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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2001 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (no fee required)
For the transition period from ___________to___________
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share New York Stock Exchange
Class A Common Stock, par value $.01 per share (Name of Each Exchange On
(Title of Each Class) Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
(Title of Class)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant was $238,000,000 based on the closing price of
Common Stock and Class A Common Stock on December 31, 2001 as reported by the
New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 31, 2001:
Common Stock, $.01 par value 9,325,365 shares
Class A Common Stock, $.01 par value 11,521,708 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III. See Item
14(a)(3) on page 59 for a listing of exhibits.
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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 are
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 the 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 or implied in those statements. Factors that
could cause such differences include, but are not limited to:
. Our intention to introduce new products;
. Our ability to make acquisitions and achieve operating synergies from
acquired businesses;
. Our ability to continue to control costs and maintain quality;
. Product pricing levels;
. Product specification costs and requirements;
. Governmental and regulatory demands;
. Governmental export policies;
. Competition on military programs;
. Governmental funding of military programs;
. Risks inherent in changes in market interest rates;
. Anticipated trends in our businesses, including trends in the markets for
aircraft engine parts, aircraft engine overhaul and electronics equipment
and airline fleet changes;
. The demand for commercial air travel;
. The adverse impact of the September 11, 2001 terrorist attacks on
commercial airlines and the economy in general;
. The extent of benefits received by U.S. airlines and air cargo carriers
under the Air Transportation Safety and System Stabilization Act,
considering any challenges to and interpretations or amendments of the Act;
. Increasing cost of insurance coverage as a result of the September 11, 2001
terrorist attacks;
. Credit risk related to receivables from customers; and
. Economic conditions within and outside of the aerospace, defense and
electronics industries.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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PART I
Item 1. Business
The Company
HEICO Corporation (HEICO or the Company) believes it is the world's largest
manufacturer of Federal Aviation Administration (FAA) approved jet engine and
aircraft replacement parts, other than the original equipment manufacturers
(OEMs) and their subcontractors. It is also a leading manufacturer of certain
electronic equipment to the aerospace, defense, medical and electronics
industries. The Company's operations are divided into two segments, the Flight
Support Group (FSG) and the Electronic Technologies Group (ETG). Through our FSG
we use proprietary technology to design, manufacture and sell jet engine and
aircraft replacement parts for sale at lower prices than those manufactured by
OEMs. These parts are approved by the FAA and are the functional equivalent of
parts sold by OEMs. In addition, our FSG repairs, refurbishes and overhauls
engine and aircraft components for domestic and foreign commercial air carriers
and aircraft repair companies, and manufactures thermal insulation products and
components parts primarily for aerospace, defense and commercial applications.
In fiscal 2001, the FSG accounted for 77% of our revenues. Through our ETG, we
manufacture various types of electrical products, including electrical power
supplies, back-up power supplies, electromagnetic interference and radio
frequency interference shielding, electro-optical products such as infrared
simulation and test equipment and analog electronic products including hybrid
laser rangefinder receivers, high power laser diode drivers, amplifiers,
photodetectors, amplifier modules, flash lamp drivers and power supplies. In
addition, ETG also repairs and overhauls inertial navigation systems and various
avionics, instruments and components for commercial, military and business
aircraft. In fiscal 2000, the ETG accounted for 23% of our revenues. In
September 2000, the Company sold Trilectron Industries, Inc. (Trilectron) and
its associated product line, which included ground support equipment for
commercial airlines and military agencies. See "Management's Discussion of
Financial Condition and Results of Operations" for details of the Company's
disposition.
We have continuously operated in the aerospace industry for approximately 40
years. Since assuming control in 1990, current management has achieved
significant sales and profit growth through expanded product offerings, an
expanded customer base, increased research and development expenditures, and the
completion of acquisitions. Since fiscal 1998, the Company, through
acquisitions, has added eight subsidiaries to its FSG and six subsidiaries to
its ETG. See "Management's Discussion of Financial Condition and Results of
Operations" for details of the Company's acquisitions. As a result of internal
growth and acquisitions, our revenues from continuing operations have grown from
$34.6 million in fiscal 1996 to $171.3 million in fiscal 2001, a compound annual
growth rate of 38% over the five-year period.
In October 1997, we formed a strategic alliance with Lufthansa Technik AG
(Lufthansa), the technical services subsidiary of Lufthansa German Airlines AG.
Lufthansa is the world's largest independent provider of engineering and
maintenance services for aircraft and aircraft engines and supports over 200
airlines, governments and other customers. As part of the transaction, Lufthansa
acquired a 20% minority interest in our FSG, investing approximately $50 million
to date. This includes direct equity investments and the funding of specific
research and development projects. In connection with acquisitions by our FSG
since 1997, Lufthansa invested additional amounts pursuant to its option to
maintain a 20% equity interest. This strategic alliance should continue to
enable us to expand domestically and internationally by enhancing our ability to
(i) identify key jet aircraft and component replacement parts with significant
profit potential by utilizing Lufthansa's extensive operating data on engine and
component parts, (ii) introduce those parts throughout the world in an efficient
manner due to Lufthansa's testing and diagnostic resources, and (iii) broaden
our customer base by capitalizing on Lufthansa's established relationships and
alliances within the airline industry.
In February 2001, we entered into a joint venture with AMR Corporation (AMR),
parent company of American Airlines, one of the world's largest airlines, to
develop, design and sell FAA-approved replacement parts through our subsidiary,
HEICO Aerospace Holdings Corp. (HEICO Aerospace). As part of the joint venture,
AMR will reimburse HEICO Aerospace for a portion of new product research and
development costs. The joint venture is 16% owned by AMR. AMR and HEICO
Aerospace have agreed to cooperate regarding technical services and
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marketing support on a worldwide basis. We believe that AMR's investment, along
with their vast technical experience as an operator and overhauler of aircraft
and engines, will allow us to accelerate the development of new FAA-approved
replacement parts and, accordingly, to manufacture and market such parts.
Flight Support Group
Our FSG is headquartered in Hollywood, Florida and designs, engineers,
manufactures, repairs and/or overhauls engine and aircraft parts and components
such as combustion chambers, compressor blades, vanes, seals and various other
engine and aircraft parts. We also manufacture specialty aviation and defense
components as a subcontractor. We serve a broad spectrum of the aviation
industry, including (i) commercial airlines and air cargo couriers, (ii) repair
and overhaul facilities, (iii) OEMs, and (iv) U.S. and foreign governments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a listing of operating subsidiaries included in the FSG.
Aircraft engine and aircraft replacement parts can be categorized by their
ongoing ability to be repaired and returned to service. The general categories
(in all of which we participate) are as follows: (i) rotable; (ii) repairable;
and (iii) expendable. A rotable is a part which is removed periodically as
dictated by an operator's maintenance procedures or on an as needed basis and is
typically repaired or overhauled and re-used an indefinite number of times. An
important subset of rotables is "life limited" parts. A life limited rotable has
a designated number of allowable flight hours and/or cycles (one take-off and
landing generally constitutes one cycle) after which it is rendered unusable. A
repairable is similar to a rotable except that it can only be repaired a limited
number of times before it must be discarded. An expendable is generally a part
which is used and not thereafter repaired for further use.
Engine and aircraft replacement parts are classified within the industry as
(i) factory-new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v)
as removed. A factory-new or new surplus part is one that has never been
installed or used. Factory-new parts are purchased from FAA-approved
manufacturers (such as HEICO or OEMs) or their authorized distributors. New
surplus parts are purchased from excess stock of airlines, repair facilities or
other redistributors. An overhauled part has been completely repaired and
inspected by a licensed repair facility such as ours. An aircraft spare part is
classified repairable if it can be repaired by a licensed repair facility under
applicable regulations. A part may also be classified repairable if it can be
removed by the operator from an aircraft or engine while operating under an
approved maintenance program and is airworthy and meets any manufacturer or time
and cycle restrictions applicable to the part. A factory-new, new surplus,
overhauled or serviceable part designation indicates that the part can be
immediately utilized on an aircraft. A part in "as removed" condition requires
inspection and possibly functional testing, repair or overhaul by a licensed
facility prior to being returned to service in an aircraft.
Factory-New Jet Engine and Aircraft Replacement Parts. The principal business
of the FSG is the research and development, design, manufacture and sale of FAA-
approved replacement parts that are sold to domestic and foreign commercial air
carriers and aircraft repair and overhaul companies. Our principal competitors
are Pratt & Whitney, a division of United Technologies Corporation (UTC) and
General Electric Company (General Electric), including its CFM International
joint venture. The FSG's factory-new replacement parts include various jet
engine and aircraft component replacement parts. A key element of our growth
strategy is the continued design and development of an increasing number of
Parts Manufacturer Approval (PMA) replacement parts in order to further
penetrate our existing customer base and obtain new customers. We select the jet
engine and aircraft component replacement parts to design and manufacture
through a selection process which analyzes industry information to determine
which replacement parts are expected to generate the greatest profitability. As
part of Lufthansa's
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investment in the FSG, Lufthansa has the right to select 50% of the parts for
which we will seek PMAs, provided that such parts are technologically and
economically feasible and substantially comparable with the profitability of our
other PMA parts.
The following table sets forth (i) the lines of engines for which we provide
jet engine replacement parts and (ii) the approximate number of such engines
currently in service as estimated by us.
Number
OEM Lines In Service Principal Engine Application
--------------------------- ------ ---------- --------------------------------
Pratt & Whitney JT8D 8,500 Boeing 727 and 737 (100 and 200
series)
McDonnell Douglas DC-9 and MD-80
JT9D 1,800 Boeing 747 (100, 200 and 300
series) and 767 (200 series)
Airbus A300 and A310
McDonnell Douglas DC-10
PW2000 1,100 Boeing 757
PW4000 2,200 Boeing 747-400, 767-300 and 777
Airbus A300, A310 and A330
McDonnell Douglas MD-11
CFM International (a joint CFM56 11,000 Boeing 737 (300, 400, 500, 700,
venture of General Electric and 800 and 900 series)
SNECMA) Airbus A320 and A340-200
General Electric CF6 5,000 Boeing 747 and 767
Airbus A300, A310 and A330
McDonnell Douglas MD-11
IAE (a joint venture of Pratt & Whitney V2500 1,500 Airbus A320,
and Rolls Royce) McDonnell Douglas MD-90
Repair and Overhaul Services. We provide repair and overhaul services on
selected engine and aircraft parts, as well as for avionics, instruments,
components, composites and flight surfaces for commercial aircraft. Our repair
and overhaul operations require a high level of expertise, advanced technology
and sophisticated equipment. Services include the repair, refurbishment and
overhaul of numerous accessories and parts mounted on gas turbine engines and
airframes. Components overhauled include fuel pumps, generators, fuel controls,
pneumatic valves, starters and actuators, turbo compressors and constant speed
drives, hydraulic pumps, valves and actuators, composite flight controls,
electro-mechanical equipment and auxiliary power unit accessories. In June 2000
and August 2001, the Company acquired the assets of Future Aviation, Inc. and
Avitech Engineering Corp., respectively, which expanded our repair and overhaul
services into the fast-growing regional commuter and business aircraft market.
Manufacture of Specialty Aircraft/Defense Related Parts and Subcontracting for
OEMs. We also manufacture thermal insulation blankets primarily for aerospace,
defense and commercial applications. We also derive revenue from the sale of
specialty components as a subcontractor for OEMs and the U.S. government.
FAA Approvals and Product Design
Non-OEM manufacturers of jet engine replacement parts must receive a Parts
Manufacturing Approval (PMA) from the FAA to sell the part. The PMA approval
process includes the submission of sample parts, drawings and testing data to
one of the FAA's Aircraft Certification Offices where the submitted data are
analyzed. We believe that an applicant's ability to successfully complete the
PMA
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process is limited by several factors, including (i) the agency's confidence
level in the applicant, (ii) the complexity of the part, (iii) the volume of
PMAs being filed, and (iv) the resources available to the FAA. We also believe
that companies such as HEICO that have demonstrated their manufacturing
capabilities and established favorable track records with the FAA generally
receive a faster turnaround time in the processing of PMA applications. Finally,
we believe that the PMA process creates a significant barrier to entry in this
market niche through both its technical demands and its limits on the rate at
which competitors can bring products to market.
As part of our growth strategy, we have continued to increase our research and
development activities. Research and development expenditures by the FSG
increased from approximately $300,000 in 1991 to approximately $7.1 million in
fiscal 2001 including $1.3 million reimbursed in 2001 under our strategic
alliances with Lufthansa and AMR. We believe that our FSG's research and
development capabilities are a significant component of our historical success
and an integral part of our growth strategy.
The Company's expanded research and development activities have included
development of more complex jet engine and aircraft replacement parts. In
October 1999, the Company received its first PMA for a compressor blade from the
FAA and is continuing research and development of other complex parts. The
Company believes the development and sale of complex parts represents a
significant long-term market opportunity; however, no assurance can be given
that the FAA will continue to grant PMAs or that the Company will achieve
acceptable levels of net sales and gross profits on such parts in the future.
We benefit from our proprietary rights relating to certain designs,
engineering, manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our unique manufacturing capabilities are required by the
customer's specifications or designs, thereby necessitating reliance on us for
production of such designed product.
While we have developed proprietary techniques, software and manufacturing
expertise for the manufacture of jet engine and aircraft replacement parts, we
have no patents for these proprietary techniques and choose to rely on trade
secret protection. We believe that although our proprietary techniques, software
and expertise are subject to misappropriation or obsolescence, development of
improved methods and processes and new techniques by us will continue on an
ongoing basis as dictated by the technological needs of our business.
Impact of September 11th Terrorist Attacks
On September 11, 2001, there were terrorist attacks on New York's World Trade
Center towers and on the Pentagon, which involved the hijacking of four U.S.
commercial aircraft. In the aftermath of the terrorist attacks, passenger
traffic on commercial flights was significantly lower than prior to the attacks
and many commercial airlines reduced their operating schedules. The overall
result of the terrorist attacks was billions in losses to the airline industry.
While the Company's diversification of its operations beyond commercial
aerospace markets has cushioned the impacts of the September 11, 2001 attacks,
the Company has seen a directly related decline in sales to the commercial
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aerospace markets particularly, sales of PMA replacement parts. As a result of
the September 11, 2001 events, many of the airlines are accelerating the
retirement of their JT8D fleets. Although the Company contemplated these
retirements, they are currently expected to occur sooner than previously
anticipated. Currently approximately two-thirds of the Company's PMA parts
offered for sale are non-JT8D and the Company's strategy is to increase market
penetration for its non-JT8D parts. However, revenue generated from the sale of
JT8D PMA parts represented approximately 21% of fiscal 2001 consolidated net
sales. The Company has also increased its new product development budget for
fiscal 2002 by approximately $3 million (a 50% increase over the FSG's new
product development expense in fiscal 2001) and plans to introduce a record
number of new commercial aircraft parts. Although the Company has experienced a
decline in sales to the commercial aerospace market, demand for the Company's
defense products and services appears to have accelerated. The Company cannot
currently predict the long-term impact of the September 11th events on its
operations.
Electronic Technologies Group
Our ETG is headquartered in Miami, Florida and manufactures various types of
electrically and electro-optical engineered products, such as power supplies,
shielding for communications, computer and aerospace applications, infrared
simulation and test equipment, laser diode drivers and hybrid laser rangefinder
receivers. In addition, our ETG also repairs and overhauls inertial navigation
systems and other avionics, instruments and components for commercial, military
and business aircraft. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a listing of operating subsidiaries
included in the ETG.
Until the September 2000 sale of Trilectron, we also served the commercial and
military ground support equipment markets. This entire product line was sold in
the sale discussed in Note 3 to the Consolidated Financial Statements.
Products of the ETG include:
. On-board Aircraft Power Supplies and Batteries. Our ETG manufactures power
supply and current control products and replacement components used in
aircraft. Our products include battery and charger units to support
emergency lighting, emergency fuel shut-off devices, emergency exit door
power assists, static inverters for emergency lighting and cockpit lighting
dimmers. While periodically entire units may require replacement, there is
an ongoing replacement market for batteries which have an estimated service
life of approximately 3 to 5 years. These products are mainly sold to OEM
customers and customers in the retrofit and modification market.
. Repair and Overhaul Services. ETG is engaged in the repair and overhaul of
inertial navigation systems which are used by commercial and military
aircraft to ascertain their locations during flight operations. In
addition, we also repair and overhaul various avionics, instruments and
other components for a wide array of commercial, military and business
aircraft.
. Electro-optical Infrared Simulation and Test Equipment. ETG is a leading
international designer and manufacturer of state-of-the-art aerospace and
defense electro-optical infrared simulation and test equipment. Our
products include high precision blackbody sources, optical systems and
fully integrated test calibration systems. In addition, the MIRAGE IR
Scene Simulator is used to project infrared scenes to assist with product
development and training for complex infrared targeting and imaging systems
and other items.
. Electro-optical Laser Products. ETG is engaged in the design and
manufacture of electro-optical laser products primarily for use in the
laser industry. Our products include hybrid laser rangefinder receivers,
amplifiers, photodetectors, amplifier modules, flash lamp drivers and power
supplies.
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. Circuit Board Shielding. ETG manufactures electromagnetic interference and
radio frequency interference shielding for circuit boards and other items
utilized in telecommunications, aerospace, and microwave applications. The
circuit board shielding technology reduces electronic noise and protects
sensitive components. We have a line of patented products and the ability
to fabricate in a wide variety of shapes and applications, which we believe
is a manufacturing advantage.
Financial information about operating segments, foreign and domestic operations
and export sales
See Note 15 to the Consolidated Financial Statements for financial information
by operating segment and information about foreign and domestic operations as
well as export sales.
Sales, Marketing and Customers
Each of our operating segments independently conducts sales and marketing
efforts directed at their respective customers and industries and, in some
cases, collaborates with other operating divisions and subsidiaries within its
group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association (AIA), the leading trade association representing the nation's
manufacturers of commercial, military and business aircraft, aircraft engines
and related components and equipment. Due in large part to our established
industry presence, we enjoy strong customer relations, name recognition and
repeat business.
We sell our products to a broad customer base consisting of domestic and
foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 22% of total net sales during the year
ended October 31, 2001.
Competition
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing of engine parts as a result of lower labor costs and other factors.
Our jet engine and aircraft replacement parts business competes primarily with
Pratt & Whitney, General Electric and Rolls Royce. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the FSG, we compete with both the leading jet engine OEMs and a large number of
machining, fabrication and repair companies, some of which have greater
financial and other resources than we do. Competition is based mainly on price,
product performance, service and technical capability.
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Competition for the repair and overhaul of airframe and engine components
comes from three principal sources: OEMs, major commercial airlines and other
independent service companies. Some of these companies have greater financial
and other resources than we do. Some major commercial airlines own and operate
their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own components and for third parties.
