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, 2004 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 [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of August 25, 2004:
Common Stock, $.01 par value 9,871,963 shares
Class A Common Stock, $.01 par value 14,308,410 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE NO
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PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of July 31, 2004 and October 31, 2003.................................2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2004 and 2003........3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2004 and 2003.........................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 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities..........................................27
Item 6. Exhibits.................................................................27
SIGNATURE...........................................................................28
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JULY 31, 2004 OCTOBER 31, 2003
------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,270,000 $ 4,321,000
Accounts receivable, net 31,502,000 28,820,000
Inventories 48,977,000 51,240,000
Prepaid expenses and other current assets 5,319,000 6,231,000
Deferred income taxes 5,105,000 3,872,000
------------- -------------
Total current assets 99,173,000 94,484,000
Property, plant and equipment, net 36,799,000 35,537,000
Goodwill 216,801,000 188,700,000
Other assets 15,862,000 14,523,000
------------- -------------
Total assets $ 368,635,000 $ 333,244,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 58,000 $ 29,000
Trade accounts payable 6,716,000 7,475,000
Accrued expenses and other current liabilities 18,091,000 14,362,000
Income taxes payable 871,000 820,000
------------- -------------
Total current liabilities 25,736,000 22,686,000
Long-term debt, net of current maturities 36,086,000 31,984,000
Deferred income taxes 15,224,000 10,337,000
Other non-current liabilities 5,795,000 6,142,000
------------- -------------
Total liabilities 82,841,000 71,149,000
------------- -------------
Minority interests in consolidated subsidiaries 43,816,000 40,577,000
------------- -------------
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred Stock, $.01 par value per share;
10,000,000 shares authorized; 300,000
shares designated as Series B Junior
Participating Preferred Stock and 300,000
shares designated as Series C Junior Participating
Preferred Stock; none issued -- --
Common Stock, $.01 par value per share;
30,000,000 shares authorized;
9,871,813 and 9,690,945 shares issued
and outstanding, respectively 99,000 97,000
Class A Common Stock, $.01 par value per share;
30,000,000 shares authorized;
14,304,970 and 13,876,496 shares issued
and outstanding, respectively 143,000 117,000
Capital in excess of par value 187,692,000 155,064,000
Retained earnings 54,044,000 69,172,000
------------- -------------
241,978,000 224,450,000
Less: Note receivable secured by Class A Common Stock -- (2,932,000)
------------- -------------
Total shareholders' equity 241,978,000 221,518,000
------------- -------------
Total liabilities and shareholders' equity $ 368,635,000 $ 333,244,000
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------ ------------
Net sales $ 154,764,000 $ 128,791,000 $ 55,820,000 $ 45,412,000
------------- ------------- ------------ ------------
Operating costs and expenses:
Cost of sales 100,898,000 85,978,000 36,204,000 30,276,000
Selling, general and administrative expenses 31,251,000 26,252,000 11,746,000 9,035,000
------------- ------------- ------------ ------------
Total operating costs and expenses 132,149,000 112,230,000 47,950,000 39,311,000
------------- ------------- ------------ ------------
Operating income 22,615,000 16,561,000 7,870,000 6,101,000
Interest expense (882,000) (937,000) (250,000) (307,000)
Interest and other income 95,000 106,000 93,000 17,000
Life insurance proceeds 5,000,000 -- 5,000,000 --
------------- ------------- ------------ ------------
Income before income taxes and minority interests 26,828,000 15,730,000 12,713,000 5,811,000
Income tax expense 7,447,000 5,605,000 2,591,000 2,107,000
------------- ------------- ------------ ------------
Income before minority interests 19,381,000 10,125,000 10,122,000 3,704,000
Minority interests' share of income 3,917,000 1,443,000 2,007,000 464,000
------------- ------------- ------------ ------------
Net income $ 15,464,000 $ 8,682,000 $ 8,115,000 $ 3,240,000
============= ============= ============ ============
Net income per share:
Basic $ .64 $ .38 $ .34 $ .14
Diluted $ .60 $ .36 $ .32 $ .13
Weighted average number of common shares
outstanding:
Basic 23,986,315 23,147,042 24,165,595 23,234,687
Diluted 25,709,844 24,409,265 25,755,455 24,463,742
Cash dividends per share $ .050 $ .045 $ .025 $ .023
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED JULY 31,
----------------------------
2004 2003
------------ -----------
Operating Activities:
Net income $ 15,464,000 $ 8,682,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,126,000 5,004,000
Deferred income tax provision 3,654,000 2,858,000
Minority interests' share of income 3,917,000 1,443,000
Tax benefit from stock option exercises 1,252,000 350,000
Change in estimate of product warranty liability (491,000) --
Restructuring expense related to inventory write-downs 350,000 --
Changes in assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (897,000) 1,400,000
Decrease in inventories 2,459,000 1,258,000
Increase in prepaid expenses and other current assets (867,000) (489,000)
Increase (decrease) in trade accounts payables, accrued
expenses and other current liabilities 2,584,000 (2,869,000)
Increase in income taxes payable 51,000 545,000
Other 2,000 (71,000)
------------ -----------
Net cash provided by operating activities 32,604,000 18,111,000
------------ -----------
Investing Activities:
Acquisitions and related costs, net of cash acquired (28,064,000) (1,530,000)
Capital expenditures (3,442,000) (3,137,000)
Other (1,159,000) 197,000
------------ -----------
Net cash used in investing activities (32,665,000) (4,470,000)
------------ -----------
Financing Activities:
Borrowings (payments) on revolving credit facilities, net 4,000,000 (12,000,000)
Cash dividends paid (1,201,000) (1,055,000)
Proceeds from stock option exercises 712,000 535,000
Other 499,000 (925,000)
------------ -----------
Net cash provided by (used in) financing activities 4,010,000 (13,445,000)
------------ -----------
Net increase in cash and cash equivalents 3,949,000 196,000
Cash and cash equivalents at beginning of year 4,321,000 4,539,000
------------ -----------
Cash and cash equivalents at end of period $ 8,270,000 $ 4,735,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of HEICO Corporation and its subsidiaries (the Company) have been prepared in
conformity with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-Q. Therefore, the condensed consolidated financial
statements do not include all information and footnotes normally included in
annual consolidated financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended October 31, 2003. The
October 31, 2003 Condensed Consolidated Balance Sheet has been derived from the
Company's audited consolidated financial statements. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the condensed consolidated balance sheets, statements of
operations and statements of cash flows for such interim periods presented. The
results of operations for the nine months ended July 31, 2004 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
RECLASSIFICATIONS
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
STOCK DIVIDEND
In December 2003, the Company's Board of Directors declared a 10% stock
dividend on both its Common Stock and its Class A Common Stock that was paid in
shares of Class A Common Stock on January 16, 2004 to shareholders of record as
of January 6, 2004. All common stock share and per share information has been
adjusted retroactively to give effect to the stock dividend.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation using the
intrinsic value method. Accordingly, compensation expense has been recorded in
the accompanying condensed consolidated financial statements for any stock
options granted below the fair market value of the underlying stock as of the
date of grant. The following table illustrates the pro forma effects on net
income and net income per share as if the Company had applied the fair-value
recognition provisions (an alternative method) to stock-based employee
compensation. The fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option-pricing model.
