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, 2003
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) 987-4000
(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 __ No X
The number of shares outstanding of each of the Registrant's classes of
common stock as of August 25, 2003:
Common Stock, $.01 par value 9,650,534 shares
Class A Common Stock, $.01 par value 11,698,827 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT
PAGE NO.
-------
Part I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of July 31, 2003 and October 31, 2002 2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risks 25
Item 4. Controls and Procedures 26
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
1
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
July 31, 2003 October 31, 2002
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,735,000 $ 4,539,000
Accounts receivable, net 27,319,000 28,407,000
Inventories 53,687,000 54,514,000
Prepaid expenses and other current assets 7,123,000 7,811,000
Deferred income taxes 3,643,000 3,295,000
--------------- ----------------
Total current assets 96,507,000 98,566,000
Property, plant and equipment, net 40,145,000 40,059,000
Goodwill, net 188,677,000 187,677,000
Other assets 10,316,000 10,030,000
--------------- ----------------
Total assets $ 335,645,000 $ 336,332,000
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 34,000 $ 6,756,000
Trade accounts payable 6,912,000 7,640,000
Accrued expenses and other current liabilities 13,446,000 14,935,000
Income taxes payable 545,000 --
--------------- ----------------
Total current liabilities 20,937,000 29,331,000
Long-term debt, net of current maturities 43,985,000 49,230,000
Deferred income taxes 9,446,000 6,240,000
Other non-current liabilities 5,854,000 6,154,000
--------------- ----------------
Total liabilities 80,222,000 90,955,000
--------------- ----------------
Minority interests in consolidated subsidiaries 39,966,000 38,313,000
--------------- ----------------
Commitments and contingencies (Notes 17 and 18)
Shareholders' equity:
Preferred Stock, par value $.01 per share; Authorized - 10,000,000
shares issuable in series; 200,000 shares designated as Series A
Junior Participating Preferred Stock, none issued -- --
Common Stock, $.01 par value; Authorized - 30,000,000 shares;
Issued and Outstanding - 9,617,591 and 9,380,174 shares,
respectively 96,000 94,000
Class A Common Stock, $.01 par value; Authorized - 30,000,000
shares; Issued and Outstanding - 11,698,827 and 11,570,195
shares, respectively 117,000 116,000
Capital in excess of par value 154,613,000 153,847,000
Retained earnings 65,631,000 58,007,000
--------------- ----------------
220,457,000 212,064,000
Less: Note receivable secured by Class A Common Stock (5,000,000) (5,000,000)
--------------- ----------------
Total shareholders' equity 215,457,000 207,064,000
--------------- ----------------
Total liabilities and shareholders' equity $ 335,645,000 $ 336,332,000
=============== ================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Nine months ended July 31, Three months ended July 31,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net sales $ 128,791,000 $ 126,600,000 $ 45,412,000 $ 42,587,000
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Cost of sales 85,978,000 81,455,000 30,276,000 27,651,000
Selling, general and administrative expenses 26,252,000 28,426,000 9,035,000 9,982,000
--------------- --------------- --------------- ---------------
Total operating costs and expenses 112,230,000 109,881,000 39,311,000 37,633,000
--------------- --------------- --------------- ---------------
Operating income 16,561,000 16,719,000 6,101,000 4,954,000
Interest expense (937,000) (1,735,000) (307,000) (473,000)
Interest and other income 106,000 104,000 17,000 12,000
Gain on sale of product line -- 1,230,000 -- --
--------------- --------------- --------------- ---------------
Income before income taxes and minority interests 15,730,000 16,318,000 5,811,000 4,493,000
Income tax expense 5,605,000 5,672,000 2,107,000 1,472,000
--------------- --------------- --------------- ---------------
Income before minority interests 10,125,000 10,646,000 3,704,000 3,021,000
Minority interests in consolidated subsidiaries 1,443,000 1,019,000 464,000 192,000
--------------- --------------- --------------- ---------------
Net income $ 8,682,000 $ 9,627,000 $ 3,240,000 $ 2,829,000
=============== =============== =============== ===============
Net income per share:
Basic $ .41 $ .46 $ .15 $ .14
=============== =============== =============== ===============
Diluted $ .39 $ .43 $ .15 $ .13
=============== =============== =============== ===============
Weighted average number of common shares outstanding:
Basic 21,042,765 20,890,792 21,122,443 20,944,797
=============== =============== =============== ===============
Diluted 22,190,241 22,575,196 22,239,765 22,532,844
=============== =============== =============== ===============
Cash dividends per share $ .050 $ .050 $ .025 $ .025
=============== =============== =============== ===============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine months ended July 31,
--------------------------------------
2003 2002
--------------- ---------------
Operating Activities:
Net income $ 8,682,000 $ 9,627,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,754,000 3,345,000
Gain on sale of product line -- (1,230,000)
Deferred income tax provision 2,858,000 3,053,000
Minority interests in consolidated subsidiaries 1,443,000 1,019,000
Tax benefit from exercise of stock options 350,000 2,675,000
Changes in assets and liabilities, net of acquisitions:
Decrease in accounts receivable 1,400,000 6,607,000
Decrease (increase) in inventories 1,258,000 (4,434,000)
Decrease (increase) in prepaid expenses and other current assets 761,000 (2,127,000)
Decrease in trade accounts payables, accrued
expenses and other current liabilities (2,869,000) (3,454,000)
Increase (decrease) in income taxes payable 545,000 (564,000)
Other (71,000) 86,000
--------------- ---------------
Net cash provided by operating activities 18,111,000 14,603,000
--------------- ---------------
Investing Activities:
Capital expenditures (3,137,000) (5,031,000)
Acquisitions and related costs, net of cash acquired (1,530,000) (5,770,000)
Payment received from employee savings and investment plan
note receivable -- 648,000
Other 197,000 191,000
--------------- ---------------
Net cash used in investing activities (4,470,000) (9,962,000)
--------------- ---------------
Financing Activities:
Payments on revolving credit facilities, net (12,000,000) (3,000,000)
Proceeds from exercise of stock options 535,000 436,000
Cash dividends paid (1,055,000) (1,045,000)
Other (925,000) (25,000)
--------------- ---------------
Net cash used in financing activities (13,445,000) (3,634,000)
--------------- ---------------
Net increase in cash and cash equivalents 196,000 1,007,000
Cash and cash equivalents at beginning of year 4,539,000 4,333,000
--------------- ---------------
Cash and cash equivalents at end of period $ 4,735,000 $ 5,340,000
=============== ===============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. 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 latest Annual Report on Form 10-K for the year ended October 31, 2002.
