UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2005 or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of May 31, 2005:
Common Stock, $.01 par value 9,989,670 shares
Class A Common Stock, $.01 par value 14,481,580 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of April 30, 2005 and October 31, 2004................................................2
Condensed Consolidated Statements of Operations (unaudited)
for the six months and three months ended April 30, 2005 and 2004........................3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended April 30, 2005 and 2004.........................................4
Notes to Condensed Consolidated Financial Statements (unaudited)..........................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risks..............................24
Item 4. Controls and Procedures..................................................................25
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................26
Item 4 Submission of Matters to a Vote of Security Holders......................................26
Item 6. Exhibits.................................................................................27
SIGNATURE...............................................................................................28
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
APRIL 30, 2005 OCTOBER 31, 2004
-------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,449,000 $ 214,000
Accounts receivable, net 42,892,000 36,798,000
Inventories 54,470,000 48,020,000
Prepaid expenses and other current assets 3,460,000 3,208,000
Deferred income taxes 6,214,000 5,672,000
-------------- ----------------
Total current assets 109,485,000 93,912,000
Property, plant and equipment, net 40,614,000 40,558,000
Goodwill 232,303,000 216,674,000
Other assets 10,920,000 13,111,000
-------------- ----------------
Total assets $ 393,322,000 $ 364,255,000
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 58,000 $ 58,000
Trade accounts payable 8,758,000 7,969,000
Accrued expenses and other current liabilities 22,627,000 20,244,000
Income taxes payable 3,035,000 3,771,000
-------------- ----------------
Total current liabilities 34,478,000 32,042,000
Long-term debt, net of current maturities 27,042,000 18,071,000
Deferred income taxes 18,155,000 16,262,000
Other non-current liabilities 6,573,000 5,834,000
-------------- ----------------
Total liabilities 86,248,000 72,209,000
-------------- ----------------
Minority interests in consolidated subsidiaries 46,759,000 44,644,000
-------------- ----------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares authorized;
300,000 shares designated as Series B Junior Participating Preferred Stock
and 300,000 shares designated as Series C Junior Participating Preferred
Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares authorized;
9,985,370 and 9,898,451 shares issued and outstanding, respectively 100,000 99,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 14,471,680 and 14,325,304 shares issued and outstanding,
respectively 145,000 143,000
Capital in excess of par value 191,330,000 187,950,000
Retained earnings 68,740,000 59,210,000
-------------- ----------------
Total shareholders' equity 260,315,000 247,402,000
-------------- ----------------
Total liabilities and shareholders' equity $ 393,322,000 $ 364,255,000
============== ================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net sales $ 123,954,000 $ 98,944,000 $ 66,973,000 $ 52,793,000
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Cost of sales 78,629,000 64,694,000 41,928,000 34,079,000
Selling, general and administrative expenses 25,231,000 19,505,000 13,612,000 10,542,000
--------------- --------------- --------------- ---------------
Total operating costs and expenses 103,860,000 84,199,000 55,540,000 44,621,000
--------------- --------------- --------------- ---------------
Operating income 20,094,000 14,745,000 11,433,000 8,172,000
Interest expense (533,000) (632,000) (300,000) (301,000)
Interest and other income 80,000 2,000 44,000 4,000
--------------- --------------- --------------- ---------------
Income before income taxes and minority interests 19,641,000 14,115,000 11,177,000 7,875,000
Income tax expense 7,136,000 4,856,000 4,213,000 2,701,000
--------------- --------------- --------------- ---------------
Income before minority interests 12,505,000 9,259,000 6,964,000 5,174,000
Minority interests' share of income 2,364,000 1,910,000 1,251,000 1,066,000
--------------- --------------- --------------- ---------------
Net income $ 10,141,000 $ 7,349,000 $ 5,713,000 $ 4,108,000
=============== =============== =============== ===============
Net income per share:
Basic $ .42 $ .31 $ .23 $ .17
Diluted $ .39 $ .29 $ .22 $ .16
Weighted average number of common shares outstanding:
Basic 24,387,667 23,896,675 24,446,997 24,048,105
Diluted 26,236,782 25,687,039 26,259,988 25,741,078
Cash dividend per share $ .025 $ .025 $ -- $ --
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED APRIL 30,
---------------------------------
2005 2004
--------------- ---------------
Operating Activities:
Net income $ 10,141,000 $ 7,349,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,503,000 3,415,000
Deferred income tax provision 1,351,000 1,716,000
Minority interests' share of income 2,364,000 1,910,000
Tax benefit from stock option exercises 2,580,000 1,258,000
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (3,989,000) (1,198,000)
(Increase) decrease in inventories (4,471,000) 2,418,000
Increase in prepaid expenses and other current assets (237,000) (439,000)
Increase (decrease) in trade accounts payables, accrued
expenses and other current liabilities 790,000 (522,000)
(Decrease) increase in income taxes payable (736,000) 1,135,000
Other 203,000 (297,000)
--------------- ---------------
Net cash provided by operating activities 11,499,000 16,745,000
--------------- ---------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (18,419,000) (27,581,000)
Capital expenditures (3,029,000) (2,589,000)
Proceeds from sale of building held for sale 3,520,000 --
Other (251,000) (371,000)
--------------- ---------------
Net cash used in investing activities (18,179,000) (30,541,000)
--------------- ---------------
Financing Activities:
Borrowings on revolving credit facility 22,000,000 27,000,000
Payments on revolving credit facility (13,000,000) (15,000,000)
Cash dividend paid (610,000) (596,000)
Proceeds from stock option exercises 801,000 684,000
Other (276,000) 832,000
--------------- ---------------
Net cash provided by financing activities 8,915,000 12,920,000
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,235,000 (876,000)
Cash and cash equivalents at beginning of year 214,000 4,321,000
--------------- ---------------
Cash and cash equivalents at end of period $ 2,449,000 $ 3,445,000
=============== ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of HEICO Corporation and its subsidiaries (the "Company") have been prepared in
conformity with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-Q. Therefore, the condensed consolidated financial
statements do not include all information and footnotes normally included in
annual consolidated financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended October 31, 2004. The
October 31, 2004 Condensed Consolidated Balance Sheet has been derived from the
Company's audited consolidated financial statements. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the condensed consolidated balance sheets, statements of
operations and statements of cash flows for such interim periods presented. The
results of operations for the six months ended April 30, 2005 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
STOCK BASED COMPENSATION
The Company currently accounts for stock-based employee compensation
using the intrinsic value method (see "New Accounting Pronouncements" below for
a discussion of a recently issued pronouncement on the accounting for
share-based payments, which is effective as of the Company's first quarter of
fiscal 2006). Accordingly, compensation expense has been recorded in the
accompanying condensed consolidated financial statements for any stock options
granted below the fair market value of the underlying stock as of the date of
grant. The following table illustrates the pro forma effects on net income and
net income per share as if the Company had applied the fair-value recognition
provisions (an alternative method) to stock-based employee compensation. The
fair value of each option grant is estimated as of the date of grant using the
Black-Scholes option-pricing model.
