HEICO
Annual Report 2017

Plain-text annual report

A N N U A L R E P O R T 2 0 1 7 H E I C O C O R P O R A T I O N / 2 0 1 7 A N N U A L R E P O R T HE I C O C O RP O R AT I O N Corporate Of fices: 3000 Taf t S treet | Holly wood, FL 33021 Phone: 954-987-4000 | Fax: 954-987-8228 | www.heico.com 60 Years of Excellence in Aerospace, Defense and Electronics FINANCIAL HIGHLIGHTS Year ended October 31,(1) (in thousands, except per share data) Operating Data: Net sales Operating income Interest expense Net income attributable to HEICO Weighted average number of common shares outstanding: (2) Basic Diluted Per Share Data: (2) Net income per share attributable to HEICO shareholders: Basic Diluted Cash dividends per share Balance Sheet Data (as of October 31): Total assets (3) Total debt (including current portion) Redeemable noncontrolling interests Total shareholders’ equity 2015 2016 2017 $ 1,188,648 229,656 4,626 133,364 (4) $ 1,376,258 $ 265,345 (5) 8,272 156,192 (5)(6) 1,524,813 306,658 9,790 185,985 (7) 83,425 84,764 83,807 85,213 84,290 86,776 $ $ 1.60 (4) 1.57 (4) .112 $ 1.86 (5)(6) 1.83 (5)(6) .128 $ 2.21 (7) 2.14 (7) .152 1,700,857 367,598 91,282 893,271 $ 1,998,412 458,225 99,512 1,047,705 $ 2,512,431 673,979 131,123 1,248,292 (1) Results include the results of acquisitions from each respective effective date. (2) All share and per share information has been adjusted retrospectively to reflect the 5-for-4 stock split effected in April 2017. (3) During fiscal 2017, we adopted Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes,” on a retrospective basis resulting in a reclassification of $35.5 million and $41.1 million in current deferred tax assets to noncurrent deferred tax liabilities in our Consolidated Balance Sheet as of October 31, 2015 and 2016, respectively. (4) Includes additional income tax credits for qualified research and development (“R&D”) activities related to the last ten months of fiscal 2014 recognized in fiscal 2015 upon the retroactive extension of the United States (“U.S.”) federal R&D tax credit in December 2014 to cover calendar year 2014, which, net of expenses, increased net income attributable to HEICO by $1.8 million, or $.02 per basic and diluted share. (5) Includes $3.1 million of acquisition costs incurred in connection with a fiscal 2016 acquisition within the Electronic Technologies Group. These expenses, net of tax, decreased net income attributable to HEICO by $2.0 million, or $.02 per basic and diluted share. (6) Includes additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015 recognized in fiscal 2016 upon the retroactive and permanent extension of the U.S. federal R&D tax credit in December 2015, which, net of expenses, increased net income attributable to HEICO by $1.7 million, or $.02 per basic and diluted share. (7) During fiscal 2017, we adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” resulting in the recognition of a $3.1 million discrete income tax benefit and a 781,000 increase in our weighted average number of diluted common shares outstanding, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million, or $.03 per basic and $.01 per diluted share. FORWARD-LOOKING STATEMENTS Certain statements in this report constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO’s actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense budget cuts, which could reduce our defense-related revenue. Parties receiving this material are encouraged to review all of HEICO’s filings with the Securities and Exchange Commission, including, but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. 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. BOARD OF DIRECTORS THOMAS M. CULLIGAN retired Chairman and CEO, Raytheon International retired Sr. Vice President, The Raytheon Company ADOLFO HENRIQUES Chairman, Gibraltar Private Bank & Trust Vice Chairman, Related Group MARK H. HILDEBRANDT Managing Partner and Member, Waldman, Trigoboff, Hildebrandt & Calnan, P.A. WOLFGANG MAYRHUBER retired Chairman of the Supervisory Board, Deutsche Lufthansa AG Chairman of the Supervisory Board, Infineon Technologies AG ERIC A. MENDELSON Co-President, HEICO Corporation LAURANS A. MENDELSON Chairman and Chief Executive Officer, HEICO Corporation VICTOR H. MENDELSON Co-President, HEICO Corporation JULIE NEITZEL Partner, WE Family Offices DR. ALAN SCHRIESHEIM retired Director, Argonne National Laboratory FRANK J. SCHWITTER retired Partner, Arthur Andersen LLP Thomas M. Culligan Adolfo Henriques Mark H. Hildebrandt Wolfgang Mayrhuber Eric A. Mendelson Laurans A. Mendelson Victor H. Mendelson Julie Neitzel Dr. Alan Schriesheim Frank J. Schwitter C O R P O R A T E P R O F I L E C elebrating our 60th anniversary in business, HEICO Corporation is a rapidly growing aerospace and electronics company focused on niche markets and cost-saving solutions for its customers. HEICO’s products are found in the most demanding applications requiring high-reliability parts and components, such as aircraft, spacecraft, defense equipment, medical equipment, and telecommunications systems. Through our Flight Support Group, we are: the world’s largest independent provider of commercial, FAA-approved aircraft replacement parts; a significant provider of aircraft accessories component repair & overhaul services for avionic, electro-mechanical, flight surface, hydraulic and pneumatic applications; a leader in niche aircraft parts distribution; and a manufacturer of other critical aircraft parts. Our Electronic Technologies Group designs and manufactures mission-critical, niche electronic, electro-optical, microwave and other components found in aviation, broadcast, defense, homeland security, medical, space, telecom and other complex equipment used worldwide. HEICO’s customers include most of the world’s airlines, overhaul shops, satellite manufacturers, commercial and defense equip- ment producers, medical equipment manufacturers, government agencies, telecommunications equipment suppliers and others. Net Sales (in millions) $1,188.6 $1,376.3 $1,524.8 Operating Income (in millions) $229.7 $265.3 $306.7 $133.4 $156.2 $186.0 Net Income (in millions) Net Income Per Share (diluted) $1.57 $1.83 $2.14 15 16 17 15 16 17 15 16 17 15 16 17 01 MANAGEMENT’S MESSAGE Dear Fellow Shareholder: In fiscal 2017, HEICO achieved its eighth consecutive year of record net income, operating income and sales results. Net income increased 19% to $186.0 million ($2.14 per diluted share) from $156.2 million ($1.83 per diluted share); operating income increased 16% to $306.7 million from $265.3 million; and net sales increased 11% to $1,524.8 million from $1,376.3 million. Operating cash flow increased 10% to $274.9 million from $249.2 million. This figure represents 148% of net income. Our record year was driven by excellent performance in both segments. In the Flight Support Group, operating income grew 10% to a record $179.3 million from $163.4 million. Additionally, net sales increased 10% to a record $967.5 million from $875.9 million. subsidiary, Radiant Power Corp., completed an add- on acquisition of Interface Displays & Controls, Inc. Despite the active year, HEICO’s total debt to shareholders’ equity ratio was 54.0% as of October 31, 2017. With net debt of only $621.9 million and a healthy leverage ratio of approximately 1.7x Net Debt/ EBITDA, we remain well capitalized to fund future growth opportunities and acquisitions. In maintaining our focus on long-term growth, we recently entered into a new $1.3 billion unsecured revolving credit agreement that doesn’t mature until 2022 and that can be expanded to $1.65 billion with bank approval. As significant shareholders ourselves, we always strive to be great stewards of the Company and efficient capital allocators. To that effect, we increased the semi-annual dividend 22%, cumula- tively, in the past 12 months through three separate increases. Additionally, we completed one 5-for-4 stock split and declared another, which became effective in January 2018. We are optimistic and bullish about HEICO’s future. Our strategy remains the same; we will continue to innovate, exceed customer expectations and acquire strong businesses. Please read the question and answer section that follows this letter to gain The Electronic Technologies Group reached new more insight into our company. heights, as well. Operating income grew 25% to a record $157.5 million from $126.0 million. Concurrently, net sales increased 12% to $574.3 million from $511.3 million. The excellent performance by both segments was primarily driven through organic product development initiatives and acquisitions. In calendar 2017, we completed four acquisitions. HEICO’s Flight Support Group acquired a France, Germany and United States-based distributor, Air Cost Control, and a California-based composites manufac- turer, Carbon by Design, in the first half of the year. In the latter half of the year, the Electronic Technologies Group acquired AeroAntenna Technology, Inc., which is HEICO’s largest acquisition ever to date. Shortly after the fiscal year ended, our Sarasota, FL-based Finally, 2017 marked HEICO’s 60th anniversary. We would like to thank our approximately 5,200 Team Members who continue to be the gold standard in our industry. Without their hard work, talent and loyalty, HEICO would not be here today. Their devotion to their craft, and to HEICO, continues to inspire us and we are humbled to be their partners in our mutual endeavors. We are also thankful to our Board of Directors for their unwavering support and counsel. Sincerely, Laurans A. Mendelson Chairman & Chief Executive Officer Eric A. Mendelson Co-President Victor H. Mendelson Co-President 02 QUESTION AND ANSWER DISCUSSION Q&A Q. Could you please provide more information on HEICO’s recent acquisitions? A. We are excited about all four acquisitions. Our largest ever acquisition, AeroAntenna Technology (Chats- worth, CA), manufactures high-reliability, mission critical antennas for a variety of commercial and defense applications. Air Cost Control (Toulouse, France; Hamburg, Germany and Sunrise, FL) is a commercial aero- space interconnect distributor that expands HEICO’s growing distribution business. HEICO has a substantial presence abroad, particularly in France, and we intend to make more international investments in the future. Carbon by Design (Oceanside, CA) manufactures composite components for highly specialized applications like UAVs, spacecraft, rockets and other end markets. This acquisition also expands HEICO’s footprint in the niche specialty products space. Last, Interface Displays & Controls (Oceanside, CA) produces displays, panels and exterior lighting for a variety of defense platforms. All four acquisitions have been meeting or exceeding expectations so far and we could not be happier with the respective management teams. Q. How does the acquisition pipeline look and what are your views on the current market environment? A. Our acquisition pipeline remains strong; we currently have projects in all stages of the acquisition process (as we always do). We believe HEICO’s post-acquisition operating philosophy of respecting and leaving intact a business’ team renders us the best buyer of businesses from owners who want a great home for their company. We value and honor the prior owner’s legacy and, often, that owner continues to have an ownership interest in the business. We will not stray from our principled investing strategy and will continue to invest in desirable assets at fair prices. While we never provide macro forecasts, we believe that the current business environment is bullish. A more hospitable attitude toward businesses by the U.S. Government, lower taxes, increased defense spending and general business enthusiasm should increase HEICO’s bottom line in the medium and long-term. The recent U.S. tax law change alone will benefit HEICO’s Team Members, customers and shareholders, allowing us to reinvest in our business and to continue to develop products to meet our customers’ needs. Q. Does HEICO plan to acquire larger companies and/ or invest outside its current markets? A. Our focus is not on acquiring companies of a particular size. We want to acquire and partner with strong, market-leading companies run by capable and ethical management teams. While our heritage is based in acquiring smaller companies by Wall Street standards, we will not hesitate to buy larger companies. Of course, we will not compromise our standards to hit a certain growth target. With regard to different industries, we continually assess and explore investing in complementary end markets. We have always said that we do not view HEICO solely as an aerospace company, but equally as a cash flow generating business. If an opportunity arises to make an investment in an adjacent industry and it fits with our stringent criteria, then we would take a serious look. Q. Are there any other reflections or thoughts on HEICO’s 60th Anniversary? A. Yes – we are truly humbled, thankful and amazed at HEICO’s performance since we took over in 1990. While it has been financially rewarding for our shareholders and Team Members, we are most grateful for the countless friendships that have been cultivated throughout the years. We frequently travel to our different subsidiaries and locations every year; as a result, we get to know many of our colleagues on a more personal level than would otherwise be possible. These interactions inspire us and make us enthu- siastic about HEICO’s future. Hopefully, HEICO’s next sixty years will follow a similar pattern to the years since 1990. On the following pages, we have laid out some guiding principles for our future. 03 HEICO ‹ HEICO’s earlier years P R I N C I P L E S For HEICO’s 60th anniversary, we felt it worthwhile to reflect on our Company’s and Team Members’ accomplishments, while also outlining the likely framework for our future. In 1990, when current leadership assumed HEICO’s management, the Company’s future was cloudy, at best. At that time, HEICO was a small company, with about $26 million in sales and $2 million in operating income, reliant on a few, soon to be increasingly retired aircraft jet engine parts. However, even with all the unforeseen challenges, we knew that by committing to a few key principles, we could grow a business that would make both our shareholders and Team Members proud. First, our customers are our highest priority. After all, without customers, we have no business. HEICO succeeds when we deliver value to our customers, often by providing a lower cost alternative. Our heritage is deeply entrenched in developing cost-saving solutions for our aerospace and defense partners. Additionally, we continually invest a significant amount in our Research and Development programs to introduce newer, more efficient products that meet stringent customer demands. Through our FAA-approved aircraft replacements parts business, we save our major airline customers an estimated average of over $30 million annually. Our Electronic Technologies Group subsidiaries manufacture mission-critical parts for highly technical and sensitive programs, many of which keep our soldiers safe every day. Suffice it to say, we will always search for new ways to grow our business by serving our customers. Above, inset photo, a technician performed a jet engine Combustion Chamber repair years ago in the Hollywood, FL facility. Above, large photo, today, a specially-trained machinist uses a computer-controlled machining center in the manufacture of a sophisticated jet engine part at the same facility. Our industry has very technical specifications and requirements for all component products that must be met in order to keep our passengers and soldiers safe. Above, a Team Member is testing and measuring one such component at our Hollywood, FL facility. HEICO’s PMA business alone designs and receives new approvals to make 300-500 highly-engineered parts each year. 04 Second, we care for our Team Members. We have businesses are already the best in their fields, as repeatedly commented that we consider HEICO’s they possess unique talents and deep expertise. Team Members to be some of the most talented and We want our Team Members to feel pride in being hard-working people in our industry. Without them, part of the HEICO family. We congratulate all of our HEICO would not be where it is today. We try to do Team Members for the wonderful journey that we right by our Team Members, as well. In 1985 HEICO have been on so far and we look forward to many established a 401K Plan, called the HEICO Savings more years to come. and Investment Plan, with the intent of allowing the Company’s Team Members to plan for retirement. At that time, the Company provided approximately 6% of its shares to the Plan. In 1992, we added another roughly 13% of the Company’s shares to the Plan. At the time the shares were provided, their aggregate value was $5.7 million. Today, those same shares are worth around $1 billion.* From an investor return perspective, a $100,000 investment in HEICO in 1990 would be worth $24.9 million* as of December 31, 2017, which is a compounded annual growth rate of 23%. As a result, our Team Members are true shareholders of this business and participate in HEICO’s success through ownership stakes, in addition to standard compensation. $100,000 investment in 1990 = $24.9 million value as of Dec 2017 = 23% Compounded Annual Growth Rate In acquisitions, we like to retain management and have minimal employee turnover – we believe this upfront loyalty has saved us much of the difficulty Third, we will continue to be an acquisitive company. We have made 65 purchases since 1996 and hope to do another 65 in the next 20 years. In 2017, we completed four acquisitions, with 65acquisitions since 1996 4acquisitions in 2017 AeroAntenna Technology, Inc., being our largest ever. Our increased borrowing capability under our $1.3 billion line of credit, which can be expanded to $1.65 billion with approval of our banking group, provides us with ample capacity to make acquisitions under our disciplined acquisition program. If you own, or know of, a Company that would like to be part of the HEICO family, please let us know. It continues to be one of our greatest honors and privileges to lead HEICO. We are humbled through our daily interactions with our colleagues and enjoy the relationships we continue to cultivate with our shareholders. In short, we cannot be more excited about HEICO’s future. In the pages that follow, we pay tribute to some of the wonderful HEICO Team other companies experience. We do not need to find Members who have been with our company and our theoretical “best-in-class” operators and implement subsidiaries for many years. bureaucratic “corporate guidelines” because our *Including dividends and assuming reinvestment of those dividends. 05 C O M M E R C I A L A V I A T I O N SOUBINH CHANTHAVONGSOUK Manufacturing Lead, Team Member for 38 years. Santa Fe Springs, CA Mt. Juliet, TN JOHN MCKINNEY Supervisor & Export Administrator, Team Member for 13 years. 06 HEICO’s commercial aviation business continued to grow in 2017. Our FAA-approved commercial aircraft alternative replacement parts (“PMA”) companies continued to deliver outstanding cost-saving solutions to our customers. HEICO currently holds more than 10,000 FAA-approvals for PMA parts on virtually all the major, large commercial aircraft in production. Each year, we develop approximately 300-500 new and highly engineered parts, as well. While our PMA program is robust and growing rapidly, HEICO still adheres to strict quality standards. In the close to 70 million parts delivered, we have a record of zero service bulletins, zero airworthiness directives and zero in-flight shutdowns. We anticipate that our growing PMA portfolio, combined with HEICO’s repair operations, will save airlines roughly $1.5 billion over the next five years. In fact, since 2002, our customers have saved an estimated nearly $3.0 billion. $3 billion customer savings since 2002 $1.5 billion projected savings for airlines in the next five years HEICO continues to expand its product breadth. At the top right, our Aeroworks subsidiary (based in Middenmeer, The Netherlands) supplies an extensive set of Galley Cart and Compartment Retainers. Below, two Team Members at our Tempe, AZ-based Harter Aerospace subsidiary repair a Thrust Reverser Actuation component. Our Aero Design subsidiary in Mt. Juliet, TN, pictured below, supplies Mainship, Emergency Backup and other Batteries for commercial, regional, business and general aviation aircraft. Above, an Aero Design Aircraft Mainship Battery Cell. 07 LATONIA MAYES Warehouse Supervisor, Team Member for 21 years. Hauppauge, NY C O M M E R C I A L A V I A T I O N ( c o n t i n u e d ) The outlook for the commercial aerospace industry remains positive. Boeing’s current 20-year market outlook forecasts 4.7% traffic growth, 41,030 new aircraft deliveries and a total industry market value of $6.1 trillion worth of aircraft deliveries. These predictions are all signs of a healthy industry that is poised to grow at a faster rate than most global GDP forecasts. Our niche manufacturing and distribution businesses had an outstanding year as well. Two acquisitions, Air Cost Control and Carbon by Design, bolstered HEICO’s footprint in these growing markets. These acquisitions expand HEICO’s customer base and product set, and both companies are run by outstanding Team Members and management teams. HEICO’s business continues to expand internationally. Above, two engineers at our JetAvi Engineering subsidiary in Bengaluru, India working on new product designs. Above left, at our Ft. Myers, FL facility, a HEICO technician works in our component repair and overhaul businesses, which are among the largest independent operations in the United States. HEICO’s distribution business continues to grow rapidly. Our recent acquisition of Air Cost Control (Toulouse, France; Hamburg, Germany and Sunrise, FL) expanded our distribution exposure in Europe; pictured above right are stocked parts at one warehouse at our Blue Aerospace subsidiary (Tamarac, FL). 08 4.7% traffic growth 41,030 new commercial aircraft deliveries $6.1 trillion total estimated new commercial aircraft market value Source: Current market outlook 2017 - 2036 (Boeing) HEICO subsidiaries extensively utilize sophisticated optical and computerized measurement systems in the design, production and quality processes. 09 D E F E N S E Tempe, AZ-based Robertson Fuel Systems manufactures Crashworthy, Self-Sealing Auxiliary Fuel Systems. Since 1976, Robertson is believed to have saved thousands of our soldiers’ lives with this unique technology. Pictured above, an Apache helicopter flies over mountainous terrain. Apache pilots are known to refuse to fly unless their helicopters are equipped with a Robertson Fuel System. AEROANTENNA TECHNOLOGY, INC. Team joined the HEICO family in September 2017. ROB CALLAHAN Engineering Tech Manager, Team Member for 33 years. Chatsworth, CA Tempe, AZ 10 Carbon by Design, acquired in 2017 and located in Oceanside, CA, manufactures a variety of composite components for UAVs (such as the one pictured above), rockets, spacecraft and other specialized applications. Pictured to the left, a Team Member is building one such composite component. HEICO is a proud supporter of our country’s military forces and her Allies across the world. Our companies manufacture a multitude of products, including: High Performance Active Antenna Systems, Electro-Optical Test Equipment, Power Amplifiers, Power Supplies, Power Converters, Recorders, Digital Receivers, Digital Tuners, Laser Rangefinder Receivers, Electromagnetic Interference and Radio Frequency Interference Shielding, Traveling Wave Tube Amplifiers and Crashworthy and Self-Sealing Auxiliary Fuel Systems. We have a strong legacy of serving the military. This bond goes deeper than just our products; many of HEICO’s Team Members are veterans or have family in the military. We take immense pride in serving our country. It is our duty to provide products that excel in mission-critical and dangerous environments, oftentimes saving our soldiers’ lives. As our military requires newer technologies and innovative designs for future defense, we intend to be their most trusted partner. HEICO’s products are on many major military jets, including the F-16 pictured to the left. Our Fort Worth, TX-based subsidiary, Aerospace & Commercial Technologies, supports the worldwide fleet of F-16s through its parts manufacturing, repair and overhaul operations. Pictured below is an F-16 Bulkhead. 11 S P A C E A N D E L E C T R O N I C S HEICO continues to innovate in the space markets. Above, 3D Plus (Buc, France) designs and manufactures Radiation Tolerant Memory Modules, Point of Load Converters and Camera Heads for a variety of space applications. Our space businesses have supplied mission-critical, high- reliability components for many strenuous missions, which recently includes: the Solar Eclipse Observation (August 2017), NASA’s OSIRIS-REx mission (September 2016) and NASA’s Juno Spacecraft (July 2016). 12 Our Georgetown, TX-based, Sierra Microwave Technology, and Blacksburg, VA-based, VPT, Inc., subsidiaries continue to design and manufacture highly- engineered components for our space and defense customers. Our customers rely on our unique expertise and capabilities to deliver products that cannot fail under the harshest environments. In the Electronic Technologies Group, our space businesses continue to be great success stories. Among the many critical components and equipment we make are: Microwave Assemblies, Ferrite Devices, Sierra Microwave Technology’s product portfolio includes microwave components and assemblies. Pictured above is an integrated assembly for a satellite. Amplifiers, Down-Converters, Electric Power Converters, Memory Modules, Power Supplies, Recorders and Systems in Packages. Each of our businesses invests heavily in new technologies and strives to be at the forefront of tomorrow’s extraterrestrial missions. In 2017, HEICO’s IRCameras subsidiary supplied a specially designed infrared imaging camera, which was incorporated into an Airborne Infrared Spectrometer (“AIR-Spec”). This AIR-Spec observed and obtained measurements of the total solar eclipse that crossed the United States on August 21, 2017. Our customers rely on us in order to make their missions successful. Our products have to perform in highly-critical situations and harsh environments. We are honored to contribute to some of our nation’s most unique and important space exploration programs. SHAWN GRAHAM Chief Operations Officer, Team Member for 21 years. Buc, France Blacksburg, VA CENDRINE NOIR Project Manager of Standard Products, Team Member for 21 years. 