.

    We believe that direct relationships are crucial to establishing and maintaining a strong customer base and, accordingly, our senior management is actively involved in our marketing activities, particularly with established customers.  We are also a member of various trade and business organizations related to the commercial aviation industry, such as the Aerospace Industries Association, which we refer to as AIA, the leading trade association representing the nation’s manufacturers of commercial, military and business aircraft, aircraft engines and related components and equipment.  Due in large part to our established industry presence, we enjoy strong customer relations, name recognition and repeat business.    

We sell our products to a broad customer base consisting of domestic and foreign commercial and cargo airlines, repair and overhaul facilities, other aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic and foreign military units, electronic manufacturing services companies, manufacturers for the defense industry as well as medical, telecommunications, scientific, and industrial companies.  No one customer accounted for sales of 10% or more of total consolidated sales from continuing operations during any of the last three fiscal years.  Net sales to our five largest customers accounted for approximately 24%, 20% and 20% of total net sales in fiscal 2020, 2019 and 2018, respectively.
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Competition

    The aerospace product and service industry is characterized by intense competition. Some of our competitors have substantially greater name recognition, inventories, complementary product and service offerings, financial, marketing and other resources than we do.  As a result, such competitors may be able to respond more quickly to customer requirements than we can.  Moreover, smaller competitors may be in a position to offer more attractive pricing as a result of lower labor costs and other factors.

    Our jet engine and aircraft component replacement parts business competes primarily with aircraft engine and aircraft component OEMs.  The competition is principally based on price and service to the extent that our parts are interchangeable.  With respect to other aerospace products and services sold by the Flight Support Group, we compete with both the leading jet engine and aircraft component OEMs and a large number of machining, fabrication, distribution and repair companies, some of which have greater financial and other resources than we do.  Competition is based mainly on price, product performance, service and technical capability.

    Competition for the repair and overhaul of jet engine and aircraft components and avionics and navigation systems as well as the manufacture of specialty aircraft and defense related parts comes from three principal sources: OEMs, major commercial airlines and other independent service companies.  Some of these competitors have greater financial and other resources than we do.  Some major commercial airlines own and operate their own service centers and sell repair and overhaul services to other aircraft operators.  Foreign airlines that provide repair and overhaul services typically provide these services for their own aircraft components and for third parties.  OEMs also maintain service centers that provide repair and overhaul services for the components they manufacture.  Other independent service organizations also compete for the repair and overhaul business of other users of aircraft components.  We believe that the principal competitive factors in the repair and overhaul market are quality, turnaround time, overall customer service and price.

    Our Electronic Technologies Group competes with several large and small domestic and foreign competitors, some of which have greater financial and other resources than we do.  The markets for our electronic, data and microwave, and electro-optical equipment products are niche markets with several competitors where competition is based mainly on design, technology, quality, price, service and customer satisfaction.

Raw Materials

    We purchase a variety of raw materials, primarily consisting of high temperature alloy sheet metal and castings, forgings, pre-plated metals and electrical components from various vendors.  The materials used by our operations are generally available from a number of sources and in sufficient quantities to meet current requirements subject to normal lead times. We are subject to rules promulgated by the Securities Exchange Commission pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the use of certain materials (tantalum, tin, gold and tungsten), known as conflict minerals, which are mined from the
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Democratic Republic of the Congo and adjoining countries. These rules may impose additional costs and may introduce new risks related to our ability to verify the origin of any conflict minerals used in our products.

Backlog

    Our total backlog was $844 million as of October 31, 2020 as compared to $900 million as of October 31, 2019. The majority of our backlog of orders as of October 31, 2020 is expected to be filled during fiscal 2021. The ETG’s backlog of unshipped orders was $559 million as of October 31, 2020 as compared to $575 million as of October 31, 2019. The FSG's backlog of unshipped orders was $285 million as of October 31, 2020 as compared to $325 million as of October 31, 2019.  This backlog excludes forecasted shipments for certain contracts of the FSG pursuant to which customers provide only estimated annual usage and not firm purchase orders.  Our backlogs within the FSG are typically short-lead in nature with many product orders being received within the month of shipment. The decrease in the FSG's backlog mainly reflects lower demand for its commercial aviation products principally resulting from the continued significant decline in global commercial air travel due to the ongoing Pandemic.

Government Regulation

    The FAA regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the United States.  Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft.  Similar rules apply in other countries.  All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance.  The inspection, maintenance and repair procedures for the various types of aircraft and equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians.  Certification and conformance is required prior to installation of a part on an aircraft.  Aircraft operators must maintain logs concerning the utilization and condition of aircraft engines, life-limited engine parts and airframes.  In addition, the FAA requires that various maintenance routines be performed on aircraft engines, some engine parts, and airframes at regular intervals based on cycles or flight time.  Engine maintenance must also be performed upon the occurrence of certain events, such as foreign object damage in an aircraft engine or the replacement of life-limited engine parts.  Such maintenance usually requires that an aircraft engine be taken out of service.  Our operations may in the future be subject to new and more stringent regulatory requirements.  In that regard, we closely monitor the FAA and industry trade groups in an attempt to understand how possible future regulations might impact us.  Our businesses which sell defense products directly to the U.S. Government or for use in systems delivered to the U.S. Government can be subject to various laws and regulations governing pricing and other factors.

    There has been no material adverse effect to our consolidated financial statements nor competitive positions as a result of these government regulations.


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Environmental Regulation

    Our operations are subject to extensive, and frequently changing, federal, state and local environmental laws and substantial related regulation by government agencies, including the Environmental Protection Agency.  Among other matters, these regulatory authorities impose requirements that regulate the operation, handling, transportation and disposal of hazardous materials; protect the health and safety of workers; and require us to obtain and maintain licenses and permits in connection with our operations.  This extensive regulatory framework imposes significant compliance burdens and risks on us.  Notwithstanding these burdens, we believe that we are in material compliance with all federal, state and local environmental laws and regulations governing our operations.
    
    There has been no material adverse effect to our consolidated financial statements nor competitive positions as a result of these environmental regulations.

Other Regulation

    We are also subject to a variety of other regulations including work-related and community safety laws.  The Occupational Safety and Health Act of 1970 mandates general requirements for safe workplaces for all employees and established the Occupational Safety and Health Administration (“OSHA”) in the Department of Labor.  In particular, OSHA provides special procedures and measures for the handling of certain hazardous and toxic substances.  In addition, specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste.  Requirements under state law, in some circumstances, may mandate additional measures for facilities handling materials specified as extremely dangerous.  We believe that our operations are in material compliance with OSHA’s health and safety requirements.

Insurance

    We are a named insured under policies which include the following coverage: (i) product liability, including grounding; (ii) personal property, inventory and business interruption at our facilities; (iii) general liability coverage; (iv) employee benefit liability; (v) international liability and automobile liability; (vi) umbrella liability coverage; and (vii) various other activities or items, each subject to certain limits and deductibles.  We believe that our insurance coverage is adequate to insure against the various liability risks of our business.

Human Capital

We believe HEICO’s employees are directly responsible for its success through dedication to their profession and craft. This talented group continues to deliver industry leading growth and new product innovations, all while maintaining HEICO’s unique entrepreneurial culture of excellence.

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As of October 31, 2020, we had approximately 5,200 full-time and part-time employees including approximately 2,500 in the Flight Support Group and approximately 2,700 in the Electronic Technologies Group. None of our employees are represented by a U.S. domestic union. Our management believes that we have good relations with our employees.

Health and Safety

The health and safety of our workforce is fundamental to the success of our business. We safeguard our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to those employees where needed for the employee to safely perform their job function.

Compensation and Benefits

As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs.

Diversity and Inclusion

We are committed to our continued efforts to increase diversity and foster an inclusive work environment that supports the global workforce and the communities we serve. We recruit the best people for the job regardless of gender, ethnicity or other protected traits and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. Our diversity, equity and inclusion principles are also reflected in our employee training and policies. We continue to enhance our diversity, equity and inclusion policies which are guided by our executive leadership team.

Available Information

    Our Internet website address is http://www.heico.com.  We make available free of charge, through the Investors section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, specialized disclosure reports on Form SD and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).  These materials are also available free of charge on the SEC’s website at http://www.sec.gov.  The information on or obtainable through our website is not incorporated into this annual report on Form 10-K.

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    We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions.  Our Code of Ethics for Senior Financial Officers and Other Officers is part of our Code of Business Conduct, which is located on our website at http://www.heico.com.  Any amendments to or waivers from a provision of this code of ethics will be posted on the website.  Also located on the website are our Corporate Governance Guidelines, Finance/Audit Committee Charter, Nominating & Corporate Governance Committee Charter, and Compensation Committee Charter.

    Copies of the above referenced materials will be made available, free of charge, upon written request to the Corporate Secretary at HEICO Corporation, 3000 Taft Street, Hollywood, Florida 33021.

