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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of each of the registrant's classes of
common stock as of June 2, 2006:
Common Stock, $.01 par value 10,296,239 shares
Class A Common Stock, $.01 par value 14,970,222 shares
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HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
----
Part I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of April 30, 2006 and October 31, 2005.................................2
Condensed Consolidated Statements of Operations (unaudited)
for the six months and three months ended April 30, 2006 and 2005.........3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended April 30, 2006 and 2005..........................4
Notes to Condensed Consolidated Financial Statements (unaudited).............5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................31
Item 4. Controls and Procedures.....................................................32
Part II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................33
Item 4. Submission of Matters to a Vote of Security Holders.........................33
Item 6. Exhibits....................................................................33
Signature..................................................................................34
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
APRIL 30, 2006 OCTOBER 31, 2005
-------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,401,000 $ 5,330,000
Accounts receivable, net 56,917,000 47,668,000
Inventories, net 82,947,000 62,758,000
Prepaid expenses and other current assets 4,130,000 3,159,000
Deferred income taxes 8,020,000 7,218,000
-------------- ----------------
Total current assets 157,415,000 126,133,000
Property, plant and equipment, net 47,473,000 46,663,000
Goodwill 264,257,000 248,229,000
Other assets 21,353,000 14,599,000
-------------- ----------------
Total assets $ 490,498,000 $ 435,624,000
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 1,568,000 $ 63,000
Trade accounts payable 15,260,000 11,129,000
Accrued expenses and other current liabilities 24,540,000 32,473,000
Income taxes payable 3,736,000 6,285,000
-------------- ----------------
Total current liabilities 45,104,000 49,950,000
Long-term debt, net of current maturities 61,022,000 34,061,000
Deferred income taxes 25,657,000 22,431,000
Other non-current liabilities 5,571,000 6,644,000
-------------- ----------------
Total liabilities 137,354,000 113,086,000
-------------- ----------------
Minority interests in consolidated subsidiaries 59,238,000 49,035,000
-------------- ----------------
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; 10,288,739 and 10,057,690 shares
issued and outstanding, respectively 103,000 101,000
Class A Common Stock, $.01 par value per share;
30,000,000 shares authorized; 14,951,104 and
14,517,669 shares issued and outstanding, respectively 150,000 145,000
Capital in excess of par value 199,564,000 192,523,000
Accumulated other comprehensive loss (9,000) (65,000)
Retained earnings 94,098,000 80,799,000
-------------- ----------------
Total shareholders' equity 293,906,000 273,503,000
-------------- ----------------
Total liabilities and shareholders' equity $ 490,498,000 $ 435,624,000
============== ================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Net sales $ 180,193,000 $ 123,954,000 $ 92,092,000 $ 66,973,000
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 114,605,000 78,629,000 58,556,000 41,928,000
Selling, general and administrative expenses 33,682,000 25,231,000 16,916,000 13,612,000
------------- ------------- ------------- -------------
Total operating costs and expenses 148,287,000 103,860,000 75,472,000 55,540,000
------------- ------------- ------------- -------------
Operating income 31,906,000 20,094,000 16,620,000 11,433,000
Interest expense (1,669,000) (533,000) (861,000) (300,000)
Interest and other income 254,000 80,000 307,000 44,000
------------- ------------- ------------- -------------
Income before income taxes and minority interests 30,491,000 19,641,000 16,066,000 11,177,000
Income tax expense 10,731,000 7,136,000 5,815,000 4,213,000
------------- ------------- ------------- -------------
Income before minority interests 19,760,000 12,505,000 10,251,000 6,964,000
Minority interests' share of income 5,469,000 2,364,000 2,709,000 1,251,000
------------- ------------- ------------- -------------
Net income $ 14,291,000 $ 10,141,000 $ 7,542,000 $ 5,713,000
============= ============= ============= =============
Net income per share:
Basic $ .58 $ .42 $ .30 $ .23
Diluted $ .54 $ .39 $ .28 $ .22
Weighted average number of common shares outstanding:
Basic 24,850,558 24,387,667 25,027,158 24,446,997
Diluted 26,426,503 26,236,782 26,621,155 26,259,988
Cash dividends per share $ .040 $ .025 $ - $ -
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
SIX MONTHS ENDED APRIL 30,
-----------------------------
2006 2005
------------- -------------
Operating Activities:
Net income $ 14,291,000 $ 10,141,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,323,000 3,503,000
Deferred income tax provision 1,744,000 1,351,000
Minority interests' share of income 5,469,000 2,364,000
Tax benefit from stock option exercises 2,377,000 2,580,000
Excess tax benefit from stock option exercises (1,135,000) --
Stock option compensation expense 887,000 1,000
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (4,519,000) (3,989,000)
Increase in inventories (8,937,000) (4,471,000)
Increase in prepaid expenses and other current assets (105,000) (237,000)
(Decrease) increase in trade accounts payables, accrued
expenses and other current liabilities (4,416,000) 790,000
Decrease in income taxes payable (2,568,000) (736,000)
Other 7,000 202,000
------------- -------------
Net cash provided by operating activities 7,418,000 11,499,000
------------- -------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (32,956,000) (18,419,000)
Capital expenditures (4,622,000) (3,029,000)
Proceeds from sale of building held for sale -- 3,520,000
Other 467,000 (251,000)
------------- -------------
Net cash used in investing activities (37,111,000) (18,179,000)
------------- -------------
Financing Activities:
Borrowings on revolving credit facility 34,000,000 22,000,000
Payments on revolving credit facility (7,000,000) (13,000,000)
Borrowings on short-term line of credit 1,000,000 --
Payments on short-term line of credit (1,500,000) --
Cash dividends paid (991,000) (610,000)
Proceeds from stock option exercises 3,785,000 801,000
Excess tax benefit from stock option exercises 1,135,000 --
Other (685,000) (276,000)
------------- -------------
Net cash provided by financing activities 29,744,000 8,915,000
------------- -------------
Effect of exchange rate changes on cash 20,000 --
------------- -------------
Net increase in cash and cash equivalents 71,000 2,235,000
Cash and cash equivalents at beginning of year 5,330,000 214,000
------------- -------------
Cash and cash equivalents at end of period $ 5,401,000 $ 2,449,000
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
HEICO Corporation and its subsidiaries (the "Company") have been prepared in
conformity with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-Q. Therefore, the condensed consolidated financial
statements do not include all information and footnotes normally included in
annual consolidated financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended October 31, 2005. The
October 31, 2005 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 six months ended April 30, 2006 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", as interpreted
by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107
and began recording compensation expense associated with stock options. SFAS No.
123(R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant date fair value of those awards (with limited exceptions). Prior to
the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation expense had only been recorded in the
consolidated financial statements for any stock options granted below fair
market value of the underlying stock as of the date of grant.
The Company adopted the modified prospective transition method provided for
under SFAS 123(R) and accordingly, prior period results have not been
retroactively adjusted. The modified prospective transition method requires that
stock-based compensation expense be recorded for (i) all new stock options
granted on or after November 1, 2005 based on the grant date fair value
determined under the provisions of SFAS 123(R) and (ii) all unvested stock
options granted prior to November 1, 2005 based on the grant date fair value as
determined under the provisions of SFAS No. 123.
