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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 JANUARY 31, 2007 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (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 February 28, 2007:
Common Stock, $.01 par value 10,417,778 shares
Class A Common Stock, $.01 par value 15,143,107 shares
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HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of January 31, 2007 and October 31, 2006............................................ 2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 2007 and 2006................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 2007 and 2006................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited).......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 23
Item 4. Controls and Procedures................................................................... 24
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................... 25
Item 6. Exhibits.................................................................................. 25
SIGNATURE................................................................................................ 26
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JANUARY 31, OCTOBER 31,
2007 2006
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,843,000 $ 4,999,000
Accounts receivable, net 66,360,000 65,012,000
Inventories, net 99,228,000 97,283,000
Prepaid expenses and other current assets 5,605,000 3,418,000
Deferred income taxes 11,729,000 9,309,000
-------------- --------------
Total current assets 188,765,000 180,021,000
Property, plant and equipment, net 50,105,000 49,489,000
Goodwill 276,423,000 275,116,000
Intangible assets, net 21,125,000 22,011,000
Other assets 10,542,000 8,178,000
-------------- --------------
Total assets $ 546,960,000 $ 534,815,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,000 $ 39,000
Trade accounts payable 21,448,000 22,386,000
Accrued expenses and other current liabilities 30,737,000 41,503,000
Income taxes payable -- 1,575,000
-------------- --------------
Total current liabilities 52,191,000 65,503,000
Long-term debt, net of current maturities 60,016,000 55,022,000
Deferred income taxes 28,970,000 28,052,000
Other non-current liabilities 8,099,000 5,679,000
-------------- --------------
Total liabilities 149,276,000 154,256,000
-------------- --------------
Minority interests in consolidated subsidiaries 65,674,000 63,301,000
-------------- --------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares
authorized; 300,000 shares designated as Series B Junior
Participating Preferred Stock and 300,000 shares designated
as Series C Junior Participating Preferred Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 10,414,778 and 10,311,564 shares issued and
outstanding, respectively 104,000 103,000
Class A Common Stock, $.01 par value per share; 30,000,000
shares authorized; 15,134,223 and 15,062,398 shares issued
and outstanding, respectively 151,000 151,000
Capital in excess of par value 214,065,000 206,260,000
Accumulated other comprehensive income 109,000 62,000
Retained earnings 117,581,000 110,682,000
-------------- --------------
Total shareholders' equity 332,010,000 317,258,000
-------------- --------------
Total liabilities and shareholders' equity $ 546,960,000 $ 534,815,000
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2007 2006
-------------- --------------
Net sales $ 113,684,000 $ 88,101,000
-------------- --------------
Operating costs and expenses:
Cost of sales 76,196,000 56,049,000
Selling, general and administrative expenses 20,348,000 16,766,000
-------------- --------------
Total operating costs and expenses 96,544,000 72,815,000
-------------- --------------
Operating income 17,140,000 15,286,000
Interest expense (849,000) (808,000)
Interest and other income (expense) 184,000 (53,000)
-------------- --------------
Income before income taxes and minority interests 16,475,000 14,425,000
Income tax expense 4,988,000 4,916,000
-------------- --------------
Income before minority interests 11,487,000 9,509,000
Minority interests' share of income 3,566,000 2,760,000
-------------- --------------
Net income $ 7,921,000 $ 6,749,000
============== ==============
Net income per share:
Basic $ .31 $ .27
Diluted $ .30 $ .26
Weighted average number of common shares outstanding:
Basic 25,482,633 24,673,957
Diluted 26,811,861 26,231,848
Cash dividends per share $ 0.04 $ 0.04
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
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2007 2006
-------------- --------------
Operating Activities:
Net income $ 7,921,000 $ 6,749,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,945,000 2,149,000
Deferred income tax provision (1,502,000) 1,061,000
Minority interests' share of income 3,566,000 2,760,000
Tax benefit from stock option exercises 6,885,000 2,365,000
Excess tax benefit from stock option exercises (5,271,000) (1,130,000)
Stock option compensation expense 258,000 428,000
Changes in assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (1,329,000) 1,444,000
Increase in inventories (2,131,000) (4,157,000)
Increase in prepaid expenses and other current assets (2,185,000) (440,000)
(Decrease) increase in trade accounts payable (944,000) 287,000
Decrease in accrued expenses and other current
liabilities (3,529,000) (6,038,000)
(Decrease) increase in income taxes payable (1,579,000) 579,000
Other (4,000) 291,000
-------------- --------------
Net cash provided by operating activities 3,101,000 6,348,000
-------------- --------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (8,385,000) (30,062,000)
Capital expenditures (2,666,000) (1,207,000)
