UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002
OR
( )TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 TAFT STREET, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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
----- -----
The number of shares outstanding of each of the Registrant's classes of common
stock as of August 31, 2002:
Title of Class Shares Outstanding
Common Stock, $.01 par value 9,379,347
Class A Common Stock, $.01 par value 11,603,195
HEICO CORPORATION
INDEX
Page No.
Part I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of July 31, 2002 and October 31, 2001 2
Condensed Consolidated Statements of Operations (unaudited)
for the nine and three months ended July 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks 22
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25
1
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
ASSETS
July 31, 2002 October 31, 2001
------------- ----------------
Current assets:
Cash and cash equivalents $5,340,000 $4,333,000
Accounts receivable, net 25,260,000 31,506,000
Inventories 55,654,000 52,017,000
Prepaid expenses and other current assets 7,412,000 5,281,000
Deferred income taxes 2,750,000 3,180,000
------------- -------------
Total current assets 96,416,000 96,317,000
Property, plant and equipment less accumulated
depreciation of $25,744,000 and $22,673,000, respectively 40,702,000 39,298,000
Intangible assets less accumulated amortization of
$19,673,000 and $19,454,000, respectively 189,780,000 183,048,000
Other assets 7,498,000 6,977,000
------------- -------------
Total assets $334,396,000 $325,640,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $12,000 $27,000
Trade accounts payable 7,077,000 7,768,000
Accrued expenses and other current liabilities 13,070,000 16,443,000
Income taxes payable -- 564,000
------------- -------------
Total current liabilities 20,159,000 24,802,000
Long-term debt, net of current maturities 63,981,000 66,987,000
Deferred income taxes 4,831,000 2,064,000
Other non-current liabilities 6,183,000 6,173,000
------------- -------------
Total liabilities 95,154,000 100,026,000
------------- -------------
Minority interests in consolidated subsidiaries 37,865,000 36,845,000
------------- -------------
Commitments and contingencies (Note 16)
Shareholders' equity:
Preferred Stock, par value $.01 per share; Authorized - 10,000,000
shares issuable in series; 200,000 shares designated as Series A
Junior Participating Preferred Stock, none issued -- --
Common Stock, $.01 par value; Authorized - 30,000,000 shares;
Issued and Outstanding - 9,379,347 and 9,317,453 shares,
respectively 94,000 93,000
Class A Common Stock, $.01 par value; Authorized - 30,000,000
shares; Issued and Outstanding - 11,603,195 and 11,515,779
shares, respectively 116,000 115,000
Capital in excess of par value 153,758,000 150,605,000
Accumulated other comprehensive loss -- (226,000)
Retained earnings 52,409,000 43,830,000
------------- -------------
206,377,000 194,417,000
Less: Note receivable from employee savings and investment plan -- (648,000)
Note receivable secured by Class A Common Stock (5,000,000) (5,000,000)
------------- -------------
Total shareholders' equity 201,377,000 188,769,000
------------- -------------
Total liabilities and shareholders' equity $334,396,000 $325,640,000
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Nine months ended July 31, Three months ended July 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- -------------- ------------
Net sales $126,600,000 $125,237,000 $42,587,000 $43,845,000
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 81,455,000 71,786,000 27,651,000 25,802,000
Selling, general and administrative expenses 28,426,000 29,133,000 9,982,000 9,974,000
------------- ------------- ------------- -------------
Total operating costs and expenses 109,881,000 100,919,000 37,633,000 35,776,000
------------- ------------- ------------- -------------
Operating income 16,719,000 24,318,000 4,954,000 8,069,000
Interest expense (1,735,000) (1,669,000) (473,000) (605,000)
Interest and other income 104,000 1,500,000 12,000 113,000
Gain on sale of product line 1,230,000 -- -- --
------------- ------------- ------------- -------------
Income before income taxes and minority interests 16,318,000 24,149,000 4,493,000 7,577,000
Income tax expense 5,672,000 9,239,000 1,472,000 2,800,000
------------- ------------- ------------- -------------
Income before minority interests 10,646,000 14,910,000 3,021,000 4,777,000
Minority interests in consolidated subsidiaries 1,019,000 2,224,000 192,000 813,000
------------- ------------- ------------- -------------
Net income $9,627,000 $12,686,000 $2,829,000 $3,964,000
============= ============= ============= =============
Net income per share:
Basic $.46 $.65 $.14 $.19
============= ============= ============= =============
Diluted $.43 $.57 $.13 $.18
============= ============= ============= =============
Weighted average number of common shares outstanding:
Basic 20,890,792 19,651,047 20,944,797 20,359,786
============= ============= ============= =============
Diluted 22,575,196 22,193,974 22,532,844 22,526,188
============= ============= ============= =============
Cash dividends per share $.050 $.045 $.025 $.023
============= ============= ============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine months ended July 31,
-----------------------------
2002 2001
------------ -------------
Cash flows from operating activities:
Net income $9,627,000 $12,686,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,345,000 7,961,000
Gain on sale of product line (1,230,000) --
Deferred income tax provision 3,053,000 668,000
Minority interests in consolidated subsidiaries 1,019,000 2,224,000
Tax benefit on stock option exercises 2,675,000 334,000
Gain on sale of property held for disposition -- (657,000)
Change in assets and liabilities, net of acquisitions:
Decrease in accounts receivable 6,607,000 1,781,000
Increase in inventories (4,434,000) (4,300,000)
Increase in prepaid expenses and other assets (2,127,000) (1,103,000)
Decrease in trade payables, accrued
expenses and other current liabilities (3,454,000) (425,000)
Decrease in income taxes payable (564,000) (8,187,000)
Other 86,000 (198,000)
------------ ------------
Net cash provided by operating activities 14,603,000 10,784,000
------------ ------------
Cash flows from investing activities:
Acquisitions and related costs, net of cash acquired (5,770,000) (27,352,000)
Capital expenditures (5,031,000) (4,249,000)
Proceeds from sale of product line -- 12,412,000
Proceeds from sale of long-term investments -- 7,039,000
Proceeds from sale of property held for disposition -- 2,157,000
Payment received from employee savings and investment
plan note receivable 648,000 803,000
Other 191,000 (387,000)
------------ ------------
Net cash used in investing activities (9,962,000) (9,577,000)
------------ ------------
Cash flows from financing activities:
Proceeds from revolving credit facility 5,000,000 24,000,000
Principal payments on long-term debt (8,021,000) (26,020,000)
Proceeds from the exercise of stock options 436,000 2,189,000
Cash dividends paid (1,045,000) (899,000)
Other (4,000) (3,000)
------------ ------------
Net cash used in financing activities (3,634,000) (733,000)
------------ ------------
Net increase in cash and cash equivalents 1,007,000 474,000
Cash and cash equivalents at beginning of year 4,333,000 4,807,000
------------ ------------
Cash and cash equivalents at end of period $5,340,000 $5,281,000
============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
July 31, 2002
1. 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 latest Annual Report on Form 10-K for the year ended October 31, 2001.