Information About Our Executive Officers

    Our executive officers are appointed by the Board of Directors and serve at the discretion of the Board.  The following table sets forth the names, ages of, and positions and offices held by our executive officers as of December 22, 2020:
NameAgePosition(s)Director
Since
Laurans A. Mendelson82Chairman of the Board; Chief Executive Officer; and Director1989
Eric A. Mendelson55Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group1992
Victor H. Mendelson53Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologies Group1996
Thomas S. Irwin74Senior Executive Vice President
Carlos L. Macau, Jr.53Executive Vice President - Chief Financial Officer and Treasurer
Steven M. Walker 56Chief Accounting Officer and Assistant Treasurer

    Laurans A. Mendelson has served as our Chairman of the Board since December 1990.  He has also served as our Chief Executive Officer since February 1990 and served as our President from September 1991 through September 2009.  Mr. Mendelson is a member of the Board of Governors of the Aerospace Industries Association (“AIA”) in Washington, D.C., of which HEICO is a member.  He is the former Chairman of the Board of Trustees, former Chairman of the Executive Committee and a current member of the Society of Mount Sinai Founders of Mount Sinai Medical Center in Miami Beach, Florida.  In addition, Mr. Mendelson is a Trustee Emeritus of Columbia University in the City of New York, where he previously served as Trustee and Chairman of the Trustees’ Audit Committee. Laurans Mendelson is the father of Eric Mendelson and Victor Mendelson.

    Eric A. Mendelson has been associated with the Company since 1990, serving in various capacities. Mr. Mendelson has served as our Co-President since October 2009 and served as our Executive Vice President from 2001 through September 2009. Mr. Mendelson has also served as
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President and Chief Executive Officer of the HEICO Flight Support Group since its formation in 1993, as well as President of various Flight Support Group subsidiaries. Mr. Mendelson is a co-founder, and, since 1987, has been Managing Director of Mendelson International Corporation, a private investment company, which is a shareholder of HEICO. In addition, Mr. Mendelson is a member of the Advisory Board of Trustees of Mount Sinai Medical Center in Miami Beach, Florida, and a member of the Board of Trustees and a Past Chairman of Ransom Everglades School in Coconut Grove, Florida, as well as a member of the Board of Visitors of Columbia College in New York City. Eric Mendelson is the son of Laurans Mendelson and the brother of Victor Mendelson.
    
Victor H. Mendelson has been associated with the Company since 1990, serving in various capacities. Mr. Mendelson has served as our Co-President since October 2009 and served as our Executive Vice President from 2001 through September 2009. Mr. Mendelson has also served as President and Chief Executive Officer of the HEICO Electronic Technologies Group since its formation in September 1996. He served as General Counsel of the Company from 1993 to 2008 and Vice President of the Company from 1996 to 2001. In addition, Mr. Mendelson was the Chief Operating Officer of the Company’s former MediTek Health Corporation subsidiary from 1995 until its profitable sale in 1996. Mr. Mendelson is a co-founder, and, since 1987, has been President of Mendelson International Corporation, a private investment company, which is a shareholder of HEICO. Mr. Mendelson is a former Director and Audit Committee member of NASDAQ-listed Terrapin 3 Acquisition Corp. Mr. Mendelson is a Trustee of Columbia University in the City of New York, a Trustee of St. Thomas University in Miami Gardens, Florida, a Director of Boys & Girls Clubs of Miami-Dade and is a Director and Past President of the Board of Directors of the Florida Grand Opera. Victor Mendelson is the son of Laurans Mendelson and the brother of Eric Mendelson.

Thomas S. Irwin has served as our Senior Executive Vice President since June 2012; our Executive Vice President, Chief Financial Officer and Treasurer from September 1991 through May 2012; Senior Vice President and Treasurer from 1986 to 1991; and our Vice President and Treasurer from 1982 to 1986.  Mr. Irwin is a Certified Public Accountant.  He is a member of the American and North Carolina Institutes of Certified Public Accountants and a member of Financial Executives International.

    Carlos L. Macau, Jr. has served as our Executive Vice President - Chief Financial Officer and Treasurer since June 2012. Mr. Macau joined HEICO from the international public accounting firm of Deloitte & Touche LLP where he worked from 2000 to 2012 as an Audit Partner. Prior to joining HEICO, Mr. Macau accumulated 22 years of financial and accounting experience serving a number of public and private manufacturing and service clients in a broad range of industries. His client responsibilities included serving as HEICO's lead client services partner for five years (2006 to 2010). Mr. Macau is a current member of the Mount Sinai Founders of Mount Sinai Medical Center in Miami Beach, Florida. Mr. Macau is a Certified Public Accountant, a Chartered Global Management Accountant, and a member of the American and Florida Institutes of Certified Public Accountants.

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    Steven M. Walker has served as our Chief Accounting Officer since June 2012 and served as our Corporate Controller from 2002 through May 2012. He has also served as our Assistant Treasurer since 2002. Mr. Walker is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.


Item 1A.    RISK FACTORS

Our business, financial condition, operating results and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth below and elsewhere in this Annual Report on Form 10-K, any one of which may cause our actual results to differ materially from anticipated results:

Strategic, Business and Operational Risks

We may not be able to effectively execute our acquisition strategy, which could slow our growth.

    A key element of our strategy is growth through the acquisition of additional companies.  Our acquisition strategy is affected by and poses a number of challenges and risks, including the following:

Availability of suitable acquisition candidates;
Availability of capital;
Diversion of management’s attention;
Effective integration of the operations and personnel of acquired companies;
Potential write downs of acquired intangible assets;
Potential loss of key employees of acquired companies;
Use of a significant portion of our available cash;
Significant dilution to our shareholders for acquisitions made utilizing our securities; and
Consummation of acquisitions on satisfactory terms.    

We may not be able to successfully execute our acquisition strategy, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Our success is dependent on the development and manufacture of new products, equipment and services.  Our inability to develop, manufacture and introduce new products and services at profitable pricing levels could reduce our sales or sales growth.

    The aviation, defense, space, medical, telecommunications and electronics industries are constantly undergoing development and change and, accordingly, new products, equipment and methods of repair and overhaul service are likely to be introduced in the future.  In addition to manufacturing electronic and electro-optical equipment and selected aerospace and defense components for OEMs and the U.S. government and repairing jet engine and aircraft
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components, we re-design sophisticated aircraft replacement parts originally developed by OEMs so that we can offer the replacement parts for sale at substantially lower prices than those manufactured by the OEMs.  Consequently, we devote substantial resources to research and product development.  Technological development poses a number of challenges and risks, including the following:

We may not be able to successfully protect the proprietary interests we have in various aircraft parts, electronic and electro-optical equipment and our repair processes;

As OEMs continue to develop and improve jet engines and aircraft components, we may not be able to re-design and manufacture replacement parts that perform as well as those offered by OEMs or we may not be able to profitably sell our replacement parts at lower prices than the OEMs;

We may need to expend significant capital to:
-    purchase new equipment and machines,
-    train employees in new methods of production and service, and
-    fund the research and development of new products; and
 
Development by our competitors of patents or methodologies that preclude us from the design and manufacture of aircraft replacement parts or electrical and electro-optical equipment could adversely affect our business, financial condition and results of operations.

    In addition, we may not be able to successfully develop new products, equipment or methods of repair and overhaul service, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Intense competition from existing and new competitors may harm our business.
 
    We face significant competition in each of our businesses.
 
Flight Support Group
 
For jet engine and aircraft component replacement parts, we compete with the industry’s leading jet engine and aircraft component OEMs.

For the distribution, overhaul and repair of jet engine and aircraft components and avionics and navigation systems as well as the manufacture of specialty aircraft and defense related parts, we compete with:
-    major commercial airlines, many of which operate their own maintenance and overhaul units;
-     OEMs, which manufacture, distribute, repair and overhaul their own and other OEM parts; and
-     other independent service companies.
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Electronic Technologies Group

For the design and manufacture of various types of electronic, data and microwave, and electro-optical equipment products, we compete in a fragmented marketplace with a number of companies, some of which are well capitalized.
    
The aviation aftermarket supply industry is highly fragmented, has several highly visible leading companies, and is characterized by intense competition.  Some of our OEM competitors have greater name recognition than HEICO, as well as complementary lines of business and financial, marketing and other resources that HEICO does not have.  In addition, OEMs, aircraft maintenance providers, leasing companies and FAA-certificated repair facilities may attempt to bundle their services and product offerings in the supply industry, thereby significantly increasing industry competition.  Moreover, our smaller competitors may be able to offer more attractive pricing of parts as a result of lower labor costs or other factors.  A variety of potential actions by any of our competitors, including a reduction of product prices or the establishment by competitors of long-term relationships with new or existing customers, could have a material adverse effect on our business, financial condition and results of operations.  Competition typically intensifies during cyclical downturns in the aviation industry, when supply may exceed demand.  We may not be able to continue to compete effectively against present or future competitors, and competitive pressures may have a material adverse effect on our business, financial condition and results of operations.

The inability to obtain certain components and raw materials from suppliers could harm our business.

    Our business is affected by the availability and price of the raw materials and component parts that we use to manufacture our products.  Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ ability to adjust delivery of long-lead time products during times of volatile demand.  The supply chains for our business could also be disrupted by external events such as natural disasters, extreme weather events, pandemics, labor disputes, governmental actions and legislative or regulatory changes.  As a result, our suppliers may fail to perform according to specifications when required and we may be unable to identify alternate suppliers or to otherwise mitigate the consequences of their non-performance.  
Transitions to new suppliers may result in significant costs and delays, including those related to the required recertification of parts obtained from new suppliers with our customers and/or regulatory agencies.  Our inability to fill our supply needs could jeopardize our ability to fulfill obligations under customer contracts, which could result in reduced revenues and profits, contract penalties or terminations, and damage to customer relationships.  Further, increased costs of such raw materials or components could reduce our profits if we were unable to pass along such price increases to our customers.

Product specification costs and requirements could cause an increase to our costs to complete contracts.

    The costs to meet customer specifications and requirements could result in us having to
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spend more to design or manufacture products and this could reduce our profit margins on current contracts or those we obtain in the future.

