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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to_____________
COMMISSION FILE NUMBER 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction of (I.R.S. Employer 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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
Class A Common Stock, $.01 par value per share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
Rights to Purchase Series B Junior Participating Preferred Stock
Rights to Purchase Series C Junior Participating Preferred Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity
held by nonaffiliates of the registrant was $298,000,000 based on the closing
price of Common Stock and Class A Common Stock as of April 30, 2004 (the last
business day of the registrant's most recently completed second fiscal quarter)
as reported by the New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of
common stock, as of January 7, 2005:
Common Stock, $.01 par value 9,958,179 shares
Class A Common Stock, $.01 par value 14,448,110 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2005
Annual Meeting of Shareholders are incorporated by reference into Part III. See
Item 15(a)(3) beginning on page 61 for a listing of exhibits.
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HEICO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 10
Item 3. Legal Proceedings........................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders...................................... 11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.................................................................... 12
Item 6. Selected Financial Data.................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 28
Item 8. Financial Statements and Supplementary Data.............................................. 29
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..... 59
Item 9A. Controls and Procedures.................................................................. 59
Item 9B. Other Information........................................................................ 59
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 60
Item 11. Executive Compensation................................................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters................................................................................. 60
Item 13. Certain Relationships and Related Transactions........................................... 60
Item 14. Principal Accountant Fees and Services................................................... 60
PART IV
Item 15. Exhibits and Financial Statement Schedules............................................... 61
SIGNATURES............................................................................................. 65
PART I
ITEM 1. BUSINESS
THE COMPANY
HEICO Corporation through its subsidiaries (collectively, "HEICO", "we",
"us", "our" or "the Company") believes it is the world's largest manufacturer of
Federal Aviation Administration (FAA)-approved jet engine and aircraft component
replacement parts, other than the original equipment manufacturers (OEMs), and
their subcontractors. HEICO is also a leading manufacturer of various types of
electronic equipment for the aviation, defense, space, medical,
telecommunications and electronics industries.
Our business is comprised of two operating segments:
The Flight Support Group. Our Flight Support Group, consisting of HEICO
Aerospace Holdings Corp. (HEICO Aerospace) and its subsidiaries, accounted for
71% of our net sales in fiscal 2004. This Group uses proprietary technology to
design and manufacture jet engine and aircraft component replacement parts for
sale at lower prices than those manufactured by OEMs. These parts are approved
by the FAA and are the functional equivalent of parts sold by OEMs. In addition,
the Flight Support Group repairs, refurbishes and overhauls jet engine and
aircraft components for domestic and foreign commercial air carriers and
aircraft repair companies, and manufactures thermal insulation products and
other component parts primarily for aerospace, defense and commercial
applications.
The Flight Support Group competes with the leading industry OEMs and, to
a lesser extent, with a number of smaller, independent parts distributors.
Historically, the three principal jet engine OEMs, General Electric (including
CFM International), Pratt & Whitney, and Rolls Royce, have been the sole source
of substantially all jet engine replacement parts for their jet engines. Other
OEMs have been the sole source of replacement parts for their aircraft component
parts. While we believe that we currently supply less than 2% of the market for
jet engine and aircraft component replacement parts, we have consistently been
adding new products to our line and currently hold and actively sell Parts
Manufacturer Approvals, which we refer to as "PMAs," for over 2,600 jet engine
and aircraft component replacement parts.
We believe that, based on our competitive pricing, reputation for high
quality, short lead time requirements, strong relationships with domestic and
foreign commercial air carriers and repair stations (companies that overhaul
aircraft engines and/or components), strategic relationships with Lufthansa and
other major airlines and successful track record of receiving PMAs from the FAA,
we are uniquely positioned to continue to increase our product lines and gain
market share.
The Electronic Technologies Group. Our Electronic Technologies Group,
consisting of HEICO Electronic Technologies Corp. and its subsidiaries,
accounted for 29% of our net sales in fiscal 2004. Through our Electronic
Technologies Group, which derived approximately 50% of its sales in fiscal 2004
from the sale of products and services to U.S. and foreign military agencies, we
design, manufacture and sell various types of electronic, microwave and
electro-optical products, including infrared simulation and test equipment,
laser rangefinder receivers, electrical power supplies, back-up power supplies,
electromagnetic interference and radio frequency interference shielding, high
power capacitor charging power supplies, amplifiers, photodetectors, amplifier
modules and flash lamp drivers. In addition, the Electronic Technologies Group
also repairs and overhauls inertial navigation systems and other avionics,
instruments, and components for commercial, military and business aircraft
operators.
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In October 1997, we entered into a strategic alliance with Lufthansa.
Lufthansa is the world's largest independent provider of engineering and
maintenance services for aircraft components and jet engines and supports over
200 airlines, governments and other customers. As part of this strategic
alliance, Lufthansa has invested approximately $50 million in our company, to
acquire and maintain a 20% minority interest in HEICO Aerospace, and to
partially fund the accelerated development of additional FAA-approved
replacement parts for jet engines and aircraft components over the subsequent
four years pursuant to a research and development cooperation agreement. This
strategic alliance has enabled us to expand domestically and internationally by
enhancing our ability to (i) identify key jet engine and aircraft component
replacement parts with significant profit potential by utilizing Lufthansa's
extensive operating data on engine and component parts; (ii) introduce those
parts throughout the world in an efficient manner due to Lufthansa's testing and
diagnostic resources; and (iii) broaden our customer base by capitalizing on
Lufthansa's established relationships and alliances within the airline industry.
In March 2001, we entered into a joint venture with American Airlines,
one of the world's largest airlines, to develop, design and sell FAA-approved
jet engine and aircraft component replacement parts through HEICO Aerospace. As
part of the joint venture, American Airlines reimburses HEICO Aerospace a
portion of new product research and development costs. The joint venture is 16%
owned by American Airlines. American Airlines and HEICO Aerospace have agreed to
cooperate regarding technical services and marketing support on a worldwide
basis. We believe that American Airlines' investment, along with its vast
technical experience as an operator and overhauler of aircraft and jet engines,
allows us to accelerate the development of new FAA-approved replacement parts
and, accordingly, to manufacture and market such parts.
During fiscal years 2002 through 2004, we entered into strategic
relationships with other leading airlines such as United Airlines (May 2002),
Delta Air Lines (February 2003), Air Canada (March 2003) and Japan Airlines
(March 2004). These relationships accelerate HEICO's efforts in developing a
broad range of jet engine and aircraft component replacement parts for FAA
approval. Each of the aforementioned airlines purchase these newly developed
parts, and most of HEICO Aerospace's current FAA-approved parts product line, on
an exclusive basis from HEICO Aerospace.
We have continuously operated in the aerospace industry for more than 40
years. Since assuming control in 1990, our current management has achieved
significant sales and profit growth through a broadened line of product
offerings, an expanded customer base, increased research and development
expenditures, and the completion of a number of acquisitions. As a result of
internal growth and acquisitions, our net sales have grown from $32.3 million in
fiscal 1990 to $215.7 million in fiscal 2004, a compound annual growth rate of
approximately 14.5%. During the same period, we improved our income from a net
loss of $0.5 million to a net income of $20.6 million.
FLIGHT SUPPORT GROUP
Our Flight Support Group is headquartered in Hollywood, Florida and
designs, engineers, manufactures, repairs and overhauls jet engine and aircraft
component replacement parts such as combustion chambers, compressor blades,
vanes, seals and various other engine and aircraft parts. The Flight Support
Group also manufactures specialty aviation and defense components as a
subcontractor. The Flight Support Group serves a broad spectrum of the aviation
industry, including (i) commercial airlines and air cargo carriers; (ii) repair
and overhaul facilities; (iii) OEMs; and (iv) U.S. and foreign governments.
Jet engine and aircraft component replacement parts can be categorized
by their ongoing ability to be repaired and returned to service. The general
categories (in all of which we participate) are as follows: (i) rotable; (ii)
repairable; and (iii) expendable. A rotable is a part which is removed
periodically as
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dictated by an operator's maintenance procedures or on an as needed basis and is
typically repaired or overhauled and re-used an indefinite number of times. An
important subset of rotables is "life limited" parts. A life limited rotable has
a designated number of allowable flight hours and/or cycles (one take-off and
landing generally constitutes one cycle) after which it is rendered unusable. A
repairable is similar to a rotable except that it can only be repaired a limited
number of times before it must be discarded. An expendable is generally a part
which is used and not thereafter repaired for further use.
Jet engine and aircraft component replacement parts are classified
within the industry as (i) factory-new; (ii) new surplus; (iii) overhauled; (iv)
repairable; and (v) as removed. A factory-new or new surplus part is one that
has never been installed or used. Factory-new parts are purchased from
FAA-approved manufacturers (such as HEICO or OEMs) or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part is one that has
been completely repaired and inspected by a licensed repair facility such as
ours. An aircraft spare part is classified as "repairable" if it can be repaired
by a licensed repair facility under applicable regulations. A part may also be
classified as "repairable" if it can be removed by the operator from an aircraft
or jet engine while operating under an approved maintenance program and is
airworthy and meets any manufacturer or time and cycle restrictions applicable
to the part. A "factory-new," "new surplus," "overhauled" or "serviceable" part
designation indicates that the part can be immediately utilized on an aircraft.
A part in "as removed" condition requires inspection and possibly functional
testing, repair or overhaul by a licensed facility prior to being returned to
service in an aircraft.
Factory-New Jet Engine and Aircraft Component Replacement Parts. The
principal business of the Flight Support Group is the research and development,
design, manufacture and sale of FAA-approved replacement parts that are sold to
domestic and foreign commercial air carriers and aircraft repair and overhaul
companies. Our principal competitors are Pratt & Whitney, a division of United
Technologies Corporation and General Electric Company, including its CFM
International joint venture. The Flight Support Group's factory-new replacement
parts include various jet engine and aircraft component replacement parts. A key
element of our growth strategy is the continued design and development of an
increasing number of Parts Manufacturer Approval (PMA) replacement parts in
order to further penetrate our existing customer base and obtain new customers.
We select the jet engine and aircraft component replacement parts to design and
manufacture through a selection process which analyzes industry information to
determine which replacement parts are suitable candidates. As part of
Lufthansa's investment in the Flight Support Group, Lufthansa has the right to
select 50% of the parts for which we will seek PMAs, provided that such parts
are technologically and economically feasible and substantially comparable with
the profitability of our other PMA parts.
Repair and Overhaul Services. The Flight Support Group provides repair
and overhaul services on selected jet engine and aircraft component parts, as
well as on avionics, instruments, composites and flight surfaces of commercial
aircraft. The Flight Support Group also provides repair and overhaul services to
military aircraft operators and aircraft repair and overhaul companies. Our
repair and overhaul operations require a high level of expertise, advanced
technology and sophisticated equipment. Services include the repair,
refurbishment and overhaul of numerous accessories and parts mounted on gas
turbine engines and airframes. Components overhauled include fuel pumps,
generators, fuel controls, pneumatic valves, starters and actuators, turbo
compressors and constant speed drives, hydraulic pumps, valves and actuators,
composite flight controls, electro-mechanical equipment and auxiliary power unit
accessories.
