UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JulyJanuary 31, 20102011
OR
o ¨ | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _______
Commission File Number: 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida | | 65-0341002 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
| |
3000 Taft Street, Hollywood, Florida | | 33021 |
(Address of principal executive offices) | | (Zip Code) |
(954) 987-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 o¨
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 number of shares outstanding of each of the registrant’s classes of common stock as of August 27, 2010February 25, 2011 is as follows:
Common Stock, $.01 par value | 13,126,00513,352,034 shares |
Class A Common Stock, $.01 par value | 19,817,87219,949,348 shares |
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| | | Page | |
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Part I. | Financial Information: | | | |
| | | | |
Item 1. | Condensed Consolidated Balance Sheets (unaudited) as of January 31, 2011 and October 31, 2010 | | 2 | |
| | | | |
| Condensed Consolidated Statements of Operations (unaudited) for the three months ended January 31, 2011 and 2010 | | 3 | |
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| | | |
| | | |
| | | |
| | 4 | |
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| Item 2.Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended January 31, 2011 and 2010 | | 5 | |
| | | | |
| Notes to Condensed Consolidated Financial Statements (unaudited) | | 6 | |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 17 | |
| | | | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | 24 | |
| | | | |
Item 4. | | | 24 | |
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Part II. | Other Information: | | | |
| | | | |
| | | | 25 | |
| | | | |
Item 6. | Exhibits | | 25 | | |
| | | | |
| | | 26 | |
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – UNAUDITED
| | July 31, 2010 | | | October 31, 2009 | |
ASSETS | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 11,037,000 | | | $ | 7,167,000 | |
Accounts receivable, net | | | 84,078,000 | | | | 77,864,000 | |
Inventories, net | | | 140,712,000 | | | | 137,585,000 | |
Prepaid expenses and other current assets | | | 5,364,000 | | | | 4,290,000 | |
Deferred income taxes | | | 18,534,000 | | | | 16,671,000 | |
Total current assets | | | 259,725,000 | | | | 243,577,000 | |
| | | | | | | | |
Property, plant and equipment, net | | | 59,803,000 | | | | 60,528,000 | |
Goodwill | | | 380,709,000 | | | | 365,243,000 | |
Intangible assets, net | | | 51,949,000 | | | | 41,588,000 | |
Other assets | | | 25,853,000 | | | | 21,974,000 | |
Total assets | | $ | 778,039,000 | | | $ | 732,910,000 | |
| | | | | | | | |
LIABILITIES AND EQUITY | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | $ | 199,000 | | | $ | 237,000 | |
Trade accounts payable | | | 28,290,000 | | | | 26,978,000 | |
Accrued expenses and other current liabilities | | | 38,292,000 | | | | 36,978,000 | |
Income taxes payable | | | 1,196,000 | | | | 1,320,000 | |
Total current liabilities | | | 67,977,000 | | | | 65,513,000 | |
| | | | | | | | |
Long-term debt, net of current maturities | | | 47,093,000 | | | | 55,194,000 | |
Deferred income taxes | | | 43,126,000 | | | | 41,340,000 | |
Other long-term liabilities | | | 27,836,000 | | | | 23,268,000 | |
Total liabilities | | | 186,032,000 | | | | 185,315,000 | |
Commitments and contingencies (Note 11) | | | | | | | | |
| | | | | | | | |
Redeemable noncontrolling interests (Note 12) | | | 56,053,000 | | | | 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, respectively | | | 131,000 | | | | 104,000 | |
Class A Common Stock, $.01 par value per share; 30,000,000 | | | | | | | | |
shares authorized; 19,815,122 and 19,641,543 shares issued | | | | | | | | |
and outstanding, respectively | | | 198,000 | | | | 157,000 | |
Capital in excess of par value | | | 227,215,000 | | | | 224,625,000 | |
Accumulated other comprehensive loss | | | (498,000 | ) | | | (1,381,000 | ) |
Retained earnings | | | 225,206,000 | | | | 189,485,000 | |
Total HEICO shareholders’ equity | | | 452,252,000 | | | | 412,990,000 | |
Noncontrolling interests | | | 83,702,000 | | | | 77,668,000 | |
Total shareholders’ equity | | | 535,954,000 | | | | 490,658,000 | |
Total liabilities and equity | | $ | 778,039,000 | | | $ | 732,910,000 | |
| | January 31, 2011 | | | October 31, 2010 | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 13,865,000 | | | $ | 6,543,000 | |
Accounts receivable, net | | | 92,047,000 | | | | 91,815,000 | |
Inventories, net | | | 149,445,000 | | | | 138,215,000 | |
Prepaid expenses and other current assets | | | 6,744,000 | | | | 3,769,000 | |
Deferred income taxes | | | 18,260,000 | | | | 18,907,000 | |
Total current assets | | | 280,361,000 | | | | 259,249,000 | |
Property, plant and equipment, net | | | 58,134,000 | | | | 59,003,000 | |
Goodwill | | | 389,202,000 | | | | 385,016,000 | |
Intangible assets, net | | | 63,100,000 | | | | 49,487,000 | |
Other assets | | | 34,703,000 | | | | 28,888,000 | |
Total assets | | $ | 825,500,000 | | | $ | 781,643,000 | |
LIABILITIES AND EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | $ | 91,000 | | | $ | 148,000 | |
Trade accounts payable | | | 33,601,000 | | | | 28,604,000 | |
Accrued expenses and other current liabilities | | | 45,966,000 | | | | 52,101,000 | |
Income taxes payable | | | 1,531,000 | | | | 979,000 | |
Total current liabilities | | | 81,189,000 | | | | 81,832,000 | |
Long-term debt, net of current maturities | | | 24,074,000 | | | | 14,073,000 | |
Deferred income taxes | | | 44,967,000 | | | | 45,308,000 | |
Other long-term liabilities | | | 36,924,000 | | | | 30,556,000 | |
Total liabilities | | | 187,154,000 | | | | 171,769,000 | |
Commitments and contingencies (Note 13) | | | | | | | | |
Redeemable noncontrolling interests (Note 10) | | | 61,196,000 | | | | 55,048,000 | |
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 13,252,034 and 13,126,005 shares issued and outstanding | | | 133,000 | | | | 131,000 | |
Class A Common Stock, $.01 par value per share; 30,000,000 shares authorized; 19,935,679 and 19,863,572 shares issued and outstanding | | | 199,000 | | | | 199,000 | |
Capital in excess of par value | | | 232,151,000 | | | | 227,993,000 | |
Accumulated other comprehensive income (loss) | | | 312,000 | | | | (124,000 | ) |
Retained earnings | | | 256,123,000 | | | | 240,913,000 | |
Total HEICO shareholders’ equity | | | 488,918,000 | | | | 469,112,000 | |
Noncontrolling interests | | | 88,232,000 | | | | 85,714,000 | |
Total shareholders’ equity | | | 577,150,000 | | | | 554,826,000 | |
Total liabilities and equity | | $ | 825,500,000 | | | $ | 781,643,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
| | Nine months ended July 31, | | | Three months ended July 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | |
Net sales | | $ | 447,650,000 | | | $ | 394,689,000 | | | $ | 158,270,000 | | | $ | 134,086,000 | |
| | | | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
Cost of sales | | | 286,351,000 | | | | 262,456,000 | | | | 100,717,000 | | | | 88,275,000 | |
Selling, general and administrative expenses | | | 81,805,000 | | | | 68,039,000 | | | | 28,560,000 | | | | 24,389,000 | |
| | | | | | | | | | | | | | | | |
Total operating costs and expenses | | | 368,156,000 | | | | 330,495,000 | | | | 129,277,000 | | | | 112,664,000 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 79,494,000 | | | | 64,194,000 | | | | 28,993,000 | | | | 21,422,000 | |
| | | | | | | | | | | | | | | | |
Interest expense | | | (422,000 | ) | | | (484,000 | ) | | | (136,000 | ) | | | (177,000 | ) |
Other income (expense) | | | 392,000 | | | | 186,000 | | | | (31,000 | ) | | | 184,000 | |
| | | | | | | | | | | | | | | | |
Income before income taxes and noncontrolling | | | | | | | | | | | | | | | | |
interests | | | 79,464,000 | | | | 63,896,000 | | | | 28,826,000 | | | | 21,429,000 | |
| | | | | | | | | | | | | | | | |
Income tax expense | | | 27,000,000 | | | | 19,331,000 | | | | 9,300,000 | | | | 6,511,000 | |
| | | | | | | | | | | | | | | | |
Net income from consolidated operations | | | 52,464,000 | | | | 44,565,000 | | | | 19,526,000 | | | | 14,918,000 | |
| | | | | | | | | | | | | | | | |
Less: Net income attributable to noncontrolling | | | | | | | | | | | | | | | | |
interests | | | 13,168,000 | | | | 11,575,000 | | | | 4,596,000 | | | | 3,786,000 | |
| | | | | | | | | | | | | | | | |
Net income attributable to HEICO | | $ | 39,296,000 | | | $ | 32,990,000 | | | $ | 14,930,000 | | | $ | 11,132,000 | |
| | | | | | | | | | | | | | | | |
Net income per share attributable to HEICO | | | | | | | | | | | | | | | | |
shareholders: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.20 | | | $ | 1.01 | | | $ | .45 | | | $ | .34 | |
Diluted | | $ | 1.16 | | | $ | .98 | | | $ | .44 | | | $ | .33 | |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares | | | | | | | | | | | | | | | | |
outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 32,793,137 | | | | 32,799,101 | | | | 32,917,530 | | | | 32,603,643 | |
Diluted | | | 33,753,414 | | | | 33,816,980 | | | | 33,797,471 | | | | 33,632,863 | |
| | | | | | | | | | | | | | | | |
Cash dividends per share | | $ | .108 | | | $ | .096 | | | $ | .060 | | | $ | .048 | |
| | Three months ended January 31, | |
| | 2011 | | | 2010 | |
| | | | | | |
Net sales | | $ | 174,219,000 | | | $ | 135,535,000 | |
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Cost of sales | | | 110,293,000 | | | | 85,415,000 | |
Selling, general and administrative expenses | | | 31,554,000 | | | | 25,576,000 | |
| | | | | | | | |
Total operating costs and expenses | | | 141,847,000 | | | | 110,991,000 | |
| | | | | | | | |
Operating income | | | 32,372,000 | | | | 24,544,000 | |
| | | | | | | | |
Interest expense | | | (54,000 | ) | | | (119,000 | ) |
Other income | | | 55,000 | | | | 155,000 | |
| | | | | | | | |
Income before income taxes and noncontrolling interests | | | 32,373,000 | | | | 24,580,000 | |
| | | | | | | | |
Income tax expense | | | 9,850,000 | | | | 8,550,000 | |
| | | | | | | | |
Net income from consolidated operations | | | 22,523,000 | | | | 16,030,000 | |
| | | | | | | | |
Less: Net income attributable to noncontrolling interests | | | 5,449,000 | | | | 4,237,000 | |
| | | | | | | | |
Net income attributable to HEICO | | $ | 17,074,000 | | | $ | 11,793,000 | |
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | | $ | .52 | | | $ | .36 | |
Diluted | | $ | .50 | | | $ | .35 | |
| | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | |
Basic | | | 33,087,674 | | | | 32,683,590 | |
Diluted | | | 33,908,223 | | | | 33,701,918 | |
| | | | | | | | |
Cash dividends per share | | $ | .060 | | | $ | .048 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
AND COMPREHENSIVE INCOME – UNAUDITED
| | | | | 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 | | | 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 | | | 56,937,000 | | | | — | | | | — | | | | — | | | | — | | | | (44,863,000 | ) | | | 77,668,000 | | | | 32,805,000 | |
