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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2005 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to________________
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
Class A Common Stock, $.01 par value per share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
Rights to Purchase Series B Junior Participating Preferred Stock
Rights to Purchase Series C Junior Participating Preferred Stock
(Title of class)
Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant was $361,562,000 based on the closing price
of Common Stock and Class A Common Stock as of April 30, 2005 (the last business
day of the registrant's most recently completed second fiscal quarter) as
reported by the New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of
common stock, as of January 6, 2006:
Common Stock, $.01 par value 10,151,603 shares
Class A Common Stock, $.01 par value 14,622,522 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2006 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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HEICO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 11
Item 3. Legal Proceedings....................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................................... 12
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities................................................................ 13
Item 6. Selected Financial Data................................................................. 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 30
Item 8. Financial Statements and Supplementary Data............................................. 31
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.... 65
Item 9A. Controls and Procedures................................................................. 65
Item 9B. Other Information....................................................................... 65
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 66
Item 11. Executive Compensation.................................................................. 66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters............................................................................. 66
Item 13. Certain Relationships and Related Transactions.......................................... 66
Item 14. Principal Accountant Fees and Services.................................................. 66
PART IV
Item 15. Exhibits and Financial Statement Schedules.............................................. 67
SIGNATURES............................................................................................. 72
PART I
ITEM 1. BUSINESS
THE COMPANY
HEICO Corporation through its subsidiaries (collectively, "HEICO",
"we", "us", "our" or "the Company") believes it is the world's largest
manufacturer of Federal Aviation Administration (FAA)-approved jet engine and
aircraft component replacement parts, other than the original equipment
manufacturers (OEMs), and their subcontractors. HEICO also believes it is a
leading manufacturer of various types of electronic equipment for the aviation,
defense, space, medical, telecommunications and electronics industries.
Our business is comprised of two operating segments:
The Flight Support Group. Our Flight Support Group, consisting of HEICO
Aerospace Holdings Corp. (HEICO Aerospace) and its subsidiaries, accounted for
69%, 71% and 73% of our net sales in fiscal 2005, 2004 and 2003, respectively.
This Group uses proprietary technology to design and manufacture jet engine and
aircraft component replacement parts for sale at lower prices than those
manufactured by OEMs. These parts are approved by the FAA and are the functional
equivalent of parts sold by OEMs. In addition, the Flight Support Group repairs,
refurbishes and overhauls jet engine and aircraft components for domestic and
foreign commercial air carriers and aircraft repair companies, and manufactures
thermal insulation products and other component parts primarily for aerospace,
defense and commercial applications.
The Flight Support Group competes with the leading industry OEMs and,
to a lesser extent, with a number of smaller, independent parts distributors.
Historically, the three principal jet engine OEMs, General Electric (including
CFM International), Pratt & Whitney, and Rolls Royce, have been the sole source
of substantially all jet engine replacement parts for their jet engines. Other
OEMs have been the sole source of replacement parts for their aircraft component
parts. While we believe that we currently supply less than 2% of the market for
jet engine and aircraft component replacement parts, we have consistently been
adding new products to our line and currently hold Parts Manufacturer Approvals,
which we refer to as "PMAs," for over 4,000 jet engine and aircraft component
replacement parts.
We believe that, based on our competitive pricing, reputation for high
quality, short lead time requirements, strong relationships with domestic and
foreign commercial air carriers and repair stations (companies that overhaul
aircraft engines and/or components), strategic relationships with Lufthansa and
other major airlines and successful track record of receiving PMAs from the FAA,
we are uniquely positioned to continue to increase our product lines and gain
market share.
The Electronic Technologies Group. Our Electronic Technologies Group,
consisting of HEICO Electronic Technologies Corp. and its subsidiaries,
accounted for 31%, 29% and 27% of our net sales in fiscal 2005, 2004 and 2003,
respectively. Through our Electronic Technologies Group, which derived
approximately 48% of its sales in fiscal 2005 from the sale of products and
services to U.S. and foreign military agencies, we design, manufacture and sell
various types of electronic, microwave and electro-optical products, including
infrared simulation and test equipment, laser rangefinder receivers, electrical
power supplies, back-up power supplies, electromagnetic interference and radio
frequency interference shielding, high power capacitor charging power supplies,
amplifiers, photodetectors, amplifier modules, flash lamp drivers, laser diode
drivers, arc lamp power supplies, custom power supply designs, cable assemblies
and high voltage interconnection devices and wire. In addition, the Electronic
Technologies Group also repairs and overhauls inertial
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navigation systems and other avionics, instruments, and components for
commercial, military and business aircraft operators.
In October 1997, we entered into a strategic alliance with Lufthansa.
Lufthansa is the world's largest independent provider of engineering and
maintenance services for aircraft components and jet engines and supports over
200 airlines, governments and other customers. As part of this strategic
alliance, Lufthansa has invested approximately $50 million in our company, to
acquire and maintain a 20% minority interest in HEICO Aerospace, and to
partially fund the accelerated development of additional FAA-approved
replacement parts for jet engines and aircraft components over the subsequent
four years pursuant to a research and development cooperation agreement. This
strategic alliance has enabled us to expand domestically and internationally by
enhancing our ability to (i) identify key jet engine and aircraft component
replacement parts with significant profit potential by utilizing Lufthansa's
extensive operating data on engine and component parts; (ii) introduce those
parts throughout the world in an efficient manner due to Lufthansa's testing and
diagnostic resources; and (iii) broaden our customer base by capitalizing on
Lufthansa's established relationships and alliances within the airline industry.
In March 2001, we entered into a joint venture with American Airlines,
one of the world's largest airlines, to develop, design and sell FAA-approved
jet engine and aircraft component replacement parts through HEICO Aerospace. The
joint venture is 16% owned by American Airlines. American Airlines and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
support on a worldwide basis. During fiscal years 2002 through 2004, we entered
into additional strategic relationships with other leading airlines such as
United Airlines (May 2002), Delta Air Lines (February 2003), Air Canada (March
2003) and Japan Airlines (March 2004). These relationships accelerate HEICO's
efforts in developing a broad range of jet engine and aircraft component
replacement parts for FAA approval. Each of the aforementioned airlines purchase
these newly developed parts, and most of HEICO Aerospace's current FAA-approved
parts product line, on an exclusive basis from HEICO Aerospace.
We have continuously operated in the aerospace industry for more than
40 years. Since assuming control in 1990, our current management has achieved
significant sales and profit growth through a broadened line of product
offerings, an expanded customer base, increased research and development
expenditures, and the completion of a number of acquisitions. As a result of
internal growth and acquisitions, our net sales have grown from $32.3 million in
fiscal 1990 to $269.6 million in fiscal 2005, a compound annual growth rate of
approximately 15.2%. During the same period, we improved our income from a net
loss of $0.5 million to a net income of $22.8 million.
FLIGHT SUPPORT GROUP
Our Flight Support Group is headquartered in Hollywood, Florida and
designs, engineers, manufactures, repairs and overhauls jet engine and aircraft
component replacement parts such as combustion chambers, compressor blades,
vanes, seals and various other engine and aircraft parts. The Flight Support
Group also manufactures specialty aviation and defense components as a
subcontractor. The Flight Support Group serves a broad spectrum of the aviation
industry, including (i) commercial airlines and air cargo carriers; (ii) repair
and overhaul facilities; (iii) OEMs; and (iv) U.S. and foreign governments.
Jet engine and aircraft component replacement parts can be categorized
by their ongoing ability to be repaired and returned to service. The general
categories (in all of which we participate) are as follows: (i) rotable; (ii)
repairable; and (iii) expendable. A rotable is a part which is removed
periodically as dictated by an operator's maintenance procedures or on an as
needed basis and is typically repaired or overhauled and re-used an indefinite
number of times. An important subset of rotables is "life limited"
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parts. A life limited rotable has a designated number of allowable flight hours
and/or cycles (one take-off and landing generally constitutes one cycle) after
which it is rendered unusable. A repairable is similar to a rotable except that
it can only be repaired a limited number of times before it must be discarded.
An expendable is generally a part which is used and not thereafter repaired for
further use.
Jet engine and aircraft component replacement parts are classified
within the industry as (i) factory-new; (ii) new surplus; (iii) overhauled; (iv)
repairable; and (v) as removed. A factory-new or new surplus part is one that
has never been installed or used. Factory-new parts are purchased from
FAA-approved manufacturers (such as HEICO or OEMs) or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part is one that has
been completely repaired and inspected by a licensed repair facility such as
ours. An aircraft spare part is classified as "repairable" if it can be repaired
by a licensed repair facility under applicable regulations. A part may also be
classified as "repairable" if it can be removed by the operator from an aircraft
or jet engine while operating under an approved maintenance program and is
airworthy and meets any manufacturer or time and cycle restrictions applicable
to the part. A "factory-new," "new surplus," "overhauled" or "repairable" part
designation indicates that the part can be immediately utilized on an aircraft.
A part in "as removed" condition requires inspection and possibly functional
testing, repair or overhaul by a licensed facility prior to being returned to
service in an aircraft.
Factory-New Jet Engine and Aircraft Component Replacement Parts. The
principal business of the Flight Support Group is the research and development,
design, manufacture and sale of FAA-approved replacement parts that are sold to
domestic and foreign commercial air carriers and aircraft repair and overhaul
companies. Our principal competitors are Pratt & Whitney, a division of United
Technologies Corporation and General Electric Company, including its CFM
International joint venture. The Flight Support Group's factory-new replacement
parts include various jet engine and aircraft component replacement parts. A key
element of our growth strategy is the continued design and development of an
increasing number of Parts Manufacturer Approval (PMA) replacement parts in
order to further penetrate our existing customer base and obtain new customers.
We select the jet engine and aircraft component replacement parts to design and
manufacture through a selection process which analyzes industry information to
determine which replacement parts are suitable candidates. As part of
Lufthansa's investment in the Flight Support Group, Lufthansa has the right to
select 50% of the parts for which we will seek PMAs, provided that such parts
are technologically and economically feasible and substantially comparable with
the profitability of our other PMA parts.
Repair and Overhaul Services. The Flight Support Group provides repair
and overhaul services on selected jet engine and aircraft component parts, as
well as on avionics, instruments, composites and flight surfaces of commercial
aircraft. The Flight Support Group also provides repair and overhaul services to
military aircraft operators and aircraft repair and overhaul companies. Our
repair and overhaul operations require a high level of expertise, advanced
technology and sophisticated equipment. Services include the repair,
refurbishment and overhaul of numerous accessories and parts mounted on gas
turbine engines and airframes. Components overhauled include fuel pumps,
generators, fuel controls, pneumatic valves, starters and actuators, turbo
compressors and constant speed drives, hydraulic pumps, valves and actuators,
composite flight controls, electro-mechanical equipment and auxiliary power unit
accessories.
Manufacture of Specialty Aircraft/Defense Related Parts and
Subcontracting for OEMs. The Flight Support Group manufactures thermal
insulation blankets primarily for aerospace, defense and commercial
applications. The Flight Support Group also manufactures specialty components
for sale as a subcontractor to OEMs and the U.S. government.
FAA Approvals and Product Design. Non-OEM manufacturers of jet engine
replacement parts must receive a Parts Manufacturer Approval (PMA) from the FAA
to sell the replacement part. The PMA
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approval process includes the submission of sample parts, drawings and testing
data to one of the FAA's Aircraft Certification Offices where the submitted data
are analyzed. We believe that an applicant's ability to successfully complete
the PMA process is limited by several factors, including (i) the agency's
confidence level in the applicant; (ii) the complexity of the part; (iii) the
volume of PMAs being filed; and (iv) the resources available to the FAA. We also
believe that companies such as HEICO that have demonstrated their manufacturing
capabilities and established favorable track records with the FAA generally
receive a faster turnaround time in the processing of PMA applications. Finally,
we believe that the PMA process creates a significant barrier to entry in this
market niche through both its technical demands and its limits on the rate at
which competitors can bring products to market.
As part of our growth strategy, we have continued to increase our
research and development activities. Research and development expenditures by
the Flight Support Group which were approximately $300,000 in fiscal 1991,
increased to approximately $7.8 million in fiscal 2005, $7.8 million in fiscal
2004 and $7.0 million in 2003. We believe that our Flight Support Group's
research and development capabilities are a significant component of our
historical success and an integral part of our growth strategy.
Our expanded research and development activities have included
development of more complex jet engine and aircraft component replacement parts.
We now have approximately 2,800 parts approved by the FAA that are actively
being marketed and have cumulative FAA approvals for over 4,000 parts. We
believe the development and subsequent sale of PMA parts represents a
significant long-term market opportunity. In fiscal 2005, the FAA granted us
PMAs for approximately 300 new parts; however, no assurance can be given that
the FAA will continue to grant PMAs or that we will achieve acceptable levels of
net sales and gross profits on such parts in the future.
We benefit from our proprietary rights relating to certain design,
engineering and manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our unique manufacturing capabilities are required by the
customer's specifications or designs, thereby necessitating reliance on us for
production of such designed products.
We have no patents for the proprietary techniques, including software
and manufacturing expertise, we have developed to manufacture jet engine and
aircraft component replacement parts and instead, we rely on trade secret
protection. Although our proprietary techniques and software and manufacturing
expertise are subject to misappropriation or obsolescence, we believe that we
take appropriate measures to prevent misappropriation or obsolescence from
occurring by developing improved methods and processes and new techniques, which
we will continue on an ongoing basis as dictated by the technological needs of
our business.
In November 2005, the Flight Support Group established a new market
presence in the distribution of OEM aftermarket products through the acquisition
of a leading distributor and designer of FAA-Approved hydraulic, pneumatic,
mechanical and electro-mechanical components for the commercial, regional and
general aviation markets. See Note 19, Subsequent Events, of the Notes to
Consolidated Financial Statements.
ELECTRONIC TECHNOLOGIES GROUP
Much of our Electronic Technologies Group's strategy is centered around
producing equipment that helps the U.S. military and allied foreign military
agencies conduct stand-off operations from greater distances. Our activities in
this regard are focused on products that are placed in airborne, vehicle-based
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or handheld targeting systems as well as in providing equipment used to develop,
test and calibrate such systems.
Electro-Optical Infrared Simulation and Test Equipment. Our Electronic
Technologies Group believes it is a leading international designer and
manufacturer of niche state-of-the-art simulation, testing and calibration
equipment used in the development of missile seeking technology, airborne
targeting and reconnaissance systems, shipboard targeting and reconnaissance
systems, space-based sensors as well as ground vehicle-based systems. These
products include infrared scene projector equipment, such as our MIRAGE IR Scene
Simulator, high precision blackbody sources, software and integrated calibration
systems.
Simulation equipment allows the U.S. government and allied foreign
military to save money on missile testing, as it allows infrared-based missiles
to be tested on a multi-axis, rotating table, instead of requiring the launch of
a complete missile. In addition, several large military prime contractors have
elected to purchase such equipment from us instead of maintaining internal staff
to do so because we can offer a more cost-effective solution. Our customers
include major U.S. Department of Defense weapons laboratories as well as defense
prime contractors such as Lockheed Martin, Northrop Grumman and Boeing.
Electro-Optical Laser Products. Our Electronic Technologies Group
believes it is a leading designer and maker of Laser Rangefinder Receivers and
other photodetectors used in airborne, vehicular and handheld targeting systems
manufactured by major prime military contractors, such as Northrop Grumman and
Lockheed Martin. Most of our Rangefinder Receiver product offering consists of
complex and patented products which detect reflected light from laser targeting
systems and allow the systems to confirm target accuracy and calculate target
distances prior to discharging a weapon system. These products are also used in
laser eye surgery systems for tracking ocular movement.
Electro-Optical, Microwave and Other Power Equipment. We produce power
supplies, amplifiers and flash lamp drivers used in laser systems for military,
medical and other applications that are sometimes utilized with our Rangefinder
Receivers. We also produce emergency back-up power supplies and batteries used
on commercial aircraft and business jets for services such as emergency exit
lighting, emergency fuel shut-off, power door assists, cockpit voice recorders
and flight computers. We offer custom or standard designs that solve challenging
OEM requirements and meet stringent agency safety and emissions requirements.
Our power electronics products include capacitor charger power supplies, laser
diode drivers, arc lamp power supplies and custom power supply designs.
Our microwave products are used in satellites and electronic warfare
systems. These products, which include isolators, bias tees, circulators,
latching ferrite switches and waveguide adapters are used in satellites to
control or direct energy according to operator needs. As satellites are
frequently used as sensors for stand-off warfare, we believe this product line
further supports our goal of increasing our activity in the stand-off market. We
believe we are a leading supplier of the niche products which we design and make
for this market, a market that includes commercial satellites. Our customers for
these products include satellite makers, such as Boeing, Northrop Grumman and
Thales.
Guidance and Navigation Repair. Our Electronic Technologies Group
repairs and overhauls inertial guidance and navigation systems, as well as their
subcomponents and other instruments, utilized in military and commercial
aircraft. These systems inform aircraft of their locations at all times and
allow them to navigate. Our customers include the United States government,
foreign military agencies, as well as both domestic and foreign commercial
airlines.
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Electromagnetic and Radio Interference Shielding. We design and make
shielding used to prevent electromagnetic energy and radio frequencies from
interfering with computers, telecommunication devices, avionics, weapons systems
and other electronic equipment. Our products include a patented line of
shielding applied directly to circuit boards and a line of gasket-type shielding
applied to computers and other electronic equipment. Our customers consist
essentially of medical, electronic, telecommunication and defense equipment
producers.
