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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 July 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 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 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 [X] Accelerated filer [ ] 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 August 27, 2007:
Common Stock, $.01 par value 10,537,741 shares
Class A Common Stock, $.01 par value 15,323,092 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 July 31, 2007 and October 31, 2006................................ 2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2007 and 2006....... 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 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..................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 28
Item 4. Controls and Procedures.................................................... 29
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................ 30
Item 6. Exhibits................................................................... 30
Signature................................................................................. 31
1
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JULY 31, 2007 OCTOBER 31, 2006
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,708,000 $ 4,999,000
Accounts receivable, net 74,861,000 65,012,000
Inventories, net 111,355,000 97,283,000
Prepaid expenses and other current assets 4,897,000 3,418,000
Deferred income taxes 9,466,000 9,309,000
---------------- ----------------
Total current assets 206,287,000 180,021,000
Property, plant and equipment, net 51,750,000 49,489,000
Goodwill 282,517,000 275,116,000
Intangible assets, net 18,839,000 22,011,000
Other assets 11,927,000 8,178,000
---------------- ----------------
Total assets $ 571,320,000 $ 534,815,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,986,000 $ 39,000
Trade accounts payable 26,089,000 22,386,000
Accrued expenses and other current liabilities 36,004,000 41,503,000
Income taxes payable 2,454,000 1,575,000
---------------- ----------------
Total current liabilities 66,533,000 65,503,000
Long-term debt, net of current maturities 39,036,000 55,022,000
Deferred income taxes 31,730,000 28,052,000
Other non-current liabilities 9,593,000 5,679,000
---------------- ----------------
Total liabilities 146,892,000 154,256,000
---------------- ----------------
Minority interests in consolidated subsidiaries 71,046,000 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;
10,537,741 and 10,311,564 shares issued and outstanding,
respectively 105,000 103,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 15,323,092 and 15,062,398 shares issued and
outstanding, respectively 153,000 151,000
Capital in excess of par value 216,291,000 206,260,000
Accumulated other comprehensive (loss) income (36,000) 62,000
Retained earnings 136,869,000 110,682,000
---------------- ----------------
Total shareholders' equity 353,382,000 317,258,000
---------------- ----------------
Total liabilities and shareholders' equity $ 571,320,000 $ 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
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
------------------------------ ------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
Net sales $ 368,054,000 $ 282,365,000 $ 133,155,000 $ 102,172,000
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 239,194,000 179,192,000 85,450,000 64,587,000
Selling, general, and administrative expenses 66,693,000 53,879,000 23,761,000 20,197,000
------------- ------------- ------------- -------------
Total operating costs and expenses 305,887,000 233,071,000 109,211,000 84,784,000
------------- ------------- ------------- -------------
Operating income 62,167,000 49,294,000 23,944,000 17,388,000
Interest expense (2,438,000) (2,627,000) (729,000) (958,000)
Interest and other income (expense) 228,000 365,000 (80,000) 111,000
------------- ------------- ------------- -------------
Income before income taxes and minority interests 59,957,000 47,032,000 23,135,000 16,541,000
Income tax expense 19,726,000 16,193,000 7,830,000 5,462,000
------------- ------------- ------------- -------------
Income before minority interests 40,231,000 30,839,000 15,305,000 11,079,000
Minority interests' share of income 11,989,000 8,272,000 4,391,000 2,803,000
------------- ------------- ------------- -------------
Net income $ 28,242,000 $ 22,567,000 $ 10,914,000 $ 8,276,000
============= ============= ============= =============
Net income per share:
Basic $ 1.10 $ .90 $ .42 $ .33
Diluted $ 1.05 $ .85 $ .40 $ .31
Weighted average number of common shares outstanding:
Basic 25,620,418 24,997,560 25,804,417 25,291,566
Diluted 26,871,310 26,521,065 26,959,815 26,710,192
Cash dividends per share $ 0.08 $ 0.08 $ 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
NINE MONTHS ENDED JULY 31,
--------------------------------
2007 2006
-------------- --------------
Operating Activities:
Net income $ 28,242,000 $ 22,567,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,959,000 6,636,000
Deferred income tax provision 3,188,000 2,839,000
Minority interests' share of income 11,989,000 8,272,000
Tax benefit from stock option exercises 6,880,000 7,252,000
Excess tax benefit from stock option exercises (5,267,000) (1,139,000)
Stock option compensation expense 542,000 1,187,000
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (9,472,000) (6,690,000)
Increase in inventories (13,132,000) (11,038,000)
Increase in prepaid expenses and other current assets (739,000) (148,000)
