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, 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 August 31, 2006:
Common Stock, $.01 par value 10,297,064 shares
Class A Common Stock, $.01 par value 15,026,802 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of July 31, 2006 and October 31, 2005..................................2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2006 and 2005.........3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 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......................................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................34
Item 4. Controls and Procedures....................................................35
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................36
Item 6. Exhibits...................................................................36
Signature.................................................................................37
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JULY 31, OCTOBER 31,
2006 2005
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,371,000 $ 5,330,000
Accounts receivable, net 61,831,000 47,668,000
Inventories, net 90,668,000 62,758,000
Prepaid expenses and other current assets 3,990,000 3,159,000
Deferred income taxes 9,030,000 7,218,000
--------------- ---------------
Total current assets 171,890,000 126,133,000
Property, plant and equipment, net 48,894,000 46,663,000
Goodwill 272,037,000 248,229,000
Other assets 21,517,000 14,599,000
--------------- ---------------
Total assets $ 514,338,000 $ 435,624,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 56,000 $ 63,000
Trade accounts payable 18,023,000 11,129,000
Accrued expenses and other current liabilities 33,152,000 32,473,000
Income taxes payable 1,606,000 6,285,000
--------------- ---------------
Total current liabilities 52,837,000 49,950,000
Long-term debt, net of current maturities 60,030,000 34,061,000
Deferred income taxes 27,762,000 22,431,000
Other non-current liabilities 5,537,000 6,644,000
--------------- ---------------
Total liabilities 146,166,000 113,086,000
--------------- ---------------
Minority interests in consolidated subsidiaries 61,097,000 49,035,000
--------------- ---------------
Commitments and contingencies (Note 12)
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; 10,296,989 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; 15,015,718 and
14,517,669 shares issued and outstanding, respectively 150,000 145,000
Capital in excess of par value 205,424,000 192,523,000
Accumulated other comprehensive income (loss) 36,000 (65,000)
Retained earnings 101,362,000 80,799,000
--------------- ---------------
Total shareholders' equity 307,075,000 273,503,000
--------------- ---------------
Total liabilities and shareholders' equity $ 514,338,000 $ 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
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Net sales $ 282,365,000 $ 193,123,000 $ 102,172,000 $ 69,169,000
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Cost of sales 179,192,000 121,799,000 64,587,000 43,170,000
Selling, general and administrative
expenses 53,879,000 39,481,000 20,197,000 14,250,000
--------------- --------------- --------------- ---------------
Total operating costs and expenses 233,071,000 161,280,000 84,784,000 57,420,000
--------------- --------------- --------------- ---------------
Operating income 49,294,000 31,843,000 17,388,000 11,749,000
Interest expense (2,627,000) (785,000) (958,000) (252,000)
Interest and other income 365,000 421,000 111,000 341,000
--------------- --------------- --------------- ---------------
Income before income taxes and minority
interests 47,032,000 31,479,000 16,541,000 11,838,000
Income tax expense 16,193,000 11,430,000 5,462,000 4,294,000
--------------- --------------- --------------- ---------------
Income before minority interests 30,839,000 20,049,000 11,079,000 7,544,000
Minority interests' share of income 8,272,000 3,862,000 2,803,000 1,498,000
--------------- --------------- --------------- ---------------
Net income $ 22,567,000 $ 16,187,000 $ 8,276,000 $ 6,046,000
=============== =============== =============== ===============
Net income per share:
Basic $ .90 $ .66 $ .33 $ .25
Diluted $ .85 $ .62 $ .31 $ .23
Weighted average number of common
shares outstanding:
Basic 24,997,560 24,425,235 25,291,566 24,500,372
Diluted 26,521,065 26,280,695 26,710,192 26,368,520
Cash dividends per share $ 0.080 $ 0.050 $ 0.040 $ 0.025
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
NINE MONTHS ENDED JULY 31,
----------------------------------
2006 2005
--------------- ---------------
Operating Activities:
Net income $ 22,567,000 $ 16,187,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,636,000 5,267,000
Deferred income tax provision 2,839,000 2,914,000
Minority interests' share of income 8,272,000 3,862,000
Tax benefit from stock option exercises 7,252,000 2,826,000
Excess tax benefit from stock option exercises (1,139,000) --
Stock option compensation expense 1,187,000 1,000
Changes in assets and liabilities, net
of acquisitions:
Increase in accounts receivable (6,690,000) (2,760,000)
Increase in inventories (11,038,000) (8,833,000)
Increase in prepaid expenses and other
current assets (148,000) (352,000)
Increase in trade accounts payables, accrued
expenses and other current liabilities 2,111,000 4,136,000
Decrease in income taxes payable (4,705,000) (2,257,000)
Other 16,000 (27,000)
--------------- ---------------
Net cash provided by operating activities 27,160,000 20,964,000
--------------- ---------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (45,618,000) (19,043,000)
Capital expenditures (7,055,000) (6,804,000)
Proceeds from sale of building held for sale -- 3,520,000
Other 539,000 224,000
--------------- ---------------
Net cash used in investing activities (52,134,000) (22,103,000)
--------------- ---------------
Financing Activities:
Borrowings on revolving credit facility 46,000,000 22,000,000
Payments on revolving credit facility (20,000,000) (18,000,000)
Borrowings on short-term line of credit 1,000,000 --
Payments on short-term line of credit (3,000,000) --
Cash dividends paid (2,004,000) (1,224,000)
Proceeds from stock option exercises 4,471,000 1,338,000
Excess tax benefit from stock option exercises 1,139,000 --
Other (1,638,000) (554,000)
--------------- ---------------
Net cash provided by financing activities 25,968,000 3,560,000
