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 JULY 31, 2001
OR
( )TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 TAFT STREET, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 _____
-----
The number of shares outstanding of each of the Registrant's classes of common
stock as of August 31, 2001:
Title of Class Shares Outstanding
Common Stock, $.01 par value 9,260,963
Class A Common Stock, $.01 par value 11,469,159
HEICO CORPORATION
INDEX
Page No.
Part I. Financial Information:
Item 1. Consolidated Condensed Balance Sheets (unaudited)
as of July 31, 2001 and October 31, 2000 2
Consolidated Condensed Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2001 and 2000 3
Consolidated Condensed Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2001 and 2000 4
Notes to Consolidated Condensed Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks 22
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 23
-1-
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS -UNAUDITED
ASSETS
July 31, 2001 October 31, 2000
------------- ----------------
Current assets:
Cash and cash equivalents $ 5,281,000 $ 4,807,000
Accounts receivable, net 29,349,000 29,553,000
Receivable from sale of product line - 12,412,000
Inventories 42,235,000 34,362,000
Prepaid expenses and other current assets 5,298,000 2,975,000
Deferred income taxes 2,820,000 2,543,000
------------ -------------
Total current assets 84,983,000 86,652,000
Property, plant and equipment less accumulated depreciation
of $21,741,000 and $19,788,000, respectively 29,154,000 26,903,000
Intangible assets less accumulated amortization of
$17,439,000 and $11,954,000, respectively 166,994,000 152,770,000
Long-term investments - 5,832,000
Other assets 7,138,000 9,575,000
------------ -------------
Total assets $288,269,000 $281,732,000
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 27,000 $ 27,000
Trade accounts payable 6,064,000 5,026,000
Accrued expenses and other current liabilities 14,456,000 17,872,000
Income taxes payable 524,000 8,258,000
------------ -------------
Total current liabilities 21,071,000 31,183,000
Long-term debt, net of current maturities 37,995,000 40,015,000
Deferred income taxes 1,595,000 417,000
Other non-current liabilities 6,038,000 6,922,000
------------ -------------
Total liabilities 66,699,000 78,537,000
------------ -------------
Minority interests in consolidated subsidiaries 36,233,000 33,351,000
------------ -------------
Commitments and contingencies (Note 16)
Shareholders' equity:
Preferred Stock, par value $.01 per share;
Authorized - 10,000,000 shares issuable
in series; 200,000 shares designated as Series A
Junior Participating Preferred Stock, none issued - -
Common Stock, $.01 par value; Authorized -
30,000,000 shares; Issued and outstanding -
9,259,635 and 8,514,056 shares, respectively 93,000 85,000
Class A Common Stock, $.01 par value;
Authorized - 30,000,000 shares; Issued and
outstanding - 11,181,337 and 10,734,619 shares,
respectively (as restated - Note 2) 112,000 90,000
Capital in excess of par value 145,347,000 111,138,000
Accumulated other comprehensive loss (255,000) (632,000)
Retained earnings 40,688,000 60,614,000
------------ -------------
185,985,000 171,295,000
Less: Note receivable from employee savings and
investment plan (648,000) (1,451,000)
------------ -------------
Total shareholders' equity 185,337,000 169,844,000
------------ -------------
Total liabilities and shareholders' equity $288,269,000 $281,732,000
============ =============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED.
-2-
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
Nine months ended July 31, Three months ended July 31,
----------------------------- ----------------------------
2001 2000* 2001 2000*
------------ ------------- ----------- -----------
Net sales $125,237,000 $155,400,000 $43,845,000 $53,912,000
------------ ------------ ----------- -----------
Operating costs and expenses:
Cost of sales 71,786,000 98,184,000 25,802,000 34,233,000
Selling, general and administrative
expenses 29,133,000 27,242,000 9,974,000 9,346,000
------------ ------------ ----------- -----------
Total operating costs and expenses 100,919,000 125,426,000 35,776,000 43,579,000
------------ ------------ ----------- -----------
Operating income 24,318,000 29,974,000 8,069,000 10,333,000
Interest expense (1,669,000) (4,272,000) (605,000) (1,675,000)
Interest and other income 1,500,000 609,000 113,000 274,000
------------ ------------ ----------- -----------
Income before income taxes
and minority interests 24,149,000 26,311,000 7,577,000 8,932,000
Income tax expense 9,239,000 10,130,000 2,800,000 3,383,000
------------ ------------ ----------- -----------
Income before minority interests 14,910,000 16,181,000 4,777,000 5,549,000
Minority interests 2,224,000 2,656,000 813,000 828,000
------------ ------------ ----------- -----------
Net income $ 12,686,000 $ 13,525,000 $ 3,964,000 $ 4,721,000
============ ============ =========== ===========
Net income per share:
Basic $ .65 $ .71 $ .19 $ .25
============ ============ =========== ===========
Diluted $ .57 $ .62 $ .18 $ .22
============ ============ =========== ===========
Weighted average number of
common shares outstanding:
Basic 19,651,047 19,086,769 20,359,786 19,112,240
============ ============ =========== ===========
Diluted 22,193,974 21,894,826 22,526,188 21,815,929
============ ============ =========== ===========
Cash dividends per share $ .045 $ .044 $ .023 $ .023
============ ============ =========== ===========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED.
*Amounts reported for the nine months and three months ended July 31, 2000
include the results of operations of Trilectron Industries, Inc., a product line
which was sold September 2000. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for further discussion.