The October 31, 2001 condensed consolidated balance sheet was derived from
audited financial statements. In the opinion of management, the unaudited
condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation of the
condensed consolidated balance sheets, statements of operations and cash flows
for such interim periods presented. The results of operations for the nine
months ended July 31, 2002 are not necessarily indicative of the results which
may be expected for the entire fiscal year.
2. All net income per share, dividend per share, stock options and shares
outstanding information has been retroactively restated to reflect all stock
dividends.
3. In November 2001, the Company, through a subsidiary, acquired certain assets
and liabilities of an unrelated entity. The purchase price was not significant
to the Company's consolidated financial statements.
4. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141
requires that all business combinations be accounted for under the purchase
method. The statement further requires separate recognition of intangible assets
that meet one of two criteria. The statement applies to all business
combinations initiated after June 30, 2001. SFAS 142 requires that an intangible
asset that is acquired shall be initially recognized and measured based on its
fair value. Goodwill in each reporting unit must be tested for impairment as of
the beginning of the fiscal year in which SFAS 142 is initially applied in its
entirety. An entity has six months from the date it initially applies this
statement to complete the transitional impairment test. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. SFAS 142
also requires that reporting units based on an entity's reporting structure be
established. All goodwill recognized in an entity's statement of financial
position at the date SFAS 142 is initially applied shall be assigned to one or
more reporting units. SFAS 142 is effective for fiscal years beginning after
December 15, 2001.
The Company adopted the provisions of SFAS 142 effective the beginning of the
first quarter of fiscal 2002. These standards only permit prospective
application of the new accounting; accordingly, adoption of these standards will
not affect previously reported financial information. The principal effect of
implementing SFAS 142 was the cessation of the amortization of goodwill in the
first nine months of fiscal 2002. The Company has performed the transitional
impairment test which requires comparison of carrying values to fair values and
if appropriate,
5
the carrying value of impaired assets is reduced to fair value. As a result of
the test performed, the Company determined there was no goodwill impairment as
of the beginning of the first quarter of fiscal 2002. There can be no assurance
that future goodwill impairments will not occur. Intangible assets that are not
subject to amortization consist of goodwill. As of July 31, 2002, the carrying
value of goodwill amounted to $187.9 million. Pretax goodwill amortization in
the nine months and three months ended July 31, 2001 amounted to $5.0 million
($.15 per diluted share, net of tax) and $1.8 million ($.05 per diluted share,
net of tax), respectively.
The following table reflects a comparison of the current year to the comparable
prior year periods' results of operations and net income per share adjusted to
give effect to the adoption of SFAS 142:
Nine months ended July 31, Three months ended July 31,
------------------------------ ----------------------------
2002 2001 2002 2001
------------- -------------- ------------ -------------
Reported net income $9,627,000 $12,686,000 $2,829,000 $3,964,000
Add-back after tax goodwill amortization -- 3,249,000 -- 1,145,000
------------- -------------- ------------- -------------
Adjusted net income $9,627,000 $15,935,000 $2,829,000 $5,109,000
============= ============== ============= =============
Net income per share - basic $.46 $.65 $.14 $.19
Add-back after tax goodwill amortization -- .16 -- .06
------------- -------------- ------------- -------------
Adjusted net income per share - basic $.46 $.81 $.14 $.25
============= ============== ============= =============
Net income per share - diluted $.43 $.57 $.13 $.18
Add-back after tax goodwill amortization -- .15 -- .05
------------- -------------- ------------- -------------
Adjusted net income per share - diluted $.43 $.72 $.13 $.23
============= ============== ============= =============
The changes in the carrying amount of goodwill during the nine months ended July
31, 2002 by segment are as follows:
Consolidated
FSG ETG Total
---------------- ---------------- ----------------
Balances as of November 1, 2001 /1/ $114,637,000 $67,441,000 $182,078,000
Goodwill acquired during the year 3,437,000 -- 3,437,000
Adjustments to Goodwill 528,000 1,836,000 2,364,000
---------------- ---------------- ----------------
Balances as of July 31, 2002 $118,602,000 $69,277,000 $187,879,000
================ ================ ================
/1/ In the quarter ended July 31, 2002, one of the Company's subsidiaries
formerly included in the Electronic Technologies Group (ETG) was reclassified to
the Flight Support Group (FSG). Balances as of November 1, 2001 have been
retroactively restated to reflect the revised segment classification.
The increase in goodwill for the nine months ended July 31, 2002 resulted
primarily from the acquisition of assets and liabilities of an unrelated entity
in November 2001 and adjustments to the preliminary allocation of the purchase
price of other acquisitions based on updated fair value information of the
assets acquired and liabilities assumed as of the dates of acquisition.