Other 72,000 360,000
-------------- --------------
Net cash used in investing activities (10,979,000) (30,909,000)
-------------- --------------
Financing Activities:
Borrowings on revolving credit facility 7,000,000 28,000,000
Payments on revolving credit facility (2,000,000) (1,000,000)
Borrowings on short-term line of credit -- 1,000,000
Cash dividends paid (1,022,000) (991,000)
Proceeds from stock option exercises 664,000 576,000
Excess tax benefit from stock option exercises 5,271,000 1,130,000
Distributions to minority interest owners (1,164,000) (250,000)
Other (39,000) (13,000)
-------------- --------------
Net cash provided by financing activities 8,710,000 28,452,000
-------------- --------------
Effect of exchange rate changes on cash 12,000 5,000
-------------- --------------
Net increase in cash and cash equivalents 844,000 3,896,000
Cash and cash equivalents at beginning of year 4,999,000 5,330,000
-------------- --------------
Cash and cash equivalents at end of period $ 5,843,000 $ 9,226,000
============== ==============
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, 2006. The
October 31, 2006 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 principally of 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 three months ended January 31, 2007 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3." SFAS No. 154 changes the requirements for the accounting and
reporting of a change in accounting principle. The Statement eliminates the
requirement in Accounting Principles Board ("APB") Opinion No. 20 to include the
cumulative effect of changes in accounting principle in the income statement in
the period of change, and instead requires that changes in accounting principle
be retrospectively applied unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The Statement
applies to all voluntary changes in accounting principle. SFAS No. 154 is
effective for changes made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material effect on the Company's
results of operations, financial position, or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109," which seeks to reduce the diversity in practice associated with the
accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in an income tax return. FIN 48 presents a
two-step process for evaluating a tax position. The first step is to determine
whether it is more-likely-than-not that a tax position will be sustained upon
examination, based on the technical merits of the position. The second step is
to measure the benefit to be recorded from tax positions that meet the
more-likely-than-not
5
recognition threshold, by determining the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate settlement, and
recognizing that amount in the financial statements. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that the adoption of FIN 48 will have on its results of
operations, financial position, and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007. The Company is currently in the process
of evaluating the effect, if any, the adoption of SFAS No. 157 will have on its
results of operations, financial position, or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB No. 108 was issued in order to eliminate the diversity in
practice surrounding how public companies quantify financial statement
misstatements. SAB No. 108 requires that registrants quantify errors using both
a balance sheet (iron curtain) approach and an income statement (rollover)
approach then evaluate whether either approach results in a misstated amount
that, when all relevant quantitative and qualitative factors are considered, is
material. SAB No. 108 is effective for fiscal years ending after November 15,
2006. The Company does not expect the adoption of SAB No. 108 to have a material
effect on its results of operations, financial position, or cash flows.
2. ACQUISITIONS
During the first quarter of fiscal 2007, the Company, through its HEICO
Aerospace Holdings Corp. subsidiary, acquired an additional 10% of the equity
interests for one of its subsidiaries, which increased the Company's ownership
interest to 90%. The purchase price was paid using cash provided by operating
activities and was not significant to the Company's condensed consolidated
financial statements.
During the first quarter of fiscal 2007, the Company, through its HEICO
Electronic Technologies Corp. subsidiary, paid $7.3 million of additional
purchase consideration related to two subsidiaries acquired in previous years,
of which $7.2 million was accrued as of October 31, 2006 based on each
subsidiary's estimated earnings relative to target. (See Note 11, Commitments
and Contingencies, for additional information on contingent purchase
consideration associated with certain of the Company's acquisitions.)
6
During fiscal 2006, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired Arger Enterprises, Inc. and its related companies
(collectively "Arger") in May 2006 and Prime Air, LLC in September 2006. The
operating results of each acquired company were included in the Company's
results of operations from their effective acquisition date. Had the
acquisitions taken place as of the beginning of fiscal 2006, net sales on a pro
forma basis for the first quarter of fiscal 2006 would have been $98.9 million.
The pro forma net income and net income per share (basic and diluted) assuming
these acquisitions had been consummated as of the beginning of fiscal 2006 would
not have been materially different than the reported amounts.
In conjunction with the acquisition of Arger, the Company recognized a $1.8
million restructuring liability as of the acquisition date to combine the
operations of Arger with other subsidiaries of HEICO Aerospace Holdings Corp.
