UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended January 31, 2006 or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
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 number of shares outstanding of each of the registrant's classes of
common stock as of March 8, 2006:
Common Stock, $.01 par value 10,195,026 shares
Class A Common Stock, $.01 par value 14,785,270 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of January 31, 2006 and October 31, 2005....................... 2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 2006 and 2005.............. 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 2006 and 2005.............. 4
Notes to Condensed Consolidated Financial Statements (unaudited).... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 17
Item 3. Quantitative and Qualitative Disclosures about Market Risks........ 26
Item 4. Controls and Procedures............................................ 27
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 28
Item 6. Exhibits........................................................... 28
SIGNATURE.................................................................... 29
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JANUARY 31, OCTOBER 31,
2006 2005
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,226,000 $ 5,330,000
Accounts receivable, net 51,045,000 47,668,000
Inventories, net 78,008,000 62,758,000
Prepaid expenses and other current assets 4,569,000 3,159,000
Deferred income taxes 7,323,000 7,218,000
-------------- --------------
Total current assets 150,171,000 126,133,000
Property, plant and equipment, net 46,010,000 46,663,000
Goodwill 263,555,000 248,229,000
Other assets 21,755,000 14,599,000
-------------- --------------
Total assets $ 481,491,000 $ 435,624,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 3,064,000 $ 63,000
Trade accounts payable 13,731,000 11,129,000
Accrued expenses and other current liabilities 27,247,000 32,473,000
Income taxes payable 6,864,000 6,285,000
-------------- --------------
Total current liabilities 50,906,000 49,950,000
Long-term debt, net of current maturities 61,040,000 34,061,000
Deferred income taxes 23,991,000 22,431,000
Other non-current liabilities 6,640,000 6,644,000
-------------- --------------
Total liabilities 142,577,000 113,086,000
-------------- --------------
Minority interests in consolidated subsidiaries 56,269,000 49,035,000
-------------- --------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares
authorized; 300,000 shares designated as Series B Junior
Participating Preferred Stock and 300,000 shares designated as
Series C Junior Participating Preferred Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 10,166,603 and 10,057,690 shares issued and
outstanding, respectively 102,000 101,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 14,628,214 and 14,517,669 shares issued and
outstanding, respectively 146,000 145,000
Capital in excess of par value 195,890,000 192,523,000
Accumulated other comprehensive loss (48,000) (65,000)
Retained earnings 86,555,000 80,799,000
-------------- --------------
Total shareholders' equity 282,645,000 273,503,000
-------------- --------------
Total liabilities and shareholders' equity $ 481,491,000 $ 435,624,000
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2006 2005
-------------- --------------
Net sales $ 88,101,000 $ 56,981,000
-------------- --------------
Operating costs and expenses:
Cost of sales 56,049,000 36,701,000
Selling, general and administrative expenses 16,766,000 11,619,000
-------------- --------------
Total operating costs and expenses 72,815,000 48,320,000
-------------- --------------
Operating income 15,286,000 8,661,000
Interest expense (808,000) (233,000)
Interest and other (expense) income (53,000) 36,000
-------------- --------------
Income before income taxes and minority interests 14,425,000 8,464,000
Income tax expense 4,916,000 2,923,000
-------------- --------------
Income before minority interests 9,509,000 5,541,000
Minority interests' share of income 2,760,000 1,113,000
-------------- --------------
Net income $ 6,749,000 $ 4,428,000
============== ==============
Net income per share:
Basic $ .27 $ .18
Diluted $ .26 $ .17
Weighted average number of common shares outstanding:
Basic 24,673,957 24,328,337
Diluted 26,231,848 26,213,577
Cash dividends per share $ .040 $ .025
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2006 2005
-------------- --------------
Operating Activities:
Net income $ 6,749,000 $ 4,428,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,149,000 1,724,000
Deferred income tax provision 1,061,000 1,102,000
Minority interests' share of income 2,760,000 1,113,000
Tax benefit from stock option exercises 2,365,000 2,538,000
Excess tax benefit from stock option exercises (1,130,000) --
Stock option compensation expense 428,000 --
Changes in assets and liabilities, net of acquisitions:
Decrease in accounts receivable 1,444,000 2,893,000
Increase in inventories (4,157,000) (2,806,000)
Increase in prepaid expenses and other current assets (440,000) (491,000)
Decrease in trade accounts payables, accrued expenses and other
current liabilities (5,751,000) (2,836,000)
Increase (decrease) in income taxes payable 579,000 (3,771,000)
Other 291,000 63,000
-------------- --------------
Net cash provided by operating activities 6,348,000 3,957,000
-------------- --------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (30,062,000) (14,679,000)
Capital expenditures (1,207,000) (944,000)
Proceeds from sale of building held for sale -- 3,520,000
Other 360,000 (235,000)
-------------- --------------
Net cash used in investing activities (30,909,000) (12,338,000)
-------------- --------------
Financing Activities:
Borrowings on revolving credit facility 28,000,000 19,000,000
Payments on revolving credit facility (1,000,000) (6,000,000)
Borrowings on short-term line of credit 1,000,000 --
Cash dividends paid (991,000) (610,000)
Proceeds from stock option exercises 576,000 488,000
Excess tax benefit from stock option exercises 1,130,000 --
Other (263,000) (194,000)
-------------- --------------
Net cash provided by financing activities 28,452,000 12,684,000
-------------- --------------
Effect of exchange rate changes on cash 5,000 --
-------------- --------------
Net increase in cash and cash equivalents 3,896,000 4,303,000
Cash and cash equivalents at beginning of year 5,330,000 214,000
-------------- --------------
Cash and cash equivalents at end of period $ 9,226,000 $ 4,517,000
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
HEICO Corporation and its subsidiaries (the "Company") have been prepared in
conformity with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-Q. Therefore, the condensed consolidated financial
statements do not include all information and footnotes normally included in
annual consolidated financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended October 31, 2005. The
October 31, 2005 Condensed Consolidated Balance Sheet has been derived from the
Company's audited consolidated financial statements. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the condensed consolidated balance sheets, statements of
operations and statements of cash flows for such interim periods presented. The
results of operations for the three months ended January 31, 2006 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", as interpreted
by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107
and began recording compensation expense associated with stock options. 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). Prior to
the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation expense had only been recorded in the
consolidated financial statements for any stock options granted below fair
market value of the underlying stock as of the date of grant.