13 O T H E R M A R K E T S Our largest acquisition ever, AeroAntenna Technology, designs and manufactures High Performance Active Antenna Systems for a multitude of end markets. To the right is a Ruggedized Global Navigations Satellite System Antenna for heavy construction or machine control applications. The antenna is specifically designed to withstand extreme conditions and high levels of shock. ROBERT BÉLAND Co-Founder and Chief Technology Officer, Team Member for 35 years. Chelmsford, MA Saint-Eustache, Canada HANK PHELPS Production Manager, Team Member for 32 years. 14 In addition to Aerospace, Defense and Space, HEICO has a medical equipment footprint. Our EMD Technologies subsidiary, based in Saint-Eustache, Canada, designs and manufactures high-voltage advanced power electronics products for the medical imaging and treatment equipment industry. To the right is a radiography-dedicated EMD Power Generator. Many of HEICO’s businesses supply components and equipment for a variety of other industries, including: Medical, Telecommunications, Oil and Gas, Agriculture and other markets. HEICO’s presence in these industries takes on a similar role to our Aerospace, Defense and Space focus; our products are used in highly sensitive, “cannot fail” environments. Our customers have come to associate us with reliability, durability and high quality. Adherence to the strict standards of our heritage industries and markets gives us the credibility to branch out into these related, adjacent markets. HEICO also supplies cable assemblies, switches, jacks, plugs and other connec- tors to other industrial markets through its Chicago, IL-based Switchcraft and Conxall subsidiaries. Pictured above are Sealed Harsh Environment Shielded Cable Assemblies, which are available in both straight and right-angle versions. 15 2017 FINANCIAL STATEMENTS AND OTHER INFORMATION Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 17 18 30 31 31 32 34 35 Management’s Annual Report on Internal Control Over Financial Reporting and Executive Officer Certifications 64 Reports of Independent Registered Public Accounting Firm Market for Company’s Common Equity and Related Stockholder Matters 65 67 Seated, left to right: Thomas S. Irwin Senior Executive Vice President Laurans A. Mendelson Chairman and Chief Executive Officer Standing, left to right: Victor H. Mendelson Co-President Joseph W. Pallot General Counsel Carlos L. Macau, Jr. Executive Vice President, Chief Financial Officer and Treasurer Eric A. Mendelson Co-President 16 Year ended October 31, (1) 2017 2016 2015 2014 2013 (in thousands, except per share data) Operating Data: Net sales Gross profit Selling, general and administrative expenses Operating income Interest expense Other income (expense) Net income attributable to HEICO Weighted average number of common shares outstanding: (2) Basic Diluted Per Share Data: (2) Net income per share attributable to HEICO shareholders: Basic Diluted Cash dividends per share Balance Sheet Data (as of October 31): Cash and cash equivalents Total assets (9) Total debt (including current portion) Redeemable noncontrolling interests Total shareholders’ equity $ $ $ $ 1,524,813 574,725 268,067 306,658 9,790 1,092 185,985 (3) $ 1,376,258 515,492 250,147 265,345 (4) 8,272 (23) 156,192 (4)(5) $ 1,188,648 434,179 204,523 229,656 4,626 (66) 133,364 (6) $ 1,132,311 398,312 194,924 203,388 (7) 5,441 625 121,293 (7) 1,008,757 371,181 187,591 183,590 3,717 888 102,396 (8) 84,290 86,776 83,807 85,213 83,425 84,764 83,079 84,316 82,873 83,727 2.21 (3) $ 2.14 (3) .152 1.86 (4)(5) $ 1.83 (4)(5) .128 1.60 (6) $ 1.57 (6) .112 1.46 (7) $ 1.44 (7) .376 1.24 (8) 1.22 (8) 1.453 52,066 2,512,431 673,979 131,123 1,248,292 $ 42,955 1,998,412 458,225 99,512 1,047,705 $ 33,603 1,700,857 367,598 91,282 893,271 $ 20,229 1,454,729 329,109 39,966 774,619 $ 15,499 1,499,979 377,515 59,218 723,235 (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) All share and per share information has been adjusted retrospectively to reflect the 5-for-4 stock split effected in April 2017. (3) During fiscal 2017, we adopted Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” resulting in the recognition of a $3.1 million discrete income tax benefit and a 781,000 increase in our weighted average number of diluted common shares outstanding, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million, or $.03 per basic and $.01 per diluted share. See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Consolidated Financial Statements for more information. (4) Includes $3.1 million of acquisition costs incurred in connection with a fiscal 2016 acquisition within the Electronic Technologies Group (“ETG”). These expenses, net of tax, decreased net income attributable to HEICO by $2.0 million, or $.02 per basic and diluted share. (5) Includes additional income tax credits for qualified research and development (“R&D”) activities related to the last ten months of fiscal 2015 recognized in fiscal 2016 upon the retroactive and permanent extension of the United States (“U.S.”) federal R&D tax credit in December 2015, which, net of expenses, increased net income attributable to HEICO by $1.7 million, or $.02 per basic and diluted share. (6) (7) Includes additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2014 recognized in fiscal 2015 upon the retroactive extension of the U.S. federal R&D tax credit in December 2014 to cover calendar year 2014, which, net of expenses, increased net income attributable to HEICO by $1.8 million, or $.02 per basic and diluted share. Operating income was increased by a $28.1 million reduction in accrued contingent consideration related to a fiscal 2013 and a fiscal 2012 acquisition within the ETG, partially offset by $15.0 million in impairment losses related to the write-down of certain intangible assets of the fiscal 2013 and fiscal 2012 acquisitions to their estimated fair values as well as lower than expected operating income at the fiscal 2013 acquired business, which in aggregate increased net income attributable to HEICO by $10.2 million, or $.12 per basic and diluted share. The reduction in accrued contingent consideration and $13.1 million of the impairment losses were recorded as a component of selling, general and administrative expenses, while the remaining impairment losses of $1.9 million were recorded as a component of cost of sales. (8) Includes additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2012 recognized in fiscal 2013 upon the retroactive extension of the U.S. federal R&D tax credit in January 2013 and higher R&D tax credits recognized upon the filing of HEICO’s fiscal 2012 U.S. federal and state tax returns, which, net of expenses, increased net income attributable to HEICO by $1.8 million, or $.02 per basic and diluted share. (9) During fiscal 2017, we adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” on a retrospective basis resulting in a reclassification of $41.1 million, $35.5 million, $34.5 million and $33.0 million in current deferred tax assets to noncurrent deferred tax liabilities in our Consolidated Balance Sheet as of October 31, 2016, 2015, 2014 and 2013, respectively. See Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, of the Notes to Consolidated Financial Statements for more information. 17 HEICO Corporation and SubsidiariesSELECTED FINANCIAL DATA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEICO Corporation and Subsidiaries Overview Our business is comprised of two operating segments, the Flight Support Group (“FSG”) and the Electronic Technologies Group (“ETG”). The Flight Support Group 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 Flight Support Group designs, manufactures, repairs, overhauls and distributes jet engine and aircraft component replacement parts. The parts and services are approved by the Federal Aviation Administration (“FAA”). The Flight Support Group 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 Flight Support Group 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 Flight Support Group 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 and is a leading distributor of aviation electrical interconnect products and electro- mechanical parts. The Electronic Technologies Group 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 and High Voltage Advanced Power Electronics. The Electronic Technologies Group designs, manufactures and sells various types of electronic, microwave and electro-optical equipment and components, including power supplies, laser rangefinder receivers, infrared simulation, calibration and testing equipment; power conversion products serving the high-reliability military, space and commercial avionics end-markets; underwater locator beacons used to locate data and voice recorders utilized on aircraft and marine vessels; electromagnetic interference shielding for commercial and military aircraft operators, electronics companies and telecommunication equipment suppliers; traveling wave tube amplifiers and microwave power modules used in radar, electronic warfare and on-board jamming and countermeasure systems; advanced high-technology interface products that link devices such as telemetry receivers, digital cameras, high resolution scanners, simulation systems and test systems to computers; high voltage energy generators, high voltage interconnection devices, cable assemblies and wire for the medical equipment, defense and other industrial markets; high voltage power supplies found in satellite communications, CT scanners and in medical and industrial x-ray systems; three-dimensional microelectronic and stacked memory products that are principally integrated into larger subsystems equipping satellites and spacecraft; harsh environment connectivity products and custom molded cable assemblies; radio frequency (RF) and microwave amplifiers, transmitters and receivers used to support military communications on unmanned aerial systems, other aircraft, helicopters and ground-based data/communications systems; communications and electronic intercept receivers and tuners for military and intelligence applications; 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; microwave modules, units and integrated sub-systems for commercial and military satellites; crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft; and high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses. Our results of operations during each of the past three fiscal years have been affected by a number of transactions. This discussion of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein. For further information regarding the acquisitions discussed below, see Note 2, Acquisitions, of the Notes to Consolidated Financial Statements. Each acquisition was included in our results of operations from the effective acquisition date. In September 2017, we acquired, through HEICO Electronic, all of the outstanding stock of AeroAntenna Technology, Inc. (“AAT”). AAT designs and produces high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses. In June 2017, we acquired, through a subsidiary of the HEICO Flight Support Corp., all of the ownership interests of Carbon by Design (“CBD”). CBD is a manufacturer of composite components for UAVs, rockets, spacecraft and other specialized applications. The purchase price of CBD was paid using cash provided by operating activities. In April 2017, we acquired, through a subsidiary of HEICO Flight Support Corp., 80.1% of the equity interests of LLP Enterprises, LLC, which owns all of the outstanding equity interests of the operating units of Air Cost Control (“A2C”). A2C is a leading aviation electrical interconnect product distributor of items such as connectors, wire, cable, protection and fastening systems, in addition to distributing a wide range of electromechanical parts. The remaining 19.9% interest continues to be owned by certain members of A2C’s management team. 18 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEICO Corporation and Subsidiaries In January 2016, we acquired, through HEICO Electronic, all of the limited liability company interests of Robertson Fuel Systems, LLC (“Robertson”). Robertson designs and produces mission-extending, crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft. In December 2015, we acquired, through a subsidiary of HEICO Electronic, certain assets of a company that designs and manufactures underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship voyage recorders and other devices which have been submerged under water. The purchase price of this acquisition was paid using cash provided by operating activities. In August 2015, we acquired, through HEICO Flight Support Corp., all of the stock of Astroseal Products Mfg. Corporation (“Astroseal”). Astroseal manufactures expanded foil mesh, which is integrated into composite aerospace structures for lightning strike protection in fixed and rotary wing aircraft. In August 2015, we acquired, through HEICO Electronic, 80.1% of the equity of Midwest Microwave Solutions, Inc. (“MMS”). MMS designs, manufactures and sells unique Size, Weight, Power and Cost (SWAP-C) optimized Communications and Electronic Intercept Receivers and Tuners for military and intelligence applications. The remaining 19.9% continues to be owned by certain members of MMS’ management team. In August 2015, we acquired, through HEICO Flight Support Corp., 80.1% of the assets and assumed certain liabilities of Aerospace & Commercial Technologies, LLC (“ACT”). ACT is a provider of products and services necessary to maintain up-to-date F-16 fighter aircraft operational capabilities. The remaining 19.9% continues to be owned by certain members of ACT’s management team. In May 2015, we acquired, through a subsidiary of HEICO Flight Support Corp., all of the stock of Thermal Energy Products, Inc. (“TEP”). TEP engineers, designs and manufactures removable/reusable insulation systems for industrial, commercial, aerospace and defense applications. In January 2015, we acquired, through HEICO Flight Support Corp., 80.1% of the equity of Harter Aerospace, LLC (“Harter”). Harter is a globally recognized component and accessory maintenance, repair, and overhaul (MRO) station specializing in commercial aircraft accessories, including thrust reverse actuation systems and pneumatics, and electromechanical components. The remaining 19.9% interest continues to be owned by certain members of Harter’s management team. In January 2015, we acquired, through HEICO Flight Support Corp., 80% of the equity of Aeroworks International Holding B.V. (“Aeroworks”). Aeroworks, which is headquartered in the Netherlands and maintains a significant portion of its production facilities in Thailand and Laos, is a manufacturer of both composite and metal parts used primarily in aircraft interior applications, including seating, galleys, lavatories, doors, and overhead bins. The remaining 20% interest continues to be owned by a certain member of Aeroworks’ management team. Unless otherwise noted, the purchase price of each of the above referenced acquisitions was paid in cash, principally using proceeds from our revolving credit facility. The aggregate amount paid in cash for acquisitions was $418.3 million, $263.8 million and $166.8 million in fiscal 2017, 2016 and 2015, respectively. 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. Revenue Recognition Revenue from the sale of products and the rendering of services is recognized when title and risk of loss passes to the customer, which is generally at the time of shipment. Revenue from certain fixed price contracts for which costs can be dependably estimated is recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the period of revision. Revisions in cost estimates may be caused by factors such as the price or availability of raw materials and component parts or variations in the amount of labor required and/or the materials necessary to meet customer specifications and requirements. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The percentage of our net sales recognized under the percentage-of-completion method was approximately 3%, 3% and 4% in fiscal 2017, 2016 and 2015, respectively. Changes in estimates pertaining to percentage-of-completion contracts did not have a material or significant effect on net income or net income per share in fiscal 2017, 2016 and 2015. 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEICO Corporation and Subsidiaries For fixed price contracts in which costs cannot be dependably estimated, revenue is recognized on the completed- contract method. A contract is considered complete when all significant costs have been incurred or the item has been accepted by the customer. Progress billings and customer advances received on fixed price contracts accounted for under the completed-contract method are classified as a reduction to contract costs that are included in inventories, if any, and any remaining amount is included in accrued expenses and other current liabilities. Valuation of Accounts Receivable The valuation of accounts receivable requires that we set up an allowance for estimated uncollectible accounts and record a corresponding charge to bad debt expense. We estimate uncollectible receivables based on such factors as our prior experience, our appraisal of a customer’s ability to pay, age of receivables outstanding and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries. Actual bad debt expense could differ from estimates made. Valuation of Inventory Inventory is stated at the lower of cost or market, 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 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 selling, general and administrative (“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, 2017, 2016 and 2015, $27.6 million, $18.9 million and $21.4 million of contingent consideration was accrued within our Consolidated Balance Sheets, respectively. During fiscal 2017, 2016 and 2015, such fair value measurement adjustments resulted in net increases to SG&A expenses of $1.1 million, $3.1 million and $.3 million, respectively. For further information regarding our contingent consideration arrangements, see Note 7, 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, 2017, 2016 and 2015, we determined there was no impairment of our goodwill. The fair value of each of our reporting units as of October 31, 2017 significantly exceeded its carrying value. 20 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEICO Corporation and Subsidiaries 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 impairment tests conducted, we did not recognize any impairment losses in fiscal 2017, 2016 and 2015. 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, Net sales Cost of sales Selling, general and administrative expenses Total operating costs and expenses Operating income Net sales by segment: Flight Support Group Electronic Technologies Group Intersegment sales Operating income by segment: Flight Support Group Electronic Technologies Group Other, primarily corporate Net sales Gross profit Selling, general and administrative expenses Operating income Interest expense Other income (expense) Income tax expense Net income attributable to noncontrolling interests Net income attributable to HEICO 2017 $ 1,524,813 950,088 268,067 1,218,155 $ 306,658 $ $ 967,540 574,261 (16,988) 1,524,813 $ 179,278 157,451 (30,071) $ 306,658 100.0% 37.7% 17.6% 20.1% .6% .1% 5.9% 1.4% 12.2% 2016 $ 1,376,258 860,766 250,147 1,110,913 $ 265,345 $ 875,870 511,272 (10,884) $ 1,376,258 $ 163,427 126,031 (24,113) $ 265,345 100.0% 37.5% 18.2% 19.3% .6% —% 5.9% 1.5% 11.3% 2015 $ 1,188,648 754,469 204,523 958,992 $ 229,656 $ 809,700 390,982 (12,034) 1,188,648 $ $ 149,798 98,833 (18,975) $ 229,656 100.0% 36.5% 17.2% 19.3% .4% —% 6.0% 1.7% 11.2% 21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Fiscal 2017 to Fiscal 2016 Net Sales Our net sales in fiscal 2017 increased by 11% to a record $1,524.8 million, as compared to net sales of $1,376.3 million in fiscal 2016. The increase in consolidated net sales reflects an increase of $63.0 million (a 12% increase) to a record $574.3 million in net sales within the ETG as well as an increase of $91.7 million (a 10% increase) to a record $967.5 million in net sales within the FSG. The net sales increase in the ETG resulted from organic growth of 7% as well as net sales of $23.3 million contributed by our fiscal 2017 and 2016 acquisitions. The ETG’s organic growth is mainly attributed to increased demand for our space, aerospace and other electronics products resulting in net sales increases of $14.7 million, $12.6 million and $9.3 million, respectively. The net sales increase in the FSG reflects net sales of $49.0 million contributed by our fiscal 2017 acquisitions as well as organic growth of 5%. The FSG’s organic growth is principally attributed to increased demand and new product offerings within our aftermarket replacement parts and repair and overhaul parts and services product lines, resulting in net sales increases of $39.8 million and $19.1 million, respectively. These increases were partially offset by $16.2 million of lower organic net sales from our specialty products product line principally related to certain aerospace, industrial and defense products. Sales price changes were not a significant contributing factor to the FSG and ETG net sales growth in fiscal 2017. Our net sales in fiscal 2017 and 2016 by market consisted of approximately 53% and 52%, respectively, from the commercial aviation industry, 34% in both periods from the defense and space industries, and 13% and 14%, respectively, from other industrial markets including medical, electronics and telecommunications. Gross Profit and Operating Expenses Our consolidated gross profit margin increased to 37.7% in fiscal 2017 as compared to 37.5% in fiscal 2016, principally reflecting an increase of .9% in the ETG’s gross profit margin, partially offset by a .3% decrease in the FSG’s gross profit margin. The increase in the ETG’s gross profit margin is principally attributed to increased net sales and a more favorable product mix for certain aerospace products. The decrease in the FSG’s gross profit margin is attributed to the previously mentioned decrease in net sales and a less favorable product mix within our specialty products product line partially offset by increased net sales and a more favorable product mix within our aftermarket replacement parts and repair and overhaul parts and services product lines. Total new product research and development (“R&D”) expenses included within our consolidated cost of sales increased to $46.5 million in fiscal 2017 compared to $44.7 million in fiscal 2016. Our consolidated SG&A expenses were $268.1 million and $250.1 million in fiscal 2017 and 2016, respectively. The increase in consolidated SG&A expenses principally reflects $13.6 million attributable to the fiscal 2017 acquisitions, $4.3 million of higher perfor- mance-based compensation expense and a $2.9 million impact from foreign currency transaction adjustments on borrowings denominated in Euros under our revolving credit facility, partially offset by $3.1 million of acquisition costs recorded in fiscal 2016 associated with a fiscal 2016 acquisition. Our consolidated SG&A expenses as a percentage of net sales decreased to 17.6% in fiscal 2017, down from 18.2% in fiscal 2016. The decrease in consolidated SG&A expenses as a percentage of net sales principally reflects an aggregate .8% impact from efficiencies realized from the benefit of our net sales growth on relatively consistent period-over-period SG&A expenses and the aforementioned decrease in acquisition costs, partially offset by a .2% impact from the previously mentioned foreign currency transaction adjustments. Operating Income Our consolidated operating income increased by 16% to a record $306.7 million in fiscal 2017, up from $265.3 million in fiscal 2016. The increase in consolidated operating income principally reflects a $31.4 million increase (a 25% increase) to a record $157.5 million in operating income of the ETG as well as a $15.9 million increase (a 10% increase) to a record $179.3 million in operating income of the FSG. Additionally, our consolidated operating income was unfavorably impacted by a $5.3 million increase in corporate expenses principally due to the previously mentioned foreign currency transaction adjustments as well as higher operating costs in line with and to support the growth of our overall business. The increase in operating income of the ETG is principally attributed to the previously mentioned net sales growth and improved gross profit margin as well as the aforementioned favorable impact of SG&A efficiencies and decrease in acquisition costs. The increase in operating income of the FSG is principally attributed to the previously mentioned net sales growth partially offset by an increase in performance-based compensation expense and the less favorable gross profit margin. Our consolidated operating income as a percentage of net sales increased to 20.1% in fiscal 2017, up from 19.3% in fiscal 2016. The increase principally reflects an increase in the ETG’s operating income as a percentage of net sales to 27.4% in fiscal 2017, up from 24.7% in fiscal 2016, partially offset by a slight decrease in the FSG’s operating income as a percentage of net sales to 18.5% in fiscal 2017, down from 18.7% in fiscal 2016. Additionally, our consolidated operating income as a percentage of net sales was unfavorably impacted by a .2% impact from the previously mentioned foreign currency transaction adjustments. The increase in the ETG’s operating income as a percentage of net sales is principally attributed to the previously mentioned, SG&A efficiencies, improved gross profit margin, and decrease in acquisition costs. 