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 JULY 31, 1998
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 Identification No.)
incorporation or organization)
3000 TAFT STREET, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices) (Zip Code)
(954) 987-6101
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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
----- -----
The number of shares outstanding of each of the Registrant's classes of common
stock as of August 31, 1998:
TITLE OF CLASS SHARES OUTSTANDING
-------------- ------------------
Common Stock, $.01 par value 8,398,436
Class A Common Stock, $.01 par value 4,198,704
HEICO CORPORATION
INDEX
PAGE NO.
--------
Part I. Financial information:
Consolidated Condensed Balance Sheets as of
July 31, 1998 (unaudited) and October 31, 1997................... 2
Consolidated Condensed Statements of Operations (unaudited)
for the nine months and three months ended July 31, 1998
and 1997......................................................... 3
Consolidated Condensed Statements of Cash Flows (unaudited)
for the nine months ended July 31, 1998 and 1997................. 4
Notes to Consolidated Condensed Financial Statements (unaudited)... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 12
Part II. Other Information:
Item 1. Legal Proceedings......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................... 16
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PART I. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
JULY 31, OCTOBER 31,
1998 1997
-------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 13,684,000 $24,199,000
Short-term investments 3,689,000 --
Accounts receivable, net 16,662,000 12,560,000
Inventories 26,038,000 18,359,000
Prepaid expenses and other current assets 1,483,000 1,500,000
Deferred income taxes 1,169,000 1,098,000
------------ -----------
Total current assets 62,725,000 57,716,000
------------ -----------
Property, plant and equipment 30,698,000 23,363,000
Less accumulated depreciation (15,604,000) (14,820,000)
------------ -----------
Property, plant and equipment, net 15,094,000 8,543,000
------------ -----------
Intangible assets less accumulated amortization of
$1,681,000 in 1998 and $1,186,000 in 1997 51,537,000 13,258,000
------------ -----------
Unexpended bond proceeds 3,119,000 5,437,000
------------ -----------
Deferred income taxes 637,000 857,000
------------ -----------
Other assets 3,459,000 2,828,000
------------ -----------
Total assets $136,571,000 $88,639,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 377,000 $ 342,000
Trade accounts payable 6,344,000 4,180,000
Accrued expenses and other current liabilities 10,260,000 6,680,000
Income taxes payable 414,000 1,383,000
------------ -----------
Total current liabilities 17,395,000 12,585,000
------------ -----------
Long-term debt and capital leases 35,236,000 10,458,000
------------ -----------
Deferred income taxes -- 463,000
------------ -----------
Other non-current liabilities 2,930,000 2,414,000
------------ -----------
Total liabilities 55,561,000 25,920,000
------------ -----------
Minority interest in consolidated subsidiary 13,981,000 3,273,000
------------ -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share;
Authorized - 10,000,000 shares issuable
in series; 200,000 designated as
Series A Junior Participating Preferred
Stock, none issued -- --
Common stock, $.01 par value; Authorized -
30,000,000 shares; Issued - 8,398,436 shares
in 1998 and 8,283,493 shares in 1997 84,000 83,000
Class A Common Stock, $.01 par value;
Authorized - 30,000,000 shares; Issued -
4,198,704 in 1998 and 4,141,747 in 1997 42,000 41,000
Capital in excess of par value 36,009,000 35,492,000
Unrealized loss on investments (82,000) --
Retained earnings 33,474,000 26,772,000
------------ -----------
69,527,000 62,388,000
Less: Note receivable from employee savings and
investment plan (2,498,000) (2,942,000)
------------ -----------
Total shareholders' equity 67,029,000 59,446,000
------------ -----------
Total liabilities and shareholders' equity $136,571,000 $88,639,000
============ ===========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-2-
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
Net sales $66,518,000 $44,535,000 $24,062,000 $16,716,000
----------- ----------- ----------- -----------
Operating costs and expenses:
Cost of sales 42,250,000 30,389,000 15,254,000 11,847,000
Selling, general and administrative expenses 11,845,000 7,777,000 4,364,000 2,613,000