-3-
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine months ended
July 31,
--------------------------------
2001 2000
------------ -----------------
Cash flows from operating activities:
Net income $ 12,686,000 $ 13,525,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 7,961,000 7,453,000
Deferred income taxes 668,000 1,219,000
Minority interests in consolidated subsidiaries 2,224,000 2,656,000
Tax benefit on stock option exercises 334,000 1,729,000
Gain on sale of property held for disposition (657,000) -
Change in assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable 1,781,000 (15,342,000)
Increase in inventories (4,300,000) (4,594,000)
Increase in prepaid expenses and
other assets (1,103,000) (2,527,000)
(Decrease) increase in trade payables, accrued
expenses and other current liabilities (425,000) 1,823,000
Decrease in income taxes payable (8,187,000) (483,000)
Other (198,000) (56,000)
------------ ------------
Net cash provided by operating activities 10,784,000 5,403,000
------------ ------------
Cash flows from investing activities:
Acquisitions and related costs, net of cash acquired (27,352,000) (23,905,000)
Capital expenditures (4,249,000) (7,858,000)
Proceeds from sale of product line 12,412,000 -
Proceeds from sale of long-term investments 7,039,000 -
Proceeds from sale of property held for disposition 2,157,000 -
Payment received from employee savings and
investment plan note receivable 803,000 556,000
Other (387,000) (827,000)
------------ ------------
Net cash used in investing activities (9,577,000) (32,034,000)
------------ ------------
Cash flows from financing activities:
Proceeds from revolving credit facility 24,000,000 28,000,000
Principal payments on long-term debt (26,020,000) (4,932,000)
Proceeds from the exercise of stock options 2,189,000 459,000
Cash dividends paid (899,000) (846,000)
Other (3,000) 223,000
------------ ------------
Net cash (used in) provided by financing activities (733,000) 22,904,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 474,000 (3,727,000)
Cash and cash equivalents at beginning of year 4,807,000 6,031,000
------------ ------------
Cash and cash equivalents at end of period $ 5,281,000 $ 2,304,000
============ ============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED.
-4-
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED
July 31, 2001
1. The accompanying unaudited consolidated condensed financial statements of
HEICO Corporation and its subsidiaries (the Company) have been prepared in
accordance with the instructions to Form 10-Q and therefore 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 latest Annual Report on
Form 10-K/A for the year ended October 31, 2000. In the opinion of management,
the unaudited consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the consolidated condensed balance sheets, statements of
operations and cash flows for such interim periods presented. The results of
operations for the three and nine months ended July 31, 2001 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. In July 2001, the Board of Directors declared a 10% stock dividend on all
shares outstanding payable in Class A Common shares. The stock dividends were
paid on August 21, 2001 to shareholders of record August 10, 2001. The stock
dividends were valued based on the closing market price of the Company's Class A
stock as of the day prior to the declaration date and $31,709,000 was deducted
from retained earnings as of July 31, 2001. All net income per share, dividend
per share and shares outstanding information has been retroactively restated to
reflect the stock dividend.
3. Certain amounts previously presented in the financial statements of prior
periods have been reclassified to conform to the current period's presentation.
4. In February 2001, the Company, through its subsidiary, HEICO Aerospace
Holdings Corp. (HEICO Aerospace) entered into a joint venture with American
Airlines' parent company, AMR Corporation (AMR). HEICO Aerospace and AMR formed
a limited liability company (AMR LLC) to develop, design and sell FAA-approved
replacement parts. As part of the joint venture, AMR will reimburse HEICO
Aerospace a portion of new product research and development costs. The funds
received as a result of the new product research and development costs paid by
AMR generally reduce new product research and development expenses in the period
such expenses are incurred. The balance of the development costs are incurred
by AMR LLC. The Company's accounting policy is to consolidate AMR LLC, with AMR
owning a 16% minority interest. In addition, AMR and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support on a
worldwide basis.
5. In February 2001, the Company, through a subsidiary, acquired certain assets
of a company, primarily FAA-approved replacement parts and related inventories.
The purchase price was not significant to the Company's consolidated financial
statements.
-5-
In April 2001, the Company, through a subsidiary, acquired substantially all of
the assets and certain liabilities of Analog Modules, Inc. (AMI) for $15.6
million in cash paid at closing. AMI is engaged in the design and manufacture of
electronic products primarily for use in the laser and electro-optics
industries. The source of the purchase price was proceeds from the Company's
Credit Facility. This acquisition has been accounted for using the purchase
method of accounting and the results of operations of AMI were included in the
Company's results effective April 1, 2001. The excess of the purchase price
over the fair value of identifiable net assets acquired was approximately $14
million and is being amortized over 25 years. Had AMI been acquired as of the
beginning of fiscal 2001, the proforma consolidated results would not have been
materially different from the reported results.
In June 2001, the Company, through a subsidiary, acquired certain assets of a
company that is a supplier of FAA-approved replacement parts. The purchase
price was not significant to the Company's consolidated financial statements.
6. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. SFAS 133 as amended by SFAS 137 and SFAS 138 establishes standards for
the accounting and reporting of derivative instruments embedded in other
contracts (collectively referred to as derivatives) and of hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
The Company adopted SFAS 133 effective November 1, 2000. The cumulative effect
on the accumulated other comprehensive income of the Company's derivative
instruments and hedging activities discussed below as of November 1, 2000 was
not significant and as of July 31, 2001 was a loss of $255,000 (net of $162,000
in income tax benefit).
In order to manage its interest rate risk related to its revolving credit
facility borrowings which have interest based on LIBOR plus a variable margin
(see Note 10), the Company has an interest rate swap agreement with a bank
expiring February 2002. This allows the Company to reduce the effects (positive
or negative) of interest rate changes on operations.
The Company has designated the interest rate swap as a hedge of the variability
of cash flows to be received or paid related to a recognized liability (cash
flow hedge). Changes in the fair value of the interest rate swap, which is
considered effective, are recorded as a component of other comprehensive income
(see Note 15) and would be reclassified into earnings to the extent the hedge,
or a part thereof, becomes ineffective.
The Company has formally documented the relationship between the interest rate
swap and the variable rate debt and its strategy for undertaking the hedge
transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. If it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, the
Company will discontinue hedge accounting prospectively.
-6-
7. Accounts receivable are composed of the following:
July 31, 2001 October 31, 2000
-------------- -----------------
Accounts receivable $30,258,000 $30,110,000
Less allowance for doubtful accounts (909,000) (557,000)
----------- -----------
Accounts receivable, net $29,349,000 $29,553,000
=========== ===========
8. Costs and estimated earnings on uncompleted percentage of completion
contracts are as follows:
July 31, 2001 October 31, 2000
-------------- -----------------
Costs incurred on uncompleted contracts $ 5,378,000 $ 5,911,000
Estimated earnings 6,120,000 6,436,000
----------- -----------
11,498,000 12,347,000
Less: Billings to date (11,653,000) (11,689,000)
----------- -----------
$ 155,000 $ 658,000
=========== ===========
Included in accompanying balance
sheets under the following captions:
Accounts receivable $ 111,000 $ 1,372,000
Accrued expenses and other current liabilities (266,000) (714,000)
----------- -----------
$ 155,000 $ 658,000
=========== ===========
During the first nine months of 2001, the Company made certain changes in
estimates due to estimated costs to complete long-term contracts accounted for
under the percentage completion method being lower than originally projected.
