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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, 2005 or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of August 29, 2005:
Common Stock, $.01 par value 10,051,815 shares
Class A Common Stock, $.01 par value 14,507,557 shares
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HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of July 31, 2005 and October 31, 2004..................................................2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months and three months ended July 31, 2005 and 2004.........................3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2005 and 2004..........................................4
Notes to Condensed Consolidated Financial Statements (unaudited)...........................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risks...............................27
Item 4. Controls and Procedures...................................................................28
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...............................29
Item 6. Exhibits..................................................................................29
Signature................................................................................................30
1
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JULY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,635,000 $ 214,000
Accounts receivable, net 41,666,000 36,798,000
Inventories 58,873,000 48,020,000
Prepaid expenses and other current assets 3,572,000 3,208,000
Deferred income taxes 6,419,000 5,672,000
---------------- ----------------
Total current assets 113,165,000 93,912,000
Property, plant and equipment, net 42,482,000 40,558,000
Goodwill 232,349,000 216,674,000
Other assets 11,000,000 13,111,000
---------------- ----------------
Total assets $ 398,996,000 $ 364,255,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 58,000 $ 58,000
Trade accounts payable 9,711,000 7,969,000
Accrued expenses and other current liabilities 24,526,000 20,244,000
Income taxes payable 1,514,000 3,771,000
---------------- ----------------
Total current liabilities 35,809,000 32,042,000
Long-term debt, net of current maturities 22,028,000 18,071,000
Deferred income taxes 19,923,000 16,262,000
Other non-current liabilities 6,672,000 5,834,000
---------------- ----------------
Total liabilities 84,432,000 72,209,000
---------------- ----------------
Minority interests in consolidated subsidiaries 48,033,000 44,644,000
---------------- ----------------
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares authorized;
300,000 shares designated as Series B Junior Participating Preferred
Stock and 300,000 shares designated as Series C Junior Participating
Preferred Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares authorized;
10,028,915 and 9,898,451 shares issued and outstanding, respectively 100,000 99,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 14,507,024 and 14,325,304 shares issued and outstanding,
respectively 145,000 143,000
Capital in excess of par value 192,114,000 187,950,000
Retained earnings 74,172,000 59,210,000
---------------- ----------------
Total shareholders' equity 266,531,000 247,402,000
---------------- ----------------
Total liabilities and shareholders' equity $ 398,996,000 $ 364,255,000
================ ================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Net sales $ 193,123,000 $ 154,764,000 $ 69,169,000 $ 55,820,000
-------------- -------------- -------------- --------------
Operating costs and expenses:
Cost of sales 121,799,000 100,898,000 43,170,000 36,204,000
Selling, general and administrative expenses 39,481,000 31,251,000 14,250,000 11,746,000
-------------- -------------- -------------- --------------
Total operating costs and expenses 161,280,000 132,149,000 57,420,000 47,950,000
-------------- -------------- -------------- --------------
Operating income 31,843,000 22,615,000 11,749,000 7,870,000
Interest expense (785,000) (882,000) (252,000) (250,000)
Interest and other income 421,000 95,000 341,000 93,000
Life insurance proceeds -- 5,000,000 -- 5,000,000
-------------- -------------- -------------- --------------
Income before income taxes and minority interests 31,479,000 26,828,000 11,838,000 12,713,000
Income tax expense 11,430,000 7,447,000 4,294,000 2,591,000
-------------- -------------- -------------- --------------
Income before minority interests 20,049,000 19,381,000 7,544,000 10,122,000
Minority interests' share of income 3,862,000 3,917,000 1,498,000 2,007,000
-------------- -------------- -------------- --------------
Net income $ 16,187,000 $ 15,464,000 $ 6,046,000 $ 8,115,000
============== ============== ============== ==============
Net income per share:
Basic $ .66 $ .64 $ .25 $ .34
Diluted $ .62 $ .60 $ .23 $ .32
Weighted average number of common shares outstanding:
Basic 24,425,235 23,986,315 24,500,372 24,165,595
Diluted 26,280,695 25,709,844 26,368,520 25,755,455
Cash dividends per share $ .050 $ .050 $ .025 $ .025
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED JULY 31,
-----------------------------------
2005 2004
---------------- ----------------
Operating Activities:
Net income $ 16,187,000 $ 15,464,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,267,000 5,126,000
Deferred income tax provision 2,914,000 3,654,000
Minority interests' share of income 3,862,000 3,917,000
Tax benefit from stock option exercises 2,826,000 1,252,000
Change in estimate of product warranty liability -- (491,000)
Restructuring expense related to inventory write-downs -- 350,000
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (2,760,000) (897,000)
(Increase) decrease in inventories (8,833,000) 2,459,000
Increase in prepaid expenses and other current assets (352,000) (867,000)
Increase in trade accounts payables, accrued
expenses and other current liabilities 4,136,000 2,584,000
(Decrease) increase in income taxes payable (2,257,000) 51,000
Other (26,000) 2,000
---------------- ----------------
Net cash provided by operating activities 20,964,000 32,604,000
---------------- ----------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (19,043,000) (28,064,000)
Capital expenditures (6,804,000) (4,253,000)
Proceeds from sale of building held for sale 3,520,000 --
Other 224,000 (348,000)
---------------- ----------------
Net cash used in investing activities (22,103,000) (32,665,000)
---------------- ----------------
Financing Activities:
Borrowings on revolving credit facility 22,000,000 27,000,000
Payments on revolving credit facility (18,000,000) (23,000,000)
Cash dividends paid (1,224,000) (1,201,000)
Proceeds from stock option exercises 1,338,000 712,000
Other (554,000) 499,000
---------------- ----------------
Net cash provided by financing activities 3,560,000 4,010,000
---------------- ----------------
Net increase in cash and cash equivalents 2,421,000 3,949,000
Cash and cash equivalents at beginning of year 214,000 4,321,000
---------------- ----------------
Cash and cash equivalents at end of period $ 2,635,000 $ 8,270,000
================ ================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
HEICO Corporation and its subsidiaries (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, 2004. The
October 31, 2004 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 of only 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 nine months ended July 31, 2005 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
STOCK BASED COMPENSATION
The Company currently accounts for stock-based employee compensation using
the intrinsic value method (see "New Accounting Pronouncements" below for a
discussion of a recently issued pronouncement on the accounting for share-based
payments, which is effective as of the Company's first quarter of fiscal 2006).