----------- ----------- ----------- -----------
Total operating costs and expenses 54,095,000 38,166,000 19,618,000 14,460,000
----------- ----------- ----------- -----------
Income from operations 12,423,000 6,369,000 4,444,000 2,256,000
Interest expense (381,000) (319,000) (128,000) (141,000)
Interest and other income 1,736,000 1,300,000 637,000 473,000
----------- ----------- ----------- -----------
Income before income taxes
and minority interest 13,778,000 7,350,000 4,953,000 2,588,000
Income tax expense 4,723,000 2,404,000 1,733,000 876,000
----------- ----------- ----------- -----------
Net income before minority interest 9,055,000 4,946,000 3,220,000 1,712,000
Minority interest 1,709,000 -- 607,000 --
----------- ----------- ----------- -----------
Net income $ 7,346,000 $ 4,946,000 $ 2,613,000 $ 1,712,000
=========== =========== =========== ===========
Net income per share:
Basic $ .59 $ .41 $ .21 $ .14
=========== =========== =========== ===========
Diluted $ .47 $ .35 $ .17 $ .12
=========== =========== =========== ===========
Weighted average number of
common shares outstanding
Basic 12,496,073 11,976,842 12,582,605 12,037,921
=========== =========== =========== ===========
Diluted 15,590,084 14,272,236 15,751,954 14,324,150
=========== =========== =========== ===========
Cash dividends per share $ .05 $ .044 $ .025 $ .022
=========== =========== =========== ===========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
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HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED
JULY 31,
-------------------------------------
1998 1997
------------ ----------
Cash flows from operating activities:
Net income $ 7,346,000 $4,946,000
Adjustments to reconcile net income to cash
from operating activities:
Depreciation and amortization 1,658,000 1,170,000
Minority interest in consolidated subsidiary 1,709,000 --
Deferred income taxes (314,000) (345,000)
Deferred financing costs (990,000) (144,000)
Change in assets and liabilities:
(Increase) in accounts receivable (1,593,000) (587,000)
(Increase) in inventories (6,552,000) (2,557,000)
Decrease (increase) in prepaid expenses and
other current assets 81,000 (708,000)
Increase (decrease) in trade payables, accrued
expenses and other current liabilities 3,963,000 (1,556,000)
(Decrease) in income taxes payable (969,000) (533,000)
Increase in other non-current liabilities -- 203,000
Other (164,000) (174,000)
----------- -----------
Net cash provided by (used in) operating activities 4,175,000 (285,000)
----------- -----------
Cash flows from investing activities:
Net purchases of short-term investments (3,771,000) --
Purchases of property, plant and equipment (3,989,000) (2,807,000)
Acquisition, net of cash acquired (35,328,000) --
Payment received from employee savings and
investment plan note receivable 444,000 396,000
Other 1,013,000 (180,000)
----------- -----------
Net cash (used in) investing activities (41,631,000) (2,591,000)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt:
Proceeds from revolving credit facility 25,000,000 --
Reimbursement from unexpended bond proceeds 2,469,000 1,427,000
Other 94,000 845,000
Proceeds from the exercise of stock options 519,000 1,028,000
Payments on long-term debt and capital leases (496,000) (573,000)
Cash dividends paid (644,000) (549,000)
Other (1,000) 3,000
----------- -----------
Net cash provided by financing activities 26,941,000 2,181,000
----------- -----------
Net (decrease) in cash and cash equivalents (10,515,000) (695,000)
Cash and cash equivalents at beginning of year 24,199,000 11,025,000
----------- -----------
Cash and cash equivalents at end of period $13,684,000 $10,330,000
=========== ===========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-4-
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED
July 31, 1998
1. The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes normally included in annual
consolidated financial statements and should be read in conjunction with the
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K/A Amendment No. 1 for the year ended October 31, 1997. In
the opinion of management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the consolidated condensed
balance sheets and consolidated condensed statements of operations and cash flow
for such interim periods presented. The results of operations for the nine
months ended July 31, 1998 are not necessarily indicative of the results which
may be expected for the entire fiscal year.