Increase in trade accounts payable 3,625,000 2,865,000
Increase (decrease) in accrued expenses and other
current liabilities 1,369,000 (754,000)
Increase (decrease) in income taxes payable 872,000 (4,705,000)
Other 208,000 16,000
-------------- --------------
Net cash provided by operating activities 37,264,000 27,160,000
-------------- --------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (14,875,000) (45,618,000)
Capital expenditures (9,465,000) (7,055,000)
Other 135,000 539,000
-------------- --------------
Net cash used in investing activities (24,205,000) (52,134,000)
-------------- --------------
Financing Activities:
Borrowings on revolving credit facility 15,000,000 46,000,000
Payments on revolving credit facility (29,000,000) (20,000,000)
Borrowings on short-term line of credit 1,000,000 1,000,000
Payments on short-term line of credit (1,000,000) (3,000,000)
Cash dividends paid (2,056,000) (2,004,000)
Proceeds from stock option exercises 2,615,000 4,471,000
Excess tax benefit from stock option exercises 5,267,000 1,139,000
Distributions to minority interest owners (4,165,000) (1,643,000)
Other (39,000) 5,000
-------------- --------------
Net cash (used in) provided by financing activities (12,378,000) 25,968,000
-------------- --------------
Effect of exchange rate changes on cash 28,000 47,000
Net increase in cash and cash equivalents 709,000 1,041,000
Cash and cash equivalents at beginning of year 4,999,000 5,330,000
-------------- --------------
Cash and cash equivalents at end of period $ 5,708,000 $ 6,371,000
============== ==============
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 ("HEICO" or 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 nine months ended July 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 uncertain 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, or in fiscal 2008 for HEICO. 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 accordance with
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 fiscal years beginning after
November 15, 2007, or in fiscal 2009 for HEICO. 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, and 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 plans to adopt SAB No. 108 as of October 31, 2007 and does not
expect it to have a material effect on its results of operations, financial
position, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure certain
financial assets and liabilities at fair value and report unrealized gains and
losses on items for which the fair value option has been elected in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, or
in fiscal 2009 for HEICO. The Company has not yet determined if it will elect to
apply any of the provisions of SFAS No. 159 and is currently evaluating the
effect, if any, the adoption of SFAS No. 159 will have on its results of
operations, financial position, and 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
interest in one of its subsidiaries, which increased the Company's ownership
interest to 90%. The purchase price was paid using cash provided by operating
activities.
6
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.)
In April 2007, the Company, through its HEICO Electronics Technologies
Corp. subsidiary, acquired all the stock of FerriShield, Inc. ("FerriShield").
FerriShield is engaged in the design and manufacture of Radio Frequency
Interference and Electromagnetic Frequency Interference ("RFI-EMI") Suppressors
for a variety of markets. HEICO is in the process of integrating FerriShield
into the operations of one of its existing subsidiaries. The purchase price was
principally paid in cash using proceeds from the Company's revolving credit
facility. The allocation of the purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed in these condensed
consolidated financial statements is preliminary until the Company obtains final
information regarding their fair values.
In May 2007, the Company, through its HEICO Aerospace Holdings subsidiary,
acquired certain assets of a supplier. The acquired assets were integrated into
one of its existing subsidiaries and will be utilized to bring certain
manufacturing operations in-house. The purchase price was paid using cash
provided by operating activities.
During the third quarter of fiscal 2007, the Company, through its HEICO
Electronic Technologies Corp. subsidiary, acquired an additional .75% equity
interest in one of its subsidiaries effective April 2007, which increased the
Company's ownership interest to 85.75%. The purchase price was accrued as of
July 31, 2007 and paid in August 2007 using cash provided by operating
activities.
All of the acquisitions described above were accounted for using the
purchase method of accounting. The purchase price of each acquisition was not
significant to the Company's consolidated financial statements individually or
in aggregate.
The operating results of the Company's fiscal 2007 acquisitions as noted
above and fiscal 2006 acquisitions of Arger Enterprises, Inc. and its related
companies in May 2006 and Prime Air, LLC in September 2006 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 nine and three months ended July 31, 2006 would have been
$318.5 million and $112.3 million, respectively, and net sales on a pro forma
basis for the nine and three months ended July 31, 2007 would not have been
materially different from the reported amounts. The pro forma net income and net
income per share (basic and diluted) assuming these acquisitions had taken place
as of the beginning of fiscal 2006 would not have been materially different than
the reported amounts.