Accordingly, compensation expense has been recorded in the accompanying
condensed consolidated financial statements for any stock options granted below
the fair market value of the underlying stock as of the date of grant. The
following table illustrates the pro forma effects on net income and net income
per share as if the Company had applied the fair-value recognition provisions
(an alternative method) to stock-based employee compensation. The fair value of
each option grant is estimated as of the date of grant using the Black-Scholes
option-pricing model.
5
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Net income, as reported $ 16,187,000 $ 15,464,000 $ 6,046,000 $ 8,115,000
Add: Stock-based employee compensation
expense included in reported net income, net of tax 1,000 1,000 -- --
Deduct: Stock-based employee compensation
expense determined under a fair-value method,
net of tax (902,000) (1,111,000) (280,000) (334,000)
-------------- -------------- -------------- --------------
Pro forma net income $ 15,286,000 $ 14,354,000 $ 5,766,000 $ 7,781,000
============== ============== ============== ==============
Net income per share:
Basic - as reported $ .66 $ .64 $ .25 $ .34
Basic - pro forma $ .63 $ .60 $ .24 $ .32
Diluted - as reported $ .62 $ .60 $ .23 $ .32
Diluted - pro forma $ .58 $ .56 $ .22 $ .30
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"), "Inventory
Costs, an amendment of ARB No. 43, Chapter 4". SFAS No. 151 requires the
allocation of fixed production overhead costs be based on the normal capacity of
the production facilities and unallocated overhead costs recognized as an
expense in the period incurred. The Statement also clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the
provisions of SFAS No. 151, but does not currently believe the adoption of the
Statement will have a material effect on its results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
This Statement revises FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees". In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 ("SAB 107") to provide public companies with
its interpretive guidance in applying the provisions of SFAS No. 123(R). SFAS
No. 123(R) focuses primarily on the accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No.
123(R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards (with limited exceptions). This
Statement is effective for fiscal years beginning after June 15, 2005;
therefore, the Company plans to adopt the new requirements in its first quarter
of fiscal 2006. The Company is currently evaluating the provisions of SFAS No.
123(R) and guidance in SAB 107 and has not yet determined the impact that SFAS
No. 123(R) and SAB 107 will have on its results of operations or financial
position.
6
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP FAS
No. 109-1"), "Application of FASB Statement No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004". FSP FAS No. 109-1 states that qualified
production activities should be accounted for as a special deduction under SFAS
No. 109 and not be treated as a rate reduction. Accordingly, the special
deduction has no effect on the Company's deferred tax assets and liabilities
existing as of the enactment date. The Company is currently evaluating the
impact of the American Jobs Creation Act of 2004, which will allow the Company
to claim a deduction from taxable income attributable to qualified domestic
production activities beginning in fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The Statement eliminates the exception of
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e. the future cash flows of the entity are not expected
to change significantly as a result of the exchange). The provisions of SFAS No.
153 are effective as of the first reporting period beginning after June 15,
2005. The Company does not expect the adoption of SFAS No. 153 to have a
material effect on its results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 changes the requirements for the accounting and reporting of a change in
accounting principle. The Statement eliminates the requirement in APB 20 to
include the cumulative effect of changes in accounting principle in the income
statement in the period of change, and instead requires that changes in
accounting principle be retrospectively applied unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The Statement applies to all voluntary changes in accounting principle.
SFAS No. 154 is effective for changes made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to
have a material effect on its results of operations or financial position.
2. ACQUISITIONS
In December 2004, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Connectronics, Corp. and its affiliate, Wiremax, Ltd.
(collectively "Connectronics"). The results of operations of Connectronics were
included in the Company's results of operations effective December 2004. Subject
to meeting certain earnings objectives during the first four years following the
acquisition, the Company may be obligated to pay additional consideration of up
to $3.8 million in the aggregate. Connectronics is engaged in the production of
specialty high voltage interconnection devices and wire primarily for defense
applications and other markets.
7
In February 2005, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Lumina Power, Inc. ("Lumina"). The results of operations of
Lumina were included in the Company's results of operations effective February
2005. Subject to meeting certain product line-related earnings objectives during
the fourth and fifth years following the acquisition, the Company may be
obligated to pay additional consideration after the fifth year, which is
currently estimated to total up to $2.3 million. Lumina is engaged in the design
and manufacture of power supplies for the laser industry.
The acquisitions of Connectronics and Lumina were accounted for using the
purchase method of accounting. The purchase price of each acquisition was paid
in cash using proceeds from the Company's revolving credit facility and was not
significant to the Company's consolidated financial statements. The Company's
pro forma consolidated operating results assuming Connectronics and Lumina had
been acquired as of the beginning of fiscal 2005 would not have been materially
different from the reported results. The allocation of the purchase price of
each acquisition to the tangible and identifiable intangible assets acquired and
liabilities assumed in these condensed consolidated financial statements is
preliminary until the Company obtains final information regarding their fair
values.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JULY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Accounts receivable $ 42,256,000 $ 37,380,000
Less: Allowance for doubtful accounts (590,000) (582,000)
---------------- ----------------
Accounts receivable, net $ 41,666,000 $ 36,798,000
================ ================
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
JULY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Costs incurred on uncompleted
contracts $ 16,232,000 $ 14,798,000
Estimated earnings 7,842,000 8,686,000
---------------- ----------------
24,074,000 23,484,000
Less: Billings to date (19,998,000) (19,663,000)
---------------- ----------------
$ 4,076,000 $ 3,821,000
================ ================
Included in accompanying condensed
consolidated balance sheets under
the following captions:
Accounts receivable, net (costs and
estimated earnings in excess of
billings) $ 4,127,000 $ 4,612,000
Accrued expenses and other current
liabilities (billings in excess of
costs and estimated earnings) (51,000) (791,000)
---------------- ----------------
$ 4,076,000 $ 3,821,000
================ ================
Changes in prior estimates did not have a material effect on net income or
diluted net income per share in the nine months and three months ended
July 31, 2005 and 2004.