Balances as of October 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(as 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 | | | 7,134,000 | | | | — | | | | — | | | | — | | | | — | | | | 39,296,000 | | | | 6,034,000 | | | | 45,330,000 | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 877,000 | | | | — | | | | — | | | | 877,000 | |
Total comprehensive income | | | 7,134,000 | | | | — | | | | — | | | | — | | | | 877,000 | | | | 39,296,000 | | | | 6,034,000 | | | | 46,207,000 | |
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 | ) |
Proceeds from stock option exercises | | | — | | | | 1,000 | | | | 1,000 | | | | 1,465,000 | | | | — | | | | — | | | | — | | | | 1,467,000 | |
Tax benefit from stock option exercises | | | — | | | | — | | | | — | | | | 951,000 | | | | — | | | | — | | | | — | | | | 951,000 | |
Stock option compensation expense | | | — | | | | — | | | | — | | | | 921,000 | | | | — | | | | — | | | | — | | | | 921,000 | |
Distributions to noncontrolling interests | | | (7,184,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Acquisitions of noncontrolling interests | | | (795,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Redemptions of common stock related to | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stock option exercises | | | — | | | | — | | | | — | | | | (681,000 | ) | | | — | | | | — | | | | — | | | | (681,000 | ) |
Adjustments to redemption amount of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
redeemable noncontrolling interests | | | (39,000 | ) | | | — | | | | — | | | | — | | | | — | | | | 39,000 | | | | — | | | | 39,000 | |
Other | | | — | | | | — | | | | — | | | | — | | | | 6,000 | | | | — | | | | — | | | | 6,000 | |
Balances as of July 31, 2010 | | $ | 56,053,000 | | | $ | 131,000 | | | $ | 198,000 | | | $ | 227,215,000 | | | $ | (498,000 | ) | | $ | 225,206,000 | | | $ | 83,702,000 | | | $ | 535,954,000 | |
| | | | | 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, 2010 | | $ | 55,048,000 | | | $ | 131,000 | | | $ | 199,000 | | | $ | 227,993,000 | | | $ | (124,000 | ) | | $ | 240,913,000 | | | $ | 85,714,000 | | | $ | 554,826,000 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 2,931,000 | | | | — | | | | — | | | | — | | | | — | | | | 17,074,000 | | | | 2,518,000 | | | | 19,592,000 | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 436,000 | | | | — | | | | — | | | | 436,000 | |
Total comprehensive income | | | 2,931,000 | | | | — | | | | — | | | | — | | | | 436,000 | | | | 17,074,000 | | | | 2,518,000 | | | | 20,028,000 | |
Cash dividends ($.06 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,990,000 | ) | | | — | | | | (1,990,000 | ) |
Tax benefit from stock option exercises | | | — | | | | — | | | | — | | | | 7,695,000 | | | | — | | | | — | | | | — | | | | 7,695,000 | |
Proceeds from stock option exercises | | | — | | | | 2,000 | | | | 1,000 | | | | 292,000 | | | | — | | | | — | | | | — | | | | 295,000 | |
Stock option compensation expense | | | — | | | | — | | | | — | | | | 543,000 | | | | — | | | | — | | | | — | | | | 543,000 | |
Redemptions of common stock related to stock option exercises | | | — | | | | — | | | | — | | | | (4,371,000 | ) | | | — | | | | — | | | | — | | | | (4,371,000 | ) |
Distributions to noncontrolling interests | | | (2,269,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Noncontrolling interests assumed related to acquisition | | | 5,612,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Adjustments to redemption amount of redeemable noncontrolling interests | | | (126,000 | ) | | | — | | | | — | | | | — | | | | — | | | | 126,000 | | | | — | | | | 126,000 | |
Other | | | — | | | | — | | | | (1,000 | ) | | | (1,000 | ) | | | — | | | | — | | | | — | | | | (2,000 | ) |
Balances as of January 31, 2011 | | $ | 61,196,000 | | | $ | 133,000 | | | $ | 199,000 | | | $ | 232,151,000 | | | $ | 312,000 | | | $ | 256,123,000 | | | $ | 88,232,000 | | | $ | 577,150,000 | |
| | | | | 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 | | | Loss | | | Earnings | | | Interests | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of October 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
(as previously reported) | | $ | ― | | | $ | 106,000 | | | $ | 158,000 | | | $ | 229,443,000 | | | $ | (4,819,000 | ) | | $ | 192,872,000 | | | $ | ― | | | $ | 417,760,000 | |
Retrospective adjustments related to | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adoption of accounting guidance for | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | 48,736,000 | | | | — | | | | — | | | | — | | | | — | | | | (35,896,000 | ) | | | 71,138,000 | | | | 35,242,000 | |
Balances as of October 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(as 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 | | | 5,938,000 | | | | — | | | | — | | | | — | | | | — | | | | 32,990,000 | | | | 5,637,000 | | | | 38,627,000 | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 2,859,000 | | | | — | | | | — | | | | 2,859,000 | |
Total comprehensive income | | | 5,938,000 | | | | — | | | | — | | | | — | | | | 2,859,000 | | | | 32,990,000 | | | | 5,637,000 | | | | 41,486,000 | |
Repurchases of common stock | | | — | | | | (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 | | | | 821,000 | | | | — | | | | — | | | | — | | | | 822,000 | |
Tax benefit from stock option exercises | | | — | | | | — | | | | — | | | | 1,889,000 | | | | — | | | | — | | | | — | | | | 1,889,000 | |
Stock option compensation expense | | | — | | | | — | | | | — | | | | 15,000 | | | | — | | | | — | | | | — | | | | 15,000 | |
Distributions to noncontrolling interests | | | (5,533,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (461,000 | ) | | | (461,000 | ) |
Acquisitions of noncontrolling interests | | | (10,015,000 | ) | | | — | | | | — | | | | — | | | | — | | | | 6,845,000 | | | | — | | | | 6,845,000 | |
Noncontrolling interests assumed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related to acquistion | | | 7,505,000 | | | | — | | | | — | | | | — | | | | — | | | | (4,202,000 | ) | | | — | | | | (4,202,000 | ) |
Adjustments to redemption amount of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
redeemable noncontrolling interests | | | 971,000 | | | | — | | | | — | | | | — | | | | — | | | | (971,000 | ) | | | — | | | | (971,000 | ) |
Other | | | — | | | | — | | | | — | | | | — | | | | 164,000 | | | | 1,000 | | | | — | | | | 165,000 | |
Balances as of July 31, 2009 | | $ | 47,602,000 | | | $ | 104,000 | | | $ | 157,000 | | | $ | 224,074,000 | | | $ | (1,796,000 | ) | | $ | 188,489,000 | | | $ | 76,314,000 | | | $ | 487,342,000 | |
| | | | | 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 | | $ | 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 | | | 2,205,000 | | | | — | | | | — | | | | — | | | | — | | | | 11,793,000 | | | | 2,032,000 | | | | 13,825,000 | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | (23,000 | ) | | | — | | | | — | | | | (23,000 | ) |
Total comprehensive income | | | 2,205,000 | | | | — | | | | — | | | | — | | | | (23,000 | ) | | | 11,793,000 | | | | 2,032,000 | | | | 13,802,000 | |
Cash dividends ($.048 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,570,000 | ) | | | — | | | | (1,570,000 | ) |
Tax benefit from stock option exercises | | | — | | | | — | | | | — | | | | 947,000 | | | | — | | | | — | | | | — | | | | 947,000 | |
Proceeds from stock option exercises | | | — | | | | — | | | | — | | | | 232,000 | | | | — | | | | — | | | | — | | | | 232,000 | |
Stock option compensation expense | | | — | | | | — | | | | — | | | | 308,000 | | | | — | | | | — | | | | — | | | | 308,000 | |
Redemptions of common stock related to stock option exercises | | | — | | | | — | | | | — | | | | (353,000 | ) | | | — | | | | — | | | | — | | | | (353,000 | ) |
Distributions to noncontrolling interests | | | (2,508,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Adjustments to redemption amount of redeemable noncontrolling interests | | | 302,000 | | | | — | | | | — | | | | — | | | | — | | | | (302,000 | ) | | | — | | | | (302,000 | ) |
Other | | | 1,000 | | | | — | | | | — | | | | — | | | | 2,000 | | | | — | | | | — | | | | 2,000 | |
Balances as of January 31, 2010 | | $ | 56,937,000 | | | $ | 104,000 | | | $ | 157,000 | | | $ | 225,759,000 | | | $ | (1,402,000 | ) | | $ | 199,406,000 | | | $ | 79,700,000 | | | $ | 503,724,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
| | Nine months ended July 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Operating Activities: | | | | | | |
Net income from consolidated operations | | $ | 52,464,000 | | | $ | 44,565,000 | |
Adjustments to reconcile net income from consolidated operations | | | | | | | | |
to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 13,578,000 | | | | 10,951,000 | |
Impairment of intangible assets | | | 281,000 | | | | — | |
Deferred income tax benefit | | | (80,000 | ) | | | (1,376,000 | ) |
Tax benefit from stock option exercises | | | 951,000 | | | | 1,889,000 | |
Excess tax benefit from stock option exercises | | | (669,000 | ) | | | (1,572,000 | ) |
Stock option compensation expense | | | 921,000 | | | | 15,000 | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | |
(Increase) decrease in accounts receivable | | | (2,988,000 | ) | | | 20,207,000 | |
Decrease (increase) in inventories | | | 3,625,000 | | | | (9,282,000 | ) |
Increase in prepaid expenses and other current assets | | | (1,051,000 | ) | | | (2,271,000 | ) |
Decrease in trade accounts payable | | | (177,000 | ) | | | (2,995,000 | ) |
Increase (decrease) in accrued expenses and other current liabilities | | | 1,744,000 | | | | (15,776,000 | ) |
Decrease in income taxes payable | | | (794,000 | ) | | | (1,080,000 | ) |
Other | | | 116,000 | | | | 444,000 | |
Net cash provided by operating activities | | | 67,921,000 | | | | 43,719,000 | |
| | | | | | | | |
Investing Activities: | | | | | | | | |
Acquisitions, net of cash acquired | | | (39,061,000 | ) | | | (34,562,000 | ) |
Capital expenditures | | | (6,743,000 | ) | | | (7,784,000 | ) |
Other | | | (18,000 | ) | | | 73,000 | |
Net cash used in investing activities | | | (45,822,000 | ) | | | (42,273,000 | ) |
| | | | | | | | |
Financing Activities: | | | | | | | | |
Payments on revolving credit facility | | | (45,000,000 | ) | | | (49,000,000 | ) |
Borrowings on revolving credit facility | | | 37,000,000 | | | | 68,000,000 | |
Acquisitions of noncontrolling interests | | | (795,000 | ) | | | (11,268,000 | ) |
Repurchases of common stock | | | — | | | | (8,098,000 | ) |
Distributions to noncontrolling interests | | | (7,184,000 | ) | | | (5,994,000 | ) |
Cash dividends paid | | | (3,614,000 | ) | | | (3,150,000 | ) |
Redemptions of common stock related to stock option exercises | | | (681,000 | ) | | | — | |
Proceeds from stock option exercises | | | 1,467,000 | | | | 822,000 | |
Excess tax benefit from stock option exercises | | | 669,000 | | | | 1,572,000 | |
Other | | | (152,000 | ) | | | (158,000 | ) |
Net cash used in financing activities | | | (18,290,000 | ) | | | (7,274,000 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash | | | 61,000 | | | | 214,000 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 3,870,000 | | | | (5,614,000 | ) |