7
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JULY 31, 2007 OCTOBER 31, 2006
---------------- ----------------
Accounts receivable $ 76,218,000 $ 67,905,000
Less: Allowance for doubtful accounts (1,357,000) (2,893,000)
---------------- ----------------
Accounts receivable, net $ 74,861,000 $ 65,012,000
================ ================
The $1.5 million decrease in the Company's allowance for doubtful accounts
is principally as a result of a sale and associated write-off in the second
quarter as well as a write-off during the third quarter of fiscal 2007 of
accounts receivable for certain customers in the aviation industry that were
fully reserved in fiscal 2005 when the customers filed for bankruptcy. The
proceeds from the aforementioned sale were recorded as a reduction to selling,
general and administrative expenses in the Company's condensed consolidated
financial statements and increased net income by approximately $.2 million, or
$.01 per diluted share, for the nine months ended July 31, 2007.
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
JULY 31, 2007 OCTOBER 31, 2006
---------------- ----------------
Costs incurred on uncompleted contracts $ 20,825,000 $ 16,428,000
Estimated earnings 11,499,000 12,221,000
---------------- ----------------
32,324,000 28,649,000
Less: Billings to date (25,020,000) (21,614,000)
---------------- ----------------
$ 7,304,000 $ 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) $ 7,304,000 $ 7,204,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings)
earnings) -- (169,000)
---------------- ----------------
$ 7,304,000 $ 7,035,000
================ ================
Changes in estimates did not have a material effect on net income or
diluted net income per share in the nine months and three months ended July 31,
2007 and 2006.
INVENTORIES
JULY 31, 2007 OCTOBER 31, 2006
---------------- ----------------
Finished products $ 57,995,000 $ 52,245,000
Work in process 15,156,000 13,805,000
Materials, parts, assemblies and supplies 38,204,000 31,233,000
---------------- ----------------
Inventories, net $ 111,355,000 $ 97,283,000
================ ================
Inventories related to long-term contracts were not significant as of July
31, 2007 and October 31, 2006.
8
PROPERTY, PLANT AND EQUIPMENT
JULY 31, 2007 OCTOBER 31, 2006
---------------- ----------------
Land $ 3,155,000 $ 3,155,000
Buildings and improvements 28,755,000 27,724,000
Machinery, equipment and tooling 61,119,000 59,052,000
Construction in progress 7,217,000 3,796,000
---------------- ----------------
100,246,000 93,727,000
Less: Accumulated depreciation and amortization (48,496,000) (44,238,000)
---------------- ----------------
Property, plant and equipment, net $ 51,750,000 $ 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 nine months ended July 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 1,145,000 3,996,000 5,141,000
Adjustments to goodwill 2,000,000 260,000 2,260,000
------------- ------------- -------------
Balances as of July 31, 2007 $ 160,349,000 $ 122,168,000 $ 282,517,000
============= ============= =============
The goodwill acquired is a result of the acquisitions described in Note 2,
Acquisitions. Adjustments to goodwill consist primarily of final purchase price
adjustments related to the preliminary allocation of the purchase price during
the allocation period for prior year acquisitions to the assets acquired and
liabilities assumed.
Identifiable intangible assets consist of:
AS OF JULY 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 $ 12,350,000 $ (3,725,000) $ 8,625,000 $ 13,595,000 $ (2,138,000) $ 11,457,000
Intellectual property 1,992,000 (872,000) 1,120,000 1,992,000 (498,000) 1,494,000
Licenses 1,000,000 (381,000) 619,000 1,000,000 (326,000) 674,000
Non-compete agreements 832,000 (593,000) 239,000 800,000 (434,000) 366,000
Patents 571,000 (134,000) 437,000 560,000 (102,000) 458,000
------------- ------------- ------------- ------------- ------------- -------------
16,745,000 (5,705,000) 11,040,000 17,947,000 (3,498,000) 14,449,000
Non-Amortizing Assets:
Trade names 7,799,000 -- 7,799,000 7,562,000 -- 7,562,000
------------- ------------- ------------- ------------- ------------- -------------
$ 24,544,000 $ (5,705,000) $ 18,839,000 $ 25,509,000 $ (3,498,000) $ 22,011,000
============= ============= ============= ============= ============= =============
9
The decrease in the gross carrying amount of customer relationships as of
July 31, 2007 compared to October 31, 2006 principally relates to an adjustment
to the preliminary allocation of the purchase price of a prior year acquisition.
This decrease was partially offset by the intangible assets recognized in
connection with the fiscal 2007 acquisitions referenced in Note 2, Acquisitions.