The restructuring costs consisted principally of employee termination and
relocation costs, moving costs and associated expenses and contract termination
costs of which $1.1 million were paid and $.6 million were deemed not necessary
and reversed during fiscal 2006. The remaining $.1 million of costs were paid in
the first quarter of fiscal 2007.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JANUARY 31, OCTOBER 31,
2007 2006
-------------- --------------
Accounts receivable $ 69,302,000 $ 67,905,000
Less: Allowance for doubtful accounts (2,942,000) (2,893,000)
-------------- --------------
Accounts receivable, net $ 66,360,000 $ 65,012,000
============== ==============
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION
CONTRACTS
JANUARY 31, OCTOBER 31,
2007 2006
-------------- --------------
Costs incurred on uncompleted contracts $ 18,254,000 $ 16,428,000
Estimated earnings 12,857,000 12,221,000
-------------- --------------
31,111,000 28,649,000
Less: Billings to date (25,630,000) (21,614,000)
-------------- --------------
$ 5,481,000 $ 7,035,000
============== ==============
Included in accompanying Condensed Consolidated
Balance Sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 7,373,000 $ 7,204,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings)
earnings) (1,892,000) (169,000)
-------------- --------------
$ 5,481,000 $ 7,035,000
============== ==============
Changes in estimates did not have a material effect on net income or
diluted net income per share in the three months ended January 31, 2007 and
2006.
7
INVENTORIES
JANUARY 31, OCTOBER 31,
2007 2006
-------------- --------------
Finished products $ 53,239,000 $ 52,245,000
Work in process 14,136,000 13,805,000
Materials, parts, assemblies and supplies 31,853,000 31,233,000
-------------- --------------
Inventories, net $ 99,228,000 $ 97,283,000
============== ==============
Inventories related to long-term contracts were not significant as of
January 31, 2007 and October 31, 2006.
PROPERTY, PLANT AND EQUIPMENT
JANUARY 31, OCTOBER 31,
2007 2006
-------------- --------------
Land $ 3,155,000 $ 3,155,000
Buildings and improvements 28,112,000 27,724,000
Machinery, equipment and tooling 60,272,000 59,052,000
Construction in progress 4,767,000 3,796,000
-------------- --------------
96,306,000 93,727,000
Less: Accumulated depreciation and amortization (46,201,000) (44,238,000)
-------------- --------------
Property, plant and equipment, net $ 50,105,000 $ 49,489,000
============== ==============
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 three months ended January 31, 2007 are as
follows:
SEGMENT
------------------------------- CONSOLIDATED
FSG ETG TOTALS
-------------- -------------- --------------
Balances as of October 31, 2006 $ 157,204,000 $ 117,912,000 $ 275,116,000
Goodwill acquired 993,000 -- 993,000
Adjustments to goodwill 54,000 260,000 314,000
-------------- -------------- --------------
Balances as of January 31, 2007 $ 158,251,000 $ 118,172,000 $ 276,423,000
============== ============== ==============
The goodwill acquired is a result of the acquisition described in Note 2,
Acquisitions. Adjustments to goodwill consist primarily of contingent purchase
price payments to previous owners of acquired businesses and adjustments related
to the preliminary allocation of the purchase price of prior year acquisitions
to the assets acquired and liabilities assumed.
8
Identifiable intangible assets consist of:
AS OF JANUARY 31, 2007 AS OF OCTOBER 31, 2006
-------------------------------------------- --------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Amortizing Assets:
Customer relationships $ 13,595,000 $ (2,801,000) $ 10,794,000 $ 13,595,000 $ (2,138,000) $ 11,457,000
Intellectual property 1,992,000 (623,000) 1,369,000 1,992,000 (498,000) 1,494,000
Licenses 1,000,000 (345,000) 655,000 1,000,000 (326,000) 674,000
Non-compete agreements 800,000 (506,000) 294,000 800,000 (434,000) 366,000
Patents 563,000 (112,000) 451,000 560,000 (102,000) 458,000
------------ ------------ ------------ ------------ ------------ ------------
17,950,000 (4,387,000) 13,563,000 17,947,000 (3,498,000) 14,449,000
Non-Amortizing Assets:
Trade names 7,562,000 -- 7,562,000 7,562,000 -- 7,562,000
------------ ------------ ------------ ------------ ------------ ------------
$ 25,512,000 ($ 4,387,000) $ 21,125,000 $ 25,509,000 ($ 3,498,000) $ 22,011,000
============ ============ ============ ============ ============ ============
5. SHORT-TERM AND LONG-TERM DEBT
As of January 31, 2007, no borrowings were outstanding under the $7.0
million short-term line of credit that one of the Company's subsidiaries has
with a bank.