Cash and cash equivalents at beginning of year | | | 7,167,000 | | | | 12,562,000 | |
Cash and cash equivalents at end of period | | $ | 11,037,000 | | | $ | 6,948,000 | |
| | Three months ended January 31, | |
| | 2011 | | | 2010 | |
| | | | | | |
Operating Activities: | | | | | | |
Net income from consolidated operations | | $ | 22,523,000 | | | $ | 16,030,000 | |
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 4,307,000 | | | | 4,251,000 | |
Deferred income tax provision | | | 347,000 | | | | 429,000 | |
Tax benefit from stock option exercises | | | 7,695,000 | | | | 947,000 | |
Excess tax benefit from stock option exercises | | | (6,359,000 | ) | | | (666,000 | ) |
Stock option compensation expense | | | 543,000 | | | | 308,000 | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | |
Decrease in accounts receivable | | | 4,836,000 | | | | 3,401,000 | |
Increase in inventories | | | (2,045,000 | ) | | | (4,082,000 | ) |
Increase in prepaid expenses and other current assets | | | (2,534,000 | ) | | | (1,352,000 | ) |
Increase in trade accounts payable | | | 1,027,000 | | | | 1,179,000 | |
Decrease in accrued expenses and other current liabilities | | | (8,010,000 | ) | | | (4,486,000 | ) |
Increase in income taxes payable | | | 782,000 | | | | 4,387,000 | |
Other | | | 435,000 | | | | (69,000 | ) |
Net cash provided by operating activities | | | 23,547,000 | | | | 20,277,000 | |
| | | | | | | | |
Investing Activities: | | | | | | | | |
Acquisitions, net of cash acquired | | | (22,588,000 | ) | | | (2,182,000 | ) |
Capital expenditures | | | (1,637,000 | ) | | | (2,158,000 | ) |
Other | | | 6,000 | | | | (3,000 | ) |
Net cash used in investing activities | | | (24,219,000 | ) | | | (4,343,000 | ) |
| | | | | | | | |
Financing Activities: | | | | | | | | |
Borrowings on revolving credit facility | | | 28,000,000 | | | | 1,000,000 | |
Payments on revolving credit facility | | | (18,000,000 | ) | | | (13,000,000 | ) |
Excess tax benefit from stock option exercises | | | 6,359,000 | | | | 666,000 | |
Redemptions of common stock related to stock option exercises | | | (4,371,000 | ) | | | (353,000 | ) |
Distributions to noncontrolling interests | | | (2,269,000 | ) | | | (2,508,000 | ) |
Cash dividends paid | | | (1,990,000 | ) | | | (1,570,000 | ) |
Proceeds from stock option exercises | | | 295,000 | | | | 232,000 | |
Other | | | (59,000 | ) | | | (34,000 | ) |
Net cash provided by (used in) financing activities | | | 7,965,000 | | | | (15,567,000 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash | | | 29,000 | | | | (10,000 | ) |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 7,322,000 | | | | 357,000 | |
Cash and cash equivalents at beginning of year | | | 6,543,000 | | | | 7,167,000 | |
Cash and cash equivalents at end of period | | $ | 13,865,000 | | | $ | 7,524,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2009.2010. The October 31, 20092010 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations and statements of cash flows for such interim periods presented. The results of operations for the ninethree months ended JulyJanuary 31, 20102011 are not necessarily indicative of the results which may be expected for the entire fiscal year.
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 fiscal 2010 share and per share information has been adjusted retrospectively to give effect to thereflect a 5-for-4 stock split.
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 equitysplit effected 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 has affected the presentation of noncontrolling interests in the Company’s condensed 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 affects the financial statement classification and measurement of redeemable noncontrolling interests. As further detailed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2009, 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.
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 Condensed 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.April 2010.
New Accounting Pronouncements
In September 2006,January 2010, 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. 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 portions of the new guidance that were delayed 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 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 newadditional 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 onCompany will make the Company’s resultsadditional Level 3 disclosures, if applicable, as of operations, financial position or cash flows.the date of adoption.
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” Under ASU 2010-29, 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. ASU 2010-29 is effective for business combinations consummated in fiscal periods beginning after December 15, 2010. Early adoption is permitted and the Company adopted the new guidance on a prospective basis as of December 2010.
2. ACQUISITIONS
In FebruaryDecember 2010, the Company, through its HEICO Electronic TechnologiesAerospace Holdings Corp. (“HEICO Electronic”Aerospace”) subsidiary, acquired substantially all80.1% of the assets and assumed certain liabilities of dB Control. dB Control produces high-power devices used in both defenseBlue Aerospace LLC. Blue Aerospace is a supplier, distributor, and commercial applications.integrator of military aircraft parts and support services primarily to foreign military organizations allied with the United States. The remaining 19.9% interest continues to be owned by certain members of Blue Aerospace’s management team (see Note 10, Redeemable Noncontrolling Interests, for additional information). The total consideration for this acquisition and related allocation to the tangible and identifiable intangible assets acquired and liabilities assumed is not material or significant to the Company’s condensed consolidated financial statements. The purchase price (including a post closing purchase price adjustment of approximately $1.6 million accrued as of the acquisition date and paid during the third quarter of fiscal 2010) was paid in cash principally using proceeds from the Company’s revolving credit facility. The total consideration includes an accrual of approximately $1.2 million representing the fair value of contingent consideration that the Company may be obligated to pay in fiscal 2013 should dB Control meet certain earnings
objectives during the second and third years following the acquisition. The maximum amount of contingent consideration that the Company could be required to pay is $2.0 million. See Note 7, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation.
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. The Company accrues an estimate of additional purchase consideration when the earnings objectives are met. During the first quarter of fiscal 2010, the Company, through HEICO Electronic, paid $1.9 million of additional purchase consideration of which $1.8 million was accrued as of October 31, 2009. During the second and third quarters of fiscal 2010, the Company, through HEICO Electronic, paid $1.0 million and $1.3 million, respectively, of additional purchase consideration related to prior year acquisitions for which the earnings objectives were met during fiscal 2010. The aforementioned amounts paid 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 purchase consideration related to prior year acquisitions may be found in Note 11, Commitments and Contingencies.
The operating results of the Company’s fiscal 20102011 acquisition were included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of the 2010fiscal 2011 acquisition included in the Condensed Consolidated Statements of Operations is not material. The following table presents unaudited pro forma financial information as if the fiscal 2010 acquisition had occurred as of November 1, 2008 for purposes of the information presented for the nine and three months ended July 31, 2009. Had the fiscal 20102011 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 the nine and three months ended JulyJanuary 31, 2010 and 2011 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.
| | Nine months ended | | | Three months ended | |
| | July 31, 2009 | | | July 31, 2009 | |
Net sales | | $ | 412,717,000 | | | $ | 139,023,000 | |
Net income from consolidated operations | | $ | 45,882,000 | | | $ | 14,969,000 | |
Net income attributable to HEICO | | $ | 34,307,000 | | | $ | 11,183,000 | |
Net income per share attributable | | | | | | | | |
to HEICO shareholders: | | | | | | | | |
Basic | | $ | 1.05 | | | $ | .34 | |
Diluted | | $ | 1.01 | | | $ | .33 | |
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
| | July 31, 2010 | | | October 31, 2009 | |
Accounts receivable | | $ | 86,962,000 | | | $ | 80,399,000 | |
Less: Allowance for doubtful accounts | | | (2,884,000 | ) | | | (2,535,000 | ) |
Accounts receivable, net | | $ | 84,078,000 | | | $ | 77,864,000 | |
| | January 31, 2011 | | | October 31, 2010 | |
Accounts receivable | | $ | 94,604,000 | | | $ | 94,283,000 | |
Less: Allowance for doubtful accounts | | | (2,557,000 | ) | | | (2,468,000 | ) |
Accounts receivable, net | | $ | 92,047,000 | | | $ | 91,815,000 | |
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
| | January 31, 2011 | | | October 31, 2010 | |
Costs incurred on uncompleted contracts | | $ | 5,391,000 | | | $ | 6,323,000 | |
Estimated earnings | | | 5,906,000 | | | | 7,603,000 | |
| | | 11,297,000 | | | | 13,926,000 | |
Less: Billings to date | | | (6,754,000 | ) | | | (8,967,000 | ) |
| | $ | 4,543,000 | | | $ | 4,959,000 | |
Included in the accompanying Condensed Consolidated | | | | | | | | |
Balance Sheets under the following captions: | | | | | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings) | | $ | 4,658,000 | | | $ | 5,135,000 | |
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) earnings) | | | (115,000 | ) | | | (176,000 | ) |
| | $ | 4,543,000 | | | $ | 4,959,000 | |
7
| | July 31, 2010 | | | October 31, 2009 | |
Costs incurred on uncompleted contracts | | $ | 4,548,000 | | | $ | 10,280,000 | |
Estimated earnings | | | 5,480,000 | | | | 8,070,000 | |
| | | 10,028,000 | | | | 18,350,000 | |
Less: Billings to date | | | (7,251,000 | ) | | | (12,543,000 | ) |
| | $ | 2,777,000 | | | $ | 5,807,000 | |
Included in the accompanying Condensed Consolidated | | | | | | | | |
Balance Sheets under the following captions: | | | | | | | | |
Accounts receivable, net (costs and estimated | | | | | | | | |
earnings in excess of billings) | | $ | 2,958,000 | | | $ | 5,832,000 | |
Accrued expenses and other current liabilities | | | | | | | | |
(billings in excess of costs and estimated earnings) | | | (181,000 | ) | | | (25,000 | ) |
| | $ | 2,777,000 | | | $ | 5,807,000 | |
The percentage of the Company’s net sales recognized under the percentage-of-completion method was not material for the three months ended January 31, 2011 and 2010. Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the ninethree months ended JulyJanuary 31, 20102011 and 2009.2010.
