HEI 04.30.2014 Q2 10Q
Index

 
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 April 30, 2014
 
 
 
 
 
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
incorporation or organization)
 
(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ 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 May 21, 2014 is as follows:
Common Stock, $.01 par value
26,828,574

shares
Class A Common Stock, $.01 par value
39,667,281

shares

Index

HEICO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
 
 
 
 
Page
Part I.
 
Financial Information
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II.
 
Other Information
 
 
 
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 




1
Index

PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
 
 
April 30, 2014
 
October 31, 2013
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 

$21,402

 

$15,499

Accounts receivable, net
 
165,053

 
157,022

Inventories, net
 
225,021

 
218,893

Prepaid expenses and other current assets
 
21,237

 
17,022

Deferred income taxes
 
29,998

 
33,036

Total current assets
 
462,711

 
441,472

 
 
 
 
 
Property, plant and equipment, net
 
95,502

 
97,737

Goodwill
 
688,088

 
688,489

Intangible assets, net
 
227,517

 
241,558

Deferred income taxes
 
1,493

 
1,791

Other assets
 
72,131

 
61,968

Total assets
 

$1,547,442

 

$1,533,015

 
 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 

$519

 

$697

Trade accounts payable
 
56,370

 
54,855

Accrued expenses and other current liabilities
 
79,982

 
105,734

Total current liabilities
 
136,871

 
161,286

 
 
 
 
 
Long-term debt, net of current maturities
 
436,074

 
376,818

Deferred income taxes
 
122,109

 
128,482

Other long-term liabilities
 
97,338

 
83,976

Total liabilities
 
792,392

 
750,562

 
 
 
 
 
Commitments and contingencies (Note 11)
 

 

 
 
 
 
 
Redeemable noncontrolling interests (Note 2)
 
37,833

 
59,218

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Preferred Stock, $.01 par value per share; 10,000 shares authorized; 300 shares designated as Series B Junior Participating Preferred Stock and 300 shares designated as Series C Junior Participating Preferred Stock; none issued
 
—

 
—

Common Stock, $.01 par value per share; 75,000 shares authorized; 26,821 and 26,790 shares issued and outstanding
 
268

 
268

Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 39,657 and 39,586 shares issued and outstanding
 
397

 
396

Capital in excess of par value
 
263,374

 
255,889

Deferred compensation obligation
 
1,138

 
1,138

HEICO stock held by irrevocable trust
 
(1,138
)
 
(1,138
)
Accumulated other comprehensive (loss) income
 
(507
)
 
144

Retained earnings
 
378,875

 
349,649

Total HEICO shareholders’ equity
 
642,407

 
606,346

Noncontrolling interests
 
74,810

 
116,889

Total shareholders’ equity
 
717,217

 
723,235

Total liabilities and equity
 

$1,547,442

 

$1,533,015

The accompanying notes are an integral part of these condensed consolidated financial statements.


2
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
 
Six months ended April 30,
 
Three months ended April 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net sales

$549,058

 

$454,198

 

$282,232

 

$237,708

 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
357,019

 
287,161

 
182,310

 
148,260

Selling, general and administrative expenses
92,483

 
87,410

 
50,751

 
44,760

 
 
 
 
 
 
 
 
Total operating costs and expenses
449,502

 
374,571

 
233,061

 
193,020

 
 
 
 
 
 
 
 
Operating income
99,556

 
79,627

 
49,171

 
44,688

 
 
 
 
 
 
 
 
Interest expense
(2,722
)
 
(1,443
)
 
(1,441
)
 
(803
)
Other income
508

 
446

 
350

 
161

 
 
 
 
 
 
 
 
Income before income taxes and noncontrolling interests
97,342

 
78,630

 
48,080

 
44,046

 
 
 
 
 
 
 
 
Income tax expense
32,000

 
24,600

 
15,300

 
15,000

 
 
 
 
 
 
 
 
Net income from consolidated operations
65,342

 
54,030

 
32,780

 
29,046

 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
9,520

 
10,372

 
4,413

 
5,346

 
 
 
 
 
 
 
 
Net income attributable to HEICO

$55,822

 

$43,658

 

$28,367

 

$23,700

 
 
 
 
 
 
 
 
Net income per share attributable to HEICO shareholders:
 
 
 
 
 
 
 
  Basic

$.84

 

$.66

 

$.43

 

$.36

  Diluted

$.83

 

$.65

 

$.42

 

$.35

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
  Basic
66,415

 
66,242

 
66,437

 
66,294

  Diluted
67,403

 
66,835

 
67,455

 
66,872

 
 
 
 
 
 
 
 
Cash dividends per share

$.41

 

$1.76

 

$—

 

$—

The accompanying notes are an integral part of these condensed consolidated financial statements.



3
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
 
Six months ended April 30,
 
Three months ended April 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income from consolidated operations

$65,342

 

$54,030

 

$32,780

 

$29,046

Other comprehensive (loss) income:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
(651
)
 
244

 
1,811

 
(2,990
)
Total other comprehensive (loss) income
(651
)
 
244

 
1,811

 
(2,990
)
Comprehensive income from consolidated operations
64,691

 
54,274

 
34,591

 
26,056

Less: Comprehensive income attributable to noncontrolling interests
9,520

 
10,372

 
4,413

 
5,346

Comprehensive income attributable to HEICO

$55,171

 

$43,902

 

$30,178

 

$20,710

The accompanying notes are an integral part of these condensed consolidated financial statements.




4
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - UNAUDITED
(in thousands, except per share data)
 
 
 
HEICO Shareholders' Equity
 
 
 
 
 
Redeemable Noncontrolling Interests
 
Common Stock
 
Class A Common Stock
 
Capital in Excess of Par Value
 
Deferred Compensation Obligation
 
HEICO Stock Held by Irrevocable Trust
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Noncontrolling Interests
 
Total Shareholders' Equity
Balances as of October 31, 2013

$59,218

 

$268

 

$396

 

$255,889

 

$1,138

 

($1,138
)
 

$144

 

$349,649

 

$116,889

 

$723,235

Comprehensive income
3,583

 
—

 
—

 
—

 
—

 
—

 
(651
)
 
55,822

 
5,937

 
61,108

Cash dividends ($.41 per share)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(27,225
)
 
—

 
(27,225
)
Issuance of common stock to HEICO Savings and Investment Plan
—

 
—

 
—

 
3,071

 
—

 
—

 
—

 
—

 
—

 
3,071

Share-based compensation expense
—

 
—

 
—

 
4,189

 
—

 
—

 
—

 
—

 
—

 
4,189

Proceeds from stock option exercises
—

 
—

 
—

 
400

 
—

 
—

 
—

 
—

 
—

 
400

Tax benefit from stock option exercises
—

 
—

 
—

 
93

 
—

 
—

 
—

 
—

 
—

 
93

Redemptions of common stock related to share-based compensation
—

 
—

 
—

 
(273
)
 