High Voltage Interconnection Devices. We design and manufacture high
and very high voltage interconnection devices, cable assemblies and wire for the
medical equipment, defense and other industrial markets. Among others, our
products are utilized in aircraft missile defense, fighter pilot helmet
displays, avionic systems, medical applications, wireless communications, as
well as industrial applications including high voltage test equipment and
underwater monitoring systems.
In November 2005, we expanded our capabilities within the Electronic
Technologies Group by an acquisition of a company specializing in the design,
manufacture and sale of advanced high-technology, high-speed interface products
utilized in homeland security, defense, medical, research, astronomical and
other applications across numerous industries. See Note 19, Subsequent Events,
of the Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
See Note 16, Operating Segments, of the Notes to Consolidated Financial
Statements for financial information by operating segment and information about
foreign and domestic operations as well as export sales.
SALES, MARKETING AND CUSTOMERS
Each of our operating segments independently conducts sales and
marketing efforts directed at their respective customers and industries and, in
some cases, collaborates with other operating divisions and subsidiaries within
its group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association, which we refer to as AIA, the leading trade association
representing the nation's manufacturers of commercial, military and business
aircraft, aircraft engines and related components and equipment. Due in large
part to our established industry presence, we enjoy strong customer relations,
name recognition and repeat business.
We sell our products to a broad customer base consisting of domestic
and foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 24% of total net sales during the year
ended October 31, 2005.
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COMPETITION
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing of replacement parts as a result of lower labor costs and other factors.
Our jet engine and aircraft component replacement parts business
competes primarily with Pratt & Whitney and General Electric. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the Flight Support Group, we compete with both the leading jet engine OEMs and a
large number of machining, fabrication and repair companies, some of which have
greater financial and other resources than we do. Competition is based mainly on
price, product performance, service and technical capability.
Competition for the repair and overhaul of jet engine and aircraft
components comes from three principal sources: OEMs, major commercial airlines
and other independent service companies. Some of these competitors have greater
financial and other resources than we do. Some major commercial airlines own and
operate their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own aircraft components and for third
parties. OEMs also maintain service centers that provide repair and overhaul
services for the components they manufacture. Other independent service
organizations also compete for the repair and overhaul business of other users
of aircraft components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
Our Electronic Technologies Group competes with several large and small
domestic and foreign competitors, some of which have greater financial and other
resources than we do. The market for our electronic products are niche markets
with several competitors with competition based mainly on design, technology,
quality, price and customer satisfaction.
RAW MATERIALS
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel,
pre-plated phosphor bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
BACKLOG
Our total backlog of unshipped orders was $61.3 million as of October
31, 2005 compared to $45.2 million as of October 31, 2004. The Flight Support
Group's backlog of unshipped orders was $22.8 million as of October 31, 2005 as
compared to $16.3 million as of October 31, 2004. This backlog excludes
forecasted shipments for certain contracts of the Flight Support Group pursuant
to which customers provide only estimated annual usage and not firm purchase
orders. The increase in the Flight Support Group's backlog reflects improved
demand for its aftermarket replacement parts and repair and overhaul services,
as well as orders of new products and services. Our backlogs within the Flight
Support Group are typically short-lead in nature with many product orders being
received within the month of shipment. The Electronic Technologies Group's
backlog of unshipped orders was $38.5 million as of October 31, 2005 as compared
to $28.9 million as of October 31, 2004. The increase in the Electronic
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Technologies Group's backlog is primarily related to additional backlogs from
fiscal 2005 acquisitions. Substantially the entire backlog of orders as of
October 31, 2005 is expected to be delivered during fiscal 2006.
GOVERNMENT REGULATION
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aviation equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and equipment are prescribed by regulatory authorities
and can be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us.
There has been no material adverse effect to our consolidated financial
statements as a result of these government regulations.
ENVIRONMENTAL REGULATION
Our operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the Environmental Protection Agency. Among
other matters, these regulatory authorities impose requirements that regulate
the operation, handling, transportation, and disposal of hazardous materials,
the health and safety of workers, and require us to obtain and maintain licenses
and permits in connection with our operations. This extensive regulatory
framework imposes significant compliance burdens and risks on us.
Notwithstanding these burdens, we believe that we are in material compliance
with all federal, state, and local laws and regulations governing our
operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 mandates general requirements for safe workplaces for all
employees and established the Occupational Safety and Health Administration
(OSHA) in the Department of Labor. In particular, OSHA provides special
procedures and measures for the handling of some hazardous and toxic substances.
In addition, specific safety standards have been promulgated for workplaces
engaged in the treatment, disposal or storage of hazardous waste. Requirements
under state law, in some circumstances, may mandate additional measures for
facilities handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA's health and safety
requirements.
INSURANCE
We are a named insured under policies which include the following
coverage: (i) product liability, including grounding; (ii) personal property,
inventory and business income at our facilities;
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(iii) general liability coverage; (iv) employee benefit liability; (v)
international liability and automobile liability; (vi) umbrella liability
coverage; and (vii) various other activities or items subject to certain limits
and deductibles. We believe that our insurance coverage is adequate to insure
against the various liability risks of our business.
EMPLOYEES
As of October 31, 2005, we had 1,556 full-time and part-time employees,
of whom 1,026 were in the Flight Support Group, 511 were in the Electronic
Technologies Group, and 19 were Corporate. None of our employees is represented
by a union. We believe that we have good relations with our employees.
AVAILABLE INFORMATION
Our Internet web site address is http://www.heico.com. We make
available free of charge through our web site our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission. The information on or obtainable through our web site is
not incorporated into this annual report on Form 10-K.
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller and other persons performing similar functions. The code of ethics is
located on our web site at http://www.heico.com. Any amendments to or waivers
from a provision of this code of ethics will be posted on the web site. Also
located on the web site is our Corporate Governance Guidelines, Finance/Audit
Committee Charter, Nominating & Corporate Governance Committee Charter and
Compensation Committee Charter.
Copies of the above referenced materials will be made available, free
of charge, upon written request to the Corporate Secretary at the Company's
headquarters.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are elected by the Board of Directors at the
first meeting following the annual meeting of shareholders and serve at the
discretion of the Board. The following table sets forth the names, ages of, and
positions and offices held by, our executive officers as of December 31, 2005:
DIRECTOR
NAME AGE POSITION(S) SINCE
- -------------------- --- ---------------------------------------------------- --------
Laurans A. Mendelson 67 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 59 Executive Vice President and Chief Financial -
Officer
Eric A. Mendelson 40 Executive Vice President and Director; President and 1992
Chief Executive Officer of HEICO Aerospace Holdings
Corp.
Victor H. Mendelson 38 Executive Vice President, General Counsel and 1996
Director; President and Chief Executive Officer
of HEICO Electronic Technologies Corp.
James L. Reum 74 Executive Vice President of HEICO -
Aerospace Holdings Corp.
9
Laurans A. Mendelson has served as Chairman of the Board of the Company
since December 1990. He has also served as Chief Executive Officer of the
Company since February 1990 and President of the Company since September 1991.
HEICO Corporation is a member of the Aerospace Industries Association (AIA) in
Washington D.C., and Mr. Mendelson frequently serves on the Board of Governors
of AIA. He is also Chairman of the Board of Trustees, member of the Executive
Committee and member of the Society of Mt. Sinai Founders of Mt. Sinai Medical
Center in Miami Beach, Florida. In addition, Mr. Mendelson served as a Trustee
of Columbia University in The City of New York from 1995 to 2001, as well as
Chairman of the Trustees' Audit Committee. Mr. Mendelson currently serves as
Trustee Emeritus of Columbia University and is a member of the Trustees' Finance
and Audit Committees. Mr. Mendelson is a Certified Public Accountant. Laurans A.
Mendelson is the father of Eric Mendelson and Victor Mendelson.
Thomas S. Irwin has served as Executive Vice President and Chief
Financial Officer of the Company since September 1991 and served as Senior Vice
President of the Company from 1986 to 1991 and Vice President and Treasurer from
1982 to 1986. Mr. Irwin is a Certified Public Accountant and a Trustee of the
Greater Hollywood Chamber of Commerce.
Eric A. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1992 to 2001, and has been
President and Chief Executive Officer of HEICO Aerospace, a subsidiary of the
Company, since its formation in 1997 and President of HEICO Aerospace
Corporation since 1993. He also served as President of HEICO's Jet Avion
Corporation, a wholly owned subsidiary of HEICO Aerospace, from 1993 to 1996 and
served as Jet Avion's Executive Vice President and Chief Operating Officer from
1991 to 1993. From 1990 to 1991, Mr. Mendelson was Director of Planning and
Operations of the Company. Mr. Mendelson is a co-founder, and, since 1987, has
been Managing Director of Mendelson International Corporation, a private
investment company, which is a shareholder of HEICO. Eric Mendelson is the son
of Laurans Mendelson and the brother of Victor Mendelson.
Victor H. Mendelson has served as Executive Vice President of the
Company since 2001, Vice President of the Company from 1996 to 2001, as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of the Company, since September 1996 and as General Counsel of the
Company since 1993. He served as Executive Vice President of the Company's
former MediTek Health Corporation subsidiary from 1994 and its Chief Operating
Officer from 1995 until its sale in July 1996. He was the Company's Associate
General Counsel from 1992 until 1993. From 1990 until 1992, he worked on a
consulting basis with the Company, developing and analyzing various strategic
opportunities. Mr. Mendelson is a co-founder, and, since 1987, has been
President of Mendelson International Corporation, a private investment company,
which is a shareholder of HEICO. He is a Trustee of the Greater Miami Chamber of
Commerce, a Trustee of St. Thomas University in Miami Gardens, Florida and a
Director of the Florida Grand Opera. Victor Mendelson is the son of Laurans
Mendelson and the brother of Eric Mendelson.
James L. Reum retired from full-time service to HEICO Aerospace in
August 2001 and remains active on a part-time basis with HEICO Aerospace as
Executive Vice President. He served as Chief Operating Officer of HEICO
Aerospace and its predecessor from 1995 to 1999, President of LPI Industries
Corporation from 1991 to 1998 and President of Jet Avion Corporation from 1996
to 1998. From 1990 to 1991, he served as Director of Research and Development
for Jet Avion Corporation. From 1986 to 1989, Mr. Reum was self-employed as a
management and engineering consultant to companies primarily within the
aerospace industry. From 1957 to 1986, he was employed in various management
positions with Chromalloy Gas Turbine Corp., Cooper Airmotive (later named
Aviall, Inc.), United Airlines, Inc. and General Electric Company.
10
ITEM 2. PROPERTIES
The Company owns or leases a number of facilities, which are utilized
by its Flight Support Group (FSG), Electronic Technologies Group (ETG), and
Corporate office. Summary information on the facilities utilized within the FSG
and the ETG to support their principal operating activities is as follows:
FLIGHT SUPPORT GROUP
Manufacture of Jet Engine and Aircraft Component Replacement Parts
Location Square footage Owned/Leased Description
-------------- -------------- ------------ -----------------------------------------
California 137,000 Leased Manufacturing and engineering facilities
Florida 121,000 Owned Manufacturing and engineering facilities,
warehouse and corporate headquarters
Florida 14,000 Leased Engineering facility and storage facility
Georgia 38,000 Owned Manufacturing and engineering facility
New Mexico 35,000 Leased Manufacturing and engineering facility
Washington 16,000 Leased Manufacturing and engineering facilities
Connecticut 10,000 Leased Manufacturing and engineering facility
Indiana 7,000 Leased Manufacturing and engineering facility
Tennessee 6,000 Leased Manufacturing and engineering facility
India 3,000 Leased Sales office
Repair and Overhaul of Jet Engine and Aircraft Components
Location Square footage Owned/Leased Description
-------------- -------------- ------------ -----------------------------------------
Florida 132,000 Owned Repair and overhaul facilities
Florida 5,000 Leased Repair and overhaul facility
California 27,000 Leased Repair and overhaul facility
ELECTRONIC TECHNOLOGIES GROUP
Manufacture of Electronic and Electro-Optical Equipment
Location Square footage Owned/Leased Description
-------------- -------------- ------------ -----------------------------------------
Florida 62,000 Leased Manufacturing and engineering facilities
Massachusetts 56,000 Owned Manufacturing and engineering facility
Massachusetts 8,000 Leased Manufacturing and engineering facility
Ohio 29,000 Leased Manufacturing and engineering facilities
California 26,000 Leased Manufacturing and engineering facility
Texas 20,000 Owned Manufacturing and engineering facility
United Kingdom 12,000 Owned Manufacturing and engineering facility
Repair and Overhaul of Aircraft Electronic Equipment
Location Square footage Owned/Leased Description
-------------- -------------- ------------ -----------------------------------------
Ohio 21,000 Leased Repair and overhaul facility
CORPORATE
Location Square footage Owned/Leased Description
-------------- -------------- ------------ -----------------------------------------
Florida 4,000 (1) Owned Corporate headquarters and administrative
offices
- ----------
(1) Represents the square footage of corporate headquarters and administrative
offices in Miami, Florida. The square footage of the Company's corporate
headquarters in Hollywood, Florida is included within the square
11
footage for Florida under the caption "FSG - Manufacture of Jet Engine and
Aircraft Component Replacement Parts."
All of the facilities listed in this Item 2 are in good operating
condition, are well maintained and are in regular use. The Company believes that
its existing facilities are sufficient to meet its operational needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2005.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Class A Common Stock and Common Stock are listed and
traded on the New York Stock Exchange (NYSE) under the symbols "HEI.A" and
"HEI," respectively. The following tables sets forth, for the periods indicated,
the high and low share prices for the Class A Common Stock and the Common Stock
as reported on the NYSE, as well as the amount of cash dividends paid per share
during such periods.
CLASS A COMMON STOCK
CASH
DIVIDENDS
HIGH LOW PER SHARE
-------- -------- ---------
FISCAL 2004:
First Quarter $ 14.40 $ 10.77 $ .025
Second Quarter 13.89 9.99 --
Third Quarter 14.00 11.55 .025
Fourth Quarter 15.18 12.06 --
FISCAL 2005:
First Quarter $ 17.80 $ 13.70 $ .025
Second Quarter 17.63 14.67 --
Third Quarter 19.10 14.52 .025
Fourth Quarter 19.69 16.17 --
As of January 6, 2006, there were 966 holders of record of the
Company's Class A Common Stock.
COMMON STOCK
CASH
DIVIDENDS
HIGH LOW PER SHARE
-------- -------- ---------
FISCAL 2004:
First Quarter $ 18.45 $ 13.71 $ .025
Second Quarter 17.45 12.90 --
Third Quarter 18.45 14.45 .025
Fourth Quarter 19.70 16.00 --
FISCAL 2005:
First Quarter $ 23.41 $ 17.86 $ .025
Second Quarter 22.72 18.55 --
Third Quarter 25.08 18.32 .025
Fourth Quarter 25.41 21.03 --
As of January 6, 2006, there were 910 holders of record of the
Company's Common Stock.
13
DIVIDEND POLICY
The Company has historically paid semi-annual cash dividends on both
its Class A Common Stock and Common Stock. In July 2005, HEICO paid its 54th
consecutive semi-annual cash dividend since 1979. HEICO's Board of Directors
presently intends to continue the payment of regular semi-annual cash dividends
on both classes of its common stock. The Company's ability to pay dividends
could be affected by future business performance, liquidity, capital needs,
alternative investment opportunities, and loan covenants under its revolving
credit facility.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of October 31, 2005.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------------------------- -------------------- -------------------- ----------------------
Equity compensation plans approved by
security holders (1) 3,061,288 $ 9.20 156,303
Equity compensation plans not
approved by security holders (2) 527,392 $ 11.19 --
-------------------- ----------------------
Total 3,588,680 $ 9.50 156,303
==================== ======================
- ----------
(1) Represents aggregated information pertaining to the Company's three equity
compensation plans: the 1993 Stock Option Plan, the Non-Qualified Stock
Option Plan and the 2002 Stock Option Plan. See Note 8, Stock Options, of
the Notes to Consolidated Financial Statements for further information
regarding these plans.
(2) Represents stock options granted to two former shareholders of an acquired
business pursuant to employment agreements entered into in connection with
the acquisition in fiscal 1999. Such stock options were fully vested and
transferable as of the grant date and expire ten years from the date of
grant. The exercise price of such options was the fair market value as of
the date of grant.
ISSUER PURCHASES OF EQUITY SECURITIES
As announced by the Company on October 21, 2002, the Company's Board of
Directors has authorized the repurchase of up to 425,000 shares of its Class A
Common Stock and/or Common Stock to be executed, at management's discretion, in
the open market or via private transactions. From October 21, 2002 through
October 31, 2003, the Company repurchased 22,000 shares of its Class A Common
Stock. The remaining 403,000 shares authorized for repurchase are subject to
certain restrictions included in the Company's revolving credit agreement. The
Company did not repurchase any shares of its Class A Common Stock and/or Common
Stock during fiscal 2005 or 2004. The repurchase program does not have a fixed
termination date.
