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, 2008 or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
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 definition 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 March 5, 2008:
Common Stock, $.01 par value 10,569,391 shares
Class A Common Stock, $.01 par value 15,686,282 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, 2008 and October 31, 2007 .....................2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 2008 and 2007 ............3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 2008 and 2007.............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 .......27
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, 2008 October 31, 2007
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $12,595,000 $4,947,000
Accounts receivable, net 74,518,000 82,399,000
Inventories, net 117,866,000 115,770,000
Prepaid expenses and other current assets 6,800,000 4,557,000
Deferred income taxes 14,321,000 10,135,000
------------ ------------
Total current assets 226,100,000 217,808,000
Property, plant and equipment, net 56,512,000 55,554,000
Goodwill 313,146,000 310,502,000
Intangible assets, net 34,475,000 35,333,000
Other assets 18,114,000 12,105,000
------------ ------------
Total assets $648,347,000 $631,302,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $2,193,000 $2,187,000
Trade accounts payable 23,813,000 28,161,000
Accrued expenses and other current liabilities 38,939,000 53,878,000
Income taxes payable -- 3,112,000
------------ ------------
Total current liabilities 64,945,000 87,338,000
Long-term debt, net of current maturities 64,666,000 53,765,000
Deferred income taxes 36,184,000 35,296,000
Other non-current liabilities 21,270,000 10,364,000
------------ ------------
Total liabilities 187,065,000 186,763,000
------------ ------------
Minority interests in consolidated subsidiaries (Note 11) 76,029,000 72,938,000
------------ ------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares
authorized; 300,000 shares designated as Series B Junior
Participating Preferred Stock and 300,000 shares designated
as Series C Junior Participating Preferred Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares authorized;
10,565,891 and 10,538,691 shares issued and outstanding, respectively 106,000 105,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 15,679,472 and 15,612,862 shares issued and
outstanding, respectively 157,000 156,000
Capital in excess of par value 227,850,000 220,658,000
Accumulated other comprehensive income 1,374,000 3,050,000
Retained earnings 155,766,000 147,632,000
------------ ------------
Total shareholders' equity 385,253,000 371,601,000
------------ ------------
Total liabilities and shareholders' equity $648,347,000 $631,302,000
============ ============
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,
--------------------------------
2008 2007
------------ ------------
Net sales $134,287,000 $113,684,000
------------ ------------
Operating costs and expenses:
Cost of sales 87,458,000 76,196,000
Selling, general, and administrative expenses 23,599,000 20,348,000
------------ ------------
Total operating costs and expenses 111,057,000 96,544,000
------------ ------------
Operating income 23,230,000 17,140,000
Interest expense (862,000) (849,000)
Interest and other (expense) income (116,000) 184,000
------------ ------------
Income before income taxes and minority interests 22,252,000 16,475,000
Income tax expense 7,580,000 4,988,000
------------ ------------
Income before minority interests 14,672,000 11,487,000
Minority interests' share of income 4,586,000 3,566,000
------------ ------------
Net income $10,086,000 $7,921,000
============ ============
Net income per share:
Basic $.39 $.31
Diluted $.37 $.30
Weighted average number of common shares outstanding:
Basic 26,184,631 25,482,633
Diluted 27,209,157 26,811,861
Cash dividends per share $0.05 $0.04
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,
------------------------------------
2008 2007
------------ ------------
Operating Activities:
Net income $10,086,000 $7,921,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,539,000 2,945,000
Deferred income tax provision 856,000 (1,502,000)
Minority interests' share of income 4,586,000 3,566,000
Tax benefit from stock option exercises 6,285,000 6,885,000
Excess tax benefit from stock option exercises (4,350,000) (5,271,000)
Stock option compensation expense 85,000 258,000
Changes in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 9,436,000 (1,329,000)
Increase in inventories (777,000) (2,131,000)
Increase in prepaid expenses and other current assets (1,211,000) (2,185,000)
Decrease in trade accounts payable (5,288,000) (944,000)
Decrease in accrued expenses and other current liabilities (8,920,000) (3,529,000)
Decrease in income taxes payable (4,581,000) (1,579,000)
Other 98,000 (4,000)
------------ -----------
Net cash provided by operating activities 9,844,000 3,101,000
------------ -----------
Investing Activities:
Acquisitions and related costs, net of cash acquired (12,190,000) (8,385,000)
Capital expenditures (2,812,000) (2,666,000)
Other 78,000 72,000
------------ -----------
Net cash used in investing activities (14,924,000) (10,979,000)
------------ -----------
Financing Activities:
Borrowings on revolving credit facility 22,000,000 7,000,000
Payments on revolving credit facility (11,000,000) (2,000,000)
Cash dividends paid (1,312,000) (1,022,000)
Proceeds from stock option exercises 824,000 664,000
Excess tax benefit from stock option exercises 4,350,000 5,271,000
Distributions to minority interest owners (2,000,000) (1,164,000)
Other (20,000) (39,000)
------------ -----------
Net cash provided by financing activities 12,842,000 8,710,000
------------ -----------
Effect of exchange rate changes on cash (114,000) 12,000
------------ -----------
Net increase in cash and cash equivalents 7,648,000 844,000
Cash and cash equivalents at beginning of year 4,947,000 4,999,000
------------ -----------
Cash and cash equivalents at end of period $12,595,000 $5,843,000
============ ===========
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 ("HEICO" 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, 2007. The October 31, 2007 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, 2008
are not necessarily indicative of the results which may be expected for the
entire fiscal year.