The change in estimates increased net income and diluted net income per share by
$500,000 ($.02 per diluted share) in the nine months ending July 31, 2001.
Changes in estimates did not have a significant impact on net income and diluted
net income per share in the three months ending July 31, 2001.
9. Inventories are comprised of the following:
July 31, 2001 October 31, 2000
------------------ ---------------------
Finished products $21,930,000 $17,364,000
Work in process 7,510,000 6,074,000
Materials, parts, assemblies and supplies 12,795,000 10,924,000
------------------ ---------------------
Total inventories $42,235,000 $34,362,000
================== =====================
Inventories related to long-term contracts were not significant as of July 31,
2001 and October 31, 2000.
10. Long-term debt consists of:
July 31, 2001 October 31, 2000
------------------- ----------------------
Borrowings under revolving credit facility $36,000,000 $38,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Equipment loans 42,000 62,000
------------------ ---------------------
38,022,000 40,042,000
Less current maturities (27,000) (27,000)
------------------ ---------------------
$37,995,000 $40,015,000
================== =====================
-7-
Pursuant to the Company's $120 million revolving credit facility (Credit
Facility), funds are available for funding acquisitions, working capital and
general corporate requirements on a revolving basis through July 2003. The
weighted average interest rates were 4.7% and 7.6% at July 31, 2001 and October
31, 2000, respectively.
The interest rates on the Series 1988 industrial development revenue bonds were
2.75% and 4.25% at July 31, 2001 and October 31, 2000, respectively.
11. Long-term investments consisted of equity securities with an aggregate cost
of $6,858,000 as of October 31, 2000. These investments were classified as
available-for-sale and stated at a fair value of $5,832,000 as of October 31,
2000. The Company sold the long-term investments during the nine months ended
July 31, 2001 with pre-tax realized gains of $180,000. Realized gains in the
quarter ended July 31, 2001 were not significant. The gross unrealized loss was
$1,026,000 as of October 31, 2000. Unrealized gains and losses, net of deferred
taxes, are reflected as a component of comprehensive income (see Note 15).
12. For the first nine months of fiscal 2001 and 2000, cost of sales amounts
include approximately $3.7 million and $1.3 million, respectively, of new
product research and development expenses of HEICO Aerospace. These expenses
for the first nine months 2001 and 2000 are net of $700,000 and $4.4 million,
respectively, received from Lufthansa and spent by the Company pursuant to a
research and development cooperation agreement entered into in October 1997. As
of July 31, 2001, the Company has no future reimbursements to be received from
Lufthansa under the agreement. The new product research and development
expenses for the first nine months of 2001 are also net of $529,000 receivable
from American Airlines under their joint venture agreement with HEICO Aerospace
(see Note 4). Reimbursements from Lufthansa and American Airlines were not
significant in the third quarter of fiscal 2001.
13. The Company's effective tax rate decreased from 37.9% in the third quarter
2000 to 37.0% in the third quarter 2001 primarily due to higher tax benefits
from foreign sales.
14. Information on operating segments for the nine months and quarter ended
July 31, 2001 and 2000, respectively, for the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG) consisting of HEICO Electronic Technologies Corp and
its subsidiaries are as follows:
Segments
----------------------------------
Other,
Primarily
FSG ETG Corporate Consolidated Totals
--- --- --------- -------------------
For the nine months ended July 31, 2001:
- ---------------------------------------------
Net sales $99,386,000 $25,851,000 $ - $125,237,000
Depreciation and amortization 6,002,000 1,751,000 208,000 7,961,000
Operating income 22,405,000 5,341,000 (3,428,000) 24,318,000
Capital expenditures 2,882,000 641,000 726,000 4,249,000
For the nine months ended July 31, 2000:
- ---------------------------------------------
Net sales $87,120,000 $68,280,000 $ - $155,400,000
Depreciation and amortization 4,941,000 2,358,000 154,000 7,453,000
Operating income 23,426,000 9,574,000 (3,026,000) 29,974,000
Capital expenditures 6,612,000 1,240,000 6,000 7,858,000
-8-
For the quarter ended July 31, 2001:
- ---------------------------------------------
Net sales $34,599,000 $ 9,246,000 $ - $43,845,000
Depreciation and amortization 2,237,000 656,000 78,000 2,971,000
Operating income 7,736,000 1,387,000 (1,054,000) 8,069,000
Capital expenditures 830,000 261,000 22,000 1,113,000
For the quarter ended July 31, 2000:
- ---------------------------------------------
Net sales $29,580,000 $24,332,000 $ - $53,912,000
Depreciation and amortization 1,797,000 759,000 52,000 2,608,000
Operating income 7,442,000 3,512,000 (621,000) 10,333,000
Capital expenditures 2,603,000 610,000 5,000 3,218,000
Net sales of the FSG includes service revenues from repair and overhaul
operations, which represented less than 10% of net sales for all periods
presented.
Total assets held by the operating segments as of July 31, 2001 and October 31,
2000 are as follows:
Segments
-----------------------------------
Other,
Primarily Consolidated
FSG ETG Corporate Totals
--- --- --------- ------
As of July 31, 2001 $205,854,000 $71,828,000 $10,587,000 $288,269,000
As of October 31, 2000 $197,442,000 $54,997,000 $29,293,000 $281,732,000
15. The Company's comprehensive income consists of:
Nine months ended July 31, Three months ended July 31,
---------------------------------- ---------------------------------
2001 2000 2001 2000
----------- ----------- ---------- ----------
Net income $12,686,000 $13,525,000 $3,964,000 $4,721,000
Other comprehensive income (loss):
Unrealized holding gain
on investments - 1,300,000 - 1,442,000
Tax expense - (498,000) - (553,000)
Interest rate swap loss
adjustment (417,000) - (17,000) -
Tax benefit 162,000 - 6,000 -
----------- ----------- ---------- ----------
Comprehensive income $12,431,000 $14,327,000 $3,953,000 $5,610,000
=========== =========== ========== ==========
16. In May 1998, the Company and its HEICO Aerospace Corporation and Jet Avion
Corporation subsidiaries were served with a lawsuit by Travelers Casualty &
Surety Co., f/k/a the Aetna Casualty and Surety Co. (Travelers). In June 1999,
the Travelers lawsuit was dismissed by the federal court based on a lack of
jurisdiction. Travelers is challenging the dismissal.