5
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net income, as reported $ 10,141,000 $ 7,349,000 $ 5,713,000 $ 4,108,000
Add: Stock-based employee compensation
expense included in reported net income, net
of tax 1,000 1,000 1,000 1,000
Deduct: Stock-based employee compensation
expense determined under a fair-value method,
net of tax (622,000) (777,000) (298,000) (391,000)
--------------- --------------- --------------- ---------------
Pro forma net income $ 9,520,000 $ 6,573,000 $ 5,416,000 $ 3,718,000
=============== =============== =============== ===============
Net income per share:
Basic - as reported $ .42 $ .31 $ .23 $ .17
Basic - pro forma $ .39 $ .28 $ .22 $ .15
Diluted - as reported $ .39 $ .29 $ .22 $ .16
Diluted - pro forma $ .36 $ .26 $ .21 $ .14
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"),
"Inventory Costs, an amendment of ARB No. 43, Chapter 4". SFAS No. 151 requires
the allocation of fixed production overhead costs be based on the normal
capacity of the production facilities and unallocated overhead costs recognized
as an expense in the period incurred. The Statement also clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the
provisions of SFAS No. 151, but does not currently believe the adoption of the
Statement will have a material effect on its results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 ("SAB 107") to provide
public companies with its interpretive guidance in applying the provisions of
SFAS No. 123(R). SFAS No. 123(R) focuses primarily on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires companies to recognize in the statement
of operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This Statement is effective for fiscal years beginning
after June 15, 2005; therefore, the Company plans to adopt the new requirements
in its first quarter of fiscal 2006. The Company is currently evaluating the
provisions of SFAS No. 123(R) and
6
guidance in SAB 107 and has not yet determined the impact that SFAS No. 123(R)
and SAB 107 will have on its results of operations or financial position.
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP FAS
No. 109-1"), "Application of FASB Statement No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004". FSP FAS No. 109-1 states that qualified
production activities should be accounted for as a special deduction under SFAS
No. 109 and not be treated as a rate reduction. Accordingly, the special
deduction has no effect on the Company's deferred tax assets and liabilities
existing as of the enactment date. The Company is currently evaluating the
impact of the American Jobs Creation Act of 2004, which will allow the Company
to claim a deduction from taxable income attributable to qualified domestic
production activities beginning in fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 is based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The Statement eliminates the
exception of nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e. the future cash flows of the entity are not expected
to change significantly as a result of the exchange). The provisions of SFAS No.
153 are effective as of the first reporting period beginning after June 15,
2005. The Company does not expect the adoption of SFAS No. 153 to have a
material effect on its results of operations or financial position.
2. ACQUISITIONS
In December 2004, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Connectronics, Corp. and its affiliate, Wiremax, Ltd.
(collectively "Connectronics"). The results of operations of Connectronics were
included in the Company's results of operations effective December 2004. Subject
to meeting certain earnings objectives during the first four years following the
acquisition, the Company may be obligated to pay additional consideration of up
to $3.8 million in the aggregate. Connectronics is engaged in the production of
specialty high voltage interconnection devices and wire primarily for defense
applications and other markets.
In February 2005, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Lumina Power, Inc. ("Lumina"). The results of operations of
Lumina were included in the Company's results of operations effective February
2005. Subject to meeting certain product line-related earnings objectives during
the fourth and fifth years following the acquisition, the Company may be
obligated to pay additional consideration after the fifth year, which is
currently estimated to total up to $2.3 million. Lumina is engaged in the design
and manufacture of power supplies for the laser industry.