5
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------- --------------------------
2004 2003 2004 2003
------------ ----------- ----------- -----------
Net income, as reported $ 15,464,000 $ 8,682,000 $ 8,115,000 $ 3,240,000
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects 1,000 3,000 -- 1,000
Deduct: Total stock-based employee
compensation expense determined under a
fair-value method for all awards, net of
related tax effects (1,111,000) (1,280,000) (334,000) (416,000)
------------ ----------- ----------- -----------
Pro forma net income $ 14,354,000 $ 7,405,000 $ 7,781,000 $ 2,825,000
============ =========== =========== ===========
Net income per share:
Basic - as reported $ .64 $ .38 $ .34 $ .14
Basic - pro forma $ .60 $ .32 $ .32 $ .12
Diluted - as reported $ .60 $ .36 $ .32 $ .13
Diluted - pro forma $ .56 $ .30 $ .30 $ .12
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation, which was
revised in December 2003, 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 was immediately effective for variable interest entities created or
entered into after January 31, 2003 and is effective in the first reporting
period ending after December 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of FIN 46 did not have a material effect on the Company's results
of operations or financial position.
2. ACQUISITION
In December 2003, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired an 80% interest in the assets and business of Sierra
Microwave Technology, Inc., (Sierra). Under the transaction, the Company formed
a new subsidiary, Sierra Microwave Technology, LLC (Sierra LLC), which acquired
substantially all of the assets and assumed certain liabilities of Sierra. The
new subsidiary is owned 80% by the Company and 20% by certain members of
Sierra's management group. The results of operations of Sierra LLC were
6
included in the Company's results of operations effective December 2003. The
purchase price was paid principally in cash using proceeds from the Company's
revolving credit facility and with some shares of the Company's Class A Common
Stock. The purchase price of the acquisition was not significant to the
Company's condensed consolidated financial statements and the pro forma
consolidated operating results assuming Sierra had been acquired as of the
beginning of fiscal 2004 would not have been materially different from the
reported results. The allocation of the purchase price to the acquired net
assets is preliminary while the Company obtains final information regarding the
fair value of assets acquired and liabilities assumed. Sierra LLC is engaged in
the design and manufacture of certain niche microwave components used in
satellites and military products.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JULY 31, 2004 OCTOBER 31, 2003
------------- ----------------
Accounts receivable $ 32,105,000 $ 29,455,000
Less: Allowance for doubtful accounts (603,000) (635,000)
------------- ----------------
Accounts receivable, net $ 31,502,000 $ 28,820,000
============= ================
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION OF
CONTRACTS
JULY 31, 2004 OCTOBER 31, 2003
------------- ----------------
Costs incurred on uncompleted contracts $ 14,885,000 $ 9,635,000
Estimated earnings 10,795,000 7,861,000
------------- ----------------
25,680,000 17,496,000
Less: Billings to date (23,658,000) (15,223,000)
------------- ----------------
$ 2,022,000 $ 2,273,000
============= ================
Included in accompanying condensed
consolidated balance sheets under
the following captions:
Accounts receivable, net (costs
and estimated earnings in excess
of billings) $ 2,800,000 $ 3,520,000
Accrued expenses and other current
liabilities (billings in excess of
costs and estimated earnings) (778,000) (1,247,000)
------------- ----------------
$ 2,022,000 $ 2,273,000
============= ================
Changes in estimates on long-term contracts accounted for under the
percentage-of-completion method did not have a significant impact on net income
or diluted net income per share in the nine months and three months ended July
31, 2004 and 2003.
INVENTORIES
JULY 31, 2004 OCTOBER 31, 2003
------------- ----------------
Finished products $ 25,388,000 $ 28,958,000
Work in process 9,855,000 9,333,000
Materials, parts, assemblies and
supplies 13,734,000 12,949,000
------------- ----------------
Total inventories $ 48,977,000 $ 51,240,000
============= ================
7
Inventories related to long-term contracts were not significant as of
July 31, 2004 and October 31, 2003. Amounts set forth above are net of
write-downs to reduce slow-moving inventories to estimated net realizable
values.