14
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, (1)
-----------------------------------------------------------------------
2001 2002 2003 2004 2005
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
OPERATING DATA:
Net sales $ 171,259 $ 172,112 $ 176,453 $ 215,744 $ 269,647
---------- ---------- ---------- ---------- ----------
Gross profit 71,146 61,502 58,104 75,812 100,996
Selling, general and administrative expenses 40,155 39,102 34,899 43,193 56,347
---------- ---------- ---------- ---------- ----------
Operating income 30,991 22,400 23,205 32,619(5) 44,649
---------- ---------- ---------- ---------- ----------
Interest expense 2,486 2,248 1,189 1,090 1,136
---------- ---------- ---------- ---------- ----------
Interest and other income 1,598 97 93 26 528
---------- ---------- ---------- ---------- ----------
Life insurance proceeds -- -- -- 5,000(6) --
---------- ---------- ---------- ---------- ----------
Gain on sale of product line -- 1,230(3) -- -- --
---------- ---------- ---------- ---------- ----------
Net income $ 15,833 $ 15,226(4) $ 12,222 $ 20,630(5)(6) $ 22,812
========== ========== ========== ========== ==========
Weighted average number of common
shares outstanding:(2)
Basic 21,917 23,004 23,237 24,037 24,460
Diluted 24,536 24,733 24,531 25,755 26,323
PER SHARE DATA: (2)
Net income:
Basic $ .72 $ .66(4) $ .53 $ .86(5)(6) $ .93
Diluted .65 .62(4) .50 .80(5)(6) .87
Cash dividends .041 .045 .045 .050 .050
BALANCE SHEET DATA (AS OF OCTOBER 31):
Total assets $ 325,640 $ 336,332 $ 333,244 $ 364,255 $ 435,624
Total debt (including current portion) 67,014 55,986 32,013 18,129 34,124
Minority interests in consolidated
subsidiaries 36,845 38,313 40,577 44,644 49,035
Shareholders' equity 188,769 207,064 221,518 247,402 273,503
- ----------
(1) Results include the results of acquisitions from each respective effective
date.
(2) Information has been adjusted retroactively to give effect to 10% stock
dividends paid in shares of Class A Common Stock in August 2001 and January
2004.
(3) Represents an increase in the gain on sale of Trilectron Industries, Inc.,
a product line sold in September 2000, of $1,230 ($765, or $.03 per basic
and diluted share, net of tax) resulting from the elimination of certain
reserves upon expiration of indemnification provisions of the sale.
(4) Includes the recovery of a portion of taxes paid in prior years resulting
from an income tax audit, which increased net income by $2,107, or $.09 per
basic and diluted share, net of related expenses. The aggregate increase in
net income from the gain on sale of a product line (see Note 3 above) and
the recovery of taxes was $2,872, or $.12 per basic and diluted share.
(5) Operating income was reduced by an aggregate of $850 in restructuring
expenses recorded by certain subsidiaries of the Flight Support Group that
provide repair and overhaul services including $350 recorded in cost of
sales and $500 recorded in selling, general and administrative expenses.
The restructuring expenses decreased net income by $427, or $.02 per basic
and diluted share.
(6) Represents proceeds from a $5,000 key-person life insurance policy
maintained by a subsidiary of the Flight Support Group. The minority
interest's share of this income totaled $1,000, which is reported as a
component of minority interests' share of income. Accordingly, the life
insurance proceeds increased net income by $4,000, or $.17 per basic and
$.16 per diluted share.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's operations are comprised of two operating segments, the
Flight Support Group (FSG) and the Electronic Technologies Group (ETG).
The Flight Support Group consists of HEICO Aerospace Holdings Corp.
(HEICO Aerospace) and its subsidiaries, which primarily:
o Manufactures Jet Engine and Aircraft Component Replacement Parts. The
Flight Support Group designs and manufactures jet engine and aircraft
component replacement parts for sale at lower prices than those
manufactured by original equipment manufacturers. The parts are
approved by the Federal Aviation Administration (FAA) and they are the
functional equivalent of parts sold by original equipment
manufacturers. The Flight Support Group also manufactures and sells
specialty parts as a subcontractor for original equipment manufacturers
and the United States government.
o Repairs and Overhauls Jet Engine and Aircraft Components. The Flight
Support Group repairs and overhauls jet engine and aircraft components
for domestic and foreign commercial air carriers, military aircraft
operators and aircraft repair and overhaul companies.
The Electronic Technologies Group consists of HEICO Electronic
Technologies Corp. (HEICO Electronic) and its subsidiaries, which primarily:
o Manufactures Electronic and Electro-Optical Equipment. The Electronic
Technologies Group designs, manufactures and sells various types of
electronic, microwave and electro-optical equipment and components,
including power supplies, laser rangefinder receivers, infra-red
simulation, calibration and testing equipment and electromagnetic
interference shielding for commercial and military aircraft operators,
electronics companies and telecommunications equipment suppliers.
o Repairs and Overhauls Aircraft Electronic Equipment. The Electronic
Technologies Group repairs and overhauls inertial navigation systems
and other avionics, instruments, and components for commercial,
military and business aircraft operators.
o Designs and Manufactures High Voltage Interconnection Devices. The
Electronic Technologies Group designs and manufactures high voltage
interconnection devices, cable assemblies and wire for the medical
equipment, defense and other industrial markets.
The Company's results of operations during each of the past three
fiscal years have been affected by a number of transactions. This discussion of
the Company's financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included herein. For further information regarding the acquisitions and
strategic alliances discussed below, see Note 2, Acquisitions, of the Notes to
Consolidated Financial Statements. The acquisitions have been accounted for
using the purchase method of accounting and are included in the Company's
results of operations from the effective dates of acquisition.
16
During fiscal 2003, the Company acquired Niacc Technology, Inc. The
purchase price of the acquisition was paid primarily by using proceeds from the
Company's revolving credit facility and was not significant to the Company's
consolidated financial statements. Had the acquisition been made at the
beginning of the fiscal year, the pro forma consolidated operating results would
not have been materially different from the reported results.
In December 2003, the Company acquired an 80% interest in Sierra
Microwave Technology, Inc., (Sierra) through its Electronic Technologies Group.
Under the transaction, the Company formed a new subsidiary, Sierra Microwave
Technology, LLC (Sierra LLC), which acquired substantially all of the assets and
assumed certain liabilities of Sierra. The new subsidiary is owned 80% by the
Company and 20% by certain members of Sierra's management group. The purchase
price was principally paid in cash using proceeds from the Company's revolving
credit facility and with shares of HEICO's Class A Common Stock. The purchase
price of the acquisition was not significant to the Company's consolidated
financial statements and the pro forma consolidated operating results assuming
Sierra had been acquired as of the beginning of fiscal 2004 would not have been
materially different from the reported results. However, the operating results
of Sierra LLC had a positive impact on the Electronic Technologies Group in
fiscal 2004, as further explained within this Item 7 under the caption
"Comparison of Fiscal 2004 to Fiscal 2003".
During fiscal 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired Connectronics, Corp. and its affiliate,
Wiremax, Ltd. (collectively "Connectronics") in December 2004, Lumina Power,
Inc. (Lumina) in February 2005, and an 85% interest in HVT Group, Inc. (HVT) in
September 2005. The remaining 15% interest is held by certain members of HVT's
management group. The operating results of each acquired company were included
in the Company's results from their effective acquisition date. The purchase
price of each acquisition was principally paid in cash using proceeds from the
Company's revolving credit facility and was not significant to the Company's
consolidated financial statements individually or in aggregate. Had each
acquisition been made at the beginning of the fiscal year, the pro forma
consolidated operating results would not have been materially different from the
reported results.
CRITICAL ACCOUNTING POLICIES
The Company believes that the following are its most critical
accounting policies, some of which require management to make judgments about
matters that are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated is recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Variations in actual labor
performance, changes to estimated profitability and final contract settlements
may result in revisions to cost estimates. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For fixed price contracts in which costs cannot be
dependably estimated, revenue is recognized on the completed-contract method. A
contract is considered complete when all significant costs have been incurred or
the item has been accepted by the customer. The aggregate effects of changes in
estimates relating to inventories and/or long-term contracts did not have a
significant effect on net income or diluted net income per share in fiscal 2005,
2004 or 2003.
17
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company set up
an allowance for estimated uncollectible accounts and record a corresponding
charge to bad debt expense. The Company estimates uncollectible receivables
based on such factors as its prior experience, its appraisal of a customer's
ability to pay, and economic conditions within and outside of the aviation,
defense, space, and electronics industries. Actual bad debt expense could differ
from estimates made.
Valuation of Inventory
Inventory is stated at the lower of cost or market, with cost being
determined on the first-in, first-out or the average cost basis. Losses, if any,
are recognized fully in the period when identified.
The Company periodically evaluates the carrying value of inventory,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates the amount necessary to write-down its
slow moving, obsolete or damaged inventory. These estimates could vary
significantly from actual requirements based upon future economic conditions,
customer inventory levels or competitive factors that were not foreseen or did
not exist when the estimated write-downs were made.
Valuation of Goodwill
The Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any. The determination of fair value requires the Company
to make a number of estimates, assumptions and judgments of such factors as
earnings multiples, projected revenues and operating expenses and the Company's
weighted average cost of capital. If there is a material change in such
assumptions used by the Company in determining fair value or if there is a
material change in the conditions or circumstances influencing fair value, the
Company could be required to recognize a material impairment charge. Based on
the annual goodwill test for impairment as of October 31, 2005, the Company
determined there is no impairment of its goodwill.
One of the Company's reporting units has experienced a decline in sales
to foreign military customers over the past three fiscal years. The reporting
unit is actively developing various expanded capabilities, but experienced some
delays in fiscal 2004 and 2005. Based on progress to date, the Company continues
to expect that the various expanded capabilities will result in significant
sales and earnings for the reporting unit beginning in fiscal 2006 and beyond.
The timing of such sales and earnings are primarily based upon certain
regulatory and sales matters. Using management's best estimates of these
assumptions, the Company determined that there is no impairment of the reporting
unit's goodwill as of October 31, 2005. Should the reporting unit incur
significant delays in further developing the expanded capabilities and
successfully selling and marketing them, the Company could be required to
recognize an impairment of all or a portion of the reporting unit's goodwill,
which had a carrying value of $17.3 million as of October 31, 2005.
18
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations,
net sales and operating income by operating segment, and the percentage of net
sales represented by the respective items in the Company's Consolidated
Statements of Operations:
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------
2003 2004 2005
-------------- -------------- --------------
Net sales $ 176,453,000 $ 215,744,000 $ 269,647,000
-------------- -------------- --------------
Cost of sales 118,349,000 139,932,000 168,651,000
Selling, general and administrative expenses 34,899,000 43,193,000 56,347,000
-------------- -------------- --------------
Total operating costs and expenses 153,248,000 183,125,000 224,998,000
-------------- -------------- --------------
Operating income $ 23,205,000 $ 32,619,000 $ 44,649,000
============== ============== ==============
Net sales by segment:
Flight Support Group $ 128,277,000 $ 153,238,000 $ 185,716,000
Electronic Technologies Group 48,597,000 62,648,000 84,094,000
Intersegment sales (421,000) (142,000) (163,000)
-------------- -------------- --------------
$ 176,453,000 $ 215,744,000 $ 269,647,000
============== ============== ==============
Operating income by segment:
Flight Support Group $ 19,187,000 $ 24,251,000 $ 35,142,000
Electronic Technologies Group 8,497,000 15,259,000 18,631,000
Other, primarily Corporate (4,479,000) (6,891,000) (9,124,000)
-------------- -------------- --------------
$ 23,205,000 $ 32,619,000 $ 44,649,000
============== ============== ==============
Net sales 100.0% 100.0% 100.0%
Gross profit 32.9% 35.1% 37.5%
Selling, general and administrative expenses 19.8% 20.0% 20.9%
Operating income 13.2% 15.1% 16.6%
Interest expense 0.7% 0.5% 0.4%
Interest and other income 0.1% -- 0.2%
Life insurance proceeds -- 2.3% --
Income tax expense 4.5% 5.1% 6.0%
Minority interests' share of income 1.1% 2.3% 1.9%
Net income 6.9% 9.6% 8.5%
19
COMPARISON OF FISCAL 2005 TO FISCAL 2004
Net Sales
Net sales in fiscal 2005 increased by 25.0% to $269.6 million, as
compared to net sales of $215.7 million in fiscal 2004. The increase in net
sales reflects an increase of $32.5 million (a 21.2% increase) to $185.7 million
in net sales within the FSG, and an increase of $21.4 million (a 34.2% increase)
to $84.1 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 continuing recovery within the
commercial airline industry, as well as increased sales of new products. The
increase in net sales within the ETG primarily resulted from the acquisition of
Connectronics in December 2004, Lumina in February 2005 and HVT Group in
September 2005 as well as improved demand for the Company's defense and
industrial electronics components.
The Company's net sales in fiscal 2005 by market approximated 64% from
the commercial aviation industry, 23% from the defense and space industries and
13% from other industrial markets including medical, electronics and
telecommunications. Net sales in fiscal 2004 by market approximated 63% from the
commercial aviation industry, 24% from the defense and space industries and 13%
from other markets.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 37.5% in fiscal 2005 as
compared to 35.1% in fiscal 2004, reflecting higher margins within the FSG
offset by a slight decrease in the ETG margin. The FSG's gross profit margin
increase was due principally to improved operating efficiencies resulting from
the higher sales volumes 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 softness in the commercial satellite market. Consolidated cost
of sales in fiscal 2005 and fiscal 2004 included approximately $11.3 million and
$10.4 million, respectively, of new product research and development expenses.
SG&A expenses were $56.3 million and $43.2 million in 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, Lumina
and HVT Group 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 20.9% in fiscal 2005 compared to 20.0% in fiscal 2004,
primarily due to increased costs to comply with the Sarbanes-Oxley Act of 2002.
Operating Income
Operating income in fiscal 2005 increased by 36.9% to $44.6 million,
compared to operating income of $32.6 million in fiscal 2004. The increase in
operating income reflects an increase of $3.3 million (a 22.1% increase) in
operating income of the ETG from $15.3 million in fiscal 2004 to $18.6 million
in fiscal 2005 reflecting the acquisitions of Connectronics, Lumina and HVT
Group and an increase of $10.8 million (a 44.9% increase) in operating income of
the FSG from $24.3 million in fiscal 2004 to $35.1 million in fiscal 2005
reflecting the higher net sales. These increases were partially offset by the
increase in Corporate expenses. As a percentage of net sales, operating income
increased from 15.1% in fiscal 2004 to 16.6% in fiscal 2005. The improvement 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 15.8% in fiscal 2004 to 18.9%
in fiscal 2005 and a decrease in the ETG's operating income as a percentage of
net
20
sales from 24.4% in fiscal 2004 to 22.2% in 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 in fiscal 2005 and fiscal 2004 was comparable as the
lower weighted average balance outstanding under the revolving credit facility
in fiscal 2005 was offset by higher interest rates. Additional information about
the Company's revolving credit facility may be found within "Financing
Activities", which follows within this Item 7.
Interest and Other Income
Interest and other income increased to $528,000 in fiscal 2005 from
$26,000 in 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 11,
Sale of Investment in Joint Venture, of the Notes to Consolidated Financial
Statements).
Life Insurance Proceeds
In 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) in fiscal 2004 by $4.0 million, or $.16
per diluted share.
Income Tax Expense
The Company's effective tax rate increased from 29.9% in fiscal 2004 to
36.6% in fiscal 2005. 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 reduction in
the tax benefit on export sales under the federal Extraterritorial Income
Exclusion provisions that began phasing out in fiscal 2005. For a detailed
analysis of the provision for income taxes see Note 6, Income Taxes, of the
Notes to Consolidated Financial Statements.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries
principally relates to the minority interests held in HEICO Aerospace and the
20% minority interest held in Sierra LLC. Minority interests' share of income in
fiscal 2005 approximated that of fiscal 2004 as higher operating income of the
FSG was offset by the minority interests' share of life insurance proceeds
received in fiscal 2004.
Net Income
The Company's net income was $22.8 million, or $.87 per diluted share,
in fiscal 2005 compared to $20.6 million, or $.80 per diluted share, in fiscal
2004. The net impact of the life insurance proceeds reduced by the restructuring
expenses increased net income by $3.6 million, or $.14 per diluted share in
fiscal 2004.
21
Outlook
Both the FSG and the ETG reported significantly improved sales and
operating income in fiscal 2005 compared to fiscal 2004. Operating margins
within the FSG continued to show year-over-year improvement and operating
margins within the ETG continued at a strong level.
As the Company looks forward to fiscal 2006 and beyond, HEICO will
continue to focus on new products, further market penetration, additional
acquisition opportunities and maintaining its financial strength. Based on
current market conditions and including the results of the Company's recent
acquisitions, the Company is targeting fiscal 2006 net sales and earnings growth
over fiscal 2005 results with some operating margin improvement.
COMPARISON OF FISCAL 2004 TO FISCAL 2003
Net Sales
Net sales in fiscal 2004 increased by 22.3% to $215.7 million, as
compared to net sales of $176.5 million in fiscal 2003. The increase in net
sales reflects an increase of $25.0 million (a 19.5% increase) to $153.2 million
in net sales within the FSG, and an increase of $14.1 million (a 28.9% increase)
to $62.6 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 continuing recovery within the
commercial airline industry, as well as increased sales of new products. The
increase in net sales within the ETG primarily resulted from the acquisition of
Sierra in December 2003 and improved demand for the Company's defense and
industrial electronics components.
The Company's net sales in fiscal 2004 by market approximated 63% from
the commercial aviation industry, 24% from the defense and space industries and
13% from other industrial markets including medical, electronics and
telecommunications. Net sales in fiscal 2003 by market approximated 68% from the
commercial aviation industry, 22% from the defense and space industries and 10%
from other markets.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 35.1% in fiscal 2004 as
compared to 32.9% in fiscal 2003, reflecting higher margins within the ETG. The
ETG's gross profit margin increase was primarily due to the acquisition of
Sierra. The FSG's gross profit margin in fiscal 2004 approximated 2003 margins
principally due to higher costs from write-offs of excess inventory in the first
quarter of fiscal 2004 and the restructuring expenses referred to below,
partially offset by a reduction of the product warranty reserve and lower
research and development expenses as a percentage of net sales. Consolidated
cost of sales in fiscal 2004 and fiscal 2003 included approximately $10.4
million and $9.2 million, respectively, of new product research and development
expenses.