--------------- ---------------
Effect of exchange rate changes on cash 47,000 --
--------------- ---------------
Net increase in cash and cash equivalents 1,041,000 2,421,000
Cash and cash equivalents at beginning of year 5,330,000 214,000
--------------- ---------------
Cash and cash equivalents at end of period $ 6,371,000 $ 2,635,000
=============== ===============
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 nine months ended July 31, 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 No. 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 No. 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 on or after November 1, 2005 ("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 nine months ended July 31, 2006, the excess tax benefit from
stock option exercises of $1,139,000 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 nine months and three months ended July 31, 2006 includes compensation
expense of $1,187,000 and $300,000, respectively, and income tax benefit related
to the Company's stock options of $351,000 and $84,000, 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 Statements 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 nine months
and three months ended July 31, 2005:
NINE MONTHS THREE MONTHS
ENDED ENDED
JULY 31, 2005 JULY 31, 2005
--------------- ---------------
Net income, as reported $ 16,187,000 $ 6,046,000
Add: Stock-based employee compensation
expense included in reported net income, net of tax 1,000 --
Deduct: Stock-based employee compensation
expense determined under a fair-value method,
net of tax (902,000) (280,000)
--------------- ---------------
Pro forma net income $ 15,286,000 $ 5,766,000
=============== ===============
Net income per share:
Basic - as reported $ .66 $ .25
Basic - pro forma $ .63 $ .24
Diluted - as reported $ .62 $ .23
Diluted - pro forma $ .58 $ .22
Further information regarding stock options can be found in Note 8, 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.
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109," which seeks to reduce the
diversity in practice associated with the accounting and reporting for
uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in an income tax return. FIN 48 presents a two-step process for evaluating
a tax position. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
based on the technical merits of the position. The second step is to measure the
benefit to be recorded from tax positions that meet the more-likely-than-not
recognition threshold, by determining the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate settlement, and
recognizing that amount in the financial statements. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that the adoption of FIN 48 will have on its results of
operations, financial position, and cash flows.
7
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.
In November 2005, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired all of the stock of Engineering Design Team, Inc. and
substantially all of the assets of its affiliate (collectively "EDT"). 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.
In May 2006, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired all of the stock of Arger Enterprises, Inc. and its related
companies (collectively "Arger"). Arger designs and distributes FAA-approved
aircraft and engine parts primarily for the commercial aviation market. The
Company intends to combine the operations of Arger within other subsidiaries of
HEICO Aerospace Holdings Corp. during the year following the acquisition.
Accordingly, the Company recognized a $1.8 million restructuring liability as
part of the acquisition costs consisting principally of employee termination and
relocation costs, moving costs and associated expenses and contract termination
costs. As of July 31, 2006, $.2 million of such accrued costs had been paid.
The acquisitions of SDI, EDT and Arger 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, EDT and Arger were included in the
Company's results of operations from their effective acquisition date. The
following table presents the Company's unaudited pro forma consolidated
operating results assuming the acquisitions of SDI, EDT and Arger had been
consummated as of the beginning of fiscal 2005. 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
8
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 and Arger.
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Net sales $ 292,635,000 $ 248,034,000 $ 103,273,000 $ 87,427,000
Net income $ 22,251,000 $ 18,307,000 $ 8,157,000 $ 6,378,000
Net income per share:
Basic $ .89 $ .75 $ .32 $ .26
Diluted $ .84 $ .70 $ .31 $ .24
Cash investing activities related to acquisitions (principally SDI, EDT,
and Arger), 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 nine months ended July 31, 2006 is as follows:
NINE MONTHS
ENDED
JULY 31, 2006
---------------
Fair values of assets acquired and liabilities assumed:
Liabilities assumed $ 11,054,000
Minority interests in consolidated subsidiaries 5,358,000
Less:
Goodwill 23,536,000
Inventories, net 16,846,000
Identifiable intangible assets 9,080,000
Accounts receivable, net 7,424,000
Accrued additional purchase consideration 3,045,000
Other assets 2,099,000
---------------
Acquisitions and related costs, net of cash acquired $ (45,618,000)
===============
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
JULY 31, OCTOBER 31,
2006 2005
--------------- ---------------
Accounts receivable $ 64,557,000 $ 49,816,000
Less: Allowance for doubtful accounts (2,726,000) (2,148,000)
--------------- ---------------
Accounts receivable, net $ 61,831,000 $ 47,668,000
=============== ===============
9
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
JULY 31, OCTOBER 31,
2006 2005
--------------- ---------------
Costs incurred on uncompleted contracts $ 16,527,000 $ 18,344,000
Estimated earnings 10,138,000 11,252,000
--------------- ---------------
26,665,000 29,596,000
Less: Billings to date (19,418,000) (21,747,000)
--------------- ---------------
$ 7,247,000 $ 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) $ 7,648,000 $ 7,889,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (401,000) (40,000)
--------------- ---------------
$ 7,247,000 $ 7,849,000
=============== ===============
Changes in estimates did not have a material effect on net income or
diluted net income per share in the nine months and three months ended July 31,
2006 and 2005.
