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Index
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2021
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
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 Accelerated filer Non-accelerated filer
Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The number of shares outstanding of each of the registrant’s classes of common stock as of February 24, 2021 is as follows:
Common Stock, $.01 par value
54,200,427 shares
Class A Common Stock, $.01 par value
81,060,661 shares



Index
HEICO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Page
Part I.Financial Information
Item 1.
Item 2.
Item 3.
Item 4.
Part II.Other Information
Item 6.


1

Index
PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
January 31, 2021October 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$399,403 $406,852 
Accounts receivable, net202,318 210,433 
Contract assets57,876 60,429 
Inventories, net462,854 463,205 
Prepaid expenses and other current assets26,648 24,706 
Total current assets1,149,099 1,165,625 
Property, plant and equipment, net177,968 168,848 
Goodwill1,388,046 1,383,167 
Intangible assets, net565,921 579,041 
Other assets284,550 251,030 
Total assets$3,565,584 $3,547,711 
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt$1,089 $1,045 
Trade accounts payable78,292 76,237 
Accrued expenses and other current liabilities151,788 162,232 
Income taxes payable3,506 1,647 
Total current liabilities234,675 241,161 
Long-term debt, net of current maturities668,595 738,786 
Deferred income taxes47,598 55,658 
Other long-term liabilities312,332 280,291 
Total liabilities1,263,200 1,315,896 
Commitments and contingencies (Note 10)
Redeemable noncontrolling interests (Note 2)222,225 221,208 
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 54,195 shares issued and outstanding
542 542 
Class A Common Stock, $.01 par value per share; 150,000 shares authorized; 81,053 and 80,923 shares issued and outstanding
811 809 
Capital in excess of par value301,107 299,930 
Deferred compensation obligation4,777 4,886 
HEICO stock held by irrevocable trust(4,777)(4,886)
Accumulated other comprehensive income (loss)2,129 (9,149)
Retained earnings1,744,247 1,688,045 
Total HEICO shareholders’ equity2,048,836 1,980,177 
Noncontrolling interests31,323 30,430 
Total shareholders’ equity2,080,159 2,010,607 
Total liabilities and equity$3,565,584 $3,547,711 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Index
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
Three months ended January 31,
20212020
Net sales$417,902 $506,275 
Operating costs and expenses:
Cost of sales259,468 308,228 
Selling, general and administrative expenses78,149 87,057 
Total operating costs and expenses337,617 395,285 
Operating income
80,285 110,990 
Interest expense(2,448)(4,283)
Other income711 195 
Income before income taxes and noncontrolling interests
78,548 106,902 
Income tax expense (benefit)2,300 (22,900)
Net income from consolidated operations76,248 129,802 
Less: Net income attributable to noncontrolling interests
5,652 7,914 
Net income attributable to HEICO$70,596 $121,888 
Net income per share attributable to HEICO shareholders:
Basic$.52 $.91 
Diluted$.51 $.89 
Weighted average number of common shares outstanding:
Basic135,210 134,523 
Diluted137,742 137,421 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Index
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
Three months ended January 31,
20212020
Net income from consolidated operations$76,248 $129,802 
Other comprehensive income (loss):
Foreign currency translation adjustments
11,648 (2,678)
Amortization of unrealized loss on defined benefit pension plan, net of tax
34 24 
Total other comprehensive income (loss) 11,682 (2,654)
Comprehensive income from consolidated operations
87,930 127,148 
Net income attributable to noncontrolling interests 5,652 7,914 
Foreign currency translation adjustments attributable to noncontrolling interests
404 (130)
Comprehensive income attributable to noncontrolling interests
6,056 7,784 
Comprehensive income attributable to HEICO$81,874 $119,364 
The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Index
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
(in thousands, except per share data)
HEICO Shareholders' Equity
Redeemable Noncontrolling InterestsCommon StockClass A Common StockCapital in Excess of Par ValueDeferred Compensation ObligationHEICO Stock Held by Irrevocable TrustAccumulated Other Comprehensive Income (Loss)Retained EarningsNoncontrolling InterestsTotal Shareholders' Equity