Manufacture of Specialty Aircraft/Defense Related Parts and
Subcontracting for OEMs. The Flight Support Group manufactures thermal
insulation blankets primarily for aerospace, defense and commercial
applications. The Flight Support Group also manufactures specialty components
for sale as a subcontractor to OEMs and the U.S. government.
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FAA Approvals and Product Design. Non-OEM manufacturers of jet engine
replacement parts must receive a Parts Manufacturer Approval (PMA) from the FAA
to sell the replacement part. The PMA approval process includes the submission
of sample parts, drawings and testing data to one of the FAA's Aircraft
Certification Offices where the submitted data are analyzed. We believe that an
applicant's ability to successfully complete the PMA process is limited by
several factors, including (i) the agency's confidence level in the applicant;
(ii) the complexity of the part; (iii) the volume of PMAs being filed; and (iv)
the resources available to the FAA. We also believe that companies such as HEICO
that have demonstrated their manufacturing capabilities and established
favorable track records with the FAA generally receive a faster turnaround time
in the processing of PMA applications. Finally, we believe that the PMA process
creates a significant barrier to entry in this market niche through both its
technical demands and its limits on the rate at which competitors can bring
products to market.
As part of our growth strategy, we have continued to increase our
research and development activities. Research and development expenditures by
the Flight Support Group increased from approximately $300,000 in 1991 to
approximately $7.8 million in fiscal 2004. We believe that our Flight Support
Group's research and development capabilities are a significant component of our
historical success and an integral part of our growth strategy.
Our expanded research and development activities have included
development of more complex jet engine and aircraft component replacement parts.
We recently received from the FAA our 19th PMA for an aircraft engine compressor
blade since October 1999 and we are continuing the research and development of
other complex parts. We believe the development and subsequent sale of complex
parts represents a significant long-term market opportunity. In fiscal 2004, the
FAA granted us PMAs for approximately 300 new parts; however, no assurance can
be given that the FAA will continue to grant PMAs or that we will achieve
acceptable levels of net sales and gross profits on such parts in the future.
We benefit from our proprietary rights relating to certain design,
engineering and manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our unique manufacturing capabilities are required by the
customer's specifications or designs, thereby necessitating reliance on us for
production of such designed products.
We have no patents for the proprietary techniques, including software
and manufacturing expertise, we have developed to manufacture jet engine and
aircraft component replacement parts and instead, we rely on trade secret
protection. Although our proprietary techniques and software and manufacturing
expertise are subject to misappropriation or obsolescence, we believe that we
take appropriate measures to prevent misappropriation or obsolescence from
occurring by developing improved methods and processes and new techniques, which
we will continue on an ongoing basis as dictated by the technological needs of
our business.
ELECTRONIC TECHNOLOGIES GROUP
Much of our Electronic Technologies Group's strategy is centered around
producing equipment that helps the U.S. military and allied foreign military
agencies conduct stand-off operations from greater distances. Our activities in
this regard are focused on products that are placed in airborne, vehicle-based
or handheld targeting systems as well as in providing equipment used to develop,
test and calibrate such systems.
Electro-Optical Infrared Simulation and Test Equipment. Our Electronic
Technologies Group is a leading international designer and manufacturer of niche
state-of-the-art simulation, testing and
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calibration equipment used in the development of missile seeking technology,
airborne targeting and reconnaissance systems, shipboard targeting and
reconnaissance systems, space-based sensors as well as ground vehicle-based
systems. These products include infrared scene projector equipment, such as our
MIRAGE IR Scene Simulator, high precision blackbody sources, software and
integrated calibration systems.
Simulation equipment allows the U.S. government and allied foreign
military to save money on missile testing, as it allows infrared-based missiles
to be tested on a multi-axis, rotating table, instead of requiring the launch of
a complete missile. In addition, several large military prime contractors have
elected to purchase such equipment from us instead of maintaining internal staff
to do so because we can offer a more cost-effective solution. Our customers
include major U.S. Department of Defense weapons laboratories as well as defense
prime contractors such as Lockheed Martin, Northrop Grumman and Boeing.
Electro-Optical Laser Products. Our Electronic Technologies Group
believes it is a leading designer and maker of Laser Rangefinder Receivers and
other photodetectors used in airborne, vehicular and handheld targeting systems
manufactured by major prime military contractors, such as Northrop Grumman and
Lockheed Martin. Most of our Rangefinder Receiver product offering consists of
complex and patented products which detect reflected light from laser targeting
systems and allow the systems to confirm target accuracy and calculate target
distances prior to discharging a weapon system. These products are also used in
laser eye surgery systems for tracking ocular movement.
Electro-Optical, Microwave and Other Power Equipment. We produce power
supplies, amplifiers and flash lamp drivers used in laser systems for military,
medical and other applications that are sometimes utilized with our Rangefinder
Receivers. We also produce emergency back-up power supplies and batteries used
on commercial aircraft and business jets for services such as emergency exit
lighting, emergency fuel shut-off, power door assists, cockpit voice recorders
and flight computers.
Our microwave products are used in satellites and electronic warfare
systems. These products, which include isolators, bias tees, circulators,
latching ferrite switches and waveguide adapters are used in satellites to
control or direct energy according to operator needs. As satellites are
frequently used as sensors for stand-off warfare, we believe this product line
further supports our goal of increasing our activity in the stand-off market. We
believe we are a leading supplier of the niche products which we design and make
for this market, a market that includes commercial satellites. Our customers for
these products include satellite makers, such as Boeing, Northrop Grumman and
Thales.
Guidance and Navigation Repair. Our Electronic Technologies Group
repairs and overhauls inertial guidance and navigation systems, as well as their
subcomponents and other instruments, utilized in military and commercial
aircraft. These systems inform aircraft of their locations at all times and
allow them to navigate. Our customers include the United States government,
foreign military agencies, as well as both domestic and foreign commercial
airlines.
Electromagnetic and Radio Interference Shielding. We design and make
shielding used to prevent electromagnetic energy and radio frequencies from
interfering with computers, telecommunication devices, avionics, weapons systems
and other electronic equipment. Our products include a patented line of
shielding applied directly to circuit boards and a line of gasket-type shielding
applied to computers and other electronic equipment. Our customers consist
essentially of medical, electronic, telecommunication and defense equipment
producers.
In December 2004, we expanded our capabilities within the Electronic
Technologies Group by an acquisition of a growing and leading producer of
specialty high voltage interconnection devices and wire
5
primarily for defense applications and other markets. See Note 20, Subsequent
Event, of the Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
See Note 16, Operating Segments, of the Notes to Consolidated Financial
Statements for financial information by operating segment and information about
foreign and domestic operations as well as export sales.
SALES, MARKETING AND CUSTOMERS
Each of our operating segments independently conducts sales and
marketing efforts directed at their respective customers and industries and, in
some cases, collaborates with other operating divisions and subsidiaries within
its group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association, which we refer to as AIA, the leading trade association
representing the nation's manufacturers of commercial, military and business
aircraft, aircraft engines and related components and equipment. Due in large
part to our established industry presence, we enjoy strong customer relations,
name recognition and repeat business.
We sell our products to a broad customer base consisting of domestic and
foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 27% of total net sales during the year
ended October 31, 2004.
COMPETITION
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing of replacement parts as a result of lower labor costs and other factors.
Our jet engine and aircraft component replacement parts business
competes primarily with Pratt & Whitney and General Electric. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the Flight Support Group, we compete with both the leading jet engine OEMs and a
large number of machining, fabrication and repair companies, some of which have
greater financial and other resources than we do. Competition is based mainly on
price, product performance, service and technical capability.
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Competition for the repair and overhaul of jet engine and aircraft
components comes from three principal sources: OEMs, major commercial airlines
and other independent service companies. Some of these competitors have greater
financial and other resources than we do. Some major commercial airlines own and
operate their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own aircraft components and for third
parties. OEMs also maintain service centers that provide repair and overhaul
services for the components they manufacture. Other independent service
organizations also compete for the repair and overhaul business of other users
of aircraft components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
Our Electronic Technologies Group competes with several large and small
domestic and foreign competitors, some of which have greater financial and other
resources than we do. The market for our electronic products are niche markets
with several competitors with competition based mainly on design, technology,
quality, price and customer satisfaction.
RAW MATERIALS
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel,
pre-plated phosphor bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
BACKLOG
Our total backlog of unshipped orders was $45.2 million as of October
31, 2004 compared to $34.6 million as of October 31, 2003. Our Flight Support
Group had a backlog of unshipped orders as of October 31, 2004 of $16.3 million
as compared to $12.7 million as of October 31, 2003. This backlog excludes
forecasted shipments for certain contracts of the Flight Support Group pursuant
to which customers provide only estimated annual usage and not firm purchase
orders. Our backlogs within the Flight Support Group are typically short-lead in
nature with many product orders being received within the month of shipment. Our
Electronic Technologies Group had a backlog of $28.9 million as of October 31,
2004 as compared to $21.9 million as of October 31, 2003. Substantially the
entire backlog of orders as of October 31, 2004 is expected to be delivered
during fiscal 2005.
GOVERNMENT REGULATION
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aviation equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and equipment are prescribed by regulatory authorities
and can be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent
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regulatory requirements. In that regard, we closely monitor the FAA and industry
trade groups in an attempt to understand how possible future regulations might
impact us.
There has been no material adverse effect to our consolidated financial
statements as a result of these government regulations.
ENVIRONMENTAL REGULATION
Our operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the Environmental Protection Agency. Among
other matters, these regulatory authorities impose requirements that regulate
the operation, handling, transportation, and disposal of hazardous materials,
the health and safety of workers, and require us to obtain and maintain licenses
and permits in connection with our operations. This extensive regulatory
framework imposes significant compliance burdens and risks on us.
Notwithstanding these burdens, we believe that we are in material compliance
with all federal, state, and local laws and regulations governing our
operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 mandates general requirements for safe workplaces for all
employees and established the Occupational Safety and Health Administration
(OSHA) in the Department of Labor. In particular, OSHA provides special
procedures and measures for the handling of some hazardous and toxic substances.
In addition, specific safety standards have been promulgated for workplaces
engaged in the treatment, disposal or storage of hazardous waste. Requirements
under state law, in some circumstances, may mandate additional measures for
facilities handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA's health and safety
requirements.
INSURANCE
We are a named insured under policies which include the following
coverage: (i) product liability, including grounding; (ii) personal property,
inventory and business income at our facilities; (iii) general liability
coverage; (iv) employee benefit liability; (v) international liability and
automobile liability; (vi) umbrella liability coverage; and (vii) various other
activities or items subject to certain limits and deductibles. We believe that
our insurance coverage is adequate to insure against the various liability risks
of our business.
EMPLOYEES
As of October 31, 2004, we had 1,263 full-time and part-time employees,
of whom 907 were in the Flight Support Group, 341 were in the Electronic
Technologies Group, and 15 were Corporate. None of our employees is represented
by a union. We believe that we have good relations with our employees.
