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, 2004 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 (I.R.S. Employer Identification No.)
incorporation or organization)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of February 23, 2004:
Common Stock, $.01 par value 9,702,135 shares
Class A Common Stock, $.01 par value 14,185,666 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of January 31, 2004 and October 31, 2003.....................2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 2004 and 2003............3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 2004 and 2003............4
Notes to Condensed Consolidated Financial Statements
(unaudited)......................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risks......19
Item 4. Controls and Procedures..........................................20
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................................21
Signature..................................................................22
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JANUARY 31, 2004 OCTOBER 31, 2003
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,947,000 $ 4,321,000
Accounts receivable, net 28,014,000 28,820,000
Inventories 49,643,000 51,240,000
Prepaid expenses and other current assets 6,286,000 6,231,000
Deferred income taxes 4,359,000 3,872,000
---------------- ----------------
Total current assets 93,249,000 94,484,000
Property, plant and equipment, net 36,655,000 35,537,000
Goodwill, net 216,229,000 188,700,000
Other assets 14,802,000 14,523,000
---------------- ----------------
Total assets $ 360,935,000 $ 333,244,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,000 $ 29,000
Trade accounts payable 6,398,000 7,475,000
Accrued expenses and other current liabilities 12,839,000 14,362,000
Income taxes payable 33,000 820,000
---------------- ----------------
Total current liabilities 19,279,000 22,686,000
Long-term debt, net of current maturities 53,983,000 31,984,000
Deferred income taxes 12,000,000 10,337,000
Other non-current liabilities 5,711,000 6,142,000
---------------- ----------------
Total liabilities 90,973,000 71,149,000
---------------- ----------------
Minority interests in consolidated subsidiaries 41,444,000 40,577,000
---------------- ----------------
Commitments and contingencies (Note 10)
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;
9,691,095 and 9,690,945 shares issued and outstanding, respectively 97,000 97,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 14,159,873 and 13,876,496 shares issued and outstanding,
respectively 142,000 117,000
Capital in excess of par value 187,082,000 155,064,000
Retained earnings 42,425,000 69,172,000
---------------- ----------------
229,746,000 224,450,000
Less: Note receivable secured by Class A Common Stock (1,228,000) (2,932,000)
---------------- ----------------
Total shareholders' equity 228,518,000 221,518,000
---------------- ----------------
Total liabilities and shareholders' equity $ 360,935,000 $ 333,244,000
================ ================
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,
------------------------------------
2004 2003
---------------- ----------------
Net sales $ 46,151,000 $ 41,788,000
---------------- ----------------
Operating costs and expenses:
Cost of sales 30,615,000 28,012,000
Selling, general and administrative expenses 8,963,000 8,247,000
---------------- ----------------
Total operating costs and expenses 39,578,000 36,259,000
---------------- ----------------
Operating income 6,573,000 5,529,000
Interest expense (331,000) (345,000)
Interest income and other (expense) income (2,000) 81,000
---------------- ----------------
Income before income taxes and minority interests 6,240,000 5,265,000
Income tax expense 2,155,000 1,857,000
---------------- ----------------
Income before minority interests 4,085,000 3,408,000
Minority interests' share of income 844,000 574,000
---------------- ----------------
Net income $ 3,241,000 $ 2,834,000
================ ================
Net income per share:
Basic $ .14 $ .12
Diluted $ .13 $ .12
Weighted average number of common shares outstanding:
Basic 23,745,244 23,086,297
Diluted 25,632,999 24,470,436
Cash dividends per share $ .025 $ .023
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,
------------------------------------
2004 2003
---------------- ----------------
Operating Activities:
Net income $ 3,241,000 $ 2,834,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,609,000 1,198,000
Deferred income tax provision 1,176,000 1,222,000
Minority interests' share of income 844,000 574,000
Tax benefit from stock option exercises 1,258,000 344,000
Changes in assets and liabilities, net of acquisitions:
Decrease in accounts receivable 2,591,000 5,426,000
Decrease (increase) in inventories 2,144,000 (116,000)
Increase in prepaid expenses and other current assets (406,000) (279,000)
Decrease in trade accounts payables, accrued
expenses and other current liabilities (3,441,000) (4,576,000)
Decrease in income taxes payable (787,000) --
Other (482,000) 41,000
---------------- ----------------
Net cash provided by operating activities 7,747,000 6,668,000
---------------- ----------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (27,337,000) --
Capital expenditures (1,017,000) (1,310,000)
Other (268,000) (28,000)
---------------- ----------------
Net cash used in investing activities (28,622,000) (1,338,000)
---------------- ----------------
Financing Activities:
Borrowings (payments) on revolving credit facilities, net 22,000,000 (5,000,000)
Cash dividends paid (596,000) (525,000)
Proceeds from stock option exercises 123,000 169,000
Other (26,000) 101,000
---------------- ----------------
Net cash provided by (used in) financing activities 21,501,000 (5,255,000)
---------------- ----------------
Net increase in cash and cash equivalents 626,000 75,000
Cash and cash equivalents at beginning of year 4,321,000 4,539,000
---------------- ----------------
Cash and cash equivalents at end of period $ 4,947,000 $ 4,614,000
================ ================
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, 2003. The
October 31, 2003 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 cash flows for such interim periods presented. The results of
operations for the three months ended January 31, 2004 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
STOCK DIVIDEND
In December 2003, the Company's Board of Directors declared a 10% stock
dividend on both its Common Stock and its Class A Common Stock that was paid in
shares of Class A Common Stock on January 16, 2004 to shareholders of record as
of January 6, 2004. All common stock share and per share information has been
adjusted retroactively to give effect to the stock dividend.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation expense has been recorded in the accompanying
condensed consolidated financial statements for those options granted below fair
market value of the underlying stock on 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) of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model.