The Travelers complaint sought reimbursement of legal fees and costs totaling in
excess of $15 million paid by Travelers in defending the Company in litigation
with United Technologies Corporation (UTC), which was settled in March 2000. In
addition, Travelers sought a declaratory judgment that the Company did not and
does not have insurance coverage under certain insurance policies with Travelers
and, accordingly, that Travelers did not have and does not have a duty to defend
or indemnify the Company under such policies. Also named as defendants in
Travelers' lawsuit are UTC and one of the law firms representing the Company in
the UTC litigation.
-9-
The Company believes that it has significant counterclaims against Travelers for
damages. After taking into consideration legal counsel's evaluation of
Travelers' claim, management is of the opinion that the outcome of the Travelers
litigation will not have a significant adverse effect on the Company's
consolidated condensed financial statements. No provision for gain or loss, if
any, has been made in the consolidated condensed financial statements.
The Company is involved in various other legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these other matters
will not have a significant adverse effect on the Company's consolidated
condensed financial statements.
17. In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which among other guidance, clarifies certain conditions to be met in
order to recognize revenue. In October 2000, the staff deferred the
implementation date of SAB 101 until no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The Company will comply with SAB 101
in the quarter ending October 31, 2001; however, such compliance is not expected
to be significant to the Company's results of operations.
In September 2000, the Emerging Issue Task Force (EITF) issued "Accounting for
Shipping and Handling Fees and Costs" (EITF 00-10). This Issue addresses the
income statement classification for shipping and handling fees and costs by
companies that record revenue based on the gross amount billed to customers.
EITF 00-10 concludes that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for goods
provided and should be classified as revenue. In addition, the shipping and
handling costs should be included in cost of sales. If shipping costs or
handling costs are significant and are not included in cost of sales, the amount
and the line item on the income statement that include them should be disclosed.
The Company will adopt EITF 00-10 in the quarter ending October 31, 2001. The
Company does not expect the impact of such adoption to be significant to the
Company's results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all
business combinations be accounted for under the purchase method. The statement
further requires separate recognition of intangible assets that meet one of two
criteria. The statement applies to all business combinations initiated after
June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired
shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
Existing goodwill will continue to be amortized through the remainder of fiscal
2001 at which time amortization will cease and the Company will perform a
transitional goodwill impairment test. SFAS No. 142 is effective for fiscal
periods beginning after December 15, 2001. Early adoption of SFAS 142 is
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not been previously
issued. The Company is currently evaluating the impact of the new accounting
standards on existing goodwill and other intangible assets. The Company expects
to early adopt SFAS 142 effective November 1, 2001 and estimates that it will
add approximately $0.20 to net income per diluted share annually.
-10-
18. In August 2001, the Company, through a subsidiary, acquired Inertial
Airline Services, Inc. (IAS) pursuant to a stock purchase agreement, for $20
million in cash and $5 million in HEICO Class A Common shares (289,964 shares)
paid at closing. The Company has guaranteed that the resale value of such Class
A Common shares will be at least $5 million through August 31, 2002. In
addition, subject to meeting certain earnings targets during the first two years
following acquisition, the Company would pay additional consideration of $6
million in cash. Concurrent with the purchase, the Company loaned the seller $5
million. The loan is due August 31, 2002 and is secured by the 289,964 shares
of HEICO Class A Common Stock. The source of the purchase price was proceeds
from the Company's Credit Facility. This acquisition has been accounted for
using the purchase method of accounting as outlined in SFAS 141. The purchase
price will be allocated to the assets and liabilities assumed based on fair
values as determined by management. However, in accordance with SFAS No. 142,
goodwill will not be amortized, but will be tested for impairment annually, or
more frequently if circumstances indicate potential impairment. Had IAS been
acquired as of the beginning of fiscal 2001, the proforma consolidated results
would not have been materially different from the reported results. IAS is
engaged primarily in the repair and overhaul of Inertial Navigation Systems
which are used by commercial and military aircraft. In addition, IAS repairs
and overhauls various other avionics, instruments and components for commercial,
military and business aircraft.
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our results of operations during the current periods and the same periods in the
prior fiscal year have been affected significantly by the sale of Trilectron
Industries, Inc. (Trilectron), a product line which was sold in September 2000.
This discussion of our financial condition and results of operations should be
read in conjunction with our Consolidated Condensed Financial Statements and
Notes thereto included herein.
Our Flight Support Group (FSG) consists of HEICO Aerospace Holdings Corp. (HEICO
Aerospace) and its subsidiaries; HEICO Aerospace Corporation, Jet Avion
Corporation (Jet Avion), LPI Industries Corporation (LPI), Aircraft Technology,
Inc. (ATI), Northwings Accessories Corporation (Northwings), McClain
International, Inc. (McClain), Associated Composite, Inc. (ACI), Rogers-Dierks,
Inc. (Rogers-Dierks), Air Radio & Instruments Corp. (Air Radio), Turbine
Kinetics, Inc. (Turbine), Thermal Structures, Inc. (Thermal) and Future
Aviation, Inc. (Future).
Our Electronic Technologies Group (ETG) consists of HEICO Electronic
Technologies Corp. and its subsidiaries; Radiant Power Corp. (Radiant), Leader
Tech, Inc. (Leader Tech), Santa Barbara Infrared, Inc. (SBIR) and Analog
Modules, Inc. (AMI) acquired April 2001.
