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, 2008 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, a non-accelerated filer, or a smaller reporting company.
See definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Accelerated Non-accelerated Smaller reporting
filer [X] filer [ ] filer [ ] company [ ]
(Do not check if a smaller reporting company)
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 28, 2008:
Common Stock, $.01 par value 10,572,641 shares
Class A Common Stock, $.01 par value 15,816,480 shares
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, 2008 and October 31, 2007................................ 2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2008 and 2007....... 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2008 and 2007........................ 4
Notes to Condensed Consolidated Financial Statements (unaudited) ......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk. ............. 33
Item 4. Controls and Procedures ................................................. 34
Part II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............. 35
Item 6. Exhibits................................................................. 35
Signature........................................................................... 36
1
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
July 31, 2008 October 31, 2007
------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $6,565,000 $4,947,000
Accounts receivable, net 76,390,000 82,399,000
Inventories, net 129,952,000 115,770,000
Prepaid expenses and other current assets 5,228,000 4,557,000
Deferred income taxes 15,958,000 10,135,000
------------ ------------
Total current assets 234,093,000 217,808,000
Property, plant and equipment, net 59,548,000 55,554,000
Goodwill 318,380,000 310,502,000
Intangible assets, net 34,655,000 35,333,000
Other assets 18,993,000 12,105,000
------------ ------------
Total assets $665,669,000 $631,302,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $250,000 $2,187,000
Trade accounts payable 29,581,000 28,161,000
Accrued expenses and other current liabilities 39,987,000 53,878,000
Income taxes payable 2,605,000 3,112,000
------------ ------------
Total current liabilities 72,423,000 87,338,000
Long-term debt, net of current maturities 42,512,000 53,765,000
Deferred income taxes 39,395,000 35,296,000
Other non-current liabilities 21,293,000 10,364,000
------------ ------------
Total liabilities 175,623,000 186,763,000
------------ ------------
Minority interests in consolidated subsidiaries (Note 11) 80,661,000 72,938,000
------------ ------------
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; -- --
10,572,641 and 10,538,691 shares issued and outstanding,
respectively 106,000 105,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 15,816,480 and 15,612,862 shares issued and
outstanding, respectively 158,000 156,000
Capital in excess of par value 229,231,000 220,658,000
Accumulated other comprehensive income 668,000 3,050,000
Retained earnings 179,222,000 147,632,000
------------ ------------
Total shareholders' equity 409,385,000 371,601,000
------------ ------------
Total liabilities and shareholders' equity $665,669,000 $631,302,000
============ ============
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,
----------------------------- -----------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
Net sales $425,631,000 $368,054,000 $147,305,000 $133,155,000
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 272,595,000 239,194,000 93,454,000 85,450,000
Selling, general and administrative expenses 75,958,000 66,693,000 26,362,000 23,761,000
------------- ------------- ------------- -------------
Total operating costs and expenses 348,553,000 305,887,000 119,816,000 109,211,000
------------- ------------- ------------- -------------
Operating income 77,078,000 62,167,000 27,489,000 23,944,000
Interest expense (1,951,000) (2,438,000) (444,000) (729,000)
Interest and other (expense) income (218,000) 228,000 (144,000) (80,000)
------------- ------------- ------------- -------------
Income before income taxes and minority interests 74,909,000 59,957,000 26,901,000 23,135,000
Income tax expense 26,040,000 19,726,000 9,500,000 7,830,000
------------- ------------- ------------- -------------
Income before minority interests 48,869,000 40,231,000 17,401,000 15,305,000
Minority interests' share of income 14,008,000 11,989,000 4,574,000 4,391,000
------------- ------------- ------------- -------------
Net income $34,861,000 $28,242,000 $12,827,000 $10,914,000
============= ============= ============= =============
Net income per share:
Basic $1.33 $1.10 $.49 $.42
Diluted $1.28 $1.05 $.47 $.40
Weighted average number of common shares outstanding:
Basic 26,280,211 25,620,418 26,379,608 25,804,417
Diluted 27,242,251 26,871,310 27,271,841 26,959,815
Cash dividends per share $0.10 $0.08 $0.05 $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,
------------------------------
2008 2007
------------ ------------
Operating Activities:
Net income $34,861,000 $28,242,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,339,000 8,959,000
Deferred income tax provision 2,179,000 3,188,000
Minority interests' share of income 14,008,000 11,989,000
Tax benefit from stock option exercises 6,281,000 6,880,000
Excess tax benefit from stock option exercises (4,347,000) (5,267,000)
Stock option compensation expense 138,000 542,000
Changes in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 7,867,000 (9,472,000)
Increase in inventories (13,062,000) (13,132,000)
Increase in prepaid expenses and other current assets (448,000) (739,000)
Increase in trade accounts payable 456,000 3,625,000
(Decrease) increase in accrued expenses and other current liabilities (2,294,000) 1,369,000
(Decrease) increase in income taxes payable (286,000) 872,000
Other (66,000) 208,000
------------ ------------
Net cash provided by operating activities 56,626,000 37,264,000
------------ ------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (28,747,000) (14,875,000)
Capital expenditures (10,121,000) (9,465,000)
Other 133,000 135,000
------------ ------------
Net cash used in investing activities (38,735,000) (24,205,000)
------------ ------------
Financing Activities:
Payments on revolving credit facility (51,000,000) (29,000,000)
Borrowings on revolving credit facility 40,000,000 15,000,000
Borrowings on short-term line of credit 500,000 1,000,000
Payments on short-term line of credit (500,000) (1,000,000)
Payment of industrial development revenue bonds (1,980,000) --
Distributions to minority interest owners (5,902,000) (4,165,000)
Cash dividends paid (2,631,000) (2,056,000)
Excess tax benefit from stock option exercises 4,347,000 5,267,000
Proceeds from stock option exercises 2,157,000 2,615,000
Other (1,087,000) (39,000)
------------ ------------
Net cash used in financing activities (16,096,000) (12,378,000)
------------ ------------
Effect of exchange rate changes on cash (177,000) 28,000
------------ ------------
Net increase in cash and cash equivalents 1,618,000 709,000
Cash and cash equivalents at beginning of year 4,947,000 4,999,000
------------ ------------
Cash and cash equivalents at end of period $6,565,000 $5,708,000
============ ============
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, 2007. The October 31, 2007 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, 2008 are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
Income Taxes
Effective November 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," and
began evaluating tax positions utilizing a two-step process. 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.
As a result of adopting the provisions of FIN 48, the Company recognized a
cumulative effect adjustment that decreased retained earnings as of the
beginning of fiscal 2008 by $639,000. Further, effective with the adoption of
FIN 48, the Company's policy is to recognize interest and penalties related to
income tax matters as a component of income tax expense. Interest and penalties,
which were not significant in fiscal 2007, were previously recorded in interest
expense and in selling, general and administrative expenses, respectively, in
the Company's consolidated statements of operations.
Further information regarding income taxes can be found in Note 6, Income
Taxes.
5
New Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("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. In February 2008, the FASB issued FASB Staff Position ("FSP") No.
SFAS 157-2, "Effective Date of FASB Statement No. 157." FSP No. SFAS 157-2
delays the effective date of SFAS No. 157 by one year for nonfinancial assets
and nonfinancial liabilities, except for the items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. 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 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.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations."