Income Taxes
Effective November 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," and
began evaluating tax positions utilizing a two-step process. The first step is
to determine whether it is more-likely-than-not that a tax position will be
sustained upon examination based on the technical merits of the position. The
second step is to measure the benefit to be recorded from tax positions that
meet the more-likely-than-not recognition threshold by determining the largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement and recognizing that amount in the financial
statements.
As a result of adopting the provisions of FIN 48, the Company recognized a
cumulative effect adjustment that decreased retained earnings as of the
beginning of fiscal 2008 by $639,000. Further, effective with the adoption of
FIN 48, the Company's policy is to recognize interest and penalties related to
income tax matters as a component of income tax expense. Interest and penalties,
which were not significant in fiscal 2007, were previously recorded in interest
expense and in selling, general, and administrative expenses, respectively, in
the Company's consolidated statements of operations.
Further information regarding income taxes can be found in Note 6, Income
Taxes.
5
New Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") SFAS No. 157, "Fair Value Measurements," which provides
enhanced guidance for using fair value to measure assets and liabilities. SFAS
No. 157 provides a common definition of fair value and establishes a framework
to make the measurement of fair value in accordance with generally accepted
accounting principles more consistent and comparable. SFAS No. 157 also requires
expanded disclosures to provide information about the extent to which fair value
is used to measure assets and liabilities, the methods and assumptions used to
measure fair value, and the effect of fair value measures on earnings. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007, or in
fiscal 2009 for HEICO. The Company is currently in the process of evaluating the
effect, if any, the adoption of SFAS No. 157 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 and report unrealized gains and
losses on items for which the fair value option has been elected in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, or
in fiscal 2009 for HEICO. The Company has not yet determined if it will elect to
apply any of the provisions of SFAS No. 159 and is currently evaluating the
effect, if any, the adoption of SFAS No. 159 will have on its results of
operations, financial position, and cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations."
SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling
interest in the acquiree. This Statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008, or in fiscal 2010 for HEICO. The Company is in the
process of evaluating the effect that 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." SFAS No. 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent's ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This Statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008, or in fiscal 2010 for HEICO. The Company is in the process of
evaluating the effect that the adoption of SFAS No. 160 will have on its results
of operations, financial position, and cash flows.
6
2. ACQUISITIONS
In November 2007, the Company, through an 80%-owned subsidiary of HEICO
Aerospace Holdings Corp. ("HEICO Aerospace"), acquired all of the stock of a
European company. Subject to meeting certain earnings objectives during the
first three years following the acquisition, the Company may be obligated to pay
additional consideration of up to approximately $.5 million in aggregate. The
acquired company provides commercial airlines, regional operators, asset
management companies, and Maintenance, Repair and Overhaul providers with high
quality and cost effective niche accessory component exchange services. The
purchase price, which was not significant to the Company's condensed
consolidated financial statements, was principally paid in cash using proceeds
from the Company's revolving credit facility.
In January 2008, the Company, through HEICO Aerospace, acquired certain
assets and assumed certain liabilities of a U.S. company that designs and
manufactures FAA-approved aircraft and engine parts primarily for the commercial
aviation market. The Company has since combined the operations of the acquired
entity within other subsidiaries of HEICO Aerospace. The purchase price, which
was not significant to the Company's condensed consolidated financial
statements, was principally paid in cash using proceeds from the Company's
revolving credit facility.
During the first quarter of fiscal 2008, the Company, through HEICO
Aerospace, paid $7.0 million of additional purchase consideration pursuant to
the terms of the purchase agreement associated with a prior year acquisition.
This amount was accrued as of October 31, 2007 based on the subsidiary's
earnings relative to target. (See Note 11, Commitments and Contingencies, for
additional information on contingent purchase consideration associated with
certain of the Company's acquisitions.)
The fiscal 2008 acquisitions described above were accounted for using the
purchase method of accounting. The allocation of the purchase price of the
fiscal 2008 and certain fiscal 2007 acquisitions 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 2008 acquisitions as
noted above and the fiscal 2007 acquisitions were included in the Company's
results of operations from their effective acquisition date. Had the
acquisitions taken place as of the beginning of fiscal 2007, net sales on a pro
forma basis for the first quarter of fiscal 2007 would have been approximately
$120 million and net sales on a pro forma basis for the first quarter of fiscal
2008 would not have been materially different from the reported amounts. The pro
forma net income and net income per share (basic and diluted) for the first
quarter of fiscal 2007 and first quarter of fiscal 2008 assuming these
acquisitions had taken place as of the beginning of fiscal 2007 would not have
been materially different than the reported amounts.