In February 2001, the Company, through HEICO Aerospace entered into a joint
venture with American Airlines' parent company, AMR Corporation (AMR). HEICO
Aerospace and AMR formed a limited liability company (AMR LLC) to develop,
design and sell FAA-approved replacement parts. As part of the joint venture,
AMR will reimburse HEICO Aerospace a portion of new product research and
development costs. The funds received as a result of the new product research
and development costs paid by AMR generally reduce new product research and
development expenses in the period such expenses are incurred. The balance of
the development costs are incurred by AMR LLC. The Company's accounting policy
is to consolidate AMR LLC, with AMR owning a 16% minority interest. In
addition, AMR and HEICO Aerospace have agreed to cooperate regarding technical
services and marketing support on a worldwide basis.
In February 2001, the Company, through a subsidiary, acquired certain assets of
a company, primarily FAA-approved replacement parts and related inventories.
The purchase price was not significant to the Company's consolidated financial
statements.
In April 2001, the Company, through a subsidiary, acquired substantially all of
the assets and certain liabilities of AMI for $15.6 million in cash paid at
closing. AMI is engaged in the design and manufacture of electronic products
primarily for use in the laser and electro-optics industries. The source of the
purchase price was proceeds from the Company's Credit Facility. This
acquisition has been accounted for using the purchase method of accounting and
the results of operations of AMI were included in the Company's results
effective April 1, 2001.
-12-
In June 2001, the Company, through a subsidiary, acquired certain assets of a
company that is a supplier of FAA-approved replacement parts. The purchase
price was not significant to the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. SFAS
133, as amended by SFAS 137 and SFAS 138, establishes standards for the
accounting and reporting of derivative instruments embedded in other contracts
(collectively referred to as derivatives) and of hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company adopted SFAS 133 effective November 1,
2000. The cumulative effect on the accumulated other comprehensive income of the
Company's derivative instruments and hedging activities discussed below as of
November 1, 2000 was not significant and as of July 31, 2001 was a loss of
$255,000 (net of $162,000 in income tax benefit).
In order to manage its interest rate risk related to its revolving credit
facility borrowings which has interest based on LIBOR plus a variable margin,
the Company has an interest rate swap agreement with a bank. This allows the
Company to reduce the effects (positive or negative) of interest rate changes on
operations. The Company has designated the interest rate swap as a hedge of the
variability of cash flows to be received or paid related to a recognized
liability (cash flow hedge). Changes in the fair value of the interest rate
swap, which is considered effective, are recorded as a component of other
comprehensive income and reclassified into earnings to the extent the hedge, or
a part thereof, becomes ineffective.
In July 2001, the Board of Directors declared a 10% stock dividend on all shares
outstanding payable in Class A Common shares. The stock dividends were paid on
August 21, 2001 to shareholders of record August 10, 2001. The stock dividends
were valued based on the closing market price of the Company's Class A stock as
of the day prior to the declaration date. All net income per share, dividend
per share and shares outstanding information has been retroactively restated to
reflect the stock dividend.
-13-
Results of Operations
For the periods indicated below, the following tables set forth the results of
operations, net sales and operating income before goodwill amortization, by
operating segment and the percentage of net sales represented by the respective
items, including fiscal 2000 results as adjusted to exclude the direct results
of operations of the Trilectron product line. The Company believes prior year
results as adjusted provide more meaningful information for comparing the
results of operations in the first nine months and the third quarter of fiscal
2001. Accordingly, certain discussion of fiscal 2001 results below reflects
comparisons to the Company's fiscal 2000 results as adjusted to exclude the
direct results of operations of Trilectron.
Nine Months Ended July 31, Three Months Ended July 31,
-------------------------------------------- -------------------------------------------
2000 2000
---------------------------- ---------------------------
As Adjusted As Reported As Adjusted As Reported
2001 2001
------------ ------------ ------------ ------------ ------------ ------------
Net sales $125,237,000 $111,145,000 $155,400,000 $ 43,845,000 $ 38,191,000 $ 53,912,000
------------ ------------ ------------ ------------ ------------ ------------
Cost of sales 71,786,000 62,146,000 98,184,000 25,802,000 21,536,000 34,233,000
Selling, general and
administrative
expenses 29,133,000 22,339,000 27,242,000 9,974,000 7,413,000 9,346,000
------------ ------------ ------------ ------------ ------------ ------------
Total operating costs
and expenses 100,919,000 84,485,000 125,426,000 35,776,000 28,949,000 43,579,000
------------ ------------ ------------ ------------ ------------ ------------
Operating income $ 24,318,000 $ 26,660,000 $ 29,974,000 $ 8,069,000 $ 9,242,000 $ 10,333,000
============ ============ ============ ============ ============ ============
Nine Months Ended July 31, Three Months Ended July 31,
-------------------------------------------- -------------------------------------------
2001 2000 2001 2000
------------ ---------------------------- ------------ ---------------------------
As Adjusted As Reported As Adjusted As Reported
------------ ------------ ------------ ------------
Net sales by segment:
FSG $ 99,386,000 $ 87,120,000 $ 87,120,000 $ 34,599,000 $ 29,580,000 $ 29,580,000
ETG 25,851,000 24,025,000 68,280,000 9,246,000 8,611,000 24,332,000
------------ ------------ ------------ ------------ ------------ ------------
$125,237,000 $111,145,000 $155,400,000 $ 43,845,000 $ 38,191,000 $ 53,912,000
============ ============ ============ ============ ============ ============
Operating income (before
goodwill amortization):
Flight Support Group $ 26,132,000 $ 26,643,000 $ 26,643,000 $ 8,996,000 $ 8,606,000 $ 8,606,000
Electronic Technologies
Group 6,659,000 7,342,000 10,851,000 1,910,000 2,783,000 3,952,000
Other, primarily corporate (3,428,000) (3,026,000) (3,026,000) (1,054,000) (621,000) (621,000)
------------ ------------ ------------ ------------ ------------ ------------
$ 29,363,000 $ 30,959,000 $ 34,468,000 $ 9,852,000 $ 10,768,000 $ 11,937,000
============ ============ ============ ============ ============ ============
Operating income (after
goodwill amortization):
Flight Support Group $ 22,405,000 $ 23,426,000 $ 23,426,000 $ 7,736,000 $ 7,442,000 $ 7,442,000
Electronic Technologies
Group 5,341,000 6,260,000 9,574,000 1,387,000 2,421,000 3,512,000
Other, primarily corporate (3,428,000) (3,026,000) (3,026,000) (1,054,000) (621,000) (621,000)
------------ ------------ ------------ ------------ ------------ ------------
$ 24,318,000 $ 26,660,000 $ 29,974,000 $ 8,069,000 $ 9,242,000 $ 10,333,000
============ ============ ============ ============ ============ ============
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 42.7% 44.1% 36.8% 41.2% 43.6% 36.5%
Selling, general and
administrative expenses 23.3% 20.1% 17.5% 22.7% 19.4% 17.3%
Operating income 19.4% 24.0% 19.3% 18.4% 24.2% 19.2%
Interest expense 1.3% N/A 2.7% 1.4% N/A 3.1%
Interest and other income 1.2% N/A 0.4% 0.3% N/A 0.5%
Income tax expense 7.4% N/A 6.5% 6.4% N/A 6.3%
Minority interest 1.8% N/A 1.7% 1.9% N/A 1.5%
Net income 10.1% N/A 8.7% 9.0% N/A 8.8%
-14-
Comparison of First Nine Months of Fiscal 2001 to First Nine Months of Fiscal
2000
Net Sales
Net sales for the first nine months of 2001 totaled $125.2 million, up 12.7%
when compared to the first nine months of 2000 net sales of $111.1 million as
adjusted.