The weighted average amortization period of the customer relationships and
non-compete agreements acquired during the nine months ended July 31, 2007 is
approximately seven years.
Amortization expense of other intangible assets for the nine months and
three months ended July 31, 2007 was $2,686,000 and $911,000, respectively.
Amortization expense of other intangible assets for the fiscal year ending
October 31, 2007 is estimated to be $2,997,000. Amortization expense for each of
the next five fiscal years is estimated to be $2,998,000 in fiscal 2008,
$2,384,000 in fiscal 2009, $1,882,000 in fiscal 2010, $1,195,000 in fiscal 2011
and $1,138,000 in fiscal 2012.
5. SHORT-TERM AND LONG-TERM DEBT
In July 2007, one of the Company's subsidiaries entered into a $5.0 million
short-term line of credit with a bank, which expires in June 2008. The line may
be used for inventory purchases and other working capital needs and is secured
by all the assets of the subsidiary. Advances under the line of credit bear
interest at the subsidiary's choice of the "Prime Rate Advance" (prime rate less
..75%) or "LIBOR Advance" (LIBOR rate plus .75%). As of July 31, 2007, no
borrowings were outstanding under the line of credit.
Long-term debt consists of:
JULY 31, 2007 OCTOBER 31, 2006
---------------- ----------------
Borrowings under revolving credit facility $ 39,000,000 $ 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
---------------- ----------------
41,022,000 55,061,000
Less: Current maturities of long-term debt (1,986,000) (39,000)
---------------- ----------------
$ 39,036,000 $ 55,022,000
================ ================
As of July 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 July 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 3.7% and 3.6% as of July 31, 2007 and October 31, 2006, respectively. The
bonds are payable in April 2008.
10
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, the
Company recognized an income tax credit for qualified research and development
activities in fiscal 2007 for the full fiscal 2006 year. The tax credit, net of
expenses, increased net income by approximately $.5 million, or $.02 per diluted
share for the nine months ended July 31, 2007.
7. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in consolidated shareholders' equity and comprehensive income for
the nine months ended July 31, 2007 are as follows:
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK STOCK PAR VALUE INCOME (LOSS) EARNINGS INCOME
------------ ------------ ------------ ------------- ------------ -------------
Balances as of October 31, 2006 $ 103,000 $ 151,000 $206,260,000 $ 62,000 $110,682,000
Net income -- -- -- -- 28,242,000 $ 28,242,000
Foreign currency translation adjustments -- -- -- 103,000 -- 103,000
Unrealized losses on available-for-sale
securities, net of tax -- -- -- (201,000) -- (201,000)
-------------
Comprehensive income -- -- -- -- -- $ 28,144,000
=============
Cash dividends ($.08 per share) -- -- -- -- (2,056,000)
Tax benefit from stock option exercises -- -- 6,880,000 -- --
Proceeds from stock option exercises 2,000 3,000 2,610,000 -- --
Stock option compensation expense -- -- 542,000 -- --
Other -- (1,000) (1,000) -- 1,000
------------ ------------ ------------ ------------- ------------
Balances as of July 31, 2007 $ 105,000 $ 153,000 $216,291,000 $ (36,000) $136,869,000
============ ============ ============ ============= ============
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended July 31, 2007 and 2006 includes
approximately $11.8 million and $12.2 million, respectively, of new product
research and development expenses. Cost of sales for the three months ended July
31, 2007 and 2006 includes approximately $3.8 million and $4.0 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.