Balances as of October 31, 2020$221,208 $542 $809 $299,930 $4,886 ($4,886)($9,149)$1,688,045 $30,430 $2,010,607 
Comprehensive income
4,797 — — — — — 11,278 70,596 1,259 83,133 
Cash dividends ($.08 per share)
— — — — — — — (10,818)— (10,818)
Share-based compensation expense
— — — 2,229 — — — — — 2,229 
Proceeds from stock option exercises
— — 2 2,448 — — — — — 2,450 
Redemptions of common stock related to stock option exercises
— — — (3,571)— — — — — (3,571)
Distributions to noncontrolling interests
(7,378)— — — — — — — (366)(366)
Adjustments to redemption amount of redeemable noncontrolling interests
3,576 — — — — — — (3,576)— (3,576)
Deferred compensation obligation— — — — (109)109 — — — — 
Other
22 — — 71 — — — — — 71 
Balances as of January 31, 2021$222,225 $542 $811 $301,107 $4,777 ($4,777)$2,129 $1,744,247 $31,323 $2,080,159 
HEICO Shareholders' Equity
Redeemable Noncontrolling InterestsCommon StockClass A Common StockCapital in Excess of Par ValueDeferred Compensation ObligationHEICO Stock Held by Irrevocable TrustAccumulated Other Comprehensive LossRetained EarningsNoncontrolling InterestsTotal Shareholders' Equity
Balances as of October 31, 2019$188,264 $541 $804 $284,609 $4,232 ($4,232)($16,739)$1,397,327 $28,118 $1,694,660 
Comprehensive income4,767 — — — — — (2,524)121,888 3,017 122,381 
Cash dividends ($.08 per share)
— — — — — — — (10,762)— (10,762)
Issuance of common stock to HEICO Savings and Investment Plan— — — 1,298 — — — — — 1,298 
Share-based compensation expense— — — 2,646 — — — — — 2,646 
Proceeds from stock option exercises— — 1 1,527 — — — — — 1,528 
Redemptions of common stock related to stock option exercises— — — (2,562)— — — — — (2,562)
Noncontrolling interests assumed related to acquisitions7,540 — — — — — — — — — 
Distributions to noncontrolling interests(4,347)— — — — — — — (534)(534)
Adjustments to redemption amount of redeemable noncontrolling interests(331)— — — — — — 331 — 331 
Other— — — 261 — — — — — 261 
Balances as of January 31, 2020$195,893 $541 $805 $287,779 $4,232 ($4,232)($19,263)$1,508,784 $30,601 $1,809,247 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
Three months ended January 31,
20212020
Operating Activities:
Net income from consolidated operations$76,248 $129,802 
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
Depreciation and amortization
23,003 21,583 
Share-based compensation expense
2,229 2,646 
Employer contributions to HEICO Savings and Investment Plan
2,840 2,613 
Deferred income tax benefit(8,345)(25,718)
Increase in accrued contingent consideration
432 408 
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable9,234 23,734 
Decrease (increase) in contract assets2,623 (1,719)
Decrease (increase) in inventories2,602 (20,449)
Increase in prepaid expenses and other current assets(6,614)(3,303)
Increase (decrease) in trade accounts payable1,641 (10,678)
Decrease in accrued expenses and other current liabilities(19,241)(48,319)
Increase (decrease) in income taxes payable6,627 (1,334)
Net changes in other long-term liabilities and assets related to
HEICO Leadership Compensation Plan
12,022 11,315 
Other
1,898 555 
Net cash provided by operating activities107,199 81,136 
Investing Activities:
Acquisitions, net of cash acquired(345)(45,343)
Capital expenditures(15,509)(6,850)
Investments related to HEICO Leadership Compensation Plan (10,400)(11,800)
Other983 439 
Net cash used in investing activities(25,271)(63,554)
Financing Activities:
Payments on revolving credit facility(70,000)(38,000)
Borrowings on revolving credit facility— 45,000 
Cash dividends paid(10,818)(10,762)
Distributions to noncontrolling interests(7,744)(4,881)
Redemptions of common stock related to stock option exercises(3,571)(2,562)
Revolving credit facility issuance costs(1,468)— 
Proceeds from stock option exercises2,450 1,528 
Other(256)(538)
Net cash used in financing activities(91,407)(10,215)
Effect of exchange rate changes on cash2,030 (397)
Net (decrease) increase in cash and cash equivalents(7,449)6,970 
Cash and cash equivalents at beginning of year406,852 57,001 
Cash and cash equivalents at end of period$399,403 $63,971 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2020. The October 31, 2020 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the three months ended January 31, 2021 are not necessarily indicative of the results which may be expected for the entire fiscal year.