Long-term debt consists of:
JANUARY 31, OCTOBER 31,
2007 2006
-------------- --------------
Borrowings under revolving credit facility $ 58,000,000 $ 53,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 42,000 81,000
-------------- --------------
60,022,000 55,061,000
Less: Current maturities of long-term debt (6,000) (39,000)
-------------- --------------
$ 60,016,000 $ 55,022,000
============== ==============
As of January 31, 2007 and October 31, 2006, the weighted average interest
rate on borrowings under the Company's revolving credit facility was 6.1%. The
revolving credit facility contains both financial and non-financial covenants.
As of January 31, 2007, the Company believes it is in compliance with all such
covenants.
The interest rates on the Series 1988 industrial development revenue bonds
were 3.5% and 3.6% as of January 31, 2007 and October 31, 2006, respectively.
9
6. INCOME TAXES
In December 2006, Section 41 of the Internal Revenue Code, "Credit for
Increasing Research Activities" was retroactively extended for two years to
cover the period from January 1, 2006 to December 31, 2007. As a result, in the
first quarter of 2007, the Company recognized an income tax credit for qualified
research and development activities for the full fiscal 2006 year. The tax
credit, net of expenses, increased net income by approximately $.3 million, or
$.01 per diluted share, for the three months ended January 31, 2007.
7. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in consolidated shareholders' equity and comprehensive income for
the three months ended January 31, 2007 are as follows:
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK STOCK PAR VALUE INCOME EARNINGS INCOME
------------- ------------- ------------- ------------- ------------- -------------
Balances as of October 31, 2006 $ 103,000 $ 151,000 $ 206,260,000 $ 62,000 $ 110,682,000
Net income -- -- -- -- 7,921,000 $ 7,921,000
Foreign currency translation adjustments -- -- -- 47,000 -- 47,000
-------------
Comprehensive income -- -- -- -- -- $ 7,968,000
=============
Cash dividends ($.04 per share) -- -- -- -- (1,022,000)
Tax benefit from stock option exercises -- -- 6,885,000 -- --
Proceeds from stock option exercises 1,000 -- 663,000 -- --
Stock option compensation expense -- -- 258,000 -- --
Other -- -- (1,000) -- --
------------- ------------- ------------- ------------- -------------
Balances as of January 31, 2007 $ 104,000 $ 151,000 $ 214,065,000 $ 109,000 $ 117,581,000
============= ============= ============= ============= =============
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the three months ended January 31, 2007 and 2006 includes
approximately $4.0 million and $3.8 million, respectively, of new product
research and development expenses. The expenses are net of reimbursements
pursuant to research and development cooperation and joint venture agreements,
which were not significant.
10
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the three months ended January 31:
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2007 2006
-------------- --------------
Numerator:
Net income $ 7,921,000 $ 6,749,000
============== ==============
Denominator:
Weighted average common shares outstanding-basic 25,482,633 24,673,957
Effect of dilutive stock options 1,329,228 1,557,891
-------------- --------------
Weighted average common shares outstanding-diluted 26,811,861 26,231,848
============== ==============
Net income per share- basic $ 0.31 $ 0.27
Net income per share- diluted $ 0.30 $ 0.26
Anti-dilutive stock options excluded -- 48,161
10. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group ("FSG"), consisting of HEICO Aerospace Holdings Corp. and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries, for the three months ended
January 31, 2007 and 2006, respectively, is as follows:
OTHER,
SEGMENT (1) PRIMARILY
------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
-------------- -------------- -------------- --------------
For the three months ended January 31, 2007:
Net sales $ 88,075,000 $ 25,609,000 $ -- $ 113,684,000
Depreciation and amortization 2,015,000 847,000 83,000 2,945,000
Operating income 14,425,000 5,764,000 (3,049,000) 17,140,000
Capital expenditures 2,339,000 315,000 12,000 2,666,000
For the three months ended January 31, 2006:
Net sales $ 63,678,000 $ 24,482,000 $ (59,000) $ 88,101,000
Depreciation and amortization 1,435,000 628,000 86,000 2,149,000
Operating income 11,615,000 6,403,000 (2,732,000) 15,286,000
Capital expenditures 823,000 378,000 6,000 1,207,000
(1) During the third quarter of fiscal 2006, one of the Company's subsidiaries
formerly included in the ETG was reclassified to the FSG. Prior period
amounts have been retroactively restated to reflect the revised segment
classification.
11
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
During the first quarter of fiscal 2007, the Company, through a subsidiary
of the FSG, entered in an operating lease commitment for a new facility which is
under construction and expected to be occupied in the fourth quarter of fiscal
2007. The minimum lease payments for fiscal 2007, which commence upon the
completion of the facility, are estimated to be $96,000. Minimum lease payments
for the next five fiscal years are estimated to be $462,000 in fiscal 2008,
$479,000 in fiscal 2009, $495,000 in fiscal 2010, $513,000 in fiscal 2011,
$531,000 in fiscal 2012 and $3,481,000 thereafter.