We may incur damages or disruption to our business caused by natural disasters and other factors that may not be covered by insurance.

    Several of our facilities, as a result of their locations, could be subject to a catastrophic loss caused by hurricanes, tornadoes, earthquakes, floods, fire, power loss, telecommunication and information systems failure, political unrest or similar events.  Our corporate headquarters and facilities located in Florida are particularly susceptible to hurricanes, storms, tornadoes or other natural disasters that could disrupt our operations, delay production and shipments, and result in large expenses to repair or replace the facility or facilities.  Should insurance or other risk transfer mechanisms, such as our existing disaster recovery and business continuity plans, be insufficient to recover all costs, we could experience a material adverse effect on our business, financial condition and results of operations.

We are subject to the risks associated with sales to foreign customers, which could harm our business.

    We market our products and services to approximately 110 countries, with approximately 33% of our consolidated net sales in fiscal 2020 derived from sales to foreign customers.  We expect that sales to foreign customers will continue to account for a significant portion of our revenues in the foreseeable future.  As a result, we are subject to risks of doing business internationally, including the following:

Fluctuations in currency exchange rates;
Volatility in foreign political, regulatory, and economic environments;
Ability to obtain required export licenses or approvals;
Uncertainty of the ability of foreign customers to finance purchases;
Uncertainties and restrictions concerning the availability of funding credit or guarantees;
Imposition of taxes, export controls, tariffs, embargoes and other trade restrictions; and
Compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S. companies abroad such as the U.S. Foreign Corrupt Practices Act.

    While the impact of these factors is difficult to predict, any one or more of these factors may have a material adverse effect on our business, financial condition and results of operations.

Cyber security events or other disruptions of our information technology systems could adversely affect our business.

    We rely on information technology systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of critical business processes and activities. We also collect and store sensitive data, including confidential business information and personal data. These systems may be susceptible to damage, disruptions or shutdowns due to attacks by computer hackers, computer viruses,
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employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events. In addition, security breaches of our systems could result in the misappropriation or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers or suppliers. Any such events could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal claims or proceedings that could have a material adverse effect on our business, financial condition and results of operations.

We may not have the administrative, operational or financial resources to continue to grow the company.

    We have experienced rapid growth in recent periods and intend to continue to pursue an aggressive growth strategy, both through acquisitions and internal expansion of products and services.  Our growth to date has placed, and could continue to place, significant demands on our administrative, operational and financial resources.  We may not be able to grow effectively or manage our growth successfully, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Goodwill and other intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.

As a result of our acquisitions, goodwill and intangible assets represent a significant portion of our total assets. As of October 31, 2020 and 2019, goodwill and intangible assets, net of amortization, accounted for 55% and 61% of our total assets, respectively. We test our goodwill and intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. We may not realize the full value of our goodwill and intangible assets, and to the extent that impairment has occurred, we would be required to recognize the impaired portion of such assets in our earnings. An impairment of a significant portion of such assets could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on key personnel and the loss of these key personnel could have a material adverse effect on our success.

    Our success substantially depends on the performance, contributions and expertise of our senior management team led by Laurans A. Mendelson, our Chairman and Chief Executive Officer, and Eric A. Mendelson and Victor H. Mendelson, our Co-Presidents. Technical employees are also critical to our research and product development, as well as our ability to continue to re-design sophisticated products of OEMs in order to sell competing replacement parts at substantially lower prices than those manufactured by the OEMs.  The loss of the services of any of our executive officers or other key employees or our inability to continue to attract or retain the necessary personnel could have a material adverse effect on our business, financial condition and results of operations.

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Our executive officers and directors have significant influence over our management and direction.

    As of December 22, 2020, collectively our executive officers and entities controlled by them, the HEICO Savings and Investment Plan (our 401(k) Plan) and members of the Board of Directors beneficially owned approximately 19% of our outstanding Common Stock and approximately 4% of our outstanding Class A Common Stock.  Accordingly, they will be able to substantially influence the election of the Board of Directors and control our business, policies and affairs, including our position with respect to proposed business combinations and attempted takeovers.

Industry and Macroeconomic Risks

Our success is highly dependent on the performance of the aviation industry, which could be impacted by lower demand for commercial air travel or airline fleet changes causing lower demand for our goods and services.

     General global industry and economic conditions that affect the aviation industry also affect our business.  We are subject to macroeconomic cycles and when recessions occur, we may experience reduced orders, payment delays, supply chain disruptions or other factors as a result of the economic challenges faced by our customers, prospective customers and suppliers.  Further, the aviation industry has historically been subject to downward cycles from time to time which reduce the overall demand for jet engine and aircraft component replacement parts and repair and overhaul services, and such downward cycles result in lower sales and greater credit risk.  Demand for commercial air travel can be influenced by airline industry profitability, world trade policies, government-to-government relations, terrorism, disease outbreaks, environmental constraints imposed upon aircraft operations, technological changes, price and other competitive factors.  These global industry and economic conditions may have a material adverse effect on our business, financial condition and results of operations.

The retirement or prolonged grounding of commercial aircraft could reduce our revenues.

    Our Flight Support Group designs and manufactures jet engine and aircraft component replacement parts and also repairs, overhauls and distributes jet engine and aircraft components.  If aircraft or engines for which we offer replacement parts or supply repair and overhaul services are retired or grounded for prolonged periods of time and there are fewer aircraft that require these parts or services, our revenues may decline.

Reductions in defense, space or homeland security spending by U.S. and/or foreign customers could reduce our revenues.

    In fiscal 2020, approximately 66% of the net sales of our Electronic Technologies Group were derived from the sale of defense, commercial and defense satellite and spacecraft components, and homeland security products.  A decline in defense, space or homeland security
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budgets or additional restrictions imposed by the U.S. government on sales of products or services to foreign military agencies could lower sales of our products and services.

We are subject to risks arising from the COVID-19 global pandemic (the "Pandemic").

Our results of operations in fiscal 2020 were significantly affected by the Pandemic. A pandemic or other public health epidemic, poses the risk that we or our 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.

With respect to our results of operations, approximately 59% of our net sales in fiscal 2020 were derived from defense, space and other industrial markets including electronics, medical and telecommunications. Although demand for these products was slightly moderated in fiscal 2020, our overall results from this portion of our business were not materially impacted by the Pandemic. However, we experienced, and expect to continue experiencing, periodic operational disruptions resulting from supply chain disturbances, staffing challenges - including at some of our customers, temporary facility closures, transportation interruptions and other conditions which slow production and orders, or increase costs.

The remaining portion of our net sales is derived from commercial aviation products and services. Actions by U.S. federal, state and foreign governments to address the Pandemic, including lockdowns, quarantines, border controls, travel restrictions and business venue closures, as well as changes in the propensity for the general public to travel by air, have had and are expected to continue to have, a significant adverse effect on the commercial aircraft markets and the demand for certain products and services HEICO provides. Furthermore, payment deferrals or defaults or bankruptcy of our customers has and may continue to adversely affect our business, and may lead to additional charges, impairments and other adverse financial impacts.

The extent to which the Pandemic may have a material adverse effect on our future business, financial condition and results of operations will depend on many factors that are not within HEICO’s control, including but not limited to the duration, spread and severity of the Pandemic, government responses and other actions to mitigate the spread of and to treat the Pandemic, and when and to what extent normal business, economic and social activity and conditions resume.

Regulatory and Legal Risks

We are subject to governmental regulation and our failure to comply with these regulations could cause the government to withdraw or revoke our authorizations and approvals to do business and could subject us to penalties and sanctions that could harm our business.

    Governmental agencies throughout the world, including the FAA, highly regulate the manufacture, repair and overhaul of aircraft parts and accessories.  We include, with the replacement parts that we sell to our customers, documentation certifying that each part complies
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with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries.  In addition, our repair and overhaul operations are subject to certification pursuant to regulations established by the FAA.  Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries.  The revocation or suspension of any of our material authorizations or approvals would have an adverse effect on our business, financial condition and results of operations.  New and more stringent government regulations, if adopted and enacted, could have an adverse effect on our business, financial condition and results of operations.  In addition, certain product sales to foreign countries of our Electronic Technologies Group and Flight Support Group require approval or licensing from the United States ("U.S.") government.  Denial of export licenses could reduce our sales to those countries and could have a material adverse effect on our business.

    Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission promulgated disclosure requirements regarding the use of certain minerals (tantalum, tin, gold and tungsten), known as conflict minerals, which are mined from the Democratic Republic of the Congo or one of its adjoining countries. There are costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Given the complexity of our supply chain, we may not be able to ascertain the origin of these minerals used in our products in a timely manner, which could cause some of our customers to disqualify us as a supplier to the extent we are unable to certify our products are conflict mineral free. Additionally, the rule could affect sourcing at competitive prices and availability in sufficient quantities of such minerals used in our manufacturing processes for certain products.

Tax changes could affect our effective tax rate and future profitability.

    We file income tax returns in the U.S. federal jurisdiction, multiple state jurisdictions and certain jurisdictions outside the U.S.  In fiscal 2020, our effective tax rate was 7.9%.  Our future effective tax rate may be adversely affected by a number of factors, including the following:

Changes in statutory tax rates in any of the various jurisdictions where we file tax returns;
Changes in available tax credits or tax deductions;
Changes in tax laws or the interpretation of such tax laws including interpretations, amendments and technical corrections of the recently enacted Tax Cuts and Jobs Act;
Changes to the accounting for income taxes in accordance with generally accepted accounting principles;
The amount of net income attributable to noncontrolling interests in our subsidiaries structured as partnerships;
Changes in the mix of earnings in jurisdictions with differing statutory tax rates;
Adjustments to estimated taxes upon finalization of various tax returns;
Resolution of issues arising from tax audits with various tax authorities; and
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The reversal of any previously experienced tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan, a nonqualified deferred compensation plan.        