Inventories
| | July 31, 2010 | | | October 31, 2009 | |
Finished products | | $ | 74,609,000 | | | $ | 79,665,000 | |
Work in process | | | 18,814,000 | | | | 14,279,000 | |
Materials, parts, assemblies and supplies | | | 47,289,000 | | | | 43,641,000 | |
Inventories, net | | $ | 140,712,000 | | | $ | 137,585,000 | |
| | January 31, 2011 | | | October 31, 2010 | |
Finished products | | $ | 80,544,000 | | | $ | 72,263,000 | |
Work in process | | | 20,832,000 | | | | 19,034,000 | |
Materials, parts, assemblies and supplies | | | 48,069,000 | | | | 46,918,000 | |
Inventories, net of valuation reserves | | $ | 149,445,000 | | | $ | 138,215,000 | |
Inventories related to long-term contracts were not significant as of JulyJanuary 31, 20102011 and October 31, 2009.2010.
Property, Plant and Equipment
| | July 31, 2010 | | | October 31, 2009 | |
Land | | $ | 3,656,000 | | | $ | 3,656,000 | |
Buildings and improvements | | | 38,750,000 | | | | 38,091,000 | |
Machinery, equipment and tooling | | | 86,276,000 | | | | 80,697,000 | |
Construction in progress | | | 6,028,000 | | | | 5,331,000 | |
| | | 134,710,000 | | | | 127,775,000 | |
Less: Accumulated depreciation and amortization | | | (74,907,000 | ) | | | (67,247,000 | ) |
Property, plant and equipment, net | | $ | 59,803,000 | | | $ | 60,528,000 | |
| | January 31, 2011 | | | October 31, 2010 | |
Land | | $ | 3,656,000 | | | $ | 3,656,000 | |
Buildings and improvements | | | 39,361,000 | | | | 38,772,000 | |
Machinery, equipment and tooling | | | 86,843,000 | | | | 85,095,000 | |
Construction in progress | | | 5,460,000 | | | | 6,319,000 | |
| | | 135,320,000 | | | | 133,842,000 | |
Less: Accumulated depreciation and amortization | | | (77,186,000 | ) | | | (74,839,000 | ) |
Property, plant and equipment, net | | $ | 58,134,000 | | | $ | 59,003,000 | |
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $7,692,000$11,519,000 and $9,689,000$9,230,000 as of JulyJanuary 31, 20102011 and October 31, 2009, respectively. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2010, and 2009 was $6,642,000 and $6,757,000 respectively. The total customer rebates and credits deducted within net sales for the three months ended JulyJanuary 31, 2011 and 2010 was $2,580,000 and 2009 was $2,244,000 and $2,023,000$2,379,000, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (“FSG”) and the Electronic Technologies Group (“ETG”). Changes in the carrying amount of goodwill by operating segment for the ninethree months ended JulyJanuary 31, 20102011 are as follows:
| | Segment | | | Consolidated | |
| | FSG | | | ETG | | | Totals | |
Balances as of October 31, 2010 | | $ | 188,459,000 | | | $ | 196,557,000 | | | $ | 385,016,000 | |
Goodwill acquired | | | 3,898,000 | | | | ¾ | | | | 3,898,000 | |
Foreign currency translation adjustments | | | ¾ | | | | 288,000 | | | | 288,000 | |
Balances as of January 31, 2011 | | $ | 192,357,000 | | | $ | 196,845,000 | | | $ | 389,202,000 | |
| | Segment | | | Consolidated | |
| | FSG | | | ETG | | | Totals | |
Balances as of October 31, 2009 | | $ | 188,459,000 | | | $ | 176,784,000 | | | $ | 365,243,000 | |
Acquired goodwill | | | ¾ | | | | 12,920,000 | | | | 12,920,000 | |
Adjustments to goodwill | | | ¾ | | | | 1,960,000 | | | | 1,960,000 | |
Foreign currency translation adjustment | | | ¾ | | | | 586,000 | | | | 586,000 | |
Balances as of July 31, 2010 | | $ | 188,459,000 | | | $ | 192,250,000 | | | $ | 380,709,000 | |
8
The goodwill acquired pertains to athe current year acquisition described in Note 2, Acquisitions, and represents 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). The adjustments to goodwill principally represent additional purchase consideration paid relating to prior year acquisitions for which the earnings objectives were met in fiscal 2010. See Note 2, Acquisitions, for additional information regarding the fiscal 2010 acquisition and additional purchase consideration. The foreign currency translation adjustment reflects unrealized translation gains on the goodwill recognized in connection with a foreign subsidiary.assumed.
Identifiable intangible assets consist of the following:
| | As of July 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 | | $ | 41,759,000 | | | $ | (14,360,000 | ) | | $ | 27,399,000 | | | $ | 33,237,000 | | | $ | (9,944,000 | ) | | $ | 23,293,000 | |
Intellectual property | | | 7,303,000 | | | | (1,247,000 | ) | | | 6,056,000 | | | | 3,369,000 | | | | (628,000 | ) | | | 2,741,000 | |
Licenses | | | 1,000,000 | | | | (603,000 | ) | | | 397,000 | | | | 1,000,000 | | | | (547,000 | ) | | | 453,000 | |
Non-compete agreements | | | 1,166,000 | | | | (991,000 | ) | | | 175,000 | | | | 1,221,000 | | | | (969,000 | ) | | | 252,000 | |
Patents | | | 558,000 | | | | (261,000 | ) | | | 297,000 | | | | 575,000 | | | | (246,000 | ) | | | 329,000 | |
Trade names | | | 569,000 | | | | (84,000 | ) | | | 485,000 | | | | 569,000 | | | | ¾ | | | | 569,000 | |
| | | 52,355,000 | | | | (17,546,000 | ) | | | 34,809,000 | | | | 39,971,000 | | | | (12,334,000 | ) | | | 27,637,000 | |
Non-Amortizing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Trade names | | | 17,140,000 | | | | ¾ | | | | 17,140,000 | | | | 13,951,000 | | | | ¾ | | | | 13,951,000 | |
| | $ | 69,495,000 | | | $ | (17,546,000 | ) | | $ | 51,949,000 | | | $ | 53,922,000 | | | $ | (12,334,000 | ) | | $ | 41,588,000 | |
| | As of January 31, 2011 | | | As of October 31, 2010 | |
| | Gross | | | | | | Net | | | Gross | | | | | | Net | |
| | Carrying | | | Accumulated | | | Carrying | | | Carrying | | | Accumulated | | | Carrying | |
| | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
Amortizing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 46,682,000 | | | $ | (13,506,000 | ) | | $ | 33,176,000 | | | $ | 37,338,000 | | | $ | (12,142,000 | ) | | $ | 25,196,000 | |
Intellectual property | | | 7,312,000 | | | | (1,594,000 | ) | | | 5,718,000 | | | | 7,281,000 | | | | (1,372,000 | ) | | | 5,909,000 | |
Licenses | | | 2,900,000 | | | | (656,000 | ) | | | 2,244,000 | | | | 1,000,000 | | | | (621,000 | ) | | | 379,000 | |
Non-compete agreements | | | 1,362,000 | | | | (1,057,000 | ) | | | 305,000 | | | | 1,170,000 | | | | (1,019,000 | ) | | | 151,000 | |
Patents | | | 569,000 | | | | (281,000 | ) | | | 288,000 | | | | 554,000 | | | | (270,000 | ) | | | 284,000 | |
Trade names | | | 569,000 | | | | (140,000 | ) | | | 429,000 | | | | 569,000 | | | | (112,000 | ) | | | 457,000 | |
| | | 59,394,000 | | | | (17,234,000 | ) | | | 42,160,000 | | | | 47,912,000 | | | | (15,536,000 | ) | | | 32,376,000 | |
Non-Amortizing Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Trade names | | | 20,940,000 | | | | — | | | | 20,940,000 | | | | 17,111,000 | | | | — | | | | 17,111,000 | |
| | $ | 80,334,000 | | | $ | (17,234,000 | ) | | $ | 63,100,000 | | | $ | 65,023,000 | | | $ | (15,536,000 | ) | | $ | 49,487,000 | |
The increase in the gross carrying amount of customer relationships, intellectual propertylicenses, non-compete agreements and non-amortizing trade names as of JulyJanuary 31, 20102011 compared to October 31, 20092010 principally relates to such intangible assets recognized in connection with an acquisition made during the secondfirst quarter of fiscal 20102011 (see Note 2, Acquisitions). The weighted average amortization period of the customer relationships, licenses and intellectual propertynon-compete agreements 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 now eight10 years, 10 years and seven2 years, respectively.
Amortization expense related to intangible assets for the nine months ended July 31, 2010 and 2009 was $5,446,000 and $3,148,000, respectively. Amortization expense related to intangible assets for the three months ended JulyJanuary 31, 2011 and 2010 was $1,651,000 and 2009 was $1,976,000 and $1,336,000,$1,576,000, respectively. Amortization expense related to intangible assets for the fiscal year ending October 31, 20102011 is estimated to be $6,795,000.$7,298,000. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $6,327,000 in fiscal 2011, $5,621,000$6,806,000 in fiscal 2012, $5,161,000$6,234,000 in fiscal 2013, $4,864,000$5,884,000 in fiscal 2014, $3,739,000$4,698,000 in fiscal 2015, $3,683,000 in fiscal 2016 and $7,748,000$9,208,000 thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following:
| | January 31, 2011 | | | October 31, 2010 | |
Borrowings under revolving credit facility | | $ | 24,000,000 | | | $ | 14,000,000 | |
Notes payable and capital leases | | | 165,000 | | | | 221,000 | |
| | | 24,165,000 | | | | 14,221,000 | |
Less: Current maturities of long-term debt | | | (91,000 | ) | | | (148,000 | ) |
| | $ | 24,074,000 | | | $ | 14,073,000 | |
| | July 31, 2010 | | | October 31, 2009 | |
Borrowings under revolving credit facility | | $ | 47,000,000 | | | $ | 55,000,000 | |
Notes payable, capital leases and equipment loans | | | 292,000 | | | | 431,000 | |
| | | 47,292,000 | | | | 55,431,000 | |
Less: Current maturities of long-term debt | | | (199,000 | ) | | | (237,000 | ) |
| | $ | 47,093,000 | | | $ | 55,194,000 | |
9
As of JulyJanuary 31, 20102011 and October 31, 2009,2010, the weighted average interest rate ofon borrowings under the Company’s $300 million revolving credit facility was 1.0% and .9%, respectively. as of each period. The revolving credit facility contains both financial and non-financial covenants. As of JulyJanuary 31, 2010,2011, the Company was in compliance with all such covenants.