GUARANTEES
The Company has arranged for standby letters of credit aggregating $1.8
million to meet the security requirement of its insurance company for potential
workers' compensation claims, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
Changes in the Company's product warranty liability for the three months
ended January 31, 2007 and 2006, respectively, are as follows:
THREE MONTHS ENDED JANUARY 31,
-----------------------------------
2007 2006
---------------- ----------------
Balances as of beginning of fiscal year $ 534,000 $ 395,000
Acquired warranty liabilities -- 15,000
Accruals for warranties 158,000 112,000
Warranty claims settled (200,000) (125,000)
---------------- ----------------
Balances as of January 31 $ 492,000 $ 397,000
================ ================
As part of the agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2001, the Company acquired an additional 10% of the equity
interests of the subsidiary during the first quarter of fiscal 2007. The Company
has the right to purchase the remaining 10% of the equity interests in fiscal
2011, or sooner under certain conditions, and the minority holder has the right
to cause the Company to purchase the same equity interest in the same period.
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and
12
fifth years following the acquisition. The additional purchase consideration
will be accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holders have the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional consideration of up to $9.2
million in fiscal 2007, $17.8 million in fiscal 2008 and $19.2 million in fiscal
2009. The additional purchase consideration will be accrued when the earnings
objectives are met.
As part of an agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2006, the Company may be obligated to pay additional purchase
consideration of up to $7.0 million in aggregate should the subsidiary meet
certain earnings objectives during the first two years following the
acquisition. The additional purchase consideration will be accrued when the
earnings objectives are met. Further, the Company has the right to purchase the
remaining 20% minority interests beginning at approximately the eighth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of an agreement for exclusive license rights to intellectual
property, one of the subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.2 million through fiscal 2007.
LITIGATION
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations, financial position, or cash flows.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion of our financial condition and results of operations should
be read in conjunction with our condensed consolidated financial statements and
notes thereto included herein. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates if
different assumptions were used or different events ultimately transpire.
The Company's critical accounting policies, some of which require
management to make judgments about matters that are inherently uncertain, are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the year ended October
31, 2006.
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. ("HEICO Electronic") and its subsidiaries.
14
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations, net
sales and operating income by segment, and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
THREE MONTHS ENDED JANUARY 31,
----------------------------------
2007 2006
--------------- ---------------
Net sales $ 113,684,000 $ 88,101,000
--------------- ---------------
Cost of sales 76,196,000 56,049,000
Selling, general and administrative expenses 20,348,000 16,766,000
--------------- ---------------
Total operating costs and expenses 96,544,000 72,815,000
--------------- ---------------
Operating income $ 17,140,000 $ 15,286,000
=============== ===============
Net sales by segment: (1)
Flight Support Group $ 88,075,000 $ 63,678,000
Electronic Technologies Group 25,609,000 24,482,000
Intersegment sales -- (59,000)
--------------- ---------------
$ 113,684,000 $ 88,101,000
=============== ===============
Operating income by segment: (1)
Flight Support Group $ 14,425,000 $ 11,615,000
Electronic Technologies Group 5,764,000 6,403,000
Other, primarily corporate (3,049,000) (2,732,000)
--------------- ---------------
$ 17,140,000 $ 15,286,000
=============== ===============
Net sales 100.0% 100.0%
Gross profit 33.0% 36.4%
Selling, general and administrative expenses 17.9% 19.0%
Operating income 15.1% 17.4%
Interest expense 0.7% 0.9%
Interest and other income (expense) 0.2% (0.1)%
Income tax expense 4.4% 5.6%
Minority interests' share of income 3.1% 3.1%
Net income 7.0% 7.7%
(1) During the third quarter of fiscal 2006, one of the Company's subsidiaries
formerly included in the Electronic Technologies Group was reclassified to
the Flight Support Group. Prior period amounts have been retroactively
restated to reflect the revised segment classification.