SFAS No. 141(R) is a revision of SFAS No.141 and retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (formerly the
"purchase accounting" method) be used for all business combinations and for an
acquirer to be identified for each business combination. However, SFAS No.
141(R) changes the approach of applying the acquisition method in a number of
significant areas, including that acquisition costs will generally be expensed
as incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS No.141(R) is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first fiscal year subsequent to December 15,
2008, or in fiscal 2010 for HEICO. The Company is in the process of evaluating
the effect the adoption of SFAS No. 141(R) will have on its results of
operations, financial position and cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51." This statement
requires the
6
recognition of a noncontrolling interest (previously referred to as minority
interest) as a separate component within equity in the consolidated balance
sheet. It also requires the amount of consolidated net income attributable to
the parent and the noncontrolling interest be clearly identified and presented
within the consolidated statement of operations. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008, or in fiscal 2010 for
HEICO. The Company is in the process of evaluating the effect the adoption of
SFAS No. 160 will have on its results of operations, financial position and cash
flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
SFAS No. 161 expands the disclosure requirements in SFAS No. 133 about an
entity's derivative instruments and hedging activities. It requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008, or in the second quarter of
fiscal 2009 for HEICO. The Company is currently in the process of evaluating the
effect the adoption of SFAS No. 161 will have on its financial statement
disclosures.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 is effective 60 days
following the Securities and Exchange Commission's approval of the Public
Company Accounting Oversight Board amendments to remove the hierarchy of
generally accepted accounting principles from the auditing standards. The
Company is currently in the process of evaluating the effect, if any, the
adoption of SFAS No. 162 will have on its results of operations, financial
position and cash flows.
2. ACQUISITIONS
In November 2007, the Company, through an 80%-owned subsidiary of HEICO
Aerospace Holdings Corp. ("HEICO Aerospace"), acquired all of the stock of a
European company. Subject to meeting certain earnings objectives during the
first three years following the acquisition, the Company may be obligated to pay
additional consideration of up to approximately $.5 million in aggregate. The
acquired company supplies aircraft parts for sale and exchange as well as repair
management services to commercial and regional airlines, asset management
companies and FAA overhaul and repair facilities.
In January 2008, the Company, through HEICO Aerospace, acquired certain
assets and assumed certain liabilities of a U.S. company that designs and
manufactures FAA-approved aircraft and engine parts primarily for the commercial
aviation market. The Company has since combined the operations of the acquired
entity within other subsidiaries of HEICO Aerospace.
7
In February 2008, the Company, through HEICO Aerospace, acquired an 80%
interest in certain assets and certain liabilities of a U.S. company that is an
FAA-approved repair station which specializes in avionics primarily for the
commercial aviation market. The remaining 20% is principally owned by certain
members of the acquired company's management. The Company has the right to
purchase the minority interests beginning at approximately the sixth anniversary
of the acquisition, or sooner under certain conditions, and the minority
interest holders have the right to cause the Company to purchase the same equity
interest over the same period.
In April 2008, the Company, through HEICO Aerospace, acquired an additional
7% equity interest in one of its subsidiaries, which increased the Company's
ownership interest to 58%.
In April 2008, the Company, through its HEICO Electronic Technologies Corp.
subsidiary ("HEICO Electronic"), acquired an additional .75% equity interest in
one of its subsidiaries, which increased the Company's ownership interest to
86.5%. The purchase price was paid using cash provided by operating activities.
During the first nine months of fiscal 2008, the Company, through HEICO
Aerospace and HEICO Electronic, paid $7.0 million and $4.7 million,
respectively, of additional purchase consideration pursuant to the terms of the
purchase agreements associated with two previous year acquisitions. These
amounts were accrued as of October 31, 2007 based on a multiple of each
subsidiary's earnings relative to target. Since these amounts were not
contingent upon the former shareholders of each acquired entity remaining
employed by the Company or providing future services to the Company, the
payments were recorded as an additional cost of the respective acquired entity.
(See Note 11, Commitments and Contingencies, for additional information on
contingent purchase consideration associated with certain of the Company's
acquisitions.)
The fiscal 2008 acquisitions described above were accounted for using the
purchase method of accounting. The purchase price of each acquisition was paid
in cash using proceeds from the Company's revolving credit facility unless
otherwise noted and was not significant to the Company's condensed consolidated
financial statements. The allocation of the purchase price of the fiscal 2008
and the fourth quarter of fiscal 2007 acquisitions 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.
The operating results of each of the Company's fiscal 2008 acquisitions as
noted above and the fiscal 2007 acquisitions 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 2007, net sales on a pro
forma basis for the nine months and three months ended July 31, 2007 would have
been approximately $389 million and $141 million, respectively, and net sales on
a pro forma basis for the nine months and three months ended July 31, 2008 would
not have been materially different than the reported amounts. The pro forma net
income and net income per share (basic and diluted) for the nine months and
three months ended July 31, 2007 and 2008 assuming these acquisitions had taken
place as of the beginning of fiscal 2007 would not have been materially
different than the reported amounts.
8
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
July 31, 2008 October 31, 2007
------------- ----------------
Accounts receivable $78,477,000 $84,111,000
Less: Allowance for doubtful accounts (2,087,000) (1,712,000)
------------- ----------------
Accounts receivable, net $76,390,000 $82,399,000
============= ================
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
July 31, 2008 October 31, 2007
------------- ----------------
Costs incurred on uncompleted contracts $22,639,000 $21,832,000
Estimated earnings 13,404,000 13,111,000
------------- ----------------
36,043,000 34,943,000
Less: Billings to date (28,659,000) (25,661,000)
------------- ----------------
$7,384,000 $9,282,000
============= ================
Included in accompanying Condensed Consolidated
Balance Sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $7,416,000 $9,300,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (32,000) (18,000)
------------- ----------------
$7,384,000 $9,282,000
============= ================
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, 2008 and
2007.
Inventories
July 31, 2008 October 31, 2007
------------- ----------------
Finished products $74,528,000 $61,592,000
Work in process 16,149,000 15,406,000
Materials, parts, assemblies and supplies 39,275,000 38,772,000
------------- ----------------
Inventories, net $129,952,000 $115,770,000
============= ================
Inventories related to long-term contracts were not significant as of July
31, 2008 and October 31, 2007.
Property, Plant and Equipment
July 31, 2008 October 31, 2007
------------- ----------------
Land $3,656,000 $3,656,000
Buildings and improvements 35,840,000 30,732,000
Machinery, equipment and tooling 72,325,000 65,242,000
Construction in progress 4,797,000 6,339,000
------------- ----------------
116,618,000 105,969,000
Less: Accumulated depreciation and amortization (57,070,000) (50,415,000)
------------- ----------------
Property, plant and equipment, net $59,548,000 $55,554,000
============= ================
9
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within
the caption accrued expenses and other current liabilities in the accompanying
Condensed Consolidated Balance Sheets was $9,746,000 and $10,452,000 as of July
31, 2008 and October 31, 2007, respectively. These amounts generally relate to
discounts negotiated with customers as part of certain sales contracts and are
usually tied to sales volume thresholds. The Company accrues customer rebates
and credits as a reduction from net sales as the revenue is recognized based on
the estimated level of discount rate expected to be earned by each customer over
the life of the contract period (generally one year). Accrued customer rebates
and credits are monitored by management and discount levels are updated at least
quarterly. The total customer rebates and credits deducted within net sales for
the nine months ended July 31, 2008 and 2007 were $7,677,000 and $7,399,000,
respectively. The total customer rebates and credits deducted within net sales
for the three months ended July 31, 2008 and 2007 were $2,575,000 and
$2,509,000, respectively.