7
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
January 31, 2008 October 31, 2007
------------------ ------------------
Accounts receivable $76,225,000 $84,111,000
Less: Allowance for doubtful accounts (1,707,000) (1,712,000)
----------- -----------
Accounts receivable, net $74,518,000 $82,399,000
=========== ===========
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
January 31, 2008 October 31, 2007
------------------ ------------------
Costs incurred on uncompleted contracts $21,337,000 $21,832,000
Estimated earnings 11,966,000 13,111,000
----------- -----------
33,303,000 34,943,000
Less: Billings to date (26,863,000) (25,661,000)
----------- -----------
$6,440,000 $9,282,000
=========== ===========
Included in accompanying Condensed Consolidated
Balance Sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $7,165,000 $9,300,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (725,000) (18,000)
----------- -----------
$6,440,000 $9,282,000
=========== ===========
Changes in estimates did not have a material effect on net income or diluted
net income per share in the three months ended January 31, 2008 and 2007.
Inventories
January 31, 2008 October 31, 2007
------------------ ------------------
Finished products $64,193,000 $61,592,000
Work in process 15,784,000 15,406,000
Materials, parts, assemblies and supplies 37,889,000 38,772,000
------------ ------------
Inventories, net $117,866,000 $115,770,000
============ ============
Inventories related to long-term contracts were not significant as of
January 31, 2008 and October 31, 2007.
8
Property, Plant and Equipment
January 31, 2008 October 31, 2007
---------------- ----------------
Land $3,656,000 $3,656,000
Buildings and improvements 32,824,000 30,732,000
Machinery, equipment and tooling 67,189,000 65,242,000
Construction in progress 5,583,000 6,339,000
----------- -----------
109,252,000 105,969,000
Less: Accumulated depreciation and amortization (52,740,000) (50,415,000)
----------- -----------
Property, plant and equipment, net $56,512,000 $55,554,000
=========== ===========
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 totals $12,454,000 and $10,452,000 as of
January 31, 2008 and October 31, 2007, respectively. These amounts generally
relate to discounts negotiated with customers as part of sales contracts and are
usually tied to sales volume thresholds. The Company accrues customer rebates
and credits as a reduction from net sales as the revenue is recognized based on
the estimated level of discount rate expected to be earned by each customer over
the life of the contract period (generally one year). Accrued customer rebates
and credits are monitored by management and discount levels are updated at least
quarterly. The total customer rebates and credits deducted from net sales for
the three months ended January 31, 2008 and 2007 equals $2,438,000 and
$2,539,000, 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, 2008 are as
follows:
Segment
--------------------------------- Consolidated
FSG ETG Totals
------------ ------------ ------------
Balances as of October 31, 2007 $169,689,000 $140,813,000 $310,502,000
Goodwill acquired 3,412,000 --- 3,412,000
Foreign currency translation adjustments (32,000) (725,000) (757,000)
Adjustments to goodwill (26,000) 15,000 (11,000)
------------ ------------ ------------
Balances as of January 31, 2008 $173,043,000 $140,103,000 $313,146,000
============ ============ ============
The goodwill acquired is a result of the acquisitions described in Note 2,
Acquisitions. The foreign currency translation adjustment principally reflects
an unrealized translation loss on the goodwill recognized in connection the
acquisition of a Canadian-based subsidiary. Foreign currency translation
adjustments are included in other comprehensive income in the Company's
Condensed Consolidated Balance Sheets (see Note 7, Shareholders' Equity and
Comprehensive Income). Adjustments to goodwill were not material in the first
quarter of 2008.
Identifiable intangible assets consist of:
As of January 31, 2008 As of October 31, 2007
------------------------------------------ ------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
----------- ------------ ----------- ----------- ------------ -----------
Amortizing Assets:
------------------
Customer relationships $20,263,000 ($5,876,000) $14,387,000 $19,784,000 ($4,912,000) $14,872,000
Intellectual property 5,985,000 (1,287,000) 4,698,000 6,204,000 (1,066,000) 5,138,000
Licenses 1,000,000 (418,000) 582,000 1,000,000 (400,000) 600,000
Non-compete agreements 1,111,000 (652,000) 459,000 937,000 (628,000) 309,000
Patents 571,000 (148,000) 423,000 560,000 (132,000) 428,000
----------- ----------- ----------- ----------- ----------- -----------
28,930,000 (8,381,000) 20,549,000 28,485,000 (7,138,000) 21,347,000
Non-Amortizing Assets:
----------------------
Trade names 13,926,000 --- 13,926,000 13,986,000 --- 13,986,000
----------- ----------- ----------- ----------- ----------- -----------
$42,856,000 ($8,381,000) $34,475,000 $42,471,000 ($7,138,000) $35,333,000
=========== =========== =========== =========== =========== ===========
9
The Company recognized additional amounts for customer relationships and
non-compete agreements with a weighted average amortization period of
approximately six years and four years, respectively, as well as an additional
amount for trade names in connection with acquisitions made during the first
quarter of fiscal 2008 (see Note 2, Acquisitions). In addition, foreign currency
translation adjustments on certain intangible assets recognized as part of the
acquisition of a Canadian-based subsidiary had the effect of reducing the gross
carrying amount of such assets. These increases and decreases to the gross
carrying amount of intangible assets in the first quarter of fiscal 2008 were
not material.
Amortization expense of other intangible assets for the three months ended
January 31, 2008 was $1,257,000. Amortization expense of other intangible assets
for the fiscal year ending October 31, 2008 is estimated to be $5,012,000.
Amortization expense for each of the next five fiscal years is estimated to be
$4,421,000 in fiscal 2009, $3,871,000 in fiscal 2010, $3,185,000 in fiscal 2011,
$2,446,000 in fiscal 2012, and $949,000 in fiscal 2013.
