LEASES

9 Months Ended

Jul. 31, 2020

LEASES

The Company’s lease arrangements primarily pertain to manufacturing facilities, office buildings, equipment, land and vehicles. The Company evaluates whether a contractual arrangement that provides it with control over the use of an asset is, or contains, a lease at the inception date. The term of a lease is inclusive of any option to renew, extend, or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company classifies a lease as operating or finance using the classification criteria set forth in ASC 842. Finance leases are not material to the Company's condensed consolidated financial statements. HEICO recognizes operating lease right-of-use (“ROU”) assets and corresponding lease liabilities as of the lease commencement date based on the present value of the lease payments over the lease term. The discount rate used to calculate the present value of the Company’s leases is based on HEICO’s incremental borrowing rate and considers credit risk, the lease term and other available information as of the commencement date since the leases do not provide a readily determinable implicit rate. Variable lease payments that depend on an index or a rate are included in the determination of operating ROU assets and lease liabilities using the index or rate at the lease commencement date. Variable lease payments that do not depend on an index or rate or resulting from changes in an index or rate subsequent to the lease commencement date, are recorded as lease expense in the period in which the obligation for the payment is incurred. The Company’s operating ROU assets are increased by any prepaid lease payments and initial direct costs and reduced by any lease incentives. The Company’s leases do not contain any material residual value guarantees or restrictive covenants.

HEICO’s operating lease ROU assets represent its right to use an underlying asset during the lease term and its operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. HEICO’s operating lease ROU assets are included within other assets and its operating lease liabilities are included within other long-term liabilities and accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet. For additional information on the Company’s finance leases, see Note 5, Long-term Debt, of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report and Note 5, Long-term Debt, and Note 3, Selected Financial Statement Information - Property, Plant and Equipment, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2019. The following table presents the Company’s operating lease ROU assets and lease liabilities as of July 31, 2020 (in thousands):


			July 31, 2020
Right-of-use assets			$57,752

Current lease liabilities			$13,587
Long-term lease liabilities			45,232
Total operating lease liabilities			$58,819

The Company’s operating lease expense is recorded as a component of cost of sales and/or selling, general, and administrative expenses in the Company’s Condensed Consolidated Statements of Operations. The following table presents the components of operating lease expense for the nine and three months ended July 31, 2020 (in thousands):


	Nine months ended	Three months ended
	July 31, 2020	July 31, 2020
Operating lease expense	$12,855	$4,311


Variable lease expense	1,942	619
Total operating lease expense ⁽¹⁾	$14,797	$4,930

⁽¹⁾Excludes short-term lease expense, which is not material.

The following table presents a maturity analysis of the Company's operating lease liabilities as of July 31, 2020 for the remainder of fiscal 2020 and the next five fiscal years and thereafter (in thousands):


Year ending October 31,
2020			$3,639
2021			16,377
2022			14,394
2023			8,952
2024			5,115
2025			4,243
Thereafter			18,566
Total minimum lease payments			71,286
Less: amount representing interest			(12,467)
Present value of minimum lease payments			$58,819

Prior to the adoption of ASC 842, the Company's future minimum lease payments under non-cancelable operating leases on an undiscounted basis as of October 31, 2019 were $15.5 million in fiscal 2020, $15.6 million in fiscal 2021, $13.8 million in fiscal 2022, $8.5 million in fiscal 2023, $4.7 million in fiscal 2024 and $18.8 million thereafter.

The Company does not have any material leases that have been signed but have yet to commence as of July 31, 2020.

The following table presents the weighted average remaining lease term and discount rate of the Company’s operating leases as of July 31, 2020:


	July 31, 2020
Weighted average remaining lease term (years)	7.0
Weighted average discount rate	5.1	%

The following table presents supplemental disclosures of cash flow information associated with the Company's operating leases for the nine months ended July 31, 2020 (in thousands):


			Nine months ended
			July 31, 2020
Cash paid for amounts included in the measurement of lease liabilities			$12,652
Right-of-use assets obtained in exchange for new lease liabilities			7,423