5
Beginning in fiscal 2006, the Company has presented the cash flows
resulting from tax deductions in excess of the cumulative compensation cost
recognized for stock options exercised ("excess tax benefit") as a financing
activity in the Condensed Consolidated Statements of Cash Flows as prescribed by
SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the Company presented
all tax benefits resulting from stock option exercises as an operating activity
in the Condensed Consolidated Statements of Cash Flows. For the six months ended
April 30, 2006, the excess tax benefit from stock option exercises of $1,135,000
was presented in financing activities in the Company's Condensed Consolidated
Statements of Cash Flows.
As a result of the adoption of SFAS No. 123(R), the Company's net income
for the six months and three months ended April 30, 2006 includes compensation
expense of $887,000 and $459,000, respectively, and income tax benefit related
to the Company's stock options of $267,000 and $141,000, respectively.
Substantially all of the stock option compensation expense was recorded as a
component of selling, general and administrative expenses in the Company's
Condensed Consolidated Statement of Operations.
The following table illustrates the pro forma effects on net income and net
income per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation during the six months and
three months ended April 30, 2005:
SIX MONTHS ENDED THREE MONTHS ENDED
APRIL 30, 2005 APRIL 30, 2005
---------------- ------------------
Net income, as reported $ 10,141,000 $ 5,713,000
Add: Stock-based employee
compensation expense included
in reported net income, net of tax 1,000 1,000
Deduct: Stock-based employee
compensation expense determined
under a fair-value method, net of tax (622,000) (298,000)
---------------- ------------------
Pro forma net income $ 9,520,000 $ 5,416,000
================ ==================
Net income per share:
Basic - as reported $ .42 $ .23
Basic - pro forma $ .39 $ .22
Diluted - as reported $ .39 $ .22
Diluted - pro forma $ .36 $ .21
Further information regarding stock options can be found in Note 7, Stock
Options.
6
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4". SFAS No.
151 requires the allocation of fixed production overhead costs be based on the
normal capacity of the production facilities and unallocated overhead costs
recognized as an expense in the period incurred. The Statement also clarifies
that abnormal inventory costs such as costs of idle facilities, excess freight
and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 did not have a material effect on the Company's results of operations,
financial position, or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations--an interpretation of
FASB Statement No. 143." This Interpretation clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the
timing and (or) method of settling the obligation are conditional on a future
event that may or may not be within the control of the entity. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company does not expect the adoption of FIN 47 to have a material effect on
its results of operations, financial position, or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 changes the requirements for the accounting and reporting of a change in
accounting principle. The Statement eliminates the requirement in APB Opinion
No. 20 to include the cumulative effect of changes in accounting principle in
the income statement in the period of change, and instead requires that changes
in accounting principle be retrospectively applied unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The Statement applies to all voluntary changes in accounting principle.
SFAS No. 154 is effective for changes made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to
have a material effect on its results of operations, financial position, or cash
flows.
2. ACQUISITIONS
In November 2005, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired a 51% interest in the assets and business of Seal Dynamics
LLC ("SDI"). The remaining 49% interest is principally held by a member of SDI's
management group. As part of the agreement to acquire a 51% interest in SDI, the
Company has the right to purchase the remaining 49% interest over a seven-year
period beginning approximately after the second anniversary of the acquisition,
or sooner under certain conditions, and the minority holder has the right to
cause the Company to purchase the same equity interest over the same period. SDI
is a distributor and designer of FAA-approved hydraulic, pneumatic, mechanical
and electro-mechanical components for the commercial, regional and general
aviation markets.
7
In November 2005, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired all of the stock of Engineering Design Team, Inc.
("EDT") and substantially all of the assets of an EDT affiliate. Subject to
meeting certain earnings objectives during the first four years following the
acquisition, the Company may be obligated to pay additional consideration of up
to $53.0 million in aggregate. EDT specializes in the design, manufacture and
sale of advanced high-technology, high-speed interface products that link
devices such as telemetry receivers, digital cameras, high resolution scanners,
simulation systems and test systems to almost any computer. EDT's products are
utilized in homeland security, defense, medical, research, astronomical and
other applications across numerous industries.
The acquisitions of SDI and EDT were accounted for using the purchase
method of accounting. The purchase price of each acquisition was principally
paid in cash using proceeds from the Company's revolving credit facility and was
not significant to the Company's consolidated financial statements individually.
The allocation of the purchase price of each acquisition 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 results of operations
of SDI and EDT were included in the Company's results of operations effective as
of the beginning of fiscal 2006. The Company's unaudited pro forma consolidated
operating results for the six months ended April 30, 2005 assuming the
acquisitions of SDI and EDT had been consummated as of the beginning of fiscal
2005 would have been net sales of $150,930,000, net income of $12,540,000, basic
net income per share of $.51 and diluted net income per share of $.48. The
Company's unaudited pro forma consolidated operating results for the three
months ended April 30, 2005 assuming the acquisitions of SDI and EDT had been
consummated as of the beginning of fiscal 2005 would have been net sales of
$80,043,000, net income of $6,744,000, basic net income per share of $.28 and
diluted net income per share of $.26. The pro forma financial information is
presented for comparative purposes only and is not necessarily indicative of the
results of operations that actually would have been achieved if the acquisitions
had taken place as of the beginning of fiscal 2005. The unaudited pro forma
financial information includes adjustments to historical amounts such as
additional amortization expense related to acquired intangible assets, increased
interest expense associated with borrowings to finance the acquisitions,
increased performance awards under the terms of the acquisitions and the
incremental minority interest in the net income of SDI.
8
Cash investing activities related to acquisitions (principally SDI and
EDT), including contingent purchase price payments to previous owners of
acquired businesses, and adjustments to the preliminary allocation of the
purchase price of prior year acquisitions to the assets acquired and liabilities
assumed for the six months ended April 30, 2006 is as follows:
SIX MONTHS ENDED
APRIL 30, 2006
------------------
Fair values of assets acquired and liabilities assumed:
Liabilities assumed $ 6,081,000
Minority interests in consolidated subsidiaries 5,358,000
Less:
Goodwill 15,731,000
Inventories, net 11,233,000
Identifiable intangible assets 8,330,000
Accounts receivable, net 4,704,000
Accrued additional purchase consideration 2,860,000
Other assets 1,537,000
------------------
Acquisitions and related costs, net of cash acquired $ (32,956,000)
==================
Accrued additional purchase consideration in the above table represents
amounts accrued as of October 31, 2005 as a component of goodwill in accordance
with the agreements related to certain prior year acquisitions that were paid in
fiscal 2006.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
APRIL 30, 2006 OCTOBER 31, 2005
--------------- ----------------
Accounts receivable $ 59,337,000 $ 49,816,000
Less: Allowance for doubtful accounts (2,420,000) (2,148,000)
--------------- ----------------
Accounts receivable, net $ 56,917,000 $ 47,668,000
=============== ================
9
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
APRIL 30, 2006 OCTOBER 31, 2005
--------------- ----------------
Costs incurred on uncompleted contracts $ 14,655,000 $ 18,344,000
Estimated earnings 8,381,000 11,252,000
--------------- ----------------
23,036,000 29,596,000
Less: Billings to date (17,129,000) (21,747,000)
--------------- ----------------
$ 5,907,000 $ 7,849,000
=============== ================
Included in accompanying condensed consolidated
balance sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 6,363,000 $ 7,889,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (456,000) (40,000)
--------------- ----------------
$ 5,907,000 $ 7,849,000
=============== ================
Changes in estimates did not have a material effect on net income or
diluted net income per share in the six months and three months ended April 30,
2006 and 2005.