The increase in sales for the first nine months of 2001 reflects an increase of
$12.3 million (a 14% increase) to $99.4 million in revenues from the FSG and an
increase of $1.8 million as adjusted (an 8% increase) to $25.9 million in
revenues from the ETG. The FSG sales increase primarily represents revenues
resulting from the Company's entry into the commuter/regional jet component
repair and overhaul market with the acquisition of Future in June 2000 and an
increase in FAA-approved jet engine (PMA) replacement parts sales, partially
offset by softness in the component repair and overhaul market. PMA replacement
parts sales in the first nine months of fiscal 2001 increased 22% over PMA
replacement parts sales in the first nine months of fiscal 2000 primarily as a
result of new products. The ETG sales increase is primarily attributed to the
acquisition of AMI in April 2001, partially offset by weakness in sales of EMI
shielding products of Leader Tech to the electronics and communications
industries reflecting the general economic weakness within some of the
technology industries and delayed shipment of high dollar value infrared test
equipment at SBIR due principally to customer and vendor delays.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 42.7% for the first nine months 2001
as compared to 44.1% as adjusted for the first nine months of 2000. This
decrease reflects lower margins within the FSG contributed by an increase in new
product research and development expenses of $2.4 million as discussed below and
softness within the component repair and overhaul market, partially offset by
the impact of higher PMA replacement parts sales. The decrease also reflects
lower margins within ETG as a result of lower sales of higher margin EMI
shielding products and lower sales of higher margin infrared test equipment at
SBIR. Cost of sales amounts for the first nine months of 2001 and first nine
months of 2000 include approximately $3.7 million and $1.3 million,
respectively, of new product research and development expenses of HEICO
Aerospace. These amounts are net of $700,000 and $4.4 million received from
Lufthansa in the first nine months of 2001 and 2000, respectively. As of July
31, 2001, the Company has no future reimbursements to be received from Lufthansa
under the agreement. The new product research and development expenses for the
first nine months of 2001 are also net of $529,000 receivable from American
Airlines under their joint venture agreement with HEICO Aerospace (see Note 4).
Selling, general and administrative (SG&A) expenses increased $6.8 million to
$29.1 million for the first nine months of 2001 from $22.3 million as adjusted
for the first nine months of 2000. As a percentage of net sales, SG&A expenses
increased to 23.3% for the first nine months of 2001 compared to 20.1% as
adjusted for the first nine months of 2000. The increases in SG&A expenses and
SG&A expenses as a percent of net sales are primarily a result of higher
marketing costs in the FSG associated with expanding product lines, a $550,000
increase in goodwill amortization primarily resulting from the acquisition of
Future and AMI, a $500,000 increase in provisions for uncollectible accounts
receivable and a $400,000 increase in general corporate expenses.
-15-
Operating Income
Operating income decreased $2.3 million to $24.3 million for the first nine
months of 2001 from $26.6 million as adjusted for the first nine months of 2000.
The decrease in operating income reflects a decrease of $1.0 million from $23.4
million to $22.4 million in the Company's FSG, a decrease of $900,000 from $6.2
million as adjusted to $5.3 million in the Company's ETG and a $400,000 increase
in general corporate expenses. The decrease in operating income of the FSG was
due primarily to lower gross profit margins reflecting lower research and
development reimbursements, higher marketing costs, higher goodwill amortization
and higher provisions for uncollectible accounts receivable discussed above,
partially offset by the impact of higher PMA replacement parts sales. The
decrease in ETG operating income was primarily due to lower sales of EMI
shielding products and delayed shipment of higher margin infrared test
equipment, partially offset by additional earnings of AMI since its acquisition
in April 2001.
As a percentage of net sales, operating income decreased from 24.0% as adjusted
in the first nine months of 2000 to 19.4% in the first nine months of 2001. The
FSG's operating income as a percentage of net sales declined from 26.9% in the
first nine months of 2000 to 22.5% in the first nine months of 2001 due to lower
gross profit margins reflecting lower research and development reimbursements,
higher marketing costs, higher goodwill amortization and higher provisions for
uncollectible accounts receivable discussed above. The ETG's operating income
as a percentage of net sales decreased from 26.1% as adjusted in the first nine
months 2000 to 20.7% in the first nine months 2001. This decrease reflects
softness in sales of EMI shielding products and lower sales of higher margin
infrared test equipment at SBIR partially offset by earnings from the
acquisition of AMI.
Operating Income before Goodwill
Operating income before goodwill amortization decreased $1.6 million to $29.4
million for the first nine months of 2001 from $31.0 million as adjusted for the
first nine months of 2000. The decrease in operating income before goodwill
reflects the lower operating income discussed above.
Interest Expense
Interest expense decreased $2.6 million to $1.7 million from the first nine
months of 2000 to the first nine months of 2001. The decrease was principally
due to lower outstanding debt balances under the Company's Credit Facility as a
result of the repayment of borrowings from the proceeds of the sale of
Trilectron and lower interest rates.