The Company adopted the modified prospective transition method provided for
under SFAS 123(R) and accordingly, prior period results have not been
retroactively adjusted. The modified prospective transition method requires that
stock-based compensation expense be recorded for (i) all new stock options
granted on or after November 1, 2005 based on the grant date fair value
determined under the provisions of SFAS 123(R) and (ii) all unvested stock
options granted prior to November 1, 2005 based on the grant date fair value as
determined under the provisions of SFAS No. 123.
5
Beginning in the first quarter of fiscal 2006, the Company has presented the
cash flows resulting from tax deductions in excess of the cumulative
compensation cost recognized for stock options exercised ("excess tax benefit")
as a financing activity in the Condensed Consolidated Statements of Cash Flows
as prescribed by SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the
Company presented all tax benefits resulting from stock option exercises as an
operating activity in the Condensed Consolidated Statements of Cash Flows. For
the three months ended January 31, 2006, the Company reclassified $1,130,000 of
excess tax benefit from stock option exercises from operating activities to
financing activities in its Condensed Consolidated Statements of Cash Flow.
As a result of the adoption of SFAS No. 123(R), the Company's net income for
the three months ended January 31, 2006 includes $428,000 of compensation
expense and $126,000 of income tax benefit related to the Company's stock
options. Substantially all of the stock option compensation expense was recorded
as a component of selling, general and administrative expenses in the Company's
Condensed Consolidated Statement of Operations.
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 of SFAS No. 123 to stock-based compensation during the three month
period ended January 31, 2005:
THREE MONTHS ENDED
JANUARY 31, 2005
------------------
Net income, as reported $ 4,428,000
Deduct: Stock-based employee compensation
expense determined under a fair-value method,
net of tax (324,000)
------------------
Pro forma net income $ 4,104,000
==================
Net income per share:
Basic - as reported $ .18
Basic - pro forma $ .17
Diluted - as reported $ .17
Diluted - pro forma $ .16
Further information regarding stock options can be found in Note 7, Stock
Options.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
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
6
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 adoption of SFAS
No. 151 did not have a material effect on the Company's results of operations,
financial position, or cash flows.
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 Opinion
No. 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, financial position, or
cash flows.
2. ACQUISITIONS
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"). The remaining 49% interest is principally held by a member of SDI's
management group. As part of the agreement to acquire a 51% interest in SDI, the
Company has the right to purchase the remaining 49% interest over a seven-year
period beginning approximately after the second anniversary of the acquisition,
or sooner under certain conditions, and the minority holder has the right to
cause the Company to purchase the same equity interest over the same period. 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. Subject to
meeting certain earnings objectives during the first four years following the
acquisition, the Company may be obligated to pay additional consideration of up
to $53.0 million in aggregate. 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.
7
The acquisitions of SDI and EDT were accounted for using the purchase method
of accounting. 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. The
allocation of the purchase price of each acquisition to the tangible and
identifiable intangible assets acquired and liabilities assumed in these
condensed consolidated financial statements is preliminary until the Company
obtains final information regarding their fair values. The results of operations
of SDI and EDT were included in the Company's results of operations effective as
of the beginning of fiscal 2006. The Company's unaudited pro forma consolidated
operating results for the three months ended January 31, 2005 assuming the
acquisitions of SDI and EDT had been consummated as of the beginning of fiscal
2005 would have been net sales of $70,887,000, net income of $5,794,000, basic
net income per share of $.24 and diluted net income per share of $.22. The pro
forma financial information is presented for comparative purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved if the acquisitions had taken place as of the beginning of fiscal
2005. The unaudited pro forma financial information includes adjustments to
historical amounts such as additional amortization expense related to acquired
intangible assets, increased interest expense associated with borrowings to
finance the acquisitions, increased performance awards under the terms of the
acquisitions and the incremental minority interest in the net income of SDI.