AVAILABLE INFORMATION
Our Internet web site address is http://www.heico.com. We make available
free of charge through our web site our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission. The information on or obtainable through our web site is not
incorporated into this annual report on Form 10-K.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are elected by the Board of Directors at the
first meeting following the annual meeting of shareholders and serve at the
discretion of the Board. The following table sets forth the names, ages of, and
positions and offices held by, our executive officers as of December 31, 2004:
DIRECTOR
NAME AGE POSITION(S) SINCE
- -------------------- --- ---------------------------------------------------- --------
Laurans A. Mendelson 66 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 58 Executive Vice President and Chief Financial -
Officer
Eric A. Mendelson 39 Executive Vice President and Director; President and 1992
Chief Executive Officer of HEICO Aerospace Holdings
Corp.
Victor H. Mendelson 37 Executive Vice President, General Counsel and 1996
Director; President and Chief Executive Officer
of HEICO Electronic Technologies Corp.
James L. Reum 73 Executive Vice President of HEICO -
Aerospace Holdings Corp.
Laurans A. Mendelson has served as Chairman of the Board of the Company
since December 1990. He has also served as Chief Executive Officer of the
Company since February 1990 and President of the Company since September 1991.
HEICO Corporation is a member of the Aerospace Industries Association (AIA) in
Washington D.C., and Mr. Mendelson has frequently served on the Board of
Governors of AIA. He is also Vice-Chairman of the Board of Trustees, member of
the Executive Committee and member of the Society of Mt. Sinai Founders of Mt.
Sinai Medical Center in Miami Beach, Florida. In addition, Mr. Mendelson served
as a Trustee of Columbia University in The City of New York from 1995 to 2001,
as well as Chairman of the Trustees' Audit Committee. Mr. Mendelson currently
serves as Trustee Emeritus of Columbia University and is a member of the
Trustees' Finance and Audit Committees. Mr. Mendelson is a Certified Public
Accountant. Laurans A. Mendelson is the father of Eric Mendelson and Victor
Mendelson.
Thomas S. Irwin has served as Executive Vice President and Chief
Financial Officer of the Company since September 1991 and served as Senior Vice
President of the Company from 1986 to 1991 and Vice President and Treasurer from
1982 to 1986. Mr. Irwin is a Certified Public Accountant and a Trustee of the
Greater Hollywood Chamber of Commerce.
Eric A. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1992 to 2001, and has been
President and Chief Executive Officer of HEICO Aerospace, a subsidiary of the
Company, since its formation in 1997 and President of HEICO Aerospace
Corporation since 1993. He also served as President of HEICO's Jet Avion
Corporation, a wholly owned subsidiary of HEICO Aerospace, from 1993 to 1996 and
served as Jet Avion's Executive Vice President and Chief Operating Officer from
1991 to 1993. From 1990 to 1991, Mr. Mendelson was Director of Planning and
Operations of the Company. Mr. Mendelson is a co-founder, and, since 1987, has
been Managing Director of Mendelson International Corporation, a private
investment company, which is a shareholder of HEICO. Eric Mendelson is the son
of Laurans Mendelson and the brother of Victor Mendelson.
9
Victor H. Mendelson has served as Executive Vice President of the
Company since 2001, Vice President of the Company from 1996 to 2001, as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of the Company, since September 1996 and as General Counsel of the
Company since 1993. He served as Executive Vice President of the Company's
former MediTek Health Corporation subsidiary from 1994 and its Chief Operating
Officer from 1995 until its sale in July 1996. He was the Company's Associate
General Counsel from 1992 until 1993. From 1990 until 1992, he worked on a
consulting basis with the Company, developing and analyzing various strategic
opportunities. Mr. Mendelson is a co-founder, and, since 1987, has been
President of Mendelson International Corporation, a private investment company,
which is a shareholder of HEICO. He is a Trustee of the Greater Miami Chamber of
Commerce and a Director of the Florida Grand Opera. Victor Mendelson is the son
of Laurans Mendelson and the brother of Eric Mendelson.
James L. Reum retired from full-time service to HEICO Aerospace in
August 2001 and remains active on a part-time basis with HEICO Aerospace as
Executive Vice President. He served as Chief Operating Officer of HEICO
Aerospace and its predecessor from 1995 to 1999, President of LPI Industries
Corporation from 1991 to 1998 and President of Jet Avion Corporation from 1996
to 1998. From 1990 to 1991, he served as Director of Research and Development
for Jet Avion Corporation. From 1986 to 1989, Mr. Reum was self-employed as a
management and engineering consultant to companies primarily within the
aerospace industry. From 1957 to 1986, he was employed in various management
positions with Chromalloy Gas Turbine Corp., Cooper Airmotive (later named
Aviall, Inc.), United Airlines, Inc. and General Electric Company.
ITEM 2. PROPERTIES
The Company owns or leases a number of facilities, which are utilized by
its Flight Support Group (FSG), Electronic Technologies Group (ETG), and
Corporate office. Summary information on the facilities utilized within the FSG
and the ETG to support their principal operating activities is as follows:
FLIGHT SUPPORT GROUP
Manufacture of Jet Engine and Aircraft Component Replacement Parts
Location Square footage Owned/Leased Description
----------- -------------- ------------ -----------------------------------------
California 139,000 Leased Manufacturing and engineering facilities
Florida 121,000 Owned Manufacturing and engineering facilities,
warehouse and corporate headquarters
Florida 5,000 Leased Engineering facility
Georgia 38,000 Owned Manufacturing and engineering facility
New Mexico 35,000 Leased Manufacturing and engineering facility
Washington 16,000 Leased Manufacturing and engineering facilities
Connecticut 10,000 Leased Manufacturing and engineering facility
Tennessee 6,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Jet Engine and Aircraft Components
Location Square footage Owned/Leased Description
----------- -------------- ------------ -----------------------------------------
Florida 105,000 Owned Repair and overhaul facilities
Florida 21,000 Leased Repair and overhaul facilities
California 27,000 Leased Repair and overhaul facility
10
ELECTRONIC TECHNOLOGIES GROUP
Manufacture of Electronic and Electro-Optical Equipment
Location Square footage Owned/Leased Description
----------- -------------- ------------ -----------------------------------------
Florida 59,000 Leased Manufacturing and engineering facilities
California 26,000 Leased Manufacturing and engineering facility
Texas 20,000 Owned Manufacturing and engineering facility
Repair and Overhaul of Aircraft Electronic Equipment
Location Square footage Owned/Leased Description
----------- -------------- ------------ -----------------------------------------
Ohio 21,000 Leased Repair and overhaul facility
CORPORATE
Location Square footage Owned/Leased Description
----------- -------------- ------------ -----------------------------------------
Florida 4,000 /(1)/ Owned Corporate headquarters and administrative
offices
- ----------
(1) Represents the square footage of corporate headquarters and administrative
offices in Miami, Florida. The square footage of the Company's corporate
headquarters in Hollywood, Florida is included within the square footage
for Florida under the caption "FSG - Manufacture of Jet Engine and
Aircraft Component Replacement Parts."
All of the facilities listed in this Item 2 are in good operating
condition, are well maintained and are in regular use. The Company believes that
its existing facilities are sufficient to meet its operational needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2004.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Class A Common Stock and Common Stock are listed and
traded on the New York Stock Exchange (NYSE) under the symbols "HEI.A" and
"HEI," respectively. The following tables sets forth, for the periods indicated,
the high and low share prices for the Class A Common Stock and the Common Stock
as reported on the NYSE, as well as the amount of cash dividends paid per share
during such periods. Lufthansa Technik AG, as a 20% shareholder of our Flight
Support Group, will be entitled to 20% of any dividends paid by our Flight
Support Group with the balance payable to the Company.
CLASS A COMMON STOCK
CASH DIVIDENDS
HIGH LOW PER SHARE
-------- -------- --------------
FISCAL 2003:
First Quarter $ 8.64 $ 6.59 $ .023
Second Quarter 7.79 5.18 --
Third Quarter 8.63 5.53 .023
Fourth Quarter 11.43 7.10 --
FISCAL 2004:
First Quarter $ 14.40 $ 10.77 $ .025
Second Quarter 13.89 9.99 --
Third Quarter 14.00 11.55 .025
Fourth Quarter 15.18 12.06 --
As of January 7, 2005, there were 1,045 holders of record of the
Company's Class A Common Stock.
COMMON STOCK
CASH DIVIDENDS
HIGH LOW PER SHARE
-------- -------- --------------
FISCAL 2003:
First Quarter $ 11.09 $ 8.18 $ .023
Second Quarter 10.11 6.68 --
Third Quarter 11.58 6.75 .023
Fourth Quarter 14.30 9.16 --
FISCAL 2004:
First Quarter $ 18.45 $ 13.71 $ .025
Second Quarter 17.45 12.90 --
Third Quarter 18.45 14.45 .025
Fourth Quarter 19.70 16.00 --
As of January 7, 2005, there were 982 holders of record of the Company's
Common Stock.
12
DIVIDEND POLICY
The Company has historically paid semi-annual cash dividends on both its
Class A Common Stock and Common Stock. In July 2004, HEICO paid its 52nd
consecutive semi-annual cash dividend since 1979. HEICO's Board of Directors
presently intends to continue the payment of regular semi-annual cash dividends
on both classes of its common stock. The Company's ability to pay dividends
could be affected by future business performance, liquidity, capital needs,
alternative investment opportunities, and loan covenants under its revolving
credit facility.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of October 31, 2004.
NUMBER OF
SECURITIES TO BE NUMBER OF SECURITIES
ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OUTSTANDING UNDER EQUITY COMPENSATION
OPTIONS, WARRANTS OPTIONS, WARRANTS PLANS (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS (a) AND RIGHTS (b) REFLECTED IN COLUMN (a)) (c)
- ------------------------------------ ----------------- ------------------ ----------------------------
Equity compensation plans approved
by security holders /(1)/ 3,507,875 $ 8.90 157,303
Equity compensation plans not
approved by security holders /(2)/ 527,392 $ 11.19 --
----------------- ----------------------------
Total 4,035,267 $ 9.20 157,303
================= ============================
- ----------
(1) Represents aggregated information pertaining to the Company's three equity
compensation plans: the 1993 Stock Option Plan, the Non-Qualified Stock
Option Plan and the 2002 Stock Option Plan. See Note 9, Stock Options, of
the Notes to Consolidated Financial Statements for further information
regarding these plans.
(2) Represents stock options granted to two former shareholders of an acquired
business pursuant to employment agreements entered into in connection with
the acquisition in fiscal 1999. Such stock options were fully vested and
transferable as of the grant date and expire ten years from the date of
grant. The exercise price of such options was the fair market value as of
the date of grant.