INVENTORIES
APRIL 30, 2006 OCTOBER 31, 2005
--------------- ----------------
Finished products $ 41,733,000 $ 26,136,000
Work in process 13,065,000 12,634,000
Materials, parts, assemblies and supplies 28,149,000 23,988,000
--------------- ----------------
Inventories, net $ 82,947,000 $ 62,758,000
=============== ================
Inventories related to long-term contracts were not significant as of
April 30, 2006 and October 31, 2005.
PROPERTY, PLANT AND EQUIPMENT
APRIL 30, 2006 OCTOBER 31, 2005
--------------- ----------------
Land $ 3,155,000 $ 3,155,000
Buildings and improvements 25,252,000 25,344,000
Machinery, equipment and tooling 54,622,000 53,460,000
Construction in progress 5,574,000 3,128,000
--------------- ----------------
88,603,000 85,087,000
Less: Accumulated depreciation and amortization (41,130,000) (38,424,000)
--------------- ----------------
Property, plant and equipment, net $ 47,473,000 $ 46,663,000
=============== ================
10
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 six months ended April 30, 2006 are as
follows:
SEGMENT
----------------------------- CONSOLIDATED
FSG ETG TOTALS
------------- ------------- -------------
Balances as of October 31, 2005 $ 122,041,000 $ 126,188,000 $ 248,229,000
Goodwill acquired 12,117,000 3,188,000 15,305,000
Adjustments to goodwill 458,000 265,000 723,000
------------- ------------- -------------
Balances as of April 30, 2006 $ 134,616,000 $ 129,641,000 $ 264,257,000
============= ============= =============
The goodwill acquired is a result of the acquisitions described in Note 2,
Acquisitions. Adjustments to goodwill consist primarily of adjustments related
to the preliminary allocation of the purchase price of prior year acquisitions
to the assets acquired and liabilities assumed (see Note 2) and contingent
purchase price payments to previous owners of acquired businesses.
Identifiable intangible assets, which are recorded within other assets in
the Company's Condensed Consolidated Balance Sheets, consist of:
AS OF APRIL 30, 2006 AS OF OCTOBER 31, 2005
-------------------------------------------- --------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Amortizing Assets:
Customer relationships $ 3,244,000 $ (232,000) $ 3,012,000 $ 0 $ 0 $ 0
Intellectual property 1,992,000 (249,000) 1,743,000 -- -- --
Licenses 1,000,000 (290,000) 710,000 1,000,000 (252,000) 748,000
Non-compete agreements 774,000 (283,000) 491,000 660,000 (129,000) 531,000
Patents 533,000 (80,000) 453,000 477,000 (60,000) 417,000
------------ ------------ ------------ ------------ ------------ ------------
7,543,000 (1,134,000) 6,409,000 2,137,000 (441,000) 1,696,000
Non-Amortizing Assets:
Trade names 6,629,000 -- 6,629,000 3,650,000 -- 3,650,000
------------ ------------ ------------ ------------ ------------ ------------
$ 14,172,000 $ (1,134,000) $ 13,038,000 $ 5,787,000 $ (441,000) $ 5,346,000
============ ============ ============ ============ ============ ============
The increase in the gross carrying amount of customer relationships,
intellectual property, non-compete agreements and trade names as of April 30,
2006 compared to October 31, 2005 principally relates to such intangible assets
recognized in connection with the acquisitions of EDT and SDI (see Note 2,
Acquisitions). A portion of the change in the gross carrying amount of trade
names and non-compete agreements reflects adjustments to the preliminary
allocation of the purchase price of prior year acquisitions to such identifiable
intangible assets (see Note 2). The weighted average amortization period of the
customer relationships, intellectual property and non-compete agreements
acquired during the six months ended April 30, 2006 is approximately seven
years, four years, and seven years, respectively.
11
Amortization expense of other intangible assets for the six months and
three months ended April 30, 2006 was $693,000 and $377,000, respectively.
Amortization expense of other intangible assets for the fiscal year ending
October 31, 2006 is estimated to be $1,372,000. Amortization expense for each of
the next five fiscal years is estimated to be $1,274,000 in fiscal 2007,
$1,123,000 in fiscal 2008, $1,109,000 in fiscal 2009, $611,000 in fiscal 2010
and $611,000 in fiscal 2011.
5. SHORT-TERM AND LONG-TERM DEBT
One of the Company's subsidiaries has a $6.0 million short-term line of
credit with a bank, which expires in June 2006. The line of credit may be used
for inventory purchases and other working capital needs and is secured by all
the assets of the subsidiary. Borrowings under the line of credit bear interest
at a rate mutually agreed upon by the subsidiary and the bank. As of April 30,
2006, $1.5 million was outstanding under the line of credit at a weighted
average interest rate of 5.6%.
Long-term debt consists of:
APRIL 30, 2006 OCTOBER 31, 2005
-------------- ----------------
Borrowings under revolving credit facility $ 59,000,000 $ 32,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 110,000 144,000
-------------- ----------------
61,090,000 34,124,000
Less: Current maturities of long-term debt (68,000) (63,000)
-------------- ----------------
$ 61,022,000 $ 34,061,000
============== ================
As of April 30, 2006 and October 31, 2005, the weighted average interest
rates on borrowings under the Company's revolving credit facility were 5.6% and
4.7%, respectively. The revolving credit facility contains both financial and
non-financial covenants. As of April 30, 2006, the Company believes it is in
compliance with all such covenants.
The interest rates on the Series 1988 industrial development revenue bonds
were 3.9% and 2.8% as of April 30, 2006 and October 31, 2005, respectively.
12
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the six months ended
April 30, 2006 are as follows:
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED
STOCK STOCK PAR VALUE LOSS EARNINGS
------------- ------------- ------------- --------------- -------------
Balances as of October 31, 2005 $ 101,000 $ 145,000 $ 192,523,000 $ (65,000) $ 80,799,000
Net income -- -- -- -- 14,291,000
Foreign currency translation adjustments -- -- -- 56,000 --
Cash dividends ($.04 per share) -- -- -- -- (991,000)
Tax benefit from stock option exercises -- -- 2,377,000 -- --
Proceeds from stock option exercises 2,000 5,000 3,778,000 -- --
Stock option compensation expense -- -- 887,000 -- --
Other -- -- (1,000) -- (1,000)
------------- ------------- ------------- --------------- -------------
Balances as of April 30, 2006 $ 103,000 $ 150,000 $ 199,564,000 $ (9,000) $ 94,098,000
============= ============= ============= =============== =============
7. STOCK OPTIONS
The Company currently has two stock option plans, the 2002 Stock Option
Plan ("2002 Plan") and the Non-Qualified Stock Option Plan under which stock
options may be granted. The Company's 1993 Stock Option Plan ("1993 Plan")
terminated in March 2003 on the tenth anniversary of its effective date. No
options may be granted under the 1993 Plan after such termination date; however,
options outstanding as of the termination date may be exercised pursuant to
their terms. In addition, the Company granted stock options to two former
shareholders of an acquired business pursuant to employment agreements entered
into in connection with the acquisition in fiscal 1999. A total of 3,031,613
shares of the Company's stock are reserved for issuance to employees, directors,
officers, and consultants as of April 30, 2006, including 2,869,150 shares
currently under option and 162,463 shares available for future grants. Options
issued under the 2002 Plan may be designated as incentive stock options or
non-qualified stock options. Incentive stock options are granted with an
exercise price of not less than 100% of the fair market value of the Company's
common stock as of date of grant (110% thereof in certain cases) and are
exercisable in percentages specified as of the date of grant over a period up to
ten years. Only employees are eligible to receive incentive stock options.