Cash investing activities related to acquisitions (principally SDI and EDT),
including contingent purchase price payments to previous owners of acquired
businesses, for the three months ended January 31, 2006 is as follows:
THREE MONTHS ENDED
JANUARY 31, 2006
------------------
Fair values of assets acquired and liabilities assumed:
Liabilities assumed $ 5,516,000
Minority interests in consolidated subsidiaries 4,704,000
Less:
Goodwill 15,326,000
Inventories, net 11,089,000
Identifiable intangible assets 7,280,000
Accounts receivable, net 4,814,000
Other assets 1,773,000
------------------
Acquisitions and related costs, net of cash
acquired $ (30,062,000)
==================
8
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JANUARY 31, 2006 OCTOBER 31, 2005
---------------- ----------------
Accounts receivable $ 53,570,000 $ 49,816,000
Less: Allowance for doubtful accounts (2,525,000) (2,148,000)
---------------- ----------------
Accounts receivable, net $ 51,045,000 $ 47,668,000
================ ================
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
JANUARY 31, 2006 OCTOBER 31, 2005
---------------- ----------------
Costs incurred on uncompleted contracts $ 13,651,000 $ 18,344,000
Estimated earnings 7,954,000 11,252,000
---------------- ----------------
21,605,000 29,596,000
Less: Billings to date (15,686,000) (21,747,000)
---------------- ----------------
$ 5,919,000 $ 7,849,000
================ ================
Included in accompanying condensed consolidated balance sheets under
the following captions:
Accounts receivable, net (costs and estimated earnings in excess
of billings) $ 5,943,000 $ 7,889,000
Accrued expenses and other current liabilities (billings in excess
of costs and estimated earnings) (24,000) (40,000)
---------------- ----------------
$ 5,919,000 $ 7,849,000
================ ================
Changes in estimates did not have a material effect on net income or diluted
net income per share in the three months ended January 31, 2006 and 2005.
INVENTORIES
JANUARY 31, 2006 OCTOBER 31, 2005
---------------- ----------------
Finished products $ 37,599,000 $ 26,136,000
Work in process 12,791,000 12,634,000
Materials, parts, assemblies and supplies 27,618,000 23,988,000
---------------- ----------------
Inventories, net $ 78,008,000 $ 62,758,000
================ ================
Inventories related to long-term contracts were not significant as of
January 31, 2006 and October 31, 2005.
9
PROPERTY, PLANT AND EQUIPMENT
JANUARY 31, 2006 OCTOBER 31, 2005
---------------- ----------------
Land $ 3,155,000 $ 3,155,000
Buildings and improvements 25,423,000 25,344,000
Machinery, equipment and tooling 53,393,000 53,460,000
Construction in progress 3,936,000 3,128,000
---------------- ----------------
85,907,000 85,087,000
Less: Accumulated depreciation and amortization (39,897,000) (38,424,000)
---------------- ----------------
Property, plant and equipment, net $ 46,010,000 $ 46,663,000
================ ================
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group ("FSG") and
the Electronic Technologies Group ("ETG"). Changes in the carrying amount of
goodwill by operating segment for the three months ended January 31, 2006 are as
follows:
SEGMENT
------------------------------- CONSOLIDATED
FSG ETG TOTALS
-------------- -------------- --------------
Balances as of October 31, 2005 $ 122,041,000 $ 126,188,000 $ 248,229,000
Goodwill acquired 12,117,000 3,185,000 15,302,000
Adjustments to goodwill 30,000 (6,000) 24,000
-------------- -------------- --------------
Balances as of January 31, 2006 $ 134,188,000 $ 129,367,000 $ 263,555,000
============== ============== ==============
The goodwill acquired is a result of the acquisitions described in Note 2,
Acquisitions. Adjustments to goodwill consist primarily of contingent purchase
price payments to previous owners of acquired businesses and adjustments related
to the preliminary allocation of the purchase price of recent acquisitions to
the assets acquired and liabilities assumed.
Identifiable intangible assets, which are recorded within other assets in
the Company's Condensed Consolidated Balance Sheets, consist of:
AS OF JANUARY 31, 2006 AS OF OCTOBER 31, 2005
------------------------------------------ ------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Amortizing Assets
Customer relationships $ 3,244,000 $ (116,000) $ 3,128,000 $ - $ - $ -
Intellectual property 1,992,000 (125,000) 1,867,000 - - -
Licenses 1,000,000 (270,000) 730,000 1,000,000 (252,000) 748,000
Non-compete agreements 860,000 (174,000) 686,000 660,000 (129,000) 531,000
Patents 477,000 (72,000) 405,000 477,000 (60,000) 417,000
------------ ------------ ------------ ------------ ------------ ------------
7,573,000 (757,000) 6,816,000 2,137,000 (441,000) 1,696,000
Non-Amortizing Assets
Trade names 5,494,000 - 5,494,000 3,650,000 - 3,650,000
------------ ------------ ------------ ------------ ------------ ------------
$ 13,067,000 $ (757,000) $ 12,310,000 $ 5,787,000 $ (441,000) $ 5,346,000
============ ============ ============ ============ ============ ============
10
The increase in the gross carrying amount of customer relationships,
intellectual property, non-compete agreements and trade names as of January 31,
2006 compared to October 31, 2005 principally relates to such intangible assets
recognized in connection with the acquisitions of EDT and SDI (see Note 2,
Acquisitions). The weighted average amortization period of the customer
relationships, intellectual property and non-compete agreements acquired during
the three months ended January 31, 2006 is approximately seven years, four
years, and seven years, respectively.
