UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For
the fiscal year ended October 31, 2010 or
|
|
|
¨
|
TRANSITION
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)
|
Registrant’s
telephone number, including area code: (954) 987-4000
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which
registered
|
|
|
Common
Stock, $.01 par value per share
|
New
York Stock Exchange
|
|
|
Class
A Common Stock, $.01 par value per share
|
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
Rights
to Purchase Series B Junior Participating Preferred Stock
Rights
to Purchase Series C Junior Participating Preferred Stock
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x
No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No
x
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 o
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
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 o Non−accelerated
filer o
Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant was $1,140,620,000 based on the closing price of
HEICO Common Stock and Class A Common Stock as of April 30, 2010 as reported by
the New York Stock Exchange.
The
number of shares outstanding of each of the registrant's classes of common stock
as of December 17, 2010:
|
Common
Stock, $.01 par value
|
13,249,534
shares
|
|
Class
A Common Stock, $.01 par value
|
19,916,953
shares
|
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
proxy statement for the 2011 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Annual Report on Form 10-K.
HEICO
CORPORATION
INDEX
TO ANNUAL REPORT ON FORM 10-K
|
Page
|
||
|
PART
I
|
||
|
PART
II
|
||
|
PART
III
|
||
|
PART
IV
|
||
PART
I
Item 1. BUSINESS
The
Company
HEICO Corporation through its
subsidiaries (collectively, “HEICO,” “we,” “us,” “our” or the “Company”)
believes it is the world’s largest manufacturer of Federal Aviation
Administration (“FAA”)-approved jet engine and aircraft component replacement
parts, other than the original equipment manufacturers (“OEMs”) and their
subcontractors. HEICO also believes it is a leading manufacturer of
various types of electronic equipment for the aviation, defense, space, medical,
telecommunication and electronic industries.
The Company was originally organized in
1957 as a holding company known as HEICO Corporation. As part of a
reorganization completed in 1993, the original holding company (formerly known
as HEICO Corporation) was renamed as HEICO Aerospace Corporation and a new
holding corporation known as HEICO Corporation was created. The
reorganization did not result in any change in the business of the Company, its
consolidated assets or liabilities or the relative interests of its
shareholders.
Our business is comprised of two
operating segments:
The Flight Support
Group. Our Flight Support Group (“FSG”), consisting of HEICO
Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, accounted for
67%, 73% and 75% of our net sales in fiscal 2010, 2009 and 2008,
respectively. The Flight Support Group uses proprietary technology to
design and manufacture jet engine and aircraft component replacement parts for
sale at lower prices than those manufactured by OEMs. These parts are
approved by the FAA and are the functional equivalent of parts sold by
OEMs. In addition, the Flight Support Group repairs, overhauls and
distributes jet engine and aircraft components, avionics and instruments for
domestic and foreign commercial air carriers and aircraft repair companies as
well as military and business aircraft operators; and manufactures thermal
insulation products and other component parts primarily for aerospace, defense
and commercial applications.
The Electronic Technologies
Group. Our Electronic Technologies Group (“ETG”), consisting
of HEICO Electronic Technologies Corp. and its subsidiaries, accounted for 33%,
27% and 25% of our net sales in fiscal 2010, 2009 and 2008,
respectively. Through our Electronic Technologies Group, which
derived approximately 57% of its sales in fiscal 2010 from the sale of products
and services to U.S. and foreign military agencies, prime defense contractors
and both commercial and defense satellite and spacecraft manufacturers, we
design, manufacture and sell various types of electronic, microwave and
electro-optical products, including infrared simulation and test equipment,
laser rangefinder receivers, electrical power supplies, back-up power supplies,
power conversion products, underwater locator beacons, electromagnetic
interference and radio frequency interference shielding, high power capacitor
charging power supplies, amplifiers, traveling wave tube amplifiers,
photodetectors, amplifier modules, microwave power modules, flash lamp drivers,
laser diode drivers, arc lamp power supplies, custom power supply designs, cable
assemblies, high voltage power supplies, high voltage interconnection devices
and wire, high voltage energy generators, high frequency power delivery systems
and high-speed interface products that link devices such as telemetry receivers,
digital cameras, high resolution scanners, simulation systems and test systems
to almost any computer.
1
HEICO has continuously operated in the
aerospace industry for more than 50 years. Since assuming control in
1990, our current management has achieved significant sales and profit growth
through a broadened line of product offerings, an expanded customer base,
increased research and development expenditures and the completion of a number
of acquisitions. As a result of internal growth and acquisitions, our
net sales from continuing operations have grown from $26.2 million in fiscal
1990 to $617.0 million in fiscal 2010, a compound annual growth rate of
approximately 17%. During the same period, we improved our net income
from $2.0 million to $54.9 million, representing a compound annual growth rate
of approximately 18%.
Flight
Support Group
The Flight Support Group, headquartered
in Hollywood, Florida, serves a broad spectrum of the aviation industry,
including (i) commercial airlines and air cargo carriers; (ii) repair and
overhaul facilities; (iii) OEMs; and (iv) U.S. and foreign
governments.
The Flight Support Group competes with
the leading industry OEMs and, to a lesser extent, with a number of smaller,
independent parts distributors. Historically, the three principal jet
engine OEMs, General Electric (including CFM International), Pratt & Whitney
and Rolls Royce, have been the sole source of substantially all jet engine
replacement parts for their jet engines. Other OEMs have been the
sole source of replacement parts for their aircraft component
parts. While we believe that we currently supply less than 2% of the
market for jet engine and aircraft component replacement parts, we have in
recent years been adding new products to our line at a rate of over 400 Parts
Manufacturer Approvals (“PMA” or “PMAs”) per year. We currently offer
to our customers over 5,000 parts for which PMAs have been received from the
FAA.
Jet engine and aircraft component
replacement parts can be categorized by their ongoing ability to be repaired and
returned to service. The general categories in which we participate
are as follows: (i) rotable; (ii) repairable; and (iii) expendable. A
rotable is a part which is removed periodically as dictated by an operator’s
maintenance procedures or on an as needed basis and is typically repaired or
overhauled and re-used an indefinite number of times. An important
subset of rotables is “life limited” parts. A life limited rotable
has a designated number of allowable flight hours and/or cycles (one take-off
and landing generally constitutes one cycle) after which it is rendered
unusable. A repairable is similar to a rotable except that it can
only be repaired a limited number of times before it must be discarded. An
expendable is generally a part which is used and not thereafter repaired for
further use.
Jet engine and aircraft component
replacement parts are classified within the industry as (i) factory-new; (ii)
new surplus; (iii) overhauled; (iv) repairable; and (v) as removed. A
factory-new or new surplus part is one that has never been installed or
used. Factory-new parts are purchased from FAA-approved manufacturers
(such as HEICO or OEMs) or their authorized distributors. New surplus
parts are purchased from excess stock of airlines, repair facilities or other
redistributors. An overhauled part is one that has been completely
repaired and inspected by a licensed repair facility such as ours. An
aircraft spare part is classified as “repairable” if it can be repaired by a
licensed repair facility under applicable regulations. A part may
also be classified as “repairable” if it can be removed by the operator from an
aircraft or jet engine while operating under an approved maintenance program and
is airworthy and meets any manufacturer or time and cycle restrictions
applicable to the part. A “factory-new,” “new surplus” or
“overhauled” part designation indicates that the part can be immediately
utilized on an aircraft. A part in “as removed” or “repairable”
condition requires inspection and possibly functional testing, repair or
overhaul by a licensed facility prior to being returned to service in an
aircraft.
2
Factory-New Jet Engine and Aircraft
Component Replacement Parts. The Flight Support Group engages
in the research and development, design, manufacture and sale of FAA-approved
replacement parts that are sold to domestic and foreign commercial air carriers
and aircraft repair and overhaul companies. Our principal competitors
are Pratt & Whitney, a division of United Technologies Corporation, and
General Electric Company, including its CFM International joint venture. The
Flight Support Group’s factory-new replacement parts include various jet engine
and aircraft component replacement parts. A key element of our growth
strategy is the continued design and development of an increasing number of PMA
replacement parts in order to further penetrate our existing customer base and
obtain new customers. We select the jet engine and aircraft component
replacement parts to design and manufacture through a selection process which
analyzes industry information to determine which replacement parts are suitable
candidates.
Repair and Overhaul
Services. The Flight Support Group provides repair and
overhaul services on selected jet engine and aircraft component parts, as well
as on avionics, instruments, composites and flight surfaces of commercial
aircraft operated by domestic and foreign commercial airlines. The
Flight Support Group also provides repair and overhaul services including
avionics and navigation systems as well as subcomponents and other instruments
utilized on military aircraft operated by the United States government and
foreign military agencies and for aircraft repair and overhaul
companies. Our repair and overhaul operations require a high level of
expertise, advanced technology and sophisticated equipment. Services
include the repair, refurbishment and overhaul of numerous accessories and parts
mounted on gas turbine engines and airframes. Components overhauled
include fuel pumps, generators, fuel controls, pneumatic valves, starters and
actuators, turbo compressors and constant speed drives, hydraulic pumps, valves
and actuators, composite flight controls, electro-mechanical equipment and
auxiliary power unit accessories. Some of the repair and overhaul
services provided by the Flight Support Group are proprietary repairs approved
by an FAA-qualified designated engineering representative
(“DER”). Such FAA-approved repairs (DER-approved repairs) typically
create cost savings or provide engineering flexibility. The Flight
Support Group also provides commercial airlines, regional operators, asset
management companies and Maintenance, Repair and Overhaul (“MRO”) providers with
high quality and cost effective niche accessory component exchange services as
an alternative to OEMs’ spares services.
Distribution. The
Flight Support Group distributes FAA-approved parts including hydraulic,
pneumatic, mechanical and electro-mechanical components for the commercial,
regional and general aviation markets.
Manufacture of Specialty
Aircraft/Defense Related Parts and Subcontracting for
OEMs. The Flight Support Group manufactures thermal insulation
blankets primarily for aerospace, defense and commercial
applications. The Flight Support Group also manufactures specialty
components for sale as a subcontractor for aerospace and industrial original
equipment manufacturers and the United States government.
FAA Approvals and Product
Design. Non-OEM manufacturers of jet engine and aircraft
component replacement parts must receive a PMA from the FAA to sell the
replacement part. The PMA approval process includes the submission of
sample parts, drawings and testing data to one of the FAA’s Aircraft
Certification Offices where the submitted data are analyzed. We
believe that an applicant’s ability to successfully complete the PMA process is
limited by several factors, including (i) the agency’s confidence level in the
applicant; (ii) the complexity of the part; (iii) the volume of PMAs being
filed; and (iv) the resources available to the FAA. We also believe
that companies such as HEICO that have demonstrated their manufacturing
capabilities and established favorable track records with the FAA generally
receive a faster turnaround time in the processing of PMA
applications. Finally, we believe that the PMA process creates a
significant barrier to entry in this market niche through both its technical
demands and its limits on the rate at which competitors can bring products to
market.
3
As part of our growth strategy, we have
continued to increase our research and development
activities. Research and development expenditures by the Flight
Support Group, which were approximately $300,000 in fiscal 1991, increased to
approximately $11.8 million in fiscal 2010, $11.5 million in fiscal 2009 and
$11.1 million in fiscal 2008. We believe that our Flight Support
Group’s research and development capabilities are a significant component of our
historical success and an integral part of our growth strategy. In
recent years, the FAA granted us PMAs for over 400 new parts and approximately
200 DER-approved repairs per year; however, no assurance can be given that the FAA
will continue to grant PMAs or DER-approved repairs or that we will achieve
acceptable levels of net sales and gross profits on such parts in the
future.
We benefit from our proprietary rights
relating to certain design, engineering and manufacturing processes and repair
and overhaul procedures. Customers often rely on us to provide initial and additional components, as
well as to redesign, re-engineer, replace or repair and provide overhaul
services on such aircraft components at every stage of their useful
lives. In addition, for some products, our unique manufacturing
capabilities are required by the customer’s specifications or designs, thereby
necessitating reliance on us for production of such designed
products.
We have no material patents for the
proprietary techniques, including software and manufacturing expertise, we have
developed to manufacture jet engine and aircraft component replacement parts and
instead, we primarily rely on trade secret protection. Although our
proprietary techniques and software and manufacturing expertise are subject to
misappropriation or obsolescence, we believe that we take appropriate measures
to prevent misappropriation or obsolescence from occurring by developing new
techniques and improving existing methods and processes, which we will continue
on an ongoing basis as dictated by the technological needs of our
business.
We believe that, based on our
competitive pricing, reputation for high quality, short lead time requirements,
strong relationships with domestic and foreign commercial air carriers and
repair stations (companies that overhaul aircraft engines and/or components),
and successful track record of receiving PMAs and DER-approved repairs from the
FAA, we are uniquely positioned to continue to increase the products and
services offered and gain market share.
Electronic
Technologies Group
Our Electronic Technologies Group’s
strategy is to design and produce mission-critical subcomponents for smaller,
niche markets, but which are utilized in larger systems – systems like
targeting, tracking, identification, simulation, testing, communications,
lighting, surgical, medical imaging, baggage scanning, telecom and computer
systems. These systems are, in turn, often located on another
platform, such as aircraft, satellites, ships, spacecrafts, land vehicles,
handheld devices and other platforms.
Electro-Optical Infrared Simulation
and Test Equipment. The Electronic Technologies Group believes
it is a leading international designer and manufacturer of niche
state-of-the-art simulation, testing and calibration equipment used in the
development of missile seeking technology, airborne targeting and reconnaissance
systems, shipboard targeting and reconnaissance systems,
space-based sensors as well as ground vehicle-based systems. These
products include infrared scene projector equipment, such as our MIRAGE IR Scene
Simulator, high precision blackbody sources, software and integrated calibration
systems.
Simulation equipment allows the U.S.
government and allied foreign military to save money on missile testing as it
allows infrared-based missiles to be tested on a multi-axis, rotating table
instead of requiring the launch of a complete missile. In addition,
several large military prime contractors have elected to purchase such equipment
from us instead of maintaining internal staff to do so because we can offer a
more cost-effective solution. Our customers include major U.S.
Department of Defense weapons laboratories and defense prime
contractors.
4
Electro-Optical Laser
Products. The Electronic Technologies Group believes it is a
leading designer and maker of Laser Rangefinder Receivers and other
photodetectors used in airborne, vehicular and handheld targeting systems
manufactured by major prime military contractors. Most of our
Rangefinder Receiver product offering consists of complex and patented products
which detect reflected light from laser targeting systems and allow the systems
to confirm target accuracy and calculate target distances prior to discharging a
weapon system. Some of these products are also used in laser eye
surgery systems for tracking ocular movement.
Electro-Optical, Microwave and Other
Power Equipment. The Electronic Technologies Group produces
power supplies, amplifiers and flash lamp drivers used in laser systems for
military, medical and other applications that are sometimes utilized with our
rangefinder receivers. We also produce emergency back-up power
supplies and batteries used on commercial aircraft and business jets for
services such as emergency exit lighting, emergency fuel shut-off, power door
assists, cockpit voice recorders and flight computers. We offer
custom or standard designs that solve challenging OEM requirements and meet
stringent safety and emissions requirements. Our power electronics
products include capacitor charger power supplies, laser diode drivers, arc lamp
power supplies and custom power supply designs.
Our microwave products are used in both
commercial and military satellites, spacecrafts and in electronic warfare
systems. These products, which include isolators, bias tees,
circulators, latching ferrite switches and waveguide adapters, are used in
satellites and spacecrafts to control or direct energy according to operator
needs. As satellites are frequently used as sensors for stand-off
warfare, we believe this product line further supports our goal of increasing
our activity in the stand-off market. We believe we are a leading
supplier of the niche products which we design and manufacture for this market,
a market that includes commercial satellites. Our customers for these
products include satellite and spacecraft manufacturers.
Electromagnetic and Radio
Interference Shielding. The Electronic Technologies Group
designs and manufactures shielding used to prevent electromagnetic energy and
radio frequencies from interfering with other devices, such as computers,
telecommunication devices, avionics, weapons systems and other electronic
equipment. Our products include a patented line of shielding applied
directly to circuit boards and a line of gasket-type shielding applied to
computers and other electronic equipment. Our customers consist
essentially of medical, electronic, telecommunication and defense equipment
producers.
High-Speed Interface
Products. The Electronic Technologies Group designs and
manufactures advanced high-technology, high-speed interface products utilized in
homeland security, defense, medical research, astronomical and other
applications across numerous industries.
High Voltage Interconnection
Devices. The Electronic Technologies Group designs and
manufactures high and very high voltage interconnection devices, cable
assemblies and wire for the medical equipment, defense and other industrial
markets. Among others, our products are utilized in aircraft missile
defense, fighter pilot helmet displays, avionic systems, medical applications,
wireless communications, and industrial applications including high voltage test
equipment and underwater monitoring systems.
5
High Voltage Advanced Power
Electronics. The Electronic Technologies Group designs and
manufactures a patented line of high voltage energy generators for medical,
baggage inspection and industrial imaging systems, and offers a patented line of
high frequency power delivery systems for the commercial sign
industry. We also produce high voltage power supplies found in
satellite communications, CT scanners and in medical and industrial x-ray
systems.
Power Conversion Products.
The Electronic Technologies Group designs and provides innovative power
conversion products principally serving the high-reliability military, space and
commercial avionics end-markets. These high density, low profile and lightweight
DC-to-DC converters and electromagnetic interference filters, which include
thick film hermetically sealed hybrids, military commercial-off-the-shelf and
custom designed and assembled products, have become the primary specified
components of their kind on a generation of complex military, space and avionics
equipment.
Underwater Locator
Beacons. The Electronic Technologies Group designs and
manufactures Underwater Locator Beacons (“ULBs”) used to locate aircraft Cockpit
Voice Recorders and Flight Data Recorders, marine ship Voyage Recorders and
various other devices which have been submerged under water. ULBs are required
equipment on all U.S. FAA and European Aviation Safety Agency (“EASA”) approved
Flight Data and Cockpit Voice Recorders used in aircraft and on similar systems
utilized on large marine shipping vessels.
Traveling Wave Tube Amplifiers
(“TWTAs”) and Microwave Power Modules (“MPMs”). The Electronic
Technologies Group designs and manufactures TWTAs and MPMs predominately used in
radar, electronic warfare, on-board jamming and countermeasure systems in
aircraft, ships and detection platforms deployed by U.S. and allied non-U.S.
military forces.
As part of our growth strategy, we have
continued to increase our research and development
activities. Research and development expenditures by the Electronic
Technologies Group were $10.9 million in fiscal 2010, $8.2 million in fiscal
2009 and $7.3 million in fiscal 2008. We believe that our Electronic
Technologies Group’s research and development capabilities are a significant
component of our historical success and an integral part of our growth
strategy.
Financial
Information About Operating Segments and Geographic Areas
See Note 15, Operating Segments, of the
Notes to Consolidated Financial Statements for financial information by
operating segment and by geographic areas.
Distribution,
Sales, Marketing and Customers
Each of our operating segments
independently conducts distribution, sales and marketing efforts directed at
their respective customers and industries and, in some cases, collaborates with
other operating divisions and subsidiaries within its group for cross-marketing
efforts. Sales and marketing efforts are conducted primarily by
in-house personnel and, to a lesser extent, by independent manufacturers’
representatives. Generally, the in-house sales personnel receive a
base salary plus commission and manufacturers’ representatives receive a
commission on sales.
We believe that direct relationships
are crucial to establishing and maintaining a strong customer base and,
accordingly, our senior management is actively involved in our marketing
activities, particularly with established customers. We are also a
member of various trade and business organizations related to the commercial
aviation industry, such as the Aerospace Industries Association, which we refer
to as AIA, the leading trade association representing the nation’s manufacturers
of commercial, military and business aircraft, aircraft engines and related
components and equipment. Due in large part to our established
industry presence, we enjoy strong customer relations, name recognition and
repeat business.
6
We sell our products to a broad
customer base consisting of domestic and foreign commercial and cargo airlines,
repair and overhaul facilities, other aftermarket suppliers of aircraft engine
and airframe materials, OEMs, domestic and foreign military units, electronic
manufacturing services companies, manufacturers for the defense industry as well
as medical, telecommunication, scientific, and industrial
companies. No one customer accounted for sales of 10% or more of
total consolidated sales from continuing operations during any of the last three
fiscal years. Net sales to our five largest customers accounted for
approximately 18% of total net sales during the year ended October 31,
2010.
Competition
The aerospace product and service
industry is characterized by intense competition. Some of our
competitors have substantially greater name recognition, inventories,
complementary product and service offerings, financial, marketing and other
resources than we do. As a result, such competitors may be able to
respond more quickly to customer requirements than we can. Moreover,
smaller competitors may be in a position to offer more attractive pricing as a
result of lower labor costs and other factors.
Our jet engine and aircraft component
replacement parts business competes primarily with Pratt & Whitney, General
Electric, and other OEMs. The competition is principally based on
price and service to the extent that our parts are
interchangeable. With respect to other aerospace products and
services sold by the Flight Support Group, we compete with both the leading jet
engine OEMs and a large number of machining, fabrication and repair companies,
some of which have greater financial and other resources than we
do. Competition is based mainly on price, product performance,
service and technical capability.
Competition for the repair and overhaul
of jet engine and aircraft components comes from three principal sources: OEMs,
major commercial airlines and other independent service
companies. Some of these competitors have greater financial and other
resources than we do. Some major commercial airlines own and operate
their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul
services typically provide these services for their own aircraft components and
for third parties. OEMs also maintain service centers that provide
repair and overhaul services for the components they
manufacture. Other independent service organizations also compete for
the repair and overhaul business of other users of aircraft
components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
Our Electronic Technologies Group
competes with several large and small domestic and foreign competitors, some of
which have greater financial and other resources than we do. The
markets for our electronic products are niche markets with several competitors
with competition based mainly on design, technology, quality, price, service and
customer satisfaction.
Raw
Materials
We purchase a variety of raw materials,
primarily consisting of high temperature alloy sheet metal and castings,
forgings, pre-plated metals and electrical components from various
vendors. The materials used by our operations are generally available
from a number of sources and in sufficient quantities to meet current
requirements subject to normal lead times.
7
Backlog
Our total backlog of unshipped orders
was $142.5 million as of October 31, 2010 compared to $104.5 million as of
October 31, 2009. The Flight Support Group’s backlog of unshipped
orders was $48.3 million as of October 31, 2010 as compared to $32.9 million as
of October 31, 2009. This backlog excludes forecasted shipments for
certain contracts of the Flight Support Group pursuant to which customers
provide only estimated annual usage and not firm purchase orders. Our
backlogs within the Flight Support Group are typically short-lead in nature with
many product orders being received within the month of shipment. The
Electronic Technologies Group’s backlog of unshipped orders was $94.2 million as
of October 31, 2010 as compared to $71.6 million as of October 31,
2009. The increase in the Electronic Technologies Group’s backlog is
principally related to backlog of the business acquired during fiscal
2010. Substantially the entire backlog of orders as of October 31,
2010 is expected to be delivered during fiscal 2011.
Government
Regulation
The FAA regulates the manufacture,
repair and operation of all aircraft and aircraft parts operated in the United
States. Its regulations are designed to ensure that all aircraft and
aviation equipment are continuously maintained in proper condition to ensure
safe operation of the aircraft. Similar rules apply in other
countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough
inspection and
maintenance. The inspection, maintenance and repair procedures for
the various types of aircraft and equipment are prescribed by regulatory authorities and can be performed only by
certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to
installation of a part on an aircraft. Aircraft operators must
maintain logs concerning the utilization and condition of aircraft engines,
life-limited engine parts and airframes. In addition, the FAA
requires that various maintenance routines be performed on aircraft engines,
some engine parts, and airframes at regular intervals based on cycles or flight
time. Engine maintenance must also be performed upon the occurrence
of certain events, such as foreign object damage in an aircraft engine or the
replacement of life-limited engine parts. Such maintenance usually
requires that an aircraft engine be taken out of service. Our
operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us. Our businesses which sell defense products directly to the United
States Government or for use in systems delivered to the United States
Government can be subject to various laws and regulations governing pricing and
other factors.
There has been no material adverse
effect to our consolidated financial statements as a result of these government
regulations.
Environmental
Regulation
Our operations are subject to
extensive, and frequently changing, federal, state and local environmental laws
and substantial related regulation by government agencies, including the
Environmental Protection Agency. Among other matters, these
regulatory authorities impose requirements that regulate the operation,
handling, transportation and disposal of hazardous materials; protect the health
and safety of workers; and require us to obtain and maintain licenses and
permits in connection with our operations. This extensive regulatory
framework imposes significant compliance burdens and risks on
us. Notwithstanding these burdens, we believe that we are in material
compliance with all federal, state and local laws and regulations governing our
operations.
There has
been no material adverse effect to our consolidated financial statements as a
result of these environmental regulations.
8
Other Regulation
We are also subject to a variety of
other regulations including work-related and community safety
laws. The Occupational Safety and Health Act of 1970 mandates general
requirements for safe workplaces for all employees and established the
Occupational Safety and Health Administration (“OSHA”) in the Department of
Labor. In particular, OSHA provides special procedures and measures
for the handling of some hazardous and toxic substances. In addition,
specific safety standards have been promulgated for workplaces engaged in the
treatment, disposal or storage of hazardous waste. Requirements under
state law, in some circumstances, may mandate additional measures for facilities
handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA’s health and safety
requirements.
Insurance
We are a named insured under policies
which include the following coverage: (i) product liability, including
grounding; (ii) personal property, inventory and business income at our
facilities; (iii) general liability coverage; (iv) employee benefit liability;
(v) international liability and automobile liability; (vi) umbrella liability
coverage; and (vii) various other activities or items subject to certain limits
and deductibles. We believe that our insurance coverage is adequate
to insure against the various liability risks of our business.
Employees
As of October 31, 2010, we had
approximately 2,300 full-time and part-time employees including approximately
1,400 in the Flight Support Group and approximately 900 in the Electronic
Technologies Group. None of our employees are represented by a
union. Our management believes that we have good relations with our
employees.
Available
Information
Our Internet web site address is
http://www.heico.com. We make available free of charge, through the
Investors section of our web site, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission (“SEC”). These materials are also available free of charge
on the SEC’s website at http://www.sec.gov. The information on or
obtainable through our web site is not incorporated into this annual report on
Form 10-K.
We have adopted a code of ethics that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller and other persons performing similar
functions. Our Code of Ethics for Senior Financial Officers and Other
Officers is part of our Code of Business Conduct, which is located on our web
site at http://www.heico.com. Any amendments to or waivers from a
provision of this code of ethics will be posted on the web site. Also
located on the web site are our Corporate Governance Guidelines, Finance/Audit
Committee Charter, Nominating & Corporate Governance Committee Charter, and
Compensation Committee Charter.
Copies of the above referenced
materials will be made available, free of charge, upon written request to the
Corporate Secretary at the Company’s headquarters.
9
Our executive officers are elected by
the Board of Directors at the first meeting following the annual meeting of
shareholders and serve at the discretion of the Board. The following
table sets forth the names, ages of, and positions and offices held by our
executive officers as of December 17, 2010:
|
Name
|
Age
|
Position(s)
|
Director
Since
|
|||
|
Laurans
A. Mendelson
|
72
|
Chairman
of the Board and Chief Executive Officer
|
1989
|
|||
|
|
|
|||||
|
Eric
A. Mendelson
|
45
|
Co-President
and Director; President and Chief Executive Officer of HEICO Aerospace
Holdings Corp.
|
1992
|
|||
|
|
||||||
|
Victor
H. Mendelson
|
43
|
Co-President
and Director; President and Chief Executive Officer of HEICO Electronic
Technologies Corp.
|
1996
|
|||
|
|
||||||
|
Thomas
S. Irwin
|
64
|
Executive
Vice President and Chief Financial Officer
|
─
|
|||
|
|
||||||
|
William
S. Harlow
|
|
62
|
|
Vice
President of Corporate Development
|
|
─
|
Laurans A. Mendelson has
served as our Chairman of the Board since December 1990. He has also
served as our Chief Executive Officer since February 1990 and served as our
President from September 1991 through September 2009. Mr. Mendelson
serves on the Board of Governors of Aerospace Industries Association (“AIA”) in
Washington D.C., of which HEICO is a member. He is also former
Chairman of the Board of Trustees, former Chairman of the Executive Committee
and a current member of the Society of Mount Sinai Founders of Mount Sinai
Medical Center in Miami Beach,
Florida. In addition, Mr. Mendelson is a Trustee Emeritus of Columbia
University in The City of New York, where he previously served as Trustee and
Chairman of the Trustees’ Audit Committee. Mr. Mendelson is a
Certified Public Accountant. Laurans Mendelson is the father of Eric
Mendelson and Victor Mendelson.