5. SHORT-TERM AND LONG-TERM DEBT
As of January 31, 2008, no borrowings were outstanding under the $5.0
million short-term line of credit that one of the Company's subsidiaries has
with a bank.
Long-term debt consists of:
January 31, 2008 October 31, 2007
---------------- ----------------
Borrowings under revolving credit facility $64,000,000 $53,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Notes payable, capital leases and equipment loans 879,000 972,000
----------- -----------
66,859,000 55,952,000
Less: Current maturities of long-term debt (2,193,000) (2,187,000)
----------- -----------
$64,666,000 $53,765,000
=========== ===========
As of January 31, 2008 and October 31, 2007, the weighted average interest
rate on borrowings under the Company's revolving credit facility, which matures
in August 2010, was 4.8% and 5.8%, respectively. The revolving credit facility
contains both financial and non-financial covenants. As of January 31, 2008,
the Company was in compliance with all such covenants.
The interest rates on the Series 1988 industrial development revenue bonds
were 2.3% and 3.3% as of January 31, 2008 and October 31, 2007, respectively.
The bonds are payable in April 2008.
10
6. INCOME TAXES
As discussed in Note 1, Summary of Significant Accounting Policies - Income
Taxes, the Company adopted the provisions of FIN 48 effective November 1, 2007.
As a result, the Company increased its liabilities related to uncertain tax
positions by $4,622,000 and accounted for this change as a $3,889,000 increase
to deferred tax assets, a $639,000 decrease to retained earnings (the cumulative
effect of adopting FIN 48), and a $94,000 decrease to deferred tax liabilities.
Upon adoption, the Company also reclassified $2,680,000 in unrecognized tax
benefits from income taxes payable to long-term income tax liabilities since the
Company does not anticipate payment or receipt of cash within one year.
Long-term income tax liabilities are classified within other non-current
liabilities in the Company's Condensed Consolidated Balance Sheets.
As of November 1, 2007, the Company's liability for gross unrecognized tax
benefits related to uncertain tax positions was $7,396,000, of which $2,948,000
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 benefits.
The amounts recorded for interest and penalties as of the date of adoption were
not significant.
The Company files income tax returns in the United States ("U.S.") federal
jurisdiction and in multiple state jurisdictions. The Company is also subject to
income taxes in certain jurisdictions outside the U.S., none of which are
individually material to the accompanying unaudited condensed consolidated
financial statements. Generally, the Company is no longer subject to U.S.
federal or state examinations by tax authorities for fiscal years prior to 2001.
The Company's U.S. federal filings and state of California filings for fiscal
years 2001 through 2005 are currently under examination by the Internal Revenue
Service and California Franchise Tax Board, respectively, who are reviewing the
income tax credit claimed by the Company for qualified research and development
activities incurred during those years. The Company does not expect these
reviews to be completed within one year and, accordingly, reclassified
$2,621,000 of income tax refunds from income taxes payable to long-term income
tax assets. Long-term income tax assets are classified within other assets in
the Company's Condensed Consolidated Balance Sheets.
During the first quarter of fiscal 2008, 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 taxing authorities or a
lapse of applicable statutes of limitations. The Company does not expect the
total amount of unrecognized tax benefits to materially change in the next
twelve months.
In December 2006, Section 41 of the Internal Revenue Code, "Credit for
Increasing Research Activities," was retroactively extended for two years to
cover the period from January 1, 2006 to December 31, 2007. As a result, in the
first quarter of 2007, the Company recognized an income tax credit for qualified
research and development activities for the full fiscal 2006 year. The tax
credit, net of expenses, increased net income by approximately $.3 million for
the three months ended January 31, 2007.
11
7. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in consolidated shareholders' equity and comprehensive income for
the three months ended January 31, 2008 are as follows:
Accumulated
Class A Capital in Other
Common Common Excess of Comprehensive Retained Comprehensive
Stock Stock Par Value Income Earnings Income
--------- ------- ----------- ------------- ------------- -------------
Balances as of October 31, 2007 $105,000 $156,000 $220,658,000 $3,050,000 $147,632,000
Net income -- -- -- -- 10,086,000 $10,086,000
Foreign currency
translation adjustments -- -- -- (1,677,000) -- (1,677,000)
-----------
Comprehensive income -- -- -- -- -- $8,409,000
===========
Cash dividends ($.05 per share) -- -- -- -- (1,312,000)
Cumulative effect of
adopting FIN 48 (Note 6) -- -- -- -- (639,000)
Tax benefit from stock
option exercises -- -- 6,285,000 -- --
Proceeds from
stock option exercises 1,000 1,000 822,000 -- --
Stock option
compensation expense -- -- 85,000 -- --
Other -- -- -- 1,000 (1,000)
-------- -------- ------------ ---------- ------------
Balances as
of January 31, 2008 $106,000 $157,000 $227,850,000 $1,374,000 $155,766,000
======== ======== ============ ========== ============
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the three months ended January 31, 2008 and 2007 includes
approximately $4.2 million and $4.0 million, respectively, of new product
research and development expenses. The expenses are net of reimbursements
pursuant to research and development cooperation and joint venture agreements,
which were not significant.