Amortization expense of other intangible assets for the three months ended
January 31, 2006 was $316,000. Amortization expense of other intangible assets
for the fiscal year ending October 31, 2006 is estimated to be $1,248,000.
Amortization expense for each of the next five fiscal years is estimated to be
$1,185,000 in fiscal 2007, $1,169,000 in fiscal 2008, $1,154,000 in fiscal 2009,
$656,000 in fiscal 2010 and $656,000 in fiscal 2011.
5. SHORT-TERM AND LONG-TERM DEBT
One of the Company's subsidiaries has a $6.0 million short-term line of
credit with a bank, which expires in June 2006. The line of credit may be used
for inventory purchases and other working capital needs and is secured by all
the assets of the subsidiary. Borrowings under the line of credit bear interest
at a rate mutually agreed upon by the subsidiary and the bank. As of January 31,
2006, $3.0 million was outstanding under the line of credit at a weighted
average of 5.1%.
Long-term debt consists of:
JANUARY 31, 2006 OCTOBER 31, 2005
---------------- ----------------
Borrowings under revolving credit facility $ 59,000,000 $ 32,000,000
Industrial Development Revenue Refunding Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 124,000 144,000
---------------- ----------------
61,104,000 34,124,000
Less: Current maturities of long-term debt (64,000) (63,000)
---------------- ----------------
$ 61,040,000 $ 34,061,000
================ ================
As of January 31, 2006 and October 31, 2005, the Company had a total of $59
million and $32 million, respectively, borrowed under its revolving credit
facility at weighted average interest rates of 5.2% and 4.7%, respectively. The
revolving credit facility contains both financial and non-financial covenants.
As of January 31, 2006, the Company believes it is in compliance with all such
covenants.
The interest rates on the Series 1988 industrial development revenue bonds
were 3.1% and 2.8% as of January 31, 2006 and October 31, 2005, respectively.
11
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the three months ended
January 31, 2006
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED
STOCK STOCK PAR VALUE LOSS EARNINGS
-------------- -------------- -------------- -------------- --------------
Balances as of October 31, 2005 $ 101,000 $ 145,000 $ 192,523,000 $ (65,000) $ 80,799,000
Net income -- -- -- -- 6,749,000
Foreign currency translation adjustments -- -- -- 17,000 --
Cash dividends ($.04 per share) -- -- -- -- (991,000)
Tax benefit from stock option exercises -- -- 2,365,000 -- --
Proceeds from stock option exercises 1,000 1,000 574,000 -- --
Stock option compensation expense -- -- 428,000 -- --
Other -- -- -- -- (2,000)
-------------- -------------- -------------- -------------- --------------
Balances as of January 31, 2006 $ 102,000 $ 146,000 $ 195,890,000 $ (48,000) $ 86,555,000
============== ============== ============== ============== ==============
7. STOCK OPTIONS
Information concerning stock option activity for the three months ended
January 31, 2006 is as follows:
SHARES UNDER OPTION
SHARES ---------------------------------
AVAILABLE WEIGHTED-AVERAGE
FOR GRANT SHARES EXERCISE PRICE
-------------- -------------- ----------------
Outstanding as of October 31, 2005 156,303 3,588,680 $ 9.50
Granted -- -- --
Cancelled 660 (2,647) $ 13.01
Exercised -- (248,167) $ 4.83
-------------- --------------
Outstanding as of January 31, 2006 156,963 3,337,866 $ 9.84
============== ==============
12
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of January 31, 2006 is as follows:
COMMON STOCK
WEIGHTED- WEIGHTED-AVERAGE
AVERAGE REMAINING AGGREGATE
EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE LIFE (YEARS) VALUE
-------------- ---------- ---------------- --------------
Outstanding as of January 31, 2006 1,418,298 $ 9.70 4.2 $ 22,036,000
Exercisable as of January 31, 2006 1,154,297 $ 9.65 3.6 $ 17,991,000
CLASS A COMMON STOCK
WEIGHTED- WEIGHTED-AVERAGE
AVERAGE REMAINING AGGREGATE
EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE LIFE (YEARS) VALUE
-------------- ---------- ---------------- --------------
Outstanding as of January 31, 2006 1,919,568 $ 9.94 4.1 $ 20,007,000
Exercisable as of January 31, 2006 1,678,521 $ 10.10 3.8 $ 17,230,000
The aggregate intrinsic values in the tables above are calculated based on
the difference between the closing price per share of the underlying common
stock as reported on the New York Stock Exchange on January 31, 2006 less the
option exercise price (if a positive spread) multiplied by the number of stock
options.