Eric A. Mendelson has served
as our Co-President since October 2009 and served as our Executive Vice
President from 2001 through September 2009. He also has served as
President and Chief Executive Officer of HEICO Aerospace Holdings Corp., a
subsidiary of ours, since its formation in 1997; and President of HEICO
Aerospace Corporation since 1993. Mr. Mendelson is a co-founder, and,
since 1987, has been Managing Director of Mendelson International Corporation, a
private investment company which is a shareholder of HEICO. In
addition, Mr. Mendelson is a member of the Advisory Board of Trustees of Mt.
Sinai Medical Center in Miami Beach, Florida and a member of the Board of
Trustees of Ransom Everglades School in Coconut Grove, Florida, as well as a
member of the Board of Directors of the Columbia College Alumni
Association. Eric Mendelson is the son of Laurans Mendelson and the
brother of Victor Mendelson.
10
Victor H. Mendelson has
served as our Co-President since October 2009 and served as our Executive Vice
President from 2001 through September 2009. He also has served as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of ours, since its formation in September 1996. He served
as our General Counsel from 1993 to September 2008 and our Vice President from
1996 to 2001. In addition, Mr. Mendelson was the Chief Operating
Officer of our former MediTek Health Corporation subsidiary from 1995 until its
profitable sale in 1996. Mr. Mendelson is a co-founder, and, since
1987, has been President of Mendelson International Corporation, a private
investment company which is a shareholder of HEICO. He is a member of
the Board of Visitors of Columbia College in New York City, a Trustee of St.
Thomas University in Miami Gardens, Florida and is President of the Board of
Directors of the Florida Grand Opera. Victor Mendelson is the son of
Laurans Mendelson and the brother of Eric Mendelson.
Thomas S. Irwin has served as
our Executive Vice President and Chief Financial Officer since September 1991;
our Senior Vice President from 1986 to 1991; and our Vice President and
Treasurer from 1982 to 1986. Mr. Irwin is a Certified Public
Accountant. He is a Trustee of the Greater Hollywood Chamber of
Commerce and a member of the Board of Directors of the Broward
Alliance.
William S. Harlow has served
as our Vice President of Corporate Development since 2001 and served as Director
of Corporate Development from 1995 to 2001.
Our
success is highly dependent on the performance of the aviation industry, which
could be impacted by lower demand for commercial air travel or airline fleet
changes causing lower demand for our goods and services.
General global industry and economic
conditions that affect the aviation industry also affect our
business. We are subject to macroeconomic cycles and when recessions
occur, we may experience reduced orders, payment delays, supply chain
disruptions or other factors as a result of the economic challenges faced by our
customers, prospective customers and suppliers. Further, the aviation
industry has historically been subject to downward cycles from time to time
which reduce the overall demand for jet engine and aircraft component
replacement parts and repair and overhaul services, and such downward cycles
result in lower sales and greater credit risk. Demand for commercial
air travel can be influenced by airline industry profitability, world trade
policies, government-to-government relations, terrorism, disease outbreaks,
environmental constraints imposed upon aircraft operations, technological
changes and price and other competitive factors. These global
industry and economic conditions may have a material adverse effect on our
business, financial condition and results of operations.
We
are subject to governmental regulation and our failure to comply with these
regulations could cause the government to withdraw or revoke our authorizations
and approvals to do business and could subject us to penalties and sanctions
that could harm our business.
Governmental agencies throughout the
world, including the FAA, highly regulate the manufacture, repair and overhaul
of aircraft parts and accessories. We include, with the replacement parts
that we sell to our customers, documentation certifying that each part complies
with applicable regulatory requirements and meets applicable standards of
airworthiness established by the FAA or the equivalent regulatory agencies in
other countries. In addition, our repair and overhaul operations are
subject to certification pursuant to regulations established by the FAA.
Specific regulations vary from country to country, although compliance with FAA
requirements generally satisfies regulatory requirements in other
countries. The revocation or suspension of any of our material
authorizations or approvals would have an adverse effect on our business,
financial condition and results of operations. New and more stringent
government regulations, if adopted and enacted, could have an adverse effect on
our business, financial condition and results of operations. In addition, some
sales to foreign countries of the equipment manufactured by our Electronic
Technologies Group require approval or licensing from the U.S.
government. Denial of export licenses could reduce our sales to those
countries and could have a material adverse effect on our business.
11
The
retirement of commercial aircraft could reduce our revenues.
Our Flight Support Group designs,
engineers, manufactures and distributes jet engine and aircraft component
replacement parts and also repairs, refurbishes and overhauls jet engine and
aircraft components. If aircraft or engines for which we have
replacement parts or supply repair and overhaul services are retired and there
are fewer aircraft that require these parts or services, our revenues may
decline.
Reductions
in defense, space or homeland security spending by U.S. and/or foreign customers
could reduce our revenues.
In fiscal 2010, approximately 57% of
the sales of our Electronic Technologies Group were derived from the sale of
defense, commercial and defense satellite and spacecraft components and homeland
security products. A decline in defense, space or homeland security
budgets or additional restrictions imposed by the U.S. government on sales of
products or services to foreign military agencies could lower sales of our
products and services.
We
are subject to the risks associated with sales to foreign customers, which could
harm our business.
We market our products and services in
approximately 100 countries, with 31% of our consolidated net sales in fiscal
2010 derived from sales to foreign customers. We expect that sales to
foreign customers will continue to account for a significant portion of our
revenues in the foreseeable future. As a result, we are subject to
risks of doing business internationally, including the following:
|
|
·
|
Changes
in regulatory requirements;
|
|
|
·
|
Fluctuations
in currency exchange rates;
|
|
|
·
|
Volatility
in foreign political and economic
environments;
|
|
|
·
|
Uncertainty
of the ability of foreign customers to finance
purchases;
|
|
|
·
|
Uncertainties
and restrictions concerning the availability of funding credit or
guarantees;
|
|
|
·
|
Imposition
of taxes, export controls, tariffs, embargoes and other trade
restrictions; and
|
|
|
·
|
Compliance
with a variety of international laws, as well as U.S. laws affecting the
activities of U.S. companies abroad such as the U.S. Foreign Corrupt
Practices Act.
|
While the impact of these factors is
difficult to predict, any one or more of these factors may have a material
adverse effect on our business, financial condition and results of
operations.
12
Intense
competition from existing and new competitors may harm our
business.
We face significant competition in each
of our businesses.
Flight
Support Group
|
|
·
|
For
jet engine and aircraft component replacement parts, we compete with the
industry’s leading jet engine and aircraft component OEMs, particularly
Pratt & Whitney and General
Electric.
|
|
|
·
|
For
the overhaul and repair of jet engine and aircraft components as well as
avionics and navigation systems, we compete
with:
|
|
|
-
|
major
commercial airlines, many of which operate their own maintenance and
overhaul units;
|
|
|
-
|
OEMs,
which manufacture, repair and overhaul their own parts;
and
|
|
|
-
|
other
independent service companies.
|
Electronic
Technologies Group
|
|
·
|
For
the design and manufacture of various types of electronic and
electro-optical equipment as well as high voltage interconnection devices
and high speed interface products, we compete in a fragmented marketplace
with a number of companies, some of which are well
capitalized.
|
The aviation aftermarket supply
industry is highly fragmented, has several highly visible leading companies, and
is characterized by intense competition. Some of our OEM competitors
have greater name recognition than HEICO, as well as complementary lines of
business and financial, marketing and other resources that HEICO does not
have. In addition, OEMs, aircraft maintenance providers, leasing
companies and FAA-certificated repair facilities may attempt to bundle their
services and product offerings in the supply industry, thereby significantly
increasing industry competition. Moreover, our smaller competitors
may be able to offer more attractive pricing of parts as a result of lower labor
costs or other factors. A variety of potential actions by any of our
competitors, including a reduction of product prices or the establishment by
competitors of long-term relationships with new or existing customers, could
have a material adverse effect on our business, financial condition and results
of operations. Competition typically intensifies during cyclical
downturns in the aviation industry, when supply may exceed demand. We
may not be able to continue to compete effectively against present or future
competitors, and competitive pressures may have a material and adverse effect on
our business, financial condition and results of operations.
Our
success is dependent on the development and manufacture of new products,
equipment and services. Our inability to develop, manufacture and
introduce new products and services at profitable pricing levels could reduce
our sales or sales growth.
The aviation, defense, space, medical,
telecommunication and electronic industries are constantly undergoing
development and change and, accordingly, new products, equipment and methods of
repair and overhaul service are likely to be introduced in the
future. In addition to manufacturing electronic and electro-optical
equipment and selected aerospace and defense components for OEMs and the U.S.
government and repairing jet engine and aircraft components, we re-design
sophisticated aircraft replacement parts originally developed by OEMs so that we
can offer the replacement parts for sale at substantially lower prices than
those manufactured by the OEMs. Consequently, we devote substantial
resources to research and product development. Technological
development poses a number of challenges and risks, including the
following:
13
|
|
·
|
We
may not be able to successfully protect the proprietary interests we have
in various aircraft parts, electronic and electro-optical equipment and
our repair processes;
|
|
|
·
|
As
OEMs continue to develop and improve jet engines and aircraft components,
we may not be able to re-design and manufacture replacement parts that
perform as well as those offered by OEMs or we may not be able to
profitably sell our replacement parts at lower prices than the
OEMs;
|
|
|
·
|
We
may need to expend significant capital
to:
|
- purchase
new equipment and machines,
- train
employees in new methods of production and service, and
- fund the
research and development of new products; and
|
|
·
|
Development
by our competitors of patents or methodologies that preclude us from the
design and manufacture of aircraft replacement parts or electrical and
electro-optical equipment could adversely affect our business, financial
condition and results of
operations.
|
In addition, we may not be able to
successfully develop new products, equipment or methods of repair and overhaul
service, and the failure to do so could have a material adverse effect on our
business, financial condition and results of operations.
The
inability to obtain certain components and raw materials from suppliers could
harm our business.
Our business is affected by the
availability and price of the raw materials and component parts that we use to
manufacture our products. Our ability to manage inventory and meet
delivery requirements may be constrained by our suppliers’ ability to adjust
delivery of long-lead time products during times of volatile
demand. The supply chains for our business could also be disrupted by
external events such as natural disasters, extreme weather events, labor
disputes, governmental actions and legislative or regulatory
changes. As a result, our suppliers may fail to perform according to
specifications as and when required and we may be unable to identify alternate
supplier or to otherwise mitigate the consequences of their
non-performance. Transitions to new suppliers may result in
significant costs and delays, including those related to the required
recertification of parts obtained from new suppliers with our customers and/or
regulatory agencies. Our inability to fill our supply needs could
jeopardize our ability to fulfill obligations under customer contracts, which
could result in reduced revenues and profits, contract penalties or
terminations, and damage to customer relationships. Further,
increased costs of such raw materials or components could reduce our profits if
we were unable to pass along such price increases to our customers.
Product
specification costs and requirements could cause an increase to our costs to
complete contracts.
The costs to meet customer
specifications and requirements could result in us having to spend more to
design or manufacture products and this could reduce our profit margins on
current contracts or those we obtain in the future.
14
We
may incur product liability claims that are not fully insured.
Our jet engine and aircraft component
replacement parts and repair and overhaul services expose our business to
potential liabilities for personal injury or death as a result of the failure of
an aircraft component that we have designed, manufactured or
serviced. The commercial aviation industry occasionally has
catastrophic losses that may exceed policy limits. An uninsured or
partially insured claim, or a claim for which third-party indemnification is not
available, could have a material adverse effect on our business, financial
condition and results of operations. Additionally, insurance coverage
costs may become even more expensive in the future. Our customers
typically require us to maintain substantial insurance coverage and our
inability to obtain insurance coverage at commercially reasonable rates could
have a material adverse effect on our business.
We may incur environmental
liabilities and these liabilities may not be covered by
insurance.
Our operations and facilities are
subject to a number of federal, state and local environmental laws and
regulations, which govern, among other things, the discharge of hazardous
materials into the air and water as well as the handling, storage and disposal
of hazardous materials. Pursuant to various environmental laws, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous materials. Environmental
laws typically impose liability whether or not the owner or operator knew of, or
was responsible for, the presence of hazardous materials. Although
management believes that our operations and facilities are in material
compliance with environmental laws and regulations, future changes in them or
interpretations thereof or the nature of our operations may require us to make
significant additional capital expenditures to ensure compliance in the
future.
We do not maintain specific
environmental liability insurance and the expenses related to these
environmental liabilities, if we are required to pay them, could have a material
adverse effect on our business, financial condition and results of
operations.
We
may incur damages or disruption to our business caused by natural disasters and
other factors that may not be covered by insurance.
Several of our facilities, as a result
of their locations, could be subject to a catastrophic loss caused by
hurricanes, tornadoes, floods, fire, power loss, telecommunication and
information systems failure or similar events. Our corporate
headquarters and facilities located in Florida are particularly susceptible to
hurricanes, storms, tornadoes or other natural disasters that could disrupt our
operations, delay production and shipments, and result in large expenses to
repair or replace the facility or facilities. Should insurance or
other risk transfer mechanisms, such as our existing disaster recovery and
business continuity plans, be insufficient to recover all costs, we could
experience a material adverse effect on our business, financial condition and
results of operations.
Tax
changes could affect our effective tax rate and future
profitability.
We file income tax returns in the U.S.
federal jurisdiction, multiple state jurisdictions and certain jurisdictions
outside the U.S. In fiscal 2010, our effective tax rate was 33.7% of
our income before income taxes and noncontrolling interests. Our
future effective tax rate may be adversely affected by a number of factors,
including the following:
|
|
·
|
Changes
in available tax credits or tax
deductions;
|
|
|
·
|
Changes
in tax laws or the interpretation of such tax laws and changes in
generally accepted accounting
principles;
|
15
|
|
·
|
The
amount of income attributable to noncontrolling
interests;
|
|
|
·
|
Changes
in the mix of earnings in jurisdictions with differing statutory tax
rates;
|
|
|
·
|
Changes
in stock option compensation
expense;
|
|
|
·
|
Adjustments
to estimated taxes upon finalization of various tax returns;
and/or
|
|
|
·
|
Resolution
of issues arising from tax audits with various tax
authorities.
|
Any significant increase in our future
effective tax rates could have a material adverse effect on net income for
future periods.
We
may not have the administrative, operational or financial resources to continue
to grow the company.
We have experienced rapid growth in
recent periods and intend to continue to pursue an aggressive growth strategy,
both through acquisitions and internal expansion of products and
services. Our growth to date has placed, and could continue to place,
significant demands on our administrative, operational and financial
resources. We may not be able to grow effectively or manage our
growth successfully, and the failure to do so could have a material adverse
effect on our business, financial condition and results of
operations.
We
may not be able to effectively execute our acquisition strategy, which could
slow our growth.
A key element of our strategy is growth
through the acquisition of additional companies. Our acquisition
strategy is affected by and poses a number of challenges and risks, including
the following:
|
|
·
|
Availability
of suitable acquisition candidates;
|
|
|
·
|
Availability
of capital;
|
|
|
·
|
Diversion
of management’s attention;
|
|
|
·
|
Effective
integration of the operations and personnel of acquired
companies;
|
|
|
·
|
Potential
write downs of acquired intangible
assets;
|
|
|
·
|
Potential
loss of key employees of acquired
companies;
|
|
|
·
|
Use
of a significant portion of our available
cash;
|
|
|
·
|
Significant
dilution to our shareholders for acquisitions made utilizing our
securities; and
|
|
|
·
|
Consummation
of acquisitions on satisfactory
terms.
|
We may not be able to successfully
execute our acquisition strategy, and the failure to do so could have a material
adverse effect on our business, financial condition and results of
operations.
We
are dependent on key personnel and the loss of these key personnel could have a
material adverse effect on our success.
Our success substantially depends on
the performance, contributions and expertise of our senior management team led
by Laurans A. Mendelson, our Chairman and Chief Executive Officer, Eric A.
Mendelson, our Co-President, and Victor H. Mendelson, our
Co-President. Technical employees are also critical to our research
and product development, as well as our ability to continue to re-design
sophisticated products of OEMs in order to sell competing replacement parts at
substantially lower prices than those manufactured by the OEMs. The
loss of the services of any of our executive officers or other key employees or
our inability to continue to attract or retain the necessary personnel could
have a material adverse effect on our business, financial condition and results
of operations.
16
Our
executive officers and directors have significant influence over our management
and direction.
As of December 17, 2010, collectively
our executive officers and entities controlled by them, our 401(k) Plan and
members of the Board of Directors beneficially owned approximately 23% of our
outstanding Common Stock and approximately 6% of our outstanding Class A Common
Stock. Accordingly, they will be able to substantially influence the
election of the Board of Directors and control our business, policies and
affairs, including our position with respect to proposed business combinations
and attempted takeovers.
Item 1B. UNRESOLVED STAFF
COMMENTS
None.
Item 2. PROPERTIES
We own or lease a number of facilities,
which are utilized by our Flight Support Group (“FSG”), Electronic Technologies
Group (“ETG”) and corporate office. As of October 31, 2010, all of
the facilities listed below were in good operating condition, well maintained
and in regular use. We believe that our existing facilities are
sufficient to meet our operational needs for the foreseeable
future. Summary information on the facilities utilized within the FSG
and the ETG to support their principal operating activities is as
follows:
Flight Support
Group
|
Square
Footage
|
||||||
|
Location
|
Leased
|
Owned
|
Description
|
|||
|
United
States facilities (8 states)
|
307,000
|
177,000
|
Manufacturing,
engineering and distribution
|
|||
|
facilities,
and corporate headquarters
|
||||||
|
United
States facilities (6 states)
|
125,0000
|
127,000
|
Repair
and overhaul facilities
|
|||
|
International
facilities (3 countries)
|
10,000
|
—
|
Manufacturing,
engineering and distribution
|
|||
|
-
India, Singapore and United
|
facilities
|
|||||
|
Kingdom
|
||||||
Electronic Technologies
Group
|
Square
Footage
|
||||||
|
Location
|
Leased
|
Owned
|
Description
|
|||
|
United
States facilities (9 states)
|
227,000
|
76,000
|
Manufacturing
and engineering facilities
|
|||
|
International
facilities (2 countries)
|
52,000
|
12,000
|
Manufacturing
and engineering facilities
|
|||
|
-
Canada and United Kingdom
|
||||||
Corporate
|
Square
Footage
|
||||||
|
Location
|
Leased
|
Owned
(1)
|
Description
|
|||
|
United
States facilities (1 state)
|
—
|
4,000
|
Administrative
offices
|
|||
|
(1)
|
Represents
the square footage of our corporate offices in Miami, Florida. The square
footage of our corporate headquarters in Hollywood, Florida is included
within the square footage under the caption “United States facilities (8
states)” under Flight Support
Group.
|
17
Item 3. LEGAL
PROCEEDINGS
We are involved in various legal
actions arising in the normal course of business. Based upon the
Company’s and our 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 our results of operations, financial position or cash
flows.
Item 4. (REMOVED AND
RESERVED)
18
PART
II
|
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Our Class
A Common Stock and Common Stock are listed and traded on the New York Stock
Exchange (“NYSE”) under the symbols “HEI.A” and “HEI,”
respectively. The following tables set forth, for the periods
indicated, the high and low share prices for our Class A Common Stock and our
Common Stock as reported on the NYSE, as well as the amount of cash dividends
paid per share during such periods.
In March 2010, the Company’s Board of
Directors declared a 5-for-4 stock split on both classes of the Company’s common
stock. The stock split was effected as of April 27, 2010 in the form
of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information in this Item 5
has been adjusted retrospectively for the 5-for-4 stock split.
Class A Common
Stock
|
High
|
Low
|
Cash Dividends
Per Share
|
||||||||||
|
Fiscal
2009:
|
||||||||||||
|
First
Quarter
|
$ | 25.09 | $ | 14.62 | $ | .048 | ||||||
|
Second
Quarter
|
24.50 | 13.87 | ― | |||||||||
|
Third
Quarter
|
26.21 | 18.61 | .048 | |||||||||
|
Fourth
Quarter
|
28.00 | 20.81 | ― | |||||||||
|
Fiscal
2010:
|
||||||||||||
|
First
Quarter
|
$ | 29.57 | $ | 24.03 | $ | .048 | ||||||
|
Second
Quarter
|
35.67 | 26.16 | ― | |||||||||
|
Third
Quarter
|
34.22 | 25.78 | .060 | |||||||||
|
Fourth
Quarter
|
37.48 | 25.24 | ― | |||||||||
As of December 17, 2010, there were 515
holders of record of our Class A Common Stock.
Common
Stock
|
High
|
Low
|
Cash Dividends
Per Share
|
||||||||||
|
Fiscal
2009:
|
||||||||||||
|
First
Quarter
|
$ | 34.22 | $ | 19.44 | $ | .048 | ||||||
|
Second
Quarter
|
33.31 | 17.12 | ― | |||||||||
|
Third
Quarter
|
32.40 | 21.06 | .048 | |||||||||
|
Fourth
Quarter
|
35.22 | 28.00 | ― | |||||||||
|
Fiscal
2010:
|
||||||||||||
|
First
Quarter
|
$ | 36.98 | $ | 29.58 | $ | .048 | ||||||
|
Second
Quarter
|
45.36 | 32.88 | ― | |||||||||
|
Third
Quarter
|
44.61 | 34.67 | .060 | |||||||||
|
Fourth
Quarter
|
50.75 | 34.58 | ― | |||||||||
As of December 17, 2010, there were 538
holders of record of our Common Stock.
19
Performance
Graphs
The following graph and table compare
the total return on $100 invested in HEICO Common Stock and HEICO Class A Common
Stock with the total return of $100 invested in the New York Stock Exchange
(NYSE) Composite Index and the Dow Jones U.S. Aerospace Index for the five-year
period from October 31, 2005 through October 31, 2010. The NYSE
Composite Index measures all common stock listed on the NYSE. The Dow
Jones U.S. Aerospace Index is comprised of large companies which make aircraft,
major weapons, radar and other defense equipment and systems as well as
providers of satellites and spacecrafts used for defense
purposes. The total returns include the reinvestment of cash
dividends.
|
Cumulative
Total Return as of October 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
|
HEICO
Common Stock
|
$ | 100.00 | $ | 164.13 | $ | 246.78 | $ | 174.82 | $ | 173.35 | $ | 284.50 | ||||||||||||
|
HEICO
Class A Common Stock
|
100.00 | 177.68 | 257.32 | 167.22 | 184.59 | 278.79 | ||||||||||||||||||
|
NYSE
Composite Index
|
100.00 | 118.05 | 138.73 | 81.54 | 90.67 | 101.08 | ||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
100.00 | 130.74 | 172.63 | 103.95 | 116.94 | 159.85 | ||||||||||||||||||
The following graph and table compare
the total return on $100 invested in HEICO Common Stock since October 31, 1990
using the same indices shown on the five-year performance graph
above. October 31, 1990 was the end of the first fiscal year
following the date the current executive management team assumed leadership of
the Company. No Class A Common Stock was outstanding as of October
31, 1990. As with the five-year performance graph, the total returns
include the reinvestment of cash dividends.
20
|
Cumulative
Total Return as of October 31,
|
||||||||||||||||||||||||||||
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
||||||||||||||||||||||
|
HEICO
Common Stock
|
$ | 100.00 | $ | 141.49 | $ | 158.35 | $ | 173.88 | $ | 123.41 | $ | 263.25 | $ | 430.02 | ||||||||||||||
|
NYSE
Composite Index
|
100.00 | 130.31 | 138.76 | 156.09 | 155.68 | 186.32 | 225.37 | |||||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
100.00 | 130.67 | 122.00 | 158.36 | 176.11 | 252.00 | 341.65 | |||||||||||||||||||||
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
||||||||||||||||||||||
|
HEICO
Common Stock
|
$ | 1,008.31 | $ | 1,448.99 | $ | 1,051.61 | $ | 809.50 | $ | 1,045.86 | $ | 670.39 | $ | 1,067.42 | ||||||||||||||
|
NYSE
Composite Index
|
289.55 | 326.98 | 376.40 | 400.81 | 328.78 | 284.59 | 339.15 | |||||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
376.36 | 378.66 | 295.99 | 418.32 | 333.32 | 343.88 | 393.19 | |||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||||||||
|
HEICO
Common Stock
|
$ | 1,366.57 | $ | 1,674.40 | $ | 2,846.48 | $ | 4,208.54 | $ | 2,872.01 | $ | 2,984.13 | $ | 4,772.20 | ||||||||||||||
|
NYSE
Composite Index
|
380.91 | 423.05 | 499.42 | 586.87 | 344.96 | 383.57 | 427.61 | |||||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
478.49 | 579.77 | 757.97 | 1,000.84 | 602.66 | 678.00 | 926.75 | |||||||||||||||||||||
Dividend
Policy
We have historically paid semi-annual
cash dividends on both our Class A Common Stock and Common Stock. In
July 2010, we paid our 64th
consecutive semi-annual cash dividend since 1979. The cash dividend
of $.06 per share represents a 25% increase over the prior semi-annual per share
amount of $.048. Effective with this increase, the current annual
cash dividend is $.12. Our Board of Directors presently intends to
continue the payment of regular semi-annual cash dividends on both classes of
our common stock. In December 2010, the Board of Directors declared a
regular semi-annual cash dividend of $.06 per share payable in January
2011. Our ability to pay dividends could be affected by future
business performance, liquidity, capital needs, alternative investment
opportunities and loan covenants under our revolving credit
facility.
21
Equity
Compensation Plan Information
The following table summarizes
information about our equity compensation plans as of October 31,
2010:
|
Number of Securities
|
||||||||||||
|
Remaining Available for
|
||||||||||||
|
Number of Securities
|
Future Issuance Under
|
|||||||||||
|
to be Issued Upon
|
Weighted-Average
|
Equity Compensation
|
||||||||||
|
Exercise of
|
Exercise Price of
|
Plans (Excluding
|
||||||||||
|
Outstanding Options,
|
Outstanding Options,
|
Securities Reflected in
|
||||||||||
|
Warrants and Rights
|
Warrants and Rights
|
Column (a))
|
||||||||||
|
Plan Category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity
compensation plans
|
||||||||||||
|
approved
by security holders (1)
|
2,032,448 | $ | 15.60 | 1,445,072 | ||||||||
|
Equity
compensation plans not
|
||||||||||||
|
approved
by security holders (2)
|
105,000 | $ | 5.89 | ― | ||||||||
|
Total
|
2,137,448 | $ | 15.13 | 1,445,072 | ||||||||
__________________
|
(1)
|
Represents
aggregated information pertaining to our three equity compensation plans:
the 1993 Stock Option Plan, the Non-Qualified Stock Option Plan and the
2002 Stock Option Plan. See Note 9, Stock Options, of the Notes
to Consolidated Financial Statements for further information regarding
these plans.
|
|
(2)
|
Represents
stock options granted in fiscal 2002 to a former shareholder of a business
acquired in fiscal 1999. Such stock options were fully vested
and transferable as of the grant date and expire ten years from the date
of grant. The exercise price of such options was the fair
market value as of the date of
grant.
|
Issuer
Purchases of Equity Securities
During March 2009, we repurchased
242,170 shares of our Class A Common Stock at an average price of $16.06 per
share and 230,625 shares of our Common Stock at an average price of $18.25 per
share under a pre-existing share repurchase program that was announced by our
Board of Directors in October 2002. We did not repurchase any shares
of our Class A Common Stock and/or Common Stock during fiscal 2008.
In March 2009, our Board of Directors
approved an increase in our share repurchase program by an aggregate 1,250,000
shares of either or both Class A Common Stock and Common Stock, bringing the
total authorized for future purchase to 1,280,928 shares. The
remaining shares authorized for repurchase can be executed, at management’s
discretion, in the open market or via private transactions and are subject to
certain restrictions included in our revolving credit agreement. The
repurchase program does not have a fixed termination date.
During December 2009, we repurchased
9,143 shares of our Common Stock at an average price of $31.54 and 2,613 shares
of our Class A Common Stock at an average price of $24.78. During May
2010, we repurchased 8,434 shares of our Common Stock at an average price of
$38.88 per share. The fiscal 2010 transactions occurred as settlement
for employee taxes due pertaining to exercises of non-qualified stock options
and did not impact the shares that may be purchased under our existing share
repurchase program.
Recent
Sales of Unregistered Securities
There were no unregistered sales of our
equity securities during fiscal 2010.