Any significant increase in our future effective tax rates could have a material adverse effect on net income for future periods.

We may incur product liability claims that are not fully insured and such insurance may not be available at commercially reasonable rates.

    Our jet engine and aircraft component replacement parts and repair and overhaul services expose our business to potential liabilities for personal injury or death as a result of the failure of an aircraft component that we have designed, manufactured or serviced.  While we maintain liability insurance to protect us from future product liability claims, an uninsured or partially insured claim, or a claim for which third-party indemnification is not available, could have a material adverse effect on our business, financial condition and results of operations. Additionally, our customers typically require us to maintain substantial insurance coverage at commercially reasonable rates and our inability to obtain insurance coverage at commercially reasonable rates could have a material adverse effect on our business.

We may incur environmental liabilities and these liabilities may not be covered by insurance.

    Our operations and facilities are subject to a number of federal, state and local environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of hazardous materials.  Pursuant to various environmental laws, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous materials.  Environmental laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous materials.  Although management believes that our operations and facilities are in material compliance with environmental laws and regulations, future changes in them or interpretations thereof or the nature of our operations may require us to make significant additional capital expenditures to ensure compliance in the future.

We carry limited specific environmental insurance, thus, losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The occurrence of an event that is not covered in full or in part by insurance could have a material adverse effect on our business, financial condition and results of operations.

Item 1B.    UNRESOLVED STAFF COMMENTS

    None.


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Item 2.    PROPERTIES

    We own or lease a number of facilities, which are utilized by our Flight Support Group (“FSG”), Electronic Technologies Group (“ETG”) and corporate offices.  As of October 31, 2020, all of the facilities listed below were in good operating condition, well maintained and in regular use.  We believe that our existing facilities are sufficient to meet our operational needs for the foreseeable future.  Summary information on the facilities utilized within the FSG, ETG and our corporate offices to support their principal operating activities is as follows:

Flight Support Group
Square Footage
LocationLeasedOwnedDescription
United States facilities (12 states)828,000 218,000 
Manufacturing, engineering and distribution facilities, and corporate headquarters
United States facilities (7 states)216,000 127,000 Repair and overhaul facilities
International facilities (10 countries)
   - China, France, Germany, India, Laos, Netherlands, Singapore, Thailand, United Arab Emirates and United Kingdom
122,000 173,000 
Manufacturing, engineering and distribution facilities, and sales offices


Electronic Technologies Group
Square Footage
LocationLeasedOwnedDescription
United States facilities (16 states)791,000 414,000 
Manufacturing and engineering facilities
International facilities (4 countries)
    - Canada, France, South Korea and
 United Kingdom
98,000 70,000 
Manufacturing and engineering facilities

Corporate
Square Footage
LocationLeased
Owned (1)
Description
United States facilities (1 state)— 7,000 Administrative offices

(1)Represents the square footage of our corporate offices in Miami, Florida.  The square footage of our corporate headquarters in Hollywood, Florida is included within Square Footage-Owned of the caption “United States facilities (12 states)” under Flight Support Group.


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Item 3.    LEGAL PROCEEDINGS

    We are involved in various legal actions arising in the normal course of business.  Based upon the Company’s and our 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 effect on our results of operations, financial position or cash flows.


Item 4.    MINE SAFETY DISCLOSURES

    Not applicable.


PART II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

    Our Class A Common Stock and Common Stock are listed and traded on the New York Stock Exchange (“NYSE”) under the symbols “HEI.A” and “HEI,”    respectively.  

    As of December 22, 2020, there were 300 holders of record of our Common Stock and 296 holders of record of our Class A Common Stock.

Performance Graphs

    The following graph and table compare the total return on $100 invested in HEICO Common Stock and HEICO Class A Common Stock with the total return on $100 invested in the NYSE Composite Index and the Dow Jones U.S. Aerospace Index for the five-year period from October 31, 2015 through October 31, 2020.  The NYSE Composite Index measures the performance of all common stocks listed on the NYSE.  The Dow Jones U.S. Aerospace Index is comprised of large companies which make aircraft, major weapons, radar and other defense equipment and systems as well as providers of satellites and spacecraft used for defense purposes.  The total returns include the reinvestment of cash dividends.

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hei-20201031_g1.jpg
Cumulative Total Return as of October 31,
201520162017201820192020
HEICO Common Stock$100.00 $134.31 $225.84 $326.76 $481.43 $410.65 
HEICO Class A Common Stock100.00 137.82 219.06 300.42 430.11 422.90 
NYSE Composite Index100.00 100.20 117.97 116.70 125.91 118.82 
Dow Jones U.S. Aerospace Index100.00 106.29 158.89 190.92 210.83 126.38 

    The following graph and table compare the total return on $100 invested in HEICO Common Stock since October 31, 1990 using the same indices shown on the five-year performance graph above.  October 31, 1990 was the end of the first fiscal year following the date the current executive management team assumed leadership of the Company.  No Class A Common Stock was outstanding as of October 31, 1990.  As with the five-year performance graph, the total returns include the reinvestment of cash dividends.

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hei-20201031_g2.jpg
Cumulative Total Return as of October 31,
19901991199219931994
HEICO Common Stock$100.00 $141.49 $158.35 $173.88 $123.41 
NYSE Composite Index100.00 130.31 138.76 156.09 155.68 
Dow Jones U.S. Aerospace Index100.00 130.67 122.00 158.36 176.11 
19951996199719981999
HEICO Common Stock$263.25 $430.02 $1,008.31 $1,448.99 $1,051.61 
NYSE Composite Index186.32 225.37 289.55 326.98 376.40 
Dow Jones U.S. Aerospace Index252.00 341.65 376.36 378.66 295.99 
20002001200220032004
HEICO Common Stock$809.50 $1,045.86 $670.39 $809.50 $1,366.57 
NYSE Composite Index400.81 328.78 284.59 400.81 380.91 
Dow Jones U.S. Aerospace Index418.32 333.32 343.88 418.32 478.49 
20052006200720082009
HEICO Common Stock$1,674.40 $2,846.48 $4,208.54 $2,872.01 $4,208.54 
NYSE Composite Index423.05 499.42 586.87 344.96 586.87 
Dow Jones U.S. Aerospace Index579.77 757.97 1,000.84 602.66 1,000.84 
20102011201220132014
HEICO Common Stock$4,722.20 $6,557.88 $5,900.20 $10,457.14 $11,416.51 
NYSE Composite Index427.61 430.46 467.91 569.69 617.23 
Dow Jones U.S. Aerospace Index926.75 995.11 1,070.15 1,645.24 1,687.41 
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Cumulative Total Return as of October 31,
20152016201720182019
HEICO Common Stock$10,776.88 $14,652.37 $23,994.03 $33,876.95 $49,277.28 
NYSE Composite Index595.37 596.57 702.38 694.81 749.66 
Dow Jones U.S. Aerospace Index1,766.94 1,878.10 2,807.42 3,373.52 3,725.15 
2020
HEICO Common Stock$44,877.75 
NYSE Composite Index707.40 
Dow Jones U.S. Aerospace Index2,233.00 

Issuer Purchases of Equity Securities

    There were no issuer purchases of our equity securities during the fourth quarter of fiscal 2020.

Recent Sales of Unregistered Securities

    There were no unregistered sales of our equity securities during fiscal 2020.

Dividend Policy

    We have historically paid semi-annual cash dividends on both our Class A Common Stock and Common Stock. In July 2020, we paid our 84th consecutive semi-annual cash dividend since 1979 of $.08 per share. Additionally, our 83rd consecutive semi-annual cash dividend paid in January 2020 represented a 14% increase over the $.07 per share semi-annual cash dividend paid in July 2019. In December 2020, our Board of Directors declared a regular semi-annual cash dividend of $.08 per share payable in January 2021.

Our Board of Directors will continue to review our dividend policy and will regularly evaluate whether dividends should be paid in cash or stock, as well as what amounts should be paid. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants under our revolving credit facility.


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Item 6.    SELECTED FINANCIAL DATA
Year ended October 31, (1)
20202019201820172016
(in thousands, except per share data)
Operating Data:
Net sales$1,787,009 $2,055,647 $1,777,721 $1,524,813 $1,376,258 
Gross profit682,127 813,840 690,715 574,725 515,492 
Selling, general and administrative expenses
305,479 356,743 314,470 268,067 250,147 
Operating income376,648 457,097 376,245 306,658 265,345 
Interest expense(13,159)(21,695)(19,901)(9,790)(8,272)
Other income (expense) 1,366 2,439 (58)1,092 (23)
Net income attributable to HEICO
313,984 
(2)
327,896 
(3)
259,233 
(4)(5)
185,985 
(6)
156,192 
Weighted average number of common shares outstanding:
Basic
134,754 133,640 132,543 131,703 130,948 
Diluted
137,302 137,350 136,696 135,588 133,145 
Per Share Data:
Net income per share attributable to HEICO shareholders:
Basic
$2.33 
(2)
$2.45 
(3)
$1.96 
(4)(5)
$1.41 
(6)
$1.19 
Diluted
2.29 
(2)
2.39 
(3)
1.90 
(4)(5)
1.37 
(6)
1.17 
Cash dividends per share
.160 .140 .116 .097 .082 
Balance Sheet Data (as of October 31):
Cash and cash equivalents
$406,852 $57,001 $59,599 $52,066 $42,955 
Total assets3,547,711 2,969,211 2,653,396 2,512,431 1,998,412 
Total debt (including current portion)
739,831 561,955 532,470 673,979 458,225 
Redeemable noncontrolling interests
221,208 188,264 132,046 131,123 99,512 
Total shareholders’ equity
2,010,607 1,694,660 1,503,008 1,248,292 1,047,705 
__________________

(1)Results include the results of acquisitions from each respective effective date.  See Note 2, Acquisitions, of the Notes to Consolidated Financial Statements for more information.