The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
    
The Company's results of operations in the first quarter of fiscal 2021 continue to reflect the adverse impact from the COVID-19 global pandemic (the “Pandemic”). Most notably, demand for HEICO's commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market. Consolidated net sales for the Company's businesses that operate within the commercial aerospace industry decreased by approximately 43% during the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020. Looking ahead to the remainder of fiscal 2021, the extent to which the Pandemic may have a material adverse effect on the Company's 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, the emergence of new coronavirus strain variants, the timing of distribution and effectiveness of COVID-19 vaccines, 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, the Company is cautiously optimistic that the recent vaccine progress may generate increased commercial air travel and result in a gradual recovery in demand for its commercial aerospace parts and services commencing toward the second-half of fiscal 2021.

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New Accounting Pronouncement

    In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update "ASU" 2017-04, "Simplifying the Test for Goodwill Impairment," which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted ASU 2017-04 in the first quarter of fiscal 2021 and will apply the guidance on a prospective basis when assessing its goodwill for impairment.


2.     SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands)January 31, 2021October 31, 2020
Accounts receivable$215,145 $223,171 
Less: Allowance for doubtful accounts(12,827)(12,738)
Accounts receivable, net$202,318 $210,433 

Inventories
(in thousands)January 31, 2021October 31, 2020
Finished products$228,602 $235,501 
Work in process40,268 37,957 
Materials, parts, assemblies and supplies193,984 189,747 
Inventories, net of valuation reserves$462,854 $463,205 

Property, Plant and Equipment
(in thousands)January 31, 2021October 31, 2020
Land$10,877 $6,678 
Buildings and improvements128,961 120,769 
Machinery, equipment and tooling269,836 265,408 
Construction in progress9,307 8,487 
418,981 401,342 
Less: Accumulated depreciation and amortization(241,013)(232,494)
Property, plant and equipment, net$177,968 $168,848 


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Accrued Customer Rebates and Credits

The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $16.0 million as of January 31, 2021 and $15.8 million as of October 31, 2020. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2021 and 2020 was $.8 million and $2.1 million, respectively.

Research and Development Expenses

The amount of new product research and development ("R&D") expenses included in cost of sales for the three months ended January 31, 2021 and 2020 is as follows (in thousands):
Three months ended January 31,
20212020
R&D expenses$16,181 $17,103 

Redeemable Noncontrolling Interests

The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2030. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is as follows (in thousands):
January 31, 2021October 31, 2020
Redeemable at fair value $180,978 $179,415 
Redeemable based on a multiple of future earnings41,247 41,793 
Redeemable noncontrolling interests$222,225 $221,208 


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Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive income (loss) for the three months ended January 31, 2021 are as follows (in thousands):
Foreign Currency TranslationDefined Benefit Pension PlanAccumulated
Other
Comprehensive Income (Loss)
Balances as of October 31, 2020($6,460)($2,689)($9,149)
Unrealized gain11,244 — 11,244 
Amortization of unrealized loss — 34 34 
Balances as of January 31, 2021$4,784 ($2,655)$2,129 


3.     GOODWILL AND OTHER INTANGIBLE ASSETS

    Changes in the carrying amount of goodwill by operating segment for the three months ended January 31, 2021 are as follows (in thousands):
SegmentConsolidated Totals
FSGETG
Balances as of October 31, 2020$427,565 $955,602 $1,383,167 
Foreign currency translation adjustments1,903 2,768 4,671 
Adjustments to goodwill(33)241 208 
Balances as of January 31, 2021$429,435 $958,611 $1,388,046 

Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2020 acquisitions.