—

 
—

 
—

 
—

 
—

 
(273
)
Distributions to noncontrolling interests
(3,712
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(67,400
)
 
(67,400
)
Acquisitions of noncontrolling interests
(1,243
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Reclassification of redeemable noncontrolling interests to noncontrolling interests
(19,383
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
19,383

 
19,383

Adjustments to redemption amount of redeemable noncontrolling interests
(630
)
 
—

 
—

 
—

 
—

 
—

 
—

 
630

 
—

 
630

Other
—

 
—

 
1

 
5

 
—

 
—

 
—

 
(1
)
 
1

 
6

Balances as of April 30, 2014

$37,833

 

$268

 

$397

 

$263,374

 

$1,138

 

($1,138
)
 

($507
)
 

$378,875

 

$74,810

 

$717,217


 
 
 
HEICO Shareholders' Equity
 
 
 
 
 
Redeemable Noncontrolling Interests
 
Common Stock
 
Class A Common Stock
 
Capital in Excess of Par Value
 
Deferred Compensation Obligation
 
HEICO Stock Held by Irrevocable Trust
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Noncontrolling Interests
 
Total Shareholders' Equity
Balances as of October 31, 2012

$67,166

 

$213

 

$315

 

$244,632

 

$823

 

($823
)
 

($3,572
)
 

$375,085

 

$103,086

 

$719,759

Comprehensive income
4,109

 
—

 
—

 
—

 
—

 
—

 
244

 
43,658

 
6,263

 
50,165

Cash dividends ($1.76 per share)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(116,645
)
 
—

 
(116,645
)
Issuance of common stock to HEICO Savings and Investment Plan
—

 
—

 
—

 
1,159

 
—

 
—

 
—

 
—

 
—

 
1,159

Share-based compensation expense
—

 
—

 
—

 
2,154

 
—

 
—

 
—

 
—

 
—

 
2,154

Proceeds from stock option exercises
—

 
1

 
1

 
284

 
—

 
—

 
—

 
—

 
—

 
286

Tax benefit from stock option exercises
—

 
—

 
—

 
5,177

 
—

 
—

 
—

 
—

 
—

 
5,177

Redemptions of common stock related to share-based compensation
—

 
—

 
—

 
(2,364
)
 
—

 
—

 
—

 
—

 
—

 
(2,364
)
Distributions to noncontrolling interests
(4,457
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Acquisitions of noncontrolling interests
(16,610
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Adjustments to redemption amount of redeemable noncontrolling interests
1,010

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,010
)
 
—

 
(1,010
)
Deferred compensation obligation
—

 
—

 
—

 
—

 
105

 
(105
)
 
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
1

 
—

 
—

 
1

 
—

 
(1
)
 
1

Balances as of April 30, 2013

$51,218

 

$214

 

$316

 

$251,043

 

$928

 

($928
)
 

($3,327
)
 

$301,088

 

$109,348

 

$658,682

The accompanying notes are an integral part of these condensed consolidated financial statements.




5
Index

HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
 
 
Six months ended April 30,
 
 
2014
 
2013
Operating Activities:
 
 
 
 
Net income from consolidated operations
 

$65,342

 

$54,030

Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
24,139

 
16,405

Share-based compensation expense
 
4,189

 
2,154

Issuance of common stock to HEICO Savings and Investment Plan
 
3,071

 
1,159

Tax benefit from stock option exercises
 
93

 
5,177

Excess tax benefit from stock option exercises
 
(93
)
 
(5,112
)
Deferred income tax benefit
 
(3,146
)
 
(856
)
Decrease in value of contingent consideration
 
(9,295
)
 
(1,203
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
Increase in accounts receivable
 
(8,113
)
 
(4,673
)
Increase in inventories
 
(6,199
)
 
(9,696
)
Increase in prepaid expenses and other current assets
 
(4,336
)
 
(2,618
)
Increase (decrease) in trade accounts payable
 
1,507

 
(8,154
)
Decrease in accrued expenses and other current liabilities
 
(18,152
)
 
(4,700
)
Increase in income taxes payable
 
—

 
2,189

Other long-term assets and liabilities, net
 
5,994

 
430

Net cash provided by operating activities
 
55,001

 
44,532

 
 
 
 
 
Investing Activities:
 
 
 
 
Capital expenditures
 
(7,485
)
 
(9,265
)
Acquisitions, net of cash acquired
 
(569
)
 
(1,242
)
Other
 
(8
)
 
(6
)
Net cash used in investing activities
 
(8,062
)
 
(10,513
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Borrowings on revolving credit facility
 
105,000

 
145,000

Payments on revolving credit facility
 
(45,000
)
 
(48,000
)
Distributions to noncontrolling interests
 
(71,112
)
 
(4,457
)
Cash dividends paid
 
(27,225
)
 
(116,645
)
Acquisitions of noncontrolling interests
 
(1,243
)
 
(16,610
)
Revolving credit facility issuance costs
 
(767
)
 
(570
)
Redemptions of common stock related to share-based compensation
 
(273
)
 
(2,364
)
Excess tax benefit from stock option exercises
 
93

 
5,112

Proceeds from stock option exercises
 
400

 
286

Other
 
(936
)
 
(325
)
Net cash used in financing activities
 
(41,063
)
 
(38,573
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
27

 
(19
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
5,903

 
(4,573
)
Cash and cash equivalents at beginning of year
 
15,499

 
21,451

Cash and cash equivalents at end of period
 

$21,402

 

$16,878

The accompanying notes are an integral part of these condensed consolidated financial statements.



6
Index

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,” 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, 2013. The October 31, 2013 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, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the six months ended April 30, 2014 are not necessarily indicative of the results which may be expected for the entire fiscal year.

Stock Split

All applicable fiscal 2013 share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in October 2013.
New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires disclosure about changes in and amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The Company adopted ASU 2013-02 in the first quarter of fiscal 2014, resulting in only expanded disclosure regarding the changes in accumulated other comprehensive income and no impact on the Company's consolidated results of operations, financial position or cash flows.



7
Index

In March 2013, the FASB issued ASU 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” which clarifies the applicable guidance for the release of any cumulative translation adjustments into net earnings. ASU 2013-05 specifies that the entire amount of cumulative translation adjustments should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the investment in the foreign entity. ASU 2013-05 is effective prospectively for fiscal years and interim reporting periods within those years beginning after December 15, 2013, or in fiscal 2015 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position or cash flows.