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, 2008 are as
follows:
Segment
------------------------------- Consolidated
FSG ETG Totals
------------- ------------- -------------
Balances as of October 31, 2007 $169,689,000 $140,813,000 $310,502,000
Goodwill acquired 9,050,000 74,000 9,124,000
Foreign currency translation adjustments (64,000) (1,040,000) (1,104,000)
Adjustments to goodwill 99,000 (241,000) (142,000)
------------- ------------- -------------
Balances as of July 31, 2008 $178,774,000 $139,606,000 $318,380,000
============= ============= =============
The goodwill acquired is a result of the current year acquisitions described
in Note 2, Acquisitions. The foreign currency translation adjustments
principally reflect an unrealized translation loss on the goodwill recognized in
connection the acquisition of a Canadian-based subsidiary. Foreign currency
translation adjustments are included in other comprehensive income in the
Company's Condensed Consolidated Balance Sheets (see Note 7, Shareholders'
Equity and Comprehensive Income). Adjustments to goodwill were not material in
the nine months and three months ended July 31, 2008.
10
Identifiable intangible assets consist of:
As of July 31, 2008 As of October 31, 2007
------------------------------------------ -----------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
----------- ------------- ----------- ----------- ------------ -----------
Amortizing Assets:
- ------------------
Customer relationships $22,626,000 ($8,038,000) $14,588,000 $19,784,000 ($4,912,000) $14,872,000
Intellectual property 5,891,000 (1,727,000) 4,164,000 6,204,000 (1,066,000) 5,138,000
Licenses 1,000,000 (455,000) 545,000 1,000,000 (400,000) 600,000
Non-compete agreements 1,056,000 (708,000) 348,000 937,000 (628,000) 309,000
Patents 573,000 (179,000) 394,000 560,000 (132,000) 428,000
----------- ------------- ----------- ----------- ------------ -----------
31,146,000 (11,107,000) 20,039,000 28,485,000 (7,138,000) 21,347,000
Non-Amortizing Assets:
- ----------------------
Trade names 14,616,000 -- 14,616,000 13,986,000 -- 13,986,000
----------- ------------- ----------- ----------- ------------ -----------
$45,762,000 ($11,107,000) $34,655,000 $42,471,000 ($7,138,000) $35,333,000
=========== ============= =========== =========== ============ ===========
The increase in the gross carrying amount of customer relationships,
non-compete agreements and trade names as of July 31, 2008 compared to October
31, 2007 principally relates to such intangible assets recognized in connection
with the acquisitions described 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, 2008 is approximately six years
and four years, respectively. In addition, foreign currency translation
adjustments on certain intangible assets recognized as part of the acquisition
of a Canadian-based subsidiary had the effect of reducing the gross carrying
amount of such assets.
Amortization expense of other intangible assets for the nine months and
three months ended July 31, 2008 was $4,004,000 and $1,382,000, respectively.
Amortization expense of other intangible assets for the fiscal year ending
October 31, 2008 is estimated to be $5,294,000. Amortization expense for each
of the next five fiscal years is estimated to be $4,811,000 in fiscal 2009,
$4,263,000 in fiscal 2010, $3,566,000 in fiscal 2011, $2,829,000 in fiscal 2012
and $1,306,000 in fiscal 2013.
5. SHORT-TERM AND LONG-TERM DEBT
The $5.0 million short-term line of credit that one of the Company's
subsidiaries has with a bank expired in June 2008, but has been temporarily
extended until a renewal contract is finalized. As of July 31, 2008, no
borrowings were outstanding.
11
Long-term debt consists of:
July 31, 2008 October 31, 2007
-------------- ----------------
Borrowings under revolving credit facility $42,000,000 $53,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 -- 1,980,000
Notes payable, capital leases and equipment loans 762,000 972,000
-------------- ---------------
42,762,000 55,952,000
Less: Current maturities of long-term debt (250,000) (2,187,000)
-------------- ---------------
$42,512,000 $53,765,000
============== ===============
Revolving Credit Facility
In May 2008, the Company amended its revolving credit facility by entering
into a $300 million Second Amended and Restated Revolving Credit Agreement
("Credit Facility") with a bank syndicate, which matures in May 2013. Under
certain circumstances, the maturity may be extended for two one-year periods.
The Credit Facility also includes a feature that will allow the Company to
increase the Credit Facility, at its option, up to $500 million through
increased commitments from existing lenders or the addition of new lenders. The
Credit Facility may be used for working capital and general corporate needs of
the Company, including letters of credit, capital expenditures and to finance
acquisitions.
Advances under the Credit Facility accrue interest at the Company's choice
of the "Base Rate" or the London Interbank Offered Rate ("LIBOR") plus
applicable margins (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, minority
interest and non-cash charges, or "leverage ratio"). The Base Rate is the higher
of (i) the Prime Rate or (ii) the Federal Funds rate plus .50%. The applicable
margins for LIBOR-based borrowings range from .625% to 2.25%. A fee is charged
on the amount of the unused commitment ranging from .125% to .35% (depending on
the Company's leverage ratio). The Credit Facility also includes a $50 million
sublimit for borrowings made in euros, a $30 million sublimit for letters of
credit and a $20 million swingline sublimit. The Credit Facility is unsecured
and contains covenants that require, among other things, the maintenance of the
leverage ratio, a senior leverage ratio and a fixed charge coverage ratio. In
the event the Company's leverage ratio exceeds a specified level, the Credit
Facility would become secured by the capital stock owned in substantially all of
the Company's subsidiaries.
As of July 31, 2008 and October 31, 2007, the weighted average interest rate
on borrowings under the Company's revolving credit facility was 3.2% and 5.8%,
respectively. The revolving credit facility contains both financial and
non-financial covenants. As of July 31, 2008, the Company was in compliance with
all such covenants.
Industrial Development Revenue Bonds
In April 2008, the Company paid the matured Series 1988 industrial
development revenue bonds aggregating $1,980,000.
12
6. INCOME TAXES
As discussed in Note 1, Summary of Significant Accounting Policies - Income
Taxes, the Company adopted the provisions of FIN 48 effective November 1, 2007.
As a result, the Company increased its liabilities related to uncertain tax
positions by $4,622,000 and accounted for this change as a $3,889,000 increase
to deferred tax assets, a $639,000 decrease to retained earnings (the cumulative
effect of adopting FIN 48), and a $94,000 decrease to deferred tax liabilities.
Upon adoption, the Company also reclassified $2,680,000 in unrecognized tax
benefits and $2,621,000 of income tax refunds (related to research and
development activities as further described below) from income taxes payable to
long-term income tax liabilities and long-term income tax assets, respectively,
since the Company does not anticipate payment or receipt of cash within one
year. Long-term income tax liabilities are classified within other non-current
liabilities and long-term income tax assets are classified within other assets
in the Company's Condensed Consolidated Balance Sheets.