INVENTORIES
JULY 31, OCTOBER 31,
2006 2005
--------------- ---------------
Finished products $ 47,261,000 $ 26,136,000
Work in process 12,788,000 12,634,000
Materials, parts, assemblies and supplies 30,619,000 23,988,000
--------------- ---------------
Inventories, net $ 90,668,000 $ 62,758,000
=============== ===============
Inventories related to long-term contracts were not significant as of July
31, 2006 and October 31, 2005.
PROPERTY, PLANT AND EQUIPMENT
JULY 31, OCTOBER 31,
2006 2005
--------------- ---------------
Land $ 3,155,000 $ 3,155,000
Buildings and improvements 25,311,000 25,344,000
Machinery, equipment and tooling 56,863,000 53,460,000
Construction in progress 6,369,000 3,128,000
--------------- ---------------
91,698,000 85,087,000
Less: Accumulated depreciation and amortization (42,804,000) (38,424,000)
--------------- ---------------
Property, plant and equipment, net $ 48,894,000 $ 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 nine months ended July 31, 2006 are as
follows:
SEGMENT (1)
--------------------------------- CONSOLIDATED
FSG ETG TOTALS
--------------- --------------- ---------------
Balances as of October 31, 2005 $ 139,343,000 $ 108,886,000 $ 248,229,000
Goodwill acquired 19,863,000 3,188,000 23,051,000
Adjustments to goodwill 497,000 260,000 757,000
--------------- --------------- ---------------
Balances as of July 31, 2006 $ 159,703,000 $ 112,334,000 $ 272,037,000
=============== =============== ===============
(1) During the third quarter of fiscal 2006, one of the Company's
subsidiaries formerly included in the ETG was reclassified to the FSG.
Balances as of October 31, 2005 have been retroactively restated to
reflect the revised segment classification.
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 JULY 31, 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 $ 3,969,000 $ (385,000) $ 3,584,000 $ 0 $ 0 $ 0
Intellectual property 1,992,000 (374,000) 1,618,000 -- -- --
Licenses 1,000,000 (308,000) 692,000 1,000,000 (252,000) 748,000
Non-compete agreements 800,000 (356,000) 444,000 660,000 (129,000) 531,000
Patents 541,000 (91,000) 450,000 477,000 (60,000) 417,000
------------ ------------ ------------ ------------ ------------ ------------
8,302,000 (1,514,000) 6,788,000 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
------------ ------------ ------------ ------------ ------------ ------------
$ 14,931,000 $ (1,514,000) $ 13,417,000 $ 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 July 31,
2006 compared to October 31, 2005 principally relates to such intangible assets
recognized in connection with the acquisitions of EDT, SDI and Arger (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
11
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 nine months ended July 31, 2006 is approximately six years,
four years, and six years, respectively.
Amortization expense of other intangible assets for the nine months and
three months ended July 31, 2006 was $1,073,000 and $380,000, respectively.
Amortization expense of other intangible assets for the fiscal year ending
October 31, 2006 is estimated to be $1,472,000. Amortization expense for each of
the next five fiscal years is estimated to be $1,526,000 in fiscal 2007,
$1,373,000 in fiscal 2008, $1,257,000 in fiscal 2009, $612,000 in fiscal 2010
and $612,000 in fiscal 2011.
5. SHORT-TERM AND LONG-TERM DEBT
In June 2006, one of the Company's subsidiaries entered into a $7.0 million
short-term line of credit with a bank, which expires in April 2007. 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. Advances under the line of
credit bear interest at the subsidiary's choice of the "Prime Rate Advance"
(prime rate less .75%) or "LIBOR Advance" (LIBOR rate plus .75%). As of July 31,
2006, no borrowings were outstanding under the line of credit.
Long-term debt consists of:
JULY 31, OCTOBER 31,
2006 2005
--------------- ---------------
Borrowings under revolving credit facility $ 58,000,000 $ 32,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 106,000 144,000
--------------- ---------------
60,086,000 34,124,000
Less: Current maturities of long-term debt (56,000) (63,000)
--------------- ---------------
$ 60,030,000 $ 34,061,000
=============== ===============
In July 2006, the Company amended its $130 million revolving credit
facility principally to include a less restrictive covenant regarding requisite
approval of acquisitions by the bank syndicate. The prior covenant relating to
approval by the bank syndicate of acquisitions in excess of an aggregate of $50
million over any twelve-month period was eliminated provided the Company
maintains an agreed upon, or lower, leverage ratio.
As of July 31, 2006 and October 31, 2005, the weighted average interest
rates on borrowings under the Company's revolving credit facility were 6.1% and
4.7%, respectively. The revolving credit facility contains both financial and
non-financial covenants. As of July 31, 2006, the Company believes it is in
compliance with all such covenants.
The interest rates on the Series 1988 industrial development revenue bonds
were 3.7% and 2.8% as of July 31, 2006 and October 31, 2005, respectively.
12
6. INCOME TAXES
As previously reported, certain individual holders of non-qualified stock
options issued by the Company exchanged certain stock options for annuity
contracts in 1999 - 2002. As a result, the recognition of compensation income
otherwise reportable upon the exercise of stock options was deferred by the
individual holders. Based on a preliminary agreement between the individuals and
the Internal Revenue Service, the remaining compensation income was accelerated
and reported by the individuals on income tax returns filed during the current
year. As a result, the Company's corresponding compensation deduction benefit
was recognized in its fiscal 2005 income tax return filed in July 2006.