22
Item 6. SELECTED FINANCIAL
DATA
|
Year ended October 31, (1)
|
||||||||||||||||||||
|
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||
|
(in thousands, except per share data)
|
||||||||||||||||||||
|
Operating
Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 392,190 | $ | 507,924 | $ | 582,347 | $ | 538,296 | $ | 617,020 | ||||||||||
|
Gross
profit
|
142,513 | 177,458 | 210,495 | 181,011 | 222,347 | |||||||||||||||
|
Selling,
general and administrative expenses
|
75,646 | 91,444 | 104,707 | 92,756 | 113,174 | |||||||||||||||
|
Operating
income
|
66,867 | 86,014 | 105,788 |
(6)
|
88,255 | 109,173 |
(8)
|
|||||||||||||
|
Interest
expense
|
3,523 | 3,293 | 2,314 | 615 | 508 | |||||||||||||||
|
Other
income (expense)
|
639 | 95 | (637 | ) | 205 | 390 | ||||||||||||||
|
Net
income attributable to HEICO
|
31,888 |
(4)
|
39,005 |
(5)
|
48,511 |
(6)
|
44,626 |
(7)
|
54,938 |
(8)
|
||||||||||
|
Weighted
average number of common shares outstanding: (2)
|
||||||||||||||||||||
|
Basic
|
31,356 | 32,145 | 32,886 | 32,756 | 32,833 | |||||||||||||||
|
Diluted
|
33,248 | 33,664 | 34,054 | 33,780 | 33,771 | |||||||||||||||
|
Per Share Data: (2)
|
||||||||||||||||||||
|
Net
income per share attributable to HEICO shareholders:
|
||||||||||||||||||||
|
Basic
|
$ | 1.02 |
(4)
|
$ | 1.21 |
(5)
|
$ | 1.48 |
(6)
|
$ | 1.36 |
(7)
|
$ | 1.67 |
(8)
|
|||||
|
Diluted
|
0.96 |
(4)
|
1.16 |
(5)
|
1.42 |
(6)
|
1.32 |
(7)
|
1.62 |
(8)
|
||||||||||
|
Cash
dividends per share (2)
|
.064 | .064 | .080 | .096 | .108 | |||||||||||||||
|
Balance
Sheet Data (as of October 31):
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 4,999 | $ | 4,947 | $ | 12,562 | $ | 7,167 | $ | 6,543 | ||||||||||
|
Total
assets
|
534,815 | 631,302 | 676,542 | 732,910 | 781,643 | |||||||||||||||
|
Total
debt (including current portion)
|
55,061 | 55,952 | 37,601 | 55,431 | 14,221 | |||||||||||||||
|
Redeemable
noncontrolling interests (3)
|
49,525 | 49,370 | 48,736 | 56,937 | 55,048 | |||||||||||||||
|
Total
shareholders’ equity (3)
|
331,034 | 395,169 | 453,002 | 490,658 | 554,826 | |||||||||||||||
_________________
|
(1)
|
Results
include the results of acquisitions from each respective effective
date. See Note 2, Acquisitions, of the Notes to Consolidated
Financial Statements for more
information.
|
|
(2)
|
All
share and per share information has been adjusted retrospectively to
reflect a 5-for-4 stock split effected in April
2010.
|
|
(3)
|
Amounts
for the years ended October 31, 2006 to 2009 have been adjusted
retrospectively to conform to new accounting guidance on accounting for
noncontrolling interests (formerly referred to as minority interests) that
we adopted effective November 1, 2009. See Note 1, Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements for more information.
|
|
(4)
|
Includes
the benefit of a tax credit (net of related expenses) for qualified
research and development activities claimed for certain prior years, which
increased net income by $1,002, or $.03 per basic and diluted
share.
|
|
(5)
|
Includes
the benefit of a tax credit (net of related expenses) for qualified
research and development activities recognized for the full fiscal 2006
year pursuant to the retroactive extension in December 2006 of Section 41,
“Credit for Increasing Research Activities,” of the Internal Revenue Code,
which increased net income by $535, or $.02 per basic and diluted
share.
|
|
(6)
|
Operating
income was reduced by an aggregate of $1,835 in impairment losses related
to the write-down of certain intangible assets within the Electronic
Technologies Group (ETG) to their estimated fair values. The
impairment losses were recorded as a component of selling, general and
administrative expenses and decreased net income attributable to HEICO by
$1,140 or $.03 per basic and diluted
share.
|
|
(7)
|
Includes
a benefit related to a settlement with the Internal Revenue Service
concerning the income tax credit claimed by the Company on its U.S.
federal filings for qualified research and development activities incurred
during fiscal years 2002 through 2005 as well as an aggregate reduction to
the related liability for unrecognized tax benefits for fiscal years 2006
through 2008, which increased net income attributable to HEICO by
approximately $1,225, or $.04 per basic and diluted
share.
|
|
(8)
|
Operating
income was reduced by an aggregate of $1,438 in impairment losses related
to the write-down of certain intangible assets within the ETG to their
estimated fair values. The impairment losses were recorded as a
component of selling, general and administrative expenses and decreased
net income attributable to HEICO by $889, or $.03 per basic and diluted
share.
|
23
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Our business is comprised of two
operating segments, the Flight Support Group (“FSG”) and the Electronic
Technologies Group (“ETG”).
The Flight Support Group consists of
HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, which
primarily:
|
|
·
|
Designs, Manufactures,
Repairs, Overhauls and Distributes Jet Engine and Aircraft Component
Replacement Parts. The Flight Support Group designs,
manufactures, repairs, overhauls and distributes jet engine and aircraft
component replacement parts. The parts and services are
approved by the Federal Aviation Administration (“FAA”). The
Flight Support Group also manufactures and sells specialty parts as a
subcontractor for aerospace and industrial original equipment
manufacturers and the United States
government.
|
The Electronic Technologies Group
consists of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its
subsidiaries, which primarily:
|
|
·
|
Designs and Manufactures
Electronic, Microwave and Electro-Optical Equipment, High-Speed Interface Products,
High Voltage Interconnection Devices and High Voltage Advanced Power
Electronics. The Electronic Technologies Group designs,
manufactures and sells various types of electronic, microwave and
electro-optical equipment and components, including power supplies, laser
rangefinder receivers, infrared simulation, calibration and testing
equipment; power conversion products serving the high-reliability
military, space and commercial avionics end-markets; underwater locator
beacons used to locate data and voice recorders utilized on aircraft and
marine vessels; electromagnetic interference shielding for commercial and
military aircraft operators, traveling wave tube amplifiers and microwave
power modules used in radar, electronic warfare, on-board jamming and
countermeasure systems, electronics companies and telecommunication
equipment suppliers; advanced high-technology interface products that link
devices such as telemetry receivers, digital cameras, high resolution
scanners, simulation systems and test systems to computers; high voltage
energy generators interconnection devices, cable assemblies and wire for
the medical equipment, defense and other industrial markets; high
frequency power delivery systems for the commercial sign industry; and
high voltage power supplies found in satellite communications, CT scanners
and in medical and industrial x-ray
systems.
|
Our results of operations during each
of the past three fiscal years have been affected by a number of
transactions. This discussion of our financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein. All per share
information has been adjusted retrospectively to reflect a 5-for-4 stock split
effected in April 2010. See Note 1, Summary of Significant Accounting
Policies – Stock Split, of the Notes to Consolidated Financial Statements for
additional information regarding this stock split. For further
information regarding the acquisitions discussed below, see Note 2,
Acquisitions, of the Notes to Consolidated Financial
Statements. Acquisitions are included in our results of operations
from the effective dates of acquisition. See Critical Accounting
Policies below for more information regarding how we account for acquisitions in
accordance with new accounting guidance adopted as of the beginning of fiscal
2010.
24
In November 2007, we acquired, through
an 80%-owned subsidiary of HEICO Aerospace, all of the stock of a European
company that supplies aircraft parts for sale and exchange and provides repair
management services.
In January 2008, we acquired, through
HEICO Aerospace, 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. We have since combined
the operations of the acquired entity within other subsidiaries of HEICO
Aerospace.
In February 2008, we acquired, through
HEICO Aerospace, an 80.1% interest in certain assets and certain liabilities of
a U.S. company that is an FAA-approved repair station which specializes in
avionics primarily for the commercial aviation market. The remaining
noncontrolling interest is principally owned by certain members of the acquired
company’s management.
In May 2009, we acquired, through HEICO
Electronic, 82.5% of the stock of VPT, Inc. (“VPT”). VPT is a
designer and provider of power conversion products principally serving the
defense, space and aviation industries. The remaining 17.5% continues
to be owned by an existing VPT shareholder which is also a supplier to the
acquired company.
In October 2009, we acquired, through
HEICO Electronic, the business, assets and certain liabilities of the Seacom
division of privately-held Dukane Corp. and formed a new subsidiary, Dukane
Seacom, Inc. (“Seacom”). Seacom is a designer and manufacturer of
underwater locator beacons used to locate aircraft cockpit voice recorders,
flight data recorders, marine ship voyage recorders and various other devices
which have been submerged under water.
In February 2010, we acquired, through
HEICO Electronic, substantially all of the assets and assumed certain
liabilities of dB Control. dB Control produces high-power devices
used in both defense and commercial applications.
The purchase price of each of the above
referenced acquisitions was paid in cash using proceeds from our revolving
credit facility and is not material or significant to our consolidated financial
statements. The aggregate cost paid in cash for acquisitions,
including additional purchase consideration payments, was $39.1 million, $59.8
million and $24.8 million in fiscal 2010, 2009 and 2008,
respectively.
In April 2008, we acquired, through
HEICO Aerospace, an additional 7% equity interest in one of our subsidiaries,
which increased our ownership interest to 58%. In December 2008, we
acquired, through HEICO Aerospace, an additional 14% equity interest in the
subsidiary, which increased our ownership interest to
72%.
Critical
Accounting Policies
We believe that the following are our
most critical accounting policies, some of which require management to make
judgments about matters that are inherently uncertain.
25
Revenue
Recognition
Revenue is recognized on an accrual
basis, primarily upon the shipment of products and the rendering of
services. Revenue from certain fixed price contracts for which costs
can be dependably estimated is recognized on the percentage-of-completion
method, measured by the percentage of costs incurred to date to estimated total
costs for each contract. This method is used because management
considers costs incurred to be the best available measure of progress on these
contracts. Variations in actual labor performance, changes to
estimated profitability and final contract settlements may result in revisions
to cost estimates. Revisions in cost estimates as contracts progress
have the effect of increasing or decreasing profits in the period of
revision. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. For fixed
price contracts in which costs cannot be dependably estimated, revenue is
recognized on the completed-contract method. A contract is considered
complete when all significant costs have been incurred or the item has been
accepted by the customer. The percentage of our net sales recognized
under the percentage-of-completion method was approximately 2%, 1% and 3% in
fiscal 2010, 2009 and 2008, respectively. The aggregate effects of
changes in estimates relating to long-term contracts did not have a significant
effect on net income or net income per share in fiscal 2010, 2009 or
2008.
Valuation
of Accounts Receivable
The valuation of accounts receivable
requires that we set up an allowance for estimated uncollectible accounts and
record a corresponding charge to bad debt expense. We estimate
uncollectible receivables based on such factors as our prior experience, our
appraisal of a customer’s ability to pay and economic conditions within and
outside of the aviation, defense, space, medical, telecommunication and
electronic industries. Actual bad debt expense could differ from
estimates made.
Valuation
of Inventory
Inventory is stated at the lower of
cost or market, with cost being determined on the first-in, first-out or the
average cost basis. Losses, if any, are recognized fully in the
period when identified.
We periodically evaluate the carrying
value of inventory, giving consideration to factors such as its physical
condition, sales patterns and expected future demand in order to estimate
the amount necessary
to write down its slow moving, obsolete or damaged inventory. These
estimates could vary significantly from actual amounts based upon future
economic conditions, customer inventory levels, or competitive factors that were
not foreseen or did not exist when the estimated write-downs were
made.
In
accordance with industry practice, all inventories are classified as a current
asset including portions with long production cycles, some of which may not be
realized within one year.
Business
Combinations
As further explained in New Accounting
Pronouncements below, we adopted new accounting guidance for business
combinations effective prospectively for acquisitions consummated on or after
November 1, 2009 (the beginning of fiscal 2010). Under the new
guidance, any contingent consideration is recognized as a liability at fair
value as of the acquisition date with subsequent fair value adjustments recorded
in operations and acquisition costs are generally expensed as
incurred. For acquisitions consummated prior to fiscal 2010,
contingent consideration is accounted for as an additional cost of the
respective acquired entity when paid and acquisition costs were capitalized as
part of the purchase price.
We allocate the purchase price of
acquired entities to the underlying tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values, with any
excess recorded as goodwill. Determining the fair value of assets
acquired and liabilities assumed requires management’s judgment and often
involves the use of significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount rates, asset lives
and market multiples, among other items. We determine the fair values
of such assets, principally intangible assets, generally in consultation with
third-party valuation advisors.
26
Valuation
of Goodwill and Other Intangible Assets
We test
goodwill for impairment annually as of October 31, or more frequently if events
or changes in circumstances indicate that the carrying amount of goodwill may
not be fully recoverable. In evaluating the recoverability of
goodwill, we compare the fair value of each of our reporting units to its
carrying value to determine potential impairment. If the carrying
value of a reporting unit exceeds its fair value, the implied fair value of that
reporting unit’s goodwill is to be calculated and an impairment loss is
recognized in the amount by which the carrying value of the reporting unit’s
goodwill exceeds its implied fair value, if any. The fair values of
our reporting units were determined using a weighted average of a market
approach and an income approach. Under the market approach, fair
values are estimated using an average of published multiples for the industry
sectors in which our reporting units operate. We calculate fair
values under the income approach by taking estimated future cash flows that are
based on internal projections and other assumptions deemed reasonable by
management and discounting them using our estimated weighted average cost of
capital. Based on the annual goodwill impairment test as of October
31, 2010, 2009 and 2008, we determined there was no impairment of our
goodwill. The fair value of each of our reporting units as of October
31, 2010 significantly exceeded their carrying value.
We test
each non-amortizing intangible asset (principally trade names) for impairment
annually as of October 31, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. To derive
the fair value of our trade names, we utilize an income approach, which relies
upon management’s assumptions of royalty rates, projected revenues and discount
rates. We also test each amortizing intangible asset for impairment
if events or circumstances indicate that the asset might be
impaired. The test consists of determining whether the carrying value
of such assets will be recovered through undiscounted expected future cash
flows. If the total of the undiscounted future cash flows is less
than the carrying amount of those assets, we recognize an impairment loss based
on the excess of the carrying amount over the fair value of the
assets. The determination of fair value requires us to make a number
of estimates, assumptions and judgments of such factors as projected revenues
and earnings and discount rates. Based on the intangible impairment
tests conducted during fiscal 2010, 2009 and 2008, we recognized pre-tax
impairment losses related to the write-down of certain customer relationships of
$1.1 million, $.2 million and $1.3 million respectively, and the write-down of
certain trade names of $.3 million, $.1 million and $.5 million respectively,
within the ETG to their estimated fair values. The impairment losses
were recorded as a component of selling, general and administrative expenses in
the Company’s Consolidated Statements of Operations.
Assumptions
utilized to determine fair value in the goodwill and intangible assets
impairment tests are highly judgmental. If there is a material change
in such assumptions or if there is a material change in the conditions or
circumstances influencing fair value, we could be required to recognize a
material impairment charge. See Item 1A., Risk Factors, for a list of
factors of which any may cause our actual results to differ materially from
anticipated results.
27
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 Consolidated
Statements of Operations:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net
sales
|
$ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | ||||||
|
Cost
of sales
|
394,673,000 | 357,285,000 | 371,852,000 | |||||||||
|
Selling,
general and administrative expenses
|
113,174,000 | 92,756,000 | 104,707,000 | |||||||||
|
Total
operating costs and expenses
|
507,847,000 | 450,041,000 | 476,559,000 | |||||||||
|
Operating
income
|
$ | 109,173,000 | $ | 88,255,000 | $ | 105,788,000 | ||||||
|
Net
sales by segment:
|
||||||||||||
|
Flight
Support Group
|
$ | 412,337,000 | $ | 395,423,000 | $ | 436,810,000 | ||||||
|
Electronic
Technologies Group
|
205,648,000 | 143,372,000 | 146,044,000 | |||||||||
|
Intersegment
sales
|
(965,000 | ) | (499,000 | ) | (507,000 | ) | ||||||
| $ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | |||||||
|
Operating
income by segment:
|
||||||||||||
|
Flight
Support Group
|
$ | 67,896,000 | $ | 60,003,000 | $ | 81,184,000 | ||||||
|
Electronic
Technologies Group
|
56,126,000 | 39,981,000 | 38,775,000 | |||||||||
|
Other,
primarily corporate
|
(14,849,000 | ) | (11,729,000 | ) | (14,171,000 | ) | ||||||
| $ | 109,173,000 | $ | 88,255,000 | $ | 105,788,000 | |||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Gross
profit
|
36.0 | % | 33.6 | % | 36.1 | % | ||||||
|
Selling,
general and administrative expenses
|
18.3 | % | 17.2 | % | 18.0 | % | ||||||
|
Operating
income
|
17.7 | % | 16.4 | % | 18.2 | % | ||||||
|
Interest
expense
|
.1 | % | .1 | % | .4 | % | ||||||
|
Other
income (expense)
|
.1 | % | ― | (.1 | )% | |||||||
|
Income
tax expense
|
5.9 | % | 5.2 | % | 6.1 | % | ||||||
|
Net
income attributable to noncontrolling interests
|
2.8 | % | 2.8 | % | 3.2 | % | ||||||
|
Net
income attributable to HEICO
|
8.9 | % | 8.3 | % | 8.3 | % | ||||||
Comparison
of Fiscal 2010 to Fiscal 2009
Net
Sales
Net sales in fiscal 2010 increased by
14.6% to a record $617.0 million, as compared to net sales of $538.3 million in
fiscal 2009. The increase in net sales reflects an increase of $62.3
million (a 43.4% increase) to a record $205.6 million in net sales within the
ETG and an increase of $16.9 million (a 4.3% increase) to $412.3 million in net
sales within the FSG. The net sales increase in the ETG reflects the
additional net sales totaling approximately $40 million contributed by a
February 2010 acquisition and two fiscal 2009 acquisitions as well as organic
growth of approximately 12%. The organic growth in the ETG
principally reflects strength in customer demand for certain of our medical
equipment, defense, electronic and satellite products. The 4.3%
increase in net sales of the FSG, which is entirely organic growth, is primarily
attributable to higher net sales of our industrial products as well as higher
net sales of our commercial aviation products reflecting the recent capacity
growth of our commercial airline customers during the third and fourth
quarters.
28
Our net sales in fiscal 2010 and 2009
by market approximated 62% and 68%, respectively, from the commercial aviation
industry, 23% and 20%, respectively, from the defense and space industries, and
15% and 12%, respectively, from other industrial markets including medical,
electronics and telecommunications.
Gross
Profit and Operating Expenses
Our consolidated gross profit margin
increased to 36.0% in fiscal 2010 as compared to 33.6% in fiscal 2009, mainly
reflecting higher margins within the FSG principally due to a more favorable
product sales mix. Consolidated cost of sales in fiscal 2010 and 2009
includes approximately $22.7 million and $19.7 million, respectively, of new
product research and development expenses.
Selling, general and administrative
(“SG&A”) expenses were $113.2 million and $92.8 million in fiscal 2010 and
fiscal 2009, respectively. The increase in SG&A expenses is
mainly due to the operating costs of the fiscal 2010 and fiscal 2009
acquisitions referenced above, and higher operating costs, principally personnel
related, associated with the growth in consolidated net
sales. SG&A expenses as a percentage of net sales increased from
17.2% in 2009 to 18.3% in fiscal 2010 reflecting a higher level of accrued
performance awards based on the improved consolidated operating
results.
Operating
Income
Operating income in fiscal 2010
increased by 23.7% to a record $109.2 million as compared to operating income of
$88.3 million in fiscal 2009. The increase in operating income
reflects a $16.1 million increase (a 40.4% increase) to a record $56.1 million
in operating income of the ETG in fiscal 2010, up from $40.0 million in fiscal
2009 and a $7.9 million increase (a 13.2% increase) in operating income of the
FSG to $67.9 million in fiscal 2010, up from $60.0 million in fiscal 2009,
partially offset by a $3.1 million increase in corporate
expenses. The increase in operating income for the ETG in fiscal 2010
reflects the impact of the fiscal 2010 and 2009 acquisitions and organic sales
growth. The increase in operating income for the FSG in fiscal 2010
reflects the aforementioned higher gross profit margins. The increase
in corporate expenses in fiscal 2010 is primarily due to the higher level of
accrued performance awards discussed previously.
As a percentage of net sales, our
consolidated operating income increased to 17.7% in fiscal 2010, up from 16.4%
in fiscal 2009. The increase in consolidated operating income as a
percentage of net sales reflects an increase in the FSG’s operating income as a
percentage of net sales to 16.5% in fiscal 2010 from 15.2% in fiscal 2009
resulting primarily from the favorable product mix previously
referenced. The ETG’s operating income as a percentage of net sales
was 27.3% in fiscal 2010, compared to 27.9% reported in fiscal 2009, reflecting
variations in product mix, including the impact of certain recently acquired
businesses.
Interest
Expense
Interest expense in fiscal 2010 and
2009 was not material.
29
Other
Income
Other income in fiscal 2010 and 2009
was not material.
Income
Tax Expense
Our effective tax rate for fiscal 2010
increased to 33.7% from 31.9% in fiscal 2009. The effective tax rate
for fiscal 2009 was lower due to a settlement reached with the Internal Revenue
Service (“IRS”) pertaining to the income tax credit claimed on HEICO’s U.S.
federal filings for qualified research and development activities incurred for
fiscal years 2002 through 2005 and a resulting reduction to the related
liability for unrecognized tax benefits for fiscal years 2006 through 2008 based
on new information obtained during the examination. In addition, the
effective tax rate for fiscal 2010 was higher than fiscal 2009 as the fiscal
2010 tax expense only reflects a credit for qualifying research and development
activities through December 31, 2009 due to the expiration of such tax credits
and was higher due to an increased effective state income tax rate principally
as a result of the previously mentioned fiscal 2010 and 2009
acquisitions. The Tax Relief, Unemployment Insurance Reauthorization
and Job Creation Act of 2010, which was approved December 17, 2010, includes an
extension of research and development tax credits retroactive to December 31,
2009. No research and development tax credits have been included for
periods after December 31, 2009 pending completion of a study of qualifying
research and development activities under the new law.
For a
detailed analysis of the provision for income taxes, see Note 6, Income Taxes,
of the Notes to Consolidated Financial Statements.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests relates to the 20% noncontrolling interest held in the
FSG and the noncontrolling interests held in certain subsidiaries of the FSG and
ETG. The increase in net income attributable to noncontrolling
interests in fiscal 2010 compared to fiscal 2009 is related to higher earnings
of certain FSG and ETG subsidiaries in which noncontrolling interests
exist.
Net
Income Attributable to HEICO
Net income attributable to HEICO was a
record $54.9 million, or $1.62 per diluted share, in fiscal 2010 compared to
$44.6 million, or $1.32 per diluted share, in fiscal 2009 reflecting the
increased operating income referenced above. Diluted net income per
share attributable to HEICO shareholders in fiscal 2009 included a $.04 per
diluted share benefit from the aforementioned favorable IRS
settlement.
Outlook
As we look forward to fiscal 2011,
HEICO will continue its focus on developing new products and services, further
market penetration, additional acquisition opportunities and maintaining its
financial strength. As the commercial airline industry expects an
increase in capacity during 2011, we are targeting growth in fiscal 2011 full
year net sales and net income over fiscal 2010 levels. In our
electronic, defense and space markets, we are pleased with increasing demand for
some of our commercial products and overall stable demand for our defense
products.
30
Comparison
of Fiscal 2009 to Fiscal 2008
Net
Sales
Net sales in fiscal 2009 decreased by
7.6% to $538.3 million compared to net sales of $582.3 million in fiscal
2008. The decrease in net sales reflects a decrease of $41.4 million
(a 9.5% decrease) to $395.4 million in net sales within the FSG and a decrease
of $2.7 million (a 1.8% decrease) to $143.4 million in net sales within the
ETG. The net sales decline in both the FSG and the ETG reflects the
impact of the continued global recession on our businesses, which has resulted
in a reduction in customer demand. The net sales decrease within the
FSG reflects lower demand for our aftermarket replacement parts and repair and
overhaul services resulting from worldwide airline capacity cuts and efforts to
reduce spending and conserve cash by the airline industry. Within the
ETG, we are generally seeing some strength in our defense related businesses,
including space and homeland security products, but continued weakness in
customer demand for certain of our medical, telecommunication and electronic
products. The net sales decline in the ETG was partially offset by
the favorable impact on net sales from acquisitions of approximately $17
million.
Our net sales in fiscal 2009 and 2008
by market approximated 68% and 69%, respectively, from the commercial aviation
industry, 20% and 16%, respectively, from the defense and space industries, and
12% and 15%, respectively, from other industrial markets including medical,
electronics and telecommunications.
Gross
Profit and Operating Expenses
Our consolidated gross profit margin
decreased to 33.6% in fiscal 2009 as compared to 36.1% in fiscal 2008, mainly
reflecting lower margins within the FSG due principally to a less favorable
product mix as well as the impact of lower sales volumes on fixed manufacturing
costs and a higher investment by HEICO in the research and development of new
products and services. Consolidated cost of sales in fiscal 2009 and
2008 includes approximately $19.7 million and $18.4 million, respectively, of
new product research and development expenses.
SG&A expenses were $92.8 million
and $104.7 million in fiscal 2009 and 2008, respectively. The
decrease in SG&A expenses is mainly due to lower operating costs,
principally personnel related, associated with cost reduction initiatives and
the decline in net sales discussed above, partially offset by the additional
operating costs associated with the acquired businesses. These cost
reductions resulted in a decrease of SG&A expenses as a percentage of net
sales from 18.0% in fiscal 2008 to 17.2% in fiscal 2009.
Operating
Income
Operating income in fiscal 2009
decreased by 16.6% to $88.3 million, compared to operating income of $105.8
million in fiscal 2008. The decrease in operating income reflects a
decrease of $21.2 million (a 26.1% decrease) to $60.0 million in operating
income of the FSG in fiscal 2009, partially offset by an increase of $1.2
million (a 3.1% increase) to $40.0 million in operating income of the ETG in
fiscal 2009 and a $2.4 million increase in corporate expenses.
As a percentage of net sales, operating
income decreased to 16.4% in fiscal 2009 compared to 18.2% in fiscal
2008. The decrease in operating income as a percentage of net sales
reflects a decrease in the FSG’s operating income as a percentage of net sales
to 15.2% in fiscal 2009 compared to 18.6% in fiscal 2008, partially offset by an
increase in the ETG’s operating income as a percentage of net sales from 26.6%
in fiscal 2008 to 27.9% in fiscal 2009. The decrease in operating
income as a percentage of net sales for the FSG principally reflects the
aforementioned impact of the lower sales volume and a less favorable product mix
on gross profit and operating income margins. The increase in
operating income as a percentage of net sales for the ETG principally reflects a
favorable product mix.
31
Interest
Expense
Interest expense decreased to $.6
million in fiscal 2009 from $2.3 million in fiscal 2008. The decrease
was principally due to lower variable interest rates under our revolving credit
facility in 2009.
Other
Income (Expense)
Other income (expense) in fiscal 2009
and 2008 was not material.
Income Tax
Expense
Our effective tax rate for fiscal 2009
decreased to 31.9% from 34.5% in fiscal 2008. The decrease was
principally related to a settlement reached with the Internal Revenue Service
(“IRS”) during fiscal 2009. The IRS settlement pertained to the
income tax credits claimed on HEICO’s U.S. federal filings for qualified
research and development activities incurred for fiscal years 2002 through 2005
and a resulting reduction to the related reserve for fiscal years 2002 through
2008 based on new information obtained during the examination, which increased
net income by approximately $1,225,000, or $.04 per diluted share, for fiscal
2009.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests relates to the 20% noncontrolling interest held in the
FSG and the noncontrolling interests held in certain subsidiaries of the FSG and
the ETG. Net income attributable to noncontrolling interests
decreased to $15.2 million in fiscal 2009 from $18.9 million in fiscal
2008. The decrease in net income attributable to noncontrolling
interests for fiscal 2009 compared to fiscal 2008 is principally attributable to
the acquired additional equity interests of certain FSG subsidiaries in which
noncontrolling interests exist as well as the lower earnings of the FSG,
partially offset by the higher earnings of certain ETG subsidiaries in which
noncontrolling interests exist and the mid-year acquisition of an 82.5% interest
in VPT.