The October 31, 2002 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 cash flows for such interim periods presented. The results of
operations for the nine months ended July 31, 2003 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
Certain amounts in the prior year's financial statements have been reclassified
to conform to the current year presentation.
2. The Company accounts for stock-based employee compensation using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation expense has been recorded in the accompanying
consolidated financial statements for those options granted below fair market
value of the underlying stock on 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 of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model.
5
Nine months ended July 31, Three months ended July 31,
------------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported $ 8,682,000 $ 9,627,000 $ 3,240,000 $ 2,829,000
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects 3,000 30,000 1,000 9,000
Deduct: Total stock-based employee
compensation expense determined under fair
value method for all awards, net of related
tax effects (1,280,000) (2,636,000) (416,000) (1,689,000)
------------ ------------ ------------ ------------
Pro forma net income $ 7,405,000 $ 7,021,000 $ 2,825,000 $ 1,149,000
============ ============ ============ ============
Net income per share:
Basic - as reported $ .41 $ .46 $ .15 $ .14
Basic - pro forma $ .35 $ .34 $ .13 $ .05
Diluted - as reported $ .39 $ .43 $ .15 $ .13
Diluted - pro forma $ .33 $ .31 $ .13 $ .05
3. Accounts receivable are composed of the following:
July 31, 2003 October 31, 2002
--------------- ----------------
Accounts receivable $ 28,830,000 $ 30,029,000
Less: Allowance for doubtful accounts (1,511,000) (1,622,000)
--------------- ----------------
Accounts receivable, net $ 27,319,000 $ 28,407,000
=============== ================
4. Costs and estimated earnings on uncompleted percentage-of-completion
contracts are as follows:
July 31, 2003 October 31, 2002
--------------- ----------------
Costs incurred on uncompleted contracts $ 7,561,000 $ 4,453,000
Estimated earnings 5,673,000 4,252,000
--------------- ----------------
13,234,000 8,705,000
Less: Billings to date (11,705,000) (8,551,000)
--------------- ----------------
$ 1,529,000 $ 154,000
=============== ================
Included in accompanying condensed consolidated
balance sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 2,339,000 $ 1,737,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (810,000) (1,583,000)
--------------- ----------------
$ 1,529,000 $ 154,000
=============== ================
Changes in estimates on long-term contracts accounted for under the
percentage-of-completion method did not have a significant impact on net income
and diluted net income per share in the nine and three months ended July 31,
2003 and 2002.
6
5. Inventories are composed of the following:
July 31, 2003 October 31, 2002
--------------- ----------------
Finished products $ 30,363,000 $ 32,501,000
Work in process 9,468,000 8,603,000
Materials, parts, assemblies and supplies 13,856,000 13,410,000
--------------- ----------------
Total inventories $ 53,687,000 $ 54,514,000
=============== ================
Inventories related to long-term contracts were not significant as of July 31,
2003 and October 31, 2002.
6. Property, plant and equipment are composed of the following:
July 31, 2003 October 31, 2002
--------------- ----------------
Land $ 2,627,000 $ 2,627,000
Building and improvements 22,297,000 20,846,000
Machinery and equipment 43,537,000 41,739,000
Construction in progress 1,654,000 1,702,000
--------------- ----------------
70,115,000 66,914,000
Less: Accumulated depreciation (29,970,000) (26,855,000)
--------------- ----------------
Property, plant and equipment, net $ 40,145,000 $ 40,059,000
=============== ================
7. The Company has two operating segments: the Flight Support Group (FSG)
and the Electronic Technologies Group (ETG). The changes in the carrying amount
of goodwill by operating segment for the nine months ended July 31, 2003 are as
follows:
Segment
--------------------------------- Consolidated
FSG ETG Total
--------------- --------------- ---------------
Balances as of October 31, 2002 $ 118,706,000 $ 68,971,000 $ 187,677,000
Goodwill acquired during the year 400,000 -- 400,000
Adjustments to goodwill 600,000 -- 600,000
--------------- --------------- ---------------
Balances as of July 31, 2003 $ 119,706,000 $ 68,971,000 $ 188,677,000
=============== =============== ===============
The goodwill acquired during the year is a result of the Company's acquisition
through a subsidiary, of substantially all of the assets and business of an
unrelated entity. The purchase price was not significant to the Company's
consolidated financial statements. Adjustments to goodwill consist primarily of
contingent purchase price payments to previous owners of acquired businesses.