ISSUER PURCHASES OF EQUITY SECURITIES
As announced by the Company on October 21, 2002, the Company's Board of
Directors has authorized the repurchase of up to 425,000 shares of its Class A
Common Stock and/or Common Stock to be executed, at management's discretion, in
the open market or via private transactions. From October 21, 2002 through
October 31, 2003, the Company repurchased 22,000 shares of its Class A Common
Stock. The remaining 403,000 shares authorized for repurchase are subject to
certain restrictions included in the Company's revolving credit agreement. The
Company did not repurchase any shares of its Class A Common Stock and/or Common
Stock during fiscal 2004. The repurchase program does not have a fixed
termination date.
13
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, /(1)/
-----------------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
OPERATING DATA:
Net sales $ 202,909 $ 171,259 $ 172,112 $ 176,453 $ 215,744
---------- ---------- ---------- ---------- ----------
Gross profit 75,811 71,146 61,502 58,104 75,812
Selling, general and administrative expenses 37,888 40,155 39,102 34,899 43,193
---------- ---------- ---------- ---------- ----------
Operating income 37,923 30,991 22,400 23,205 32,619 /(7)/
---------- ---------- ---------- ---------- ----------
Interest expense 5,611 2,486 2,248 1,189 1,090
---------- ---------- ---------- ---------- ----------
Interest and other income 929 1,598 97 93 26
---------- ---------- ---------- ---------- ----------
Life insurance proceeds -- -- -- -- 5,000 /(8)/
---------- ---------- ---------- ---------- ----------
Gain on sale of product line 17,296 /(3)/ -- 1,230 /(5)/ -- --
---------- ---------- ---------- ---------- ----------
Income (loss):
From continuing operations 27,739 /(3)/ 15,833 15,226 /(6)/ 12,222 20,630
From gain on sale of discontinued operations (1,422) /(4)/ -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income $ 26,317 /(3)/ $ 15,833 $ 15,226 /(6)/ $ 12,222 $ 20,630 /(7)//(8)/
========== ========== ========== ========== ==========
Weighted average number of common shares
outstanding: /(2)/
Basic 21,026 21,917 23,004 23,237 24,037
Diluted 24,099 24,536 24,733 24,531 25,755
PER SHARE DATA: /(2)/
Income from continuing operations:
Basic $ 1.32 /(3)/ $ .72 $ .66 /(6)/ $ .53 $ .86 /(7)//(8)/
Diluted 1.15 /(3)/ .65 .62 /(6)/ .50 .80 /(7)//(8)/
Net Income:
Basic 1.25 /(3)/ .72 .66 /(6)/ .53 .86 /(7)//(8)/
Diluted 1.09 /(3)/ .65 .62 /(6)/ .50 .80 /(7)//(8)/
Cash dividends .039 .041 .045 .045 .050
BALANCE SHEET DATA (AS OF OCTOBER 31):
Total assets $ 281,732 $ 325,640 $ 336,332 $ 333,244 $ 364,255
Total debt (including current portion) 40,042 67,014 55,986 32,013 18,129
Minority interests in consolidated subsidiaries 33,351 36,845 38,313 40,577 44,644
Shareholders' equity 169,844 188,769 207,064 221,518 247,402
- ----------
(1) Results include the results of acquisitions and disposition of a product
line from each respective effective date.
(2) Information has been adjusted retroactively to give effect to 10% stock
dividends paid in shares of Class A Common Stock in July 2000, August 2001
and January 2004.
(3) Represents the pretax gain on the sale of Trilectron Industries, Inc.
(Trilectron), a product line sold in September 2000. The gain on sale of
Trilectron increased income from continuing operations and net income in
fiscal 2000 by $10,542, or $.50 per basic share and $.44 per diluted share,
net of tax.
(4) Represents an adjustment to the gain from sale of discontinued health care
operations ($.07 per basic share and $.06 per diluted share, net of tax)
that were sold in fiscal 1996.
(5) Represents an increase in the gain on sale of the Trilectron product line
of $1,230 ($765, or $.03 per basic and diluted share, net of tax) resulting
from the elimination of certain reserves upon expiration of indemnification
provisions of the sale.
14
(6) Includes the recovery of a portion of taxes paid in prior years resulting
from an income tax audit, which increased net income by $2,107, or $.09 per
basic and diluted share, net of related expenses. The aggregate increase in
net income from the gain on sale of a product line (see Note 5 above) and
the recovery of taxes was $2,872, or $.12 per basic and diluted share.
(7) Operating income was reduced by an aggregate of $850 in restructuring
expenses recorded by certain subsidiaries of the Flight Support Group that
provide repair and overhaul services including $350 recorded in cost of
sales and $500 recorded in selling, general and administrative expenses.
The restructuring expenses decreased net income by $427, or $.02 per basic
and diluted share. Operating income was also reduced by an aggregate of
$410 of legal and other costs related to litigation brought by a subsidiary
of the Electronic Technologies Group. The litigation-related expenses
decreased net income by $257, or $.01 per basic and diluted share.
(8) Represents proceeds from a $5,000 key-person life insurance policy
maintained by a subsidiary of the Flight Support Group. The minority
interest's share of this income totaled $1,000, which is reported as a
component of minority interests' share of income. Accordingly, the life
insurance proceeds increased net income by $4,000, or $.17 per basic and
$.16 per diluted share.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's operations are comprised of two operating segments, the
Flight Support Group (FSG) and the Electronic Technologies Group (ETG).
The Flight Support Group consists of HEICO Aerospace Holdings Corp.
(HEICO Aerospace) and its subsidiaries, which primarily:
. Manufactures Jet Engine and Aircraft Component Replacement Parts. The
Flight Support Group designs and manufactures jet engine and aircraft
component replacement parts for sale at lower prices than those
manufactured by original equipment manufacturers. The parts are approved
by the Federal Aviation Administration (FAA) and they are the functional
equivalent of parts sold by original equipment manufacturers. The Flight
Support Group also manufactures and sells specialty parts as a
subcontractor for original equipment manufacturers and the United States
government.
. Repairs and Overhaul Jet Engine and Aircraft Components. The Flight
Support Group repairs and overhauls jet engine and aircraft components
for domestic and foreign commercial air carriers, military aircraft
operators and aircraft repair and overhaul companies.
The Electronic Technologies Group consists of HEICO Electronic
Technologies Corp. (HEICO Electronic) and its subsidiaries, which primarily:
. Manufactures Electronic and Electro-Optical Equipment. The Electronic
Technologies Group designs, manufactures and sells various types of
electronic, microwave and electro-optical equipment and components,
including power supplies, laser rangefinder receivers, infra-red
simulation, calibration and testing equipment and electromagnetic
interference shielding for commercial and military aircraft operators,
electronics companies and telecommunications equipment suppliers.
. Repairs and Overhaul Aircraft Electronic Equipment. The Electronic
Technologies Group repairs and overhauls inertial navigation systems and
other avionics, instruments, and components for commercial, military and
business aircraft operators.
The Company's results of operations during each of the past three fiscal
years have been affected by a number of transactions. This discussion of the
Company's financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included herein. For further information regarding the acquisitions and
strategic alliances discussed below, see Note 2, Acquisitions and Strategic
Alliances, of the Notes to Consolidated Financial Statements. The acquisitions
have been accounted for using the purchase method of accounting and are included
in the Company's results of operations from the effective dates of acquisition.
During fiscal 2002 and fiscal 2003, the Company acquired Jetseal, Inc.
and Niacc Technology, Inc., respectively. The purchase price of each acquisition
was paid primarily by using proceeds from the Company's revolving credit
facility and was not significant to the Company's consolidated financial
statements. Had the fiscal 2002 and fiscal 2003 acquisitions been made at the
beginning of their
16
respective fiscal years, the pro forma consolidated operating results would not
have been materially different from the reported results.
In December 2003, the Company acquired an 80% interest in Sierra
Microwave Technology, Inc. (Sierra) through the Electronic Technologies Group.
Under the transaction, the Company formed a new subsidiary, Sierra Microwave
Technology, LLC (Sierra LLC), which acquired substantially all of the assets and
assumed certain liabilities of Sierra. The new subsidiary is owned 80% by the
Company and 20% by certain members of Sierra's management group. The purchase
price was paid principally in cash using proceeds from the Company's revolving
credit facility and with shares of the Company's Class A Common Stock. The
purchase price of the acquisition was not significant to the Company's
consolidated financial statements and the pro forma consolidated operating
results assuming Sierra had been acquired as of the beginning of fiscal 2004
would not have been materially different from the reported results. However, the
operating results of Sierra LLC have had a positive impact on the Electronic
Technologies Group, the smaller of the Company's two operating segments, as
further explained within this Item 7 under the caption "Comparison of Fiscal
2004 to Fiscal 2003".
In October 1997, the Company entered into a strategic alliance with
Lufthansa Technik AG, the technical services subsidiary of Lufthansa German
Airlines, whereby Lufthansa Technik invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid to HEICO Aerospace pursuant to a
research and development cooperation agreement, which has partially funded the
accelerated development of additional FAA-approved replacement parts for jet
engines and aircraft components. The funds received as a result of the research
and development cooperation agreement reduced research and development expenses
in the periods such expenses were incurred. In addition, Lufthansa Technik and
HEICO Aerospace have agreed to cooperate regarding technical services and
marketing support for jet engine and aircraft component replacement parts on a
worldwide basis. In connection with subsequent acquisitions by HEICO Aerospace,
Lufthansa Technik invested additional amounts aggregating to approximately $21
million pursuant to its option to maintain a 20% equity interest.
In March 2001, the Company entered into a joint venture with American
Airlines' parent company, AMR Corporation, to develop, design and sell
FAA-approved jet engine and aircraft component replacement parts through HEICO
Aerospace. As part of the joint venture, AMR Corporation reimburses HEICO
Aerospace a portion of new product research and development costs. The funds
received as a result of the new product research and development costs paid by
AMR Corporation generally reduce new product research and development expenses
in the period such expenses are incurred. The balance of the development costs
are incurred by the joint venture, which is 16% owned by AMR Corporation. In
addition, AMR Corporation and HEICO Aerospace have agreed to cooperate regarding
technical services and marketing support on a worldwide basis.
CRITICAL ACCOUNTING POLICIES
The Company believes that the following are its most critical accounting
policies, some of which require management to make judgments about matters that
are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated is recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Variations in actual labor
performance, changes to estimated profitability and final contract settlements
may result in revisions to cost estimates. Revisions in
17
cost estimates as contracts progress have the effect of increasing or decreasing
profits in the period of revision. For fixed price contracts in which costs
cannot be dependably estimated, revenue is recognized on the completed-contract
method. A contract is considered complete when all costs except insignificant
items have been incurred or the item has been accepted by the customer. The
aggregate effects of changes in estimates relating to inventories and/or
long-term contracts did not have a significant effect on net income or diluted
net income per share in fiscal 2004, 2003 or 2002.
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company set up an
allowance for estimated uncollectible accounts and record a corresponding charge
to bad debt expense. The Company estimates uncollectible receivables based on
such factors as its prior experience, its appraisal of a customer's ability to
pay, and economic conditions within and outside of the aviation, defense, space,
and electronics industries. Actual bad debt expense could differ from estimates
made.