8
INVENTORIES
JULY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Finished products $ 23,834,000 $ 19,838,000
Work in process 11,960,000 9,597,000
Materials, parts, assemblies and
supplies 23,079,000 18,585,000
---------------- ----------------
Total inventories $ 58,873,000 $ 48,020,000
================ ================
Inventories related to long-term contracts were not significant as of
July 31, 2005 and October 31, 2004.
During the second quarter of fiscal 2005, the Company reclassified certain
inventory (with a carrying value of $4.5 million) within one of its repair and
overhaul subsidiaries from finished products to materials, parts, assemblies and
supplies based on a review of how the inventory is utilized in its operations.
Inventory balances as of October 31, 2004 (also with a carrying value of
$4.5 million) have been reclassified to conform to the current year
presentation.
PROPERTY, PLANT AND EQUIPMENT
JULY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Land $ 2,963,000 $ 2,157,000
Buildings and improvements 21,805,000 20,007,000
Machinery, equipment and tooling 55,158,000 55,869,000
Construction in progress 2,927,000 2,239,000
---------------- ----------------
82,853,000 80,272,000
Less: Accumulated depreciation and
amortization (40,371,000) (39,714,000)
---------------- ----------------
Property, plant and equipment, net $ 42,482,000 $ 40,558,000
================ ================
In January 2005, the Company received proceeds of $3,520,000 from the sale
of a vacated building and associated land previously classified as held for
sale. The $3,468,000 carrying value of the property was included within other
assets in the Company's Consolidated Balance Sheet as of October 31, 2004.
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 nine months ended July 31, 2005 are as
follows:
SEGMENT
----------------------------------- CONSOLIDATED
FSG ETG TOTALS
---------------- ---------------- ----------------
Balances as of October 31, 2004 $ 120,288,000 $ 96,386,000 $ 216,674,000
Goodwill acquired during the period -- 15,049,000 15,049,000
Adjustments to goodwill 626,000 -- 626,000
---------------- ---------------- ----------------
Balances as of July 31, 2005 $ 120,914,000 $ 111,435,000 $ 232,349,000
================ ================ ================
9
The goodwill acquired during the period is a result of the acquisitions
described in Note 2, Acquisitions. Adjustments to goodwill consist primarily of
contingent purchase price payments to previous owners of acquired businesses.
Other intangible assets are recorded within other assets in the Company's
Condensed Consolidated Balance Sheets. Other intangible assets subject to
amortization consist primarily of non-compete agreements, licenses, and patents.
The gross carrying amount and accumulated amortization of other intangible
assets was $2,495,000 and $432,000, respectively, as of July 31, 2005.
Amortization expense of other intangible assets for the nine months and three
months ended July 31, 2005 was $183,000 and $65,000, respectively. Amortization
expense of other intangible assets for the fiscal year ending October 31, 2005
is estimated to be $250,000. Amortization expense for each of the next five
fiscal years is estimated to be $267,000 in fiscal 2006, $267,000 in fiscal
2007, $267,000 in fiscal 2008, $253,000 in fiscal 2009 and $223,000 in fiscal
2010.
5. LONG-TERM DEBT
Long-term debt consists of:
JULY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Borrowings under revolving credit facility $ 20,000,000 $ 16,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 106,000 149,000
---------------- ----------------
22,086,000 18,129,000
Less: Current maturities of long-term debt (58,000) (58,000)
---------------- ----------------
$ 22,028,000 $ 18,071,000
================ ================
As of July 31, 2005 and October 31, 2004, the Company had a total of $20
million and $16 million, respectively, borrowed under its revolving credit
facility at weighted average interest rates of 4.5% and 2.9%, respectively.
Effective April 2005, the Company entered into an amendment of its revolving
credit agreement, which extended the term by one year to May 2008. The revolving
credit facility contains both financial and non-financial covenants. As of July
31, 2005, the Company believes it is in compliance with all such covenants. In
August 2005, the Company increased amounts available under its revolving credit
facility and further extended the term when it entered into a $130 million
Amended and Restated Revolving Credit Agreement (see Note 14, Subsequent Event).
The interest rates on the Series 1988 industrial development revenue bonds
were 2.4% and 1.8% as of July 31, 2005 and October 31, 2004, respectively.
10
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the nine months ended
July 31, 2005 are as follows:
CLASS A CAPITAL IN
COMMON COMMON EXCESS OF RETAINED
STOCK STOCK PAR VALUE EARNINGS
------------- ------------- ------------- -------------
Balances as of October 31, 2004 $ 99,000 $ 143,000 $ 187,950,000 $ 59,210,000
Net income -- -- -- 16,187,000
Cash dividends ($.05 per share) -- -- -- (1,224,000)
Tax benefit from stock option exercises -- -- 2,826,000 --
Proceeds from stock option exercises 1,000 2,000 1,335,000 --
Other -- -- 3,000 (1,000)
------------- ------------- ------------- -------------
Balances as of July 31, 2005 $ 100,000 $ 145,000 $ 192,114,000 $ 74,172,000
============= ============= ============= =============
7. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended July 31, 2005 and 2004 includes
approximately $8.2 million and $6.8 million, respectively, of new product
research and development expenses. Cost of sales for the three months ended
July 31, 2005 and 2004 includes approximately $2.9 million and $2.3 million,
respectively, of new product research and development expenses. The expenses are
net of reimbursements pursuant to research and development cooperation and joint
venture agreements, which were not significant.
8. SALE OF INVESTMENT IN JOINT VENTURE
During the third quarter of fiscal 2005, the Company's HEICO Aerospace
Holdings Corp. subsidiary sold its investment in a 50%-owned joint venture that
was accounted for under the equity method and recognized a gain on the sale of
$276,000, which is included in interest and other income in the Company's
Condensed Consolidated Statements of Operations. The Company's investment in the
50%-owned joint venture and its share of its operating results were not
significant to the Company's consolidated financial statements.
9. LIFE INSURANCE PROCEEDS
In July 2004, the Company received $5.0 million in proceeds from the death
benefit of a key-person life insurance policy maintained by a subsidiary of the
Flight Support Group that provides repair and overhaul services. The life
insurance proceeds, which are non-taxable, increased net income (after the
minority interest's share of the income) for the nine months and three months
ended July 31, 2004 by $4.0 million, or $.16 per diluted share.