As of November 1, 2007, the Company's liability for gross unrecognized tax
benefits related to uncertain tax positions was $7,396,000, of which $2,948,000
would decrease the Company's income tax expense and effective income tax rate if
the tax benefits were recognized. The remaining liability was for tax positions
for which the uncertainty was only related to the timing of such tax benefits.
The amounts recorded for interest and penalties as of the date of adoption were
not significant.
The Company files income tax returns in the United States ("U.S.") federal
jurisdiction and in multiple state jurisdictions. The Company is also subject to
income taxes in certain jurisdictions outside the U.S., none of which are
individually material to the accompanying unaudited condensed consolidated
financial statements. Generally, the Company is no longer subject to U.S.
federal or state examinations by tax authorities for fiscal years prior to 2001.
The Company's U.S. federal filings and state of California filings for fiscal
years 2001 through 2005 are currently under examination by the Internal Revenue
Service and California Franchise Tax Board, respectively, who are reviewing the
income tax credit claimed by the Company for qualified research and development
activities incurred during those years.
During the nine months and three months ended July 31, 2008, there were no
material changes in the liability for unrecognized tax positions resulting from
tax positions taken during the current or a prior year, settlements with taxing
authorities or a lapse of applicable statutes of limitations. The Company does
not expect the total amount of unrecognized tax benefits to materially change in
the next twelve months.
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 for the nine months
ended July 31, 2007.
13
7. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in consolidated shareholders' equity and comprehensive income for
the nine months ended July 31, 2008 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, 2007 $105,000 $156,000 $220,658,000 $3,050,000 $147,632,000
Net income -- -- -- -- 34,861,000 $34,861,000
Foreign currency translation adjustments -- -- -- (2,388,000) -- (2,388,000)
------------
Comprehensive income -- -- -- -- -- $32,473,000
============
Cash dividends ($.10 per share) -- -- -- -- (2,631,000)
Cumulative effect of adopting FIN 48 (Note 6) -- -- -- -- (639,000)
Tax benefit from stock option exercises -- -- 6,281,000 -- --
Proceeds from stock option exercises 1,000 2,000 2,154,000 -- --
Stock option compensation expense -- -- 138,000 -- --
Other -- -- -- 6,000 (1,000)
-------- -------- ------------ ------------- ------------
Balances as of July 31, 2008 $106,000 $158,000 $229,231,000 $668,000 $179,222,000
======== ======== ============ ============= ============
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended July 31, 2008 and 2007 includes
approximately $13.9 million and $11.8 million, respectively, of new product
research and development expenses. Cost of sales for the three months ended
July 31, 2008 and 2007 includes approximately $5.4 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.
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,
--------------------------- ---------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Numerator:
Net income $34,861,000 $28,242,000 $12,827,000 $10,914,000
=========== =========== =========== ===========
Denominator:
Weighted average common shares outstanding-basic 26,280,211 25,620,418 26,379,608 25,804,417
Effect of dilutive stock options 962,040 1,250,892 892,233 1,155,398
----------- ----------- ----------- -----------
Weighted average common shares outstanding-diluted 27,242,251 26,871,310 27,271,841 26,959,815
=========== =========== =========== ===========
Net income per share-basic $1.33 $1.10 $0.49 $0.42
Net income per share-diluted $1.28 $1.05 $0.47 $0.40
Anti-dilutive stock options excluded -- -- -- --
14
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, 2008 and 2007, respectively, is as follows:
Other,
Segment Primarily
----------------------------- Corporate and Consolidated
FSG ETG Intersegment Totals
------------ ------------ ------------- ------------
For the nine months ended July 31, 2008:
- ----------------------------------------
Net sales $320,286,000 $105,697,000 ($352,000) $425,631,000
Depreciation and amortization 6,905,000 4,068,000 366,000 11,339,000
Operating income 59,723,000 27,731,000 (10,376,000) 77,078,000
Capital expenditures 7,928,000 1,635,000 558,000 10,121,000
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 three months ended July 31, 2008:
- -----------------------------------------
Net sales $109,969,000 $37,676,000 ($340,000) $147,305,000
Depreciation and amortization 2,483,000 1,366,000 182,000 4,031,000
Operating income 20,392,000 10,783,000 (3,686,000) 27,489,000
Capital expenditures 2,596,000 469,000 108,000 3,173,000
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
Total assets by operating segment as of July 31, 2008 and October 31, 2007
are as follows:
Segment Other,
----------------------------- Primarily Consolidated
FSG ETG Corporate Totals
------------ ------------ ------------- ------------
Total assets as of July 31, 2008 $406,090,000 $223,898,000 $35,681,000 $665,669,000
Total assets as of October 31, 2007 379,433,000 230,448,000 21,421,000 631,302,000
15
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
During the third quarter of fiscal 2008, the Company, through a subsidiary
of the FSG, entered into two facility operating lease commitments, which
commence during the fourth quarter of fiscal 2008. The aggregate minimum lease
payments for these facilities are estimated to be $70,000 in fiscal 2008,
$659,000 in fiscal 2009, $683,000 in fiscal 2010, $711,000 in fiscal 2011,
$738,000 in fiscal 2012 and $687,000 in fiscal 2013.
Guarantees
The Company has arranged for standby letters of credit aggregating $1.4
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.
Product Warranty
Changes in the Company's product warranty liability for the nine months
ended July 31, 2008 and 2007, respectively, are as follows:
Nine months ended July 31,
------------------------------
2008 2007
----------- -----------
Balances as of beginning of fiscal year $1,181,000 $534,000
Accruals for warranties 1,053,000 1,345,000
Warranty claims settled (592,000) (739,000)
----------- -----------
Balances as of July 31 $1,642,000 $1,140,000
=========== ===========
Acquisitions
Put/Call Rights
Pursuant to the purchase agreement related to the acquisition of 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 in fiscal 2007. The
Company has provided notice to the minority interest holder that it will
purchase the remaining 10% interest effective October 31, 2008. The estimated
purchase price of this additional minority interest is not expected to be
significant to the Company's consolidated financial statements.
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
over a five-year period beginning at approximately the tenth anniversary of the
acquisition, or sooner under certain conditions, and the minority interest
holders have the right to cause the Company to purchase their interests over a
five-year period commencing on approximately the fifth anniversary of the
acquisition, or sooner under certain conditions.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority interest holders have the right to cause the
Company to purchase their interests over
16
a four-year period starting around the second anniversary of the acquisition, or
sooner under certain conditions. In 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 has since increased its ownership interest in the subsidiary by 1.5% (or
one-fourth of such minority interest holders' aggregate interest in fiscal 2007
and 2008, respectively) to 86.5% effective April 2008.
Pursuant to the purchase agreement related to the acquisition of a 51%
interest in a subsidiary by the FSG in fiscal 2006, the minority interest
holders exercised their option during fiscal 2008 to cause the Company to
purchase their aggregate 28% interest over the four-year period ending in fiscal
2011. Accordingly, the Company increased its ownership interest in the
subsidiary by 7% (or one-fourth of such minority interest holders' aggregate
interest) to 58% effective April 2008. 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 interest
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 an 80% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase the minority interests
over a four-year period beginning at approximately the eighth anniversary of the
acquisition, or sooner under certain conditions, and the minority interest
holders have the right to cause the Company to purchase the same equity interest
over the same period.