11
9. 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,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Numerator:
Net income $ 28,242,000 $ 22,567,000 $ 10,914,000 $ 8,276,000
============ ============ ============ ============
Denominator:
Weighted average common shares outstanding-basic 25,620,418 24,997,560 25,804,417 25,291,566
Effect of dilutive stock options 1,250,892 1,523,505 1,155,398 1,418,626
------------ ------------ ------------ ------------
Weighted average common shares outstanding-diluted 26,871,310 26,521,065 26,959,815 26,710,192
============ ============ ============ ============
Net income per share-basic $ 1.10 $ 0.90 $ 0.42 $ 0.33
Net income per share-diluted $ 1.05 $ 0.85 $ 0.40 $ 0.31
Anti-dilutive stock options excluded -- 16,720 -- 1,000
12
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 nine months and
three months ended July 31, 2007 and 2006, respectively, is as follows:
OTHER,
PRIMARILY
CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------- ------------- ------------- -------------
For the nine months ended July 31, 2007:
Net sales $ 280,959,000 $ 87,111,000 $ (16,000) $ 368,054,000
Depreciation and amortization 6,116,000 2,591,000 252,000 8,959,000
Operating income 50,094,000 23,383,000 (11,310,000) 62,167,000
Capital expenditures 7,687,000 1,620,000 158,000 9,465,000
For the nine months ended July 31, 2006:
Net sales $ 198,586,000 $ 83,858,000 $ (79,000) $ 282,365,000
Depreciation and amortization 4,467,000 1,939,000 230,000 6,636,000
Operating income 33,832,000 25,036,000 (9,574,000) 49,294,000
Capital expenditures 5,915,000 1,034,000 106,000 7,055,000
For the three months ended July 31, 2007:
Net sales $ 100,488,000 $ 32,677,000 $ (10,000) $ 133,155,000
Depreciation and amortization 2,036,000 891,000 84,000 3,011,000
Operating income 17,802,000 10,243,000 (4,101,000) 23,944,000
Capital expenditures 2,816,000 807,000 121,000 3,744,000
For the three months ended July 31, 2006:
Net sales $ 71,069,000 $ 31,113,000 $ (10,000) $ 102,172,000
Depreciation and amortization 1,570,000 670,000 73,000 2,313,000
Operating income 11,471,000 9,688,000 (3,771,000) 17,388,000
Capital expenditures 2,196,000 173,000 64,000 2,433,000
13
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
During the first quarter of fiscal 2007, the Company, through a subsidiary
of the FSG, entered into an operating lease commitment for a new facility which
is under construction and expected to be occupied as of the end of fiscal 2007.
The minimum lease payments for the facility, which commence upon its completion,
are estimated to be $459,000 in fiscal 2008, $475,000 in fiscal 2009, $492,000
in fiscal 2010, $509,000 in fiscal 2011, $527,000 in fiscal 2012, and $3,595,000
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.
PRODUCT WARRANTY
Changes in the Company's product warranty liability for the nine months
ended July 31, 2007 and 2006, respectively, are as follows:
NINE MONTHS ENDED JULY 31,
--------------------------
2007 2006
----------- -----------
Balances as of beginning of fiscal year $ 534,000 $ 395,000
Acquired warranty liabilities -- 15,000
Accruals for warranties 1,345,000 396,000
Warranty claims settled (739,000) (410,000)
----------- -----------
Balances as of July 31 $ 1,140,000 $ 396,000
=========== ===========
ACQUISITIONS
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.
14
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. During
fiscal 2007, some of the minority interest holders exercised their option to
cause the Company to purchase their aggregate 3% interest over the four-year
period ending in fiscal 2010. Accordingly, the Company increased its ownership
interest in the subsidiary by .75% (or one-fourth of such minority interest
holders' aggregate interest) to 85.75% effective April 2007.
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.
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.
15
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.
16
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.
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
------------------------------- -------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
Net sales $ 368,054,000 $ 282,365,000 $ 133,155,000 $ 102,172,000
------------- ------------- ------------- -------------
Cost of sales 239,194,000 179,192,000 85,450,000 64,587,000
Selling, general and administrative expenses 66,693,000 53,879,000 23,761,000 20,197,000
------------- ------------- ------------- -------------
Total operating costs and expenses 305,887,000 233,071,000 109,211,000 84,784,000
------------- ------------- ------------- -------------
Operating income $ 62,167,000 $ 49,294,000 $ 23,944,000 $ 17,388,000
============= ============= ============= =============
Net sales by segment:
Flight Support Group $ 280,959,000 $ 198,586,000 $ 100,488,000 $ 71,069,000
Electronic Technologies Group 87,111,000 83,858,000 32,677,000 31,113,000
Intersegment sales (16,000) (79,000) (10,000) (10,000)
------------- ------------- ------------- -------------
$ 368,054,000 $ 282,365,000 $ 133,155,000 $ 102,172,000
============= ============= ============= =============
Operating income by segment:
Flight Support Group $ 50,094,000 $ 33,832,000 $ 17,802,000 $ 11,471,000
Electronic Technologies Group 23,383,000 25,036,000 10,243,000 9,688,000
Other, primarily corporate (11,310,000) (9,574,000) (4,101,000) (3,771,000)
------------- ------------- ------------- -------------
$ 62,167,000 $ 49,294,000 $ 23,944,000 $ 17,388,000
============= ============= ============= =============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 35.0% 36.5% 35.8% 36.8%
Selling, general and administrative expenses 18.1% 19.1% 17.8% 19.8%
Operating income 16.9% 17.5% 18.0% 17.0%
Interest expense 0.7% 0.9% 0.5% 0.9%
Interest and other income (expense) 0.1% 0.1% (0.1)% 0.1%
Income tax expense 5.4% 5.7% 5.9% 5.3%
Minority interests' share of income 3.3% 2.9% 3.3% 2.7%
Net income 7.7% 8.0% 8.2% 8.1%
17
COMPARISON OF FIRST NINE MONTHS OF FISCAL 2007 TO FIRST NINE MONTHS OF FISCAL
2006
Net Sales
Net sales for the first nine months of fiscal 2007 increased by 30.3% to
$368.1 million, as compared to net sales of $282.4 million for the first nine
months of fiscal 2006. The increase in net sales reflects an increase of $82.4
million (a 41.5% increase) to $281.0 million in net sales within the FSG and an
increase of $3.3 million (a 3.9% increase) to $87.1 million in net sales within
the ETG. The FSG's net sales increase reflects organic growth of approximately
21% as well as 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. 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 principally of organic growth) reflects increased demand for certain
products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased to 35.0% for the first nine
months of fiscal 2007 as compared to 36.5% for the first nine months of fiscal
2006, reflecting lower margins within the ETG due principally to a less
favorable product mix. Consolidated cost of sales for the first nine months of
fiscal 2007 and 2006 includes approximately $11.8 million and $12.2 million,
respectively, of new product research and development expenses.