6. INCOME TAXES
As of JulyJanuary 31, 2010,2011, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $2,596,000$2,592,000 of which $2,058,000$2,190,000 would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits for the ninethree months ended JulyJanuary 31, 20102011 is as follows:
Balance as of October 31, 2010 | | $ | 2,306,000 | |
Increases related to prior year tax positions | | | 104,000 | |
Increases related to current year tax positions | | | 182,000 | |
Balance as of January 31, 2011 | | $ | 2,592,000 | |
Balance as of October 31, 2009 | | $ | 3,328,000 | |
Decreases related to prior year tax positions | | | (837,000 | ) |
Increases related to current year tax positions | | | 393,000 | |
Lapse of statutes of limitations | | | (288,000 | ) |
Balance as of July 31, 2010 | | $ | 2,596,000 | |
The $732,000 net decreaseThere were no material changes in the liability for gross unrecognized tax benefits was principally related topositions resulting from tax positions taken during the finalizationcurrent or a prior year, settlements with other taxing authorities or a lapse of a studyapplicable statutes of qualifying research and development activities used to prepare the Company’s fiscal 2009 U.S. federal and state income tax returns. The decrease in the liability reduced the Company’s income tax expense by $801,000.
limitations. The accrual of interest and penalties related to the unrecognized tax benefits was not material for the ninethree months ended JulyJanuary 31, 2010.2011. Further, the Company does not expect the total amount of unrecognized tax benefits to materially change in the next twelve months.
In December 2010, Section 41 of the Internal Revenue Code, “Credit for Increasing Research Activities,” was retroactively extended for two years to cover the period from January 1, 2010 to December 31, 2011. As a result, the Company recognized an income tax credit for qualified research and development activities for the last ten months of fiscal 2010 in the first quarter of 2011. The tax credit, net of expenses, increased net income attributable to HEICO by approximately $.8 million for the three months ended January 31, 2011.
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 setsets 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 July 31, 2010 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | |
Deferred compensation plans: | | | | | | | | | | | | |
Corporate owned life insurance | | $ | — | | | $ | 20,672,000 | | | $ | — | | | $ | 20,672,000 | |
Equity securities | | | 964,000 | | | | — | | | | — | | | | 964,000 | |
Mutual funds | | | 961,000 | | | | — | | | | — | | | | 961,000 | |
Money market funds and cash | | | 832,000 | | | | — | | | | — | | | | 832,000 | |
Other | | | — | | | | 525,000 | | | | — | | | | 525,000 | |
Total assets | | $ | 2,757,000 | | | $ | 21,197,000 | | | $ | — | | | $ | 23,954,000 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Contingent consideration | | $ | — | | | $ | — | | | $ | 1,150,000 | | | $ | 1,150,000 | |
| | | As of January 31, 2011 | |
| | | Quoted Prices | | | Significant | | | Significant | | | | |
| | | in Active Markets | | | Other Observable | | | Unobservable | | | | |
| | As of October 31, 2009 | | | for Identical Assets | | | Inputs | | | Inputs | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred compensation plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate owned life insurance | | $ | — | | | $ | 15,687,000 | | | $ | — | | | $ | 15,687,000 | | | $ | — | | | $ | 27,827,000 | | | $ | — | | | $ | 27,827,000 | |
Equity securities | | | 1,057,000 | | | — | | | — | | | | 1,057,000 | | | | 1,343,000 | | | | — | | | | — | | | | 1,343,000 | |
Money market funds and cash | | | | 1,315,000 | | | | — | | | | — | | | | 1,315,000 | |
Mutual funds | | | 614,000 | | | — | | | — | | | | 614,000 | | | | 1,028,000 | | | | — | | | | — | | | | 1,028,000 | |
Money market funds and cash | | | 2,163,000 | | | — | | | — | | | | 2,163,000 | | |
Other | | | — | | | | 243,000 | | | | — | | | | 243,000 | | | | — | | | | 476,000 | | | | 556,000 | | | | 1,032,000 | |
Total assets | | $ | 3,834,000 | | | $ | 15,930,000 | | | $ | — | | | $ | 19,764,000 | | | $ | 3,686,000 | | | $ | 28,303,000 | | | $ | 556,000 | | | $ | 32,545,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | — | | | — | | | — | | | — | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Contingent consideration | | | $ | — | | | $ | — | | | $ | 1,150,000 | | | $ | 1,150,000 | |
| | As of October 31, 2010 | |
| | Quoted Prices | | | Significant | | | Significant | | | | |
| | in Active Markets | | | Other Observable | | | Unobservable | | | | |
| | for Identical Assets | | | Inputs | | | Inputs | | | | |
| | (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 | |
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 2.2 and are valued using a market approach. Certain other assets of the LCP represent investments in HEICO common stock and money market funds that are classified within Level 1. The majority of 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. A portion of the assets within the other deferred compensation plan is currently invested in a fund that invests in future and forward contracts; most of which are privately negotiated with counterparties without going through a public exchange, and that use trading methods that are proprietary and confidential. These assets are therefore classified within Level 3 and are valued
using a market approach with corresponding gains and losses reported within other income (expense) in the Company’s Condensed Consolidated Statement of Operations. The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Condensed Consolidated Balance Sheets.Sheets and have an aggregate value of $32,545,000 as of January 31, 2011 and $26,887,000 as of October 31, 2010, of which the LCP related assets were $28,366,000 and $22,604,000 as of January 31, 2011 and October 31, 2010, respectively. The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $23,667,000$32,620,000 as of JulyJanuary 31, 20102011 and $19,505,000$26,506,000 as of October 31, 2009.2010, of which the LCP related liability was $28,440,000 and $22,223,000 as of January 31, 2011 and October 31, 2010, respectively.
Changes in the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended January 31, 2011 are as follows:
Balance as of October 31, 2010 | | $ | — | |
Purchases | | | 550,000 | |
Total unrealized gains | | | 6,000 | |
Balance as of January 31, 2011 | | $ | 556,000 | |
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the three months ended January 31, 2011.
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
was determined 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 JulyJanuary 31, 20102011 and this obligation is included in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheet. Changes in the fair value of contingent consideration will be recorded in the Company’s condensed consolidated statements of operations.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of JulyJanuary 31, 20102011 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
8. SHAREHOLDERS’ EQUITY
During the first quarter of fiscal 2011, the Company repurchased an aggregate 65,706 shares of Common Stock at a total cost of approximately $3.7 million and an aggregate 17,562 shares of Class A Common Stock at a total cost of approximately $.7 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.
9. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended July 31, 2010 and 2009 includes approximately $16.5 million and $14.8 million, respectively, of new product research and development expenses. Cost of sales for the three months ended JulyJanuary 31, 20102011 and 20092010 includes approximately $6.0$5.6 million and $5.1 million, respectively, of new product research and development expenses.
9.10. 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 the second quarter of 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 January 31, 2011, management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay is approximately $61 million. The actual Redemption Amount will likely be different. The aggregate Redemption Amount of all Put Rights was determined using probability adjusted internal estimates of future earnings of the Company’s subsidiaries with Put Rights while considering the earliest exercise date, the measurement period and any applicable fair value adjustments. The portion of the estimated Redemption Amount as of January 31, 2011 redeemable at fair value is approximately $31 million and the portion redeemable based solely on a multiple of future earnings is approximately $30 million. The portion of periodic adjustments to the Redemption Amount based on fair value, if any, 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 in excess of fair value, if any, will affect net income per share attributable to HEICO shareholders.
As discussed in Note 2, Acquisitions, the Company entered into an agreement to acquire an 80.1% interest in a subsidiary by the FSG in December 2010. As part of the agreement, the Company has the right to purchase the noncontrolling interests over a two-year period beginning in fiscal 2015, 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. The estimated amount of Put Rights related to the acquisition is included in the aggregate Redemption Amount above.
11. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows:
| | Nine months ended July 31, | | | Three months ended July 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Numerator: | | | | | | | | | | | | |
Net income attributable to HEICO | | $ | 39,296,000 | | | $ | 32,990,000 | | | $ | 14,930,000 | | | $ | 11,132,000 | |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding-basic | | | 32,793,137 | | | | 32,799,101 | | | | 32,917,530 | | | | 32,603,643 | |
Effect of dilutive stock options | | | 960,277 | | | | 1,017,879 | | | | 879,941 | | | | 1,029,220 | |
Weighted average common shares outstanding-diluted | | | 33,753,414 | | | | 33,816,980 | | | | 33,797,471 | | | | 33,632,863 | |
| | | | | | | | | | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.20 | | | $ | 1.01 | | | $ | .45 | | | $ | .34 | |
Diluted | | $ | 1.16 | | | $ | .98 | | | $ | .44 | | | $ | .33 | |
| | | | | | | | | | | | | | | | |
Anti-dilutive stock options excluded | | | 432,292 | | | | 3,193 | | | | 431,250 | | | | 9,579 | |
| | Three months ended January 31, | |
| | 2011 | | | 2010 | |
Numerator: | | | | | | |
Net income attributable to HEICO | | $ | 17,074,000 | | | $ | 11,793,000 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding-basic | | | 33,087,674 | | | | 32,683,590 | |
Effect of dilutive stock options | | | 820,549 | | | | 1,018,328 | |
Weighted average common shares outstanding - diluted | | | 33,908,223 | | | | 33,701,918 | |
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | | $ | .52 | | | $ | .36 | |
Diluted | | $ | .50 | | | $ | .35 | |
| | | | | | | | |
Anti-dilutive stock options excluded | | | 216,000 | | | | 434,375 | |
No portion of the adjustments to the redemption amount of redeemable noncontrolling interests of ($39,000)126,000) and $272,000$302,000 for the nine months and three months ended JulyJanuary 31, 2011 and 2010, respectively, reflect a redemption amount in excess of fair value and therefore no portion of the adjustments affect basic or diluted net income per share attributable to HEICO shareholders.