(2)During fiscal 2020, the Company recognized a $48.3 million discrete tax benefit from stock option exercises, which, net of noncontrolling interests, increased net income attributable to HEICO by $47.0 million, or $.35 per basic share and $.34 per diluted share.

(3)During fiscal 2019, the Company recognized a $16.5 million discrete tax benefit from stock option exercises, which, net of noncontrolling interests, increased net income attributable to HEICO by $15.0 million, or $.11 per basic and diluted share.




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(4)During fiscal 2018, the United States ("U.S.") government enacted significant changes to existing tax law resulting in HEICO recording a discrete tax benefit from remeasuring its U.S. federal net deferred tax liabilities that was partially offset by a provisional discrete tax expense related to a one-time transition tax on the unremitted earnings of HEICO's foreign subsidiaries. The net impact of these amounts increased net income attributable to HEICO by $12.1 million, or $.09 per basic and diluted share. See Note 7, Income Taxes, of the Notes to Consolidated Financial Statements for more information.

(5)During fiscal 2018, the Company recognized a net benefit from stock option exercises that increased net income attributable to HEICO by $2.1 million, or $.02 per basic and diluted share.

(6)During fiscal 2017, the Company adopted Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting," resulting in the recognition of a $3.1 million discrete income tax benefit and a 1,220,000 increase in HEICO's weighted average number of diluted common shares outstanding, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million, or $.02 per basic and $.01 per diluted share.


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Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

    Our business is comprised of two operating segments, the Flight Support Group (“FSG”) and the Electronic Technologies Group (“ETG”).

    The FSG consists of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”), which is 80% owned, and HEICO Flight Support Corp., which is wholly owned, and their collective subsidiaries, which primarily:

Designs, Manufactures, Repairs, Overhauls and Distributes Jet Engine and Aircraft Component Replacement Parts. The FSG designs and manufactures jet engine and aircraft component replacement parts, which are approved by the Federal Aviation Administration (“FAA”). In addition, the FSG repairs, overhauls and distributes jet engine and aircraft components, avionics and instruments for domestic and foreign commercial air carriers and aircraft repair companies as well as military and business aircraft operators. The FSG also manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and the United States ("U.S.") government. Additionally, the FSG is a leading supplier, distributor, and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the U.S. and a leading manufacturer of advanced niche components and complex composite assemblies for commercial aviation, defense and space applications. Further, the FSG engineers, designs and manufactures thermal insulation blankets and parts as well as removable/reusable insulation systems for aerospace, defense, commercial and industrial applications; manufactures expanded foil mesh for lightning strike protection in fixed and rotary wing aircraft; distributes aviation electrical interconnect products and electromechanical parts; and overhauls industrial pumps, motors, and other hydraulic units with a focus on the support of legacy systems for the U.S. Navy.

    The ETG consists of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries, which primarily:

Designs and Manufactures Electronic, Microwave and Electro-Optical Equipment, High-Speed Interface Products, High Voltage Interconnection Devices, EMI and RFI Shielding and Filters, High Voltage Advanced Power Electronics, Power Conversion Products, Underwater Locator Beacons, Microelectronic Memory Products, Self-Sealing Auxiliary Fuel Systems, Active Antenna Systems and TSCM Equipment.  The ETG collectively designs, manufactures and sells various types of electronic, data and microwave, and electro-optical products, including infrared simulation and test equipment, laser rangefinder receivers, electrical power supplies, back-up power supplies, power conversion products, underwater locator beacons, emergency locator transmission beacons, flight deck annunciators, panels and indicators, electromagnetic and radio frequency interference shielding and filters, high power capacitor charging power supplies, amplifiers, traveling
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wave tube amplifiers, photodetectors, amplifier modules, microwave power modules, flash lamp drivers, laser diode drivers, arc lamp power supplies, custom power supply designs, cable assemblies, high voltage power supplies, high voltage interconnection devices and wire, high voltage energy generators, high frequency power delivery systems, three-dimensional microelectronic and stacked memory products, harsh environment electronic connectors and other interconnect products, radio frequency ("RF") and microwave amplifiers, transmitters and receivers; RF sources, detectors and controllers, wireless cabin control systems, solid state power distribution and management systems, crashworthy and ballistically self-sealing auxiliary fuel systems, nuclear radiation detectors, communications and electronic intercept receivers and tuners, fuel level sensing systems, high-speed interface products that link devices, high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses; silicone material for a variety of demanding applications; precision power analog monolithic, hybrid and open frame components; high-reliability ceramic-to-metal feedthroughs and connectors, technical surveillance countermeasures (TSCM) equipment to detect devices used for espionage and information theft; and rugged small-form factor embedded computing solutions.

Our results of operations in fiscal 2020 were significantly affected by the COVID-19 global pandemic (the “Pandemic”). The effects of the Pandemic 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 Pandemic, we 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 and our Board of Directors. Additionally, our response to the Pandemic included the implementation of varying health and safety measures at our facilities, including: supplying and requiring the use of personal protective equipment; staggering work shifts; body temperature taking; 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 59% of our net sales in fiscal 2020 were derived from defense, space and other industrial markets including electronics, medical and telecommunications. Although demand for these products was slightly moderated in fiscal 2020, our overall results from this portion of our business were not materially impacted by the Pandemic. However, we experienced, and expect to continue experiencing, periodic operational disruptions resulting from supply chain disturbances, staffing challenges - including at some of our customers, temporary facility closures, transportation interruptions and other conditions which slow production and orders, or increase costs.

The remaining portion of our fiscal 2020 net sales was derived from commercial aviation products and services. The Pandemic has caused significant volatility and a substantial decline in value across global markets. Most notably, the commercial aerospace industry experienced an ongoing substantial decline in demand resulting from a significant number of aircraft in the
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global fleet being grounded during fiscal 2020. Our businesses that operate within the commercial aerospace industry were materially impacted by the significant decline in global commercial air travel that began in March 2020. Consolidated net sales for our businesses that operate within the commercial aerospace industry decreased by approximately 32% during fiscal 2020.

As we look ahead to fiscal 2021, the extent to which the Pandemic may have a material adverse effect on our future business, financial condition and results of operations will depend on many factors that are not within HEICO’s control, including but not limited to the duration, spread and severity of the Pandemic, government responses and other actions to mitigate the spread of and to treat the Pandemic, and when and to what extent normal business, economic and social activity and conditions resume. However, we are cautiously optimistic that the recent vaccine progress may generate increased commercial air travel and result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal 2021.

Additionally, our results of operations in fiscal 2020 have been affected by recent acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.     

Presentation of Results of Operations and Liquidity and Capital Resources

    The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal 2020 to fiscal 2019. A similar discussion and analysis that compares fiscal 2019 to fiscal 2018 may be found in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Form 10-K for the fiscal 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 Consolidated Statements of Operations (in thousands):
Year ended October 31,
20202019
Net sales$1,787,009 $2,055,647 
Cost of sales1,104,882 1,241,807 
Selling, general and administrative expenses
305,479 356,743 
Total operating costs and expenses
1,410,361 1,598,550 
Operating income$376,648 $457,097 
Net sales by segment:
Flight Support Group
$924,812 $1,240,183 
Electronic Technologies Group874,987 834,522 
Intersegment sales
(12,790)(19,058)
$1,787,009 $2,055,647 
Operating income by segment:
Flight Support Group
$143,051 $242,029 
Electronic Technologies Group
258,814 245,743 
Other, primarily corporate
(25,217)(30,675)
$376,648 $457,097 
Net sales100.0 %100.0 %
Gross profit38.2 %39.6 %
Selling, general and administrative expenses
17.1 %17.4 %
Operating income21.1 %22.2 %
Interest expense.7 %1.1 %
Other income .1 %.1 %
Income tax expense1.6 %3.8 %
Net income attributable to noncontrolling interests
1.2 %1.5 %
Net income attributable to HEICO
17.6 %16.0 %
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Comparison of Fiscal 2020 to Fiscal 2019

Net Sales

    Our consolidated net sales in fiscal 2020 decreased by 13% to $1,787.0 million, as compared to net sales of $2,055.6 million in fiscal 2019. The decrease in consolidated net sales principally reflects a decrease of $315.4 million (a 25% decrease) to $924.8 million in net sales within the FSG partially offset by an increase of $40.5 million (a 5% increase) to a record $875.0 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 Pandemic. As a result, organic net sales of our aftermarket replacement parts, repair and overhaul parts and services, and specialty products product lines decreased by $154.0 million, $106.2 million, and $58.8 million, respectively. The net sales increase in the ETG principally reflects $52.8 million contributed by our fiscal 2020 and 2019 acquisitions and higher demand for our defense products resulting in an organic net sales increase of $13.6 million partially offset by lower demand for our commercial aerospace and medical products resulting in organic net sales decreases of $12.9 million and $5.6 million, respectively, largely attributable to the Pandemic. Sales price changes were not a significant contributing factor to the change in net sales of the FSG and ETG in the fiscal 2020.