Selling, general and administrative ("SG&A") expenses were $66.7 million
and $53.9 million for the first nine months 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 growth in net sales
discussed above including the Prime Air acquisition and an increase in corporate
expenses. The higher corporate expenses primarily reflect higher accrued
performance awards based on the improvement in consolidated operating results.
As a percentage of net sales, SG&A expenses decreased to 18.1% for the
first nine months of fiscal 2007 compared to 19.1% for the first nine months 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 nine months of fiscal 2007 increased by
26.1% to $62.2 million, compared to operating income of $49.3 million for the
first nine months of fiscal 2006. The increase in operating income reflects an
increase of $16.3 million (a 48.1% increase) to $50.1 million in operating
income of the FSG in the first nine months of fiscal 2007 from $33.8 million for
the first nine months of fiscal 2006, partially offset by a $1.6 million
decrease (a 6.6% decrease) in operating income of the ETG from $25.0 million for
the first nine months of fiscal 2006 to $23.4 million for the first nine months
of fiscal 2007 as a result of lower operating margins and a $1.7 million
increase in corporate expenses as discussed above.
18
As a percentage of net sales, consolidated operating income decreased to
16.9% for the first nine months of fiscal 2007 compared to 17.5% for the first
nine months of fiscal 2006. The consolidated operating income as a percentage of
net sales reflects a decrease in the ETG's operating income as a percentage of
net sales from 29.9% in the first nine months of fiscal 2006 to 26.8% in the
first nine months of fiscal 2007, partially offset by an increase in the FSG's
operating income as a percentage of net sales from 17.0% in the first nine
months of fiscal 2006 to 17.8% in the first nine months of fiscal 2007. The
decrease in operating income as a percentage of net sales for the ETG
principally reflects the aforementioned decrease in gross profit margins. The
increase in operating income as a percentage of net sales for the FSG
principally reflects the increase in net sales and improved operating
efficiencies within SG&A expenses. See "Outlook" below for additional
information on the operating margins of the FSG and ETG.
Interest Expense
Interest expense decreased slightly to $2,438,000 in the first nine months
of fiscal 2007 from $2,627,000 in the first nine months of fiscal 2006. The
decrease was principally due to a lower weighted average balance outstanding
under the revolving credit facility in the first nine months of fiscal 2007
partially offset by higher interest rates.
Interest and Other Income
Interest and other income in the first nine months of fiscal 2007 and 2006
were not material.
Income Tax Expense
The Company's effective tax rate for the first nine months of fiscal 2007
decreased to 32.9% from 34.4% for the first nine months 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 in fiscal 2007.
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 $.5 million for the first nine months 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 nine months of fiscal 2007 compared to the first nine months of fiscal
2006 is primarily attributable to the higher earnings of the FSG and Seal LLC,
as well as the September 2006 acquisition of Prime Air.
19
Net Income
The Company's net income was $28.2 million, or $1.05 per diluted share, for
the first nine months of fiscal 2007 compared to $22.6 million, or $.85 per
diluted share, for the first nine months of fiscal 2006 reflecting the increased
operating income referenced above, partially offset by the increased minority
interests' share of income of certain consolidated subsidiaries.