Non-qualified stock options under the 2002 Plan may be granted at less than fair
market value and may be immediately exercisable. Options granted under the
Non-Qualified Stock Option Plan may be granted with an exercise price of no less
than the fair market value of the Company's common stock as of the date of grant
and are generally exercisable in four equal annual installments commencing one
year from the date of grant. The options granted pursuant to the 2002 Plan may
be designated as Common Stock and/or Class A Common Stock in such proportions as
shall be determined by the Board of Directors or the Stock Option Plan Committee
in its sole discretion. The stock options granted to two former shareholders of
an acquired business were fully vested and transferable as of the grant date and
expire ten years from the date of grant. The exercise price of such options was
the fair market
13
value as of the date of grant. Options under all stock option plans expire not
later than ten years after the date of grant, unless extended by the Stock
Option Plan Committee or the Board of Directors.
Information concerning stock option activity for the six months ended April
30, 2006 is as follows:
SHARES UNDER OPTION
SHARES -----------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------- ---------- ----------------
Outstanding as of October 31, 2005 156,303 3,588,680 $ 9.50
Granted -- -- $ --
Cancelled 6,160 (9,358) $ 8.95
Exercised -- (710,172) $ 6.91
---------- ----------
Outstanding as of April 30, 2006 162,463 2,869,150 $ 10.14
========== ==========
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of April 30, 2006 is as follows:
COMMON STOCK
OPTIONS OUTSTANDING
---------------------------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING AGGREGATE
RANGE OF NUMBER AVERAGE CONTRACTUAL INTRINSIC
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (YEARS) VALUE
- --------------- ------------ -------------- ---------------- ------------
$1.16 - $ 2.90 111,182 $ 1.84 1.4 $ 3,442,000
$2.91 - $ 7.00 127,250 $ 6.31 0.6 3,371,000
$7.01 - $12.00 591,250 $ 8.97 5.3 14,091,000
$12.01 - $21.92 456,751 $ 14.21 4.8 8,491,000
------------ ------------
1,286,433 $ 9.95 4.3 $ 29,395,000
============ ============
OPTIONS EXERCISABLE
---------------------------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING AGGREGATE
RANGE OF NUMBER AVERAGE CONTRACTUAL INTRINSIC
EXERCISE PRICES EXERCISABLE EXERCISE PRICE LIFE (YEARS) VALUE
- --------------- ------------ -------------- ---------------- ------------
$1.16 - $ 2.90 111,182 $ 1.84 1.4 $ 3,442,000
$2.91 - $ 7.00 127,250 $ 6.31 0.6 3,371,000
$7.01 - $12.00 469,249 $ 9.18 4.9 11,084,000
$12.01 - $21.92 380,751 $ 14.24 4.7 7,067,000
------------ ------------
1,088,432 $ 9.86 4.0 $ 24,964,000
============ ============
14
CLASS A COMMON STOCK
OPTIONS OUTSTANDING
---------------------------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING AGGREGATE
RANGE OF NUMBER AVERAGE CONTRACTUAL INTRINSIC
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (YEARS) VALUE
- --------------- ------------ -------------- ---------------- ------------
$1.16 - $ 2.90 105,795 $ 1.80 1.4 $ 2,740,000
$2.91 - $ 7.00 151,065 $ 5.65 5.5 3,331,000
$7.01 - $12.00 734,534 $ 8.48 4.9 14,115,000
$12.01 - $21.92 591,323 $ 15.24 3.9 7,370,000
------------ ------------
1,582,717 $ 10.29 4.3 $ 27,556,000
============ ============
OPTIONS EXERCISABLE
---------------------------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING AGGREGATE
RANGE OF NUMBER AVERAGE CONTRACTUAL INTRINSIC
EXERCISE PRICES EXERCISABLE EXERCISE PRICE LIFE (YEARS) VALUE
- --------------- ------------ -------------- ---------------- ------------
$1.16 - $ 2.90 105,795 $ 1.80 1.4 $ 2,740,000
$2.91 - $ 7.00 99,805 $ 5.71 4.7 2,195,000
$7.01 - $12.00 656,575 $ 8.44 4.7 12,645,000
$12.01 - $21.92 551,386 $ 15.36 3.7 6,802,000
------------ ------------
1,413,561 $ 10.45 4.1 $ 24,382,000
============ ============
The aggregate intrinsic values in the tables above are calculated based on
the difference between the closing price per share of the underlying common
stock as reported on the New York Stock Exchange as of April 30, 2006 less the
option exercise price (if a positive spread) multiplied by the number of stock
options.
If there were a change in control of the Company, options outstanding for
an additional 147,707 shares of Common Stock and 151,602 shares of Class A
Common Stock would become immediately exercisable.
Information concerning stock options exercised during the six months ended
April 30, 2006 is as follows:
SIX MONTHS ENDED
APRIL 30, 2006
----------------
Cash proceeds from stock option exercises $ 3,785,000
Tax benefit realized from stock option exercises 1,387,000
Intrinsic value of stock option exercises 13,461,000
Effective as of November 1, 2005, the Company generally recognizes
compensation expense ratably over the vesting period. As of April 30, 2006,
there was $1.3 million of pretax unrecognized compensation expense related to
nonvested stock options, which is expected to be recognized over a weighted
average period of approximately 1.6 years.