OEMs also maintain service centers that provide repair and overhaul services for
the components they manufacture. Other independent service organizations also
compete for the repair and overhaul business of other users of aircraft
components. We believe that the principal competitive factors in the repair and
overhaul market are quality, turnaround time, overall customer service and
price.
Our ETG competes with several large and small domestic and foreign
competitors, some of which have greater financial and other resources than we
do. The market for our electronic products are niche markets with several
competitors with competition based mainly on design, technology, quality, price
and customer satisfaction.
Raw Materials
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel, pre-
plated phospher bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
Backlogs
Our total backlog of unshipped orders was $47.0 million on October 31, 2001
versus $30.5 million on October 31, 2000. Our FSG operations had a backlog of
unshipped orders as of October 31, 2001 of $12.2 million as compared to $13.9
million as of October 31, 2000. This backlog excludes forecasted shipments for
certain contracts of the FSG pursuant to which customers provide only estimated
annual usage and not firm purchase orders. Our ETG operations had a backlog of
$34.7 million as of October 31, 2001 and $16.6 million as of October 31, 2000.
Substantially all of the backlog of orders as of October 31, 2001 are expected
to be delivered during fiscal 2002. Our backlogs are typically short-lead in
nature with many product orders being received by the Company within the month
of shipment.
Government Regulation
The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft parts operated in the United States. Its regulations are designed to
ensure that all aircraft and aviation equipment are continuously maintained in
proper condition to ensure safe operation of the aircraft. Similar rules apply
in other countries. All aircraft must be maintained under a continuous condition
monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for the various
types of aircraft and equipment are prescribed by regulatory authorities and can
be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us.
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There has been no material adverse effect to the Company's consolidated
financial statements as a result of these government regulations.
Environmental Regulation
Our operations are subject to extensive, and frequently changing, federal,
state and local environmental laws and substantial related regulation by
government agencies, including the Environmental Protection Agency (the EPA).
Among other matters, these regulatory authorities impose requirements that
regulate the operation, handling, transportation, and disposal of hazardous
materials, the health and safety of workers, and require us to obtain and
maintain licenses and permits in connection with our operations. This extensive
regulatory framework imposes significant compliance burdens and risks on us.
Notwithstanding these burdens, we believe that we are in material compliance
with all federal, state, and local laws and regulations governing our
operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 (OSHA) mandates general requirements for safe workplaces for
all employees. In particular, OSHA provides special procedures and measures for
the handling of some hazardous and toxic substances. In addition, specific
safety standards have been promulgated for workplaces engaged in the treatment,
disposal or storage of hazardous waste. Requirements under state law, in some
circumstances, may mandate additional measures for facilities handling materials
specified as extremely dangerous. We believe that our operations are in material
compliance with OSHA's health and safety requirements.
Insurance
We are a named insured under policies which include the following coverage:
(i) product liability, including grounding; (ii) personal property, inventory
and business income at our facilities; (iii) general liability coverage; (iv)
employee benefit liability; (v) international liability and automobile
liability; (vi) umbrella liability coverage; and (vii) various other activities
or items subject to certain limits and deductibles. We believe that coverages
are adequate to insure against the various liability risks of our business. The
Company has seen an increase in insurance costs following the September 11th
terrorist attacks, however, the increase in these costs experienced to date are
not currently expected to have a significant adverse impact on the Company's
operations.
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Employees
As of December 31, 2001, the Company had 1,012 full-time employees, of which
730 were in the FSG, 269 were in the ETG, and 13 were corporate. None of our
employees are represented by a union. We believe that our employee relations are
good.
Item 2. Properties
We own or lease the following facilities:
Flight Support Group
--------------------
Square Owned/Lease
Location Description Footage Expiration
--------------------- ------------------------- --------- -------------
Hollywood, Florida Manufacturing and 140,000 Owned
engineering facility and
corporate headquarters
Hollywood, Florida Overhaul and repair facility 45,000 Owned
Atlanta, Georgia Manufacturing and 40,000 Owned
engineering facility
Miami, Florida Overhaul and repair facility 60,000 Owned
Miami, Florida Overhaul and repair facility 14,000 September 2002
Miami, Florida Warehouse facility 14,000 September 2002
Anacortes, Washington Engineering and 7,000 June 2003
manufacturing facility
Glastonbury, Connecticut Engineering facility 5,000 June 2002
Corona, California Manufacturing and 91,000 August 2003
engineering facility
Roswell, New Mexico Manufacturing and 45,000 Month to month
engineering facility
Fort Myers, Florida Overhaul and repair facility 30,000 Owned
Hayward, California Overhaul and repair facility 27,000 August 2006
Titusville, Florida Engineering facility 2,000 April 2002
Phoenix, Arizona Engineering facility 2,000 December 2005
Electronic Technologies Group
-----------------------------
Location Description Footage Expiration
--------------------- ------------------------- --------- -------------
Sarasota, Florida Manufacturing and 10,000 March 2004
engineering facility
Tampa, Florida Manufacturing and 41,000 August 2003
engineering facility
Santa Barbara, California Manufacturing and 14,000 May 2003 - August 2003
engineering facility
Cleveland, Ohio Overhaul and repair facility 19,000 March 2011
Nashville, Tennessee Manufacturing and 6,000 October 2003
engineering facility
Orlando, Florida Manufacturing and 21,000 April 2002 - July 2002
engineering facility
10
Corporate
---------
Square Owned/Lease
Location Description Footage Expiration
--------------------- ------------------------- --------- -------------
Hollywood, Florida Corporate headquarters Included Owned
above
Miami, Florida Administrative offices 6,000 Owned
For additional information with respect to our leases, see Note 7 of Notes to
our Consolidated Financial Statements.
We believe that our existing facilities are sufficient to meet our operational
needs for the foreseeable future. The loss of any of the Company's facilities
could have an adverse impact on operations in the short-term.
Item 3. Legal Proceedings
In October 2001, the Company settled a lawsuit filed by Travelers Casualty &
Surety Co., f/k/a the Aetna Casualty and Surety Co. (Travelers) in May 1998.
The Travelers complaint sought reimbursement of legal fees and costs totaling in
excess of $15 million paid by Travelers in defending the Company in litigation
with United Technologies Corporation, which was settled in March 2000. In
addition, Travelers sought a declaratory judgment that the Company did not have
insurance coverage under certain insurance policies with Travelers and,
accordingly, that Travelers did not have a duty to defend or indemnify the
Company under such policies. The settlement with Travelers did not result in
any gain or loss to the Company and all claims were dismissed.
The Company is involved in various legal actions arising in the normal course
of business. Based upon the amounts sought by the plaintiffs in these actions,
management is of the opinion that the outcome of these matters will not have a
material adverse effect on the Company's business or financial condition.
Item 4. Submission of Matters to a Vote of Securities Holders
There were no matters submitted to a vote of securities holders during the
fourth quarter of fiscal 2001.
Executive Officers of the Registrant
The Executive Officers are elected by the Board of Directors at the first
meeting following the annual meeting of shareholders and serve at the discretion
of the Board. The names and ages of, and offices held by, the executive officers
of the Company are as follows:
Director
Name Age Position(s) Since
---- --- ----------- --------
Laurans A. Mendelson 63 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 55 Executive Vice President and Chief Financial
Officer
Eric A. Mendelson 36 Executive Vice President and Director, President 1992
of HEICO Aerospace Holdings Corp.
Victor H. Mendelson 34 Executive Vice President, General Counsel and 1996
Director, President of HEICO Electronics
Technologies Corp.
James L. Reum 70 Executive Vice President of HEICO
Aerospace Holdings Corp.
11
Laurans A. Mendelson has served as Chairman of the Board of the Company since
December 1990. Mr. Mendelson has also served as Chief Executive Officer of the
Company since February 1990, President of the Company since September 1991 and
served as President of the Company's former MediTek Health Corporation
subsidiary from May 1994 until its sale in July 1996. Mr. Mendelson serves on
the board of governors and is a member of the Finance Committee of the Aerospace
Industries Association in Washington, D.C. He also serves on the Board of
Directors and is Chairman of the Audit Committee of Hawker Pacific Aerospace,
which provides overhaul and repair services to the aviation industry. Mr.
Mendelson is also a member of the Board of Trustees, the Executive Committee and
Founders Club of Mount Sinai Medical Center in Miami Beach, Florida. In
addition, Mr. Mendelson served as a Trustee of Columbia University in The City
of New York from 1995 to 2001, as well as, Chairman of the Trustees' Audit
Committee. Mr. Mendelson currently serves as Trustee Emeritus of Columbia
University and maintains membership positions on the Trustee Committees he had
before becoming Trustee Emeritus. Mr. Mendelson is a Certified Public
Accountant.
Thomas S. Irwin has served as Executive Vice President and Chief Financial
Officer of the Company since September 1991 and served as Senior Vice President
of the Company from 1986 to 1991 and Vice President and Treasurer from 1982 to
1986. Mr. Irwin is a Certified Public Accountant.
Eric A. Mendelson has served as Executive Vice President of the Company since
2001, Vice President of the Company since 1992, and has been President and Chief
Executive Officer of HEICO Aerospace, a subsidiary of HEICO, since is formation
in 1997 and President of HEICO Aerospace Corporation since 1993. He also served
as President of HEICO's Jet Avion Corporation, a wholly owned subsidiary of
HEICO Aerospace, from 1993 to 1996 and served as Jet Avion's Executive Vice
President and Chief Operating Officer from 1991 to 1993. From 1990 to 1991, Mr.
Mendelson was Director of Planning and Operations of the Company. Mr. Mendelson
is a co-founder, and, since 1987, has been Managing Director of Mendelson
International Corporation (MIC), a private investment company which is a
shareholder of HEICO. Eric Mendelson is the son of Laurans Mendelson and the
brother of Victor Mendelson.
Victor H. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company since 1996, as President and Chief
Executive Officer of HEICO Electronic Technologies Corp., a subsidiary of HEICO,
since September 1996 and as General Counsel of the Company since 1993. He served
as Executive Vice President of MediTek Health Corporation from 1994 and its
Chief Operating Officer from 1995 until its sale in July 1996. He was the
Company's Associate General Counsel from 1992 until 1993. From 1990 until 1992,
he worked on a consulting basis with the Company, developing and analyzing
various strategic opportunities. Mr. Mendelson is a co-founder, and, since 1987,
has been President of MIC (a private investment company which is a shareholder
of HEICO). He is a Trustee of St. Thomas University, Miami, Florida and Chairman
of its Finance Committee, as well as a Director of the Florida Grand Opera.
Victor Mendelson is the son of Laurans Mendelson and the brother of Eric
Mendelson.
James L. Reum has served as Executive Vice President of HEICO Aerospace since
April 1993 and Chief Operating Officer of HEICO Aerospace from May 1995 until
September 1999. He also served as President of LPI Industries Corporation from
1991 to 1998 and President of Jet Avion Corporation from 1996 to 1998. From
January 1990 to August 1991, he served as Director of Research and Development
for Jet Avion Corporation. From 1986 to 1989, Mr. Reum was self-employed as a
management and engineering consultant to companies primarily within the
aerospace industry. From 1957 to 1986, he was employed in various management
positions with Chromalloy Gas Turbine Corp., Cooper Airmotive (later named
Aviall, Inc.), United Airlines, Inc. and General Electric Company. Mr. Reum
retired from full-time service to HEICO Aerospace in August 2001, and remains
active on a part-time basis with HEICO Aerospace.
12
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's Directors, Executive Officers and 10% shareholders to file initial
reports of ownership and changes in ownership of Common Stock with the
Securities and Exchange Commission and the New York Stock Exchange. Directors,
Executive Officers and 10% shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file. Based on the review of such reports
furnished to the Company, the Company believes that during 2001, the Company's
Directors, Executive Officers and 10% shareholders complied with all Section
16(a) filing requirements applicable to them.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Class A Common Stock and the Common Stock are listed and traded
on the New York Stock Exchange (NYSE) under the symbols "HEI.A" and "HEI,"
respectively. The following table sets forth, for the periods indicated, the
high and low sales prices for the Class A Common Stock and the Common Stock as
reported on NYSE, as well as the amount of cash dividends paid per share during
such periods. Lufthansa Technik, as a 20% shareholder of our FSG, will be
entitled to 20% of any dividends paid by our FSG with the balance payable to the
Company.
In July 2000 and August 2001, the Company paid 10% stock dividends on all
shares outstanding in Class A Common Stock. The quarterly sales prices and cash
dividend amounts have been retroactively adjusted for the 10% stock dividends.
Class A Common Stock
--------------------
Cash Dividends
High Low Per Share
---- --- -------------
Fiscal 2000
First Quarter.................................................... $17.56 $10.33 $.022
Second Quarter................................................... 14.67 9.09 --
Third Quarter.................................................... 14.55 9.25 $.022
Fourth Quarter................................................... 14.95 9.89 --
Fiscal 2001:
First Quarter.................................................... $13.17 $ 9.15 $.022
Second Quarter................................................... 15.55 11.00 --
Third Quarter.................................................... 17.91 13.73 $.023
Fourth Quarter................................................... 17.58 9.40 --
On December 31, 2001 there were 1,133 holders of record of the Class A
Common Stock.
Common Stock
------------
Cash Dividends
High Low Per Share
---- --- -------------
Fiscal 2000:
First Quarter.................................................... $18.49 $11.94 $.022
Second Quarter................................................... 14.93 10.95 --
Third Quarter.................................................... 18.41 10.17 $.022
Fourth Quarter................................................... 18.30 10.68 --
Fiscal 2001:
First Quarter.................................................... $17.05 $11.14 $.022
Second Quarter................................................... 16.64 12.36 --
Third Quarter.................................................... 19.26 13.91 $.023
Fourth Quarter................................................... 20.58 10.98 --
On December 31, 2001, there were 1,115 holders of record of the Common
Stock.
14
Item 6. Selected Financial Data
Year Ended October 31, (5)
--------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands, except per share data)
Operating Data:
Net sales.................................................. $ 63,674 $ 95,351 $141,269 $202,909 $171,259
-------- -------- -------- -------- --------
Gross profit............................................... 20,629 36,104 57,532 75,811 71,146
Selling, general and administrative expenses............... 11,515 17,140 24,717 36,576 39,578
Write-off of receivables(1)................................ -- -- -- 1,312 577
-------- -------- -------- -------- --------
Operating income........................................... 9,114 18,964 32,815 37,923 30,991
-------- -------- -------- -------- --------
Interest expense........................................... 477 984 2,173 5,611 2,486
-------- -------- -------- -------- --------
Gain on sale of product line(2)............................ -- -- -- 17,296 --
-------- -------- -------- -------- --------
Income (loss):
From continuing operations............................... 7,019 10,509 16,337 27,739 15,833
From gain on sale of discontinued operations(3).......... -- -- -- (1,422) --
-------- -------- -------- -------- --------
Net income................................................. $ 7,019 $ 10,509 $ 16,337 $ 26,317 $ 15,833
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding:(4)
Basic.................................................... 14,568 15,124 17,933 19,114 19,925
Diluted.................................................. 17,446 18,805 21,348 21,908 22,305
Per Share Data:(4)
Income from continuing operations:
Basic.................................................... $ .48 $ .69 $ .91 $ 1.45(6) $ .79
Diluted.................................................. .40 .56 .77 1.27(6) .71
Net income:
Basic.................................................... .48 .69 .91 1.38(6) .79
Diluted.................................................. .40 .56 .77 1.20(6) .71
Cash dividends(4).......................................... .037 .041 .041 .044 .045
Balance Sheet Data (at year end):
Working capital............................................ $ 45,131 $ 40,587 $ 63,278 $ 55,469 $ 71,515
Total assets............................................... 88,639 133,061 273,163 281,732 325,640
Total debt (including current portion)..................... 10,800 30,520 73,501 40,042 67,014
Minority interests in consolidated subsidiaries............ 3,273 14,892 30,022 33,351 36,845
Shareholders' equity....................................... 59,446 67,607 139,289 169,844 188,769
__________
(1) Represents write-off of receivables as a result of bankruptcy filings by
certain customers.
(2) Represents the gain on sale of Trilectron Industries, Inc. (Trilectron) in
September 2000.
(3) Represents adjustment to gain from the sale of the discontinued health care
operations that were sold in fiscal 1996.
(4) Information has been adjusted to reflect a three-for-two stock split in
December 1997, a 10% stock dividend paid in 1997, a 50% stock distribution
paid in shares of Class A Common Stock in April 1998 and 10% stock
dividends paid in shares of Class A Common Stock in July 2000 and August
2001.
(5) Results include the results of acquisitions and disposition of a product
line from each respective effective date.
(6) The gain on sale of Trilectron referenced above increased basic and diluted
income per share from continuing operations and net income by $0.55 and
$0.48, respectively.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Our Flight Support Group (FSG) consists of HEICO Aerospace Holdings Corp.
(HEICO Aerospace) and the following principal operating subsidiaries:
Name Description of Principal Operations
---- -----------------------------------
Jet Avion Corporation (Jet Avion).................. Design and manufacture of FAA-approved
replacement parts
McClain International, Inc. (McClain).............. Design, manufacture and overhaul of FAA-approved
replacement parts
Rogers-Dierks, Inc. (Rogers-Dierks)................ Design and manufacture of FAA-approved
replacement parts
Turbine Kinetics, Inc. (Turbine)................... Design and manufacture of FAA-approved
replacement parts
Aviation Facilities, Inc. (AFI).................... Design and manufacture of FAA-approved
replacement parts
HEICO Aerospace Parts Corp. (HAPC)................. Design and manufacture of FAA-approved
replacement parts
HEICO Aerospace Corporation (HAC).................. Sale and distribution of FAA-approved replacement parts
LPI Industries Corporation (LPI)................... Original equipment manufacturer subcontractor
Aircraft Technology, Inc. (Aircraft Technology).... Repair and overhaul of jet engine and aircraft parts
Northwings Accessories Corporation (Northwings).... Repair and overhaul of jet engine and aircraft
components and accessories
Associated Composite, Inc. (ACI)................... Repair and overhaul of aircraft composites and
flight surfaces
Air Radio & Instruments Corp. (Air Radio).......... Repair and overhaul of avionics, instruments and
electronic equipment for aircraft
Future Aviation, Inc. (Future)..................... Repair and overhaul of regional, commuter and business
aircraft components and accessories
Avitech Engineering Corporation (Avitech).......... Repair and overhaul of regional, commuter and business
aircraft components and accessories
Thermal Structures, Inc. (Thermal)................. Manufacture of thermal insulation products and related
components
16
Our Electronic Technologies Group (ETG) consists of HEICO Electronic
Technologies Corp. and the following operating subsidiaries:
Name Description of Principal Operations
---- -----------------------------------
Radiant Power Corp. (Radiant)...................... Design and manufacture of electrical back-up power
supplies and battery packs for commercial
aircraft applications
Aero Design, Inc. (Aero Design).................... Design and manufacture of electrical back-up power
supplies and battery packs for commercial
aircraft applications
Leader Tech, Inc. (Leader Tech).................... Manufacture of electromagnetic interference and radio
frequency interference shielding for primarily
communications, computer and aerospace
applications
Santa Barbara Infrared, Inc. (SBIR)................ Design and manufacture of aerospace and defense
electronically controlled electro-optical infrared
simulation and test equipment
Analog Modules, Inc. (AMI)......................... Design and manufacture of electro-optical
products primarily for use in the laser industry
Inertial Airline Services, Inc. (IAS).............. Repair and overhaul of inertial navigation systems and
other avionics equipment used in commercial,
military and business aircraft
In September 2000, the Company sold Trilectron Industries, Inc.