6
Other intangible assets subject to amortization consist primarily of licenses,
loan costs, patents, and non-compete covenants. The gross carrying amount and
accumulated amortization of other intangible assets was $4.0 million and $2.1
million, respectively, as of July 31, 2002. Amortization expense of other
intangible assets for the nine months and three months ended July 31, 2002 was
$219,000 and $63,000, respectively. Amortization expense for the fiscal year
ended October 31, 2002 and the succeeding five fiscal years by year is expected
to be as follows: 2002 - $334,000; 2003 - $305,000; 2004 - $282,000; 2005 -
$240,000; 2006 - $116,000; 2007 - $115,000.
5. In September 2000, the Company sold a product line represented by a
wholly-owned subsidiary, Trilectron Industries, Inc. (Trilectron). At the time
of the sale, the Company accrued approximately $10.8 million for expenses
related to the sale. In the second quarter of fiscal 2002, the Company
recognized a $1.2 million pre-tax gain ($765,000 net of tax or $.03 per diluted
share) on sale of the Trilectron product line due to the elimination of certain
reserves upon the expiration of indemnification provisions of the sales
contract. The $1.2 million gain is reported as gain on sale of product line in
the condensed consolidated statements of operations.
6. Accounts receivable are composed of the following:
July 31, 2002 October 31, 2001
-------------- ----------------
Accounts receivable $26,471,000 $32,415,000
Less allowance for doubtful accounts (1,211,000) (909,000)
-------------- ----------------
Accounts receivable, net $25,260,000 $31,506,000
============== ================
7. Costs and estimated earnings on uncompleted percentage of completion
contracts are as follows:
July 31, 2002 October 31, 2001
--------------- -----------------
Costs incurred on uncompleted contracts $5,810,000 $7,709,000
Estimated earnings 7,349,000
6,224,000
--------------- ----------------
13,159,000 13,933,000
Less: Billings to date (14,108,000) (14,770,000)
--------------- ----------------
($949,000) ($837,000)
=============== ================
Included in accompanying balance
sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $1,193,000 $234,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated (2,142,000) (1,071,000)
earnings)
--------------- ----------------
($949,000) ($837,000)
=============== ================
Changes in estimates on long-term contracts accounted for under the percentage
of completion method did not have a significant impact on net income and diluted
net income per share in the nine months and three months ended July 31, 2002 and
2001.
7
8. Inventories are comprised of the following:
July 31, 2002 October 31, 2001
------------------- --------------------
Finished products $32,103,000 $27,791,000
Work in process 6,995,000 7,883,000
Materials, parts, assemblies and supplies 16,556,000 16,343,000
------------------- --------------------
Total inventories $55,654,000 $52,017,000
=================== ====================
Inventories related to long-term contracts were not significant as of July 31,
2002 and October 31, 2001.
9. Long-term debt consists of:
July 31, 2002 October 31, 2001
------------------- --------------------
Borrowings under revolving credit facility $62,000,000 $65,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Equipment loans 13,000 34,000
------------------- --------------------
63,993,000 67,014,000
Less current maturities (12,000) (27,000)
------------------- --------------------
$63,981,000 $66,987,000
=================== ====================
10. Pursuant to the Company's $120 million revolving credit facility (Credit
Facility) of which $62 million was outstanding as of July 31, 2002, funds are
available for funding acquisitions, working capital and general corporate
requirements on a revolving basis through July 2003. The Company has the option
to convert outstanding advances to term loans amortizing over a period through
July 2005. The weighted average interest rates were 2.8% and 3.4% at July 31,
2002 and October 31, 2001, respectively.
The interest rates on the Series 1988 industrial development revenue bonds were
1.4% and 2.1% at July 31, 2002 and October 31, 2001, respectively.
11. For the nine months ended July 31, 2002 and 2001, cost of sales amounts
included approximately $8.2 million and $5.4 million, respectively, of new
product research and development expenses. The expenses for the first nine
months of fiscal 2001 are net of $1.2 million in reimbursements pursuant to
research and development cooperation and joint venture agreements. The
reimbursements pursuant to such agreements in the nine months ended July 31,
2002 were not significant.
12. The Company's effective tax rate decreased from 38.3% in the first nine
months of fiscal 2001 to 34.8% in the first nine months of fiscal 2002 primarily
due to the elimination of goodwill amortization and a higher tax benefit on
export sales.
8
13. Information on operating segments for the nine months and three months ended
July 31, 2002 and 2001, respectively, for the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG) consisting of HEICO Electronic Technologies Corp. and
its subsidiaries is as follows:
Segments /1/
-----------------------------------
Other,
Primarily
Corporate and
Intersegment Consolidated
FSG ETG Sales Totals
--------------- --------------- ---------------- ---------------
For the nine months ended July 31, 2002:
- -------------------------------------------
Net sales $88,316,000 $38,734,000 ($450,000) $126,600,000
Depreciation and amortization 2,266,000 860,000 219,000 3,345,000
Operating income 11,683,000 8,789,000 (3,753,000) 16,719,000
Capital expenditures 2,775,000 1,461,000 795,000 5,031,000
For the nine months ended July 31, 2001:
- -------------------------------------------
Net sales $99,664,000 $25,573,000 $ - $125,237,000
Depreciation and amortization 6,021,000 1,732,000 208,000 7,961,000
Operating income 22,423,000 5,323,000 (3,428,000) 24,318,000
Capital expenditures 2,889,000 634,000 726,000 4,249,000
For the three months ended July 31, 2002:
- -------------------------------------------
Net sales $29,724,000 $12,970,000 ($107,000) $42,587,000
Depreciation and amortization 799,000 295,000 70,000 1,164,000
Operating income 3,577,000 2,698,000 (1,321,000) 4,954,000
Capital expenditures 582,000 337,000 765,000 1,684,000
For the three months ended July 31, 2001:
- -------------------------------------------
Net sales $34,877,000 $8,968,000 $ - $43,845,000
Depreciation and amortization 2,256,000 637,000 78,000 2,971,000
Operating income 7,754,000 1,369,000 (1,054,000) 8,069,000
Capital expenditures 837,000 254,000 22,000 1,113,000
Total assets held by the operating segments as of July 31, 2002 and October 31, 2001 are as follows:
Segments /1/
-------------------------------------
Other,
Primarily Consolidated
FSG ETG Corporate Totals
----------------- ---------------- -------------- ---------------
As of July 31, 2002 $221,230,000 $101,620,000 $11,546,000 $334,396,000
As of October 31, 2001 $213,000,000 $101,818,000 $10,822,000 $325,640,000
/1/ In the quarter ended July 31, 2002, one of the Company's subsidiaries
formerly included in the Electronic Technologies Group was reclassified to the
Flight Support Group. Prior period amounts have been retroactively restated to
reflect the revised segment classification.
