UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2009 or
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |X| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of each of the registrant's classes of
common stock as of February 27, 2009:
Common Stock, $.01 par value 10,572,641 shares
Class A Common Stock, $.01 par value 15,859,259 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Part I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of January 31, 2009 and October 31, 2008.....................................2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 2009 and 2008............................3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 2009 and 2008............................4
Notes to Condensed Consolidated Financial Statements (unaudited)...................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................28
Item 4. Controls and Procedures...........................................................28
Part II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................29
Item 6. Exhibits..........................................................................29
Signature........................................................................................30
1
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
January 31, 2009 October 31, 2008
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,383,000 $ 12,562,000
Accounts receivable, net 74,591,000 88,403,000
Inventories, net 140,428,000 132,910,000
Prepaid expenses and other current assets 7,778,000 3,678,000
Deferred income taxes 13,868,000 13,957,000
---------------- ----------------
Total current assets 241,048,000 251,510,000
Property, plant and equipment, net 59,970,000 59,966,000
Goodwill 329,677,000 323,393,000
Intangible assets, net 23,844,000 24,983,000
Other assets 17,839,000 16,690,000
---------------- ----------------
Total assets $ 672,378,000 $ 676,542,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 218,000 $ 220,000
Trade accounts payable 26,619,000 29,657,000
Accrued expenses and other current liabilities 30,687,000 49,586,000
Income taxes payable 2,440,000 1,765,000
---------------- ----------------
Total current liabilities 59,964,000 81,228,000
Long-term debt, net of current maturities 40,328,000 37,381,000
Deferred income taxes 39,093,000 39,192,000
Other non-current liabilities 20,019,000 17,003,000
---------------- ----------------
Total liabilities 159,404,000 174,804,000
---------------- ----------------
Minority interests in consolidated subsidiaries (Note 12) 83,657,000 83,978,000
---------------- ----------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares
authorized; 300,000 shares designated as Series B Junior
Participating Preferred Stock and 300,000 shares designated
as Series C Junior Participating Preferred Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 10,572,641 and 10,572,641 shares issued and
outstanding, respectively 106,000 106,000
Class A Common Stock, $.01 par value per share; 30,000,000
shares authorized; 15,850,487 and 15,829,790 shares issued
and outstanding, respectively 159,000 158,000
Capital in excess of par value 231,907,000 229,443,000
Accumulated other comprehensive loss (5,459,000) (4,819,000)
Retained earnings 202,604,000 192,872,000
---------------- ----------------
Total shareholders' equity 429,317,000 417,760,000
---------------- ----------------
Total liabilities and shareholders' equity $ 672,378,000 $ 676,542,000
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three months ended January 31,
------------------------------------
2009 2008
---------------- ----------------
Net sales $ 130,437,000 $ 134,287,000
---------------- ----------------
Operating costs and expenses:
Cost of sales 86,533,000 87,458,000
Selling, general and administrative expenses 22,451,000 23,599,000
---------------- ----------------
Total operating costs and expenses 108,984,000 111,057,000
---------------- ----------------
Operating income 21,453,000 23,230,000
Interest expense (195,000) (862,000)
Other expense (47,000) (116,000)
---------------- ----------------
Income before income taxes and minority interests 21,211,000 22,252,000
Income tax expense 5,860,000 7,580,000
---------------- ----------------
Income before minority interests 15,351,000 14,672,000
Minority interests' share of income 4,034,000 4,586,000
---------------- ----------------
Net income $ 11,317,000 $ 10,086,000
================ ================
Net income per share:
Basic $ .43 $ .39
Diluted $ .42 $ .37
Weighted average number of common shares outstanding:
Basic 26,410,681 26,184,631
Diluted 27,241,961 27,209,157
Cash dividends per share $ 0.06 $ 0.05
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three months ended January 31,
------------------------------------
2009 2008
---------------- ----------------
Operating Activities:
Net income $ 11,317,000 $ 10,086,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,471,000 3,539,000
Deferred income tax provision 87,000 856,000
Minority interests' share of income 4,034,000 4,586,000
Tax benefit from stock option exercises 2,139,000 6,285,000
Excess tax benefit from stock option exercises (1,796,000) (4,350,000)
Stock option compensation expense 4,000 85,000
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable 13,619,000 9,436,000
Increase in inventories (7,830,000) (777,000)
Increase in prepaid expenses and other current assets (1,600,000) (1,211,000)
Decrease in trade accounts payable (2,935,000) (5,288,000)
Decrease in accrued expenses and other current liabilities (15,129,000) (8,920,000)
Decrease in income taxes payable (353,000) (4,581,000)
Other 178,000 98,000
---------------- ----------------
Net cash provided by operating activities 5,206,000 9,844,000
---------------- ----------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (12,784,000) (12,190,000)
Capital expenditures (2,616,000) (2,812,000)
Other 14,000 78,000
---------------- ----------------
Net cash used in investing activities (15,386,000) (14,924,000)
---------------- ----------------
Financing Activities:
Borrowings on revolving credit facility 16,000,000 22,000,000
Payments on revolving credit facility (13,000,000) (11,000,000)
Excess tax benefit from stock option exercises 1,796,000 4,350,000
Proceeds from stock option exercises 322,000 824,000
Cash dividends paid (1,585,000) (1,312,000)
Distributions to minority interest owners (1,390,000) (2,000,000)
Other (45,000) (20,000)
---------------- ----------------
Net cash provided by financing activities 2,098,000 12,842,000
---------------- ----------------
Effect of exchange rate changes on cash (97,000) (114,000)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (8,179,000) 7,648,000
Cash and cash equivalents at beginning of year 12,562,000 4,947,000
---------------- ----------------
Cash and cash equivalents at end of period $ 4,383,000 $ 12,595,000
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
HEICO Corporation and its subsidiaries (collectively, "HEICO," "we," "us," "our"
or the "Company") have been prepared in conformity with accounting principles
generally accepted in the United States of America for interim financial
information and in accordance with the instructions to Form 10-Q. Therefore, the
condensed consolidated financial statements do not include all information and
footnotes normally included in annual consolidated financial statements and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended October 31, 2008. The October 31, 2008 Condensed Consolidated Balance
Sheet has been derived from the Company's audited consolidated financial
statements. In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting principally of normal
recurring accruals) necessary for a fair presentation of the condensed
consolidated balance sheets, statements of operations and statements of cash
flows for such interim periods presented. The results of operations for the
three months ended January 31, 2009 are not necessarily indicative of the
results which may be expected for the entire fiscal year.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for measuring
fair value, and requires expanded disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2, "Effective
Date of FASB Statement No. 157," which delays the effective date of SFAS No. 157
by one year for nonfinancial assets and liabilities, except those recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company adopted all required portions of SFAS No. 157 effective November 1,
2008. The adoption of SFAS No. 157 did not have a material effect on the
Company's results of operations, financial position or cash flows. See Note 7,
Fair Value Measurements, which provides information about the extent to which
fair value is used to measure assets and liabilities and the methods and
assumptions used to measure fair value. The portions of SFAS No. 157 that were
delayed by FSP FAS 157-2 will be adopted by the Company at the beginning of
fiscal 2010 and the Company is currently in the process of evaluating the effect
such adoption will have on its results of operations, financial position and
cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure certain
financial assets and liabilities at fair value that are not currently required
to be measured at fair value, and report unrealized gains and losses on items
for which the fair value option has been elected in earnings. The Company
adopted
5
SFAS No. 159 effective November 1, 2008 and has not elected to measure any
financial assets and financial liabilities at fair value that were not
previously required to be measured at fair value. Accordingly, the adoption of
SFAS No. 159 did not impact the Company's results of operations, financial
position or cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 became effective November
15, 2008. The adoption of SFAS No. 162 did not have a material effect on the
Company's results of operations, financial position or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations." SFAS No. 141(R) is a revision of SFAS No.141 and retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting
(formerly the "purchase accounting" method) be used for all business
combinations and for an acquirer to be identified for each business combination.