(Trilectron), which was formerly a part of the ETG. Trilectron designed and
manufactured electronically controlled ground support equipment for aircraft.
The sale of this product line is further discussed below and in Note 3 to our
Consolidated Financial Statements.
Our results of operations during the current and prior fiscal years have
been affected by a number of significant transactions. This discussion of our
financial condition and results of operations should be read in conjunction with
our Consolidated Financial Statements and Notes thereto included or incorporated
by reference herein. For further information regarding the acquisitions and
strategic alliances discussed below, see Note 2 to our Consolidated Financial
Statements. The acquisitions have been accounted for using the purchase method
of accounting and are included in the Company's results of operations from the
effective date of acquisition.
In October 1997, the Company entered into a strategic alliance with
Lufthansa, the technical services subsidiary of Lufthansa German Airlines,
whereby Lufthansa invested approximately $26 million in HEICO Aerospace,
including $10 million paid at closing pursuant to a stock purchase agreement and
approximately $16 million paid to HEICO Aerospace pursuant to a research and
development cooperation agreement, which has partially funded the accelerated
development of additional Federal Aviation Administration (FAA)-approved
replacement parts for jet engines and aircraft. The funds received as a result
of the research and development cooperation agreement reduce research and
development expenses in the period such expenses are incurred. In addition,
Lufthansa and HEICO Aerospace have agreed to cooperate regarding technical
services and marketing support for replacement parts on a worldwide basis. In
connection with subsequent acquisitions by HEICO Aerospace, Lufthansa invested
additional amounts aggregating $21 million pursuant to its option to maintain a
20% equity interest.
Between December 1998 and June 2000, the Company acquired Rogers-Dierks,
Radiant, Air Radio, Leader Tech, Turbine, Thermal, SBIR and Future for an
aggregate purchase price of approximately $121 million.
17
In April 2001, the Company acquired substantially all of the assets and
certain liabilities of Analog Modules, Inc. (AMI) for $15.6 million in cash paid
at closing.
In August 2001, the Company acquired IAS pursuant to a stock purchase
agreement, for $20 million in cash and $5 million in HEICO Class A Common shares
(289,964 shares) paid at closing. The Company has guaranteed that the resale
value of such Class A Common shares will be at least $5 million through August
31, 2002. Should the market value be lower than $5 million by August 31, 2002,
the Company would have to pay the difference in cash. Based on the closing
market price of the HEICO Class A Common shares on October 31, 2001, the Company
would have to pay the seller an additional amount of approximately $1.5 million.
In addition, subject to meeting certain earnings targets during the first two
years following acquisition, the Company could pay additional consideration of
$6 million in cash. Concurrent with the purchase, the Company loaned the seller
$5 million which is due August 31, 2002 and is secured by the 289,964 shares of
HEICO Class A Common Stock.
In addition, during fiscal 2001, the Company acquired certain assets and
liabilities of other companies, (including Avitech, AFI and Aero Design) with an
aggregate purchase price totaling approximately $9 million.
In September 2000, the Company consummated the sale of all of the
outstanding capital stock of HEICO Electronic's wholly-owned subsidiary,
Trilectron. In consideration of the sale of Trilectron's capital stock, the
Company received an aggregate of $69.0 million in cash and retained certain
property having a book value of approximately $1.5 million which was sold in
fiscal 2001. The proceeds from the sale were used to pay down the outstanding
balance on the Company's Credit Facility.
The sale of Trilectron did not meet the requirements for classification as
a discontinued operation in accordance with Accounting Principles Board Opinion
No. 30 because its activities could not be clearly distinguished, physically and
operationally and for financial reporting purposes, from the other assets,
results of operations, and activities of the Company's Electronic Technologies
Group (ETG) operating segment of which it was a part. Trilectron was managed as
part of the ETG and the ETG was treated as a single operating segment. The ETG
shared facilities, staff, information technology processing and other centrally
provided services with no allocation of costs and interest expense between the
divisions within the ETG. Accordingly, the sale was reported as a sale of a
product line and Trilectron's results of operations through the date of the
closing have been reported in the Company's consolidated statements of
operations.
The sale of Trilectron resulted in a pretax gain in fiscal 2000 of
$17,296,000 ($10,542,000 or $.48 per diluted share, net of income tax). The
pretax gain is net of expenses of $10.8 million directly related to the
transaction. Expenses related to the sale included Board-approved management
incentive bonuses, professional service fees, contract indemnification costs,
required reserves and miscellaneous costs and expenses. See Note 3 to the
Consolidated Financial Statements for further detail of expenses related to the
sale.
In February 2001, the Company, through its subsidiary, HEICO Aerospace
entered into a joint venture with AMR Corporation (AMR) to develop, design and
sell FAA-approved replacement parts. As part of the joint venture, AMR will
reimburse HEICO Aerospace a portion of new product research and development
costs. The funds received as a result of the new product research and
development costs paid by AMR generally reduce new product research and
development expenses in the period such expenses are incurred. The balance of
the development costs are incurred by the joint venture, which is 16% owned by
AMR. In addition, AMR and HEICO Aerospace have agreed to cooperate regarding
technical services and marketing support on a worldwide basis.
In April 1998, the Company paid a 50% stock distribution in shares of Class
A Common Stock. In July 2000 and August 2001, the Company paid 10% stock
dividends in shares of Class A Common Stock. All net income per
18
share, dividends per share and common stock outstanding information has been
adjusted for all years presented to give retroactive effect to stock
distributions and stock dividends.
Results of Operations
For the periods indicated, the following table sets forth the results of
operations, net sales and operating income before and after goodwill
amortization by operating segment and the percentage of net sales represented by
the respective items including fiscal 2000 and 1999 results as adjusted to
exclude the direct results of operations of the Trilectron product line. The
Company believes fiscal 2000 and 1999 results as adjusted provide more
meaningful information in certain cases for comparing the results of operations
in fiscal 2001. Accordingly, certain discussion of fiscal 2001 results below
reflects comparisons to the Company's fiscal 2000 results as adjusted to exclude
the direct results of operations of Trilectron.
1999 2000 2001
---------------------------------- ------------------------------- ------------
As Reported As Adjusted As Reported As Adjusted
----------------- -------------- -------------- --------------
Net sales $141,269,000 $104,652,000 $202,909,000 $152,756,000 $171,259,000
----------------- -------------- -------------- -------------- ------------
Cost of sales 83,737,000 54,369,000 127,098,000 86,061,000 100,113,000
Selling, general and
administrative expenses 24,717,000 20,250,000 36,576,000 30,886,000 39,578,000
Write-off of receivables -- -- 1,312,000 1,312,000 577,000
----------------- -------------- -------------- -------------- ------------
Total operating costs and expenses 108,454,000 74,619,000 164,986,000 118,259,000 140,268,000
----------------- -------------- -------------- -------------- ------------
Operating income $ 32,815,000 $ 30,033,000 $ 37,923,000 $ 34,497,000 $ 30,991,000
================= ============== ============== ============== ============
Net sales by segment:
FSG $ 94,617,000 $ 94,617,000 $119,304,000 $119,304,000 $131,621,000
ETG 46,652,000 10,035,000 83,605,000 33,452,000 39,638,000
----------------- -------------- -------------- -------------- ------------
$141,269,000 $104,652,000 $202,909,000 $152,756,000 $171,259,000
================= ============== ============== ============== ============
Operating income (before
goodwill amortization):
Flight Support Group $ 34,337,000 $ 34,337,000 $ 34,054,000 $ 34,054,000 $ 32,390,000
Electronic Technologies Group 6,603,000 3,666,000 14,144,000 10,478,000 9,734,000
Other, primarily corporate (4,460,000) (4,460,000) (4,162,000) (4,162,000) (4,298,000)
----------------- -------------- -------------- -------------- ------------
$ 36,480,000 $ 33,543,000 $ 44,036,000 $ 40,370,000 $ 37,826,000
================= ============== ============== ============== ============
Operating income (after
goodwill amortization):
Flight Support Group $ 31,338,000 $ 31,338,000 $ 29,621,000 $ 29,621,000 $ 27,404,000
Electronic Technologies
Group 5,937,000 3,155,000 12,464,000 9,038,000 7,885,000
Other, primarily corporate (4,460,000) (4,460,000) (4,162,000) (4,162,000) (4,298,000)
----------------- -------------- ------------- -------------- ------------
$ 32,815,000 $ 30,033,000 $ 37,923,000 $ 34,497,000 $ 30,991,000
================= ============== ============= ============== ============
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 40.7% 48.0% 37.4% 43.7% 41.5%
Selling, general and
administrative expenses 17.5% 19.3% 18.0% 20.2% 23.1%
Write-off receivables -- -- 0.6% 0.9% 0.3%
Operating income 23.2% 28.7% 18.7% 22.6% 18.1%
Interest expense 1.5% N/A 2.8% N/A 1.5%
Interest and other income 0.6% N/A 0.5% N/A 0.9%
Gain on sale of product line -- N/A 8.5% N/A --
Income tax expense 8.2% N/A 9.6% N/A 6.7%
Minority interests 2.5% N/A 1.6% N/A 1.6%
Net income 11.6% N/A 13.0% N/A 9.2%
19
Comparison of Fiscal 2001 to Fiscal 2000
Net Sales
Net sales in fiscal 2001 totaled $171.3 million, up 12% when compared to
fiscal 2000 net sales of $152.8 million as adjusted (to exclude Trilectron) in
fiscal 2000.
The increase in sales for fiscal 2001 reflects an increase of $12.3 million (a
10% increase) to $131.6 million from the Company's FSG and an increase of $6.2
million as adjusted (an 18% increase) to $39.6 million in revenues from the
Company's ETG. The FSG sales increase primarily represents revenues resulting
from an increase in FAA-approved (PMA) replacement parts sales and an increase
in component repair and overhaul revenues. PMA replacement parts sales in
fiscal 2001 increased over fiscal 2000 primarily as a result of new products
while component repair and overhaul revenues increased as a result of the
Company's entry into the regional and business aviation maintenance repair and
overhaul (MRO) market with the acquisition of Future in June 2000 partially
offset by softness in the commercial MRO market. The FSG sales increase
includes additional revenue of $9.0 million from businesses acquired during
fiscal 2000 (Future) and fiscal 2001 (Avitech and AFI). The FSG's commercial
aerospace operations experienced a decline in sales after the September 11, 2001
terrorist attacks discussed below. The ETG sales increase is primarily
attributed to revenues of $9.8 million resulting from the acquisition of AMI in
April 2001 and IAS in August 2001, partially offset by weakness in sales of EMI
shielding products of Leader Tech to the electronics and communications
industries reflecting the general economic weakness within some of the
technology industries.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 41.5% for fiscal 2001 as compared
to 43.7% as adjusted for fiscal 2000. This decrease reflects lower margins
within the FSG contributed by a budgeted increase in new product research and
development expenses of $3.5 million resulting from lower new product research
and development reimbursements as discussed below and softness within the
commercial component repair and overhaul market, partially offset by the impact
of higher PMA replacement parts sales. The decrease also reflects lower margins
within ETG as a result of lower sales of higher margin EMI shielding products.
Cost of sales amounts for fiscal 2001 and 2000 include approximately $5.8
million and $2.3 million, respectively, of new product research and development
expenses of HEICO Aerospace. These amounts are net of $700,000 and $5.2 million
received from Lufthansa pursuant to the research and development cooperation
agreement in fiscal 2001 and 2000, respectively. As of October 31, 2001, the
Company has no future reimbursements to be received from Lufthansa under the
agreement. The new product research and development expenses for fiscal 2001 are
also net of $575,000 receivable from AMR Corporation, parent of American
Airlines, under their joint venture agreement with HEICO Aerospace (see Note 2
to consolidated financial statements). FSG's new product research and
development expense for fiscal 2002 is expected to increase by approximately $3
million as the Company plans to introduce additional new commercial jet engine
and aircraft parts.
Selling, general and administrative (SG&A) expenses increased $8.7 million to
$39.6 million for fiscal 2001 from $30.9 million as adjusted for fiscal 2000.
As a percentage of net sales, SG&A expenses increased to 23.1% for fiscal 2001
compared to 20.2% as adjusted for fiscal 2000. The increases in SG&A expenses
and SG&A expenses as a percent of net sales are primarily a result of higher
marketing costs in the FSG associated with expanding product lines and a
$700,000 increase in goodwill amortization primarily resulting from the
acquisition of Future and AMI.
In fiscal 2001 and fiscal 2000, the Company wrote-off receivables of $577,000
and $1,312,000, respectively, as a result of bankruptcy filings by certain
customers. The charge reduced fiscal 2001 and 2000 net income by $291,000
($.01 per diluted share) and $651,000 ($.03 per diluted share), respectively.
There were no significant receivable write-offs resulting from bankruptcies
during 1999.
20
Operating Income
Operating income decreased $3.5 million to $31.0 million (a 10% decrease) for
fiscal 2001 from $34.5 million as adjusted for fiscal 2000. As a percent of net
sales, operating income decreased from 22.6% in fiscal 2000 as adjusted to 18.1%
in fiscal 2001. The decrease in operating income and operating income as a
percent of net sales reflects a decrease of $2.2 million (a 7% decrease) from
$29.6 million to $27.4 million in the Company's FSG and a decrease of $1.2
million (a 13% decrease) from $9.0 million as adjusted to $7.9 million in the
Company's ETG. The FSG's operating income as a percent of net sales declined
from 24.8% in fiscal 2000 to 20.8% in fiscal 2001 while the ETG's operating
income as a percent of net sales decreased from 27.0% in fiscal 2000 to 19.9% in
fiscal 2001. The decrease in FSG operating income and operating income as a
percent of net sales in fiscal 2001 was due primarily to the impact of higher
PMA replacement parts sales discussed above being more than offset by lower
gross profit margins reflecting lower new product research and development
reimbursements, higher marketing costs and higher goodwill amortization.
Operating income for fiscal 2001 was also affected by softness in the commercial
MRO market and the impact of the September 11, 2001 events on commercial airline
customers, discussed below. The decrease in ETG operating income and operating
income as a percent of net sales was due primarily to lower sales of higher
margin EMI shielding products discussed above, partially offset by additional
earnings of AMI (acquired April 2001) and IAS (acquired August 2001).
Operating Income before Goodwill
Operating income before goodwill amortization decreased $2.6 million to $37.8
million for fiscal 2001 from $40.4 million as adjusted for fiscal 2000. The
decrease in operating income before goodwill reflects the lower operating income
discussed above.
Interest Expense
Interest expense decreased $3.1 million to $2.5 million from fiscal 2000 to
fiscal 2001. The decrease was principally due to a decrease in the outstanding
debt balances during the period related to repayment of borrowings on the
Company's Credit Facility from the proceeds from the sale of Trilectron and a
decrease in interest rates partially offset by additional borrowings to
partially fund acquisitions.
Interest and Other Income
Interest and other income increased by $669,000 to $1.6 million from fiscal
2000 to fiscal 2001 due principally to a pretax gain of $657,000 realized on the
sale of property retained in the sale of the Trilectron and a realized gain of
$180,000 on the sale of long-term investments.
Income Tax Expense
The Company's effective tax rate decreased to 38.1% in fiscal 2001 from 38.6%
in fiscal 2000, primarily due to a higher tax benefit on export sales partially
offset by higher non-deductible goodwill resulting from acquisitions. For a
detailed analysis of the provisions for income taxes, see Note 8 to the
Consolidated Financial Statements.
Minority Interests
Minority interests represents the 20% minority interest held by Lufthansa in
HEICO Aerospace and the 16% minority interest held by AMR in the joint venture
with HEICO Aerospace. Minority interests decreased $499,000 to $2.8 million in
fiscal 2001 from $3.3 million in fiscal 2000 mainly due to minority interest
income of $342,000 representing AMR's share in the new product research and
development costs incurred within the joint venture.
21
Income from Continuing Operations
The Company's income from continuing operations was $15.8 million, or $.71 per
diluted share, in fiscal 2001. Income from continuing operations in fiscal 2000
was $27.7 million, or $1.27 per diluted share, including the impact of the gain
on sale of Trilectron which was $10.5 million ($.48 per diluted share). The
decrease in income from continuing operations is primarily due to the gain on
the sale of product line in the fourth quarter of fiscal 2000 and the lower
operating income discussed above.
Cash earnings (net income adjusted to exclude goodwill amortization) per
diluted share was $.91 in fiscal 2001 and $.97 on income from continuing
operations in fiscal 2000 before the Trilectron gain. Including the gain on the
sale of Trilectron, cash earnings was $31,745,000, or $1.45 per share, in fiscal
2000. Cash earnings per diluted share is currently a financial indicator used
by management to assess results of operations on the basis of operating
performance. However, cash earnings per diluted share should not be considered
in isolation or as a substitute for measuring performance in accordance with
accounting principles generally accepted in the United States. Our calculation
of cash earnings per share may be different from the calculation used by others,
and therefore comparability may be affected.
Net Income
The Company's net income was $15.8 million, or $0.71 per diluted share, in
fiscal 2001. In fiscal 2000, net income was $26.3 million, or $1.20 per diluted
share, including the impact of the gain on sale of Trilectron, which was $10.5
million ($.48 per diluted share). The lower net income in fiscal 2001 is
primarily due to the Trilectron gain and the lower operating income discussed
above. Trilectron, which was sold in the fourth quarter of fiscal 2000,
contributed approximately 5 cents per diluted share to earnings in fiscal 2000.
September 11th Terrorist Attacks
On September 11, 2001, there were terrorist attacks on New York's World Trade
Center towers and on the Pentagon, which involved the hijacking of four U.S.
commercial aircraft. In the aftermath of the terrorist attacks, passenger
traffic on commercial flights was significantly lower than prior to the attacks
and many commercial airlines reduced their operating schedules. The overall
result of the terrorist attacks was billions in losses to the airline industry.