22 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest Expense Interest expense increased to $9.8 million in fiscal 2017 from $8.3 million in fiscal 2016. The increase was principally due to higher interest rates partially offset by a lower weighted average balance outstanding under our revolving credit facility. Other Income (Expense) Other income (expense) in fiscal 2017 and 2016 was not material. Income Tax Expense Our effective tax rate in fiscal 2017 decreased to 30.3% from 31.5% in fiscal 2016. The decrease principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan and a $3.1 million discrete income tax benefit related to stock option exercises resulting from the adoption of Accounting Standards Update 2016-09, “Improvements to Employee Share-Based Payment Accounting,” in the first quarter of fiscal 2017 (see New Accounting Pronouncements below). These decreases were partially offset by the benefit recognized in fiscal 2016 from the retroactive and permanent extension of the U.S. federal R&D tax credit that resulted in the recognition of additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015 and a less favorable benefit in fiscal 2017 from the foreign tax rate differential associated with the undistributed earnings of a fiscal 2015 acquisition. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $21.7 million in fiscal 2017 compared to $20.0 million in fiscal 2016. The increase in fiscal 2017 reflects higher net income of certain subsidiaries of the FSG and ETG in which noncontrolling interests are held, inclusive of a fiscal 2017 acquisition. Net Income Attributable to HEICO Net income attributable to HEICO increased by 19% to a record $186.0 million, or $2.14 per diluted share, in fiscal 2017, up from $156.2 million, or $1.83 per diluted share, in fiscal 2016, principally reflecting the previously mentioned increased net sales and operating income. Outlook As we look ahead to fiscal 2018, we anticipate net sales growth within the FSG’s commercial aviation and defense product lines. We also expect growth within the ETG, principally driven by demand for the majority of our products. During fiscal 2018, we will continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy while maintaining our financial strength and flexibility. Overall, we are targeting growth in fiscal 2018 full year net sales and net income over fiscal 2017 levels. This outlook excludes the impact of additional acquired businesses, if any. Comparison of Fiscal 2016 to Fiscal 2015 Net Sales Our net sales in fiscal 2016 increased by 16% to a record $1,376.3 million, as compared to net sales of $1,188.6 million in fiscal 2015. The increase in consolidated net sales reflects an increase of $120.3 million (a 31% increase) to a record $511.3 million in net sales within the ETG as well as an increase of $66.2 million (an 8% increase) to a record $875.9 million in net sales within the FSG. The net sales increase in the ETG reflects net sales of $107.3 million contributed by our fiscal 2016 and 2015 acquisitions as well as organic growth of 4%. The ETG’s organic growth resulted mainly from an aggregate net sales increase of $17.2 million attributed to higher demand from certain space, medical and other electronics products, partially offset by a $3.2 million net sales decrease from lower demand for certain defense products. The net sales increase in the FSG reflects net sales of $40.6 million contributed by our fiscal 2015 acquisitions as well as organic growth of 3%. The FSG’s organic growth is principally attributed to increased demand and new product offerings within our aftermarket replacement parts and specialty products lines, resulting in net sales increases of $22.6 million and $10.9 million, respectively. These increases were partially offset by $7.9 million of lower organic net sales from our repair and overhaul parts and services product line. Our repair and overhaul parts and services product line was adversely impacted by the mix of products repaired during fiscal 2016, which required less extensive repair and overhaul services, as well as softer demand from our South American market. The FSG experienced organic revenue growth of 6% in fiscal 2016 excluding our repair and overhaul parts and services product line. Sales price changes were not a significant contributing factor to the FSG and ETG net sales growth in fiscal 2016. Our net sales in fiscal 2016 and 2015 by market consisted of approximately 52% and 57%, respectively, from the commercial aviation industry, 34% and 27%, respectively, from the defense and space industries, and 14% and 16%, respectively, from other industrial markets including medical, electronics and telecommunications. 23 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit and Operating Expenses Our consolidated gross profit margin increased to 37.5% in fiscal 2016 as compared to 36.5% in fiscal 2015, principally reflecting an increase of .9% in the FSG’s gross profit margin, partially offset by a .5% decrease in the ETG’s gross profit margin. The increase in the FSG’s gross profit margin is principally attributed to increased net sales and a more favorable product mix within our aftermarket replace- ment parts and specialty products product lines, partially offset by decreased net sales and a less favorable product mix within our repair and overhaul parts and services product line. The decrease in the ETG’s gross profit margin is principally attributed to a less favorable product mix for certain space products. Total new product R&D expenses included within our consolidated cost of sales increased to $44.7 million in fiscal 2016 compared to $38.7 million in fiscal 2015. Our consolidated SG&A expenses were $250.1 million and $204.5 million in fiscal 2016 and 2015, respectively. The increase in consolidated SG&A expenses principally reflects $21.8 million attributable to the fiscal 2016 and 2015 acquisitions, inclusive of $3.1 million of acquisition costs associated with a fiscal 2016 acquisition, $9.1 million of higher performance-based compensation expense, $3.1 million attributable to changes in the estimated fair value of accrued contingent consideration associated with a prior year acquisition, inclusive of foreign currency transaction adjustments, and a $2.4 million impact from foreign currency transaction adjustments on borrowings denominated in Euros under our revolving credit facility. Our consolidated SG&A expenses as a percentage of net sales were 18.2% and 17.2% in fiscal 2016 and 2015, respectively. The increase in consolidated SG&A expenses as a percentage of net sales principally reflects a .5% impact from higher performance-based compensation expense and a .2%, .2% and .2% impact from the aforementioned changes in the estimated fair value of accrued contingent consideration, foreign currency transaction adjustments and acquisition costs, respectively. Operating Income Our consolidated operating income in fiscal 2016 increased by 16% to a record $265.3 million, up from $229.7 million in fiscal 2015. As a percentage of net sales, our consolidated operating income was 19.3% in both fiscal 2016 and 2015. The increase in consolidated operating income is primarily attributed to a $27.2 million increase (a 28% increase) to a record $126.0 million in operating income of the ETG as well as a $13.6 million increase (a 9% increase) to a record $163.4 million in operating income of the FSG, partially offset by a $5.1 million increase in corporate expenses principally reflecting higher performance-based compensation expense and the previously mentioned foreign currency transaction adjustments on borrowings denominated in Euros. The increase in operating income of the ETG is mainly attributed to the previously mentioned net sales growth, partially offset by a $6.4 million and $5.2 million increase in amortization expense of intangible assets and performance-based compensation expense, respectively, in addition to the impact from the previously mentioned acquisition costs. The increase in operating income of the FSG is mainly attributed to the previously mentioned net sales growth and improved gross profit margin, partially offset by a $4.4 million increase in performance-based compensation expense, the previously mentioned changes in the estimated fair value of accrued contingent consideration and a $3.0 million increase in amortization expense of intangible assets. Interest Expense Interest expense increased to $8.3 million in fiscal 2016 from $4.6 million in fiscal 2015. The increase was due to a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal 2016 and 2015 acquisitions as well as higher interest rates. Other Expense Other expense in fiscal 2016 and 2015 was not material. Income Tax Expense Our effective tax rate in fiscal 2016 decreased to 31.5% from 31.7% in fiscal 2015. The decrease principally reflects the benefits recognized in fiscal 2016 of a larger income tax credit for qualified R&D activities resulting from the permanent extension of the U.S. federal R&D tax credit in December 2015 and a lower effective state tax rate driven by certain apportionment updates recognized upon the amendment of certain prior year tax returns in fiscal 2016. These decreases were partially offset by the benefits recognized in fiscal 2015 from a prior year tax return amendment for additional foreign tax credits related to R&D activities at one of our foreign subsidiaries and higher net income attributable to noncontrolling interests in subsidiaries structured as partnerships. See Note 6, Income Taxes, of the Notes to Consolidated Financial Statements for a detailed analysis of the provision for income taxes. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $20.0 million in fiscal 2016 compared to $20.2 million in fiscal 2015. 24 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Income Attributable to HEICO Net income attributable to HEICO increased by 17% to a record $156.2 million, or $1.83 per diluted share, in fiscal 2016 from $133.4 million, or $1.57 per diluted share, in fiscal 2015, principally reflecting the previously mentioned increased net sales and operating income. 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 manufactur- ing efficiencies and cost reductions. Liquidity and Capital Resources Our capitalization was as follows (in thousands): As of October 31, Total debt (including current portion) Less: Cash and cash equivalents Net debt (total debt less cash and cash equivalents) Shareholders’ equity Total capitalization (debt plus equity) Net debt to shareholders’ equity Total debt to total capitalization 2017 2016 $ 673,979 (52,066) 621,913 1,248,292 1,922,271 50% 35% $ 458,225 (42,955) 415,270 1,047,705 1,505,930 40% 30% Our principal uses of cash include acquisitions, capital expenditures, cash dividends, distributions to noncontrolling interests and working capital needs. Capital expenditures in fiscal 2018 are anticipated to approximate $50 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility. In November 2017, we entered into a new $1.3 billion Revolving Credit Facility Agreement (“New Credit Facility”) with a bank syndicate, which matures in November 2022. Under certain circumstances, the maturity of the New Credit Facility may be extended for two one-year periods. The New Credit Facility also includes a feature that will allow us to increase revolving commitments under the New Credit Facility 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 New Credit Facility may be used to finance acquisitions and for working capital and other general corporate purposes, including capital expenditures. The New Credit Facility replaced the $670 million Revolving Credit Agreement (see Financing Activities below). Borrowings under the New 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 minus the daily average Eurocurrency Reserve Rate for such Interest Period, as such capitalized terms are defined in the New 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 New 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 New Credit Facility may be accelerated upon an event of default, as such events are described in the New Credit Facility. The New 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 New Credit Facility. We were in compliance with all financial and nonfinancial covenants of the New Credit Facility as of October 31, 2017. As of December 19, 2017, we had approximately $625 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. 25 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Activities Net cash provided by operating activities was $274.9 million in fiscal 2017 and consisted primarily of net income from consolidated operations of $207.7 million and depreciation and amortization expense of $64.8 million (a non-cash item). Net cash provided by operating activities increased by $25.7 million in fiscal 2017 from $249.2 million in fiscal 2016. The increase in net cash provided by operating activities in fiscal 2017 is principally due to a $31.5 million increase in net income from consolidated operations and a $4.5 million increase in depreciation and amortization expense (a non-cash item), partially offset by a $12.0 million increase in working capital (current assets minus current liabilities). The $12.0 million increase in working capital is principally attributed to a $33.5 million decrease in accrued expenses and other current liabilities, which mainly reflects a decrease in deferred revenue attributed to billings in excess of costs and estimated earnings on fixed price contracts for which revenue is being recognized on the percentage-of-completion method and customer deposits received in connection with both manufacturing and repair and overhaul services, partially offset by an $18.8 million decrease in accounts receivable. Net cash provided by operating activities was $249.2 million in fiscal 2016 and consisted primarily of net income from consolidated operations of $176.2 million, depreciation and amortization expense of $60.3 million (a non-cash item) and an increase in working capital (current assets minus current liabilities) of $8.1 million. Net cash provided by operating activities increased by $76.3 million in fiscal 2016 from $172.9 million in fiscal 2015. The increase in net cash provided by operating activities in fiscal 2016 is principally due to a $36.7 million decrease in working capital, a $22.6 million increase in net income from consolidated operations and a $12.4 million increase in deprecia- tion and amortization expense (a non-cash item). The $36.7 million decrease in working capital is principally attributed to a $36.2 million increase in accrued expenses and other current liabilities, which mainly reflects an increase in deferred revenue attributed to billings in excess of costs and estimated earnings on a fixed price contract for which revenue is being recognized on the percentage-of-completion method and customer deposits received in connection with a contract to provided repair and overhaul services, as well as a higher level of accrued performance-based compensation due to the improved consolidated operating results, and an increase in accrued customer rebates and credits. Net cash provided by operating activities was $172.9 million in fiscal 2015 and consisted primarily of net income from consolidated operations of $153.6 million, depreciation and amortization expense of $47.9 million (a non-cash item) and a decrease in working capital (current assets minus current liabilities) of $28.7 million. Investing Activities Net cash used in investing activities during the three-year fiscal period ended October 31, 2017 primarily relates to several acquisitions aggregating $848.9 million, including $418.3 million in fiscal 2017, $263.8 million in fiscal 2016, and $166.8 million in fiscal 2015. Further details on acquisitions may be found under the caption “Overview” and Note 2, Acquisitions, of the Notes to Consolidated Financial Statements. Capital expenditures aggregated $75.1 million over the last three fiscal years, primarily reflecting the expansion, replacement and betterment of existing production facilities and capabilities, which were generally funded using cash provided by operating activities. Financing Activities Net cash provided by financing activities was $175.9 million in fiscal 2017 as compared to $56.8 million in fiscal 2016 and $27.3 million in fiscal 2015. During the three-year fiscal period ended October 31, 2017, we borrowed an aggregate $837.7 million under our revolving credit facility including borrowings of $404.0 million in fiscal 2017, $260.0 million in fiscal 2016, and $173.7 million in fiscal 2015. The aforementioned borrowings were made principally to fund acquisitions. Further details on acquisitions may be found under the caption “Overview” and Note 2, Acquisitions, of the Notes to Consolidated Financial Statements. Payments on our revolving credit facility aggregated $492.9 million over the last three fiscal years, including $190.9 million in fiscal 2017, $170.0 million in fiscal 2016, and $132.0 million in fiscal 2015. For the three-year fiscal period ended October 31, 2017, we made distributions to noncontrolling interests aggregating $47.1 million and paid an aggregate $32.9 million in cash dividends. Borrowings under our revolving credit facility in fiscal 2017, 2016 and 2015 were made under our $670 million Revolving Credit Agreement (“Prior Credit Facility”) with a bank syndicate, which was amended in November 2013 to become an $800 million facility and again in April 2017 to become a $1.0 billion facility. The Prior Credit Facility was available to finance acquisitions and for working capital and general corporate purposes, including capital expenditures. 26 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Advances under the Prior Credit Facility accrued interest at our choice of the “Base Rate” or the London Interbank Offered Rate (“LIBOR”) plus the applicable margin (based on our ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, noncontrolling interests and non-cash charges, or “leverage ratio”). The Base Rate was the highest of (i) the Prime Rate; (ii) the Federal Funds rate plus .50% per annum; and (iii) the Adjusted LIBO Rate determined on a daily basis for an Interest Period of one month plus 1.00% per annum, as such capitalized terms were defined in the Prior Credit Facility. The applicable margin for a LIBOR-based borrowing ranged from .75% to 2.25%. The applicable margin for a Base Rate borrowing ranged from 0% to 1.25%. A fee was charged on the amount of the unused commitment ranging from .125% to .35% (depending on our leverage ratio). The Prior Credit Facility was unsecured and contained covenants that restricted the amount of certain payments, including dividends, and required, among other things, the maintenance of a total leverage ratio, a senior leverage ratio and a fixed charge coverage ratio. As of October 31, 2017, we were in compliance with all financial and nonfinancial covenants of the Prior Credit Facility. See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements for further information regarding the Prior Credit Facility. Contractual Obligations The following table summarizes our contractual obligations as of October 31, 2017 (in thousands): Long-term debt obligations (1) Capital lease obligations (2) Operating lease obligations (3) Purchase obligations (4) (5) (6) Other long-term liabilities (7) Total contractual obligations Total $ 671,115 3,325 74,127 29,931 2,689 $ 781,187 2018 $ — 575 13,402 8,803 479 $ 23,259 Payments due by fiscal period 2019 - 2020 2021 - 2022 Thereafter $ 671,115 1,100 23,997 7,085 2,210 $ 705,507 $ — 1,028 20,663 413 — $ 22,104 $ — 622 16,065 13,630 — $ 30,317 (1) Excludes interest charges on borrowings and the fee on the amount of any unused commitment that we may be obligated to pay under our revolving credit facility as such amounts vary. 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. As discussed in “Liquidity and Capital Resources,” we entered into a New Credit Facility in November 2017 that matures in November 2022. Accordingly, the $671 million we had outstanding under our prior revolving credit facility as of October 31, 2017 and shown as due in fiscal 2019 is now due in fiscal 2023. (2) Inclusive of $.5 million in interest charges. See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements for additional information regarding our capital lease obligations. (3) See Note 15, Commitments and Contingencies – Lease Commitments, of the Notes to Consolidated Financial Statements for additional information regarding our operating lease obligations. (4) Includes contingent consideration aggregating $27.6 million related to a fiscal 2015, 2016 and 2017 acquisition. See Note 7, Fair Value Measurements, of the Notes to Consolidated Financial Statements for additional information. (5) Also includes an aggregate $2.3 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 2025. The Put Rights provide that cash consideration be paid for their equity interests (the “Redemption Amount”). As of October 31, 2017, management’s estimate of the aggregate Redemption Amount of all Put Rights that we could be required to pay is approximately $131.1 million, which is reflected within redeemable noncontrolling interests in our Consolidated Balance Sheet. The amounts in the table do not include Put Right obligations as none of the noncontrolling interest holders have exercised their Put Rights as of October 31, 2017. See Note 11, Redeemable Noncontrolling Interests, of the Notes to Consolidated Financial Statements for further information. (7) The amounts in the table do not include liabilities related to the HEICO Corporation Leadership Compensation Plan or our other deferred compensation arrangement as they are each 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 these two deferred compensation plans. Off-Balance Sheet Arrangements Guarantees As of October 31, 2017, we have arranged for standby letters of credit aggregating $4.2 million, which are supported by our revolving credit facility and pertain to payment guarantees related to potential workers’ compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of our subsidiaries. 27 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09, as amended, is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospec- tively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. We are currently evaluating which transition method we will elect. In addition, we are currently identifying our various revenue streams and reviewing certain underlying customer contracts to determine the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows. In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Under current guidance, inventories are measured at the lower of cost or market. ASU 2015-11 must be applied prospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. We are currently evaluating the effect, if any, the adoption of this guidance will have on our consolidat- ed results of operations, financial position and cash flows. In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. We adopted ASU 2015-17 on a retrospective basis in the fourth quarter of fiscal 2017, resulting in a reclassification of $41.1 million in current deferred tax assets to noncurrent deferred tax liabilities in our Consolidated Balance Sheet as of October 31, 2016. In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. We are currently evaluating the effect the adoption of this guidance will have on our consolidated results of operations, financial position and cash flows. In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects related to accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits and tax deficiencies are to be recognized in the statement of operations as a component of income tax expense rather than as capital in excess of par value. We adopted ASU 2016-09 in the first quarter of fiscal 2017 resulting in the recognition of a $3.1 million discrete income tax benefit, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million. Additionally, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, which increased our weighted average number of diluted common shares outstanding by 781,000 for fiscal 2017. Further, ASU 2016-09 requires excess tax benefits be presented within the statement of cash flows as an operating activity rather than as a financing activity. We adopted this change on a prospective basis, which resulted in a $3.1 million increase in cash provided by operating activities and a $3.1 million decrease in cash provided by financing activities in fiscal 2017. In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. We are currently evaluating the effect the adoption of this guidance will have on its consolidated statement of cash flows. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated results of operations, financial position and cash flows. 28 HEICO Corporation and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature may be forward-looking and the words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward- looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include: • Lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; • Product specification costs and requirements, which could cause an increase to our costs to complete contracts; • Governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; • Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; • Product development or manufacturing difficulties, which could increase our product development costs and delay sales; • Our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and • Defense budget cuts, which could reduce our defense-related revenue. 