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Identifiable intangible assets consist of the following (in thousands):
As of January 31, 2021As of October 31, 2020
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Amortizing Assets:
Customer relationships$435,317 ($190,688)$244,629 $443,143 ($188,919)$254,224 
Intellectual property241,704 (89,952)151,752 240,725 (84,686)156,039 
Licenses6,559 (4,795)1,764 6,559 (4,670)1,889 
Patents1,073 (750)323 1,071 (746)325 
Non-compete agreements818 (818) 811 (811) 
Trade names450 (228)222 450 (219)231 
685,921 (287,231)398,690 692,759 (280,051)412,708 
Non-Amortizing Assets:
Trade names167,231 — 167,231 166,333 — 166,333 
$853,152 ($287,231)$565,921 $859,092 ($280,051)$579,041 
    Amortization expense related to intangible assets for the three months ended January 31, 2021 and 2020 was $15.2 million and $13.7 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2021 is estimated to be $44.7 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $53.1 million in fiscal 2022, $47.5 million in fiscal 2023, $42.6 million in fiscal 2024, $38.2 million in fiscal 2025, $33.8 million in fiscal 2026, and $138.8 million thereafter.


4.     LONG-TERM DEBT

    Long-term debt consists of the following (in thousands):
January 31, 2021October 31, 2020
Borrowings under revolving credit facility$660,000 $730,000 
Finance leases and note payable 9,684 9,831 
669,684 739,831 
Less: Current maturities of long-term debt(1,089)(1,045)
$668,595 $738,786 

The Company's borrowings under its revolving credit facility mature in fiscal 2024. As of January 31, 2021 and October 31 2020, the weighted average interest rate on borrowings under the Company's revolving credit facility was 1.2% and 1.3%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2021, the Company was in compliance with all such covenants.




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5.     REVENUE
    
Contract Balances

    Contract assets (unbilled receivables) represent revenue recognized on contracts using an over-time recognition model in excess of amounts invoiced to the customer. Contract liabilities (deferred revenue) represent customer advances and billings in excess of revenue recognized and are included within accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet.    

    Changes in the Company’s contract assets and liabilities for the three months ended January 31, 2021 are as follows (in thousands):
January 31, 2021October 31, 2020Change
Contract assets $57,876 $60,429 ($2,553)
Contract liabilities 30,004 25,631 4,373 
Net contract assets $27,872 $34,798 ($6,926)
    
    The decrease in the Company's contract assets during the first quarter of fiscal 2021 mainly occurred within the ETG and principally reflects billings on certain customer contracts made during the quarter in excess of amounts recorded as unbilled receivables on certain customer contracts using an over-time recognition model.

    The increase in the Company's contract liabilities during the first quarter of fiscal 2021 mainly occurred within the ETG and principally reflects the receipt during the quarter of new customer deposits on certain customer contracts in excess of reductions to contract liabilities from customer deposits recognized as revenue.

    The amount of revenue that the Company recognized during the first quarter of fiscal 2021 that was included in contract liabilities as of the beginning of fiscal 2021 was $11.2 million.
    
Remaining Performance Obligations

    As of January 31, 2021, the Company had $486.2 million of remaining performance obligations associated with contracts with an original duration of greater than one year pertaining to the majority of the products offered by the ETG as well as certain products of the FSG's specialty products and aftermarket replacement parts product lines. The Company will recognize net sales as these obligations are satisfied. The Company expects to recognize $286.5 million of this amount during the remainder of fiscal 2021 and $199.7 million thereafter, of which the majority is expected to occur in fiscal 2022.
    