However, SFAS No. 141(R) changes the approach of applying the acquisition method
in a number of significant areas, including that acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at
fair value at the acquisition date; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; restructuring costs associated with a business combination
will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. SFAS No.141(R) is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first fiscal year beginning
on or after December 15, 2008, or in fiscal 2010 for HEICO. The Company is
currently in the process of evaluating the effect the adoption of SFAS No.
141(R) will have on its results of operations, financial position and cash
flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51." This
statement requires the recognition of a noncontrolling interest (previously
referred to as minority interest) as a separate component within equity in the
consolidated balance sheet. It also requires the amount of consolidated net
income attributable to the parent and the noncontrolling interest be clearly
identified and presented within the consolidated statement of operations. SFAS
No. 160 is effective for fiscal years beginning on or after December 15, 2008,
or in fiscal 2010 for HEICO. The Company is currently in the process of
evaluating the effect the adoption of SFAS No. 160 will have on its results of
operations, financial position and cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
SFAS No. 161 expands the disclosure requirements in SFAS No. 133 about an
entity's derivative instruments and hedging activities. It requires enhanced
disclosures about (i) how and why an entity uses derivative instruments; (ii)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and (iii) how derivative instruments
and related hedged items affect an entity's financial position, financial
performance
6
and cash flows. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008, or in the second quarter of fiscal 2009 for
HEICO. The Company is currently in the process of evaluating the effect the
adoption of SFAS No. 161 will have on its financial statement disclosures.
2. ACQUISITIONS
In December 2008, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary ("HEICO Aerospace"), made payment for the remaining 10% equity
interest in one of its subsidiaries, which increased the Company's ownership
interest to 100% effective October 31, 2008. The purchase price was accrued as
of October 31, 2008 and was paid using cash provided by operating activities.
In December 2008, the Company, through HEICO Aerospace, acquired an
additional 14% equity interest in one of its subsidiaries, which increased the
Company's ownership interest to 72%.
During the first quarter of fiscal 2009, the Company, through its HEICO
Electronic Technologies Corp. subsidiary, paid $2.2 million of additional
purchase consideration pursuant to the terms of the purchase agreement
associated with a previous year acquisition. The amount paid, which was fully
accrued as of October 31, 2008, was based on a multiple of the subsidiary's
earnings relative to target. Since this amount was not contingent upon the
former shareholders of the acquired entity remaining employed by the Company or
providing future services to the Company, the payment was recorded as an
additional cost of the acquired entity. (See Note 12, Commitments and
Contingencies, for additional information on contingent purchase consideration
associated with certain of the Company's acquisitions.)
The fiscal 2009 acquisitions described above were accounted for using the
purchase method of accounting. The purchase price of each acquisition was paid
in cash using proceeds from the Company's revolving credit facility unless
otherwise noted and was not significant to the Company's condensed consolidated
financial statements. The allocation of the purchase price of a certain fiscal
2008 acquisition to the tangible and identifiable intangible assets acquired and
liabilities assumed in these condensed consolidated financial statements is
preliminary until the Company obtains final information regarding their fair
values.
The operating results of each of the Company's fiscal 2009 acquisitions as
noted above were included in the Company's results of operations from their
effective acquisition date. Assuming these acquisitions had taken place as of
the beginning of fiscal 2008, the pro forma net sales for the three months ended
January 31, 2008 and 2009 would not have been different than the reported
amounts, and the pro forma net income and net income per share (basic and
diluted) for the three months ended January 31, 2008 and 2009 would not have
been materially different than the reported amounts.
7
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
January 31, 2009 October 31, 2008
---------------- ----------------
Accounts receivable $ 77,301,000 $ 90,990,000
Less: Allowance for doubtful accounts (2,710,000) (2,587,000)
---------------- ----------------
Accounts receivable, net $ 74,591,000 $ 88,403,000
================ ================
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
January 31, 2009 October 31, 2008
---------------- ----------------
Costs incurred on uncompleted contracts $ 20,678,000 $ 21,505,000
Estimated earnings 11,873,000 12,545,000
---------------- ----------------
32,551,000 34,050,000
Less: Billings to date (27,287,000) (28,337,000)
---------------- ----------------
$ 5,264,000 $ 5,713,000
================ ================
Included in accompanying Condensed Consolidated
Balance Sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 5,344,000 $ 6,115,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (80,000) (402,000)
---------------- ----------------
$ 5,264,000 $ 5,713,000
================ ================
Changes in estimates did not have a material effect on net income in the
three months ended January 31, 2009 and 2008.
Inventories
January 31, 2009 October 31, 2008
---------------- ----------------
Finished products $ 78,796,000 $ 74,281,000
Work in process 18,322,000 17,897,000
Materials, parts, assemblies and supplies 43,310,000 40,732,000
---------------- ----------------
Inventories, net $ 140,428,000 $ 132,910,000
================ ================
Inventories related to long-term contracts were not significant as of
January 31, 2009 and October 31, 2008.