8. Other intangible assets are recorded within the caption "Other Assets"
in the Company's consolidated balance sheet. Other intangible assets subject to
amortization consist primarily of licenses, patents, and non-compete covenants.
The gross carrying amount and accumulated amortization of other intangible
assets was $1,352,000 and $116,000, respectively, as of July 31, 2003.
Amortization expense of other
7
intangible assets for the nine months and three months ended July 31, 2003 was
$68,000 and $22,000, respectively. Amortization expense of other intangible
assets for the fiscal year ending October 31, 2003 is estimated to be $99,000.
Amortization expense for each of the next five fiscal years is estimated to be
$107,000 in fiscal 2004, $107,000 in fiscal 2005, $107,000 in fiscal 2006,
$106,000 in fiscal 2007 and $105,000 in fiscal 2008.
9. Long-term debt consists of:
July 31, 2003 October 31, 2002
--------------- ----------------
Borrowings under revolving credit facility $ 42,000,000 $ 54,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 39,000 6,000
--------------- ----------------
44,019,000 55,986,000
Less: Current maturities of long-term debt (34,000) (6,756,000)
--------------- ----------------
$ 43,985,000 $ 49,230,000
=============== ================
As of July 31, 2003 and October 31, 2002, the Company had a total of $42 million
and $54 million, respectively, borrowed under its respective $120 million
revolving credit facilities at weighted average interest rates of 2.6% and 2.9%,
respectively. As explained in Note 10, the Company replaced its former credit
facility in May 2003.
The interest rates on the Series 1988 industrial development revenue bonds were
..9% and 1.9% as of July 31, 2003 and October 31, 2002, respectively.
10. In May 2003, the Company entered into a new $120 million revolving
credit agreement (new Credit Facility) with a bank syndicate, which contains
both revolving credit and term loan features. Borrowings outstanding under the
previous credit facility were repaid with borrowings under the new Credit
Facility, which expires in May 2006. The new Credit Facility may be used for
working capital and general corporate needs of the Company, including letters of
credit, and to finance acquisitions (generally not in excess of an aggregate
total of $30 million over any trailing twelve-month period without the requisite
approval of the bank syndicate). The Company has the option to extend the
revolving credit term for two one-year periods or to convert outstanding
advances as of the initial expiration date to term loans amortizing over the
subsequent twelve-month period subject to requisite bank syndicate approval.
Advances under the new Credit Facility accrue interest at the Company's choice
of the London Interbank Offered Rate (LIBOR), or the "Base Rate," plus
applicable margins (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, or "leverage
ratio"). The Base Rate is the higher of (i) the Prime Rate or (ii) the Federal
Funds rate plus .50%. The applicable margins range from 1.00% to 2.25% for LIBOR
based borrowings and from .00% to .75% for Base Rate based borrowings. A fee is
charged on the amount of the unused commitment ranging from .25% to .50%
(depending on the leverage ratio of the Company). The new Credit Facility is
secured by all assets other than real property of the Company and its
subsidiaries and contains covenants which require, among other things, the
maintenance of the leverage ratio and a fixed charge coverage ratio as well as
minimum net worth requirements.
11. The Company adopted FASB Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,"
8
effective as of its first quarter of fiscal 2003. FIN 45 requires, among other
things as further detailed in Note 19, disclosures to be made by a guarantor
about its obligations under certain guarantees that it has issued. Such
disclosures for the Company are set forth below.
The Company has arranged for standby letters of credit aggregating to $1.2
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 $0.5 million
letter of credit expiring July 2004. These letters of credit are supported by
the Company's Credit Facility. In addition, the Company's industrial development
revenue bonds are secured by a $2.0 million letter of credit expiring February
2004 and a mortgage on the related properties pledged as collateral.
The Company's accounting policy for product warranties is to accrue an estimated
liability at the time of shipment. Warranty reserves are included in the
Company's condensed consolidated balance sheets under the caption "Accrued
expenses and other current liabilities." The amount recognized is based on
historical claims cost experience. Changes in the product warranty liability for
the nine months ended July 31, 2003 are as follows:
Balance as of October 31, 2002 $ 685,000
Accruals for warranties issued during the period 133,000
Warranty claims settled during the period (126,000)
---------------
Balance as of July 31, 2003 $ 692,000
===============
12. Changes in consolidated shareholders' equity for the nine months ended
July 31, 2003 are as follows:
Class A Capital in
Common Common Excess of Retained Note
Stock Stock Par Value Earnings Receivable
------------- ------------- ------------- ------------- -------------
Balances as of October 31, 2002 $ 94,000 $ 116,000 $ 153,847,000 $ 58,007,000 $ (5,000,000)
Net income to date 8,682,000
Cash dividends ($.05 per share) (1,055,000)
Tax benefit for stock option
exercises 350,000
Exercises of stock options 2,000 1,000 532,000
Repurchases of stock (120,000)
Other 4,000 (3,000)
------------- ------------- ------------- ------------- -------------
Balances as of July 31, 2003 $ 96,000 $ 117,000 $ 154,613,000 $ 65,631,000 $ (5,000,000)
============= ============= ============= ============= =============
13. For the nine months ended July 31, 2003 and 2002, cost of sales amounts
included approximately $6.5 million and $8.2 million, respectively, of new
product research and development expenses. New product research and development
expenses for the three months ended July 31, 2003 and 2002 were $2.3 million and
$3.0 million, respectively. The expenses for the fiscal 2003 and fiscal 2002
periods are net of reimbursements pursuant to research and development
cooperation and joint venture agreements. The reimbursements pursuant to such
agreements were not significant.