Valuation of Inventory
A portion of inventory is stated at the lower of cost or market, with
cost being determined on the first-in, first-out or the average cost basis. The
remaining portion of inventory is stated at the lower of cost or market, on a
per contract accumulation of contract costs basis, with estimated total contract
costs being allocated ratably to all units. The effects of changes in estimated
total contract costs are recognized in the period of revision. Losses, if any,
are recognized fully in the period when identified.
The Company periodically evaluates the carrying value of inventory,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates the amount necessary to write-down its
slow moving, obsolete or damaged inventory. These estimates could vary
significantly from actual requirements based upon future economic conditions,
customer inventory levels or competitive factors that were not foreseen or did
not exist when the estimated write-downs were made.
Valuation of Goodwill
The Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any. The determination of fair value requires the Company
to make a number of estimates, assumptions and judgments. If there is a material
change in such assumptions used by the Company in determining fair value or if
there is a material change in the conditions or circumstances influencing fair
value, the Company could be required to recognize a material impairment charge.
Based on the annual goodwill test for impairment as of October 31, 2004, the
Company determined there is no impairment of its goodwill.
One of the Company's reporting units has experienced a decline in sales
to foreign military customers over the past two fiscal years. The reporting unit
is actively developing various expanded capabilities, but experienced some
delays in fiscal 2004. Based on progress to date, the Company continues to
expect that the various expanded capabilities will result in significant sales
and earnings for the reporting unit beginning in fiscal 2005 and beyond. The
timing of such sales and earnings are primarily based upon certain regulatory
and sales matters. Using management's best estimates of these
18
assumptions, the Company determined that there is no impairment of the reporting
unit's goodwill as of October 31, 2004. Should the reporting unit incur
significant delays in further developing the expanded capabilities and
successfully selling and marketing them, the Company could be required to
recognize an impairment of all or a portion of the reporting unit's goodwill,
which had a carrying value of $17.3 million as of October 31, 2004.
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations,
net sales and operating income by operating segment, and the percentage of net
sales represented by the respective items in the Company's Consolidated
Statements of Operations:
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------
2002 2003 2004
--------------- --------------- ---------------
Net sales $ 172,112,000 $ 176,453,000 $ 215,744,000
--------------- --------------- ---------------
Cost of sales 110,610,000 118,349,000 139,932,000
Selling, general and administrative expenses 39,102,000 34,899,000 43,193,000
--------------- --------------- ---------------
Total operating costs and expenses 149,712,000 153,248,000 183,125,000
--------------- --------------- ---------------
Operating income $ 22,400,000 $ 23,205,000 $ 32,619,000
=============== =============== ===============
Net sales by segment:
Flight Support Group $ 120,097,000 $ 128,277,000 $ 153,238,000
Electronic Technologies Group 52,510,000 48,597,000 62,648,000
Intersegment sales (495,000) (421,000) (142,000)
--------------- --------------- ---------------
$ 172,112,000 $ 176,453,000 $ 215,744,000
=============== =============== ===============
Operating income by segment:
Flight Support Group $ 15,846,000 $ 19,187,000 $ 24,251,000
Electronic Technologies Group 11,873,000 8,497,000 15,259,000
Other, primarily corporate (5,319,000) (4,479,000) (6,891,000)
--------------- --------------- ---------------
$ 22,400,000 $ 23,205,000 $ 32,619,000
=============== =============== ===============
Net sales 100.0% 100.0% 100.0%
Gross profit 35.7% 32.9% 35.1%
Selling, general and administrative expenses 22.7% 19.8% 20.0%
Operating income 13.0% 13.2% 15.1%
Interest expense 1.3% 0.7% 0.5%
Interest and other income 0.1% 0.1% --
Life insurance proceeds -- -- 2.3%
Gain on sale of product line 0.7% -- --
Income tax expense 2.9% 4.5% 5.1%
Minority interests' share of income 0.8% 1.1% 2.3%
Net income 8.8% 6.9% 9.6%
19
COMPARISON OF FISCAL 2004 TO FISCAL 2003
Net Sales
Net sales in fiscal 2004 increased by 22.3% to $215.7 million, as
compared to net sales of $176.5 million in fiscal 2003. The increase in net
sales reflects an increase of $25.0 million (a 19.5% increase) to $153.2 million
in sales within the FSG, and an increase of $14.1 million (a 28.9% increase) to
$62.6 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 continuing 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 in
December 2003 and improved demand for the Company's defense and industrial
electronics components.
The Company's net sales in fiscal 2004 by market approximated 63% from
the commercial aviation industry, 24% from the defense and space industries and
13% from other industrial markets including medical, electronics and
telecommunications. Net sales in fiscal 2003 by market approximated 68% from the
commercial aviation industry, 22% from the defense and space industries and 10%
from other markets.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 35.1% in fiscal 2004 as
compared to 32.9% in fiscal 2003, reflecting higher margins within the ETG. The
ETG's gross profit margin increase was primarily due to the acquisition of
Sierra. The FSG's gross profit margin in fiscal 2004 approximated 2003 margins
principally due to higher costs from write-offs of excess inventory in the first
quarter of fiscal 2004 and the restructuring expenses referred to below,
partially offset by a reduction of the product warranty reserve and lower
research and development expenses as a percentage of net sales. Consolidated
cost of sales in fiscal 2004 and fiscal 2003 included approximately $10.4
million and $9.2 million, respectively, of new product research and development
expenses.
During the third and fourth quarters of fiscal 2004, the Company
incurred an aggregate of $850,000 of restructuring expenses within certain
subsidiaries of the FSG that provide repair and overhaul services ("repair and
overhaul subsidiaries"). The unexpected death of an executive of certain of the
repair and overhaul subsidiaries (see "Life Insurance Proceeds" below) was the
impetus for the commencement of the restructuring activities, which the Company
believes will allow it to better service its customers and improve operating
margins. The restructuring expenses include $350,000 of inventory write-downs,
which were recorded within cost of sales, and $261,000 of management
hiring/relocation related expenses, $168,000 of moving costs and other
associated expenses and $71,000 of contract termination costs that were all
recorded within selling, general and administrative (SG&A) expenses. The
inventory written down is related to older generation aircraft for which repair
and overhaul services are being discontinued by the Company. The management
hiring/relocation related expenses include one-time employee termination/hiring
benefits and relocation costs. The moving costs and other associated expenses
consist of moving costs related to the consolidation of two repair and overhaul
facilities. Contract termination costs include the lease termination on a
facility.
SG&A expenses were $43.2 million and $34.9 million in fiscal 2004 and
fiscal 2003, respectively. The increase in SG&A expenses reflects higher sales
within the FSG, the acquisition of Sierra, an increase in Corporate expenses,
the aforementioned restructuring expenses, and litigation-related expenses
referred to below. The increase in Corporate expenses from $4.5 million in
fiscal 2003 to $6.9 million in fiscal 2004 reflects accrued performance awards
of $1.4 million in fiscal 2004 and a
20
reversal of approximately $400,000 of professional fees in fiscal 2003 that were
accrued at the end of fiscal 2002 pursuant to a contractual arrangement that was
renegotiated in the first quarter of fiscal 2003.
The Company also incurred $410,000 of legal and other costs related to
litigation brought by a subsidiary of the ETG against two former employees for
breach of contract and other possible causes of action against the former
employees and others, which were recorded within SG&A expenses.
The restructuring expenses and litigation-related expenses decreased net
income by $684,000, or $.03 per diluted share in fiscal 2004. For more
information on the restructuring activities, see Note 12, Restructuring
Expenses, of the Notes to Consolidated Financial Statements. For more
information on the litigation-related expenses, see Note 17, Commitments and
Contingencies - Litigation, of the Notes to Consolidated Financial Statements.
As a percentage of net sales, SG&A expenses remained stable at 20.0% in
fiscal 2004 compared to 19.8% in fiscal 2003 despite a .4% increase attributable
to the aforementioned restructuring expenses and litigation-related expenses,
which reflects efforts to control costs while increasing revenues.
Operating Income
Operating income in fiscal 2004 increased by 40.6% to $32.6 million,
compared to operating income of $23.2 million in fiscal 2003. The increase in
operating income reflects an increase of $6.8 million (a 79.6% increase) in
operating income of the ETG from $8.5 million in fiscal 2003 to $15.3 million in
fiscal 2004 reflecting the acquisition of Sierra and an increase of $5.1 million
(a 26.4% increase) in operating income of the FSG from $19.2 million in fiscal
2003 to $24.3 million in fiscal 2004 reflecting the higher sales. These
increases were partially offset by the increase in Corporate expenses. As a
percentage of net sales, operating income increased from 13.2% in fiscal 2003 to
15.1% in fiscal 2004. The improvement in operating income as a percentage of net
sales reflects an increase in the ETG's operating income as a percentage of net
sales from 17.5% in fiscal 2003 to 24.4% in fiscal 2004 and an increase in the
FSG's operating income as a percentage of net sales from 15.0% in fiscal 2003 to
15.8% in fiscal 2004 despite a .4% decrease attributable to the aforementioned
restructuring expenses and litigation-related expenses. The improvement in the
ETG's operating income and operating income as a percentage of net sales
reflects the purchase of Sierra and the increased sales, discussed previously.
The increase in the FSG's operating income and operating income as a percentage
of net sales reflects the increased sales previously discussed and lower SG&A
expenses as a percentage of sales.
Interest Expense
Interest expense in fiscal 2004 and fiscal 2003 was comparable as
average borrowings outstanding and associated interest rates remained at
approximately the same levels. Additional information about the Company's
revolving credit facility may be found within "Financing Activities", which
follows within this Item 7.
Interest and Other Income
Interest and other income in fiscal 2004 and fiscal 2003 were not
material.
21
Life Insurance Proceeds
In the third quarter of fiscal 2004, the Company received $5.0 million
in proceeds from a key-person life insurance policy maintained by a subsidiary
of the FSG. The life insurance proceeds, which are non-taxable, increased net
income (after the minority interest's share of the income) in fiscal 2004 by
$4.0 million, or $.16 per diluted share.
Income Tax Expense
The Company's effective tax rate decreased from 35.6% in fiscal 2003 to
29.9% in fiscal 2004 as the aforementioned $5.0 million in life insurance
proceeds and the minority interest's share of the income of Sierra LLC are
excluded from the Company's income that is subject to federal income taxes. For
a detailed analysis of the provision for income taxes see Note 7, Income Taxes,
of the Notes to Consolidated Financial Statements.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra LLC. The increase from fiscal 2003 to fiscal 2004 was
attributable to higher earnings of the FSG and income of Sierra LLC.
Net Income
The Company's net income was $20.6 million, or $.80 per diluted share,
in fiscal 2004 compared to $12.2 million, or $.50 per diluted share, in fiscal
2003. The net impact of the life insurance proceeds reduced by the restructuring
expenses and litigation-related expenses increased net income by $3.3 million,
or $.13 per diluted share in fiscal 2004.