5
THREE MONTHS ENDED JANUARY 31,
------------------------------
2004 2003
------------- --------------
Net income, as reported $ 3,241,000 $ 2,834,000
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects -- 1,000
Deduct: Total stock-based employee
compensation expense determined under
a fair-value method for all awards, net
of related tax effects (386,000) (413,000)
------------- --------------
Pro forma net income $ 2,855,000 $ 2,422,000
============= ==============
Net income per share:
Basic - as reported $ .14 $ .12
Basic - pro forma $ .12 $ .10
Diluted - as reported $ .13 $ .12
Diluted - pro forma $ .11 $ .10
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation, which was
revised in December 2003, clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 requires an enterprise to consolidate a variable interest
entity if that enterprise will absorb a majority of the entity's expected
losses, is entitled to receive a majority of the entity's expected residual
returns, or both. FIN 46 also requires disclosures about unconsolidated variable
interest entities in which an enterprise holds a significant variable interest.
FIN 46 was immediately effective for variable interest entities created or
entered into after January 31, 2003 and is effective in the first reporting
period ending after December 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of FIN 46 did not have a material effect on the Company's results
of operations or financial position.
2. ACQUISITION
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 certain liabilities of Sierra. The new
subsidiary is owned 80% by the Company and 20% by certain members of Sierra's
management group. The results of operations of Sierra LLC were included in the
Company's results of operations effective December 2003. The purchase price was
paid principally in cash using proceeds from the Company's revolving credit
facility and with some
6
shares of the Company's Class A Common Stock. The purchase price of the
acquisition was not significant to the Company's condensed 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. The allocation of the purchase
price to the acquired net assets is preliminary while the Company obtains final
information regarding the fair value of assets acquired and liabilities assumed.
Sierra LLC is engaged in the design and manufacture of certain niche microwave
components used in satellites and military products.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JANUARY 31, 2004 OCTOBER 31, 2003
---------------- ----------------
Accounts receivable $ 28,709,000 $ 29,455,000
Less: Allowance for doubtful accounts (695,000) (635,000)
---------------- ----------------
Accounts receivable, net $ 28,014,000 $ 28,820,000
================ ================
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
JANUARY 31, 2004 OCTOBER 31, 2003
---------------- ----------------
Costs incurred on uncompleted contracts $ 10,460,000 $ 9,635,000
Estimated earnings 8,159,000 7,861,000
---------------- ----------------
18,619,000 17,496,000
Less: Billings to date (17,915,000) (15,223,000)
---------------- ----------------
$ 704,000 $ 2,273,000
================ ================
Included in accompanying condensed consolidated
balance sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 2,223,000 $ 3,520,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (1,519,000) (1,247,000)
---------------- ----------------
$ 704,000 $ 2,273,000
================ ================
Changes in estimates on long-term contracts accounted for under the
percentage-of-completion method did not have a significant impact on net income
or diluted net income per share in the three months ended January 31, 2004 and
2003.