11
10. RESTRUCTURING EXPENSES
During the first quarter of fiscal 2005, the Company completed the
restructuring activities initiated in fiscal 2004 within certain subsidiaries of
the Flight Support Group that provide repair and overhaul services.
The following table details the restructuring activity that occurred in
fiscal 2005:
MANAGEMENT MOVING COSTS AND CONTRACT
HIRING/RELOCATION OTHER ASSOCIATED TERMINATION
RELATED EXPENSES EXPENSES COSTS TOTALS
----------------- ----------------- ----------------- -----------------
Balances as of October 31, 2004 $ 64,000 $ 111,000 $ 71,000 $ 246,000
Additional charges and reversals 69,000 (47,000) -- 22,000
Cash payments (133,000) (64,000) (71,000) (268,000)
----------------- ----------------- ----------------- -----------------
Balances as of July 31, 2005 $ -- $ -- $ -- $ --
================= ================= ================= =================
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the nine months and three months ended July 31:
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Numerator:
Net income $ 16,187,000 $ 15,464,000 $ 6,046,000 $ 8,115,000
Denominator:
Weighted average common shares outstanding-basic 24,425,235 23,986,315 24,500,372 24,165,595
Effect of dilutive stock options 1,855,460 1,723,529 1,868,148 1,589,860
------------- ------------- ------------- -------------
Weighted average common shares outstanding-diluted 26,280,695 25,709,844 26,368,520 25,755,455
============= ============= ============= =============
Net income per share- basic $ .66 $ .64 $ .25 $ .34
Net income per share- diluted $ .62 $ .60 $ .23 $ .32
Anti-dilutive stock options excluded 197,241 577,136 155,705 591,773
12
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 July 31, 2005 and 2004, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
----------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------- ------------- ------------- -------------
For the nine months ended July 31, 2005:
Net sales $ 138,462,000 $ 54,808,000 $ (147,000) $ 193,123,000
Depreciation and amortization 3,377,000 1,568,000 322,000 5,267,000
Operating income 26,921,000 10,501,000 (5,579,000) 31,843,000
Capital expenditures 5,967,000 811,000 26,000 6,804,000
For the nine months ended July 31, 2004:
Net sales $ 112,053,000 $ 42,825,000 $ (114,000) $ 154,764,000
Depreciation and amortization 3,501,000 1,294,000 331,000 5,126,000
Operating income 17,344,000 9,615,000 (4,344,000) 22,615,000
Capital expenditures 2,827,000 1,421,000 5,000 4,253,000
For the three months ended July 31, 2005:
Net sales $ 50,146,000 $ 19,047,000 $ (24,000) $ 69,169,000
Depreciation and amortization 1,125,000 533,000 106,000 1,764,000
Operating income 10,454,000 3,820,000 (2,525,000) 11,749,000
Capital expenditures 3,498,000 266,000 11,000 3,775,000
For the three months ended July 31, 2004:
Net sales $ 40,086,000 $ 15,743,000 $ (9,000) $ 55,820,000
Depreciation and amortization 1,156,000 450,000 105,000 1,711,000
Operating income 6,006,000 3,428,000 (1,564,000) 7,870,000
Capital expenditures 1,292,000 370,000 2,000 1,664,000
The total assets held by each operating segment as of July 31, 2005 and
October 31, 2004 is as follows:
SEGMENT OTHER,
----------------------------- PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
------------- ------------- ------------- -------------
Total assets as of July 31, 2005 $ 224,380,000 $ 158,590,000 $ 16,026,000 $ 398,996,000
Total assets as of October 31, 2004 212,615,000 136,860,000 14,780,000 364,255,000
13
13. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has arranged for standby letters of credit aggregating
$1.8 million to meet the security requirement of its insurance company for
potential workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through two letters of
credit aggregating $0.3 million, both expiring December 2005. These letters of
credit are supported by the Company's revolving credit facility. In addition,
the Company's industrial development revenue bonds are secured by a $2.0 million
letter of credit expiring April 2008 and a mortgage on the related properties
pledged as collateral.
Changes in the Company's product warranty liability for the nine months
ended July 31, 2005 and 2004, respectively, are as follows:
2005 2004
---------- ----------
Balances as of beginning of fiscal year $ 129,000 $ 633,000
Changes in estimate of warranty liability -- (491,000)
Accruals for warranties 430,000 121,000
Warranty claims settled (188,000) (110,000)
---------- ----------
Balances as of July 31, $ 371,000 $ 153,000
========== ==========
As part of the agreement to acquire an 80% interest in Sierra Microwave
Technology, Inc., the Company has the right to purchase the minority interests
in approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
As part of the agreement to purchase Connectronics (see Note 2,
Acquisitions), the Company may be obligated to pay additional purchase
consideration of up to $3.8 millions in the aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition.
As part of the agreement to purchase Lumina (see Note 2, Acquisitions), the
Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should Lumina meet certain product
line-related earnings objectives during the fourth and fifth years following the
acquisition.
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 or financial position.
14
14. SUBSEQUENT EVENT
In August 2005, the Company amended its revolving credit facility by
entering into a $130 million Amended and Restated Revolving Credit Agreement
("Credit Facility") with a bank syndicate, which expires in August 2010. The
Credit Facility includes a feature that will allow the Company to increase the
Credit Facility, at its option, up to an aggregate amount of $175 million
through increased commitments from existing lenders or the addition of new
lenders. The Credit Facility may be used for working capital and general
corporate needs of the Company, including letters of credit, capital
expenditures and to finance acquisitions (generally not in excess of an
aggregate total of $50 million over any trailing twelve-month period without the
requisite approval of the bank syndicate). Advances under the Credit Facility
accrue interest at the Company's choice of the "Base Rate" or the London
Interbank Offered Rate (LIBOR) plus applicable margins (based on the Company's
ratio of total funded debt to earnings before interest, taxes, depreciation and
amortization, minority interest, and non-cash charges or "leverage ratio"). The
Base Rate is the higher of (i) the Prime Rate or (ii) the Federal Funds rate
plus .50%. The applicable margins range from .75% to 2.00% for LIBOR based
borrowings and from .00% to .50% for Base Rate based borrowings. A fee is
charged on the amount of the unused commitment ranging from .20% to .50%
(depending on the Company's leverage ratio). The Credit Facility also includes a
$10 million swingline sublimit and a $15 million sublimit for letters of credit.