Net
Income Attributable to HEICO
Our net income attributable to HEICO
was $44.6 million, or $1.32 per diluted share, in fiscal 2009 compared to $48.5
million, or $1.42 per diluted share, in fiscal 2008 reflecting the decreased
operating income referenced above, partially offset by the aforementioned
favorable IRS settlement, the decreased noncontrolling interests’ share of
income of certain consolidated subsidiaries and lower interest
expense.
Inflation
We have generally experienced increases
in our costs of labor, materials and services consistent with overall rates of
inflation. The impact of such increases on net income attributable to
HEICO has been generally minimized by efforts to lower costs through
manufacturing efficiencies and cost reductions.
32
Liquidity
and Capital Resources
Our capitalization was as
follows:
|
As
of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
and cash equivalents
|
$ | 6,543,000 | $ | 7,167,000 | ||||
|
Total
debt (including current portion)
|
14,221,000 | 55,431,000 | ||||||
|
Shareholders’
equity
|
554,826,000 | 490,658,000 | ||||||
|
Total
capitalization (debt plus equity)
|
569,047,000 | 546,089,000 | ||||||
|
Total
debt to total capitalization
|
2 | % | 10 | % | ||||
In addition to cash and cash
equivalents of $6.5 million, we had approximately $284 million of unused
availability under the terms of our revolving credit facility as of October 31,
2010. Our principal uses of cash include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital. We finance our activities primarily
from our operating activities and financing activities, including borrowings
under long-term credit agreements.
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 $101.7 million for fiscal 2010, principally reflecting net income
from consolidated operations of $72.4 million, depreciation and amortization of
$17.6 million, a decrease in net operating assets of $6.7 million, a deferred
income tax provision of $1.8 million, impairment losses of certain intangible
assets aggregating $1.4 million and stock option compensation expense of $1.4
million. The decrease in net operating assets (current assets used in
operating activities net of current liabilities) of $6.7 million primarily
reflects higher accrued expenses associated with performance based awards and
decreased inventory levels due to continuing efforts to manage inventory levels,
while meeting customer delivery requirements, partially offset by increased
accounts receivable related to higher net sales in fiscal 2010.
Net cash provided by operating
activities was $75.8 million for fiscal 2009, principally reflecting net income
from consolidated operations of $59.8 million, depreciation and amortization of
$15.0 million, a tax benefit related to stock option exercises of $1.9 million,
and a decrease in net operating assets of $2.5 million, partially offset by the
presentation of $1.6 million of excess tax benefit from stock option exercises
as a financing activity and a deferred income tax benefit of $2.7
million. The decrease in net operating assets (current assets used in
operating activities net of current liabilities) primarily reflects a decrease
in accounts receivable due to the timing of cash collections and lower net
sales, partially offset by a decrease in accrued expenses, including employee
compensation, customer rebates and credits and additional accrued purchase
consideration since October 31, 2008.
Net cash provided by operating
activities was $73.2 million for fiscal 2008, principally reflecting net income
from consolidated operations of $67.4 million, depreciation and amortization of
$15.1 million, a tax benefit related to stock option exercises of $6.2 million,
a deferred income tax provision of $3.6 million and impairment losses of certain
intangible assets aggregating $1.8 million, partially offset by an increase in
net operating assets of $17.1 million and the presentation of $4.3 million of
excess tax benefit from stock option exercises as a financing
activity. The increase in net operating assets (current assets used
in operating activities net of current liabilities) primarily reflects a higher
investment in inventories by the FSG required to meet sales demand associated
with new product offerings, sales growth, and increased lead times on certain
raw materials; and an increase in accounts receivable due to sales growth;
partially offset by higher current liabilities associated with increased sales
and purchases and higher accrued employee compensation and related payroll
taxes.
33
Investing
Activities
Net cash used in investing activities
during the three-year fiscal period ended October 31, 2010 primarily relates to
several acquisitions, including payments of additional contingent purchase
consideration, totaling $39.1 million in fiscal 2010, $59.8 million in fiscal
2009 and $24.8 million in fiscal 2008. Further details on
acquisitions may be found at the beginning of this Item 7 under the caption
“Overview” and Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements. Capital expenditures aggregated $32.6 million over the
last three fiscal years, primarily reflecting the expansion, replacement and
betterment of existing production facilities and capabilities, which were
generally funded using cash provided by operating activities.
Financing
Activities
During the three-year fiscal period
ended October 31, 2010, the Company borrowed an aggregate $178.0 million under
its revolving credit facility principally to fund acquisitions and for working
capital needs, including $37.0 million in fiscal 2010, $91.0 million in fiscal
2009 and $50.0 million in fiscal 2008. Further details on
acquisitions may be found at the beginning of this Item 7 under the caption
“Overview” and Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements. Repayments on the revolving credit facility aggregated
$217.0 million over the last three fiscal years, including $78.0 million in
fiscal 2010, $73.0 million in fiscal 2009 and $66.0 million in fiscal
2008. For the three-year fiscal period ended October 31, 2010, we
made distributions to noncontrolling interest owners aggregating $27.4 million,
acquired certain noncontrolling interests aggregating $16.3 million, paid cash
dividends aggregating $9.3 million, and made repurchases of our common stock
aggregating $8.1 million. For the three-year fiscal period ended
October 31, 2010, we received proceeds from stock option exercises aggregating
$5.4 million. Net cash provided by financing activities also includes
the presentation of $.7 million, $1.6 million and $4.3 million of excess tax
benefit from stock option exercises in fiscal 2010, 2009 and 2008,
respectively.
In May 2008, we amended our revolving
credit facility by entering into a $300 million Second Amended and Restated
Revolving Credit Agreement (“Credit Facility”) with a bank syndicate, which
matures in May 2013. Under certain circumstances, the maturity may be
extended for two one-year periods. The Credit Facility also includes
a feature that will allow us to increase the Credit Facility, at our option, up
to $500 million through increased commitments from existing lenders or the
addition of new lenders. The Credit Facility may be used for working
capital and general corporate needs of the company, including letters of credit,
capital expenditures and to finance acquisitions. Advances under the
Credit Facility accrue interest at our choice of the “Base Rate” or the London
Interbank Offered Rate (“LIBOR”) plus applicable margins (based on our ratio of
total funded debt to earnings before interest, taxes, depreciation and
amortization, minority interest and non-cash charges, or “leverage
ratio”). The Base Rate is the higher of (i) the Prime Rate or (ii)
the Federal Funds rate plus .50%. The applicable margins for
LIBOR-based borrowings range from .625% to 2.25%. A fee is charged on
the amount of the unused commitment ranging from .125% to .35% (depending on our
leverage ratio). The Credit Facility also includes a $50 million
sublimit for borrowings made in euros, a $30 million sublimit for letters of
credit and a $20 million swingline sublimit. The Credit Facility is
unsecured and contains covenants that require, among other things, the
maintenance of the leverage ratio, a senior leverage ratio and a fixed charge
coverage ratio. In the event our leverage ratio exceeds a specified
level, the Credit Facility would become secured by the capital stock owned in
substantially all of our subsidiaries. As of October 31, 2010, our
leverage ratios were significantly below and our fixed charge coverage ratio was
significantly above such specified levels. See Note 5, Long-Term
Debt, of the Notes to Consolidated Financial Statements for further information
regarding the revolving credit facility.
34
Contractual
Obligations
The following table summarizes our
contractual obligations as of October 31, 2010:
|
Payments due by fiscal period
|
||||||||||||||||||||
|
Total
|
2011
|
2012 - 2013
|
2014 - 2015
|
Thereafter
|
||||||||||||||||
|
Long-term
debt obligations (1)
|
$ | 14,209,000 | $ | 136,000 | $ | 14,073,000 | $ | ― | $ | ― | ||||||||||
|
Capital
lease obligations (1)
|
12,000 | 12,000 | ― | ― | ― | |||||||||||||||
|
Operating
lease obligations (2)
|
24,812,000 | 6,167,000 | 9,648,000 | 4,486,000 | 4,511,000 | |||||||||||||||
|
Purchase
obligations (3) (4)
(5)
|
11,450,000 | 10,663,000 | 787,000 | ― | ― | |||||||||||||||
|
Other
long-term liabilities (6)
(7)
|
322,000 | 61,000 | 114,000 | 66,000 | 81,000 | |||||||||||||||
|
Total
contractual obligations
|
$ | 50,805,000 | $ | 17,039,000 | $ | 24,622,000 | $ | 4,552,000 | $ | 4,592,000 | ||||||||||
________________
|
(1)
|
Excludes
interest charges on borrowings and the fee on the amount of any unused
commitment that we may be obligated to pay under our revolving credit
facility as such amounts vary. Also excludes interest charges
associated with notes payable and capital lease obligations as such
amounts are not material. See Note 5, Long-Term Debt, of the
Notes to Consolidated Financial Statements and “Financing Activities”
above for additional information regarding our long-term debt
obligations.
|
|
(2)
|
See
Note 16, Commitments and Contingencies – Lease Commitments, of the Notes
to Consolidated Financial Statements for additional information regarding
our operating lease obligations.
|
|
(3)
|
As
further explained below in “New Accounting Pronouncements,” the
noncontrolling interest holders of certain subsidiaries have rights (“Put
Rights”) that may be exercised on varying dates causing us to purchase
their equity interests beginning in fiscal 2011 through fiscal
2018. The Put Rights provide that cash consideration be paid
for their noncontrolling interests (“Redemption Amount”). As of
October 31, 2010, management’s estimate of the aggregate Redemption Amount
of all Put Rights that we would be required to pay is approximately $55
million, which is reflected within redeemable noncontrolling interests in
our Consolidated Balance Sheet. Of this amount $6,486,000 and
$787,000 are included in the table as amounts payable in fiscal 2011 and
2012, respectively, pursuant to past exercises of such Put Rights by the
noncontrolling interest holders of certain of our
subsidiaries. As the actual Redemption Amount payable in fiscal
2012 is based on a multiple of future earnings,
such amount will likely be different. The remaining Redemption
Amounts have been excluded from the table as the timing of such payments
is contingent upon the exercise of the Put
Rights.
|
|
(4)
|
Also
includes accrued additional contingent purchase consideration of
$4,104,000 payable in fiscal 2011 relating to a prior year acquisition
(see Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements). The amounts in the table do not include the
additional contingent purchase consideration we may have to pay based on
future earnings of certain acquired businesses. As of October
31, 2010, management’s estimate of the aggregate amount of such contingent
purchase consideration is approximately $9.9 million, which is payable
beginning in fiscal 2011 through fiscal 2013. Of this total,
$1.2 million is related to a 2010 acquisition and has been accrued within
other long-term liabilities in our Consolidated Balance Sheet as further
described in Note 7, Fair Value Measurements, of the Notes to Consolidated
Financial Statements. The remaining contingent purchase
consideration is further discussed in “Off-Balance Sheet Arrangements –
Additional Contingent Purchase Consideration”
below.
|
|
(5)
|
Also
includes an aggregate $73,000 of commitments for capital
expenditures. All purchase obligations of inventory and
supplies in the ordinary course of business (i.e., with deliveries
scheduled within the next year) are excluded from the
table.
|
|
(6)
|
Represents
payments aggregating $322,000 under our Directors Retirement Plan, for
which benefits are presently being paid and excludes $190,000 of payments
for which benefit payments have not yet commenced. Our
Directors Retirement Plan’s projected benefit obligation of $409,000 is
accrued within other long-term liabilities in our Consolidated Balance
Sheet as of October 31, 2010. See Note 10, Retirement Plans, of
the Notes to Consolidated Financial Statements (the plan is unfunded and we pay benefits
directly). The amounts in the table do not include liabilities
related to the Leadership Compensation Plan or our other deferred
compensation arrangement as they are each fully supported by assets held
within irrevocable trusts. See Note 3, Selected Financial
Statement Information – Other Long-Term Liabilities, of the Notes to
Consolidated Financial Statements for further information about these two
deferred compensation plans.
|
35
|
(7)
|
The
amounts in the table do not include approximately $2,252,000 of our
liability for unrecognized tax benefits due to the uncertainty with
respect to the timing of future cash flows associated with these
unrecognized tax benefits as we are unable to make reasonably reliable
estimates of the timing of any cash settlements. See Note 6,
Income Taxes, of the Notes to Consolidated Financial Statements for
further information about our liability for unrecognized tax
benefits.
|
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.
Additional
Contingent Purchase Consideration
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2007, we may be obligated to pay additional
purchase consideration of up to 73 million Canadian dollars in aggregate, which
translates to approximately $72 million U.S. dollars based on the October 31,
2010 exchange rate, should the subsidiary meet certain earnings objectives
through fiscal 2012.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional
purchase consideration of up to approximately $1.3 million in fiscal 2011 and
$10.1 million in fiscal 2012 should the subsidiary meet certain earnings
objectives during the second and third years, respectively, following the
acquisition.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional
purchase consideration of up to approximately $7.6 million should the subsidiary
meet certain earnings objectives during the second year following the
acquisition.
The above referenced additional
contingent purchase consideration will be accrued when the earnings objectives
are met. Such additional contingent purchase consideration is based
on a multiple of earnings above a threshold (subject to a cap in certain cases)
and is not contingent upon the former shareholders of the acquired entities
remaining employed by us or providing future services to
us. Accordingly, such consideration will be recorded as an additional
cost of the respective acquired entity when paid. The aggregate
maximum amount of such contingent purchase consideration that we could be
required to pay is approximately $91 million payable over future periods
beginning in fiscal 2011 through fiscal 2012. Assuming the
subsidiaries perform over their respective future measurement periods at the
same earnings levels they have performed in the comparable historical
measurement periods, the aggregate amount of such contingent purchase
consideration that we would be required to pay is approximately $9
million. The actual contingent purchase consideration will likely be
different.
For additional information on how we
account for contingent consideration associated with acquisitions, see Note 1,
Summary of Significant Accounting Policies – Business Combinations, of the Notes
to Consolidated Financial Statements.
36
New
Accounting Pronouncements
Effective
November 1, 2009, we adopted new accounting guidance that requires the
recognition of certain noncontrolling interests (previously referred to as
minority interests) as a separate component within equity in the consolidated
balance sheet. It also requires the amount of consolidated net income
attributable to the parent and the noncontrolling interests be clearly
identified and presented within the consolidated statement of
operations. The adoption of this new guidance (which is included in
Accounting Standards Codification (“ASC”) 810, “Consolidation”) has affected the
presentation of noncontrolling interests in our consolidated financial
statements on a retrospective basis. For example, under this
guidance, “Net income from consolidated operations” is comparable to what was
previously presented as “Income before minority interests” and “Net income
attributable to HEICO” is comparable to what was previously presented as “Net
income.” Further, acquisitions of noncontrolling interests are
considered a financing activity under the new accounting guidance and are no
longer presented as an investing activity.
Effective November 1, 2009, we also
adopted new accounting guidance that retrospectively affects the financial
statement classification and measurement of redeemable noncontrolling
interests. This guidance is included in ASC 480, “Distinguishing
Liabilities from Equity.” As further detailed in Note 12, Redeemable
Noncontrolling Interests, of the Notes to Consolidated Financial Statements, the
holders of equity interests in certain of our subsidiaries have rights (“Put
Rights”) that require us to provide cash consideration for their equity
interests (the “Redemption Amount”) at fair value or at a formula that
management intended to reasonably approximate fair value based solely on a
multiple of future earnings over a measurement period. The Put Rights
are embedded in the shares owned by the noncontrolling interest holders and are
not freestanding. Previously, we recorded such redeemable
noncontrolling interests at historical cost plus an allocation of subsidiary
earnings based on ownership interest, less dividends paid to the noncontrolling
interest holders. Effective November 1, 2009, we adjusted our
redeemable noncontrolling interests in accordance with this new accounting
guidance to the higher of their carrying cost or management’s estimate of the
Redemption Amount with a corresponding decrease to retained earnings and
classified such interests outside of permanent equity. Under this
guidance, subsequent adjustments to the carrying amount of redeemable
noncontrolling interests to reflect any changes in the Redemption Amount at the
end of each reporting period will be recorded in the same
manner. Such adjustments to Redemption Amounts based on fair value
will have no effect on net income per share attributable to HEICO shareholders
whereas the portion of periodic adjustments to the carrying amount of redeemable
noncontrolling interests based solely on a multiple of future earnings that
reflect a redemption amount in excess of fair value will effect net income per
share attributable to HEICO shareholders under the two-class
method.
As a result of adopting the new
accounting guidance for noncontrolling interests and redeemable noncontrolling
interests, we (i) reclassified approximately $78 million from temporary equity
(previously labeled as “Minority interests in consolidated subsidiaries”) to
permanent equity (labeled as “Noncontrolling interests”) pertaining to
noncontrolling interests that do not contain a redemption feature; and (ii)
renamed temporary equity as “Redeemable noncontrolling interests” and recorded
an approximately $45 million increase to redeemable noncontrolling interests
with a corresponding decrease to retained earnings in our Consolidated Balance
Sheet. The resulting $57 million of redeemable noncontrolling
interests as of November 1, 2009 represents management’s estimate of the
aggregate Redemption Amount of all Put Rights that we would be required to pay
of which approximately $25 million is redeemable at fair value and approximately
$32 million is redeemable based solely on a multiple of future
earnings. The actual Redemption Amount will likely be
different. See Note 12, Redeemable Noncontrolling Interests, for
additional information as well as our Consolidated Statements of Shareholders’
Equity and Comprehensive Income, which have been retrospectively
adjusted.
37
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued new guidance which defines fair
value, establishes a framework for measuring fair value, and requires expanded
disclosures about fair value measurements. This guidance is included
in ASC 820, “Fair Value Measurements and Disclosures.” In February
2008, the FASB issued additional guidance which delayed the effective date by
one year for nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring
basis. These nonfinancial assets and liabilities include items such
as goodwill, other intangible assets, and property, plant and equipment that are
measured at fair value resulting from impairment, if deemed
necessary. We adopted the provisions of this guidance related to
nonfinancial assets and liabilities on a prospective basis as of the beginning
of fiscal 2010, or November 1, 2009. The adoption did not have a
material effect on our results of operations, financial position or cash
flows.
In
December 2007, the FASB issued new guidance for business combinations that
retains the fundamental requirements of previous guidance that the acquisition
method of accounting (formerly the “purchase accounting” method) be used for all
business combinations and for an acquirer to be identified for each business
combination. However, the new guidance changes the approach of
applying the acquisition method in a number of significant areas, including that
acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value as of the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset as of the acquisition date; restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. Further, any contingent consideration will be recognized as
a liability at fair value as of the acquisition date with subsequent fair value
adjustments recorded in operations. Contingent consideration was
previously accounted for as an additional cost of the respective acquired entity
when paid. We adopted the new guidance (which is included in ASC 805,
“Business Combinations”) on a prospective basis as of the beginning of fiscal
2010 for all business combinations consummated on or after November 1,
2009. The adoption did not have a material effect on our results of
operations, financial position or cash flows.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures
About Fair Value Measurements,” which requires new disclosures regarding
transfers in and out of Level 1 and Level 2 fair value measurements and more
detailed information of activity in Level 3 fair value
measurements. We adopted ASU 2010-06 as of the beginning of the
second quarter of fiscal 2010, except the additional Level 3 disclosures,
which are effective in fiscal years beginning after December 15, 2010, or as of
fiscal 2012 for us. The adoption did not have a material effect on
our results of operations, financial position or cash flows. The
Company will make the additional Level 3 disclosures, if applicable, as of the
date of adoption.
In
December 2010, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 10-G,
“Disclosure of Supplementary Pro Forma Information for Business
Combinations.” Under EITF Issue 10-G, supplemental pro forma
information disclosures pertaining to acquisitions should be presented as if the
business combination(s) occurred as of the beginning of the prior annual period
when comparative financial statements are presented. EITF Issue 10-G
is effective for business combinations consummated in periods beginning after
December 15, 2010, or in the second quarter of fiscal 2011 for
HEICO. Early adoption is permitted. We will make the
required disclosures prospectively as of the date of the adoption for any
material business combinations or series of immaterial business combinations
that are material in the aggregate.
38
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 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 risks, uncertainties and contingencies. We have based
these forward-looking statements on our current expectations and projections
about future events. All forward-looking statements involve risks and
uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking
statements are based upon management’s estimates of fair values and of future
costs, using currently available information. Therefore, actual
results may differ materially from those expressed or implied in those
statements. Factors that could cause such differences include, but are not
limited to:
|
|
·
|
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;
|
|
|
·
|
Our
ability to introduce new products and product pricing levels, which could
reduce our sales or sales growth;
and
|
|
|
·
|
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, telecommunication and electronic industries, which could
negatively impact our costs and
revenues.
|
For further information on these and
other factors that potentially could materially affect our financial results,
see Item 1A, Risk Factors. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The primary market risk to which we
have exposure is interest rate risk, mainly related to our revolving credit
facility, which has variable interest rates. Interest rate risk
associated with our variable rate debt is the potential increase in interest
expense from an increase in interest rates. Periodically, we enter
into interest rate swap agreements to manage our interest expense. We
did not have any interest rate swap agreements in effect as of October 31,
2010. Based on our aggregate outstanding variable rate debt balance
of $14 million as of October 31, 2010, a hypothetical 10% increase in interest
rates would not have a material effect on our results of operations, financial
position or cash flows.
39
We maintain a portion of our cash and
cash equivalents in financial instruments with original maturities of three
months or less. These financial instruments are subject to interest
rate risk and will decline in value if interest rates increase. Due
to the short duration of these financial instruments, a hypothetical 10%
increase in interest rates as of October 31, 2010 would not have a material
effect on our results of operations, financial position or cash
flows.
We are also exposed to foreign currency
exchange rate fluctuations on the United States dollar value of our 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 October 31, 2010 would not have a material effect on our results of
operations, financial position or cash flows.
40
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
HEICO
CORPORATION AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
42
|
|
|
|
|
Consolidated
Balance Sheets as of October 31, 2010 and 2009
|
44
|
|
|
|
|
Consolidated
Statements of Operations for the years ended October 31,
2010,
|
|
|
2009
and 2008
|
45
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
|
|
for
the years ended October 31, 2010, 2009 and 2008
|
46
|
|
Consolidated
Statements of Cash Flows for the years ended October 31,
2010,
|
|
|
2009
and 2008
|
48
|
|
Notes
to Consolidated Financial Statements
|
49
|
|
Financial
Statement Schedule II, Valuation and Qualifying Accounts for
the
|
|
|
years
ended October 31, 2010, 2009 and 2008
|
87
|
41
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
HEICO
Corporation
Hollywood,
Florida
We have
audited the accompanying consolidated balance sheets of HEICO Corporation and
subsidiaries (the “Company”) as of October 31, 2010 and 2009, and the related
consolidated statements of operations, shareholders’ equity and comprehensive
income, and cash flows for each of the three years in the period ended October
31, 2010. Our audits also included the financial statement schedule listed
in the Index at Item 15. We also have audited the Company’s internal
control over financial reporting as of October 31, 2010, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is
responsible for these financial statements and the financial statement schedule,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule and an opinion
on the Company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
42
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of HEICO Corporation and
subsidiaries as of October 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2010, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. Also, in our opinion,
the Company maintained, in all material respects, effective internal control
over financial reporting as of October 31, 2010, based on the criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As
discussed in Note 1 to the consolidated financial statements, the Company
retrospectively changed its method of accounting for noncontrolling interests to
adopt new accounting guidance contained in Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, and FASB ASC
480, Distinguishing
Liabilities from Equity.