10.12. OPERATING SEGMENTS
Information on the Company’s two operating segments, the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and its subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries, for the nine months and three months ended JulyJanuary 31, 20102011 and 2009,2010, respectively, is as follows:
| | | | | | | | Other, | | | | |
| | | | | | | | Primarily | | | | |
| | Segment | | | Corporate and | | | Consolidated | |
| | FSG | | | ETG | | | Intersegment | | | Totals | |
Three months ended January 31, 2011: | | | | | | | | | | | | |
Net sales | | $ | 120,641,000 | | | $ | 53,939,000 | | | $ | (361,000 | ) | | $ | 174,219,000 | |
Depreciation and amortization | | | 2,378,000 | | | | 1,834,000 | | | | 95,000 | | | | 4,307,000 | |
Operating income | | | 20,429,000 | | | | 15,538,000 | | | | (3,595,000 | ) | | | 32,372,000 | |
Capital expenditures | | | 1,285,000 | | | | 351,000 | | | | 1,000 | | | | 1,637,000 | |
| | | | | | | | | | | | | | | | |
Three months ended January 31, 2010: | | | | | | | | | | | | | | | | |
Net sales | | $ | 93,779,000 | | | $ | 42,058,000 | | | $ | (302,000 | ) | | $ | 135,535,000 | |
Depreciation and amortization | | | 2,464,000 | | | | 1,688,000 | | | | 99,000 | | | | 4,251,000 | |
Operating income | | | 16,720,000 | | | | 11,170,000 | | | | (3,346,000 | ) | | | 24,544,000 | |
Capital expenditures | | | 1,949,000 | | | | 206,000 | | | | 3,000 | | | | 2,158,000 | |
14
| | | | | | | | Other, | | | | |
| | | | | | | | Primarily | | | | |
| | Segment | | | Corporate and | | | Consolidated | |
| | FSG | | | ETG | | | Intersegment | | | Totals | |
For the nine months ended July 31, 2010: | | | | | | | | | | | | |
Net sales | | $ | 301,145,000 | | | $ | 147,231,000 | | | $ | (726,000 | ) | | $ | 447,650,000 | |
Depreciation and amortization | | | 7,467,000 | | | | 5,817,000 | | | | 294,000 | | | | 13,578,000 | |
Operating income | | | 50,332,000 | | | | 39,961,000 | | | | (10,799,000 | ) | | | 79,494,000 | |
Capital expenditures | | | 5,513,000 | | | | 1,214,000 | | | | 16,000 | | | | 6,743,000 | |
| | | | | | | | | | | | | | | | |
For the nine months ended July 31, 2009: | | | | | | | | | | | | | | | | |
Net sales | | $ | 297,543,000 | | | $ | 97,523,000 | | | $ | (377,000 | ) | | $ | 394,689,000 | |
Depreciation and amortization | | | 7,330,000 | | | | 3,287,000 | | | | 334,000 | | | | 10,951,000 | |
Operating income | | | 46,297,000 | | | | 26,508,000 | | | | (8,611,000 | ) | | | 64,194,000 | |
Capital expenditures | | | 6,644,000 | | | | 1,075,000 | | | | 65,000 | | | | 7,784,000 | |
| | | | | | | | | | | | | | | | |
For the three months ended July 31, 2010: | | | | | | | | | | | | | | | | |
Net sales | | $ | 104,323,000 | | | $ | 54,107,000 | | | $ | (160,000 | ) | | $ | 158,270,000 | |
Depreciation and amortization | | | 2,493,000 | | | | 2,111,000 | | | | 96,000 | | | | 4,700,000 | |
Operating income | | | 17,557,000 | | | | 15,198,000 | | | | (3,762,000 | ) | | | 28,993,000 | |
Capital expenditures | | | 1,696,000 | | | | 434,000 | | | | 13,000 | | | | 2,143,000 | |
| | | | | | | | | | | | | | | | |
For the three months ended July 31, 2009: | | | | | | | | | | | | | | | | |
Net sales | | $ | 97,236,000 | | | $ | 37,054,000 | | | $ | (204,000 | ) | | $ | 134,086,000 | |
Depreciation and amortization | | | 2,521,000 | | | | 1,409,000 | | | | 113,000 | | | | 4,043,000 | |
Operating income | | | 14,759,000 | | | | 9,935,000 | | | | (3,272,000 | ) | | | 21,422,000 | |
Capital expenditures | | | 1,867,000 | | | | 466,000 | | | | 54,000 | | | | 2,387,000 | |
Total assets by operating segment as of JulyJanuary 31, 20102011 and October 31, 20092010 are as follows:
| | | | | | | | Other, | | | | |
| | Segment | | | Primarily | | | Consolidated | |
| | FSG | | | ETG | | | Corporate | | | Totals | |
| | | | | | | | | | | | |
Total assets as of July 31, 2010 | | $ | 413,551,000 | | | $ | 324,822,000 | | | $ | 39,666,000 | | | $ | 778,039,000 | |
Total assets as of October 31, 2009 | | | 414,030,000 | | | | 285,602,000 | | | | 33,278,000 | | | | 732,910,000 | |
| | Segment | | | Primarily | | | Consolidated | |
| | FSG | | | ETG | | | Corporate | | | Totals | |
| | | | | | | | | | | | |
Total assets as of January 31, 2011 | | $ | 448,405,000 | | | $ | 324,854,000 | | | $ | 52,241,000 | | | $ | 825,500,000 | |
Total assets as of October 31, 2010 | | | 410,666,000 | | | | 328,577,000 | | | | 42,400,000 | | | | 781,643,000 | |
11.13. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has arranged for a standby letter of credit for $1.5 million to meet the security requirement of its insurance company for potential workers’ compensation claims, which is supported by the Company’s revolving credit facility.
Product Warranty
Changes in the Company’s product warranty liability for the ninethree months ended JulyJanuary 31, 20102011 and 2009,2010, respectively, are as follows:
| | Nine months ended July 31, | |
| | 2010 | | | 2009 | |
Balances as of beginning of fiscal year | | $ | 1,022,000 | | | $ | 671,000 | |
Accruals for warranties | | | 1,251,000 | | | | 1,163,000 | |
Warranty claims settled | | | (855,000 | ) | | | (645,000 | ) |
Acquired warranty liabilities | | | 80,000 | | | | — | |
Balances as of July 31 | | $ | 1,498,000 | | | $ | 1,189,000 | |
| | Three months ended January 31, | |
| | 2011 | | | 2010 | |
Balances as of beginning of fiscal year | | $ | 1,636,000 | | | $ | 1,022,000 | |
Accruals for warranties | | | 283,000 | | | | 454,000 | |
Warranty claims settled | | | (174,000 | ) | | | (281,000 | ) |
Balances as of January 31 | | $ | 1,745,000 | | | $ | 1,195,000 | |
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 $71$73 million U.S. dollars based on the JulyJanuary 31, 20102011 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 $11.7$7.6 million should the subsidiary meet certain earnings objectives during the first two yearssecond 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 $94$92 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 $11$16 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.
12. REDEEMABLE NONCONTROLLING INTERESTS
As further detailed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2009, 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 July 31, 2010, management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay is approximately $56 million. The actual Redemption Amount will likely be different. The portion of the estimated Redemption Amount as of July 31, 2010 redeemable at fair value is $25 million and the portion redeemable based solely on a multiple of future earnings is $31 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 Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for a summary of changes in redeemable noncontrolling interests for the nine months ended July 31, 2010 and 2009.
In April 2010, the Company, through HEICO Electronic, acquired an additional 3.4% equity interest in one of its subsidiaries, which increased the Company’s ownership interest to 93.3%. In May 2010, the Company, through its HEICO Aerospace Holdings Corp. subsidiary, acquired an additional 2.2% equity interest in one of its subsidiaries, which increased the Company’s ownership interest to 82.3%. The purchase prices of the redeemable noncontrolling interests acquired were paid using cash provided by operating activities. The acquisitions resulted in a decrease to redeemable noncontrolling interests and had no effect on HEICO shareholders’ equity.
During the nine months ended July 31, 2009, the Company acquired certain redeemable noncontrolling interests and accounted for the transactions 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. As mentioned in Note 1, Summary of Significant Accounting Policies, the Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income for the nine months ended July 31, 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.
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2009. 2010. One such critical accounting policy pertains to the valuation of our goodwill which we test 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 fullyfull recoverable. Based on the results of our annual goodwill impairment testingtest as of October 31, 2009,2010, we determined that there was no impairment of our goodwill and the fair value of each of our reporting units significantly exceeded their carrying value. No events or changes in circumstances have occurred since the last annual impairment test to indicate potential goodwill impairment.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
Our results of operations for the nine months and three months ended JulyJanuary 31, 20102011 have been affected by certainthe fiscal 20102011 and 2009the fiscal 2010 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report and of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2009.2010, respectively.
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 Condensed Consolidated Financial Statements for additional information regarding this stock split.
Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations.