    Our net sales in fiscal 2020 and 2019 by market consisted of approximately 41% and 52% from the commercial aviation industry, respectively, 44% and 35% from the defense and space industries, respectively, and 15% and 13% from other industrial markets including electronics, medical and telecommunications, respectively.

Gross Profit and Operating Expenses

    Our consolidated gross profit margin was 38.2% in fiscal 2020 as compared to 39.6% in 2019, principally reflecting a decrease of 3.6% and 1.3% in the FSG's and ETG's gross profit margin, respectively. The decrease in the FSG's gross profit margin principally reflects a 2.1% impact, or an incremental increase of $18.1 million, from an increase in inventory obsolescence expense mainly resulting from the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the Pandemic's financial impact. Additionally, the FSG's lower gross profit margin reflects the impact from lower net sales 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 a less favorable product mix of certain commercial aerospace and medical products, partially offset by increased net sales of certain defense products. Total new product research and development ("R&D") expenses included within our consolidated cost of sales were $65.6 million and $66.6 million in fiscal 2020 and 2019, respectively.
    Our consolidated selling, general and administrative ("SG&A") expenses decreased by 14% to $305.5 million in fiscal 2020, as compared to $356.7 million in fiscal 2019. The decrease in consolidated SG&A expenses reflects a $36.5 million decrease in performance-based
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compensation expense, a $20.7 million reduction in other general and administrative expenses and a $16.5 million reduction in other selling expenses including outside sales commissions, marketing and travel. These decreases were partially offset by $13.4 million attributable to the fiscal 2019 and 2020 acquisitions and a $9.1 million increase in bad debt expense principally due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 2020 as a result of the Pandemic's financial impact.

    Our consolidated SG&A expenses as a percentage of net sales decreased to 17.1% in fiscal 2020, down from 17.4% in fiscal 2019. The decrease in consolidated SG&A expenses as a percentage of net sales is due to a 1.6% impact from lower performance-based compensation expense and a .2% decrease in other selling expenses, partially offset by a 1.0% impact from higher other general and administrative expenses as a percentage of net sales and a .5% increase in bad debt expense principally due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 2020 as a result of the Pandemic's financial impact.

Operating Income

    Our consolidated operating income decreased by 18% to $376.6 million in fiscal 2020, as compared to $457.1 million in fiscal 2019. The decrease in consolidated operating income principally reflects a $99.0 million decrease (a 41% decrease) to $143.1 million in operating income of the FSG partially offset by a $13.1 million increase (a 5% increase) to a record $258.8 million in operating income of the ETG. The decrease in operating income of the FSG principally reflects the previously mentioned decrease in net sales, lower gross profit margin and a $9.3 million increase in bad debt expense principally due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 2020 as a result of the Pandemic's financial impact, partially offset by a $26.1 million decrease in performance-based compensation expense. The increase in operating income of the ETG principally reflects the previously mentioned net sales growth, a $5.4 million decrease in performance-based compensation expense and a $2.5 million decrease in acquisition-related expenses, partially offset by the previously mentioned decrease in gross profit margin. Further, the decrease in consolidated operating income was partially offset by $5.4 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 was 21.1% in fiscal 2020, as compared to 22.2% in fiscal 2019. The decrease principally reflects a decrease in the FSG’s operating income as a percentage of net sales to 15.5% in fiscal 2020, as compared to 19.5% in fiscal 2019. The decrease in the FSG’s operating income as a percentage of net sales reflects the previously mentioned lower gross profit margin and a .5% increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned higher bad debt expense and fixed cost efficiencies lost resulting from the Pandemic's impact, partially offset by the previously mentioned lower performance-based compensation expense. The ETG's operating income as a percentage of net sales increased to 29.6% in fiscal 2020, up from 29.4% in fiscal 2019.

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Interest Expense

    Interest expense decreased to $13.2 million in fiscal 2020, down from $21.7 million in 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 fiscal 2020 and 2019 was not material.

Income Tax Expense
    
    Our effective tax rate in fiscal 2020 was 7.9%, as compared to 17.8% in fiscal 2019. The decrease in our effective tax rate in fiscal 2020 is mainly attributable to a $31.8 million larger tax benefit recognized in fiscal 2020 from stock option exercises compared to fiscal 2019 as a 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. and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $21.9 million in fiscal 2020, as compared to $31.8 million in fiscal 2019. The decrease in net income attributable to noncontrolling interests in fiscal 2020 principally reflects a decrease in operating results of certain subsidiaries of the FSG in which noncontrolling interests are held as well as 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 was $314.0 million, or $2.29 per diluted share, in fiscal 2020 as compared to $327.9 million, or $2.39 per diluted share, in fiscal 2019, principally reflecting the previously mentioned lower operating income of the FSG, partially offset by lower income tax expense, less net income attributable to noncontrolling interests and lower interest expense.






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Outlook

As we look ahead to fiscal 2021, the Pandemic will likely continue to negatively impact the commercial aerospace industry and HEICO. Given this uncertainty, HEICO cannot provide fiscal 2021 net sales and earnings guidance at this time. However, we believe our ongoing fiscal conservative policies, healthy balance sheet, and increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers. In addition, our time-tested strategy of maintaining low debt and acquiring and operating high cash generating businesses across a diverse base of industries beyond commercial aerospace, such as defense, space and other high-end markets including electronics and medical, puts us in a good financial position to weather this uncertain economic period. Further, we are cautiously optimistic that the recent vaccine progress may generate increased commercial air travel and result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal 2021.

Inflation

    We have generally experienced increases in our costs of labor, materials and services consistent with overall rates of inflation.  The impact of such increases on net income attributable to HEICO has been generally minimized by efforts to lower costs through manufacturing efficiencies and cost reductions.

Liquidity and Capital Resources

    The following table summarizes our capitalization (in thousands):
As of October 31,
20202019
Cash and cash equivalents$406,852 $57,001 
Total debt (including current portion)739,831 561,955 
Shareholders’ equity2,010,607 1,694,660 
Total capitalization (debt plus equity)2,750,438 2,256,615 
Total debt to total capitalization27%25%
    
    Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 2021 are anticipated to approximate $40 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility.
    
    As of December 22, 2020, we had approximately $755 million of unused committed availability under the terms of our revolving credit facility. Based on our current outlook, we believe that net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund our cash requirements for at least the next twelve months.

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Operating Activities

Net cash provided by operating activities was $409.1 million in fiscal 2020 and consisted primarily of net income from consolidated operations of $335.9 million, depreciation and amortization expense of $88.6 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO Leadership Compensation Plan (“LCP”) of $14.8 million (principally participant deferrals and employer contributions), $10.1 million in share-based compensation expense (a non-cash item), and $9.6 million in employer contributions to the HEICO Savings and Investment Plan (a non-cash item), partially offset by a $48.5 million increase in working capital. The increase in working capital is inclusive of a $68.2 million decrease in accrued expenses and other current liabilities and trade accounts payable mainly reflecting lower accrued performance-based compensation as well as the timing of payments; a $28.3 million increase in inventories as a result of certain inventory purchase commitments based on pre-Pandemic net sales expectations and to support the backlog of certain of our businesses; and a $16.4 million increase in contract assets, partially offset by a $71.5 million decrease in accounts receivable resulting from lower net sales and strong cash collections. Net cash provided by operating activities decreased by $28.3 million in fiscal 2020 from $437.4 million in fiscal 2019. The decrease is principally attributable to a $23.9 million decrease in net income from consolidated operations and a $16.3 million increase in net working capital partially offset by a $5.1 million increase in depreciation and amortization expense (a non-cash item).

Net cash provided by operating activities was $437.4 million in fiscal 2019 and consisted primarily of net income from consolidated operations of $359.7 million, depreciation and amortization expense of $83.5 million (a non-cash item), net changes in other long-term liabilities and assets related to the HEICO LCP of $12.9 million (principally participant deferrals and employer contributions) and $10.3 million in share-based compensation expense (a non-cash item), partially offset by a $32.3 million increase in working capital.

Investing Activities

Net cash used in investing activities totaled $199.0 million in fiscal 2020 and related primarily to acquisitions of $163.9 million (net of cash acquired), capital expenditures of $22.9 million and investments related to the HEICO LCP of $15.9 million. Further details on acquisitions may be found in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.

Net cash used in investing activities totaled $280.6 million in fiscal 2019 and related primarily to acquisitions of $240.8 million (net of cash acquired), capital expenditures of $28.9 million and investments related to the HEICO LCP of $13.7 million. Further details on acquisitions may be found in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.




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Financing Activities

Net cash provided by financing activities in fiscal 2020 totaled $137.7 million. During 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 Pandemic and $45.0 million to fund our fiscal 2020 acquisitions. We also received $14.3 million in capital contributions from the noncontrolling interest holders of a subsidiary of HEICO Electronic representing their share of the purchase price for a 25% interest in two acquisitions made by a subsidiary of HEICO Electronic in August 2020. (See Note 2, Acquisitions, of the Notes to Consolidated Financial Statements for further details). Additionally, we made $68.0 million in payments on our revolving credit facility, paid $21.6 million in cash dividends on our common stock, made $17.9 million of distributions to noncontrolling interests, redeemed common stock related to stock option exercises aggregating $12.1 million, paid $7.5 million to acquire certain noncontrolling interests and received $7.0 million in proceeds from stock option exercises.