Accordingly, the Company recorded a $5.0 million tax benefit from stock option
exercises during the third quarter of fiscal 2006 by increasing capital in
excess of par value, a component of shareholders' equity in the Company's
Condensed Consolidated Balance Sheets (see Note 7, Shareholders' Equity) and
increasing the tax benefit from stock option exercises, a component of net cash
provided by operating activities in the Company's Condensed Consolidated
Statements of Cash Flows.
The Company claimed an income tax credit for qualified research and
development activities in its income tax return for fiscal 2005 and an amended
return for a previous tax year that were filed in the third quarter of fiscal
2006. The aggregate tax credit, net of expenses, increased net income by
approximately $.2 million for the nine months and three months ended July 31,
2006. The Company is reviewing other open tax years and may file amendments to
claim additional tax credits for qualified research and development activities
incurred during such years. The benefit of such tax credits will be recorded
when the Company has completed its review and sustainability is considered
probable.
7. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the nine months ended July
31, 2006 are as follows:
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED
STOCK STOCK PAR VALUE INCOME/(LOSS) EARNINGS
---------- ---------- --------------- --------------- ---------------
Balances as of October 31, 2005 $ 101,000 $ 145,000 $ 192,523,000 $ (65,000) $ 80,799,000
Net income -- -- -- -- 22,567,000
Foreign currency translation adjustments -- -- -- 101,000 --
Cash dividends ($.08 per share) -- -- -- -- (2,004,000)
Tax benefit from stock option exercises -- -- 7,252,000 -- --
Proceeds from stock option exercises 3,000 5,000 4,463,000 -- --
Stock option compensation expense -- -- 1,187,000 -- --
Other (1,000) -- (1,000) -- --
---------- ---------- --------------- --------------- ---------------
Balances as of July 31, 2006 $ 103,000 $ 150,000 $ 205,424,000 $ 36,000 $ 101,362,000
========== ========== =============== =============== ===============
13
8. 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 2,958,616
shares of the Company's stock are reserved for issuance to employees, directors,
officers, and consultants as of July 31, 2006, including 2,796,153 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 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 nine months ended July
31, 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 (9,491) $ 8.95
Exercised -- (783,036) $ 7.14
-------------- ----------
Outstanding as of July 31, 2006 162,463 2,796,153 $ 10.16
============== ==========
14
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of July 31, 2006 is as follows:
COMMON STOCK
OPTIONS OUTSTANDING
---------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (YEARS) VALUE
----------------- ----------- -------------- --------------------- --------------
$1.16 - $ 2.90 111,182 $ 1.84 1.1 $ 3,225,000
$2.91 - $ 7.00 127,250 $ 6.31 0.4 3,123,000
$7.01 - $12.00 583,000 $ 8.97 5.1 12,755,000
$12.01 - $21.92 456,750 $ 14.21 4.5 7,600,000
----------- --------------
1,278,182 $ 9.96 4.1 $ 26,703,000
=========== ==============
OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES EXERCISABLE EXERCISE PRICE LIFE (YEARS) VALUE
----------------- ----------- -------------- --------------------- --------------
$1.16 - $ 2.90 111,182 $ 1.84 1.1 $ 3,225,000
$2.91 - $ 7.00 127,250 $ 6.31 0.4 3,123,000
$7.01 - $12.00 460,999 $ 9.19 4.8 9,986,000
$12.01 - $21.92 450,750 $ 14.22 4.5 7,495,000
----------- --------------
1,150,181 $ 10.13 3.8 $ 23,829,000
=========== ==============
CLASS A COMMON STOCK
OPTIONS OUTSTANDING
---------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (YEARS) VALUE
----------------- ----------- -------------- --------------------- --------------
$1.16 - $ 2.90 95,795 $ 1.71 1.1 $ 2,346,000
$2.91 - $ 7.00 150,735 $ 5.65 5.2 3,098,000
$7.01 - $12.00 684,159 $ 8.35 4.7 12,210,000
$12.01 - $21.92 587,282 $ 15.22 3.6 6,447,000
----------- --------------
1,517,971 $ 10.32 4.1 $ 24,101,000
=========== ==============
OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES EXERCISABLE EXERCISE PRICE LIFE (YEARS) VALUE
----------------- ----------- -------------- --------------------- --------------
$1.16 - $ 2.90 95,795 $ 1.71 1.1 $ 2,346,000
$2.91 - $ 7.00 99,475 $ 5.71 4.5 2,039,000
$7.01 - $12.00 624,471 $ 8.31 4.6 11,170,000
$12.01 - $21.92 564,647 $ 15.31 3.5 6,149,000
----------- --------------
1,384,388 $ 10.52 3.9 $ 21,704,000
=========== ==============
15
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 July 31, 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 77,707 shares of Common Stock and 116,799 shares of Class A Common
Stock would become immediately exercisable.
Information concerning stock options exercised during the nine months ended
July 31, 2006 is as follows:
NINE MONTHS
ENDED
JULY 31, 2006
-------------
Cash proceeds from stock option exercises $ 4,471,000
Tax benefit realized from stock option exercises 1,391,000
Intrinsic value of stock option exercises 14,924,000
Effective as of November 1, 2005, the Company generally recognizes
compensation expense ratably over the vesting period. As of July 31, 2006, there
was $1.0 million of pretax unrecognized compensation expense related to
nonvested stock options, which is expected to be recognized over a weighted
average period of approximately 1.5 years.
9. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended July 31, 2006 and 2005 includes
approximately $12.2 million and $8.2 million, respectively, of new product
research and development expenses. Cost of sales for the three months ended July
31, 2006 and 2005 includes approximately $4.0 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.
16
10. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the nine months and three months ended July 31:
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Numerator:
Net income $ 22,567,000 $ 16,187,000 $ 8,276,000 $ 6,046,000
============== ============== ============== ==============
Denominator:
Weighted average common shares outstanding-basic 24,997,560 24,425,235 25,291,566 24,500,372
Effect of dilutive stock options 1,523,505 1,855,460 1,418,626 1,868,148
-------------- -------------- -------------- --------------
Weighted average common shares outstanding-diluted 26,521,065 26,280,695 26,710,192 26,368,520
============== ============== ============== ==============
Net income per share- basic $ 0.90 $ 0.66 $ 0.33 $ 0.25
Net income per share- diluted $ 0.85 $ 0.62 $ 0.31 $ 0.23
Anti-dilutive stock options excluded 16,720 197,241 1,000 155,705
11. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group ("FSG"), consisting of HEICO Aerospace Holdings Corp. and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries, for the nine months and
three months ended July 31, 2006 and 2005, respectively, as well as for the
three months ended April 30, 2006 and 2005, January 31, 2006 and 2005, and
October 31, 2005, is as follows:
OTHER,
SEGMENT (1) PRIMARILY
--------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
--------------- --------------- --------------- ---------------
For the nine months ended July 31, 2006:
Net sales $ 198,586,000 $ 83,858,000 $ (79,000) $ 282,365,000
Depreciation and amortization 4,467,000 1,939,000 230,000 6,636,000
Operating income 33,832,000 25,036,000 (9,574,000) 49,294,000
Capital expenditures 5,915,000 1,034,000 106,000 7,055,000
For the nine months ended July 31, 2005:
Net sales $ 142,849,000 $ 50,421,000 $ (147,000) $ 193,123,000
Depreciation and amortization 4,151,000 794,000 322,000 5,267,000
Operating income 25,347,000 12,075,000 (5,579,000) 31,843,000
Capital expenditures 6,337,000 441,000 26,000 6,804,000
17
OTHER,
SEGMENT (1) PRIMARILY
--------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
--------------- --------------- --------------- --------------
For the three months ended July 31, 2006:
Net sales $ 71,069,000 $ 31,113,000 $ (10,000) $ 102,172,000
Depreciation and amortization 1,570,000 670,000 73,000 2,313,000
Operating income 11,471,000 9,688,000 (3,771,000) 17,388,000
Capital expenditures 2,196,000 173,000 64,000 2,433,000
For the three months ended July 31, 2005:
Net sales $ 51,445,000 $ 17,748,000 $ (24,000) $ 69,169,000
Depreciation and amortization 1,377,000 281,000 106,000 1,764,000
Operating income 9,795,000 4,479,000 (2,525,000) 11,749,000
Capital expenditures 3,632,000 132,000 11,000 3,775,000
For the three months ended April 30, 2006:
Net sales $ 63,839,000 $ 28,263,000 $ (10,000) $ 92,092,000
Depreciation and amortization 1,462,000 641,000 71,000 2,174,000
Operating income 10,746,000 8,945,000 (3,071,000) 16,620,000
Capital expenditures 2,896,000 483,000 36,000 3,415,000
For the three months ended April 30, 2005:
Net sales $ 47,931,000 $ 19,109,000 $ (67,000) $ 66,973,000
Depreciation and amortization 1,377,000 290,000 112,000 1,779,000
Operating income 8,423,000 4,665,000 (1,655,000) 11,433,000
Capital expenditures 1,846,000 226,000 13,000 2,085,000
For the three months ended January 31, 2006:
Net sales $ 63,678,000 $ 24,482,000 $ (59,000) $ 88,101,000
Depreciation and amortization 1,435,000 628,000 86,000 2,149,000
Operating income 11,615,000 6,403,000 (2,732,000) 15,286,000
Capital expenditures 823,000 378,000 6,000 1,207,000
For the three months ended January 31, 2005:
Net sales $ 43,473,000 $ 13,564,000 $ (56,000) $ 56,981,000
Depreciation and amortization 1,397,000 223,000 104,000 1,724,000
Operating income 7,129,000 2,931,000 (1,399,000) 8,661,000
Capital expenditures 859,000 83,000 2,000 944,000
For the three months ended October 31, 2005:
Net sales $ 49,140,000 $ 27,400,000 $ (16,000) $ 76,524,000
Depreciation and amortization 1,724,000 323,000 95,000 2,142,000
Operating income 7,448,000 8,903,000 (3,545,000) 12,806,000
Capital expenditures 1,122,000 322,000 25,000 1,469,000
18
The total assets held by each operating segment as of July 31, 2006 and
October 31, 2005 is as follows:
SEGMENT (1)
--------------------------------- PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
--------------- --------------- --------------- ---------------
Total assets as of July 31, 2006 $ 321,022,000 $ 176,834,000 $ 16,482,000 $ 514,338,000
Total assets as of October 31, 2005 259,957,000 159,123,000 16,544,000 435,624,000
(1) During the third quarter of fiscal 2006, one of the Company's subsidiaries
formerly included in the ETG was reclassified to the FSG. Prior period amounts
have been retroactively restated to reflect the revised segment classification.