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the three months ended January 31:
Three months ended January 31,
------------------------------
2008 2007
------------- -------------
Numerator:
Net income $10,086,000 $7,921,000
=========== ==========
Denominator:
Weighted average common shares outstanding-basic 26,184,631 25,482,633
Effect of dilutive stock options 1,024,526 1,329,228
---------- ----------
Weighted average common shares outstanding-diluted 27,209,157 26,811,861
=========== ==========
Net income per share-basic $0.39 $0.31
Net income per share-diluted $0.37 $0.30
Anti-dilutive stock options excluded -- --
12
10. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group ("FSG"), consisting of HEICO Aerospace Holdings Corp. and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries, for the three months ended
January 31, 2008 and 2007, respectively, is as follows:
Other,
Segment Primarily
----------------------------- Corporate and Consolidated
FSG ETG Intersegment Totals
------------ ----------- ------------- -------------
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
For the three months ended January 31, 2007:
--------------------------------------------
Net sales $88,075,000 $25,609,000 $-- $113,684,000
Depreciation and amortization 2,015,000 847,000 83,000 2,945,000
Operating income 14,425,000 5,764,000 (3,049,000) 17,140,000
Capital expenditures 2,339,000 315,000 12,000 2,666,000
Total assets by operating segment as of January 31, 2008 and October 31,
2007 are as follows:
Segment Other,
----------------------------- Primarily Consolidated
FSG ETG Corporate Totals
------------ ------------ ------------- -------------
Total assets as of January 31, 2008 $387,208,000 $226,185,000 $34,954,000 $648,347,000
Total assets as of October 31, 2007 379,433,000 230,448,000 21,421,000 631,302,000
11. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has arranged for standby letters of credit aggregating $1.4
million to meet the security requirement of its insurance company for potential
workers' compensation claims, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
13
Product Warranty
Changes in the Company's product warranty liability for the three months
ended January 31, 2008 and 2007, respectively, are as follows:
Three months ended January 31,
------------------------------
2008 2007
---------- --------
Balances as of beginning of fiscal year $1,181,000 $534,000
Acquired warranty liabilities -- --
Accruals for warranties 172,000 158,000
Warranty claims settled (223,000) (200,000)
---------- --------
Balances as of January 31 $1,130,000 $492,000
========== ========
Acquisitions
Pursuant to the agreement related to the acquisition of a 90% interest in a
subsidiary by the FSG in fiscal 2001, the Company has the right to purchase the
remaining 10% of the equity interests in fiscal 2011, or sooner under certain
conditions, and the minority holder has the right to cause the Company to
purchase the same equity interest in the same period.
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions. In fiscal
2007, some of the minority interest holders exercised their option to cause the
Company to purchase their aggregate 3% interest over the four-year period ending
in fiscal 2010. Accordingly, the Company increased its ownership interest in the
subsidiary by .75% during fiscal 2007 and will increase its ownership interest
by an additional .75% (or from 85.75% to 86.50%) effective the second quarter of
fiscal 2008. The purchase price of this additional minority interest is not
significant.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holders have the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period. During the first quarter of fiscal 2008, the
minority interest holders exercised their option to cause the Company to
purchase their aggregate 28% interest
14
over the four-year period beginning in the second quarter of fiscal 2008.
Accordingly, the Company will increase its ownership interest in the subsidiary
by 7% (or one-fourth of such minority interest holders' aggregate interest) to
58% effective in the second quarter of fiscal 2008. The purchase price of this
additional minority interest is $4.1 million.
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
beginning at approximately the eighth anniversary of the acquisition, 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 to cause the
Company to purchase their equity interests ("Put Rights") may be exercised on
varying dates beginning in fiscal 2008 through fiscal 2017. 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 the 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 $49 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 on 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, in December 2007, the FASB issued SFAS No. 160
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 statement of financial position within
equity. It also will require that any increases, or decreases in ownership
interests in a subsidiary that do not result in a loss of control be accounted
for as equity transactions and as a result any difference between the amount by
which the non-controlling (minority) interest is adjusted and the fair value of
the consideration paid or received, if any, would be recognized directly in
equity attributable to the controlling interest. 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.
As part of the agreement to purchase a subsidiary by the ETG in fiscal 2005,
the Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should the subsidiary meet certain product
line-related earnings objectives during the fourth and fifth years following the
acquisition. The additional purchase consideration will be accrued when the
earnings objectives are met.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional purchase consideration up to
$17.8 million and $19.2 million, respectively, based on the subsidiary's fiscal
2008 and 2009 respective earnings relative to target. The additional purchase
consideration will be accrued when the earnings objectives are met and will be
paid in the following fiscal year.
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
$73.0 million in aggregate should the subsidiary meet certain earnings
objectives during the first five years following the acquisition. The additional
purchase consideration will be accrued when the earnings objectives are met.
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 $.5 million in aggregate during the first three years following
the acquisition should the subsidiary meet certain earnings objectives.
15
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.
The Company's critical accounting policies, some of which require
management to make judgments about matters that are inherently uncertain, are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the year ended October
31, 2007.
The Company has two operating segments: the Flight Support Group ("FSG"),
consisting of HEICO Aerospace Holdings Corp. ("HEICO Aerospace") and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. ("HEICO Electronic") and its subsidiaries.