Information concerning stock options exercised during the three months ended
January 31, 2006 is as follows:
THREE MONTHS ENDED
JANUARY 31, 2006
------------------
Cash proceeds from stock option exercises $ 576,000
Tax benefit realized from stock option exercises 1,379,000
Intrinsic value of stock option exercises 3,891,000
Effective as of November 1, 2005, the Company generally recognizes
compensation expense ratably over the vesting period. As of January 31, 2006,
there was $1.6 million of pretax unrecognized compensation expense related to
nonvested stock options, which is expected to be recognized over a weighted
average period of approximately 1.4 years.
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the three months ended January 31, 2006 and 2005 includes
approximately $3.8 million and $2.4 million, respectively, of new product
research and development expenses. The expenses are net of reimbursements
pursuant to research and development cooperation and joint venture agreements,
which were not significant.
13
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the three months ended January 31:
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2006 2005
-------------- --------------
Numerator:
Net income $ 6,749,000 $ 4,428,000
============== ==============
Denominator:
Weighted average common shares outstanding-basic 24,673,957 24,328,337
Effect of dilutive stock options 1,557,891 1,885,240
-------------- --------------
Weighted average common shares outstanding-diluted 26,231,848 26,213,577
============== ==============
Net income per share- basic $ 0.27 $ 0.18
Net income per share- diluted $ 0.26 $ 0.17
Anti-dilutive stock options excluded 48,161 220,173
10. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group ("FSG"), consisting of HEICO Aerospace Holdings Corp. and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries, for the three months ended
January 31, 2006 and 2005, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
-------------- -------------- -------------- --------------
For the three months ended January 31, 2006:
Net sales $ 61,689,000 $ 26,471,000 $ (59,000) $ 88,101,000
Depreciation and amortization 1,194,000 869,000 86,000 2,149,000
Operating income 12,308,000 5,710,000 (2,732,000) 15,286,000
Capital expenditures 815,000 386,000 6,000 1,207,000
For the three months ended January 31, 2005:
Net sales $ 42,263,000 $ 14,774,000 $ (56,000) $ 56,981,000
Depreciation and amortization 1,136,000 484,000 104,000 1,724,000
Operating income 7,598,000 2,462,000 (1,399,000) 8,661,000
Capital expenditures 734,000 208,000 2,000 944,000
14
The total assets held by each operating segment as of January 31, 2006 and
October 31, 2005 is as follows:
SEGMENT OTHER,
------------------------------- PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
-------------- -------------- -------------- --------------
Total assets as of January 31, 2006 $ 263,412,000 $ 200,241,000 $ 17,838,000 $ 481,491,000
Total assets as of October 31, 2005 230,229,000 188,851,000 16,544,000 435,624,000
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has arranged for standby letters of credit aggregating $2.2
million to meet the security requirement of its insurance company for potential
workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through two letters of
credit aggregating $1.2 million, both expiring April 2006. These letters of
credit are supported by the Company's revolving credit facility. In addition,
the Company's industrial development revenue bonds are secured by a $2.0 million
letter of credit expiring April 2008 and a mortgage on the related properties
pledged as collateral.
Changes in the Company's product warranty liability for the three months
ended January 31, 2006 and 2005, respectively, are as follows:
2006 2005
------------ ------------
Balances as of beginning of fiscal year $ 395,000 $ 129,000
Acquired warranty liabilities 15,000 --
Accruals for warranties 112,000 130,000
Warranty claims settled (125,000) (67,000)
------------ ------------
Balances as of January 31 $ 397,000 $ 192,000
============ ============
As part of the agreement to acquire an 80% interest in a subsidiary by the
ETG in fiscal 2004, 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 on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal 2005,
the Company may be obligated to pay additional purchase consideration of up to
$3.8 million in aggregate should the subsidiary meet certain earnings objectives
during the first four years following the acquisition. The Company has $2.2
million of such additional purchase consideration accrued as of January 31, 2006
based on the subsidiary's earnings relative to target for the first year, which
it expects to pay in fiscal 2006.
15
As part of the agreement to purchase a subsidiary by the ETG in fiscal 2005,
the Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should the subsidiary 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 a subsidiary by the
ETG in fiscal 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.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holder has the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holder has the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional consideration of up to $53.0
million in aggregate during the first four years following the acquisition. The
maximum amount of additional consideration that may become payable by year is
$6.8 million in fiscal 2006, $9.2 million in fiscal 2007, $17.8 million in
fiscal 2008 and $19.2 million in fiscal 2009. The additional purchase
consideration will be accrued when the earnings objectives are met.
The Company has also accrued additional purchase consideration aggregating
$.7 million as of January 31, 2006 in accordance with the agreements related to
certain 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 subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.4 million 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion of our financial condition and results of operations should
be read in conjunction with our condensed consolidated financial statements and
notes thereto included herein. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates if
different assumptions were used or different events ultimately transpire.
