hei-20210131

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)


Florida						65-0341002
(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 class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value per share

HEI

New York Stock Exchange

Class A Common Stock, $.01 par value per share

HEI.A

New 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.	Financial Statements:

		Condensed Consolidated Balance Sheets (unaudited) as of January 31, 202 1 and October 31, 20 20	2

		Condensed Consolidated Statements of Operations (unaudited) for the three months ended January 31, 202 1 and 20 20	3

		Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months ended January 31, 202 1 and 20 20	4

		Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the three months ended January 31, 202 1 and 20 20	5

		Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended January 31, 202 1 and 20 20	6

		Notes to Condensed Consolidated Financial Statements (unaudited)	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	29

Part II.	Other Information

	Item 6.	Exhibits	30

Signatures			31

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, 2021	October 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$399,403	$406,852
Accounts receivable, net	202,318	210,433
Contract assets	57,876	60,429
Inventories, net	462,854	463,205
Prepaid expenses and other current assets	26,648	24,706
Total current assets	1,149,099	1,165,625

Property, plant and equipment, net	177,968	168,848
Goodwill	1,388,046	1,383,167
Intangible assets, net	565,921	579,041
Other assets	284,550	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 payable	78,292	76,237
Accrued expenses and other current liabilities	151,788	162,232
Income taxes payable	3,506	1,647
Total current liabilities	234,675	241,161

Long-term debt, net of current maturities	668,595	738,786
Deferred income taxes	47,598	55,658
Other long-term liabilities	312,332	280,291
Total liabilities	1,263,200	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 value	301,107	299,930
Deferred compensation obligation	4,777	4,886
HEICO stock held by irrevocable trust	(4,777)	(4,886)
Accumulated other comprehensive income (loss)	2,129	(9,149)
Retained earnings	1,744,247	1,688,045
Total HEICO shareholders’ equity	2,048,836	1,980,177
Noncontrolling interests	31,323	30,430
Total shareholders’ equity	2,080,159	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.

Index

HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(in thousands, except per share data)


	Three months ended January 31,
	2021	2020

Net sales	$417,902	$506,275

Operating costs and expenses:
Cost of sales	259,468	308,228
Selling, general and administrative expenses	78,149	87,057

Total operating costs and expenses	337,617	395,285

Operating income	80,285	110,990

Interest expense	(2,448)	(4,283)
Other income	711	195

Income before income taxes and noncontrolling interests	78,548	106,902

Income tax expense (benefit)	2,300	(22,900)

Net income from consolidated operations	76,248	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:
Basic	135,210	134,523
Diluted	137,742	137,421

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

Index

HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME – UNAUDITED

(in thousands)


	Three months ended January 31,
	2021	2020

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.

Index

HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED

(in thousands, except per share data)


		HEICO Shareholders' Equity
	Redeemable Noncontrolling Interests	Common Stock	Class A Common Stock	Capital in Excess of Par Value	Deferred Compensation Obligation	HEICO Stock Held by Irrevocable Trust	Accumulated Other Comprehensive Income (Loss)	Retained Earnings	Noncontrolling Interests	Total 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 Interests	Common Stock	Class A Common Stock	Capital in Excess of Par Value	Deferred Compensation Obligation	HEICO Stock Held by Irrevocable Trust	Accumulated Other Comprehensive Loss	Retained Earnings	Noncontrolling Interests	Total Shareholders' Equity
Balances as of October 31, 2019	$188,264	$541	$804	$284,609	$4,232	($4,232)	($16,739)	$1,397,327	$28,118	$1,694,660
Comprehensive income	4,767	—	—	—	—	—	(2,524)	121,888	3,017	122,381
Cash dividends ($.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 acquisitions	7,540	—	—	—	—	—	—	—	—	—
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.

HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)


	Three months ended January 31,
	2021	2020
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 receivable	9,234	23,734
Decrease (increase) in contract assets	2,623	(1,719)
Decrease (increase) in inventories	2,602	(20,449)
Increase in prepaid expenses and other current assets	(6,614)	(3,303)
Increase (decrease) in trade accounts payable	1,641	(10,678)
Decrease in accrued expenses and other current liabilities	(19,241)	(48,319)
Increase (decrease) in income taxes payable	6,627	(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 activities	107,199	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)
Other	983	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 exercises	2,450	1,528
Other	(256)	(538)
Net cash used in financing activities	(91,407)	(10,215)

Effect of exchange rate changes on cash	2,030	(397)

Net (decrease) increase in cash and cash equivalents	(7,449)	6,970
Cash and cash equivalents at beginning of year	406,852	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.

Index

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.

Index

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, 2021	October 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, 2021	October 31, 2020
Finished products	$228,602	$235,501
Work in process	40,268	37,957
Materials, parts, assemblies and supplies	193,984	189,747
Inventories, net of valuation reserves	$462,854	$463,205

Property, Plant and Equipment


(in thousands)	January 31, 2021	October 31, 2020
Land	$10,877	$6,678
Buildings and improvements	128,961	120,769
Machinery, equipment and tooling	269,836	265,408
Construction in progress	9,307	8,487
	418,981	401,342
Less: Accumulated depreciation and amortization	(241,013)	(232,494)
Property, plant and equipment, net	$177,968	$168,848

Index

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,
	2021	2020
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, 2021	October 31, 2020
Redeemable at fair value	$180,978	$179,415
Redeemable based on a multiple of future earnings	41,247	41,793
Redeemable noncontrolling interests	$222,225	$221,208

Index

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 Translation	Defined Benefit Pension Plan	Accumulated Other Comprehensive Income (Loss)
Balances as of October 31, 2020	($6,460)	($2,689)	($9,149)
Unrealized gain	11,244	—	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):


	Segment		Consolidated Totals
	FSG	ETG
Balances as of October 31, 2020	$427,565	$955,602	$1,383,167
Foreign currency translation adjustments	1,903	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.

Index

Identifiable intangible assets consist of the following (in thousands):


	As of January 31, 2021			As of October 31, 2020
	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount
Amortizing Assets:
Customer relationships	$435,317	($190,688)	$244,629	$443,143	($188,919)	$254,224
Intellectual property	241,704	(89,952)	151,752	240,725	(84,686)	156,039
Licenses	6,559	(4,795)	1,764	6,559	(4,670)	1,889
Patents	1,073	(750)	323	1,071	(746)	325
Non-compete agreements	818	(818)	—	811	(811)	—
Trade names	450	(228)	222	450	(219)	231
	685,921	(287,231)	398,690	692,759	(280,051)	412,708
Non-Amortizing Assets:
Trade names	167,231	—	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, 2021	October 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.

Index

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, 2021	October 31, 2020	Change
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.

Index

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,
	2021	2020
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 sales	199,334	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 sales	223,550	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.

Index

The following table summarizes the Company’s net sales by industry for each operating segment (in thousands):


	Three months ended January 31,
	2021	2020
Flight Support Group:
Aerospace	$135,056	$239,923
Defense and Space	54,044	50,253
Other (1)	10,234	10,891
Total net sales	199,334	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 sales	223,550	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 funds	4,322	—	—	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 funds	11	—	—	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	$10,193	Compound annual revenue growth rate	0% - 19%	7.0%
		Discount rate	4.3% - 4.5%	4.4%

8-11-2020	14,357	Compound annual revenue growth rate	4% - 18%	13.0%
		Discount rate	4.5% - 4.5%	4.5%

9-15-2017	18,269	Compound 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 consideration						432
Foreign currency transaction adjustments						413
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,
	2021	2020
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 options	2,532	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
	FSG	ETG
Three months ended January 31, 2021:
Net sales	$199,334	$223,550	($4,982)	$417,902
Depreciation	3,450	3,059	246	6,755
Amortization	5,136	10,838	274	16,248
Operating income	25,822	60,128	(5,665)	80,285
Capital expenditures	1,988	13,521	—	15,509

Three months ended January 31, 2020:
Net sales	$301,067	$208,411	($3,203)	$506,275
Depreciation	3,617	2,928	255	6,800
Amortization	4,859	9,678	246	14,783
Operating income	62,045	57,491	(8,546)	110,990
Capital expenditures	4,118	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