OUTLOOK
The Company reported increased consolidated net sales and operating income
in the first nine months of fiscal 2007 reflecting both strong organic growth
and growth through acquisitions, but experienced a slight decline in operating
margins. Consolidated operating margins for the nine months of fiscal 2007
reflect a lower margin for the ETG partially offset by a higher margin for the
FSG. The ETG's operating margin, which may vary considerably from
quarter-to-quarter based on the timing of product shipments/mix, increased to
31.3% in the third quarter from 25.6% in the second quarter of fiscal 2007,
which marks the second consecutive quarter of improvement.
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 net sales and earnings over fiscal 2006 and full
fiscal 2007 operating margins to approximate those of the prior year.
COMPARISON OF THIRD QUARTER OF FISCAL 2007 TO THIRD QUARTER OF FISCAL 2006
Net Sales
Net sales for the third quarter of fiscal 2007 increased by 30.3% to $133.2
million, as compared to net sales of $102.2 million for the third quarter of
fiscal 2006. The increase in net sales reflects an increase of $29.4 million (a
41.4% increase) to $100.5 million in net sales within the FSG and an increase of
$1.6 million (a 5.0% increase) to $32.7 million in net sales within the ETG. The
FSG's net sales increase reflects organic growth of approximately 24% as well as
the prior year acquisitions of Arger and Prime Air. The organic growth reflects
higher sales of new products and services and continued increased demand for the
FSG's aftermarket replacement parts and repairs and overhaul services. The ETG's
net sales increase (consisting principally of organic growth) reflects increased
demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased to 35.8% for the third quarter
of fiscal 2007 as compared to 36.8% for the third quarter of fiscal 2006,
reflecting lower margins within the ETG partially offset by higher margins
within the FSG. The lower margins within the ETG principally reflect higher new
product research and development expenses as a percentage of net sales. The
higher margins within the FSG were due principally to lower new product research
and development expenses as a percentage of net sales partially offset by a
slightly unfavorable product mix. Consolidated cost of sales for the third
quarter of fiscal 2007 and 2006 includes
20
approximately $3.8 million and $4.0 million, respectively, of new product
research and development expenses.
SG&A expenses were $23.8 million and $20.2 million for the third 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 growth in net sales discussed above including the Prime Air
acquisition, and a slight increase in corporate expenses.
As a percentage of net sales, SG&A expenses decreased to 17.8% for the
third quarter of fiscal 2007 compared to 19.8% for the third 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 third quarter of fiscal 2007 increased by 37.7% to
$23.9 million, compared to operating income of $17.4 million for the third
quarter of fiscal 2006. The increase in operating income reflects an increase of
$6.3 million (a 55.2% increase) to $17.8 million in operating income of the FSG
in the third quarter of fiscal 2007 from $11.5 million for the third quarter of
fiscal 2006 and a $.5 million increase (a 5.7% increase) in operating income of
the ETG from $9.7 million for the third quarter of fiscal 2006 to $10.2 million
for the third quarter of fiscal 2007 partially offset by a $.3 million increase
in corporate expenses.
As a percentage of net sales, consolidated operating income increased to
18.0% for the third quarter of fiscal 2007 compared to 17.0% for the third
quarter of fiscal 2006. The consolidated operating income as a percentage of net
sales reflects an increase in the FSG's operating income as a percentage of net
sales from 16.1% in the third quarter of fiscal 2006 to 17.7% in the third
quarter of fiscal 2007 and a slight increase in the ETG's operating income as a
percentage of net sales from 31.1% in the third quarter of fiscal 2006 to 31.3%
in the third quarter of fiscal 2007. The increase in operating income as a
percentage of net sales for the FSG principally reflects the increase in net
sales and improved operating efficiencies within SG&A expenses as well as the
increased gross profit margins discussed previously. The increase in operating
income as a percentage of net sales for the ETG principally reflects improved
operating efficiencies within SG&A expenses partially offset by the
aforementioned decreased gross profit margins. See "Outlook" above for
additional information on the operating margins of the FSG and ETG.
Interest Expense
Interest expense decreased to $729,000 in the third quarter of fiscal 2007
from $958,000 in the third quarter of fiscal 2006. The decrease was principally
due to a lower weighted average balance outstanding under the revolving credit
facility in the third quarter of fiscal 2007.
Interest and Other Income (Expense)
Interest and other income (expense) in the third quarter of fiscal 2007 and
2006 were not material.
21
Income Tax Expense
The Company's effective tax rate for the third quarter of fiscal 2007
increased to 33.8% from 33.0% for the third quarter of fiscal 2006. The increase
is principally due to an income tax credit for qualified research and
development activities claimed in the third quarter of fiscal 2006 on the
Company's fiscal 2005 tax return and on amended return for a previous tax year.