PROPERTY, PLANT AND EQUIPMENT
JULY 31, 2004 OCTOBER 31, 2003
------------- ----------------
Land $ 2,157,000 $ 1,750,000
Buildings and improvements 19,902,000 18,981,000
Machinery and equipment 46,777,000 43,629,000
Construction in progress 1,942,000 1,623,000
------------- ----------------
70,778,000 65,983,000
Less: Accumulated depreciation (33,979,000) (30,446,000)
------------- ----------------
Property, plant and equipment, net $ 36,799,000 $ 35,537,000
============= ================
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (FSG)
and the Electronic Technologies Group (ETG). Changes in the carrying amount of
goodwill by operating segment for the nine months ended July 31, 2004 are as
follows:
SEGMENT
---------------------------- CONSOLIDATED
FSG ETG TOTALS
------------- ------------ -------------
Balances as of October 31, 2003 $ 119,729,000 $ 68,971,000 $ 188,700,000
Goodwill acquired -- 27,510,000 27,510,000
Adjustments to goodwill 525,000 66,000 591,000
------------- ------------ -------------
Balances as of July 31, 2004 $ 120,254,000 $ 96,547,000 $ 216,801,000
============= ============ =============
The goodwill acquired during the period is a result of the Company's
acquisition, through a subsidiary, of an 80% interest in the assets and business
of Sierra (see Note 2 - Acquisition). Adjustments to goodwill consist primarily
of additional purchase price payments and contingent purchase price payments to
previous owners of acquired businesses.
Other intangible assets are recorded within Other Assets in the
accompanying Condensed Consolidated Balance Sheets. 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 $1,455,000 and $231,000 respectively, as of July 31, 2004.
Amortization expense of other intangible assets for the nine months and three
months ended July 31, 2004 was $84,000 and $30,000 respectively. Amortization
expense of other intangible assets for the fiscal year ending October 31, 2004
is estimated to be $114,000. Amortization expense for each of the next five
fiscal years is estimated to be $130,000 in fiscal 2005, $130,000 in fiscal
2006, $126,000 in fiscal 2007, $111,000 in fiscal 2008 and $93,000 in fiscal
2009.
8
5. LONG-TERM DEBT
Long-term debt consists of:
JULY 31, 2004 OCTOBER 31, 2003
------------- ----------------
Borrowings under revolving credit
facility $ 34,000,000 $ 30,000,000
Industrial Development Revenue
Refunding Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 164,000 33,000
------------- ----------------
36,144,000 32,013,000
Less: Current maturities of
long-term debt (58,000) (29,000)
------------- ----------------
$ 36,086,000 $ 31,984,000
============= ================
As of July 31, 2004 and October 31, 2003, the Company had a total of $34
million and $30 million, respectively, borrowed under its $120 million revolving
credit facility at weighted average interest rates of 2.7% and 2.6%,
respectively. In April 2004, the Company extended the revolving credit term by
one year to May 2007. The revolving credit facility contains both financial and
non-financial covenants. As of July 31, 2004, the Company was in compliance with
all such covenants.
The interest rates on the Series 1988 industrial development revenue
bonds were 1.1% and 1.2% as of July 31, 2004 and October 31, 2003, respectively.
In January 2004, the Company extended the expiration date of its $2.0 million
letter of credit that secures the payment of the 1988 industrial development
revenue bonds to April 2008.
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the nine months ended
July 31, 2004 are as follows:
CLASS A CAPITAL IN
COMMON COMMON EXCESS OF PAR RETAINED NOTE
STOCK STOCK VALUE EARNINGS RECEIVABLE
------------ ------------ ------------- ------------ ------------
Balances as of October 31, 2003 $ 97,000 $ 117,000 $ 155,064,000 $ 69,172,000 $ (2,932,000)
10% stock dividend on Common
Stock and Class A Common Stock
paid in shares of Class A Common
Stock (Note 1) -- 22,000 29,342,000 (29,393,000) --
Net income -- -- -- 15,464,000 --
Shares issued in connection with
business acquisition (Note 2) -- 3,000 2,997,000 -- --
Proceeds from shares sold in
connection with business
acquisition (Note 13) -- -- -- -- 1,259,000
Adjustment to guaranteed resale
value of shares issued in connection
with business acquisition (Note 13) -- -- (1,673,000) -- 1,673,000
Cash dividends ($.05 per share) -- -- -- (1,201,000) --
Tax benefit from stock option
exercises -- -- 1,252,000 -- --
Exercises of stock options 2,000 2,000 708,000 -- --
Other -- (1,000) 2,000 2,000 --
------------ ------------ ------------- ------------ ------------
Balances as of July 31, 2004 $ 99,000 $ 143,000 $ 187,692,000 $ 54,044,000 $ --
============ ============ ============= ============ ============
9
7. RESEARCH AND DEVELOPMENT EXPENSES
Cost of Sales for the nine months ended July 31, 2004 and 2003 includes
approximately $6.8 million and $6.5 million, respectively, of new product
research and development expenses. New product research and development expenses
for both the three months ended July 31, 2004 and 2003 were $2.3 million. The
expenses are net of reimbursements pursuant to research and development
cooperation and joint venture agreements, which were not significant.
8. RESTRUCTURING EXPENSES
In July 2004, the Company incurred $600,000 of restructuring expenses
within certain subsidiaries of the Flight Support Group that provide repair and
overhaul services ("repair and overhaul subsidiaries"). The restructuring
expenses include $350,000 of inventory write-downs, which were recorded within
Cost of Sales in the accompanying Condensed Consolidated Statements of
Operations, and $250,000 of management hiring/relocation related expenses that
were recorded within Selling, General and Administrative Expenses. The inventory
written down is related to older generation aircraft for which repair and
overhaul services are being discontinued by the Company. The repair and overhaul
subsidiaries' restructuring expenses decreased net income (after income taxes
and the minority interest's share of the expenses) for the nine months and three
months ended July 31, 2004 by $301,000, or $.01 per diluted share.