9
14. The following table sets forth the computation of basic and diluted net
income per share:
Nine months ended July 31, Three months ended July 31,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Numerator:
Net income $ 8,682,000 $ 9,627,000 $ 3,240,000 $ 2,829,000
============= ============= ============= =============
Denominator:
Weighted average common shares
outstanding - basic 21,042,765 20,890,792 21,122,443 20,944,797
Effect of dilutive stock options 1,147,476 1,684,404 1,117,322 1,588,047
------------- ------------- ------------- -------------
Weighted average common shares
outstanding - diluted 22,190,241 22,575,196 22,239,765 22,532,844
============= ============= ============= =============
Net income per share - basic $ .41 $ .46 $ .15 $ .14
Net income per share - diluted $ .39 $ .43 $ .15 $ .13
Anti-dilutive stock options excluded 2,172,352 1,020,216 2,121,484 1,300,918
15. Comprehensive income consists of:
Nine months ended July 31, Three months ended July 31,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income $ 8,682,000 $ 9,627,000 $ 3,240,000 $ 2,829,000
Other comprehensive income (loss):
Interest rate swap gain adjustment -- 370,000 -- --
Tax expense -- (144,000) -- --
------------- ------------- ------------- -------------
Comprehensive income $ 8,682,000 $ 9,853,000 $ 3,240,000 $ 2,829,000
============= ============= ============= =============
10
16. Information by operating segment for the nine months and three months
ended July 31, 2003 and 2002, respectively, for 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, is as follows:
Other,
Segment Primarily
-------------------------------- Corporate and Consolidated
FSG ETG Intersegment Totals
------------- ------------- ------------- -------------
For the nine months ended July 31, 2003:
- ---------------------------------------
Net sales $ 95,004,000 $ 34,102,000 $ (315,000) $ 128,791,000
Depreciation and amortization 2,434,000 1,012,000 308,000 3,754,000
Operating income 14,336,000 5,374,000 (3,149,000) 16,561,000
Capital expenditures 902,000 2,231,000 4,000 3,137,000
For the nine months ended July 31, 2002:
- ---------------------------------------
Net sales $ 88,316,000 $ 38,734,000 $ (450,000) $ 126,600,000
Depreciation and amortization 2,266,000 860,000 219,000 3,345,000
Operating income 11,683,000 8,789,000 (3,753,000) 16,719,000
Capital expenditures 2,775,000 1,461,000 795,000 5,031,000
For the three months ended July 31, 2003:
- ----------------------------------------
Net sales $ 32,742,000 $ 12,814,000 $ (144,000) $ 45,412,000
Depreciation and amortization 795,000 375,000 155,000 1,325,000
Operating income 4,797,000 2,702,000 (1,398,000) 6,101,000
Capital expenditures 366,000 428,000 -- 794,000
For the three months ended July 31, 2002:
- ----------------------------------------
Net sales $ 29,724,000 $ 12,970,000 $ (107,000) $ 42,587,000
Depreciation and amortization 799,000 295,000 70,000 1,164,000
Operating income 3,577,000 2,698,000 (1,321,000) 4,954,000
Capital expenditures 582,000 337,000 765,000 1,684,000
17. The Company is involved in various legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these matters will not
have a significant effect on the Company's condensed consolidated financial
statements.
18. As partial consideration in the acquisition of Inertial Airline
Services, Inc. (IAS) in August 2001, the Company issued $5 million in HEICO
Class A Common Stock (289,964 shares) and guaranteed that the resale value of
such Class A Common Stock would be at least $5 million through August 31, 2002,
which both parties agreed to extend to August 31, 2003. Based on the closing
market price of HEICO Class A Common Stock on July 31, 2003, the Company would
have had to pay the seller an additional amount of approximately $2.3 million in
cash, which would have been recorded as a reduction of shareholders' equity.
Concurrent with the purchase, the Company loaned the seller $5 million, which is
due August 31, 2003 and is secured by the 289,964 shares of HEICO Class A Common
Stock. The loan is reflected as a reduction in the equity section of the
Company's consolidated balance sheet as a note receivable secured by Class A
Common Stock.
11
19. On November 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board (APB) Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 develops one accounting model (based on
the model in SFAS No. 121) for long-lived assets that are to be disposed of by
sale, as well as addresses the principal implementation issues. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of carrying value or fair value less cost to sell. That requirement
eliminates the requirement of APB Opinion No. 30 that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that have
not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The adoption of SFAS
No. 144 did not have a material effect on the Company's results of operations or
financial position.