The Credit Facility is secured by substantially all assets other than real
property of the Company and its subsidiaries and contains covenants that
require, among other things, the maintenance of the leverage ratio and a fixed
charge coverage ratio as well as minimum net worth requirements.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion of our financial condition and results of operations should
be read in conjunction with our condensed consolidated financial statements and
notes thereto included herein. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates if
different assumptions were used or different events ultimately transpire.
The Company's critical accounting policies, some of which require
management to make judgments about matters that are inherently uncertain, are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the year ended
October 31, 2004.
The Company has two operating segments: the Flight Support Group (FSG),
consisting of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and its
subsidiaries, and the Electronic Technologies Group (ETG), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries.
16
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations, net
sales and operating income by segment, and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
----------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net sales $ 193,123,000 $ 154,764,000 $ 69,169,000 $ 55,820,000
------------- ------------- ------------- -------------
Cost of sales 121,799,000 100,898,000 43,170,000 36,204,000
Selling, general and administrative expenses 39,481,000 31,251,000 14,250,000 11,746,000
------------- ------------- ------------- -------------
Total operating costs and expenses 161,280,000 132,149,000 57,420,000 47,950,000
------------- ------------- ------------- -------------
Operating income $ 31,843,000 $ 22,615,000 $ 11,749,000 $ 7,870,000
============= ============= ============= =============
Net sales by segment:
Flight Support Group $ 138,462,000 $ 112,053,000 $ 50,146,000 $ 40,086,000
Electronic Technologies Group 54,808,000 42,825,000 19,047,000 15,743,000
Intersegment sales (147,000) (114,000) (24,000) (9,000)
------------- ------------- ------------- -------------
$ 193,123,000 $ 154,764,000 $ 69,169,000 $ 55,820,000
============= ============= ============= =============
Operating income by segment:
Flight Support Group $ 26,921,000 $ 17,344,000 $ 10,454,000 $ 6,006,000
Electronic Technologies Group 10,501,000 9,615,000 3,820,000 3,428,000
Other, primarily corporate (5,579,000) (4,344,000) (2,525,000) (1,564,000)
------------- ------------- ------------- -------------
$ 31,843,000 $ 22,615,000 $ 11,749,000 $ 7,870,000
============= ============= ============= =============
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.9% 34.8% 37.6% 35.1%
Selling, general and administrative expenses 20.4% 20.2% 20.6% 21.0%
Operating income 16.5% 14.6% 17.0% 14.1%
Interest expense 0.4% 0.6% 0.4% 0.4%
Interest and other income 0.2% 0.1% 0.5% 0.2%
Life insurance proceeds - 3.2% - 9.0%
Income tax expense 5.9% 4.8% 6.2% 4.6%
Minority interests' share of income 2.0% 2.5% 2.2% 3.6%
Net income 8.4% 10.0% 8.7% 14.5%
COMPARISON OF FIRST NINE MONTHS OF FISCAL 2005 TO FIRST NINE MONTHS OF
FISCAL 2004
Net Sales
Net sales for the first nine months of fiscal 2005 increased by 24.8% to
$193.1 million, as compared to net sales of $154.8 million for the first nine
months of fiscal 2004. The increase in net sales reflects an increase of
$26.4 million (a 23.6% increase) to $138.5 million in net sales within the FSG,
and an increase of $12.0 million (a 28.0% increase) to $54.8 million in net
sales within the ETG. The FSG's net sales increase primarily reflects improved
demand for its aftermarket
17
replacement parts and repair and overhaul services, which reflects continued
recovery within the commercial airline industry, as well as increased sales of
new products and services. The ETG's net sales increase reflects the
acquisitions of Connectronics and Lumina (see Note 2, Acquisitions, of the Notes
to Condensed Consolidated Financial Statements) and organic growth of
approximately 3% reflecting increased demand for certain products.
The Company's net sales for the first nine months of fiscal 2005 by market
approximated 67% from the commercial aviation industry, 21% from the defense and
space industries and 12% from other industrial markets including medical,
electronics and telecommunications. Net sales in fiscal 2004 by market
approximated 65% from the commercial aviation industry, 23% from the defense and
space industries and 12% from other markets.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 36.9% for the first nine
months of fiscal 2005 as compared to 34.8% for the first nine months of fiscal
2004, reflecting higher margins within the FSG offset by a decrease in the ETG
margin. The FSG's gross profit margin increase was due principally to improved
operating efficiencies within the FSG, lower new product research and
development expenses as a percentage of net sales and lower charges related to
excess or slow-moving inventory. The ETG's gross profit margin decrease was
primarily due to lower sales of higher margin products due principally to
technical delays impacting shipments of some higher margin products and softness
in the commercial satellite market and higher new product research and
development expenses as a percentage of net sales. Consolidated cost of sales
for the first nine months of fiscal 2005 and 2004 includes approximately
$8.2 million and $6.8 million, respectively, of new product research and
development expenses.
Selling, general and administrative (SG&A) expenses were $39.5 million and
$31.3 million for the first nine months of fiscal 2005 and fiscal 2004,
respectively. The increase in SG&A expenses was mainly due to higher operating
costs, principally personnel related, associated with the increase in net sales
discussed above, the acquisitions of Connectronics and Lumina and an increase in
Corporate expenses. Corporate expenses are up due to increased costs to comply
with the Sarbanes-Oxley Act of 2002 and higher accrued performance awards. As a
percentage of net sales, SG&A expenses increased slightly to 20.4% for the first
nine months of fiscal 2005 compared to 20.2% for the first nine months of fiscal
2004 reflecting the Company's efforts to control costs while increasing revenue.
During the third quarter of fiscal 2004, the Company incurred an aggregate
of $600,000 of restructuring expenses within the FSG including $350,000 of
inventory write-downs recorded in cost of sales and $250,000 of other expenses
recorded in SG&A expenses. The restructuring expenses decreased net income by
$301,000, or $.01 per diluted share, for the first nine months of fiscal 2004.