9
14. The Company's comprehensive income consists of:
Nine months ended July 31, Three months ended July 31,
------------------------------------ -----------------------------------
2002 2001 2002 2001
----------------- --------------- -------------- ----------------
Net income $9,627,000 $12,686,000 $2,829,000 $3,964,000
Interest rate swap income (loss)
adjustment 370,000 (417,000) -- (17,000)
Tax (expense) benefit (144,000) 162,000 -- 6,000
----------------- --------------- -------------- ----------------
Comprehensive income $9,853,000 $12,431,000 $2,829,000 $3,953,000
================= =============== ============== ================
15. The following is a reconciliation between the weighted average outstanding
shares used in the calculation of basic and diluted net income per share.
Nine months ended July 31, Three months ended July 31,
------------------------------------ -----------------------------------
2002 2001 2002 2001
----------------- --------------- -------------- ----------------
Weighted average common shares
outstanding 20,890,792 19,651,047 20,944,797 20,359,786
Net effect of dilutive stock options 1,684,404 2,542,927 1,588,047 2,166,402
----------------- --------------- -------------- ----------------
Weighted average common shares
outstanding - assuming dilution 22,575,196 22,193,974 22,532,844 22,526,188
================= =============== ============== ================
Options outstanding which are not
included in the calculation of
diluted net income per share
because their impact is anti-dilutive 1,020,216 588,727 1,300,918 508,861
================= =============== ============== ================
16. The Company is involved in various legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these matters will not
have a significant effect on the Company's condensed consolidated financial
statements.
17. The Company recently completed a tax audit with the Internal Revenue Service
that will result in recovery of a portion of taxes paid in prior years. The
recovery, net of expenses, including professional fees and interest is expected
to increase fourth quarter fiscal 2002 earnings by approximately $2 million, or
$.08 - $.09 per diluted share.
18. As partial consideration in the acquisition of Inertial Airline Services,
Inc. (IAS) in August 2001, the Company issued $5 million in HEICO Class A Common
shares and guaranteed that the resale value of such Class A Common shares would
be at least $5 million through August 31, 2002, which both parties agreed to
extend to August 31, 2003. Based on the closing market price of the HEICO Class
A Common shares on August 31, 2002, the Company would have been required to pay
IAS an additional amount of approximately $2.5 million in cash. Pursuant to the
terms of the Note Receivable from IAS, which is secured by such Class A Common
shares, IAS would be required to use the $2.5 million to reduce the Company's
Note Receivable.
19. In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supercedes
SFAS Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." SFAS 144 applies to all
long-lived assets (including discontinued operations) and consequently amends
Accounting Principles Board No. 30, "Reporting Results of Operations -
10
Reporting the Effects of Disposal of a Segment of a Business" (APB 30). SFAS 144
develops one accounting model (based on the model in SFAS 121) for long-lived
assets that are to be disposed of by sale, as well as addresses the principal
implementation issues. SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of carrying value or fair value
less cost to sell. That requirement eliminates the requirement of APB 30 that
discontinued operations be measured at net realizable value or that entities
include under "discontinued operations" in the financial statements amounts for
operating losses that have not yet occurred. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. While the Company has not completed the process of determining the
effect of this new accounting pronouncement on its consolidated financial
statements, the Company currently expects that the effect of SFAS No. 144 on the
Company's financial statements, when it becomes effective, will not be
significant. SFAS 144 is effective for fiscal years beginning after December 15,
2001 and generally the provisions of the statement will be applied
prospectively.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement eliminates the SFAS 4 requirement that gains and losses from
extinguishment of debt be classified as an extraordinary item, and requires that
such gains and losses be evaluated for extraordinary classification under the
criteria of APB 30, "Reporting Results of Operations." This statement also
amends SFAS 13 to require that certain lease modifications that have economic
effects that are similar to sales-leaseback transactions be accounted for in the
same manner as sales-leaseback transactions. SFAS 145 also makes various other
technical corrections to existing pronouncements. This statement is effective
for fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of SFAS 145 to have a material effect on its results of operations or
financial position.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)" (EITF 94-3). SFAS 146 requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred, as opposed to when the entity commits
to an exit plan under EITF 94-3. SFAS 146 also establishes that fair value is
the objective for the initial measurement of the liability. This statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS 146 to have a material effect on
its results of operations or financial position.
11
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 at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those estimates
if different assumptions were used or different events ultimately transpire.
Our Flight Support Group (FSG) consists of HEICO Aerospace Holdings Corp. (HEICO
Aerospace) and its subsidiaries and our Electronic Technologies Group (ETG)
consists of HEICO Electronic Technologies Corp. and its subsidiaries.
In November 2001, the Company, through a FSG subsidiary, acquired certain assets
and liabilities of an unrelated entity. The purchase price was not significant
to the Company's consolidated financial statements.
All net income per share information has been retroactively restated to reflect
all stock dividends.