During the third and fourth quarters of fiscal 2004, the Company
incurred an aggregate of $850,000 of restructuring expenses within certain
subsidiaries of the FSG that provide repair and overhaul services ("repair and
overhaul subsidiaries"). The unexpected death of an executive of certain of the
repair and overhaul subsidiaries (see "Life Insurance Proceeds" below) was the
impetus for the commencement of the restructuring activities, which the Company
believes will allow it to better service its customers and improve operating
margins. The restructuring expenses include $350,000 of inventory write-downs,
which were recorded within cost of sales, and $261,000 of management
hiring/relocation related expenses, $168,000 of moving costs and other
associated expenses and $71,000 of contract
22
termination costs that were all recorded within selling, general and
administrative (SG&A) expenses. The inventory written down is related to older
generation aircraft for which repair and overhaul services are being
discontinued by the Company. The management hiring/relocation related expenses
include one-time employee termination/hiring benefits and relocation costs. The
moving costs and other associated expenses consist of moving costs related to
the consolidation of two repair and overhaul facilities. Contract termination
costs include the lease termination on a facility.
SG&A expenses were $43.2 million and $34.9 million in fiscal 2004 and
fiscal 2003, respectively. The increase in SG&A expenses reflects higher sales
within the FSG, the acquisition of Sierra, an increase in Corporate expenses,
the aforementioned restructuring expenses, and litigation-related expenses
referred to below. The increase in Corporate expenses from $4.5 million in
fiscal 2003 to $6.9 million in fiscal 2004 reflects accrued performance awards
of $1.4 million in fiscal 2004 and a reversal of approximately $400,000 of
professional fees in fiscal 2003 that were accrued at the end of fiscal 2002
pursuant to a contractual arrangement that was renegotiated in the first quarter
of fiscal 2003.
The Company also incurred $410,000 of legal and other costs related to
litigation brought by a subsidiary of the ETG against two former employees for
breach of contract and other possible causes of action against the former
employees and others, which were recorded within SG&A expenses.
The restructuring expenses and litigation-related expenses decreased
net income by $684,000, or $.03 per diluted share in fiscal 2004. For more
information on the restructuring activities, see Note 13, Restructuring
Expenses, of the Notes to Consolidated Financial Statements.
As a percentage of net sales, SG&A expenses remained stable at 20.0% in
fiscal 2004 compared to 19.8% in fiscal 2003 despite a .4% increase attributable
to the aforementioned restructuring expenses and litigation-related expenses,
which reflects efforts to control costs while increasing revenues.
Operating Income
Operating income in fiscal 2004 increased by 40.6% to $32.6 million,
compared to operating income of $23.2 million in fiscal 2003. The increase in
operating income reflects an increase of $6.8 million (a 79.6% increase) in
operating income of the ETG from $8.5 million in fiscal 2003 to $15.3 million in
fiscal 2004 reflecting the acquisition of Sierra and an increase of $5.1 million
(a 26.4% increase) in operating income of the FSG from $19.2 million in fiscal
2003 to $24.3 million in fiscal 2004 reflecting the higher net sales. These
increases were partially offset by the increase in Corporate expenses. As a
percentage of net sales, operating income increased from 13.2% in fiscal 2003 to
15.1% in fiscal 2004. The improvement in operating income as a percentage of net
sales reflects an increase in the ETG's operating income as a percentage of net
sales from 17.5% in fiscal 2003 to 24.4% in fiscal 2004 and an increase in the
FSG's operating income as a percentage of net sales from 15.0% in fiscal 2003 to
15.8% in fiscal 2004 despite a .4% decrease attributable to the aforementioned
restructuring expenses and litigation-related expenses. The improvement in the
ETG's operating income and operating income as a percentage of net sales
reflects the purchase of Sierra and the increased sales, discussed previously.
The increase in the FSG's operating income and operating income as a percentage
of net sales reflects the increased sales previously discussed and lower SG&A
expenses as a percentage of net sales.
Interest Expense
Interest expense in fiscal 2004 and fiscal 2003 was comparable as
average borrowings outstanding and associated interest rates remained at
approximately the same levels. Additional
23
information about the Company's revolving credit facility may be found within
"Financing Activities", which follows within this Item 7.
Interest and Other Income
Interest and other income in fiscal 2004 and fiscal 2003 were not
material.
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) in fiscal 2004 by
$4.0 million, or $.16 per diluted share.
Income Tax Expense
The Company's effective tax rate decreased from 35.6% in fiscal 2003 to
29.9% in fiscal 2004 as the aforementioned $5.0 million in life insurance
proceeds and the minority interest's share of the income of Sierra LLC are
excluded from the Company's income that is subject to federal income taxes. For
a detailed analysis of the provision for income taxes see Note 6, Income Taxes,
of the Notes to Consolidated Financial Statements.
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 LLC. The increase from fiscal 2003 to fiscal 2004 was
attributable to higher earnings of the FSG and income of Sierra LLC.
Net Income
The Company's net income was $20.6 million, or $.80 per diluted share,
in fiscal 2004 compared to $12.2 million, or $.50 per diluted share, in fiscal
2003. The net impact of the life insurance proceeds reduced by the restructuring
expenses and litigation-related expenses increased net income by $3.3 million,
or $.13 per diluted share in fiscal 2004.
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 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.
24
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 $35.8 million for fiscal
2005, principally reflecting net income of $22.8 million, depreciation and
amortization of $7.4 million, minority interests' share of income of $5.1
million, a deferred income tax provision of $3.0 million and a tax benefit
related to stock option exercises of $2.8 million, partially offset by an
increase in net operating assets of $5.3 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; and an increase in accounts receivable due
to sales growth, partially offset by higher current liabilities associated with
increased sales and purchases and higher accrued employee compensation and
related payroll taxes. (See Note 3, Selected Financial Statement Information, of
the Notes to Consolidated Financial Statements.)
Net cash provided by operating activities was $44.1 million for fiscal
2004, consisting primarily of net income of $20.6 million, including $4.0
million of cash proceeds from life insurance net of the minority interest's
share, depreciation and amortization of $6.8 million, minority interests' share
of income of consolidated subsidiaries of $5.0 million, a deferred income tax
provision of $4.1 million, a tax benefit on stock option exercises of $1.3
million, and a decrease in net operating assets of $6.5 million. The decrease in
net operating assets (current assets used in operating activities net of current
liabilities) primarily reflects lower inventories resulting from efforts to
improve inventory turnover by reducing the level of finished goods maintained on
hand, higher accounts receivable and current liabilities associated with
increased sales levels and higher income taxes payable resulting from the timing
of required income tax payments.
Net cash provided by operating activities was $28.9 million for fiscal
2003, principally reflecting net income of $12.2 million, depreciation and
amortization of $6.7 million, deferred income tax provision of $3.5 million,
minority interests' share of income of consolidated subsidiaries of $2.0
million, and a decrease in net operating assets of $4.0 million. The decrease in
net operating assets (current assets used in operating activities net of current
liabilities) primarily reflects lower inventories resulting from efforts to
improve inventory turnover by reducing the level of finished goods maintained on
hand.
Investing Activities
Net cash used in investing activities during the three fiscal year
period ended October 31, 2005 primarily relates to several acquisitions,
including contingent payments, totaling $71.2 million, including $41.5 million
in fiscal 2005 and $28.1 million in fiscal 2004. Further details on acquisitions
may be found at the beginning of this Item 7 under the caption "Overview".
Capital expenditures aggregated $18.7 million over the last three fiscal years,
primarily reflecting the expansion of existing production facilities and
capabilities, which were generally funded using cash provided by operating
activities. In fiscal 2005, the Company received 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, of the Notes to Consolidated
Financial Statements).
Financing Activities
The Company borrowed a net $16.0 million under its revolving credit
facility in fiscal 2005 and used cash provided by operating activities to make
net payments on its revolving credit facility of $14.0 million in fiscal 2004
and $24.0 million in fiscal 2003. The net borrowings made in fiscal 2005 reflect
25
$37.0 million borrowed to fund the aforementioned acquisitions, net of
repayments of $21.0 million. The net payments made in fiscal 2004 reflect $27.0
million borrowed to fund an aforementioned acquisition, net of repayments of
$41.0 million. For the three fiscal year period ended October 31, 2005, the
Company paid cash dividends aggregating $3.5 million and received proceeds from
stock option exercises of $3.7 million.
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. See Note 5,
Long-Term Debt, of the Notes to Consolidated Financial Statements for further
information regarding the revolving credit facility.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as
of October 31, 2005:
PAYMENTS DUE BY FISCAL PERIOD
---------------------------------------------------------
TOTAL 2006 2007 - 2008 2009 - 2010 THEREAFTER
------------ ------------ ------------ ------------ ------------
Long-term debt obligations (1) $ 33,980,000 $ -- $ 1,980,000 $ 32,000,000 $ --
Capital lease obligations
and equipment loans (1) 144,000 63,000 54,000 27,000 --
Operating lease obligations (2) 11,660,000 2,519,000 4,116,000 1,843,000 3,182,000
Purchase obligations (3) 3,171,000 3,171,000 -- -- --
Other long-term liabilities (4) 843,000 274,000 303,000 119,000 147,000
------------ ------------ ------------ ------------ ------------
Total contractual obligations $ 49,798,000 $ 6,027,000 $ 6,453,000 $ 33,989,000 $ 3,329,000
============ ============ ============ ============ ============
- ----------
(1) Excludes interest charges on borrowings and the fee on the amount of
any unused commitment that the Company may be obligated to pay under
its revolving credit facility as such amounts vary. Also excludes
interest charges associated with capital lease obligations and
equipment loans as such amounts are not material. See Note 5,
Long-Term Debt, of the Notes to Consolidated Financial Statements and
Financing Activities above for additional information regarding the
Company's long-term debt and capital lease obligations and equipment
loans.
26
(2) See Note 17, Commitments and Contingencies - Lease Commitments, of the
Notes to Consolidated Financial Statements for additional information
regarding the Company's operating lease obligations.
(3) Includes additional purchase consideration aggregating $3.0 million
relating to the Connectronics and HVT acquisitions. See Note 2,
Acquisitions, of the Notes to Consolidated Financial Statements. Also
includes commitments for capitalized expenditures and excludes all
purchase obligations for inventory and supplies in the ordinary course
of business.
(4) Includes projected payments aggregating $488,000 under our Directors
Retirement Plan, which is explained further in Note 9, Retirement
Plans, of the Notes to Consolidated Financial Statements. The plan is
unfunded and we pay benefits directly. The amounts in the table do not
include amounts related to the Company's deferred compensation
arrangement for which there is an offsetting asset included in the
Company's Consolidated Balance Sheets. Also includes $355,000 of
guaranteed minimum royalty payments as part of an agreement for
exclusive license rights to intellectual property.
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. As of October 31, 2005, one of the Company's
subsidiaries had guaranteed its performance related to a customer contract
through two letters of credit, aggregating $.3 million, both expiring December
2005. In November 2005, the letters of credit were extended to April 2006 and
increased to an aggregate of $1.2 million. All of 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
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing at approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase Connectronics Corporation, the
Company may be obligated to pay additional purchase consideration of up to $3.8
million in aggregate should Connectronics meet certain earnings objectives
during the first four years following the acquisition. The Company accrued $2.2
million of such additional purchase consideration as of October 31, 2005 based
on the year-to-date earnings of Connectronics relative to its target, which it
expects to pay in fiscal 2006.
As part of the agreement to purchase Lumina Power, Inc., the Company
may be obligated to pay additional purchase consideration in fiscal 2010
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. The additional purchase consideration will be accrued
when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in HVT Group, Inc.,
the minority holders have the right to cause the Company to purchase their
interests over a four-year period starting around the second anniversary of the
acquisition, or sooner under certain conditions.
The Company also accrued additional purchase consideration aggregating
$.8 million as of October 31, 2005 in accordance with the agreements related to
the Connectronics and HVT acquisitions based principally on the actual value of
the net assets acquired. The Company expects to pay this amount in fiscal 2006.
27
For additional information on the aforementioned acquisitions, see
Note 2, Acquisitions, of the Notes to Consolidated Financial Statements.
As part of an agreement for exclusive license rights to intellectual
property, one of the Company's subsidiaries has guaranteed minimum royalty
payments aggregating $355,000 through fiscal 2007.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 does not expect 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 SFAS 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. Based on the number of stock options outstanding as of October
31, 2005 and the insignificant number of stock options granted during the last
two fiscal years, the Company expects the net income effect in fiscal 2006 from
the adoption of SFAS No. 123(R) and SAB 107 to be less than the fiscal 2005 pro
forma effect included in the table under the Stock Based Compensation section of
Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated
Financial Statements.
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.
28
The adoption of SFAS No. 153 did not have a material effect on the Company's
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.
In September 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on issue EITF 05-06, "Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination". EITF 05-6 resolves that leasehold improvements that are placed in
service significantly after and not contemplated at or near the beginning of the
lease term or that are acquired in a business combination should be amortized
over the shorter of the useful life of the assets or a term that includes the
required lease periods and renewals that are deemed to be reasonably assured as
of the date the leasehold improvements are purchased or the date of acquisition,
as applicable. EITF 05-6 is effective the first reporting period beginning after
June 29, 2005. The adoption of EITF 05-6 did not have a material effect on the
Company's 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 or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o Lower demand for commercial air travel or airline fleet changes, which
could cause lower demand for our goods and services;
o Product specification costs and requirements, which could cause an
increase to our costs to complete contracts;
o 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;
29
o HEICO's ability to introduce new products and product pricing levels,
which could reduce our sales or sales growth;
o 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
o 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk to which the Company has exposure is interest
rate risk, mainly related to its revolving credit facility and industrial
revenue bonds, which have variable interest rates. Interest rate risk associated
with the Company's variable rate debt is the potential increase in interest
expense from an increase in interest rates. Periodically, the Company enters
into interest rate swap agreements to manage its interest expense. The Company
did not have any interest rate swap agreements in effect as of October 31, 2005.
Based on the Company's aggregate outstanding variable rate debt balance of $34
million as of October 31, 2005, a hypothetical 10% increase in interest rates
would increase the Company's interest expense by approximately $156,000 in
fiscal 2006.
The Company maintains a portion of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a hypothetical 10% increase in interest rates as of October 31,
2005 would not have a material effect on the Company's results of operations or
financial position.
The Company is also exposed to foreign currency exchange rate
fluctuations on the United States dollar value of its foreign currency
denominated transactions, which are principally in British pound sterling. A
hypothetical 10% weakening in the exchange rate of the British pound sterling to
the United States dollar as of October 31, 2005 would not have a material effect
on the Company's results of operations or financial position.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Management's Report on Internal Control Over Financial Reporting................................. 32
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting................................................................................... 33
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements..... 35
Consolidated Balance Sheets as of October 31, 2005 and 2004...................................... 36
Consolidated Statements of Operations for the years ended October 31, 2005,
2004 and 2003............................................................................... 37
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended October 31, 2005, 2004 and 2003......................................... 38
Consolidated Statements of Cash Flows for the years ended October 31, 2005,
2004 and 2003............................................................................... 39
Notes to Consolidated Financial Statements....................................................... 40
31
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of HEICO Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of,
the Company's principal executive and principal financial officers and effected
by the Company's board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial
statements.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of October 31, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Based on our assessment, management believes that, as of October 31,
2005, the Company's internal control over financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte &
Touche LLP, has issued an attestation report on our assessment of the Company's
internal control over financial reporting. Their report appears on the following
page.