2. On July 31, 1998, the Company, through a subsidiary, acquired all of the
outstanding capital stock of McClain International, Inc., located in Atlanta,
GA. In consideration of this acquisition, the Company paid approximately $41
million in cash. The Company also purchased from one of McClain's selling
shareholders, McClain's headquarters and manufacturing facility for $2.5 million
in cash. McClain designs, manufactures and overhauls FAA-approved aircraft jet
engine replacement components.
The source of the purchase price was $10 million from available funds, $9
million from an additional investment advance by Lufthansa Technik AG
(Lufthansa), which owns 20% of HEICO Aerospace Holdings Corp., and $25 million
from proceeds of a $120 million revolving credit facility (see Note 5 to the
Consolidated Condensed Financial Statements).
The acquisition of McClain has been accounted for using the purchase method of
accounting. The purchase price has been assigned to the net assets acquired
based on the fair value of such assets and liabilities at the date of
acquisition. The excess of purchase price over the fair value of the
identifiable net assets acquired amounted to $37.7 million, which is being
amortized over 30 years using the straight line method.
-5-
Results of operations of McClain will be included with the Company's results
effective August 1, 1998.
The following table presents unaudited pro forma consolidated operating results
as if the Company's acquisition of McClain had been consummated as of November
1, 1996. The pro forma consolidated operating results do not purport to present
actual operating results had the acquisition been made at the beginning of
fiscal 1997, or the results which may occur in the future.
PRO FORMA
NINE MONTHS ENDED JULY 31,
-------------------------------
1998 1997
------------- -------------
Net sales...................................... $ 76,214,000 $ 52,634,000
Net income before minority interest............ 10,219,000 5,837,000
Minority interest.............................. 2,153,000 375,000
Net income..................................... 8,066,000 5,462,000
Net income per share
Basic........................................ $ 0.65 $ 0.46
Diluted...................................... $ 0.52 $ 0.38
During the third quarter of fiscal 1998, the Company terminated its plans to
acquire Teleflex-Lionel-Dupont and PTM International, Inc. (See Notes 11 and 12
of the Form 10-Q for the quarter ended April 30, 1998.)
3. Short-term investments consist of equity securities. These investments are
classified as available-for-sale and stated at fair value. All short-term
investments held are summarized below:
JULY 31, 1998
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Equity securities............. $3,823,000 $ -- $ 134,000 $3,689,000
========== ========== ========== ==========
There were no short-term investments during the year ended October 31, 1997.
Unrealized gains and losses, net of deferred taxes, are reflected as an
adjustment to shareholders' equity. Gross realized gains on sales of securities
classified as available-for-sale, using the average cost method, were $172,000
and $288,000 for the three-month and nine-month periods ended July 31, 1998.
There were no realized losses during these periods.
-6-
4. Accounts receivable are composed of the following:
JULY 31, 1998 OCTOBER 31, 1997
------------------ ----------------
Accounts receivable............................ $ 17,011,000 $ 12,922,000
Less allowance for doubtful accounts........... (349,000) (362,000)
------------------ ----------------
Accounts receivable, net....................... $ 16,662,000 $ 12,560,000
================== ================
Inventories are comprised of the following:
JULY 31, 1998 OCTOBER 31, 1997
------------------ ----------------
Finished products.............................. $ 8,968,000 $ 4,329,000
Work in process................................ 6,558,000 7,359,000
Materials, parts, assemblies and supplies...... 10,512,000 6,671,000
------------------ ----------------
Total inventories.............................. $ 26,038,000 $ 18,359,000
================== ================
Inventories related to long-term contracts were not significant as of July 31,
1998 and October 31, 1997.
The accompanying consolidated condensed financial statements do not include any
material revenue amounts in excess of billings or any material billings in
excess of costs and profits related to long-term contracts.