The acquisitions of Connectronics and Lumina were accounted for using
the purchase method of accounting. The purchase price of each acquisition was
paid in cash using proceeds
7
from the Company's revolving credit facility and was not significant to the
Company's consolidated financial statements. The Company's pro forma
consolidated operating results assuming Connectronics and Lumina had been
acquired as of the beginning of fiscal 2005 would not have been materially
different from the reported results. The allocation of the purchase price of
each acquisition to the tangible and identifiable intangible assets acquired and
liabilities assumed in these condensed consolidated financial statements is
preliminary until the Company obtains final information regarding their fair
values.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
APRIL 30, 2005 OCTOBER 31, 2004
---------------- ----------------
Accounts receivable $ 43,724,000 $ 37,380,000
Less: Allowance for doubtful accounts (832,000) (582,000)
---------------- ----------------
Accounts receivable, net $ 42,892,000 $ 36,798,000
================ ================
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
APRIL 30, 2005 OCTOBER 31, 2004
---------------- ----------------
Costs incurred on uncompleted contracts $ 14,128,000 $ 14,798,000
Estimated earnings 7,268,000 8,686,000
---------------- ----------------
21,396,000 23,484,000
Less: Billings to date (16,791,000) (19,663,000)
---------------- ----------------
$ 4,605,000 $ 3,821,000
================ ================
Included in accompanying condensed consolidated
balance sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 4,883,000 $ 4,612,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (278,000) (791,000)
---------------- ----------------
$ 4,605,000 $ 3,821,000
================ ================
Changes in prior estimates did not have a material effect on net income
or diluted net income per share in the six months and three months ended April
30, 2005 and 2004.
INVENTORIES
APRIL 30, 2005 OCTOBER 31, 2004
---------------- ----------------
Finished products $ 20,936,000 $ 19,838,000
Work in process 11,241,000 9,597,000
Materials, parts, assemblies and supplies 22,293,000 18,585,000
---------------- ----------------
Total inventories $ 54,470,000 $ 48,020,000
================ ================
Inventories related to long-term contracts were not significant as of
April 30, 2005 and October 31, 2004.
8
During the second quarter of fiscal 2005, the Company reclassified
certain inventory (with a carrying value of $4.5 million) within one of its
repair and overhaul subsidiaries from Finished Products to Materials, Parts,
Assemblies and Supplies based on a review of how the inventory is utilized in
its operations. Inventory balances as of October 31, 2004 (also with a carrying
value of $4.5 million) have been reclassified to conform to the current year
presentation.
PROPERTY, PLANT AND EQUIPMENT
APRIL 30, 2005 OCTOBER 31, 2004
---------------- ----------------
Land $ 2,157,000 $ 2,157,000
Buildings and improvements 20,272,000 20,007,000
Machinery, equipment and tooling 55,501,000 55,869,000
Construction in progress 2,971,000 2,239,000
---------------- ----------------
80,901,000 80,272,000
Less: Accumulated depreciation and amortization (40,287,000) (39,714,000)
---------------- ----------------
Property, plant and equipment, net $ 40,614,000 $ 40,558,000
================ ================
In January 2005, the Company received proceeds of $3,520,000 from the
sale of a vacated building and associated land previously classified as held for
sale. The $3,468,000 carrying value of the property was included within other
assets in the Company's Consolidated Balance Sheet as of October 31, 2004.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (FSG)
and the Electronic Technologies Group (ETG). Changes in the carrying amount of
goodwill by operating segment for the six months ended April 30, 2005 are as
follows:
SEGMENT
----------------------------------- CONSOLIDATED
FSG ETG TOTALS
---------------- ---------------- ----------------
Balances as of October 31, 2004 $ 120,288,000 $ 96,386,000 $ 216,674,000
Goodwill acquired during the period -- 15,036,000 15,036,000
Adjustments to goodwill 593,000 -- 593,000
---------------- ---------------- ----------------
Balances as of April 30, 2005 $ 120,881,000 $ 111,422,000 $ 232,303,000
================ ================ ================
The goodwill acquired during the period is a result of the acquisitions
described in Note 2, Acquisitions. Adjustments to goodwill consist primarily of
contingent purchase price payments to previous owners of acquired businesses.
Other intangible assets are recorded within other assets in the
Company's Condensed Consolidated Balance Sheets. Other intangible assets subject
to amortization consist primarily of non-compete agreements, licenses, and
patents. The gross carrying amount and accumulated amortization of other
intangible assets was $2,489,000 and $367,000, respectively, as of April 30,
2005. Amortization expense of other intangible assets for the six months and
three months ended April 30, 2005 was $118,000 and $76,000 respectively.
Amortization expense of other
9
intangible assets for the fiscal year ending October 31, 2005 is estimated to be
$258,000. Amortization expense for each of the next five fiscal years is
estimated to be $266,000 in fiscal 2006, $266,000 in fiscal 2007, $266,000 in
fiscal 2008, $252,000 fiscal 2009 and $215,000 in fiscal 2010.
5. LONG-TERM DEBT
Long-term debt consists of:
APRIL 30, 2005 OCTOBER 31, 2004
---------------- ----------------
Borrowings under revolving credit facility $ 25,000,000 $ 16,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 120,000 149,000
---------------- ----------------
27,100,000 18,129,000
Less: Current maturities of long-term debt (58,000) (58,000)
---------------- ----------------
$ 27,042,000 $ 18,071,000
================ ================
As of April 30, 2005 and October 31, 2004, the Company had a total of
$25 million and $16 million, respectively, borrowed under its $120 million
revolving credit facility at weighted average interest rates of 4.0% and 2.9%,
respectively. The revolving credit facility contains both financial and
non-financial covenants. As of April 30, 2005, the Company believes it is in
compliance with all such covenants.
The interest rates on the Series 1988 industrial development revenue
bonds were 3.1% and 1.8% as of April 30, 2005 and October 31, 2004,
respectively.