Property, Plant and Equipment
January 31, 2009 October 31, 2008
---------------- ----------------
Land $ 3,656,000 $ 3,656,000
Buildings and improvements 36,603,000 36,229,000
Machinery, equipment and tooling 74,081,000 73,038,000
Construction in progress 6,379,000 5,446,000
---------------- ----------------
120,719,000 118,369,000
Less: Accumulated depreciation and amortization (60,749,000) (58,403,000)
---------------- ----------------
Property, plant and equipment, net $ 59,970,000 $ 59,966,000
================ ================
8
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included
within the caption accrued expenses and other current liabilities in the
accompanying Condensed Consolidated Balance Sheets was $12,930,000 and
$11,758,000 as of January 31, 2009 and October 31, 2008, respectively. The total
customer rebates and credits deducted within net sales for the three months
ended January 31, 2009 and 2008 were $2,172,000 and $2,438,000, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group ("FSG")
and the Electronic Technologies Group ("ETG"). Changes in the carrying amount of
goodwill by operating segment for the three months ended January 31, 2009 are as
follows:
Segment
---------------------------- Consolidated
FSG ETG Totals
------------ ------------ ------------
Balances as of October 31, 2008 $181,126,000 $142,267,000 $323,393,000
Goodwill acquired 6,467,000 -- 6,467,000
Foreign currency translation adjustments (158,000) (148,000) (306,000)
Adjustments to goodwill 123,000 -- 123,000
------------ ------------ ------------
Balances as of January 31, 2009 $187,558,000 $142,119,000 $329,677,000
============ ============ ============
The goodwill acquired is a result of certain current year acquisitions
described in Note 2, Acquisitions. The foreign currency translation adjustments
principally reflect an unrealized translation loss on the goodwill recognized in
connection with foreign subsidiaries. Foreign currency translation adjustments
are included in other comprehensive income in the Company's Condensed
Consolidated Balance Sheets (see Note 8, Shareholders' Equity and Comprehensive
Income). Adjustments to goodwill were not material in the three months ended
January 31, 2009.
Identifiable intangible assets consist of:
As of January 31, 2009 As of October 31, 2008
-------------------------------------------- --------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------------ ------------ ------------ ------------ ------------ ------------
Amortizing Assets:
Customer relationships $ 16,651,000 ($ 7,103,000) $ 9,548,000 $ 16,845,000 ($ 6,451,000) $ 10,394,000
Intellectual property 3,411,000 (1,977,000) 1,434,000 3,427,000 (1,833,000) 1,594,000
Licenses 1,000,000 (492,000) 508,000 1,000,000 (474,000) 526,000
Non-compete agreements 1,076,000 (735,000) 341,000 1,086,000 (660,000) 426,000
Patents 577,000 (203,000) 374,000 575,000 (189,000) 386,000
------------ ------------ ------------ ------------ ------------ ------------
22,715,000 (10,510,000) 12,205,000 22,933,000 (9,607,000) 13,326,000
Non-Amortizing Assets:
Trade names 11,639,000 -- 11,639,000 11,657,000 -- 11,657,000
------------ ------------ ------------ ------------ ------------ ------------
$ 34,354,000 ($10,510,000) $ 23,844,000 $ 34,590,000 ($ 9,607,000) $ 24,983,000
============ ============ ============ ============ ============ ============
9
Amortization expense of other intangible assets for the three months ended
January 31, 2009 and 2008 was $941,000 and $1,257,000, respectively.
Amortization expense of other intangible assets for the fiscal year ending
October 31, 2009 is estimated to be $3,648,000. Amortization expense for each of
the next five fiscal years is estimated to be $2,912,000 in fiscal 2010,
$2,217,000 in fiscal 2011, $1,561,000 in fiscal 2012, $1,046,000 in fiscal 2013
and $679,000 in fiscal 2014.
5. SHORT-TERM AND LONG-TERM DEBT
As of January 31, 2009, no borrowings were outstanding under the $2.5
million short-term line of credit that one of the Company's subsidiaries has
with a bank.
Long-term debt consists of:
January 31, 2009 October 31, 2008
---------------- ----------------
Borrowings under revolving credit facility $ 40,000,000 $ 37,000,000
Notes payable, capital leases and equipment loans 546,000 601,000
---------------- ----------------
40,546,000 37,601,000
Less: Current maturities of long-term debt (218,000) (220,000)
---------------- ----------------
$ 40,328,000 $ 37,381,000
================ ================
As of January 31, 2009 and October 31, 2008, the weighted average interest
rate on borrowings under the Company's revolving credit facility was .9% and
3.6%, respectively. The revolving credit facility contains both financial and
non-financial covenants. As of January 31, 2009, the Company was in compliance
with all such covenants.
6. INCOME TAXES
As of January 31, 2009 and October 31, 2008, the Company's liability for
gross unrecognized tax benefits related to uncertain tax positions was
$4,298,000 and $5,742,000, respectively, of which $1,963,000 and $3,438,000,
respectively, would decrease the Company's income tax expense and effective
income tax rate if the tax benefits were recognized. The remaining liability was
for tax positions for which the uncertainty was only related to the timing of
such tax benefit. A reconciliation of the activity related to the liability for
gross unrecognized tax benefits for the three months ended January 31, 2009
follows:
Balance as of October 31, 2008 $ 5,742,000
Increases related to prior year tax positions 109,000
Decreases related to prior year tax positions (1,466,000)
Increases related to current year tax positions 243,000
Settlements (211,000)
Lapse of statutes of limitations (119,000)
------------
Balance as of January 31, 2009 $ 4,298,000
============
The $1,444,000 decrease in the liability was primarily due to a favorable
settlement reached with the Internal Revenue Service ("IRS") during the first
quarter of fiscal 2009
10
concerning the income tax credit claimed by the Company in its U.S. federal
filings for qualified research and development activities incurred during fiscal
years 2002 through 2005 as well as an aggregate reduction to the related
uncertain tax positions for fiscal years 2006 through 2008 based on information
obtained during the IRS' examination. As a result of the IRS settlement and
reserve adjustment for fiscal years 2006 through 2008, the Company recognized an
additional tax benefit during the first quarter of fiscal 2009, which increased
net income by approximately $1,083,000. Further, the Company believes that it is
reasonably possible that within the next twelve months the California Franchise
Tax Board examination of the income tax credit claimed for qualified research
and development activities on the Company's state of California filings for
fiscal years 2001 through 2005 will be settled. Accordingly, the Company
reclassified the related liability for unrecognized tax benefits from other
non-current liabilities to accrued expenses and other current liabilities in the
Company's Condensed Consolidated Balance Sheets. In addition, the Company
reclassified the $2,605,000 aggregate receivable for the U.S. federal filings
and state of California filings income tax refunds, which reflects the IRS
settlement and interest income, from long-term income tax assets within other
assets to current income tax assets within prepaid expenses and other current
assets in the Company's Condensed Consolidated Balance Sheets.
Except for the impact of the IRS settlement, there were no material
changes in the liability for unrecognized tax positions resulting from tax
positions taken during the current or a prior year, settlements with other
taxing authorities or a lapse of applicable statutes of limitations. The accrual
of interest and penalties related to the unrecognized tax benefits was not
material for the three months ended January 31, 2009. Further, the Company does
not expect the total amount of unrecognized tax benefits to materially change in
the next twelve months.
7. FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157 effective November 1, 2008 for all
financial assets and liabilities and nonfinancial assets and liabilities that
are recognized or disclosed at fair value on a recurring basis. SFAS No.157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS No. 157 also establishes a three-level fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. An asset or liability's level is based on the lowest level of input
that is significant to the fair value measurement. SFAS No. 157 requires that
assets and liabilities carried at fair value be classified and disclosed in one
of the following three categories:
Level 1 -- Quoted prices in active markets for identical assets or liabilities;
Level 2 -- Inputs, other than quoted prices included within Level 1, that are
observable for the asset or liability either directly or indirectly;
or
Level 3 -- Unobservable inputs for the asset or liability where there is little
or no market data, requiring management to develop its own
assumptions.
11
The following table sets forth by level within the fair value hierarchy,
the Company's financial assets and liabilities and nonfinancial assets and
liabilities that were measured at fair value on a recurring basis as of January
31, 2009:
Level 1 Level 2 Level 3 Total
------------- ------------- ------------- -------------
Assets:
Deferred compensation plans $ 2,702,000 $ 12,222,000 $ -- $ 14,924,000
Liabilities -- -- -- --
The Company maintains two non-qualified deferred compensation plans. The
assets of the HEICO Corporation Leadership Compensation Plan principally
represent cash surrender values of life insurance policies, which derive their
fair value from investments in mutual funds that are managed by an insurance
company and classified within Level 2. The assets of the Company's other
deferred compensation plan are invested in publicly-traded mutual funds and a
life insurance policy and the fair values of this plan's assets are classified
within Level 1 and Level 2, respectively. The assets of both plans are held
within irrevocable trusts and classified within other assets (long-term) in the
Company's Condensed Consolidated Balance Sheets. The related liabilities of the
two deferred compensation plans are included within other non-current
liabilities in the Company's Condensed Consolidated Balance Sheets and have an
aggregate value of $14,980,000 as of January 31, 2009.
8. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in consolidated shareholders' equity and comprehensive income for
the three months ended January 31, 2009 are as follows:
Accumulated
Class A Capital in Other
Common Common Excess of Comprehensive Retained Comprehensive
Stock Stock Par Value Loss Earnings Income
-------- -------- ------------- -------------- ------------- -------------
Balances as of October 31, 2008 $106,000 $158,000 $ 229,443,000 ($ 4,819,000) $ 192,872,000
Net income -- -- -- -- 11,317,000 $ 11,317,000
Foreign currency translation adjustments -- -- -- (775,000) -- (775,000)
-------------
Comprehensive income -- -- -- -- -- $ 10,542,000
=============
Cash dividends ($.06 per share) -- -- -- -- (1,585,000)
Tax benefit from stock option exercises -- -- 2,139,000 -- --
Proceeds from stock option exercises -- 1,000 321,000 -- --
Stock option compensation expense -- -- 4,000 -- --
Other -- -- -- 135,000 --
-------- -------- ------------- -------------- -------------
Balances as of January 31, 2009 $106,000 $159,000 $ 231,907,000 ($ 5,459,000) $ 202,604,000
======== ======== ============= ============== =============
9. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the three months ended January 31, 2009 and 2008
includes approximately $4.8 million and $4.2 million, respectively, of new
product research and development expenses.
12
10. NET INCOME PER SHARE
The computation of basic and diluted net income per share is as follows:
Three months ended January 31,
-----------------------------------
2009 2008
---------------- ----------------
Numerator:
Net income $ 11,317,000 $ 10,086,000
================ ================
Denominator:
Weighted average common shares outstanding-basic 26,410,681 26,184,631
Effect of dilutive stock options 831,280 1,024,526
---------------- ----------------
Weighted average common shares outstanding-diluted 27,241,961 27,209,157
================ ================
Net income per share-basic $ 0.43 $ 0.39
Net income per share-diluted $ 0.42 $ 0.37
Anti-dilutive stock options excluded -- --
11. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group ("FSG"), consisting of HEICO Aerospace Holdings Corp. and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries, for the three months ended
January 31, 2009 and 2008, respectively, is as follows:
Other,
Segment Primarily
------------------------------- Corporate and Consolidated
FSG ETG Intersegment Totals
-------------- -------------- -------------- --------------
For the three months ended January 31, 2009:
Net sales $ 99,562,000 $ 30,959,000 ($ 84,000) $ 130,437,000
Depreciation and amortization 2,411,000 951,000 109,000 3,471,000
Operating income 15,641,000 8,542,000 (2,730,000) 21,453,000
Capital expenditures 2,291,000 314,000 11,000 2,616,000
For the three months ended January 31, 2008:
Net sales $ 102,349,000 $ 31,938,000 $ -- $ 134,287,000
Depreciation and amortization 2,107,000 1,350,000 82,000 3,539,000
Operating income 18,946,000 7,177,000 (2,893,000) 23,230,000
Capital expenditures 2,168,000 441,000 203,000 2,812,000
13
Total assets by operating segment as of January 31, 2009 and October 31,
2008 are as follows:
Segment Other,
------------------------------- Primarily Consolidated
FSG ETG Corporate Totals
-------------- -------------- -------------- --------------
Total assets as of January 31, 2009 $ 423,507,000 $ 213,471,000 $ 35,400,000 $ 672,378,000
Total assets as of October 31, 2008 418,079,000 220,888,000 37,575,000 676,542,000
12. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has arranged for a standby letter of credit for $1.5 million
to meet the security requirement of its insurance company for potential workers'
compensation claims, which are supported by the Company's revolving credit
facility.
Product Warranty
Changes in the Company's product warranty liability for the three months
ended January 31, 2009 and 2008, respectively, are as follows:
Three months ended January 31,
------------------------------------
2009 2008
---------------- ----------------
Balances as of beginning of fiscal year $ 671,000 $ 1,181,000
Accruals for warranties 222,000 172,000
Warranty claims settled (248,000) (223,000)
---------------- ----------------
Balances as of January 31 $ 645,000 $ 1,130,000
================ ================
Acquisitions
Put/Call Rights
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the minority interest holders currently have the right to
cause the Company to purchase their interests over a five-year period and the
Company has the right to purchase the minority interests over a five-year period
beginning in fiscal 2015, or sooner under certain conditions.
Pursuant to the purchase agreement related to the acquisition of an 85%
interest in a subsidiary by the ETG in fiscal 2005, certain minority interest
holders exercised their option during fiscal 2007 to cause the Company to
purchase their aggregate 3% interest over a four-year period ending in fiscal
2010. Accordingly, the Company increased its ownership interest in the
subsidiary by 1.5% (or one-fourth of such minority interest holders' aggregate
interest in fiscal 2007 and 2008, respectively) to 86.5% effective April 2008.