Interest and Other Income
Interest and other income increased $891,000 to $1.5 million from the first nine
months of 2000 to the first nine months of 2001 due principally to a gain of
$657,000 on the sale of property retained in the sale of the Trilectron product
line sold in September 2000 and a realized gain of $180,000 on the sale of long-
term investments.
-16-
Minority Interests
Minority interests represent the 20% minority interest held by Lufthansa in
HEICO Aerospace and the 16% minority interest held by AMR in the joint venture
with HEICO Aerospace. Minority interests decreased $432,000 to $2.2 million in
the first nine months of 2001 from $2.6 million in the first nine months of 2000
mainly due to minority interest income of $325,000 representing AMR's share in
the new product research and development costs incurred within the new joint
venture.
Net Income
The Company's net income decreased from $13.5 million, or $.62 per diluted
share, in the first nine months of 2000 to $12.7 million, or $0.57 per diluted
share, in the first nine months of 2001. The decrease in net income is primarily
due to the lower operating income discussed above. Trilectron, which was sold in
the fourth quarter of fiscal 2000, contributed approximately 5 cents per diluted
share to earnings in the first nine months of fiscal 2000.
For the balance of fiscal 2001, the Company expects continued growth driven
primarily by PMA sales and recent acquisitions, including Inertial Airlines
Services, Inc. which was acquired August 2001 (see Note 18). Despite the
weakness in demand within certain of the ETG's markets, primarily the technology
industries discussed above, growth of our other businesses is expected to result
in earnings for the full fiscal year 2001 being at least flat when compared with
fiscal 2000.
Cash earnings per share or net income per diluted share before goodwill
amortization (adjusted for the after tax impact of goodwill) was $.72 in the
first nine months of fiscal 2001 and $0.75 in the first nine months of fiscal
2000. Cash earnings per share is currently a financial indicator used by
management to assess results of operations on the basis of operating
performance. However, cash earnings per share should not be considered in
isolation or as a substitute for measuring performance in accordance with
generally accepted accounting principles. Our calculation of cash earnings per
share may be different from the calculation used by others, and therefore
comparability may be affected.
Comparison of Third Quarter of Fiscal 2001 to Third Quarter of Fiscal 2000
Net Sales
Net sales for the third quarter 2001 totaled $43.8 million, up 14.8% when
compared to the third quarter 2000 net sales of $38.2 million as adjusted.
The increase in third quarter 2001 sales reflects an increase of $5.0 million (a
17% increase) to $34.6 million in revenues from the FSG and an increase of
$635,000 as adjusted (a 7.4% increase) to $9.2 million in revenues from the ETG.
The FSG sales increase primarily represents revenues resulting from the
Company's entry into the commuter/regional jet component repair and overhaul
market with the acquisition of Future in June 2000 and an increase in PMA
replacement parts sales partially offset by softness in the component repair and
overhaul market. PMA replacement parts sales in the third quarter 2001 increased
41% over PMA replacement parts sales in the third quarter 2000 primarily
as a result of new products.
-17-
The ETG sales increase is primarily attributed to the acquisition of AMI in
April 2001, partially offset by weakness in sales of EMI shielding products of
Leader Tech to the electronics and communication industries reflecting the
general economic weakness within some of the technology industries and delayed
shipment of high dollar value infrared test equipment at SBIR due principally to
customer and vendor delays.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 41.2% for the third quarter 2001 as
compared to 43.6% as adjusted for the third quarter 2000. This decrease reflects
lower margins within the FSG contributed by an increase in new product research
and development expenses of $1.3 million discussed below and softness within the
component repair and overhaul market, partially offset by the impact of higher
PMA replacement parts sales. The decrease also reflects lower gross margins in
the ETG as a result of lower sales of higher margin EMI shielding products and
lower sales of higher margin infrared test equipment at SBIR. Cost of sales
amounts for the third quarter 2001 and third quarter 2000 include approximately
$1.7 million and $400,000, respectively, of new product research and development
expenses of HEICO Aerospace. These amounts are net of $1.4 million received from
Lufthansa in the third quarter 2000. Reimbursements from Lufthansa and American
Airlines were not significant in the third quarter 2001.
Selling, general and administrative (SG&A) expenses increased $2.6 million to
$10.0 million for the third quarter 2001 from $7.4 million as adjusted for the
third quarter 2000. As a percentage of net sales, SG&A expenses increased to
22.7% for the third quarter 2001 compared to 19.4% as adjusted for the third
quarter 2000. The increases in SG&A expenses and SG&A expenses as a percent of
net sales are primarily a result of higher marketing costs in the FSG associated
with expanding product lines, a $400,000 increase in general corporate expenses,
a $190,000 increase in provisions for uncollectible accounts receivable and a
$179,000 increase in goodwill amortization primarily resulting from the
acquisition of Future and AMI.
Operating Income
Operating income decreased $1.1 million to $8.1 million for the third quarter
2001 from $9.2 million as adjusted for the third quarter 2000. The decrease in
operating income reflects a decrease of $1.0 million from $2.4 million as
adjusted to $1.4 million in the Company's ETG, an increase in general corporate
expenses of $400,000, offset by an increase of $300,000 from $7.4 million to
$7.7 million in the Company's FSG. The lower ETG operating income was due to
lower sales of EMI shielding products and delayed shipment of infrared test
equipment, partially offset by additional earnings from the acquisition of AMI
in April 2001. The increase in operating income of the FSG was due primarily to
higher PMA replacement parts sales, partially offset by lower research and
development reimbursements, higher marketing costs, higher provisions for
uncollectible accounts receivable and higher goodwill amortization discussed
above.
-18-
As a percentage of net sales, operating income decreased from 24.2% as adjusted
in the third quarter of 2000 to 18.4% in the third quarter of 2001. The FSG's
operating income as a percentage of net sales declined from 25.2% in the third
quarter of 2000 to 22.4% in the third quarter 2001 due to lower gross profit
margins reflecting lower research and development reimbursements, higher
marketing costs, higher provisions for uncollectible accounts receivable and
higher goodwill amortization discussed above. The ETG's operating income as a
percentage of net sales declined from 28.1% as adjusted in the third quarter
2000 to 15.0% in the third quarter 2001. This decrease reflects softness in
sales of higher margin EMI shielding products and lower sales of higher margin
infrared test equipment at SBIR, partially offset by the acquisition of AMI
discussed above.