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the six months ended
April 30, 2005 are as follows:
CAPITAL IN
CLASS A EXCESS OF RETAINED
COMMON STOCK COMMON STOCK PAR VALUE EARNINGS
---------------- ---------------- ---------------- ----------------
Balances as of October 31, 2004 $ 99,000 $ 143,000 $ 187,950,000 $ 59,210,000
Net income -- -- -- 10,141,000
Cash dividend ($.025 per share) -- -- -- (610,000)
Tax benefit from stock option exercises -- -- 2,580,000 --
Proceeds from stock option exercises 1,000 1,000 799,000 --
Other -- 1,000 1,000 (1,000)
---------------- ---------------- ---------------- ----------------
Balances as of April 30, 2005 $ 100,000 $ 145,000 $ 191,330,000 $ 68,740,000
================ ================ ================ ================
10
7. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the six months ended April 30, 2005 and 2004 includes
approximately $5.3 million and $4.5 million, respectively, of new product
research and development expenses. The expenses are net of reimbursements
pursuant to research and development cooperation and joint venture agreements,
which were not significant.
8. RESTRUCTURING EXPENSES
During the first quarter of fiscal 2005, the Company completed the
restructuring activities initiated in fiscal 2004 within certain subsidiaries of
the Flight Support Group that provide repair and overhaul services.
The following table details the restructuring activity that occurred in
fiscal 2005:
MANAGEMENT MOVING COSTS AND CONTRACT
HIRING/RELOCATION OTHER ASSOCIATED TERMINATION
RELATED EXPENSES EXPENSES COSTS TOTALS
----------------- ---------------- ---------------- ----------------
Balances as of October 31, 2004 $ 64,000 $ 111,000 $ 71,000 $ 246,000
Additional charges and reversals 69,000 (47,000) -- 22,000
Cash payments (133,000) (64,000) (71,000) (268,000)
----------------- ---------------- ---------------- ----------------
Balances as of April 30, 2005 $ -- $ -- $ -- $ --
================= ================ ================ ================
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the six months and three months ended April 30:
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Numerator:
Net income $ 10,141,000 $ 7,349,000 $ 5,713,000 $ 4,108,000
=============== =============== =============== ===============
Denominator:
Weighted average common shares outstanding - basic 24,387,667 23,896,675 24,446,997 24,048,105
Effect of dilutive stock options 1,849,115 1,790,364 1,812,991 1,692,973
--------------- --------------- --------------- ---------------
Weighted average common shares outstanding - diluted 26,236,782 25,687,039 26,259,988 25,741,078
=============== =============== =============== ===============
Net income per share - basic $ .42 $ .31 $ .23 $ .17
Net income per share - diluted $ .39 $ .29 $ .22 $ .16
Anti-dilutive stock options excluded 218,010 569,817 215,846 589,039
11
10. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group (FSG), consisting of HEICO Aerospace Holdings Corp. and its subsidiaries,
and the Electronic Technologies Group (ETG), consisting of HEICO Electronic
Technologies Corp. and its subsidiaries, for the six months and three months
ended April 30, 2005 and 2004, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
--------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
--------------- --------------- --------------- ---------------
For the six months ended April 30, 2005:
Net sales $ 88,316,000 $ 35,761,000 $ (123,000) $ 123,954,000
Depreciation and amortization 2,252,000 1,035,000 216,000 3,503,000
Operating income 16,467,000 6,681,000 (3,054,000) 20,094,000
Capital expenditures 2,469,000 545,000 15,000 3,029,000
For the six months ended April 30, 2004:
Net sales $ 71,967,000 $ 27,082,000 $ (105,000) $ 98,944,000
Depreciation and amortization 2,345,000 844,000 226,000 3,415,000
Operating income 11,338,000 6,187,000 (2,780,000) 14,745,000
Capital expenditures 1,535,000 1,051,000 3,000 2,589,000
For the three months ended April 30, 2005:
Net sales $ 46,053,000 $ 20,987,000 $ (67,000) $ 66,973,000
Depreciation and amortization 1,116,000 551,000 112,000 1,779,000
Operating income 8,869,000 4,219,000 (1,655,000) 11,433,000
Capital expenditures 1,735,000 337,000 13,000 2,085,000
For the three months ended April 30, 2004:
Net sales $ 37,710,000 $ 15,143,000 $ (60,000) $ 52,793,000
Depreciation and amortization 1,258,000 439,000 109,000 1,806,000
Operating income 6,012,000 3,703,000 (1,543,000) 8,172,000
Capital expenditures 909,000 533,000 -- 1,442,000
The total assets held by each operating segment as of April 30, 2005 and
October 31, 2004 is as follows:
SEGMENT OTHER,
--------------------------------- PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
--------------- --------------- --------------- ---------------
Total assets as of April 30, 2005 $ 217,193,000 $ 160,408,000 $ 15,721,000 $ 393,322,000
Total assets as of October 31, 2004 212,615,000 136,860,000 14,780,000 364,255,000
12
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has arranged for standby letters of credit aggregating $1.8
million to meet the security requirement of its insurance company for potential
workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a $0.2 million
letter of credit expiring December 2005. These letters of credit are supported
by the Company's $120 million revolving credit facility. In addition, the
Company's industrial development revenue bonds are secured by a $2.0 million
letter of credit expiring April 2008 and a mortgage on the related properties
pledged as collateral.
Changes in the Company's product warranty liability for the six months
ended April 30, 2005 and 2004, respectively, are as follows:
2005 2004
----------- -----------
Balances as of beginning of fiscal year $ 129,000 $ 633,000
Changes in estimate of warranty liability -- (491,000)
Accruals for warranties 262,000 63,000
Warranty claims settled (105,000) (50,000)
----------- -----------
Balances as of April 30, $ 286,000 $ 155,000
=========== ===========
As part of the agreement to acquire an 80% interest in Sierra Microwave
Technology, Inc. the Company has the right to purchase the minority interests in
approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
As part of the agreement to purchase Connectronics (see Note 2,
Acquisitions), the Company may be obligated to pay additional purchase
consideration of up to $3.8 millions in the aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition.