15
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the six months ended April 30, 2006 and 2005 includes
approximately $8.2 million and $5.3 million, respectively, of new product
research and development expenses. Cost of sales for the three months ended
April 30, 2006 and 2005 includes approximately $4.4 million and $2.9 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 six months and three months ended April 30:
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Numerator:
Net income $ 14,291,000 $ 10,141,000 $ 7,542,000 $ 5,713,000
============= ============= ============= =============
Denominator:
Weighted average common shares outstanding-basic 24,850,558 24,387,667 25,027,158 24,446,997
Effect of dilutive stock options 1,575,945 1,849,115 1,593,997 1,812,991
------------- ------------- ------------- -------------
Weighted average common shares outstanding-diluted 26,426,503 26,236,782 26,621,155 26,259,988
============= ============= ============= =============
Net income per share- basic $ .58 $ .42 $ .30 $ .23
Net income per share- diluted $ .54 $ .39 $ .28 $ .22
Anti-dilutive stock options excluded 24,581 218,010 1,000 215,846
16
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 six months and three
months ended April 30, 2006 and 2005, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
-------------- -------------- -------------- --------------
For the six months ended April 30, 2006:
Net sales $ 124,169,000 $ 56,093,000 $ (69,000) $ 180,193,000
Depreciation and amortization 2,415,000 1,751,000 157,000 4,323,000
Operating income 23,344,000 14,365,000 (5,803,000) 31,906,000
Capital expenditures 3,666,000 914,000 42,000 4,622,000
For the six months ended April 30, 2005:
Net sales $ 88,316,000 $ 35,761,000 $ (123,000) $ 123,954,000
Depreciation and amortization 2,252,000 1,035,000 216,000 3,503,000
Operating income 16,467,000 6,681,000 (3,054,000) 20,094,000
Capital expenditures 2,469,000 545,000 15,000 3,029,000
For the three months ended April 30, 2006:
Net sales $ 62,480,000 $ 29,622,000 $ (10,000) $ 92,092,000
Depreciation and amortization 1,221,000 882,000 71,000 2,174,000
Operating income 11,036,000 8,655,000 (3,071,000) 16,620,000
Capital expenditures 2,851,000 528,000 36,000 3,415,000
For the three months ended April 30, 2005:
Net sales $ 46,053,000 $ 20,987,000 $ (67,000) $ 66,973,000
Depreciation and amortization 1,116,000 551,000 112,000 1,779,000
Operating income 8,869,000 4,219,000 (1,655,000) 11,433,000
Capital expenditures 1,735,000 337,000 13,000 2,085,000
The total assets held by each operating segment as of April 30, 2006 and
October 31, 2005 is as follows:
SEGMENT OTHER,
------------------------------- PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
-------------- -------------- -------------- --------------
Total assets as of April 30, 2006 $ 269,603,000 $ 203,935,000 $ 16,960,000 $ 490,498,000
Total assets as of October 31, 2005 230,229,000 188,851,000 16,544,000 435,624,000
17
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has arranged for standby letters of credit aggregating $2.2
million to meet the security requirement of its insurance company for potential
workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a letter of
credit for $.1 million, expiring August 2006. These letters of credit are
supported by the Company's revolving credit facility. In addition, the Company's
industrial development revenue bonds are secured by a $2.0 million letter of
credit expiring April 2008 and a mortgage on the related properties pledged as
collateral.
Changes in the Company's product warranty liability for the six months
ended April 30, 2006 and 2005, respectively, are as follows:
2006 2005
----------- -----------
Balances as of beginning of fiscal year $ 395,000 $ 129,000
Acquired warranty liabilities 15,000 --
Accruals for warranties 167,000 262,000
Warranty claims settled (212,000) (105,000)
----------- -----------
Balances as of April 30 $ 365,000 $ 286,000
=========== ===========
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration of
up to $3.8 million in aggregate should the subsidiary meet certain earnings
objectives during the first four years following the acquisition. In the second
quarter of 2006, the Company paid $2.2 million of such additional purchase
consideration based on the subsidiary's earnings relative to target for the
first year.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and fifth
years following the acquisition. The additional purchase consideration will be
accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year
18
period beginning approximately after the second anniversary of the acquisition,
or sooner under certain conditions, and the minority holder has the right to
cause the Company to purchase the same equity interest over the same period.
Further, the Company has the right to purchase the remaining 21% of the equity
interests of the subsidiary over a three-year period beginning approximately
after the fourth anniversary of the acquisition, or sooner under certain
conditions, and the minority holder has the right to cause the Company to
purchase the same equity interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional consideration of up to $53.0
million in aggregate during the first four years following the acquisition. The
maximum amount of additional consideration that may become payable by year is
$6.8 million in fiscal 2006, $9.2 million in fiscal 2007, $17.8 million in
fiscal 2008 and $19.2 million in fiscal 2009. The additional purchase
consideration will be accrued when the earnings objectives are met.
The Company has also accrued additional purchase consideration aggregating
$.5 million as of April 30, 2006 in accordance with the agreements related to
certain acquisitions based principally on the actual value of the net assets
acquired. The Company expects to pay this amount in fiscal 2006.
As part of an agreement for exclusive license rights to intellectual
property, one of the subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.4 million through fiscal 2007.
LITIGATION
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations, financial position, or cash flows.
12. SUBSEQUENT EVENT
In May 2006, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired all of the stock of Arger Enterprises, Inc. ("Arger") and
two affiliated companies of Arger. Arger designs and distributes FAA-approved
aircraft and engine parts primarily for the commercial aviation market.
The purchase price of this acquisition was not significant to the Company's
condensed consolidated financial statements and was principally paid using
proceeds from the Company's revolving credit facility.
19
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, 2005.
The Company has two operating segments: the Flight Support Group ("FSG"),
consisting of HEICO Aerospace Holdings Corp. ("HEICO Aerospace") and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries.
The Company's results of operations during the six months ended April 30,
2006 have been affected by several recent acquisitions.
In November 2005, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired a 51% interest in Seal Dynamics LLC ("SDI"). The remaining
49% interest is principally held by a member of SDI's management group. In
November 2005, the Company, through its HEICO Electronic Technologies Corp.
subsidiary, acquired Engineering Design Team, Inc. ("EDT") and an EDT affiliate.
The purchase price of each acquisition was principally paid in cash using
proceeds from the Company's revolving credit facility and was not significant to
the Company's consolidated financial statements individually. The operating
results of SDI and EDT were included in the Company's results of operations
effective as of the beginning of fiscal 2006. For further information regarding
these acquisitions, see Note 2, Acquisitions, of the Notes to Condensed
Consolidated Financial Statements.
During fiscal 2005, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired Connectronics, Corp. and its affiliate, Wiremax, Ltd.
(collectively "Connectronics") in December 2004, Lumina Power, Inc. ("Lumina")
in February 2005, and an 85% interest in HVT Group, Inc. ("HVT") in September
2005. The remaining 15% interest is held by certain members of HVT's management
group. The operating results of each acquired company were included in the
Company's results of operations from their effective acquisition date.
20
As further explained within Comparison of First Six Months of Fiscal 2006
to First Six Months of Fiscal 2005, the first six months of fiscal 2006 reflects
the full impact of each of the above mentioned acquisitions whereas the first
six months of fiscal 2005 includes just five months of operating results of
Connectronics and three months of operating results of Lumina from each of their
respective aforementioned acquisition dates.
As further explained within Comparison of Second Quarter of Fiscal 2006 to
the Second Quarter of Fiscal 2005, the second quarter of fiscal 2006 reflects
the full impact of each of the above mentioned acquisitions whereas the second
quarter of fiscal 2005 includes just the operating results of Connectronics and
Lumina and not of HVT, SDI and EDT, which were acquired subsequently.
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.