/s/
DELOITTE & TOUCHE LLP
Certified
Public Accountants
Miami,
Florida
December
22, 2010
43
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 6,543,000 | $ | 7,167,000 | ||||
|
Accounts
receivable, net
|
91,815,000 | 77,864,000 | ||||||
|
Inventories,
net
|
138,215,000 | 137,585,000 | ||||||
|
Prepaid
expenses and other current assets
|
3,769,000 | 4,290,000 | ||||||
|
Deferred
income taxes
|
18,907,000 | 16,671,000 | ||||||
|
Total
current assets
|
259,249,000 | 243,577,000 | ||||||
|
Property,
plant and equipment, net
|
59,003,000 | 60,528,000 | ||||||
|
Goodwill
|
385,016,000 | 365,243,000 | ||||||
|
Intangible
assets, net
|
49,487,000 | 41,588,000 | ||||||
|
Other
assets
|
28,888,000 | 21,974,000 | ||||||
|
Total
assets
|
$ | 781,643,000 | $ | 732,910,000 | ||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 148,000 | $ | 237,000 | ||||
|
Trade
accounts payable
|
28,604,000 | 26,978,000 | ||||||
|
Accrued
expenses and other current liabilities
|
52,101,000 | 36,978,000 | ||||||
|
Income
taxes payable
|
979,000 | 1,320,000 | ||||||
|
Total
current liabilities
|
81,832,000 | 65,513,000 | ||||||
|
Long-term
debt, net of current maturities
|
14,073,000 | 55,194,000 | ||||||
|
Deferred
income taxes
|
45,308,000 | 41,340,000 | ||||||
|
Other
long-term liabilities
|
30,556,000 | 23,268,000 | ||||||
|
Total
liabilities
|
171,769,000 | 185,315,000 | ||||||
|
Commitments
and contingencies (Notes 2 and 16)
|
||||||||
|
Redeemable
noncontrolling interests (Note 12)
|
55,048,000 | 56,937,000 | ||||||
|
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
|
¾ | ¾ | ||||||
|
Common
Stock, $.01 par value per share; 30,000,000 shares
authorized;
|
||||||||
|
13,126,005
and 13,011,426 shares issued and outstanding
|
131,000 | 104,000 | ||||||
|
Class
A Common Stock, $.01 par value per share; 30,000,000
|
||||||||
|
shares
authorized; 19,863,572 and 19,641,543 shares issued
|
||||||||
|
and
outstanding
|
199,000 | 157,000 | ||||||
|
Capital
in excess of par value
|
227,993,000 | 224,625,000 | ||||||
|
Accumulated
other comprehensive loss
|
(124,000 | ) | (1,381,000 | ) | ||||
|
Retained
earnings
|
240,913,000 | 189,485,000 | ||||||
|
Total
HEICO shareholders’ equity
|
469,112,000 | 412,990,000 | ||||||
|
Noncontrolling
interests
|
85,714,000 | 77,668,000 | ||||||
|
Total
shareholders’ equity
|
554,826,000 | 490,658,000 | ||||||
|
Total
liabilities and equity
|
$ | 781,643,000 | $ | 732,910,000 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
44
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net
sales
|
$ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | ||||||
|
Operating
costs and expenses:
|
||||||||||||
|
Cost
of sales
|
394,673,000 | 357,285,000 | 371,852,000 | |||||||||
|
Selling,
general and administrative expenses
|
113,174,000 | 92,756,000 | 104,707,000 | |||||||||
|
Total
operating costs and expenses
|
507,847,000 | 450,041,000 | 476,559,000 | |||||||||
|
Operating
income
|
109,173,000 | 88,255,000 | 105,788,000 | |||||||||
|
Interest
expense
|
(508,000 | ) | (615,000 | ) | (2,314,000 | ) | ||||||
|
Other
income (expense)
|
390,000 | 205,000 | (637,000 | ) | ||||||||
|
Income
before income taxes and noncontrolling interests
|
109,055,000 | 87,845,000 | 102,837,000 | |||||||||
|
Income
tax expense
|
36,700,000 | 28,000,000 | 35,450,000 | |||||||||
|
Net
income from consolidated operations
|
72,355,000 | 59,845,000 | 67,387,000 | |||||||||
|
Less:
Net income attributable to noncontrolling interests
|
17,417,000 | 15,219,000 | 18,876,000 | |||||||||
|
Net
income attributable to HEICO
|
$ | 54,938,000 | $ | 44,626,000 | $ | 48,511,000 | ||||||
|
Net
income per share attributable to HEICO shareholders (Note
13):
|
||||||||||||
|
Basic
|
$ | 1.67 | $ | 1.36 | $ | 1.48 | ||||||
|
Diluted
|
$ | 1.62 | $ | 1.32 | $ | 1.42 | ||||||
|
Weighted
average number of common shares outstanding:
|
||||||||||||
|
Basic
|
32,832,508 | 32,755,999 | 32,886,424 | |||||||||
|
Diluted
|
33,770,830 | 33,780,039 | 34,054,195 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
45
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
|
HEICO Shareholders' Equity
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Redeemable
|
Class A
|
Capital in
|
Other
|
Total
|
||||||||||||||||||||||||||||
|
Noncontrolling
|
Common
|
Common
|
Excess of
|
Comprehensive
|
Retained
|
Noncontrolling
|
Shareholders'
|
|||||||||||||||||||||||||
|
Interests
|
Stock
|
Stock
|
Par Value
|
Income (Loss)
|
Earnings
|
Interests
|
Equity
|
|||||||||||||||||||||||||
|
Balances
as of October 31, 2007 (as previously reported)
|
$ | ― | $ | 105,000 | $ | 156,000 | $ | 220,658,000 | $ | 3,050,000 | $ | 147,632,000 | $ | ― | $ | 371,601,000 | ||||||||||||||||
|
Retrospective
adjustments related to adoption of accounting guidance
for noncontrolling interests (Note 1)
|
49,370,000 | — | — | — | — | (37,983,000 | ) | 61,551,000 | 23,568,000 | |||||||||||||||||||||||
|
Balances
as of October 31, 2007 (as retrospectively adjusted)
|
49,370,000 | 105,000 | 156,000 | 220,658,000 | 3,050,000 | 109,649,000 | 61,551,000 | 395,169,000 | ||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
9,611,000 | — | — | — | — | 48,511,000 | 9,265,000 | 57,776,000 | ||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
— | — | — | — | (7,706,000 | ) | — | — | (7,706,000 | ) | ||||||||||||||||||||||
|
Total
comprehensive income
|
9,611,000 | — | — | — | (7,706,000 | ) | 48,511,000 | 9,265,000 | 50,070,000 | |||||||||||||||||||||||
|
Cash
dividends ($.080 per share)
|
— | — | — | — | — | (2,631,000 | ) | — | (2,631,000 | ) | ||||||||||||||||||||||
|
Cumulative
effect of adopting FIN 48
|
— | — | — | — | — | (639,000 | ) | — | (639,000 | ) | ||||||||||||||||||||||
|
Proceeds
from stock option exercises
|
— | 1,000 | 2,000 | 2,395,000 | — | — | — | 2,398,000 | ||||||||||||||||||||||||
|
Tax
benefit from stock option exercises
|
— | — | — | 6,248,000 | — | — | — | 6,248,000 | ||||||||||||||||||||||||
|
Stock
option compensation expense
|
— | — | — | 142,000 | — | — | — | 142,000 | ||||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
(7,456,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
|
Acquisitions
of noncontrolling interests
|
(4,277,000 | ) | — | — | — | — | 3,086,000 | — | 3,086,000 | |||||||||||||||||||||||
|
Noncontrolling
interests assumed related to acquisition
|
2,046,000 | — | — | — | — | (1,267,000 | ) | — | (1,267,000 | ) | ||||||||||||||||||||||
|
Adjustments
to redemption amount of redeemable noncontrolling
interests
|
(558,000 | ) | — | — | — | — | 268,000 | 290,000 | 558,000 | |||||||||||||||||||||||
|
Contributions
from noncontrolling interests
|
— | — | — | — | — | — | 32,000 | 32,000 | ||||||||||||||||||||||||
|
Other
|
— | — | — | — | (163,000 | ) | (1,000 | ) | — | (164,000 | ) | |||||||||||||||||||||
|
Balances
as of October 31, 2008 (as retrospectively adjusted)
|
48,736,000 | 106,000 | 158,000 | 229,443,000 | (4,819,000 | ) | 156,976,000 | 71,138,000 | 453,002,000 | |||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
8,228,000 | — | — | — | — | 44,626,000 | 6,991,000 | 51,617,000 | ||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
— | — | — | — | 3,276,000 | — | — | 3,276,000 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
8,228,000 | — | — | — | 3,276,000 | 44,626,000 | 6,991,000 | 54,893,000 | ||||||||||||||||||||||||
|
Repurchases
of common stock (Note 8)
|
— | (2,000 | ) | (2,000 | ) | (8,094,000 | ) | — | — | — | (8,098,000 | ) | ||||||||||||||||||||
|
Cash
dividends ($.096 per share)
|
— | — | — | — | — | (3,150,000 | ) | — | (3,150,000 | ) | ||||||||||||||||||||||
|
Proceeds
from stock option exercises
|
— | — | 1,000 | 1,206,000 | — | — | — | 1,207,000 | ||||||||||||||||||||||||
|
Tax
benefit from stock option exercises
|
— | — | — | 1,890,000 | — | — | — | 1,890,000 | ||||||||||||||||||||||||
|
Stock
option compensation expense
|
— | — | — | 181,000 | — | — | — | 181,000 | ||||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
(9,130,000 | ) | — | — | — | — | — | (461,000 | ) | (461,000 | ) | |||||||||||||||||||||
|
Acquisitions
of noncontrolling interests
|
(10,015,000 | ) | — | — | — | — | 6,845,000 | — | 6,845,000 | |||||||||||||||||||||||
|
Noncontrolling
interests assumed related to acquisition
|
7,505,000 | — | — | — | — | (4,200,000 | ) | — | (4,200,000 | ) | ||||||||||||||||||||||
|
Adjustments
to redemption amount of redeemable noncontrolling
interests
|
11,613,000 | — | — | — | — | (11,613,000 | ) | — | (11,613,000 | ) | ||||||||||||||||||||||
|
Other
|
— | — | — | (1,000 | ) | 162,000 | 1,000 | — | 162,000 | |||||||||||||||||||||||
|
Balances
as of October 31, 2009 (as retrospectively adjusted)
|
$ | 56,937,000 | $ | 104,000 | $ | 157,000 | $ | 224,625,000 | $ | (1,381,000 | ) | $ | 189,485,000 | $ | 77,668,000 | $ | 490,658,000 | |||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
46
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
|
HEICO Shareholders' Equity
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Redeemable
|
Class A
|
Capital in
|
Other
|
Total
|
||||||||||||||||||||||||||||
|
Noncontrolling
|
Common
|
Common
|
Excess of
|
Comprehensive
|
Retained
|
Noncontrolling
|
Shareholders'
|
|||||||||||||||||||||||||
|
Interests
|
Stock
|
Stock
|
Par Value
|
Income (Loss)
|
Earnings
|
Interests
|
Equity
|
|||||||||||||||||||||||||
|
Balances
as of October 31, 2009 (as previously reported)
|
$ | ― | $ | 104,000 | $ | 157,000 | $ | 224,625,000 | $ | (1,381,000 | ) | $ | 234,348,000 | $ | ― | $ | 457,853,000 | |||||||||||||||
|
Retrospective
adjustments related to adoption of accounting guidance for noncontrolling
interests (Note 1)
|
56,937,000 | — | — | — | — | (44,863,000 | ) | 77,668,000 | 32,805,000 | |||||||||||||||||||||||
|
Balances
as of October 31, 2009 (as retrospectively adjusted)
|
56,937,000 | 104,000 | 157,000 | 224,625,000 | (1,381,000 | ) | 189,485,000 | 77,668,000 | 490,658,000 | |||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
9,370,000 | — | — | — | — | 54,938,000 | 8,047,000 | 62,985,000 | ||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
— | — | — | — | 1,271,000 | — | — | 1,271,000 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
9,370,000 | — | — | — | 1,271,000 | 54,938,000 | 8,047,000 | 64,256,000 | ||||||||||||||||||||||||
|
Cash
dividends ($.108 per share)
|
— | — | — | — | — | (3,546,000 | ) | — | (3,546,000 | ) | ||||||||||||||||||||||
|
Five-for-four
common stock split
|
— | 26,000 | 40,000 | (66,000 | ) | — | (68,000 | ) | — | (68,000 | ) | |||||||||||||||||||||
|
Redemptions
of common stock related to stock option exercises (Note 8)
|
— | — | — | (681,000 | ) | — | — | — | (681,000 | ) | ||||||||||||||||||||||
|
Proceeds
from stock option exercises
|
— | 1,000 | 2,000 | 1,812,000 | — | — | — | 1,815,000 | ||||||||||||||||||||||||
|
Tax
benefit from stock option exercises
|
— | — | — | 951,000 | — | — | — | 951,000 | ||||||||||||||||||||||||
|
Stock
option compensation expense
|
— | — | — | 1,353,000 | — | — | — | 1,353,000 | ||||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
(10,360,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
|
Acquisitions
of noncontrolling interests
|
(795,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
|
Adjustments
to redemption amount of redeemable noncontrolling
interests
|
(104,000 | ) | — | — | — | — | 104,000 | — | 104,000 | |||||||||||||||||||||||
|
Other
|
— | — | — | (1,000 | ) | (14,000 | ) | — | (1,000 | ) | (16,000 | ) | ||||||||||||||||||||
|
Balances
as of October 31, 2010
|
$ | 55,048,000 | $ | 131,000 | $ | 199,000 | $ | 227,993,000 | $ | (124,000 | ) | $ | 240,913,000 | $ | 85,714,000 | $ | 554,826,000 | |||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
47
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Operating
Activities:
|
||||||||||||
|
Net
income from consolidated operations
|
$ | 72,355,000 | $ | 59,845,000 | $ | 67,387,000 | ||||||
|
Adjustments
to reconcile net income from consolidated
|
||||||||||||
|
operations
to net cash provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
17,597,000 | 14,967,000 | 15,052,000 | |||||||||
|
Impairment
of intangible assets
|
1,438,000 | 300,000 | 1,835,000 | |||||||||
|
Deferred
income tax provision (benefit)
|
1,817,000 | (2,651,000 | ) | 3,617,000 | ||||||||
|
Tax
benefit from stock option exercises
|
951,000 | 1,890,000 | 6,248,000 | |||||||||
|
Excess
tax benefit from stock option exercises
|
(669,000 | ) | (1,573,000 | ) | (4,324,000 | ) | ||||||
|
Stock
option compensation expense
|
1,353,000 | 181,000 | 142,000 | |||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||
|
(Increase)
decrease in accounts receivable
|
(10,684,000 | ) | 15,214,000 | (4,749,000 | ) | |||||||
|
Decrease
(increase) in inventories
|
6,359,000 | (87,000 | ) | (16,597,000 | ) | |||||||
|
Decrease
in prepaid expenses and other current assets
|
549,000 | 5,216,000 | 650,000 | |||||||||
|
Increase
(decrease) in trade accounts payable
|
125,000 | (5,619,000 | ) | 808,000 | ||||||||
|
Increase
(decrease) in accrued expenses and other
|
||||||||||||
|
current
liabilities
|
11,474,000 | (11,296,000 | ) | 3,803,000 | ||||||||
|
Decrease
in income taxes payable
|
(1,196,000 | ) | (936,000 | ) | (1,040,000 | ) | ||||||
|
Other
|
248,000 | 366,000 | 330,000 | |||||||||
|
Net
cash provided by operating activities
|
101,717,000 | 75,817,000 | 73,162,000 | |||||||||
|
Investing
Activities:
|
||||||||||||
|
Acquisitions,
net of cash acquired
|
(39,061,000 | ) | (59,798,000 | ) | (24,761,000 | ) | ||||||
|
Capital
expenditures
|
(8,877,000 | ) | (10,253,000 | ) | (13,455,000 | ) | ||||||
|
Other
|
(325,000 | ) | 20,000 | 166,000 | ||||||||
|
Net
cash used in investing activities
|
(48,263,000 | ) | (70,031,000 | ) | (38,050,000 | ) | ||||||
|
Financing
Activities:
|
||||||||||||
|
Payments
on revolving credit facility
|
(78,000,000 | ) | (73,000,000 | ) | (66,000,000 | ) | ||||||
|
Borrowings
on revolving credit facility
|
37,000,000 | 91,000,000 | 50,000,000 | |||||||||
|
Distributions
to noncontrolling interests
|
(10,360,000 | ) | (9,591,000 | ) | (7,456,000 | ) | ||||||
|
Acquisitions
of noncontrolling interests
|
(795,000 | ) | (11,268,000 | ) | (4,277,000 | ) | ||||||
|
Repurchases
of common stock
|
— | (8,098,000 | ) | — | ||||||||
|
Cash
dividends paid
|
(3,546,000 | ) | (3,150,000 | ) | (2,631,000 | ) | ||||||
|
Payment
of industrial development revenue bonds
|
— | — | (1,980,000 | ) | ||||||||
|
Redemptions
of common stock related to stock option exercises
|
(681,000 | ) | — | — | ||||||||
|
Proceeds
from stock option exercises
|
1,815,000 | 1,207,000 | 2,398,000 | |||||||||
|
Excess
tax benefit from stock option exercises
|
669,000 | 1,573,000 | 4,324,000 | |||||||||
|
Other
|
(294,000 | ) | (219,000 | ) | (1,158,000 | ) | ||||||
|
Net
cash used in financing activities
|
(54,192,000 | ) | (11,546,000 | ) | (26,780,000 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
114,000 | 365,000 | (717,000 | ) | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(624,000 | ) | (5,395,000 | ) | 7,615,000 | |||||||
|
Cash
and cash equivalents at beginning of year
|
7,167,000 | 12,562,000 | 4,947,000 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 6,543,000 | $ | 7,167,000 | $ | 12,562,000 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
48
HEICO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
HEICO Corporation, through its
principal subsidiaries HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and
HEICO Electronic Technologies Corp. (“HEICO Electronic”) and their subsidiaries
(collectively, the “Company”), is principally engaged in the design, manufacture
and sale of aerospace, defense and electronic related products and services
throughout the United States and internationally. The Company’s
customer base is primarily the aviation, defense, space, medical,
telecommunication and electronic industries.
Basis
of Presentation
The consolidated financial statements
include the accounts of HEICO Corporation and its subsidiaries, all of which are
wholly-owned except for HEICO Aerospace, which is 20%-owned by Lufthansa Technik
AG, the technical services subsidiary of Lufthansa German
Airlines. In addition, HEICO Aerospace consolidates three
subsidiaries which are 72%, 80%, and 82.3% owned, respectively, and a joint
venture formed in March 2001, which is 16% owned by American Airlines’ parent
company, AMR Corporation. Also, HEICO Electronic consolidates three
subsidiaries, which are 80%, 93.3% and 82.5% owned, respectively (see Note 12,
Redeemable Noncontrolling Interests). All significant intercompany
balances and transactions are eliminated.
Stock
Split
In March 2010, the Company’s Board of
Directors declared a 5-for-4 stock split on both classes of the Company’s common
stock. The stock split was effected as of April 27, 2010 in the form
of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information has been
adjusted retrospectively to give effect to the 5-for-4 stock split.
Use
of Estimates and Assumptions
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For purposes of the consolidated
financial statements, the Company considers all highly liquid investments such
as U.S. Treasury bills and money market funds with an original maturity of three
months or less to be cash equivalents.
49
Accounts
Receivable
Accounts receivable consist of amounts
billed and currently due from customers and unbilled costs and estimated
earnings related to revenue from certain fixed price contracts recognized on the
percentage-of-completion method that have been recognized for accounting
purposes, but not yet billed to customers. The valuation of accounts
receivable requires that the Company set up an allowance for estimated
uncollectible accounts and record a corresponding charge to bad debt
expense. The Company estimates uncollectible receivables based on
such factors as its prior experience, its appraisal of a customer’s ability to
pay, age of receivables outstanding and economic conditions within and outside
of the aviation, defense, space, medical, telecommunication and electronic
industries.
Concentrations
of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and trade accounts receivable. The Company
places its temporary cash investments with high credit quality financial
institutions and limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company’s customer base and their dispersion across many different geographical
regions. The Company performs ongoing credit evaluations of its customers,
but does not generally require collateral to support customer receivables.
Inventory
Inventory is stated at the lower of
cost or market, with cost being determined on the first-in, first-out or the
average cost basis. Losses, if any, are recognized fully in the
period when identified.
The Company periodically evaluates the
carrying value of inventory, giving consideration to factors such as its
physical condition, sales patterns and expected future demand in order to
estimate the amount
necessary to write down its slow moving, obsolete or damaged
inventory. These estimates could vary significantly from actual
amounts based upon future economic conditions, customer inventory levels or
competitive factors that were not foreseen or did not exist when the estimated
write-downs were made.
In
accordance with industry practice, all inventories are classified as a current
asset including portions with long production cycles, some of which may not be
realized within one year.
Property,
Plant and Equipment
Property, plant and equipment is
recorded at cost. Depreciation and amortization is generally provided
on the straight-line method over the estimated useful lives of the various
assets. The Company’s property, plant and equipment is depreciated
over the following estimated useful lives:
|
Buildings
and improvements
|
15
to 40 years
|
|
Leasehold
improvements
|
2
to 20 years
|
|
Machinery
and equipment
|
3
to 10 years
|
|
Tooling
|
2
to 5 years
|
The costs of major additions and
improvements are capitalized. Leasehold improvements are amortized
over the shorter of the leasehold improvement’s useful life or the lease
term. Repairs and maintenance are expensed as
incurred. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected within earnings.
50
Business
Combinations
As further explained in New Accounting
Pronouncements below, the Company adopted new accounting guidance for business
combinations effective prospectively for acquisitions consummated on or after
November 1, 2009 (the beginning of fiscal 2010). Under the new
guidance, any contingent consideration is recognized as a liability at fair
value as of the acquisition date with subsequent fair value adjustments recorded
in operations. Acquisition costs are generally expensed as
incurred. For acquisitions consummated prior to fiscal 2010,
contingent consideration is accounted for as an additional cost of the
respective acquired entity when paid and acquisition costs were capitalized as
part of the purchase price.
The Company allocates the purchase
price of acquired entities to the underlying tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
values, with any excess recorded as goodwill. The operating results
of acquired businesses are included in the Company’s results of operations
beginning as of their effective acquisition dates.
Goodwill
and Other Intangible Assets
The Company tests goodwill for
impairment annually as of October 31, or more frequently if events or changes in
circumstances indicate that the carrying amount of goodwill may not be fully
recoverable. The test requires the Company to compare the fair value
of each of its reporting units to its carrying value to determine potential
impairment. If the carrying value of a reporting unit exceeds its
fair value, the implied fair value of that reporting unit’s goodwill is to be
calculated and an impairment loss is recognized in the amount by which the
carrying value of the reporting unit’s goodwill exceeds its implied fair value,
if any.
The Company’s intangible assets not
subject to amortization consist principally of its trade names. The
Company’s intangible assets subject to amortization are amortized on the
straight-line method over the following estimated useful lives:
|
Customer
relationships
|
5
to 10 years
|
|
Intellectual
property
|
6
to 15 years
|
|
Licenses
|
12
to 17 years
|
|
Non-compete
agreements
|
2
to 7 years
|
|
Patents
|
5
to 19 years
|
|
Trade
names
|
5
to 10 years
|
Amortization expense of intellectual
property, licenses and patents is recorded as a component of cost of sales, and
amortization expense of customer relationships, non-compete agreements and trade
names is recorded as a component of selling, general and administrative expenses
in the Company’s Consolidated Statement of Operations. The Company
tests each non-amortizing intangible asset for impairment annually as of October
31, or more frequently if events or changes in circumstances indicate that the
asset might be impaired. To derive the fair value of its trade names,
the Company utilizes an income approach. The Company also tests each
amortizing intangible asset for impairment if events or circumstances indicate
that the asset might be impaired. The test consists of determining
whether the carrying value of such assets will be recovered through undiscounted
expected future cash flows. If the total of the undiscounted future
cash flows is less than the carrying amount of those assets, the Company
recognizes an impairment loss based on the excess of the carrying amount over
the fair value of the assets.
Investments
Investments are stated at fair value
based on quoted market prices. Investments that are intended to be
held for less than one year are included within prepaid expenses and other
current assets in the Company’s Consolidated Balance Sheets, while those
intended to be held for longer than one year are classified within other
assets. Unrealized gains or losses associated with available-for-sale
securities are reported net of tax within other comprehensive income in
shareholders’ equity. Unrealized gains or losses associated with
trading securities are recorded as a component of other income in the Company’s
Consolidated Statement of Operations.
51
Derivative
Instruments
From time to time, the Company utilizes
certain derivative instruments (e.g. interest rate swap agreements and foreign
currency forward contracts) to hedge the variability of expected future cash
flows of certain transactions. On an ongoing basis, the Company
assesses whether derivative instruments used in hedging transactions are highly
effective in offsetting changes in cash flows of the hedged items and therefore
qualify as cash flow hedges. For a derivative instrument that
qualifies as a cash flow hedge, the effective portion of changes in fair value
of the derivative is deferred and recorded as a component of other comprehensive
income until the hedged transaction occurs and is recognized in
earnings. All other portions of changes in the fair value of a cash
flow hedge are recognized in earnings immediately.
The
Company has previously utilized interest rate swap agreements to manage interest
expense related to its revolving credit facility. Interest rate risk
associated with the Company’s variable rate revolving credit facility is the
potential increase in interest expense from an increase in interest
rates. The Company did not enter into any interest rate swap
agreements in fiscal 2010, 2009 or 2008.
During fiscal 2008, the Company entered
into a one year foreign currency forward contract to mitigate foreign exchange
risk at one of its foreign subsidiaries for transactions denominated in a
currency other than its functional currency. The impact of this
forward contract did not have a material effect on the Company’s results of
operations, financial position or cash flows in fiscal 2009 or
2008. The Company did not enter into any foreign currency forward
contracts in fiscal 2010 or 2009.
Customer
Rebates and Credits
The Company records accrued customer
rebates and credits as a component of accrued expenses and other current
liabilities in the Company’s Consolidated Balance Sheets. These
amounts generally relate to discounts negotiated with customers as part of
certain sales contracts that are usually tied to sales volume
thresholds. The Company accrues customer rebates and credits as a
reduction within 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.
Product
Warranties
Product warranty liabilities are
estimated at the time of shipment and recorded as a component of accrued
expenses and other current liabilities in the Company’s Consolidated Balance
Sheets. The amount recognized is based on historical claims
experience.
Revenue
Recognition
Revenue is recognized on an accrual
basis, primarily upon the shipment of products and the rendering of
services. Revenue earned from rendering services represented less
than 10% of consolidated net sales for all periods presented. Revenue
from certain fixed price contracts for which costs can be dependably estimated
is recognized on the percentage-of-completion method, measured by the percentage
of costs incurred to date to estimated total costs for each
contract. The percentage of the Company’s net sales recognized under
the percentage-of-completion method was approximately 2%, 1%, and 3% in fiscal
2010, 2009 and 2008, respectively. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Selling, general and administrative costs are charged to
expense as incurred.
52
Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are
determined. Variations in actual labor performance, changes to
estimated profitability, and final contract settlements may result in revisions
to cost estimates and are recognized in income in the period in which the
revisions are determined.
The asset, “costs and estimated
earnings in excess of billings” on uncompleted percentage-of-completion
contracts, included in accounts receivable, represents revenue recognized in
excess of amounts billed. The liability, “billings in excess of costs
and estimated earnings,” included in accrued expenses and other current
liabilities, represents billings in excess of revenue recognized on contracts
accounted for under either the percentage-of-completion method or the
completed-contract method. Billings are made based on the completion
of certain milestones as provided for in the contracts.
For fixed price contracts in which
costs cannot be dependably estimated, revenue is recognized on the
completed-contract method. A contract is considered complete when all
significant costs have been incurred or the item has been accepted by the
customer. The aggregate effects of changes in estimates relating to
long-term contracts did not have a material effect on net income from
consolidated operations in fiscal 2010, 2009 or 2008.
Stock-Based
Compensation
The Company records compensation
expense associated with stock options in its Consolidated Statements of
Operations based on the grant date fair value of those awards. The
fair value of each stock option on the date of grant is estimated using the
Black-Scholes pricing model based on certain valuation
assumptions. Expected volatilities are based on the Company’s
historical stock prices over the contractual terms of the options and other
factors. The risk-free interest rates used are based on the published
U.S. Treasury yield curve in effect at the time of the grant for
instruments with a similar life. The dividend yield reflects the
Company’s expected dividend yield at the date of grant. The expected
life represents the period that the stock options are expected to be
outstanding, taking into consideration the contractual terms of the options and
employee historical exercise behavior. The Company generally
recognizes stock option compensation expense ratably over the award’s vesting
period.
The Company calculates the amount of
excess tax benefit that is available to offset future write-offs of deferred tax
assets, or additional paid-in-capital pool (“APIC Pool”) by tracking each stock
option award granted after November 1, 1996 on an employee-by-employee basis and
on a grant-by-grant basis to determine whether there is a tax benefit situation
or tax deficiency situation for each such award. The Company then
compares the fair value expense to the tax deduction received for each stock
option grant and aggregates the benefits and deficiencies, which have the effect
of increasing or decreasing, respectively, the APIC Pool. Should the
amount of future tax deficiencies be greater than the available APIC Pool, the
Company will record the excess as income tax expense in its Consolidated
Statements of Operations. The excess tax benefit resulting from tax
deductions in excess of the cumulative compensation expense recognized for stock
options exercised is presented as a financing activity in the Company’s
Consolidated Statements of Cash Flows. All other tax benefits related
to stock options have been presented as a component of operating
activities.
53
Income
Taxes
Income tax expense includes United
States and foreign income taxes, plus the provision for United States taxes on
undistributed earnings of foreign subsidiaries not deemed to be permanently
invested. Deferred income taxes are provided on elements of income
that are recognized for financial accounting purposes in periods different from
periods recognized for income tax purposes.
The Company accounts for uncertainty in
income taxes and evaluates 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 the new
guidance relating to the accounting for uncertainty in income taxes effective
November 1, 2007, the Company recognized a cumulative effect adjustment that
decreased retained earnings as of the beginning of fiscal 2008 by
$639,000. The Company’s policy is to recognize interest and penalties
related to income tax matters as a component of income tax
expense. Further information regarding income taxes can be found in
Note 6, Income Taxes.
Noncontrolling
Interests
Effective
November 1, 2009, the Company adopted new accounting guidance that requires the
recognition of certain noncontrolling interests (previously referred to as
minority interests) as a separate component within equity in the consolidated
balance sheet. It also requires the amount of consolidated net income
attributable to the parent and the noncontrolling interests be clearly
identified and presented within the consolidated statement of
operations. The adoption of this new guidance (which is included in
Accounting Standards Codification (“ASC”) 810, “Consolidation”) has affected the
presentation of noncontrolling interests in the Company’s consolidated financial
statements on a retrospective basis. For example, under this
guidance, “Net income from consolidated operations” is comparable to what was
previously presented as “Income before minority interests” and “Net income
attributable to HEICO” is comparable to what was previously presented as “Net
income.” Further, acquisitions of noncontrolling interests are
considered a financing activity under the new accounting guidance and are no
longer presented as an investing activity.
Effective
November 1, 2009, the Company also adopted new accounting guidance that
retrospectively affects the financial statement classification and measurement
of redeemable noncontrolling interests. This guidance is included in
ASC 480, “Distinguishing Liabilities from Equity.” As further
detailed in Note 12, Redeemable Noncontrolling Interests, the holders of equity
interests in certain of the Company’s subsidiaries have rights (“Put Rights”)
that require the Company to provide cash consideration for their equity
interests (the “Redemption Amount”) at fair value or at a formula that
management intended to reasonably approximate fair value based solely on a
multiple of future earnings over a measurement period. The Put Rights
are embedded in the shares owned by the noncontrolling interest holders and are
not freestanding. Previously, the Company recorded such redeemable
noncontrolling interests at historical cost plus an allocation of subsidiary
earnings based on ownership interest, less dividends paid to the noncontrolling
interest holders. Effective November 1, 2009, the Company adjusted
its redeemable noncontrolling interests in accordance with this new accounting
guidance to the higher of their carrying cost or management’s estimate of the
Redemption Amount with a corresponding decrease to retained earnings and
classified such interests outside of permanent equity. Under this
guidance, subsequent adjustments to the carrying amount of redeemable
noncontrolling interests to reflect any changes in the Redemption Amount at the
end of each reporting period will be recorded in the same
manner. Such adjustments to Redemption Amounts based on fair value
will have no effect on net income per share attributable to HEICO shareholders
whereas the portion of periodic adjustments to the carrying amount of redeemable
noncontrolling interests based solely on a multiple of future earnings that
reflect a redemption amount in excess of fair value will effect net income per
share attributable to HEICO shareholders under the two-class
method.
54
As a result of adopting the new
accounting guidance for noncontrolling interests and redeemable noncontrolling
interests, the Company (i) reclassified approximately $78 million from temporary
equity (previously labeled as “Minority interests in consolidated subsidiaries”)
to permanent equity (labeled as “Noncontrolling interests”) pertaining to
noncontrolling interests that do not contain a redemption feature; and (ii)
renamed temporary equity as “Redeemable noncontrolling interests” and recorded
an approximately $45 million increase to redeemable noncontrolling interests
with a corresponding decrease to retained earnings in the Company’s Consolidated
Balance Sheet. The resulting $57 million of redeemable noncontrolling
interests as of November 1, 2009 represents management’s estimate of the
aggregate Redemption Amount of all Put Rights that the Company would be required
to pay of which approximately $25 million is redeemable at fair value and
approximately $32 million is redeemable based solely on a multiple of future
earnings. The actual Redemption Amount will likely be
different. See Note 12, Redeemable Noncontrolling Interests, for
additional information as well as the Company’s Consolidated Statements of
Shareholders’ Equity and Comprehensive Income, which have been retrospectively
adjusted.