While the Company's diversification of its operations beyond commercial
aerospace markets has cushioned the impacts of the September 11, 2001 attacks,
the Company has seen a directly related decline in sales to the commercial
aerospace markets, particularly sales of PMA replacement parts. As a result of
the September 11, 2001 events, many of the airlines are accelerating the
retirement of their JT8D fleets. Although the Company contemplated these
retirements, they are currently expected to occur sooner than previously
anticipated. Currently approximately two-thirds of the Company's PMA parts
offered for sale are non-JT8D and the Company's strategy is to increase market
penetration for its non-JT8D parts. However, revenue from the sale of JT8D PMA
parts represented approximately 21% of fiscal 2001 consolidated net sales. The
Company has also increased its new product development budget for fiscal 2002 by
approximately $3 million (a 50% increase over the FSG's new product development
expense in fiscal 2001) and plans to introduce a record number of
22
new commercial jet engine and aircraft replacement parts. Although the Company
has experienced a decline in sales to the commercial aerospace market, demand
for the Company's defense products and services has accelerated. The Company has
also seen an increase in insurance costs following the terrorist attacks;
however, the increase in these costs experienced to date are not currently
expected to have a significant adverse impact on the Company's results of
operations.
Outlook
The Company is unable to predict when, or if, the commercial aviation market
will rebound with certainty, but presently most within the industry expect the
commercial markets to rebound in the second half of 2002. Because the Company's
products reduce airlines' operating expenses, management believes the Company's
sales should recover before many other participants in the commercial aviation
industry. The Company believes that its joint ventures with American Airlines
and Lufthansa are evidence of how critical the Company is to the airlines'
ability to operate cost effectively.
During the past two years, through a series of acquisitions, the Company has
substantially diversified its revenue base so that currently approximately 35%
of its revenues are derived from customers outside of commercial aviation. In
the fourth quarter of fiscal 2001, approximately 25% of the Company's revenues
were derived from defense activities and approximately 10% was derived from
medical, electronics and other manufacturing markets. The Company currently
expects continued strengthening in its defense markets and low to modest growth
in the other markets. The Company has increased its defense-related Operations
and Maintenance ("O & M") activities at a time when it appears that the O&M
portion of the United States defense budget will receive one of the largest
shares of the anticipated spending increase.
Because of the uncertainties in the commercial aviation market since September
11th and the current weak domestic economy, the Company cannot predict with
certainty the near term impact of recent events. The Company believes, however,
that its basic strategies will result in long-term growth.
Comparison of Fiscal 2000 to Fiscal 1999
Net Sales
Net sales in fiscal 2000 totaled $202.9 million, up 44% when compared to
fiscal 1999 net sales of $141.3 million.
The increase in sales for fiscal 2000 reflects an increase of $24.7 million (a
26% increase) to $119.3 million from the Company's FSG and an increase of $37.0
million (a 79% increase) to $83.6 million in revenues from the Company's ETG.
Sales from the FSG reflect the addition of newly-acquired businesses and
increases in sales of new products and services, including newly developed and
acquired FAA-approved jet engine replacement parts, partially offset by softness
within the aviation aftermarket in the second half of fiscal 2000. The FSG
sales increase includes revenues of $17.9 million from businesses acquired
during fiscal 1999 (Air Radio and Thermal) and fiscal 2000 (Future). Sales from
the ETG reflect revenues from new products and increased market penetration as
well as $12.7 million from businesses acquired during fiscal 1999 (Radiant,
Leader Tech, and SBIR), net of the decrease in sales resulting from the product
line sold in September 2000 (Trilectron). Excluding sales of Trilectron,
consolidated sales were $152.8 million for fiscal 2000 and $104.7 million for
fiscal 1999.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 37.4% for fiscal 2000 as compared
to 40.7% for fiscal 1999. Excluding the results of operations of Trilectron,
gross margins in fiscal 2000 were 43.7% compared to 48.0% in fiscal 1999. The
lower gross margins in fiscal 2000 were primarily due to a decrease in FSG gross
profit margins. The
23
decrease in the FSG gross margins was primarily due to lower margins contributed
by certain acquired businesses and higher new product research and development
expense due to lower reimbursements from Lufthansa, softness in demand for our
higher margin replacement parts, less favorable product pricing and the benefit
realized in fiscal 1999 from favorable pricing under certain contracts. Fiscal
2000 and 1999 cost of sales amounts include approximately $2.3 million and $1.2
million of new product research and development expenses of the FSG,
respectively. These amounts are net of $5.2 million and $6.7 million received
from Lufthansa in 2000 and 1999, respectively, and spent by the Company pursuant
to the research and development agreement with Lufthansa. The decrease in the
gross margin of the FSG was offset by an increase in the gross margin of the
ETG. The gross margin improvement in the ETG primarily reflects higher gross
profit margins contributed by businesses acquired in fiscal 1999 and the
addition of new products with higher profit margins.
SG&A expenses were $36.6 million for fiscal 2000 and $24.7 million for fiscal
1999. The increase results from the inclusion of SG&A expenses of the newly
acquired companies, including additional amortization of goodwill which totaled
$6.1 million in fiscal 2000 versus $3.7 million in fiscal 1999, and higher
marketing costs. As a percentage of net sales, SG&A expenses remained stable at
18.0% in fiscal 2000 versus 17.5% in fiscal 1999 reflecting continuing efforts
to control costs while increasing revenues.
In fiscal 2000, the Company wrote-off receivables of $1,312,000 as a result of
bankruptcy filings by certain customers. These customers contributed sales of
approximately $2 million in the first half of fiscal year 2000, substantially
all occurring prior to the bankruptcy filings. The charge reduced fiscal net
income by $651,000 or $.03 per diluted share, net of income tax. There were no
significant receivable write-offs resulting from bankruptcies during 1999.
Operating Income
Operating income increased $5.1 million to $37.9 million (a 16% increase) for
fiscal 2000 from $32.8 million for fiscal 1999. The increase in operating
income reflects an increase of $6.6 million (a 110% increase) from $5.9 million
to $12.5 million in the Company's ETG offset by a decrease of $1.7 million (a 5%
decrease) from $31.3 million to $29.6 million in the Company's FSG. The
decrease in FSG operating income in fiscal 2000 was due primarily to the $1.3
million write-off of receivables referenced above and higher new product
research and development expense discussed above. The increase in ETG operating
income was due primarily to increases in sales and gross profits in the ETG
discussed above. Operating income for fiscal 2000 was also affected by softness
in certain segments of the aviation aftermarket and the sale of Trilectron in
September 2000.
As a percentage of net sales, operating income decreased from 23.2% in fiscal
1999 to 18.7% in fiscal 2000 reflecting lower margins within the FSG discussed
above. The FSG's operating income as a percentage of net sales declined from
33.1% in fiscal 1999 to 24.8% in fiscal 2000 due principally to the receivable
write-off referenced above, lower margins contributed by certain acquired
businesses and higher new product research and development expense. The
operating margins in the FSG were partially offset by improvements in the
operating margins of the ETG, as well as lower corporate costs. The ETG's
operating income as a percentage of net sales improved from 12.7% in fiscal 1999
to 14.9% in fiscal 2000. This improvement reflects higher operating margins
contributed by businesses acquired in fiscal 1999 and new products. Corporate
costs as a percent of consolidated sales were down 1% in fiscal 2000 versus
fiscal 1999.
Adjusted to exclude Trilectron's operations and the impact of the
aforementioned accounts receivable write-off, operating margins were 23.4% in
fiscal 2000.
24
Interest Expense
Interest expense increased $3.4 million to $5.6 million from fiscal 1999 to
fiscal 2000. The increase was principally due to increased outstanding debt
balances during the period related to borrowings on the Company's Credit
Facility used principally to finance acquisitions.
Interest and Other Income
Interest and other income increased by $35,000 to $929,000 from fiscal 1999 to
fiscal 2000 due to an increase in invested funds.
Gain on Sale of Product Line
The gain represents the pretax gain on the aforementioned sale of Trilectron.
Income Tax Expense
The Company's effective tax rate increased to 38.6% in fiscal 2000 from 36.8%
in fiscal 1999, primarily due to lower tax benefit on export sales attributable
to the inclusion of the gain on the sale of Trilectron, increased state taxes
and non-deductible goodwill resulting from acquisitions. For a detailed
analysis of the provisions for income taxes, see Note 8 to the Consolidated
Financial Statements.
Minority Interest
Minority interest represents the 20% minority interest held by Lufthansa,
which decreased $304,000 from fiscal 1999 to fiscal 2000 due primarily to lower
net income of the FSG and higher corporate expenses allocable to the minority
interest.
Income from Continuing Operations
The Company's income from continuing operations totaled $27.7 million, or
$1.27 per diluted share, in fiscal 2000 improving 70% from income from
continuing operations of $16.3 million, or $.77 per diluted share, in fiscal
1999.
The increase in income from continuing operations is primarily due to the gain
on the sale of product line and increased operating income partially offset by
higher interest expense discussed above.
The impact of the gain on sale of product line was an increase of $10,542,000
($0.48 per diluted share) to income from continuing operations in fiscal 2000.
Cash earnings per diluted share from continuing operations, or income from
continuing operations per diluted share before goodwill amortization (adjusted
for the after tax impact of goodwill), increased 66% to $1.45 in fiscal 2000
from $.87 in fiscal 1999.
Adjustment to Gain on Sale of Discontinued Operations
The adjustment to gain on sale of discontinued operations of $1.4 million
($0.07 per diluted share) represents the additional taxes and related interest
incurred in connection with the Company's settlement of a tax adjustment whereby
the IRS conceded one-third of the original tax adjustment proposed by the IRS.
For further information, see Note 4 to Consolidated Financial Statements.
25
Net Income
The Company's net income totaled $26.3 million, or $1.20 per diluted share, in
fiscal 2000, improving 61% from net income of $16.3 million, or $.77 per diluted
share, in fiscal 1999.
The improvement in net income for fiscal 2000 over fiscal 1999 reflects the
increase in income from continuing operations partially offset by the adjustment
to the gain on sale of the discontinued health care operations.
Inflation
The Company has generally experienced increases in its costs of labor,
materials and services consistent with overall rates of inflation. The impact of
such increases on the Company's net income has been generally minimized by
efforts to lower costs through manufacturing efficiencies and cost reductions.
Liquidity and Capital Resources
The Company generates cash primarily from operating activities and financing
activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
interest and principal on debt, capital expenditures and increases in working
capital.
The Company believes that operating cash flow and available borrowings under
the Company's Credit Facility will be sufficient to fund cash requirements for
the foreseeable future.
Operating Activities
Excluding the payment of income taxes on the Trilectron gain, cash flow from
operations totaled approximately $24 million in fiscal 2001. Cash flow from
operations, including the payment of income taxes on the gain, was $16.5 million
for fiscal 2001, principally reflecting net income of $15.8 million,
depreciation and amortization and minority interest of $10.6 million and $2.8
million, respectively, offset by an increase in net operating assets of $12.9
million. The increase in net operating assets (current assets used in
operations net of current liabilities) primarily resulted from an increase in
inventories to meet increased PMA sales and payment of income taxes of
approximately $7 million on the fiscal 2000 gain from the sale of Trilectron.
Cash flow from operations was $12.1 million in fiscal 2000 principally
reflecting net income of $26.3 million, adjustments for gain on sale of product
line, depreciation and amortization, minority interest, and tax benefits related
to stock option exercises of $17.3 million, $9.8 million, $3.3 million and $1.7
million, respectively, offset by an increase in net operating assets of $11.5
million. The increase in net operating assets primarily resulted from an
increase in accounts receivable resulting from extended payment terms, and an
increase in inventories to meet increased sales orders under certain ETG
contracts, as well as increases in income taxes payable and accrued expenses of
$7.9 million and $1.2 million, respectively, mainly due to the sale of
Trilectron. Excluding cash flow used in the operations of Trilectron prior to
its sale, cash flow from operations totaled approximately $21 million in fiscal
2000.
Cash flow from operations was $9.6 million in fiscal 1999 principally
reflecting net income of $16.3 million, adjustments for depreciation and
amortization, minority interest, and tax benefits related to stock option
exercises of $6.3 million, $3.6 million and $1.6 million, respectively, offset
by an increase in net operating assets of $18.2 million. This increase in net
operating assets primarily resulted from the net effect of an increase in
inventories to meet increased sales orders and an increase in accounts
receivable resulting from extended payment terms under
26
certain ETG contracts, offset by an increase in trade payables and other current
liabilities associated with higher levels of operations and deferred
reimbursement of research and development costs from Lufthansa.
Investing Activities
The principal cash provided by investing activities was $12.4 million and
$48.4 million generated in fiscal 2001 and fiscal 2000, respectively, as a
result of the sale of Trilectron in fiscal 2000. In addition, the Company
received proceeds of $9.2 million in fiscal 2001 from the sale of long-term
investments and property that was held for disposition. Cash used in investing
activities the last three years was primarily cash used in acquisitions totaling
$190.9 million, including $61.2 million in fiscal 2001. For further detail on
acquisitions see Notes 2 and 16 to the Consolidated Financial Statements.
Capital expenditures totaled $29.8 million primarily representing the purchase
of new facilities and expansion of existing production facilities and
capabilities.
Financing Activities
The Company's principal financing activities over the last three years
included proceeds from long-term debt of $183.0 million, including $180.5
million from the Company's Credit Facility, proceeds from stock option exercises
of $4.8 million and net proceeds from the offering of 3.0 million shares of
Class A Common Stock totaling $56.3 million in fiscal 1999. In addition, the
Company received $11.9 million in minority interest investments which includes
amounts from Lufthansa during fiscal 1999 to maintain its 20% equity position in
the FSG and AMR in fiscal 2001. The Company repaid $140.6 million of the
outstanding balance on its Credit Facility and other long-term debt. The
Company also used an aggregate of $2.7 million to repurchase common stock during
fiscal 2000 and fiscal 1999.
In 1998, the Company entered into a $120 million revolving credit facility
with a bank syndicate, which contains both revolving credit and term loan
features. The credit facility may be used for working capital and general
corporate needs of the Company and to finance acquisitions (generally not in
excess of $25.0 million for any single acquisition nor in excess of an aggregate
of $25.0 million for acquisitions during any four fiscal quarter period without
the requisite approval of the bank syndicate) on a revolving basis through July
2003. The Company has the option to convert outstanding advances to term loans
amortizing over a period through July 2005. Advances under the credit facility
accrue interest, at the Company's option, at a premium (based on the Company's
ratio of total funded debt to earnings before interest, taxes, depreciation and
amortization) over the LIBOR rate or the higher of the prime lending rate and
the Federal Funds Rate. The Company is required to maintain certain financial
covenants, including minimum net worth, limitations on capital expenditures
(excluding expenditures for the acquisition of businesses) and limitations on
additional indebtedness. See Note 6 to the consolidated financial statements
for further information regarding credit facilities.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133, as amended by SFAS 137 and SFAS
138, establishes standards for the accounting and reporting of derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and of hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company adopted SFAS 133 effective November 1, 2000.
27
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which among other guidance, clarifies certain conditions to be met in
order to recognize revenue. In October 2000, the staff deferred the
implementation date of SAB 101 until no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The Company believes its revenue
recognition policies are in accordance with SAB 101.
In September 2000, the EITF issued "Accounting for Shipping and Handling Fees
and Costs" (EITF 00-10). This Issue addresses the income statement
classification for shipping and handling fees and costs by companies that record
revenue based on the gross amount billed to customers. EITF 00-10 concludes
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenues earned for goods provided and should be
classified as revenue. In addition, the shipping and handling costs should be
included in cost of sales. If shipping costs or handling costs are significant
and are not included in cost of sales, the amount and the line item on the
income statement that include them should be disclosed. The Company adopted
EITF 00-10 in the quarter ended October 31, 2001. The adoption of EITF 00-10
did not have a significant impact on the Company's results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. The statement further requires
separate recognition of intangible assets that meet one of two criteria. The
statement applies to all business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill has been amortized through the end of fiscal 2001 at which time
amortization ceased. The Company is in the process of performing transitional
goodwill impairment tests. SFAS No. 142 is effective for fiscal periods
beginning after December 15, 2001. Early adoption of SFAS 142 is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been previously issued. The Company
is currently evaluating the impact of the new accounting standards on existing
goodwill and other intangible assets. The Company will adopt SFAS 142 effective
November 1, 2001. During the year ended October 31, 2001, goodwill amortization
was $6,835,000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS Statement No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends APB 30, "Reporting
Results of Operations Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 develops one accounting model (based on the model in SFAS
121) for long-lived assets that are to be disposed of by sale, as well as
addresses the principal implementation issues. SFAS 144 requires that long-
lived assets that are to be disposed of by sale be measured at the lower of book
value or fair value less cost to sell. That requirement eliminates the
requirement of APB 30 that discontinued operations be measured at net realizable
value or that entities include under "discontinued operations" in the financial
statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. While the Company has not completed the
process of determining the effect of this new accounting pronouncement on its
consolidated financial statements, the Company currently expects that the effect
of SFAS No. 144 on the Company's financial statements, when it becomes
effective, will not be significant. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and generally the provisions of the statement
will be applied prospectively.
28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from changes in values of financial
instruments, including interest rate risk and liquidity risk. We engage in
transactions in the normal course of business that expose us to market risks.
The primary market risk to which the Company has exposure is interest rate risk,
mainly related to its revolving credit facility and industrial revenue bonds,
which had an aggregate outstanding balance of $67 million and $40 million at
October 31, 2001 and 2000, respectively. Interest rates on the revolving credit
facility borrowings are based on LIBOR plus a variable margin, while interest
rates on the industrial development revenue bonds are based on variable rates.
Changes in interest rates can affect the Company's net income and cash flows.
In order to manage its interest rate risk, in February 2000, the Company entered
into an interest rate swap with a bank pursuant to which it exchanged floating
rate interest based on three-month LIBOR on a notional principal amount of $20
million for a fixed rate payment obligation of 6.59% for a two-year period
ending February 2, 2002. This allows the Company to reduce the effects
(positive or negative) of interest rate changes on operations. Based on the
outstanding debt balance at October 31, 2001 and 2000, a change of 1% in
interest rates would cause a change in interest expense of approximately
$470,000 and $100,000, respectively, on an annual basis.
As of October 31, 2001 and 2000, the Company maintains a portion of its cash
and cash equivalents in financial instruments with original maturities of three
months or less. These financial instruments are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short duration
of these financial instruments, an immediate increase of 1% in interest rates
would not have a material effect on the Company's financial condition.