2.     SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable
(in thousands)
 
April 30, 2014
 
October 31, 2013
Accounts receivable
 

$167,492

 

$160,118

Less: Allowance for doubtful accounts
 
(2,439
)
 
(3,096
)
Accounts receivable, net
 

$165,053

 

$157,022


Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
(in thousands)
 
April 30, 2014
 
October 31, 2013
Costs incurred on uncompleted contracts
 

$27,100

 

$22,548

Estimated earnings
 
24,846

 
25,391

 
 
51,946

 
47,939

Less: Billings to date
 
(46,636
)
 
(40,676
)


 

$5,310

 

$7,263

Included in the accompanying Condensed Consolidated Balance Sheets under the following captions:
 
 
 
 
Accounts receivable, net (costs and estimated earnings in excess of billings)
 

$8,622

 

$9,540

Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
 
(3,312
)
 
(2,277
)
 
 

$5,310

 

$7,263


Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the six and three months ended April 30, 2014 and 2013.



8
Index

Inventories
(in thousands)
 
April 30, 2014
 
October 31, 2013
Finished products
 

$110,458

 

$103,234

Work in process
 
29,102

 
26,810

Materials, parts, assemblies and supplies
 
81,206

 
79,863

Contracts in process
 
7,695

 
9,941

Less: Billings to date
 
(3,440
)
 
(955
)
Inventories, net of valuation reserves
 

$225,021

 

$218,893


Contracts in process represents accumulated capitalized costs associated with fixed price contracts for which revenue is recognized on the completed-contract method. Related progress billings and customer advances (“billings to date”) are classified as a reduction to contracts in process, if any, and any excess is included in accrued expenses and other current liabilities.

Property, Plant and Equipment
(in thousands)
 
April 30, 2014
 
October 31, 2013
Land
 

$4,516

 

$4,515

Buildings and improvements
 
60,598

 
60,105

Machinery, equipment and tooling
 
137,446

 
131,855

Construction in progress
 
5,024

 
4,932

 
 
207,584

 
201,407

Less: Accumulated depreciation and amortization
 
(112,082
)
 
(103,670
)
Property, plant and equipment, net
 

$95,502

 

$97,737


Accrued Customer Rebates and Credits

The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $7.5 million and $14.8 million as of April 30, 2014 and October 31, 2013, respectively. The total customer rebates and credits deducted within net sales for the six months ended April 30, 2014 and 2013 was $3.4 million and $3.5 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended April 30, 2014 and 2013 was $1.7 million and $2.1 million, respectively. The decrease in the amount of accrued customer rebates and credits since October 31, 2013 principally reflects the payments made in the second quarter of fiscal 2014.




9
Index

Employee Retirement Plan

In connection with an acquisition during the third quarter of fiscal 2013, the Company assumed a frozen qualified defined benefit pension plan. The components of net pension income for the six months ended April 30, 2014 that were recorded within the Company's Condensed Consolidated Statement of Operations are as follows (in thousands):
 
 
Six months ended
April 30, 2014
 
Three months ended
April 30, 2014
Expected return on plan assets
 

$370

 

$185

Interest cost
 
306

 
153

Net pension income
 

$64

 

$32


Redeemable Noncontrolling Interests

The holders of equity interests in certain of the Company's subsidiaries have put rights that may be exercised on varying dates causing the Company to give cash consideration to purchase their equity interests based on fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate redemption amount of all put rights that the Company could be required to pay at varying dates through fiscal 2022 is as follows (in thousands):
 
 
April 30, 2014
 
October 31, 2013
Redeemable at fair value
 

$27,697

 

$47,839

Redeemable based on a multiple of future earnings
 
10,136

 
11,379

Redeemable noncontrolling interests
 

$37,833

 

$59,218


The decrease in the aggregate redemption amount of all put rights since the prior fiscal year end principally reflects a reclassification of the redemption amount pertaining to the equity interest in one of the Company's subsidiaries from redeemable noncontrolling interests (temporary equity) to noncontrolling interests (permanent equity) upon the expiration of the holder's put right in the second quarter of fiscal 2014.

Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income (loss) for the six months ended April 30, 2014 are as follows (in thousands):
 
 
Foreign Currency Translation
 
Pension Benefit Obligation
 
Accumulated
Other Comprehensive
Income (Loss)
Balances at October 31, 2013
 

($466
)
 

$610

 

$144

Unrealized loss
 
(651
)
 
—

 
(651
)
Balances at April 30, 2014
 

($1,117
)
 

$610

 

($507
)




10
Index

3.     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 six months ended April 30, 2014 are as follows (in thousands):

 
 
Segment
 
Consolidated Totals
 
 
FSG
 
ETG
 
Balances as of October 31, 2013
 

$279,855

 

$408,634

 

$688,489

Foreign currency translation adjustments
 
—

 
(428
)
 
(428
)
Adjustment to goodwill
 
—

 
27

 
27

Balances as of April 30, 2014
 

$279,855

 

$408,233

 

$688,088


Identifiable intangible assets consist of the following (in thousands):
 
 
As of April 30, 2014
 
As of October 31, 2013
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 

$154,168

 

($46,114
)
 

$108,054

 

$156,801

 

($38,461
)
 

$118,340

Intellectual property
 
75,102

 
(14,343
)
 
60,759

 
75,095

 
(10,795
)
 
64,300

Licenses
 
2,900

 
(1,513
)
 
1,387

 
2,900

 
(1,381
)
 
1,519

Non-compete agreements
 
1,123

 
(1,123
)
 
—

 
1,132

 
(1,132
)
 
—

Patents
 
690

 
(380
)
 
310

 
642

 
(351
)
 
291

Trade names
 
566

 
(504
)
 
62

 
566

 
(448
)
 
118

 
 
234,549

 
(63,977
)
 
170,572

 
237,136

 
(52,568
)
 
184,568

Non-Amortizing Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
56,945

 
—

 
56,945

 
56,990

 
—

 
56,990

 
 

$291,494

 

($63,977
)
 

$227,517

 

$294,126

 

($52,568
)
 

$241,558


Amortization expense related to intangible assets for the six months ended April 30, 2014 and 2013 was $14.1 million and $8.9 million, respectively. Amortization expense related to intangible assets for the three months ended April 30, 2014 and 2013 was $7.0 million and $4.4 million, respectively. The increase in amortization expense for the six and three months ended April 30, 2014 compared to the six and three months ended April 30, 2013 principally relates to the incremental amortization expense of intangible assets recognized in connection with fiscal 2013 acquisitions. Amortization expense related to intangible assets for the remainder of fiscal 2014 is estimated to be $13.9 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $26.1 million in fiscal 2015, $24.2 million in fiscal 2016, $23.1 million in fiscal 2017, $21.0 million in fiscal 2018, $18.6 million in fiscal 2019 and $43.7 million thereafter.