17
Results of Operations
The following table sets forth the results of the Company's operations, net
sales and operating income by segment and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
Three months ended January 31,
------------------------------
2008 2007
------------ ------------
Net sales $134,287,000 $113,684,000
------------ ------------
Cost of sales 87,458,000 76,196,000
Selling, general, and administrative expenses 23,599,000 20,348,000
------------ ------------
Total operating costs and expenses 111,057,000 96,544,000
------------ ------------
Operating income $23,230,000 $17,140,000
============ ============
Net sales by segment:
Flight Support Group $102,349,000 $88,075,000
Electronic Technologies Group 31,938,000 25,609,000
Intersegment sales -- --
------------ ------------
$134,287,000 $113,684,000
============ ============
Operating income by segment:
Flight Support Group $18,946,000 $14,425,000
Electronic Technologies Group 7,177,000 5,764,000
Other, primarily corporate (2,893,000) (3,049,000)
------------ ------------
$23,230,000 $17,140,000
============ ============
Net sales 100.0% 100.0%
Gross profit 34.9% 33.0%
Selling, general and administrative expenses 17.6% 17.9%
Operating income 17.3% 15.1%
Interest expense 0.6% 0.7%
Interest and other (expense) income (0.1%) 0.2%
Income tax expense 5.6% 4.4%
Minority interests' share of income 3.4% 3.1%
Net income 7.5% 7.0%
18
Comparison of First Quarter of Fiscal 2008 to First Quarter of Fiscal 2007
Net Sales
Net sales for the first quarter of fiscal 2008 increased by 18.1% to $134.3
million, as compared to net sales of $113.7 million for the first quarter of
fiscal 2007. The increase in net sales reflects an increase of $14.3 million (a
16.2% increase) to $102.3 million in net sales within the FSG and an increase of
$6.3 million (a 24.7% increase) to $31.9 million in net sales within the ETG.
The FSG's net sales increase reflects organic growth of approximately 12% as
well as the impact on net sales from prior year and fiscal 2008 acquisitions.
The organic growth reflects higher sales of new products and services and
continued increased demand for the FSG's aftermarket replacement parts and its
repair and overhaul services. The ETG's net sales increase reflects organic
growth of approximately 14% reflecting increased demand for certain products as
well as the impact on net sales from prior year acquisitions.
Gross Profit and Operating Expenses
The Company's gross profit margin increased to 34.9% for the first quarter
of fiscal 2008 as compared to 33.0% for the first quarter of fiscal 2007,
reflecting higher gross profit margins within both FSG and ETG. The higher gross
profit margins within the FSG and ETG principally reflect a more favorable
product mix. Consolidated cost of sales for the first quarter of fiscal 2008 and
2007 includes approximately $4.2 million and $4.0 million, respectively, of new
product research and development expenses.
SG&A expenses were $23.6 million and $20.3 million for the first quarter of
fiscal 2008 and fiscal 2007, respectively. The increase in SG&A expenses was
mainly due to higher operating costs, principally personnel related, associated
with the growth in net sales discussed above, including the acquired businesses.
As a percentage of net sales, SG&A expenses decreased to 17.6% for the first
quarter of fiscal 2008 down slightly from 17.9% for the first quarter of fiscal
2007.
Operating Income
Operating income for the first quarter of fiscal 2008 increased by 35.5% to
$23.2 million, compared to operating income of $17.1 million for the first
quarter of fiscal 2007. The increase in operating income reflects an increase of
$4.5 million (a 31.3% increase) to $18.9 million in operating income of the FSG
in the first quarter of fiscal 2008 from $14.4 million for the first quarter of
fiscal 2007, a $1.4 million increase (a 24.5% increase) in operating income of
the ETG from $5.8 million for the first quarter of fiscal 2007 to $7.2 million
for the first quarter of fiscal 2008.
As a percentage of net sales, consolidated operating income increased to
17.3% for the first quarter of fiscal 2008 compared to 15.1% for the first
quarter of fiscal 2007. The consolidated operating income as a percentage of net
sales reflects an increase in the FSG's operating income as a percentage of net
sales from 16.4% in the first quarter of fiscal 2007 to 18.5% in the first
quarter of fiscal 2008. The increase in operating income as a percentage of net
sales for the FSG
19
principally reflects the increase in net sales as well as the increased gross
profit margins discussed previously. The ETG's operating income as a percentage
of net sales was 22.5% in both the first quarter of fiscal 2008 and 2007. Based
on current economic conditions and backlogs, the Company expects ETG's operating
margins to be approximately 25% to 27% for the full fiscal 2008 year.
Interest Expense
Interest expense in the first quarter of fiscal 2008 was comparable to the
first quarter of fiscal 2007.
Interest and Other (Expense) Income
Interest and other (expense) income in the first quarter of fiscal 2008 and
2007 were not material.
Income Tax Expense
The Company's effective tax rate for the first quarter of fiscal 2008
increased to 34.1% from 30.3% for the first quarter of fiscal 2007. The increase
is principally due to an income tax credit for qualified research and
development activities recognized for the full fiscal 2006 year during the first
quarter of fiscal 2007. The fiscal 2006 tax credit was recorded pursuant to the
December 2006 retroactive extension for the two year period covering January 1,
2006 to December 31, 2007 of Section 41, "Credit for Increasing Research
Activities," of the Internal Revenue Code.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the 20% minority interest held in HEICO Aerospace, the minority interests held
in certain subsidiaries of HEICO Aerospace including the 49% minority interest
held in Seal Dynamics LLC ("Seal LLC"), and the minority interests held in
certain subsidiaries of HEICO Electronic. The increase in the minority
interests' share of income for the first quarter of fiscal 2008 compared to the
first quarter of fiscal 2007 is primarily attributable to the higher earnings of
the FSG and Seal LLC.