12. 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, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
Changes in the Company's product warranty liability for the nine months
ended July 31, 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 396,000 430,000
Warranty claims settled (410,000) (188,000)
---------- ----------
Balances as of July 31 $ 396,000 $ 371,000
========== ==========
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 fiscal 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.
19
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and fifth
years following the acquisition. The additional purchase consideration will be
accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority 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
$.3 million as of July 31, 2006 in accordance with the agreements related to
certain acquisitions based principally on the actual value of the net assets
acquired. The Company paid this amount in August 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 $.2 million through fiscal 2007.
LITIGATION
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations, financial position, or cash flows.
20
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 nine months ended July 31,
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. and its affiliate
(collectively "EDT"). In May 2006, the Company, through its HEICO Aerospace
Holdings Corp. subsidiary, acquired all of the stock of Arger Enterprises, Inc.
and its related companies (collectively "Arger"). 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, EDT and Arger
were included in the Company's results of operations effective from each of
their respective acquisition dates. 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
21
company were included in the Company's results of operations from their
effective acquisition date.
As further explained within Comparison of First Nine Months of Fiscal 2006
to First Nine Months of Fiscal 2005, the first nine months of fiscal 2006
reflects operating results of all of the above mentioned fiscal 2006 and 2005
acquisitions from each of their respective acquisition dates, whereas the first
nine months of fiscal 2005 includes just eight months of operating results of
Connectronics and six months of operating results of Lumina from their
respective aforementioned acquisition dates.
As further explained within Comparison of Third Quarter of Fiscal 2006 to
Third Quarter of Fiscal 2005, the third quarter of fiscal 2006 reflects
operating results of all of the above mentioned fiscal 2006 and 2005
acquisitions, whereas the third quarter of fiscal 2005 includes just the
operating results of Connectronics and Lumina and not of HVT, SDI, EDT and
Arger, which were acquired subsequently.
22
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations, net
sales and operating income by segment, and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
--------------------------------- ---------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Net sales $ 282,365,000 $ 193,123,000 $ 102,172,000 $ 69,169,000
-------------- -------------- -------------- --------------
Cost of sales 179,192,000 121,799,000 64,587,000 43,170,000
Selling, general and administrative expenses 53,879,000 39,481,000 20,197,000 14,250,000
-------------- -------------- -------------- --------------
Total operating costs and expenses 233,071,000 161,280,000 84,784,000 57,420,000
-------------- -------------- -------------- --------------
Operating income $ 49,294,000 $ 31,843,000 $ 17,388,000 $ 11,749,000
============== ============== ============== ==============
Net sales by segment: (1)
Flight Support Group $ 198,586,000 $ 142,849,000 $ 71,069,000 $ 51,445,000
Electronic Technologies Group 83,858,000 50,421,000 31,113,000 17,748,000
Intersegment sales (79,000) (147,000) (10,000) (24,000)
-------------- -------------- -------------- --------------
$ 282,365,000 $ 193,123,000 $ 102,172,000 $ 69,169,000
============== ============== ============== ==============
Operating income by segment: (1)
Flight Support Group $ 33,832,000 $ 25,347,000 $ 11,471,000 $ 9,795,000
Electronic Technologies Group 25,036,000 12,075,000 9,688,000 4,479,000
Other, primarily corporate (9,574,000) (5,579,000) (3,771,000) (2,525,000)
-------------- -------------- -------------- --------------
$ 49,294,000 $ 31,843,000 $ 17,388,000 $ 11,749,000
============== ============== ============== ==============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.5% 36.9% 36.8% 37.6%
Selling, general and administrative expenses 19.1% 20.4% 19.8% 20.6%
Operating income 17.5% 16.5% 17.0% 17.0%
Interest expense 0.9% 0.4% 0.9% 0.4%
Interest and other income 0.1% 0.2% 0.1% 0.5%
Income tax expense 5.7% 5.9% 5.3% 6.2%
Minority interests' share of income 2.9% 2.0% 2.7% 2.2%
Net income 8.0% 8.4% 8.1% 8.7%
(1) During the third quarter of fiscal 2006, one of the Company's subsidiaries
formerly included in the Electronic Technologies Group was reclassified to the
Flight Support Group. Prior period amounts have been retroactively restated to
reflect the revised segment classification.
23
COMPARISON OF FIRST NINE MONTHS OF FISCAL 2006 TO FIRST NINE MONTHS OF FISCAL
2005
Net Sales
Net sales for the first nine months of fiscal 2006 increased by 46.2% to
$282.4 million, as compared to net sales of $193.1 million for the first nine
months of fiscal 2005. The increase in net sales reflects an increase of $55.7
million (a 39.0% increase) to $198.6 million in net sales within the FSG, and an
increase of $33.4 million (a 66.3% increase) to $83.9 million in net sales
within the ETG. The FSG's net sales increase reflects the acquisitions of SDI
and Arger and organic growth of approximately 12%. 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 15% reflecting increased demand for certain
products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased slightly to 36.5% for the first
nine months of fiscal 2006 as compared to 36.9% for the first nine months of
fiscal 2005, reflecting 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 some of the recent acquisitions. Consolidated cost of sales for
the first nine months of fiscal 2006 and 2005 includes approximately $12.2
million and $8.2 million, respectively, of new product research and development
expenses.