11
Index

4.     LONG-TERM DEBT

Long-term debt consists of the following (in thousands):
 
 
April 30, 2014
 
October 31, 2013
Borrowings under revolving credit facility
 

$433,000

 

$373,000

Capital leases and notes payable
 
3,593

 
4,515

 
 
436,593

 
377,515

Less: Current maturities of long-term debt
 
(519
)
 
(697
)
 
 

$436,074

 

$376,818


As of April 30, 2014 and October 31, 2013, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 1.3%. The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2014, the Company was in compliance with all such covenants.

In November 2013, the Company entered into an amendment to extend the maturity date of its revolving credit facility by one year to December 2018 and to increase the aggregate principal amount to $800 million. Furthermore, the amendment includes a feature that will allow the Company to increase the aggregate principal amount by an additional $200 million to become a $1.0 billion facility through increased commitments from existing lenders or the addition of new lenders.


5.     INCOME TAXES

As of April 30, 2014, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $1.0 million of which $.7 million would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits for the six months ended April 30, 2014 is as follows (in thousands):
Balance as of October 31, 2013
 

$1,072

Increases related to current year tax positions
 
54

Settlements
 
(22
)
Lapse of statutes of limitations
 
(60
)
Balance as of April 30, 2014
 

$1,044


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 six months ended April 30, 2014. Further, the Company does not expect the total amount of unrecognized tax benefits to materially change in the next twelve months.



12
Index

The Company’s effective tax rate in the first six months of fiscal 2014 increased to 32.9% from 31.3% in the first six months of fiscal 2013. The increase is principally due to an income tax credit for qualified research and development activities for the last ten months of fiscal 2012 that was recognized in the first quarter of fiscal 2013 resulting from the retroactive extension of Section 41 of the Internal Revenue Code, "Credit for Increasing Research Activities," in January 2013 to cover the two-year period from January 1, 2012 to December 31, 2013 and the expiration of Section 41 on December 31, 2013 that limited the tax credit recognized in the first six months of fiscal 2014 to just the first two months of fiscal 2014 qualified research and development activities. Additionally, the increase is partially the result of a larger income tax deduction recognized in the prior year under Section 404(k) of the Internal Revenue Code for the special and extraordinary cash dividend paid in December 2012 to participants of the HEICO Savings and Investment Plan holding HEICO common stock. These increases were partially offset by the impact of a reduction in accrued contingent consideration during the first six months of fiscal 2014 associated with a fiscal 2013 acquisition acquired by means of a nontaxable stock transaction.

The Company’s effective tax rate in the second quarter of fiscal 2014 decreased to 31.8% from 34.1% in the second quarter of fiscal 2013. The decrease is principally attributed to the impact of a reduction in accrued contingent consideration associated with a fiscal 2013 acquisition acquired by means of a nontaxable stock transaction.
    



13
Index

6.     FAIR VALUE MEASUREMENTS

The following tables set forth by level within the fair value hierarchy, the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands):
 
 
As of April 30, 2014
 
 
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Deferred compensation plans:
 
 
 
 
 
 
 
 
Corporate owned life insurance
 

$—

 

$60,370

 

$—

 

$60,370

Equity securities
 
2,281

 
—

 
—

 
2,281

Mutual funds
 
2,183

 
—

 
—

 
2,183

Money market deposit accounts
 
913

 
—

 
—

 
913

Other
 
1,671

 
15

 
—

 
1,686

Total assets
 

$7,048

 

$60,385

 

$—

 

$67,433

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$20,015

 

$20,015


 
 
As of October 31, 2013
 
 
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Deferred compensation plans:
 
 
 
 
 
 
 
 
Corporate owned life insurance
 

$—

 

$52,655

 

$—

 

$52,655

Equity securities
 
1,940

 
—

 
—

 
1,940

Mutual funds
 
1,529

 
—

 
—

 
1,529

Money market deposit accounts
 
1,470

 
—

 
—

 
1,470

Other
 
—

 
46

 
—

 
46

Total assets
 

$4,939

 

$52,701

 

$—

 

$57,640

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 

$—

 

$—

 

$29,310

 

$29,310


The Company maintains two non-qualified deferred compensation plans. The assets of the HEICO Corporation Leadership Compensation Plan (the “LCP”) principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company and are classified within Level 2 and valued using a market approach. The assets of the Company’s other deferred compensation plan are principally invested in equity securities, mutual funds, and money market deposit accounts that are classified within Level 1. The assets of both plans are held within irrevocable trusts and



14
Index

classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $67.4 million as of April 30, 2014 and $57.6 million as of October 31, 2013, of which the LCP related assets were $62.0 million and $52.7 million as of April 30, 2014 and October 31, 2013, respectively. The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $66.4 million as of April 30, 2014 and $56.9 million as of October 31, 2013, of which the LCP related liability was $61.0 million and $51.9 million as of April 30, 2014 and October 31, 2013, respectively.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2013, the Company may have been obligated to pay contingent consideration of up to $20.0 million had the acquired entity met certain earnings objectives during the last three months of the calendar year of acquisition and may be obligated to pay contingent consideration of up to $30.0 million should the acquired entity meet certain earnings objectives during each of the next two calendar years (2014 and 2015). In December 2013, the acquired entity incurred unanticipated costs associated with certain contracts for which revenue is recognized on the percentage-of-completion method and as a result, did not meet its calendar 2013 related earnings objectives. Accordingly, the $7.0 million contingent consideration accrued as of October 31, 2013 was recorded as a reduction to selling, general and administrative expenses ("SG&A") in the Company's Condensed Consolidated Statement of Operations in the first quarter of fiscal 2014. The estimated fair value of the contingent consideration for the calendar 2014 and 2015 earnings period was $11.4 million as of April 30, 2014 compared to $13.7 million as of October 31, 2013. The $2.3 million decrease is principally attributed to revised earnings estimates that reflect less favorable projected market conditions during the earnout period. The fair value adjustment was recorded as a reduction to SG&A expenses in the second quarter of fiscal 2014.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2012, the Company may be obligated to pay contingent consideration of up to $10.6 million in aggregate should the acquired entity meet certain earnings objectives during each of the next three years following the second anniversary date of the acquisition. As of April 30, 2014 and October 31, 2013, the estimated fair value of the contingent consideration was $8.6 million.