29
Item 8. Financial Statements and Supplementary Data HEICO Corporation and
Subsidiaries
HEICO CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report..................................................................... 31
Consolidated Balance Sheets at October 31, 2001 and 2000......................................... 32
Consolidated Statements of Operations for the years ended October 31, 2001, 2000 and
1999........................................................................................... 34
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years
ended October 31, 2001, 2000 and 1999.......................................................... 35
Consolidated Statements of Cash Flows for the years ended October 31, 2001, 2000 and
1999........................................................................................... 36
Notes to Consolidated Financial Statements....................................................... 37
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of HEICO Corporation:
We have audited the accompanying consolidated balance sheets of HEICO
Corporation and subsidiaries (the Company) as of October 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended October 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
December 21, 2001
31
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 2001 and 2000
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 4,333,000 $ 4,807,000
Accounts receivable, net........................................... 31,506,000 29,553,000
Receivable from sale of product line (Note 3)...................... -- 12,412,000
Inventories........................................................ 52,017,000 34,362,000
Prepaid expenses and other current assets.......................... 5,281,000 2,975,000
Deferred income taxes.............................................. 3,180,000 2,543,000
------------ ------------
Total current assets....................................... 96,317,000 86,652,000
Property, plant and equipment, net................................... 39,298,000 26,903,000
Intangible assets, net............................................... 183,048,000 152,770,000
Long-term investments................................................ -- 5,832,000
Other assets......................................................... 6,977,000 9,575,000
------------ ------------
Total assets............................................... $325,640,000 $281,732,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
32
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 2001 and 2000
2001 2000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................................. $ 27,000 $ 27,000
Trade accounts payable........................................................... 7,768,000 5,026,000
Accrued expenses and other current liabilities................................... 16,443,000 17,872,000
Income taxes payable............................................................. 564,000 8,258,000
------------ ------------
Total current liabilities................................................. 24,802,000 31,183,000
Long-term debt, net of current maturities......................................... 66,987,000 40,015,000
Deferred income taxes............................................................. 2,064,000 417,000
Other non-current liabilities..................................................... 6,173,000 6,922,000
------------ ------------
Total liabilities......................................................... 100,026,000 78,537,000
------------ ------------
Minority interests in consolidated subsidiaries................................... 36,845,000 33,351,000
------------ ------------
Commitments and contingencies (Notes 2, 3, 6, 7 and 17)
Shareholders' equity:
Preferred Stock, par value $.01 per share;
Authorized -- 10,000,000 shares issuable in series, 200,000
designated as Series A Junior Participating Preferred Stock,
none issued..................................................................... -- --
Common Stock, $.01 par value; Authorized -- 30,000,000 shares;
Issued and Outstanding 9,317,453 shares in 2001 and 8,514,056 in 2000........... 93,000 85,000
Class A Common Stock, $.01 par value; Authorized -- 30,000,000 shares;
Issued and Outstanding 11,515,779 shares in 2001 and 10,734,620 in 2000
(as restated)................................................................... 115,000 90,000
Capital in excess of par value................................................... 150,605,000 111,138,000
Accumulated other comprehensive loss............................................. (226,000) (632,000)
Retained earnings................................................................ 43,830,000 60,614,000
------------ ------------
194,417,000 171,295,000
Less: Note receivable from employee savings and investment plan.................. (648,000) (1,451,000)
Note receivable secured by Class A Common Stock............................ (5,000,000) --
------------ ------------
Total shareholders' equity................................................. 188,769,000 169,844,000
------------ ------------
Total liabilities and shareholders' equity................................. $325,640,000 $281,732,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
33
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Net sales...................................................... $171,259,000 $202,909,000 $141,269,000
------------ ------------ ------------
Operating costs and expenses:
Cost of sales.................................................. 100,113,000 127,098,000 83,737,000
Selling, general and administrative expenses................... 39,578,000 36,576,000 24,717,000
Write-off of receivables (Note 16)............................. 577,000 1,312,000 --
------------ ------------ ------------
Total operating costs and expenses................... 140,268,000 164,986,000 108,454,000
------------ ------------ ------------
Operating income............................................... 30,991,000 37,923,000 32,815,000
Interest expense............................................... (2,486,000) (5,611,000) (2,173,000)
Interest and other income...................................... 1,598,000 929,000 894,000
Gain on sale of product line................................... -- 17,296,000 --
------------ ------------ ------------
Income from continuing operations
before income taxes and minority interests.................. 30,103,000 50,537,000 31,536,000
Income tax expense............................................. 11,480,000 19,509,000 11,606,000
------------ ------------ ------------
Income from continuing operations before minority interests.... 18,623,000 31,028,000 19,930,000
Minority interests............................................. 2,790,000 3,289,000 3,593,000
------------ ------------ ------------
Income from continuing operations.............................. 15,833,000 27,739,000 16,337,000
Adjustment to gain on sale of discontinued health care opera-
tions, net of applicable income tax benefit of $208,000..... -- (1,422,000) --
------------ ------------ ------------
Net income..................................................... $ 15,833,000 $ 26,317,000 $ 16,337,000
============ ============ ============
Basic per share data:
Income from continuing operations............................ $ .79 $ 1.45 $ .91
Adjustment to gain on sale of discontinued health care
operations................................................. -- (.07) --
------------ ------------ ------------
Net income................................................... $ .79 $ 1.38 $ .91
============ ============ ============
Diluted per share data:
Income from continuing operations............................ $ .71 $ 1.27 $ .77
Adjustment to gain on sale of discontinued health care
operations................................................. -- (.07) --
------------ ------------ ------------
Net income................................................... $ .71 $ 1.20 $ .77
============ ============ ============
Weighted average number of common shares outstanding:
Basic........................................................ 19,924,962 19,114,323 17,933,070
============ ============ ============
Diluted...................................................... 22,305,365 21,908,473 21,348,139
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
34
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended October 31, 2001, 2000 and 1999
Class A Capital in Accumulated Other
Common Common Excess of Comprehensive Retained Notes Comprehensive
Stock Stock Par Value Loss Earnings Receivable Income
--------- -------- ------------- ---------------- --------- ----------- -------------
Balances, October 31, 1998............. $83,000 $ 41,000 $ 34,474,000 $(1,142,000) $ 36,649,000 $(2,498,000)
Secondary offering of Class A Common
shares............................... -- 30,000 56,235,000 -- -- --
Repurchase of stock.................... (1,000) -- (2,625,000) -- -- --
Exercise of stock options.............. 2,000 2,000 1,335,000 -- -- --
Tax benefit for stock option exercises. -- -- 1,610,000 -- -- --
Payment on note receivable from
employee savings and investment plan.. -- -- -- -- -- 491,000
Cash dividends ($.041 per share)....... -- -- -- -- (708,000) --
Net income for the year................ -- -- -- -- 16,337,000 -- $16,337,000
Unrealized loss on investments, net of
tax of $721,000....................... -- -- -- (1,093,000) -- -- (1,093,000)
-----------
Comprehensive income................... -- -- -- -- -- -- $15,244,000
Other.................................. -- -- 65,000 -- 2,000 -- ===========
------- -------- ------------ ----------- ------------ -----------
Balances, October 31, 1999............. 84,000 73,000 91,094,000 (2,235,000) 52,280,000 (2,007,000)
10% Common and Class A stock dividend
paid in Class A shares.............. -- 15,000 17,125,000 -- (17,158,000) --
Repurchase of stock.................... -- -- (105,000) -- -- --
Exercise of stock options.............. 1,000 2,000 978,000 -- -- --
Tax benefit for stock option exercises. -- -- 1,736,000 -- -- --
Payment on note receivable from
employee savings and investment plan.. -- -- -- -- -- 556,000
Cash dividends ($.044 per share)....... -- -- -- -- (828,000) --
Net income for the year................ -- -- -- -- 26,317,000 -- $26,317,000
Unrealized gain on investments, net of
tax of $998,000....................... -- -- -- 1,603,000 -- -- 1,603,000
-----------
Comprehensive income................... -- -- -- -- -- -- $27,920,000
===========
Other.................................. -- -- 310,000 -- 3,000 --
------- -------- ------------ ----------- ------------ ----------
Balances, October 31, 2000............. 85,000 90,000 111,138,000 (632,000) 60,614,000 (1,451,000)
10% Common and Class A stock dividend
paid in Class A shares.............. -- 19,000 31,648,000 -- (31,709,000) --
Shares issued in connection with the
acquisition (Note 2)............... -- 3,000 4,997,000 -- -- (5,000,000)
Exercise of stock options.............. 8,000 3,000 2,420,000 -- -- --
Tax benefit for stock option exercises. -- -- 334,000 -- -- --
Payment on note receivable from
employee savings and investment plan.. -- -- -- -- -- 803,000
Cash dividends ($.045 per share)....... -- -- -- -- (900,000) --
Net income for the year................ -- -- -- -- 15,833,000 -- $15,833,000
Unrealized gain on investments, net of
tax of $394,000....................... -- -- -- 632,000 -- -- 632,000
Unrealized loss on interest rate swap,
net of tax of $144,000................ -- -- -- (226,000) -- -- (226,000)
-----------
Comprehensive income................... -- -- -- -- -- -- $16,239,000
===========
Other.................................. -- -- 68,000 -- (8,000) --
------- -------- ------------ ----------- ------------ -----------
Balances, October 31, 2001............. $93,000 $115,000 $150,605,000 $ (226,000) $ 43,830,000 $(5,648,000)
======= ======== ============ =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
35
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ -------------
Cash flows from operating activities:
Net income...................................................................... $ 15,833,000 $ 26,317,000 $ 16,337,000
Adjustments to reconcile net income to cash provided by operating
activities:
Gain on sale of product line.................................................. -- (17,296,000) --
Gain on sale of property held for disposition................................. (657,000) -- --
Gain on sale of investments................................................... (180,000) -- --
Depreciation and amortization................................................. 10,588,000 9,775,000 6,289,000
Deferred income taxes......................................................... 760,000 (175,000) 31,000
Deferred financing costs...................................................... -- 8,000 --
Minority interests in consolidated subsidiaries............................... 2,790,000 3,289,000 3,593,000
Tax benefit on stock option exercises......................................... 334,000 1,736,000 1,610,000
Change in assets and liabilities, net of acquisitions and dispositions:
Decrease (increase) in accounts receivable.................................. 1,194,000 (11,569,000) (5,442,000)
Increase in inventories..................................................... (6,773,000) (7,471,000) (12,209,000)
Increase in prepaid expenses and other current assets....................... (329,000) (1,662,000) (393,000)
Increase in trade payables, accrued expenses and
other current liabilities................................................. 1,154,000 1,159,000 231,000
(Decrease) increase in income taxes payable................................. (8,147,000) 7,866,000 (569,000)
Other....................................................................... (37,000) 155,000 134,000
------------ ------------ -------------
Net cash provided by operating activities....................................... 16,530,000 12,132,000 9,612,000
------------ ------------ -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired.............................................. (61,207,000) (24,799,000) (104,861,000)
Proceeds from sale of product line, net of expenses............................. -- 44,377,000 --
Proceeds from receivable from sale of product line.............................. 12,412,000 4,000,000 --
Proceeds from property held for disposition..................................... 2,157,000 -- --
Capital expenditures............................................................ (6,927,000) (8,665,000) (14,217,000)
Net change in long-term investments............................................. 7,039,000 -- (2,366,000)
Payment received from employee savings and investment plan note
receivable.................................................................... 803,000 556,000 491,000
Other........................................................................... (160,000) (724,000) (517,000)
------------ ------------ -------------
Net cash (used in) provided by investing activities............................. (45,883,000) 14,745,000 (121,470,000)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt:
Revolving credit facility..................................................... 56,000,000 29,000,000 95,500,000
Other......................................................................... -- 1,167,000 1,349,000
Principal payments on long-term debt............................................ (29,028,000) (58,381,000) (53,187,000)
Proceeds from Class A Common Stock offering, net................................ -- -- 56,265,000
Minority interest investments................................................... 414,000 -- 11,537,000
Proceeds from the exercise of stock options..................................... 2,431,000 981,000 1,339,000
Repurchases of common stock..................................................... -- (105,000) (2,626,000)
Cash dividends paid (including fractional Class A share payments
of $41,000 and $18,000 in 2001 and 2000, respectively)....................... (941,000) (846,000) (708,000)
Other........................................................................... 3,000 83,000 (189,000)
------------ ------------ -------------
Net cash provided by (used in) financing activities............................. 28,879,000 (28,101,000) 109,280,000
------------ ------------ -------------
Net decrease in cash and cash equivalents....................................... (474,000) (1,224,000) (2,578,000)
Cash and cash equivalents at beginning of year.................................. 4,807,000 6,031,000 8,609,000
------------ ------------ -------------
Cash and cash equivalents at end of year........................................ $ 4,333,000 $ 4,807,000 $ 6,031,000
============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
36
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 31, 2001, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
HEICO Corporation, through its principal subsidiaries HEICO Aerospace
Holdings Corp. (HEICO Aerospace) and HEICO Electronic Technologies Corp. (HEICO
Electronic) and their subsidiaries (collectively, the Company), is principally
engaged in the design, manufacture and sale of aerospace, defense and
electronics related products and services throughout the United States and
internationally. HEICO Aerospace's subsidiaries include HEICO Aerospace
Corporation, Jet Avion Corporation (Jet Avion), LPI Industries Corporation
(LPI), Aircraft Technology, Inc. (Aircraft Technology), Northwings Accessories
Corporation (Northwings), McClain International, Inc. (McClain), Associated
Composite, Inc. (ACI), Rogers-Dierks, Inc. (Rogers-Dierks), Air Radio &
Instruments Corp. (Air Radio), Turbine Kinetics, Inc. (Turbine), Thermal
Structures, Inc. (Thermal), Future Aviation, Inc. (Future), Avitech Engineering
Corporation (Avitech) acquired August 2001, HEICO Aerospace Parts Corp. (HAPC) a
company formed September 2001 and Aviation Facilities, Inc. (AFI) acquired
October 2001. HEICO Electronic's subsidiaries include Radiant Power Corp.
(Radiant Power), Leader Tech, Inc. (Leader Tech), Santa Barbara Infrared, Inc.
(SBIR), Analog Modules, Inc. (Analog Modules) acquired April 2001, Aero Design,
Inc. (Aero Design) acquired June 2001 and Inertial Airline Services (IAS)
acquired August 2001. Trilectron Industries, Inc. (Trilectron), which was sold
September 2000, was formerly a subsidiary of HEICO Electronic. For further
detail of acquired and sold subsidiaries discussed above, see Notes 2 and 3. The
Company's customer base is primarily the commercial airline, defense and
electronics industries. As of October 31, 2001, the Company's principal
operations are located in Atlanta, Georgia; Anacortes, Washington; Glastonbury,
Connecticut; Corona, Hayward, and Santa Barbara, California; Cleveland, Ohio and
Hollywood, Miami, Tampa, Titusville, Naples, Orlando and Sarasota, Florida.
Basis of presentation
The consolidated financial statements include the accounts of HEICO
Corporation and its subsidiaries, all of which are wholly-owned except for HEICO
Aerospace, of which a 20% interest was sold to Lufthansa Technik AG (Lufthansa)
in October 1997. In addition, HEICO Aerospace consolidates a joint venture
formed in February 2001, which is 16% owned by American Airlines' parent
company, AMR Corporation (AMR) (Note 2). All significant intercompany balances
and transactions are eliminated.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
37
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
Cash and cash equivalents
For purposes of the consolidated financial statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Inventories
Portions of the inventories are stated at the lower of cost or market, with
cost being determined on the first-in, first-out basis. The remaining portions
of the inventories are stated at the lower of cost or market, on a per contract
basis, with estimated total contract costs being allocated ratably to all units.
The effects of changes in estimated total contract costs are recognized in the
period determined. Losses, if any, are recognized fully when identified.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided mainly on the straight-line method over the estimated
useful lives of the various assets. Property, plant and equipment useful lives
are as follows:
Buildings and components...................... 7 to 55 years
Building and leasehold improvements........... 3 to 15 years
Machinery and equipment....................... 3 to 20 years
The costs of major renewals and betterments are capitalized. Repairs and
maintenance are charged to operations as incurred. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any
related gain or loss is reflected in earnings.
Intangible assets
Intangible assets include the excess of cost over the fair value of net
assets acquired and deferred charges which are amortized on the straight-line
method over their legal or estimated useful lives, whichever is shorter, as
follows:
Excess of cost over the fair market value of net
assets acquired..................................... 20 to 40 years
Deferred charges..................................... 3 to 20 years
The Company reviews the carrying value of the excess of cost over the fair
value of net assets acquired (goodwill) for impairment whenever events or
changes in circumstances indicate that it may not be recoverable. An impairment
would be recognized in operating results, based upon the difference between each
consolidated entities' respective present value of future cash flows and the
carrying value of the goodwill, if a permanent diminution in value were to
occur. As of October 31, 2001, the Company determined there has been no
impairment of goodwill.
Financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other current liabilities approximate
fair value due to the relatively short maturity of the respective instruments.
The carrying value of long-term debt approximates fair market value due to its
floating interest rates.
38
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions and limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different geographical regions.
Long-term investments are stated at fair value based on quoted market
prices.
Revenue recognition
Revenue is recognized on an accrual basis, primarily upon shipment of
products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated are recognized on the
percentage of completion method, measured by the cost-to-cost method. Revisions
in cost estimates as contracts progress have the effect of increasing or
decreasing profits in the current period. For contracts in which costs cannot be
dependably estimated, revenue is recognized on the completed-contract method. A
contract is considered complete when all costs except insignificant items have
been incurred or the item has been accepted by the customer. The aggregate
effects of changes in estimates relating to inventories and/or long-term
contracts were not material except as noted in the unaudited quarterly financial
information presented in Note 14 to the Financial Statements. Revenues earned
from rendering services represented less than 10% of consolidated net sales for
all periods presented.
Long-term contracts
Accounts receivable and accrued expenses and current liabilities include
amounts related to the production of products under fixed-price contracts
exceeding terms of one year. Certain of these contracts recognize revenues on
the percentage-of-completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. This method is
used because management considers costs incurred to be the best available
measure of progress on these contracts. Certain other contracts have revenues
recognized on the completed-contract method. This method is used where the
Company does not have adequate historical data to ensure that estimates are
reasonably dependable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted percentage of completion contracts," included in accounts
receivable, represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
percentage of completion contracts," included in accrued expenses and other
current liabilities, represents billings in excess of revenues recognized.
Billings are made based on the completion of certain milestones as provided for
in the contracts.
Income taxes
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from such
items recognized for income tax purposes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
39
Net income per share
Basic net income per share is calculated on the basis of the weighted average
number of shares outstanding during the period, excluding dilution. Diluted net
income per share is computed on the basis of the weighted average number of
shares outstanding during the period plus potentially dilutive common shares
arising from the assumed exercise of stock options, if dilutive. The dilutive
impact of potentially dilutive common shares is determined by applying the
treasury stock method.
Stock based compensation
The Company measures compensation cost for stock options using the intrinsic
value method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue using the accounting methods prescribed by APB No. 25 and to
provide in Note 12 the proforma disclosures required by Statement of Financial
Accounting Standards (SFAS) No. 123.
Contingencies
Losses for contingencies such as product warranties, litigation and
environmental matters are recognized in income when they are probable and can be
reasonably estimated. Gain contingencies are not recognized in income.
New accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133, as amended by SFAS 137 and SFAS
138, establishes standards for the accounting and reporting of derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and of hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company adopted SFAS 133 effective November 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which among other guidance, clarifies certain conditions to be met in
order to recognize revenue. In October 2000, the staff deferred the
implementation date of SAB 101 until no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The Company believes its revenue
recognition policies are in accordance with SAB 101.