The following table summarizes the restructuring expenses and associated
accrual:
MANAGEMENT
HIRING /
RELOCATION
INVENTORY RELATED
WRITE-DOWNS EXPENSES TOTALS
----------- ---------- ----------
Balances as of April 30, 2004 $ -- $ -- $ --
Restructuring expenses 350,000 250,000 600,000
Cash payments -- -- --
Non-cash amount (350,000) -- (350,000)
----------- ---------- ----------
Balances as of July 31, 2004 $ -- $ 250,000 $ 250,000
=========== ========== ==========
The accrued restructuring expenses are included within Accrued Expenses
and Other Current Liabilities in the accompanying Condensed Consolidated Balance
Sheets.
The repair and overhaul subsidiaries' restructuring plan is expected to
result in additional expenses estimated to aggregate approximately $400,000 -
$600,000. The additional expenses include contract termination costs, including
the lease termination on a facility, and other associated costs principally
consisting of moving costs related to the consolidation of two repair and
overhaul facilities and one-time employee termination/hiring benefits. These
additional restructuring expenses are expected to be incurred and/or recognized
under the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" over the fourth quarter of fiscal 2004 and first quarter
of fiscal 2005.
10
9. LIFE INSURANCE PROCEEDS
In July 2004, the Company received $5.0 million in proceeds from the
death benefit of a key-person life insurance policy maintained by a subsidiary
of the Flight Support Group that provides repair and overhaul services. The life
insurance proceeds increased net income (after the minority interest's share of
the income) for the nine months and three months ended July 31, 2004 by $4.0
million, or $.16 per diluted share.
10. INCOME TAX EXPENSE
The Company's effective tax rates of 27.8% and 20.4% for the nine months
and three months ended July 31, 2004 are substantially lower than the effective
tax rates for the respective periods of the prior year as the $5.0 million in
life insurance proceeds received in July 2004 (see Note 9 - Life Insurance
Proceeds) and the minority interests' share of the income of Sierra LLC are
excluded from the Company's income that is subject to income taxes.
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the nine months and three months ended July 31:
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Net income $ 15,464,000 $ 8,682,000 $ 8,115,000 $ 3,240,000
============ ============ ============ ============
Denominator:
Weighted average common shares outstanding - basic 23,986,315 23,147,042 24,165,595 23,234,687
Effect of dilutive stock options 1,723,529 1,262,223 1,589,860 1,229,055
------------ ------------ ------------ ------------
Weighted average common shares outstanding - diluted 25,709,844 24,409,265 25,755,455 24,463,742
============ ============ ============ ============
Net income per share - basic $ .64 $ .38 $ .34 $ .14
Net income per share - diluted $ .60 $ .36 $ .32 $ .13
Anti-dilutive stock options excluded 577,136 2,389,587 591,773 2,333,632
11
12. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group (FSG), consisting of HEICO Aerospace Holdings Corp. and its subsidiaries,
and the Electronic Technologies Group (ETG), consisting of HEICO Electronic
Technologies Corp. and its subsidiaries, for the nine months and three months
ended July 31, 2004 and 2003, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
--------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------- ------------ ------------- -------------
For the nine months ended July 31, 2004:
Net sales $ 112,053,000 $ 42,825,000 $ (114,000) $ 154,764,000
Depreciation and amortization 3,501,000 1,294,000 331,000 5,126,000
Operating income 17,344,000 /(a)/ 9,615,000 /(b)/ (4,344,000) 22,615,000
Capital expenditures 2,016,000 1,421,000 5,000 3,442,000
For the nine months ended July 31, 2003:
Net sales $ 95,004,000 $ 34,102,000 $ (315,000) $ 128,791,000
Depreciation and amortization 3,684,000 1,012,000 308,000 5,004,000
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 three months ended July 31, 2004:
Net sales $ 40,086,000 $ 15,743,000 ($9,000) $ 55,820,000
Depreciation and amortization 1,156,000 450,000 105,000 1,711,000
Operating income 6,006,000 /(a)/ 3,428,000 /(b)/ (1,564,000) 7,870,000
Capital expenditures 850,000 370,000 2,000 1,222,000
For the three months ended July 31, 2003:
Net sales $ 32,742,000 $ 12,814,000 $ (144,000) $ 45,412,000
Depreciation and amortization 1,202,000 375,000 155,000 1,732,000
Operating income 4,797,000 2,702,000 (1,398,000) 6,101,000
Capital expenditures 366,000 428,000 -- 794,000
- ----------
/(a)/ Includes $600,000 of restructuring expenses (See Note 8 -
Restructuring Expenses).
/(b)/ Includes $235,000 of litigation-related expenses (See Note 13 -
Commitments and Contingencies - Litigation).
The total assets held by each operating segment as of July 31, 2004 and
October 31, 2003 is as follows:
SEGMENT OTHER,
------------------------------ PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
------------- ------------- ------------- ------------
Total assets as of July 31, 2004 $ 215,337,000 $ 134,250,000 $ 19,048,000 $ 368,635,000
Total assets as of October 31, 2003 214,292,000 103,798,000 15,154,000 333,244,000
12
13. COMMITMENTS AND CONTINGENCIES
GUARANTEES
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 $120 million revolving credit facility. In addition, the Company's
industrial development revenue bonds are secured by a $2.0 million letter of
credit expiring April 2008 and a mortgage on the related properties pledged as
collateral.
The Company's accounting policy for product warranties is to accrue an
estimated liability at the time of shipment. Warranty reserves are included in
Accrued Expenses and Other Current Liabilities in the accompanying Condensed
Consolidated Balance Sheets. The amount recognized is based on historical claims
cost experience. Based on an analysis of such cost experience, the Company
reduced its estimated warranty liability in the first quarter of fiscal 2004.