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. 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 $671.0 million as of October 31, 2017, 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, 2017 would not have a material effect on our results of operations, financial position or cash flows. Foreign Currency Risk We have a few foreign subsidiaries that conduct a portion of their operations in currencies other than the U.S. dollar, or principally in Euros, Canadian dollars and British pounds sterling. 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, Canadian dollar or British pound sterling to the U.S. dollar as of October 31, 2017 would not have a material effect on our results of operations, financial position or cash flows. 29 HEICO Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) As of October 31, ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories, net Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Goodwill Intangible assets, net Deferred income taxes Other assets Total assets LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt Trade accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities Long-term debt, net of current maturities Deferred income taxes Other long-term liabilities Total liabilities Commitments and contingencies (Note 15) 2017 2016 $ 52,066 222,456 343,628 13,742 631,892 129,883 1,081,306 538,081 — 131,269 $ 2,512,431 $ 451 89,724 147,612 11,650 249,437 673,528 59,026 151,025 1,133,016 $ 42,955 202,227 286,302 11,674 543,158 121,611 865,717 366,863 407 100,656 $ 1,998,412 $ 411 73,335 136,053 4,622 214,421 457,814 64,899 114,061 851,195 Redeemable noncontrolling interests (Note 11) 131,123 99,512 Shareholders’ equity: Common Stock, $.01 par value per share; 75,000 shares authorized; 33,777 and 33,715 shares issued and outstanding Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 50,705 and 50,396 shares issued and outstanding Capital in excess of par value Deferred compensation obligation HEICO stock held by irrevocable trust Accumulated other comprehensive loss Retained earnings Total HEICO shareholders’ equity Noncontrolling interests Total shareholders’ equity Total liabilities and equity The accompanying notes are an integral part of these consolidated financial statements. 338 270 507 326,544 3,118 (3,118) (10,556) 844,247 1,161,080 87,212 1,248,292 $ 2,512,431 403 306,328 2,460 (2,460) (25,326) 681,704 963,379 84,326 1,047,705 $ 1,998,412 30 HEICO Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended October 31, 2017 2016 2015 Net sales $ 1,524,813 $ 1,376,258 $ 1,188,648 Operating costs and expenses: Cost of sales Selling, general and administrative expenses 950,088 268,067 860,766 250,147 754,469 204,523 Total operating costs and expenses 1,218,155 1,110,913 958,992 Operating income Interest expense Other income (expense) 306,658 265,345 229,656 (9,790) 1,092 (8,272) (23) (4,626) (66) Income before income taxes and noncontrolling interests 297,960 257,050 224,964 Income tax expense Net income from consolidated operations Less: Net income attributable to noncontrolling interests 90,300 207,660 21,675 80,900 176,150 19,958 71,400 153,564 20,200 Net income attributable to HEICO $ 185,985 $ 156,192 $ 133,364 Net income per share attributable to HEICO shareholders (Note 17): Basic Diluted Weighted average number of common shares outstanding (Note 17): Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. $ $ 2.21 2.14 $ $ 1.86 1.83 $ $ 1.60 1.57 84,290 86,776 83,807 85,213 83,425 84,764 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year ended October 31, 2017 2016 2015 Net income from consolidated operations Other comprehensive income (loss): Foreign currency translation adjustments Unrealized gain (loss) on defined benefit pension plan, net of tax Amortization of unrealized loss on defined benefit pension plan, net of tax Total other comprehensive income (loss) Comprehensive income from consolidated operations Net income attributable to noncontrolling interests Foreign currency translation adjustments attributable to noncontrolling interests Comprehensive income attributable to noncontrolling interests Comprehensive income attributable to HEICO $ 207,660 $ 176,150 $ 153,564 15,346 321 29 15,696 223,356 21,675 926 22,601 $ 200,755 353 (661) — (308) 175,842 19,958 (62) 19,896 155,946 $ (16,880) (771) — (17,651) 135,913 20,200 (860) 19,340 116,573 $ The accompanying notes are an integral part of these consolidated financial statements. 31 HEICO Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except per share data) Redeemable Noncontrolling Interests Common Stock $ 99,512 11,637 — — — — — 23,339 (10,323) (3,848) 10,806 — — 131,123 $ $ 91,282 9,968 — — — — — (9,957) (3,599) 11,818 — — $ 99,512 $ 39,966 6,534 — — — — — 36,224 (5,166) 13,724 — — $ 91,282 $ 270 — — 68 — — — — — — — — — $ 338 $ 269 — — 1 — — — — — — — — $ 270 $ 268 — — 1 — — — — — — — — $ 269 Class A Common Stock $ 403 — — 101 — — 3 — — — — — — $ 507 $ 400 — — 1 — 2 — — — — — — $ 403 $ 397 — — 1 — 2 — — — — — — $ 400 Balances as of October 31, 2016 Comprehensive income Cash dividends ($.152 per share) Five-for-four common stock split Issuance of common stock to HEICO Savings and Investment Plan Share-based compensation expense Proceeds from stock option exercises Noncontrolling interests assumed related to acquisitions Distributions to noncontrolling interests Acquisitions of noncontrolling interests Adjustments to redemption amount of redeemable noncontrolling interests Deferred compensation obligation Other Balances as of October 31, 2017 Balances as of October 31, 2015 Comprehensive income (loss) Cash dividends ($.128 per share) Issuance of common stock to HEICO Savings and Investment Plan Share-based compensation expense Proceeds from stock option exercises Tax benefit from stock option exercises Distributions to noncontrolling interests Acquisitions of noncontrolling interests Adjustments to redemption amount of redeemable noncontrolling interests Deferred compensation obligation Other Balances as of October 31, 2016 Balances as of October 31, 2014 Comprehensive income (loss) Cash dividends ($.112 per share) Issuance of common stock to HEICO Savings and Investment Plan Share-based compensation expense Proceeds from stock option exercises Tax benefit from stock option exercises Noncontrolling interests assumed related to acquisitions Distributions to noncontrolling interests Adjustments to redemption amount of redeemable noncontrolling interests Deferred compensation obligation Other Balances as of October 31, 2015 The accompanying notes are an integral part of these consolidated financial statements. 32 HEICO Shareholders’ Equity Capital in Excess of Par Value Deferred Compensation Obligation HEICO Stock Held by Irrevocable Trust Accumulated Comprehensive Other Loss $ 306,328 $ 2,460 $ (2,460) $ (25,326) $ 681,704 $ 14,770 Retained Earnings Noncontrolling Interests Shareholders’ Total Equity $ 1,047,705 658 (658) (203) $ 326,544 $ 286,220 $ $ 3,118 1,783 $ $ (3,118) $ (10,556) $ 844,247 87,212 $ 1,248,292 (1,783) $ (25,080) $ 548,054 $ 893,271 (246) 156,192 (10,724) 185,985 (12,807) (23) 194 (10,806) — — — — — — — — — — — — — — — — — — — — — — — 84,326 10,964 (8,078) $ $ 83,408 9,928 (9,060) $ $ 50 84,326 75,135 12,806 — — — — — — — — — — — — — — — — — — — — — — — — — — — 211,719 (12,807) (23) 7,517 7,415 5,659 (8,078) 194 (10,806) — — (203) 165,874 (10,724) 6,892 6,434 5,924 868 (9,060) (11,818) — — 44 129,379 (9,343) 5,754 6,048 3,673 1,402 — (4,533) (13,724) — (4) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 677 (677) (11,818) $ 306,328 $ 2,460 $ (2,460) $ (25,326) $ 681,704 $ 269,351 $ 1,138 $ (1,138) $ 1,047,705 $ 774,619 $ (8,289) (16,791) $ 437,757 133,364 (9,343) 645 (645) (13,724) (4,533) $ 286,220 $ 1,783 $ (1,783) $ (25,080) $ 548,054 $ 83,408 $ 893,271 (169) 7,517 7,415 5,656 — — — — — — — — — 6,890 6,434 5,922 868 — — — — (6) — — 5,752 6,048 3,671 1,402 — — — — (4) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Balances as of October 31, 2016 Comprehensive income Cash dividends ($.152 per share) Five-for-four common stock split Issuance of common stock to HEICO Savings and Investment Plan Share-based compensation expense Proceeds from stock option exercises Noncontrolling interests assumed related to acquisitions Distributions to noncontrolling interests Acquisitions of noncontrolling interests Adjustments to redemption amount of redeemable noncontrolling interests Issuance of common stock to HEICO Savings and Investment Plan Adjustments to redemption amount of redeemable noncontrolling interests Deferred compensation obligation Other Balances as of October 31, 2017 Balances as of October 31, 2015 Comprehensive income (loss) Cash dividends ($.128 per share) Share-based compensation expense Proceeds from stock option exercises Tax benefit from stock option exercises Distributions to noncontrolling interests Acquisitions of noncontrolling interests Deferred compensation obligation Other Balances as of October 31, 2016 Balances as of October 31, 2014 Comprehensive income (loss) Cash dividends ($.112 per share) Share-based compensation expense Proceeds from stock option exercises Tax benefit from stock option exercises Deferred compensation obligation Other Balances as of October 31, 2015 Redeemable Noncontrolling Interests $ 99,512 11,637 Common Stock $ 270 Class A Common Stock $ 403 68 101 $ 131,123 $ 338 $ 507 $ 91,282 9,968 $ 269 $ 400 $ 99,512 $ 270 $ 403 $ 39,966 6,534 $ 268 $ 397 23,339 (10,323) (3,848) 10,806 (9,957) (3,599) 11,818 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1 — — — — — — — — — — 1 — — — — — — — — — — — — 3 — — — — — — — — 1 — 2 — — — — — — — — 1 — 2 — — — — — — Issuance of common stock to HEICO Savings and Investment Plan Noncontrolling interests assumed related to acquisitions Distributions to noncontrolling interests Adjustments to redemption amount of redeemable noncontrolling interests 36,224 (5,166) 13,724 The accompanying notes are an integral part of these consolidated financial statements. $ 91,282 $ 269 $ 400 HEICO Shareholders’ Equity Deferred Compensation Obligation HEICO Stock Held by Irrevocable Trust Accumulated Other Comprehensive Loss $ 2,460 — — — — — — — — — — 658 — 3,118 $ $ 1,783 — — — — — — — — — 677 — $ 2,460 $ $ 1,138 — — — — — — — — — 645 — 1,783 $ $ $ $ $ $ (2,460) — — — — — — — — — — (658) — (3,118) (1,783) — — — — — — — — — (677) — (2,460) (1,138) — — — — — — — — — (645) — (1,783) $ (25,326) 14,770 — — — — — — — — — — — (10,556) $ $ (25,080) (246) — — — — — — — — — — $ (25,326) $ (8,289) (16,791) — — — — — — — — — — $ (25,080) Capital in Excess of Par Value $ 306,328 — — (169) 7,517 7,415 5,656 — — — — — (203) $ 326,544 $ 286,220 — — 6,890 6,434 5,922 868 — — — — (6) $ 306,328 $ 269,351 — — 5,752 6,048 3,671 1,402 — — — — (4) $ 286,220 Retained Earnings $ 681,704 185,985 (12,807) (23) — — — — — 194 (10,806) — — $ 844,247 $ 548,054 156,192 (10,724) — — — — — — (11,818) — — $ 681,704 $ 437,757 133,364 (9,343) — — — — — — (13,724) — — $ 548,054 Noncontrolling Interests $ $ $ $ $ $ 84,326 10,964 — — — — — — (8,078) — — — — 87,212 83,408 9,928 — — — — — (9,060) — — — 50 84,326 75,135 12,806 — — — — — — (4,533) — — — 83,408 Total Shareholders’ Equity $ 1,047,705 211,719 (12,807) (23) 7,517 7,415 5,659 — (8,078) 194 (10,806) — (203) $ 1,248,292 $ 893,271 165,874 (10,724) 6,892 6,434 5,924 868 (9,060) — (11,818) — 44 $ 1,047,705 $ 774,619 129,379 (9,343) 5,754 6,048 3,673 1,402 — (4,533) (13,724) — (4) $ 893,271 33 HEICO Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended October 31, 2017 2016 2015 Operating Activities: Net income from consolidated operations Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: Depreciation and amortization Employer contributions to HEICO Savings and Investment Plan Share-based compensation expense Increase in accrued contingent consideration, net Foreign currency transaction adjustments, net Deferred income tax benefit Tax benefit from stock option exercises Excess tax benefit from stock option exercises Payment of contingent consideration Changes in operating assets and liabilities, net of acquisitions: Decrease (increase) in accounts receivable Increase in inventories Decrease (increase) in prepaid expenses and other current assets Increase in trade accounts payable Increase (decrease) in accrued expenses and other current liabilities Increase in income taxes payable Other long-term assets and liabilities, net Net cash provided by operating activities Investing Activities: Acquisitions, net of cash acquired Capital expenditures Other Net cash used in investing activities Financing Activities: Borrowings on revolving credit facility Payments on revolving credit facility Distributions to noncontrolling interests Cash dividends paid Payment of contingent consideration Acquisitions of noncontrolling interests Proceeds from stock option exercises Excess tax benefit from stock option exercises Revolving credit facility issuance costs Other Net cash provided by financing activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying notes are an integral part of these consolidated financial statements. 34 $ 207,660 $ 176,150 $ 153,564 64,823 7,768 7,415 1,100 3,347 (11,096) — — — 2,846 (21,204) 134 6,386 1,794 6,071 (2,159) 274,885 (418,265) (25,998) (552) (444,815) 404,000 (190,877) (18,401) (12,807) (7,039) (3,848) 5,659 — (270) (545) 175,872 3,169 9,111 42,955 52,066 $ 60,277 7,020 6,434 3,063 13 (9,194) 868 (881) (631) (15,955) (14,421) (2,356) 4,074 35,279 1,443 (1,999) 249,184 (263,811) (30,863) (2,942) (297,616) 260,000 (170,000) (19,017) (10,724) (6,329) (3,599) 5,924 881 — (364) 56,772 1,012 9,352 33,603 42,955 $ 47,907 6,125 6,048 293 (3,704) (7,080) 1,402 (1,402) — (22,572) (10,187) 1,433 3,169 (883) 373 (1,623) 172,863 (166,784) (18,249) (973) (186,006) 173,696 (132,000) (9,699) (9,343) — — 3,673 1,402 — (393) 27,336 (819) 13,374 20,229 33,603 $ HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 . S U M M A RY O F S I G N I F I C A N T A C C O U N T I N G P O L I C I ES Nature of Business HEICO Corporation, through its principal subsidiaries consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”), HEICO Flight Support Corp. and HEICO Electronic Technologies Corp. (“HEICO Electronic”) and their respective subsidiaries (collectively, the “Company”), is principally engaged in the design, manufacture and sale of aerospace, defense and electronic related products and services throughout the United States (“U.S.”) and internationally. The Company’s customer base is primarily the aviation, defense, space, medical, telecommu- nications and electronics industries. Basis of Presentation The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic and its subsidiaries. The consolidated financial statements include the financial accounts of HEICO Corporation and its subsidiaries, all of which are wholly owned except for HEICO Aerospace, which is 20% owned by Lufthansa Technik AG (“LHT”), the technical services subsidiary of Lufthansa German Airlines. In addition, HEICO Aerospace consolidates two subsidiaries which are 80.1% and 82.3% owned, respectively, and a joint venture, which is 84% owned. Also, HEICO Flight Support Corp. consolidates two subsidiaries which are 80% and 84% owned, respectively, and four subsidiaries that are each 80.1% owned. Furthermore, HEICO Electronic consolidates four subsidiaries, which are 80.1%, 80.1%, 82.5%, and 95.9% owned, respectively, and a wholly owned subsidiary of HEICO Electronic consolidates a subsidiary which is 78% owned. See Note 11, Redeemable Noncontrolling Interests. All intercompany balances and transactions are eliminated. Stock Split In March 2017, the Company’s Board of Directors declared a 5-for-4 stock split on both classes of the Company’s common stock. The stock split was effected as of April 19, 2017 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017. All applicable share and per share information has been adjusted retrospectively to give effect to the fiscal 2017 5-for-4 stock split. Use of Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the consolidated financial statements, the Company considers all highly liquid investments such as U.S. Treasury bills and money market funds, without liquidity fees or redemption gates, with an original maturity of three months or less at the time of purchase to be cash equivalents. Accounts Receivable Accounts receivable consist of amounts billed and currently due from customers and unbilled costs and estimated earnings related to revenue from certain fixed price contracts recognized on the percentage-of-completion method that have been recognized for accounting purposes, but not yet billed to customers. The valuation of accounts receivable requires that the Company set up an allowance for estimated uncollectible accounts and record a corresponding charge to bad debt expense. The Company estimates uncollectible receivables based on such factors as its prior experience, its appraisal of a customer’s ability to pay, age of receivables outstanding and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographical regions. The Company performs ongoing credit evaluations of its customers, but does not generally require collateral to support customer receivables. Inventory Inventory is stated at the lower of cost or market, 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. 35 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company periodically evaluates 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. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation and amortization is generally provided on the straight-line method over the estimated useful lives of the various assets. The Company’s property, plant and equipment is depreciated over the following estimated useful lives: Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 to 40 years Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 20 years Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years Tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 5 years The costs of major additions and improvements are capitalized. Leasehold improvements are amortized over the shorter of the leasehold improvement’s useful life or the lease term. Repairs and maintenance costs are expensed as incurred. Upon an asset’s disposition, its cost and related accumulated depreciation are removed from the financial accounts and any resulting gain or loss is reflected within earnings. Capital Leases Assets acquired under capital leases are recorded at the lower of the asset’s fair value or the present value of the future minimum lease payments, excluding any portion of the lease payments representing executory costs. The discount rate used in determining the present value of the minimum lease payments is the lower of the rate implicit in the lease or the Company’s incremental borrowing rate. Assets under capital leases are included in property, plant and equipment and are depreciated over the shorter of the lease term or the useful life of the leased asset. Lease payments under capital leases are recognized as a reduction of the capital lease obligation and as interest expense. Business Combinations The Company allocates 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. The operating results of acquired businesses are included in the Company’s results of operations beginning as of their effective acquisition dates. Acquisition costs are generally expensed as incurred, were not material in fiscal 2017 or 2015 and totaled $3.2 million in fiscal 2016. See Note 2, Acquisitions, for additional information regarding fiscal 2016 acquisition costs. For contingent consideration arrangements, a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 2, Acquisitions, and Note 7, Fair Value Measurements. Goodwill and Other Intangible Assets The Company tests 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, the Company compares the fair value of each of its 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 the Company’s reporting units are determined by 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. The Company calculates 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. The Company’s intangible assets not subject to amortization consist principally of its trade names. The Company’s intangible assets subject to amortization are amortized on the straight-line method (except for certain customer relationships amortized on an accelerated method) over the following estimated useful lives: Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 to 15 years Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 to 22 years Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 to 17 years Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 20 years 15 years Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 to 36 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense of intellectual property, licenses and patents is recorded as a component of cost of sales, and amortization expense of customer relationships, non-compete agreements and trade names is recorded as a component of selling, general and administrative (“SG&A”) expenses in the Company’s Consolidated Statements of Operations. The Company tests each non-amortizing intangible asset 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 its trade names, the Company utilizes an income approach, which relies upon management’s assumptions of royalty rates, projected revenues and discount rates. The Company also tests 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, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. The determination of fair value requires management to make a number of estimates, assumptions and judgments of such factors as projected revenues and earnings and discount rates. Investments Investments are stated at fair value based on quoted market prices. Investments that are intended to be held for less than one year are included within prepaid expenses and other current assets in the Company’s Consolidated Balance Sheets, while those intended to be held for longer than one year are classified within other assets. Unrealized gains or losses associated with available-for-sale securities are reported net of tax within other comprehensive income or (loss) in shareholders’ equity. Unrealized gains or losses associated with trading securities are recorded as a component of other income in the Company’s Consolidated Statements of Operations. Customer Rebates and Credits The Company records accrued customer rebates and credits as a component of accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets. These amounts generally relate to discounts negotiated with customers as part of certain sales contracts that are usually tied to sales volume thresholds. The Company accrues customer rebates and credits as a reduction within net sales as the revenue is recognized based on the estimated level of discount rate expected to be earned by each customer over the life of the contractual rebate period (generally one year). Accrued customer rebates and credits are monitored by management and discount levels are updated at least quarterly. Product Warranties Product warranty liabilities are estimated at the time of shipment and recorded as a component of accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets. The amount recognized is based on historical claims experience. Defined Benefit Pension Plan In connection with a prior year acquisition, the Company assumed a frozen qualified defined benefit pension plan (the “Plan”). The Plan’s benefits are based on employee compensation and years of service; however, the accrued benefit for Plan participants was fixed as of the date of acquisition. The Company uses an actuarial valuation to determine the projected benefit obligation of the Plan and records the difference between the fair value of the Plan’s assets and the projected benefit obligation as of October 31 in its Consolidated Balance Sheets. Additionally, any actuarial gain or loss that arises during a fiscal year that is not recognized as a component of net periodic pension income or expense is recorded as a component of other comprehensive income or (loss), net of tax. See Note 10, Employee Retirement Plans, for additional information and disclosures about the Plan. Revenue Recognition Revenue from the sale of products and the rendering of services is recognized when title and risk of loss passes to the customer, which is generally at the time of shipment. Revenue from the rendering of services represented less than 10% of consolidated net sales for all periods presented. Revenue from certain fixed price contracts for which costs can be dependably estimated is recognized on the percent- age-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. The percentage of the Company’s net sales recognized under the percentage-of-completion method was approximately 3%, 3% and 4% in fiscal 2017, 2016 and 2015, respectively. 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 costs. SG&A costs are charged to expense as incurred. Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the period of revision. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Variations in actual labor performance, changes to estimated profitability, and final contract settlements may result in revisions to cost estimates and are recognized in income in the period in which the revisions are determined. Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations in fiscal 2017, 2016 or 2015. 