Outlook
Both the FSG and the ETG reported significantly improved sales and
operating income for fiscal 2004 compared to fiscal 2003. Operating margins
within the FSG continued to show year-over-year improvement despite the
restructuring expenses and operating margins within the ETG continued at a
strong level.
The Company's December 2004 acquisition of a producer of specialty high
voltage interconnection devices and wire primarily for defense applications and
other markets (see Note 20, Subsequent Event, of the Notes to Consolidated
Financial Statements) furthers its product and customer diversification
strategy. Net sales from the defense and space industries and other industrial
markets, including medical, electronics and telecommunications, represented
approximately 37% of the Company's total net sales in fiscal 2004.
As the Company looks forward to fiscal 2005 and beyond, HEICO will
continue to focus on new products, further market penetration, additional
acquisitions and maintaining its financial strength. Based on current market
conditions, the Company believes that the FSG's operating margins can continue
to show year-over-year improvement while maintaining the strong operating
margins in the ETG. Including the results of the Company's recent acquisition,
the Company is targeting fiscal 2005 net sales and earnings growth over fiscal
2004 results.
22
COMPARISON OF FISCAL 2003 TO FISCAL 2002
Net Sales
Net sales in fiscal 2003 totaled $176.5 million, up 3% when compared to
net sales of $172.1 million in fiscal 2002. The increase reflects higher sales
within the FSG, which increased 7% to $128.3 million in fiscal 2003 compared to
$120.1 million in fiscal 2002, partially offset by lower sales within the ETG,
which decreased 7% to $48.6 million in fiscal 2003 from $52.5 million in fiscal
2002. The sales increase within the FSG primarily reflects stronger repair and
overhaul related sales and higher commercial aftermarket parts and services
sales primarily attributable to sales of new products and services and improved
demand within the commercial aerospace industry in the later half of fiscal 2003
following the end of the impact of the military conflict in Iraq and SARS. The
sales decrease within the ETG is primarily attributed to a decline in demand
from certain foreign military customers.
Gross Profit and Operating Expenses
The Company's gross profit margins averaged 32.9% in fiscal 2003 as
compared to 35.7% in fiscal 2002. This decrease is primarily due to lower
margins within the ETG attributed to lower foreign military sales and lower
sales of other higher margin products. The FSG's gross profit margins in fiscal
2003 approximated fiscal 2002 margins. Cost of sales in fiscal 2003 and fiscal
2002 includes approximately $9.2 million and $9.7 million, respectively, of new
product research and development expenses net of reimbursements pursuant to
cooperation and joint venture agreements. The decline in new product research
and development expenses was in line with a decrease in the amount budgeted for
fiscal 2003 relative to actual fiscal 2002 expenses.
Selling, general and administrative (SG&A) expenses decreased $4.2
million to $34.9 million in fiscal 2003 from $39.1 million in fiscal 2002. The
decrease in SG&A expenses is mainly due to lower commission expenses within the
ETG due to the lower sales discussed previously, lower corporate expenses, and
reduced bad debt expenses within the FSG. Corporate expenses include the
reversal of approximately $400,000 of professional fees that were accrued in the
fourth quarter of fiscal 2002 pursuant to a contractual agreement, which was
renegotiated in the first quarter of fiscal 2003. Bad debt expenses were lower
within the FSG in fiscal 2003 due to bankruptcy filings by certain customers in
fiscal 2002. As a percentage of sales, SG&A expenses decreased to 19.8% in
fiscal 2003 compared to 22.7% in fiscal 2002. The decrease is primarily due to
higher sales volumes and lower bad debt expenses within the FSG, the reduction
in corporate expenses, and by lower sales of products bearing higher commission
rates within the ETG.
Operating Income
Operating income increased to $23.2 million in fiscal 2003 from $22.4
million in fiscal 2002. The increase in operating income reflects higher
operating income within the FSG, which increased to $19.2 million in fiscal 2003
from $15.8 million in fiscal 2002 and a $0.8 million reduction in corporate
expenses, partially offset by lower operating income within the ETG, which
decreased to $8.5 million in fiscal 2003 compared to $11.9 million in fiscal
2002. As a percentage of sales, operating income increased to 13.2% in fiscal
2003 from 13.0% in fiscal 2002. The increase in operating income as a percentage
of sales reflects an increase in the FSG's operating income as a percentage of
sales from 13.2% in fiscal 2002 to 15.0% in fiscal 2003, offset by a decrease in
the ETG's operating income as a percentage of sales from 22.6% in fiscal 2002 to
17.5% in fiscal 2003. The increase in the FSG's operating income as a percentage
of sales reflects the higher sales and lower bad debt expenses discussed above.
The decrease in the ETG's operating income as a percentage of sales reflects the
lower sales and gross profit margins discussed previously.
23
Interest Expense
Interest expense decreased to $1.2 million in fiscal 2003 from $2.2
million in fiscal 2002. The decrease was principally due to a lower weighted
average balance outstanding under the Company's revolving credit facilities in
fiscal 2003 and lower interest rates. Additional information about the Company's
revolving credit facilities may be found within "Financing Activities", which
follows within this Item 7.
Interest and Other Income
Interest and other income in fiscal 2003 approximated amounts in fiscal
2002.
Gain on Sale of Product Line
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 net of tax, or $.03 per diluted share) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions of the sales contract.
Income Tax Expense
The Company's effective tax rate was 35.6% in fiscal 2003 compared to
23.0% in fiscal 2002. Income tax expense in fiscal 2002 reflects the recovery of
a portion of taxes paid in prior years resulting from an income tax audit
completed in fiscal 2002, which increased net income by $2.1 million, or $.09
per diluted share, net of related expenses (including professional fees and
interest) as explained further in Note 7, Income Taxes, of the Notes to
Consolidated Financial Statements. The recovery of taxes paid was the principal
reason for the lower effective tax in fiscal 2002. For a detailed analysis of
the provision for income taxes, see Note 7, Income Taxes, of the Notes to
Consolidated Financial Statements.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries
represents the minority interests held in HEICO Aerospace. Minority interests
increased by $2.0 million in fiscal 2003 as compared to an increase of $1.3
million in fiscal 2002 due mainly to the higher earnings within the FSG.
Net Income
The Company's net income was $12.2 million, or $.50 per diluted share,
in fiscal 2003 compared to net income of $15.2 million, or $.62 per diluted
share in fiscal 2002. The lower net income in fiscal 2003 primarily reflects the
effect of the income tax recovery and gain on sale of a product line in fiscal
2002, which increased net income by an aggregate of $2.9 million, or $.12 per
diluted share, and higher minority interests in fiscal 2003 as discussed above
offset by slightly higher operating income in fiscal 2003.
INFLATION
The Company has generally experienced increases in its costs of labor,
materials and services consistent with overall rates of inflation. The impact of
such increases on the Company's net income has been generally minimized by
efforts to lower costs through manufacturing efficiencies and cost reductions.
24
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 amount of cash and cash equivalents in the accompanying Consolidated
Balance Sheets declined from $4.3 million as of October 31, 2003 to $.2 million
as of October 31, 2004 principally through the use of available cash to repay
borrowings under the Company's revolving credit facility. The revolving credit
facility may be drawn upon or repaid as necessary for working capital and
general corporate needs of the Company.
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 $44.1 million for fiscal
2004, consisting primarily of net income of $20.6 million, including $4.0
million of cash proceeds from life insurance net of the minority interest's
share, depreciation and amortization of $6.8 million, minority interests' share
of income of consolidated subsidiaries of $5.0 million, a deferred income tax
provision of $4.1 million, a tax benefit on stock option exercises of $1.3
million, and a decrease in net operating assets of $6.5 million. The decrease in
net operating assets (current assets used in operating activities net of current
liabilities) primarily reflects lower inventories resulting from efforts to
improve inventory turnover by reducing the level of finished goods maintained on
hand, higher accounts receivable and current liabilities associated with
increased sales levels and higher income taxes payable resulting from the timing
of required income tax payments.
Net cash provided by operating activities was $28.9 million for fiscal
2003, principally reflecting net income of $12.2 million, depreciation and
amortization of $6.7 million, deferred income tax provision of $3.5 million,
minority interests' share of income of consolidated subsidiaries of $2.0
million, and a decrease in net operating assets of $4.0 million. The decrease in
net operating assets (current assets used in operating activities net of current
liabilities) primarily reflects lower inventories resulting from efforts to
improve inventory turnover by reducing the level of finished goods maintained on
hand.
Net cash provided by operating activities was $26.3 million for fiscal
2002, principally reflecting net income of $15.2 million, depreciation and
amortization of $6.0 million, deferred income tax provision of $3.9 million, and
a tax benefit related to stock option exercises of $2.9 million, partially
offset by an increase in net operating assets of $1.9 million. The increase in
net operating assets (current assets used in operating activities net of current
liabilities) primarily resulted from higher inventories associated with new
products.
Investing Activities
Net cash used in investing activities during the three fiscal year
period ended October 31, 2004 primarily relates to various acquisitions,
including contingent payments, totaling $34.2 million, including $28.1 million
in fiscal 2004. Further details on acquisitions may be found at the beginning of
this Item 7 under the caption "Overview". Capital expenditures aggregated to
$18.8 million over the last three fiscal
25
years, primarily reflecting the expansion of existing production facilities and
capabilities, which were generally funded by cash generated by operating
activities.
Financing Activities
The Company used cash provided by operating activities to make net
payments on its revolving credit facility of $14.0 million in fiscal 2004, $24.0
million in fiscal 2003 and $11.0 million in fiscal 2002. The net payments made
in fiscal 2004 reflect $27.0 million borrowed to fund the aforementioned
acquisition, net of repayments of $41.0 million. For the three fiscal year
period ended October 31, 2004, the Company paid cash dividends aggregating to
$3.3 million and received proceeds from stock option exercises of $2.4 million.
In April 2004, the Company extended the term of its $120 million
revolving credit agreement by one year to May 2007. The revolving credit
facility may be used for working capital and general corporate needs of the
Company, including letters of credit, and to finance acquisitions (generally not
in excess of an aggregate total of $30 million over any trailing twelve-month
period without the requisite approval of the bank syndicate). The Company can
extend the revolving credit term for an additional one year period subject to
requisite bank syndicate approval. Advances under the revolving credit facility
accrue interest at the Company's choice of the London Interbank Offered Rate
(LIBOR) or the "Base Rate" plus applicable margins (based on the Company's ratio
of total funded debt to earnings before interest, taxes, depreciation and
amortization, or "leverage ratio"). The revolving credit facility is secured by
substantially all assets other than real property of the Company and its
subsidiaries and contains covenants which require, among other things, the
maintenance of a leverage ratio and a fixed charge coverage ratio as well as
minimum net worth requirements. See Note 6, Long-Term Debt, of the Notes to
Consolidated Financial Statements for further information regarding the
revolving credit facility.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as
of October 31, 2004:
PAYMENTS DUE BY FISCAL PERIOD
---------------------------------------------------------
TOTAL 2005 2006 - 2007 2008 - 2009 THEREAFTER
------------ ------------ ------------ ------------ ------------
Long-term debt obligations /(1)/ $ 17,980,000 $ -- $ 16,000,000 $ 1,980,000 $ --
Capital lease obligations /(1)/ 149,000 58,000 91,000 -- --
Operating lease obligations /(2)/ 6,859,000 1,960,000 2,516,000 1,302,000 1,081,000
Purchase obligations /(3)/ 206,000 206,000 -- -- --
Other long-term liabilities /(4)/ 562,000 74,000 148,000 137,000 203,000
------------ ------------ ------------ ------------ ------------
Total contractual obligations $ 25,756,000 $ 2,298,000 $ 18,755,000 $ 3,419,000 $ 1,284,000
============ ============ ============ ============ ============
- ----------
(1) See Note 6, Long-Term Debt, of the Notes to Consolidated Financial
Statements and Financing Activities above for additional information
regarding the Company's long-term debt and capital lease obligations.