Date: January 17, 2006
/s/ LAURANS A. MENDELSON /s/ THOMAS S. IRWIN
- ------------------------ -----------------------
Laurans A. Mendelson Thomas S. Irwin
Chief Executive Officer Chief Financial Officer
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of HEICO Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that HEICO
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of October 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of October 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of October 31, 2005, based on the
33
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended October
31, 2005 of the Company and our report dated January 17, 2006 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
January 17, 2006
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of HEICO Corporation:
We have audited the accompanying consolidated balance sheets of HEICO
Corporation and subsidiaries (the "Company") as of October 31, 2005 and 2004,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended October 31, 2005. Our audits also included the financial statement
schedule presented in Item 15. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of HEICO Corporation and subsidiaries
as of October 31, 2005 and 2004, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of October 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated January 17, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
January 17, 2006
35
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,330,000 $ 214,000
Accounts receivable, net 47,668,000 36,798,000
Inventories, net 62,758,000 48,020,000
Prepaid expenses and other current assets 3,159,000 3,208,000
Deferred income taxes 7,218,000 5,672,000
-------------- --------------
Total current assets 126,133,000 93,912,000
Property, plant and equipment, net 46,663,000 40,558,000
Goodwill 248,229,000 216,674,000
Other assets 14,599,000 13,111,000
-------------- --------------
Total assets $ 435,624,000 $ 364,255,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 63,000 $ 58,000
Trade accounts payable 11,129,000 7,969,000
Accrued expenses and other current liabilities 32,473,000 20,244,000
Income taxes payable 6,285,000 3,771,000
-------------- --------------
Total current liabilities 49,950,000 32,042,000
Long-term debt, net of current maturities 34,061,000 18,071,000
Deferred income taxes 22,431,000 16,262,000
Other non-current liabilities 6,644,000 5,834,000
-------------- --------------
Total liabilities 113,086,000 72,209,000
-------------- --------------
Minority interests in consolidated subsidiaries 49,035,000 44,644,000
-------------- --------------
Commitments and contingencies (Notes 2 and 17)
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 par share; 30,000,000 shares authorized;
10,057,690 and 9,898,451 shares issued and outstanding, respectively 101,000 99,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 14,517,669 and 14,325,304 shares issued and outstanding,
respectively 145,000 143,000
Capital in excess of par value 192,523,000 187,950,000
Accumulated other comprehensive loss (65,000) --
Retained earnings 80,799,000 59,210,000
-------------- --------------
Total shareholders' equity 273,503,000 247,402,000
-------------- --------------
Total liabilities and shareholders' equity $ 435,624,000 $ 364,255,000
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
36
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Net sales $ 269,647,000 $ 215,744,000 $ 176,453,000
-------------- -------------- --------------
Operating costs and expenses:
Cost of sales 168,651,000 139,932,000 118,349,000
Selling, general and administrative expenses 56,347,000 43,193,000 34,899,000
-------------- -------------- --------------
Total operating costs and expenses 224,998,000 183,125,000 153,248,000
-------------- -------------- --------------
Operating income 44,649,000 32,619,000 23,205,000
Interest expense (1,136,000) (1,090,000) (1,189,000)
Interest and other income 528,000 26,000 93,000
Life insurance proceeds -- 5,000,000 --
-------------- -------------- --------------
Income before income taxes and minority interests 44,041,000 36,555,000 22,109,000
Income tax expense 16,100,000 10,948,000 7,872,000
-------------- -------------- --------------
Income before minority interests 27,941,000 25,607,000 14,237,000
Minority interests' share of income 5,129,000 4,977,000 2,015,000
-------------- -------------- --------------
Net income $ 22,812,000 $ 20,630,000 $ 12,222,000
============== ============== ==============
Net income per share:
Basic $ .93 $ .86 $ .53
Diluted $ .87 $ .80 $ .50
Weighted average number of common shares outstanding:
Basic 24,460,185 24,036,980 23,236,841
Diluted 26,323,302 25,754,598 24,531,280
The accompanying notes are an integral part of these consolidated financial
statements.
37
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED NOTE COMPREHENSIVE
STOCK STOCK PAR VALUE LOSS EARNINGS RECEIVABLE INCOME
------------ ------------- ------------- ------------- ------------- ------------ -------------
Balances as of
October 31, 2002 $ 94,000 $ 116,000 $ 153,847,000 $ -- $ 58,007,000 $ (5,000,000)
Net income -- -- -- -- 12,222,000 -- $ 12,222,000
-------------
Comprehensive income -- -- -- -- -- -- $ 12,222,000
=============
Proceeds from shares
of common stock sold
in connection with
business acquisition
(Note 17) -- -- -- -- -- 2,068,000
Cash dividends
($.045 per share) -- -- -- -- (1,055,000) --
Tax benefit from
stock options
exercises -- -- 348,000 -- -- --
Proceeds from stock
option exercises 3,000 1,000 985,000 -- -- --
Repurchase of common
stock -- -- (120,000) -- -- --
Other -- -- 4,000 -- (2,000) --
------------ ------------- ------------- ------------- ------------- ------------
Balances as of
October 31, 2003 97,000 117,000 155,064,000 -- 69,172,000 (2,932,000)
10% stock dividend on
common stock and
Class A Common Stock
paid in shares of
Class A Common Stock
(Note 7) -- 22,000 29,342,000 -- (29,393,000) --
Net income -- -- -- -- 20,630,000 -- $ 20,630,000
-------------
Comprehensive income -- -- -- -- -- -- $ 20,630,000
=============
Shares issued in
connection with
business acquisition
(Note 2) -- 3,000 2,997,000 -- -- --
Proceeds from shares
of common stock sold
in connection with
business acquisition
(Note 17) -- -- -- -- -- 1,259,000
Adjustment to
guaranteed resale
value of shares of
common stock issued
in connection with
business acquisition
(Note 17) -- -- (1,673,000) -- -- 1,673,000
Cash dividends
($.05 per share) -- -- -- -- (1,201,000) --
Tax benefit from
stock options
exercises -- -- 1,258,000 -- -- --
Proceeds from stock
option exercises 2,000 2,000 959,000 -- -- --
Other -- (1,000) 3,000 -- 2,000 --
------------ ------------- ------------- ------------- ------------- ------------
Balances as of
October 31, 2004 99,000 143,000 187,950,000 -- 59,210,000 --
Net income -- -- -- -- 22,812,000 -- $ 22,812,000
Foreign currency
translation
adjustment (Note 1) -- -- -- (65,000) -- -- (65,000)
-------------
Comprehensive income -- -- -- -- -- -- $ 22,747,000
=============
Cash dividends
($.05 per share) -- -- -- -- (1,224,000) --
Tax benefit from
stock options
exercises -- -- 2,830,000 -- -- --
Proceeds from stock
option exercises 2,000 2,000 1,742,000 -- -- --
Other -- -- 1,000 -- 1,000 --
------------ ------------- ------------- ------------- ------------- ------------
Balances as of
October 31, 2005 $ 101,000 $ 145,000 $ 192,523,000 $ (65,000) $ 80,799,000 $ --
============ ============= ============= ============= ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
38
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------
2005 2004 2003
------------- ------------- -------------
Operating Activities:
Net income $ 22,812,000 $ 20,630,000 $ 12,222,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,409,000 6,779,000 6,720,000
Deferred income tax provision 3,031,000 4,125,000 3,520,000
Minority interests' share of income 5,129,000 4,977,000 2,015,000
Tax benefit from stock option exercises 2,830,000 1,258,000 348,000
Change in estimate of product warranty liability -- (535,000) --
Restructuring expense related to inventory write-downs -- 350,000 --
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (6,852,000) (6,193,000) (101,000)
(Increase) decrease in inventories (10,113,000) 3,576,000 3,705,000
(Increase) decrease in prepaid expenses and other current
assets (119,000) 263,000 999,000
Increase (decrease) in trade account payables, accrued
expenses and other current liabilities 9,548,000 6,036,000 (1,390,000)
Increase in income taxes payable 2,163,000 2,951,000 820,000
Other (30,000) (167,000) 6,000
------------- ------------- -------------
Net cash provided by operating activities 35,808,000 44,050,000 28,864,000
------------- ------------- -------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (41,500,000) (28,099,000) (1,554,000)
Capital expenditures (8,273,000) (5,737,000) (4,723,000)
Proceeds from sale of building held for sale 3,520,000 -- --
Other 357,000 (335,000) 85,000
------------- ------------- -------------
Net cash used in investing activities (45,896,000) (34,171,000) (6,192,000)
------------- ------------- -------------
Financing Activities:
Borrowings on revolving credit facility 37,000,000 27,000,000 --
Payments on revolving credit facility (21,000,000) (41,000,000) (24,000,000)
Cash dividends paid (1,224,000) (1,201,000) (1,055,000)
Proceeds from stock option exercises 1,746,000 963,000 989,000
Proceeds from shares of common stock sold in connection
with business acquisition -- 1,259,000 2,068,000
Repurchases of common stock -- -- (120,000)
Other (1,300,000) (1,007,000) (772,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities 15,222,000 (13,986,000) (22,890,000)
------------- ------------- -------------
Effect of exchange rate changes on cash (18,000) -- --
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 5,116,000 (4,107,000) (218,000)
Cash and cash equivalents at beginning of year 214,000 4,321,000 4,539,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,330,000 $ 214,000 $ 4,321,000
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
39
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HEICO Corporation, through its principal subsidiaries HEICO Aerospace
Holdings Corp. (HEICO Aerospace) and HEICO Electronic Technologies Corp. (HEICO
Electronic) and their subsidiaries (collectively, the Company), is principally
engaged in the design, manufacture and sale of aerospace, defense, and
electronics related products and services throughout the United States and
internationally. HEICO Aerospace's principal subsidiaries include HEICO
Aerospace Corporation, Jet Avion Corporation, LPI Industries Corporation,
Aircraft Technology, Inc., Northwings Accessories Corporation, McClain
International, Inc., Rogers-Dierks, Inc., Turbine Kinetics, Inc., Thermal
Structures, Inc., Future Aviation, Inc., Aero Design, Inc., HEICO Aerospace
Parts Corp., Aviation Facilities, Inc., Jetseal, Inc. and Niacc-Avitech
Technologies Inc. HEICO Electronic's principal subsidiaries include Radiant
Power Corp., Leader Tech, Inc., Santa Barbara Infrared, Inc., Analog Modules,
Inc., Inertial Airline Services, Inc., Sierra Microwave Technology, LLC,
Connectronics Corporation, Lumina Power, Inc. and HVT Group, Inc. The Company's
customer base is primarily the commercial airline, defense, space and
electronics industries. As of October 31, 2005, the Company's principal
operations are located in Glastonbury, Connecticut; Atlanta, Georgia; Chelmsford
and Peabody, Massachusetts; Cleveland and Toledo, Ohio; Georgetown, Texas; Mt.
Juliet, Tennessee; Anacortes and Spokane, Washington; Corona, Fresno, and Santa
Barbara, California; Fort Myers, Hollywood, Miami, Orlando, Sarasota, Tampa and
Titusville, Florida; and Great Dunmow, U.K.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HEICO
Corporation and its subsidiaries, all of which are wholly-owned except for HEICO
Aerospace, which is 20%-owned by Lufthansa Technik AG, the technical services
subsidiary of Lufthansa German Airlines, and two subsidiaries within HEICO
Electronic, which are 80% and 85% owned, respectively. In addition, HEICO
Aerospace consolidates a joint venture formed in March 2001, which is 16%-owned
by American Airlines' parent company, AMR Corporation, and an 80%-owned
subsidiary. (See Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements.) All significant intercompany balances and transactions are
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
40
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined on the first-in, first-out or the average cost basis. Losses, if any,
are recognized fully in the period when identified.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided mainly on the straight-line method over the estimated
useful lives of the various assets. Property, plant and equipment useful lives
are as follows:
Buildings and improvements............................ 20 to 55 years
Leasehold improvements................................ 2 to 20 years
Machinery and equipment............................... 3 to 10 years
Tooling............................................... 2 to 5 years
The costs of major additions and improvements are capitalized.
Leasehold improvements are amortized over the shorter of the leasehold
improvement's useful life or the lease term. Repairs and maintenance are charged
to operations as incurred. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and any related gain or loss is
reflected in earnings.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of goodwill may not be fully recoverable. The test requires the Company
to compare the fair value of each of its reporting units to its carrying value
to determine potential impairment. If the carrying value of a reporting unit
exceeds its fair value, the implied fair value of that reporting unit's goodwill
is to be calculated and an impairment loss shall be recognized in the amount by
which the carrying value of a reporting unit's goodwill exceeds its implied fair
value, if any.
The Company's intangible assets subject to amortization consist
primarily of licenses, patents and non-compete agreements and are amortized on
the straight-line method over the following estimated useful lives:
Licenses.............................................. 12 to 17 years
Patents............................................... 10 to 17 years
Non-compete agreements................................ 2 to 7 years
The Company's intangible assets not subject to amortization consist of
trade names. The Company tests each non-amortizing asset for impairment annually
as of October 31, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The test consists of a comparison of
the fair value of each intangible asset to its carrying amount. If the carrying
amount of an intangible asset exceeds its fair value, an impairment loss shall
be recognized in an amount equal to that excess.
41
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
trade accounts payable and accrued expenses and other current liabilities
approximate fair value due to the relatively short maturity of the respective
instruments. The carrying value of long-term debt approximates fair market value
due to its floating interest rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions and limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different geographical regions.
Long-term investments (included within other assets in the Company's
Consolidated Balance Sheets) are stated at fair value based on quoted market
prices.
INTEREST RATE SWAP AGREEMENTS
Periodically, the Company enters into interest rate swap agreements to
manage interest expense related to its revolving credit facility. Interest rate
risk associated with the Company's variable rate revolving credit facility is
the potential increase in interest expense from an increase in interest rates. A
derivative instrument (e.g. interest rate swap agreement) that hedges the
variability of cash flows related to a recognized liability is designated as a
cash flow hedge.
On an ongoing basis, the Company assesses whether derivative
instruments used in hedging transactions are highly effective in offsetting
changes in cash flows of the hedged items and therefore qualify as cash flow
hedges. For a derivative instrument that qualifies as a cash flow hedge, the
effective portion of changes in fair value of the derivative is deferred and
recorded as a component of other comprehensive income until the hedged
transaction occurs and is recognized in earnings. All other portions of changes
in the fair value of a cash flow hedge are recognized in earnings immediately.
The Company did not enter into any interest rate swap agreements in
fiscal 2005, 2004 or 2003.
PRODUCT WARRANTIES
Product warranty liabilities are estimated at the time of shipment and
recorded as a component of accrued expenses and other current liabilities in the
Company's Consolidated Balance Sheets. The amount recognized is based on
historical claims cost experience.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated is recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For fixed price contracts in which costs cannot be
dependably estimated, revenue is recognized on the completed-contract method. A
contract is considered complete when all costs except insignificant items have
been incurred or the item has been accepted by the customer. The aggregate
effects of changes in estimates relating to inventories and/or long-term
contracts did not have a significant effect on net income or diluted net
42
income per share in fiscal 2005, 2004 or 2003. Revenues earned from rendering
services represented less than 10% of consolidated net sales for all periods
presented.
LONG-TERM CONTRACTS
Accounts receivable and accrued expenses and other current liabilities
include amounts related to the production of products under fixed-price
contracts exceeding terms of one year. Revenues are recognized on the
percentage-of-completion method for certain of these contracts, measured by the
percentage of costs incurred to date to estimated total costs for each contract.
This method is used because management considers costs incurred to be the best
available measure of progress on these contracts. Revenues are recognized on the
completed-contract method for certain other contracts. This method is used when
the Company does not have adequate historical data to ensure that estimates are
reasonably dependable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Variations in actual labor performance, changes to
estimated profitability and final contract settlements may result in revisions
to cost estimates and are recognized in income in the period in which the
revisions are determined.
The asset, "costs and estimated earnings in excess of billings" on
uncompleted percentage-of-completion contracts, included in accounts receivable,
represents revenues recognized in excess of amounts billed. The liability,
"billings in excess of costs and estimated earnings," included in accrued
expenses and other current liabilities, represents billings in excess of
revenues recognized on contracts accounted for under either the
percentage-of-completion method or the completed-contract method. Billings are
made based on the completion of certain milestones as provided for in the
contracts.
INCOME TAXES
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from periods
recognized for income tax purposes.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period plus potentially dilutive
common shares arising from the assumed exercise of stock options, if dilutive.
The dilutive impact of potentially dilutive common shares is determined by
applying the treasury stock method.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries that do not utilize
the United States dollar as its functional currency are translated at year-end
rates of exchange, while revenues and expenses are translated at monthly
weighted average rates of exchange for the year. Unrealized translation gains or
losses are reported as foreign currency translation adjustments through other
comprehensive income (loss) in shareholders' equity.
43
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation using the
intrinsic value method. Accordingly, compensation expense has been recorded in
the accompanying consolidated financial statements for any stock options granted
below 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.
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Net income, as reported $ 22,812,000 $ 20,630,000 $ 12,222,000
Add: Stock-based employee compensation expense included
in reported net income, net of tax 2,000 2,000 3,000
Deduct: Stock-based employee compensation expense
determined under a fair value method, net of tax (1,162,000) (1,481,000) (1,724,000)
-------------- -------------- --------------
Pro forma net income $ 21,652,000 $ 19,151,000 $ 10,501,000
============== ============== ==============
Net income per share:
Basic - as reported $ .93 $ .86 $ .53
Basic - pro forma $ .89 $ .80 $ .45
Diluted - as reported $ .87 $ .80 $ .50
Diluted - pro forma $ .82 $ .74 $ .43
CONTINGENCIES
Losses for contingencies such as product warranties, litigation and
environmental matters are recognized in income when they are probable and can be
reasonably estimated. Gain contingencies are not recognized in income until they
have been realized.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 does not expect 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 SFAS 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
44
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. Based on the number of stock options
outstanding as of October 31, 2005 and the insignificant number of stock options
granted during the last two fiscal years, the Company expects the net income
effect in fiscal 2006 from the adoption of SFAS No. 123(R) and SAB 107 to be
less than the fiscal 2005 pro forma effect included in the table under the Stock
Based Compensation section of this Note 1.
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 adoption of SFAS No. 153 did not have a material effect on the
Company's 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.
In September 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on issue EITF 05-06, "Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination". EITF 05-6 resolves that leasehold improvements that are placed in
service significantly after and not contemplated at or near the beginning of the
lease term or that are acquired in a business combination should be amortized
over the shorter of the useful life of the assets or a term that includes the
required lease periods and renewals that are deemed to be reasonably assured as
of the date the leasehold improvements are purchased or the date of acquisition,
as applicable. EITF 05-6 is effective the first reporting period beginning after
June 29, 2005. The adoption of EITF 05-6 did not have a material effect on the
Company's results of operations or financial position.
45
2. ACQUISITIONS
In May 2003, the Company, through a subsidiary, acquired substantially
all of the assets and liabilities of Niacc Technology, Inc. (Niacc). Niacc is
engaged in the repair and overhaul of aircraft components and accessories
principally serving the regional commuter and business aircraft market. The
Company paid the purchase price of this acquisition primarily by using proceeds
from its revolving credit facility.