Selling, general and administrative ("SG&A") expenses were $53.9 million
and $39.5 million for the first nine 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 19.1% for the
first nine months of fiscal 2006 compared to 20.4% for the first nine 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 nine months of fiscal 2006 increased by
54.8% to $49.3 million, compared to operating income of $31.8 million for the
first nine months of fiscal 2005. The increase in operating income reflects an
increase of $8.5 million (a 33.5% increase) to $33.8 million
24
in operating income of the FSG in the first nine months of fiscal 2006 from
$25.3 million for the first nine months of fiscal 2005. Operating income of the
ETG increased $13.0 million (a 107.3% increase) to $25.0 million for the first
nine months of fiscal 2006 from $12.1 million for the first nine 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 16.5% in the first nine months of fiscal 2005 to 17.5% in the
first nine months of fiscal 2006. The increase in operating income as a
percentage of net sales reflects a slight decrease in the FSG's operating income
as a percentage of net sales from 17.7% in the first nine months of fiscal 2005
to 17.0% in the first nine months of fiscal 2006 and an increase in the ETG's
operating income as a percentage of net sales from 23.9% in the first nine
months of fiscal 2005 to 29.9% in the first nine months of fiscal 2006. The
decrease in the FSG's operating income as a percentage of net sales reflects the
lower gross profit margins discussed previously, partially offset by improved
operating efficiencies within SG&A expenses. 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 $2,627,000 in the first nine months of fiscal
2006 from $785,000 in the first nine months of fiscal 2005. The increase was
principally due to a higher weighted average balance outstanding under the
revolving credit facility in the first nine months of fiscal 2006 attributable
to borrowings to fund acquisitions and higher interest rates.
Interest and Other Income
Interest and other income in the first nine months of fiscal 2006 and
fiscal 2005 were not material.
Income Tax Expense
The Company's effective tax rate for the first nine months of fiscal 2006
decreased to 34.4% from 36.3% for the first nine 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, as well as an income tax credit for qualified research and
development activities claimed in the third quarter of fiscal 2006 on the
Company's fiscal 2005 tax return and an amended return for a previous tax year.
The aggregate tax credit, net of expenses, increased net income by approximately
$.2 million for the first nine months of fiscal 2006. The Company is reviewing
other open tax years and may file amendments to claim additional tax credits for
qualified research and development activities incurred during such years. The
benefit of such tax credits will be recorded when the Company has completed its
review and sustainability is considered probable.
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
25
Microwave Technology, LLC ("Sierra") and the 15% minority interest held in HVT.
The increase in the minority interests' share of income for the first nine
months of fiscal 2006 compared to the first nine 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.
Net Income
The Company's net income was $22.6 million, or $.85 per diluted share, for
the first nine months of fiscal 2006 compared to $16.2 million, or $.62 per
diluted share, for the first nine months of fiscal 2005 reflecting the increased
operating income referenced above, partially offset by the increased minority
interests' share of income of certain consolidated subsidiaries.
OUTLOOK
The Company reported increased 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 nine months 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 THIRD QUARTER OF FISCAL 2006 TO THIRD QUARTER OF FISCAL 2005
Net Sales
Net sales for the third quarter of fiscal 2006 increased by 47.7% to $102.2
million, as compared to net sales of $69.2 million for the third quarter of
fiscal 2005. The increase in net sales reflects an increase of $19.6 million (a
38.1% increase) to $71.1 million in net sales within the FSG, and an increase of
$13.4 million (a 75.3% increase) to $31.1 million in net sales within the ETG.
The FSG's net sales increase reflects the acquisitions of SDI and Arger and
organic growth of approximately 8%. 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 30% reflecting increased demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased to 36.8% for the third quarter
of fiscal 2006 as compared to 37.6% for the third 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 some of the
26
recent acquisitions. Consolidated cost of sales for the third quarter of fiscal
2006 and 2005 includes approximately $4.0 million and $2.9 million,
respectively, of new product research and development expenses.
SG&A expenses were $20.2 million and $14.3 million for the third 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 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 19.8% for the
third quarter of fiscal 2006 compared to 20.6% for the third 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 third quarter of fiscal 2006 increased by 48.0% to
$17.4 million, compared to operating income of $11.7 million for the third
quarter of fiscal 2005. The increase in operating income reflects an increase of
$1.7 million (a 17.1% increase) to $11.5 million in operating income of the FSG
in the third quarter of fiscal 2006 from $9.8 million for the third quarter of
fiscal 2005. Operating income of the ETG increased $5.2 million (a 116.3%
increase) to $9.7 million for the third quarter of fiscal 2006 from $4.5 million
for the third quarter of fiscal 2005. These increases were partially offset by
the aforementioned increase in corporate expenses. As a percentage of net sales,
operating income approximated 17.0% in both the third quarter of fiscal 2006 and
2005. The operating income as a percentage of net sales reflects an increase in
the ETG's operating income as a percentage of net sales from 25.2% in the third
quarter of fiscal 2005 to 31.1% in the third quarter of fiscal 2006 offset by a
decrease in the FSG's operating income as a percentage of net sales from 19.0%
in the third quarter of fiscal 2005 to 16.1% in the third 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 within SG&A expenses.