Changes in the product warranty liability for the nine months ended July 31,
2004 are as follows:
Balance as of October 31, 2003 $ 633,000
Change in estimate of warranty liability (491,000)
Accruals for warranties 121,000
Warranty claims settled (110,000)
----------
Balance as of July 31, 2004 $ 153,000
==========
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 (318,960 shares) and guaranteed that the resale value of
such Class A Common Stock would be at least $5 million through August 31, 2004.
Concurrent with the acquisition, the Company loaned the seller $5 million, which
was due August 31, 2004 and secured by the 318,960 shares of HEICO Class A
Common Stock. The loan has been shown as a reduction of shareholders' equity in
the Company's Condensed Consolidated Balance Sheets under the caption, "Note
Receivable Secured by Class A Common Stock." In October 2003, the seller sold
220,000 shares of the HEICO Class A Common Stock and the Company received net
proceeds of $2.1 million to reduce the note receivable. In the second quarter of
fiscal 2004, the Company received net proceeds of $1.2 million from the seller
upon the sale of the remaining 98,960 shares of the HEICO Class A Common Stock.
Pursuant to the Company's guarantee that the aggregate resale value of the
318,960 shares of Class A Common Stock would be at least $5 million, the $1.7
million difference between the guaranteed value and the $3.3 million of
aggregate net proceeds ($2.1 million received in October 2003 and $1.2 million
received in the second quarter of 2004) from the sales of the Class A Common
Stock has been recorded as a reduction of both capital in excess of par value
and the note receivable.
13
As part of the agreement to acquire an 80% interest in Sierra (see Note
2 - Acquisition), the Company has the right to purchase the minority interests
in approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
LITIGATION
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's condensed
consolidated financial statements.
In the third quarter of fiscal 2004, the Company incurred $235,000 of
legal and other costs related to litigation brought by a subsidiary of the
Electronic Technologies Group against two former employees for breach of
contract and other possible causes of action against the former employees and
others. The litigation-related expenses, which were recorded within Selling,
General and Administrative Expenses in the accompanying Condensed Consolidated
Statements of Operations, decreased net income for the nine months and three
months ended July 31, 2004 by $148,000, or $.01 per diluted share.
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 materially
from those estimates if different assumptions were used or different events
ultimately transpire.
The Company's critical accounting policies, some of which require
management to make judgments about matters that are inherently uncertain, are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the year ended October
31, 2003.
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.
The Company acquired an 80% interest in Sierra Microwave Technology,
Inc. (Sierra) in December 2003 through its ETG (see Note 2 to the Condensed
Consolidated Financial Statements). The purchase price of the acquisition was
not significant to the Company's condensed consolidated financial statements and
the pro forma consolidated results assuming Sierra had been acquired as of the
beginning of fiscal 2004 would not have been materially different from the
reported results. However, the operating results of Sierra have had a positive
impact on the ETG, the smaller of the Company's two operating segments, as
further explained below.
15
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations;
net sales and operating income by segment; and the percentage of net sales
represented by the respective items in the accompanying Condensed Consolidated
Statements of Operations.
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
-------------------------------- ---------------------------------
2004 2003 2004 2003
------------- ------------ ------------- -------------
Net sales $ 154,764,000 $ 128,791,000 $ 55,820,000 $ 45,412,000
------------- ------------- ------------- -------------
Cost of sales 100,898,000 85,978,000 36,204,000 30,276,000
Selling, general and administrative
expenses 31,251,000 26,252,000 11,746,000 9,035,000
------------- ------------- ------------- -------------
Total operating costs and expenses 132,149,000 112,230,000 47,950,000 39,311,000
------------- ------------- ------------- -------------
Operating income $ 22,615,000 $ 16,561,000 $ 7,870,000 $ 6,101,000
============= ============= ============= =============
Net sales by segment:
Flight Support Group $ 112,053,000 $95,004,000 $ 40,086,000 $ 32,742,000
Electronic Technologies Group 42,825,000 34,102,000 15,743,000 12,814,000
Intersegment sales (114,000) (315,000) (9,000) (144,000)
------------- ------------- ------------- -------------
$ 154,764,000 $ 128,791,000 $ 55,820,000 $ 45,412,000
============= ============= ============= =============
Operating income by segment:
Flight Support Group $17,344,000 /(a)/ $ 14,336,000 $ 6,006,000 /(a)/ $ 4,797,000
Electronic Technologies Group 9,615,000 /(b)/ 5,374,000 3,428,000 /(b)/ 2,702,000
Other, primarily corporate (4,344,000) (3,149,000) (1,564,000) (1,398,000)
------------- ------------- ------------- -------------
$ 22,615,000 $ 16,561,000 $ 7,870,000 $ 6,101,000
============= ============= ============= =============
- ----------
/(a)/ Includes $600,000 of restructuring expenses as discussed below.
/(b)/ Includes $235,000 of litigation-related expenses as discussed below.
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 34.8% 33.2% 35.1% 33.3%
Selling, general and administrative expenses 20.2% 20.4% 21.0% 19.9%
Operating income 14.6% 12.9% 14.1% 13.4%
Interest expense 0.6% 0.7% 0.4% 0.7%
Interest and other income 0.1% 0.1% 0.2% --
Life insurance proceeds 3.2% -- 9.0% --
Income tax expense 4.8% 4.4% 4.6% 4.6%
Minority interests' share of income 2.5% 1.1% 3.6% 1.0%
Net income 10.0% 6.7% 14.5% 7.1%
16
COMPARISON OF FIRST NINE MONTHS OF FISCAL 2004 TO FIRST NINE MONTHS OF FISCAL
2003
Net Sales
Net sales for the first nine months of fiscal 2004 increased by 20.2% to
$154.8 million, as compared to net sales of $128.8 million for the first nine
months of fiscal 2003. The increase in net sales reflects an increase of $17.0
million (a 17.9% increase) to $112.1 million in sales within the FSG, and an
increase of $8.7 million (a 25.6% increase) to $42.8 million in sales within the
ETG. The FSG's sales increase primarily reflects improved demand for its
aftermarket replacement parts and repair and overhaul services, which reflects
continuing recovery within the commercial airline industry, as well as increased
sales of new products. The increase in sales within the ETG primarily resulted
from the acquisition of Sierra in December 2003.