INVENTORIES
JANUARY 31, 2004 OCTOBER 31, 2003
---------------- ----------------
Finished products $ 26,661,000 $ 28,958,000
Work in process 9,800,000 9,333,000
Materials, parts, assemblies and supplies 13,182,000 12,949,000
---------------- ----------------
Total inventories $ 49,643,000 $ 51,240,000
================ ================
7
Inventories related to long-term contracts were not significant as of
January 31, 2004 and October 31, 2003. Amounts set forth above are net of
reserves to reduce slow-moving inventories to estimated net realizable values.
PROPERTY, PLANT AND EQUIPMENT
JANUARY 31, 2004 OCTOBER 31, 2003
---------------- ----------------
Land $ 2,157,000 $ 1,750,000
Buildings and improvements 19,559,000 18,981,000
Machinery and equipment 44,739,000 43,629,000
Construction in progress 1,802,000 1,623,000
---------------- ----------------
68,257,000 65,983,000
Less: Accumulated depreciation (31,602,000) (30,446,000)
---------------- ----------------
Property, plant and equipment, net $ 36,655,000 $ 35,537,000
================ ================
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, 2004 are as
follows:
SEGMENT
---------------------------------- CONSOLIDATED
FSG ETG TOTAL
--------------- ---------------- ----------------
Balances as of October 31, 2003 $ 119,729,000 $ 68,971,000 $ 188,700,000
Goodwill acquired during the period -- 27,510,000 27,510,000
Adjustments to goodwill 19,000 -- 19,000
--------------- ---------------- ----------------
Balances as of January 31, 2004 $ 119,748,000 $ 96,481,000 $ 216,229,000
=============== ================ ================
The goodwill acquired during the period is a result of the Company's
acquisition through a subsidiary of an 80% interest in the assets and business
of Sierra (see Note 2). Adjustments to goodwill consist primarily of contingent
purchase price payments to previous owners of acquired businesses.
Other intangible assets are recorded within the caption "Other assets" in
the Company's condensed consolidated balance sheets. Other intangible assets
subject to amortization consist primarily of licenses, patents, and non-compete
covenants. The gross carrying amount and accumulated amortization of other
intangible assets was $1,423,000 and $174,000, respectively, as of January 31,
2004. Amortization expense of other intangible assets for the three months ended
January 31, 2004 was $27,000. Amortization expense of other intangible assets
for the fiscal year ending October 31, 2004 is estimated to be $107,000.
Amortization expense for each of the next five fiscal years is estimated to be
$128,000 in fiscal 2005, $128,000 in fiscal 2006, $127,000 in fiscal 2007,
$106,000 in fiscal 2008 and $91,000 in fiscal 2009.
8
5. LONG-TERM DEBT
Long-term debt consists of:
JANUARY 31, 2004 OCTOBER 31, 2003
---------------- ----------------
Borrowings under revolving credit facility $ 52,000,000 $ 30,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 12,000 33,000
---------------- ----------------
53,992,000 32,013,000
Less: Current maturities of long-term debt (9,000) (29,000)
---------------- ----------------
$ 53,983,000 $ 31,984,000
================ ================
As of January 31, 2004 and October 31, 2003, the Company had a total of $52
million and $30 million, respectively, borrowed under its $120 million revolving
credit facility at weighted average interest rates of 2.4% and 2.6%,
respectively.
The interest rates on the Series 1988 industrial development revenue bonds
were 1.0% and 1.2% as of January 31, 2004 and October 31, 2003, respectively. In
January 2004, the Company extended the expiration date of its $2.0 million
letter of credit that secures the payment of the 1988 industrial development
revenue bonds to April 2008.
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the three months ended
January 31, 2004 are as follows:
CLASS A CAPITAL IN
COMMON COMMON EXCESS OF RETAINED NOTE
STOCK STOCK PAR VALUE EARNINGS RECEIVABLE
------------ ------------ -------------- -------------- --------------
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 1) -- 22,000 29,342,000 (29,393,000) --
Net income to date -- -- -- 3,241,000 --
Shares issued in connection with
business acquisition (Note 2) -- 3,000 2,997,000 -- --
Adjustment to guaranteed resale
value of shares issued in
connection with business
acquisition (Note 10) -- -- (1,704,000) -- 1,704,000
Cash dividends ($.05 per share) -- -- -- (596,000) --
Tax benefit from stock
option exercises -- -- 1,258,000 -- --
Exercises of stock options -- -- 123,000 -- --
Other -- -- 2,000 1,000 --
------------ ------------ -------------- -------------- ---------------
Balances as of January 31, 2004 $ 97,000 $ 142,000 $ 187,082,000 $ 42,425,000 $ (1,228,000)
============ ============ ============== ============== ===============
9
7. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the three months ended January 31, 2004 and 2003 includes
approximately $2.1 million and $2.2 million, respectively, of new product
research and development expenses. The expenses are net of reimbursements
pursuant to research and development cooperation and joint venture agreements,
which were not significant.