Net cash used in financing activities in fiscal 2019 totaled $159.7 million. During fiscal 2019, we made $283.0 million in payments on our revolving credit facility, paid $110.9 million in distributions to noncontrolling interests, redeemed common stock related to stock option exercises aggregating $64.0 million and paid $18.7 million in cash dividends on our common stock. Additionally, we borrowed $313.0 million under our revolving credit facility to fund certain of our fiscal 2019 acquisitions and a certain distribution to a noncontrolling interest holder.
    
    In November 2017, we entered into a $1.3 billion Revolving Credit Facility Agreement ("Credit Facility") with a bank syndicate, which matures in November 2022. Under certain circumstances, the maturity of the Credit Facility may be extended for two one-year periods. The Credit Facility also includes a feature that will allow us to increase the capacity by $350 million to become a $1.65 billion facility through increased commitments from existing lenders or the addition of new lenders. Borrowings under the Credit Facility may be used to finance acquisitions and for working capital and other general corporate purposes, including capital expenditures.         

On December 11, 2020, we entered into an amendment to extend the maturity date of the Credit Facility by one year to November 2023 and to increase the capacity by $200 million to $1.5 billion. The Credit Facility continues to include a feature that will allow us to increase the capacity by $350 million to become a $1.85 billion facility through increased commitments from existing lenders or the addition of new lenders and can be extended for an additional one-year period.

    Borrowings under the Credit Facility accrue interest at our election of the Base Rate or the Eurocurrency Rate, plus in each case, the Applicable Rate (based on our Total Leverage Ratio). The Base Rate for any day is a fluctuating rate per annum equal to the highest of (i) the Prime Rate; (ii) the Federal Funds Rate plus .50%; and (iii) the Eurocurrency Rate for an Interest Period of one month plus 100 basis points. The Eurocurrency Rate is the rate per annum obtained by dividing LIBOR for the applicable Interest Period by a percentage equal to 1.00
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minus the daily average Eurocurrency Reserve Rate for such Interest Period, as such capitalized terms are defined in the Credit Facility. The Applicable Rate for Eurocurrency Rate Loans ranges from 1.00% to 2.00%. The Applicable Rate for Base Rate Loans ranges from 0% to 1.00%. A fee is charged on the amount of the unused commitment ranging from .125% to .30% (depending on our Total Leverage Ratio). The Credit Facility also includes $100 million sublimits for borrowings made in foreign currencies and for swingline borrowings, and a $50 million sublimit for letters of credit. Outstanding principal, accrued and unpaid interest and other amounts payable under the Credit Facility may be accelerated upon an event of default, as such events are described in the Credit Facility. The Credit Facility is unsecured and contains covenants that require, among other things, the maintenance of a Total Leverage Ratio and an Interest Coverage Ratio, as such capitalized terms are defined in the Credit Facility. We were in compliance with all financial and nonfinancial covenants of the Credit Facility as of October 31, 2020.

Contractual Obligations

    The following table summarizes our contractual obligations as of October 31, 2020
(in thousands):
Payments due by fiscal period
Total20212022 - 20232024 - 2025Thereafter
Long-term debt obligations (1)
$730,264 $11 $98 $730,110 $45 
Estimated interest payments (1)
28,395 9,422 18,844 129 — 
Finance lease obligations (2)
12,144 1,436 2,527 1,964 6,217 
Operating lease obligations (3)
70,778 16,549 24,392 9,832 20,005 
Purchase obligations (4) (5) (6)
46,164 3,631 22,366 20,167 — 
Other long-term liabilities (7)
14,209 2,582 8,869 1,719 1,039 
Total contractual obligations$901,954 $33,631 $77,096 $763,921 $27,306 
__________________

(1)Estimated interest payments assumes the $730.0 million outstanding balance under our revolving credit facility and related interest rate of 1.3% as of October 31, 2020, will remain constant through the credit facility's maturity date in fiscal 2024. Actual interest payments may vary significantly based on future borrowings, repayments and interest rate fluctuations. As discussed in "Liquidity and Capital Resources," we entered into an amendment to extend the maturity date of our revolving credit facility by one year to November 2023, which is reflected in the table. See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements and "Liquidity and Capital Resources," above for additional information regarding our long-term debt obligations.

(2)Inclusive of $2.6 million of imputed interest.  See Note 9, Leases, of the Notes to Consolidated Financial Statements for additional information regarding our finance lease obligations.

(3)See Note 9, Leases, of the Notes to Consolidated Financial Statements for additional information regarding our operating lease obligations.

(4)Includes contingent consideration aggregating $42.0 million related to a fiscal 2017 acquisition and certain fiscal 2020 acquisitions. See Note 8, Fair Value Measurements, of the Notes to Consolidated Financial Statements for additional information.

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(5)Also includes an aggregate $1.4 million of commitments principally for capital expenditures and inventory. All purchase obligations of inventory and supplies in the ordinary course of business (i.e., with deliveries scheduled within the next year) are excluded from the table.

(6)The holders of equity interests in certain of our subsidiaries have rights (“Put Rights”) that may be exercised on varying dates causing us to purchase their equity interests through fiscal 2030.  The Put Rights provide that cash consideration be paid for their equity interests (the “Redemption Amount”). As of October 31, 2020, management’s estimate of the aggregate Redemption Amount of all Put Rights that we could be required to pay is approximately $221.2 million, which is reflected within redeemable noncontrolling interests in our Consolidated Balance Sheet. Of this amount, $2.3 million is included in the table as payable in fiscal 2021 pursuant to the past exercise of such Put Rights by the noncontrolling interest holder of one of our subsidiaries. See Note 13, Redeemable Noncontrolling Interests, of the Notes to Consolidated Financial Statements for further information.

(7)Includes $7.2 million of deferred payroll taxes related to the provisions of the Coronavirus Aid, Relief and Economic Security Act, which allows the Company to defer its portion of certain calendar year 2020 payroll taxes until fiscal 2022 and 2023. Also includes $3.5 million related to a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries which will be paid over a remaining six-year period as permitted by the Tax Cuts and Jobs Act. The amounts in the table do not include liabilities related to the HEICO LCP as they are fully supported by assets held within irrevocable trusts. See Note 3, Selected Financial Statement Information - Other Long-Term Assets and Liabilities, of the Notes to Consolidated Financial Statements for further information about this deferred compensation plan.

Off-Balance Sheet Arrangements

Guarantees

    As of October 31, 2020, we have arranged for standby letters of credit aggregating $14.6 million, which are supported by our revolving credit facility and principally pertain to performance guarantees related to customer contracts entered into by certain of our subsidiaries as well as payment guarantees related to potential workers' compensation claims and a facility lease.

Critical Accounting Policies

    We believe that the following are our most critical accounting policies, which require management to make judgments about matters that are inherently uncertain.

    Assumptions utilized to determine fair value in connection with business combinations, contingent consideration arrangements and in goodwill and intangible assets impairment tests are highly judgmental.  If there is a material change in such assumptions or if there is a material change in the conditions or circumstances influencing fair value, we could be required to recognize a material impairment charge.  See Item 1A., Risk Factors, for a list of factors which may cause our actual results to differ materially from anticipated results.

Revenue Recognition

During fiscal 2019, we adopted Accounting Standard Codification ("ASC") Topic 606, "Revenue from Contracts with Customers" ("ASC 606"). Pursuant to ASC 606, HEICO
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recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to receive in exchange for the good or service. Our performance obligations are satisfied and control is transferred either at a point-in-time or over-time. The majority of our revenue is recognized at a point-in-time when control is transferred, which is generally evidenced by the shipment or delivery of the product to the customer, a transfer of title, a transfer of the significant risks and rewards of ownership, and customer acceptance. For certain contracts under which we produce products with no alternative use and for which we have an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date and for certain other contracts under which we create or enhance a customer-owned asset while performing repair and overhaul services, control is transferred to the customer over-time. HEICO recognizes revenue using an over-time recognition model for these types of contracts.

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

    Under the cost-to-cost method, the extent of progress toward completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead, capital costs, and manufacturing efficiency. We review our cost estimates on a periodic basis, or when circumstances change and warrant a modification to a previous estimate. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections.

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

    Certain of our contracts give rise to variable consideration when they contain items such as customer rebates, credits, volume purchase discounts, penalties and other provisions that may impact the total consideration we will receive. We include variable consideration in the transaction price generally by applying the most likely amount method of the consideration that we expect to be entitled to receive based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable
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that a significant reversal of revenue recognized will not occur when the uncertainty is resolved. We estimate variable consideration by applying the most likely amount method when there are a limited number of outcomes related to the resolution of the variable consideration.    

    Changes in estimates that result in adjustments to net sales and cost of sales are recognized as necessary in the period they become known on a cumulative catch-up basis. Changes in estimates did not have a material effect on net income from consolidated operations in fiscal 2020, 2019 and 2018.

Valuation of Inventory

    Inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out or the average cost basis.  Losses, if any, are recognized fully in the period when identified.

    We periodically evaluate the carrying value of inventory, giving consideration to factors such as its physical condition, sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.  These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
    
In accordance with industry practice, all inventories are classified as a current asset including portions with long production cycles, some of which may not be realized within one year.

Business Combinations

    We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities and any noncontrolling interests assumed based on their estimated fair values, with any excess recorded as goodwill.  Determining the fair value of assets acquired and liabilities and noncontrolling interests assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.  We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors.