Interest Expense
Interest expense increased to $958,000 in the third quarter of fiscal 2006
from $252,000 in the third quarter of fiscal 2005. The increase was principally
due to a higher weighted average balance outstanding under the revolving credit
facility in the third quarter of fiscal 2006 attributable to borrowings to fund
acquisitions and higher interest rates.
Interest and Other Income
Interest and other income in the third quarter of fiscal 2006 and 2005 were
not material.
27
Income Tax Expense
The Company's effective tax rate for the third quarter of fiscal 2006
decreased to 33.0% from 36.3% for the third 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, as well as an income tax credit for qualified research and
development activities claimed in the third quarter of fiscal 2006 on the
Company's fiscal 2005 tax return and an amended return for a previous tax year.
The aggregate tax credit, net of expenses, increased net income by approximately
$.2 million for the third quarter of fiscal 2006. The Company is reviewing other
open tax years and may file amendments to claim additional tax credits for
qualified research and development activities incurred during such years. The
benefit of such tax credits will be recorded when the Company has completed its
review and sustainability is considered probable.
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 third
quarter of fiscal 2006 compared to the third 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 $8.3 million, or $.31 per diluted share, for
the third quarter of fiscal 2006 compared to $6.0 million, or $.23 per diluted
share, for the third 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 $27.2 million for the first
nine months of fiscal 2006, consisting primarily of net income of $22.6 million,
minority interests' share of income of
28
consolidated subsidiaries of $8.3 million, a tax benefit on stock option
exercises of $7.3 million, depreciation and amortization of $6.6 million, a
deferred income tax provision of $2.8 million, and stock option compensation
expense of $1.2 million, partially offset by an increase in net operating assets
of $20.5 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 income taxes that
were accrued as of October 31, 2005. Net cash provided by operating activities
increased from $21.0 million for the first nine months of fiscal 2005
principally as a result of the increase in net income and the minority
interests' share of income and an increased tax benefit from stock option
exercises, partially offset by the increase in net operating assets referenced
above. During the third quarter of fiscal 2006, the Company recognized a $5.0
million tax benefit from stock option exercises after the individuals who
exercised certain stock options entered into a preliminary agreement with the
Internal Revenue Service under which their compensation income that had been
previously deferred was accelerated (see Note 6, Income Taxes, of the Notes to
Condensed Consolidated Financial Statements).
Investing Activities
Net cash used in investing activities during the first nine months of
fiscal 2006 related primarily to acquisitions and related costs (principally
SDI, EDT and Arger) of $45.6 million and capital expenditures totaling $7.1
million.
Financing Activities
Net cash provided by financing activities during the first nine months of
fiscal 2006 primarily related to borrowings of $46.0 million on the Company's
revolving credit facility principally used to fund the aforementioned
acquisitions, proceeds from stock option exercises of $4.5 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),
partially offset by repayments of $20.0 million and $3.0 million on the
Company's revolving credit facility and short-term line of credit, respectively,
and the payment of $2.0 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, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth
29
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 fiscal 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 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
$.3 million as of July 31, 2006 in accordance with the agreements related to
certain acquisitions based principally on the actual value of the net assets
acquired. The Company paid this amount in August 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 $.2 million through fiscal 2007.
30
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 No. 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 No. 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 on or after November 1, 2005 ("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 nine months ended July 31, 2006, the excess tax benefit from
stock option exercises of $1,139,000 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 nine months and three months ended July 31, 2006 includes compensation
expense of $1,187,000 and $300,000, respectively, and income tax benefit related
to the Company's stock options of $351,000 and $84,000, 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 Statements of Operations.
As of July 31, 2006, there was $1.0 million of pretax unrecognized
compensation expense related to nonvested stock options, which is expected to be
recognized over a weighted average period of approximately 1.5 years.
Further information regarding stock options can be found in Note 8, Stock
Options, of the Notes to Condensed Consolidated Financial Statements.
31
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.
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109," which seeks to reduce the
diversity in practice associated with the accounting and reporting for
uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in an income tax return. FIN 48 presents a two-step process for evaluating
a tax position. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
based on the technical merits of the position. The second step is to measure the
benefit to be recorded from tax positions that meet the more-likely-than-not
recognition threshold, by determining the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate settlement, and
recognizing that amount in the financial statements. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that the adoption of FIN 48 will have on its results of
operations, financial position, and cash flows.
32
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.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the outstanding debt balance as of July 31, 2006, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $362,000 on an annual basis.
The Company is also exposed to foreign currency exchange rate fluctuations
on the United States dollar value of its foreign currency denominated
transactions, which are principally in British pound sterling. A hypothetical
10% weakening in the exchange rate of the British pound sterling to the United
States dollar as of July 31, 2006 would not have a material effect on the
Company's results of operations, financial position, or cash flows.
34
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.
35
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity securities
or repurchase any of its equity securities during the first nine months of
fiscal 2006.
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
-------- -----------------------------------------------------------
10.1 First Amendment, effective as of July 14, 2006, to Amended
and Restated Revolving Credit Agreement among HEICO
Corporation, as Borrower, the lenders from time to time
party hereto, and SunTrust Bank, as Administrative Agent. *
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.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: September 11, 2006 By: /s/ THOMAS S. IRWIN
----------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
37
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- ------------------------------------------------------------------
10.1 First Amendment, effective as of July 14, 2006, to Amended and
Restated Revolving Credit Agreement among HEICO Corporation, as
Borrower, the lenders from time to time party hereto, and SunTrust
Bank, as Administrative Agent.
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.
38