Further, the remaining minority interest holders currently have the right to
cause the Company to purchase their aggregate 12% interest over a four-year
period.
Pursuant to the purchase agreement related to the acquisition of a 51%
interest in a
14
subsidiary by the FSG in fiscal 2006, the minority interest holders exercised
their option during fiscal 2008 to cause the Company to purchase an aggregate
28% interest over a four-year period ending in fiscal 2011. Accordingly, the
Company increased its ownership interest in the subsidiary by 7% (or one-fourth
of such minority interest holders' aggregate interest) to 58% effective April
2008. The Company and the minority interest holders agreed to accelerate the
purchase of 14% of these equity interests (7% from April 2009 and 7% from April
2010), which increased the Company's ownership interest to 72% effective
December 2008. The remaining 7% interest is anticipated to be purchased in April
2011. Further, the Company has the right to purchase the remaining 21% of the
equity interests of the subsidiary over a three-year period beginning in fiscal
2012, or sooner under certain conditions, and the minority interest holders have
the right to cause the Company to purchase the same equity interest over the
same period.
As part of the agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase the minority interests
over a four-year period beginning in fiscal 2014, or sooner under certain
conditions, and the minority interest holders have the right to cause the
Company to purchase the same equity interest over the same period.
As part of an agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2008, the Company has the right to purchase the minority interests
over a five-year period beginning in fiscal 2014, or sooner under certain
conditions, and the minority interest holders have the right to cause the
Company to purchase the same equity interest over the same period.
The above referenced rights of the minority interest holders ("Put
Rights") may be exercised on varying dates causing the Company to purchase their
equity interests beginning in fiscal 2009 through fiscal 2018. The Put Rights,
all of which relate either to common shares or membership interests in limited
liability companies, provide that the cash consideration to be paid for the
minority interests ("Redemption Amount") be at a formula that management
intended to reasonably approximate fair value, as defined in the applicable
agreements based on a multiple of future earnings over a measurement period.
Assuming the subsidiaries perform over their respective future measurement
periods at the same earnings levels they performed in the comparable historical
measurement periods and assuming all Put Rights are exercised, the aggregate
Redemption Amount that the Company would be required to pay is approximately $40
million. The actual Redemption Amount will likely be different. Upon exercise of
any Put Right, the Company's ownership interest in the subsidiary would increase
and minority interest expense would decrease. The Put Rights are embedded in the
shares owned by the minority interest holders and are not freestanding.
Consistent with Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," minority interests have been recorded in the Company's consolidated
balance sheets at historical cost plus an allocation of subsidiary earnings
based on ownership interests, less dividends paid to the minority interest
holders. As described in Note 1, Summary of Significant Accounting Policies, the
FASB issued SFAS No. 160 in December 2007 that will change the current
accounting and financial reporting for non-controlling (minority) interests.
SFAS No. 160 will be effective for fiscal years beginning after December 15,
2008. The Company will adopt SFAS No. 160 on November 1, 2009. SFAS No. 160 will
require that non-controlling (minority) interests be reported in the
consolidated balance sheet within equity. The Company is not yet in a position
to assess the full impact and related disclosure of adopting SFAS No. 160 on its
minority interest liabilities and related Put Rights.
15
Additional Contingent Purchase Consideration
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.1 million should the subsidiary meet
certain product line-related earnings objectives during calendar years 2008 and
2009.
As part of the agreement to acquire a subsidiary by the ETG in fiscal
2006, the Company may be obligated to pay additional purchase consideration up
to $19.2 million should the subsidiary meet certain earnings objectives in
fiscal 2009.
As part of the agreement to acquire a subsidiary by the ETG in fiscal
2007, the Company may be obligated to pay additional purchase consideration up
to 73 million Canadian dollars in aggregate, which translates to $59 million
U.S. dollars based on the January 31, 2009 exchange rate, should the subsidiary
meet certain earnings objectives through fiscal 2012.
As part of the agreement to acquire a subsidiary by the FSG in fiscal
2008, the Company may be obligated to pay additional consideration of up to
approximately $.4 million in aggregate should the subsidiary meet certain
earnings objectives during fiscal 2010, 2011 and 2012.
The above referenced additional contingent purchase consideration will be
accrued when the earnings objectives are met. Such additional contingent
consideration is based on a multiple of earnings above a threshold (subject to a
cap in certain cases) and is not contingent upon the former shareholders of the
acquired entities remaining employed by the Company or providing future services
to the Company. Accordingly, such consideration will be recorded as an
additional cost of the respective acquired entity when paid. The maximum amount
of such contingent consideration that the Company could be required to pay
aggregates approximately $81 million payable over the future periods beginning
in fiscal 2010 through fiscal 2013. Assuming the subsidiaries perform over their
respective future measurement periods at the same earnings levels they performed
in the comparable historical measurement periods, the aggregate amount of such
contingent consideration that the Company would be required to pay is
approximately $4 million. The actual contingent purchase consideration will
likely be different.
Litigation
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations, financial position or cash flows.
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements and notes thereto included herein. The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates if different assumptions were used or different events
ultimately transpire.
Our critical accounting policies, some of which require management to make
judgments about matters that are inherently uncertain, are described in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," under the heading "Critical Accounting Policies" in our Annual
Report on Form 10-K for the year ended October 31, 2008.
Our business is comprised of two operating segments: the Flight Support
Group ("FSG"), consisting of HEICO Aerospace Holdings Corp. ("HEICO Aerospace")
and its subsidiaries, and the Electronic Technologies Group ("ETG"), consisting
of HEICO Electronic Technologies Corp. ("HEICO Electronic") and its
subsidiaries.
17
Results of Operations
The following table sets forth the results of our operations, net sales
and operating income by segment and the percentage of net sales represented by
the respective items in our Condensed Consolidated Statements of Operations.