As part of the agreement to purchase Lumina (see Note 2, Acquisitions),
the Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should Lumina meet certain product
line-related earnings objectives during the fourth and fifth years following the
acquisition.
LITIGATION
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 or financial position.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements and notes thereto included herein. The preparation of consolidated
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
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates if different assumptions were used or different events
ultimately transpire.
The Company's critical accounting policies, some of which require
management to make judgments about matters that are inherently uncertain, are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the year ended October
31, 2004.
The Company has two operating segments: the Flight Support Group (FSG),
consisting of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and its
subsidiaries, and the Electronic Technologies Group (ETG), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries.
14
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations,
net sales and operating income by segment, and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
----------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Net sales $ 123,954,000 $ 98,944,000 $ 66,973,000 $ 52,793,000
---------------- ---------------- ---------------- ----------------
Cost of sales 78,629,000 64,694,000 41,928,000 34,079,000
Selling, general and administrative expenses 25,231,000 19,505,000 13,612,000 10,542,000
---------------- ---------------- ---------------- ----------------
Total operating costs and expenses 103,860,000 84,199,000 55,540,000 44,621,000
---------------- ---------------- ---------------- ----------------
Operating income $ 20,094,000 $ 14,745,000 $ 11,433,000 $ 8,172,000
================ ================ ================ ================
Net sales by segment:
Flight Support Group $ 88,316,000 $ 71,967,000 $ 46,053,000 $ 37,710,000
Electronic Technologies Group 35,761,000 27,082,000 20,987,000 15,143,000
Intersegment sales (123,000) (105,000) (67,000) (60,000)
---------------- ---------------- ---------------- ----------------
$ 123,954,000 $ 98,944,000 $ 66,973,000 $ 52,793,000
================ ================ ================ ================
Operating income by segment:
Flight Support Group $ 16,467,000 $ 11,338,000 $ 8,869,000 $ 6,012,000
Electronic Technologies Group 6,681,000 6,187,000 4,219,000 3,703,000
Other, primarily corporate (3,054,000) (2,780,000) (1,655,000) (1,543,000)
---------------- ---------------- ---------------- ----------------
$ 20,094,000 $ 14,745,000 $ 11,433,000 $ 8,172,000
================ ================ ================ ================
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.6% 34.6% 37.4% 35.4%
Selling, general and administrative expenses 20.4% 19.7% 20.3% 20.0%
Operating income 16.2% 14.9% 17.1% 15.5%
Interest expense 0.4% 0.6% 0.4% 0.6%
Interest and other income 0.1% - 0.1% -
Income tax expense 5.8% 4.9% 6.3% 5.1%
Minority interests' share of income 1.9% 1.9% 1.9% 2.0%
Net income 8.2% 7.4% 8.5% 7.8%
15
COMPARISON OF FIRST SIX MONTHS OF FISCAL 2005 TO FIRST SIX MONTHS OF FISCAL 2004
Net Sales
Net sales for the first six months of fiscal 2005 increased by 25.3% to
$124.0 million, as compared to net sales of $98.9 million for the first six
months of fiscal 2004. The increase in net sales reflects an increase of $16.3
million (a 22.7% increase) to $88.3 million in net sales within the FSG, and an
increase of $8.7 million (a 32.0% increase) to $35.8 million in net sales within
the ETG. The FSG's net sales increase primarily reflects improved demand for its
aftermarket replacement parts and repair and overhaul services, which reflects
continued recovery within the commercial airline industry, as well as increased
sales of new products. The ETG's net sales increase reflects the acquisition of
Connectronics and Lumina (see Note 2, Acquisitions, of the Notes to Condensed
Consolidated Financial Statements) and organic growth of approximately 10%
reflecting increased demand for certain products.
The Company's net sales for the first six months of fiscal 2005 by
market approximated 67% from the commercial aviation industry, 21% from the
defense and space industries and 12% from other industrial markets including
medical, electronics and telecommunications. Net sales in fiscal 2004 by market
approximated 65% from the commercial aviation industry, 23% from the defense and
space industries and 12% from other markets.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 36.6% for the first six
months of fiscal 2005 as compared to 34.6% for the first six months of fiscal
2004, reflecting higher margins within the FSG offset by a decrease in the ETG
margin. The FSG's gross profit margin increase was due principally to improved
operating efficiencies within the FSG, lower new product research and
development expenses as a percentage of net sales and lower charges related to
excess or slow-moving inventory. The ETG's gross profit margin decrease was
primarily due to lower sales of higher margin products and higher new product
research and development expenses as a percentage of net sales. Consolidated
cost of sales for the first six months of fiscal 2005 and 2004 includes
approximately $5.3 million and $4.5 million, respectively, of new product
research and development expenses.
SG&A expenses were $25.2 million and $19.5 million for the first six
months of fiscal 2005 and fiscal 2004, respectively. As a percentage of net
sales, SG&A expenses increased to 20.4% for the first six months of fiscal 2005
compared to 19.7% for the first six months of fiscal 2004. The increase in SG&A
expenses and SG&A expenses as a percentage of net sales is mainly due to the
increase in operating costs, principally personnel related, associated with the
increase in net sales discussed above.