Net
Income per Share Attributable to HEICO Shareholders
Basic net income per share attributable
to HEICO shareholders is computed by dividing net income attributable to HEICO
by the weighted average number of common shares outstanding during the
period. Diluted net income per share attributable to HEICO
shareholders is computed by dividing net income attributable to HEICO by the
weighted average number of common shares outstanding during the period plus
potentially dilutive common shares arising from the assumed exercise of stock options,
if dilutive. The dilutive impact of potentially dilutive common
shares is determined by applying the treasury stock method.
As further detailed in “Noncontrolling
Interests” above, the portion of periodic adjustments to the carrying amount of
redeemable noncontrolling interests based solely on a multiple of future
earnings that reflect a redemption amount in excess of fair value are deducted
from net income attributable to HEICO for purposes of determining net income per
share attributable to HEICO shareholders under the two-class method (see Note
13, Net Income per Share Attributable to HEICO Shareholders).
Foreign
Currency Translation
All assets and liabilities of foreign
subsidiaries that do not utilize the United States dollar as its functional
currency are translated at period-end exchange rates, while revenue and expenses
are translated using average exchange rates for the
period. Unrealized translation gains or losses are reported as
foreign currency translation adjustments through other comprehensive income in
shareholders’ equity.
Contingencies
Losses for contingencies such as
product warranties, litigation and environmental matters are recognized in
income when they are probable and can be reasonably estimated. Gain
contingencies are not recognized in income until they have been
realized.
55
New
Accounting Pronouncements
As
discussed within “Noncontrolling Interests” above, the Company adopted new
guidance related to the recognition, measurement and classification of
noncontrolling interests.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued new
guidance which defines fair value, establishes a framework for measuring fair
value, and requires expanded disclosures about fair value
measurements. This guidance is included in ASC 820, “Fair Value
Measurements and Disclosures.” In February 2008, the FASB issued
additional guidance which delayed the effective date by one year for
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. These
nonfinancial assets and liabilities include items such as goodwill, other
intangible assets, and property, plant and equipment that are measured at fair
value resulting from impairment, if deemed necessary. The provisions
of this guidance related to nonfinancial assets and liabilities were adopted by
the Company on a prospective basis as of the beginning of fiscal 2010, or
November 1, 2009. The adoption did not have a material effect on the
Company’s results of operations, financial position or cash flows.
In
December 2007, the FASB issued new guidance for business combinations that
retains the fundamental requirements of previous guidance that the acquisition
method of accounting (formerly the “purchase accounting” method) be used for all
business combinations and for an acquirer to be identified for each business
combination. However, the new guidance changes the approach of
applying the acquisition method in a number of significant areas, including that
acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value as of the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset as of the acquisition date; restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. Further, any contingent consideration will be recognized as
a liability at fair value as of the acquisition date with subsequent fair value
adjustments recorded in operations. Contingent consideration was
previously accounted for as an additional cost of the respective acquired entity
when paid. The Company adopted the new guidance (which is included in
ASC 805, “Business Combinations”) on a prospective basis as of the beginning of
fiscal 2010 for all business combinations consummated on or after November 1,
2009. The adoption did not have a material effect on the Company’s
results of operations, financial position or cash flows.
In January 2010, the FASB issued
Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures About Fair
Value Measurements,” which requires new disclosures regarding transfers in and
out of Level 1 and Level 2 fair value measurements and more detailed information
of activity in Level 3 fair value measurements. The Company adopted
ASU 2010-06 as of the beginning of the second quarter of fiscal 2010, except the
additional Level 3 disclosures, which are effective in fiscal years beginning
after December 15, 2010, or as of fiscal 2012 for HEICO. The adoption
did not have a material effect on the Company’s results of operations, financial
position or cash flows. The Company will make the additional Level 3
disclosures, if applicable, as of the date of adoption.
In December 2010, the FASB ratified
Emerging Issues Task Force (“EITF”) Issue 10-G, “Disclosure of Supplementary Pro
Forma Information for Business Combinations.” Under EITF Issue 10-G,
supplemental pro forma information disclosures pertaining to acquisitions should
be presented as if the business combination(s) occurred as of the beginning of
the prior annual period when comparative financial statements are
presented. EITF Issue 10-G is effective for business combinations
consummated in periods beginning after December 15, 2010, or in the second
quarter of fiscal 2011 for HEICO. Early adoption is
permitted. The Company will make the required disclosures
prospectively as of the date of the adoption for any material business
combinations or series of immaterial business combinations that are material in
the aggregate.
56
2. ACQUISITIONS
In November 2007, the Company, through
an 80%-owned subsidiary of HEICO Aerospace, acquired all of the stock of a
European company. The acquired company supplies aircraft parts for
sale and exchange as well as repair management services to commercial and
regional airlines, asset management companies and FAA overhaul and repair
facilities.
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.
In February 2008, the Company, through
HEICO Aerospace, acquired an 80.1% interest in certain assets and certain
liabilities of a U.S. company that is an FAA-approved repair station which
specializes in avionics primarily for the commercial aviation
market. The remaining noncontrolling interest is principally owned by
certain members of the acquired company’s management.
In May 2009, the Company, through HEICO
Electronic, acquired 82.5% of the stock of VPT, Inc., a U.S. company that
designs and provides power conversion products principally serving the defense,
space and aviation industries. The remaining 17.5% continues to be
owned by an existing VPT shareholder which is also a supplier to the acquired
company. During the first year following the acquisition, VPT met
certain earnings objectives which obligated the Company to pay additional
purchase consideration of $1.3 million in the third quarter of fiscal
2010. In addition, subject to meeting certain earnings objectives
during the second and third year following the acquisition, the Company may be
obligated to pay additional purchase consideration of up to approximately $1.3
million in fiscal 2011 and $10.1 million in fiscal 2012.
In October 2009, the Company, through
HEICO Electronic, acquired the business, assets and certain liabilities of the
Seacom division of privately-held Dukane Corp. and formed a new subsidiary,
Dukane Seacom, Inc. (“Seacom”). Seacom is a designer and manufacturer
of underwater locator beacons used to locate aircraft cockpit voice recorders,
flight data recorders, marine ship voyage recorders and various other devices
which have been submerged under water. Subject to meeting certain
earnings objectives during the first two years following the acquisition, the
Company may be obligated to pay additional purchase consideration of up to
approximately $11.7 million in aggregate. Based on the subsidiary’s
earnings in the first year following the acquisition, the Company accrued $4.1
million of additional purchase consideration as of October 31, 2010, which it
expects to pay in fiscal 2011.
In February 2010, the Company, through
HEICO Electronic, acquired substantially all of the assets and assumed certain
liabilities of dB Control. dB control produces high-power devices
used in both defense and commercial applications. As further detailed
in Note 7, Fair Value Measurements, the Company may be obligated to pay
contingent consideration of up to $2.0 million in fiscal 2013 should dB Control
meet certain earnings objectives during the second and third years following the
acquisition.
57
As part of the purchase agreements
associated with certain prior year acquisitions, the Company may be obligated to
pay additional purchase consideration based on the acquired subsidiary meeting
certain earnings objectives following the acquisition. For
acquisitions consummated prior to fiscal 2010, the Company accrues an estimate
of additional purchase consideration when the earnings objectives are
met. During fiscal 2010, the Company, through HEICO Electronic, paid
$4.2 million of such additional purchase consideration of which $1.8 million was
accrued as of October 31, 2009. During fiscal 2009, the Company,
through HEICO Electronic, paid $3.8 million of such additional purchase
consideration of which $2.2 million was accrued as of October 31,
2008. During fiscal 2008, the Company, through HEICO Aerospace and
HEICO Electronic, paid $7.0 million and $4.7 million, respectively, of such
additional purchase consideration, all of which was accrued as of October 31,
2007. The amounts paid in fiscal 2010, 2009 and 2008 were based on a
multiple of each applicable subsidiary’s earnings relative to target and were
not contingent upon the former shareholders of the respective acquired entity
remaining employed by the Company or providing future services to the
Company. Accordingly, these amounts represent an additional cost of
the respective entity recorded as additional goodwill. Information
regarding additional contingent purchase consideration related to acquisitions
prior to fiscal 2010 may be found in Note 16, Commitments and
Contingencies.
The purchase price of each of the above
referenced acquisitions was paid in cash using proceeds from the Company’s
revolving credit facility and is not material or significant to the Company’s
consolidated financial statements. The aggregate cost paid in cash
for acquisitions, including additional purchase consideration payments, was
$39.1 million, $59.8 million and $24.8 million in fiscal 2010, 2009 and 2008,
respectively. The allocation of the purchase price of each
acquisition to the tangible and identifiable intangible assets acquired and
liabilities assumed is based on their estimated fair values as of the date of
acquisition. The Company determines the fair values of such assets
and liabilities, generally in consultation with third-party valuation
advisors. The excess of the purchase price over the estimated fair
values is recorded as goodwill (see Note 17, Supplemental Disclosures of Cash
Flow Information).
The operating results of the Company’s
fiscal 2010 acquisition were included in the Company’s results of operations
from the effective acquisition date. The amount of net sales and
earnings of the 2010 acquisition included in the Consolidated Statements of
Operations is not material. The following table presents unaudited
pro forma financial information for fiscal 2009 as if the fiscal 2010
acquisition had occurred as of November 1, 2008 for purposes of the information
presented for the year ended October 31, 2009. Had the fiscal 2010
acquisition been consummated as of November 1, 2009, net sales, net income from
consolidated operations, net income attributable to HEICO, and basic and diluted
net income per share attributable to HEICO shareholders on a pro forma basis for
fiscal 2010 would not have been materially different than the reported
amounts. The pro forma financial information is presented for
comparative purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved if the acquisition had taken
place as of November 1, 2008. The unaudited pro forma financial
information includes adjustments to historical amounts such as additional
amortization expense related to intangible assets acquired and increased
interest expense associated with borrowings to finance the
acquisition.
|
Year ended
|
||||
|
October 31, 2009
|
||||
|
Net
sales
|
$ | 563,025,000 | ||
|
Net
income from consolidated operations
|
$ | 61,966,000 | ||
|
Net
income attributable to HEICO
|
$ | 46,747,000 | ||
|
Net
income per share attributable to HEICO shareholders:
|
||||
|
Basic
|
$ | 1.43 | ||
|
Diluted
|
$ | 1.38 | ||
58
3. SELECTED
FINANCIAL STATEMENT INFORMATION
Accounts
Receivable
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Accounts
receivable
|
$ | 94,283,000 | $ | 80,399,000 | ||||
|
Less: Allowance
for doubtful accounts
|
(2,468,000 | ) | (2,535,000 | ) | ||||
|
Accounts
receivable, net
|
$ | 91,815,000 | $ | 77,864,000 | ||||
Costs
and Estimated Earnings on Uncompleted Percentage-of-Completion
Contracts
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Costs
incurred on uncompleted contracts
|
$ | 6,323,000 | $ | 10,280,000 | ||||
|
Estimated
earnings
|
7,603,000 | 8,070,000 | ||||||
| 13,926,000 | 18,350,000 | |||||||
|
Less: Billings
to date
|
(8,967,000 | ) | (12,543,000 | ) | ||||
| $ | 4,959,000 | $ | 5,807,000 | |||||
|
Included
in the accompanying Consolidated Balance
|
||||||||
|
Sheets
under the following captions:
|
||||||||
|
Accounts
receivable, net (costs and estimated earnings in excess of
billings)
|
$ | 5,135,000 | $ | 5,832,000 | ||||
|
Accrued
expenses and other current liabilities (billings in excess of costs and
estimated earnings)
|
(176,000 | ) | (25,000 | ) | ||||
| $ | 4,959,000 | $ | 5,807,000 | |||||
Changes in estimates pertaining to
percentage of completion contracts did not have a material effect on net income
from consolidated operations in fiscal 2010, 2009 or 2008.
Inventories
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Finished
products
|
$ | 72,263,000 | $ | 79,665,000 | ||||
|
Work
in process
|
19,034,000 | 14,279,000 | ||||||
|
Materials,
parts, assemblies and supplies
|
46,918,000 | 43,641,000 | ||||||
|
Inventories,
net of valuation reserves
|
$ | 138,215,000 | $ | 137,585,000 | ||||
Inventories related to long-term
contracts were not significant as of October 31, 2010 and 2009.
59
Property,
Plant and Equipment
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Land
|
$ | 3,656,000 | $ | 3,656,000 | ||||
|
Buildings
and improvements
|
38,772,000 | 38,091,000 | ||||||
|
Machinery,
equipment and tooling
|
85,095,000 | 80,697,000 | ||||||
|
Construction
in progress
|
6,319,000 | 5,331,000 | ||||||
| 133,842,000 | 127,775,000 | |||||||
|
Less: Accumulated
depreciation and amortization
|
(74,839,000 | ) | (67,247,000 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 59,003,000 | $ | 60,528,000 | ||||
The amounts set forth above include
tooling costs having a net book value of $4,479,000 and $4,369,000 as of October
31, 2010 and 2009, respectively. Amortization expense on capitalized
tooling was $1,857,000, $1,825,000 and $1,575,000 for the fiscal years ended
October 31, 2010, 2009 and 2008, respectively. Expenditures for
capitalized tooling costs were $1,750,000, $2,193,000 and $1,412,000 in fiscal
2010, 2009 and 2008, respectively.
Depreciation and amortization expense,
exclusive of tooling, on property, plant and equipment was $8,668,000,
$8,365,000 and $7,990,000 for the fiscal years ended October 31, 2010, 2009 and
2008, respectively.
Included in the Company’s property,
plant and equipment is rotable equipment located at various customer locations
in connection with certain repair and maintenance agreements. The
rotables are stated at a net book value of $219,000 and $631,000 as of October
31, 2010 and 2009, respectively.
Accrued
Expenses and Other Current Liabilities
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Accrued
employee compensation and related payroll taxes
|
$ | 26,556,000 | $ | 14,745,000 | ||||
|
Accrued
customer rebates and credits
|
9,230,000 | 9,689,000 | ||||||
|
Accrued
additional purchase consideration
|
4,104,000 | 1,775,000 | ||||||
|
Other
|
12,211,000 | 10,769,000 | ||||||
|
Accrued
expenses and other current liabilities
|
$ | 52,101,000 | $ | 36,978,000 | ||||
The increase in accrued employee
compensation and related payroll taxes as of October 31, 2010 compared to
October 31, 2009 reflects a higher level of accrued performance awards based on
the improved consolidated operating results.
The total
customer rebates and credits deducted within net sales for the fiscal years
ended October 31, 2010, 2009 and 2008 were $8,866,000, $8,315,000 and
$10,249,000, respectively.
60
Other
Long-Term Assets and Liabilities
The Company provides eligible
employees, officers and directors of the Company the opportunity to voluntarily
defer base salary, bonus payments, commissions, long-term incentive awards and
directors fees, as applicable, on a pre-tax basis through the HEICO Corporation
Leadership Compensation Plan (“LCP”), a nonqualified deferred compensation plan
that conforms to Section 409A of the Internal Revenue Code. The
Company matches 50% of the first 6% of base salary deferred by each
participant. In fiscal 2008, the LCP was amended principally to allow
director fees that would otherwise be payable in Company common stock to be
deferred into the Plan, and, when distributed, amounts would be distributable in
actual shares of Company common stock. During fiscal 2009, the LCP
was amended to comply with the final Section 409A regulations issued by the
Internal Revenue Service, which became effective January 1,
2009. Further, while the Company has no obligation to do so, the LCP
also provides the Company the opportunity to make discretionary
contributions. The Company’s matching contributions and any
discretionary contributions are subject to vesting and forfeiture provisions set
forth in the LCP. Company contributions to the Plan charged to income
in fiscal 2010, 2009 and 2008 totaled $2,862,000, $2,195,000 and $2,075,000,
respectively. The aggregate liabilities of the LCP were $22,223,000
and $15,552,000 as of October 31, 2010 and 2009, respectively, and are
classified within other long-term liabilities in the Company’s Consolidated
Balance Sheets. The assets of the LCP, totaling $22,604,000 and
$15,811,000 as of October 31, 2010 and 2009, respectively, are classified within
other assets and principally represent cash surrender values of life insurance
policies that are held within an irrevocable trust that may be used to satisfy
the obligations under the LCP.
Other long-term liabilities also
includes deferred compensation of $4,283,000 and $3,953,000 as of October 31,
2010 and 2009, respectively, principally related to elective deferrals of salary
and bonuses under a Company sponsored non-qualified deferred compensation plan
available to selected employees. The Company makes no contributions
to this plan. The assets of this plan, which equaled the deferred
compensation liability as of October 31, 2010 and 2009, respectively, are held
within an irrevocable trust and classified within other assets in the Company’s
Consolidated Balance Sheets. Additional information regarding the
assets of this deferred compensation plan and the LCP may be found in Note 7,
Fair Value Measurements.
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 during fiscal 2010 and 2009 by operating segment are as
follows:
|
Segment
|
Consolidated
|
|||||||||||
|
FSG
|
ETG
|
Totals
|
||||||||||
|
Balances
as of October 31, 2008
|
$ | 181,126,000 | $ | 142,267,000 | $ | 323,393,000 | ||||||
|
Goodwill
acquired
|
6,444,000 | 29,269,000 | 35,713,000 | |||||||||
|
Adjustments
to goodwill
|
866,000 | 1,612,000 | 2,478,000 | |||||||||
|
Accrued
additional purchase consideration
|
¾ | 1,775,000 | 1,775,000 | |||||||||
|
Foreign
currency translation adjustments
|
23,000 | 1,861,000 | 1,884,000 | |||||||||
|
Balances
as of October 31, 2009
|
188,459,000 | 176,784,000 | 365,243,000 | |||||||||
|
Goodwill
acquired
|
¾ | 12,920,000 | 12,920,000 | |||||||||
|
Adjustments
to goodwill
|
¾ | 1,960,000 | 1,960,000 | |||||||||
|
Accrued
additional purchase consideration
|
¾ | 4,104,000 | 4,104,000 | |||||||||
|
Foreign
currency translation adjustments
|
¾ | 789,000 | 789,000 | |||||||||
|
Balances
as of October 31, 2010
|
$ | 188,459,000 | $ | 196,557,000 | $ | 385,016,000 | ||||||
61
The goodwill acquired during fiscal
2010 relates to the current year acquisition described in Note 2,
Acquisitions. The goodwill acquired during fiscal 2009 relates to the
prior year acquisitions described in Note 2, Acquisitions, as well as
acquisitions of redeemable noncontrolling interests described in Note 12,
Redeemable Noncontrolling Interests. The amounts represent the
residual value after the allocation of the total consideration to the tangible
and identifiable intangible assets acquired and liabilities assumed (inclusive
of contingent consideration for the fiscal 2010 acquisition). The
adjustments to goodwill during fiscal 2010 and 2009 principally represent
additional purchase consideration paid relating to prior year acquisitions for
which the earnings objectives were met in fiscal 2010 and 2009,
respectively. The accrued additional purchase consideration
recognized in fiscal 2010 and 2009 is the result of certain subsidiaries of the
ETG meeting certain earnings objectives in those respective fiscal
years. See Note 2 and Note 16, Commitments and Contingencies, for
additional information regarding additional contingent purchase
consideration. The foreign currency translation adjustment reflects
unrealized translation gains on the goodwill recognized in connection with
foreign subsidiaries. Foreign currency translation adjustments are
included in other comprehensive income in the Company’s Consolidated Statements
of Shareholders’ Equity and Comprehensive Income. The Company
estimates that approximately $19 million and $25 million of the goodwill
recognized in fiscal 2010 and 2009, respectively, will be deductible for income
tax purposes. Based on the annual test for goodwill impairment as of
October 31, 2010, the Company determined there is no impairment of its goodwill
as the fair value of each of the Company’s reporting units significantly
exceeded their carrying value.
Identifiable intangible assets consist
of:
|
As of October 31, 2010
|
As of October 31, 2009
|
|||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||
|
Amortizing Assets:
|
||||||||||||||||||||||||
|
Customer
relationships
|
$ | 37,338,000 | $ | (12,142,000 | ) | $ | 25,196,000 | $ | 33,237,000 | $ | (9,944,000 | ) | $ | 23,293,000 | ||||||||||
|
Intellectual
property
|
7,281,000 | (1,372,000 | ) | 5,909,000 | 3,369,000 | (628,000 | ) | 2,741,000 | ||||||||||||||||
|
Licenses
|
1,000,000 | (621,000 | ) | 379,000 | 1,000,000 | (547,000 | ) | 453,000 | ||||||||||||||||
|
Non-compete
agreements
|
1,170,000 | (1,019,000 | ) | 151,000 | 1,221,000 | (969,000 | ) | 252,000 | ||||||||||||||||
|
Patents
|
554,000 | (270,000 | ) | 284,000 | 575,000 | (246,000 | ) | 329,000 | ||||||||||||||||
|
Trade
names
|
569,000 | (112,000 | ) | 457,000 | 569,000 | ¾ | 569,000 | |||||||||||||||||
| 47,912,000 | (15,536,000 | ) | 32,376,000 | 39,971,000 | (12,334,000 | ) | 27,637,000 | |||||||||||||||||
|
Non-Amortizing Assets:
|
||||||||||||||||||||||||
|
Trade
names
|
17,111,000 | ¾ | 17,111,000 | 13,951,000 | ¾ | 13,951,000 | ||||||||||||||||||
| $ | 65,023,000 | $ | (15,536,000 | ) | $ | 49,487,000 | $ | 53,922,000 | $ | (12,334,000 | ) | $ | 41,588,000 | |||||||||||
The increase in the gross carrying
amount of customer relationships, intellectual property and non-amortizing trade
names as of October 31, 2010 compared to October 31, 2009 principally relates to
such intangible assets recognized in connection with an acquisition made during
the second quarter of fiscal 2010 (see Note 2, Acquisitions, and Note 17,
Supplemental Disclosures of Cash Flow Information). The increase in
the gross carrying amount of customer relationships recognized in connection
with the fiscal 2010 acquisition was partially offset by the write-off of
certain such fully amortized intangible assets and a write-down to fair value of
certain other such intangible assets. During fiscal 2010 and 2009,
the Company recognized impairment losses of approximately $1.1 million and $.2
million, respectively, from the write-down of certain customer relationships and
$.3 million and $.1 million, respectively, from the write-down of trade names,
within the ETG to their estimated fair values, due to reductions in future cash
flows associated with such intangible assets. The impairment losses
were recorded as a component of selling, general and administrative expenses in
the Company’s Consolidated Statement of Operations.
The weighted average amortization
period of the customer relationships and intellectual property acquired during
fiscal 2010 is eight years. Based on the final purchase price
allocations during the allocation period for certain fiscal 2009 acquisitions,
the weighted average amortization period of the customer relationships and
intellectual property acquired in fiscal 2009 is approximately eight years and
seven years, respectively. The weighted average amortization period
of the finite-lived trade names and non-compete agreements acquired during
fiscal 2009 is approximately five years and two years,
respectively.
62
Amortization expense of other
intangible assets was $6,795,000, $4,499,000 and $5,156,000 for the fiscal years
ended October 31, 2010, 2009 and 2008, respectively. Amortization expense
for each of the next five fiscal years and thereafter is estimated to be
$6,100,000 in fiscal 2011, $5,396,000 in fiscal 2012, $4,936,000 in fiscal 2013,
$4,639,000 in fiscal 2014, $3,495,000 in fiscal 2015 and $7,810,000
thereafter.
5. LONG-TERM
DEBT
Long-term debt consists of the
following:
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Borrowings
under revolving credit facility
|
$ | 14,000,000 | $ | 55,000,000 | ||||
|
Notes
payable, capital leases and equipment loans
|
221,000 | 431,000 | ||||||
| 14,221,000 | 55,431,000 | |||||||
|
Less: Current
maturities of long-term debt
|
(148,000 | ) | (237,000 | ) | ||||
| $ | 14,073,000 | $ | 55,194,000 | |||||
The aggregate balance of long-term debt
will mature within the next three fiscal years with $148,000 in fiscal 2011, $52,000 in fiscal 2012
and $14,021,000 in fiscal 2013.
Revolving
Credit Facility
In May 2008, the Company amended its
revolving credit facility by entering into a $300 million Second Amended and
Restated Revolving Credit Agreement (“Credit Facility”) with a bank syndicate,
which matures in May 2013. Under certain circumstances, the maturity
may be extended for two one-year periods. The Credit Facility also
includes a feature that will allow the Company to increase the Credit Facility,
at its option, up to $500 million through increased commitments from existing
lenders or the addition of new lenders. The Credit Facility may be
used for working capital and general corporate needs of the Company, including
letters of credit, capital expenditures and to finance
acquisitions. Advances under the Credit Facility accrue interest at
the Company’s choice of the “Base Rate” or the London Interbank Offered Rate
(“LIBOR”) plus applicable margins (based on the Company’s ratio of total funded
debt to earnings before interest, taxes, depreciation and amortization,
noncontrolling interest and non-cash charges, or “leverage
ratio”). The Base Rate is the higher of (i) the Prime Rate or (ii)
the Federal Funds rate plus .50%. The applicable margins for
LIBOR-based borrowings range from .625% to 2.25%. A fee is charged on
the amount of the unused commitment ranging from .125% to .35% (depending on the
Company’s leverage ratio). The Credit Facility also includes a $50
million sublimit for borrowings made in euros, a $30 million sublimit for
letters of credit and a $20 million swingline sublimit. The Credit
Facility is unsecured and contains covenants that require, among other things,
the maintenance of the leverage ratio, a senior leverage ratio and a fixed
charge coverage ratio. In the event the Company’s leverage ratio
exceeds a specified level, the Credit Facility would become secured by the
capital stock owned in substantially all of the Company’s
subsidiaries.
As of October 31, 2010 and 2009, the
Company had a total of $14 million and $55 million, respectively, borrowed under
its revolving credit facility at a weighted average interest rate of .9% as of
each period. The amounts were primarily borrowed to fund acquisitions
(see Note 2, Acquisitions) as well as for working capital and general corporate
purposes. The revolving credit facility contains both financial and
non-financial covenants. As of October 31, 2010, the Company was in
compliance with all such covenants.
63
6. INCOME
TAXES
The components of the provision for
income taxes on income before income taxes and noncontrolling interests are
as follows:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 29,180,000 | $ | 25,920,000 | $ | 27,118,000 | ||||||
|
State
|
4,659,000 | 3,890,000 | 4,225,000 | |||||||||
|
Foreign
|
1,044,000 | 841,000 | 490,000 | |||||||||
| 34,883,000 | 30,651,000 | 31,833,000 | ||||||||||
|
Deferred
|
1,817,000 | (2,651,000 | ) | 3,617,000 | ||||||||
|
Total
income tax expense
|
$ | 36,700,000 | $ | 28,000,000 | $ | 35,450,000 | ||||||
A reconciliation of the federal
statutory income tax rate to the Company’s effective tax rate is as
follows:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
taxes, less applicable federal income tax reduction
|
3.2 | 2.5 | 2.9 | |||||||||
|
Net
tax benefit on noncontrolling interests’ share of income
|
(2.6 | ) | (2.7 | ) | (3.0 | ) | ||||||
|
Net
tax benefit on qualified research and development
activities
|
(1.0 | ) | (2.9 | ) | (.3 | ) | ||||||
|
Net
tax benefit on qualified domestic production activities
|
(.8 | ) | (.6 | ) | (.7 | ) | ||||||
|
Other,
net
|
(.1 | ) | .6 | .6 | ||||||||
|
Effective
tax rate
|
33.7 | % | 31.9 | % | 34.5 | % | ||||||
64
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The Company believes that
it is more likely than not that it will generate sufficient future taxable
income to utilize all of its deferred tax assets and has therefore not recorded
a valuation allowance on any such asset. Significant components of
the Company’s deferred tax assets and liabilities are as follows:
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Inventories
|
$ | 14,196,000 | $ | 13,123,000 | ||||
|
Deferred
compensation liability
|
9,969,000 | 7,407,000 | ||||||
|
Foreign
R&D carryforward and credit
|
2,788,000 | 1,714,000 | ||||||
|
Bonus
accrual
|
1,568,000 | 1,214,000 | ||||||
|
Net
operating loss carryforward of acquired business
|
1,395,000 | 4,184,000 | ||||||
|
Stock
option compensation
|
1,068,000 | 549,000 | ||||||
|
Allowance
for doubtful accounts receivable
|
896,000 | 880,000 | ||||||
|
Vacation
accrual
|
769,000 | 795,000 | ||||||
|
Customer
rebates accrual
|
558,000 | 671,000 | ||||||
|
Other
|
1,864,000 | 1,833,000 | ||||||
|
Total
deferred tax assets
|
35,071,000 | 32,370,000 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangible
asset amortization
|
55,750,000 | 50,113,000 | ||||||
|
Accelerated
depreciation
|
3,044,000 | 3,700,000 | ||||||
|
Software
development costs
|
1,905,000 | 1,622,000 | ||||||
|
Other
|
773,000 | 1,604,000 | ||||||
|
Total
deferred tax liabilities
|
61,472,000 | 57,039,000 | ||||||
|
Net
deferred tax liability
|
$ | (26,401,000 | ) | $ | (24,669,000 | ) | ||
The net deferred tax liability is
classified in the Company’s Consolidated Balance Sheets as follows:
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Current
asset
|
$ | 18,907,000 | $ | 16,671,000 | ||||
|
Long-term
liability
|
45,308,000 | 41,340,000 | ||||||
|
Net
deferred tax liability
|
$ | (26,401,000 | ) | $ | (24,669,000 | ) | ||
As of October 31, 2010 and 2009, the
Company’s liability for gross unrecognized tax benefits related to uncertain tax
positions was $2,306,000 and $3,328,000, respectively, of which $1,927,000 and
$2,859,000, respectively, would decrease the Company’s income tax expense and
effective income tax rate if the tax benefits were recognized.