The Company's critical accounting policies, some of which require management
to make judgments about matters that are inherently uncertain, are described in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," under the heading "Critical Accounting Policies" in the
Company's Annual Report on Form 10-K for the year ended October 31, 2005.
The Company has two operating segments: the Flight Support Group ("FSG"),
consisting of HEICO Aerospace Holdings Corp. ("HEICO Aerospace") and its
subsidiaries, and the Electronic Technologies Group ("ETG"), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries.
The Company's results of operations during the three months ended
January 31, 2006 have been affected by several recent acquisitions.
In November 2005, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired a 51% interest in Seal Dynamics LLC ("SDI"). The remaining
49% interest is principally held by a member of SDI's management group. In
November 2005, the Company, through its HEICO Electronic Technologies Corp.
subsidiary, acquired Engineering Design Team, Inc. ("EDT") and an EDT affiliate.
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. The operating
results of SDI and EDT were included in the Company's results of operations
effective as of the beginning of fiscal 2006. For further information regarding
these acquisitions, see Note 2, Acquisitions, of the Notes to Condensed
Consolidated Financial Statements.
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 of operations from their effective acquisition date.
17
As further explained within Comparison of First Quarter of Fiscal 2006 to
First Quarter of Fiscal 2005, the first quarter of fiscal 2006 reflects the full
impact of each of the above mentioned acquisitions whereas the first quarter of
fiscal 2005 includes just the operating results of Connectronics effective as of
the December 2005 acquisition date.
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations, net
sales and operating income by segment, and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
THREE MONTHS ENDED
JANUARY 31,
---------------------------
2006 2005
------------ ------------
Net sales $ 88,101,000 $ 56,981,000
------------ ------------
Cost of sales 56,049,000 36,701,000
Selling, general and administrative expenses 16,766,000 11,619,000
------------ ------------
Total operating costs and expenses 72,815,000 48,320,000
------------ ------------
Operating income $ 15,286,000 $ 8,661,000
============ ============
Net sales by segment:
Flight Support Group $ 61,689,000 $ 42,263,000
Electronic Technologies Group 26,471,000 14,774,000
Intersegment sales (59,000) (56,000)
------------ ------------
$ 88,101,000 $ 56,981,000
============ ============
Operating income by segment:
Flight Support Group $ 12,308,000 $ 7,598,000
Electronic Technologies Group 5,710,000 2,462,000
Other, primarily corporate (2,732,000) (1,399,000)
------------ ------------
$ 15,286,000 $ 8,661,000
============ ============
Net sales 100.0% 100.0%
Gross profit 36.4% 35.6%
Selling, general and administrative expenses 19.0% 20.4%
Operating income 17.4% 15.2%
Interest expense 0.9% 0.4%
Interest and other (expense) income (0.1%) 0.1%
Income tax expense 5.6% 5.1%
Minority interests' share of income 3.1% 2.0%
Net income 7.7% 7.8%
18
COMPARISON OF FIRST QUARTER OF FISCAL 2006 TO FIRST QUARTER OF FISCAL 2005
Net Sales
Net sales for the first quarter of 2006 increased by 54.6% to $88.1 million,
as compared to net sales of $57.0 million for the first three months of fiscal
2005. The increase in net sales reflects an increase of $19.4 million (a 46.0%
increase) to $61.7 million in net sales within the FSG and an increase of $11.7
million (a 79.2% increase) to $26.5 million in net sales within the ETG. The
FSG's net sales increase primarily reflects the acquisition of SDI and organic
growth of approximately 19%. The organic growth reflects improved demand for its
aftermarket replacement parts and repair and overhaul services, which reflects
continued recovery within the commercial airline industry, as well as increased
sales of new products and services. The ETG's net sales increase principally
reflects the acquisitions of Connectronics, Lumina, HVT and EDT and organic
growth of approximately 13% reflecting increased demand for certain products.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 36.4% for the first quarter of
fiscal 2006 as compared to 35.6% for the first quarter of fiscal 2005,
reflecting higher margins within the ETG. The ETG's gross profit margin increase
was principally from improved product mix, including a higher margin product mix
contributed by recent acquisitions. Consolidated cost of sales for the first
quarter of fiscal 2006 and 2005 includes approximately $3.8 million and $2.4
million, respectively, of new product research and development expenses.
Selling, general and administrative ("SG&A") expenses were $16.8 million and
$11.6 million for the first quarter of fiscal 2006 and 2005, respectively. The
increase in SG&A expenses was mainly due to higher operating costs, principally
personnel related, associated with the aforementioned acquisitions, the increase
in net sales discussed above, an increase in corporate expenses and stock option
compensation expense (see Stock Based Compensation below). Corporate expenses
are up due to increased costs to comply with the Sarbanes-Oxley Act of 2002 and
higher accrued performance awards. The majority of such costs incurred in fiscal
2005 were not incurred until the second half of fiscal 2005.