| | Nine months ended July 31, | | | Three months ended July 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Net sales | | $ | 447,650,000 | | | $ | 394,689,000 | | | $ | 158,270,000 | | | $ | 134,086,000 | |
Cost of sales | | | 286,351,000 | | | | 262,456,000 | | | | 100,717,000 | | | | 88,275,000 | |
Selling, general and administrative expenses | | | 81,805,000 | | | | 68,039,000 | | | | 28,560,000 | | | | 24,389,000 | |
Total operating costs and expenses | | | 368,156,000 | | | | 330,495,000 | | | | 129,277,000 | | | | 112,664,000 | |
Operating income | | $ | 79,494,000 | | | $ | 64,194,000 | | | $ | 28,993,000 | | | $ | 21,422,000 | |
| | | | | | | | | | | | | | | | |
Net sales by segment: | | | | | | | | | | | | | | | | |
Flight Support Group | | $ | 301,145,000 | | | $ | 297,543,000 | | | $ | 104,323,000 | | | $ | 97,236,000 | |
Electronic Technologies Group | | | 147,231,000 | | | | 97,523,000 | | | | 54,107,000 | | | | 37,054,000 | |
Intersegment sales | | | (726,000 | ) | | | (377,000 | ) | | | (160,000 | ) | | | (204,000 | ) |
| | $ | 447,650,000 | | | $ | 394,689,000 | | | $ | 158,270,000 | | | $ | 134,086,000 | |
| | | | | | | | | | | | | | | | |
Operating income by segment: | | | | | | | | | | | | | | | | |
Flight Support Group | | $ | 50,332,000 | | | $ | 46,297,000 | | | $ | 17,557,000 | | | $ | 14,759,000 | |
Electronic Technologies Group | | | 39,961,000 | | | | 26,508,000 | | | | 15,198,000 | | | | 9,935,000 | |
Other, primarily corporate | | | (10,799,000 | ) | | | (8,611,000 | ) | | | (3,762,000 | ) | | | (3,272,000 | ) |
| | $ | 79,494,000 | | | $ | 64,194,000 | | | $ | 28,993,000 | | | $ | 21,422,000 | |
| | | | | | | | | | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Gross profit | | | 36.0 | % | | | 33.5 | % | | | 36.4 | % | | | 34.2 | % |
Selling, general and administrative expenses | | | 18.3 | % | | | 17.2 | % | | | 18.0 | % | | | 18.2 | % |
Operating income | | | 17.8 | % | | | 16.3 | % | | | 18.3 | % | | | 16.0 | % |
Interest expense | | | .1 | % | | | .1 | % | | | .1 | % | | | .1 | % |
Other income (expense) | | | .1 | % | | | — | | | | — | | | | .1 | % |
Income tax expense | | | 6.0 | % | | | 4.9 | % | | | 5.9 | % | | | 4.9 | % |
Net income attributable to noncontrolling | | | | | | | | | | | | | | | | |
interests | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % | | | 2.8 | % |
Net income attributable to HEICO | | | 8.8 | % | | | 8.4 | % | | | 9.4 | % | | | 8.3 | % |
| | Three months ended January 31, | |
| | 2011 | | | 2010 | |
Net sales | | $ | 174,219,000 | | | $ | 135,535,000 | |
Cost of sales | | | 110,293,000 | | | | 85,415,000 | |
Selling, general and administrative expenses | | | 31,554,000 | | | | 25,576,000 | |
Total operating costs and expenses | | | 141,847,000 | | | | 110,991,000 | |
Operating income | | $ | 32,372,000 | | | $ | 24,544,000 | |
| | | | | | | | |
Net sales by segment: | | | | | | | | |
Flight Support Group | | $ | 120,641,000 | | | $ | 93,779,000 | |
Electronic Technologies Group | | | 53,939,000 | �� | | | 42,058,000 | |
Intersegment sales | | | (361,000 | ) | | | (302,000 | ) |
| | $ | 174,219,000 | | | $ | 135,535,000 | |
| | | | | | | | |
Operating income by segment: | | | | | | | | |
Flight Support Group | | $ | 20,429,000 | | | $ | 16,720,000 | |
Electronic Technologies Group | | | 15,538,000 | | | | 11,170,000 | |
Other, primarily corporate | | | (3,595,000 | ) | | | (3,346,000 | ) |
| | $ | 32,372,000 | | | $ | 24,544,000 | |
| | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | % |
Gross profit | | | 36.7 | % | | | 37.0 | % |
Selling, general and administrative expenses | | | 18.1 | % | | | 18.9 | % |
Operating income | | | 18.6 | % | | | 18.1 | % |
Interest expense | | | ¾ | | | | 0.1 | % |
Other income | | | ¾ | | | | 0.1 | % |
Income tax expense | | | 5.7 | % | | | 6.3 | % |
Net income attributable to noncontrolling interests | | | 3.1 | % | | | 3.1 | % |
Net income attributable to HEICO | | | 9.8 | % | | | 8.7 | % |
Comparison of First Nine MonthsQuarter of Fiscal 20102011 to First Nine MonthsQuarter of Fiscal 20092010
Net Sales
Net sales for the first nine monthsquarter of fiscal 20102011 increased by 13.4%29% to a record $447.7$174.2 million, as compared to net sales of $394.7$135.5 million for the first nine monthsquarter of fiscal 2009.2010. The increase in net sales reflects an increase of $49.7$26.9 million (a 51.0%29% increase) to a record $147.2$120.6 million in net sales within the ETG andFSG as well as an increase of $3.6$11.9 million (a 1.2%28% increase) to $301.1$53.9 million in net sales within the FSG.ETG. The net sales increase in the FSG reflects organic growth of approximately 24% reflecting increased airline capacity as well as additional net sales of approximately $3 million contributed by a December 2010 acquisition. The net sales increase in the ETG reflects the additional net sales totalingof approximately $31$7 million contributed by a Februaryfiscal 2010 acquisition and two fiscal 2009 acquisitions as well as organic growth of approximately 14%12%. The organic growth in the ETG reflects continued strength in demand for certain of our medical equipment,defense and electronic satellite and defense products. The net sales increase within the FSG, which is entirely organic growth, reflects higher net sales of our industrial products, partially offset by lower net sales of our other FSG products and services for which demand has been lower principally as a result of reduced airline capacity.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 36.0%remained strong at 36.7% for the first nine monthsquarter of fiscal 20102011 as compared to 33.5%37.0% for the first nine monthsquarter of fiscal 2009, mainly reflecting higher2010. The slight decrease in the consolidated gross profit margin reflects lower margins within the FSG principallywhen compared to the first quarter of fiscal 2010, which included the favorable impact from the sale of some products previously written down as slow moving. This decrease was partially offset by some improvement in ETG margins due to a more favorable product sales mix. Consolidated cost of sales for the first nine monthsquarter of fiscal 20102011 and 20092010 includes approximately $16.5$5.6 million and $14.8$5.1 million, respectively, of new product research and development expenses.
Selling, general and administrative (“SG&A”) expenses were $81.8$31.6 million and $68.0$25.6 million for the first nine monthsquarter of fiscal 20102011 and fiscal 2009,2010, respectively. The increase in SG&A expenses was mainly due to the operating costs of the fiscal 20102011 and fiscal 20092010 acquisitions referenced above, and higher operating costs, principally personnel related, associated with the growth in consolidated net sales.above. SG&A expenses as a percentage of net sales increaseddecreased from 17.2% for18.9% in the first nine months of fiscal 2009 to 18.3% for the first nine monthsquarter of fiscal 2010 to 18.1% in the first quarter of fiscal 2011 principally reflecting an increase in amortization expensethe impact of intangible assets associated with the recent acquisitions and a higher level of accrued performance awards basednet sales volumes on the improved consolidated operating results.fixed portion of SG&A expenses within the FSG, ETG and corporate.
Operating Income
Operating income for the first nine monthsquarter of fiscal 20102011 increased by 23.8%32% to a record $79.5$32.4 million as compared to operating income of $64.2$24.5 million for the first nine monthsquarter of fiscal 2009.2010. The increase in operating income reflects a $13.5$4.4 million increase (a 50.8%39% increase) to a record $40.0$15.5 million in operating income of the ETG in the first nine monthsquarter of fiscal 2011, up from $11.2 million in the first quarter of fiscal 2010 up from $26.5 million for the first nine months of fiscal 2009 and a $4.0$3.7 million increase (a 8.7%22% increase) in operating income of the FSG to $50.3$20.4 million for the first nine monthsquarter of fiscal 2010,2011, up from $46.3$16.7 million for the first nine monthsquarter of fiscal 2009, partially offset by a $2.2 million increase in corporate expenses.2010. The increase in operating income forof the
ETG in the first nine monthsquarter of fiscal 20102011 reflects organic sales growth and the impact of the fiscal 2010 and 2009 acquisitions and organic sales growth.acquisition. The increase in operating income forof the FSG in the first nine monthsquarter of fiscal 20102011 reflects the aforementioned higher gross profit margins. The increase in corporate expenses for the first nine months of fiscal 2010 is primarily due to the higher level of accrued performance awards discussed previously.sales volumes.
As a percentage of net sales, our consolidated operating income increased to 17.8%18.6% for the first nine monthsquarter of fiscal 2010,2011, up from 16.3%18.1% for the first nine monthsquarter of fiscal 2009.2010. The increase in consolidated operating income as a percentage of net sales principally reflects an increase in the ETG’s operating income as a percentage of net sales from 26.6% in the first quarter of fiscal 2010 to 28.8% in the first quarter of fiscal 2011 reflecting the aforementioned higher gross profit margins, partially offset by a decrease in the FSG’s operating income as a percentage of net sales to 16.7%16.9% in the first nine monthsquarter of fiscal 2011 from 17.8% in the first quarter of fiscal 2010 from 15.6%reflecting the decrease in the first nine months of fiscal 2009 resulting primarily from the favorable product mix previously referenced. The ETG’s operatinggross profit margins discussed above. Operating income as a percentage of net sales was 27.1%for the FSG improved to 16.9% from 15.8% reported in the first nine monthsfourth quarter of fiscal 2010 approximatingreflecting the 27.2% reportedincrease in the first nine months of fiscal 2009.sales volumes.
Interest Expense
Interest expense in the first nine monthsquarter of fiscal 20102011 and 20092010 was not material.
Other Income
Other income in the first nine monthsquarter of fiscal 20102011 and 20092010 was not material.
Income Tax Expense
Our effective tax rate forin the first nine monthsquarter of fiscal 2010 increased2011 decreased to 34.0%30.4% from 30.3% for34.8% in the first nine monthsquarter of fiscal 2009.2010. The effective tax rate for the first nine months of fiscal 2009 was lowerdecrease is principally due to a settlement reached with the Internal Revenue Service (“IRS”) pertaining to thean 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 the first ninelast ten months of fiscal 2010 that was higher as it reflects arecognized in the first quarter of fiscal 2011. The additional fiscal 2010 tax credit for qualifying research and development activities for only two months aswas recorded pursuant to the underlying provisionDecember 2010 retroactive extension of Section 41 of the IRSInternal Revenue Code, “Credit for Increasing Research Activities,” to cover the period from January 1, 2010 to December 31, 2011. The tax code expiredcredit, net of expenses, increased net income attributable to HEICO by approximately $.8 million, or $.02 per diluted share, in December 2009 and was higher due to an increased effective state income tax rate principally as a resultthe first quarter of the previously mentioned fiscal 2010 and 2009 acquisitions.2011.
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 for the first nine monthsquarter of fiscal 20102011 compared to the first nine monthsquarter of fiscal 20092010 is principally related to higher earnings of the FSG in which the 20% noncontrolling interest is held as well as higher earnings of certain ETG and FSG subsidiaries in which noncontrolling interests exist.
Net Income Attributable to HEICO
Net income attributable to HEICO was a record $39.3 million, or $1.16 per diluted share, for the first nine months of fiscal 2010 compared to $33.0 million, or $.98 per diluted share, for the first nine months of fiscal 2009 reflecting the increased operating income referenced above. Diluted net income per share attributable to HEICO shareholders in the first nine months of fiscal 2009 included a $.04 per diluted share benefit from the aforementioned favorable IRS settlement.
Comparison of Third Quarter of Fiscal 2010 to Third Quarter of Fiscal 2009
Net Sales
Net sales for the third quarter of fiscal 2010 increased by 18.0% to a record $158.3 million, as compared to net sales of $134.1 million for the third quarter of fiscal 2009. The increase in net sales reflects an increase of $17.1 million (a 46.0% increase) to a record $54.1 million in net sales within the ETG in addition to an increase of $7.1 million (a 7.3% increase) to $104.3 million in net sales within the FSG. The net sales increase in the ETG reflects organic growth of approximately 22% as well as additional net sales totaling approximately $7 million contributed by a February 2010 acquisition and an October fiscal 2009 acquisition. The organic growth in the ETG reflects continued strength in demand for certain of our medical equipment, electronic, satellite and defense products. The net sales increase within the FSG, which is entirely organic growth, principally reflects an increase in net sales to our commercial aviation customers and higher net sales of our industrial products.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 36.4% for the third quarter of fiscal 2010 as compared to 34.2% for the third quarter of fiscal 2009, mainly reflecting higher margins within the FSG principally due to a more favorable product sales mix. Consolidated cost of sales for the third quarter of fiscal 2010 and 2009 includes approximately $6.0 million and $5.1 million, respectively, of new product research and development expenses.