The Company's net sales for the first nine months of fiscal 2004 by
market approximated 65% from the commercial aviation industry, 23% from the
defense and space industries and 12% from other markets including industrial,
medical, electronics and telecommunications. Net sales for the first nine months
of fiscal 2003 by market approximated 69% from the commercial aviation industry,
21% from the defense and space industries and 10% from other markets.
Gross Profits and Operating Expenses
In the third quarter of fiscal 2004, the Company incurred $600,000 of
restructuring expenses within certain subsidiaries of the FSG that provide
repair and overhaul services ("repair and overhaul subsidiaries"). The
restructuring expenses include $350,000 of inventory write-downs, which were
recorded within Cost of Sales, and $250,000 of management hiring/relocation
related expenses that were recorded within Selling, General and Administrative
(SG&A) expenses. The Company also incurred $235,000 of legal and other costs
related to litigation brought by a subsidiary of the ETG against two former
employees for breach of contract and other possible causes of action against the
former employees and others, which were recorded within SG&A expenses in the
third quarter of fiscal 2004. The restructuring expenses and litigation-related
expenses decreased net income by $449,000, or $.02 per diluted share, for the
first nine months of fiscal 2004. For more information on the restructuring
plan, see the Outlook section below and Note 8 to the Condensed Consolidated
Financial Statements.
The Company's gross profit margin improved to 34.8% for the first nine
months of fiscal 2004 as compared to 33.2% for the first nine months of fiscal
2003, reflecting higher margins within the ETG offset by a small decrease in the
FSG's gross profit margin. The ETG's gross profit margin increase was primarily
due to the acquisition of Sierra and sales of higher margin products. The FSG's
gross profit margin decrease was principally due to higher costs from write-offs
of excess inventory in the first quarter of fiscal 2004 and the restructuring
expenses referred to above, partially offset by a reduction of the product
warranty reserve and lower research and development expenses as a percentage of
net sales. Consolidated cost of sales for the first nine months of fiscal 2004
and fiscal 2003 includes approximately $6.8 million and $6.5 million,
respectively, of new product research and development expenses.
17
SG&A expenses were $31.3 million and $26.3 million for the first nine
months of fiscal 2004 and fiscal 2003, respectively. The increase in SG&A
expenses reflects higher sales within the FSG, the acquisition of Sierra, an
increase in Corporate expenses, and the aforementioned restructuring and
litigation-related expenses. Corporate expenses in the first nine months of
fiscal 2003 reflect a reversal of approximately $400,000 of professional fees
that were accrued at the end of fiscal 2002 pursuant to a contractual
arrangement that was renegotiated in the first quarter of fiscal 2003.
As a percentage of net sales, SG&A expenses decreased to 20.2% for the
first nine months of fiscal 2004 compared to 20.4% for the first nine months of
fiscal 2003. The decrease as a percentage of sales is due to higher sales
volumes within the FSG and ETG, partially offset by the increased SG&A expenses
discussed previously.
Operating Income
Operating income for the first nine months of fiscal 2004 increased by
36.6% to $22.6 million, compared to operating income of $16.6 million for the
first nine months of fiscal 2003. The increase in operating income reflects an
increase of $3.0 million (a 21.0% increase) in operating income of the FSG from
$14.3 million for the first nine months of fiscal 2003 to $17.3 million for the
first nine months of fiscal 2004 reflecting the higher sales and an increase of
$4.2 million (a 78.9% increase) in operating income of the ETG from $5.4 million
for the first nine months of fiscal 2003 to $9.6 million for the first nine
months of fiscal 2004 reflecting the acquisition of Sierra. These increases were
partially offset by a $1.2 million increase in Corporate expenses reflecting an
increase in general corporate costs. As a percentage of net sales, operating
income increased from 12.9% in the first nine months of fiscal 2003 to 14.6% in
the first nine months of fiscal 2004. The improvement in operating income as a
percentage of net sales reflects an increase in the FSG's operating income as a
percentage of net sales from 15.1% in the first nine months of fiscal 2003 to
15.5% in the first nine months of fiscal 2004 and an increase in the ETG's
operating income as a percentage of net sales from 15.8% in the first nine
months of fiscal 2003 to 22.5% in the first nine months of fiscal 2004. The
increase in the FSG's operating income as a percentage of net sales reflects
lower SG&A expenses as a percentage of sales, partially offset by the small
decrease in gross profit margins discussed previously. The improvement in the
ETG's operating income and operating income as a percentage of net sales
reflects the purchase of Sierra and the increased gross margins, discussed
previously.
Interest Expense
Interest expense in the first nine months of fiscal 2004 and fiscal 2003
was comparable as average borrowings outstanding and associated interest rates
remained at approximately the same levels.
Interest and Other Income
Interest and other income in the first nine months of fiscal 2004 and
fiscal 2003 were not material.
18
Life Insurance Proceeds
In the third quarter of fiscal 2004, the Company received $5.0 million
in proceeds from a key-person life insurance policy maintained by a subsidiary
of the Flight Support Group. The life insurance proceeds increased net income
(after the minority interest's share of the income) for the first nine months of
fiscal 2004 by $4.0 million, or $.16 per diluted share.
Income Tax Expense
The Company's effective tax rate decreased from 35.6% for the first nine
months of fiscal 2003 to 27.8% for the first nine months of fiscal 2004 as the
aforementioned $5.0 million in life insurance proceeds and the minority
interests' share of the income of Sierra Microwave Technology, LLC (Sierra LLC)
are excluded from the Company's income that is subject to federal income taxes.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra LLC. The increase from the first nine months of fiscal 2003 to
the first nine months of fiscal 2004 was attributable to higher earnings of the
FSG and income of Sierra LLC.