15
COMPARISON OF FIRST QUARTER OF FISCAL 2007 TO FIRST QUARTER OF FISCAL 2006
Net Sales
Net sales for the first quarter of fiscal 2007 increased by 29.0% to $113.7
million, as compared to net sales of $88.1 million for the first quarter of
fiscal 2006. The increase in net sales reflects an increase of $24.4 million (a
38.3% increase) to $88.1 million in net sales within the FSG, and an increase of
$1.1 million (a 4.6% increase) to $25.6 million in net sales within the ETG. The
FSG's net sales increase reflects the prior year acquisitions of Arger
Enterprises, Inc. and its related companies (collectively "Arger") in May 2006
and Prime Air, LLC ("Prime Air") in September 2006 as well as organic growth of
approximately 18%. The organic growth reflects higher sales of new products and
services and continued increased demand for the FSG's aftermarket replacement
parts and repair and overhaul services. The ETG's net sales increase (consisting
entirely of organic growth) reflects increased demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased to 33.0% for the first quarter
of fiscal 2007 as compared to 36.4% for the first quarter of fiscal 2006,
reflecting lower margins within the FSG and ETG due principally to product mix.
Consolidated cost of sales for the first quarter of fiscal 2007 and 2006
includes approximately $4.0 million and $3.8 million, respectively, of new
product research and development expenses.
SG&A expenses were $20.3 million and $16.8 million for the first quarter of
fiscal 2007 and fiscal 2006, respectively. The increase in SG&A expenses was
mainly due to higher operating costs, principally personnel related, associated
with the Arger and Prime Air acquisitions and the increase in net sales
discussed above.
As a percentage of net sales, SG&A expenses decreased to 17.9% for the
first quarter of fiscal 2007 compared to 19.0% for the first quarter of fiscal
2006. The decrease as a percentage of net sales is due to efficiencies in
controlling costs while increasing revenues.
Operating Income
Operating income for the first quarter of fiscal 2007 increased by 12.1% to
$17.1 million, compared to operating income of $15.3 million for the first
quarter of fiscal 2006. The increase in operating income reflects an increase of
$2.8 million (a 24.2% increase) to $14.4 million in operating income of the FSG
in the first quarter of fiscal 2007 from $11.6 million for the first quarter of
fiscal 2006 partially offset by a $0.3 million increase in Corporate expenses
and a $.6 million decrease (a 10.0% decrease) in operating income of the ETG
from $6.4 million for the first quarter of fiscal 2006 to $5.8 million for the
first quarter of fiscal 2007.
As a percentage of net sales, consolidated operating income decreased to
15.1% for the first quarter of fiscal 2007 compared to 17.4% for the first
quarter of fiscal 2006. The consolidated operating income as a percentage of net
sales reflects a decrease in the FSG's operating income as a percentage of net
sales from 18.2% in the first quarter of fiscal 2006 to 16.4% in the first
quarter of
16
fiscal 2007 and a decrease in the ETG's operating income as a percentage of net
sales from 26.2% in the first quarter of fiscal 2006 to 22.5% in the first
quarter of fiscal 2007. The decrease in operating income as a percentage of net
sales for the FSG principally reflects the decreased gross profit margins
discussed previously partially offset by operating efficiencies within SG&A
expenses. The decrease in operating income as a percentage of net sales for the
ETG principally reflects the aforementioned decreased gross profit margins. See
"Outlook" below for additional information on the operating margins of the FSG
and ETG.
Interest Expense
Interest expense increased to $849,000 in the first quarter of fiscal 2007
from $808,000 in the first quarter of fiscal 2006. The increase was principally
due to higher interest rates offset by a lower weighted average balance
outstanding under the revolving credit facility in the first quarter of fiscal
2007.
Interest and Other Income
Interest and other income in the first quarter of fiscal 2007 and 2006 were
not material.
Income Tax Expense
The Company's effective tax rate for the first quarter of fiscal 2007
decreased to 30.3% from 34.1% for the first quarter of fiscal 2006. The decrease
is principally due to an income tax credit for qualified research and
development activities recognized for the full fiscal 2006 year and the first
quarter of fiscal 2007, as well as a higher amount of the minority interests'
share of income excluded from the Company's fiscal 2007 consolidated income
subject to federal income taxes. The fiscal 2006 tax credit was recorded
pursuant to the December 2006 retroactive extension for the two year period
covering January 1, 2006 to December 31, 2007 of Section 41, "Credit for
Increasing Research Activities," of the Internal Revenue Code and increased net
income, net of expenses, by approximately $.3 million for the first quarter of
fiscal 2007.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the 20% minority interest held in HEICO Aerospace and the minority interests
held in certain subsidiaries of HEICO Aerospace including the 49% minority
interest held in Seal Dynamics LLC ("Seal LLC") and the 20% minority interest
held in Prime Air; and the minority interests held in certain subsidiaries of
HEICO Electronic. The increase in the minority interests' share of income for
the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006 is
attributable to the higher earnings of Seal LLC and the FSG and the September
2006 acquisition of Prime Air.