On November 1, 2002, the Company adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement eliminates the SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," requirement that gains and losses from
extinguishment of debt be classified as an extraordinary item, and requires that
such gains and losses be evaluated for extraordinary classification under the
criteria of APB Opinion No. 30. This statement also amends SFAS No. 13,
"Accounting for Leases," to require that certain lease modifications that have
economic effects that are similar to sales-leaseback transactions be accounted
for in the same manner as sales-leaseback transactions. SFAS No. 145 also makes
various other technical corrections to existing pronouncements. The adoption of
SFAS No. 145 did not have a material effect on the Company's results of
operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
This Issue addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF 00-21 provides guidance to determine how arrangement consideration should
be measured, whether an arrangement should be divided into separate units of
accounting, and how arrangement consideration should be allocated among separate
units of accounting. The provisions of EITF 00-21 are effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not expect the adoption of EITF 00-21 to have a material effect on
its results of operations or financial position.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation
12
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statement periods ending
after December 15, 2002. The Company adopted FIN 45 effective as of its first
quarter of fiscal 2003, which did not have a material effect on the Company's
results of operations or financial position. The disclosures made pursuant to
FIN 45 may be found in Note 11.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim Financial Reporting," to require disclosure about those effects in
interim financial information. The transition guidance and annual disclosure
requirements are effective for fiscal years ending after December 15, 2002. The
interim disclosure requirements are effective for interim periods beginning
after December 15, 2002 and may be found in Note 2.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a
liability for a cost associated with an exit or disposal activity at fair value
when the liability is incurred. Previously, a liability for an exit cost was
recognized when the entity committed to an exit plan under EITF Issue No. 94-3.
The adoption of SFAS No. 146 did not have a material effect on the Company's
results of operations or financial position, but may affect the timing and
amounts of the recognition of future restructuring costs.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an enterprise
to consolidate a variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive a majority of
the entity's expected residual returns, or both. FIN 46 also requires
disclosures about unconsolidated variable interest entities in which an
enterprise holds a significant variable interest. FIN 46 is effective for
variable interest entities created or entered into after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it
13
acquired before February 1, 2003. The Company does not expect the adoption of
FIN 46 to have a material effect on its results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language of an "underlying" to conform it to
language used in FIN 45, and amends certain other existing pronouncements. The
provisions of SFAS No. 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect
on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances), which, under
previous guidance, may have been classified as equity. The provisions of SFAS
No. 150 are effective for financial instruments entered into or modified after
May 31, 2003 and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003. The Company does not expect the
adoption of SFAS No. 150 to have a material effect on its results of operations
or financial position.
14
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 significantly from those estimates
if different assumptions were used or different events ultimately transpire.
The Company's critical accounting policies, 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
2002 Annual Report on Form 10-K.
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.
RESULTS OF OPERATIONS
The following table sets forth the results of operations, net sales and
operating income by operating segment and the percentage of net sales
represented by the respective items.
Nine months ended July 31, Three months ended July 31,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 128,791,000 $ 126,600,000 $ 45,412,000 $ 42,587,000
------------- ------------- ------------- -------------
Cost of sales 85,978,000 81,455,000 30,276,000 27,651,000
Selling, general and administrative expenses 26,252,000 28,426,000 9,035,000 9,982,000
------------- ------------- ------------- -------------
Total operating costs and expenses 112,230,000 109,881,000 39,311,000 37,633,000
------------- ------------- ------------- -------------
Operating income $ 16,561,000 $ 16,719,000 $ 6,101,000 $ 4,954,000
============= ============= ============= =============
15
Nine months ended July 31, Three months ended July 31,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales by segment:
FSG $ 95,004,000 $ 88,316,000 $ 32,742,000 $ 29,724,000
ETG 34,102,000 38,734,000 12,814,000 12,970,000
Intersegment sales (315,000) (450,000) (144,000) (107,000)
------------- ------------- ------------- -------------
$ 128,791,000 $ 126,600,000 $ 45,412,000 $ 42,587,000
============= ============= ============= =============
Operating income by segment:
FSG $ 14,336,000 $ 11,683,000 $ 4,797,000 $ 3,577,000
ETG 5,374,000 8,789,000 2,702,000 2,698,000
Other, primarily corporate (3,149,000) (3,753,000) (1,398,000) (1,321,000)
------------- ------------- ------------- -------------
$ 16,561,000 $ 16,719,000 $ 6,101,000 $ 4,954,000
============= ============= ============= =============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 33.2% 35.7% 33.3% 35.1%
Selling, general and administrative expense 20.4% 22.5% 19.9% 23.4%
Operating income 12.9% 13.2% 13.4% 11.6%
Interest expense 0.7% 1.4% 0.6% 1.1%
Interest and other income 0.1% 0.1% -- --
Gain on sale of product line -- 1.0% -- --
Income tax expense 4.4% 4.5% 4.6% 3.5%
Minority interests 1.1% 0.8% 1.0% 0.5%
Net income 6.7% 7.6% 7.1% 6.6%
COMPARISON OF FIRST NINE MONTHS OF FISCAL 2003 TO FIRST NINE MONTHS OF FISCAL
2002
Net Sales
Net sales for the first nine months of fiscal 2003 totaled $128.8 million,
compared to net sales of $126.6 million for the first nine months of fiscal
2002. The increase in net sales reflects an increase of $6.7 million (an 8%
increase) to $95.0 million in sales from the FSG, partially offset by a decrease
of $4.6 million (a 12% decrease) to $34.1 million in sales from the ETG. The FSG
sales increase primarily reflects higher commercial aftermarket parts and
services sales, principally attributable to sales of new products and services.