37 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The asset, “costs and estimated earnings in excess of billings” on uncompleted percentage-of-completion contracts, included in accounts receivable, represents revenue recognized in excess of amounts billed. The liability, “billings in excess of costs and estimated earnings,” included in accrued expenses and other current liabilities, represents billings in excess of revenue recognized on contracts accounted for under the percentage-of-completion method. Billings are made based on the completion of certain milestones as provided for in the contracts. For fixed price contracts in which costs cannot be dependably estimated, revenue is recognized on the completed-contract method. A contract is considered complete when all significant costs have been incurred or the item has been accepted by the customer. Progress billings and customer advances (“billings to date”) received on fixed price contracts accounted for under the completed-contract method are classified as a reduction to contracts in process (a component of inventories), if any, and any remaining amount is included in accrued expenses and other current liabilities. Stock-Based Compensation The Company records compensation expense associated with stock options in its Consolidated Statements of Operations based on the grant date fair value of those awards. The fair value of each stock option on the date of grant is estimated using the Black-Scholes pricing model based on certain valuation assumptions. Expected stock price volatility is based on the Company’s historical stock prices over the contractual term of the option grant and other factors. The risk-free interest rate used is based on the published U.S. Treasury yield curve in effect at the time of the option grant for instruments with a similar life. The dividend yield reflects the Company’s expected dividend yield at the date of grant. The expected option life represents the period of time that the stock options are expected to be outstanding, taking into consideration the contractual term of the option grant and employee historical exercise behavior. The Company generally recognizes stock option compensation expense ratably over the award’s vesting period. Income Taxes Income tax expense includes U.S. and foreign income taxes, plus a provision for U.S. taxes on undistributed earnings of foreign subsidiaries not deemed to be permanently invested. Deferred income taxes are provided on elements of income that are recognized for financial accounting purposes in periods different from periods recognized for income tax purposes. The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. Further information regarding income taxes can be found in Note 6, Income Taxes. Redeemable Noncontrolling Interests As further detailed in Note 11, Redeemable Noncontrolling Interests, the holders of equity interests in certain of the Company’s subsidiaries have rights (“Put Rights”) that require the Company to provide cash consideration for their equity interests (the “Redemption Amount”) at fair value or at a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. The Put Rights are embedded in the shares owned by the noncontrolling interest holders and are not freestanding. The Company tracks the carrying cost of such redeemable noncontrolling interests at historical cost plus an allocation of subsidiary earnings based on ownership interest, less dividends paid to the noncontrolling interest holders. Redeemable noncontrolling interests are recorded outside of permanent equity at the higher of their carrying cost or management’s estimate of the Redemption Amount. The initial adjustment to record redeemable noncontrolling interests at the Redemption Amount results in a corresponding decrease to retained earnings. Subsequent adjustments to the Redemption Amount of redeemable noncontrolling interests may result in corresponding decreases or increases to retained earnings, provided any increases to retained earnings may only be recorded to the extent of decreases previously recorded. Adjustments to Redemption Amounts based on fair value will have no effect on net income per share attributable to HEICO shareholders whereas the portion of periodic adjustments to the carrying amount of redeemable noncontrolling interests based solely on a multiple of future earnings that reflect a redemption amount in excess of fair value will affect net income per share attributable to HEICO shareholders. Acquisitions of redeemable noncontrolling interests are treated as equity transactions. Net Income per Share Attributable to HEICO Shareholders Basic net income per share attributable to HEICO shareholders is computed by dividing net income attributable to HEICO by the weighted average number of common shares outstanding during the period. Diluted net income per share attributable to HEICO share- holders is computed by dividing net income attributable to HEICO by the weighted average number of common shares outstanding during the period plus potentially dilutive common shares arising from the assumed exercise of stock options, if dilutive. The dilutive impact of potentially dilutive common shares is determined by applying the treasury stock method. 38 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign Currency All assets and liabilities of foreign subsidiaries that do not utilize the U.S. dollar as its functional currency are translated at period-end exchange rates, while revenue and expenses are translated using average exchange rates for the period. Unrealized translation gains or losses are reported as foreign currency translation adjustments through other comprehensive income or (loss) in shareholders’ equity. Transaction gains or losses related to balances denominated in a currency other than the functional currency are recorded in the Company’s Consolidated Statements of Operations. Contingencies Losses for contingencies such as product warranties, litigation and environmental matters are recognized in income when they are probable and can be reasonably estimated. Gain contingencies are not recognized in income until they have been realized. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09, as amended, is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption in the year preceding the effective date is permitted. ASU 2014-09 shall be applied either retrospec- tively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The Company is currently evaluating which transition method it will elect. In addition, the Company is currently identifying its various revenue streams and reviewing certain underlying customer contracts to determine the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows. In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Under current guidance, inventories are measured at the lower of cost or market. ASU 2015-11 must be applied prospectively and is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. The Company is currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows. In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. The Company adopted ASU 2015-17 on a retrospective basis in the fourth quarter of fiscal 2017, resulting in a reclassification of $41.1 million in current deferred tax assets to noncurrent deferred tax liabilities in the Company’s Consolidated Balance Sheet as of October 31, 2016. In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows. In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects related to accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits and tax deficiencies are to be recognized in the statement of operations as a component of income tax expense rather than as capital in excess of par value. The Company adopted ASU 2016-09 in the first quarter of fiscal 2017 resulting in the recognition of a $3.1 million discrete income tax benefit, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million. Additionally, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, which increased the Company’s weighted average number of diluted common shares outstanding by 781,000 for fiscal 2017. Further, ASU 2016-09 requires excess tax benefits be presented within the statement of cash flows as an operating activity rather than as a financing activity. The Company adopted this change on a prospective basis, which resulted in a $3.1 million increase in cash provided by operating activities and a $3.1 million decrease in cash provided by financing activities in fiscal 2017. In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies how cer- tain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 provides guidance on eight specific cash flow classification issues including contingent consideration payments made after a business combination, proceeds from corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 for HEICO. Early adoption is permitted. ASU 2016-15 requires a retrospective transition approach for all periods presented. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated statement of cash flows. 39 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019, or in fiscal 2021 for HEICO. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated results of operations, financial position and cash flows. 2 . A C Q U I S I T I O N S AAT Acquisition On September 15, 2017, the Company, through HEICO Electronic, acquired all of the outstanding stock of AeroAntenna Technology, Inc. (“AAT”). The purchase price of this acquisition was paid in cash using proceeds from the Company’s revolving credit facility. AAT designs and produces high performance active antenna systems for commercial aircraft, precision guided munitions, other defense applications and commercial uses. The Company believes that this acquisition is consistent with HEICO’s practice of acquiring high quality niche designers and manufacturers who also focus on customer needs and will further enable the Company to broaden its product offerings, technologies and customer base. The following table summarizes the total consideration for the acquisition of AAT (in thousands): Cash paid Less: cash acquired Cash paid, net Contingent consideration Additional purchase consideration Total consideration $ 317,500 (868) 316,632 13,797 220 $ 330,649 As noted in the table above, the total consideration includes an accrual of $13.8 million representing the estimated fair value of contin- gent consideration the Company may be obligated to pay should AAT meet certain earnings objectives during the first six years following the acquisition. See Note 7, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation. The following table summarizes the allocation of the total consideration for the acquisition of AAT to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands): Assets acquired: Goodwill Customer relationships Intellectual property Trade name Accounts receivable Inventories Property, plant and equipment Other assets Total assets acquired, excluding cash Liabilities assumed: Accounts payable Accrued expenses Total liabilities assumed Net assets acquired, excluding cash $ 160,903 100,000 39,000 20,000 6,115 5,923 1,246 208 333,395 1,290 1,456 2,746 $ 330,649 The allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustments to such allocations to be material to the Company’s consolidated financial statements. The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of AAT and the value of its assembled workforce that do not qualify for separate recognition. The amortization period of the customer relationships, intellectual property and trade name acquired is 15 years, 15 years and indefinite, respectively. The operating results of AAT were included in the Company’s results of operations from the effective acquisition date. The Company’s consolidated net sales and net income attributable to HEICO for the fiscal year ended October 31, 2017 includes $10.2 million and $2.5 million, respectively from the acquisition of AAT. 40 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents unaudited pro forma financial information for fiscal 2017 and fiscal 2016 as if the acquisition of AAT had occurred as of November 1, 2015 (in thousands, except per share data): Year ended October 31, Net sales Net income from consolidated operations Net income attributable to HEICO Net income per share attributable to HEICO shareholders: Basic Diluted 2017 $ 1,582,653 220,419 $ 198,744 $ $ $ 2.36 2.29 2016 $ 1,428,336 185,070 $ 165,112 $ $ $ 1.97 1.94 The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2015. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to intangible assets acquired, increased interest expense associated with borrowings to finance the acquisition and inventory purchase accounting adjust- ments charged to cost of sales as the inventory is sold. Robertson Acquisition On January 11, 2016, the Company, through HEICO Electronic, acquired all of the limited liability company interests of Robertson Fuel Systems, LLC (“Robertson”). The purchase price of this acquisition was paid in cash using proceeds from the Company’s revolving credit facility. Robertson designs and produces mission-extending, crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft. The Company believes that this acquisition is consistent with HEICO’s practice of acquiring outstanding niche designers and manufacturers of critical components in the defense industry and will further enable the Company to broaden its product offerings, technologies and customer base. The following table summarizes the total consideration for the acquisition of Robertson (in thousands): Cash paid Less: cash acquired Total consideration $ 256,293 (3,271) $ 253,022 The following table summarizes the allocation of the total consideration for the acquisition of Robertson to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands): Assets acquired: Goodwill Customer relationships Intellectual property Trade name Inventories Property, plant and equipment Accounts receivable Other assets Total assets acquired, excluding cash Liabilities assumed: Accounts payable Accrued expenses Total liabilities assumed Net assets acquired, excluding cash $ 93,425 55,100 39,600 28,400 27,417 7,476 4,973 1,884 258,275 4,606 647 5,253 $ 253,022 The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of Robertson and the value of its assembled workforce that do not qualify for separate recognition. The amortization period of the customer relationships, intellectual property and trade name acquired is 15 years, 22 years and indefinite, respectively. Acquisition costs associated with the purchase of Robertson totaled $3.1 million in fiscal 2016 and were recorded as a component of SG&A expenses in the Company’s Consolidated Statements of Operations. The operating results of Robertson were included in the Company’s results of operations from the effective acquisition date. The Company’s consolidated net sales and net income attributable to HEICO for the fiscal year ended October 31, 2016 includes $84.1 million and $12.3 million, respectively, from the acquisition of Robertson, exclusive of the aforementioned acquisition costs. 41 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents unaudited pro forma financial information for fiscal 2015 as if the acquisition of Robertson had occurred as of November 1, 2014 (in thousands, except per share data): Year ended October 31, Net sales Net income from consolidated operations Net income attributable to HEICO Net income per share attributable to HEICO shareholders: Basic Diluted 2015 $ 1,275,926 162,645 $ 142,445 $ $ $ 1.71 1.68 The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2014. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to intangible assets acquired, increased interest expense associated with borrowings to finance the acquisition, the reclassification of acquisition costs associated with the purchase of Robertson from fiscal 2016 to fiscal 2015, and inventory purchase accounting adjustments charged to cost of sales as the inventory is sold. Had the acquisition of Robertson been consummated as of November 1, 2014, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for fiscal 2016 would not have been materially different than the reported amounts. Other Acquisitions In June 2017, the Company, through a subsidiary of the HEICO Flight Support Corp., acquired all of the ownership interests of Carbon by Design (“CBD”). CBD is a manufacturer of composite components for UAVs, rockets, spacecraft and other specialized applications. The purchase price of CBD was paid using cash provided by operating activities. In April 2017, the Company, through a subsidiary of HEICO Flight Support Corp., acquired 80.1% of the equity interests of LLP Enterprises, LLC, which owns all of the outstanding equity interests of the operating units of Air Cost Control (“A2C”). A2C is a leading aviation electrical interconnect product distributor of items such as connectors, wire, cable, protection and fastening systems, in addition to distributing a wide range of electromechanical parts. The remaining 19.9% interest continues to be owned by certain members of A2C’s management team (see Note 11, Redeemable Noncontrolling Interests, for additional information). In December 2015, the Company, through a subsidiary of HEICO Electronic, acquired certain assets of a company that designs and manufactures underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship voyage recorders and other devices which have been submerged under water. The total consideration includes an accrual representing the estimated fair value of contingent consideration the Company may be obligated to pay in aggregate during the first five years following the acquisition. See Note 7, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation. The purchase price of this acquisition was paid using cash provided by operating activities. In August 2015, the Company, through HEICO Flight Support Corp., acquired all of the stock of Astroseal Products Mfg. Corporation (“Astroseal”). Astroseal manufactures expanded foil mesh, which is integrated into composite aerospace structures for lightning strike protection in fixed and rotary wing aircraft. In August 2015, the Company, through HEICO Electronic, acquired 80.1% of the equity of Midwest Microwave Solutions, Inc. (“MMS”). MMS designs, manufactures and sells unique Size, Weight, Power and Cost (SWAP-C) optimized Communications and Electronic Intercept Receivers and Tuners for military and intelligence applications. The remaining 19.9% continues to be owned by certain members of MMS’ management team (see Note 11, Redeemable Noncontrolling Interests, for additional information). In August 2015, the Company, through HEICO Flight Support Corp., acquired 80.1% of the assets and assumed certain liabilities of Aerospace & Commercial Technologies, LLC (“ACT”). ACT is a provider of products and services necessary to maintain up-to-date F-16 fighter aircraft operational capabilities. The remaining 19.9% continues to be owned by certain members of ACT’s management team (see Note 11, Redeemable Noncontrolling Interests, for additional information). In May 2015, the Company, through a subsidiary of HEICO Flight Support Corp., acquired all of the stock of Thermal Energy Products, Inc. (“TEP”). TEP engineers, designs and manufactures removable/reusable insulation systems for industrial, commercial, aerospace and defense applications. In January 2015, the Company, through HEICO Flight Support Corp., acquired 80.1% of the equity of Harter Aerospace, LLC (“Harter”). Harter is a globally recognized component and accessory maintenance, repair, and overhaul (MRO) station specializing in commercial aircraft accessories, including thrust reverse actuation systems and pneumatics, and electromechanical components. The remaining 19.9% interest continues to be owned by certain members of Harter’s management team (see Note 11, Redeemable Noncontrolling Interests, for additional information). 42 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2015, the Company, through HEICO Flight Support Corp., acquired 80% of the equity of Aeroworks International Holding B.V. (“Aeroworks”). Aeroworks, which is headquartered in the Netherlands and maintains a significant portion of its production facilities in Thailand and Laos, is a manufacturer of both composite and metal parts used primarily in aircraft interior applications, including seating, galleys, lavatories, doors, and overhead bins. The remaining 20% interest continues to be owned by a certain member of Aeroworks’ management team (see Note 11, Redeemable Noncontrolling Interests, for additional information). The total consideration includes an accrual representing the estimated fair value of contingent consideration that the Company may be obligated to pay should Aeroworks meet certain earnings objectives during each of the first four years following the acquisition. See Note 7, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation. Unless otherwise noted, the purchase price of each of the above referenced other acquisitions was paid in cash, principally using proceeds from the Company’s revolving credit facility, and is not material or significant to the Company’s consolidated financial statements. The following table summarizes the aggregate total consideration for the Company’s other acquisitions (in thousands): Year ended October 31, Cash paid Less: cash acquired Cash paid, net Contingent consideration Additional purchase consideration Total consideration 2017 2016 $ $ 109,345 (7,712) 101,633 — — 101,633 $ $ 11,000 — 11,000 1,225 — 12,225 2015 171,829 (5,062) 166,767 21,355 (211) 187,911 $ $ The following table summarizes the allocation of the aggregate total consideration for the Company’s other acquisitions to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed (in thousands): Year ended October 31, Assets acquired: Goodwill Customer relationships Trade names Intellectual property Licenses Inventories Accounts receivable Property, plant and equipment Other assets Total assets acquired, excluding cash Liabilities assumed: Accounts payable Accrued expenses Deferred income taxes Other liabilities Total liabilities assumed Noncontrolling interests in consolidated subsidiaries 2017 2016 2015 $ 48,960 29,500 16,750 1,950 — 27,271 15,169 4,503 976 145,079 7,696 6,016 4,984 1,411 20,107 23,339 $ 6,876 2,800 300 2,000 — 249 — — — 12,225 — — — — — — $ 88,602 58,410 14,094 29,177 1,300 18,055 10,719 16,031 2,547 238,935 4,845 2,570 6,764 621 14,800 36,224 Net assets acquired, excluding cash $ 101,633 $ 12,225 $ 187,911 The following table summarizes the weighted average amortization period of the definite-lived intangible assets acquired in connection with the Company’s other fiscal 2017, 2016 and 2015 acquisitions (in years): Year ended October 31, Customer relationships Trade names Intellectual property Licenses 2017 2016 12 — 13 — 11 15 15 — 2015 10 — 12 11 43 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The allocation of the total consideration of the Company’s other fiscal 2017 acquisitions to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustments to such allocations to be material to the Company’s consolidated financial statements. The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of the businesses acquired and the value of their assembled workforces that do not qualify for separate recognition, which, in the case of A2C, MMS, ACT, Harter and Aeroworks benefit both the Company and the noncontrolling interest holders. The fair value of the noncontrolling interests in A2C, MMS, ACT, Harter and Aeroworks was determined based on the consideration paid by the Company for its controlling ownership interest adjusted for a lack of control that a market participant would consider when estimating the fair value of the noncontrolling interest. The operating results of the Company’s other fiscal 2017 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The Company’s consolidated net sales for the fiscal year ended October 31, 2017 includes $49.0 million from the other fiscal 2017 acquisitions. The amount of earnings of the other fiscal 2017 acquisitions included in the Company’s results of operations for the fiscal year ended October 31, 2017 is not material. Had the acquisitions occurred as of November 1, 2015, net sales on a pro forma basis for fiscal 2017 would not have been materially different than the reported amounts and net sales on a pro forma basis for fiscal 2016 would have been $1,464.5 million. Net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for fiscal 2017 and 2016 would not have been materially different than the reported amounts. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisitions had taken place as of November 1, 2015. The operating results of the Company’s other fiscal 2016 acquisition were included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of the Company’s other fiscal 2016 acquisition included in the Consolidated Statement of Operations is not material. Had the other fiscal 2016 acquisition occurred as of November 1, 2014, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for fiscal 2016 and 2015 would not have been materially different than the reported amounts. The operating results of the Company’s fiscal 2015 acquisitions were included in the Company’s results of operations from each of the effective acquisition dates. The Company’s consolidated net sales and net income attributable to HEICO for fiscal 2015 includes approximately $62.9 million and $7.9 million, respectively, from the fiscal 2015 acquisitions. The following table presents unaudited pro forma financial information for fiscal 2015 as if the Company’s fiscal 2015 acquisitions had occurred as of November 1, 2013 (in thousands, except per share data): Year ended October 31, Net sales Net income from consolidated operations Net income attributable to HEICO Net income per share attributable to HEICO shareholders: Basic Diluted 2015 1,244,911 163,012 140,771 1.69 1.66 $ $ $ $ $ The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the fiscal 2015 acquisitions had taken place as of November 1, 2013. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to intangible assets acquired, increased interest expense associated with borrowings to finance the acquisitions and inventory purchase accounting adjustments charged to cost of sales as the inventory is sold. 3 . S E L ECT E D F I N A N C I A L STAT E M E N T I N FO R M AT I O N Accounts Receivable As of October 31, (in thousands) Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net 44 2017 2016 $ $ 225,462 (3,006) 222,456 $ 205,386 (3,159) 202,227 $ HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts As of October 31, (in thousands) Costs incurred on uncompleted contracts Estimated earnings Less: Billings to date Included in the accompanying Consolidated Balance Sheets under the following captions: Accounts receivable, net (costs and estimated earnings in excess of billings) Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) 2017 2016 $ $ $ $ 29,491 19,902 49,393 (41,262) 8,131 9,377 (1,246) 8,131 $ $ $ $ 19,086 13,887 32,973 (39,142) (6,169) 4,839 (11,008) (6,169) Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations in fiscal 2017, 2016 or 2015. Inventories As of October 31, (in thousands) Finished products Work in process Materials, parts, assemblies and supplies Contracts in process Less: Billings to date Inventories, net of valuation reserves 2017 2016 $ 173,559 39,986 128,031 2,415 (363) $ 343,628 $ $ 131,008 36,076 117,153 3,253 (1,188) 286,302 Contracts in process represents accumulated capitalized costs associated with fixed price contracts. Related progress billings and customer advances (“billings to date”) are classified as a reduction to contracts in process, if any, and any excess is included in accrued expenses and other liabilities. Property, Plant and Equipment As of October 31, (in thousands) Land Buildings and improvements Machinery, equipment and tooling Construction in progress Less: Accumulated depreciation and amortization Property, plant and equipment, net 2017 2016 $ $ 5,435 91,916 191,298 5,553 294,202 (164,319) 129,883 $ $ 5,090 79,205 171,717 10,453 266,465 (144,854) 121,611 The amounts set forth above include tooling costs having a net book value of $7.6 million and $7.7 million as of October 31, 2017 and 2016, respectively. Amortization expense on capitalized tooling was $2.7 million, $2.9 million and $2.4 million in fiscal 2017, 2016 and 2015, respectively. The amounts set forth above also include $4.8 million of assets under capital leases as of both October 31, 2017 and October 31, 2016. Accumulated depreciation associated with assets under capital leases was $1.0 million and $.9 million as of October 31, 2017 and October 31, 2016, respectively. See Note 5, Long-Term Debt, for additional information pertaining to capital lease obligations. Depreciation and amortization expense, exclusive of tooling, on property, plant and equipment was $21.9 million, $20.4 million and $17.8 million in fiscal 2017, 2016 and 2015, respectively. 45 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accrued Expenses and Other Current Liabilities As of October 31, (in thousands) Accrued employee compensation and related payroll taxes Deferred revenue Accrued customer rebates and credits Contingent consideration and other accrued purchase consideration Other Accrued expenses and other current liabilities 2017 78,058 29,247 12,866 7,588 19,853 147,612 $ $ 2016 67,660 32,135 11,881 6,918 17,459 136,053 $ $ The increase in accrued employee compensation and related payroll taxes principally reflects a higher level of accrued performance- based compensation based on the improved consolidated operating results and the impact from our fiscal 2017 acquisitions. The total customer rebates and credits deducted within net sales in fiscal 2017, 2016 and 2015 was $11.0 million, $10.8 million and $4.7 million, respectively. Other Long-Term Assets and Liabilities The Company provides eligible employees, officers and directors of the Company the opportunity to voluntarily defer base salary, bonus payments, commissions, long-term incentive awards and directors fees, as applicable, on a pre-tax basis through the HEICO Corporation Leadership Compensation Plan (“LCP”), a nonqualified deferred compensation plan that conforms to Section 409A of the Internal Revenue Code. The Company matches 50% of the first 6% of base salary deferred by each participant. Director fees that would otherwise be payable in Company common stock may be deferred into the LCP, and, when distributable, are distributed in actual shares of Company common stock. The LCP does not provide for diversification of a director’s assets allocated to Company common stock. The deferred compensation obligation associated with Company common stock is recorded as a component of shareholders’ equity at cost and subsequent changes in fair value are not reflected in operations or shareholders’ equity of the Company. Further, while the Company has no obligation to do so, the LCP also provides the Company the opportunity to make discretionary contributions. The Company’s matching contributions and any discretionary contributions are subject to vesting and forfeiture provisions set forth in the LCP. Company contributions to the LCP charged to income in fiscal 2017, 2016 and 2015 totaled $4.6 million, $6.8 million and $5.7 million, respectively. The aggregate liabilities of the LCP were $116.0 million and $87.9 million as of October 31, 2017 and 2016, respectively, and are classified within other long-term liabilities in the Company’s Consolidated Balance Sheets. The assets of the LCP, totaling $117.2 million and $88.5 million as of October 31, 2017 and 2016, respectively, are classified within other assets and principally represent cash surrender values of life insurance policies that are held within an irrevocable trust that may be used to satisfy the obligations under the LCP. Other long-term liabilities also includes deferred compensation of $5.7 million and $4.7 million as of October 31, 2017 and 2016, respec- tively, principally related to elective deferrals of salary and bonuses under a Company sponsored non-qualified deferred compensation plan formerly available to selected employees. The Company makes no contributions to this plan. The assets of this plan, which equaled the deferred compensation liability as of October 31, 2017 and 2016, respectively, are held within an irrevocable trust and classified within other assets in the Company’s Consolidated Balance Sheets. Additional information regarding the assets of this deferred compensation plan and the LCP may be found in Note 7, Fair Value Measurements. Research and Development Expenses The amount of new product research and development (“R&D”) expenses included in cost of sales is as follows (in thousands): Year ended October 31, R&D expenses Accumulated Other Comprehensive Loss 2017 2016 2015 $ 46,473 $ 44,726 $ 38,747 Changes in the components of accumulated other comprehensive loss during fiscal 2017 and 2016 are as follows (in thousands): Balances as of October 31, 2015 Unrealized gain (loss) Balances as of October 31, 2016 Unrealized gain Amortization of unrealized loss Balances as of October 31, 2017 46 Foreign Currency Translation Pension Benefit Obligation $ (24,368) 415 (23,953) 14,420 — (9,533) $ $ (712) (661) (1,373) 321 29 $ (1,023) Accumulated Other Comprehensive Loss $ (25,080) (246) (25,326) 14,741 29 $ (10,556) HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 . G O O D W I L L A N D OT H E R I N TA N G I B L E A S S E TS Changes in the carrying amount of goodwill during fiscal 2017 and 2016 by operating segment are as follows (in thousands): Balances as of October 31, 2015 Goodwill acquired Foreign currency translation adjustments Adjustments to goodwill Balances as of October 31, 2016 Goodwill acquired Foreign currency translation adjustments Balances as of October 31, 2017 FSG $ 337,507 — (256) (570) 336,681 48,960 2,965 $ 388,606 Segment ETG $ 429,132 100,301 (425) 28 529,036 160,903 2,761 $ 692,700 Consolidated Totals $ 766,639 100,301 (681) (542) 865,717 209,863 5,726 $ 1,081,306 The goodwill acquired during fiscal 2017 and 2016 relates to the acquisitions consummated in those respective years as described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company’s Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2015 acquisitions. The Company estimates that the majority of the goodwill acquired in fiscal 2017 and all of the goodwill acquired in fiscal 2016 is deductible for income tax purposes. Based on the annual test for goodwill impairment as of October 31, 2017, the Company determined there is no impairment of its goodwill and the fair value of each of the Company’s reporting units significantly exceeded their carrying value. Identifiable intangible assets consist of the following (in thousands): Amortizing Assets: Customer relationships Intellectual property Licenses Patents Non-compete agreements Trade names Non-Amortizing Assets: Trade names Gross Carrying Amount $ 379,966 181,811 6,559 870 817 466 570,489 As of October 31, 2017 As of October 31, 2016 Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization $ (117,069) (44,861) (2,928) (551) (817) (118) (166,344) $ 262,897 136,950 3,631 319 — 348 404,145 $ 248,271 139,817 6,559 779 811 466 396,703 $ (88,829) (33,291) (2,325) (480) (811) (77) (125,813) Net Carrying Amount $ 159,442 106,526 4,234 299 — 389 270,890 133,936 $ 704,425 — $ (166,344) 133,936 $ 538,081 95,973 $ 492,676 — $ (125,813) 95,973 $ 366,863 The increase in the gross carrying amount of customer relationships, intellectual property and non-amortizing trade names as of October 31, 2017 compared to October 31, 2016 principally relates to such intangible assets recognized in connection with the fiscal 2017 acquisitions (see Note 2, Acquisitions). Amortization expense related to intangible assets was $39.5 million, $36.4 million and $27.0 million in fiscal 2017, 2016 and 2015, respectively. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $48.3 million in fiscal 2018, $46.0 million in fiscal 2019, $43.2 million in fiscal 2020, $40.5 million in fiscal 2021, $35.1 million in fiscal 2022 and $191.0 million thereafter. 5 . L O N G -T E R M D E B T Long-term debt consists of the following (in thousands): As of October 31, Borrowings under revolving credit facility Capital leases and note payable Less: Current maturities of long-term debt 2017 671,000 2,979 673,979 (451) 673,528 $ $ 2016 $ 455,083 3,142 458,225 (411) 457,814 $ 47 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of October 31, 2017 and 2016, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 2.4% and 1.6%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of October 31, 2017, the Company was in compliance with all such covenants. As of October 31, 2017, the Company’s borrowings under its revolving credit facility were to mature in fiscal 2019. In November 2017, the Company entered into a new $1.3 billion Revolving Credit Agreement with a bank syndicate, which matures in November 2022 and replaced the prior revolving credit facility (see Revolving Credit Facility below). During fiscal 2015, the Company elected to borrow €32 million under its revolving credit facility to facilitate a fiscal 2015 acquisition. During fiscal 2017, the Company repaid the full amount of the Euro borrowing. Revolving Credit Facility On November 6, 2017, the Company entered into a new $1.3 billion Revolving Credit Facility Agreement (“New Credit Facility”) with a bank syndicate, which matures in November 2022. Under certain circumstances, the maturity of the New Credit Facility may be extended for two one-year periods. The New Credit Facility also includes a feature that will allow the Company to increase revolving commitments under the New Credit Facility 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 New Credit Facility may be used to finance acquisitions and for working capital and other general corporate purposes, including capital expenditures. The New Credit Facility replaced the $670 million Revolving Credit Agreement. Borrowings under the New Credit Facility accrue interest at the Company’s election of the Base Rate or the Eurocurrency Rate, plus in each case, the Applicable Rate (based on the Company’s 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 minus the daily average Eurocurrency Reserve Rate for such Interest Period, as such capitalized terms are defined in the New 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 the Company’s Total Leverage Ratio). The New 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 New Credit Facility may be accelerated upon an event of default, as such events are described in the New Credit Facility. The New 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 New Credit Facility. Borrowings under the Company’s revolving credit facility as of October 31, 2017 were made under the Company’s $670 million Revolving Credit Agreement (“Prior Credit Facility”) with a bank syndicate, which was amended in November 2013 to become an $800 million facility and again in April 2017 to become a $1.0 billion facility. The Prior Credit Facility was available to finance acquisitions and for working capital and other general corporate purposes of the Company, including capital expenditures. Advances under the Prior Credit Facility accrued interest at the Company’s choice of the “Base Rate” or the London Interbank Offered Rate (“LIBOR”) plus the applicable margin (based on the Company’s ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, noncontrolling interests and non-cash charges, or “leverage ratio”). The Base Rate was the highest of (i) the Prime Rate; (ii) the Federal Funds rate plus .50% per annum; and (iii) the Adjusted LIBO Rate determined on a daily basis for an Interest Period of one month plus 1.00% per annum, as such capitalized terms were defined in the Prior Credit Facility. The applicable margin for a LIBOR-based borrowing ranged from .75% to 2.25%. The applicable margin for a Base Rate borrowing ranged from 0% to 1.25%. A fee was charged on the amount of the unused commitment ranging from .125% to .35% (depending on the Company’s leverage ratio). The Prior Credit Facility also included a $50 million sublimit for borrowings made in foreign currencies, letters of credit and swingline borrowings. Outstanding principal, accrued and unpaid interest and other amounts payable under the Prior Credit Facility may have been accelerated upon an event of default, as such events were described in the Prior Credit Facility. The Prior Credit Facility was unsecured and contained covenants that restricted the amount of certain payments, including dividends, and required, among other things, the maintenance of a total leverage ratio, a senior leverage ratio and a fixed charge coverage ratio. In the event the Company’s leverage ratio exceeded a specified level, the Prior Credit Facility would have become secured by the capital stock owned in substantially all of the Company’s subsidiaries. 48 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital Lease Obligations A subsidiary of HEICO Electronic is a party to a capital lease for a manufacturing facility and related property in France. The lease contains a bargain purchase option and has a twelve-year term, which began in fiscal 2011. Additionally, the subsidiary is a party to certain capital leases, principally for office equipment, with lease terms of approximately five years. Furthermore, a subsidiary of HEICO Flight Support Corp. entered into a ten-year capital lease for a manufacturing facility during fiscal 2016. The estimated future minimum lease payments of all capital leases for the next five fiscal years and thereafter are as follows (in thousands): Year ending October 31, 2018 2019 2020 2021 2022 Thereafter Total minimum lease payments Less: amount representing interest Present value of minimum lease payments 6 . I N C O M E TA X ES $ 575 575 525 519 509 622 3,325 (461) $ 2,864 The components of income before income taxes and noncontrolling interests are as follows (in thousands): Year ended October 31, Domestic Foreign Income before taxes and noncontrolling interests 2017 $ 264,420 33,540 $ 297,960 2016 $ 227,927 29,123 $ 257,050 2015 $ 206,612 18,352 $ 224,964 The components of the provision for income taxes on income before income taxes and noncontrolling interests are as follows (in thousands): Year ended October 31, Current: Federal State Foreign Deferred: Federal State Foreign Total income tax expense 2017 2016 2015 $ 85,047 6,820 9,529 101,396 (9,661) (499) (936) (11,096) $ 90,300 $ 75,261 7,463 7,370 90,094 (5,979) (2,587) (628) (9,194) $ 80,900 $ 65,857 8,559 4,064 78,480 (4,459) (1,907) (714) (7,080) 71,400 $ 2015 35.0% 2.4% (1.9%) .1% (1.2%) —% (1.3%) (.8%) (.6%) 31.7% 49 A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows: Year ended October 31, Federal statutory income tax rate State taxes, net of federal income tax benefit Research and development tax credits Tax-exempt (gains) losses on corporate-owned life insurance policies Domestic production activities tax deduction Tax benefit related to stock option exercises (ASU 2016-09 adoption) Noncontrolling interests’ share of income Foreign tax differential, where permanently reinvested outside of the U.S. Other, net Effective tax rate 2017 35.0% 1.9% (1.8%) (1.8%) (1.1%) (1.0%) (.7%) (.4%) .2% 30.3% 2016 35.0% 1.7% (2.7%) (.1%) (1.3%) —% (.7%) (.8%) .4% 31.5% HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s effective tax rate in fiscal 2017 decreased to 30.3% from 31.5% in fiscal 2016. The decrease principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the LCP and a $3.1 million discrete income tax benefit related to stock option exercises resulting from the adoption of ASU 2016-09 in the first quarter of fiscal 2017 (see Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements). These decreases were partially offset by the benefit recognized in fiscal 2016 from the retroactive and permanent extension of the U.S. federal R&D tax credit that resulted in the recognition of additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015 and a less favorable benefit in fiscal 2017 from the foreign tax rate differential associated with the undistributed earnings of a fiscal 2015 acquisition. The Company’s effective tax rate in fiscal 2016 decreased to 31.5% from 31.7% in fiscal 2015. The decrease principally reflects the benefits recognized in fiscal 2016 of a larger income tax credit for qualified R&D activities resulting from the retroactive and permanent extension of the U.S. federal R&D tax credit in December 2015 and a lower effective state tax rate driven by certain apportionment updates recognized upon the amendment of certain prior year tax returns in fiscal 2016. These decreases were partially offset by the benefits recognized in fiscal 2015 from a prior year tax return amendment for additional foreign tax credits related to R&D activities at one of our foreign subsidiaries and higher net income attributable to noncontrolling interests in subsidiaries structured as partnerships. The Company files income tax returns in the U.S. federal jurisdiction and in multiple state jurisdictions. The Company is also subject to income taxes in certain jurisdictions outside the U.S., none of which are individually material to the accompanying consolidated financial statements. Generally, the Company is no longer subject to U.S. federal, state or foreign examinations by tax authorities for years prior to fiscal 2013. The Company has not made a provision for U.S. income taxes on the undistributed earnings of a fiscal 2015 foreign acquisition as such earnings are considered permanently reinvested outside of the U.S. The amount of undistributed earnings is not material to the Company’s consolidated financial statements. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than not that it will generate sufficient future taxable income to utilize all of its deferred tax assets and has therefore not recorded a valuation allowance on any such asset. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): As of October 31, Deferred tax assets: Deferred compensation liability Inventories Share-based compensation Bonus accrual Vacation accrual Customer rebates accrual Deferred revenue R&D related carryforward Other Total deferred tax assets Deferred tax liabilities: Goodwill and other intangible assets Property, plant and equipment Other Total deferred tax liabilities Net deferred tax liability 2017 2016 $ 47,093 31,797 12,984 4,956 2,112 1,864 730 645 8,585 110,766 (160,158) (7,887) (1,747) (169,792) $ (59,026) $ 36,134 27,969 11,338 4,744 2,127 1,917 1,365 2,057 8,489 96,140 (150,185) (8,291) (2,156) (160,632) $ (64,492) The net deferred tax liability is classified in the Company’s Consolidated Balance Sheets as follows (in thousands) in accordance with ASU 2015-17, which the Company adopted in the fourth quarter of fiscal 2017 on a retrospective basis (see Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements): As of October 31, Long-term liability Long-term asset Net deferred tax liability 50 2017 $ (59,026) — $ (59,026) 2016 $ (64,899) 407 $ (64,492) HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of October 31, 2017 and 2016, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $2.0 million and $1.6 million, respectively, of which $1.3 million and $1.0 million, respectively, would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits during fiscal 2017 and 2016 is as follows (in thousands): Year ended October 31, Balances as of beginning of year Increases related to current year tax positions Increases related to prior year tax positions Decreases related to prior year tax positions Lapses of statutes of limitations Balances as of end of year 7 . FA I R VA L U E M E A S U R E M E N TS 2017 2016 $ $ 1,602 596 — (24) (134) 2,040 $ $ 787 524 521 (14) (216) 1,602 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): Assets: Deferred compensation plans: Corporate owned life insurance Money market funds Equity securities Mutual funds Other Total assets Liabilities: Contingent consideration As of October 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ — 3,972 2,895 1,541 1,246 $ 9,654 $ 113,220 — — — — $ 113,220 $ $ — — — — — — Total $ 113,220 3,972 2,895 1,541 1,246 $ 122,874 $ — $ — $ 27,573 $ 27,573 Assets: Deferred compensation plans: Corporate owned life insurance Money market funds Equity securities Mutual funds Other Total assets Liabilities: Contingent consideration $ $ $ As of October 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) — 2,515 1,832 1,758 1,043 7,148 $ 86,004 — — — 50 $ 86,054 $ $ — — — — — — Total $ 86,004 2,515 1,832 1,758 1,093 $ 93,202 — $ — $ 18,881 $ 18,881 51 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company maintains two non-qualified deferred compensation plans. 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 Company’s other deferred compensation plan are principally invested in equity securities and mutual funds that are classified within Level 1. The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Consolidated Balance Sheets. As part of the agreement to acquire certain assets of a company by the ETG in fiscal 2016, the Company may be obligated to pay contingent consideration of up to $2.0 million in aggregate during the five year period following the acquisition. During fiscal 2017, the Company paid $.3 million of contingent consideration based on the actual financial performance of the acquired entity during the first year following the acquisition. As of October 31, 2017, the estimated fair value of the remaining contingent consideration was $1.4 million. As part of the agreement to acquire a subsidiary by the FSG in fiscal 2015, the Company may be obligated to pay contingent consid- eration of up to €6.1 million per year, or €18.3 million in aggregate, should the acquired entity meet certain earnings objectives during each of the first three years following the first anniversary of the acquisition. During fiscal 2017, the Company paid €6.1 million, or $6.8 million, of contingent consideration based on the actual earnings of the acquired entity during the second year following the acquisition. As of October 31, 2017, the estimated fair value of the remaining contingent consideration was €10.8 million, or $12.6 million. As part of the agreement to acquire a subsidiary by the ETG in fiscal 2017, the Company may be obligated to pay contingent consid- eration of $20.0 million in fiscal 2023 should the acquired entity meet certain earnings objectives during the first six years following the acquisition. As of October 31, 2017, the estimated fair value of the contingent consideration was $13.6 million. The estimated fair value of the contingent consideration arrangements described above are classified within Level 3 and were de- termined using a probability-based scenario analysis approach. 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. The Level 3 inputs used to derive the estimated fair value of the Company’s contingent consideration liability as of October 31, 2017 are as follows: Compound annual revenue growth rate range Weighted average discount rate Fiscal 2017 Acquisition (8%) - 4% 4.7% Fiscal 2016 Acquisition 4% - 12% 3.4% Fiscal 2015 Acquisition 8% - 13% .8% Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) during fiscal 2017 and 2016 are as follows (in thousands): Balance as of October 31, 2015 Increase in accrued contingent consideration Contingent consideration related to acquisition Payment of contingent consideration Foreign currency transaction adjustments Balance as of October 31, 2016 Contingent consideration related to acquisition Increase in accrued contingent consideration, net Payment of contingent consideration Foreign currency transaction adjustments Balance as of October 31, 2017 Included in the accompanying Consolidated Balance Sheet under the following captions: Accrued expenses and other current liabilities Other long-term liabilities 52 Liabilities $ 21,405 3,063 1,225 (6,960) 148 18,881 13,797 1,100 (7,039) 834 $ 27,573 $ 7,368 20,205 $ 27,573 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company recorded the increase in accrued contingent consideration and foreign currency transaction adjustments set forth in the table above within SG&A expenses in the Company’s Consolidated Statements of Operations. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during fiscal 2017 and 2016. 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 October 31, 2017 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. 8 . S H A R E H O L D E R S ’ EQ U I T Y Common Stock and Class A Common Stock The Company has two classes of common stock that are virtually identical in all economic respects except voting rights. Each share of Common Stock is entitled to one vote per share. Each share of Class A Common Stock is entitled to a 1/10 vote per share. Holders of the Company’s common stock are entitled to receive dividends and other distributions payable in cash, property, stock or otherwise, when and if declared by the Board of Directors. In the event of liquidation, after payment of debts and other liabilities of the Company, the remaining assets of the Company will be distributable ratably among the holders of both classes of common stock. Share Repurchases In 1990, the Company’s Board of Directors authorized a share repurchase program, which allows the Company to repurchase shares of Company common stock in the open market or in privately negotiated transactions at the Company’s discretion, subject to certain restrictions included in the Company’s revolving credit agreement. As of October 31, 2017, the maximum number of shares that may yet be purchased under this program was 3,127,266 of either or both of the Company’s Class A Common Stock and the Company’s Common Stock. The repurchase program does not have a fixed termination date. During fiscal 2017, 2016 and 2015, the Company did not repurchase any shares of Company common stock under this program. Stock Split In March 2017, the Company’s Board of Directors declared a 5-for-4 stock split on both classes of the Company’s common stock. The stock split was effected as of April 19, 2017 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017. All applicable share and per share information has been adjusted retrospectively to give effect to the fiscal 2017 5-for-4 stock split. 9 . S H A R E - B A S E D C O M P E N S AT I O N The Company may grant various forms of share-based compensation awards including stock options, restricted stock, restricted stock awards and stock appreciation rights through the HEICO Corporation 2012 Incentive Compensation Plan (“2012 Plan”). The 2012 Plan became effective in fiscal 2012, the same time the Company’s 2002 Stock Option Plan (“2002 Plan”) expired. Also, in fiscal 2012, the Company made a decision to no longer issue options under its Non-Qualified Stock Option Plan (“NQSOP”). Options outstanding under the 2002 Plan and NQSOP may be exercised pursuant to their terms. The total number of shares approved by the shareholders of the Company for the 2012 Plan is 3.3 million plus any options outstanding under the 2002 Plan and NQSOP as of the 2012 Plan’s effective date that are subsequently forfeited or expire. A total of approximately 5.2 million shares of the Company’s common stock are reserved for issuance to employees, directors, officers and consultants as of October 31, 2017, including 4.7 million shares currently under option and 0.5 million shares available for future grants. Stock options granted pursuant to the 2012 Plan may be designated as Common Stock and/or Class A Common Stock in such proportions as shall be determined by the Board of Directors or the Stock Option Plan Committee at its sole discretion. The exercise price per share of a stock option granted under the 2012 Plan may not be less than the fair market value of the designated class of Company common stock as of the date of grant and stock option grants vest ratably over a period specified as of the date of grant (generally five years) and expire ten years after the date of grant. Options issued under the 2012 Plan may be designated as incentive stock options or non-qualified stock options, but only employees are eligible to receive incentive stock options and no incentive stock options were outstanding as of October 31, 2017. The 2012 Plan will terminate no later than the tenth anniversary of its effective date. 53 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information concerning share-based activity for each of the last three fiscal years ended October 31 is as follows (in thousands, except per share data): Outstanding as of October 31, 2014 Granted Exercised Outstanding as of October 31, 2015 Granted Exercised Cancelled Outstanding as of October 31, 2016 Granted Exercised Outstanding as of October 31, 2017 Shares Available For Grant 2,021 (363) — 1,658 (375) — 7 1,290 (759) — 531 Shares Under Option Shares 4,080 363 (274) 4,169 375 (364) (7) 4,173 759 (262) 4,670 Weighted Average Exercise Price $ 18.08 $ 41.48 $ 13.48 $ 20.42 $ 36.84 $ 16.33 $ 29.10 $ 22.23 $ 64.63 $ 23.85 $ 29.04 Information concerning stock options outstanding (all of which are vested or expected to vest) and stock options exercisable by class of common stock as of October 31, 2017 is as follows (in thousands, except per share and contractual life data): Common Stock Class A Common Stock Common Stock Class A Common Stock Number Outstanding 2,343 2,327 4,670 Number Outstanding 1,887 1,226 3,113 Options Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) $ 25.44 $ 32.66 $ 29.04 4.0 6.1 5.1 Options Exercisable Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) $ 17.82 $ 20.30 18.80 $ 2.9 4.3 3.5 2016 $ 5,924 868 9,751 Aggregate Intrinsic Value $ 152,858 101,081 $ 253,939 Aggregate Intrinsic Value $ 137,469 68,432 $ 205,901 2015 $ 3,673 1,402 6,958 Information concerning stock options exercised is as follows (in thousands): Year ended October 31, Cash proceeds from stock option exercises Tax benefit realized from stock option exercises Intrinsic value of stock option exercises 2017 $ 5,659 3,087 10,376 Net income attributable to HEICO for the fiscal years ended October 31, 2017, 2016 and 2015 includes compensation expense of $7.4 million, $6.4 million and $5.8 million, respectively, and an income tax benefit of $2.6 million, $2.4 million and $2.2 million, respectively, related to the Company’s stock options. Substantially all of the stock option compensation expense was recorded as a component of SG&A expenses in the Company’s Consolidated Statements of Operations. As of October 31, 2017, there was $25.5 million of pre-tax unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 3.7 years. The total fair value of stock options that vested in fiscal 2017, 2016 and 2015 was $5.3 million, $5.8 million and $5.5 million, respectively. If there were a change in control of the Company, all of the unvested options outstanding as of October 31, 2017 would become immediately exercisable. 54 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As previously mentioned in Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, the Company adopted ASU 2016-09 in fiscal 2017, resulting in the recognition of a $3.1 million discrete income tax benefit from stock option exercises in the Company’s Consolidated Statement of Operations as a component of income tax expense. For the fiscal years ended October 31, 2016 and 2015, the excess tax benefit resulting from tax deductions in excess of the cumulative compensation cost recognized for stock options exercised was $.9 million and $1.4 million, respectively, and is presented as a financing activity in the Company’s Consolidated Statements of Cash Flows. The fair value of each stock option grant in fiscal 2017, 2016 and 2015 was estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions: Year ended October 31, 2017 Class A 2016 Class A 2015 Class A Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Expected stock price volatility Risk-free interest rate Dividend yield Forfeiture rate Expected option life (years) Weighted average fair value 37.89% 2.44% .26% .00% 9 $ 33.38 28.18% 2.06% .31% .00% 7 $ 19.49 39.63% 2.16% .24% .00% 9 $ 18.90 32.52% 1.82% .32% .00% 6 $ 12.38 39.96% 2.30% .24% .00% 9 $ 22.77 36.51% 2.12% .32% .00% 7 $ 15.67 1 0 . E M P L OY E E R E T I R E M E N T P L A N S The HEICO Savings and Investment Plan (the “401(k) Plan”) is a qualified defined contribution retirement plan under which eligible employees of the Company and its participating subsidiaries may make Elective Deferral Contributions up to the limitations set forth in Section 402(g) of the Internal Revenue Code. The Company generally makes a 50% Employer Matching Contribution, as determined by the Board of Directors, based on a participant’s Elective Deferral Contribution up to 6% of the participant’s Compensation for the Elective Deferral Contribution period. The 401(k) Plan also provides that the Company may make additional Employer Contributions. Employer Contributions may be contributed in the form of the Company’s common stock or cash, as determined by the Company. Employer Contribu- tions awarded in the form of Company common stock are valued based on the fair value of the underlying shares as of the effective date of contribution. Employer Contributions may be diversified by a participant into any of the participant-directed investment options of the 401(k) Plan; however, Employee Contributions may not be invested in Company common stock. Unless specified otherwise, all capitalized terms herein are defined in the 401(k) Plan document. Participants receive 100% vesting in Employee Contributions and on cash dividends received on Company common stock. Vesting in Employer Contributions is based on a participant’s number of Years of Service. Employer Contributions to the 401(k) Plan charged to income in fiscal 2017, 2016 and 2015 totaled $7.8 million, $7.0 million and $6.1 million, respectively, and were made through the issuance of new shares of Company common stock and the use of forfeited shares within the 401(k) Plan. Information concerning share-based activity pertaining to the 401(k) Plan for each of the last three fiscal years ended October 31 is as follows (in thousands): Shares available for issuance as of October 31, 2014 Issuance of common stock to 401(k) Plan Shares available for issuance as of October 31, 2015 Shares registered for issuance to the 401(k) Plan Issuance of common stock to 401(k) Plan Shares available for issuance as of October 31, 2016 Issuance of common stock to 401(k) Plan Shares available for issuance as of October 31, 2017 Common Stock Class A Common Stock 85 (67) 18 375 (78) 315 (60) 255 85 (67) 18 375 (78) 315 (60) 255 As previously mentioned in Note 1, Summary of Significant Accounting Policies, the Company acquired a frozen qualified defined benefit pension plan in connection with a prior year acquisition. 55 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the Plan’s projected benefit obligation and plan assets during fiscal 2017 and 2016 are as follows (in thousands): Change in projected benefit obligation: Projected benefit obligation as of October 31, 2015 Actuarial loss Interest cost Benefits paid Projected benefit obligation as of October 31, 2016 Actuarial gain Interest cost Benefits paid Projected benefit obligation as of October 31, 2017 Change in plan assets: Fair value of plan assets as of October 31, 2015 Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets as of October 31, 2016 Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets as of October 31, 2017 Funded status as of October 31, 2016 Funded status as of October 31, 2017 $ $ $ $ $ $ 14,168 655 613 (925) 14,511 (156) 561 (916) 14,000 10,767 263 405 (925) 10,510 1,048 428 (916) 11,070 (4,001) (2,930) The $2.9 million and $4.0 million difference between the projected benefit obligation and fair value of plan assets as of October 31, 2017 and October 31, 2016, respectively, is included in other long-term liabilities within the Company’s Consolidated Balance Sheets. Additionally, the Plan experienced a $.5 million unrealized gain and a $1.1 million unrealized loss during fiscal 2017 and 2016, respectively, that were recognized in other comprehensive income (loss) and reported net of $.2 million and ($.4) million of tax in fiscal 2017 and 2016, respectively. The total unrealized loss in accumulated other comprehensive loss that has yet to be recognized as a component of net periodic pension income (expense) as of October 31, 2017 is $1.7 million (pre-tax), of which the Company expects to recognize less than $.1 million during fiscal 2018. Weighted average assumptions used to determine the projected benefit obligation are as follows: As of October 31, Discount rate 2017 3.98% Weighted average assumptions used to determine net pension income are as follows: Year ended October 31, Discount rate Expected return on plan assets 2017 3.99% 6.75% 2016 3.99% 2016 4.47% 6.75% 2015 4.20% 6.75% The discount rate used to determine the projected benefit obligation was determined using the results of a bond yield curve model based on a portfolio of high-quality bonds matching expected Plan benefit payments. The expected return on Plan assets was based upon the target asset allocation and investment return estimates for the Plan’s equity and fixed income securities. In establishing this assumption, the Company considers many factors including both the historical rate of return and projected inflation-adjusted real rate of return on the Plan’s various asset classes and the expected working lifetime for Plan participants. 56 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Components of net pension income that were recorded within the Company’s Consolidated Statements of Operations are as follows (in thousands): Year ended October 31, Expected return on plan assets Less: Interest cost Less: Amortization of unrealized loss Net pension income 2017 $ 688 (561) (46) 81 $ 2016 $ 702 (613) — $ 89 2015 $ 738 (561) — 177 $ The Company anticipates making contributions of $.5 million to the Plan during fiscal 2018. Estimated future benefit payments to be made during each of the next five fiscal years and in aggregate during the succeeding five fiscal years are as follows (in thousands): Year ending October 31, 2018 2019 2020 2021 2022 2023-2027 $ 895 926 928 898 878 4,378 The fair value of the Plan’s assets are set forth by level within the fair value hierarchy in the following tables (in thousands): Equity securities Fixed income securities Money market funds and cash Equity securities Fixed income securities Money market funds and cash As of October 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 5,593 5,382 95 11,070 $ $ $ — — — — $ $ — — — — As of October 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 5,149 5,219 142 10,510 $ $ $ — — — — $ $ — — — — Total $ 5,593 5,382 95 11,070 $ Total $ 5,149 5,219 142 10,510 $ Fixed income securities consist of investments in mutual funds. Equity securities consist of investments in common stocks, mutual funds and exchange traded funds. The Plan’s actual and targeted asset allocations by investment category are as follows: As of October 31, 2017 2016 Equity securities Fixed income securities Money market funds and cash Actual 50% 49% 1% 100% Target 50% 50% —% 100% Actual 49% 50% 1% 100% Target 50% 50% —% 100% 57 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 1 . R E D E E M A B L E N O N C O N T R O L L I N G I N T E R ESTS 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 2025. 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 at a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. As of October 31, 2017, management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company could be required to pay is approximately $131.1 million. The actual Redemption Amount will likely be different. The aggregate Redemption Amount of all Put Rights was determined using probability adjusted internal estimates of future earnings of the Company’s subsidiaries with Put Rights while considering the earliest exercise date, the measurement period and any applicable fair value adjustments. The portion of the estimated Redemption Amount as of October 31, 2017 redeemable at fair value is approximately $82.1 million and the portion redeemable based solely on a multiple of future earnings is approximately $49.0 million. A summary of the Put Rights associated with the redeemable noncontrolling interests in certain of the Company’s subsidiaries as of October 31, 2017 is as follows: Subsidiary Acquisition Year 2005 2006 2008 2009 2012 2012 2012 2015 2015 2015 2015 2017 Operating Segment Company Ownership Interest Earliest Put Right Year Purchase Period (Years) ETG FSG FSG ETG ETG FSG FSG FSG FSG ETG FSG FSG 95.9% 80.1% 82.3% 82.5% 78.0% 84.0% 80.1% 80.0% 80.1% 80.1% 80.1% 80.1% 2018 (1) 2018 (1) 2018 (1) 2018 (1) 2018 (1) 2018 2019 2019 2020 2020 2022 2022 4 (2) 4 5 1 2 4 4 4 4 2 4 2 (3) (1) Currently puttable (2) A portion is to be purchased in a lump sum (3) The second purchase is to be made two years after the first Put Right Year The estimated aggregate Redemption Amount of the Put Rights that are currently puttable or becoming puttable during fiscal 2018 is approximately $40.4 million, of which approximately $21.0 million would be payable in fiscal 2018 should all of the eligible associated noncontrolling interest holders elect to exercise their Put Rights during fiscal 2018. Additionally, the Company has call rights to purchase the equity interests of the noncontrolling holders over the same purchase period as the Put Rights. During fiscal 2016, the holders of a 19.9% noncontrolling equity interest in a subsidiary of the FSG that was acquired in fiscal 2011 exercised their option to cause the Company to purchase their interests over a two-year period ending in fiscal 2017. Accordingly, the Company’s ownership interest in the subsidiary increased to 100% effective March 2017. The $3.8 million and $3.6 million Redemption Amount for the redeemable noncontrolling interests acquired in fiscal 2017 and 2016, respectively, were paid using cash provided by operating activities. 58 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 2 . N E T I N C O M E P E R S H A R E AT T R I B U TA B L E TO H E I C O S H A R E H O L D E R S The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data): Year ended October 31, Numerator: Net income attributable to HEICO Denominator: Weighted average common shares outstanding - basic Effect of dilutive stock options Weighted average common shares outstanding - diluted Net income per share attributable to HEICO shareholders: Basic Diluted Anti-dilutive stock options excluded 2017 2016 2015 $ 185,985 $ 156,192 $ 133,364 84,290 2,486 86,776 $ $ 2.21 2.14 511 83,807 1,406 85,213 $ $ 1.86 1.83 725 83,425 1,339 84,764 $ $ 1.60 1.57 515 1 3 . Q U A R T E R LY F I N A N C I A L I N FO R M AT I O N ( U N A U D I T E D ) (in thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Net sales: 2017 2016 Gross profit: 2017 2016 Net income from consolidated operations: 2017 2016 Net income attributable to HEICO: 2017 2016 Net income per share attributable to HEICO: Basic: 2017 2016 Diluted: 2017 2016 $ 343,432 $ 306,227 $ $ 125,417 112,196 $ 46,265 $ 35,924 $ 40,927 31,271 $ $ $ $ $ .49 .37 .47 .37 $ 368,657 $ 350,648 $ $ $ $ 140,382 134,029 50,833 43,729 $ 45,686 38,657 $ $ $ $ $ .54 .46 .53 .45 $ 391,500 $ 356,084 $ $ 148,897 133,583 $ 51,475 $ 46,976 $ 45,698 $ 42,002 $ $ $ $ .54 .50 .53 .49 $ 421,224 $ 363,299 $ $ $ $ 160,029 135,684 59,087 49,521 $ 53,674 $ 44,262 $ $ $ $ .64 .53 .62 .52 During the first quarter of fiscal 2017, the Company adopted ASU 2016-09 (see Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements), resulting in the recognition of a $3.1 million discrete income tax benefit and a 679,000 increase in the Company’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 $.03 per basic and diluted share. During the first quarter of fiscal 2016, the Company incurred $3.1 million of acquisition costs in connection with a fiscal 2016 acquisition. These expenses, net of tax, decreased net income attributable to HEICO by $2.0 million, or $.02 per basic and diluted share. During the first quarter of fiscal 2016, the Company recognized additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015 upon the retroactive and permanent extension of the U.S. federal R&D tax credit in December 2015, which, net of expenses, increased net income attributable to HEICO by $1.7 million, or $.02 per basic and per diluted share. Due to changes in the average number of common shares outstanding, net income per share attributable to HEICO for the full fiscal year may not equal the sum of the four individual quarters. 59 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 4 . O P E R AT I N G S EG M E N TS The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace and HEICO Flight Support Corp. and their collective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic and its subsidiaries. The Company’s operating segment reporting structure is consistent with how management reviews the business, makes investing and resource decisions and assesses operating performance. Additionally, characteristics such as similarity of products, customers, economic characteristics and various other factors are considered when identifying the Company’s operating segments. The FSG designs, manufac- tures, repairs, overhauls and distributes jet engine and aircraft component replacement parts. The parts and services are approved by the FAA. The FSG also manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and the 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 is 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 and is a leading distributor of aviation electrical interconnect products and electromechanical parts. The ETG collectively designs and manufactures electronic, microwave, and electro-optical equipment and components, three-dimensional microelectronic and stacked memory products, high-speed interface products, high voltage interconnection devices, high voltage advanced power electronics products, power conversion products, underwater locator beacons, electromagnetic interference shielding, traveling wave tube amplifiers, harsh environment electronic connectors and other interconnect products, communications and electronic intercept receivers and tuners, crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft, radio frequency (RF) and microwave amplifiers, transmitters and receivers, satellite microwave modules and integrated subsystems and high performance active antenna systems primarily for the aviation, defense, space, medical, telecommunications and electronics industries. The Company’s reportable operating segments offer distinctive products and services that are marketed through different channels. They are managed separately because of their unique technology and service requirements. Segment Profit or Loss The accounting policies of the Company’s operating segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Management evaluates segment performance based on segment operating income. Information on the Company’s two operating segments, the FSG and the ETG, for each of the last three fiscal years ended October 31 is as follows (in thousands): Year ended October 31, 2017: Net sales Depreciation Amortization Operating income Capital expenditures Total assets Year ended October 31, 2016: Net sales Depreciation Amortization Operating income Capital expenditures Total assets Year ended October 31, 2015: Net sales Depreciation Amortization Operating income Capital expenditures Total assets Segment FSG ETG Other, Primarily Corporate and Intersegment (1) Consolidated Totals $ 967,540 13,042 18,026 179,278 15,665 1,042,925 $ 875,870 12,113 16,590 163,427 18,434 877,672 $ 809,700 10,859 13,470 149,798 11,737 867,213 $ 574,261 8,609 24,167 157,451 10,100 1,339,363 $ 511,272 8,030 22,664 126,031 11,962 1,015,696 $ 390,982 6,803 15,945 98,833 6,201 743,873 $ (16,988) 227 752 (30,071) 233 130,143 $ (10,884) 218 662 (24,113) 467 105,044 $ (12,034) 168 662 (18,975) 311 89,771 $ $ $ 1,524,813 21,878 42,945 306,658 25,998 2,512,431 1,376,258 20,361 39,916 265,345 30,863 1,998,412 1,188,648 17,830 30,077 229,656 18,249 1,700,857 (1) Intersegment activity principally consists of net sales from the ETG to the FSG. 60 Year ended October 31, 2016: Net sales Depreciation Amortization Operating income Capital expenditures Total assets Year ended October 31, 2015: Net sales Depreciation Amortization Operating income Capital expenditures Total assets Year ended October 31, 2014: Net sales Depreciation Amortization Operating income Capital expenditures Total assets Segment FSG ETG Other, Primarily Corporate and Intersegment (1) Consolidated Totals $ 875,870 $ 511,272 $ (10,884) $ 1,376,258 $ 809,700 $ 390,982 $ (12,034) $ 1,188,648 12,113 16,590 163,427 18,434 878,674 10,859 13,470 149,798 11,737 868,218 9,809 10,034 136,480 9,437 676,824 8,030 22,664 126,031 11,962 1,017,827 6,803 15,945 98,833 6,201 746,018 7,113 19,993 88,914 6,327 703,144 218 662 (24,113) 467 142,974 168 662 (18,975) 311 122,151 146 662 (22,006) 646 109,246 20,361 39,916 265,345 30,863 2,039,475 17,830 30,077 229,656 18,249 1,736,387 17,068 30,689 203,388 16,410 1,489,214 $ 762,801 $ 379,404 $ (9,894) $ 1,132,311 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Company’s net sales to external customers by product lines included in each operating segment (in thousands): Year ended October 31, Flight Support Group: Aftermarket replacement parts (1) Repair and overhaul parts and services (2) Specialty products (3) Total net sales Electronic Technologies Group: Electronic component parts for defense, space and aerospace equipment (4) Electronic component parts for equipment in various other industries (5) Total net sales 2017 2016 2015 $ 489,644 270,482 207,414 967,540 $ 405,108 251,357 219,405 875,870 $ 356,070 258,952 194,678 809,700 420,991 371,297 255,095 153,270 574,261 139,975 511,272 135,887 390,982 Other, primarily corporate and intersegment (16,988) (10,884) (12,034) Total consolidated net sales $ 1,524,813 $ 1,376,258 $ 1,188,648 (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, 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 and high performance active antenna systems. (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 and custom molded cable assemblies. Major Customer and Geographic Information The Company markets its products and services in approximately 110 countries. The following table summarizes the Company’s net sales to customers located in the United States and to those in other countries for each of the last three fiscal years ended October 31 (in thousands). Net sales are attributed to countries based on the location of the customer. Net sales to any one customer or originating from any one foreign country did not account for 10% or more of the Company’s consolidated net sales during any of the last three fiscal years. The following table also summarizes the Company’s long-lived assets held within and outside of the United States as of October 31 of the last three fiscal years (in thousands). Long-lived assets consist of net property, plant and equipment. Net Sales: United States of America Other countries Total net sales Long-lived assets: United States of America Other countries Total long-lived assets 2017 2016 2015 $ 1,007,491 517,322 $ 1,524,813 $ 904,670 471,588 $ 1,376,258 $ $ 97,367 32,516 129,883 $ 94,889 26,722 121,611 $ $ 785,567 403,081 $ 1,188,648 $ 85,253 20,417 105,670 $ 61 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 5 . C O M M I T M E N TS A N D C O N T I N G E N C I ES Lease Commitments The Company leases certain property and equipment, including manufacturing facilities and office equipment under operating leases. Some of these leases provide the Company with the option after the initial lease term either to purchase the property at the then fair market value or renew the lease at the then fair rental value. Generally, management expects that leases will be renewed or replaced by other leases in the normal course of business. Future minimum payments under non-cancelable operating leases for the next five fiscal years and thereafter are estimated to be as follows (in thousands): Year ending October 31, 2018 2019 2020 2021 2022 Thereafter Total minimum lease commitments $ 13,402 12,249 11,748 10,904 9,759 16,065 $ 74,127 Total rent expense charged to operations for operating leases in fiscal 2017, 2016 and 2015 amounted to $15.6 million, $14.7 million and $11.9 million, respectively. Guarantees As of October 31, 2017, the Company has arranged for standby letters of credit aggregating $4.2 million, which are supported by its revolving credit facility and pertain to payment guarantees related to potential workers’ compensation claims and a facility lease as well as performance guarantees related to customer contracts entered into by certain of the Company’s subsidiaries. Product Warranty Changes in the Company’s product warranty liability in fiscal 2017 and 2016 are as follows (in thousands): Year ended October 31, Balances as of beginning of year Accruals for warranties Warranty claims settled Balances as of end of year Litigation 2017 $ 3,351 2,254 (2,684) $ 2,921 2016 $ 3,203 3,025 (2,877) $ 3,351 The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. 