Net Income
The Company's net income was $10.1 million, or $0.37 per diluted share, for
the first quarter of fiscal 2008 compared to $7.9 million, or $0.30 per diluted
share, for the first quarter of fiscal 2007 reflecting the increased operating
income referenced above, partially offset by the increased minority interests'
share of income of certain consolidated subsidiaries and higher effective tax
rate.
20
Outlook
The Company reported increased consolidated net sales and operating income
in the first three months of fiscal 2008 reflecting both strong organic growth
and growth through acquisitions. Consolidated operating margins for the first
quarter of fiscal 2008 versus the first quarter of fiscal 2007 reflects higher
operating margins in the FSG and comparable operating margins for the ETG when
compared to the first quarter of fiscal 2007. The Company expects continued
improvements in its sales during the remainder of the year. Based on current
market conditions, the Company continues to target growth in fiscal 2008 net
sales and earnings over fiscal 2007.
Liquidity and Capital Resources
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under short-term and long-term credit
agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities and
available borrowings under its revolving credit facility will be sufficient to
fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $9.8 million for the first
three months of fiscal 2008, consisting primarily of net income of $10.1
million, a tax benefit on stock option exercises of $6.3 million, minority
interests' share of income of consolidated subsidiaries of $4.6 million,
depreciation and amortization of $3.5 million, a deferred income tax provision
of $.9 million and stock option compensation expense of $.1 million, partially
offset by an increase in net operating assets of $11.3 million and the
presentation of $4.4 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, 2007.
Net cash provided by operating activities increased to $9.8 million for the
first three months of fiscal 2008 from $3.1 million for the first three months
of fiscal 2007 principally due to higher income before minority interests and
the timing of receivable collections, partially offset by the payment of the
aforementioned accrued expenses and other current liabilities.
Investing Activities
Net cash used in investing activities during the first three months of
fiscal 2008 related primarily to acquisitions and related costs of $12.2 million
and capital expenditures totaling $2.8 million. Acquisitions and related costs
principally reflect the payment of $7.0 million of additional purchase
consideration related to a subsidiary previously acquired, which was accrued as
of October 31, 2007 based on the subsidiary's earnings relative to target and
two fiscal 2008
21
acquisitions. Further details on the fiscal 2008 acquisitions may be found in
Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial
Statements.
Financing Activities
Net cash provided by financing activities during the first three months of
fiscal 2008 primarily related to borrowings of $22.0 million on the Company's
revolving credit facility principally used to fund the aforementioned additional
purchase consideration and fiscal 2008 acquisitions, the presentation of $4.4
million of excess tax benefit from stock option exercises as a financing
activity and proceeds from stock option exercises of $.8 million, partially
offset by repayments of $11.0 million on the Company's revolving credit
facility, distributions to minority interest owners of $2.0 million, and the
payment of $1.3 million in cash dividends on the Company's common stock.
Contractual Obligations
There have not been any material changes to the amounts presented in table
of contractual obligations that was included in the Company's Annual Report on
Form 10-K for the year ended October 31, 2007.
As discussed in "New Accounting Pronouncements" below and Note 6, Income
Taxes, of the Notes to Condensed Consolidated Financial Statements, the Company
adopted the provisions of FIN 48 during the first quarter of fiscal 2008. As of
January 31, 2008, the Company's liability for unrecognized tax benefits was
$7,388,000. At this time, it is uncertain if or when such amount may be settled
with taxing authorities.
As discussed in "Off-Balance Sheet Arrangements" below, the Company 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 the Company could be required to pay aggregates approximates
$113 million payable over the future periods beginning in fiscal 2009 through
fiscal 2013.
Off-Balance Sheet Arrangements
The Company has arranged for standby letters of credit aggregating $1.4
million to meet the security requirement of its insurance company for potential
workers' compensation claims, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
Pursuant to the agreement related to the acquisition of a 90% interest in a
subsidiary by the FSG in fiscal 2001, the Company has the right to purchase the
remaining 10% of the equity interests in fiscal 2011, or sooner under certain
conditions, and the minority holder has the right to cause the Company to
purchase the same equity interest in the same period.
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
22
As part of the agreement to acquire an 85% interest in a subsidiary by the
ETG in fiscal 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions. In fiscal
2007, some of the minority interest holders exercised their option to cause the
Company to purchase their aggregate 3% interest over the four-year period ending
in fiscal 2010. Accordingly, the Company increased its ownership interest in the
subsidiary by .75% during fiscal 2007 and will increase its ownership interest
by an additional .75% (or from 85.75% to 86.50%) effective the second quarter of
fiscal 2008. The purchase price of this additional minority interest is not
significant.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holders have the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period. During the first quarter of fiscal 2008, the
minority interest holders exercised their option to cause the Company to
purchase their aggregate 28% interest over the four-year period beginning in the
second quarter of fiscal 2008. Accordingly, the Company will increase its
ownership interest in the subsidiary by 7% (or one-fourth of such minority
interest holders' aggregate interest) to 58% effective in the second quarter of
fiscal 2008. The purchase price of this additional minority interest is $4.1
million.