SG&A expenses were $28.6 million and $24.4 million for the third quarter of fiscal 2010 and fiscal 2009, respectively. The increase in SG&A expenses was mainly due to the operating costs of the fiscal 2010 acquisition and the fiscal 2009 acquisition 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 decreased slightly to 18.0% for the third quarter of fiscal 2010 from 18.2% for the third quarter of fiscal 2009 reflecting the benefit of higher net sales on the portion of SG&A expenses that are fixed costs, partially offset by an increase in amortization expense of intangible assets associated with the recent acquisitions and the higher level of accrued performance awards.
Operating income for the third quarter of fiscal 2010 increased by 35.3% to a record $29.0 million as compared to operating income of $21.4 million for the third quarter of fiscal 2009. The increase in operating income reflects a $5.3 million increase (a 53.0% increase) to a record $15.2 million in operating income of the ETG in the third quarter of fiscal 2010, up from $9.9 million for the third quarter of fiscal 2009 and a $2.8 million increase (a 19.0% increase) in operating income of the FSG to $17.6 million for the third quarter of fiscal 2010, up from $14.8 million for the third quarter of fiscal 2009, partially offset by a $.5 million increase in corporate expenses. The increase in operating income for the ETG in the third quarter of fiscal 2010 is primarily due to the organic sales growth, as well as the impact of the fiscal 2010 and 2009 acquisitions. The increase in operating income for the FSG in the third quarter of fiscal 2010 reflects the aforementioned higher gross profit margins. The increase in corporate expenses for the third quarter of 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 18.3% for the third quarter of fiscal 2010, up from 16.0% for the third quarter of fiscal 2009. The FSG’s operating income as a percentage of net sales increased to 16.8% in the third quarter of fiscal 2010, up from 15.2% in the third quarter of fiscal 2009 resulting primarily from the favorable product mix previously referenced. The ETG’s operating income as a percentage of net sales increased to 28.1% in the third quarter of fiscal 2010, up from 26.8% in the third quarter of fiscal 2009 primarily due to the higher net sales and a favorable product sales mix.
Interest Expense
Interest expense in the third quarter of fiscal 2010 and 2009 was not material.
Other Income
Other income in the third quarter of fiscal 2010 and 2009 was not material.
Income Tax Expense
Our effective tax rate for the third quarter of fiscal 2010 increased to 32.3% from 30.4% for the third quarter of fiscal 2009. The increase principally reflects the expiration of an income tax credit for qualified research and development activities as of December 2009. Our effective tax rate of 32.3% for the third quarter of fiscal 2010 is less than the effective tax rate of 35.0% experienced in the first half of fiscal 2010 as the third quarter includes a $732,000 decrease in the liability for unrecognized tax benefits that principally relates to the finalization of a study of fiscal 2009 qualified research and development activities as further explained in Note 6, Income Taxes, of the Notes to Condensed 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 for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 is principally related to higher earnings of certain FSG and ETG subsidiaries in which noncontrolling interests exist and higher earnings of the FSG.
Net Income Attributable to HEICO
Net income attributable to HEICO was a record $14.9$17.1 million, or $.44$.50 per diluted share, for the thirdfirst quarter of fiscal 20102011 compared to $11.1$11.8 million, or $.33$.35 per diluted share, for the thirdfirst quarter of fiscal 20092010 reflecting the increased operating income referenced above.above and the benefit from the retroactive extension of the R&D income tax credit.
Outlook
AsIn our Flight Support Group’s markets, the commercial airline industry generally expects a continued increase in capacity during 2011. In our Electronic Technologies Group’s markets, we look forward togenerally see stable or increasing demand for our products. Based on the balancecurrent economic visibility, we expect continued year-over-year sales and earnings growth for the remainder of fiscal 2010 and beyond, we are seeing some signs of improved product demand within our commercial aviation markets, which represent over 60% of our consolidated net sales. To date, the strengthening has been moderate, but appears sustainable into fiscal 2011. Based on current market conditions within our aviation and other major markets, we are raising our fiscal 2010 net sales target to approximately 11% over fiscal 2009 and raising our net income per diluted share target to a range of 14% - 16% over fiscal 2009. We expect fiscal 2010 cash flow provided by operating activities to grow approximately 3% - 8% over fiscal 2009.
Liquidity and Capital Resources
Our principal uses of cash include acquisitions, payments of principal and interest on debt, acquisitions, capital expenditures, distributions to noncontrolling interests, cash dividends and increases in working capital.
We finance our activities primarily from our operating activities and financing activities, including borrowings under our revolving credit facility. The revolving credit facility contains both financial and non-financial covenants. As of JulyJanuary 31, 2010,2011, we were in compliance with all such covenants. As of January 31, 2011, our net debt to shareholders’ equity ratio was 6.8%1.8%, with net debt (total debt less cash and cash equivalents) of $36.3$10.3 million. We have no significant debt maturities until fiscal 2013.
Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our revolving credit facility will be sufficient to fund cash requirements for at least the foreseeable future.next twelve months.
Operating Activities
Net cash provided by operating activities was $67.9$23.5 million for the first nine monthsquarter of fiscal 20102011 and consisted primarily of net income from consolidated operations of $52.5 million and depreciation and amortization of $13.6 million (a non-cash item).$22.5 million. Net cash provided by operating activities increased $24.2$3.2 million from $43.7$20.3 million in the first nine monthsquarter of fiscal
2009 2010 primarily due to highera $6.5 million increase in net income from consolidated operations, after adding back depreciationwhich was partially offset by a $3.5 million year-over-year decrease in accrued expenses and amortization, controlling our inventory levelsother current liabilities related to the payment of performance bonuses in the first nine monthsquarter that were accrued as of fiscal 2010 and the lower accrual for performance based awards in fiscal 2009 coupled with the payment thatprior year of such awards accrued in fiscal 2008, partially offset by increased accounts receivable related to the higher net sales in fiscal 2010 compared to fiscal 2009 and the timing of cash collections.end.
Investing Activities
Net cash used in investing activities of $45.8$24.2 million during the first nine monthsquarter of fiscal 20102011 related primarily to acquisitions of $39.1$22.6 million and capital expenditures totaling $6.7$1.6 million. Cash invested in acquisitions principally representsFurther details regarding the acquisition made by the ETG of a subsidiaryFSG in the secondfirst quarter and additional purchase consideration paid pursuant to the terms of the purchase agreements associated with the current year and certain prior year acquisitions. Seefiscal 2011 may be found in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements for further details.Statements.
Financing Activities
Net cash used inprovided by financing activities of $18.3 million during the first nine monthsquarter of fiscal 20102011 of $8.0 million related primarily to net paymentsborrowings on our revolving credit facility of $8.0$10.0 million and
the presentation of $6.4 million of excess tax benefit from stock option exercises as a financing activity, partially offset by redemptions of common stock related to stock option exercises of $4.4 million, distributions to noncontrolling interests of $7.2$2.3 million, and the payment of $3.6$2.0 million in cash dividends on our common stock, and $.8 million in acquisitions of noncontrolling interests, partially offset by proceeds from stock option exercises of $1.5 million.stock.
Contractual Obligations
There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2009.
2010. As discussed in a footnote to the contractual obligations table, management’s estimate of the aggregate Redemption Amount of all Put Rights that we would be required to pay was approximately $55 million as of October 31, 2010, which has increased to approximately $61 million as of January 31, 2011 as a result of the acquisition made by the FSG during the first quarter of fiscal 2011. See “New Accounting Pronouncements” belowNote 10, Redeemable Noncontrolling Interests, for additional information pertaining to our redeemable noncontrolling interests.
See “Off-Balance Sheet Arrangements – Acquisitions – Additional Contingent Purchase Consideration” below for additional information pertaining to any additional contingent purchase consideration we may be obligated to pay based on future earnings of certain acquired businesses.
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.
Acquisitions – 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 $71$73 million U.S. dollars based on the JulyJanuary 31, 20102011 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 $11.7$7.6 million should the subsidiary meet certain earnings objectives during the first two yearssecond 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 $94$92 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 $11$16 million. The actual contingent purchase consideration will likely be different.
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 has affected the presentation of noncontrolling interests in our condensed 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 affects the financial statement classification and measurement of redeemable noncontrolling interests. As further detailed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2009, 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 Condensed 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.
In September 2006,January 2010, 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. 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 portions of the new guidance that were delayed 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 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 newadditional 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. TheHEICO. We will make the additional Level 3 disclosures, if applicable, as of the date of adoption.
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” Under ASU 2010-29, 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. ASU 2010-29 is effective for business combinations consummated in fiscal periods beginning after December 15, 2010. Early adoption did not haveis permitted and we adopted the new guidance on a material effect on our resultsprospective basis as of operations, financial position or cash flows.December 2010.
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 known and unknown risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results,
performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future
costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to: lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; HEICO’s ability to introduce new products and product pricing levels, which could reduce our sales or sales growth and;growth; and HEICO’s 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. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2009.2010.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation referred to above that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During MayDecember 2010, we repurchased 8,43465,706 shares of our Common Stock at a weighted average price of $55.65 and 17,562 shares of our Class A Common Stock at an average price of $38.88 per share$40.71. The fiscal 2011 transaction occurred as settlement for employee taxes due pertaining to exercises of non-qualified stock options.options and did not impact the shares that may be purchased under our existing share repurchase program. We made no repurchases of common stock under our existing share program during the thirdfirst quarter of fiscal 20102011 and the number of shares that may be repurchased is 1,280,928.1,024,742.
Exhibit | | Description |
| | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. * |
| | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. * |
| | |
32.1 | | Section 1350 Certification of Chief Executive Officer. ** |
| | |
32.2 | | Section 1350 Certification of Chief Financial Officer. ** |
| | |
101.INS | | XBRL Instance Document.**^ |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document.** ^ |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document.** ^ |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document.** ^ |
| | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document.** ^ |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.** ^ |
| ^ | 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. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEICO CORPORATION | |
| | | |
Date: September 1, 2010March 2, 2011 | By: | /s/ THOMAS S. IRWIN | |
| | Thomas S. Irwin | |
| | Executive Vice President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
| |
| | Chief Financial Officer | |
| | (Principal Financial and | |
| | Accounting Officer) | |
EXHIBIT INDEX
Exhibit | | Description |
| | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. * |
| | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. * |
| | |
32.1 | | Section 1350 Certification of Chief Executive Officer. ** |
| | |
32.2 | | Section 1350 Certification of Chief Financial Officer. ** |
| | |
101.INS | | XBRL Instance Document.** |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document.** |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document.** |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document.** |
| | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document.** |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.** |