Operating Income
Operating income of $20.1 million for the first six months of fiscal
2005 was 36.3% higher than operating income of $14.7 million for the first six
months of fiscal 2004. The improvement in operating income reflects a $5.1
million increase in operating income of the FSG from $11.3 million
16
for the first six months of fiscal 2004 to $16.5 million for the first six
months to fiscal 2005. Operating income of the ETG increased $0.5 million from
$6.2 million for the first six months of fiscal 2004 to $6.7 million for the
first six months of fiscal 2005. As a percentage of net sales, operating income
increased from 14.9% in the first six months of fiscal 2004 to 16.2% in the
first six months of fiscal 2005. The increase in operating income as a
percentage of net sales reflects an increase in the FSG's operating income as a
percentage of net sales from 15.8% in the first six months of fiscal 2004 to
18.6% in the first six months of fiscal 2005 and a decrease in the ETG's
operating income as a percentage of net sales from 22.8% in the first six months
of fiscal 2004 to 18.7% in the first six months of fiscal 2005. The increase in
the FSG's operating income as a percentage of net sales reflects the improved
gross margins discussed previously. The decrease in the ETG's operating income
as a percentage of net sales reflects the decreased gross margins discussed
previously.
Interest Expense
Interest expense decreased to $533,000 in the first six months of fiscal
2005 from $632,000 in the first six months of fiscal 2004. The decrease was
principally due to a lower weighted average balance outstanding under the
revolving credit facility in the first six months of fiscal 2005, partially
offset by higher interest rates.
Interest and Other Income
Interest and other income in the first six months of fiscal 2005 and
fiscal 2004 were not material.
Income Tax Expense
The Company's effective tax rate for the first six months of fiscal 2005
increased to 36.3% from 34.4% for the first six months of fiscal 2004. The
increase is due to a lower amount of the minority interests' share of income
excluded from our consolidated income subject to federal income taxes, a
reduction in the tax benefit on export sales under the federal Extraterritorial
Income Exclusion provisions that begin phasing out in fiscal 2005 and higher
state taxes principally related to recent acquisitions.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra Microwave Technology, LLC. The increase from the first six months
of fiscal 2004 to the first six months of fiscal 2005 was primarily attributable
to higher earnings of the FSG.
Net Income
The Company's net income was $10.1 million, or $.39 per diluted share,
for the first six months of fiscal 2005 compared to $7.3 million, or $.29 per
diluted share, for the first six months of fiscal 2004 reflecting the increased
operating income referenced above.
17
OUTLOOK
The Company reported increased sales in its two business segments
reflecting both organic growth and growth through acquisitions. The Company
believes that the FSG's operating margins will continue to show year over year
improvement during the balance of fiscal 2005 while operating margins in the ETG
are expected to return to levels approximating those experienced in fiscal 2004.
Based on the current strengthening of the markets in which the Company
participates and the Company's continued success in introducing new products and
services, the Company continues to target growth in fiscal 2005 sales and net
income over fiscal 2004 results.
COMPARISON OF SECOND QUARTER OF FISCAL 2005 TO SECOND QUARTER OF FISCAL 2004
Net Sales
Net sales for the second quarter of fiscal 2005 increased by 26.9% to
$67.0 million, as compared to net sales of $52.8 million for the second quarter
of fiscal 2004. The increase in net sales reflects an increase of $8.3 million
(a 22.1% increase) to $46.1 million in net sales within the FSG, and an increase
of $5.8 million (a 38.6% increase) to $21.0 million in net sales within the ETG.
The FSG's net sales increase primarily reflects improved demand for its
aftermarket replacement parts and repair and overhaul services, which reflects
continued recovery within the commercial airline industry, as well as increased
sales of new products. The ETG's net sales increase reflects the acquisition of
Connectronics and Lumina (see Note 2, Acquisitions, of the Notes to Condensed
Consolidated Financial Statements) and organic growth of approximately 9%
reflecting increased demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 37.4% for the second
quarter of fiscal 2005 as compared to 35.4% for the second quarter of fiscal
2004, reflecting higher margins within the FSG offset by a decrease in the ETG
margin. The FSG's gross profit margin increase was due principally to improved
operating efficiencies within the FSG, lower new product research and
development expenses as a percentage of net sales and lower charges related to
excess or slow-moving inventory. The ETG's gross profit margin decrease was
primarily due to lower sales of higher margin products and higher new product
research and development expenses as a percentage of net sales. Consolidated
cost of sales for the second quarter of fiscal 2005 and 2004 includes
approximately $2.9 million and $2.4 million, respectively, of new product
research and development expenses.
SG&A expenses were $13.6 million and $10.5 million for the second
quarter of fiscal 2005 and fiscal 2004, respectively. As a percentage of net
sales, SG&A expenses increased slightly to 20.3% for the second quarter of
fiscal 2005 compared to 20.0% for the second quarter of fiscal 2004. The
increase in SG&A expenses and SG&A expenses as a percentage of net sales is
mainly due to increased operating costs, principally personnel related,
associated with the increase in net sales discussed above.