As part of an agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2008, the Company has the right to purchase the minority interests
over a five-year period beginning at approximately the sixth anniversary of the
acquisition, or sooner under certain conditions, and the minority interest
holders have the right to cause the Company to purchase the same equity interest
over the same period.
The above referenced rights of the minority interest holders to cause the
Company to purchase their equity interests ("Put Rights") may be exercised on
varying dates beginning in fiscal 2008 through fiscal 2018. The Put Rights, all
of which relate either to common shares or membership interests in limited
liability companies, provide that the cash consideration to be paid for the
minority interests ("Redemption Amount") be at a formula that management
intended to reasonably approximate fair value, as defined in the applicable
agreements based on a multiple of future earnings over a measurement period.
Assuming the subsidiaries perform over their respective future measurement
periods at the same earnings levels they performed in the comparable historical
measurement periods and assuming all Put Rights are exercised, the aggregate
Redemption Amount that the Company would be required to pay is approximately $49
million. The actual Redemption Amount will likely be different. Upon exercise of
any Put Right, the Company's ownership interest in the subsidiary would increase
and minority interest expense would decrease. The Put Rights are embedded in the
shares owned by the minority interest holders and are not freestanding.
Consistent with Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," minority interests have been recorded on the Company's consolidated
balance sheets at historical cost plus an allocation of subsidiary earnings
based on ownership interests, less dividends paid to the minority interest
holders. As described in Note 1,
17
Summary of Significant Accounting Policies, the FASB issued SFAS No. 160 in
December 2007 that will change the current accounting and financial reporting
for non-controlling (minority) interests. SFAS No. 160 will be effective for
fiscal years beginning after December 15, 2008. The Company will adopt SFAS No.
160 on November 1, 2009. SFAS No. 160 will require that non-controlling
(minority) interests be reported in the consolidated balance sheet within
equity. The Company is not yet in a position to assess the full impact and
related disclosure of adopting SFAS No. 160 on its minority interest liabilities
and related Put Rights.
Additional Contingent Purchase Consideration
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.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional purchase consideration up to
$17.8 million and $19.2 million, respectively, based on the subsidiary's fiscal
2008 and 2009 respective earnings relative to target.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2007,
the Company may be obligated to pay additional purchase consideration up to
$71.1 million in aggregate should the subsidiary meet certain earnings
objectives during the first five years following the acquisition.
As part of the agreement to acquire a subsidiary by the FSG in fiscal 2008,
the Company may be obligated to pay additional consideration of up to
approximately $.5 million in aggregate should the subsidiary meet certain
earnings objectives during the first three years following the acquisition.
The above referenced additional contingent purchase consideration will be
accrued when the earnings objectives are met. Such additional contingent
consideration is based on a multiple of earnings above a threshold (subject to a
cap in certain cases) and is not contingent upon the former shareholders of the
acquired entities remaining employed by the Company or providing future services
to the Company. Accordingly, such consideration will be recorded as an
additional cost of the respective acquired entity when accrued. The maximum
amount of such contingent consideration that the Company could be required to
pay aggregates approximately $111 million payable over the future periods
beginning in fiscal 2009 through fiscal 2013. Assuming the subsidiaries perform
over their respective future measurement periods at the same earnings levels
they performed in the comparable historical measurement periods, the aggregate
amount of such contingent consideration that the Company would be required to
pay is approximately $5 million. The actual contingent purchase consideration
will likely be different.
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.
18
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, 2007.
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.
19
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,
----------------------------- -----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net sales $425,631,000 $368,054,000 $147,305,000 $133,155,000
------------ ------------ ------------ ------------
Cost of sales 272,595,000 239,194,000 93,454,000 85,450,000
Selling, general and administrative expenses 75,958,000 66,693,000 26,362,000 23,761,000
------------ ------------ ------------ ------------
Total operating costs and expenses 348,553,000 305,887,000 119,816,000 109,211,000
------------ ------------ ------------ ------------
Operating income $77,078,000 $62,167,000 $27,489,000 $23,944,000
============ ============ ============ ============
Net sales by segment:
Flight Support Group $320,286,000 $280,959,000 $109,969,000 $100,488,000
Electronic Technologies Group 105,697,000 87,111,000 37,676,000 32,677,000
Intersegment sales (352,000) (16,000) (340,000) (10,000)
------------ ------------ ------------ ------------
$425,631,000 $368,054,000 $147,305,000 $133,155,000
============ ============ ============ ============
Operating income by segment:
Flight Support Group $59,723,000 $50,094,000 $20,392,000 $17,802,000
Electronic Technologies Group 27,731,000 23,383,000 10,783,000 10,243,000
Other, primarily corporate (10,376,000) (11,310,000) (3,686,000) (4,101,000)
------------ ------------ ------------ ------------
$77,078,000 $62,167,000 $27,489,000 $23,944,000
============ ============ ============ ============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.0% 35.0% 36.6% 35.8%
Selling, general and administrative expenses 17.8% 18.1% 17.9% 17.8%
Operating income 18.1% 16.9% 18.7% 18.0%
Interest expense 0.5% 0.7% 0.3% 0.5%
Interest and other (expense) income (0.1%) 0.1% (0.1%) (0.1%)
Income tax expense 6.1% 5.4% 6.4% 5.9%
Minority interests' share of income 3.3% 3.3% 3.1% 3.3%
Net income 8.2% 7.7% 8.7% 8.2%
20
Comparison of First Nine Months of Fiscal 2008 to First Nine Months of Fiscal
2007
Net Sales
Net sales for the first nine months of fiscal 2008 increased by 15.6% to
$425.6 million, as compared to net sales of $368.1 million for the first nine
months of fiscal 2007. The increase in net sales reflects an increase of $39.3
million (a 14.0% increase) to $320.3 million in net sales within the FSG and an
increase of $18.6 million (a 21.3% increase) to $105.7 million in net sales
within the ETG. The FSG's net sales increase reflects organic growth of
approximately 10% as well as the impact on net sales from prior year and fiscal
2008 acquisitions. The organic growth principally represents 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
reflects the impact on net sales from prior year acquisitions as well as organic
growth of approximately 10% principally due to increased demand for certain
products.
Gross Profit and Operating Expenses
The Company's gross profit margin increased to 36.0% for the first nine
months of fiscal 2008 as compared to 35.0% for the first nine months of fiscal
2007, principally reflecting higher margins within the FSG primarily due to a
more favorable product mix. Consolidated cost of sales for the first nine months
of fiscal 2008 and 2007 includes approximately $13.9 million and $11.8 million,
respectively, of new product research and development expenses.
Selling, general and administrative ("SG&A") expenses were $76.0 million and
$66.7 million for the first nine months of fiscal 2008 and fiscal 2007,
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 and the additional operating costs associated with the acquired
businesses. As a percentage of net sales, SG&A expenses decreased to 17.8% for
the first nine months of fiscal 2008 compared to 18.1% for the first nine months
of fiscal 2007.