5. Long-term debt consists of:
JULY 31, 1998 OCTOBER 31, 1997
------------------ ----------------
Borrowings under revolving credit facility.... $ 25,000,000 --
Industrial Development Revenue
Bonds - Series 1997A......................... 3,000,000 $ 3,000,000
Industrial Development Revenue
Bonds - Series 1997C......................... 995,000 1,000,000
Industrial Development Revenue
Bonds - Series 1996.......................... 3,500,000 3,500,000
Industrial Development Revenue
Refunding Bonds - Series 1988................ 1,980,000 1,980,000
Equipment loans................................ 1,060,000 1,320,000
Capital leases................................. 78,000 --
------------------ ----------------
35,613,000 10,800,000
Less current maturities........................ (377,000) (342,000)
------------------ ----------------
$ 35,236,000 $ 10,458,000
================== ================
In July 1998, the Company entered into a $120 million revolving credit
facility (Credit Facility) with a bank. Funds are available for funding
acquisitions, working capital and general corporate requirements on a revolving
basis through July 2001. The Credit Facility may be extended by mutual consent
through July 2003. The Company has the option to convert outstanding advances to
term loans amortizing over a five year period, with a maximum Credit Facility
term of seven years. Outstanding borrowings bear
-7-
interest at the Company's choice of prime rate or London Interbank Offering
Rates (LIBOR) plus applicable margins. The applicable margins range from .00% to
.50% for prime rate borrowings and from .75% to 2.00% for LIBOR based borrowings
depending on the leverage ratio of the Company. A fee of .20% to .40% is charged
on the amount of the unused commitment depending on the leverage ratio of the
Company. The Credit Facility is secured by all the assets of the Company and its
subsidiaries and contains covenants which, among other things, requires the
maintenance of certain working capital, leverage and debt service ratios as well
as minimum net worth requirements. At July 31, 1998, the Company had a total of
$25 million borrowed under the Credit Facility at an interest rate of 6.78%,
which was borrowed to partially fund the acquisition of McClain (see Note 2 to
the Consolidated Condensed Financial Statements).
The industrial development revenue bonds represent bonds issued by
Broward County, Florida in 1996 (Series 1996 bonds) and in 1988 (Series 1988
bonds), and bonds issued by Manatee County, Florida in 1997 (Series 1997A and
Series 1997C bonds).
As of July 31, 1998, unexpended proceeds of the Series 1997A and 1997C
bonds of $1,674,000, including investment earnings, are held by the trustee and
are available for future qualified expenditures. The Series 1997A and 1997C
bonds bear interest at 3.65% at July 31, 1998.
As of July 31, 1998, unexpended proceeds of the Series 1996 bonds of
$1,445,000, including investment earnings, are held by the trustee and are
available for future qualified expenditures. The Series 1996 and Series 1988
bonds bear interest as of July 31, 1998, at 3.75% and 3.55%, respectively.
Equipment loans bear interest at rates ranging from 8.50% to 9.00% as
of July 31, 1998.
Included in property, plant and equipment in the accompanying balance
sheets is an asset held under a capital lease as summarized below:
JULY 31, 1998 OCTOBER 31, 1997
------------------ ----------------
Machinery and equipment (lease expires
in 2000; interest rate of 14.3%)........... $ 141,000 --
Less accumulated amortization................. (71,000) --
------------------ ----------------
Assets under capital lease, net............... $ 70,000 --
================== ================
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6. On March 20, 1998, the Company's Board of Directors declared a stock dividend
payable in newly-authorized Class A Common Stock. The 50% dividend was paid on
April 23, 1998, to shareholders of record on April 9, 1998. All net income per
share, dividend per share, stock options and common shares outstanding
information has been adjusted for the effect of any stock dividends and stock
splits. As of July 31, 1998, the Company has outstanding 8,398,436 shares of
$.01 par value per share Common Stock and options to purchase 2,765,932 shares
of Common Stock. Each share of Common Stock is entitled to one vote per share.
As of July 31, 1998, the Company has 4,198,704 outstanding shares of Class A
Common Stock and 1,396,293 options outstanding to purchase Class A Common Stock.