(2) See Note 17, Commitments and Contingencies - Lease Commitments, of the
Notes to Consolidated Financial Statements for additional information
regarding the Company's operating lease obligations.
(3) Includes commitments for capitalized expenditures and excludes all
purchase obligations for inventory and supplies in the ordinary course
of business.
26
(4) These amounts represent projected payments under our Directors
Retirement Plan, which is explained further in Note 10, Retirement
Plans, of the Notes to Consolidated Financial Statements. The plan is
unfunded and we pay benefits directly. The amounts in the table do not
include amounts related to the Company's deferred compensation
arrangement for which there is an offsetting asset included in the
Company's Consolidated Balance Sheets.
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. 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 Microwave
Technology, Inc. (see Note 2, Acquisitions and Strategic Alliances, of the Notes
to 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 STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46(R), or FIN
46(R), "Consolidation of Variable Interest Entities". FIN 46(R) replaces FIN 46
and addresses consolidation by business enterprises of variable interest
entities. This Interpretation shall be applied to variable interest entities or
potential variable interest entities commonly referred to as special-purpose
entities by the end of the first reporting period ending after December 15, 2003
and applied to all variable interest entities by the end of the first reporting
period ending after March 15, 2004. The adoption of FIN 46(R) did not have a
material effect on the Company's results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees"" SFAS No. 123(R) focuses primarily on the accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. SFAS No. 123(R) requires companies to recognize in the
statement of operations the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those
awards (with limited exceptions). This Statement is effective as of the first
reporting period that begins after June 15, 2005. Accordingly, the Company will
adopt SFAS 123(R) in its fourth quarter of fiscal 2005. The Company is currently
evaluating the provisions of SFAS 123(R) and has not yet determined the impact
that this Statement will have on its results of operations or financial
position.
FORWARD LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements contained herein that are not clearly historical in
nature may be forward-looking and the words "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Any forward-looking statements contained herein, in press releases,
written statements or other documents filed with the Securities and Exchange
Commission or in communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and conference
calls, concerning our operations, economic performance and financial condition
are subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current
27
expectations and projections about future events. All forward-looking statements
involve risks and uncertainties, many of which are beyond our control, which may
cause actual results, performance or achievements to differ materially from
anticipated results, performance or achievements. Also, forward-looking
statements are based upon management's estimates of fair values and of future
costs, using currently available information. Therefore, actual results may
differ materially from those expressed or implied in those statements. Factors
that could cause such differences include, but are not limited to:
. 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.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in values of
financial instruments, including interest rate risk and liquidity risk. The
Company engages in transactions in the normal course of business that expose it
to market risks. The primary market risk to which the Company has exposure is
interest rate risk, mainly related to its revolving credit facility and
industrial revenue bonds, which had an aggregate outstanding balance of $18.0
million as of October 31, 2004. Interest rates on borrowings outstanding under
the revolving credit facility are based on LIBOR plus a variable margin, while
interest rates on the industrial development revenue bonds are based on variable
rates. Interest rate risk associated with the Company's variable rate debt is
the potential increase in interest expense from an increase in interest rates.
Based on the outstanding debt balance as of October 31, 2004, a hypothetical 10%
increase in interest rates would increase the Company's interest expense by
approximately $50,000 in fiscal 2005.
The Company maintains a portion of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a hypothetical 10% increase in interest rates as of October 31,
2004 would not have a material effect on the Company's results of operations or
financial position.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm................... 30
Consolidated Balance Sheets as of October 31, 2004 and 2003 (as restated). 31
Consolidated Statements of Operations for the years ended
October 31, 2004, 2003 and 2002.......................................... 32
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended October 31, 2004, 2003 and 2002............... 33
Consolidated Statements of Cash Flows for the years ended
October 31, 2004, 2003 (as restated) and 2002 (as restated).............. 34
Notes to Consolidated Financial Statements................................ 35
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of HEICO Corporation:
We have audited the accompanying consolidated balance sheets of HEICO
Corporation and subsidiaries (the "Company") as of October 31, 2004 and 2003,
and the related consolidated statements of operations, of shareholders' equity
and comprehensive income, and of cash flows for each of the three years in the
period ended October 31, 2004. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 19, the consolidated balance sheet as of October 31, 2003
and the consolidated statements of cash flows for the years ended October 31,
2003 and 2002 have been restated to reflect capitalized tooling costs as a
component of property, plant and equipment.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
January 14, 2005
30
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31,
-------------------------------
2004 2003
-------------- --------------
As Restated
See Note 19
ASSETS
Current assets:
Cash and cash equivalents $ 214,000 $ 4,321,000
Accounts receivable, net 36,798,000 28,820,000
Inventories 48,020,000 51,240,000
Prepaid expenses and other current assets 3,208,000 3,003,000
Deferred income taxes 5,672,000 3,872,000
-------------- --------------
Total current assets 93,912,000 91,256,000
Property, plant and equipment, net 40,558,000 39,783,000
Goodwill 216,674,000 188,700,000
Other assets 13,111,000 13,505,000
-------------- --------------
Total assets $ 364,255,000 $ 333,244,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 58,000 $ 29,000
Trade accounts payable 7,969,000 7,475,000
Accrued expenses and other current liabilities 20,244,000 14,362,000
Income taxes payable 3,771,000 820,000
-------------- --------------
Total current liabilities 32,042,000 22,686,000
Long-term debt, net of current maturities 18,071,000 31,984,000
Deferred income taxes 16,262,000 10,337,000
Other non-current liabilities 5,834,000 6,142,000
-------------- --------------
Total liabilities 72,209,000 71,149,000
-------------- --------------
Minority interests in consolidated subsidiaries 44,644,000 40,577,000
-------------- --------------
Commitments and contingencies (Notes 2 and 17)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000
shares authorized; 300,000 shares designated as
Series B Junior Participating Preferred Stock and
300,000 shares designated as Series C Junior
Participating Preferred Stock; none issued -- --
Common Stock, $.01 par value par share; 30,000,000
shares authorized; 9,898,451 and 9,690,945 shares
issued and outstanding, respectively 99,000 97,000
Class A Common Stock, $.01 par value per share;
30,000,000 shares authorized; 14,325,304 and
13,876,496 shares issued and outstanding, respectively 143,000 117,000
Capital in excess of par value 187,950,000 155,064,000
Retained earnings 59,210,000 69,172,000
-------------- --------------
247,402,000 224,450,000
Less: Note receivable secured by Class A Common Stock -- (2,932,000)
-------------- --------------
Total shareholders' equity 247,402,000 221,518,000
-------------- --------------
Total liabilities and shareholders' equity $ 364,255,000 $ 333,244,000
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
31
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Net sales $ 215,744,000 $ 176,453,000 $ 172,112,000
--------------- --------------- ---------------
Operating costs and expenses:
Cost of sales 139,932,000 118,349,000 110,610,000
Selling, general and administrative expenses 43,193,000 34,899,000 39,102,000
--------------- --------------- ---------------
Total operating costs and expenses 183,125,000 153,248,000 149,712,000
--------------- --------------- ---------------
Operating income 32,619,000 23,205,000 22,400,000
Interest expense (1,090,000) (1,189,000) (2,248,000)
Interest and other income 26,000 93,000 97,000
Life insurance proceeds 5,000,000 -- --
Gain on sale of product line -- -- 1,230,000
--------------- --------------- ---------------
Income before income taxes and minority interests 36,555,000 22,109,000 21,479,000
Income tax expense 10,948,000 7,872,000 4,930,000
--------------- --------------- ---------------
Income before minority interests 25,607,000 14,237,000 16,549,000
Minority interests' share of income 4,977,000 2,015,000 1,323,000
--------------- --------------- ---------------
Net income $ 20,630,000 $ 12,222,000 $ 15,226,000
=============== =============== ===============
Net income per share:
Basic $ .86 $ .53 $ .66
Diluted $ .80 $ .50 $ .62
Weighted average number of common shares outstanding:
Basic 24,036,980 23,236,841 23,003,784
Diluted 25,754,598 24,531,280 24,732,679
The accompanying notes are an integral part of these consolidated
financial statements.