Three months ended January 31,
-------------------------------------
2009 2008
---------------- ----------------
Net sales $ 130,437,000 $ 134,287,000
---------------- ----------------
Cost of sales 86,533,000 87,458,000
Selling, general and administrative expenses 22,451,000 23,599,000
---------------- ----------------
Total operating costs and expenses 108,984,000 111,057,000
---------------- ----------------
Operating income $ 21,453,000 $ 23,230,000
================ ================
Net sales by segment:
Flight Support Group $ 99,562,000 $ 102,349,000
Electronic Technologies Group 30,959,000 31,938,000
Intersegment sales (84,000) --
---------------- ----------------
$ 130,437,000 $ 134,287,000
================ ================
Operating income by segment:
Flight Support Group $ 15,641,000 $ 18,946,000
Electronic Technologies Group 8,542,000 7,177,000
Other, primarily corporate (2,730,000) (2,893,000)
---------------- ----------------
$ 21,453,000 $ 23,230,000
================ ================
Net sales 100.0% 100.0%
Gross profit 33.7% 34.9%
Selling, general and administrative expenses 17.2% 17.6%
Operating income 16.4% 17.3%
Interest expense 0.1% 0.6%
Other expense -- 0.1%
Income tax expense 4.5% 5.6%
Minority interests' share of income 3.1% 3.4%
Net income 8.7% 7.5%
18
Comparison of First Quarter of Fiscal 2009 to First Quarter of Fiscal 2008
Net Sales
Net sales for the first quarter of fiscal 2009 decreased by 2.9% to $130.4
million, as compared to net sales of $134.3 million for the first quarter of
fiscal 2008. The decrease in net sales reflects a decrease of $2.8 million (a
2.7% decrease) to $99.6 million in net sales within the FSG and a decrease of
$1.0 million (a 3.1% decrease) to $31.0 million in net sales within the ETG. The
net sales decline in both the FSG and the ETG reflects the effects of the
deepening global recession, which has resulted in a reduction in customer
demand. Within the FSG, we have seen demand fall as the airline industry cuts
global capacity and reduces spending to conserve cash. Within the ETG, we are
generally seeing strength in our defense related businesses, including space and
homeland security products, but weakness in customer demand for some of our
electronic products, including demand from medical equipment end-markets.
Gross Profit and Operating Expenses
The consolidated gross profit margin decreased to 33.7% for the first
quarter of fiscal 2009 as compared to 34.9% for the first quarter of fiscal
2008, principally reflecting lower margins within the FSG primarily due to the
impact of a less favorable product and services mix, lower sales volume and
higher research and development spending. Consolidated cost of sales for the
first quarter of fiscal 2009 and 2008 includes approximately $4.8 million and
$4.2 million, respectively, of new product research and development expenses.
Selling, general and administrative ("SG&A") expenses were $22.5 million
and $23.6 million for the first quarter of fiscal 2009 and fiscal 2008,
respectively. The decrease in SG&A expenses was mainly due to lower operating
costs, principally personnel related, associated with the decline in net sales
discussed above. As a percentage of net sales, SG&A expenses decreased to 17.2%
for the first quarter of fiscal 2009 compared to 17.6% for the first quarter of
fiscal 2008.
Operating Income
Operating income for the first quarter of fiscal 2009 decreased by 7.6% to
$21.5 million, compared to operating income of $23.2 million for the first
quarter of fiscal 2008. The decrease in operating income reflects a decrease of
$3.3 million (a 17.4% decrease) to $15.6 million in operating income of the FSG
in the first quarter of fiscal 2009 from $18.9 million for the first quarter of
fiscal 2008, offset by a $1.4 million increase (a 19.0% increase) in operating
income of the ETG from $7.2 million for the first quarter of fiscal 2008 to $8.5
million for the first quarter of fiscal 2009.
As a percentage of net sales, consolidated operating income decreased to
16.4% for the first quarter of fiscal 2009 compared to 17.3% for the first
quarter of fiscal 2008. The consolidated operating income as a percentage of net
sales reflects a decrease in the FSG's operating income as a percentage of net
sales from 18.5% in the first quarter of fiscal 2008 to 15.7% in the first
quarter of fiscal 2009, offset by an increase in the ETG's operating income as a
percentage of net sales from 22.5% in the first quarter of fiscal 2008 to 27.6%
in the first quarter
19
of fiscal 2009. The decrease in operating income as a percentage of net sales
for the FSG principally reflects the aforementioned impact of the lower sales
volume on gross profit margins. The increase in operating income as a percentage
of net sales for the ETG principally reflects a favorable product mix.
Interest Expense
Interest expense decreased to $195,000 in the first quarter of fiscal 2009
from $862,000 in the first quarter of fiscal 2008. The decrease was principally
due to lower interest rates and a lower weighted average balance outstanding
under the revolving credit facility in the first quarter of fiscal 2009.
Other Expense
Other expense in the first quarter of fiscal 2009 and 2008 was not
material.
Income Tax Expense
Our effective tax rate for the first quarter of fiscal 2009 decreased to
27.6% from 34.1% for the first quarter of fiscal 2008. This decrease reflects a
settlement reached with the Internal Revenue Service during the first quarter of
fiscal 2009 concerning the income tax credit claimed on HEICO's U.S. federal
filings for qualified research and development activities incurred during fiscal
years 2002 through 2005 as well as an aggregate reduction to the related reserve
for fiscal years 2006 through 2008, which increased net income by approximately
$1,083,000, or $.04 per diluted share.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the 20% minority interest held in HEICO Aerospace and the minority interests
held in certain subsidiaries of HEICO Aerospace and HEICO Electronic. The
decrease in the minority interests' share of income for the first quarter of
fiscal 2009 compared to the first quarter of fiscal 2008 was attributable to the
acquisition of additional equity interests of certain FSG subsidiaries in which
minority interests exist as well as lower earnings of the FSG.
Net Income
Our net income was $11.3 million, or $.42 per diluted share, for the first
quarter of fiscal 2009 compared to $10.1 million, or $.37 per diluted share, for
the first quarter of fiscal 2008. This increase in net income reflects the
aforementioned favorable IRS settlement, the decreased minority interests' share
of income of certain consolidated subsidiaries and lower interest expense,
partially offset by the decreased operating income referenced above.
20
Outlook
In light of the currently forecasted airline capacity reductions and
continuing weakness in demand for certain products of the ETG, together with
limited general economic visibility, we are updating our forecasted fiscal 2009
full year diluted net income per share to be approximately flat with fiscal 2008
and net sales to a range of flat to down 5% when compared to fiscal 2008.
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, payments of principal and
interest on debt, capital expenditures, cash dividends and increases in working
capital.
We finance our activities primarily from our operating activities and
financing activities, including borrowings under short-term and long-term credit
agreements. As of January 31, 2009, our debt to capital ratio was only 8.6%,
with net debt (total debt less cash and cash equivalents) of $36.2 million, and
we have no significant debt maturities until 2013.
Based on our current outlook, we believe that our net cash provided by
operating activities and available borrowings under our revolving credit
facility will be sufficient to fund cash requirements for the foreseeable
future.
Operating Activities
Net cash provided by operating activities was $5.2 million for the first
quarter of fiscal 2009, consisting primarily of net income of $11.3 million,
minority interests' share of income of consolidated subsidiaries of $4.0
million, depreciation and amortization of $3.5 million and a tax benefit on
stock option exercises of $2.1 million, partially offset by an increase in net
operating assets of $14.2 million and the presentation of $1.8 million of excess
tax benefit from stock option exercises as a financing activity. The increase in
net operating assets principally results from payments of accrued expenses and
other current liabilities since October 31, 2008.