Each share of Class A Common Stock is entitled to a 1/10 vote per share. Holders
of the Company's Common Stock and Class A Common Stock are entitled to receive
when, as and if declared by the Board of Directors dividends and other
distributions payable in cash, property, stock, or otherwise. In the event of
liquidation, after payment of debts and other liabilities of the Company, and
after making provision for the holders of preferred stock, if any, the remaining
assets of the Company will be distributable ratably among the holders of all
classes of common stock. Stock options outstanding for the Company's Common
Stock and Class A Common Stock had average exercise prices of $6.98 and $6.95,
respectively at July 31, 1998. The term of each option is determined by the
Stock Option Committee but shall never exceed ten years. Since the end of fiscal
year 1997, 115,270 shares of Common Stock and 36,241 shares of Class A Common
Stock were issued upon exercise of stock options.
7. Research and development expenses for the first nine months of fiscal 1998
and 1997 totaled $835,000 and $2,206,000, respectively. The expenses for the
first nine months of 1998 are net of $2,302,000 received from Lufthansa Technik
AG (Lufthansa) pursuant to a research and development cooperation agreement
entered into on October 30, 1997.
8. Basic net income per share is calculated on the basis of the weighted average
number of shares outstanding during the period, excluding dilution. Diluted net
income per share is computed on the basis of the weighted average number of
shares outstanding during the period plus common share equivalents arising from
the assumed exercise of stock options, if dilutive. Per share information for
fiscal 1997 has been restated in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share."
9. In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Adoption of this statement will not impact
the Company's
-9-
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 132 standardizes the
disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS 132 is effective for fiscal years beginning after
December 15, 1997. Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosure.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains and losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
The Company has not yet quantified the impact of adopting SFAS 133 on its
financial statements and has not determined the timing of or method of
adoption of the statement.
10. In May 1998, the Company and its HEICO Aerospace Corporation and Jet Avion
Corporation subsidiaries were served with a lawsuit by Travelers Casualty &
Surety Co., f/k/a The Aetna Casualty and Surety Co. (Aetna). The complaint seeks
reimbursement of legal fees and costs totaling in excess of $14 million paid by
Aetna in defending the Company in litigation with United Technologies Corp.
(UTC), which was filed in November 1989. (See Note 13 to the Consolidated
Financial Statements of the Company's Form 10-K/A Amendment No. 1 for
the fiscal year ended October 31, 1997 for a discussion of the UTC litigation).
In addition, Aetna seeks a declaratory judgement that the Company did not and
does not have insurance coverage under certain insurance policies with Aetna and
accordingly, that Aetna did not have and does not have a duty to defend or
indemnify the Company under such policies. Also named as defendants in Aetna's
lawsuit are UTC and one of the law firms representing the Company in the UTC
litigation.
-10-
During fiscal 1997 and 1998, Summary Judgements dismissing UTC's remaining
claims against the Company were issued by the United States District Court
Judge. As a result of these rulings, the only claims currently pending in the
UTC litigation are the Company's counterclaims against UTC. UTC may challenge
these rulings in further court proceedings.
The Company intends to vigorously defend Aetna's claim and believes that it has
significant counterclaims for damages. After taking into consideration legal
counsel's evaluation of Aetna's claim, management is of the opinion that the
outcome of the Aetna litigation will not have a significant adverse effect on
the Company's consolidated financial statements.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine months ended July 31, 1998 and 1997
RESULTS OF CONTINUING OPERATIONS
Fiscal 1998 third quarter net sales totaled $24,062,000, representing a 44%
increase over net sales of $16,716,000 in the third quarter of fiscal 1997.
Fiscal 1998 third quarter net income of $2,613,000 ($.17 per share) increased
53% over fiscal 1997 third quarter net income of $1,712,000 ($.12 per share).
For the first nine months of fiscal 1998, net sales and net income totaled
$66,518,000 and $7,346,000 ($.47 per share), respectively, representing a 49%
increase over net sales of $44,535,000 in the first nine months of fiscal 1997
and a 49% increase over net income of $4,946,000 ($.35 per share) in the first
nine months of fiscal 1997.
The improved fiscal 1998 operating results are primarily attributable to
increased sales and gross margins discussed below.