The estimated fair values of the contingent consideration arrangements described above are classified within Level 3 and were determined using a probability-based scenario analysis approach. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate reflecting the credit risk of a market participant. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's condensed consolidated statements of operations.



15
Index

The Level 3 inputs used to derive the estimated fair values of the contingent consideration as of April 30, 2014 were as follows:
 
 
Fiscal 2013 Acquisition
 
Fiscal 2012 Acquisition
Compound annual revenue growth rate range
 
(4%) - 29%
 
(5%) - 18%
Weighted average discount rate
 
2.8%
 
2.9%
    
Changes in the Company’s contingent consideration measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended April 30, 2014 are as follows (in thousands):
 
 
Liabilities
Balance as of October 31, 2013
 

$29,310

Decrease in value of contingent consideration
 
(9,295
)
Balance as of April 30, 2014
 

$20,015

 
 
 
Included in the accompanying Condensed Consolidated Balance Sheet
under the following captions:
 
 
Accrued expenses and other current liabilities
 

$—

Other long-term liabilities
 
20,015

 
 

$20,015

    
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the six months ended April 30, 2014.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of April 30, 2014 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.


7.     SHAREHOLDERS' EQUITY

In January 2014, the Company paid a special and extraordinary $.35 per share cash dividend on both classes of HEICO's common stock as well as its regular semi-annual $.06 per share cash dividend. The dividends, which aggregated $27.2 million, were principally funded from borrowings under the Company's revolving credit facility.

Consistent with the Company's past practice of increasing its ownership in certain non-wholly-owned subsidiaries, on February 18, 2014, HEICO Corporation acquired the 20% noncontrolling interest held by Lufthansa Technik AG (“LHT”) in four of the Company's existing subsidiaries principally operating in the specialty products and distribution businesses within its HEICO Aerospace subsidiary (the “Transaction”). Pursuant to the Transaction, HEICO Aerospace paid dividends proportional to the ownership (80%/20%) to HEICO and LHT, and



16
Index

HEICO transferred the businesses to HEICO Flight Support Corp., a wholly-owned subsidiary of HEICO. HEICO did not record any gain or loss in connection with the Transaction. LHT’s dividend of $67.4 million was paid in cash, principally using proceeds from the Company’s revolving credit facility. LHT remains a 20% owner in HEICO Aerospace, a leading producer of PMA parts and component repair and overhaul services.


8.     RESEARCH AND DEVELOPMENT EXPENSES

Cost of sales for the six months ended April 30, 2014 and 2013 includes approximately $18.4 million and $15.0 million, respectively, of new product research and development expenses. Cost of sales for the three months ended April 30, 2014 and 2013 includes approximately $9.3 million and $7.7 million, respectively, of new product research and development expenses.


9.     NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to
HEICO
 

$55,822

 

$43,658

 

$28,367

 

$23,700

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common
shares outstanding - basic
 
66,415

 
66,242

 
66,437

 
66,294

Effect of dilutive stock options
 
988

 
593

 
1,018

 
578

Weighted average common
shares outstanding - diluted
 
67,403

 
66,835

 
67,455

 
66,872

 
 
 
 
 
 
 
 
 
Net income per share attributable to
HEICO shareholders:
 
 
 
 
 
 
 
 
 Basic
 

$.84

 

$.66

 

$.43

 

$.36

 Diluted
 

$.83

 

$.65

 

$.42

 

$.35

 
 
 
 
 
 
 
 
 
Anti-dilutive stock options
excluded
 
425

 
841

 
305

 
747






17
Index

10. OPERATING SEGMENTS

Information on the Company’s two operating segments, the Flight Support Group ("FSG"), consisting of HEICO Aerospace and HEICO Flight Support Corp. and their collective subsidiaries; and the Electronic Technologies Group ("ETG"), consisting of HEICO Electronic Technologies Corp. and its subsidiaries, for the six and three months ended April 30, 2014 and 2013, respectively, is as follows (in thousands):
 
 
 
 
 
 
Other,
Primarily Corporate and
Intersegment
 
Consolidated
Totals
 
 
Segment
 
 
 
 
FSG
 
ETG
 
 
Six months ended April 30, 2014:
 
 
 
 
 
 
 
 
Net sales
 

$376,477

 

$177,233

 

($4,652
)
 

$549,058

Depreciation and amortization
 
9,863

 
13,871

 
405

 
24,139

Operating income
 
69,089

 
41,040

 
(10,573
)
 
99,556

Capital expenditures
 
4,256

 
2,759

 
470

 
7,485

 
 
 
 
 
 
 
 
 
Six months ended April 30, 2013:
 
 
 
 
 
 
 
 
Net sales
 

$294,229

 

$162,778

 

($2,809
)
 

$454,198

Depreciation and amortization
 
5,703

 
10,316

 
386

 
16,405

Operating income
 
54,541

 
35,795

 
(10,709
)
 
79,627

Capital expenditures
 
5,298

 
3,825

 
142

 
9,265

 
 
 
 
 
 
 
 
 
Three months ended April 30, 2014:
 
 
 
 
 
 
 
 
Net sales
 

$194,892

 

$89,741

 

($2,401
)
 

$282,232

Depreciation and amortization
 
4,943

 
6,946

 
200

 
12,089

Operating income
 
36,886

 
18,136

 
(5,851
)
 
49,171

Capital expenditures
 
2,231

 
1,051

 
213

 
3,495

 
 
 
 
 
 
 
 
 
Three months ended April 30, 2013:
 
 
 
 
 
 
 
 
Net sales
 

$155,231

 

$83,937

 

($1,460
)
 

$237,708

Depreciation and amortization
 
2,868

 
5,203

 
194

 
8,265

Operating income
 
30,296

 
20,249

 
(5,857
)
 
44,688

Capital expenditures
 
2,911

 
1,790

 
98

 
4,799


Total assets by operating segment as of April 30, 2014 and October 31, 2013 are as follows (in thousands):
 
 
Segment
 
Other,
Primarily Corporate
 
Consolidated
Totals
 
 
FSG
 
ETG
 
 
Total assets as of April 30, 2014
 

$688,106

 

$751,459

 

$107,877

 

$1,547,442

Total assets as of October 31, 2013
 
679,839

 
759,807

 
93,369

 
1,533,015





18
Index

11. 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 is supported by the Company’s revolving credit facility.
Product Warranty
Changes in the Company’s product warranty liability for the six months ended April 30, 2014 and 2013, respectively, are as follows (in thousands):
 
 
Six months ended April 30,
 
 
2014
 
2013
Balances as of beginning of fiscal year
 

$3,233

 

$2,571

Accruals for warranties
 
1,125

 
(220
)
Warranty claims settled
 
(941
)
 
(622
)
Balances as of April 30
 

$3,417

 

$1,729

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.