Operating Income
Operating income for the first quarter of fiscal 2006 increased by 76.5% to
$15.3 million, compared to operating income of $8.7 million in fiscal 2005. The
increase in operating income reflects an increase of $4.7 million (a 62.0%
increase) to $12.3 million in operating income of the FSG from $7.6 million for
the first quarter of fiscal 2005. Operating income of the ETG increased $3.2
million (a 131.9% increase) to $5.7 million from $2.5 million for the first
quarter of fiscal 2005. These increases were partially offset the aforementioned
increase in corporate expenses. As a percentage of net sales, operating income
increased to 17.4% in the first quarter of fiscal 2006 from 15.2% for the first
quarter of 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 18.0% in the first quarter of fiscal 2005 to 20.0% in the first
quarter of fiscal 2006 and an increase in the ETG's operating income as a
percentage of net sales from
19
16.7% in the first quarter of fiscal 2005 to 21.6% in the first quarter of
fiscal 2006. The increase in the FSG's operating income as a percentage of net
sales reflects improved operating efficiencies. The increase in the ETG's
operating income as a percentage of net sales reflects the increased gross
profit margins discussed previously.
Interest Expense
Interest expense increased to $808,000 in the first quarter of fiscal 2006
from $233,000 in the first quarter of fiscal 2005. The increase was principally
due to a higher weighted average balance outstanding under the revolving credit
facility in the first quarter of fiscal 2006 attributable to borrowings related
to acquisitions and higher interest rates.
Interest and Other (Expense) Income
Interest and other (expense) income were not material in the first quarter
of fiscal 2006 or 2005.
Income Tax Expense
The Company's effective tax rate for the first quarter of fiscal 2006
decreased to 34.1% from 34.5% for the first quarter of fiscal 2005. The decrease
is principally due to a higher amount of the minority interests' share of income
excluded from the Company's fiscal 2006 consolidated income subject to federal
income taxes, partially offset by higher state taxes, principally related to
recent acquisitions.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates to
the minority interests held in HEICO Aerospace including the 49% minority
interest held in SDI and the minority interests held in the ETG, which consist
of the 20% minority interest held in Sierra Microwave Technology, LLC ("Sierra")
and the 15% minority interest held in HVT. The increase in the minority
interests' share of income for the first quarter of fiscal 2006 compared to the
first quarter of fiscal 2005 is attributable to the acquisitions of SDI
(November 2005) and HVT (September 2005) and the higher earnings of the FSG and
Sierra.
Net Income
The Company's net income was $6.7 million, or $.26 per diluted share, for
the first quarter of fiscal 2006 compared to $4.4 million, or $0.17 per diluted
share, for the first quarter of fiscal 2005 reflecting the increased operating
income referenced above, partially offset by the increased minority interests'
share of income of certain consolidated subsidiaries.
OUTLOOK
The Company reported increased sales and operating income in its two
business segments reflecting both growth through acquisitions and strong organic
growth.
20
Based on increasing product demand and the Company's continued success in
introducing new products and services, the Company continues to target growth in
fiscal 2006 sales and net income over fiscal 2005 results with some operating
margin improvement.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities and
available borrowings under its revolving credit facility will be sufficient to
fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $6.3 million for the first
three months of fiscal 2006, consisting primarily of net income of $6.7 million,
minority interests' share of income of consolidated subsidiaries of $2.8
million, a tax benefit on stock option exercises of $2.4 million, depreciation
and amortization of $2.1 million, a deferred income tax provision of $1.1
million, and stock option compensation expense of $.4 million, partially offset
by an increase in net operating assets of $8.1 million and the reclassification
of $1.1 million of excess tax benefit from stock option exercises to a financing
activity in accordance with the provisions of SFAS No. 123(R) (see Stock Based
Compensation below). 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 the payment of performance awards that were accrued as of October
31, 2005. Net cash provided by operating activities increased from $4.0 million
for the first three months of fiscal 2005 principally as a result of the
increase in net income.
Investing Activities
Net cash used in investing activities during the first three months of
fiscal 2006 related primarily to acquisitions and related costs (principally SDI
and EDT) of $30.1 million and capital expenditures totaling $1.2 million.
Financing Activities
Net cash provided by financing activities during the first three months of
fiscal 2006 primarily related to borrowings of $28.0 million on the Company's
revolving credit facility to fund the aforementioned acquisitions and $1.1
million of excess tax benefit from stock option exercises classified as a
financing activity in accordance with the provisions of SFAS No. 123(R),
partially offset by the payment of $1.0 million in cash dividends on the
Company's common stock.
21
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating $2.2
million to meet the security requirement of its insurance company for potential
workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through two letters of
credit aggregating $1.2 million, both expiring April 2006. 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 a subsidiary by the
ETG in fiscal 2004, 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 on approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal 2005,
the Company may be obligated to pay additional purchase consideration of up to
$3.8 million in aggregate should the subsidiary meet certain earnings objectives
during the first four years following the acquisition. The Company has $2.2
million of such additional purchase consideration accrued as of January 31, 2006
based on the subsidiary's earnings relative to target for the first year, which
it expects to pay in fiscal 2006.