Net sales of the Company's Flight Support operations rose 48% to $15.5 million
in the third quarter of fiscal 1998 and rose 58% to $44.9 million in the first
nine months of fiscal 1998. The increase in net sales of the Flight Support
operations in fiscal 1998 is principally due to the sales of Northwings
Accessories Corp. (Northwings), a business acquired in September 1997, and
increased sales volumes of jet engine replacement parts to the Company's
commercial airlines industry customers.
The balance of the increase in net sales is attributable to revenues of the
Ground Support operations which rose 37% to $8.5 million in the third quarter of
fiscal 1998 and rose 34% to $21.6 million in the first nine months of fiscal
1998. This increase principally reflects higher demand for the Company's Ground
Support products as well as sales of new products.
The Company's Flight Support operations had a backlog of approximately $35
million as of July 31, 1998. The backlog includes approximately $28 million
representing forecasted shipments over the next 12 months for certain contracts
pursuant to which customers provide estimated annual usage. The current backlog
increased over the October 31, 1997 backlog of approximately $24 million and the
July 31, 1997 backlog of $11 million principally due to the aforementioned sales
volume increase and the addition of a $2 million backlog of the newly acquired
Northwings operation.
-12-
The Company's Ground Support operations had a backlog of approximately $7
million at July 31, 1998, $12 million at October 31, 1997, $11 million at July
31, 1997. This decrease principally reflects shipments related to a $4 million
contract received in fiscal 1997.
Substantially all of this backlog of orders is expected to be delivered within
twelve months.
The Company's gross profit margins for the third quarter of fiscal 1998 averaged
36.6% as compared to gross profit margins averaging 29.1% in the same period of
fiscal 1997. Gross profit margins averaged 36.5% in the first nine months of
fiscal 1998, and 31.8% in the first nine months of fiscal 1997. These increases
reflect improvements in gross margins in both the Flight Support and Ground
Support operations. The improvement in gross margins in the Flight Support
operations reflects an increase resulting from the reimbursement in development
and research costs from Lufthansa (see Note 7 to the Consolidated Condensed
Financial Statements) and higher gross profit margins of the newly acquired
Northwings operations. The improved gross margins in the Ground Support
operations result principally from manufacturing cost efficiencies and
volume increases in sales of higher gross profit margin products.
Selling, general and administrative (SG&A) expenses in the third quarter and the
first nine months of fiscal 1998 increased $1,751,000 and $4,068,000,
respectively, over amounts in the third quarter and the first nine months of
fiscal 1997. The increase from fiscal 1997 is due principally to the SG&A
expenses of Northwings, increased selling expenses within the Flight Support and
Ground Support operations associated with higher sales volumes and an increase
in general corporate expense. As a percentage of sales, SG&A expenses increased
to 17.8% in the third quarter of fiscal 1998 from 17.5% in the third quarter of
fiscal 1997 and increased to 18.1% in the first nine months of fiscal 1998 from
15.6% in the first nine months of fiscal 1997. The fiscal 1998 increases reflect
higher general corporate expenses and the inclusion of Northwings SG&A expenses
since acquisition. As a result of the acquisition of McClain (see Note 2 to the
Consolidated Condensed Financial Statements) SG&A expenses will include
additional amortization of goodwill in the amount of approximately $1.3 million
annually.
Income from operations, which totaled $4,444,000 for the third quarter of fiscal
1998 and $12,423,000 for the first nine months of fiscal 1998, increased
$2,188,000 and $6,054,000, respectively, over the same three-month and
nine-month periods of last year. These increases reflect the acquisition of
Northwings as well as increases in sales and gross margins of the Flight Support
and Ground Support operations.
Interest and other income in the third quarter and the first nine months of
fiscal 1998 increased $164,000 and $436,000, respectively, over the same periods
in fiscal 1997. These increases are principally due to the investment of cash
received from the sale of a 20% minority interest in a consolidated subsidiary
to Lufthansa in October 1997.
-13-
The Company's effective tax rate of 34.3% for the first nine months of fiscal
1998 increased over the 32.7% rate in the first nine months of fiscal 1997. The
increase is primarily attributable to non-deductible amortization of goodwill
related to the acquisition of Northwings.