Operating Income
Operating income of $31.8 million for the first nine months of fiscal 2005
was 40.8% higher than operating income of $22.6 million for the first nine
months of fiscal 2004. The improvement
18
in operating income reflects a $9.6 million increase in operating income of the
FSG from $17.3 million for the first nine months of fiscal 2004 to $26.9 million
for the first nine months of fiscal 2005. Operating income of the ETG increased
$.9 million from $9.6 million for the first nine months of fiscal 2004 to
$10.5 million for the first nine months of fiscal 2005. These increases in
operating income were partially offset by the increase in Corporate expenses
discussed above. As a percentage of net sales, operating income increased from
14.6% in the first nine months of fiscal 2004 to 16.5% in the first nine months
of fiscal 2005. The increase in operating income as a percentage of net sales
reflects an increase in the FSG's operating income as a percentage of net sales
from 15.5% in the first nine months of fiscal 2004 to 19.4% in the first nine
months of fiscal 2005 and a decrease in the ETG's operating income as a
percentage of net sales from 22.5% in the first nine months of fiscal 2004 to
19.2% in the first nine months of fiscal 2005. The increase in the FSG's
operating income as a percentage of net sales reflects the improved gross
margins discussed previously. The decrease in the ETG's operating income as a
percentage of net sales reflects the decreased gross margins discussed
previously.
Interest Expense
Interest expense decreased to $785,000 in the first nine months of fiscal
2005 from $882,000 in the first nine months of fiscal 2004. The decrease was
principally due to a lower weighted average balance outstanding under the
revolving credit facility in the first nine months of fiscal 2005, partially
offset by higher interest rates.
Interest and Other Income
Interest and other income increased to $421,000 in the first nine months of
fiscal 2005 from $95,000 in the first nine months of fiscal 2004. The increase
was primarily due to the gain on the sale of a 50%-owned joint venture in the
third quarter of fiscal 2005 (see Note 8, Sale of Investment in Joint Venture,
of the Notes to Condensed Consolidated Financial Statements).
Life Insurance Proceeds
In the third quarter of fiscal 2004, the Company received $5.0 million in
proceeds from a key-person life insurance policy maintained by a subsidiary of
the FSG. The life insurance proceeds, which are non-taxable, increased net
income (after the minority interest's share of the income) for the first nine
months of fiscal 2004 by $4.0 million, or $.16 per diluted share.
Income Tax Expense
The Company's effective tax rate for the first nine months of fiscal 2005
increased to 36.3% from 27.8% for the first nine months of fiscal 2004. The
increase is principally due to the aforementioned $5.0 million in life insurance
proceeds received in fiscal 2004 that were excluded from the Company's income
that was subject to federal income taxes as well as higher state taxes
principally related to recent acquisitions and a lower amount of the minority
interests' share of income excluded from the Company's fiscal 2005 consolidated
income subject to federal income taxes.
19
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra Microwave Technology, LLC ("Sierra"). Minority interests' share
of income for the first nine months of fiscal 2005 approximated that of the
first nine months of fiscal 2004 as the higher operating income of the FSG was
offset by the minority interest's share of the aforementioned life insurance
proceeds received in fiscal 2004.
Net Income
The Company's net income was $16.2 million, or $.62 per diluted share, for
the first nine months of fiscal 2005 compared to $15.5 million, or $.60 per
diluted share, for the first nine months of fiscal 2004 reflecting the increased
operating income referenced above. The net impact of the life insurance proceeds
increased net income by $4.0 million, or $.16 per diluted share, for the first
nine months of fiscal 2004.
OUTLOOK
The Company reported increased sales and operating income in its two
business segments reflecting both organic growth and growth through
acquisitions.
Based on increasing product demand and the Company's continued success in
introducing new products and services, the Company continues to target growth in
fiscal 2005 sales and net income over fiscal 2004 results.
COMPARISON OF THIRD QUARTER OF FISCAL 2005 TO THIRD QUARTER OF FISCAL 2004
Net Sales
Net sales for the third quarter of fiscal 2005 increased by 23.9% to
$69.2 million, as compared to net sales of $55.8 million for the third quarter
of fiscal 2004. The increase in net sales reflects an increase of $10.1 million
(a 25.1% increase) to $50.1 million in net sales within the FSG, and an increase
of $3.3 million (a 21.0% increase) to $19.0 million in net sales within the ETG.
The FSG's net sales increase primarily reflects improved demand for its
aftermarket replacement parts and repair and overhaul services, which reflects
continued recovery within the commercial airline industry, as well as increased
sales of new products and services. The ETG's net sales increase principally
reflects the acquisitions of Connectronics and Lumina (see Note 2, Acquisitions,
of the Notes to Condensed Consolidated Financial Statements).
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 37.6% for the third quarter
of fiscal 2005 as compared to 35.1% for the third quarter of fiscal 2004,
reflecting higher margins within the FSG offset by a decrease in the ETG margin.
The FSG's gross profit margin increase was due principally to improved operating
efficiencies within the FSG, lower new product research and
20
development expenses as a percentage of net sales and lower charges related to
excess or slow-moving inventory. The ETG's gross profit margin decrease was
primarily due to lower sales of higher margin products due principally to
technical delays impacting shipments of some higher margin products and softness
in the commercial satellite market and higher new product research and
development expenses as a percentage of net sales. Consolidated cost of sales
for the third quarter of fiscal 2005 and 2004 includes approximately
$2.9 million and $2.3 million, respectively, of new product research and
development expenses.
SG&A expenses were $14.3 million and $11.7 million for the third quarter of
fiscal 2005 and fiscal 2004, respectively. The increase in SG&A expenses was
mainly due to higher operating costs, principally personnel related, associated
with the increase in net sales discussed above, the acquisitions of
Connectronics and Lumina and an increase in Corporate expenses, partially offset
by restructuring expenses incurred in the third quarter of fiscal 2004 as
discussed below. Corporate expenses are up due to increased costs to comply with
the Sarbanes-Oxley Act of 2002 and higher accrued performance awards. As a
percentage of net sales, SG&A expenses decreased to 20.6% for the third quarter
of fiscal 2005 compared to 21.0% for the third quarter of fiscal 2004. The
decrease in SG&A expenses as a percent of net sales is due principally to a
reduction in restructuring expenses discussed below.
During the third quarter of fiscal 2004, the Company incurred an aggregate
of $600,000 of restructuring expenses within the FSG including $350,000 of
inventory write-downs recorded in cost of sales and $250,000 of other expenses
recorded in SG&A expenses. The restructuring expenses decreased net income by
$301,000, or $.01 per diluted share, for the third quarter of fiscal 2004.