18
Operating Income
Operating income of $11.4 million for the second quarter of fiscal 2005
was 39.9% higher than operating income of $8.2 million for the second quarter of
fiscal 2004. The improvement in operating income reflects a $2.9 million
increase in operating income of the FSG from $6.0 million for the second quarter
of fiscal 2004 to $8.9 million for the second quarter of fiscal 2005. Operating
income of the ETG increased $0.5 million from $3.7 million for the second
quarter of fiscal 2004 to $4.2 million for the second quarter of fiscal 2005. As
a percentage of net sales, operating income increased from 15.5% in the second
quarter of fiscal 2004 to 17.1% in the second quarter of fiscal 2005. The
increase in operating income as a percentage of net sales reflects an increase
in the FSG's operating income as a percentage of net sales from 15.9% in the
second quarter of fiscal 2004 to 19.3% in the second quarter of fiscal 2005 and
a decrease in the ETG's operating income as a percentage of net sales from 24.5%
in the second quarter of fiscal 2004 to 20.1% in the second quarter of fiscal
2005. The increase in the FSG's operating income as a percentage of net sales
reflects the improved gross margins discussed previously. The decrease in the
ETG's operating income as a percentage of net sales reflects the decreased gross
margins discussed previously.
Interest Expense
Interest expense was $300,000 in the second quarter of fiscal 2005 and
$301,000 in the second quarter of fiscal 2004 reflecting lower weighted average
balance outstanding under the revolving credit facility in the second quarter of
fiscal 2005 offset by higher interest rates.
Interest and Other Income
Interest and other income in the second quarter of fiscal 2005 and
fiscal 2004 were not material.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra Microwave Technology, LLC. The increase from the second quarter
of fiscal 2004 to the second quarter of fiscal 2005 was primarily attributable
to higher earnings of the FSG.
Net Income
The Company's net income was $5.7 million, or $.22 per diluted share,
for the second quarter of fiscal 2005 compared to $4.1 million, or $.16 per
diluted share, for the second quarter of fiscal 2004 reflecting the increased
operating income referenced above.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities
and available borrowings under its revolving credit facility will be sufficient
to fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $11.5 million for the
first six months of fiscal 2005, consisting primarily of net income of $10.1
million, depreciation and amortization of $3.5 million, a tax benefit on stock
option exercises of $2.6 million, minority interests' share of income of
consolidated subsidiaries of $2.4 million, a deferred income tax provision of
$1.4 million, and an increase in net operating assets of $8.4 million. The
increase in net operating assets (current assets used in operating activities
net of current liabilities) primarily reflects a higher investment in
inventories required to meet increased sales demand associated with new product
offerings and sales growth and an increase in accounts receivable due to sales
growth. Net cash provided by operating activities decreased from $16.7 million
for the first six months of fiscal 2004 principally as a result of the increase
in net operating assets referenced above.
Investing Activities
Net cash used in investing activities during the first six months of
fiscal 2005 related primarily to acquisitions and related costs (principally
Connectronics and Lumina) of $18.4 million and capital expenditures totaling
$3.0 million, partially offset by proceeds of $3.5 million from the sale of a
building held for sale (see Note 3, Selected Financial Statement Information -
Property, Plant and Equipment).
Financing Activities
Net cash provided by financing activities during the first six months of
fiscal 2005 primarily related to borrowings of $22.0 million on the Company's
revolving credit facility to fund the Connectronics and Lumina acquisitions, to
make required income tax payments and for other working capital needs, and
proceeds from stock option exercises of $0.8 million, partially offset by
repayments of $13.0 million on the Company's revolving credit facility and the
payment of $0.6 million in cash dividends on the Company's common stock.
20
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating $1.8
million to meet the security requirement of its insurance company for potential
workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a $0.2 million
letter of credit expiring December 2005. These letters of credit are supported
by the Company's $120 million revolving credit facility. In addition, the
Company's industrial development revenue bonds are secured by a $2.0 million
letter of credit expiring April 2008 and a mortgage on the related properties
pledged as collateral.
As part of the agreement to acquire an 80% interest in Sierra Microwave
Technology, Inc., the Company has the right to purchase the minority interests
in approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
As part of the agreement to purchase Connectronics (See Note 2,
Acquisitions), the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in the aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition.
As part of the agreement to purchase Lumina (see Note 2, Acquisitions),
the Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should Lumina meet certain product
line-related earnings objectives during the fourth and fifth years following the
acquisition.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"),
"Inventory Costs, an amendment of ARB No. 43, Chapter 4". SFAS No. 151 requires
the allocation of fixed production overhead costs be based on the normal
capacity of the production facilities and unallocated overhead costs recognized
as an expense in the period incurred. The Statement also clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the
provisions of SFAS No. 151, but does not currently believe the adoption of the
Statement will have a material effect on its results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 ("SAB 107") to provide
public companies with its interpretive guidance in applying the provisions of
SFAS No. 123(R). SFAS No. 123(R) focuses primarily on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R)
21
requires companies to recognize in the statement of operations the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (with limited exceptions). This
Statement is effective for fiscal years beginning after June 15, 2005;
therefore, the Company plans to adopt the new requirements in its first quarter
of fiscal 2006. The Company is currently evaluating the provisions of SFAS No.
123(R) and guidance in SAB 107 and has not yet determined the impact that SFAS
No. 123(R) and SAB 107 will have on its results of operations or financial
position.
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP FAS
No. 109-1"), "Application of FASB Statement No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004". FSP FAS No. 109-1 states that qualified
production activities should be accounted for as a special deduction under SFAS
No. 109 and not be treated as a rate reduction. Accordingly, the special
deduction has no effect on the Company's deferred tax assets and liabilities
existing as of the enactment date. The Company is currently evaluating the
impact of the American Jobs Creation Act of 2004, which will allow the Company
to claim a deduction from taxable income attributable to qualified domestic
production activities beginning in fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 is based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The Statement eliminates the
exception of nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e. the future cash flows of the entity are not expected
to change significantly as a result of the exchange). The provisions of SFAS No.
153 are effective as of the first reporting period beginning after June 15,
2005. The Company does not expect the adoption of SFAS No. 153 to have a
material effect on its results of operations or financial position.