Critical Accounting Policies
The Company believes that the following are its most critical accounting
policies, some of which require management to make judgments about matters that
are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon shipment of products
and the rendering of services. Revenue from certain fixed price contracts for
which costs can be dependably estimated are recognized on the percentage of
completion method, measured by the cost-to-cost method. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For contracts in which costs cannot be dependably estimated,
revenue is recognized on the completed-contract method. A contract is considered
complete when all costs except insignificant items have been incurred or the
item has been accepted by the customer. The aggregate effects of changes in
estimates relating to inventories and/or long-term contracts were not material
in the third quarter and first nine months of fiscal 2002.
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company provide for
estimated bad debts, by recording allowances based upon the Company's
experience, economic conditions, and a significant negative change in a
customer's financial condition. Actual bad debts could differ from estimates
used.
12
Inventories
Portions of the inventories are stated at the lower of cost or market, with cost
being determined on the first-in, first-out basis. The remaining portions of the
inventories are stated at the lower of cost or market, on a per contract basis,
with estimated total contract costs being allocated ratably to all units. The
effects of changes in estimated total contract costs are recognized in the
period determined. Losses, if any, are recognized fully when identified.
The Company periodically evaluates inventory levels, giving consideration to
factors such as the physical condition of the inventory, sales patterns and
expected future demand and estimates a reasonable amount to be provided for slow
moving, obsolete or damaged inventory. These estimates could vary significantly,
either favorably or unfavorably, from actual requirements based upon future
economic conditions, customer inventory levels or competitive factors that were
not foreseen or did not exist when the valuation allowances were established.
Goodwill
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), effective
the beginning of the first quarter of fiscal 2002. The principal effect of
implementing SFAS 142 was the cessation of the amortization of goodwill in the
first nine months of fiscal 2002. The Company has performed the transitional
impairment test which requires comparison of carrying values to fair values and
if appropriate, the carrying value of impaired assets is reduced to fair value.
As a result of the test performed, the Company determined there was no goodwill
impairment as of the beginning of the first quarter of fiscal 2002. The test
required estimates, assumptions and judgments and results could be materially
different if different estimates, assumptions and judgments had been used. There
can be no assurance that future goodwill impairments will not occur. Intangible
assets that are not subject to amortization consist of goodwill. As of July 31,
2002, goodwill amounted to $187.9 million.
Results of Operations
The Company's results of operations in the first nine months of fiscal 2002
compared to the same period in fiscal 2001 has been significantly affected by
the terrorist attacks of September 11, 2001 (September 11th), the adoption of
SFAS 142 and the results of operations from businesses acquired in fiscal 2001.
For the periods indicated below, the following tables set forth the results of
operations, net sales and operating income by operating segment and the
percentage of net sales represented by the respective items.
Nine months ended July 31, Three months ended July 31,
----------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- ---------------- -------------- --------------
Net sales $126,600,000 $125,237,000 $42,587,000 $43,845,000
--------------- ---------------- -------------- --------------
Cost of sales 81,455,000 71,786,000 27,651,000 25,802,000
Selling, general and administrative expenses 28,426,000 29,133,000 9,982,000 9,974,000
--------------- ---------------- -------------- --------------
Total operating costs and expenses 109,881,000 100,919,000 37,633,000 35,776,000
--------------- ---------------- -------------- --------------
Operating income $16,719,000 $24,318,000 $4,954,000 $8,069,000
=============== ================ ============== ==============
13
Nine months ended July 31, Three months ended July 31,
-------------------------------------- ---------------------------------
2002 2001 2002 2001
----------------- ----------------- -------------- --------------
Net sales by segment: /1/
FSG $88,316,000 $99,664,000 $29,724,000 $34,877,000
ETG 38,734,000 25,573,000 12,970,000 8,968,000
Intersegment sales (450,000) - (107,000) -
----------------- ----------------- -------------- --------------
$126,600,000 $125,237,000 $42,587,000 $43,845,000
================= ================= ============== ==============
Operating income by segment: /1/
FSG $11,683,000 $22,423,000 $3,577,000 $7,754,000
ETG 8,789,000 5,323,000 2,698,000 1,369,000
Other, primarily corporate (3,753,000) (3,428,000) (1,321,000) (1,054,000)
----------------- ----------------- -------------- --------------
$16,719,000 $24,318,000 $4,954,000 $8,069,000
================= ================= ============== ==============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 35.7% 42.7% 35.1% 41.2%
Selling, general and
administrative expense 22.5% 23.3% 23.4% 22.7%
Operating income 13.2% 19.4% 11.6% 18.4%
Interest expense 1.4% 1.3% 1.1% 1.4%
Interest and other income 0.1% 1.2% - 0.3%
Gain on sale of product line 1.0% - - -
Income tax expense 4.5% 7.4% 3.5% 6.4%
Minority interests 0.8% 1.8% 0.5% 1.9%
Net income 7.6% 10.1% 6.6% 9.0%
/1/ In the quarter ended July 31, 2002, one of the Company's subsidiaries
formerly included in the Electronic Technologies Group was reclassified to the
Flight Support Group. Prior period results have been retroactively restated to
reflect the revised segment classification.
Comparison of First Nine Months of Fiscal 2002 to First Nine Months of Fiscal
2001
Net Sales
Net sales for the first nine months of fiscal 2002 totaled $126.6 million, up 1%
when compared to net sales of $125.2 million the first nine months of fiscal
2001. The increase in sales for the first nine months of fiscal 2002 reflects an
increase of $13.2 million (a 51% increase) to $38.7 million in sales from the
ETG, partially offset by a decrease of $11.3 million (an 11% decrease) to $88.3
million in sales from the FSG. The ETG sales increase mainly reflects revenues
resulting from acquisitions as the Company expanded its capabilities to include
laser and navigation technologies. This increase was partially offset by lower
sales of electromagnetic interference (EMI) shielding products to the
electronics and communications industries. The FSG sales decrease mainly
reflects the continued impact of the terrorist attacks of September 11th on
commercial airline customers and continued softness in demand within the
component overhaul and repair services market, particularly from cargo carriers,
which resulted in lower FAA-approved (PMA) parts and overhaul services sales.