The decrease in sales within the ETG primarily resulted from a decline in demand
from certain foreign military customers.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 33.2% for the first nine months of
fiscal 2003 as compared to 35.7% for the first nine months of fiscal 2002,
reflecting lower margins within the ETG, partially offset by higher margins
within the FSG. The ETG's gross profit margin decrease was primarily caused by
lower foreign military sales and lower sales of other higher margin products.
The FSG's gross profit margin increase was principally due to lower new product
research and development expenses. Consolidated cost of sales amounts for the
first nine months of fiscal 2003 and fiscal 2002 include approximately $6.5
million and $8.2 million, respectively, of new product research and development
expenses. The decline in new product research and development expenses is in
line with a decrease in the fiscal 2003 budget relative to actual fiscal
16
2002 expenses.
Selling, general and administrative (SG&A) expenses were $26.3 million and $28.4
million for the first nine months of fiscal 2003 and fiscal 2002, respectively.
The decrease in SG&A expenses is mainly due to lower commission expenses within
the ETG due to the lower sales discussed previously and lower corporate
expenses. Corporate expenses in the first nine months of fiscal 2003 include the
reversal of approximately $400,000 of professional fees that were accrued in the
fourth quarter of fiscal 2002 pursuant to a contractual arrangement, which was
renegotiated in the first quarter of fiscal 2003. As a percentage of net sales,
SG&A expenses decreased to 20.4% for the first nine months of fiscal 2003
compared to 22.5% for the first nine months of fiscal 2002. The decrease is due
to higher sales volumes within the FSG and the reduction in corporate expenses,
partially offset by the lower sales within the ETG.
Operating Income
Operating income of $16.6 million for the first nine months of fiscal 2003
approximated operating income of $16.7 million for the first nine months of
fiscal 2002. Operating income in the first nine months of fiscal 2003 reflects
an increase from $11.7 million to $14.3 million in the Company's FSG and a $0.6
million reduction in corporate expenses, offset by a decrease from $8.8 million
to $5.4 million in the Company's ETG. As a percentage of net sales, operating
income decreased slightly from 13.2% in the first nine months of fiscal 2002 to
12.9% in the first nine months of fiscal 2003. The decline in operating income
as a percentage of net sales reflects a decrease in the ETG's operating income
as a percentage of net sales from 22.7% in the first nine months of fiscal 2002
to 15.8% in the first nine months of fiscal 2003, partially offset by an
increase in the FSG's operating income as a percentage of net sales from 13.2%
in the first nine months of fiscal 2002 to 15.1% in the first nine months of
fiscal 2003. The decrease in the ETG's operating income and operating income as
a percentage of net sales reflects the lower sales and gross profit margins
discussed previously. The increase in the FSG's operating income and operating
income as a percentage of net sales reflects the higher sales and lower new
product development expenses discussed previously.
Interest Expense
Interest expense decreased to $.9 million in the first nine months of fiscal
2003 from $1.7 million in the first nine months of fiscal 2002. The decrease was
principally due to a lower weighted average balance outstanding under the
Company's Credit Facility in fiscal 2003 and lower interest rates.
Interest and Other Income
Interest and other income in the first nine months of fiscal 2003 approximated
amounts in the first nine months of fiscal 2002.
17
Gain on Sale of Product Line
In the second quarter of fiscal 2002, the Company recognized an additional
pretax gain of $1,230,000 ($765,000 net of tax or $.03 per diluted share) on the
sale of the Trilectron product line due to the elimination of certain reserves
upon the expiration of indemnification provisions of the sales contract.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. The increase from the first nine months of
fiscal 2002 to the first nine months of fiscal 2003 was primarily due to higher
earnings of the FSG.
Net Income
The Company's net income was $8.7 million, or $.39 per diluted share, in the
first nine months of fiscal 2003 and $9.6 million, or $.43 per diluted share, in
the first nine months of fiscal 2002. Net income in the first nine months of
fiscal 2002 included the $765,000, or $.03 per share, after tax gain on the sale
of the product line referenced above.
OUTLOOK
The Company's sales and earnings in the FSG improved for both the third quarter
and first nine months of fiscal 2003 relative to the same periods of fiscal
2002. These improvements are a result of the Company's ongoing new product
development efforts and also reflect some recent recovery in the commercial
aerospace industry. The end of military conflict in Iraq and the subsiding
impact of SARS have positively affected the commercial aerospace industry.
Sales and operating income within the Company's ETG improved in the third
quarter of fiscal 2003 by 14% and 42%, respectively, compared to the second
quarter of fiscal 2003. These increases reflect the shipments of some of the
products whose delivery was delayed in the first half of the year.
Based on the recent strengthening of demand within the commercial aerospace
industry and the Company's continued success in introducing new products and
services, the Company is now targeting fiscal 2003 earnings at the high end of
the previously reported range of $.50 - $.55 per diluted share on sales growth
of 2% to 3% over fiscal 2002 sales.
COMPARISON OF THIRD QUARTER OF FISCAL 2003 TO THIRD QUARTER OF FISCAL 2002
Net Sales
Net sales for the third quarter of fiscal 2003 totaled $45.4 million, compared
to net sales of $42.6 million for the third quarter of fiscal 2002. The increase
in net sales reflects an increase of $3.0 million (a 10% increase) to $32.7
million in sales from the FSG, partially offset by a slight
18
decrease of $0.2 million (a 1% decrease) to $12.8 million in sales from the ETG.