Operating Income
Operating income for the first nine months of fiscal 2008 increased by 24.0%
to $77.1 million, compared to operating income of $62.2 million for the first
nine months of fiscal 2007. The increase in operating income reflects an
increase of $9.6 million (a 19.2% increase) to $59.7 million in operating income
of the FSG in the first nine months of fiscal 2008 from $50.1 million for the
first nine months of fiscal 2007, a $4.3 million increase (an 18.6% increase) in
operating income of the ETG from $23.4 million for the first nine months of
fiscal 2007 to $27.7 million for the first nine months of fiscal 2008 and a $.9
million decrease in corporate expenses.
As a percentage of net sales, consolidated operating income increased to
18.1% for the first nine months of fiscal 2008 compared to 16.9% for the first
nine months of fiscal 2007. 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 17.8% in the first nine months of fiscal 2007 to 18.6% in the
first nine months of fiscal 2008 offset by a decrease in the ETG's operating
income as a percentage of net sales from 26.8% in the first nine months of
fiscal 2007 to 26.2%
21
in the first nine months of fiscal 2008. The increase in operating income as a
percentage of net sales for the FSG principally reflects the aforementioned
increased gross profit margins. The decrease in operating income as a percentage
of net sales for the ETG principally reflects an increase in amortization
expense of intangible assets associated with prior year acquisitions. See
"Outlook" below for additional information on the operating margins of the FSG
and ETG.
Interest Expense
Interest expense decreased to $1,951,000 in the first nine months of fiscal
2008 from $2,438,000 in the first nine months of fiscal 2007. The decrease was
principally due to lower interest rates, partially offset by the higher weighted
average balance outstanding under the revolving credit facility in the first
nine months of fiscal 2008.
Interest and Other (Expense) Income
Interest and other (expense) income in the first nine months of fiscal 2008
and 2007 were not material.
Income Tax Expense
The Company's effective tax rate for the first nine months of fiscal 2008
increased to 34.8% from 32.9% for the first nine months of fiscal 2007. This
increase was principally related 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. As a
result of this retroactive extension, the Company recognized an income tax
credit for qualified research and development activities for the full fiscal
2006 year in the first nine months of fiscal 2007, which increased net income,
net of expenses, by approximately $.5 million. Further, due to the expiration of
the research credit as of December 31, 2007, an income tax credit for qualified
research and development activities occurring subsequent to this date was not
reflected in income tax expense in the first nine months of fiscal 2008.
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 and HEICO Electronic. The
increase in the minority interests' share of income for the first nine months of
fiscal 2008 compared to the first nine months of fiscal 2007 was attributable to
the higher earnings of the FSG and certain ETG subsidiaries in which the
minority interests exist.
Net Income
The Company's net income was $34.9 million, or $1.28 per diluted share, for
the first nine months of fiscal 2008 compared to $28.2 million, or $1.05 per
diluted share, for the first nine months of fiscal 2007. This increase in net
income reflects the increased operating income referenced above, partially
offset by the increased minority interests' share of income of certain
consolidated subsidiaries.
22
Outlook
The Company reported increased consolidated net sales and operating income
in the nine months and three months ended July 31, 2008, reflecting both organic
growth and growth through acquisitions. Increased consolidated operating margins
for the first nine months of fiscal 2008 versus the respective period in fiscal
2007 reflect higher operating margins for the FSG offset by lower operating
margins for the ETG. Based on current market conditions, the Company continues
to target growth in fiscal 2008 net sales and earnings during the remainder of
the year over the comparable period in fiscal 2007.
Comparison of Third Quarter of Fiscal 2008 to Third Quarter of Fiscal 2007
Net Sales
Net sales for the third quarter of fiscal 2008 increased by 10.6% to $147.3
million, as compared to net sales of $133.2 million for the third quarter of
fiscal 2007. The increase in net sales reflects an increase of $9.5 million (a
9.4% increase) to $110.0 million in net sales within the FSG and an increase of
$5.0 million (a 15.3% increase) to $37.7 million in net sales within the ETG.
The FSG's net sales increase reflects organic growth of approximately 5% as well
as the impact on net sales from prior year and fiscal 2008 acquisitions. The
organic growth principally represents higher sales of new products and services
and continued increased demand for the FSG's aftermarket replacement parts and
its repair and overhaul services. The ETG's net sales increase reflects the
impact on net sales from prior year acquisitions as well as organic growth of
approximately 4% principally due to increased demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin increased to 36.6% for the third quarter
of fiscal 2008 as compared to 35.8% for the third quarter of fiscal 2007. The
increase in gross profit margin reflects higher gross profit margins within the
FSG, principally due to a favorable product mix, offset by lower gross profit
margins within the ETG, mainly due to a less favorable product mix.
Consolidated cost of sales for the third quarter of fiscal 2008 and 2007
includes approximately $5.4 million and $3.8 million, respectively, of new
product research and development expenses.
SG&A expenses were $26.4 million and $23.8 million for the third quarter of
fiscal 2008 and fiscal 2007, 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 and the additional operating costs
associated with the acquired businesses. As a percentage of net sales, SG&A
expenses for the third quarter of fiscal 2008 and 2007 were 17.9% and 17.8%,
respectively.
Operating Income
Operating income for the third quarter of fiscal 2008 increased by 14.8% to
$27.5 million, compared to operating income of $23.9 million for the third
quarter of fiscal 2007. The increase in operating income reflects an increase of
$2.6 million (a 14.5% increase) to $20.4 million in
23
operating income of the FSG in the third quarter of fiscal 2008 from $17.8
million for the third quarter of fiscal 2007, a $.6 million increase (a 5.3%
increase) in operating income of the ETG from $10.2 million for the third
quarter of fiscal 2007 to $10.8 million for the third quarter of fiscal 2008,
and a $.4 million decrease in corporate expenses.
As a percentage of net sales, consolidated operating income increased to
18.7% for the third quarter of fiscal 2008 compared to 18.0% for the third
quarter of fiscal 2007. 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 17.7% in the third quarter of fiscal 2007 to 18.5% in the third
quarter of fiscal 2008. The increase in operating income as a percentage of net
sales for the FSG principally reflects the increased gross profit margins
discussed previously. The ETG's operating income as a percentage of net sales
was 28.6% and 31.3% in the third quarter of fiscal 2008 and 2007, respectively,
principally reflecting the decreased gross profit margins discussed previously.
Interest Expense
Interest expense decreased to $444,000 in the third quarter of fiscal 2008
from $729,000 in the third quarter of fiscal 2007, principally due to lower
interest rates.
Interest and Other (Expense) Income
Interest and other (expense) income in the third quarter of fiscal 2008 and
2007 were not material.
Income Tax Expense
The Company's effective tax rate for the third quarter of fiscal 2008
increased to 35.3% from 33.8% for the third quarter of fiscal 2007. The increase
was principally due to the expiration of the research credit under Section 41 of
the Internal Revenue Code as of December 31, 2007. As a result, an income tax
credit for qualified research and development activities occurring subsequent to
this date was not reflected in income tax expense for the third quarter of
fiscal 2008.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the 20% minority interest held in HEICO Aerospace, the minority interests held
in certain subsidiaries of HEICO Aerospace 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 2008 compared to the
third quarter of fiscal 2007 was primarily attributable to the higher earnings
of the FSG and certain ETG subsidiaries in which the minority interests exist.