19
Index

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, 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, 2013. There have been no material changes to our critical accounting policies during the six months ended April 30, 2014.

Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and HEICO Flight Support Corp. and their collective subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.

Our results of operations for the six and three months ended April 30, 2014 have been affected by the fiscal 2014 acquisition of certain noncontrolling interests as further detailed in Note 7, Shareholders' Equity, of the Notes to the Condensed Consolidated Financial Statements of this quarterly report and by the fiscal 2013 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2013.

All fiscal 2013 per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in October 2013.



20
Index

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 (in thousands):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 

$549,058

 

$454,198

 

$282,232

 

$237,708

Cost of sales
 
357,019

 
287,161

 
182,310

 
148,260

Selling, general and administrative expenses
 
92,483

 
87,410

 
50,751

 
44,760

Total operating costs and expenses
 
449,502

 
374,571

 
233,061

 
193,020

Operating income
 

$99,556

 

$79,627

 

$49,171

 

$44,688

 
 
 
 
 
 
 
 
 
Net sales by segment:
 
 
 
 
 
 
 
 
Flight Support Group
 

$376,477

 

$294,229

 

$194,892

 

$155,231

Electronic Technologies Group
 
177,233

 
162,778

 
89,741

 
83,937

Intersegment sales
 
(4,652
)
 
(2,809
)
 
(2,401
)
 
(1,460
)
 
 

$549,058

 

$454,198

 

$282,232

 

$237,708

 
 
 
 
 
 
 
 
 
Operating income by segment:
 
 
 
 
 
 
 
 
Flight Support Group
 

$69,089

 

$54,541

 

$36,886

 

$30,296

Electronic Technologies Group
 
41,040

 
35,795

 
18,136

 
20,249

Other, primarily corporate
 
(10,573
)
 
(10,709
)
 
(5,851
)
 
(5,857
)
 
 

$99,556

 

$79,627

 

$49,171

 

$44,688

 
 
 
 
 
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Gross profit
 
35.0
%
 
36.8
%
 
35.4
%
 
37.6
%
Selling, general and administrative expenses
 
16.8
%
 
19.2
%
 
18.0
%
 
18.8
%
Operating income
 
18.1
%
 
17.5
%
 
17.4
%
 
18.8
%
Interest expense
 
.5
%
 
.3
%
 
.5
%
 
.3
%
Other income
 
.1
%
 
.1
%
 
.1
%
 
.1
%
Income tax expense
 
5.8
%
 
5.4
%
 
5.4
%
 
6.3
%
Net income attributable to noncontrolling interests
 
1.7
%
 
2.3
%
 
1.6
%
 
2.2
%
Net income attributable to HEICO
 
10.2
%
 
9.6
%
 
10.1
%
 
10.0
%



21
Index

Comparison of First Six Months of Fiscal 2014 to First Six Months of Fiscal 2013

Net Sales

Our net sales in the first six months of fiscal 2014 increased by 21% to a record $549.1 million, as compared to net sales of $454.2 million in the first six months of fiscal 2013. The increase in net sales principally reflects an increase of $82.2 million (a 28% increase) to a record $376.5 million in net sales within the FSG as well as an increase of $14.5 million (a 9% increase) to a record $177.2 million in net sales within the ETG. The net sales increase in the FSG reflects organic growth of approximately 17% as well as additional net sales of $31.3 million from a fiscal 2013 acquisition. The organic growth in the FSG reflects new product offerings and continued improving market conditions resulting in net sales increases of $45.0 million within our aftermarket replacement parts and repair and overhaul services product lines and $6.0 million within our specialty products lines. The net sales increase in the ETG resulted from additional net sales of $12.2 million from a fiscal 2013 acquisition as well as organic growth of approximately 1%. Sales price changes were not a significant contributing factor to the FSG and ETG net sales growth in the first six months of fiscal 2014.

Gross Profit and Operating Expenses

Our consolidated gross profit margin decreased to 35.0% in the first six months of fiscal 2014 as compared to 36.8% in the first six months of fiscal 2013, principally reflecting a decrease of 3.4% and .7% in the ETG's and FSG's gross profit margin, respectively. The decrease in the ETG's gross profit margin is principally attributed to a less favorable product mix for certain of our space and defense products. The decrease in the FSG's gross profit margin is principally attributed to a less favorable product mix for certain of our aftermarket replacement parts and repair and overhaul services product lines and our specialty products lines. Total new product research and development expenses included within our consolidated cost of sales increased to $18.4 million in the first six months of fiscal 2014 compared to $15.0 million in the first six months of fiscal 2013.

Selling, general and administrative (“SG&A”) expenses were $92.5 million and $87.4 million in the first six months of fiscal 2014 and 2013, respectively. The increase in SG&A expenses principally relates to additional costs incurred of $4.9 million at our existing businesses to support the consolidated organic sales growth. SG&A expenses of approximately $9.4 million were attributed to the fiscal 2013 acquired businesses. During the first six months of fiscal 2014, approximately $9.3 million was recorded as a fair value adjustment to reduce the estimated accrued contingent consideration associated with a fiscal 2013 acquisition. The resulting reduction to SG&A expenses was principally due to unanticipated costs associated with certain contracts and less favorable projected market conditions during the future earnout period.

SG&A expenses as a percentage of net sales decreased from 19.2% in the first six months of fiscal 2013 to 16.8% in the first six months of fiscal 2014 principally reflecting the impact of the reduced contingent consideration as well as the impact of higher sales volumes on the fixed portion of SG&A expenses.



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Index

Operating Income

Operating income in the first six months of fiscal 2014 increased by 25% to a record $99.6 million as compared to operating income of $79.6 million in the first six months of fiscal 2013. The increase in operating income reflects a $14.6 million increase (a 27% increase) to a record $69.1 million in operating income of the FSG in the first six months of fiscal 2014, up from $54.5 million in the first six months of fiscal 2013 and a $5.2 million increase (a 15% increase) in operating income of the ETG to a record $41.0 million in the first six months of fiscal 2014, up from $35.8 million in the first six months of fiscal 2013. The increase in operating income of the FSG is principally attributed to the previously mentioned net sales growth. The increase in operating income of the ETG is principally attributed to the overall impact of the acquired business.
  