62 HEICO Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 6 . S U P P L E M E N TA L D I S C L O S U R ES O F C A S H F L O W I N FO R M AT I O N The following table presents supplemental disclosures of cash flow information and non-cash investing activities for fiscal 2017, 2016 and 2015 (in thousands): Year ended October 31, Cash paid for income taxes Cash received from income tax refunds Cash paid for interest Contingent consideration Additional purchase consideration Property, plant and equipment acquired through capital lease obligations 1 7 . S U B S EQ U E N T E V E N TS 2017 $ 95,851 (2,953) 9,631 13,797 220 37 2016 $ 87,486 (1,906) 8,288 1,225 — 1,111 2015 $ 76,021 (1,211) 4,598 21,355 (204) 59 In November 2017, the Company, through a subsidiary of HEICO Electronic, acquired all the stock of Interface Displays & Controls, Inc. (“IDC”). IDC designs and manufactures electronic products for aviation, marine, military, fighting vehicles, and embedded computing markets. The purchase price of this acquisition was paid using cash provided by operating activities and the total consideration for the acquisition is not material or significant to the Company’s consolidated financial statements. On December 15, 2017, the Company’s Board of Directors declared a 5-for-4 stock split on both classes of the Company’s common stock. The stock split is payable to shareholders of record as of January 3, 2018 and the Company expects to distribute the additional shares to shareholders on January 17, 2018. Accordingly, the prices of both the Company’s Class A Common Stock and Common Stock are anticipated to begin trading on a post-split basis on January 18, 2018. None of the applicable share and per share information in these consolidated financial statements has been adjusted retrospectively to give effect to the pending 5-for-4 stock split. Pro forma unaudited net income per share attributable to HEICO shareholders and the weighted average number of common shares outstanding for fiscal 2017, 2016 and 2015 giving retrospective effect to the pending fiscal 2018 stock split is as follows (in thousands, except per share data): Year ended October 31, 2017 2016 2015 Net income per share attributable to HEICO shareholders: Basic Diluted Weighted average number of common shares outstanding: Basic Diluted $ $ 1.77 1.71 105,363 108,470 $ $ 1.49 1.47 104,758 106,516 $ $ 1.28 1.26 104,281 105,955 63 HEICO Corporation and Subsidiaries MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of HEICO Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, under the supervision of and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on its assessment, management concluded that the Company’s internal control over financial reporting is effective as of October 31, 2017. In September 2017, the Company acquired all of the outstanding stock of AeroAntenna Technology, Inc., (“AAT”). In June 2017, the Company acquired all of the ownership interests of Carbon by Design (“CBD”). In April 2017, the Company acquired 80.1% of the equity interests of LLP Enterprises, LLC, which owns all of the outstanding equity interests of the operating units of Air Cost Control (“A2C”). See Note 2, Acquisitions, of the Notes to Consolidated Financial Statements for additional information. As permitted by the Securities and Exchange Commission, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition and management elected to exclude AAT, CBD, and A2C (collectively, the “Excluded Acquisitions”) from its assessment of internal control over financial reporting as of October 31, 2017. The aggregate assets and net sales of the Excluded Acquisitions constituted 19.7% and 3.9% of the Company’s consolidated total assets and net sales as of and for the year ended October 31, 2017, respectively. Deloitte & Touche LLP, an independent registered public accounting firm, audited the Company’s consolidated financial statements included in this Annual Report for the year ended October 31, 2017. A copy of their report is included in this Annual Report. Deloitte & Touche LLP has issued their attestation report on management’s internal control over financial reporting, which is set forth below. EXECUTIVE OFFICER CERTIFICATIONS HEICO Corporation has filed with the U.S. Securities and Exchange Commission as Exhibits 31.1 and 31.2 to its Form 10-K for the year ended October 31, 2017, the required certifications of its Chief Executive Officer (CEO) and Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act regarding the quality of its public disclosures. HEICO Corporation’s CEO also has submitted to the New York Stock Exchange (NYSE) following the March 2017 annual meeting of shareholders, the annual CEO certification stating that he is not aware of any violation by HEICO Corporation of the NYSE’s corporate governance listing standards. All Board of Directors Committee Charters, Corporate Governance Guidelines as well as HEICO’s Code of Ethics and Business Conduct are located on HEICO’s website at www.heico.com. 64 HEICO Corporation and Subsidiaries REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of HEICO Corporation Hollywood, Florida We have audited the accompanying consolidated balance sheets of HEICO Corporation and subsidiaries (the “Company”) as of October 31, 2017 and 2016, and 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, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of HEICO Corporation and subsidiaries as of October 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2017, 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), the Company’s internal control over financial reporting as of October 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 21, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida December 21, 2017 65 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of HEICO Corporation Hollywood, Florida We have audited the internal control over financial reporting of HEICO Corporation and subsidiaries (the “Company”) as of October 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at AeroAntenna Technology, Inc., Carbon by Design and Air Cost Control, (collectively, the “Excluded Acquisitions”), which were acquired during 2017 and whose financial statements constitute 19.7% of total assets and 3.9% of net sales of the Company’s consolidated financial statement amounts as of and for the year ended October 31, 2017. Accordingly, our audit did not include the internal control over financial reporting of the Excluded Acquisitions. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended October 31, 2017 of the Company and our report dated December 21, 2017 expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida December 21, 2017 66 MARKET FOR COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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. The following tables set forth, for the periods indicated, the high and low share prices for our Class A Common Stock and our Common Stock as reported on the NYSE, as well as the amount of cash dividends paid per share during such periods. In March 2017, the Company’s Board of Directors declared a 5-for-4 stock split on both classes of the Company’s common stock. The stock split was effected as of April 19, 2017 in the form of a 25% stock dividend distributed to shareholders of record as of April 7, 2017. All applicable share and per share information has been adjusted retrospectively to give effect to the fiscal 2017 5-for-4 stock split. Fiscal 2016: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2017: First Quarter Second Quarter Third Quarter Fourth Quarter Class A Common Stock Low High Common Stock High Low Cash Dividends Per Share $ 40.06 41.18 46.26 48.82 $ 56.20 61.35 71.85 78.70 $ 34.25 32.08 39.94 45.07 $ 47.36 51.92 58.75 69.75 $ 45.42 50.15 55.98 60.01 $ 65.90 71.62 81.69 93.00 $ 38.29 41.41 48.27 52.56 $ 53.08 60.00 70.59 80.29 $ $ .064 — .064 — .072 — .080 — As of December 19, 2017, there were 340 holders of record of our Class A Common Stock and 330 holders of record of our Common Stock. In addition, as of December 19, 2017, there were approximately 47,195 shareholder account positions of the Company’s Class A Common Stock and Common Stock in brokerage or nominee accounts. The combined total of all record holders and brokerage or nominee shareholder account positions is approximately 47,865 of both classes of 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, 2012 through October 31, 2017. 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. Comparison of Five-Year Cumulative Total Return $440 $400 $360 $320 $280 $240 $200 $160 $120 $80 $40 0 2012 2013 2014 2015 2016 2017 HEICO Common Stock HEICO Class A Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index HEICO Common Stock HEICO Class A Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index Cumulative Total Return as of October 31, $ 2012 100.00 100.00 100.00 100.00 2013 $ 182.13 171.07 121.75 153.74 $ 2014 185.88 203.08 131.91 157.68 $ 2015 173.27 194.47 127.24 165.11 2016 2017 $ 232.72 268.01 127.50 175.50 $ 391.31 426.00 150.11 262.34 67 HEICO Corporation and Subsidiaries MARKET FOR COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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. Comparison of Twenty-Seven Year Cumulative Total Return HEICO Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index $25,000 $20,000 $15,000 $10,000 $5,000 $0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 HEICO Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index HEICO Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index HEICO Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index Cumulative Total Return as of October 31, 1990 1991 1992 1993 1994 1995 $ $ $ $ $ $ 100.00 100.00 100.00 1996 430.02 225.37 341.65 2002 670.39 284.59 343.88 141.49 130.31 130.67 $ 158.35 138.76 122.00 1997 1,008.31 289.55 376.36 1998 $ 1,448.99 326.98 378.66 $ $ 173.88 156.09 158.36 1999 1,051.61 376.40 295.99 $ $ 123.41 155.68 176.11 2000 809.50 400.81 418.32 $ $ 263.25 186.32 252.00 2001 1,045.86 328.78 333.32 2003 2004 2005 2006 2007 1,067.42 339.15 393.19 $ 1,366.57 380.91 478.49 $ 1,674.40 423.05 579.77 $ 2,846.48 499.42 757.97 $ 4,208.54 586.87 1,000.84 2008 2009 2010 2011 2012 2013 HEICO Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index $ 2,872.01 344.96 602.66 $ 2,984.13 383.57 678.00 $ 4,722.20 427.61 926.75 $ 6,557.88 430.46 995.11 $ 5,900.20 467.91 1,070.15 $ 10,457.14 569.69 1,645.24 HEICO Common Stock NYSE Composite Index Dow Jones U.S. Aerospace Index $ 2014 11,416.51 617.23 1,687.41 2015 2016 2017 $ 10,776.88 595.37 1,766.94 $ 14,652.37 596.57 1,878.10 $ 23,994.03 702.38 2,807.42 68 HEICO Corporation and Subsidiaries Electronic Technologies Group 3D-Plus SAS AeroAntenna Technology, Inc. Analog Modules, Inc. Connectronics Corp. and Wiremax dB Control Corp. Dukane Seacom, Inc. EMD Technologies Incorporated Engineering Design Team, Inc. HEICO Electronic Technologies Corp. HVT Group, Inc. Dielectric Sciences, Inc. Essex X-Ray & Medical Equipment LTD Interface Displays & Controls, Inc. Leader Tech, Inc. Lucix Corporation Lumina Power, Inc. Midwest Microwave Solutions, Inc. Radiant Power Corp. Ramona Research, Inc. Robertson Fuel Systems, LLC Santa Barbara Infrared, Inc. Sierra Microwave Technology, LLC Switchcraft, Inc. and Conxall VPT, Inc. Subsidiaries Flight Support Group Action Research Corporation Aero Design, Inc. Aerospace & Commercial Technologies, LLC Aeroworks International Holding B.V. Air Cost Control Aircraft Technology, Inc. Astroseal Products Mfg. Corporation Blue Aerospace LLC Carbon by Design Corporation CSI Aerospace, Inc. Future Aviation, Inc. Harter Aerospace, LLC HEICO Aerospace Corporation HEICO Aerospace Holdings Corp. HEICO Aerospace Parts Corp. HEICO Component Repair Group - Miami HEICO Flight Support Corp. HEICO Parts Group HEICO Repair Group Inertial Airline Services, Inc. Jet Avion Corporation Jetseal, Inc. LPI Corporation McClain International, Inc. Niacc-Avitech Technologies, Inc. Prime Air, LLC and Prime Air Europe Reinhold Industries, Inc. Seal Dynamics LLC Sunshine Avionics LLC Thermal Energy Products, Inc. Thermal Structures, Inc. Turbine Kinetics, Inc. Registrar & Transfer Agent Computershare By Regular Mail PO Box 505000 Louisville, KY 40233-5000 United States By Overnight Delivery 462 South 4th Street Suite 1600 Louisville, KY 40233-5000 United States Telephone: 800-368-5948 www.computershare.com/investor New York Stock Exchange Symbols Class A Common Stock - “HEI.A” Common Stock - “HEI” Form 10-K and Board of Directors Inquiries The Company’s Annual Report on Form 10-K for 2017, as filed with the Securities and Exchange Commission, is available without charge upon written request to the Corporate Secretary at the Company’s headquarters. Any inquiry to any member of the Company’s Board of Directors, including, but not limited to “independent” Directors, should be addressed to such Director(s) care of the Company’s Headquarters and such inquiries will be forwarded to the Director(s) of whom the inquiry is being made. Annual Meeting The Annual Meeting of Shareholders will be held on Friday, March 16, 2018 at 10:00 a.m. at the Conrad Miami 1395 Brickell Avenue Miami, FL 33131 Telephone: 305-503-6500 Shareholder Information Elizabeth R. Letendre Corporate Secretary HEICO Corporation 3000 Taft Street Hollywood, FL 33021 Telephone: 954-987-4000 Facsimile: 954-987-8228 eletendre@heico.com 69 OFFICERS AND SENIOR LEADERSHIP Laurans A. Mendelson Chairman of the Board of Directors and Chief Executive Officer, HEICO Corporation Jerry Goldlust President and Founder, HVT Group, Inc. and Dielectric Sciences, Inc. Nadim Bakhache President, EMD Technologies Incorporated Keith Bandolik President, Switchcraft, Inc. and Conxall Vaughn Barnes President, HEICO Specialty Products Group - Thermal Products (Thermal Structures, Inc., Thermal Energy Products, Inc. and Jetseal, Inc.) Paul Belisle Vice President and General Manager, Turbine Kinetics, Inc. Adam Bentkover Vice President - Acquisitions, HEICO Corporation Jeffrey S. Biederwolf Senior Vice President, HEICO Repair Group Steven Case President, Engineering Design Team, Inc. Vladimir Cervera Vice President and General Manager - Structures, HEICO Component Repair Group – Miami Barry Cohen President and Founder, Prime Air, LLC Dominick Consalvi Vice President and General Manager, Carbon by Design Corporation Ian D. Crawford President and Founder, Analog Modules, Inc. Alexandre de Gunten Business Development Officer, HEICO Aerospace Corporation Leon Gonzalez Vice President and General Manager, Sunshine Avionics LLC Clarence Hightower President, HEICO Specialty Products Group - Interiors and Composites, and Reinhold Industries, Inc. William J. Hinski Vice President - Managing Director, Harter Aerospace, LLC John F. Hunter Senior Vice President, HEICO Parts Group Tung Huynh President and Co-Founder, Lumina Power, Inc. Thomas S. Irwin Senior Executive Vice President, HEICO Corporation Todd Jones General Manager, Ramona Research, Inc. Joe Klein Chief Executive Officer and Founder, AeroAntenna Technology, Inc. Elizabeth R. Letendre Corporate Secretary, HEICO Corporation Jack Lewis Senior Vice President, HEICO Parts Group Omar Lloret Vice President and General Manager - Accessories, HEICO Component Repair Group – Miami Carlos L. Macau, Jr. Executive Vice President, Chief Financial Officer and Treasurer, HEICO Corporation Sjuk de Vries Chief Executive Officer and Founder, Aeroworks International Holding B.V. Patrick Markham Vice President - Technical Services, HEICO Parts Group Andrew J. Feeley Vice President and General Manager, CSI Aerospace, Inc. Pierre Maurice President and Co-Founder, 3D Plus SAS William Fenne Vice President and General Manager, Niacc-Avitech Technologies, Inc. Steve McHugh Chief Operating Officer, Electronic Technologies Group and President and Co-Founder, Santa Barbara Infrared, Inc. and IRCameras, LLC Robert J. McKenna President, Leader Tech, Inc. Bruce McQuerry Vice President and General Manager, McClain International, Inc. Eric A. Mendelson Co-President, HEICO Corporation Victor H. Mendelson Co-President, HEICO Corporation Michael Milardo President, Astroseal Products Mfg. Corporation Michael Montgomery Vice President and General Manager, Aero Design, Inc. Luis J. Morell President, HEICO Parts Group and HEICO Repair Group Michael Navon President and Founder, Blue Aerospace LLC Joseph W. Pallot General Counsel, HEICO Corporation Laurent Parelle Chief Executive Officer, Air Cost Control Anish V. Patel President, Radiant Power Corp. and Dukane Seacom, Inc. Jeffrey Perkins Vice President and General Manager, Seal Dynamics – Tampa Niall Porter General Manager, Jet Avion Corporation Chad Putnam General Manager, Action Research Corporation Rex Reum President, Jetseal, Inc. Phillip J. Rezin President, Midwest Microwave Solutions, Inc. Thomas L. Ricketts Chief Executive Officer and Co-Founder, Connectronics Corp. and Wiremax Troy J. Rodriguez President and Co-Founder, Sierra Microwave Technology, LLC James E. Roubian Senior Vice President - Manufacturing, HEICO Parts Group Dr. Daniel M. Sable Chief Executive Officer and Co-Founder, VPT, Inc. Mark Shahriary Chief Executive Officer, Lucix Corporation Val R. Shelley Vice President - Strategy, HEICO Corporation Newman Shufflebarger Chief Executive Officer, Robertson Fuel Systems, LLC David R. Smith President, Aerospace & Commercial Technologies, LLC Gary Spaulding Chief Operating Officer, dB Control Corp. David J. Susser President, HEICO Distribution Group and Seal Dynamics LLC Gregg Tuttle Vice President and General Manager, Future Aviation, Inc. Steven M. Walker Chief Accounting Officer and Assistant Treasurer, HEICO Corporation Nicholas “Tony” Wright Vice President and General Manager - Avionics, HEICO Repair Group 70 FINANCIAL HIGHLIGHTS Year ended October 31,(1) (in thousands, except per share data) Operating Data: Net sales Operating income Interest expense Net income attributable to HEICO Weighted average number of common shares outstanding: (2) Basic Diluted Per Share Data: (2) Net income per share attributable to HEICO shareholders: Basic Diluted Cash dividends per share Balance Sheet Data (as of October 31): Total assets (3) Total debt (including current portion) Redeemable noncontrolling interests Total shareholders’ equity 2015 2016 2017 $ 1,188,648 229,656 4,626 133,364 (4) $ 1,376,258 $ 265,345 (5) 8,272 156,192 (5)(6) 1,524,813 306,658 9,790 185,985 (7) 83,425 84,764 83,807 85,213 84,290 86,776 $ $ 1.60 (4) 1.57 (4) .112 $ 1.86 (5)(6) 1.83 (5)(6) .128 $ 2.21 (7) 2.14 (7) .152 1,700,857 367,598 91,282 893,271 $ 1,998,412 458,225 99,512 1,047,705 $ 2,512,431 673,979 131,123 1,248,292 (1) Results include the results of acquisitions from each respective effective date. (2) All share and per share information has been adjusted retrospectively to reflect the 5-for-4 stock split effected in April 2017. (3) During fiscal 2017, we adopted Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes,” on a retrospective basis resulting in a reclassification of $35.5 million and $41.1 million in current deferred tax assets to noncurrent deferred tax liabilities in our Consolidated Balance Sheet as of October 31, 2015 and 2016, respectively. (4) Includes additional income tax credits for qualified research and development (“R&D”) activities related to the last ten months of fiscal 2014 recognized in fiscal 2015 upon the retroactive extension of the United States (“U.S.”) federal R&D tax credit in December 2014 to cover calendar year 2014, which, net of expenses, increased net income attributable to HEICO by $1.8 million, or $.02 per basic and diluted share. (5) Includes $3.1 million of acquisition costs incurred in connection with a fiscal 2016 acquisition within the Electronic Technologies Group. These expenses, net of tax, decreased net income attributable to HEICO by $2.0 million, or $.02 per basic and diluted share. (6) Includes additional income tax credits for qualified R&D activities related to the last ten months of fiscal 2015 recognized in fiscal 2016 upon the retroactive and permanent extension of the U.S. federal R&D tax credit in December 2015, which, net of expenses, increased net income attributable to HEICO by $1.7 million, or $.02 per basic and diluted share. (7) During fiscal 2017, we adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” resulting in the recognition of a $3.1 million discrete income tax benefit and a 781,000 increase in our weighted average number of diluted common shares outstanding, which, net of noncontrolling interests, increased net income attributable to HEICO by $2.6 million, or $.03 per basic and $.01 per diluted share. FORWARD-LOOKING STATEMENTS Certain statements in this report constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO’s actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense budget cuts, which could reduce our defense-related revenue. Parties receiving this material are encouraged to review all of HEICO’s filings with the Securities and Exchange Commission, including, but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. 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. BOARD OF DIRECTORS THOMAS M. CULLIGAN retired Chairman and CEO, Raytheon International retired Sr. Vice President, The Raytheon Company ADOLFO HENRIQUES Chairman, Gibraltar Private Bank & Trust Vice Chairman, Related Group MARK H. HILDEBRANDT Managing Partner and Member, Waldman, Trigoboff, Hildebrandt & Calnan, P.A. WOLFGANG MAYRHUBER retired Chairman of the Supervisory Board, Deutsche Lufthansa AG Chairman of the Supervisory Board, Infineon Technologies AG ERIC A. MENDELSON Co-President, HEICO Corporation LAURANS A. MENDELSON Chairman and Chief Executive Officer, HEICO Corporation VICTOR H. MENDELSON Co-President, HEICO Corporation JULIE NEITZEL Partner, WE Family Offices DR. ALAN SCHRIESHEIM retired Director, Argonne National Laboratory FRANK J. SCHWITTER retired Partner, Arthur Andersen LLP Thomas M. Culligan Adolfo Henriques Mark H. Hildebrandt Wolfgang Mayrhuber Eric A. Mendelson Laurans A. Mendelson Victor H. Mendelson Julie Neitzel Dr. Alan Schriesheim Frank J. Schwitter A N N U A L R E P O R T 2 0 1 7 H E I C O C O R P O R A T I O N / 2 0 1 7 A N N U A L R E P O R T HE I C O C O RP O R AT I O N Corporate Of fices: 3000 Taf t S treet | Holly wood, FL 33021 Phone: 954-987-4000 | Fax: 954-987-8228 | www.heico.com 60 Years of Excellence in Aerospace, Defense and Electronics 

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