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Net sales $ 180,193,000 $ 123,954,000 $ 92,092,000 $ 66,973,000
-------------- -------------- -------------- --------------
Cost of sales 114,605,000 78,629,000 58,556,000 41,928,000
Selling, general and administrative expenses 33,682,000 25,231,000 16,916,000 13,612,000
-------------- -------------- -------------- --------------
Total operating costs and expenses 148,287,000 103,860,000 75,472,000 55,540,000
-------------- -------------- -------------- --------------
Operating income $ 31,906,000 $ 20,094,000 $ 16,620,000 $ 11,433,000
============== ============== ============== ==============
Net sales by segment:
Flight Support Group $ 124,169,000 $ 88,316,000 $ 62,480,000 $ 46,053,000
Electronic Technologies Group 56,093,000 35,761,000 29,622,000 20,987,000
Intersegment sales (69,000) (123,000) (10,000) (67,000)
-------------- -------------- -------------- --------------
$ 180,193,000 $ 123,954,000 $ 92,092,000 $ 66,973,000
============== ============== ============== ==============
Operating income by segment:
Flight Support Group $ 23,344,000 $ 16,467,000 $ 11,036,000 $ 8,869,000
Electronic Technologies Group 14,365,000 6,681,000 8,655,000 4,219,000
Other, primarily corporate (5,803,000) (3,054,000) (3,071,000) (1,655,000)
-------------- -------------- -------------- --------------
$ 31,906,000 $ 20,094,000 $ 16,620,000 $ 11,433,000
============== ============== ============== ==============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.4% 36.6% 36.4% 37.4%
Selling, general and administrative expenses 18.7% 20.4% 18.4% 20.3%
Operating income 17.7% 16.2% 18.0% 17.1%
Interest expense 0.9% 0.4% 0.9% 0.4%
Interest and other income 0.1% 0.1% 0.3% 0.1%
Income tax expense 6.0% 5.8% 6.3% 6.3%
Minority interests' share of income 3.0% 1.9% 2.9% 1.9%
Net income 7.9% 8.2% 8.2% 8.5%
21
COMPARISON OF FIRST SIX MONTHS OF FISCAL 2006 TO FIRST SIX MONTHS OF FISCAL 2005
Net Sales
Net sales for the first six months of fiscal 2006 increased by 45.4% to
$180.2 million, as compared to net sales of $124.0 million for the first six
months of fiscal 2005. The increase in net sales reflects an increase of $35.9
million (a 40.6% increase) to $124.2 million in net sales within the FSG, and an
increase of $20.3 million (a 56.9% increase) to $56.1 million in net sales
within the ETG. The FSG's net sales increase reflects the acquisition of SDI and
organic growth of approximately 14%. The organic growth reflects increased sales
of new products and services as well as improved demand for the FSG's
aftermarket replacement parts and repair and overhaul services, associated with
continued recovery within the commercial airline industry. The ETG's net sales
increase reflects the acquisitions of Connectronics, Lumina, HVT and EDT and
organic growth of approximately 9% reflecting increased demand for certain
products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased slightly to 36.4% for the first
six months of fiscal 2006 as compared to 36.6% for the first six months of
fiscal 2005, reflecting slightly lower margins within the FSG offset by an
increase in the ETG margin. The FSG's gross profit margin decrease was due
principally to a less favorable product mix including the expected impact of
lower margins realized on products distributed by SDI. The ETG's gross profit
margin increase was principally from improved product mix, including a higher
margin product mix contributed by recent acquisitions. Consolidated cost of
sales for the first six months of fiscal 2006 and 2005 includes approximately
$8.2 million and $5.3 million, respectively, of new product research and
development expenses.
Selling, general and administrative ("SG&A") expenses were $33.7 million
and $25.2 million for the first six months of fiscal 2006 and fiscal 2005,
respectively. The increase in SG&A expenses was mainly due to higher operating
costs, principally personnel related, associated with the aforementioned
acquisitions, the increase in net sales discussed above, an increase in
corporate expenses and stock option compensation expense (see Stock Based
Compensation below). Corporate expenses are up due to increased costs to comply
with the Sarbanes-Oxley Act of 2002 and higher accrued performance awards. The
majority of such costs incurred in fiscal 2005 were not incurred until the
second half of fiscal 2005.
As a percentage of net sales, SG&A expenses decreased to 18.7% for the
first six months of fiscal 2006 compared to 20.4% for the first six months of
fiscal 2005. The decrease as a percentage of net sales is due to improved
efficiencies in controlling costs while increasing revenues.
Operating Income
Operating income for the first six months of fiscal 2006 increased by 58.8%
to $31.9 million, compared to operating income of $20.1 million for the first
six months of fiscal 2005. The increase in operating income reflects an increase
of $6.8 million (a 41.8% increase) to $23.3 million in
22
operating income of the FSG in the first six months of fiscal 2006 from $16.5
million for the first six months of fiscal 2005. Operating income of the ETG
increased $7.7 million (a 115.0% increase) to $14.4 million for the first six
months of fiscal 2006 from $6.7 million for the first six months of fiscal 2005.
These increases were partially offset by the aforementioned increase in
corporate expenses. As a percentage of net sales, operating income increased
from 16.2% in the first six months of fiscal 2005 to 17.7% in the first six
months of fiscal 2006. The increase in operating income as a percentage of net
sales reflects an increase in the FSG's operating income as a percentage of net
sales from 18.6% in the first six months of fiscal 2005 to 18.8% in the first
six months of fiscal 2006 and an increase in the ETG's operating income as a
percentage of net sales from 18.7% in the first six months of fiscal 2005 to
25.6% in the first six months of fiscal 2006. The increase in the FSG's
operating income as a percentage of net sales reflects improved operating
efficiencies. The increase in the ETG's operating income as a percentage of net
sales reflects the increased gross profit margins discussed previously.
Interest Expense
Interest expense increased to $1,669,000 in the first six months of fiscal
2006 from $533,000 in the first six months of fiscal 2005. The increase was
principally due to a higher weighted average balance outstanding under the
revolving credit facility in the first six months of fiscal 2006 and higher
interest rates.
Interest and Other Income
Interest and other income in the first six months of fiscal 2006 and fiscal
2005 were not material.
Income Tax Expense
The Company's effective tax rate for the first six months of fiscal 2006
decreased to 35.2% from 36.3% for the first six months of fiscal 2005. The
decrease is principally due to a higher amount of the minority interests' share
of income excluded from the Company's fiscal 2006 consolidated income subject to
federal income taxes.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the minority interests held in HEICO Aerospace, including the 49% minority
interest held in SDI, and the minority interests held in the ETG, which consist
of the 20% minority interest held in Sierra Microwave Technology, LLC ("Sierra")
and the 15% minority interest held in HVT. The increase in the minority
interests' share of income for the first six months of fiscal 2006 compared to
the first six months of fiscal 2005 is attributable to the acquisitions of SDI
(November 2005) and HVT (September 2005) and the higher earnings of the FSG and
Sierra.
23
Net Income
The Company's net income was $14.3 million, or $.54 per diluted share, for
the first six months of fiscal 2006 compared to $10.1 million, or $.39 per
diluted share, for the first six months of fiscal 2005 reflecting the increased
operating income referenced above.
OUTLOOK
The Company reported increased sales and operating income in its two
business segments reflecting both growth through acquisitions and strong organic
growth. Consolidated operating margins experienced in the first half of fiscal
2006 approximate those currently expected for the full fiscal 2006 year.
Based on the Company's continued success in introducing new products and
services and increasing product demand, the Company continues to target growth
in fiscal 2006 sales and net income over fiscal 2005.