In December 2003, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired an 80% interest in the assets and
business of Sierra Microwave Technology, Inc., (Sierra). Under the transaction,
the Company formed a new subsidiary, Sierra Microwave Technology, LLC (Sierra
LLC), which acquired substantially all of the assets and assumed certain
liabilities of Sierra. The new subsidiary is owned 80% by the Company and 20% by
certain members of Sierra's management group. The purchase price was principally
paid in cash using proceeds from the Company's revolving credit facility and
with shares of HEICO's Class A Common Stock. Sierra LLC is engaged in the design
and manufacture of certain niche microwave components used in satellites and
military products. As part of the agreement to acquire an 80% interest in
Sierra, the Company has the right to purchase the minority interests beginning
at approximately the tenth anniversary of the acquisition, or sooner under
certain conditions, and the minority holders have the right to cause the Company
to purchase their interests commencing at approximately the fifth anniversary of
the acquisition, or sooner under certain conditions.
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 purchase price was principally paid in
cash using proceeds from the Company's revolving credit facility. Subject to
meeting certain earnings objectives during the first four years following the
acquisition, the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in aggregate. The Company accrued $2.2
million of such additional purchase consideration as of October 31, 2005 based
on the year-to-date earnings of Connectronics relative to its target, which it
expects to pay in fiscal 2006. Connectronics is engaged in the production of
specialty high voltage interconnection devices and wire primarily for defense
applications and other markets.
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 purchase price
was principally paid in cash using proceeds from the Company's revolving credit
facility. 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 purchase consideration after the fifth year, which
is currently estimated to total up to $2.3 million. The additional purchase
consideration will be accrued when the earnings objectives are met. Lumina is
engaged in the design and manufacture of power supplies for the laser industry.
In September 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired an 85% interest in the stock of HVT
Group, Inc., (HVT). The remaining 15% interest is held by certain members of
HVT's management group. The purchase price was principally paid in cash using
proceeds from the Company's revolving credit facility. As part of the agreement
to acquire an 85% interest in HVT, the minority holders have the right to cause
the Company to purchase their interests over a four-year period starting around
the second anniversary of the acquisition, or sooner under certain conditions.
HVT is a leading provider of very high voltage interconnection devices and cable
assemblies for the medical equipment, defense and industrial markets.
46
In September 2005, the Company, through its HEICO Aerospace Holdings
Corp. subsidiary, acquired certain assets and assumed certain liabilities in an
aerospace and defense product line acquisition, which will be used in the
operations of one of its existing subsidiaries. The purchase price was paid in
cash provided by operating activities.
The Company also accrued additional purchase consideration aggregating
$.8 million as of October 31, 2005 in accordance with the agreements related to
the Connectronics and HVT acquisitions based principally on the actual value of
net assets acquired. The Company expects to pay this amount in fiscal 2006.
All of the acquisitions described above were accounted for using the
purchase method of accounting and the results of each company were included in
the Company's results from their effective purchase dates. The purchase price of
each acquisition was not significant to the Company's consolidated financial
statements individually or in aggregate and the pro forma consolidated operating
results assuming each acquisition had been consummated as of the beginning of
its respective fiscal year would not have been materially different from the
reported results. The costs of each acquisition have been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values as of the date of acquisition as determined
by management. The allocation of the purchase price of HVT to the tangible and
identifiable intangible assets acquired and liabilities assumed in these
consolidated financial statements is preliminary until the Company obtains final
information regarding their fair values. The excess of the purchase price over
the net of the amounts assigned to assets acquired and liabilities assumed has
been recorded as goodwill (See Note 18, Supplemental Disclosures of Cash Flow
Information, of the Notes to Consolidated Financial Statements). The aggregate
cost of acquisitions, including payments made in cash and with shares of the
Company's common stock and contingent payments, was $41.5 million, $31.1 million
and $1.6 million in fiscal 2005, 2004 and 2003, respectively.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Accounts receivable $ 49,816,000 $ 37,380,000
Less: Allowance for doubtful accounts (2,148,000) (582,000)
-------------- --------------
Accounts receivable, net $ 47,668,000 $ 36,798,000
============== ==============
The $1.6 million net increase in the Company's allowance for doubtful
accounts in fiscal 2005 is principally as a result of bankruptcy filings in the
fourth quarter by certain customers in the aviation industry. The associated
charge is included in selling, general and administrative expenses in the
Company's Consolidated Statements of Operations. (See Note 15, Quarterly
Financial Information, of the Notes to Consolidated Financial Statements). The
30% increase in accounts receivable from $36.8 million as of October 31, 2004 to
$47.7 million as of October 31, 2005 exceeds the 25% increase the Company
experienced in net sales during fiscal 2005 as accounts receivable as of October
31, 2005 reflects the full impact of the fiscal 2005 acquisitions, which only
affected net sales since their respective acquisition dates.
47
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Costs incurred on uncompleted contracts $ 18,344,000 $ 14,798,000
Estimated earnings 11,252,000 8,686,000
-------------- --------------
29,596,000 23,484,000
Less: Billings to date (21,747,000) (19,663,000)
-------------- --------------
$ 7,849,000 $ 3,821,000
============== ==============
Included in accompanying consolidated balance
sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 7,889,000 $ 4,612,000
Accrued expenses and other current liabilities (billings
in excess of costs and estimated earnings) (40,000) (791,000)
-------------- --------------
$ 7,849,000 $ 3,821,000
============== ==============
Changes in estimates did not have a material effect on net income or
diluted net income per share in fiscal 2005, 2004, or 2003.
INVENTORIES
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Finished products $ 26,136,000 $ 19,838,000
Work in process 12,634,000 9,597,000
Materials, parts, assemblies and supplies 23,988,000 18,585,000
-------------- --------------
Inventories, net $ 62,758,000 $ 48,020,000
============== ==============
Inventories related to long-term contracts were not significant as of
October 31, 2005 and 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
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Land $ 3,155,000 $ 2,157,000
Buildings and improvements 25,344,000 20,007,000
Machinery, equipment and tooling 53,460,000 55,869,000
Construction in progress 3,128,000 2,239,000
-------------- --------------
85,087,000 80,272,000
Less: Accumulated depreciation and amortization (38,424,000) (39,714,000)
-------------- --------------
Property, plant and equipment, net $ 46,663,000 $ 40,558,000
============== ==============
The amounts set forth above include tooling costs having a net book
value of $3,441,000 and $3,652,000 as of October 31, 2005 and 2004,
respectively. Amortization expense on capitalized tooling
48
was $1,346,000, $1,484,000 and $1,639,000 for the fiscal years ended October 31,
2005, 2004 and 2003, respectively. Expenditures for capitalized tooling costs
were $885,000, $955,000 and $952,000 in fiscal 2005, 2004 and 2003,
respectively.
Depreciation and amortization expense, exclusive of tooling, on
property, plant and equipment, amounted to approximately $5,574,000, $4,841,000
and $4,659,000 for the fiscal years ended October 31, 2005, 2004 and 2003,
respectively.
Included in the Company's property, plant and equipment is rotable
equipment located at various customer locations in connection with certain
repair and maintenance agreements. The rotables are stated at a net book value
of $3,256,000 and $3,781,000 as of October 31, 2005 and 2004, respectively.
Under the terms of the agreements, the customers may purchase the equipment at
specified prices, which are no less than net book value, upon termination of the
agreements. The equipment is currently being depreciated over its estimated
life.
In January 2005, the Company received proceeds of $3,520,000 from the
sale of 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.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
AS OF OCTOBER 31,
-------------- --------------
2005 2004
-------------- --------------
Accrued employee compensation and related payroll taxes $ 13,794,000 $ 9,105,000
Accrued customer rebates and credits 8,222,000 5,961,000
Accrued additional purchase consideration 3,045,000 --
Other 7,412,000 5,178,000
-------------- --------------
Total accrued expenses and other current liabilities $ 32,473,000 $ 20,244,000
============== ==============
OTHER NON-CURRENT LIABILITIES
Other non-current liabilities include deferred compensation of
$5,847,000 and $5,216,000 as of October 31, 2005 and 2004, respectively,
principally related to elective deferrals of salary and bonuses under a Company
sponsored non-qualified deferred compensation plan available to selected
employees. The Company makes no contributions to this plan. The assets of this
plan related to this deferred compensation liability are held within an
irrevocable trust and classified within other assets (long-term) in the
accompanying Consolidated Balance Sheets.
49
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (FSG )
and the Electronic Technologies Group (ETG). Changes in the carrying amount of
goodwill during fiscal 2005 and 2004 by operating segment are as follows:
SEGMENT
----------------------------- CONSOLIDATED
FSG ETG TOTALS
------------- ------------- -------------
Balances as of October 31, 2003 $ 119,729,000 $ 68,971,000 $ 188,700,000
Goodwill acquired -- 27,349,000 27,349,000
Adjustments to goodwill 559,000 66,000 625,000
------------- ------------- -------------
Balances as of October 31, 2004 120,288,000 96,386,000 216,674,000
Goodwill acquired 1,092,000 26,757,000 27,849,000
Accrued additional purchase consideration -- 3,045,000 3,045,000
Adjustments to goodwill 661,000 -- 661,000
------------- ------------- -------------
Balances as of October 31, 2005 $ 122,041,000 $ 126,188,000 $ 248,229,000
============= ============= =============
The goodwill acquired and accrued additional purchase consideration
during fiscal 2005 are a result of the Company's acquisitions described in Note
2, Acquisitions, of the Notes to Consolidated Financial Statements. Adjustments
to goodwill consist primarily of additional purchase price payments and
contingent purchase price payments to previous owners of acquired businesses.
Identifiable intangible assets, which are recorded within other assets
in the Company's Consolidated Balance Sheets, consist of:
AS OF OCTOBER 31,
---------------------------------------------------------------------------------------
2005 2004
------------------------------------------ ------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Amortizing Assets
Licenses $ 1,000,000 $ (252,000) $ 748,000 $ 1,000,000 $ (178,000) $ 822,000
Patents 477,000 (60,000) 417,000 338,000 (32,000) 306,000
Non-compete agreements 660,000 (129,000) 531,000 110,000 (49,000) 61,000
------------ ------------ ------------ ------------ ------------ ------------
2,137,000 (441,000) 1,696,000 1,448,000 (259,000) 1,189,000
Non-Amortizing Assets
Trade names 3,650,000 -- 3,650,000 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
$ 5,787,000 $ (441,000) $ 5,346,000 $ 1,448,000 $ (259,000) $ 1,189,000
============ ============ ============ ============ ============ ============
The increase in the gross carrying amount of non-compete agreements and
trade names as of October 31, 2005 compared to October 31, 2004 principally
relates to such intangible assets recognized in connection with fiscal 2005
acquisitions. (See Note 2, Acquisitions, and Note 18, Supplemental Disclosures
of Cash Flow Information, of the Notes to Consolidated Financial Statements.)
The weighted average amortization period of the non-compete agreements acquired
in fiscal 2005 is approximately six years. Acquisitions of intangible assets
were not significant in fiscal 2004.
Amortization expense of other intangible assets was $193,000, $112,000
and $98,000 for the fiscal years ended October 31, 2005, 2004 and 2003,
respectively. Amortization expense for each of the next five fiscal years is
expected to be $259,000 in fiscal 2006, $196,000 in fiscal 2007, $180,000 in
fiscal 2008, $166,000 in fiscal 2009, and $166,000 in fiscal 2010.
50
5. LONG-TERM DEBT
Long-term debt consists of:
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Borrowings under revolving credit facility $ 32,000,000 $ 16,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 144,000 149,000
-------------- --------------
34,124,000 18,129,000
Less: Current maturities of long-term debt (63,000) (58,000)
-------------- --------------
$ 34,061,000 $ 18,071,000
============== ==============
The aggregate amount of long-term debt maturing by fiscal year is
$63,000 in fiscal 2006, $39,000 in fiscal 2007, $1,995,000 in fiscal 2008,
$18,000 in fiscal 2009, and $32,009,000 in fiscal 2010.
REVOLVING CREDIT FACILITY
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.
As of October 31, 2005 and 2004, the Company had a total of $32 million
and $16 million, respectively, borrowed under its revolving credit facility at
weighted average interest rates of 4.7% and 2.9%, respectively. The amounts were
primarily borrowed to partially fund acquisitions (see Note 2, Acquisitions, of
the Notes to Consolidated Financial Statements).
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds outstanding as of October 31,
2005 represent bonds issued by Broward County, Florida in 1988 (the 1988 bonds).
The 1988 bonds are due April 2008 and bear interest at a variable rate
calculated weekly (2.8% and 1.8% as of October 31, 2005 and 2004, respectively).
The 1988 bonds as amended are secured by a $2.0 million letter of credit
expiring April 2008 and a mortgage on the related properties pledged as
collateral.
51
6. INCOME TAXES
The provision for income taxes on income before income taxes and
minority interests for each of the three fiscal years ended October 31 is as
follows:
2005 2004 2003
------------ ------------ ------------
Current:
Federal $ 11,346,000 $ 6,088,000 $ 3,908,000
State 1,667,000 735,000 444,000
Foreign 56,000 -- --
------------ ------------ ------------
13,069,000 6,823,000 4,352,000
Deferred 3,031,000 4,125,000 3,520,000
------------ ------------ ------------
Total income tax expense $ 16,100,000 $ 10,948,000 $ 7,872,000
============ ============ ============
The following table reconciles the federal statutory tax rate to the
Company's effective tax rate for each of the three fiscal years ended
October 31:
2005 2004 2003
-------- -------- --------
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, less applicable federal income tax reduction 3.2 2.2 2.5
Net tax benefit related to non-taxable life insurance proceeds -- (4.8) --
Net tax benefit on export sales (1.8) (2.3) (2.3)
Net tax benefit (liability) on minority interest's share of income (.5) (.9) .4
Other, net .7 .7 --
-------- -------- --------
Effective tax rate 36.6% 29.9% 35.6%
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company
believes that it is more likely than not that it will generate sufficient future
taxable income to utilize all of its deferred tax assets and has therefore not
recorded a valuation allowance on any such asset. Significant components of the
Company's deferred tax assets and liabilities are as follows:
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Deferred tax assets:
Inventories $ 4,268,000 $ 3,744,000
Deferred compensation liability 2,286,000 2,096,000
Allowance for doubtful accounts receivable 810,000 187,000
Customer rebates accrual 739,000 623,000
Capitalized research and development expenses 502,000 709,000
Other 1,535,000 1,640,000
-------------- --------------
Total deferred tax assets 10,140,000 8,999,000
-------------- --------------
Deferred tax liabilities:
Intangible asset amortization 20,722,000 15,545,000
Accelerated depreciation 4,504,000 3,966,000
Other 127,000 78,000
-------------- --------------
Total deferred tax liabilities 25,353,000 19,589,000
-------------- --------------
Net deferred tax liability $ (15,213,000) $ (10,590,000)
============== ==============
52
The net deferred tax liability is classified on the balance sheet as
follows:
AS OF OCTOBER 31,
-------------------------------
2005 2004
-------------- --------------
Current asset $ 7,218,000 $ 5,672,000
Long-term liability (22,431,000) (16,262,000)
-------------- --------------
Net deferred tax liability $ (15,213,000) $ (10,590,000)
============== ==============
The increase in the net deferred tax liability from $10.6 million as of
October 31, 2004 to $15.2 million as of October 31, 2005 is due to the $3.0
million deferred income tax expense for fiscal 2005 and $1.6 million in net
deferred tax liabilities recognized in connection with an acquisition in fiscal
2005. The net deferred tax liabilities recognized principally relate to
differences between the assigned values and the tax bases of identifiable
intangible assets and property, plant and equipment acquired. No deferred tax
assets or liabilities were recognized in connection with the Company's
acquisitions in fiscal 2004 or 2003.
Certain individual holders of non-qualified stock options issued by the
Company exchanged certain stock options for annuity contracts in 1999 - 2002. As
a result, the recognition of compensation income otherwise reportable upon the
exercise of stock options was deferred. Accordingly, the Company has reported
the compensation income to the individuals for income tax purposes and taken the
corresponding tax deduction on the Company's income tax returns beginning in
fiscal 2004 on an installment basis over the lives of the annuity contracts. The
individuals and the Company each are in discussions with the Internal Revenue
Service, which could accelerate the income reportable by the individuals and
accelerate the Company's corresponding compensation deduction benefit allowable
on its income tax returns. If the income is accelerated, the Company would
receive a tax refund of approximately $5 million, which would be recorded as a
tax benefit from stock option exercises by increasing Capital in Excess of Par
Value, a component of Shareholders' Equity in the Company's Consolidated Balance
Sheets. Absent a resolution, the Company expects to continue to report the
compensation income to the individuals and record the corresponding tax credit
and increase in Capital in Excess of Par Value over the lives of the annuity
contracts through fiscal 2016.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company's Board of Directors adopted, as of November 2, 2003, a new
Shareholder Rights Agreement (the "2003 Plan") to replace the expiring one (the
"1993 Plan"). Pursuant to the 2003 Plan, the Board declared a dividend of one
preferred share purchase right for each outstanding share of Common Stock and
Class A Common Stock (with the preferred share purchase rights collectively as
"the Rights"). The Rights trade with the common stock and are not exercisable or
transferable apart from the Common Stock and Class A Common Stock until after a
person or group either acquires 15% or more of the outstanding common stock or
commences or announces an intention to commence a tender offer for 15% or more
of the outstanding common stock. Absent either of the aforementioned events
transpiring, the Rights will expire as of the close of business on November 2,
2013.