    As part of the agreement to acquire certain subsidiaries, we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition. As of the acquisition date, contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach. Under this method, a set of discrete potential future subsidiary earnings is determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood is then assigned to each discrete potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate
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reflecting the credit risk of HEICO. Subsequent to the acquisition date, the fair value of such contingent consideration is measured each reporting period and any changes are recorded to SG&A expenses within our Consolidated Statements of Operations. 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. As of October 31, 2020, 2019 and 2018, $42.0 million, $18.3 million and $20.9 million of contingent consideration was accrued within our Consolidated Balance Sheets, respectively. During fiscal 2020, 2019 and 2018, such fair value measurement adjustments resulted in net increases (decreases) to SG&A expenses of $.5 million, $2.6 million and ($1.4) million, respectively. For further information regarding our contingent consideration arrangements, see Note 8, Fair Value Measurements, of the Notes to Consolidated Financial Statements.

Valuation of Goodwill and Other Intangible Assets

    We test goodwill for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable.  In evaluating the recoverability of goodwill, we compare the fair value of each of our reporting units to its carrying value to determine potential impairment.  If the carrying value of a reporting unit exceeds its fair value, the implied fair value of that reporting unit’s goodwill is to be calculated and an impairment loss is recognized in the amount by which the carrying value of the reporting unit’s goodwill exceeds its implied fair value, if any.  The fair values of our reporting units were determined using a weighted average of a market approach and an income approach.  Under the market approach, fair values are estimated using published market multiples for comparable companies. We calculate fair values under the income approach by taking estimated future cash flows that are based on internal projections and other assumptions deemed reasonable by management and discounting them using an estimated weighted average cost of capital.  Based on the annual goodwill impairment test as of October 31, 2020, 2019 and 2018, we determined there was no impairment of our goodwill.  The fair value of each of our reporting units as of October 31, 2020 significantly exceeded its carrying value.

    We test each non-amortizing intangible asset (principally trade names) for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. To derive the fair value of our trade names, we utilize an income approach, which relies upon management's assumptions of royalty rates, projected revenues and discount rates.  We also test each amortizing intangible asset for impairment if events or circumstances indicate that the asset might be impaired.  The test consists of determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows.  If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.  The determination of fair value requires us to make a number of estimates, assumptions and judgments of underlying factors such as projected revenues and related earnings as well as discount rates. Based on the intangible asset impairment tests conducted, we did not recognize any impairment losses in fiscal 2020, 2019 and 2018.

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New Accounting Pronouncements

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

Forward-Looking Statements

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

The severity, magnitude and duration of the Pandemic;

Our liquidity and the amount and timing of cash generation;

Lower commercial air travel caused by the Pandemic and its aftermath, 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;
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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.

For further information on these and other factors that potentially could materially affect our financial results, see Item 1A, Risk Factors. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.


Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

    We have exposure to interest rate risk, mainly related to our revolving credit facility, which has variable interest rates.  Interest rate risk associated with our variable rate debt is the potential increase in interest expense from an increase in interest rates.  Based on our aggregate outstanding variable rate debt balance of $730.0 million as of October 31, 2020, a hypothetical 10% increase in interest rates would not have a material effect on our results of operations, financial position or cash flows. We also maintain a portion of our cash and cash equivalents in financial instruments with original maturities of three months or less.  These financial instruments are subject to interest rate risk and will decline in value if interest rates increase.  Due to the short duration of these financial instruments, a hypothetical 10% increase in interest rates as of October 31, 2020 would not have a material effect on our results of operations, financial position or cash flows.

Foreign Currency Risk

    We have several foreign subsidiaries that utilize a functional currency other than the U.S. dollar, or principally the Euro. Accordingly, changes in exchange rates between such foreign currencies and the U.S. dollar will affect the translation of the financial results of our foreign subsidiaries into the U.S. dollar for purposes of reporting our consolidated financial results. A hypothetical 10% weakening in the exchange rate of the Euro to the U.S. dollar as of October 31, 2020 would not have a material effect on our results of operations, financial position or cash flows.
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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HEICO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
HEICO Corporation
Hollywood, Florida

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of HEICO Corporation and subsidiaries (the "Company") as of October 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended October 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 23, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the Finance/Audit Committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
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critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventories, net - Refer to Notes 1 and 3 to the Financial Statements

Critical Audit Matter Description

Inventory is stated at the lower of cost or net realizable value. The Company periodically evaluates the carrying value of inventory, which requires management to make significant estimates and assumptions related to sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving or obsolete inventory. Changes in the assumptions related to future demand and sales patterns could have a significant impact on the valuation of finished goods inventory for certain of the Company’s aftermarket replacement parts and repair and overhaul parts and services business units in the Flight Support Group operating segment.

Given the magnitude of the inventory balances at these business units, coupled with the judgments necessary to project sales patterns and expected future demand within these aftermarket replacement parts and repair and overhaul parts and services business units, auditing such estimates required a high degree of auditor judgment and an increased extent of effort when performing audit procedures and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the expected future demand and sales patterns used by management to estimate the valuation reserve on inventory included the following, among others:

We tested the effectiveness of controls, including those related to evaluating the reasonableness of expected future demand and sales patterns.

We evaluated the reasonableness of management’s assumptions of future demand and sales patterns by performing the following:

Utilized historical inventory usage data to analyze the relationship between the inventory valuation reserve calculated, the inventory on hand, and the sales trends over time.

Compared management’s assumptions to available external market data for certain inventory items.

Evaluated the accuracy and completeness of the valuation reserve by selecting a sample of inventory items and obtaining supporting documentation regarding current and historical sales patterns.


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We tested declines in the inventory valuation reserve and evaluated whether such declines were the result of the sale or write off of inventory parts or the result of changes in the significant assumptions used to develop the valuation reserve.

/s/ DELOITTE & TOUCHE LLP

Miami, Florida
December 23, 2020
We have served as the Company's auditor since 1990.
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HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
As of October 31,
20202019
ASSETS
Current assets:
Cash and cash equivalents$406,852 $57,001 
Accounts receivable, net210,433 274,326 
Contract assets60,429 43,132 
Inventories, net463,205 420,319 
Prepaid expenses and other current assets24,706 18,953 
Total current assets
1,165,625 813,731 
Property, plant and equipment, net168,848 173,345 
Goodwill1,383,167 1,268,703 
Intangible assets, net579,041 550,693 
Other assets251,030 162,739 
Total assets$3,547,711 $2,969,211 
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt$1,045 $906 
Trade accounts payable76,237 106,225 
Accrued expenses and other current liabilities162,232 178,957 
Income taxes payable1,647 3,050 
Total current liabilities241,161 289,138 
Long-term debt, net of current maturities738,786 561,049 
Deferred income taxes55,658 51,496 
Other long-term liabilities280,291 184,604 
Total liabilities1,315,896 1,086,287 
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests (Note 13)221,208 188,264 
Shareholders’ equity:
Preferred Stock, $.01 par value per share; 10,000 shares authorized; none issued
  
Common Stock, $.01 par value per share; 150,000 shares authorized;
54,195 and 54,143 shares issued and outstanding
542 541 
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 80,923 and 80,353 shares issued and outstanding
809 804 
Capital in excess of par value299,930 284,609 
Deferred compensation obligation4,886 4,232 
HEICO stock held by irrevocable trust(4,886)(4,232)
Accumulated other comprehensive loss(9,149)(16,739)
Retained earnings1,688,045 1,397,327 
Total HEICO shareholders’ equity1,980,177 1,666,542 
Noncontrolling interests30,430 28,118 
Total shareholders’ equity2,010,607 1,694,660 
Total liabilities and equity$3,547,711 $2,969,211 
The accompanying notes are an integral part of these consolidated financial statements.
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HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended October 31,
202020192018
Net sales$1,787,009 $2,055,647 $1,777,721 
Operating costs and expenses:
Cost of sales
1,104,882 1,241,807 1,087,006 
Selling, general and administrative expenses
305,479 356,743 314,470 
Total operating costs and expenses
1,410,361 1,598,550 1,401,476 
Operating income376,648 457,097 376,245 
Interest expense(13,159)(21,695)(19,901)
Other income (expense) 1,366 2,439 (58)
Income before income taxes and noncontrolling interests
364,855 437,841 356,286 
Income tax expense29,000 78,100 70,600 
Net income from consolidated operations335,855 359,741 285,686 
Less: Net income attributable to noncontrolling interests
21,871 31,845 26,453 
Net income attributable to HEICO$313,984 $327,896 $259,233 
Net income per share attributable to HEICO shareholders:
Basic
$2.33 $2.45 $1.96 
Diluted
$2.29 $2.39 $1.90 
Weighted average number of common shares outstanding:
Basic
134,754 133,640 132,543 
Diluted
137,302 137,350 136,696 

The accompanying notes are an integral part of these consolidated financial statements.

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HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended October 31,
202020192018
Net income from consolidated operations$335,855 $359,741 $285,686 
Other comprehensive income (loss):
Foreign currency translation adjustments8,876 (844)(5,243)
Unrealized loss on defined benefit pension plan, net of tax(1,012)(889)(97)
Amortization of unrealized loss on defined benefit pension plan, net of tax 73 25 13 
Total other comprehensive income (loss)7,937 (1,708)(5,327)
Comprehensive income from consolidated operations343,792 358,033 280,359 
Net income attributable to noncontrolling interests21,871 31,845 26,453 
Foreign currency translation adjustments attributable to noncontrolling interests