This decrease was partially offset by revenues from newly-acquired businesses.
The increase in sales attributable to newly-acquired businesses of both the ETG
and FSG approximated $20.9 million.
14
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 35.7% for the first nine months of
fiscal 2002 as compared to 42.7% for the first nine months of fiscal 2001. This
decrease reflects lower margins within the FSG primarily attributable to lower
sales of higher margin PMA parts and overhaul services discussed above, and a
budgeted increase in new product research and development expenses of $2.8
million. The decrease was partially offset by slightly higher gross margins in
the ETG due primarily to increased sales of higher margin defense related
products. Cost of sales amounts for the first nine months of fiscal 2002 and
fiscal 2001 include approximately $8.2 million and $5.4 million, respectively,
of new product research and development expenses net of reimbursements pursuant
to cooperation and joint venture agreements. FSG's new product research and
development expense for the full fiscal 2002 is expected to increase by
approximately $3 million over fiscal 2001 as the Company plans to introduce
additional new commercial jet engine and aircraft parts.
Selling, general and administrative (SG&A) expenses decreased to $28.4 million
for the first nine months of fiscal 2002 from $29.1 million for the first nine
months of fiscal 2001. As a percentage of net sales, SG&A expenses decreased to
22.5% for the first nine months of fiscal 2002 compared to 23.3% for the first
nine months of fiscal 2001. The decrease in SG&A and SG&A as a percentage of
sales is mainly due to the elimination of goodwill amortization ($5.0 million)
as required under SFAS 142, partially offset by additional SG&A expenses of
newly-acquired businesses and accelerated marketing efforts.
Operating Income
Operating income decreased to $16.7 million for the first nine months of fiscal
2002 from $24.3 million for the first nine months of fiscal 2001. As a
percentage of net sales, operating income decreased from 19.4% in the first nine
months of fiscal 2001 to 13.2% in the first nine months of fiscal 2002. The
decrease in operating income reflects a decrease from $22.4 million to $11.7
million in the Company's FSG partially offset by an increase from $5.3 million
to $8.8 million in the Company's ETG. The decline in operating income as a
percentage of net sales reflects a decline in the FSG's operating income as a
percentage of net sales from 22.5% in the first nine months of fiscal 2001 to
13.2% in the first nine months of fiscal 2002 while the ETG's operating income
as a percentage of net sales increased from 20.8% in the first nine months of
fiscal 2001 to 22.7% in the first nine months of fiscal 2002. The decrease in
the FSG's operating income and operating income as a percentage of net sales
reflects the lower sales and gross margins discussed above. The lower margins in
the FSG were partially offset by the elimination of goodwill amortization of
$3.7 million and the operating income of acquired businesses. The increase in
ETG's operating income and operating income as a percentage of net sales
reflects the higher defense related sales discussed above, the elimination of
goodwill amortization of $1.3 million and operating income from acquired
businesses.
15
Interest Expense
Interest expense increased by $66,000 to $1.7 million from the first nine months
of fiscal 2001 to the first nine months of fiscal 2002. The increase was
principally due to higher borrowings under the Company's Credit Facility used to
fund acquisitions, partially offset by lower interest rates.
Interest and Other Income
Interest and other income decreased from $1.5 million for the first nine months
of fiscal 2001 to $104,000 for the first nine months of fiscal 2002. The
decrease is mainly due to the inclusion in fiscal 2001 of a gain of $657,000 on
the sale of property retained in the sale of the Trilectron product line sold in
September 2000 and a realized gain of $179,000 on the sale of long-term
investments. The decrease also reflects lower investment interest rates and
other income in the first nine months of fiscal 2002.
Gain on Sale of Product Line
In the second quarter of fiscal 2002, the Company recognized an additional
pretax gain of $1,230,000 ($765,000 net of tax or $.03 per diluted share) on
sale of the Trilectron product line due to the elimination of certain reserves
upon the expiration of indemnification provisions of the sales contract.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. The decrease from the first nine months of
fiscal 2001 to the first nine months of fiscal 2002 was primarily due to lower
earnings of the FSG.
Income Tax Expense
The Company's effective tax rate was 34.8% in the first nine months of fiscal
2002 and 38.3% in the first nine months of fiscal 2001. The decrease is
primarily due to the elimination of goodwill amortization and a higher tax
benefit on export sales.
Net Income
The Company's net income was $9.6 million, or $.43 per diluted share, in the
first nine months of fiscal 2002 and $12.7 million, or $.57 per diluted share,
in the first nine months of fiscal 2001. For the first nine months of fiscal
2001, net income as adjusted on a proforma basis for the adoption of SFAS 142
would have been $15.9 million, or $.72 per diluted share. The lower net income
in the first nine months of fiscal 2002 reflects the lower operating income
discussed above, partially offset by the additional gain on sale of the
Trilectron product line.
16
Outlook
The Company's fiscal 2002 results to-date have been negatively impacted by the
events of September 11th coupled with a weak economy as sales to commercial
airlines fell after rising throughout fiscal 2001 prior to the attacks. The
Company's diversification of its operations beyond commercial aerospace has
helped cushion the impact of September 11th. Including sales from newly-acquired
businesses, revenues from defense customers in fiscal 2002 increased over 50%
compared to the first nine months of fiscal 2001 and represent approximately 25%
of the Company's total revenues in the first nine months of fiscal 2002. In
addition, approximately 10% of the Company's total revenues in the first nine
months of fiscal 2002 were derived from markets other than the aviation and
defense industries, including industrial, medical, electronics and
telecommunications. The Company currently expects continued strengthening of its
defense markets and low to modest growth in other markets.