Net Income
The Company's net income was $12.8 million, or $.47 per diluted share, for
the third quarter of fiscal 2008 compared to $10.9 million, or $.40 per diluted
share, for the third quarter of fiscal
24
2007. This increase in net income reflects the increased operating income
referenced above, partially offset by the increased minority interests' share of
income of certain consolidated subsidiaries and higher effective tax rate.
Liquidity and Capital Resources
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under short-term and 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.
Operating Activities
Net cash provided by operating activities was $56.6 million for the first
nine months of fiscal 2008, consisting primarily of net income of $34.9 million,
minority interests' share of income of consolidated subsidiaries of $14.0
million, depreciation and amortization of $11.3 million, a tax benefit on stock
option exercises of $6.3 million, and a deferred income tax provision of $2.2
million, partially offset by an increase in net operating assets of $7.8 million
and the presentation of $4.3 million of excess tax benefit from stock option
exercises as a financing activity. The increase in net operating assets
principally reflects a higher investment in inventories by the FSG required to
meet increased sales demand associated with new product offerings, sales growth
and increased lead times on certain raw materials, partially offset by a
decrease in accounts receivables due to the timing of accrued rebates and
credits issued to customers and cash collections.
Net cash provided by operating activities increased $19.3 million from $37.3
million for the first nine months of fiscal 2007 to $56.6 million for the first
nine months of fiscal 2008 principally due to the aforementioned decrease in
accounts receivables as well as higher income before minority interests and
depreciation and amortization, partially offset by the timing of the net payment
of certain liabilities, including trade accounts payable, accrued expenses and
income taxes, that vary somewhat from year to year.
Investing Activities
Net cash used in investing activities during the first nine months of fiscal
2008 related primarily to acquisitions and related costs of $28.7 million and
capital expenditures totaling $10.1 million. Acquisitions and related costs
principally reflect three fiscal 2008 acquisitions, additional purchase
consideration related to two subsidiaries acquired in previous years, which was
accrued as of October 31, 2007 based on each subsidiary's earnings relative to
target, and the acquisition of an additional 7% of the equity interests of a
subsidiary of the FSG. Further details on the fiscal 2008 acquisitions may be
found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial
Statements.
25
Financing Activities
Net cash used in financing activities during the first nine months of fiscal
2008 primarily related to repayments of $51.0 million on the Company's revolving
credit facility, distributions to minority interest owners of $5.9 million, the
payment of $2.6 million in cash dividends on the Company's common stock and the
payment of the matured industrial development revenue bonds aggregating $2.0
million, partially offset by borrowings of $40.0 million on the Company's
revolving credit facility principally used to fund the aforementioned
acquisitions and related costs, the presentation of $4.3 million of excess tax
benefit from stock option exercises as a financing activity and proceeds from
stock option exercises of $2.2 million.
In May 2008, the Company amended its revolving credit facility by entering
into a $300 million Second Amended and Restated Revolving Credit Agreement
("Credit Facility") with a bank syndicate, which matures in May 2013. Under
certain circumstances, the maturity may be extended for two one-year periods.
The Credit Facility also includes a feature that will allow the Company to
increase the Credit Facility, at its option, up to $500 million through
increased commitments from existing lenders or the addition of new lenders. The
Credit Facility may be used for working capital and general corporate needs of
the Company, including letters of credit, capital expenditures and to finance
acquisitions.
Advances under the Credit Facility accrue interest at the Company's choice
of the "Base Rate" or the London Interbank Offered Rate ("LIBOR") plus
applicable margins (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, minority
interest and non-cash charges, or "leverage ratio"). The Base Rate is the higher
of (i) the Prime Rate or (ii) the Federal Funds rate plus .50%. The applicable
margins for LIBOR-based borrowings range from .625% to 2.25%. A fee is charged
on the amount of the unused commitment ranging from .125% to .35% (depending on
the Company's leverage ratio). The Credit Facility also includes a $50 million
sublimit for borrowings made in euros, a $30 million sublimit for letters of
credit and a $20 million swingline sublimit. The Credit Facility is unsecured
and contains covenants that require, among other things, the maintenance of the
leverage ratio, a senior leverage ratio and a fixed charge coverage ratio. In
the event the Company's leverage ratio exceeds a specified level, the Credit
Facility would become secured by the capital stock owned in substantially all of
the Company's subsidiaries.
Contractual Obligations
There have not been any material changes to the amounts presented in the
table of contractual obligations that was included in the Company's Annual
Report on Form 10-K for the year ended October 31, 2007, except for the
extension of the term under the Company's amended revolving credit facility as
discussed in "Liquidity and Capital Resources - Financing Activities" above and
the additional operating lease commitments as discussed in "Off-Balance Sheet
Arrangements - Lease Commitments" below.
As discussed in "New Accounting Pronouncements" below and Note 6, Income
Taxes, of the Notes to Condensed Consolidated Financial Statements, the Company
adopted the provisions of FIN 48 during the first quarter of fiscal 2008. As of
July 31, 2008, the Company's liability for
26
unrecognized tax benefits was $7,595,000. At this time, it is uncertain if or
when such amount may be settled with taxing authorities.
As discussed in "Off-Balance Sheet Arrangements - Acquisitions - Put/Call
Rights" below, the minority interest holders of certain subsidiaries have the
right to cause the Company to purchase their equity interests ("Put Rights"),
which may be exercised on varying dates beginning in fiscal 2008 through fiscal
2018. Assuming the subsidiaries perform over their respective future measurement
periods at the same earnings levels they performed in the comparable historical
measurement periods and assuming all Put Rights are exercised, the aggregate
amount that the Company would be required to pay is approximately $49 million.
The actual amount will likely be different.
Further, as discussed in "Off-Balance Sheet Arrangements - Acquisitions -
Additional Contingent Purchase Consideration" below, the Company may be
obligated to pay additional contingent purchase consideration based on future
earnings of certain acquired businesses. The maximum amount of such contingent
consideration that the Company could be required to pay aggregates approximately
$111 million payable over the future periods beginning in fiscal 2009 through
fiscal 2013. Assuming the subsidiaries perform over their respective future
measurement periods at the same earnings levels they performed in the comparable
historical measurement periods, the aggregate amount of such contingent
consideration that the Company would be required to pay is approximately $5
million. The actual contingent purchase consideration will likely be different.
Off-Balance Sheet Arrangements
Lease Commitments
During the third quarter of fiscal 2008, the Company, through a subsidiary
of the FSG, entered into two facility operating lease commitments, which
commence during the fourth quarter of fiscal 2008. The aggregate minimum lease
payments for these facilities are estimated to be $70,000 in fiscal 2008,
$659,000 in fiscal 2009, $683,000 in fiscal 2010, $711,000 in fiscal 2011,
$738,000 in fiscal 2012 and $687,000 in fiscal 2013.
Guarantees
The Company has arranged for standby letters of credit aggregating $1.4
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.
Acquisitions - Put/Call Rights
Pursuant to the purchase agreement related to the acquisition of 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 in fiscal 2007. The
Company has provided notice to the minority interest holder that it will
purchase the remaining 10% interest effective October 31, 2008. The estimated
purchase price of this additional minority interest is not expected to be
significant to the Company's consolidated financial statements.