In September 2000, the EITF issued "Accounting for Shipping and Handling Fees
and Costs" (EITF 00-10). This Issue addresses the income statement
classification for shipping and handling fees and costs by companies that record
revenue based on the gross amount billed to customers. EITF 00-10 concludes
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenues earned for goods provided and should be
classified as revenue. In addition, the shipping and handling costs should be
included in cost of sales. If shipping costs or handling costs are significant
and are not included in cost of sales, the amount and the line item on the
income statement that include them should be disclosed. The Company adopted
EITF 00-10 in the quarter ended October 31, 2001. The adoption of EITF 00-10
did not have a significant impact on the Company's results of operations.
40
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. The statement further requires separate
recognition of intangible assets that meet one of two criteria. The statement
applies to all business combinations initiated after June 30, 2001. SFAS No. 142
requires that an intangible asset that is acquired shall be initially recognized
and measured based on its fair value. The statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. Existing goodwill has been amortized
through the end of fiscal 2001 at which time amortization ceased. The Company is
in the process of performing a transitional goodwill impairment test. SFAS No.
142 is effective for fiscal periods beginning after December 15, 2001. Early
adoption of SFAS 142 is permitted for entities with fiscal years beginning after
March 15, 2001, provided that the first interim financial statements have not
been previously issued. The Company is currently evaluating the impact of the
new accounting standards on existing goodwill and other intangible assets. The
Company will adopt SFAS 142 effective November 1, 2001. During the year ended
October 31, 2001, goodwill amortization was $6,835,000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS Statement No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends APB 30, "Reporting
Results of Operations Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 develops one accounting model (based on the model in SFAS
121) for long-lived assets that are to be disposed of by sale, as well as
addresses the principal implementation issues. SFAS 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. That requirement eliminates the requirement of
APB 30 that discontinued operations be measured at net realizable value or that
entities include under "discontinued operations" in the financial statements
amounts for operating losses that have not yet occurred. Additionally, SFAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. While the Company has not completed the process of
determining the effect of this new accounting pronouncement on its consolidated
financial statements, the Company currently expects that the effect of SFAS No.
144 on the Company's financial statements, when it becomes effective, will not
be significant. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and generally the provisions of the statement will be applied
prospectively.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
Acquisitions
Between December 1998 and September 1999, the Company acquired substantially
all of the assets of Rogers-Dierks, Radiant, Turbine and all of the outstanding
capital stock of Air Radio, Leader Tech and SBIR for an aggregate purchase price
of approximately $72.6 million. Rogers-Dierks, Turbine and Air Radio were
acquired through HEICO Aerospace. Radiant, Leader Tech, and SBIR were acquired
through HEICO Electronic. The source of the purchase price for these
acquisitions was proceeds from the Company's Credit Facility, excluding Air
Radio and Turbine, which were funded primarily from the proceeds of the
Company's public offering discussed in Note 11. Subsequent to the closings of
the HEICO Aerospace transactions, Lufthansa made additional investments of
approximately $5.0 million in HEICO Aerospace pursuant to Lufthansa's option to
maintain its 20% equity interest in HEICO Aerospace.
In connection with the Rogers-Dierks acquisition, the Company paid $1.1
million of deferred payments over the two-year period ended October 31, 2001. As
a result of Rogers-Dierks meeting earnings objectives, the Company paid a total
of $5.9 million in additional purchase consideration between fiscal 2000 and
fiscal 2001 to the former shareholders. Rogers-Dierks formerly designed and
manufactured FAA-approved, factory-new jet engine
41
replacement parts for sale to commercial airlines. The Company has continued to
use the acquired assets for the same purposes as formerly used by Rogers-Dierks.
The Radiant Power product line includes back-up power supplies and battery packs
for a variety of aircraft applications. Turbine is engaged in the design and
manufacture of FAA-approved, factory-new replacement parts. Air Radio is engaged
in the overhaul and repair of avionics, instruments and electronic equipment for
commercial aircraft. As a result of meeting certain earnings objectives, the
former shareholders of Air Radio received additional consideration of $1.25
million in fiscal 2000 under the terms of the acquisition. Leader Tech
manufactures electromagnetic and radio frequency shielding for circuit boards
primarily utilized in telecommunications, computer, aerospace and microwave
applications. SBIR is an international designer and manufacturer of aerospace
and defense infrared simulation and ground test equipment. The former
shareholders of SBIR received additional consideration of $3.6 million in fiscal
2001 as part of the final purchase price adjustment.
In June 1999, the Company, through HEICO Aerospace, acquired all of the
outstanding capital stock of Thermal. Thermal manufactures thermal insulation
products and related components primarily for aerospace and defense
applications. In consideration of this acquisition, the Company paid
approximately $28.9 million in cash, and assumed approximately $4 million in
debt. The assumed debt was repaid by the Company at closing. Subject to
meeting certain earnings objectives, one of Thermal's selling shareholders would
receive additional consideration of up to $1 million over the three years
following the acquisition date. As of the end of fiscal 2001, Thermal's selling
shareholders have received additional consideration of $300,000. The source of
the purchase price was proceeds from the Company's Credit Facility. Subsequent
to the closing of the transaction, Lufthansa made an additional investment of
$6.7 million in HEICO Aerospace pursuant to Lufthansa's option to maintain its
20% equity interest in HEICO Aerospace.
In June 2000, the Company, through a subsidiary, acquired substantially all of
the assets and certain liabilities of Future for $14.7 million in cash. The
source of the purchase price was proceeds from the Company's Credit Facility.
Future is engaged in the repair and overhaul of aircraft accessory components
principally serving the regional and commuter aircraft market.
In April 2001, the Company, through a subsidiary, acquired substantially all
of the assets and certain liabilities of Analog Modules, Inc. (AMI) for $15.6
million in cash paid at closing. AMI is engaged in the design and manufacture of
electronic products primarily for use in the laser and electro-optics
industries. The source of the purchase price was proceeds from the Company's
Credit Facility.
In August 2001, the Company, through a subsidiary, acquired Inertial Airline
Services, Inc. (IAS) pursuant to a stock purchase agreement, for $20 million in
cash and $5 million in HEICO Class A Common shares (289,964 shares) paid at
closing. The Company has guaranteed that the resale value of such Class A
Common shares will be at least $5 million through August 31, 2002. Should the
market value be lower than $5 million by August 31, 2002, the Company would have
to pay the difference in cash. Based on the closing market price of the HEICO
Class A Common shares on October 31, 2001, the Company would have to pay the
seller an additional amount of approximately $1.5 million. In addition, subject
to meeting certain earnings targets during the first two years following
acquisition, the Company could pay additional consideration of $6 million in
cash. Concurrent with the purchase, the Company loaned the seller $5 million
which is due August 31, 2002 and is secured by the 289,964 shares of HEICO Class
A Common Stock. The loan is reflected as a reduction in the equity section of
the Company's consolidated balance sheet as note receivable secured by Class A
Common Stock. The source of the purchase price, including the loan, was
proceeds from the Company's Credit Facility. IAS is engaged primarily in the
repair and overhaul of inertial navigation systems and other avionics equipment
which are used by commercial, military and business aircraft.
During fiscal 2001, the Company, through subsidiaries, also acquired certain
assets and liabilities of other companies (including Avitech, AFI and Aero
Design) with individually insignificant purchase prices and an aggregate
totaling approximately $9 million. These acquisitions are in the business of
design and manufacture of
42
FAA-approved replacement parts except Avitech which is an aircraft accessory
components repair and overhaul facility.
Had the fiscal 2001 acquisitions been acquired as of the beginning of fiscal
2001, the proforma consolidated results would not have been materially different
from the reported results.
All of the acquisitions described above were accounted for using the purchase
method of accounting and the results of each company were included in the
Company's results from their effective purchase dates. The costs of each
acquisition have been allocated to the assets acquired and liabilities assumed
based on their fair values at the date of acquisition as determined by
management (See Note 16 - Supplemental disclosures of cash flow information).
The excess of the purchase prices over the fair value of the identifiable net
assets acquired aggregated approximately $37.6 million, $20.0 million, and $92.6
million in fiscal 2001, 2000, and 1999, respectively, and have been amortized
over a range of 20 to 30 years using the straight-line method for all
acquisitions through June 30, 2001. The fiscal 2001 excess of purchase prices
over the fair value of identifiable net assets acquired includes $31.9 million
related to HEICO Electronic acquisitions and $5.7 million related to HEICO
Aerospace acquisitions. These amounts are deductible for income tax purposes.
For acquisitions subsequent to June 30, 2001 (IAS, Avitech, and AFI) the
allocation of the purchase price is preliminary while management obtains final
information regarding the fair value of assets acquired and liabilities assumed.
Although the allocation and amortization periods are subject to adjustment, the
Company does not expect that such adjustment will have a material effect on the
consolidated financial statements. In accordance with SFAS 142, goodwill
related to these acquisitions is not being amortized. Effective November 1,
2001, goodwill for all acquisitions will be tested for impairment annually, or
more frequently if circumstances indicate potential impairment.
Strategic alliances and sale of minority interests in consolidated subsidiaries
In October 1997, the Company entered into a strategic alliance with Lufthansa,
the technical services subsidiary of Lufthansa German Airlines, whereby
Lufthansa invested approximately $26 million in HEICO Aerospace, including $10
million paid at closing pursuant to a stock purchase agreement and approximately
$16 million paid to HEICO Aerospace pursuant to a research and development
cooperation agreement, which has partially funded the accelerated development of
additional FAA-approved replacement parts. The funds received as a result of the
research and development cooperation agreement reduce research and development
expenses in the period such expenses are incurred (Note 16). In addition,
Lufthansa and HEICO Aerospace have agreed to cooperate regarding technical
services and marketing support for jet engine parts on a worldwide basis. In
connection with subsequent acquisitions by HEICO Aerospace, Lufthansa invested
additional amounts aggregating $21 million pursuant to its option to maintain a
20% equity interest.
In February 2001, the Company, through its subsidiary HEICO Aerospace, entered
into a joint venture with AMR to develop, design and sell FAA-approved
replacement parts. As part of the joint venture, AMR will reimburse HEICO
Aerospace a portion of new product research and development costs. The funds
received as a result of the new product research and development costs paid by
AMR generally reduce new product research and development expenses in the period
such expenses are incurred. The balance of the development costs are incurred
by the joint venture, which is 16% owned by AMR. In addition, AMR and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
support on a worldwide basis.
3. SALE OF PRODUCT LINE
In September 2000, the Company consummated the sale of all of the outstanding
capital stock of HEICO Electronic's wholly-owned subsidiary, Trilectron, to a
subsidiary of Illinois Tool Works Inc. In consideration of the sale of
Trilectron's capital stock, the Company received $52,500,000 in cash, an
unsecured non-interest bearing
43
promissory note for $12.0 million payable in three equal installments over 90
days, a purchase price adjustment of $4.5 million based on the net worth of
Trilectron as of the closing date of the sale, and retained certain property
having a book value of approximately $1.5 million which was sold in fiscal 2001.
The proceeds from the sale were used to pay down the outstanding balance on the
Company's Credit Facility.
The sale of Trilectron did not meet the requirements for classification as a
discontinued operation in accordance with APB No. 30 because its activities
could not be clearly distinguished, physically and operationally and for
financial reporting purposes, from the other assets, results of operations, and
activities of the Company's Electronic Technologies Group (ETG) operating
segment of which it was a part. Trilectron was managed as part of the ETG and
the ETG was treated as a single operating segment. The ETG shared facilities,
staff, information technology processing and other centrally provided services
with no allocation of costs and interest expense between the divisions within
the ETG. Accordingly, the sale was reported as a sale of a product line and
Trilectron's results of operations through the date of the closing have been
reported in the Company's consolidated statements of operations.
The sale of Trilectron resulted in a pretax gain in fiscal 2000 of $17,296,000
($10,542,000 or $.48 per diluted share, net of income tax). The pretax gain is
net of expenses of $10.8 million directly related to the transaction.
A summary of the components of the expenses of the sale of the Trilectron
product line are as follows:
Bonuses and related costs $ 6,700,000 (a)
Professional service fees 2,500,000 (b)
Contract indemnification, reserves and
miscellaneous costs and expenses 1,600,000 (c)
------------
Total expenses of sale $ 10,800,000
============
(a) Represents incentive bonus payments which were approved by the Board of
Directors contingent upon the sale of Trilectron and paid from the
proceeds of the sale.
(b) Represents investment banking, legal, accounting and tax consulting
fees, all of which were incurred in connection with the sale.
(c) Represents reserves related to indemnification provisions entered into
in connection with the sale of Trilectron, estimated expenses of
relocating Radiant Power from the Trilectron facility to new facilities
and miscellaneous other expenses and costs which were incurred in
connection with the sale of Trilectron.
The receivable from sale of product line of $12,412,000 reported in the
October 31, 2000 consolidated balance sheet was fully collected in fiscal 2001.
4. ADJUSTMENT TO GAIN ON SALE OF DISCONTINUED OPERATIONS
In January 1999, the Company received notice of a proposed adjustment pursuant
to an examination by the Internal Revenue Service (IRS) of the Company's fiscal
1995 and 1996 tax returns, disallowing the utilization of a $4.6 million capital
loss carryforward to partially offset the gain recognized by the Company in
connection with the sale of its health care operations in July 1996. In fiscal
2000, the Company reached a settlement pursuant to which the IRS conceded one-
third of the original tax adjustment. Accordingly, the additional taxes and
related interest, aggregating $1.4 million ($.07 per diluted share) is reflected
as adjustment to gain on sale of discontinued health care operations in the
consolidated statement of operations.
44
5. INVESTMENTS
Long-term investments consisted of equity securities with an aggregate cost
of $6,858,000 as of October 31, 2000. These investments were classified as
available-for-sale and stated at a fair value of $5,832,000 as of October 31,
2000. The Company sold the long-term investments during fiscal 2001 with pre-tax
realized gains of $180,000 calculated using the average cost method. The gross
unrealized loss was $1,026,000 as of October 31, 2000. The gross unrealized
loss, net of deferred taxes, is reflected as a component of comprehensive
income. There were no realized gains or losses during fiscal 2000 and 1999.
6. CREDIT FACILITIES AND LONG-TERM DEBT
Long-term debt consists of:
October 31,
-----------------------------
2001 2000
----------- -----------
Borrowings under revolving credit facility...................................... $65,000,000 $38,000,000
Industrial Development Revenue Refunding Bonds -- Series 1988................... 1,980,000 1,980,000
Equipment loans................................................................. 34,000 62,000
----------- -----------
67,014,000 40,042,000
Less current maturities......................................................... (27,000) (27,000)
----------- -----------
$66,987,000 $40,015,000
=========== ===========
The amount of long-term debt maturing in each of the next five years is
$27,000 in fiscal 2002, $8,131,000 in fiscal 2003, $32,501,000 in fiscal 2004,
$24,375,000 in fiscal 2005, $0 in fiscal 2006 and $1,980,000 thereafter. The
amount of long-term debt maturing in each of the next five years assumes the
outstanding borrowings under the revolving credit facility of $65,000,000 will
be converted to term loans in July 2003 and amortized over a two-year period in
accordance with the terms of the facility.
Revolving credit facility
In July 1998, the Company entered into a $120 million credit facility
(Credit Facility) with a bank syndicate. Funds are available for funding
acquisitions, working capital and general corporate requirements on a revolving
basis through July 2003. The Company has the option to convert outstanding
advances to term loans amortizing over a period through July 2005. Outstanding
borrowings bear interest at the Company's choice of prime rate or London
Interbank Offering Rates (LIBOR) plus applicable margins. The applicable margins
range from .00% to .50% for prime rate borrowings and from .75% to 2.00% for
LIBOR based borrowings depending on the leverage ratio of the Company. A fee of
.20% to .40% is charged on the amount of the unused commitment depending on the
leverage ratio of the Company. The Credit Facility is secured by all the assets,
excluding real estate, of the Company and its subsidiaries and contains
covenants which, among other things, requires the maintenance of certain working
capital, leverage and debt service ratios as well as minimum net worth
requirements. At October 31, 2001 and 2000, the Company had a total of $65
million and $38 million borrowed under the Credit Facility at weighted average
interest rates of 3.4% and 7.6%, respectively. The amounts were borrowed to
partially fund acquisitions (Note 2).
Interest rate swap
In order to manage its interest rate risk related to its revolving credit
facility borrowings which has interest based on LIBOR plus a variable margin
(see above), the Company has an interest rate swap agreement with a bank
expiring February 2002. This allows the Company to reduce the effects (positive
or negative) of interest rate changes on operations. The Company has designated
the interest rate swap as a hedge of the variability of cash flows to be
received or paid related to a recognized liability (cash flow hedge). Changes
in the fair value of the interest rate swap, which is considered effective, are
recorded as a component of other comprehensive income and reclassified into
earnings to the extent the hedge, or a part thereof, becomes ineffective.
45
The Company has formally documented the relationship between the interest rate
swap and the variable rate debt and its strategy for undertaking the hedge
transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. If it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, the
Company will discontinue hedge accounting prospectively.
The cumulative effect on the accumulated other comprehensive income of the
Company's derivative instruments and hedging activities discussed above as of
November 1, 2000 was not significant and as of October 31, 2001 was a loss of
$226,000 (net of $144,000 in income tax benefit).
Industrial development revenue bonds
The industrial development revenue bonds outstanding October 31, 2001
represent bonds issued by Broward County, Florida in 1988 (the 1988 bonds). The
1988 bonds are due April 2008 and bear interest at a variable rate calculated
weekly (2.05% and 4.25% at October 31, 2001 and 2000, respectively). The 1988
bonds as amended are secured by a letter of credit expiring February 2004 and a
mortgage on the related properties pledged as collateral.
7. LEASE COMMITMENTS
The Company leases certain property and equipment, including manufacturing
facilities and office equipment under operating leases. Some of these leases
provide the Company with the option after the initial lease term either to
purchase the property at the then fair market value or renew its lease at the
then fair rental value. Generally, management expects that leases will be
renewed or replaced by other leases in the normal course of business.
Minimum payments for operating leases having initial or remaining non-
cancelable terms in excess of one year are as follows:
Year ending October 31,
2002......................................................... $2,341,000
2003......................................................... 2,021,000
2004......................................................... 988,000
2005......................................................... 628,000
2006......................................................... 328,000
Thereafter................................................... 900,000
----------
Total minimum lease commitments.............................. $7,206,000
==========
Total rent expense charged to operations for operating leases in fiscal 2001,
fiscal 2000 and fiscal 1999 amounted to $2,217,000, $2,041,000 and $976,000,
respectively.