65
A
reconciliation of the activity related to the liability for gross unrecognized
tax benefits during the fiscal years ended October 31, 2010 and 2009 is as
follows:
|
Year ended October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balances
as of beginning of year
|
$ | 3,328,000 | $ | 5,742,000 | ||||
|
Increases
related to prior year tax positions
|
46,000 | 91,000 | ||||||
|
Decreases
related to prior year tax positions
|
(1,229,000 | ) | (3,562,000 | ) | ||||
|
Increases
related to current year tax positions
|
551,000 | 1,234,000 | ||||||
|
Settlements
|
(31,000 | ) | (211,000 | ) | ||||
|
Lapse
of statutes of limitations
|
(359,000 | ) | 34,000 | |||||
|
Balances
as of end of year
|
$ | 2,306,000 | $ | 3,328,000 | ||||
The Company’s net liability for
unrecognized tax benefits was $2,252,000 as of October 31, 2010, including
$238,000 of interest and $170,000 of penalties and net of $462,000 in related
deferred tax assets. During the fiscal year ended October 31, 2010,
the Company accrued interest of $62,000 and penalties of $22,000 related to the
unrecognized tax benefits noted above.
The $1,022,000 decrease in the
liability during fiscal 2010 was principally related to the finalization of a
study of qualifying research and development activities used to prepare the
Company’s fiscal 2009 U.S. federal and state income tax returns and the
settlement of the California Franchise Tax Board examination of the income tax
credit claimed for qualified research and development activities on the
Company’s state of California filings for fiscal years 2001 through
2005. The decrease in the liability reduced the Company’s income tax
expense by $932,000.
The $2,414,000 decrease in the
liability during fiscal 2009 was principally related to the release of
liabilities for tax positions for which the uncertainty was only related to the
timing of such tax benefits and the effect of a favorable settlement reached
with the IRS during fiscal 2009, partially offset by increases related to
current year tax positions. During the IRS’ examination of the income
tax credits claimed by the Company in its U.S. federal filings for qualified
research and development activities incurred for fiscal years 2002 through 2005,
new information was obtained that supported an aggregate reduction of the
liability for uncertain tax positions concerning research and development
activities for fiscal years 2002 through 2008. As a result of the IRS
settlement and associated liability adjustment, the Company recognized a tax
benefit, which increased net income attributable to HEICO by approximately
$1,225,000 for fiscal 2009. Further, during the second quarter of
2009, the Company filed an application with the IRS for an accounting
methodology change that does not require the IRS’ advanced
approval. As this change removed the uncertainty surrounding certain
tax positions that were related only to the timing of such tax benefits, the
Company released the related liability, including interest, and deferred tax
asset upon filing the application, which did not have a material effect on net
income for the fiscal year 2009.
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 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 2006.
The total amount of unrecognized tax
benefits can change due to audit settlements, tax examination activities, lapse
of applicable statutes of limitations and the recognition and measurement
criteria under the guidance related to accounting for uncertainty in income
taxes. The Company is unable to estimate what this change could be
within the next twelve months, but does not believe it would be material to its
consolidated financial statements.
66
7. FAIR
VALUE MEASUREMENTS
The Company performs its fair value
measurements according to accounting guidance that defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement
date. The guidance also establishes a three-level fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. An asset or liability’s level is based on the lowest
level of input that is significant to the fair value measurement. The
guidance requires that assets and liabilities carried at fair value be
classified and disclosed in one of the following three categories:
|
|
Level 1 — | Quoted prices in active markets for identical assets or liabilities; |
|
Level
2 —
|
Inputs,
other than quoted prices included within Level 1, that are observable for
the asset or liability either directly or indirectly; or
|
|
Level
3 —
|
Unobservable
inputs for the asset or liability where there is little or no market data,
requiring management to develop its own
assumptions.
|
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 as of October 31, 2010 and
2009:
|
As of October 31, 2010
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Deferred
compensation plans:
|
||||||||||||||||
|
Corporate
owned life insurance
|
$ | — | $ | 22,908,000 | $ | — | $ | 22,908,000 | ||||||||
|
Equity
securities
|
1,267,000 | — | — | 1,267,000 | ||||||||||||
|
Money
market funds and cash
|
1,165,000 | — | — | 1,165,000 | ||||||||||||
|
Mutual
funds
|
1,002,000 | — | — | 1,002,000 | ||||||||||||
|
Other
|
— | 545,000 | — | 545,000 | ||||||||||||
|
Total
assets
|
$ | 3,434,000 | $ | 23,453,000 | $ | — | $ | 26,887,000 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Contingent
consideration
|
$ | — | $ | — | $ | 1,150,000 | $ | 1,150,000 | ||||||||
|
As of October 31, 2009
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Deferred
compensation plans:
|
||||||||||||||||
|
Corporate
owned life insurance
|
$ | — | $ | 15,687,000 | $ | — | $ | 15,687,000 | ||||||||
|
Equity
securities
|
1,057,000 | — | — | 1,057,000 | ||||||||||||
|
Money
market funds and cash
|
2,163,000 | — | — | 2,163,000 | ||||||||||||
|
Mutual
funds
|
614,000 | — | — | 614,000 | ||||||||||||
|
Other
|
— | 243,000 | — | 243,000 | ||||||||||||
|
Total
assets
|
$ | 3,834,000 | $ | 15,930,000 | $ | — | $ | 19,764,000 | ||||||||
|
Liabilities
|
— | — | — | — | ||||||||||||
67
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. Certain other assets of the LCP represent
investments in HEICO common stock and money market funds that are classified
within Level 1. The assets of the Company’s other deferred
compensation plan are principally invested in a life insurance policy that is
classified within Level 2 and equity securities, mutual funds and money market
funds that are classified within Level 1. The assets of both plans
are held within irrevocable trusts and classified within other assets in the
Company’s Consolidated Balance Sheets. The related liabilities of the
two deferred compensation plans are included within other long-term liabilities
in the Company’s Consolidated Balance Sheets and have an aggregate value of
$26,506,000 as of October 31, 2010 and $19,505,000 as of October 31,
2009.
The
Company did not have any transfers between Level 1 and Level 2 fair value
measurements during fiscal 2010.
As part of the agreement to acquire a
subsidiary by the ETG in the second quarter of fiscal 2010, the Company may be
obligated to pay contingent consideration of up to $2.0 million in fiscal 2013
should the acquired entity meet certain earnings objectives during the second
and third years following the acquisition. The $1,150,000 fair value
of the contingent consideration as of the acquisition date was determined using
a discounted cash flow model and probability adjusted internal estimates of the
subsidiary’s future earnings and is classified in Level 3. There have
been no subsequent changes in the fair value of this contingent consideration as
of October 31, 2010 and this obligation is included in other long-term
liabilities in the Company’s Consolidated Balance Sheet. Changes in
the fair value of contingent consideration will be recorded in the Company’s
consolidated statements of operations.
The
carrying amounts of cash and cash equivalents, accounts receivable, trade
accounts payable and accrued expenses and other current liabilities approximate
fair value as of October 31, 2010 due to the relatively short maturity of the
respective instruments. The carrying value of long-term debt
approximates fair value due to its variable interest rates.
During fiscal 2010 and 2009, certain
intangible assets within the ETG were measured at fair value on a nonrecurring
basis, resulting in the recognition of impairment losses aggregating $1.4
million and $.3 million, respectively (see Note 4, Goodwill and Other Intangible
Assets). The fair value of each asset was determined using a
discounted cash flow model and internal estimates of each asset’s future cash
flows.
The following table sets forth the fair
values as of October 31 of the Company’s nonfinancial assets and liabilities
that were measured at fair value on a nonrecurring basis, all of which are
classified in Level 3, and related impairment losses recognized during fiscal
2010 and 2009:
|
2010
|
2009
|
|||||||||||||||||||||||
|
Carrying
|
Impairment
|
Fair Value
|
Carrying
|
Impairment
|
Fair Value
|
|||||||||||||||||||
|
Amount
|
Loss
|
(Level 3)
|
Amount
|
Loss
|
(Level 3)
|
|||||||||||||||||||
|
Customer
relationships
|
$ | 1,871,000 | $ | (1,080,000 | ) | $ | 791,000 | $ | 406,000 | $ | (200,000 | ) | $ | 206,000 | ||||||||||
|
Trade
names
|
1,937,000 | (330,000 | ) | 1,607,000 | 351,000 | (100,000 | ) | 251,000 | ||||||||||||||||
|
Other
intangible assets
|
28,000 | (28,000 | ) | — | — | — | — | |||||||||||||||||
|
Total
|
$ | (1,438,000 | ) | $ | (300,000 | ) | ||||||||||||||||||
68
8. SHAREHOLDERS’
EQUITY
Preferred
Stock Purchase Rights Plan
The Company’s Board of Directors
adopted, as of November 2, 2003, a Shareholder Rights Agreement (the “2003
Plan”). Pursuant to the 2003 Plan, the Board declared a dividend of
one preferred share purchase right for each outstanding share of Common Stock
and Class A Common Stock (with the preferred share purchase rights collectively
as the “Rights”). The Rights trade with the common stock and are not
exercisable or transferable apart from the Common Stock and Class A Common Stock
until after a person or group either acquires 15% or more of the outstanding
common stock or commences or announces an intention to commence a tender offer
for 15% or more of the outstanding common stock. Absent either of the
aforementioned events transpiring, the Rights will expire as of the close of
business on November 2, 2013.
The Rights have certain anti-takeover
effects and, therefore, will cause substantial dilution to a person or group who
attempts to acquire the Company on terms not approved by the Company’s Board of
Directors or who acquires 15% or more of the outstanding common stock without
approval of the Company’s Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board
since they may be redeemed by the Company at $.01 per Right at any time until
the close of business on the tenth day after a person or group has obtained
beneficial ownership of 15% or more of the outstanding common stock or until a
person commences or announces an intention to commence a tender offer for 15% or
more of the outstanding common stock. The 2003 Plan also contains a
provision to help ensure a potential acquirer pays all shareholders a fair price
for the Company.
Common
Stock and Class A Common Stock
Each share of Common Stock is entitled
to one vote per share. Each share of Class A Common Stock is entitled to a 1/10
vote per share. Holders of the Company’s Common Stock and Class A
Common Stock are entitled to receive when, as and if declared by the Board of
Directors, dividends and other distributions payable in cash, property, stock or
otherwise. In the event of liquidation, after payment of debts and
other liabilities of the Company, and after making provision for the holders of
preferred stock, if any, the remaining assets of the Company will be
distributable ratably among the holders of all classes of common
stock.
Stock
Split
In March 2010, the Company’s Board of
Directors declared a 5-for-4 stock split on both classes of the Company’s common
stock. The stock split was effected as of April 27, 2010 in the form
of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information has been
adjusted retrospectively to give effect to the 5-for-4 stock split.
Share
Repurchases
In accordance with the Company’s share
repurchase program, 242,170 shares of Class A Common Stock were repurchased at a
total cost of $3.9 million and 230,625 shares of Common Stock were repurchased
at a total cost of $4.2 million during the second quarter of 2009.
In March 2009, the Company’s Board of
Directors approved an increase in the Company’s share repurchase program by an
aggregate 1,250,000 shares of either or both Class A Common Stock and Common
Stock, bringing the total authorized for future purchase to 1,280,928
shares.
69
During
the first and second quarters of fiscal 2010, the Company repurchased an
aggregate 17,577 shares of Common Stock at a total cost of $.6 million and an
aggregate 2,613 shares of Class A Common Stock at a total cost of $.1
million. The transactions occurred as settlement for employee taxes
due pertaining to exercises of non-qualified stock options and did not impact
the number of shares authorized for future purchase under the Company’s share
repurchase program.
The Company did not repurchase any
shares of its common stock in fiscal 2008.
9. STOCK
OPTIONS
The Company currently has two stock
option plans, the 2002 Stock Option Plan (“2002 Plan”) and the Non-Qualified
Stock Option Plan, under which stock options may be granted. The
Company’s 1993 Stock Option Plan (“1993 Plan”) terminated in March 2003 on the
tenth anniversary of its effective date. No options may be granted
under the 1993 Plan after such termination date; however, options outstanding as
of the termination date may be exercised pursuant to their terms. In
addition, the Company granted stock options in fiscal 2002 to a former
shareholder of an acquired business pursuant to an employment agreement entered
into in connection with the acquisition in fiscal 1999. A total of
3,582,520 shares of the Company’s stock are reserved for issuance to employees,
directors, officers and consultants as of October 31, 2010, including 2,137,448
shares currently under option and 1,445,072 shares available for future
grants. Options issued under the 2002 Plan may be designated as
incentive stock options or non-qualified stock options. Incentive
stock options are granted with an exercise price of not less than 100% of the
fair market value of the Company’s common stock as of date of grant (110%
thereof in certain cases) and are exercisable in percentages specified as of the
date of grant over a period up to ten years. Only employees are
eligible to receive incentive stock options. Non-qualified stock
options under the 2002 Plan may be immediately exercisable. In March
2008, the Company’s shareholders approved two amendments to the 2002 Plan, which
principally increased the number of shares available for issuance under the plan
and now requires options be granted with an exercise price of no less than fair
market value of the Company’s common stock as of the date of the
grant. The options granted pursuant to the 2002 Plan may be
designated as Common Stock and/or Class A Common Stock in such proportions as
shall be determined by the Board of Directors or the Stock Option Plan Committee
at its sole discretion. Options granted under the Non-Qualified Stock
Option Plan may be granted with an exercise price of no less than the fair
market value of the Company’s common stock as of the date of grant and are
generally exercisable in four equal annual installments commencing one year from
the date of grant. The stock options granted to a former shareholder
of an acquired business were fully vested and transferable as of the grant date
and expire ten years from the date of grant. The exercise price of
such options was the fair market value as of the date of
grant. Options under all stock option plans expire no later than ten
years after the date of grant, unless extended by the Stock Option Plan
Committee or the Board of Directors.
70
Information concerning stock option
activity for each of the three fiscal years ended October 31 is as
follows:
|
Shares
|
Shares Under Option
|
|||||||||||
|
Available
|
Weighted Average
|
|||||||||||
|
For Grant
|
Shares
|
Exercise Price
|
||||||||||
|
Outstanding
as of October 31, 2007
|
203,630 | 2,344,163 | $ | 7.83 | ||||||||
|
Shares
approved by the Shareholders for the 2002 Stock Option
Plan
|
1,875,000 | — | $ | — | ||||||||
|
Cancelled
|
817 | (887 | ) | $ | 5.33 | |||||||
|
Exercised
|
— | (313,598 | ) | $ | 7.65 | |||||||
|
Outstanding
as of October 31, 2008
|
2,079,447 | 2,029,678 | $ | 7.86 | ||||||||
|
Granted
|
(421,875 | ) | 421,875 | $ | 29.16 | |||||||
|
Exercised
|
— | (122,725 | ) | $ | 9.83 | |||||||
|
Outstanding
as of October 31, 2009
|
1,657,572 | 2,328,828 | $ | 11.62 | ||||||||
|
Granted
|
(212,500 | ) | 212,500 | $ | 40.86 | |||||||
|
Cancelled
|
— | (744 | ) | $ | 10.91 | |||||||
|
Exercised
|
— | (403,136 | ) | $ | 8.43 | |||||||
|
Outstanding
as of October 31, 2010
|
1,445,072 | 2,137,448 | $ | 15.13 | ||||||||
Information concerning stock options
outstanding and stock options exercisable by class of common stock as of October
31, 2010 is as follows:
|
Options Outstanding
|
|||||||||||||||||
|
Weighted
|
Weighted Average
|
Aggregate
|
|||||||||||||||
|
Number
|
Average
|
Remaining Contractual
|
Intrinsic
|
||||||||||||||
|
Outstanding
|
Exercise Price
|
Life (Years)
|
Value
|
||||||||||||||
|
Common
Stock
|
1,441,479 | $ | 16.98 |
3.9
|
$ | 47,282,827 | |||||||||||
|
Class
A Common Stock
|
695,969 | $ | 11.29 |
3.4
|
17,989,858 | ||||||||||||
| 2,137,448 | $ | 15.13 |
3.8
|
$ | 65,272,685 | ||||||||||||
|
Options Exercisable
|
|||||||||||||||||
|
Weighted
|
Weighted
Average
|
Aggregate
|
|||||||||||||||
|
Number
|
Average
|
Remaining
Contractual
|
Intrinsic
|
||||||||||||||
|
Exercisable
|
Exercise Price
|
Life (Years)
|
Value
|
||||||||||||||
|
Common
Stock
|
1,041,479 | $ | 9.39 |
1.8
|
$ | 42,065,227 | |||||||||||
|
Class
A Common Stock
|
545,969 | $ | 7.38 |
1.9
|
16,247,778 | ||||||||||||
| 1,587,448 | $ | 8.70 |
1.9
|
$ | 58,313,005 | ||||||||||||
Information concerning stock options
exercised is as follows:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Cash
proceeds from stock option exercises
|
$ | 1,815,000 | $ | 1,207,000 | $ | 2,398,000 | ||||||
|
Tax
benefit realized from stock option exercises
|
951,000 | 1,890,000 | 6,248,000 | |||||||||
|
Intrinsic
value of stock option exercises
|
10,379,000 | 1,586,000 | 7,854,000 | |||||||||
71
Net income attributable to HEICO for
the fiscal years ended October 31, 2010, 2009 and 2008 includes compensation
expense of $1,353,000, $181,000 and $142,000, respectively, and an income tax
benefit of $516,000, $64,000 and $43,000, respectively, related to the Company’s
stock options. Substantially all of the stock option compensation
expense was recorded as a component of selling, general and administrative
expenses in the Company’s Consolidated Statements of Operations. As
of October 31, 2010, there was $9,131,000 of pre-tax unrecognized compensation
expense related to nonvested stock options, which is expected to be recognized
over a weighted average period of approximately 4.3 years. The total
fair value of stock options that vested in 2010, 2009 and 2008 was $1,212,000,
$14,000 and $408,000, respectively.
For the fiscal years ended October 31,
2010, 2009 and 2008, the excess tax benefit resulting from tax deductions in
excess of the cumulative compensation cost recognized for stock options
exercised was $669,000, $1,573,000 and $4,324,000, respectively, and is
presented as a financing activity in the Company’s Consolidated Statements of
Cash Flows.
The weighted-average fair value of
stock options granted during fiscal 2010 was $22.31 per share for Common Stock
and $11.13 per share for Class A Common Stock. The weighted-average
fair value of stock options granted during fiscal 2009 was $16.79 per share for
Common Stock and $10.76 per share for Class A Common Stock. The
Company did not grant any stock options in fiscal 2008. If there were
a change in control of the Company, all of the unvested options outstanding as
of October 31, 2010 would become immediately exercisable.
The fair
value of each stock option grant was estimated on the date of grant using the
Black-Scholes option-pricing model based on the following weighted average
assumptions for the fiscal years ended October 31, 2010 and 2009:
|
2010
|
2009
|
|||||||||||||||
|
Class A
|
Class A
|
|||||||||||||||
|
Common
|
Common
|
Common
|
Common
|
|||||||||||||
|
Stock
|
Stock
|
Stock
|
Stock
|
|||||||||||||
|
Expected
stock price volatility
|
42.01 | % | 39.57 | % | 44.13 | % | 39.44 | % | ||||||||
|
Risk-free
interest rate
|
2.45 | % | 3.02 | % | 3.22 | % | 2.80 | % | ||||||||
|
Dividend
yield
|
.27 | % | .33 | % | .25 | % | .33 | % | ||||||||
|
Forfeiture
rate
|
.00 | % | .00 | % | .00 | % | .00 | % | ||||||||
|
Expected
option life (years)
|
9 | 7 | 9 | 6 | ||||||||||||
10. RETIREMENT
PLANS
The Company has a qualified defined
contribution retirement plan (the “Plan”) under which eligible employees of the
Company and its participating subsidiaries may make Elective Deferral
Contributions up to the limitations set forth in Section 402(g) of the Internal
Revenue Code. The Company generally makes a 25% or 50% Employer
Matching Contribution, as determined by the Board of Directors, based on a
participant’s Elective Deferral Contribution up to 6% of the participant’s
Compensation for the Elective Deferral Contribution period. The
Employer Matching Contribution may be contributed to the Plan in the form of the
Company’s common stock or cash, as determined by the Company. The
Company’s match of a portion of a participant’s contribution is invested in
Company common stock and is based on the fair value of the shares as of the date
of contribution. The Plan also provides that the Company may
contribute to the Plan additional amounts in its common stock or cash at the
discretion of the Board of Directors. Employee contributions can not
be invested in Company common stock.
72
Participants
receive 100% vesting of employee contributions and cash dividends received on
Company common stock. Vesting in Company contributions is based on a
participant’s number of years of vesting service. Contributions to
the Plan charged to income in fiscal 2010, 2009 and 2008 totaled $20,000,
$40,000 and $230,000, respectively. Company contributions are made
with the use of forfeited shares within the Plan. As of October 31,
2010, the Plan held approximately 37,000 forfeited shares of Common Stock and
84,000 forfeited shares of Class A Common Stock, which are available to make
future Company contributions.
In 1991, the Company established a
Directors Retirement Plan covering its then current directors. The
net assets and expenses of this plan as of October 31, 2010, 2009 and 2008 were
not material to the financial position of the Company. The projected
benefit obligation of this plan was $409,000 and $441,000 as of October 31, 2010
and 2009, respectively, and is classified within other long-term liabilities in
the Company’s Consolidated Balance Sheets.
11. RESEARCH
AND DEVELOPMENT EXPENSES
Cost of sales amounts in fiscal 2010,
2009 and 2008 include approximately $22.7 million, $19.7 million and $18.4
million, respectively, of new product research and development
expenses.
12. REDEEMABLE
NONCONTROLLING INTERESTS
The holders of equity interests in
certain of the Company’s subsidiaries have rights (“Put Rights”) that may be
exercised on varying dates causing the Company to purchase their equity
interests beginning in fiscal 2011 through fiscal 2018. The Put
Rights, all of which relate either to common shares or membership interests in
limited liability companies, provide that the cash consideration to be paid for
their equity interests (the “Redemption Amount”) be at fair value or at a
formula that management intended to reasonably approximate fair value based
solely on a multiple of future earnings over a measurement period. As
of October 31, 2010, management’s estimate of the aggregate Redemption Amount of
all Put Rights that the Company would be required to pay is approximately $55
million. The actual Redemption Amount will likely be
different. The portion of the estimated Redemption Amount as of
October 31, 2010 redeemable at fair value is approximately $25 million and the
portion redeemable based solely on a multiple of future earnings is
approximately $30 million.
See Note 1, Summary of Significant
Accounting Policies, for more information regarding how the Company accounts for
its redeemable noncontrolling interests in accordance with new accounting
guidance adopted as of the beginning of fiscal 2010 and the Company’s
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for a
summary of changes in redeemable noncontrolling interests for fiscal
2010. Acquisitions of redeemable noncontrolling interests are treated
as equity transactions under the new accounting guidance. During
fiscal 2008 and 2009, the Company accounted for acquisitions of redeemable
noncontrolling interests under the accounting guidance in effect at that time
pertaining to step acquisitions. The excess of the purchase price
paid over the carrying amount was allocated principally to goodwill under such
guidance. The Company’s Consolidated Statement of Shareholders’
Equity and Comprehensive Income for fiscal 2008 and 2009 is presented on a
retrospective basis to reflect the adoption of new accounting guidance as of
November 1, 2009 pertaining to redeemable noncontrolling interests, which
resulted in an increase to redeemable noncontrolling interests and a decrease to
retained earnings. The subsequent acquisition of certain redeemable
noncontrolling interests on a retrospective basis results in a reversal of any
previously recorded decrease to retained earnings related to such redeemable
noncontrolling interests recorded as part of the adoption of this new accounting
guidance.
73
The portion of adjustments to the
redemption amount of redeemable noncontrolling interests determined to be in
excess of fair value in fiscal 2010 was $102,000, which affects the calculation
of basic and diluted net income per share attributable to HEICO shareholders
under the two-class method. No portions of the adjustments to the
redemption amount of redeemable noncontrolling interests were determined to be
in excess of fair value in fiscal 2009 and 2008. See Note 13, Net
Income per Share Attributable to HEICO Shareholders, for the computation of net
income per share under the two-class method.
A summary of the put and call rights
associated with the redeemable noncontrolling interests in certain of the
Company’s subsidiaries and transactions involving redeemable noncontrolling
interests during fiscal 2010, 2009 and 2008 is as follows:
As part of the agreement to acquire an
80% interest in a subsidiary by the ETG in fiscal 2004, the noncontrolling
interest holders currently have the right to cause the Company to purchase their
interests over a five-year period and the Company has the right to purchase the
noncontrolling interests over a five-year period beginning in fiscal 2015, or
sooner under certain conditions.
Pursuant to the purchase agreement
related to the acquisition of an 85% interest in a subsidiary by the ETG in
fiscal 2005, certain noncontrolling interest holders exercised their option
during fiscal 2007 to cause the Company to purchase their aggregate 3% interest
over a four-year period that ended in fiscal 2010. Pursuant to this
same purchase agreement, certain other noncontrolling interest holders exercised
their option during fiscal 2009 to cause the Company to purchase their aggregate
10.5% interest over a four-year period ending in fiscal
2012. Accordingly, the Company increased its ownership interest in
the subsidiary by an aggregate 8.3% (or one-fourth of such applicable
noncontrolling interest holders’ aggregate interest in fiscal years 2007 through
2010) to 93.3% effective April 2010. The purchase prices of the
acquired equity interests were paid using cash provided by operating
activities. Further, the remaining noncontrolling interest holders
currently have the right to cause the Company to purchase their aggregate 1.5%
interest over a four-year period.
Pursuant to the purchase agreement
related to the acquisition of a 51% interest in a subsidiary by the FSG in
fiscal 2006, the noncontrolling interest holders exercised their option during
fiscal 2008 to cause the Company to purchase an aggregate 28% interest over a
four-year period ending in fiscal 2011. Accordingly, the Company
increased its ownership interest in the subsidiary by 7% (or one-fourth of such
noncontrolling interest holders’ aggregate interest) to 58% effective April
2008. The Company and the noncontrolling interest holders agreed to
accelerate the purchase of 14% of these equity interests (7% from April 2009 and
7% from April 2010), which increased the Company’s ownership interest to 72%
effective December 2008. The remaining 7% interest is scheduled to be
purchased in April 2011. Further, the Company has the right to
purchase the remaining 21% of the equity interests of the subsidiary over a
three-year period beginning in fiscal 2012, or sooner under certain conditions,
and the noncontrolling interest holders have the right to cause the Company to
purchase the same equity interests over the same period.
As part of the agreement to acquire an
80% interest in a subsidiary by the FSG in fiscal 2006, the Company has the
right to purchase the noncontrolling interests over a four-year period beginning
in fiscal 2014, or sooner under certain conditions, and the noncontrolling
interest holders have the right to cause the Company to purchase the same equity
interests over the same period.
As part of the agreement to acquire an
80.1% interest in a subsidiary by the FSG in fiscal 2008, the Company has the
right to purchase the noncontrolling interests over a five-year period beginning
in fiscal 2014, or sooner under certain conditions, and the noncontrolling
interest holders have the right to cause the Company to purchase the same equity
interests over the same period. In May 2010, the Company, through the
FSG, acquired an additional 2.2% equity interest in the subsidiary, which
increased the Company’s ownership interest to 82.3%. The additional
equity interest acquired was pursuant to an amendment to the original agreement
which does not affect the put/call provisions pertaining to the remaining
noncontrolling interests.