Net Income
The Company's net income was $15.5 million, or $.60 per diluted share,
for the first nine months of fiscal 2004 compared to $8.7 million, or $.36 per
diluted share, for the first nine months of fiscal 2003. The net impact of the
life insurance proceeds reduced by the restructuring expenses and
litigation-related expenses increased net income by $3.6 million, or $.14 per
diluted share for the first nine months of fiscal 2004.
OUTLOOK
The Company reported increased sales and improved margins in its two
business segments, reflecting both organic growth and growth through
acquisitions.
Operating margins within the Flight Support Group continue to show
year-over-year improvement despite the restructuring expenses incurred in the
third quarter of fiscal 2004. The restructuring efforts will also include the
consolidation of two repair and overhaul facilities and additional related
costs, which are estimated to aggregate approximately $400,000 - $600,000 over
the fourth quarter of fiscal 2004 and first quarter of fiscal 2005. The Company
believes these restructuring efforts will allow it to better serve its customers
while further improving operating margins.
Based on operating results for the first nine months of 2004, the
current market conditions and the Company's continued success in introducing new
products and services, the Company continues to target growth in fiscal 2004
sales and earnings over fiscal 2003 results.
19
COMPARISON OF THIRD QUARTER OF FISCAL 2004 TO THIRD QUARTER OF FISCAL 2003
Net Sales
Net sales for the third quarter of fiscal 2004 increased by 22.9% to
$55.8 million, as compared to net sales of $45.4 million for the third quarter
of fiscal 2003. The increase in net sales reflects an increase of $7.3 million
(a 22.4% increase) to $40.1 million in sales within the FSG, and an increase of
$2.9 million (a 22.9% increase) to $15.7 million in sales within the ETG. The
FSG's sales increase primarily reflects improved demand for its aftermarket
replacement parts and repair and overhaul services, which reflects continued
recovery within the commercial airline industry, as well as increased sales of
new products. The increase in sales within the ETG primarily resulted from the
acquisition of Sierra.
Gross Profits and Operating Expenses
In the third quarter of fiscal 2004, the Company incurred $600,000 of
restructuring expenses within certain subsidiaries of the FSG that provide
repair and overhaul services ("repair and overhaul subsidiaries"). The
restructuring expenses include $350,000 of inventory write-downs, which were
recorded within Cost of Sales, and $250,000 of management hiring/relocation
related expenses that were recorded within Selling, General and Administrative
(SG&A) expenses. The Company also incurred $235,000 of legal and other costs
related to litigation brought by a subsidiary of the ETG against two former
employees for breach of contract and other possible causes of action against the
former employees and others, which were recorded within SG&A expenses in the
third quarter of fiscal 2004. The restructuring expenses and litigation-related
expenses decreased net income by $449,000, or $.02 per diluted share, for the
third quarter of fiscal 2004.
The Company's gross profit margin improved to 35.1% for the third
quarter of fiscal 2004 as compared to 33.3% for the third quarter of fiscal
2003, reflecting higher margins within both the ETG and FSG. The ETG's gross
profit margin increase was primarily due to the acquisition of Sierra and sales
of higher margin products. The FSG's gross profit margin increase was due to
lower research and development expenses as a percentage of sales and sales of
higher margin products, partially offset by the restructuring expenses referred
to above. Consolidated cost of sales for both the third quarter of fiscal 2004
and fiscal 2003 includes approximately $2.3 million of new product research and
development expenses.
SG&A expenses were $11.7 million and $9.0 million for the third quarter
of fiscal 2004 and fiscal 2003, respectively. The increase in SG&A expenses is
mainly due to higher sales within the FSG, the acquisition of Sierra and the
aforementioned restructuring and litigation-related expenses. As a percentage of
net sales, SG&A expenses increased to 21.0% for the third quarter of fiscal 2004
compared to 19.9% for the third quarter of fiscal 2003. The increase as a
percentage of sales is due principally to the restructuring and
litigation-related expenses.
20
Operating Income
Operating income of $7.9 million for the third quarter of fiscal 2004
was 29.0% higher than operating income of $6.1 million for the third quarter of
fiscal 2003. The improvement in operating income reflects a $1.2 million
increase in operating income of the FSG from $4.8 million for the third quarter
of fiscal 2003 to $6.0 million for the third quarter to fiscal 2004 and a $0.7
million increase in operating income of the ETG from $2.7 million for the third
quarter of fiscal 2003 to $3.4 million for the third quarter of fiscal 2004,
partially offset by a $0.2 million increase in Corporate expenses. As a
percentage of net sales, operating income increased from 13.4% in the third
quarter of fiscal 2003 to 14.1% in the third quarter of fiscal 2004. 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 14.7% in the
third quarter of fiscal 2003 to 15.0% in the third quarter of fiscal 2004 and an
increase in the ETG's operating income as a percentage of net sales from 21.1%
in the third quarter of fiscal 2003 to 21.8% in the third quarter of fiscal
2004. The increase in the FSG's operating income as a percentage of net sales
reflects the improved gross margins discussed previously, partially offset by
higher SG&A expenses as a percentage of sales. The increase in the ETG's
operating income and operating income as a percentage of net sales reflects the
purchase of Sierra and the increased gross margins, discussed previously.
Interest Expense
Interest expense decreased to $250,000 in the third quarter of fiscal
2004 from $307,000 in the third quarter of fiscal 2003. The decrease was
principally due to a lower weighted average balance outstanding under the
revolving credit facility in the third quarter of fiscal 2004.
Interest and Other Income
Interest and other income in the third quarter of fiscal 2004 and fiscal
2003 were not material.