As a percentage of net sales, our consolidated operating income increased to 18.1% in the first six months of fiscal 2014, up from 17.5% in the first six months of fiscal 2013. The increase in consolidated operating income as a percentage of net sales principally reflects an increase in the ETG’s operating income as a percentage of net sales from 22.0% in the first six months of fiscal 2013 to 23.2% in the first six months of fiscal 2014. The increase in operating income as a percentage of net sales is principally attributed to the overall impact of the acquired business, partially offset by the aforementioned less favorable product mix.

Interest Expense

Interest expense increased to $2.7 million in the first six months of fiscal 2014 from $1.4 million in the first six months of fiscal 2013. The increase was principally due to a higher weighted average balance outstanding under our revolving credit facility in the first six months of fiscal 2014 associated with fiscal 2013 acquisitions.

Other Income

Other income in the first six months of fiscal 2014 and 2013 was not material.

Income Tax Expense

Our effective tax rate in the first six months of fiscal 2014 increased to 32.9% from 31.3% in the first six months of fiscal 2013. The increase is principally due to an income tax credit for qualified research and development activities for the last ten months of fiscal 2012 that was recognized in the first quarter of fiscal 2013 resulting from the retroactive extension of Section 41 of the Internal Revenue Code, "Credit for Increasing Research Activities," in January 2013 to cover the two-year period from January 1, 2012 to December 31, 2013 and the expiration of Section 41 on December 31, 2013 that limited the tax credit recognized in the first six months of fiscal 2014 to just the first two months of fiscal 2014 qualified research and development activities. Additionally, the increase is partially the result of a larger income tax deduction recognized in the prior year under Section 404(k) of the Internal Revenue Code for the special and extraordinary cash dividend paid in December 2012 to participants of the HEICO Savings



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Index

and Investment Plan holding HEICO common stock. These increases were partially offset by the impact of a reduction in accrued contingent consideration during the first six months of fiscal 2014 associated with a fiscal 2013 acquisition acquired by means of a nontaxable stock transaction.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $9.5 million in the first six months of fiscal 2014 compared to $10.4 million in the first six months of fiscal 2013. The decrease principally reflects purchases of certain noncontrolling interests during fiscal 2013 and the second quarter of fiscal 2014 resulting in lower allocations of net income to noncontrolling interests.

Net Income Attributable to HEICO

Net income attributable to HEICO increased to a record $55.8 million, or $.83 per diluted share, in the first six months of fiscal 2014 from $43.7 million, or $.65 per diluted share, in the first six months of fiscal 2013, principally reflecting the previously mentioned increased operating income.

Comparison of Second Quarter of Fiscal 2014 to Second Quarter of Fiscal 2013

Net Sales

Our net sales in the second quarter of fiscal 2014 increased by 19% to $282.2 million, as compared to net sales of $237.7 million in the second quarter of fiscal 2013. The increase in net sales principally reflects an increase of $39.7 million (a 26% increase) to a record $194.9 million in net sales within the FSG as well as an increase of $5.8 million (a 7% increase) to $89.7 million in net sales within the ETG. The net sales increase in the FSG reflects organic growth of approximately 15% as well as additional net sales of $15.7 million from a fiscal 2013 acquisition. The organic growth in the FSG principally reflects new product offerings and continued improving market conditions resulting in net sales increases of $23.1 million within our aftermarket replacement parts and repair and overhaul services product lines. The net sales increase in the ETG resulted from additional net sales of $4.1 million from a fiscal 2013 acquisition as well as organic growth of approximately 2%. Sales price changes were not a significant contributing factor to the FSG and ETG net sales growth in the second quarter of fiscal 2014.

Gross Profit and Operating Expenses

Our consolidated gross profit margin decreased to 35.4% in the second quarter of fiscal 2014 as compared to 37.6% in the second quarter of fiscal 2013, reflecting a decrease of 4.0% and 1.0% in the ETG's and FSG's gross profit margin, respectively. The decrease in the ETG's



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Index

gross profit margin is principally attributed to a less favorable product mix for certain of our space and defense products inclusive of the impact of the fiscal 2013 acquisition. The decrease in the FSG's gross profit margin is principally attributed to a less favorable mix for certain products within our specialty products lines. Total new product research and development expenses included within our consolidated cost of sales increased to $9.3 million in the second quarter of fiscal 2014 compared to $7.7 million in the second quarter of fiscal 2013.

SG&A expenses were $50.8 million and $44.8 million in the second quarter of fiscal 2014 and fiscal 2013, respectively. The increase in SG&A expenses reflects an increase of $4.8 million attributable to the fiscal 2013 acquired businesses, which was partially offset by a $2.3 million reduction in the fair value of the contingent consideration related to one of the acquisitions principally due to less favorable projected market conditions during the future earnout period. The remainder of the increase in SG&A expenses pertains to our existing businesses to support the consolidated organic sales growth.

SG&A expenses as a percentage of net sales decreased from 18.8% in the second quarter of fiscal 2013 to 18.0% in the second quarter of fiscal 2014 principally reflecting the impact of the fair value adjustment to the contingent consideration earnout liability.

Operating Income

Operating income in the second quarter of fiscal 2014 increased by 10% to $49.2 million as compared to operating income of $44.7 million in the second quarter of fiscal 2013. The increase in operating income reflects a $6.6 million increase (a 22% increase) to a record $36.9 million in operating income of the FSG in the second quarter of fiscal 2014, up from $30.3 million in the second quarter of fiscal 2013, partially offset by a $2.1 million decrease (a 10% decrease) in operating income of the ETG to $18.1 million in the second quarter of fiscal 2014 as compared to $20.2 million in the second quarter of fiscal 2013. The increase in operating income of the FSG principally reflects the previously mentioned net sales growth. The decrease in operating income of the ETG is mainly attributed to the previously mentioned less favorable product mix, partially offset by the aforementioned reduction in contingent consideration.

    As a percentage of net sales, our consolidated operating income decreased to 17.4% in the second quarter of fiscal 2014, down from 18.8% in the second quarter of fiscal 2013. The decrease in consolidated operating income as a percentage of net sales reflects a decrease in the ETG’s operating income as a percentage of net sales from 24.1% in the second quarter of fiscal 2013 to 20.2% in the second quarter of fiscal 2014 and a decrease in the FSG's operating income as a percentage of net sales from 19.5% in the second quarter of fiscal 2013 to 18.9% in the second quarter of fiscal 2014. The decrease in operating income as a percentage of net sales for the ETG is principally attributed to a less favorable product mix. The decrease in operating income as a percentage of net sales for the FSG principally reflects the impact of additional amortization expense from a fiscal 2013 acquisition.