74
During the first quarter of fiscal
2009, the Company, through HEICO Aerospace, acquired the remaining 10% equity
interest in one of its subsidiaries, which increased the Company’s ownership
interest to 100% effective October 31, 2008. The purchase price of the
acquired equity interest, which was accrued as of October 31, 2008, was paid
using cash provided by operating activities.
As part of an agreement to acquire an
82.5% interest in a subsidiary by the ETG in fiscal 2009, the Company has the
right to purchase the noncontrolling interests beginning in fiscal 2014, or
sooner under certain conditions, and the noncontrolling interest holder has the
right to cause the Company to purchase the same equity interests over the same
period.
The purchase prices of the redeemable
noncontrolling interests acquired in fiscal 2010 were paid using cash provided
by operating activities. The purchase prices of the redeemable
noncontrolling interests acquired in fiscal 2009 and 2008 were paid in cash
using proceeds from the Company’s revolving credit facility unless otherwise
noted. The aggregate cost of the redeemable noncontrolling interests
acquired was $.8 million, $11.3 million and $4.3 million in fiscal 2010, 2009
and 2008, respectively.
13. NET
INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted
net income per share attributable to HEICO shareholders using the two-class
method is as follows:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income attributable to HEICO
|
$ | 54,938,000 | $ | 44,626,000 | $ | 48,511,000 | ||||||
|
Less:
redemption amount of redeemable noncontrolling interests in excess of fair
value (see Note 12)
|
102,000 | — | — | |||||||||
|
Net
income attributable to HEICO, as adjusted
|
$ | 54,836,000 | $ | 44,626,000 | $ | 48,511,000 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average common shares outstanding - basic
|
32,832,508 | 32,755,999 | 32,886,424 | |||||||||
|
Effect
of dilutive stock options
|
938,322 | 1,024,040 | 1,167,771 | |||||||||
|
Weighted
average common shares outstanding - diluted
|
33,770,830 | 33,780,039 | 34,054,195 | |||||||||
|
Net
income per share attributable to HEICO shareholders:
|
||||||||||||
|
Basic
|
$ | 1.67 | $ | 1.36 | $ | 1.48 | ||||||
|
Diluted
|
$ | 1.62 | $ | 1.32 | $ | 1.42 | ||||||
|
Anti-dilutive
stock options excluded
|
415,625 | 107,864 | — | |||||||||
75
14. QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Net
sales:
|
||||||||||||||||
|
2010
|
$ | 135,535,000 | $ | 153,845,000 | $ | 158,270,000 | $ | 169,370,000 | ||||||||
|
2009
|
$ | 130,437,000 | $ | 130,166,000 | $ | 134,086,000 | $ | 143,607,000 | ||||||||
|
Gross
profit:
|
||||||||||||||||
|
2010
|
$ | 50,120,000 | $ | 53,626,000 | $ | 57,553,000 | $ | 61,048,000 | ||||||||
|
2009
|
$ | 43,904,000 | $ | 42,518,000 | $ | 45,811,000 | $ | 48,778,000 | ||||||||
|
Net
income from consolidated operations:
|
||||||||||||||||
|
2010
|
$ | 16,030,000 | $ | 16,908,000 | $ | 19,526,000 | $ | 19,891,000 | ||||||||
|
2009
|
$ | 15,351,000 | $ | 14,296,000 | $ | 14,918,000 | $ | 15,280,000 | ||||||||
|
Net
income attributable to HEICO:
|
||||||||||||||||
|
2010
|
$ | 11,793,000 | $ | 12,573,000 | $ | 14,930,000 | $ | 15,642,000 | ||||||||
|
2009
|
$ | 11,317,000 | $ | 10,541,000 | $ | 11,132,000 | $ | 11,636,000 | ||||||||
|
Net
income per share attributable to HEICO:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
2010
|
$ | .36 | $ | .38 | $ | .45 | $ | .47 | ||||||||
|
2009
|
$ | .34 | $ | .32 | $ | .34 | $ | .36 | ||||||||
|
Diluted:
|
||||||||||||||||
|
2010
|
$ | .35 | $ | .37 | $ | .44 | $ | .46 | ||||||||
|
2009
|
$ | .33 | $ | .31 | $ | .33 | $ | .35 | ||||||||
During the fourth quarter of fiscal
2010, the Company recorded impairment losses related to the write-down of
certain intangible assets to their estimated fair values, which decreased net
income attributable to HEICO by $713,000, or $.02 per diluted share, in
aggregate.
During the first and second quarters of
fiscal 2009, the Company reached a settlement with the Internal Revenue Service
concerning the income tax credit claimed by the Company on its U.S. federal
filings for qualified research and development activities incurred during fiscal
years 2002 through 2005 as well as an aggregate reduction to the related
liability for unrecognized tax benefits for fiscal years 2006 through 2008,
which increased net income attributable to HEICO by approximately $1,225,000, or
$.04 per diluted share.
Due to changes in the average number of
common shares outstanding, net income per share for the full fiscal year may not
equal the sum of the four individual quarters.
15.
OPERATING SEGMENTS
The Company has two operating
segments: the Flight Support Group (“FSG”), consisting of HEICO
Aerospace and its subsidiaries and the Electronic Technologies Group (“ETG”),
consisting of HEICO
Electronic and its subsidiaries. The Flight Support Group designs,
manufactures, repairs, overhauls and distributes jet engine and aircraft
component replacement parts. The parts and services are approved by
the FAA. The FSG also manufactures and sells specialty parts as a
subcontractor for aerospace and industrial original equipment manufacturers and
the United States government. The Electronic Technologies Group
designs and manufactures electronic, microwave, and electro-optical equipment
and components, high-speed interface products, high voltage interconnection
devices, high voltage advanced power electronics products, power conversion
products, underwater locator beacons and traveling wave tube amplifiers
primarily for the aviation, defense, space, medical, telecommunication and
electronic industries.
76
The Company’s reportable operating
segments offer distinctive products and services that are marketed through
different channels. They are managed separately because of their
unique technology and service requirements.
Segment
Profit or Loss
The accounting policies of the
Company’s operating segments are the same as those described in Note 1, Summary
of Significant Accounting Policies. Management evaluates segment
performance based on segment operating income.
Information
on the Company’s two operating segments, the FSG and the ETG, for each of the
last three fiscal years ended October 31 is as follows:
|
Other,
|
||||||||||||||||
|
Primarily
|
||||||||||||||||
|
Segment
|
Corporate and
|
Consolidated
|
||||||||||||||
|
FSG
|
ETG
|
Intersegment
|
Totals
|
|||||||||||||
|
Year ended October 31,
2010:
|
||||||||||||||||
|
Net
sales
|
$ | 412,337,000 | $ | 205,648,000 | $ | (965,000 | ) | $ | 617,020,000 | |||||||
|
Depreciation
and amortization
|
9,899,000 | 7,308,000 | 390,000 | 17,597,000 | ||||||||||||
|
Operating
income
|
67,896,000 | 56,126,000 | (14,849,000 | ) | 109,173,000 | |||||||||||
|
Capital
expenditures
|
7,343,000 | 1,502,000 | 32,000 | 8,877,000 | ||||||||||||
|
Total
assets
|
410,666,000 | 328,577,000 | 42,400,000 | 781,643,000 | ||||||||||||
|
Year ended October 31,
2009:
|
||||||||||||||||
|
Net
sales
|
$ | 395,423,000 | $ | 143,372,000 | $ | (499,000 | ) | $ | 538,296,000 | |||||||
|
Depreciation
and amortization
|
9,801,000 | 4,728,000 | 438,000 | 14,967,000 | ||||||||||||
|
Operating
income
|
60,003,000 | 39,981,000 | (11,729,000 | ) | 88,255,000 | |||||||||||
|
Capital
expenditures
|
8,518,000 | 1,670,000 | 65,000 | 10,253,000 | ||||||||||||
|
Total
assets
|
414,030,000 | 285,602,000 | 33,278,000 | 732,910,000 | ||||||||||||
|
Year ended October 31,
2008:
|
||||||||||||||||
|
Net
sales
|
$ | 436,810,000 | $ | 146,044,000 | $ | (507,000 | ) | $ | 582,347,000 | |||||||
|
Depreciation
and amortization
|
9,339,000 | 5,238,000 | 475,000 | 15,052,000 | ||||||||||||
|
Operating
income
|
81,184,000 | 38,775,000 | (14,171,000 | ) | 105,788,000 | |||||||||||
|
Capital
expenditures
|
10,735,000 | 2,093,000 | 627,000 | 13,455,000 | ||||||||||||
|
Total
assets
|
418,079,000 | 220,888,000 | 37,575,000 | 676,542,000 | ||||||||||||
Major
Customer and Geographic Information
No one customer accounted for 10% or
more of the Company’s consolidated net sales during the last three fiscal
years. The Company’s net sales originating and long-lived assets held
outside of the United States during each of the last three fiscal years were not
material.
77
The
Company markets its products and services in approximately 100
countries. The Company’s net sales to any country other than the
United States of America did not exceed 10% of consolidated net
sales. Sales are attributed to countries based on the location of
customers. The composition of the Company’s net sales to customers
located in the United States of America and to those in other countries for each
of the last three fiscal years ended October 31 is as follows:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
United
States of America
|
$ | 423,916,000 | $ | 367,736,000 | $ | 400,447,000 | ||||||
|
Other
countries
|
193,104,000 | 170,560,000 | 181,900,000 | |||||||||
|
Total
|
$ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | ||||||
16. COMMITMENTS
AND CONTINGENCIES
Lease
Commitments
The Company leases certain property and
equipment, including manufacturing facilities and office equipment under
operating leases. Some of these leases provide the Company with the
option after the initial lease term either to purchase the property at the then
fair market value or renew the lease at the then fair rental
value. Generally, management expects that leases will be renewed or
replaced by other leases in the normal course of business.
Future minimum payments under
non-cancelable operating leases for the next five fiscal years and thereafter
are estimated to be as follows:
|
Year
ending October 31,
|
||||
|
2011
|
$ | 6,167,000 | ||
|
2012
|
5,542,000 | |||
|
2013
|
4,106,000 | |||
|
2014
|
2,318,000 | |||
|
2015
|
2,168,000 | |||
|
Thereafter
|
4,511,000 | |||
|
Total
minimum lease commitments
|
$ | 24,812,000 | ||
Total rent expense charged to
operations for operating leases in fiscal 2010, 2009 and 2008 amounted to
$6,963,000, $6,274,000 and $6,074,000, respectively.
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.
78
Product
Warranty
Changes in the Company’s product
warranty liability for fiscal 2010 and 2009 are as follows:
|
Year ended October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balances
as of beginning of year
|
$ | 1,022,000 | $ | 671,000 | ||||
|
Accruals
for warranties
|
1,613,000 | 1,566,000 | ||||||
|
Warranty
claims settled
|
(1,079,000 | ) | (1,228,000 | ) | ||||
|
Acquired
warranty liabilities
|
80,000 | 13,000 | ||||||
|
Balances
as of end of year
|
$ | 1,636,000 | $ | 1,022,000 | ||||
Additional
Contingent Purchase Consideration
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 of up to 73 million Canadian dollars in
aggregate, which translates to approximately $72 million U.S. dollars based on
the October 31, 2010 exchange rate, should the subsidiary meet certain earnings
objectives through fiscal 2012.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, the Company may be obligated to pay
additional purchase consideration of up to approximately $1.3 million in fiscal
2011 and $10.1 million in fiscal 2012 should the subsidiary meet certain
earnings objectives during the second and third years, respectively, following
the acquisition.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, the Company may be obligated to pay
additional purchase consideration of up to approximately $7.6 million should the
subsidiary meet certain earnings objectives during the second year following the
acquisition.
The above referenced additional
contingent purchase consideration will be accrued when the earnings objectives
are met. Such additional contingent purchase consideration is based
on a multiple of earnings above a threshold (subject to a cap in certain cases)
and is not contingent upon the former shareholders of the acquired entities
remaining employed by the Company or providing future services to the
Company. Accordingly, such consideration will be recorded as an
additional cost of the respective acquired entity when paid. The
aggregate maximum amount of such contingent purchase consideration that the
Company could be required to pay is approximately $91 million payable over
future periods beginning in fiscal 2011 through fiscal 2012. Assuming
the subsidiaries perform over their respective future measurement periods at the
same earnings levels they have performed in the comparable historical
measurement periods, the aggregate amount of such contingent purchase
consideration that the Company would be required to pay is approximately $9
million. The actual contingent purchase consideration will likely be
different.
Litigation
The Company is involved in various
legal actions arising in the normal course of business. Based upon
the Company’s and its legal counsel’s evaluations of any claims or assessments,
management is of the opinion that the outcome of these matters will not have a
material adverse effect on the Company’s results of operations, financial
position or cash flows.
79
17. SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was $532,000,
$617,000 and $2,443,000 in fiscal 2010, 2009 and 2008,
respectively. Cash paid for income taxes was $37,300,000, $30,209,000
and $26,669,000 in fiscal 2010, 2009 and 2008, respectively. Cash
received from income tax refunds in fiscal 2010, 2009 and 2008 was $3,031,000,
$5,398,000 and $29,000 respectively.
Cash investing activities related to
acquisitions, including contingent purchase price payments to previous owners of
businesses acquired prior to fiscal 2010, is as follows:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Fair
value of assets acquired:
|
||||||||||||
|
Liabilities
assumed
|
$ | 3,952,000 | $ | 3,881,000 | $ | 1,561,000 | ||||||
|
Noncontrolling
interests in consolidated subsidiaries
|
— | 3,305,000 | 779,000 | |||||||||
|
Less:
|
||||||||||||
|
Goodwill
|
15,372,000 | 30,389,000 | 7,181,000 | |||||||||
|
Identifiable
intangible assets
|
15,400,000 | 21,562,000 | 3,355,000 | |||||||||
|
Accounts
receivable
|
6,685,000 | 4,720,000 | 2,045,000 | |||||||||
|
Inventories
|
3,184,000 | 4,249,000 | 1,328,000 | |||||||||
|
Accrued
additional purchase consideration
|
1,775,000 | 2,212,000 | 11,736,000 | |||||||||
|
Property,
plant and equipment
|
573,000 | 553,000 | 1,381,000 | |||||||||
|
Other
assets
|
24,000 | 3,299,000 | 75,000 | |||||||||
|
Acquisitions,
net of cash acquired
|
$ | (39,061,000 | ) | $ | (59,798,000 | ) | $ | (24,761,000 | ) | |||
In connection with certain
acquisitions, the Company accrued additional purchase consideration aggregating
$4.1 million, $1.8 million and $2.2 million as of October 31, 2010, 2009 and
2008, respectively, which was allocated to goodwill (see Note 2, Acquisitions,
and Note 4, Goodwill and Other Intangible Assets).
There were no significant capital
leases or other equipment financing activities during fiscal 2010, 2009 and
2008.
|
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Item 9A. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The Company’s management, with the
participation of the Company’s Chief Executive Officer and its Chief Financial
Officer, evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this annual 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 annual
report.
80
Management’s Report on Internal
Control Over Financial Reporting
Management of HEICO Corporation is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management, under the supervision of
and with the participation of the Company’s Chief Executive Officer and the
Chief Financial Officer, assessed the effectiveness of the Company’s internal
control over financial reporting based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on its assessment, management believes that
the Company’s internal control over financial reporting is effective as of
October 31, 2010.
Deloitte & Touche LLP, the
independent registered public accounting firm that audited the Company’s
consolidated financial statements included in this Annual Report on Form 10-K,
has issued an attestation report on the Company’s internal control over
financial reporting as of October 31, 2010. A copy of the report is
included in Item 8, Financial
Statements and Supplementary Data, of this Annual Report on Form
10-K.
Changes
in Internal Control Over Financial Reporting
There have been no changes in the
Company’s internal control over financial reporting 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.
Item 9B. OTHER
INFORMATION
None.
81
PART
III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
Information concerning the Directors of
the Company, including the Finance/Audit Committee of the Board of Directors and
its Finance/Audit Committee Financial Expert, as well as information concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934 is hereby
incorporated by reference to the Company’s definitive proxy statement, which
will be filed with the Securities and Exchange Commission (“Commission”) within
120 days after the close of fiscal 2010.
Information concerning the Executive
Officers of the Company is set forth in Item 1 of Part I hereof under the
caption “Executive Officers of the Registrant.”
The Company has adopted a code of
ethics that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller and persons performing
similar functions. The code of ethics is located on the Company’s
Internet web site at http://www.heico.com. Any amendments to or
waivers from a provision of this code of ethics will be posted on the Company’s
web site.
Item 11. EXECUTIVE
COMPENSATION
Information concerning executive
compensation is hereby incorporated by reference to the Company’s definitive
proxy statement, which will be filed with the Commission within 120 days after
the close of fiscal 2010.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
Information concerning security
ownership of certain beneficial owners and management is hereby incorporated by
reference to the Company’s definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 2010.
Equity compensation plan information is
set forth in Item 5 of Part II hereof under the caption “Equity Compensation
Plan Information.”
|
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information concerning certain
relationships and related transactions and director independence is hereby
incorporated by reference to the Company’s definitive proxy statement, which
will be filed with the Commission within 120 days after the close of fiscal
2010.
Item 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Information concerning fees and
services by the principal accountant is hereby incorporated by reference to the
Company’s definitive proxy statement, which will be filed with the Commission
within 120 days after the close of fiscal 2010.
82
PART
IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)(1) Financial
Statements
The following consolidated financial
statements of the Company and subsidiaries are included in Part II, Item
8:
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
42
|
|
Consolidated
Balance Sheets as of October 31, 2010 and 2009
|
44
|
|
Consolidated
Statements of Operations for the years ended October 31,
2010,
|
|
|
2009
and 2008
|
45
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
|
|
for
the years ended October 31, 2010, 2009 and 2008
|
46
|
|
Consolidated
Statements of Cash Flows for the years ended October 31,
2010,
|
|
|
2009
and 2008
|
48
|
|
Notes
to Consolidated Financial Statements
|
49
|
(a)(2)
Financial Statement Schedules
The following financial statement
schedule of the Company and subsidiaries is included herein:
|
|
·
|
Schedule
II – Valuation and Qualifying
Accounts
|
All other schedules have been omitted
because the required information is not applicable or the information is
included in the consolidated financial statements or notes thereto presented in
Part II, Item 8.
(a)(3) Exhibits
|
Exhibit
|
Description
|
|||
|
2.1
|
—
|
Amended
and Restated Agreement of Merger and Plan of Reorganization, dated as of
March 22, 1993, by and among HEICO Corporation, HEICO Industries, Corp.
and New HEICO, Inc. is incorporated by reference to Exhibit 2.1 to the
Registrant’s Registration Statement on Form S-4 (Registration No.
33-57624) Amendment No. 1 filed on March 19, 1993.*
|
||
|
3.1
|
—
|
Articles
of Incorporation of the Registrant are incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-4
(Registration No. 33-57624) Amendment No. 1 filed on March 19,
1993.*
|
||
|
3.2
|
—
|
Articles
of Amendment of the Articles of Incorporation of the Registrant, dated
April 27, 1993, are incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form 8-B dated April 29,
1993.*
|
||
|
3.3
|
—
|
Articles
of Amendment of the Articles of Incorporation of the Registrant, dated
November 3, 1993, are incorporated by reference to Exhibit 3.3 to the Form
10-K for the year ended October 31,
1993.*
|
83
|
Exhibit
|
Description
|
|||
|
3.4
|
—
|
Articles
of Amendment of the Articles of Incorporation of the Registrant, dated
March 19, 1998, are incorporated by reference to Exhibit 3.4 to the
Company’s Registration Statement on Form S-3 (Registration No. 333-48439)
filed on March 23, 1998.*
|
||
|
3.5
|
—
|
Articles
of Amendment of the Articles of Incorporation of the Registrant, dated as
of November 2, 2003, are incorporated by reference to Exhibit 3.5 to the
Form 10-K for the year ended October 31, 2003.*
|
||
|
3.6
|
—
|
Bylaws
of the Registrant are incorporated by reference to Exhibit 3.1 to the Form
8-K filed on December 19, 2007.*
|
||
|
4.0
|
—
|
The
description and terms of the Preferred Stock Purchase Rights are set forth
in a Rights Agreement between the Company and SunTrust Bank, N.A., as
Rights Agent, dated as of November 2, 2003, incorporated by reference to
Exhibit 4.0 to the Form 8-K dated November 2, 2003.*
|
||
|
10.1#
|
—
|
HEICO
Savings and Investment Plan, as amended and restated effective as of
January 1, 2007 is incorporated by reference to Exhibit 10.1 to the Form
10-Q for the quarterly period ended January 31, 2008.*
|
||
|
10.2#
|
—
|
First
Amendment, effective as of January 1, 2007, to the HEICO Savings and
Investment Plan, is incorporated by reference to Exhibit 10.2 to the Form
10-K for the year ended October 31, 2008.*
|
||
|
10.3#
|
—
|
Second
Amendment, effective as of January 1, 2009, to the HEICO Savings and
Investment Plan, is incorporated by reference to Exhibit 10.3 to the Form
10-K for the year ended October 31, 2008.*
|
||
|
10.4#
|
—
|
Third
Amendment, effective as of January 1, 2007, to the HEICO Savings and
Investment Plan.*
|
||
|
10.5#
|
—
|
Fourth
Amendment, effective as of January 1, 2009, to the HEICO Savings and
Investment Plan.**
|
||
|
10.6#
|
—
|
Non-Qualified
Stock Option Agreement for Directors, Officers and Employees is
incorporated by reference to Exhibit 10.8 to the Form 10-K for the year
ended October 31, 1985.*
|
||
|
10.7#
|
—
|
HEICO
Corporation 1993 Stock Option Plan, as amended, is incorporated by
reference to Exhibit 4.7 to the Company’s Registration Statement on Form
S-8 (Registration No. 333-81789) filed on June 29,
1999.*
|
||
|
10.8#
|
—
|
HEICO
Corporation Amended and Restated 2002 Stock Option Plan, effective March
28, 2008, is incorporated by reference to Appendix A to the Form DEF-14A
filed on February 28, 2008.*
|
||
|
10.9#
|
—
|
HEICO
Corporation Directors’ Retirement Plan, as amended, dated as of May 31,
1991, is incorporated by reference to Exhibit 10.19 to the Form 10-K for
the year ended October 31, 1992.*
|
||
|
10.10#
|
—
|
Key
Employee Termination Agreement, dated as of April 5, 1988, between HEICO
Corporation and Thomas S. Irwin is incorporated by reference to Exhibit
10.20 to the Form 10-K for the year ended October 31,
1992.*
|
84
|
Exhibit
|
Description
|
|||
|
10.11#
|
—
|
HEICO
Corporation Leadership Compensation Plan, effective October 1, 2006, as
Amended and Restated effective January 1, 2009, is incorporated by
reference to Exhibit 10.1 to the Form 8-K filed on December 16,
2008.*
|
||
|
10.12#
|
—
|
HEICO
Corporation Leadership Compensation Plan, effective October 1, 2006, as
Re-Amended and Restated effective January 1, 2009, is incorporated by
reference to Exhibit 10.1 to the Form 8-K filed on September 17,
2009.*
|
||
|
10.13#
|
—
|
HEICO
Corporation 2007 Incentive Compensation Plan, effective as of November 1,
2006, is incorporated by reference to Exhibit 10.1 to the Form 8-K filed
on March 19, 2007.*
|
||
|
10.14
|
—
|
Shareholders
Agreement, dated October 30, 1997, by and between HEICO Aerospace Holdings
Corp., HEICO Aerospace Corporation and all of the shareholders of HEICO
Aerospace Holdings Corp. and Lufthansa Technik AG is incorporated by
reference to
Exhibit
10.32 to Form 10-K/A for the year ended October 31,
1997.*
|
||
|
10.15
|
—
|
Second
Amended and Restated Revolving Credit Agreement, dated as of May 27, 2008,
among HEICO Corporation, as Borrower, the lenders from time to time party
hereto, Regions Bank and Wells Fargo Bank, National Association, as
Co-Documentation Agents, JPMorgan Chase Bank, N.A., as Syndication Agent,
and SunTrust Bank, as Administrative Agent, is incorporated by reference
to Exhibit 10.1 to the Form 8-K filed on May 30, 2008.*
|
||
|
21
|
—
|
Subsidiaries
of HEICO Corporation.**
|
||
|
23
|
—
|
Consent
of Independent Registered Public Accounting Firm.**
|
||
|
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.^
|
# Management
contract or compensatory plan or arrangement required to be filed as an
exhibit.
* Previously
filed.
** Filed
herewith.
*** Furnished
herewith.
85
|
^
|
Pursuant
to Rule 406T of Regulation S-T, these interactive data files are deemed
not filed or part of a registration statement prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934 and
otherwise are not subject to liability under those
sections.
|
86
HEICO
CORPORATION AND SUBSIDIARIES
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||
|
Allowance
as of beginning of year
|
$ | 2,535,000 | $ | 2,587,000 | $ | 1,712,000 | ||||||
|
Additions
charged to costs and expenses (a)
|
1,452,000 | 52,000 | 872,000 | |||||||||
|
Additions
charged to other accounts (b)
|
— | 26,000 | 29,000 | |||||||||
|
Deductions
(c)
|
(1,519,000 | ) | (130,000 | ) | (26,000 | ) | ||||||
|
Allowance
as of end of year
|
$ | 2,468,000 | $ | 2,535,000 | $ | 2,587,000 | ||||||
|
(a)
|
Additions
charged to costs and expenses in fiscal 2010 were higher than fiscal 2009
and fiscal 2008 principally as a result of ceased operations of certain
customers within the Flight Support
Group.
|
|
(b)
|
Principally
additions from acquisitions.
|
|
(c)
|
Principally
write-offs of uncollectible accounts receivable, net of
recoveries.
|
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Inventory
valuation reserves:
|
||||||||||||
|
Reserves
as of beginning of year
|
$ | 34,330,000 | $ | 27,186,000 | $ | 27,141,000 | ||||||
|
Additions
charged to costs and expenses
|
2,902,000 | 7,649,000 | 1,808,000 | |||||||||
|
Additions
charged to other accounts (a)
|
11,000 | 391,000 | 731,000 | |||||||||
|
Deductions
(b)
|
(1,296,000 | ) | (896,000 | ) | (2,494,000 | ) | ||||||
|
Reserves
as of end of year
|
$ | 35,947,000 | $ | 34,330,000 | $ | 27,186,000 | ||||||
|
(a)
|
Principally
additions from acquisitions.
|
|
(b)
|
Principally
write-offs of slow moving, obsolete or damaged
inventory.
|
87
Pursuant to the requirements of Section
13 or 15(d) 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:
December 22, 2010
|
By:
|
/s/ THOMAS S.
IRWIN
|
|
|
Thomas
S. Irwin
|
|||
|
Executive
Vice President
|
|||
|
and
Chief Financial Officer
|
|||
|
(Principal
Financial and
|
|||
|
Accounting
Officer)
|
|||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
/s/ LAURANS A. MENDELSON
|
Chairman
of the Board, Chief Executive Officer
|
December
22, 2010
|
|
|
Laurans
A. Mendelson
|
and
Director (Principal Executive Officer)
|
||
|
/s/ SAMUEL L. HIGGINBOTTOM
|
Director
|
December
22, 2010
|
|
|
Samuel
L. Higginbottom
|
|||
|
/s/ MARK H. HILDEBRANDT
|
Director
|
December
22, 2010
|
|
|
Mark
H. Hildebrandt
|
|||
|
Director
|
|||
|
Wolfgang
Mayrhuber
|
|||
|
/s/ ERIC A. MENDELSON
|
Co-President
and Director
|
December
22, 2010
|
|
|
Eric
A. Mendelson
|
|||
|
/s/ VICTOR H. MENDELSON
|
Co-President
and Director
|
December
22, 2010
|
|
|
Victor
H. Mendelson
|
|||
|
/s/ MITCHELL I. QUAIN
|
Director
|
December
22, 2010
|
|
|
Mitchell
I. Quain
|
|||
|
/s/ ALAN SCHRIESHEIM
|
Director
|
December
22, 2010
|
|
|
Alan
Schriesheim
|
|||
|
/s/ FRANK J. SCHWITTER
|
Director
|
December
22, 2010
|
|
|
Frank
J. Schwitter
|
88
EXHIBIT
INDEX
|
Exhibit
|
Description
|
|||
|
10.5
|
—
|
Fourth
Amendment, effective as of January 1, 2009, to the HEICO Savings and
Investment Plan.
|
||
|
21
|
—
|
Subsidiaries
of HEICO Corporation.
|
||
|
23
|
—
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
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.
|