Net cash provided by operating activities decreased $4.6 million from $9.8
million for the first quarter of fiscal 2008 to $5.2 million for the first
quarter of fiscal 2009 principally due to higher inventory levels at the FSG as
a result of lower sales volumes in the first quarter of fiscal 2009 and higher
investment in inventories for new product offerings.
Investing Activities
Net cash used in investing activities during the first quarter of fiscal
2009 related primarily to acquisitions and related costs of $12.8 million and
capital expenditures totaling $2.6 million. Acquisitions and related costs
principally reflect the acquisition of an additional 14% of the equity interests
of a subsidiary of the FSG and additional purchase consideration related to a
subsidiary acquired in a previous year, which was accrued as of October 31, 2008
based on the subsidiary's earnings relative to target. Further details on the
fiscal 2009 acquisitions may be found in Note 2, Acquisitions, of the Notes to
Condensed Consolidated Financial Statements.
21
Financing Activities
Net cash provided by financing activities during the first quarter of
fiscal 2009 primarily related to borrowings of $16.0 million on our revolving
credit facility principally to fund acquisitions and related costs as well as
the presentation of $1.8 million of excess tax benefit from stock option
exercises as a financing activity, partially offset by repayments of $13.0
million on our revolving credit facility, the payment of $1.6 million in cash
dividends on our common stock and distributions to minority interest owners of
$1.4 million.
Contractual Obligations
There have not been any material changes to the amounts presented in the
table of contractual obligations that was included in our Annual Report on Form
10-K for the year ended October 31, 2008.
As discussed in "Off-Balance Sheet Arrangements - Acquisitions - Put/Call
Rights" below, the minority interest holders of certain subsidiaries have rights
("Put Rights") that may be exercised on varying dates causing us to purchase
their equity interests beginning in fiscal 2009 through fiscal 2018. Assuming
the subsidiaries perform over their respective future measurement periods at the
same earnings levels they performed in the comparable historical measurement
periods and assuming all Put Rights are exercised, the aggregate amount that we
would be required to pay is approximately $40 million. The actual amount will
likely be different.
Further, as discussed in "Off-Balance Sheet Arrangements - Acquisitions -
Additional Contingent Purchase Consideration" below, we may be obligated to pay
additional contingent purchase consideration based on future earnings of certain
acquired businesses. The maximum amount of such contingent consideration that we
could be required to pay aggregates approximately $81 million payable over the
future periods beginning in fiscal 2010 through fiscal 2013. Assuming the
subsidiaries perform over their respective future measurement periods at the
same earnings levels they performed in the comparable historical measurement
periods, the aggregate amount of such contingent consideration that we would be
required to pay is approximately $4 million. The actual contingent purchase
consideration will likely be different.
Off-Balance Sheet Arrangements
Guarantees
We have arranged for a standby letter of credit for $1.5 million to meet
the security requirement of our insurance company for potential workers'
compensation claims, which are supported by our revolving credit facility.
22
Acquisitions - Put/Call Rights
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the minority interest holders currently have the right to
cause us to purchase their interests over a five-year period and we have the
right to purchase the minority interests over a five-year period beginning in
fiscal 2015, or sooner under certain conditions.
Pursuant to the purchase agreement related to the acquisition of an 85%
interest in a subsidiary by the ETG in fiscal 2005, certain minority interest
holders exercised their option during fiscal 2007 to cause us to purchase their
aggregate 3% interest over a four-year period ending in fiscal 2010.
Accordingly, we increased our ownership interest in the subsidiary by 1.5% (or
one-fourth of such minority interest holders' aggregate interest in fiscal 2007
and 2008, respectively) to 86.5% effective April 2008. Further, the remaining
minority interest holders currently have the right to cause us to purchase their
aggregate 12% interest over a four-year period.
Pursuant to the purchase agreement related to the acquisition of a 51%
interest in a subsidiary by the FSG in fiscal 2006, the minority interest
holders exercised their option during fiscal 2008 to cause us to purchase an
aggregate 28% interest over a four-year period ending in fiscal 2011.
Accordingly, we increased our ownership interest in the subsidiary by 7% (or
one-fourth of such minority interest holders' aggregate interest) to 58%
effective April 2008. We and the minority interest holders agreed to accelerate
the purchase of 14% of these equity interests (7% from April 2009 and 7% from
April 2010), which increased our ownership interest to 72% effective December
2008. The remaining 7% interest is anticipated to be purchased in April 2011.
Further, we have the right to purchase the remaining 21% of the equity interests
of the subsidiary over a three-year period beginning in fiscal 2012, or sooner
under certain conditions, and the minority interest holders have the right to
cause us to purchase the same equity interest over the same period.
As part of the agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2006, we have the right to purchase the minority interests over a
four-year period beginning in fiscal 2014, or sooner under certain conditions,
and the minority interest holders have the right to cause us to purchase the
same equity interest over the same period.
As part of an agreement to acquire an 80% interest in a subsidiary by the
FSG in fiscal 2008, we have the right to purchase the minority interests over a
five-year period beginning in fiscal 2014, or sooner under certain conditions,
and the minority interest holders have the right to cause us to purchase the
same equity interest over the same period.
The above referenced rights of the minority interest holders ("Put
Rights") may be exercised on varying dates causing us to purchase their equity
interests beginning in fiscal 2009 through fiscal 2018. The Put Rights, all of
which relate either to common shares or membership interests in limited
liability companies, provide that the cash consideration to be paid for the
minority interests ("Redemption Amount") be at a formula that management
intended to reasonably approximate fair value, as defined in the applicable
agreements based on a multiple of future earnings over a measurement period.
Upon exercise of any Put Right, our ownership
23
interest in the subsidiary would increase and minority interest expense would
decrease. The Put Rights are embedded in the shares owned by the minority
interest holders and are not freestanding. Consistent with Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," minority interests have
been recorded in our consolidated balance sheets at historical cost plus an
allocation of subsidiary earnings based on ownership interests, less dividends
paid to the minority interest holders. As described in Note 1, Summary of
Significant Accounting Policies, of the Notes to Condensed Consolidated
Financial Statements, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 160 in December 2007
that will change the current accounting and financial reporting for
non-controlling (minority) interests. SFAS No. 160 will be effective for fiscal
years beginning after December 15, 2008. We will adopt SFAS No. 160 on November
1, 2009. SFAS No. 160 will require that non-controlling (minority) interests be
reported in the consolidated balance sheet within equity. We are not yet in a
position to assess the full impact and related disclosure of adopting SFAS No.