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Disaggregation of Revenue

    The following table summarizes the Company’s net sales by product line for each operating segment (in thousands):
Three months ended January 31,
20212020
Flight Support Group:
Aftermarket replacement parts (1)
$118,434 $168,267 
Repair and overhaul parts and services (2)
42,412 69,287 
Specialty products (3)
38,488 63,513 
Total net sales199,334 301,067 
Electronic Technologies Group:
Electronic component parts primarily for defense,
space and aerospace equipment (4)
167,089 160,713 
Electronic component parts for equipment
in various other industries (5)
56,461 47,698 
Total net sales223,550 208,411 
Intersegment sales(4,982)(3,203)
Total consolidated net sales$417,902 $506,275 

(1)    Includes various jet engine and aircraft component replacement parts.
(2)    Includes primarily the sale of parts consumed in various repair and overhaul services on selected jet engine and aircraft components, avionics, instruments, composites and flight surfaces of commercial and military aircraft.
(3)    Includes primarily the sale of specialty components such as thermal insulation blankets, renewable/reusable insulation systems, advanced niche components, complex composite assemblies, and expanded foil mesh.
(4)    Includes various component parts such as electro-optical infrared simulation and test equipment, electro-optical laser products, electro-optical, microwave and other power equipment, high-speed interface products, power conversion products, underwater locator beacons, emergency locator transmission beacons, traveling wave tube amplifiers, microwave power modules, three-dimensional microelectronic and stacked memory products, crashworthy and ballistically self-sealing auxiliary fuel systems, radio frequency (RF) and microwave amplifiers, transmitters and receivers, high performance communications and electronic intercept receivers and tuners, high performance active antenna systems, and technical surveillance countermeasures (TSCM) equipment.
(5)    Includes various component parts such as electromagnetic and radio interference shielding, high voltage interconnection devices, high voltage advanced power electronics, harsh environment connectivity products, custom molded cable assemblies, silicone material for a variety of demanding applications and rugged small form-factor embedded computing solutions.


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    The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):
Three months ended January 31,
20212020
Flight Support Group:
Aerospace$135,056 $239,923 
Defense and Space 54,044 50,253 
Other (1)
10,234 10,891 
Total net sales199,334 301,067 
Electronic Technologies Group:
Defense and Space 142,092 133,110 
Other (2)
63,907 54,963 
Aerospace 17,551 20,338 
Total net sales223,550 208,411 
Intersegment sales (4,982)(3,203)
Total consolidated net sales$417,902 $506,275 

(1)    Principally industrial products.
(2)    Principally other electronics and medical products.


6.     INCOME TAXES
    
The Company's income tax expense was $2.3 million in the first quarter of fiscal 2021, as compared to an income tax benefit of $22.9 million in the first quarter of fiscal 2020. The Company recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2021 and 2020 of $13.5 million and $47.6 million, respectively. The tax benefit from stock option exercises in both periods was the result of strong appreciation in HEICO's stock price during the optionees' holding periods and the $34.1 million larger benefit recognized in the first quarter of fiscal 2020 was the result of more stock options exercised.

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7.    FAIR VALUE MEASUREMENTS

The Company's assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands):
As of January 31, 2021
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
Significant
Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total
Assets:
Deferred compensation plan:
Corporate-owned life insurance$ $209,873 $ $209,873 
Money market funds4,322   4,322 
Total assets$4,322 $209,873 $ $214,195 
Liabilities:
Contingent consideration $ $ $42,819 $42,819 
As of October 31, 2020
Quoted Prices
in Active Markets for Identical Assets (Level 1)
Significant
Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total
Assets:
Deferred compensation plan:
Corporate-owned life insurance$ $180,128 $ $180,128 
Money market funds11   11 
Total assets$11 $180,128 $ $180,139 
Liabilities:
Contingent consideration $ $ $41,974 $41,974 

The Company maintains the HEICO Corporation Leadership Compensation Plan (the "LCP"), which is a non-qualified deferred compensation plan. The assets of the LCP principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company and are classified within Level 2 and valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the LCP are held within an irrevocable trust and classified within other assets in the Company’s Condensed Consolidated Balance Sheets. The related liabilities of the LCP are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $212.2 million as of January 31, 2021 and $178.3 million as of October 31, 2020.