As previously stated, the Company has increased its new product research and
development budget for FAA-approved replacement parts by over 50% in fiscal 2002
and accelerated marketing activities. While such expenditures have negatively
impacted near-term earnings, the Company expects such efforts will significantly
benefit future periods. Furthermore, the Company's strategic relationships with
some of the world's major airlines demonstrate its focus on medium and long-term
growth opportunities.
Operating results in the third quarter of fiscal 2002 were negatively impacted
by softer demand for the Company's products and services by its commercial
airline customers following some strengthening in the second quarter of fiscal
2002. This reflects a slower recovery within the commercial airline industry
than previously anticipated. Also, the third quarter of fiscal 2002 was
negatively impacted by some delays in shipments of foreign military sales
resulting from delays in approvals by government agencies. These shipments are
expected to be made in the fourth quarter of fiscal 2002 and the first quarter
of fiscal 2003.
For the balance of fiscal 2002, the Company expects some improvement in demand
for its products and services from commercial airlines and continued strength
within its defense related products and services. In addition, the Company
recently completed a tax audit that will result in recovery of a portion of
taxes paid in prior years, which is expected to increase fourth quarter earnings
by approximately $2 million ($.08-$.09 per share), net of expenses, including
professional fees and interest. Despite the softness in the commercial airline
industry, the Company estimates that earnings per share for fiscal 2002,
including the tax recovery, will be in the range of $.65-$.70 per share.
At this time, the Company expects considerable improvement in fiscal 2003 over
fiscal 2002. While weakness in the airline industry may continue into the
foreseeable future, the Company believes that its basic strategies will result
in long-term growth.
Comparison of Third Quarter of Fiscal 2002 to Third Quarter of Fiscal 2001
Net Sales
Net sales for the third quarter of fiscal 2002 totaled $42.6 million, down 3%
when compared to net sales of $43.8 million for the third quarter of fiscal
2001. The decrease in net sales reflects a
17
decrease of $5.2 million (a 15% decrease) to $29.7 million in sales from the
FSG, partially offset by an increase of $4.0 million (a 45% increase) to $13.0
million in sales from the ETG. The FSG sales decrease mainly reflects the
continued impact of the terrorist attacks of September 11th on commercial
airline customers. This decrease was partially offset by revenues from
newly-acquired businesses. The ETG sales increase reflects the acquisition of
Inertial Airline Services (acquired August 2001) as the Company expanded its
aircraft accessory component repair and overhaul operations, and increased
revenues from defense customers. The increase in sales attributable to
newly-acquired businesses of both the ETG and FSG approximated $4.6 million.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 35.1% for the third quarter of
fiscal 2002 as compared to 41.2% for the third quarter of fiscal 2001. This
decrease reflects lower margins within the FSG primarily attributable to lower
sales of higher margin PMA parts and a budgeted increase in new product research
and development expenses of $0.4 million. The decrease was partially offset by
slightly higher gross margins in the ETG due primarily to increased sales of
higher margin defense related products. Cost of sales amounts for the third
quarter of fiscal 2002 and fiscal 2001 include approximately $3.0 million and
$2.5 million, respectively, of new product research and development expenses net
of reimbursements pursuant to cooperation and joint venture agreements.
Selling, general and administrative (SG&A) expenses were $10.0 million for the
third quarter of fiscal 2002 and the third quarter of fiscal 2001. As a
percentage of net sales, SG&A expenses increased to 23.4% for the third quarter
of fiscal 2002 compared to 22.7% for the third quarter of fiscal 2001. The
increase in SG&A as a percentage of net sales is mainly due to accelerated
marketing efforts and the decline in sales discussed above, partially offset by
the elimination of goodwill amortization ($1.8 million) as required under SFAS
142.
Operating Income
Operating income decreased to $5.0 million for the third quarter of fiscal 2002
from $8.1 million for the third quarter of fiscal 2001. As a percentage of net
sales, operating income decreased from 18.4% in the third quarter of fiscal 2001
to 11.6% in the third quarter of fiscal 2002. The decrease in operating income
reflects a decrease from $7.8 million to $3.6 million in the Company's FSG
partially offset by an increase from $1.4 million to $2.7 million in the
Company's ETG. The decline in operating income as a percentage of net sales
reflects a decline in the FSG's operating income as a percentage of net sales
from 22.2% in the third quarter of fiscal 2001 to 12.0% in the third quarter of
fiscal 2002 partially offset by an increase in the ETG's operating income as a
percentage of net sales from 15.3% in the third quarter of fiscal 2001 to 20.8%
in the third quarter of fiscal 2002. The decrease in the FSG's operating income
and operating income as a percentage of net sales reflects the lower sales and
gross margins discussed previously. The lower margins in the FSG were partially
offset by the elimination of goodwill amortization of $1.3 million. The increase
in the ETG's operating income and operating income as a percentage of net sales
reflects the higher defense related sales discussed previously, the elimination
of goodwill amortization of $0.5 million and operating income from acquired
businesses.
18
Interest Expense
Interest expense decreased $132,000 to $473,000 from the third quarter of fiscal
2001 to the third quarter of fiscal 2002. The decrease was principally due to
lower interest rates, partially offset by higher borrowings under the Company's
Credit Facility to fund acquisitions.
Interest and Other Income
Interest and other income decreased from $113,000 to $12,000 from the third
quarter of fiscal 2001 to the third quarter of fiscal 2002. The decrease
reflects lower investment interest rates and other income in the third quarter
of fiscal 2002.
Income Tax Expense
The Company's effective tax rate decreased to 32.8% in the third quarter of
fiscal 2002 from 37.0% in the third quarter of fiscal 2001. The decrease is
primarily due to the elimination of goodwill amortization and a higher tax
benefit on export sales.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. The decrease from the third quarter of fiscal
2001 to the third quarter of fiscal 2002 was primarily due to lower earnings of
the FSG.