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Index

Interest Expense

Interest expense increased to $1.4 million in the second quarter of fiscal 2014 from $.8 million in the second quarter of fiscal 2013. The increase was principally due to a higher weighted average balance outstanding under our revolving credit facility in the second quarter of fiscal 2014 associated with fiscal 2013 acquisitions and the acquisition of certain noncontrolling interests in the second quarter of fiscal 2014.

Other Income

Other income in the second quarter of fiscal 2014 and 2013 was not material.

Income Tax Expense

Our effective tax rate in the second quarter of fiscal 2014 decreased to 31.8% from 34.1% in the second quarter of fiscal 2013. The decrease is principally attributed to the impact of a reduction in accrued contingent consideration associated with a fiscal 2013 acquisition acquired by means of a nontaxable stock transaction.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held by Lufthansa Technik AG in HEICO Aerospace and the noncontrolling interests held by others in certain subsidiaries of the FSG and ETG. Net income attributable to noncontrolling interests was $4.4 million in the second quarter of fiscal 2014 compared to $5.3 million in the second quarter of fiscal 2013. The decrease principally reflects the purchase of certain noncontrolling interests during the second quarter of fiscal 2014 resulting in lower allocations of net income to noncontrolling interests.

Net Income Attributable to HEICO

Net income attributable to HEICO increased to $28.4 million, or $.42 per diluted share, in the second quarter of fiscal 2014 from $23.7 million, or $.35 per diluted share, in the second quarter of fiscal 2013, principally reflecting the previously mentioned increased operating income and the lower effective tax rate.

Outlook

As we look ahead to the remainder of fiscal 2014, we continue to anticipate organic growth within our product lines that serve the commercial aviation markets. We expect organic growth within the ETG consistent with the prior year, reflecting higher demand for the majority of our products, moderated by lower demand for certain of our defense-related products. During the remainder of fiscal 2014, we plan to remain focused on new product development, further market penetration, executing our acquisition strategies and maintaining our financial strength. Based on our current economic visibility, we continue to estimate consolidated fiscal 2014 year-



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Index

over-year growth in net sales of 12% - 14% but are increasing our consolidated fiscal 2014 year-over-year growth in net income to 12% - 14%, up from our prior growth estimate of 10% - 12%.

Liquidity and Capital Resources

Our principal uses of cash include acquisitions, distributions to noncontrolling interests, cash dividends, capital expenditures and working capital needs. Capital expenditures in fiscal 2014 are anticipated to approximate $25 million. We finance our activities primarily from our operating and financing activities, including borrowings under our revolving credit facility.

In November 2013, we entered into an amendment to extend the maturity date of our revolving credit facility by one year to December 2018 and to increase the aggregate principal amount to $800 million. Furthermore, the amendment includes a feature that will allow us to increase the aggregate principal amount by an additional $200 million to become a $1.0 billion facility through increased commitments from existing lenders or the addition of new lenders. In February 2014, we paid a cash dividend of $67.4 million to Lufthansa Technik AG ("LHT") as part of a transaction in which we acquired certain noncontrolling interests held by LHT in four of our existing subsidiaries. Additionally, in January 2014, we paid a special and extraordinary cash dividend of $.35 per share on both classes of our common stock as well as our regular semi-annual $.06 per share cash dividend, which aggregated $27.2 million. The dividends were principally funded from borrowings under our revolving credit facility.

The revolving credit facility contains both financial and non-financial covenants. As of April 30, 2014, we were in compliance with all such covenants. As of April 30, 2014, our net debt to shareholders’ equity ratio was 57.9%, with net debt (total debt less cash and cash equivalents) of $415.2 million.

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 at least the next twelve months.

Operating Activities

Net cash provided by operating activities was $55.0 million in the first six months of fiscal 2014 and consisted primarily of net income from consolidated operations of $65.3 million, depreciation and amortization of $24.1 million (a non-cash item) and share-based compensation expense of $4.2 million (a non-cash item), partially offset by a net increase in operating assets and liabilities of $29.3 million and a decrease in the value of contingent consideration of $9.3 million (a non-cash item). Net cash provided by operating activities increased by $10.5 million in the first six months of fiscal 2014 from $44.5 million in the first six months of fiscal 2013. The increase in net cash provided by operating activities in fiscal 2014 is principally due to an $11.3 million and $7.7 million increase in net income from consolidated operations and depreciation and amortization, respectively, partially offset by an $8.1 million increase in non-cash fair value adjustments associated with contingent consideration recognized on prior period acquisitions.



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Index

Investing Activities

Net cash used in investing activities of $8.1 million in the first six months of fiscal 2014 principally reflects capital expenditures.

Financing Activities

Net cash used in financing activities in the first six months of fiscal 2014 totaled $41.1 million and related primarily to distributions to noncontrolling interests of $71.1 million and cash dividends paid on our common stock of $27.2 million, partially offset by net borrowings on our revolving credit facility of $60.0 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, 2013.

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 is supported by our revolving credit facility.

New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires disclosure about changes in and amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. We adopted ASU 2013-02 in the first quarter of fiscal 2014, resulting in only expanded disclosure regarding the changes in accumulated other comprehensive income and no impact on our consolidated results of operations, financial position or cash flows.

In March 2013, the FASB issued ASU 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” which clarifies the applicable guidance



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Index

for the release of any cumulative translation adjustments into net earnings. ASU 2013-05 specifies that the entire amount of cumulative translation adjustments should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the investment in the foreign entity. ASU 2013-05 is effective prospectively for fiscal years and interim reporting periods within those years beginning after December 15, 2013, or in fiscal 2015 for HEICO. Early adoption is permitted. We are currently evaluating the effect, if any, the adoption of this guidance will have on our consolidated results of operations, financial position or 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 “anticipate,” “believe,” “expect,” “estimate” and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statement 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 risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include: lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product development or 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; product development difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest and income tax rates and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense budget cuts, which could reduce our defense-related revenue. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.



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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2013.


Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our 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, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’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 have been no changes in our internal control over financial reporting during the second quarter ended April 30, 2014 that have materially affected, or are reasonably likely to materially affect, HEICO's internal control over financial reporting.



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PART II. OTHER INFORMATION
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. **
 
 
 
101.INS
 
XBRL Instance Document. *
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document. *
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document. *
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. *
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document. *
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document. *
 
 
*
Filed herewith.
**     Furnished herewith.




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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HEICO CORPORATION
 
 
 
 
Date:
May 22, 2014
By:
/s/ CARLOS L. MACAU, JR.
 
 
 
Carlos L. Macau, Jr.
Executive Vice President - Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 
By:
/s/ STEVEN M. WALKER
 
 
 
Steven M. Walker
Chief Accounting Officer
and Assistant Treasurer
(Principal Accounting Officer)



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Index

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.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.