The sales increase in the FSG primarily reflects higher commercial aftermarket
parts and services sales, principally attributable to sales of new products and
services and the recently improved demand within the commercial aerospace
industry. Sales within the ETG primarily reflect a decline in demand from
certain foreign military customers offset by the shipments of some of the
products whose delivery was delayed in the first half of the year.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 33.3% for the third quarter of
fiscal 2003 as compared to 35.1% for the third quarter of fiscal 2002, primarily
reflecting lower margins within the ETG. The ETG's gross profit margin decrease
was primarily caused by the reduced foreign military sales and lower sales of
other higher margin products. Consolidated cost of sales amounts for the third
quarter of fiscal 2003 and fiscal 2002 include approximately $2.3 million and
$3.0 million, respectively, of new product research and development expenses.
Selling, general and administrative (SG&A) expenses were $9.0 million and $10.0
million for the third quarter of fiscal 2003 and the third quarter of fiscal
2002, respectively. The decrease in SG&A expenses is mainly due to lower
commission expenses within the ETG due to the lower sales discussed above. As a
percentage of net sales, SG&A expenses decreased to 19.9% for the third quarter
of fiscal 2003 compared to 23.4% for the third quarter of fiscal 2002. The
decrease is primarily due to the higher sales volumes within the FSG and lower
commission expenses within the ETG.
Operating Income
Operating income totaled $6.1 million in the third quarter of fiscal 2003 versus
$5.0 million for the third quarter of fiscal 2002. The increase in operating
income reflects an increase from $3.6 million to $4.8 million in the Company's
FSG. Operating income of the ETG was $2.7 million for the third quarter of
fiscal 2003 and 2002. As a percentage of net sales, operating income increased
from 11.6% in the third quarter of fiscal 2002 to 13.4% in the third quarter of
fiscal 2003. 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 12.0% in the third quarter of fiscal 2002 to 14.7% in the third quarter of
fiscal 2003 and a slight increase in the ETG's operating income as a percentage
of net sales from 20.8% in the third quarter of fiscal 2002 to 21.1% in the
third quarter of fiscal 2003. The increase in the FSG's operating income and
operating income as a percentage of net sales reflects the higher sales and
lower new product development expenses discussed previously.
Interest Expense
Interest expense decreased $166,000 from $473,000 in the third quarter of fiscal
2002 to $307,000 in the third quarter of fiscal 2003. The decrease was
principally due to a lower weighted average balance outstanding under the
Company's Credit Facility in the third quarter of fiscal 2003 and lower interest
rates.
19
Interest and Other Income
Interest and other income in the third quarter of fiscal 2003 approximated
amounts in the third quarter of fiscal 2002.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. The increase from the third quarter of fiscal
2002 to the third quarter of fiscal 2003 was primarily due to higher earnings of
the FSG.
Net Income
The Company's net income was $3.2 million, or $.15 per diluted share, in the
third quarter of fiscal 2003 and $2.8 million, or $.13 per diluted share, in the
third quarter of fiscal 2002.
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 payments of interest and principal
on debt, capital expenditures, acquisitions and increases in working capital.
The Company believes that its operating cash flow and available borrowings under
the Company's Credit Facility will be sufficient to fund cash requirements for
the foreseeable future.
Operating Activities
The Company's cash flow from operating activities was $18.1 million for the
first nine months of fiscal 2003, consisting primarily of net income of $8.7
million, depreciation and amortization of $3.8 million, a deferred income tax
provision of $2.9 million, minority interests in consolidated subsidiaries of
$1.4 million, and a decrease in net operating assets of $1.0 million.
Investing Activities
Cash used in investing activities during the first nine months of fiscal 2003
related primarily to capital expenditures totaling $3.1 million for building
improvements at certain manufacturing facilities and equipment purchases. In
addition, acquisitions and related costs of $1.5 million primarily pertain to an
acquisition, through a subsidiary, of substantially all of the assets and
business of an unrelated entity and contingent purchase price payments to
previous owners of acquired businesses.
20
Financing Activities
In May 2003, the Company entered into a new $120 million revolving credit
agreement (new Credit Facility) with a bank syndicate, which contains both
revolving credit and term loan features. Borrowings outstanding under the
previous credit facility were repaid with borrowings under the new Credit
Facility, which expires in May 2006. The new Credit Facility may be used for
working capital and general corporate needs of the Company, including letters of
credit, and to finance acquisitions. The Company has the option to extend the
revolving credit term for two one-year periods or to convert outstanding
advances as of the initial expiration date to term loans amortizing over the
subsequent twelve-month period subject to requisite bank syndicate approval. The
new Credit Facility is secured by all assets other than real property of the
Company and its subsidiaries and contains covenants which require, among other
things, the maintenance of a leverage ratio and a fixed charge coverage ratio as
well as minimum net worth requirements.
Cash used in financing activities during the first nine months of fiscal 2003
primarily related to net payments totaling $12.0 million on the Company's new
Credit Facility and its former credit facility as well as the payment of cash
dividends totaling $1.1 million.
NEW ACCOUNTING PRONOUNCEMENTS
On November 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board (APB) Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 develops one accounting model (based on
the model in SFAS No. 121) for long-lived assets that are to be disposed of by
sale, as well as addresses the principal implementation issues. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of carrying value or fair value less cost to sell. That requirement
eliminates the requirement of APB Opinion No. 30 that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that have
not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The adoption of SFAS
No. 144 did not have a material effect on the Company's results of operations or
financial position.