8. 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:
2004 2003
-------------- --------------
Numerator:
Net income $ 3,241,000 $ 2,834,000
============== ==============
Denominator:
Weighted average common shares outstanding - basic 23,745,244 23,086,297
Effect of dilutive stock options 1,887,755 1,384,139
-------------- --------------
Weighted average common shares outstanding - diluted 25,632,999 24,470,436
============== ==============
Net income per share - basic $ .14 $ .12
Net income per share - diluted $ .13 $ .12
Anti-dilutive stock options excluded 550,595 2,282,402
9. OPERATING SEGMENTS
Information on the Company's two operating segments, namely, 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, 2004 and 2003, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
----------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------ -------------- -------------- ---------------
For the three months ended January 31, 2004:
Net sales $ 34,257,000 $ 11,939,000 $ (45,000) $ 46,151,000
Depreciation and amortization 1,087,000 405,000 117,000 1,609,000
Operating income 5,326,000 2,484,000 (1,237,000) 6,573,000
Capital expenditures 496,000 518,000 3,000 1,017,000
For the three months ended January 31, 2003:
Net sales $ 31,886,000 $ 10,000,000 $ (98,000) $ 41,788,000
Depreciation and amortization 819,000 308,000 71,000 1,198,000
Operating income 5,377,000 768,000 (616,000) 5,529,000
Capital expenditures 140,000 1,170,000 -- 1,310,000
10
The total assets held by each operating segment as of January 31, 2004 and
October 31, 2003 is as follows:
SEGMENT OTHER,
------------------------------ PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
------------- -------------- -------------- ---------------
Total assets as of January 31, 2004 $ 213,501,000 $ 132,858,000 $ 14,576,000 $ 360,935,000
Total assets as of October 31, 2003 214,292,000 103,798,000 15,154,000 333,244,000
10. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has arranged for standby letters of credit aggregating to $1.2
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 a $0.5 million
letter of credit expiring July 2004. These letters of credit are supported by
the Company's $120 million 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.
The Company's accounting policy for product warranties is to accrue an
estimated liability at the time of shipment. Warranty reserves are included in
the Company's condensed consolidated balance sheets under the caption "Accrued
expenses and other current liabilities." The amount recognized is based on
historical claims cost experience. Based on an analysis of such cost experience,
the Company reduced its estimated warranty liability in the first quarter of
fiscal 2004. Changes in the product warranty liability for the three months
ended January 31, 2004 are as follows:
Balance as of October 31, 2003 $ 633,000
Change in estimate of warranty liability (491,000)
Accruals for warranties issued during the period 34,000
Warranty claims settled during the period (33,000)
----------
Balance as of January 31, 2004 $ 143,000
==========
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 is shown as a reduction of shareholders' equity in the Company's
condensed consolidated balance sheets under the caption, "Note receivable
secured by Class A Common Stock." In October 2003, the seller sold 220,000
shares of the HEICO Class A Common Stock and the Company received net proceeds
of $2.1 million to reduce the note receivable. In February 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
11
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 October 2003 and $1.2 million received in February 2004)
from the sales of the Class A Common Stock has been recorded as a reduction of
capital in excess of par value and the note receivable as of January 31, 2004.
As part of the agreement to acquire an 80% interest in Sierra (see Note 2),
the Company has the right to purchase the minority interests in approximately
ten years, or sooner under certain conditions, and the minority holders have the
right to cause the Company to purchase their interests commencing in
approximately five years, or sooner under certain conditions.
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 significant effect on the Company's condensed
consolidated financial statements.
12
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, 2003.
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.
