INCOME TAXES

12 Months Ended

Oct. 31, 2019

INCOME TAXES

The components of income before income taxes and noncontrolling interests are as follows (in thousands):



	Year ended October 31,
	2019		2018		2017
Domestic		$386,584		$309,123		$264,420
Foreign	51,257		47,163		33,540
Income before taxes and noncontrolling interests		$437,841		$356,286		$297,960

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,
	2019			2018			2017
Current:
Federal		$56,670			$61,548			$85,047
State	12,795			9,420			6,820
Foreign	15,027			12,608			9,529
	84,492			83,576			101,396
Deferred:
Federal	(3,140		)	(13,115		)	(9,661		)
State	(1,263		)	1,578			(499		)
Foreign	(1,989		)	(1,439		)	(936		)
	(6,392		)	(12,976		)	(11,096		)
Total income tax expense		$78,100			$70,600			$90,300

A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:



	Year ended October 31,
	2019		2018		2017
Federal statutory income tax rate (blended rate in fiscal 2018)	21.0	%	23.3	%	35.0	%
State taxes, net of federal income tax benefit	3.0	%	2.9	%	1.9	%
Tax benefit related to stock option exercises	(3.8	%)	(.5	%)	(1.0	%)
Discrete net tax benefit related to Tax Act	—	%	(3.4	%)	—	%
Research and development tax credits	(1.7	%)	(2.0	%)	(1.8	%)
Foreign derived intangible income deduction	(1.4	%)	—	%	—	%
Tax-exempt (gains) losses on corporate-owned life insurance policies	(.6	%)	.1	%	(1.8	%)
Nondeductible compensation	.8	%	.2	%	—	%
Domestic production activities tax deduction	—	%	(.8	%)	(1.1	%)
Other, net	.5	%	—	%	(.9	%)
Effective tax rate	17.8	%	19.8	%	30.3	%

In December 2017, the United States ("U.S.") government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act contains significant changes to previous tax law, some of which became immediately effective in fiscal 2018 including, among other things, a reduction in the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018 resulting in a blended rate of 23.3% for fiscal 2018 and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of the Company’s foreign subsidiaries. Certain other provisions of the Tax Act became effective for HEICO in fiscal 2019 including a new tax on Global Intangible Low-Taxed Income (“GILTI”), a new deduction for Foreign-Derived Intangible Income (“FDII”), the

repeal of the domestic production activity deduction and increased limitations on the deductibility of certain executive compensation. As a result of the Tax Act, the Company remeasured its U.S. federal net deferred tax liabilities and recorded a discrete tax benefit of $16.5 million in fiscal 2018. Further, the Company recorded a provisional discrete tax expense of $4.4 million in fiscal 2018 related to a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries, which it intends to pay over the eight-year period allowed for in the Tax Act.

The Company’s effective tax rate in fiscal 2019 decreased to 17.8% from 19.8% in fiscal 2018. The decrease in the Company's effective tax rate in fiscal 2019 is mainly attributable to a $14.3 million larger tax benefit in fiscal 2019 from stock option exercises compared to fiscal 2018 and the reduction in the federal tax rate from a blended rate of 23.3% in fiscal 2018 to 21% in fiscal 2019, partially offset by the net impact of the previously mentioned discrete tax amounts recorded in fiscal 2018. The provisions of the Tax Act that became effective for HEICO in fiscal 2019 did not have a material net effect on the Company's effective tax rate.

The Company’s effective tax rate in fiscal 2018 decreased to 19.8% from 30.3% in fiscal 2017. The decrease principally reflects the previously mentioned discrete tax benefit from the remeasurement of the Company’s U.S. federal net deferred tax liabilities and the net benefit of a lower federal statutory income tax rate, which were partially offset by the aforementioned one-time transition tax expense. Further, the decrease in fiscal 2018 was slightly moderated by an unfavorable impact from lower tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan ("HEICO LCP").

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 2015.

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,
	2019			2018
Deferred tax assets:
Deferred compensation liability		$35,437			$31,152
Inventories	23,858			22,204
Share-based compensation	10,206			9,811
Bonus accrual	6,463			4,474
Customer rebates accrual	2,324			1,526
Vacation accrual	1,452			1,456
Other	8,806			7,152
Total deferred tax assets	88,546			77,775

Deferred tax liabilities:
Goodwill and other intangible assets	(122,075		)	(112,533		)
Property, plant and equipment	(14,137		)	(11,615		)
Adoption of ASC 606	(3,277		)	—
Other	(553		)	(271		)
Total deferred tax liabilities	(140,042		)	(124,419		)
Net deferred tax liability		($51,496	)		($46,644	)

As of October 31, 2019 and 2018, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $2.7 million and $2.1 million, respectively, of which $2.1 million and $1.7 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 2019 and 2018 is as follows (in thousands):



	Year ended October 31,
	2019			2018
Balances as of beginning of year		$2,100			$2,040
Increases related to current year tax positions	653			591
Increases related to prior year tax positions	45			20
Settlements	—			(394		)
Lapses of statutes of limitations	(128		)	(157		)
Balances as of end of year		$2,670			$2,100