The minority interest in the third quarter and the first nine months of fiscal
1998 of $607,000 and $1,709,000, respectively, represents the aforementioned 20%
minority interest held by Lufthansa in a consolidated subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1998, net cash provided by operating
activities was $4,175,000, reflecting net income of $7,346,000 partially offset
by increases in inventories of $6,552,000 required to meet increased sales and
faster customer delivery requirements, net of a $3,963,000 increase in trade
accounts payable and other current liabilities associated with the higher levels
of operations.
The Company's principal investing activities during the first nine months of
fiscal 1998 were $35,328,000 used in the acquisition of McClain (see Note 2 to
the Consolidated Condensed Financial Statements) and purchases of property,
plant and equipment of $3,989,000 including $2,759,000 related to the Series
1997 industrial development revenue bond project. The Company also purchased
short-term investments of $3,771,000 (see Note 3 to Consolidated Condensed
Financial Statements).
The Company's principal financing activities during the first nine months of
fiscal 1998 were $27,563,000 in proceeds of long-term debt including $25,000,000
from a new $120 million revolving credit facility to partially fund the
acquisition of McClain (see Note 5 to the Consolidated Condensed Financial
Statements) and $2,469,000 in reimbursements for qualified expenditures from
above referenced Series 1997 industrial development revenue bonds.
There have been no other material changes in the liquidity or the capital
resources of the Company since the end of fiscal 1997.
YEAR 2000 ISSUE
The Company has developed plans to address any possible liability related to
the impact of the Year 2000 problem on its computer systems through a conversion
plan to be completed by the end of 1999. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company does not expect the financial impact of making the
required system changes to be material to the Company's consolidated financial
position, results of operations or cash flows which are being funded through
operating cash flows. The Company is expensing all costs associated with these
systems changes as the costs are incurred.
There can be no assurance that the Company's suppliers or vendors are or will by
Year 2000 compliant. Failure of any third-party enterprises with which the
Company interacts to achieve Year 2000 compliance could have a material adverse
effect on the Company's business, financial condition and results of operations.
-14-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in previously reported
litigation involving the Company and its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of earnings per share.
Exhibit 27 - Financial Data Schedule.
(b) The only report on Form 8-K was filed by the Company dated
July 31, 1998 and is reported under Item 2, "Acquisition or
Disposition of Assets," relating to the purchase of all of the
outstanding capital stock of McClain International, Inc.
-15-
SIGNATURES
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
(Registrant)
SEPTEMBER 14, 1998 BY /S/THOMAS S. IRWIN
- ------------------------ -------------------------------------
Date Thomas S. Irwin, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-16-
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Computation of Earnings Per Share.
27 Financial Data Schedule.
EXHIBIT 11
HEICO CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
1998 1997
----------------------------- ----------------------------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Nine months ended July 31:
Weighted average number of common
shares outstanding 12,496,073 12,496,073 11,976,842 11,976,842
Common Stock equivalents arising from
dilutive stock options (1) -- 3,094,011 -- 2,295,394
---------- ---------- ---------- ----------
12,496,073 15,590,084 11,976,842 14,272,236
========== ========== ========== ==========
Net income per share $ .59 $ .47 $ .41 $ .35
========== ========== ========== ==========
Three months ended July 31:
Weighted average number of common
shares outstanding 12,582,605 12,582,605 12,037,921 12,037,921
Common Stock equivalents arising from
dilutive stock options (1) -- 3,169,349 -- 2,286,229
---------- ---------- ---------- ----------
12,582,605 15,751,954 12,037,921 14,324,150
========== ========== ========== ==========
Net income per share $ .21 $ .17 $ .14 $ .12
========== ========== ========== ==========
- ----------
(1) Computed under the "treasury stock" method using the average market price.
5
9-MOS
OCT-31-1998
JUL-31-1998
13,684,000
3,689,000
17,011,000
(349,000)
26,038,000
62,725,000
30,698,000
(15,604,000)
136,571,000
17,395,000
35,236,000
0
0
126,000
66,903,000
136,571,000
66,518,000
66,518,000
42,250,000
42,250,000
0
0
381,000
13,778,000
4,723,000
7,346,000
0
0
0
7,346,000
.59
.47