Net Income
The Company's net income was $2.8 million, or $.13 per diluted share, in the
third quarter of fiscal 2002 and $4.0 million, or $.18 per diluted share, in the
third quarter of fiscal 2001. For the third quarter of fiscal 2001, net income
as adjusted on a proforma basis for the adoption of SFAS 142 would have been
$5.1 million, or $.23 per diluted share. The lower net income in the third
quarter of fiscal 2002 reflects the lower operating income discussed previously.
Inflation
The Company has generally experienced increases in its costs of labor, materials
and services consistent with overall rates of inflation. The impact of such
increases on the Company's net income has been generally minimized by efforts to
lower costs through manufacturing efficiencies and cost reductions.
Liquidity and Capital Resources
The Company generates cash primarily from operating activities and financing
activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include payments of interest and principal
on debt, acquisitions, capital expenditures and increases in working capital.
19
The Company believes that operating cash flow and available borrowings under the
Company's Credit Facility will be sufficient to fund cash requirements for the
foreseeable future.
Operating Activities
The Company's cash flow from operations was $14.6 million for the first nine
months of fiscal 2002, consisting primarily of net income of $9.6 million,
depreciation and amortization of $3.3 million, deferred income tax provision of
$3.1 million, tax benefit on stock option exercises of $2.7 million, partially
offset by an increase in net operating assets of $4.0 million, mainly due to
higher inventories in the FSG associated with new products.
Investing Activities
The principal cash used in investing activities in the first nine months of
fiscal 2002 was acquisition related costs and capital expenditures of
approximately $5.8 million and $5.0 million, respectively.
Financing Activities
The Company's principal financing activities during the first nine months of
fiscal 2002 included net payments of $3.0 million to reduce borrowings under the
Company's Credit Facility and the payment of cash dividends of $1.0 million.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supercedes SFAS Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business" (APB 30). SFAS 144 develops one
accounting model (based on the model in SFAS 121) for long-lived assets that are
to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of carrying value or fair value less cost to sell.
That requirement eliminates the requirement of APB 30 that discontinued
operations be measured at net realizable value or that entities include under
"discontinued operations" in the financial statements amounts for operating
losses that have not yet occurred. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
While the Company has not completed the process of determining the effect of
this new accounting pronouncement on its consolidated financial statements, the
Company currently expects that the effect of SFAS No. 144 on the Company's
financial statements, when it becomes effective, will not be significant. SFAS
144 is effective for fiscal years beginning after December 15, 2001 and
generally the provisions of the statement will be applied prospectively.
20
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement eliminates the SFAS 4 requirement that gains and losses from
extinguishment of debt be classified as an extraordinary item, and requires that
such gains or losses be evaluated for extraordinary classification under the
criteria of APB 30, "Reporting Results of Operations." This statement also
amends SFAS 13 to require that certain lease modifications that have economic
effects that are similar to sales-leaseback transactions be accounted for in the
same manner as sales-leaseback transactions. SFAS 145 also makes various other
technical corrections to existing pronouncements. This statement is effective
for fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of SFAS 145 to have a material effect on its results of operations or
financial position.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)" (ETIF 94-3). SFAS 146 requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred, as opposed to when the entity commits
to an exit plan under EITF 94-3. SFAS 146 also establishes that fair value is
the objective for the initial measurement of the liability. This statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS 146 to have a material effect on
its results of operations or financial position.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking," including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's shareholders. Management believes that all statements
that express expectations and projections with respect to future matters may
differ materially from that discussed as a result of factors, including, but not
limited to, the demand for commercial air travel, the adverse impact of the
September 11, 2001 terrorist attacks on commercial airlines and the economy in
general, the extent of benefits received by U.S. airlines and air cargo carriers
under the Air Transportation Safety and System Stabilization Act, considering
any challenges to and interpretations or amendments of the Act, increasing cost
of insurance coverage as a result of the September 11, 2001 terrorist attacks,
credit risk related to receivables from customers, product specification costs
and requirements, governmental and regulatory demands, competition on military
programs, government export policies, government funding of military programs,
product pricing levels, the Company's ability to make acquisitions and achieve
operating synergies from such acquisitions, interest rates and economic
conditions within and outside of the aerospace, defense and electronics
industries. For an enterprise such as the Company, a wide range of factors could
materially affect future developments and performance. A list of such factors is
set forth in the Company's Annual Report on Form 10-K for the year ended October
31, 2001.
21
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 at July 31, 2002, a change of 1% in
interest rates would cause a change in interest expense of approximately
$640,000 on an annual basis.
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) There were no reports on Form 8-K filed during the three months ended
July 31, 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HEICO CORPORATION
-----------------
(Registrant)
September 13, 2002 BY /s/Thomas S. Irwin
- ------------------------- ----------------------------------
Date Thomas S. Irwin, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
24
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 in order 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 quarterly report; and
(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 quarterly report.
September 13, 2002 /S/ LAURANS A. MENDELSON
- ----------------------------- ------------------------
Date Laurans A. Mendelson
Chief Executive Officer
25
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 in order 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
quarterly report; and
(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 quarterly report.
September 13, 2002 /S/ THOMAS S. IRWIN
- -------------------------------- -------------------
Date Thomas S. Irwin
Chief Financial Officer
26
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HEICO Corporation (the "Company") on
Form 10-Q for the period ended July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Laurans A. Mendelson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/S/ LAURANS A. MENDELSON
------------------------
Laurans A. Mendelson
Chief Executive Officer
September 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HEICO Corporation (the "Company") on
Form 10-Q for the period ended July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas S. Irwin, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/S/ THOMAS S. IRWIN
------------------------
Thomas S. Irwin
Chief Financial Officer
September 13, 2002