8. INCOME TAXES
The provision for income taxes on income from continuing operations for each
of the three years ended October 31 was as follows:
2001 2000 1999
----------- ----------- -----------
Current:
Federal............................................. $ 9,611,000 $17,690,000 $10,540,000
State............................................... 1,109,000 1,994,000 1,035,000
----------- ----------- -----------
10,720,000 19,684,000 11,575,000
Deferred.............................................. 760,000 (175,000) 31,000
----------- ----------- -----------
Total income tax expense.............................. $11,480,000 $19,509,000 $11,606,000
=========== =========== ===========
46
A deferred tax charge of $250,000, a deferred tax charge of $998,000 and
deferred tax benefit of $721,000, relating to unrealized gains and losses on the
interest rate swap and long-term investments were recorded as adjustments to
shareholders' equity in fiscal 2001, 2000 and 1999, respectively.
In connection with its acquisitions, the Company assumed net deferred tax
assets of $37,000 in fiscal 2000 and net deferred liabilities of $295,000 in
fiscal 1999. No deferred tax assets or liabilities were assumed in fiscal 2001.
The following table reconciles the federal statutory tax rate to the Company's
effective tax rate from continuing operations:
2001 2000 1999
---- ---- ----
Federal statutory tax rate............................................... 35.0% 35.0% 35.0%
State taxes, less applicable federal income tax reduction................ 2.6 2.5 2.1
Net tax benefits on export sales......................................... (2.4) (1.4) (2.0)
Nondeductible amortization of intangible assets.......................... 2.7 1.6 1.3
Other, net............................................................... .2 .9 .4
---- ---- ----
Effective tax rate............................................. 38.1% 38.6% 36.8%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of October 31, 2001 and
2000 are as follows:
October 31,
-------------------------------
2001 2000
----------- -----------
Deferred tax assets:
Inventories........................................................... $ 1,296,000 $ 660,000
Bad debt allowances................................................... 468,000 254,000
Deferred compensation liability....................................... 1,650,000 1,616,000
Vacation accruals..................................................... 253,000 138,000
Customer rebates and credits.......................................... 480,000 267,000
Retirement plan liability............................................. 226,000 228,000
Warranty accruals..................................................... 327,000 280,000
Unrealized loss on interest rate swap/investments..................... 145,000 394,000
Accrued items related to sale of product line......................... 720,000 1,073,000
Other................................................................. 133,000 158,000
----------- -----------
Total deferred tax assets................................... 5,698,000 5,068,000
----------- -----------
Deferred tax liabilities:
Accelerated depreciation.............................................. 1,120,000 635,000
Intangible asset amortization......................................... 3,201,000 2,054,000
Other................................................................. 261,000 253,000
----------- -----------
Total deferred tax liabilities.............................. 4,582,000 2,942,000
----------- -----------
Net deferred tax asset...................................... 1,116,000 2,126,000
Less current portion........................................ (3,180,000) (2,543,000)
----------- -----------
Net deferred tax liability, long-term portion............... $(2,064,000) $ (417,000)
=========== ===========
9. STOCK DIVIDENDS
In June 2000 and July 2001, the Board of Directors declared 10% stock
dividends on all shares outstanding, payable in Class A Common shares. The
dividend was paid on July 21, 2000 and August 21, 2001 to shareholders of record
July 10, 2000 and August 10, 2001, respectively. The 10% dividend was valued
based on the closing market price of the Company's Class A Common stock as of
the day prior to the declaration date. All income per share, dividend per
share, price per share, exercise price, stock options and common shares
outstanding information has been retroactively restated to reflect stock
dividends and splits.
47
10. PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1993, pursuant to a plan adopted by the Board of Directors on such date,
the Board declared a distribution of one Preferred Stock Purchase Right (the
Rights) for each outstanding share of common stock of the Company. The Rights
trade with the common stock and are not exercisable or transferable apart from
the Common Stock and Class A Common Stock until after a person or group either
acquires 15% or more of the outstanding common stock or commences or announces
an intention to commence a tender offer for 30% or more of the outstanding
common stock. Absent either of the aforementioned events transpiring, the Rights
will expire at the close of business on November 2, 2003.
The Rights have certain anti-takeover effects and, therefore, will cause
substantial dilution to a person or group who attempts to acquire the Company on
terms not approved by the Company's Board of Directors or who acquires 15% or
more of the outstanding common stock without approval of the Company's Board of
Directors. The Rights should not interfere with any merger or other business
combination approved by the Board since they may be redeemed by the Company at
$.01 per Right at any time until the close of business on the tenth day after a
person or group has obtained beneficial ownership of 15% or more of the
outstanding common stock or until a person commences or announces an intention
to commence a tender offer for 30% or more of the outstanding common stock.
11. COMMON STOCK AND CLASS A COMMON STOCK
In February and March 1999, the Company completed, through a public offering,
the issuance of an aggregate of 3,622,801 shares of Class A Common Stock,
including over-allotment options granted to the underwriters. The net proceeds
of the offering to the Company were $56.3 million. A portion of the proceeds of
the offering were used to repay the outstanding balance under the Company's
Credit Facility and to acquire Air Radio and Turbine (Note 2). The remaining
proceeds were used for working capital and general corporate purposes.
In accordance with the Company's share repurchase program, 96,300 and 56,039
shares of Common Stock and Class A Common Stock, respectively, were repurchased
in fiscal 1999 at a total cost of approximately $2.6 million. In fiscal 2000,
6,600 shares of Common Stock were repurchased at a total cost of approximately
$105,000. No shares were repurchased in fiscal 2001.
Each share of Common Stock is entitled to one vote per share. Each share of
Class A Common Stock is entitled to a 1/10 vote per share. Holders of the
Company's Common Stock and Class A Common Stock are entitled to receive when, as
and if declared by the Board of Directors, dividends and other distributions
payable in cash, property, stock, or otherwise. In the event of liquidation,
after payment of debts and other liabilities of the Company, and after making
provision for the holders of preferred stock, if any, the remaining assets of
the Company will be distributable ratably among the holders of all classes of
common stock.
12. STOCK OPTIONS
The Company currently has two stock option plans, the 1993 Stock Option Plan
(1993 Plan) and the Non-Qualified Stock Option Plan (NQSOP). A total of
2,038,332 Common and 2,307,990 Class A Common shares of the Company's stock are
reserved for issuance to directors, officers and key employees as of October 31,
2001. Options issued under the 1993 Plan may be designated incentive stock
options (ISO) or non-qualified stock options (NQSO). ISOs are granted at not
less than 100% of the fair market value at the date of grant (110% thereof in
certain cases) and are exercisable in percentages specified at date of grant
over a period up to ten years. Only employees are eligible to receive ISOs.
NQSOs may be granted at less than fair market value and may be immediately
exercisable. Options granted under the NQSOP may be granted to directors,
officers and employees at no less than the fair
48
market value at the date of grant and are generally exercisable in four equal
annual installments commencing one year from date of grant.
All stock option share and price per share information has been retroactively
restated for stock dividends and splits.
Information concerning all of the stock option transactions for the three
years ended October 31, 2001 is as follows:
Shares Under Option
Shares ----------------------------------
Available Price
For Option Shares Per Share
---------- ---------- ---------------------
Outstanding, October 31, 1998......................... 277,266 5,042,948 $ 1.20 -- $25.32
Additional shares approved by shareholders
for 1993 Stock Option Plan.......................... 726,000 -- --
Shares approved by Board of Directors for
grant to former shareholders of SBIR................. 458,893 -- --
Granted............................................... (1,077,021) 1,077,021 $16.71 -- $21.44
Cancelled............................................. 31,878 (32,333) $ 1.61 -- $24.11
Exercised............................................. -- (510,187) $ 1.61 -- $ 9.65
---------- ---------- -----------------
Outstanding, October 31, 1999......................... 417,016 5,577,449 $ 1.20 -- $25.32
Granted............................................... (338,377) 338,377 $ 9.82 -- $13.43
Cancelled............................................. 727,339 (760,340) $ 3.35 -- $24.11
Exercised............................................. -- (208,196) $ 1.61 -- $ 9.65
---------- ---------- -----------------
Outstanding, October 31, 2000......................... 805,978 4,947,290 $ 1.20 -- $25.32
Shares approved by Board of Directors for
grant to former shareholders of SBIR................. 229,900 -- --
Granted............................................... (995,200) 995,200 $ 9.54 -- $15.54
Cancelled............................................. 153,370 (415,406) $ 6.11 -- $24.11
Exercised............................................. -- (1,374,810) $ 1.40 -- $13.43
---------- ---------- -----------------
Outstanding, October 31, 2001......................... 194,048 4,152,274 $ 1.20 -- $25.32
========== ==========
Summary of shares available for option and shares under option by class of
common stock is as follows:
Shares Under Option
Shares ----------------------------------
Available Price
For Option Shares Per Share
---------- ---------- ---------------------
Common Stock......................................... 532,869 2,358,403 $1.20 -- $25.32
Class A Common Stock................................. 273,109 2,588,887 $1.20 -- $24.11
------- ---------
Outstanding, October 31, 2000 805,978 4,947,290
======= =========
Common Stock......................................... 29,819 2,008,513 $1.20 -- $25.32
Class A Common Stock................................. 164,229 2,143,761 $1.20 -- $24.11
------- ---------
Outstanding, October 31, 2001 194,048 4,152,274
======= =========
49
Information concerning stock options outstanding and exercisable by class of
common stock as of October 31, 2001 is as follows:
Common Stock
Weighted Weighted Average Weighted
Range of Options Average Remaining Options Average
Exercise Prices Outstanding Exercise Price Contractual Life (Years) Exercisable Exercise Price
--------------- ----------- -------------- ------------------------ ----------- --------------
$ 1.20 - $ 2.75 600,138 $ 1.81 2.0 600,138 $ 1.81
$ 2.76 - $ 6.05 336,465 3.85 3.8 334,965 3.85
$ 6.06 - $10.22 365,008 8.32 5.5 334,215 8.26
$10.23 - $25.32 706,902 15.64 9.2 216,501 16.11
--------- ------ --- --------- ------
2,008,513 $ 8.21 5.5 1,485,819 $ 5.80
========= ====== === ========= ======
Class A Common Stock
Weighted Weighted Average Weighted
Range of Options Average Remaining Options Average
Exercise Prices Outstanding Exercise Price Contractual Life (Years) Exercisable Exercise Price
--------------- ----------- -------------- ------------------------ ----------- --------------
$ 1.20 - $ 2.75 495,708 $ 1.82 2.0 495,708 $ 1.82
$ 2.76 - $ 6.05 276,345 3.86 3.8 275,122 3.85
$ 6.06 - $10.22 358,288 8.54 6.0 277,337 8.28
$10.23 - $24.11 1,013,420 15.89 8.5 625,937 16.46
--------- ------ --- --------- ------
2,143,761 $ 9.85 6.0 1,674,104 $ 8.70
========= ====== === ========= ======
If there were a change in control of the Company, options for an additional
522,694 shares of Common Stock and 469,657 shares of Class A Common Stock would
become immediately exercisable.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, compensation expense has
been recorded in the accompanying consolidated financial statements for those
options granted below the fair market value of the stock on the date of grant.
Had the fair value of all grants under these plans been recognized as
compensation expense over the vesting period of the grants, consistent with SFAS
No. 123, the Company's net income would have been $10,469,000 ($.53 and $.47
basic and diluted net income per share, respectively) for fiscal 2001,
$22,953,000 ($1.20 and $1.05 basic and diluted net income per share,
respectively) for fiscal 2000, and $10,666,000 ($.59 and $.50 basic and diluted
net income per share, respectively) for fiscal 1999.
The estimated weighted average fair value of options granted was $11.23 per
share for Common Stock and $8.94 per share for Class A Common Stock in fiscal
2001, $9.15 per share for Common Stock and $8.95 per share for Class A Common
Stock in fiscal 2000 and $14.95 per share for Common Stock and $11.78 per share
for Class A Common Stock in fiscal 1999.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Class A Class A Class A
Common Common Common Common Common Common
Stock Stock Stock Stock Stock Stock
----- ----- ----- ----- ----- -----
Volatility.................................... 55.65% 55.47% 55.83% 55.12% 59.42% 56.74%
Risk free interest rate (weighted average).... 5.24% 5.22% 6.22% 6.16% 5.21% 5.17%
Dividend yield (weighted average)............. .0030% .0034% .0031% .0033% .0019% .0021%
Expected life (years)......................... 8 8 8 8 8 8
50
13. RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the Plan)
under which eligible employees of the Company and its participating subsidiaries
may contribute up to 10% of their annual compensation, as defined, and the
Company will contribute specified percentages ranging from 25% to 50% of
employee contributions up to 3% of annual pay in Company stock or cash, as
determined by the Company. The Plan also provides that the Company may
contribute additional amounts in its common stock or cash at the discretion of
the Board of Directors. Employee contributions can not be invested in Company
stock.
In 1992, the Company sold 987,699 shares of the Company's Common Stock and
804,975 shares of Class A Common Stock to the Plan for an aggregate price of
$4,122,000 entirely financed through a promissory note with the Company. The
promissory note is payable in nine equal annual installments, inclusive of
principal and interest at the rate of 8% per annum, of $655,000 each and a final
installment of $640,000 in September 2002 and is prepayable in full or in part
without penalty at any time. As the Plan accrues each payment of principal, an
appropriate percentage of stock is allocated to eligible employees' accounts in
accordance with applicable regulations under the Internal Revenue Code. The
unallocated shares of stock collateralize the 1992 promissory note. The per
share cost to the Plan for the 1992 stock sale ($2.30 per share) was determined
based on the average closing market price of the Company's stock on the twenty
business days prior to the effective date of the sale. In accordance with the
provisions of the Plan, the Company is obligated to make cash contributions in
amounts sufficient to meet the debt service requirements on the promissory note.
Principal amounts repaid on the promissory note are determined based on the
value of the shares released during the preceding twelve months but cannot be
less than the minimum annual installments required. Dividends on allocated
shares are issued to participants' accounts. Dividends on unallocated shares
are held in the Plan and may be used to make note payments.
Participants receive 100% vesting in employee contributions. Vesting in
Company contributions is based on number of years of service. Contributions to
the Plan charged to income for fiscal 2001, 2000 and 1999 totaled $493,000,
$907,000, and $503,000, respectively, net of interest income earned on the note
received from the Plan of $52,000 in fiscal 2001, $168,000 in fiscal 2000 and
$202,000 in fiscal 1999.
In 1991, the Company established a Directors Retirement Plan covering its then
current directors. The net assets of this plan as of October 31, 2001, 2000 and
1999 are not material to the financial position of the Company. During fiscal
2001, 2000 and 1999, $21,000, $62,000, and $67,000, respectively, was expensed
for this plan.
51
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Net sales:
2001................................................... $39,650,000 $41,742,000 $43,845,000 $46,022,000
2000................................................... 47,940,000 53,548,000 53,912,000 47,509,000
1999................................................... 28,211,000 32,731,000 35,593,000 44,734,000
Gross profit:
2001................................................... 17,032,000 18,376,000 18,043,000 17,695,000
2000................................................... 17,858,000 19,679,000 19,679,000 18,595,000
1999................................................... 11,683,000 13,429,000 14,479,000 17,941,000
Income from continuing operations:
2001................................................... 3,908,000 4,814,000 3,964,000 3,147,000
2000................................................... 4,015,000 4,789,000 4,721,000 14,214,000
1999................................................... 3,203,000 4,090,000 4,351,000 4,693,000
Net income:
2001................................................... 3,908,000 4,814,000 3,964,000 3,147,000
2000................................................... 4,015,000 4,789,000 4,721,000 12,792,000
1999................................................... 3,203,000 4,090,000 4,351,000 4,693,000
Income per share from continuing operations:
Basic
2001................................................... .20 .25 .19 .15
2000................................................... .21 .25 .25 .74
1999................................................... .21 .22 .23 .25
Diluted
2001................................................... .18 .22 .18 .14
2000................................................... .18 .22 .22 .65
1999................................................... .17 .19 .19 .21
Net income per share:
Basic
2001................................................... .20 .25 .19 .15
2000................................................... .21 .25 .25 .67
1999................................................... .21 .22 .23 .25
Diluted
2001................................................... .18 .22 .18 .14
2000................................................... .18 .22 .22 .58
1999................................................... .17 .19 .19 .21
Income from continuing operations in the fourth quarter of fiscal 2000
includes the gain on sale of product line and write-off of certain receivables
referenced in Notes 3 and 16, respectively. The impact of the gain and the
write-off was an increase of $10,542,000 ($.48 per diluted share) and a decrease
of $651,000 ($.03 per diluted share), respectively, to income from continuing
operations in the fourth quarter of fiscal 2000. Net income in the fourth
quarter of fiscal 2000 also includes the adjustment to gain on sale of
discontinued operations referenced in Note 4, which reduced net income by
$1,422,000 ($.07 per diluted share).
During the first and second quarter of 2001, the Company made certain changes
in estimates due to estimated costs to complete long-term contracts accounted
for under the percentage of completion method being lower than originally
projected. The change in estimates increased net income and diluted net income
per share by $200,000 ($.01 per diluted share) and $400,000 ($.02 per diluted
share) in the first and second quarter of 2001, respectively.
52
Changes in estimates did not have a significant impact on net income and diluted
net income per share in the third and fourth quarters of fiscal 2001.
Due to changes in the average number of common shares outstanding, net income
per share for the full fiscal year does not equal the sum of the four individual
quarters.
15. OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG), consisting of HEICO Electronic and its subsidiaries.
See Note 1 for the list of operating subsidiaries aggregated in each reportable
operating segment. The FSG designs and manufactures FAA-approved replacement
parts, provides FAA-authorized repair and overhaul services and provides
subcontracting services to OEMs in the aviation industry and the U.S.
Government. The ETG designs and manufactures commercial and military power
supplies, circuit board shielding, laser and electro-optical products and
infrared simulation and test equipment and repairs and overhauls aircraft
electronic equipment primarily for the aerospace, defense and electronics
industries.
The Company's reportable business divisions offer distinctive products and
services that are marketed through different channels. They are managed
separately because of their unique technology and service requirements.
Segment profit or loss
The accounting policies for segments are the same as those described in the
summary of significant accounting policies (Note 1). Management evaluates
segment performance based on segment operating income.
Segments
------------------------------
Other,
Primarily Consolidated
FSG ETG Corporate Totals
--- --- --------- ------
For the year ended October 31, 2001:
------------------------------------
Net sales $131,621,000 $ 39,638,000 $ -- $171,259,000
Depreciation and amortization 7,587,000 2,702,000 299,000 10,588,000
Operating income 27,404,000 7,885,000 (4,298,000) 30,991,000
Total assets 209,367,000 105,451,000 10,822,000 325,640,000
Capital expenditures 4,897,000 1,300,000 730,000 6,927,000
For the year ended October 31, 2000:
------------------------------------
Net sales $119,304,000 $ 83,605,000 $ -- $202,909,000
Depreciation and amortization 6,808,000 2,762,000 205,000 9,775,000
Operating income 29,621,000 12,464,000 (4,162,000) 37,923,000
Total assets 197,442,000 54,997,000 29,293,000 281,732,000
Capital expenditures 7,301,000 1,360,000 4,000 8,665,000
For the year ended October 31, 1999:
------------------------------------
Net sales $ 94,617,000 $ 46,652,000 $ -- $141,269,000
Depreciation and amortization 4,727,000 1,364,000 198,000 6,289,000
Operating income 31,338,000 5,937,000 (4,460,000) 32,815,000
Total assets 173,635,000 89,486,000 10,042,000 273,163,000
Capital expenditures 13,359,000 835,000 23,000 14,217,000
53
Major customer and geographic information
No one customer accounted for 10 percent or more of the Company's
consolidated net sales during the last three fiscal years. The Company had no
material sales originating or long-lived assets held outside of the United
States during the last three fiscal years.