As part of the agreement to purchase a subsidiary by the ETG in fiscal 2005,
the Company may be obligated to pay additional purchase consideration currently
estimated to total up to $2.3 million should the subsidiary 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 a subsidiary by the
ETG in fiscal 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.
As part of the agreement to acquire a 51% interest in a subsidiary by the
FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holder has the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holder has the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2006,
the Company may be obligated to pay additional consideration of up to $53.0
million in aggregate during the first
22
four years following the acquisition. The maximum amount of additional
consideration that may become payable by year is $6.8 million in fiscal 2006,
$9.2 million in fiscal 2007, $17.8 million in fiscal 2008 and $19.2 million in
fiscal 2009. The additional purchase consideration will be accrued when the
earnings objectives are met.
The Company has also accrued additional purchase consideration aggregating
$.7 million as of January 31, 2006 in accordance with the agreements related to
certain 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 subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.4 million through fiscal 2007.
STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", as interpreted
by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107
and began recording compensation expense associated with stock options. 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). Prior to
the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, compensation expense had only been recorded in the consolidated
financial statements for any stock options granted below fair market value of
the underlying stock as of the date of grant.
The Company adopted the modified prospective transition method provided for
under SFAS 123(R) and accordingly, prior period results have not been
retroactively adjusted. The modified prospective transition method requires that
stock-based compensation expense be recorded for (i) all new stock options
granted on or after November 1, 2005 based on the grant date fair value
determined under the provisions of SFAS 123(R) and (ii) all unvested stock
options granted prior to November 1, 2005 based on the grant date fair value as
determined under the provisions of SFAS No. 123.
Beginning in the first quarter of fiscal 2006, the Company has presented the
cash flows resulting from tax deductions in excess of the cumulative
compensation cost recognized for stock options exercised ("excess tax benefit")
as a financing activity in the Condensed Consolidated Statements of Cash Flows
as prescribed by SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the
Company presented all tax benefits resulting from stock option exercises as an
operating activity in the Condensed Consolidated Statements of Cash Flows. For
the three months ended January 31, 2006, the Company reclassified $1,130,000 of
excess tax benefit from stock option exercises from operating activities to
financing activities in its Condensed Consolidated Statements of Cash Flows.
23
As a result of the adoption of SFAS No. 123(R), the Company's net income for
the three months ended January 31, 2006 includes $428,000 of compensation
expense and $126,000 of income tax benefits related to the Company's stock
options. Substantially all of the stock option compensation expense was recorded
as a component of selling, general and administrative expenses in the Company's
Condensed Consolidated Statement of Operations.
As of January 31, 2006, there was $1.6 million of pretax unrecognized
compensation expense related to nonvested stock options, which is expected to be
recognized over a weighted average period of approximately 1.4 years.
Further information regarding stock options can be found in Note 7, Stock
Options, of the Notes to Condensed Consolidated Financial Statements.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
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 adoption of SFAS
No. 151 did not have a material effect on the Company's results of operations,
financial position, or cash flows.
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 Opinion
No. 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, financial position, or
cash flows.
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
24
calls and conference calls, concerning our operations, economic performance and
financial condition are subject to known and unknown risks, uncertainties and
contingencies. We have based these forward-looking statements on our current
expectations and projections about future events. All forward-looking statements
involve risks and uncertainties, many of which are beyond our control, which may
cause actual results, performance or achievements to differ materially from
anticipated results, performance or achievements. Also, forward-looking
statements are based upon management's estimates of fair values and of future
costs, using currently available information. Therefore, actual results may
differ materially from those expressed in or implied by those statements.
Factors that could cause such differences, but are not limited to: lower demand
for commercial air travel or airline fleet changes, which could cause lower
demand for our goods and services; product specification costs and requirements,
which could cause an increase to our costs to complete contracts; governmental
and regulatory demands, export policies and restrictions, reductions in defense
or space spending by U.S. and/or foreign customers, or competition from existing
and new competitors, which could reduce our sales; HEICO's ability to introduce
new products and product pricing levels, which could reduce our sales or sales
growth; HEICO's ability to make acquisitions and achieve operating synergies
from acquired businesses, customer credit risk, interest rates and economic
conditions within and outside of the aviation, defense, space and electronics
industries, which could negatively impact our costs and revenues; and HEICO's
ability to maintain effective internal controls, which could adversely affect
our business and the market price of our common stock. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the outstanding debt balance as of January 31, 2006, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $328,000 on an annual basis.
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 January 31, 2006 would not have a material effect on the
Company's results of operations or financial position.
26
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity securities or
repurchase any of its equity securities during the first three months of fiscal
2006.
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. *
32.1 Section 1350 Certification of Chief Executive Officer. **
32.2 Section 1350 Certification of Chief Financial Officer. **
- -----------------------
* Filed herewith.
** Furnished herewith.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: March 10, 2006 By: /s/ THOMAS S. IRWIN
--------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
29
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.