The Rights have certain anti-takeover effects and, therefore, will
cause substantial dilution to a person or group who attempts to acquire the
Company on terms not approved by the Company's Board of Directors or who
acquires 15% or more of the outstanding common stock without approval of the
Company's Board of Directors. The Rights should not interfere with any merger or
other business
53
combination approved by the Board since they may be redeemed by the Company at
$.01 per Right at any time until the close of business on the tenth day after a
person or group has obtained beneficial ownership of 15% or more of the
outstanding common stock or until a person commences or announces an intention
to commence a tender offer for 15% or more of the outstanding common stock. The
2003 Plan also contains a provision to help ensure a potential acquiror pays all
shareholders a fair price for the Company.
COMMON STOCK AND CLASS A COMMON STOCK
Each share of Common Stock is entitled to one vote per share. Each
share of Class A Common Stock is entitled to a 1/10 vote per share. Holders of
the Company's Common Stock and Class A Common Stock are entitled to receive
when, as and if declared by the Board of Directors, dividends and other
distributions payable in cash, property, stock, or otherwise. In the event of
liquidation, after payment of debts and other liabilities of the Company, and
after making provision for the holders of preferred stock, if any, the remaining
assets of the Company will be distributable ratably among the holders of all
classes of common stock.
SHARE REPURCHASES
In accordance with the Company's share repurchase program, 22,000
shares of Class A Common Stock were repurchased at a total cost of $120,000 in
fiscal 2003. No shares were repurchased in fiscal 2005 or 2004.
STOCK DIVIDEND
In January 2004, the Company paid a 10% stock dividend on both classes
of common stock outstanding with shares of Class A Common Stock. The 10%
dividend was valued based on the closing market price of the Company's Class A
Common Stock as of the day prior to the declaration date. All net income per
share, dividend per share, price and other data per share, exercise price, stock
option, and common share data has been adjusted retroactively to give effect to
the stock dividend.
8. STOCK OPTIONS
The Company currently has two stock option plans, the 2002 Stock Option
Plan (2002 Plan) and the Non-Qualified Stock Option Plan under which stock
options may be granted. The Company's 1993 Stock Option Plan (1993 Plan)
terminated in March 2003 on the tenth anniversary of its effective date. No
options may be granted under the 1993 Plan after such termination date; however,
options outstanding as of the termination date may be exercised pursuant to
their terms. In addition, the Company granted stock options to two former
shareholders of an acquired business pursuant to employment agreements entered
into in connection with the acquisition in fiscal 1999. A total of 3,744,983
shares of the Company's stock are reserved for issuance to employees, directors,
officers, and consultants as of October 31, 2005, including 3,588,680 shares
currently under option and 156,303 shares available for future grants. Options
issued under the 2002 Plan may be designated as incentive stock options or
non-qualified stock options. Incentive stock options are granted with an
exercise price of not less than 100% of the fair market value of the Company's
common stock as of date of grant (110% thereof in certain cases) and are
exercisable in percentages specified as of the date of grant over a period up to
ten years. Only employees are eligible to receive incentive stock options.
Non-qualified stock options under the 2002 Plan may be granted at less than fair
market value and may be immediately exercisable. Options granted under the
Non-Qualified Stock Option Plan may be granted with an exercise price of no less
than the fair market value of the Company's common stock as of the date of grant
and are generally exercisable in four equal annual installments commencing one
year from the date of grant. The options granted pursuant to the
54
2002 Plan may be with respect to Common Stock and/or Class A Common Stock, in
such proportions as shall be determined by the Board of Directors or the Stock
Option Plan Committee in its sole discretion. The stock options granted to two
former shareholders of an acquired business were fully vested and transferable
as of the grant date and expire ten years from the date of grant. The exercise
price of such options was the fair market value as of the date of grant. Options
under all stock option plans expire not later than ten years after the date of
grant, unless extended by the Stock Option Plan Committee or the Board of
Directors.
Information concerning stock option activity for each of the three
fiscal years ended October 31 is as follows:
SHARES UNDER OPTION
SHARES ----------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
------------ ------------ -------------------
Outstanding as of October 31, 2002 338,591 4,866,501 $ 8.31
Granted (503,250) 503,250 $ 7.20
Cancelled 331,082 (334,749) $ 13.10
Exercised -- (586,327) $ 2.30
------------ ------------
Outstanding as of October 31, 2003 166,423 4,448,675 $ 8.62
Granted (10,000) 10,000 $ 13.19
Cancelled 880 (20,332) $ 12.26
Exercised -- (403,076) $ 2.75
------------ ------------
Outstanding as of October 31, 2004 157,303 4,035,267 $ 9.20
Granted (1,000) 1,000 $ 19.08
Cancelled -- (82,637) $ 13.38
Exercised -- (364,950) $ 5.36
------------ ------------
Outstanding as of October 31, 2005 156,303 3,588,680 $ 9.50
============ ============
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of October 31, 2005 is as follows:
COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (YEARS) EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ------------------------ ----------- ----------------
$ 1.16 - $ 2.90 111,182 $ 1.84 0.9 111,182 $ 1.84
$ 2.91 - $ 7.00 308,017 $ 4.75 0.7 308,017 $ 4.75
$ 7.01 - $12.00 642,250 $ 8.99 5.6 459,249 $ 9.32
$12.01 - $21.92 479,501 $ 14.43 5.2 403,501 $ 14.50
----------- -----------
1,540,950 $ 9.32 4.1 1,281,949 $ 9.20
=========== ===========
CLASS A COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (YEARS) EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ------------------------ ----------- ----------------
$ 1.16 - $ 2.90 110,795 $ 1.84 0.9 110,795 $ 1.84
$ 2.91 - $ 7.00 436,278 $ 4.97 2.5 355,428 $ 4.85
$ 7.01 - $12.00 848,244 $ 8.60 5.2 733,942 $ 8.55
$12.01 - $21.92 652,413 $ 15.40 4.3 598,775 $ 15.60
----------- -----------
2,047,730 $ 9.63 4.1 1,798,940 $ 9.75
=========== ===========
55
If there were a change in control of the Company, options outstanding
for an additional 183,560 shares of Common Stock and 225,530 shares of Class A
Common Stock would become immediately exercisable.
The estimated weighted average fair value of the Class A Common Stock
options granted was $9.16, $6.16 and $3.55 per share, respectively in fiscal
years 2005, 2004 and 2003. The estimated weighted average fair value of the
Common Stock options granted was $4.64 per share in fiscal 2003. There were no
grants of Common Stock options in fiscal 2005 and 2004.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions for each of the three fiscal years ended October 31:
2005 2004 2003
----------------- ----------------- -----------------
CLASS A CLASS A CLASS A
COMMON COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
------- ------- ------- ------- ------- -------
Expected stock price volatility -- 43.84% -- 46.87% 52.65% 52.24%
Risk free interest rate -- 4.09% -- 3.28% 3.37% 3.43%
Dividend yield -- .38% -- .38% .26% .33%
Expected option life (years) -- 6 -- 6 8 8
9. RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the
Plan) under which eligible employees of the Company and its participating
subsidiaries may make elective deferral contributions, effective January 1,
2005, up to the limitations set forth in Section 402(g) of the Internal Revenue
Code. Prior to calendar 2005, deferrals were permitted up to 15% of an eligible
employee's annual compensation as defined by the Plan. The Company generally
makes a 25% or 50% employer matching contribution, as determined by the Board of
Directors, based on a participant's Elective Deferral Contribution up to 6% of
the Participant's compensation for the Elective Deferral Contribution period.
The match is made in the Company's common stock or cash, as determined by the
Company. The Company's match of employee contributions paid in common stock is
based on the fair market value of the shares as of the date of contribution. The
Plan also provides that the Company may contribute additional amounts in its
common stock or cash at the discretion of the Board of Directors. Employee
contributions can not be invested in Company stock.
Participants receive 100% vesting in employee contributions. Vesting in
Company contributions is based on a participant's number of years of vesting
service. Contributions to the Plan charged to income in fiscal 2005, 2004 and
2003 totaled $148,000, $189,000 and $403,000, respectively. The decline in
charges to income results principally from the use of forfeited shares within
the Plan to make Company contributions. As of October 31, 2005, the Plan held
approximately 230,000 forfeited shares of Common Stock and 231,000 forfeited
shares of Class A Common Stock, which are available to make future Company
contributions.
In 1991, the Company established a Directors Retirement Plan covering
its then current directors. The net assets of this plan as of October 31, 2005,
2004 and 2003 are not material to the financial position of the Company. During
fiscal 2005, 2004 and 2003, $59,000, $88,000, and $34,000, respectively, were
expensed for this plan.
56
10. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales amounts in fiscal 2005, 2004 and 2003 include
approximately $11,311,000, $10,446,000 and $9,224,000 respectively, of new
product research and development expenses. The expenses are net of
reimbursements pursuant to research and development cooperation and joint
venture agreements. Such reimbursements were not significant in fiscal 2005,
2004 and 2003.
11. 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
Consolidated Statements of Operations. The Company's investment in the 50%-owned
joint venture and its share of the operating results were not significant to the
Company's consolidated financial statements.
12. LIFE INSURANCE PROCEEDS
In fiscal 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 fiscal 2004 net income
(after the minority interest's share of the income) by $4.0 million, or $.16 per
diluted share.
13. RESTRUCTURING EXPENSES
During the first quarter of fiscal 2005, the Company completed
restructuring activities initiated in fiscal 2004 within certain subsidiaries of
the Flight Support Group that provide repair and overhaul services. The
unexpected death of an executive of certain of the repair and overhaul
subsidiaries (see Note 12, Life Insurance Proceeds, of the Notes to Consolidated
Financial Statements) was the impetus for the commencement of the restructuring
activities, which the Company believes will allow it to better service its
customers and improve operating margins. The Company incurred $22,000 of
restructuring expenses in fiscal 2005 and $850,000 in fiscal 2004. The fiscal
2004 restructuring expenses include $350,000 of inventory write-downs, which
were recorded within cost of sales in the accompanying Consolidated Statements
of Operations, and $261,000 of management hiring/relocation related expenses,
$168,000 of moving costs and other associated expenses and $71,000 of contract
termination costs that were all recorded within selling, general and
administrative expenses. The inventory written down is related to older
generation aircraft for which repair and overhaul services are being
discontinued by the Company. The management hiring/relocation related expenses
include one-time employee termination/hiring benefits and relocation costs. The
moving costs and other associated expenses consist of moving costs related to
the consolidation of two repair and overhaul facilities. Contract termination
costs include the lease termination on a facility. The repair and overhaul
subsidiaries' restructuring expenses decreased net income (after income taxes
and the minority interest's share of the expenses) in fiscal 2004 by $427,000.
57
The following table details the restructuring activity that occurred in
fiscal 2005 and 2004:
MANAGEMENT MOVING
HIRING/ COSTS AND
INVENTORY RELOCATION OTHER CONTRACT
WRITE- RELATED ASSOCIATED TERMINATION
DOWNS EXPENSES EXPENSES COSTS TOTALS
------------ ------------ ------------ ------------ ------------
Balances as of November 1, 2003 $ -- $ -- $ -- $ -- $ --
Restructuring expenses 350,000 261,000 168,000 71,000 850,000
Cash payments -- (197,000) (57,000) -- (254,000)
Non-cash amount (350,000) -- -- -- (350,000)
------------ ------------ ------------ ------------ ------------
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 October 31, 2005 $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
14. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for each of the three fiscal years ended October 31:
2005 2004 2003
------------ ------------ ------------
Numerator:
Net income $ 22,812,000 $ 20,630,000 $ 12,222,000
============ ============ ============
Denominator:
Weighted average common shares outstanding - basic 24,460,185 24,036,980 23,236,841
Effect of dilutive stock options 1,863,117 1,717,618 1,294,439
------------ ------------ ------------
Weighted average common shares outstanding - diluted 26,323,302 25,754,598 24,531,280
============ ============ ============
Net income per share - basic $ .93 $ .86 $ .53
Net income per share - diluted $ .87 $ .80 $ .50
Anti-dilutive stock options excluded 181,760 579,837 2,144,694
58
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Net sales:
2005 $ 56,981,000 $ 66,973,000 $ 69,169,000 $ 76,524,000
2004 46,151,000 52,793,000 55,820,000 60,980,000
Gross profit:
2005 20,280,000 25,045,000 25,999,000 29,672,000
2004 15,536,000 18,714,000 19,616,000 21,946,000
Net income:
2005 4,428,000 5,713,000 6,046,000 6,625,000
2004 3,241,000 4,108,000 8,115,000 5,166,000
Net income per share:
Basic
2005 $ .18 $ .23 $ .25 $ .27
2004 .14 .17 .34 .21
Diluted
2005 .17 .22 .23 .25
2004 .13 .16 .32 .20
During the third quarter of fiscal 2004, the Company received $5.0
million in life insurance proceeds as referenced in Note 12, Life Insurance
Proceeds, of the Notes to Consolidated Financial Statements, which increased net
income (after the minority interest's share of the income) by $4.0 million, or
$.16 per diluted share.
During the third and fourth quarters of fiscal 2004 and the first
quarter of fiscal 2005, the Company incurred restructuring expenses within
certain subsidiaries of its Flight Support Group as referenced in Note 13,
Restructuring Expenses, of the Notes to Consolidated Financial Statements. In
the third quarter of fiscal 2004, restructuring expenses decreased gross profit
by $350,000 and net income by $301,000, or $.01 per diluted share. The net
impact of the restructuring expenses in the fourth quarter of fiscal 2004 and
first quarter of fiscal 2005 was not significant.
During the fourth quarter of fiscal 2005, the Company increased its
allowance for doubtful accounts by $1.6 million as a result of bankruptcy
filings by certain customers in the aviation industry as referenced in Note 3,
Selected Financial Statement Information, of the Notes to Consolidated Financial
Statements. The associated charge decreased net income by $829,000, or $.03 per
diluted share.
Due to changes in the average number of common shares outstanding, net
income per share for the full fiscal year may not equal the sum of the four
individual quarters.
59
16. OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG), consisting of HEICO Electronic and its subsidiaries.
See Note 1, Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements for a list of operating subsidiaries
aggregated in each reportable operating segment. The Flight Support Group
designs and manufactures FAA-approved jet engine and aircraft component
replacement parts, provides FAA-authorized repair and overhaul services and
provides subcontracting services to original equipment manufacturers in the
aviation industry and the U.S. Government. The Electronic Technologies Group
designs and manufactures commercial and military power supplies, circuit board
shielding, laser and electro-optical products, infrared simulation and test
equipment, and high voltage interconnection devices and cable assemblies and
repairs and overhauls aircraft electronic equipment primarily for the aviation,
defense, space, and electronics industries.
The Company's reportable business divisions offer distinctive products
and services that are marketed through different channels. They are managed
separately because of their unique technology and service requirements.
SEGMENT PROFIT OR LOSS
The accounting policies of the Company's operating segments are the
same as those described in Note 1, Summary of Significant Accounting Policies,
of the Notes to Consolidated Financial Statements. Management evaluates segment
performance based on segment operating income.
OTHER,
SEGMENT PRIMARILY
----------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------- ------------- ------------- -------------
For the year ended October 31, 2005:
Net sales $ 185,716,000 $ 84,094,000 $ (163,000) $ 269,647,000
Depreciation and amortization 4,522,000 2,470,000 417,000 7,409,000
Operating income 35,142,000 18,631,000 (9,124,000) 44,649,000
Capital expenditures 7,059,000 1,163,000 51,000 8,273,000
Total assets 230,229,000 188,851,000 16,544,000 435,624,000
For the year ended October 31, 2004:
Net sales $ 153,238,000 $ 62,648,000 $ (142,000) $ 215,744,000
Depreciation and amortization 4,580,000 1,762,000 437,000 6,779,000
Operating income 24,251,000 15,259,000 (6,891,000) 32,619,000
Capital expenditures 3,964,000 1,767,000 6,000 5,737,000
Total assets 212,615,000 136,860,000 14,780,000 364,255,000
For the year ended October 31, 2003:
Net sales $ 128,277,000 $ 48,597,000 $ (421,000) $ 176,453,000
Depreciation and amortization 4,895,000 1,399,000 426,000 6,720,000
Operating income 19,187,000 8,497,000 (4,479,000) 23,205,000
Capital expenditures 2,102,000 2,617,000 4,000 4,723,000
Total assets 214,292,000 103,798,000 15,154,000 333,244,000
60
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
No one customer accounted for 10 percent or more of the Company's
consolidated net sales during the last three fiscal years. The Company's net
sales originating and long-lived assets held outside of the United States during
each of the last three fiscal years were not material.
Export sales were $69,792,000 in fiscal 2005, $55,695,000 in fiscal
2004 and $47,013,000 in fiscal 2003.
17. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain property and equipment, including
manufacturing facilities and office equipment under operating leases. Some of
these leases provide the Company with the option after the initial lease term
either to purchase the property at the then fair market value or renew the lease
at the then fair rental value. Generally, management expects that leases will be
renewed or replaced by other leases in the normal course of business.
Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows:
Year ending October 31,
2006 ................................... $ 2,519,000
2007 ................................... 2,201,000
2008 ................................... 1,915,000
2009 ................................... 949,000
2010 ................................... 894,000
Thereafter ............................. 3,182,000
------------
Total minimum lease commitments ........ $ 11,660,000
============
Total rent expense charged to operations for operating leases in fiscal
2005, fiscal 2004 and fiscal 2003 amounted to $2,679,000, $2,737,000 and
$2,768,000, respectively.