27
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
over a five-year period beginning at approximately the tenth anniversary of the
acquisition, or sooner under certain conditions, and the minority interest
holders have the right to cause the Company to purchase their interests over a
five-year period commencing on approximately the fifth anniversary of the
acquisition, or sooner under certain conditions.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority interest 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. In
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 has since increased its
ownership interest in the subsidiary by 1.5% (or one-fourth of such minority
interest holders' aggregate interest in fiscal 2007 and 2008, respectively) to
86.5% effective April 2008.
Pursuant to the purchase agreement related to the acquisition of a 51%
interest in a subsidiary by the FSG in fiscal 2006, the minority interest
holders exercised their option during fiscal 2008 to cause the Company to
purchase their aggregate 28% interest over the four-year period ending in fiscal
2011. Accordingly, the Company increased its ownership interest in the
subsidiary by 7% (or one-fourth of such minority interest holders' aggregate
interest) to 58% effective April 2008. 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 interest
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 an 80% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase the minority interests
over a four-year period beginning at approximately the eighth anniversary of the
acquisition, or sooner under certain conditions, and the minority interest
holders have the right to cause the Company to purchase the same equity interest
over the same period.
As part of an agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2008, the Company has the right to purchase the minority interests
over a five-year period beginning at approximately the sixth anniversary of the
acquisition, or sooner under certain conditions, and the minority interest
holders have the right to cause the Company to purchase the same equity interest
over the same period.
The above referenced rights of the minority interest holders to cause the
Company to purchase their equity interests ("Put Rights") may be exercised on
varying dates beginning in fiscal 2008 through fiscal 2018. The Put Rights, all
of which relate either to common shares or membership interests in limited
liability companies, provide that the cash consideration to be paid for the
minority interests ("Redemption Amount") be at a formula that management
intended to reasonably approximate fair value, as defined in the applicable
agreements based on a multiple of future earnings over a measurement period.
Upon exercise of any Put Right, the Company's ownership interest in the
subsidiary would increase and minority interest expense
28
would decrease. The Put Rights are embedded in the shares owned by the minority
interest holders and are not freestanding. Consistent with Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," minority interests have
been recorded on the Company's consolidated balance sheets at historical cost
plus an allocation of subsidiary earnings based on ownership interests, less
dividends paid to the minority interest holders. As described in Note 1, Summary
of Significant Accounting Policies, the FASB issued SFAS No. 160 in December
2007 that will change the current accounting and financial reporting for
non-controlling (minority) interests. SFAS No. 160 will be effective for fiscal
years beginning after December 15, 2008. The Company will adopt SFAS No. 160 on
November 1, 2009. SFAS No. 160 will require that non-controlling (minority)
interests be reported in the consolidated balance sheet within equity. The
Company is not yet in a position to assess the full impact and related
disclosure of adopting SFAS No. 160 on its minority interest liabilities and
related Put Rights.
Acquisitions - Additional Contingent Purchase Consideration
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.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional purchase consideration up to
$17.8 million and $19.2 million, respectively, based on the subsidiary's fiscal
2008 and 2009 respective earnings relative to target.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2007,
the Company may be obligated to pay additional purchase consideration up to
$71.1 million in aggregate should the subsidiary meet certain earnings
objectives during the first five years following the acquisition.
As part of the agreement to acquire a subsidiary by the FSG in fiscal 2008,
the Company may be obligated to pay additional consideration of up to
approximately $.5 million in aggregate should the subsidiary meet certain
earnings objectives during the first three years following the acquisition.
The above referenced additional contingent purchase consideration will be
accrued when the earnings objectives are met. Such additional contingent
consideration is based on a multiple of earnings above a threshold (subject to a
cap in certain cases) and is not contingent upon the former shareholders of the
acquired entities remaining employed by the Company or providing future services
to the Company. Accordingly, such consideration will be recorded as an
additional cost of the respective acquired entity when accrued.
New Accounting Pronouncements
Effective November 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," and
began evaluating tax positions utilizing a two-step process. The first step is
to determine whether it is more-likely-than-not that a tax position
29
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.
As a result of adopting the provisions of FIN 48, the Company recognized a
cumulative effect adjustment that decreased retained earnings as of the
beginning of fiscal 2008 by $639,000. Further, effective with the adoption of
FIN 48, the Company's policy is to recognize interest and penalties related to
income tax matters as a component of income tax expense. Interest and penalties,
which were not significant in fiscal 2007, were previously recorded in interest
expense and in selling, general, and administrative expenses, respectively, in
the Company's consolidated statements of operations.
Further information regarding income taxes can be found in Note 6, Income
Taxes, of the Notes to Condensed Consolidated Financial Statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("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. In February 2008, the FASB issued FASB Staff Position ("FSP") No.
SFAS 157-2, "Effective Date of FASB Statement No. 157." FSP No. SFAS 157-2
delays the effective date of SFAS No. 157 by one year for nonfinancial assets
and nonfinancial liabilities, except for the items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. 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 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.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations."
SFAS No. 141(R) is a revision of SFAS No.141 and retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (formerly the
"purchase accounting" method) be used for all business combinations and for an
acquirer to be identified for each business combination.
30
However, SFAS No. 141(R) changes the approach of applying the acquisition method
in a number of significant areas, including that acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at
fair value at the acquisition date; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; restructuring costs associated with a business combination
will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. SFAS No.141(R) is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first fiscal year
subsequent to December 15, 2008, or in fiscal 2010 for HEICO. The Company is in
the process of evaluating the effect the adoption of SFAS No. 141(R) will have
on its results of operations, financial position and cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51." This statement
requires the recognition of a noncontrolling interest (previously referred to as
minority interest) as a separate component within equity in the consolidated
balance sheet. It also requires the amount of consolidated net income
attributable to the parent and the noncontrolling interest be clearly identified
and presented within the consolidated statement of operations. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008, or in fiscal
2010 for HEICO. The Company is in the process of evaluating the effect the
adoption of SFAS No. 160 will have on its results of operations, financial
position and cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
SFAS No. 161 expands the disclosure requirements in SFAS No. 133 about an
entity's derivative instruments and hedging activities. It requires enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008, or in the second quarter of
fiscal 2009 for HEICO. The Company is currently in the process of evaluating the
effect the adoption of SFAS No. 161 will have on its financial statement
disclosures.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 is effective 60 days
following the Securities and Exchange Commission's approval of the Public
Company Accounting Oversight Board amendments to remove the hierarchy of
generally accepted accounting principles from the auditing standards. The
Company is currently in the process of evaluating the effect, if any, the
adoption of SFAS No. 162 will have on its results of operations, financial
position and cash flows.
31
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, space or
homeland security 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.
32
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 Company's aggregate outstanding variable rate debt
balance as of July 31, 2008, a hypothetical 10% increase in interest rates would
increase the Company's interest expense by approximately $135,000 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 Canadian dollar and British pound
sterling. A hypothetical 10% weakening in the exchange rate of the Canadian
dollar or British pound sterling to the United States dollar as of July 31, 2008
would not have a material effect on the Company's results of operations,
financial position or cash flows.
33
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.
34
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
2008.
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.
35
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: September 3, 2008 By: /s/ THOMAS S. IRWIN
-----------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
36
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 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: September 3, 2008 /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 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: September 3, 2008 /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, 2008 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: September 3, 2008 /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, 2008 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: September 3, 2008 /s/ THOMAS S. IRWIN
-------------------
Thomas S. Irwin
Chief Financial Officer