Life Insurance Proceeds
In the third quarter of fiscal 2004, the Company received $5.0 million
in proceeds from a key-person life insurance policy maintained by a subsidiary
of the Flight Support Group. The life insurance proceeds increased net income
(after the minority interest's share of the income) for the third quarter of
fiscal 2004 by $4.0 million, or $.16 per diluted share.
Income Tax Expense
The Company's effective tax rate decreased from 36.3% for the third
quarter of fiscal 2003 to 20.4% for the third quarter of fiscal 2004 as the
aforementioned $5.0 million in life insurance proceeds and the minority
interests' share of the income of Sierra Microwave Technology, LLC (Sierra LLC)
are excluded from the Company's income that is subject to federal income taxes.
21
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra LLC. The increase from the third quarter of fiscal 2003 to the
third quarter of fiscal 2004 was attributable to higher earnings of the FSG and
income of Sierra LLC.
Net Income
The Company's net income was $8.1 million, or $.32 per diluted share,
for the third quarter of fiscal 2004 compared to $3.2 million, or $0.13 per
diluted share, for the third quarter of fiscal 2003. The net impact of the life
insurance proceeds reduced by the restructuring expenses and litigation-related
expenses increased net income by $3.6 million, or $.14 per diluted share for the
third quarter of fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its operating cash flow and available
borrowings under its revolving credit facility will be sufficient to fund cash
requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $32.6 million for the
first nine months of fiscal 2004, consisting primarily of net income of $15.5
million, including $4.0 million of cash proceeds from life insurance net of the
minority interest's share, depreciation and amortization of $5.1 million,
minority interests' share of income of consolidated subsidiaries of $3.9
million, a deferred income tax provision of $3.7 million, a tax benefit on stock
option exercises of $1.3 million, and a decrease in net operating assets of $3.3
million.
Investing Activities
Net cash used in investing activities during the first nine months of
fiscal 2004 related primarily to the acquisition of Sierra, and capital
expenditures totaling $3.4 million principally for building improvements at
certain manufacturing facilities and equipment purchases.
Financing Activities
Net cash provided by financing activities during the first nine months
of fiscal 2004 primarily related to net borrowings of $4.0 million on the
Company's revolving credit facility reflecting $27.0 million borrowed to fund
the acquisition referenced above, net of repayments of $23.0
22
million and proceeds from stock option exercises of $0.7 million, partially
offset by the payment of $1.2 million in cash dividends on the Company's common
stock.
In April 2004, the Company extended the term of its revolving credit
facility by one year to May 2007.
OFF-BALANCE SHEET ARRANGEMENTS
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 $120 million revolving credit facility. In addition, the Company's
industrial development revenue bonds are secured by a $2.0 million letter of
credit expiring April 2008 and a mortgage on the related properties pledged as
collateral.
As part of the agreement to acquire an 80% interest in Sierra (see Note
2 to the Condensed Consolidated Financial Statements), the Company has the right
to purchase the minority interests in approximately ten years, or sooner under
certain conditions, and the minority holders have the right to cause the Company
to purchase their interests commencing in approximately five years, or sooner
under certain conditions.
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation, which was
revised in December 2003, 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 was immediately effective for variable interest entities created or
entered into after January 31, 2003 and is effective in the first reporting
period ending after December 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of FIN 46 did not have a material effect on the Company's results
of operations or financial position.
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
23
all statements that express expectations and projections with respect to future
matters could differ materially from those expressed in or implied by those
forward-looking statements 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 an increase to our costs to complete contracts;
governmental and regulatory demands, export policies and restrictions,
reductions in defense or space spending by U.S. and/or foreign customers, or
competition from existing and new competitors, which could reduce our sales;
HEICO's ability to introduce new products and product pricing levels, which
could reduce our sales or sales growth; HEICO's ability to make acquisitions and
achieve operating synergies from acquired businesses, customer credit risk,
interest rates and economic conditions within and outside of the aerospace,
defense, space 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 Annual Report on Form 10-K for the
year ended October 31, 2003. We undertake no obligation to publicly update or
revise any forward-looking statement, 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, 2004, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $94,000 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 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
As announced by the Company in October 2002, the Company's Board of
Directors has authorized the repurchase of up to 425,000 shares of its Common
Stock and/or Class A Common Stock to be executed, at management's discretion, in
the open market or via private transactions. Through July 31, 2004, the Company
has repurchased 22,000 shares of its Class A Common Stock. The remaining 403,000
shares authorized for repurchase are subject to certain restrictions included in
the Company's revolving credit agreement. During the quarter ended July 31,
2004, the Company did not repurchase any shares of its Common Stock and/or Class
A Common Stock. The repurchase program does not have a fixed termination date.
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer. *
32.1 Section 1350 Certification of Chief Executive Officer. **
32.2 Section 1350 Certification of Chief Financial Officer. **
------------------
* Filed herewith.
** Furnished herewith.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
-----------------
(Registrant)
Date: August 27, 2004 By: /s/ Thomas S. Irwin
-------------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Laurans A. Mendelson, Chief Executive Officer of HEICO Corporation, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q of HEICO
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in
this report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: August 27, 2004 /S/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Thomas S. Irwin, Chief Financial Officer of HEICO Corporation, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of HEICO
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in
this report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: August 27, 2004 /S/ THOMAS S. IRWIN
-------------------
Thomas S. Irwin
Chief Financial Officer
Exhibit 32.1
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the
"Company") on Form 10-Q for the period ended July 31, 2004 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 27, 2004 /S/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 32.2
SECTION 1350 CERTIFICATION
In connection with the Quarterly Report of HEICO Corporation (the
"Company") on Form 10-Q for the period ended July 31, 2004 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 27, 2004 /S/ THOMAS S. IRWIN
-------------------
Thomas S. Irwin
Chief Financial Officer