GUARANTEES
The Company has arranged for standby letters of credit aggregating to
$1.8 million to meet the security requirement of its insurance company for
potential workers' compensation claims. As of October 31, 2005, one of the
Company's subsidiaries had guaranteed its performance related to a customer
contract through two letters of credit aggregating $.3 million, both expiring
December 2005. In November 2005, the letters of credit were extended to April
2006 and increased to an aggregate of $1.2 million. All of 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.
61
Changes in the Company's product warranty liability for fiscal 2005 and
2004 are as follows:
Balance as of October 31, 2003 $ 633,000
Change in estimate of warranty liability (535,000)
Accruals for warranties 345,000
Warranty claims settled (314,000)
-----------
Balance as of October 31, 2004 129,000
Acquired warranty liabilities 89,000
Accruals for warranties 488,000
Warranty claims settled (311,000)
-----------
Balance as of October 31, 2005 $ 395,000
===========
The acquired warranty liabilities in fiscal 2005 pertain to the
acquisitions made as further discussed in Note 2, Acquisitions, of the Notes to
Consolidated Financial Statements. Based on an analysis of its historical claims
cost experience, the Company reduced its estimated warranty liability in fiscal
2004.
As partial consideration in the acquisition of Inertial Airline
Services, Inc. (IAS) in August 2001, the Company issued $5 million in HEICO
Class A Common Stock (318,960 shares) and guaranteed that the resale value of
such Class A Common Stock would be at least $5 million through August 31, 2004.
Concurrent with the acquisition, the Company loaned the seller $5 million, which
was due August 31, 2004 and secured by the 318,960 shares of HEICO Class A
Common Stock. The loan was reflected as a reduction of shareholders' equity in
the Company's Consolidated Balance Sheets under the caption, "Note Receivable
Secured by Class A Common Stock." In fiscal 2003, the seller sold 220,000 shares
of the HEICO Class A Common Stock and the Company received the net proceeds of
$2.1 million to reduce the note receivable. In fiscal 2004, the Company received
net proceeds of $1.2 million from the seller upon the sale of the remaining
98,960 shares of the HEICO Class A Common Stock. Pursuant to the Company's
guarantee that the aggregate resale value of the 318,960 shares of Class A
Common Stock would be at least $5 million, the $1.7 million difference between
the guaranteed value and the $3.3 million of aggregate net proceeds ($2.1
million received in fiscal 2003 and $1.2 million received in fiscal 2004) from
the sales of the Class A Common Stock was recorded in fiscal 2004 as a reduction
of both capital in excess of par value and the note receivable.
As part of the agreement to acquire an 80% interest in Sierra Microwave
Technology, Inc., in December 2003, the Company has the right to purchase the
minority interests beginning at approximately the tenth anniversary of the
acquisition, or sooner under certain conditions, and the minority holders have
the right to cause the Company to purchase their interests commencing at
approximately the fifth anniversary of the acquisition, or sooner under certain
conditions.
As part of the agreement to purchase Connectronics Corporation in
December 2004, the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition. The Company accrued $2.2 million of such additional purchase
consideration as of October 31, 2005 based on the year-to-date earnings of
Connectronics relative to its target, which it expects to pay in fiscal 2006.
As part of the agreement to purchase Lumina Power, Inc. in February
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should
62
Lumina meet certain product line-related earnings objectives during the fourth
and fifth years following the acquisition. The additional purchase consideration
will be accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in HVT Group, Inc.
in September 2005, the minority holders have the right to cause the Company to
purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
The Company also accrued additional purchase consideration aggregating
$.8 million as of October 31, 2005 in accordance with the agreements related to
the Connectronics and HVT acquisitions based principally on the actual value of
the net assets acquired. The Company expects to pay this amount in fiscal 2006.
As part of an agreement for exclusive license rights to intellectual
property, one of the Company's subsidiaries has guaranteed minimum royalty
payments aggregating $355,000 through fiscal 2007.
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.
18. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was $1,062,000, $1,099,000 and $1,291,000 in
fiscal 2005, 2004 and 2003, respectively. Cash paid for income taxes was
$8,176,000, $2,688,000 and $3,460,000 in fiscal 2005, 2004 and 2003,
respectively. Cash received from income tax refunds in fiscal 2005, 2004 and
2003 was $101,000, $72,000 and $1,300,000, respectively.
Cash investing activities related to acquisitions, including contingent
payments, for each of the three fiscal years ended October 31, is as follows:
2005 2004 2003
-------------- -------------- --------------
Fair value of assets acquired:
Liabilities assumed $ 5,202,000 $ 684,000 $ 698,000
Less:
Goodwill 28,510,000 24,974,000 1,023,000
Accounts receivable 4,055,000 1,785,000 312,000
Inventories 4,645,000 707,000 431,000
Property, plant and equipment 4,904,000 1,311,000 408,000
Trade names 3,650,000 -- --
Non-compete agreements 560,000 -- --
Other assets 378,000 6,000 78,000
-------------- -------------- --------------
Cash paid, including contingent payments $ (41,500,000) $ (28,099,000) $ (1,554,000)
============== ============== ==============
63
In connection with the purchase of Sierra in December 2003 (see Note 2,
Acquisitions, of the Notes to Consolidated Financial Statements), the Company
issued shares of HEICO's Class A Common Stock valued at $3 million, which was
allocated to goodwill.
In connection with the acquisitions of Connectronics and HVT in fiscal
2005, the Company accrued additional purchase consideration aggregating $3.0
million, which was allocated to goodwill (see Note 2, Acquisitions, of the Notes
to Consolidated Financial Statements).
Retained earnings were reduced by $29,393,000 in fiscal 2004 as a
result of the 10% stock dividend described in Note 7, Shareholders' Equity -
Stock Dividend, of the Notes to Consolidated Financial Statements.
There were no significant capital lease and/or other equipment
financing activities during fiscal 2005, 2004, or 2003.
19. SUBSEQUENT EVENTS (UNAUDITED)
In November 2005, the Company, through its HEICO Aerospace Holdings
Corp. subsidiary, acquired a 51% interest in the assets and business of Seal
Dynamics LLC (SDI). SDI is a distributor and designer of FAA-Approved hydraulic,
pneumatic, mechanical and electro-mechanical components for the commercial,
regional and general aviation markets.
In November 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired all of the stock of Engineering Design
Team, Inc. (EDT) and substantially all of the assets of an EDT affiliate. EDT
specializes in the design, manufacture and sale of advanced high-technology,
high-speed interface products that link devices such as telemetry receivers,
digital cameras, high resolution scanners, simulation systems and test systems
to almost any computer. EDT's products are utilized in homeland security,
defense, medical, research, astronomical and other applications across numerous
industries.
The purchase price of each acquisition was not significant to the
Company's consolidated financial statements individually or in aggregate and was
principally paid using proceeds from the Company's revolving credit facility.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 Annual
Report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective for the purpose of ensuring that material information
required to be in this Annual Report on Form 10-K is made known to them by
others on a timely basis and that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's report on the Company's internal control over financial
reporting is included in Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
ATTESTATION REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP's attestation report on the Company's assessment
of its internal control over financials reporting is included in Item 8,
Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is continuously seeking to improve the efficiency and
effectiveness of its operations and of its internal controls. This results in
refinements to processes throughout the Company. However, there have been no
changes in the Company's internal control over financial reporting that occurred
during the Company's most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company, including the
Finance/Audit Committee of the Board of Directors and its Finance/Audit
Committee Financial Expert, is hereby incorporated by reference to the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission (Commission) within 120 days after the close of fiscal 2005.
Information concerning the Executive Officers of the Company is set
forth in Item 1 of Part I hereof under the caption "Executive Officers of the
Registrant."
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. The code of ethics is
located on the Company's Internet web site at http://www.heico.com. Any
amendments to or waivers from a provision of this code of ethics will be posted
on the Company's web site.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners
and management is hereby incorporated by reference to the Company's definitive
proxy statement, which will be filed with the Commission within 120 days after
the close of fiscal 2005.
Equity compensation plan information is set forth in Item 5 of Part II
hereof under the caption "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the principal accountant's fees and services is
hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2005.
66
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
subsidiaries are included in Part II, Item 8:
PAGE
----
Management's Report on Internal Control Over Financial Reporting............................. 32
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting............................................................................... 33
Report of Independent Registered Public Accounting Firm on Consolidated Financial
Statements.............................................................................. 35
Consolidated Balance Sheets at October 31, 2005 and 2004..................................... 36
Consolidated Statements of Operations for the years ended October 31, 2005,
2004 and 2003........................................................................... 37
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended October 31, 2005, 2004 and 2003..................................... 38
Consolidated Statements of Cash Flows for the years ended October 31, 2005,
2004 and 2003........................................................................... 39
Notes to Consolidated Financial Statements................................................... 40
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company and
subsidiaries is included herein:
o Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information
is not applicable or the information is included in the consolidated financial
statements or notes thereto presented in Part II, Item 8.
(a)(3) EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------
2.1 -- Amended and Restated Agreement of Merger and Plan of
Reorganization, dated as of March 22, 1993, by and among HEICO
Corporation, HEICO Industries, Corp. and New HEICO, Inc. is
incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-57624)
Amendment No. 1 filed on March 19, 1993.*
3.1 -- Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (Registration No. 33-57624) Amendment No. 1 filed on
March 19, 1993.*
67
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------
3.2 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated April 27, 1993, are incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
8-B dated April 29, 1993.*
3.3 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated November 3, 1993, are incorporated by reference
to Exhibit 3.3 to the Form 10-K for the year ended October 31,
1993.*
3.4 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated March 19, 1998, are incorporated by reference
to Exhibit 3.4 to the Company's Registration Statement on Form
S-3 (Registration No. 333-48439) filed on March 23, 1998.*
3.5 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated as of November 2, 2003, are incorporated by
reference to Exhibit 3.5 to the Form 10-K for the year ended
October 31, 2003.*
3.6 -- Bylaws of the Registrant are incorporated by reference to
Exhibit 3.4 to the Form 10-K for the year ended
October 31, 1996.*
4.0 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunBank, N.A., as Rights Agent, dated as of November 2, 1993,
incorporated by reference to Exhibit 1 to the Form 8-K dated
November 2, 1993.*
4.1 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunTrust Bank, N.A., as Rights Agent, dated as of November 2,
2003, incorporated by reference to Exhibit 4.0 to the Form 8-K
dated November 2, 2003.*
10.1 -- Loan Agreement, dated March 1, 1988, between HEICO Corporation
and Broward County, Florida is incorporated by reference to
Exhibit 10.1 to the Form 10-K for the year ended October 31,
1994.*
10.2 -- SunBank Reimbursement Agreement, dated February 28, 1994, between
HEICO Aerospace Corporation and SunBank/South Florida, N.A. is
incorporated by reference to Exhibit 10.2 to the Form 10-K for
the year ended October 31, 1994.*
10.3 -- Amendment, dated March 1, 1995, to the SunBank Reimbursement
Agreement dated February 28, 1994 between HEICO Aerospace
Corporation and SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.3 to the Form 10-K from the year ended
October 31, 1995.*
10.4 -- Amendment and Extension, dated February 28, 1999 to the SunBank
Reimbursement Agreement dated February 28, 1994, between SunTrust
Bank, South Florida, N.A. and HEICO Aerospace Corporation is
incorporated by reference to Exhibit 10.4 to the Form 10-K for
the year ended October 31, 1999.*
68
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------
10.5 -- Amendment, dated July 20, 2000, to the SunBank Reimbursement
Agreement dated February 28, 1994, between HEICO Aerospace
Corporation and SunTrust Bank is incorporated by reference to
Exhibit 10.5 to the Form 10-K for the year ended October 31,
2000.*
10.6 -- Amendment, dated as of January 14, 2004, to the SunBank
Reimbursement Agreement, dated as of February 28, 1994, between
HEICO Aerospace Corporation and SunTrust Bank is incorporated by
reference to Exhibit 10.1 to the Form 10-Q for the quarterly
period ended January 31, 2004.*
10.7# -- HEICO Savings and Investment Plan, as amended and restated
effective as of January 1, 2002 is incorporated by reference to
Exhibit 10.6 to the Form 10-K for the year ended October 31,
2002.*
10.8# -- First Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.7 to the Form 10-K for the year ended October 31,
2003.*
10.9# -- Second Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.8 to the Form 10-K for the year ended October 31,
2003.*
10.10# -- Third Amendment, effective as of October 1, 2003, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.9 to the Form 10-K for the year ended October 31,
2003.*
10.11# -- Fourth Amendment, with portions effective as of January 1, 2005,
and other portions effective as of January 1, 2004, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.11 to the Form 10-K for the year ended October 31,
2004. *
10.12# -- Fifth Amendment, effective as of March 28, 2005, to the HEICO
Savings and Investment Plan is incorporated by reference to
Exhibit 10.1 to the Form 10-Q for the quarterly period ended
April 30, 2005. *
10.13# -- Sixth Amendment, effective as of January 1, 2006, to the HEICO
Savings and Investment Plan. **
10.14# -- Non-Qualified Stock Option Agreement for Directors, Officers and
Employees is incorporated by reference to Exhibit 10.8 to the
Form 10-K for the year ended October 31, 1985.*
10.15# -- HEICO Corporation 1993 Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81789)
filed on June 29, 1999.*
10.16# -- HEICO Corporation 2002 Stock Option Plan, effective March 19,
2002, is incorporated by reference to Exhibit 10.10 to the Form
10-K for the year ended October 31, 2002.*
69
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------
10.17# -- HEICO Corporation Directors' Retirement Plan, as amended, dated
as of May 31, 1991, is incorporated by reference to Exhibit 10.19
to the Form 10-K for the year ended October 31, 1992.*
10.18# -- Key Employee Termination Agreement, dated as of April 5, 1988,
between HEICO Corporation and Thomas S. Irwin is incorporated by
reference to Exhibit 10.20 to the Form 10-K for the year ended
October 31, 1992.*
10.19 -- Shareholders Agreement, dated October 30, 1997, by and between
HEICO Aerospace Holdings Corp., HEICO Aerospace Corporation and
all of the shareholders of HEICO Aerospace Holdings Corp. and
Lufthansa Technik AG is incorporated by reference to Exhibit
10.32 to Form 10-K/A for the year ended October 31, 1997.*
10.20 -- Revolving Credit Agreement, dated as of May 15, 2003, among HEICO
Corporation and SunTrust Bank, as Administrative Agent, is
incorporated by reference to Exhibit 10.1 to the Form 8-K filed
on May 29, 2003.*
10.21 -- Consent to Extension dated as of April 5, 2004 to the Revolving
Credit Agreement dated as of May 15, 2003 among HEICO Corporation
and SunTrust Bank, is incorporated by reference to Exhibit 10.1
to the Form 10-Q for the quarterly period ended April 30, 2004.*
10.22 -- 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, is incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarterly period ended July 31, 2005. *
10.23 -- 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.*
21 -- Subsidiaries of HEICO Corporation.**
23 -- Consent of Independent Registered Public Accounting Firm.**
31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.**
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.**
32.1 -- Section 1350 Certification of Chief Executive Officer.***
32.2 -- Section 1350 Certification of Chief Financial Officer.***
- ----------
# Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
* Previously filed.
** Filed herewith.
*** Furnished herewith.
70
HEICO CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Allowance as of beginning of year $ 582,000 $ 635,000 $ 1,622,000
Additions (deductions) charged (credited) to costs
and expenses 1,867,000 316,000 (133,000)
Additions from acquisitions 10,000 4,000 30,000
Deductions (a) (311,000) (373,000) (884,000)
------------ ------------ ------------
Allowance as of end of year $ 2,148,000 $ 582,000 $ 635,000
============ ============ ============
(a) Principally write-offs of uncollectible accounts receivables, net of
recoveries.
INVENTORY VALUATION RESERVES:
Reserves as of beginning of year $ 14,487,000 $ 12,142,000 $ 8,129,000
Additions charged to costs and expenses 2,218,000 4,553,000 3,697,000
Additions from acquisitions 402,000 152,000 350,000
Deductions (a) (619,000) (2,360,000) (34,000)
------------ ------------ ------------
Reserves as of end of year $ 16,488,000 $ 14,487,000 $ 12,142,000
============ ============ ============
(a) Principally write-offs of slow moving, obsolete or damaged inventory.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
Date: January 17, 2006 By: /s/ THOMAS S. IRWIN
---------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ LAURANS A. MENDELSON Chairman, President,
- ------------------------------ Director (Principal
Laurans A. Mendelson Executive Officer)
/s/ SAMUEL L. HIGGINBOTTOM Director
- ------------------------------
Samuel L. Higginbottom
Director
- ------------------------------
Wolfgang Mayrhuber
/s/ ERIC A. MENDELSON Director
- ------------------------------
Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director
- ------------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR Director
- ------------------------------
Albert Morrison, Jr.
/s/ JOSEPH W. PALLOT Director
- ------------------------------
Joseph W. Pallot
/s/ ALAN SCHRIESHEIM Director
- ------------------------------
Alan Schriesheim
72
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------
10.13 -- Sixth Amendment, effective as of January 1, 2006, to the HEICO
Savings and Investment Plan.
21 -- Subsidiaries of HEICO Corporation.
23 -- Consent of Independent Registered Public Accounting Firm.
31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 -- Section 1350 Certification of Chief Executive Officer.
32.2 -- Section 1350 Certification of Chief Financial Officer.
73