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 statement contained herein that are not clearly historical in
nature may be forward-looking and the words "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward looking
statements. Any forward-looking statements 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 known and unknown 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 statements. Factors that could cause such
differences, but are
22
not limited to: lower demand for commercial air travel or airline fleet changes,
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 or space spending by U.S. and/or foreign
customers, or competition from existing and new competitors, which could reduce
our sales; HEICO's ability to introduce new products and product pricing levels,
which could reduce our sales or sales growth; HEICO's ability to make
acquisitions and achieve operating synergies from acquired businesses, customer
credit risk, interest rates and economic conditions within and outside of the
aviation, defense, space and electronics industries, which could negatively
impact our costs and revenues; and HEICO's ability to maintain effective
internal controls, which could adversely affect our business and the market
price of our common stock. We undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the outstanding debt balance as of April 30, 2005, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $106,000 on an annual basis.
24
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity
securities or repurchase any of its equity securities during the first six
months of fiscal 2005.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on March 25, 2005, the
Company's shareholders elected eight directors. The number of votes cast for and
withheld for each nominee for director was as follows:
DIRECTOR FOR WITHHELD
---------------------- ---------- ----------
Samuel L. Higginbottom 9,969,758 260,360
Wolfgang Mayrhuber 9,110,740 1,119,378
Eric A. Mendelson 9,209,946 1,020,172
Laurans A. Mendelson 9,354,673 875,445
Victor H. Mendelson 9,171,735 1,058,383
Albert Morrison, Jr. 10,122,333 107,785
Joseph W. Pallot 10,120,818 109,300
Dr. Alan Schriesheim 10,016,302 213,816
The Company's shareholders also ratified the appointment of Deloitte &
Touche LLP as the Company's independent registered public accounting firm for
the fiscal year ending October 31, 2005, with 10,141,903 voting for the
proposal, 57,273 voting against and 30,942 abstaining.
26
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
------- ---------------------------------------------------------
10.1 Fifth Amendment, effective as of March 28, 2005, to the
HEICO Savings and Investment Plan. *
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. *
32.1 Section 1350 Certification of Chief Executive Officer. **
32.2 Section 1350 Certification of Chief Financial Officer. **
----------
* Filed herewith.
** Furnished herewith.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: June 2, 2005 By: /s/ THOMAS S. IRWIN
----------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
10.1 Fifth Amendment, effective as of March 28, 2005, to the HEICO Savings
and Investment Plan.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
Exhibit 10.1
FIFTH AMENDMENT TO THE
HEICO SAVINGS AND INVESTMENT PLAN
THIS FIFTH AMENDMENT (the "Amendment"), made as of the 25th day of
March, 2005, to the HEICO Savings and Investment Plan (the "Plan"), by HEICO
Corporation, a Florida corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the Plan for the sole and exclusive
benefit of its eligible participants and their respective beneficiaries under
the terms and provisions of the Internal Revenue Code of 1986, as amended; and
WHEREAS, pursuant to Section 15.01 of the Plan, the Company has the
power to amend the Plan;
NOW, THEREFORE, the Plan shall be amended as follows:
EFFECTIVE AS OF MARCH 28, 2005:
1. Section 10.01(c)(1) is hereby amended in its entirety to read as
follows:
"If the value of a Participant's vested Accounts to be
distributed is less than or equal to $1,000, computed on the
Participant's Termination Date, the Participant's vested Account
balance shall be distributed in a lump sum payment as soon as
administratively feasible after his Termination Date."
2. Section 10.01(c)(2) is hereby amended in its entirety to read as
follows:
"If the value of a Participant's vested Accounts as of his
Termination Date is greater than $1,000, the Participant's
consent to a distribution shall be required; provided that,
notwithstanding the lack of consent, distribution shall be made
no later than the date established under Section 10.06 for
mandatory distributions."
3. The last sentence of Section 10.01(c)(3) is hereby amended in its
entirety to read as follows:
"If the value of the Participant's vested Accounts as so
determined is $1,000 or less, the Plan shall immediately
distribute the Participant's entire vested Account balance."
4. Section 10.06(d) is hereby amended in its entirety to read as follows:
"Notwithstanding the foregoing provisions of this Section 10.06,
if the value of a Participant's vested Accounts to be
distributed is less than or equal to $1,000, computed on the
Participant's Termination of Employment, the Participant's
vested Account balance shall be distributed in a lump sum
payment as soon as practicable after his Termination of
Employment."
5. In all other respects, the Plan shall remain unchanged by the Amendment.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed the day and year first above written.
HEICO Corporation, a Florida corporation
By:
------------------------------------
Name:
Title:
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Laurans A. Mendelson, Chief Executive Officer of HEICO Corporation, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q of HEICO
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this
report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: June 2, 2005 /S/ LAURANS A. MENDELSON
--------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Thomas S. Irwin, Chief Financial Officer of HEICO Corporation, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of HEICO
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this
report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: June 2, 2005 /S/ THOMAS S. IRWIN
--------------------------
Thomas S. Irwin
Chief Financial Officer
Exhibit 32.1
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the "Company") on
Form 10-Q for the period ended April 30, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report") I, Laurans A. Mendelson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: June 2, 2005 /S/ LAURANS A. MENDELSON
--------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 32.2
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the "Company") on
Form 10-Q for the period ended April 30, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report") I, Thomas S. Irwin, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: June 2, 2005 /S/ THOMAS S. IRWIN
--------------------------
Thomas S. Irwin
Chief Financial Officer