Export sales were $46,014,000 in fiscal 2001, $56,626,000 in fiscal 2000
and $42,167,000 in fiscal 1999.
16. OTHER CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS
AND STATEMENTS OF CASH FLOWS INFORMATION
Accounts receivable are composed of the following:
Balance at October 31,
------------------------------
2001 2000
----------- -----------
Accounts receivable....................... $32,415,000 $30,110,000
Less allowance for doubtful accounts...... (909,000) (557,000)
----------- -----------
Accounts receivable, net........... $31,506,000 $29,553,000
=========== ===========
In fiscal 2001 and 2000, the Company wrote off receivables aggregating
$577,000 and $1,312,000 as a result of bankruptcy filings by certain customers.
The charge is included in the operating income section of the consolidated
results of operations. The charge reduced fiscal 2001 and 2000 net income by
$291,000 ($.01 per diluted share) and $651,000 ($.03 per diluted share),
respectively.
Costs and estimated earnings on uncompleted percentage of completion
contracts are as follows:
October 31, 2001 October 31, 2000
---------------- ----------------
Costs incurred on uncompleted contracts......................... $ 7,709,000 $ 5,911,000
Estimated earnings.............................................. 6,224,000 6,436,000
------------ ------------
13,933,000 12,347,000
Less billings to date........................................... (14,770,000) (11,689,000)
------------ ------------
$ (837,000) $ 658,000
============ ============
Included in accompanying balance
sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings)............................. $ 234,000 $ 1,372,000
Accrued expenses, net of other current liabilities (billings
in excess of costs and estimated earnings).................. (1,071,000) (714,000)
------------ ------------
$ (837,000) $ 658,000
============ ============
During fiscal 2001, the Company made certain changes in estimates due to
estimated costs to complete long-term contracts accounted for under the
percentage of completion method being lower than originally projected. The
change in estimates increased net income and diluted net income per share by
$700,000 ($.03 per diluted share). Changes in estimates did not have a
significant impact on net income and diluted net income per share in fiscal 2000
or fiscal 1999.
54
Inventories are composed of the following:
Balance at October 31,
-------------------------------
2001 2000
------------- -------------
Finished products.................................................. $ 27,791,000 $ 17,364,000
Work in process.................................................... 7,883,000 6,074,000
Materials, parts, assemblies and supplies.......................... 16,343,000 10,924,000
------------- -------------
Total inventories........................................ $ 52,017,000 $ 34,362,000
============= =============
Inventories related to long-term contracts were not significant as of October
31, 2001 and 2000.
Property, plant and equipment are composed of the following:
Balance at October 31,
-------------------------------
2001 2000
------------- -------------
Land............................................................... $ 2,627,000 $ 2,258,000
Buildings and improvements......................................... 18,380,000 16,549,000
Machinery and equipment............................................ 37,398,000 26,927,000
Construction in progress........................................... 3,566,000 957,000
------------- -------------
61,971,000 46,691,000
Less accumulated depreciation...................................... (22,673,000) (19,788,000)
------------- -------------
Property, plant and equipment, net....................... $ 39,298,000 $ 26,903,000
============= =============
Depreciation and amortization expense on property, plant, and equipment
amounted to approximately $3,090,000, $3,011,000 and $2,430,000 for the years
ended October 31, 2001, 2000 and 1999, respectively.
Included in the Company's property, plant and equipment is rotable equipment
located at various customer locations in connection with certain repair and
maintenance agreements. The rotables are stated at a net book value of
$5,508,000. Under the terms of the agreements, the customers may cancel the
agreements and purchase the equipment at specified prices. The equipment is
currently being depreciated over its estimated life.
Intangible assets are composed of the following:
Balance at October 31,
-------------------------------
2001 2000
------------- -------------
Excess of cost over the fair value of net assets acquired.......... $ 199,661,000 $ 161,976,000
Deferred charges................................................... 2,841,000 2,748,000
------------- -------------
202,502,000 164,724,000
Less accumulated amortization...................................... (19,454,000) (11,954,000)
------------- -------------
Intangible assets, net............................................. $ 183,048,000 $ 152,770,000
============= =============
Amortization expense related to excess of costs over the fair value of net
assets acquired and deferred charges amounted to approximately $7,498,000,
$6,764,000 and $3,859,000 for the years ended October 31, 2001, 2000 and 1999,
respectively.
55
Accrued expenses and other current liabilities are composed of the following:
Balance at October 31,
-------------------------
2001 2000
----------- -----------
Accrued employee compensation.............................................. $ 4,869,000 $ 4,004,000
Accrued customer rebates and credits....................................... 3,418,000 1,893,000
Accrued expenses related to sale of product line........................... 1,890,000 2,757,000
Deferred purchase price adjustments related to acquisitions................ 29,000 3,024,000
Billings in excess of revenue.............................................. 1,071,000 714,000
Other...................................................................... 5,166,000 5,480,000
----------- -----------
Total accrued expenses and other current
liabilities.................................................... $16,443,000 $17,872,000
=========== ===========
Other non-current liabilities include deferred compensation of $3,983,000 and
$4,117,000 as of October 31, 2001 and 2000, respectively.
Research and development expenses
Fiscal 2001, 2000 and 1999 cost of sales amounts include approximately
$5,800,000, $2,300,000 and $1,200,000, respectively, of new product research and
development expenses of HEICO Aerospace. The expenses for fiscal 2001, 2000 and
1999 are net of $700,000, $5,200,000 and $6,700,000, respectively, received
from Lufthansa and spent by the Company for all three years pursuant to a
research and development cooperation agreement entered into October 1997 (Note
2). As of October 31, 2001, all reimbursements for research and development
expenses have been paid by Lufthansa. The new product research and development
expenses for fiscal 2001 are also net of $575,000 received from American
Airlines under their joint venture agreement with HEICO Aerospace (Note 2).
Supplemental disclosures of cash flow information are as follows:
Cash paid for interest was $2,379,000, $5,575,000 and $2,052,000 in fiscal
2001, 2000 and 1999, respectively. Cash paid for income taxes was $18,563,000,
$10,248,000 and $10,312,000 in fiscal 2001, 2000 and 1999, respectively.
Non-cash investing and financing activities related to the acquisitions
including contingent note payments during fiscal 2001, 2000 and 1999 were as
follows:
2001 2000 1999
------------ ------------ -------------
Fair value of assets acquired:
Liabilities assumed.................................. $ 468,000 $ 31,000 $ 11,317,000
------------ ------------ -------------
Less:
Intangible assets.................................. 37,579,000 19,974,000 93,347,000
Inventories........................................ 10,882,000 1,698,000 8,640,000
Accounts receivable................................ 3,147,000 1,567,000 10,381,000
Property, plant and equipment...................... 8,479,000 83,000 1,597,000
Other assets....................................... 1,588,000 1,508,000 2,213,000
------------ ------------ -------------
Cash paid, including contingent note payments......... $(61,207,000) $(24,799,000) $(104,861,000)
============ ============ =============
56
As part of the consideration in connection with the sale of the Trilectron
product line in fiscal 2000, the Company received an unsecured promissory note
for $12.0 million that was paid in full in fiscal 2001 (Note 3). In connection
with the purchase of IAS (Note 2), the Company issued 289,964 HEICO Class A
Common shares then valued at $5 million and issued a $5 million note receivable
guaranteed by the issued shares. Additionally, retained earnings was charged
$31,709,000 and $17,158,000 as a result of the 10% stock dividends described in
Note 9 above in fiscal 2001 and 2000, respectively. There were no significant
capital lease financing activities during fiscal 2001, 2000 and 1999.
17. CONTINGENCIES
Pending litigation
In October 2001, the Company settled a lawsuit filed by Travelers Casualty &
Surety Co., f/k/a the Aetna Casualty and Surety Co. (Travelers) in May 1998.
The Travelers complaint sought reimbursement of legal fees and costs totaling in
excess of $15 million paid by Travelers in defending the Company in litigation
with United Technologies Corporation, which was settled in March 2000. In
addition, Travelers sought a declaratory judgment that the Company did not have
insurance coverage under certain insurance policies with Travelers and,
accordingly, that Travelers did not have a duty to defend or indemnify the
Company under such policies. The settlement with Travelers did not result in
any gain or loss to the Company and all claims were dismissed.
The Company is involved in various legal actions arising in the normal course
of business. Based upon the amounts sought by the plaintiffs in these actions,
management is of the opinion that the outcome of these matters will not have a
significant effect on the Company's consolidated financial statements.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
57
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the Directors of the Company is incorporated by
reference to the Company's definitive proxy statement which will be filed with
the Securities and Exchange Commission (Commission) within 120 days after the
close of fiscal 2001.
Information concerning the executive officers of the Company is set forth at
Part I hereof under the caption "Executive Officers of the Registrant."
Item 11. Executive Compensation
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement which will be filed with
the Commission within 120 days after the close of fiscal 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to the Company's definitive proxy
statement which will be filed with the Commission within 120 days after the
close of fiscal 2001.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
hereby incorporated by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days after the close of
fiscal 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
The following consolidated financial statements of the Company and
subsidiaries are included in Part II, Item 8:
Page
----
Independent Auditors' Report.................................................... 31
Consolidated Balance Sheets at October 31, 2001 and 2000........................ 32-33
Consolidated Statements of Operations for the years ended October 31, 2001,
2000 and 1999................................................................. 34
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended October 31, 2001, 2000 and 1999.......................... 35
Consolidated Statements of Cash Flows for the years ended October 31, 2001,
2000 and 1999................................................................. 36
Notes to Consolidated Financial Statements...................................... 37-57
(a)(2) Financial Statement Schedules:
No schedules have been submitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
58
(a)(3) Exhibits
Exhibit
Number Description
------ -----------
2.1 -- Amended and Restated Agreement of Merger and Plan of
Reorganization, dated as of March 22, 1993, by and among HEICO
Corporation, HEICO Industries, Corp. and New HEICO, Inc. is
incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-57624)
Amendment No. 1 filed on March 19, 1993.*
2.2 -- Stock Purchase Agreement, dated as of July 12, 1999, among HEICO
Corporation, Thermal Structures, Inc., Quality Honeycomb, Inc.,
David A. Janes, Vaughn Barnes, Stephen T. Braunheim, DLD
Investments, LLC, and Acme Freight, LLC (without schedules and
exhibits) is incorporated by reference to Exhibit 2.1 to Form 8-K
dated July 30, 1999.*
2.3 -- Stock Purchase Agreement, dated August 1, 2000, by and between
HEICO Aviation Products Corp., N/K/A HEICO Electronic
Technologies Corp. and Hobart Brothers Company (without schedules
and exhibits) is incorporated by reference to Exhibit 2.1 to Form
8-K dated September 14, 2000.*
2.4 -- First Amendment to Stock Purchase Agreement, effective as of
September 14, 2000, between HEICO Aviation Products Corp. N/K/A
HEICO Electronic Technologies Corp. and Hobart Brothers Company
is incorporated by reference to Exhibit 2.2 to Form 8-K dated
September 14, 2000.*
3.1 -- Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (Registration No. 33-57624) Amendment No. 1 filed on
March 19, 1993.*
3.2 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated April 27, 1993, are incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
8-B dated April 29, 1993.*
3.3 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated November 3, 1993, are incorporated by reference
to Exhibit 3.3 to the Form 10-K for the year ended October 31,
1993.*
3.4 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated March 19, 1998, are incorporated by reference
to Exhibit 3.4 to the Company's Registration Statement on Form
S-3 (Registration No. 333-48439) filed on March 23, 1998.*
3.5 -- Bylaws of the Registrant are incorporated by reference to Exhibit
3.4 to the Form 10-K for the year ended October 31, 1996.*
4.0 -- The description and terms of Preferred Stock Purchase Rights are
set forth in a Rights Agreement between the Company and SunBank,
N.A., as Rights Agent, dated as of November 2, 1993, incorporated
by reference to Exhibit 1 to the Form 8-K dated November 2,
1993.*
10.1 -- Loan Agreement, dated March 1, 1988, between HEICO Corporation
and Broward County, Florida is incorporated by reference to
Exhibit 10.1 to the Form 10-K for the year ended October 31,
1994*
59
10.2 -- SunBank Reimbursement Agreement, dated February 28, 1994,
between HEICO Aerospace Corporation and SunBank/South Florida,
N.A. is incorporated by reference to Exhibit 10.2 to the Form
10-K for the year ended October 31, 1994.*
10.3 -- Amendment, dated March 1, 1995, to the SunBank Reimbursement
Agreement dated February 28, 1994 between HEICO Aerospace
Corporation and SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.3 to the Form 10-K from the year ended
October 31, 1995.*
10.4 -- Amendment and Extension, dated February 28, 1999 to Loan
Agreement dated February 28, 1994, between SunTrust Bank, South
Florida, N.A. and HEICO Aerospace Corporation is incorporated by
reference to Exhibit 10.4 to the Form 10-K for the year ended
October 31, 1999.*
10.5 -- Amendment, dated July 20, 2000, to the SunBank Reimbursement
Agreement dated February 28, 1994, between HEICO Aerospace
Corporation and SunTrust Bank is incorporated by reference to
Exhibit 10.5 to the Form 10-K for the year ended October 31,
2000.*
10.6 -- HEICO Savings and Investment Plan and Trust, as amended and
restated effective January 2, 1987 is incorporated by reference
to Exhibit 10.2 to the Form 10-K for the year ended October 31,
1987.*
10.7 -- HEICO Savings and Investment Plan, as amended and restated
December 19, 1994, is incorporated by reference to Exhibit 10.11
to the Form 10-K for the year ended October 31, 1994.*
10.8 -- HEICO Corporation 1993 Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81789)
filed on June 29, 1999.*
10.9 -- HEICO Corporation Combined Stock Option Plan, dated March 15,
1988, is incorporated by reference to Exhibit 10.3 to the Form
10-K for the year ended October 31, 1989.*
10.10 -- Non-Qualified Stock Option Agreement for Directors, Officers and
Employees is incorporated by reference to Exhibit 10.8 to the
Form 10-K for the year ended October 31, 1985.*
10.11 -- HEICO Corporation Directors' Retirement Plan, as amended, dated
as of May 31, 1991, is incorporated by reference to Exhibit
10.19 to the Form 10-K for the year ended October 31, 1992.*
10.12 -- Key Employee Termination Agreement, dated as of April 5, 1988,
between HEICO Corporation and Thomas S. Irwin is incorporated by
reference to Exhibit 10.20 to the Form 10-K for the year ended
October 31, 1992.*
10.13 -- Loan Agreement, dated as of March 1, 1997, between Trilectron
Industries, Inc. and Manatee County, Florida is incorporated by
reference to Exhibit 10.1 to the Form 10-Q for the three months
ended April 30, 1997.*
60
10.14 -- Letter of Credit and Reimbursement Agreement, dated as of March
1, 1997, between Trilectron Industries, Inc., and First Union
National Bank of Florida (excluding referenced exhibits) is
incorporated by reference to Exhibit 10.2 to the Form 10-Q for
the three months ended April 30, 1997.*
10.15 -- Stock Purchase Agreement, dated October 30, 1997, by and among
HEICO Corporation, HEICO Aerospace Holdings Corp. and Lufthansa
Technik AG is incorporated by reference to Exhibit 10.31 to Form
10-K/A for the year ended October 31, 1997.*
10.16 -- Shareholders Agreement, dated October 30, 1997, by and between
HEICO Aerospace Holdings Corp., HEICO Aerospace Corporation and
all of the shareholders of HEICO Aerospace Holdings Corp. and
Lufthansa Technik AG is incorporated by reference to Exhibit
10.32 to Form 10-K/A for the year ended October 31, 1997.*
10.17 -- Credit Agreement among HEICO Corporation and SunTrust Bank,
South Florida, N.A., as Agent, dated as of July 30, 1998, is
incorporated by reference to Exhibit 10.2 to Form 8-K dated
August 4, 1998.*
10.18 -- First Amendment, dated July 30, 1998 to Credit Agreement among
HEICO Corporation and SunTrust Bank, South Florida, N.A., as
agent, dated as of July 31, 1998 is incorporated by reference to
Exhibit 10.31 to the Form 10-K for the year ended October 31,
1999.*
10.19 -- Second Amendment, dated May 12, 1999, to Credit Agreement among
HEICO Corporation and SunTrust Bank, South Florida, N.A., as
agent, dated as of July 31, 1998 is incorporated by reference to
Exhibit 10.32 to the Form 10-K for the year ended October 31,
1999.*
10.20 -- Third Amendment, dated as of June 23, 2000, to Credit Agreement
among HEICO Corporation and SunTrust Bank (formerly known as
SunTrust Bank, South Florida, N.A.) as Agent dated as of July
31, 1998, is incorporated by reference to Exhibit 10.1 to Form
10-Q for the quarterly period ended July 31, 2000.*
10.21 -- Asset Purchase Agreement, dated as of December 4, 1998, among
RDI Acquisition Corp., HEICO Aerospace Holdings Corp., HEICO
Corporation, Rogers-Dierks, Inc., William Rogers and John Dierks
(without schedules and exhibits) is incorporated by Reference to
Exhibit 2.1 to Form 8-K dated December 22, 1998.*
21 -- Subsidiaries of the Company is incorporated by reference to
Exhibit 21 to the Form 10-K for the year ended October 31,
2001.**
23 -- Consent of Deloitte & Touche LLP.**
__________
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K by the Company during the fourth
quarter of fiscal 2001.
61
(c) Exhibits
See Item 14(a)(3).
(d) Separate Financial Statements Required
Not applicable.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
By: /s/ THOMAS S. IRWIN
-----------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: January 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ LAURANS A. MENDELSON Chairman, President, Chief
-------------------------------------------------- Executive Officer and
Laurans A. Mendelson Director (Principal
Executive Officer)
/s/ SAMUEL L. HIGGINBOTTOM Director
--------------------------------------------------
Samuel L. Higginbottom
Director
--------------------------------------------------
Wolfgang Mayrhuber
/s/ ERIC A. MENDELSON Director
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Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director
--------------------------------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR Director
--------------------------------------------------
Albert Morrison, Jr.
/s/ ALAN SCHRIESHEIM Director
--------------------------------------------------
Alan Schriesheim
63
Exhibit Index
Exhibit # Description
--------- -----------
21 Subsidiaries of the Company
23 Consent of Deloitte & Touche LLP