The aggregate tax credit, net of expenses, increased net income by approximately
$.2 million for the third quarter of fiscal 2006.
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 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 third quarter of
fiscal 2007 compared to the third quarter of fiscal 2006 is primarily
attributable to the higher earnings of the FSG and Seal LLC, as well as the
September 2006 acquisition of Prime Air.
Net Income
The Company's net income was $10.9 million, or $.40 per diluted share, for
the third quarter of fiscal 2007 compared to $8.3 million, or $.31 per diluted
share, for the third quarter of fiscal 2006 reflecting the increased operating
income referenced above, partially offset by the increased minority interests'
share of income of certain consolidated subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities and
available borrowings under its revolving credit facility will be sufficient to
fund cash requirements for the foreseeable future.
22
Operating Activities
Net cash provided by operating activities was $37.3 million for the first
nine months of fiscal 2007, consisting primarily of net income of $28.2 million,
minority interests' share of income of consolidated subsidiaries of $12.0
million, depreciation and amortization of $9.0 million, a tax benefit on stock
option exercises of $6.9 million, a deferred income tax provision of $3.2
million and stock option compensation expense of $.5 million, partially offset
by an increase in net operating assets of $17.2 million and the presentation of
$5.3 million of excess tax benefit from stock option exercises as a financing
activity. The increase in net operating assets (current assets used in operating
activities net of current liabilities) primarily reflects a higher investment in
inventories by the FSG required to meet increased sales demand, improve product
delivery times and higher prices of certain raw materials; and an increase in
accounts receivable due to the sales growth.
Net cash provided by operating activities increased to $37.3 million for
the first nine months of fiscal 2007 from $27.2 million for the first nine
months of fiscal 2006 principally due to higher income before minority interests
and a decrease in net operating assets. The decrease in net operating assets for
the first nine months of fiscal 2007 compared to the first nine months of fiscal
2006 principally reflects differences in the timing of payment of certain
recurring liabilities, which vary somewhat from year to year.
Investing Activities
Net cash used in investing activities during the first nine months of
fiscal 2007 related primarily to acquisitions and related costs of $14.9 million
and capital expenditures totaling $9.5 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
acquisitions of FerriShield, Inc. and an additional 10% of the equity interests
of a subsidiary of the Company's HEICO Aerospace Holdings Corp. subsidiary.
Further details on acquisitions may be found in Note 2, Acquisitions, of the
Notes to Condensed Consolidated Financial Statements.
Financing Activities
Net cash used in financing activities during the first nine months of
fiscal 2007 primarily related to repayments of $29.0 million on the Company's
revolving credit facility, distributions to minority interest owners of $4.2
million, and the payment of $2.1 million in cash dividends on the Company's
common stock, partially offset by borrowings of $15.0 million on the Company's
revolving credit facility principally used to fund the aforementioned additional
purchase consideration and acquisition, 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 $2.6 million.
23
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.
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. During
fiscal 2007, some of the minority interest holders exercised their option to
cause the Company to purchase their aggregate 3% interest over the four-year
period ending in fiscal 2010. Accordingly, the Company increased its ownership
interest in the subsidiary by .75% (or one-fourth of such minority interest
holders' aggregate interest) to 85.75% effective April 2007.
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.
24
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.
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 uncertain 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, or in fiscal 2008 for HEICO. 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.
25
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 accordance with
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 fiscal years beginning after
November 15, 2007, or in fiscal 2009 for HEICO. 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, and 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 plans to adopt SAB No. 108 as of October 31, 2007 and does not
expect it to have a material effect on its results of operations, financial
position, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure certain
financial assets and liabilities at fair value and report unrealized gains and
losses on items for which the fair value option has been elected in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, or
in fiscal 2009 for HEICO. The Company has not yet determined if it will elect to
apply any of the provisions of SFAS No. 159 and is currently evaluating the
effect, if any, the adoption of SFAS No. 159 will have on its results of
operations, financial position, and 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
26
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.
27
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, 2007, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $244,000 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 July 31, 2007 would not have a material effect on the
Company's results of operations, financial position, or cash flows.
28
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.
29
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 nine 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.
30
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: August 31, 2007 By: /s/ THOMAS S. IRWIN
---------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
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.
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: August 31, 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: August 31, 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 July 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: August 31, 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 July 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: August 31, 2007 /s/ THOMAS S. IRWIN
-----------------------
Thomas S. Irwin
Chief Financial Officer