Operating Income
Operating income of $11.7 million for the third quarter of fiscal 2005 was
49.3% higher than operating income of $7.9 million for the third quarter of
fiscal 2004. The improvement in operating income reflects a $4.4 million
increase in operating income of the FSG from $6.0 million for the third quarter
of fiscal 2004 to $10.5 million for the third quarter of fiscal 2005. Operating
income of the ETG increased $.4 million from $3.4 million for the third quarter
of fiscal 2004 to $3.8 million for the third quarter of fiscal 2005. These
increases in operating income were partially offset by the increase in Corporate
expenses discussed above. As a percentage of net sales, operating income
increased from 14.1% in the third quarter of fiscal 2004 to 17.0% in the third
quarter of fiscal 2005. The increase in operating income as a percentage of net
sales reflects an increase in the FSG's operating income as a percentage of net
sales from 15.0% in the third quarter of fiscal 2004 to 20.8% in the third
quarter of fiscal 2005 and a decrease in the ETG's operating income as a
percentage of net sales from 21.8% in the third quarter of fiscal 2004 to 20.1%
in the third quarter of fiscal 2005. The increase in the FSG's operating income
as a percentage of net sales reflects the improved gross margins discussed
previously. The decrease in the ETG's operating income as a percentage of net
sales reflects the decreased gross margins discussed previously.
21
Interest Expense
Interest expense was $252,000 in the third quarter of fiscal 2005 versus
$250,000 in the third quarter of fiscal 2004 reflecting lower weighted average
balance outstanding under the revolving credit facility in the third quarter of
fiscal 2005 offset by higher interest rates.
Interest and Other Income
Interest and other income increased to $341,000 in the third quarter of
fiscal 2005 from $93,000 in the third quarter of fiscal 2004. The increase was
primarily due to the gain on the sale of a 50%-owned joint venture in the third
quarter of fiscal 2005 (see Note 8, Sale of Investment in Joint Venture, of the
Notes to Condensed Consolidated Financial Statements).
Life Insurance Proceeds
In the third quarter of fiscal 2004, the Company received $5.0 million in
proceeds from a key-person life insurance policy maintained by a subsidiary of
the FSG. The life insurance proceeds increased net income (after the minority
interest's share of the income) for the third quarter of fiscal 2004 by
$4.0 million, or $.16 per diluted share.
Income Tax Expense
The Company's effective tax rate for the third quarter of fiscal 2005
increased to 36.2% from 20.4% for the third quarter of fiscal 2004. The increase
is principally due to the aforementioned $5.0 million in life insurance proceeds
received in fiscal 2004 that were excluded from the Company's income that was
subject to federal income taxes as well as higher state taxes principally
related to recent acquisitions and a lower amount of the minority interests'
share of income excluded from the Company's fiscal 2005 consolidated income
subject to federal income taxes.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra. The decrease from the third quarter of fiscal 2004 to the third
quarter of fiscal 2005 was primarily attributable to the lower minority
interest's share of the income of the FSG, which included a $1.0 million share
of the aforementioned life insurance proceeds in the third quarter of
fiscal 2004.
Net Income
The Company's net income was $6.0 million, or $.23 per diluted share, for
the third quarter of fiscal 2005 compared to $8.1 million, or $.32 per diluted
share, for the third quarter of fiscal 2004 reflecting the increased operating
income referenced above. The net impact of the life insurance proceeds increased
net income by $4.0 million, or $.16 per diluted share, for the third quarter of
fiscal 2004.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities and
available borrowings under its revolving credit facility will be sufficient to
fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $21.0 million for the first
nine months of fiscal 2005, consisting primarily of net income of $16.2 million,
depreciation and amortization of $5.3 million, minority interests' share of
income of consolidated subsidiaries of $3.9 million, a deferred income tax
provision of $2.9 million, a tax benefit on stock option exercises of
$2.8 million and an increase in net operating assets of $10.1 million. The
increase in net operating assets (current assets used in operating activities
net of current liabilities) primarily reflects a higher investment in
inventories required to meet increased sales demand associated with new product
offerings, sales growth, and increased lead times on certain raw materials; an
increase in accounts receivable due to sales growth; and the payment of income
taxes that were accrued as of October 31, 2004, partially offset by higher
current liabilities associated with increased sales and purchases. Net cash
provided by operating activities decreased from $32.6 million for the first nine
months of fiscal 2004 principally as a result of the increase in net operating
assets referenced above.
Investing Activities
Net cash used in investing activities during the first nine months of
fiscal 2005 related primarily to acquisitions and related costs (principally
Connectronics and Lumina) of $19.0 million and capital expenditures totaling
$6.8 million, partially offset by proceeds of $3.5 million from the sale of a
building held for sale (see Note 3, Selected Financial Statement Information -
Property, Plant and Equipment).
Financing Activities
Net cash provided by financing activities during the first nine months of
fiscal 2005 primarily related to borrowings of $22.0 million on the Company's
revolving credit facility to fund the Connectronics and Lumina acquisitions, to
make required income tax payments and for other working capital needs, and
proceeds from stock option exercises of $1.3 million, partially offset by
repayments of $18.0 million on the Company's revolving credit facility and the
payment of $1.2 million in cash dividends on the Company's common stock.
In August 2005, the Company amended its revolving credit facility by
entering into a $130 million Amended and Restated Revolving Credit Agreement
("Credit Facility") with a bank
23
syndicate, which expires in August 2010. The Credit Facility includes a feature
that will allow the Company to increase the Credit Facility, at its option, up
to an aggregate amount of $175 million through increased commitments from
existing lenders or the addition of new lenders. The Credit Facility may be used
for working capital and general corporate needs of the Company, including
letters of credit, capital expenditures and to finance acquisitions (generally
not in excess of an aggregate total of $50 million over any trailing
twelve-month period without the requisite approval of the bank syndicate).