COMPARISON OF SECOND QUARTER OF FISCAL 2006 TO SECOND QUARTER OF FISCAL 2005
Net Sales
Net sales for the second quarter of fiscal 2006 increased by 37.5% to $92.1
million, as compared to net sales of $67.0 million for the second quarter of
fiscal 2005. The increase in net sales reflects an increase of $16.4 million (a
35.7% increase) to $62.5 million in net sales within the FSG, and an increase of
$8.6 million (a 41.1% increase) to $29.6 million in net sales within the ETG.
The FSG's net sales increase reflects the acquisition of SDI and organic growth
of approximately 9%. The organic growth reflects increased sales of new products
and services as well as improved demand for the FSG's aftermarket replacement
parts and repair and overhaul services associated with continued recovery within
the commercial airline industry. The ETG's net sales increase reflects the
acquisitions of HVT and EDT and organic growth of approximately 6% reflecting
increased demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased to 36.4% for the second quarter
of fiscal 2006 as compared to 37.4% for the second quarter of fiscal 2005,
reflecting lower margins within the FSG partially offset by an increase in the
ETG margin. The FSG's gross profit margin decrease was due principally to a less
favorable product mix including the expected impact of lower margins realized on
products distributed by SDI. The ETG's gross profit margin increase was
principally from improved product mix, including a higher margin product mix
contributed by recent acquisitions. Consolidated cost of sales for the second
quarter of fiscal 2006 and 2005 includes approximately $4.4 million and $2.9
million, respectively, of new product research and development expenses.
SG&A expenses were $16.9 million and $13.6 million for the second quarter
of fiscal 2006 and fiscal 2005, respectively. The increase in SG&A expenses was
mainly due to higher operating costs, principally personnel related, associated
with the aforementioned acquisitions, the increase in net sales discussed above,
an increase in corporate expenses and stock option compensation expense (see
Stock Based Compensation below). Corporate expenses are up due to increased
costs
24
to comply with the Sarbanes-Oxley Act of 2002 and higher accrued performance
awards. The majority of such costs incurred in fiscal 2005 were not incurred
until the second half of fiscal 2005.
As a percentage of net sales, SG&A expenses decreased to 18.4% for the
second quarter of fiscal 2006 compared to 20.3% for the second quarter of fiscal
2005. The decrease as a percentage of net sales is due to improved efficiencies
in controlling costs while increasing revenues.
Operating Income
Operating income for the second quarter of fiscal 2006 increased by 45.4%
to $16.6 million, compared to operating income of $11.4 million for the second
quarter of fiscal 2005. The increase in operating income reflects an increase of
$2.1 million (a 24.4% increase) to $11.0 million in operating income of the FSG
in the second quarter of fiscal 2006 from $8.9 million for the second quarter of
fiscal 2005. Operating income of the ETG increased $4.5 million (a 105.1%
increase) to $8.7 million for the second quarter of fiscal 2006 from $4.2
million for the second quarter of fiscal 2005. These increases were partially
offset by the aforementioned increase in corporate expenses. As a percentage of
net sales, operating income increased from 17.1% in the second quarter of fiscal
2005 to 18.0% in the second quarter of fiscal 2006. The increase in operating
income as a percentage of net sales reflects an increase in the ETG's operating
income as a percentage of net sales from 20.1% in the second quarter of fiscal
2005 to 29.2% in the second quarter of fiscal 2006 offset by a decrease in the
FSG's operating income as a percentage of net sales from 19.3% in the second
quarter of fiscal 2005 to 17.7% in the second quarter of fiscal 2006. The
increase in the ETG's operating income as a percentage of net sales reflects the
increased gross profit margins discussed previously. The decrease in the FSG's
operating income as a percentage of net sales reflects the decreased gross
profit margins discussed previously partially offset by improved operating
efficiencies.
Interest Expense
Interest expense increased to $861,000 in the second quarter of fiscal 2006
from $300,000 in the second quarter of fiscal 2005. The increase was principally
due to a higher weighted average balance outstanding under the revolving credit
facility in the second quarter of fiscal 2006 attributable to borrowings related
to acquisitions and higher interest rates.
Interest and Other Income
Interest and other income in the second quarter of fiscal 2006 and 2005
were not material.
Income Tax Expense
The Company's effective tax rate for the second quarter of fiscal 2006
decreased to 36.2% from 37.7% for the second quarter of fiscal 2005. The
decrease is principally due to a higher amount of the minority interests' share
of income excluded from the Company's fiscal 2006 consolidated income subject to
federal income taxes.
25
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the minority interests held in HEICO Aerospace, including the 49% minority
interest held in SDI, and the minority interests held in the ETG, which consist
of the 20% minority interest held in Sierra and the 15% minority interest held
in HVT. The increase in the minority interests' share of income for the second
quarter of fiscal 2006 compared to the second quarter of fiscal 2005 is
attributable to the acquisitions of SDI (November 2005) and HVT (September 2005)
and the higher earnings of the FSG and Sierra.
Net Income
The Company's net income was $7.5 million, or $.28 per diluted share, for
the second quarter of fiscal 2006 compared to $5.7 million, or $.22 per diluted
share, for the second quarter of fiscal 2005 reflecting the increased operating
income referenced above, partially offset by the increased minority interests'
share of income of certain consolidated subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities and
available borrowings under its revolving credit facility will be sufficient to
fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $7.4 million for the first
six months of fiscal 2006, consisting primarily of net income of $14.3 million,
minority interests' share of income of consolidated subsidiaries of $5.5
million, depreciation and amortization of $4.3 million, a tax benefit on stock
option exercises of $2.4 million, a deferred income tax provision of $1.7
million, and stock option compensation expense of $.9 million, partially offset
by an increase in net operating assets of $20.6 million and the presentation of
$1.1 million of excess tax benefit from stock option exercises as a financing
activity in accordance with the provisions of SFAS No. 123(R) (see Stock Based
Compensation below). The increase in net operating assets (current assets used
in operating activities net of current liabilities) primarily reflects a higher
investment in inventories by the FSG required to meet increased sales demand
associated with new product offerings, sales growth and increased lead times on
certain raw materials; an increase in accounts receivable due to sales growth;
and the payment of performance awards and income taxes that were accrued as of
October 31, 2005. Net cash provided by operating activities decreased from $11.5
million for the first six months of fiscal 2005 principally as a result of the
increase in net operating assets referenced above, partially offset by the
increase in net income and the minority interests' share of income.
26
Investing Activities
Net cash used in investing activities during the first six months of fiscal
2006 related primarily to acquisitions and related costs (principally SDI and
EDT) of $33.0 million and capital expenditures totaling $4.6 million.
Financing Activities
Net cash provided by financing activities during the first six months of
fiscal 2006 primarily related to borrowings of $34.0 million on the Company's
revolving credit facility principally used to fund the aforementioned
acquisitions, proceeds from stock option exercises of $3.8 million and $1.1
million of excess tax benefit from stock option exercises classified as a
financing activity in accordance with the provisions of SFAS No. 123(R),
partially offset by repayments of $7.0 million on the Company's revolving credit
facility and the payment of $1.0 million in cash dividends on the Company's
common stock.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating $2.2
million to meet the security requirement of its insurance company for potential
workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a letter of
credit for $.1 million, expiring August 2006. These letters of credit are
supported by the Company's revolving credit facility. In addition, the Company's
industrial development revenue bonds are secured by a $2.0 million letter of
credit expiring April 2008 and a mortgage on the related properties pledged as
collateral.