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,
------------------------------
2004 2003
------------- --------------
Net sales $ 46,151,000 $ 41,788,000
------------- --------------
Cost of sales 30,615,000 28,012,000
Selling, general and administrative expenses 8,963,000 8,247,000
------------- --------------
Total operating costs and expenses 39,578,000 36,259,000
------------- --------------
Operating income $ 6,573,000 $ 5,529,000
============= ==============
13
THREE MONTHS ENDED JANUARY 31,
------------------------------
2004 2003
------------- --------------
Net sales by segment:
Flight Support Group $ 34,257,000 $ 31,886,000
Electronic Technologies Group 11,939,000 10,000,000
Intersegment sales (45,000) (98,000)
------------- --------------
$ 46,151,000 $ 41,788,000
============= ==============
Operating income by segment:
Flight Support Group $ 5,326,000 $ 5,377,000
Electronic Technologies Group 2,484,000 768,000
Other, primarily corporate (1,237,000) (616,000)
------------- --------------
$ 6,573,000 $ 5,529,000
============= ==============
Net sales 100.0% 100.0%
Gross profit 33.7% 33.0%
Selling, general and administrative expense 19.4% 19.7%
Operating income 14.2% 13.2%
Interest expense 0.7% 0.8%
Interest income and other (expense) income -- 0.2%
Income tax expense 4.7% 4.4%
Minority interests' share of income 1.8% 1.4%
Net income 7.0% 6.8%
COMPARISON OF FIRST THREE MONTHS OF FISCAL 2004 TO FIRST THREE MONTHS OF FISCAL
2003
Net Sales
Net sales for the first three months of fiscal 2004 totaled $46.2 million,
compared to net sales of $41.8 million for the first three months of fiscal
2003. The increase in net sales reflects an increase of $2.4 million (7%
increase) to $34.3 million in sales within the FSG, and an increase of $1.9
million (a 19% increase) to $11.9 million in sales within the ETG. The FSG's
sales increase primarily reflects improved demand for its aftermarket
replacement parts and repair and overhaul services, which reflects some recovery
within the commercial airline industry, as well as increased sales of new
products. The increase in sales within the ETG primarily resulted from the
acquisition of Sierra Microwave Technology, Inc. (Sierra) in December 2003.
Gross Profits and Operating Expenses
The Company's gross profit margin averaged 33.7% for the first three months
of fiscal 2004 as compared to 33.0% for the first three months of fiscal 2003,
reflecting higher margins within the ETG offset by a small decrease in the FSG's
gross profit margin. The ETG's gross profit margin increase was primarily due to
the acquisition of Sierra and sales of higher margin products. The FSG's gross
profit margin decrease was principally due to higher costs from write-offs of
excess inventory, partially offset by a reduction of its product warranty
reserve and lower research and development expenses as a percentage of net sales
in the first quarter of fiscal 2004. Consolidated cost of sales amounts for the
first three months of fiscal 2004 and fiscal 2003 include approximately $2.1
million and $2.2 million, respectively, of new product research and development
expenses.
14
Selling, general and administrative (SG&A) expenses were $9.0 million and
$8.2 million for the first three months of fiscal 2004 and fiscal 2003,
respectively. The increase in SG&A expenses is mainly due an increase in
Corporate expenses. Corporate expenses in the first quarter of fiscal 2003
reflected a reversal of approximately $400,000 of professional fees that were
accrued at the end of fiscal 2002 pursuant to a contractual arrangement that was
renegotiated in the first quarter of fiscal 2003.
As a percentage of net sales, SG&A expenses decreased to 19.4% for the
first three months of fiscal 2004 compared to 19.7% for the first three months
of fiscal 2003. The decrease as a percentage of sales is due to higher sales
volumes within the FSG and ETG.
Operating Income
Operating income of $6.6 million for the first three months of fiscal 2004
was 18.9% higher than operating income of $5.5 million for the first three
months of fiscal 2003. The increase in operating income reflects a $1.7 million
increase in operating income of the ETG from $0.8 million for the first three
months of fiscal 2003 to $2.5 million for the first three months of fiscal 2004,
partially offset by a $0.6 million increase in Corporate expenses. As a
percentage of net sales, operating income increased from 13.2% in the first
three months of fiscal 2003 to 14.2% in the first three months of fiscal 2004.
The increase 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 7.7% in
the first three months of fiscal 2003 to 20.8% in the first three months of
fiscal 2004 offset by a slight decrease in the FSG's operating income as a
percentage of net sales from 16.9% in the first three months of fiscal 2003 to
15.5% in the first three months of fiscal 2004. The increase in the ETG's
operating income and operating income as a percentage of net sales reflects the
purchase of Sierra and the increased gross margins, discussed previously. The
decrease in the FSG's operating income as a percentage of net sales reflects the
lower gross profit margins discussed previously.
Interest Expense
Interest expense in the first three months of fiscal 2004 and fiscal 2003
were comparable as average borrowings outstanding and associated interest rates
remained at approximately the same levels.
Interest Income and Other (Expense) Income
Interest income and other (expense) income in the first three months of
fiscal 2004 and fiscal 2003 were not material.