Advances under the Credit Facility accrue interest at the Company's choice of
the "Base Rate" or the London Interbank Offered Rate (LIBOR) plus applicable
margins (based on the Company's ratio of total funded debt to earnings before
interest, taxes, depreciation and amortization, minority interest, and non-cash
charges or "leverage ratio"). The Base Rate is the higher of (i) the Prime Rate
or (ii) the Federal Funds rate plus .50%. The applicable margins range from .75%
to 2.00% for LIBOR based borrowings and from .00% to .50% for Base Rate based
borrowings. A fee is charged on the amount of the unused commitment ranging from
..20% to .50% (depending on the Company's leverage ratio). The Credit Facility
also includes a $10 million swingline sublimit and a $15 million sublimit for
letters of credit. The Credit Facility is secured by substantially all assets
other than real property of the Company and its subsidiaries and contains
covenants that require, among other things, the maintenance of the leverage
ratio and a fixed charge coverage ratio as well as minimum net worth
requirements.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating
$1.8 million to meet the security requirement of its insurance company for
potential workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through two letters of
credit, aggregating $0.3 million, both expiring December 2005. These letters of
credit are supported by the Company's revolving credit facility. In addition,
the Company's industrial development revenue bonds are secured by a $2.0 million
letter of credit expiring April 2008 and a mortgage on the related properties
pledged as collateral.
As part of the agreement to acquire an 80% interest in Sierra Microwave
Technology, Inc., the Company has the right to purchase the minority interests
in approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
As part of the agreement to purchase Connectronics (See Note 2,
Acquisitions), the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in the aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition.
As part of the agreement to purchase Lumina (see Note 2, Acquisitions), the
Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should Lumina meet certain product
line-related earnings objectives during the fourth and fifth years following the
acquisition.
24
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"), "Inventory
Costs, an amendment of ARB No. 43, Chapter 4". SFAS No. 151 requires the
allocation of fixed production overhead costs be based on the normal capacity of
the production facilities and unallocated overhead costs recognized as an
expense in the period incurred. The Statement also clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the
provisions of SFAS No. 151, but does not currently believe the adoption of the
Statement will have a material effect on its results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
This Statement revises FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees". In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 ("SAB 107") to provide public companies with
its interpretive guidance in applying the provisions of SFAS No. 123(R).
SFAS No. 123(R) focuses primarily on the accounting for transactions in which an
entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires companies to recognize in the statement of operations
the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards (with limited
exceptions). This Statement is effective for fiscal years beginning after June
15, 2005; therefore, the Company plans to adopt the new requirements in its
first quarter of fiscal 2006. The Company is currently evaluating the provisions
of SFAS No. 123(R) and guidance in SAB 107 and has not yet determined the impact
that SFAS No. 123(R) and SAB 107 will have on its results of operations or
financial position.
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP FAS
No. 109-1"), "Application of FASB Statement No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004". FSP FAS No. 109-1 states that qualified
production activities should be accounted for as a special deduction under
SFAS No. 109 and not be treated as a rate reduction. Accordingly, the special
deduction has no effect on the Company's deferred tax assets and liabilities
existing as of the enactment date. The Company is currently evaluating the
impact of the American Jobs Creation Act of 2004, which will allow the Company
to claim a deduction from taxable income attributable to qualified domestic
production activities beginning in fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The Statement eliminates the exception of
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e. the future cash flows of the entity are not expected
to change significantly as a result of the exchange). The provisions of
SFAS No. 153 are effective as of the first reporting period beginning after June
15, 2005. The Company does not expect the adoption of SFAS No. 153 to have a
material effect on its results of operations or financial position.
25
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS No. 154 changes the requirements for the accounting and reporting of a
change in accounting principle. The Statement eliminates the requirement in APB
20 to include the cumulative effect of changes in accounting principle in the
income statement in the period of change, and instead requires that changes in
accounting principle be retrospectively applied unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The Statement applies to all voluntary changes in accounting principle.
SFAS No. 154 is effective for changes made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to
have a material effect on its results of operations or financial position.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained herein that are not clearly historical in nature may be
forward-looking and the words "believe," "expect," "estimate" and similar
expressions are generally intended to identify forward looking statements. Any
forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls,
concerning our operations, economic performance and financial condition are
subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed in or implied by those statements. Factors that could cause such
differences, but are not limited to: lower demand for commercial air travel or
airline fleet changes, which could cause lower demand for our goods and
services; product specification costs and requirements, which could cause an
increase to our costs to complete contracts; governmental and regulatory
demands, export policies and restrictions, reductions in defense or space
spending by U.S. and/or foreign customers, or competition from existing and new
competitors, which could reduce our sales; HEICO's ability to introduce new
products and product pricing levels, which could reduce our sales or sales
growth; HEICO's ability to make acquisitions and achieve operating synergies
from acquired businesses, customer credit risk, interest rates and economic
conditions within and outside of the aviation, defense, space and electronics
industries, which could negatively impact our costs and revenues; and HEICO's
ability to maintain effective internal controls, which could adversely affect
our business and the market price of our common stock. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the outstanding debt balance as of July 31, 2005, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $94,000 on an annual basis.
27
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
28
PART II. OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity securities
or repurchase any of its equity securities during the first nine months of
fiscal 2005.
Item 6. EXHIBITS
EXHIBIT DESCRIPTION
------- ----------------------------------------------------------
10.1 First Amendment, effective as of April 13, 2005, to the
Revolving Credit Agreement among HEICO Corporation, as
Borrower, the lenders from time to time party hereto, and
SunTrust Bank, as Administrative Agent. *
10.2 Amended and Restated Revolving Credit Agreement, dated as
of August 4, 2005, among HEICO Corporation, as Borrower,
the lenders from time to time party hereto and SunTrust
Bank, as Administrative Agent; Wachovia Bank, National
Association as Syndication Agent; and HSBC Bank USA, as
Documentation Agent, is incorporated by reference to
Exhibit 10.1 to the Form 8-K filed on August 8, 2005.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. *
32.1 Section 1350 Certification of Chief Executive Officer. **
32.2 Section 1350 Certification of Chief Financial Officer. **
------------------
* Filed herewith.
** Furnished herewith.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: August 31, 2005 By: /s/ THOMAS S. IRWIN
---------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
30
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- ----------------------------------------------------------
10.1 First Amendment, effective as of April 13, 2005, to the
Revolving Credit Agreement among HEICO Corporation, as
Borrower, the lenders from time to time party hereto, and
SunTrust Bank, as Administrative Agent.
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.
31