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration of
up to $3.8 million in aggregate should the subsidiary meet certain earnings
objectives during the first four years following the acquisition. In the second
quarter of 2006, the Company paid $2.2 million of such additional purchase
consideration based on the subsidiary's earnings relative to target for the
first year.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and fifth
years following the acquisition. The additional purchase consideration will be
accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
27
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holder has the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holder has the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional consideration of up to $53.0
million in aggregate during the first four years following the acquisition. The
maximum amount of additional consideration that may become payable by year is
$6.8 million in fiscal 2006, $9.2 million in fiscal 2007, $17.8 million in
fiscal 2008 and $19.2 million in fiscal 2009. The additional purchase
consideration will be accrued when the earnings objectives are met.
The Company has also accrued additional purchase consideration aggregating
$.5 million as of April 30, 2006 in accordance with the agreements related to
certain acquisitions based principally on the actual value of the net assets
acquired. The Company expects to pay this amount in fiscal 2006.
As part of an agreement for exclusive license rights to intellectual
property, one of the subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.4 million through fiscal 2007.
STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", as interpreted
by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107
and began recording compensation expense associated with stock options. SFAS No.
123(R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant date fair value of those awards (with limited exceptions). Prior to
the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, compensation expense had only been recorded in the consolidated
financial statements for any stock options granted below fair market value of
the underlying stock as of the date of grant.
The Company adopted the modified prospective transition method provided for
under SFAS 123(R) and accordingly, prior period results have not been
retroactively adjusted. The modified prospective transition method requires that
stock-based compensation expense be recorded for (i) all new stock options
granted on or after November 1, 2005 based on the grant date fair value
28
determined under the provisions of SFAS 123(R) and (ii) all unvested stock
options granted prior to November 1, 2005 based on the grant date fair value as
determined under the provisions of SFAS No. 123.
Beginning in fiscal 2006, the Company has presented the cash flows
resulting from tax deductions in excess of the cumulative compensation cost
recognized for stock options exercised ("excess tax benefit") as a financing
activity in the Condensed Consolidated Statements of Cash Flows as prescribed by
SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the Company presented
all tax benefits resulting from stock option exercises as an operating activity
in the Condensed Consolidated Statements of Cash Flows. For the six months ended
April 30, 2006, the Company reclassified $1,135,000 of excess tax benefit from
stock option exercises from operating activities to financing activities in its
Condensed Consolidated Statements of Cash Flows.
As a result of the adoption of SFAS No. 123(R), the Company's net income
for the six months and three months ended April 30, 2006 includes compensation
expense of $887,000 and $459,000 , respectively, and income tax benefit related
to the Company's stock options of $267,000 and $141,000, respectively.
Substantially all of the stock option compensation expense was recorded as a
component of selling, general and administrative expenses in the Company's
Condensed Consolidated Statement of Operations.
As of April 30, 2006, there was $1.3 million of pretax unrecognized
compensation expense related to nonvested stock options, which is expected to be
recognized over a weighted average period of approximately 1.6 years.
Further information regarding stock options can be found in Note 7, Stock
Options, of the Notes to Condensed Consolidated Financial Statements.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4". SFAS No.
151 requires the allocation of fixed production overhead costs be based on the
normal capacity of the production facilities and unallocated overhead costs
recognized as an expense in the period incurred. The Statement also clarifies
that abnormal inventory costs such as costs of idle facilities, excess freight
and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 did not have a material effect on the Company's results of operations,
financial position, or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations--an interpretation of
FASB Statement No. 143." This Interpretation clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the
timing and (or) method of settling the obligation are conditional on a future
event that may or may not be within the control of the entity. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company does not expect the
29
adoption of SFAS No. 154 to have a material effect on its results of operations,
financial position, or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 changes the requirements for the accounting and reporting of a change in
accounting principle. The Statement eliminates the requirement in APB Opinion
No. 20 to include the cumulative effect of changes in accounting principle in
the income statement in the period of change, and instead requires that changes
in accounting principle be retrospectively applied unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The Statement applies to all voluntary changes in accounting principle.
SFAS No. 154 is effective for changes made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to
have a material effect on its results of operations, financial position, or cash
flows.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature may be
forward-looking and the words "believe," "expect," "estimate" and similar
expressions are generally intended to identify forward looking statements. Any
forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls,
concerning our operations, economic performance and financial condition are
subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed in or implied by those statements. Factors that could cause such
differences, but are not limited to: lower demand for commercial air travel or
airline fleet changes, which could cause lower demand for our goods and
services; product specification costs and requirements, which could cause an
increase to our costs to complete contracts; governmental and regulatory
demands, export policies and restrictions, reductions in defense or space
spending by U.S. and/or foreign customers, or competition from existing and new
competitors, which could reduce our sales; HEICO's ability to introduce new
products and product pricing levels, which could reduce our sales or sales
growth; HEICO's ability to make acquisitions and achieve operating synergies
from acquired businesses, customer credit risk, interest rates and economic
conditions within and outside of the aviation, defense, space and electronics
industries, which could negatively impact our costs and revenues; and HEICO's
ability to maintain effective internal controls, which could adversely affect
our business and the market price of our common stock. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the outstanding debt balance as of April 30, 2006, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $348,000 on an annual basis.
The Company is also exposed to foreign currency exchange rate fluctuations
on the United States dollar value of its foreign currency denominated
transactions, which are principally in British pound sterling. A hypothetical
10% weakening in the exchange rate of the British pound sterling to the United
States dollar as of April 30, 2006 would not have a material effect on the
Company's results of operations or financial position.
31
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.
32
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 six months of fiscal
2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on March 27, 2006, the Company's
shareholders elected eight directors. The number of votes cast for and withheld
for each nominee for director was as follows:
DIRECTOR FOR WITHHELD
---------------------- ---------- --------
Samuel L. Higginbottom 10,560,107 513,530
Wolfgang Mayrhuber 10,218,622 855,015
Eric A. Mendelson 10,219,063 854,574
Laurans A. Mendelson 10,315,314 758,323
Victor H. Mendelson 10,171,802 901,835
Albert Morrison, Jr. 10,777,399 296,238
Joseph W. Pallot 10,858,250 215,387
Dr. Alan Schriesheim 10,777,036 296,601
The Company's shareholders also ratified the appointment of Deloitte &
Touche LLP as the Company's independent registered public accounting firm for
the fiscal year ending October 31, 2006, with 10,855,210 voting for the
proposal, 147,457 voting against and 70,965 abstaining.
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.
33
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: June 7, 2006 By: /s/ THOMAS S. IRWIN
-------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
34
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Laurans A. Mendelson, Chief Executive Officer of HEICO Corporation, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q of HEICO
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 7, 2006 /s/ LAURANS A. MENDELSON
------------------------------
Laurans A. Mendelson
Chief Executive Officer
Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Thomas S. Irwin, Chief Financial Officer of HEICO Corporation, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of HEICO
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 7, 2006 /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 April 30, 2006 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: June 7, 2006 /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 April 30, 2006 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: June 7, 2006 /S/ THOMAS S. IRWIN
------------------------------
Thomas S. Irwin
Chief Financial Officer