Income Tax Expense
The Company's effective tax rate decreased from 35.3% for the first three
months of fiscal 2003 to 34.5% for the first three months of fiscal 2004 as the
minority interests' share of the income of Sierra Microwave Technology, LLC
(Sierra LLC) is excluded from the Company's income that is subject to federal
income taxes, and due to a higher tax benefit on foreign sales.
15
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 the first three months of fiscal 2003 to
the first three months of fiscal 2004 was primarily attributable to income of
Sierra LLC.
Net Income
The Company's net income was $3.2 million, or $.13 per diluted share, in
the first three months of fiscal 2004 compared to $2.8 million, or $.12 per
diluted share, in the first three months of fiscal 2003.
Outlook
The Company reported increased sales in its two business segments
reflecting both organic growth and growth through acquisitions. The Company
believes that the FSG's operating margins will continue to improve during the
balance of fiscal 2004 while maintaining the strong operating margins in the
ETG.
Based on the current strengthening of the general economy and the markets
in which the Company participates and the Company's continued success in
introducing new products and services, the Company continues to target growth in
fiscal 2004 sales and earnings over fiscal 2003 results.
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
interest and principal on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its operating cash flow 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 $7.7 million for the first
three months of fiscal 2004, consisting primarily of net income of $3.2 million,
depreciation and amortization of $1.6 million, a deferred income tax provision
of $1.2 million, a tax benefit on stock option exercises of $1.3 million and
minority interests' share of income of consolidated subsidiaries of $0.8
million, partially offset by an increase in net operating assets of $0.3
million.
16
Investing Activities
Net cash used in investing activities during the first three months of
fiscal 2004 related primarily to the acquisition of Sierra and capital
expenditures totaling $1.0 million for building improvements at certain
manufacturing facilities and equipment purchases.
Financing Activities
Net cash provided by financing activities during the first three months of
fiscal 2004 primarily related to net borrowings of $22.0 million on the
Company's revolving credit facility primarily to fund the acquisition referenced
above, partially offset by the payment of $0.6 million in cash dividends on the
Company's common stock.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating to $1.2
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 a $0.5 million
letter of credit expiring July 2004. These letters of credit are supported by
the Company's $120 million 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 (see Note 2
to the condensed consolidated financial statements), the Company has the right
to purchase the minority interests in approximately ten years, or sooner under
certain conditions, and the minority holders have the right to cause the Company
to purchase their interests commencing in approximately five years, or sooner
under certain conditions.
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation, which was
revised in December 2003, clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 requires an enterprise to consolidate a variable interest
entity if that enterprise will absorb a majority of the entity's expected
losses, is entitled to receive a majority of the entity's expected residual
returns, or both. FIN 46 also requires disclosures about unconsolidated variable
interest entities in which an enterprise holds a significant variable interest.
FIN 46 was immediately effective for variable interest entities created or
entered into after January 31, 2003 and is effective in the first reporting
period ending after December 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of FIN 46 did not have a material effect on the Company's results
of operations or financial position.
17
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or oral
statements that are "forward-looking," including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's shareholders. Management believes that all statements
that express expectations and projections with respect to future matters could
differ materially from those expressed in or implied by those forward-looking
statements as a result of factors, including, but 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 our costs to complete contracts to increase; governmental and
regulatory demands, export policies and restrictions, military program funding
by U.S. and non-U.S. Government agencies or competition on military programs,
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, competition from existing and new competitors, customer credit risk,
interest rates and economic conditions within and outside of the aerospace,
defense and electronics industries, which could negatively impact our costs and
revenues. For an enterprise such as the Company, a wide range of factors could
materially affect future developments and performance. A list of such factors is
set forth in the Company's Annual Report on Form 10-K for the year ended October
31, 2003. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
18
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, 2004, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $73,000 on an annual basis.
19
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
concluded that the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective, based on their
evaluation as of the end of the period covered by this quarterly report on Form
10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were 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.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT DESCRIPTION
10.1 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. *
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief
Executive Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of the 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.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on November 4, 2003, which contained the
description and terms of a new shareholder Rights Agreement effective
as of November 2, 2003.
The Company furnished a report on Form 8-K to the Securities and
Exchange Commission dated December 15, 2003, which contained a press
release announcing the Company's financial results for the fiscal
fourth quarter and full year ended October 31, 2003.
21
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
(Registrant)
Date: February 27, 2004 By: /s/ Thomas S. Irwin
------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
EXHIBIT INDEX
Exhibit # Description
- --------- -----------
10.1 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.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.