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
beginning at approximately the eighth anniversary of the acquisition, 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 to cause the
Company to purchase their equity interests ("Put Rights") may be exercised on
varying dates beginning in fiscal 2008 through fiscal 2017. 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 the 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 $49 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 on 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, in December 2007, the FASB issued SFAS No. 160
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 statement of financial position within
equity. It also will require that any increases, or decreases in ownership
interests in a subsidiary that do not result in a loss of control be accounted
for as equity transactions and as a result any difference between the amount by
which the non-controlling (minority) interest is adjusted and the fair value of
the consideration paid or received, if any, would be recognized directly in
equity attributable to the controlling interest. 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.
As part of the agreement to purchase a subsidiary by the ETG in fiscal 2005,
the Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3
23
million should the subsidiary meet certain product line-related earnings
objectives during the fourth and fifth years following the acquisition. The
additional purchase consideration will be accrued when the earnings objectives
are met.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional purchase consideration up to
$17.8 million and $19.2 million, respectively, based on the subsidiary's fiscal
2008 and 2009 respective earnings relative to target. The additional purchase
consideration will be accrued when the earnings objectives are met and will be
paid in the following fiscal year.
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
$73.0 million in aggregate should the subsidiary meet certain earnings
objectives during the first five years following the acquisition. The
additional purchase consideration will be accrued when the earnings objectives
are met.
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 $.5 million in aggregate during the first three years following
the acquisition should the subsidiary meet certain earnings objectives.
New Accounting Pronouncements
Effective November 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," and
began evaluating tax positions utilizing a two-step process. The first step is
to determine whether it is more-likely-than-not that a tax position will be
sustained upon examination based on the technical merits of the position. The
second step is to measure the benefit to be recorded from tax positions that
meet the more-likely-than-not recognition threshold by determining the largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement and recognizing that amount in the financial
statements.
As a result of adopting the provisions of FIN 48, the Company recognized a
cumulative effect adjustment that decreased retained earnings as of the
beginning of fiscal 2008 by $639,000. Further, effective with the adoption of
FIN 48, the Company's policy is to recognize interest and penalties related to
income tax matters as a component of income tax expense. Interest and penalties,
which were not significant in fiscal 2007, were previously recorded in interest
expense and in selling, general, and administrative expenses, respectively, in
the Company's consolidated statements of operations.
Further information regarding income taxes can be found in Note 6, Income
Taxes, of the Notes to Condensed Consolidated Financial Statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") SFAS No. 157, "Fair Value Measurements," which provides
enhanced guidance for using fair value to measure assets and liabilities. SFAS
No. 157 provides a common definition of fair value
24
and establishes a framework to make the measurement of fair value in accordance
with generally accepted accounting principles more consistent and comparable.
SFAS No. 157 also requires expanded disclosures to provide information about the
extent to which fair value is used to measure assets and liabilities, the
methods and assumptions used to measure fair value, and the effect of fair value
measures on earnings. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, or in fiscal 2009 for HEICO. The Company is currently in the
process of evaluating the effect, if any, the adoption of SFAS No. 157 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 and report unrealized gains and
losses on items for which the fair value option has been elected in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, or
in fiscal 2009 for HEICO. The Company has not yet determined if it will elect to
apply any of the provisions of SFAS No. 159 and is currently evaluating the
effect, if any, the adoption of SFAS No. 159 will have on its results of
operations, financial position, and cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations."
SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling
interest in the acquiree. This Statement also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008, or in fiscal 2010 for HEICO. The Company is in the
process of evaluating the effect that 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." SFAS No. 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent's ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This Statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008, or in fiscal 2010 for HEICO. The Company is in the process of
evaluating the effect that the adoption of SFAS No. 160 will have on its results
of operations, financial position, and cash flows.
Forward-Looking Statements
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature may be
forward-looking and the words "believe," "expect," "estimate" and similar
expressions are generally intended to identify forward looking statements.
25
Any forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls, and conference calls,
concerning our operations, economic performance, and financial condition are
subject to known and unknown risks, uncertainties, and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance, or achievements to differ materially from anticipated
results, performance, or achievements. Also, forward-looking statements are
based upon management's estimates of fair values and of future costs, using
currently available information. Therefore, actual results may differ materially
from those expressed in or implied by those statements. Factors that could cause
such differences, but are not limited to: lower demand for commercial air travel
or airline fleet changes, which could cause lower demand for our goods and
services; product specification costs and requirements, which could cause an
increase to our costs to complete contracts; governmental and regulatory
demands, export policies and restrictions, reductions in defense, 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.
26
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 as of January 31, 2008, a hypothetical 10% increase in interest rates
would increase the Company's interest expense by approximately $312,000 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,
2008 would not have a material effect on the Company's results of operations,
financial position, or cash flows.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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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
2008.
Item 6. EXHIBITS
Exhibit Description
------- -----------
10.1 HEICO Savings and Investment Plan, as amended and restated
effective January 1, 2007. *
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.
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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 10, 2008 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
------- -----------
10.1 HEICO Savings and Investment Plan, as amended and restated effective
January 1, 2007.
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.