Operating Income before Goodwill
Operating income before goodwill amortization decreased $900,000 to $9.9 million
for the third quarter 2001 from $10.8 million as adjusted for the third quarter
2000. The decrease in operating income before goodwill reflects the lower
operating income discussed above.
Interest Expense
Interest expense decreased $1.1 million to $605,000 from the third quarter 2000
to the third quarter 2001. The decrease was principally due to lower outstanding
debt balances under the Company's Credit Facility as a result of the repayment
of borrowings from the proceeds of the sale of Trilectron and lower interest
rates.
Interest and Other Income
Interest and other income decreased $161,000 from $274,000 to $113,000 from the
third quarter 2000 to the third quarter 2001. This decrease reflects lower
short-term investments.
Minority Interests
Minority interests represents the 20% minority interest held by Lufthansa in
HEICO Aerospace and the 16% minority interest held by AMR in the joint venture
with HEICO Aerospace.
Net Income
The Company's net income was $4.0 million, or $.18 per diluted share, in the
third quarter 2001 and $4.7 million, or $.22 per diluted share, in the third
quarter 2000. Trilectron, which was sold in the fourth quarter of fiscal 2000,
contributed approximately 2 cents per diluted share to earnings in the third
quarter 2000.
Cash earnings per share or net income per diluted share before goodwill
amortization (adjusted for the after tax impact of goodwill) was $.23 in the
third quarter of fiscal 2001 and $.26 in the third quarter of fiscal 2000.
-19-
Inflation
The Company has generally experienced increases in its costs of labor, materials
and services consistent with overall rates of inflation. The impact of such
increases on the Company's net income has been generally minimized by efforts to
lower costs through manufacturing efficiencies and cost reductions.
Liquidity and Capital Resources
The Company generates cash primarily from operating activities and financing
activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, increases in working
capital, payments of interest and principal on debt and capital expenditures.
The Company believes that operating cash flow and available borrowings under the
Company's Credit Facility will be sufficient to fund cash requirements for the
foreseeable future.
Operating Activities
The Company's cash flow from operations was $10.8 million for the first nine
months of 2001, consisting primarily of net income of $12.7 million,
depreciation and amortization of $8.0 million and minority interests of $2.2
million, partially offset by the payment of income taxes of approximately $7
million on the fiscal 2000 gain from the sale of Trilectron and increase in net
operating assets of $5.2 million. The increase in net operating assets resulted
primarily from an increase in inventories to meet increasing PMA parts sales.
Investing Activities
The principal cash used in investing activities in the first nine months of 2001
was acquisition related costs and capital expenditures of approximately $27.4
million and $4.2 million, respectively, partially offset by $14.6 million cash
provided by the proceeds from the sale of Trilectron and the sale of property
retained in the sale of Trilectron and $7.0 million cash from the sale of long-
term investments.
Financing Activities
The Company's principal financing activities during the first nine months of
fiscal 2001 included net payments of $2.0 million to reduce borrowings under the
Company's Credit Facility.
New Accounting Interpretations
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
among other guidance, clarifies certain conditions to be met in order to
recognize revenue. In October 2000, the staff deferred the implementation date
of SAB 101 until no later than the fourth quarter of fiscal years beginning
after December 15, 1999. The Company will comply with SAB 101 in the quarter
ending October 31, 2001; however, such compliance is not expected to be
significant to the Company's results of operations.
-20-
In September 2000, the Emerging Issue Task Force (EITF) issued "Accounting for
Shipping and Handling Fees and Costs" (EITF 00-10). This Issue addresses the
income statement classification for shipping and handling fees and costs by
companies that record revenue based on the gross amount billed to customers.
EITF 00-10 concludes that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for goods
provided and should be classified as revenue. In addition, the shipping and
handling costs should be included in cost of sales. If shipping costs or
handling costs are significant and are not included in cost of sales, the amount
and the line item on the income statement that include them should be disclosed.
The Company will adopt EITF 00-10 in the quarter ending October 31, 2001. The
Company does not expect the impact of such adoption to be significant to the
Company's results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to
all business combinations initiated after June 30, 2001. SFAS No. 142 requires
that an intangible asset that is acquired shall be initially recognized and
measured based on its fair value. The statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. Existing goodwill will continue to be
amortized through the remainder of fiscal 2001 at which time amortization will
cease and the Company will perform a transitional goodwill impairment test.
SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001.
Early adoption is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not been
previously issued. The Company is currently evaluating the impact of the new
accounting standards on existing goodwill and other intangible assets. The
Company expects to early adopt SFAS 142 effective November 1, 2001 and estimates
that it will add approximately $0.20 to net income per diluted share annually.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking," including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's shareholders. Management believes that all statements
that express expectations and projections with respect to future matters may
differ materially from that discussed as a result of factors, including, but not
limited to, lower commercial air travel, product specification costs and
requirements, governmental and regulatory demands, competition on military
programs, product pricing levels, the Company's ability to make acquisitions and
achieve operating synergies from such acquisitions, interest rates and economic
conditions within and outside of the aerospace, defense and electronics
industries. For an enterprise as the Company, a wide range of factors could
materially affect future developments and performance. A list of such factors
is set forth in the Company's Annual Report on Form 10-K/A for the year ended
October 31, 2000.
-21-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company entered into an interest rate swap with a bank pursuant to which it
exchanged floating rate interest based on three-month LIBOR on a notional
principal amount of $30 million for a fixed rate payment obligation of 6.59% for
a two-year period ending February 2, 2002. During the first nine months of
fiscal 2001, the Company reduced the notional principal amount on its interest
rate swap to $20,000,000. Based on the outstanding debt balance at July 31,
2001 and October 31, 2000, a change of 1% in interest rates would cause a change
in interest expense of approximately $180,000 and $100,000, respectively, on an
annual basis.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None.
(b) There were no reports on Form 8-K filed during the three months
ended July 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
-----------------
(Registrant)
September 13, 2001 BY /s/Thomas S. Irwin
------------------------- ---------------------
Date Thomas S. Irwin, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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