On November 1, 2002, the Company adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement eliminates the SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of
21
Debt," requirement that gains and losses from extinguishment of debt be
classified as an extraordinary item, and requires that such gains and losses be
evaluated for extraordinary classification under the criteria of APB Opinion No.
30. This statement also amends SFAS No. 13, "Accounting for Leases," to require
that certain lease modifications that have economic effects that are similar to
sales-leaseback transactions be accounted for in the same manner as
sales-leaseback transactions. SFAS No. 145 also makes various other technical
corrections to existing pronouncements. The adoption of SFAS No. 145 did not
have a material effect on the Company's results of operations or financial
position.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
This Issue addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF 00-21 provides guidance to determine how arrangement consideration should
be measured, whether an arrangement should be divided into separate units of
accounting, and how arrangement consideration should be allocated among separate
units of accounting. The provisions of EITF 00-21 are effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not expect the adoption of EITF 00-21 to have a material effect on
its results of operations or financial position.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statement
periods ending after December 15, 2002. The Company adopted FIN 45 effective as
of its first quarter of fiscal 2003, which did not have a material effect on the
Company's results of operations or financial position. The disclosures made
pursuant to FIN 45 may be found in Note 11 of the Notes to Condensed
Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim Financial Reporting," to require disclosure about those effects in
interim financial information. The transition guidance and annual disclosure
requirements are effective for fiscal years ending after December 15, 2002. The
interim disclosure requirements are effective for interim periods beginning
after December 15, 2002 and may be found in Note 2 of the Notes to Condensed
Consolidated Financial Statements.
22
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a
liability for a cost associated with an exit or disposal activity at fair value
when the liability is incurred. Previously, a liability for an exit cost was
recognized when the entity committed to an exit plan under EITF Issue No. 94-3.
The adoption of SFAS No. 146 did not have a material effect on the Company's
results of operations or financial position, but may affect the timing and
amounts of the recognition of future restructuring costs.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an enterprise
to consolidate a variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive a majority of
the entity's expected residual returns, or both. FIN 46 also requires
disclosures about unconsolidated variable interest entities in which an
enterprise holds a significant variable interest. FIN 46 is effective for
variable interest entities created or entered into after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
the adoption of FIN 46 to have a material effect on its results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language of an "underlying" to conform it to
language used in FIN 45, and amends certain other existing pronouncements. The
provisions of SFAS No. 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect
on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances), which, under
previous guidance, may have been classified as equity. The provisions of SFAS
No. 150 are effective for financial instruments entered into or modified after
May 31, 2003 and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003. The Company does not expect the
adoption of SFAS No. 150 to have a material effect on its results of operations
or financial position.
23
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking," including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's shareholders. Management believes that all statements
that express expectations and projections with respect to future matters may
differ materially from that discussed as a result of factors, including, but 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 our costs to complete contracts to
increase; governmental and regulatory demands, export policies and restrictions,
military program funding by U.S. and non-U.S. Government agencies or competition
on military programs, 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 aerospace, defense and electronics
industries, which could negatively impact our costs and revenues. For an
enterprise such as the Company, a wide range of factors could materially affect
future developments and performance. A list of such factors is set forth in the
Company's 2002 Annual Report on Form 10-K. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
24
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 July 31, 2003, a hypothetical
10% increase in interest rates would increase the Company's interest expense by
approximately $111,000 on an annual basis.
25
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer concluded
that the Company's disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) are effective, based on their evaluation as
of the end of the period covered by this quarterly report on Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial reporting
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.
26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Revolving Credit Agreement, dated as of May 15, 2003,
among HEICO Corporation and SunTrust Bank, as
Administrative Agent, is incorporated by reference to
Exhibit 10.1 to the Form 8-K filed on May 29, 2003.
31.1 Section 302 Certification of the Chief Executive
Officer.*
31.2 Section 302 Certification of the Chief Financial
Officer.*
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.**
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.**
----------
* Filed herewith.
** Furnished herewith.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on May 29, 2003, which included a
press release announcing the Company's financial results for the
second quarter ended April 30, 2003. Also included in this
filing is a copy of the Revolving Credit Agreement related to a
new $120 million revolving credit facility the Company entered
into in May 2003, which replaced its former $120 million credit
facility.
A report on Form 8-K was filed on July 31, 2003, which contains
a notice dated July 17, 2003 to the members of the board of
directors and executive officers of the Company concerning a
temporary suspension of trading in securities of HEICO
Corporation. The temporary suspension, also called a "blackout
period," is a result of changes in the recordkeeper and
investment options of the HEICO Savings and Investment Plan.
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
-----------------------
(Registrant)
Date: August 29, 2003 By: /s/ Thomas S. Irwin
-------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
Exhibit 31.1
SECTION 302 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: August 29, 2003 /s/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 31.2
SECTION 302 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: August 29, 2003 /s/ THOMAS S. IRWIN
-----------------------
Thomas S. Irwin
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HEICO Corporation (the "Company") on
Form 10-Q for the period ended July 31, 2003 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: August 29, 2003 /s/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HEICO Corporation (the "Company") on
Form 10-Q for the period ended July 31, 2003 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: August 29, 2003
/s/ THOMAS S. IRWIN
--------------------------
Thomas S. Irwin
Chief Financial Officer