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As part of the agreement to acquire 89.99% of the equity interests of a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to CAD $27.0 million, or $21.1 million, in fiscal 2025 should the acquired entity meet certain earnings objectives during fiscal 2023 and 2024. However, should the acquired entity achieve a certain earnings objective over any two consecutive fiscal years beginning in fiscal 2021 and ending in fiscal 2023, half of the contingent consideration obligation, or CAD $13.5 million, would be payable in the following year. As of January 31, 2021, the estimated fair value of the contingent consideration was CAD $13.0 million, or $10.2 million.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2020, the Company may be obligated to pay contingent consideration of up to $35.0 million in fiscal 2025 based on the earnings of the acquired entity during calendar years 2023 and 2024 provided the entity meets certain earnings objectives during each of calendar years 2021 to 2024. As of January 31, 2021, the estimated fair value of the contingent consideration was $14.4 million. The obligation to pay any contingent consideration would be payable by a consolidated subsidiary of HEICO that is 75% owned by HEICO Electronic.

    As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consideration of $20.0 million in fiscal 2023 should the acquired entity meet a certain earnings objective during the first six years following the acquisition. As of January 31, 2021, the estimated fair value of the contingent consideration was $18.3 million.
    
    The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were determined using probability-based scenario analyses. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of HEICO. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's consolidated statements of operations.


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The following unobservable inputs were used to derive the estimated fair value of the Company's Level 3 contingent consideration liabilities as of January 31, 2021 ($ in thousands):
Unobservable Weighted
Acquisition Date Fair Value Input Range
Average (1)
8-18-2020$10,193Compound annual revenue growth rate
0% - 19%
7.0%
Discount rate
4.3% - 4.5%
4.4%
8-11-202014,357Compound annual revenue growth rate
4% - 18%
13.0%
Discount rate
4.5% - 4.5%
4.5%
9-15-201718,269Compound annual revenue growth rate
(3%) - 10%
6.0%
Discount rate
3.4% - 3.4%
3.4%

(1)    Unobservable inputs were weighted by the relative fair value of the contingent consideration liability.

Changes in the Company’s contingent consideration liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended January 31, 2021 are as follows (in thousands):
Liabilities
Balance as of October 31, 2020$41,974 
Increase in accrued contingent consideration432 
Foreign currency transaction adjustments413 
Balance as of January 31, 2021$42,819 

The Company's contingent consideration liabilities are included in other long-term liabilities in its Condensed Consolidated Balance Sheet and the Company records changes in accrued contingent consideration and foreign currency transaction adjustments within selling, general and administrative expenses in its Condensed Consolidated Statement of Operations.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of January 31, 2021 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.


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8.    NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
    The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
Three months ended January 31,
20212020
Numerator:
Net income attributable to HEICO
$70,596 $121,888 
Denominator:
Weighted average common shares outstanding - basic
135,210 134,523 
Effect of dilutive stock options2,532 2,898 
Weighted average common shares outstanding - diluted
137,742 137,421 
Net income per share attributable to HEICO shareholders:
Basic$.52 $.91 
Diluted$.51 $.89 
Anti-dilutive stock options excluded
28 117 


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9.    OPERATING SEGMENTS
    Information on the Company’s two operating segments, the FSG and the ETG, for the three months ended January 31, 2021 and 2020, respectively, is as follows (in thousands):
Other,
Primarily Corporate and
Intersegment
(1)
Consolidated
Totals
Segment
FSGETG
Three months ended January 31, 2021:
Net sales$199,334 $223,550 ($4,982)$417,902 
Depreciation3,450 3,059 246 6,755 
Amortization5,136 10,838 274 16,248 
Operating income25,822 60,128 (5,665)80,285 
Capital expenditures1,988 13,521  15,509 
Three months ended January 31, 2020:
Net sales$301,067 $208,411 ($3,203)$506,275 
Depreciation3,617 2,928 255 6,800 
Amortization4,859 9,678 246 14,783 
Operating income62,045 57,491 (8,546)110,990 
Capital expenditures4,118 2,727 5 6,850 

(1) Intersegment activity principally consists of net sales from the ETG to the FSG.

Total assets by operating segment are as follows (in thousands):
Other,
Primarily Corporate
Consolidated
Totals
Segment