160 on its minority interest liabilities and related Put Rights. See also
"Contractual Obligations" above.
Acquisitions - Additional Contingent Purchase Consideration
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, we may be obligated to pay additional purchase consideration currently
estimated to total up to $2.1 million should the subsidiary meet certain product
line-related earnings objectives during calendar years 2008 and 2009.
As part of the agreement to acquire a subsidiary by the ETG in fiscal
2006, we may be obligated to pay additional purchase consideration up to $19.2
million should the subsidiary meet certain earnings objectives in fiscal 2009.
As part of the agreement to acquire a subsidiary by the ETG in fiscal
2007, we may be obligated to pay additional purchase consideration up to 73
million Canadian dollars in aggregate, which translates to $59 million U.S.
dollars based on the January 31, 2009 exchange rate, should the subsidiary meet
certain earnings objectives through fiscal 2012.
As part of the agreement to acquire a subsidiary by the FSG in fiscal
2008, we may be obligated to pay additional consideration of up to approximately
$.4 million in aggregate should the subsidiary meet certain earnings objectives
during fiscal 2010, 2011 and 2012.
The above referenced additional contingent purchase consideration will be
accrued when the earnings objectives are met. Such additional contingent
consideration is based on a multiple of earnings above a threshold (subject to a
cap in certain cases) and is not contingent upon the former shareholders of the
acquired entities remaining employed by us or providing future services to us.
Accordingly, such consideration will be recorded as an additional cost of the
respective acquired entity when paid. See also "Contractual Obligations" above.
24
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for measuring
fair value, and requires expanded disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2, "Effective
Date of FASB Statement No. 157," which delays the effective date of SFAS No. 157
by one year for nonfinancial assets and liabilities, except those recognized or
disclosed at fair value in the financial statements on a recurring basis. We
adopted all required portions of SFAS No. 157 effective November 1, 2008. The
adoption of SFAS No. 157 did not have a material effect on our results of
operations, financial position or cash flows. See Note 7, Fair Value
Measurements, of the Notes to Condensed Consolidated Financial Statements, which
provides information about the extent to which fair value is used to measure
assets and liabilities and the methods and assumptions used to measure fair
value. We will adopt the portions of SFAS No. 157 that were delayed by FSP FAS
157-2 at the beginning of fiscal 2010 and we are currently in the process of
evaluating the effect such adoption will have on our results of operations,
financial position and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure certain
financial assets and liabilities at fair value that are not currently required
to be measured at fair value, and report unrealized gains and losses on items
for which the fair value option has been elected in earnings. We adopted SFAS
No. 159 effective November 1, 2008 and have not elected to measure any financial
assets and financial liabilities at fair value that were not previously required
to be measured at fair value. Accordingly, the adoption of SFAS No. 159 did not
impact our results of operations, financial position or cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 became effective November
15, 2008. The adoption of SFAS No. 162 did not have a material effect on our
results of operations, financial position or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations." SFAS No. 141(R) is a revision of SFAS No.141 and retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting
(formerly the "purchase accounting" method) be used for all business
combinations and for an acquirer to be identified for each business combination.
However, SFAS No. 141(R) changes the approach of applying the acquisition method
in a number of significant areas, including that acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at
fair value at the acquisition date; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; restructuring costs associated with a business combination
will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income
25
tax expense. SFAS No.141(R) is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first fiscal year beginning on or after December 15, 2008, or in fiscal 2010 for
HEICO. We are currently in the process of evaluating the effect the adoption of
SFAS No. 141(R) will have on our results of operations, financial position and
cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51." This
statement requires the recognition of a noncontrolling interest (previously
referred to as minority interest) as a separate component within equity in the
consolidated balance sheet. It also requires the amount of consolidated net
income attributable to the parent and the noncontrolling interest be clearly
identified and presented within the consolidated statement of operations. SFAS
No. 160 is effective for fiscal years beginning on or after December 15, 2008,
or in fiscal 2010 for HEICO. We are currently in the process of evaluating the
effect the adoption of SFAS No. 160 will have on our results of operations,
financial position and cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
SFAS No. 161 expands the disclosure requirements in SFAS No. 133 about an
entity's derivative instruments and hedging activities. It requires enhanced
disclosures about (i) how and why an entity uses derivative instruments; (ii)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and (iii) how derivative instruments
and related hedged items affect an entity's financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008, or in the second quarter of
fiscal 2009 for HEICO. We are currently in the process of evaluating the effect
the adoption of SFAS No. 161 will have on our financial statement disclosures.
Forward-Looking Statements
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature may be
forward-looking and the words "believe," "expect," "estimate" and similar
expressions are generally intended to identify forward-looking statements. Any
forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls,
concerning our operations, economic performance and financial condition are
subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed or implied in those statements. Factors that could cause such
differences
26
include, but are not limited to: lower demand for commercial air travel or
airline fleet changes, which could cause lower demand for our goods and
services; product specification costs and requirements, which could cause an
increase to our costs to complete contracts; governmental and regulatory
demands, export policies and restrictions, reductions in defense, space or
homeland security spending by U.S. and/or foreign customers or competition from
existing and new competitors, which could reduce our sales; HEICO's ability to
introduce new products and product pricing levels, which could reduce our sales
or sales growth; HEICO's ability to make acquisitions and achieve operating
synergies from acquired businesses, customer credit risk, interest rates and
economic conditions within and outside of the aviation, defense, space and
electronics industries, which could negatively impact our costs and revenues;
and HEICO's ability to maintain effective internal controls, which could
adversely affect our business and the market price of our common stock. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
27
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the Company's aggregate outstanding variable rate debt
balance of $40.0 million as of January 31, 2009, a hypothetical 10% increase in
interest rates would increase the Company's interest expense by approximately
$34,000 on an annual basis.
The Company is also exposed to foreign currency exchange rate fluctuations
on the United States dollar value of its foreign currency denominated
transactions, which are principally in Canadian dollar and British pound
sterling. A hypothetical 10% weakening in the exchange rate of the Canadian
dollar or British pound sterling to the United States dollar as of January 31,
2009 would not have a material effect on the Company's results of operations,
financial position or cash flows.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this quarterly report. Based
upon that evaluation, the Company's Chief Executive Officer and its Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
28
PART II. OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity securities
or repurchase any of its equity securities during the first three months of
fiscal 2009.
Item 6. EXHIBITS
Exhibit Description
------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. *
32.1 Section 1350 Certification of Chief Executive Officer. **
32.2 Section 1350 Certification of Chief Financial Officer. **
* Filed herewith.
** Furnished herewith.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: March 3, 2009 By: /s/ THOMAS S. IRWIN
------------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
30
EXHIBIT INDEX
Exhibit Description
------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.