Net Income
The Company's net income was $7.9 million, or $0.30 per diluted share, for
the first quarter of fiscal 2007 compared to $6.7 million, or $.26 per diluted
share, for the first quarter of fiscal 2006 reflecting the increased operating
income referenced above, partially offset by the increased
17
minority interests' share of income of certain consolidated subsidiaries.
OUTLOOK
The Company reported increased sales and operating income in its two
business segments reflecting both growth through acquisitions and strong organic
growth, but experienced a slight decline in operating margins. The first quarter
of fiscal 2007 operating margin of the FSG of 16.4%, while down from the prior
year first quarter, approximated the FSG's full fiscal 2006 operating margin of
16.9%. The ETG's operating margin, which varies somewhat from quarter-to-quarter
based on the timing of product shipments and product mix, was also down in the
first quarter of fiscal 2007. The backlog of the ETG, however, was up as of the
end of the first quarter of fiscal 2007 reflecting an increase of $10.3 million,
or 22.8%, to $55.9 million from $45.6 million as of October 31, 2006. Further,
sales orders of the ETG for the first quarter of fiscal 2007 were up 21.2% over
the first quarter of fiscal 2006.
Based on current economic conditions, the state of the aviation, defense
and electronics industries, order patterns and backlog, the Company continues to
target growth in fiscal 2007 sales and net income over fiscal 2006 and operating
margins to improve over the balance of the year such that full fiscal 2007
operating margins are expected to approximate those of the prior year.
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 additional
consideration, payments of principal and interest on debt, capital expenditures,
cash dividends and increases in working capital.
The Company believes that its net cash provided by operating activities and
available borrowings under its revolving credit facility will be sufficient to
fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $3.1 million for the first
three months of fiscal 2007, consisting primarily of net income of $7.9 million,
a tax benefit on stock option exercises of $6.9 million, minority interests'
share of income of consolidated subsidiaries of $3.6 million, depreciation and
amortization of $2.9 million, and stock option compensation expense of $.3
million, partially offset by an increase in net operating assets of $11.7
million, the presentation of $5.3 million of excess tax benefit from stock
option exercises as a financing activity and a deferred income tax provision of
$1.5 million.
Net cash provided by operating activities decreased from $6.3 million for
the first quarter of fiscal 2006 to $3.1 million for the first quarter of fiscal
2007 principally due to a higher excess tax
18
benefit from stock option exercises presented as a financing activity, partially
offset by an increase in net income.
The Company generally recognizes a tax benefit from stock option exercises
in the first quarter of its fiscal year ending January 31, or shortly after the
tax year ends (December 31) for any option holder recognizing compensation
income from stock option exercises. The Company experienced an increase in stock
option exercises during calendar 2006 over the previous year due to continued
appreciation in the value of its common stock, which led to a $6.9 million tax
benefit from stock option exercises in the first quarter of fiscal 2007 compared
to a $2.4 million benefit in the first quarter of fiscal 2006. The excess tax
benefit from stock option exercise presented as a financing activity increased
to $5.3 million in the first quarter of fiscal 2007 compared to $1.1 million in
the first quarter of fiscal 2006.
Investing Activities
Net cash used in investing activities during the first three months of
fiscal 2007 related primarily to acquisitions and related costs of $8.4 million
and capital expenditures totaling $2.7 million. Acquisitions and related costs
principally reflect the payment of additional purchase consideration related to
two subsidiaries acquired in previous years, which was accrued as of October 31,
2006 based on each subsidiary's estimated earnings relative to target and the
acquisition of an additional 10% of the equity interests of a subsidiary of the
Company's HEICO Aerospace Holdings Corp. subsidiary.
Financing Activities
Net cash provided by financing activities during the first three months of
fiscal 2007 primarily related to borrowings of $7.0 million on the Company's
revolving credit facility principally used to fund the aforementioned additional
purchase consideration, the presentation of $5.3 million of excess tax benefit
from stock option exercises as a financing activity and proceeds from stock
option exercises of $.7 million, partially offset by repayments of $2.0 million
on the Company's revolving credit facility, distributions to minority interest
owners of $1.2 million and the payment of $1.0 million in cash dividends on the
Company's common stock.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating $1.8
million to meet the security requirement of its insurance company for potential
workers' compensation claims, which are supported by the Company's 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 a subsidiary by the
FSG in fiscal 2001, the Company acquired an additional 10% of the equity
interests of the subsidiary during the first quarter of fiscal 2007. The Company
has the right to purchase the remaining 10% of the equity interests in fiscal
2011, or sooner under certain conditions, and the minority holder has the right
to cause the Company to purchase the same equity interest in the same period.
19
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and fifth
years following the acquisition. The additional purchase consideration will be
accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holders have the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional consideration of up to $9.2
million in fiscal 2007, $17.8 million in fiscal 2008 and $19.2 million in fiscal
2009. The additional purchase consideration will be accrued when the earnings
objectives are met.
As part of an agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2006, the Company may be obligated to pay additional purchase
consideration of up to $7.0 million in aggregate should the subsidiary meet
certain earnings objectives during the first two years following the
acquisition. The additional purchase consideration will be accrued when the
earnings objectives are met. Further, the Company has the right to purchase the
remaining 20% minority interests beginning at approximately the eighth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of an agreement for exclusive license rights to intellectual
property, one of the subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.2 million through fiscal 2007.
20
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3." SFAS No. 154 changes the requirements for the accounting and
reporting of a change in accounting principle. The Statement eliminates the
requirement in Accounting Principles Board ("APB") Opinion No. 20 to include the
cumulative effect of changes in accounting principle in the income statement in
the period of change, and instead requires that changes in accounting principle
be retrospectively applied unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The Statement
applies to all voluntary changes in accounting principle. SFAS No. 154 is
effective for changes made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material effect on the Company's
results of operations, financial position, or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109," which seeks to reduce the diversity in practice associated with the
accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in an income tax return. FIN 48 presents a
two-step process for evaluating a tax position. The first step is to determine
whether it is more-likely-than-not that a tax position will be sustained upon
examination, based on the technical merits of the position. The second step is
to measure the benefit to be recorded from tax positions that meet the
more-likely-than-not recognition threshold, by determining the largest amount of
tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement, and recognizing that amount in the financial statements.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the impact that the adoption of FIN 48 will have
on its results of operations, financial position, and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007. The Company is currently in the process
of evaluating the effect, if any, the adoption of SFAS No. 157 will have on its
results of operations, financial position, or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB No. 108 was issued in order to eliminate the diversity in
practice surrounding how public companies quantify financial statement
misstatements. SAB No. 108 requires that registrants quantify errors using both
a balance sheet
21
(iron curtain) approach and an income statement (rollover) approach then
evaluate whether either approach results in a misstated amount that, when all
relevant quantitative and qualitative factors are considered, is material. SAB
No. 108 is effective for fiscal years ending after November 15, 2006. The
Company does not expect the adoption of SAB No. 108 to have a material effect on
its results of operations, financial position, or cash flows.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature may be
forward-looking and the words "believe," "expect," "estimate" and similar
expressions are generally intended to identify forward looking statements. Any
forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls,
concerning our operations, economic performance and financial condition are
subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed in or implied by those statements. Factors that could cause such
differences, but are not limited to: lower demand for commercial air travel or
airline fleet changes, which could cause lower demand for our goods and
services; product specification costs and requirements, which could cause an
increase to our costs to complete contracts; governmental and regulatory
demands, export policies and restrictions, reductions in defense or space
spending by U.S. and/or foreign customers, or competition from existing and new
competitors, which could reduce our sales; HEICO's ability to introduce new
products and product pricing levels, which could reduce our sales or sales
growth; HEICO's ability to make acquisitions and achieve operating synergies
from acquired businesses, customer credit risk, interest rates and economic
conditions within and outside of the aviation, defense, space and electronics
industries, which could negatively impact our costs and revenues; and HEICO's
ability to maintain effective internal controls, which could adversely affect
our business and the market price of our common stock. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
22
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 January 31, 2007, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $359,000 on an annual basis.
The Company is also exposed to foreign currency exchange rate fluctuations
on the United States dollar value of its foreign currency denominated
transactions, which are principally in British pound sterling. A hypothetical
10% weakening in the exchange rate of the British pound sterling to the United
States dollar as of January 31, 2007 would not have a material effect on the
Company's results of operations, financial position, or cash flows.
23
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity securities
or repurchase any of its equity securities during the first three months of
fiscal 2007.
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
------- ---------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. *
32.1 Section 1350 Certification of Chief Executive Officer. **
32.2 Section 1350 Certification of Chief Financial Officer. **
----------
* Filed herewith.
** Furnished herewith.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: March 2, 2007 By: /s/ THOMAS S. IRWIN
---------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
27
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 quarterly 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) 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
d) 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 (the registrant's fourth
fiscal quarter in the case of an annual report) 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: March 2, 2007 /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 quarterly 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) 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
d) 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 (the registrant's fourth
fiscal quarter in the case of an annual report) 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: March 2, 2007 /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 January 31, 2007 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, as amended; 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: March 2, 2007 /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 January 31, 2007 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, as amended; 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: March 2, 2007 /s/ THOMAS S. IRWIN
-----------------------
Thomas S. Irwin
Chief Financial Officer