32
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED
CLASS A CAPITAL IN OTHER
COMMON COMMON EXCESS OF COMPREHENSIVE RETAINED NOTES COMPREHENSIVE
STOCK STOCK PAR VALUE LOSS EARNINGS RECEIVABLE INCOME
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balances as of
October 31, 2001 $ 93,000 $ 115,000 $ 150,605,000 $ (226,000) $ 43,830,000 $ (5,648,000)
Net income -- -- -- -- 15,226,000 -- $ 15,226,000
Unrealized gain on
interest rate swap,
net of tax benefit
of $144,000 -- -- -- 226,000 -- -- 226,000
-------------
Comprehensive income -- -- -- -- -- -- $ 15,452,000
=============
Cash dividends
($.045 per share) -- -- -- -- (1,045,000) --
Payment on note
receivable from
employee savings and
investment plan -- -- -- -- -- 648,000
Tax benefit from
stock options
exercises -- -- 2,944,000 -- -- --
Exercises of stock
options 1,000 1,000 436,000 -- -- --
Repurchase of stock -- -- (200,000) -- -- --
Other -- -- 62,000 -- (4,000) --
------------- ------------- ------------- ------------- ------------- -------------
Balances as of
October 31, 2002 94,000 116,000 153,847,000 -- 58,007,000 (5,000,000)
Net income -- -- -- -- 12,222,000 -- $ 12,222,000
-------------
Comprehensive income -- -- -- -- -- -- $ 12,222,000
=============
Proceeds from shares
sold in connection
with business
acquisition (Note 17) -- -- -- -- -- 2,068,000
Cash dividends
($.045 per share) -- -- -- -- (1,055,000) --
Tax benefit from
stock options
exercises -- -- 348,000 -- -- --
Exercises of stock
options 3,000 1,000 985,000 -- -- --
Repurchase of stock -- -- (120,000) -- -- --
Other -- -- 4,000 -- (2,000) --
------------- ------------- ------------- ------------- ------------- -------------
Balances as of
October 31, 2003 97,000 117,000 155,064,000 -- 69,172,000 (2,932,000)
10% stock dividend on
Common Stock and
Class A Common Stock
paid in shares of
Class A Common
Stock (Note 8) -- 22,000 29,342,000 -- (29,393,000) --
Net income -- -- -- -- 20,630,000 -- $ 20,630,000
-------------
Comprehensive income $ 20,630,000
=============
Shares issued in
connection with
business acquisition
(Note 2) -- 3,000 2,997,000 -- -- --
Proceeds from shares
sold in connection
with business
acquisition (Note 17) -- -- -- -- -- 1,259,000
Adjustment to
guaranteed resale
value of shares
issued in connection
with business
acquisition (Note 17) -- -- (1,673,000) -- -- 1,673,000
Cash dividends
($.05 per share) -- -- -- -- (1,201,000) --
Tax benefit from
stock options
exercises -- -- 1,258,000 -- -- --
Exercises of stock
options 2,000 2,000 959,000 -- -- --
Other -- (1,000) 3,000 -- 2,000 --
------------- ------------- ------------- ------------- ------------- -------------
Balances as of
October 31, 2004 $ 99,000 $ 143,000 $ 187,950,000 $ -- $ 59,210,000 $ --
============= ============= ============= ============= ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
33
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
As Restated As Restated
See Note 19 See Note 19
Operating Activities:
Net income $ 20,630,000 $ 12,222,000 $ 15,226,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,779,000 6,720,000 5,967,000
Deferred income tax provision 4,125,000 3,520,000 3,917,000
Minority interests' share of income 4,977,000 2,015,000 1,323,000
Tax benefit from stock option exercises 1,258,000 348,000 2,944,000
Gain on sale of product line -- -- (1,230,000)
Change in estimate of product warranty liability (535,000) -- --
Restructuring expense related to inventory write-downs 350,000 -- --
Changes in assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (6,193,000) (101,000) 3,421,000
Decrease (increase) in inventories 3,576,000 3,705,000 (3,996,000)
Decrease (increase) in prepaid expenses and other current assets 263,000 999,000 (393,000)
Increase (decrease) in trade account payables, accrued expenses
and other current liabilities 6,036,000 (1,390,000) (588,000)
Increase (decrease) in income taxes payable 2,951,000 820,000 (564,000)
Other (167,000) 6,000 267,000
------------ ------------ ------------
Net cash provided by operating activities 44,050,000 28,864,000 26,294,000
------------ ------------ ------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (28,099,000) (1,554,000) (4,515,000)
Capital expenditures (5,737,000) (4,723,000) (8,338,000)
Payment received from employee savings and investment plan note
receivable -- -- 648,000
Other (335,000) 85,000 (2,188,000)
------------ ------------ ------------
Net cash used in investing activities (34,171,000) (6,192,000) (14,393,000)
------------ ------------ ------------
Financing Activities:
Payments on revolving credit facility, net (14,000,000) (24,000,000) (11,000,000)
Cash dividends paid (1,201,000) (1,055,000) (1,045,000)
Proceeds from stock option exercises 963,000 989,000 438,000
Proceeds from shares of common stock sold in connection
with business acquisition 1,259,000 2,068,000 --
Repurchases of common stock -- (120,000) (200,000)
Minority interest investment 164,000 249,000 --
Other (1,171,000) (1,021,000) 112,000
------------ ------------ ------------
Net cash used in financing activities (13,986,000) (22,890,000) (11,695,000)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (4,107,000) (218,000) 206,000
Cash and cash equivalents at beginning of year 4,321,000 4,539,000 4,333,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 214,000 $ 4,321,000 $ 4,539,000
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
34
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HEICO Corporation, through its principal subsidiaries HEICO Aerospace
Holdings Corp. (HEICO Aerospace) and HEICO Electronic Technologies Corp. (HEICO
Electronic) and their subsidiaries (collectively, the Company), is principally
engaged in the design, manufacture and sale of aerospace, defense, and
electronics related products and services throughout the United States and
internationally. HEICO Aerospace's principal subsidiaries include HEICO
Aerospace Corporation, Jet Avion Corporation, LPI Industries Corporation,
Aircraft Technology, Inc., Northwings Accessories Corporation, McClain
International, Inc., Rogers-Dierks, Inc., Turbine Kinetics, Inc., Thermal
Structures, Inc., Future Aviation, Inc., Aero Design, Inc., HEICO Aerospace
Parts Corp., Aviation Facilities, Inc., Jetseal, Inc. and Niacc Technology, Inc.
HEICO Electronic's principal subsidiaries include Radiant Power Corp., Leader
Tech, Inc., Santa Barbara Infrared, Inc., Analog Modules, Inc., Inertial Airline
Services, Inc. and Sierra Microwave Technology, LLC. The Company's customer base
is primarily the commercial airline, defense, space and electronics industries.
As of October 31, 2004, the Company's principal operations are located in
Glastonbury, Connecticut; Atlanta, Georgia; Cleveland, Ohio; Georgetown, Texas;
Mt. Juliet, Tennessee; Anacortes and Spokane, Washington; Corona, Fresno, and
Santa Barbara, California; and Fort Myers, Hollywood, Miami, Orlando, Sarasota,
Tampa and Titusville, Florida.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HEICO
Corporation and its subsidiaries, all of which are wholly-owned except for HEICO
Aerospace, which is 20%-owned by Lufthansa Technik AG, the technical services
subsidiary of Lufthansa German Airlines, and one subsidiary within HEICO
Electronic, which is 80% owned. In addition, HEICO Aerospace consolidates a
joint venture formed in March 2001, which is 16%-owned by American Airlines'
parent company, AMR Corporation, and an 80%-owned subsidiary. (See Note 2,
Acquisitions and Strategic Alliances, of the Notes to Consolidated Financial
Statement.) HEICO Aerospace also accounts for a 50%-owned joint venture formed
in fiscal 2002 under the equity method. The Company's investment in the
50%-owned joint venture and its share of its operating results were not
significant to the Company's consolidated financial statements. All significant
intercompany balances and transactions are eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
35
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
INVENTORY
A portion of inventory is stated at the lower of cost or market, with
cost being determined on the first-in, first-out or the average cost basis. The
remaining portion of inventory is stated at the lower of cost or market, on a
per contract accumulation of contract costs basis, with estimated total contract
costs being allocated ratably to all units. The effects of changes in estimated
total contract costs are recognized in the period of revision. Losses, if any,
are recognized fully in the period when identified.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided mainly on the straight-line method over the estimated
useful lives of the various assets. Property, plant and equipment useful lives
are as follows:
Buildings..................................... 28 to 55 years
Leasehold improvements........................ 3 to 40 years
Machinery and equipment....................... 3 to 20 years
Tooling....................................... 2 to 5 years
The costs of major additions and improvements are capitalized. Repairs
and maintenance are charged to operations as incurred. Upon disposition, the
cost and related accumulated depreciation are removed from the accounts and any
related gain or loss is reflected in earnings.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any.
The Company's intangible assets subject to amortization consist
primarily of licenses, patents and non-compete covenants and are amortized on
the straight-line method over their legal or estimated useful lives, ranging
from 7 to 17 years.
36
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
trade accounts payable and accrued expenses and other current liabilities
approximate fair value due to the relatively short maturity of the respective
instruments. The carrying value of long-term debt approximates fair market value
due to its floating interest rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions and limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different geographical regions.
Long-term investments (included within other assets in the Company's
Consolidated Balance Sheets) are stated at fair value based on quoted market
prices.
INTEREST RATE SWAP AGREEMENTS
Periodically, the Company enters into interest rate swap agreements to
manage interest expense related to its $120 million revolving credit facility.
Interest rate risk associated with the Company's variable rate revolving credit
facility is the potential increase in interest expense from an increase in
interest rates. A derivative instrument (e.g. interest rate swap agreement) that
hedges the variability of cash flows related to a recognized liability is
designated as a cash flow hedge. The Company's interest rate swap agreements
expired in fiscal 2002 and the Company did not enter into any interest rate swap
agreements in fiscal 2004 or fiscal 2003.
On an ongoing basis, the Company assesses whether derivative instruments
used in hedging transactions are highly effective in offsetting changes in cash
flows of the hedged items and therefore qualify as cash flow hedges. For a
derivative instrument that qualifies as a cash flow hedge, the effective portion
of changes in fair value of the derivative is deferred and recorded as a
component of other comprehensive income until the hedged transaction occurs and
is recognized in earnings. All other portions of changes in the fair value of a
cash flow hedge are recognized in earnings immediately.
PRODUCT WARRANTIES
Product warranty liabilities are estimated at the time of shipment and
recorded as a component of accrued expenses and other current liabilities in the
Company's Consolidated Balance Sheets. The amount recognized is based on
historical claims cost experience.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated is recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For fixed price contracts in which costs cannot be
dependably estimated, revenue is recognized on the completed-contract method. A
contract is considered complete when all costs except insignificant items have
been incurred or the item has been accepted by the customer. The aggregate
effects of changes in estimates relating to inventories and/or long-term
contracts did not have a significant effect on net income or diluted net
37
income per share in fiscal 2004, 2003 or 2002. Revenues earned from rendering
services represented less than 10% of consolidated net sales for all periods
presented.
LONG-TERM CONTRACTS
Accounts receivable and accrued expenses and other current liabilities
include amounts related to the production of products under fixed-price
contracts exceeding terms of one year. Revenues are recognized on the
percentage-of-completion method for certain of these contracts, measured by the
percentage of costs incurred to date to estimated total costs for each contract.
This method is used because management considers costs incurred to be the best
available measure of progress on these contracts. Revenues are recognized on the
completed-contract method for certain other contracts. This method is used when
the Company does not have adequate historical data to ensure that estimates are
reasonably dependable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Variations in actual labor performance, changes to
estimated profitability and final contract settlements may result in revisions
to cost estimates and are recognized in income in the period in which the
revisions are determined.
The asset, "costs and estimated earnings in excess of billings" on
uncompleted percentage-of-completion contracts, included in accounts receivable,
represents revenues recognized in excess of amounts billed. The liability,
"billings in excess of costs and estimated earnings," included in accrued
expenses and other current liabilities, represents billings in excess of
revenues recognized on contracts accounted for under either the
percentage-of-completion method or the completed-contract method. Billings are
made based on the completion of certain milestones as provided for in the
contracts.
INCOME TAXES
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from periods
recognized for income tax purposes.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period plus potentially dilutive
common shares arising from the assumed exercise of stock options, if dilutive.
The dilutive impact of potentially dilutive common shares is determined by
applying the treasury stock method.
38
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation using the
intrinsic value method. Accordingly, compensation expense has been recorded in
the accompanying consolidated financial statements for any stock options granted
below fair market value of the underlying stock as of the date of grant. The
following table illustrates the pro forma effects on net income and net income
per share as if the Company had applied the fair-value recognition provisions
(an alternative method) to stock-based employee compensation. The fair value of
each option grant is estimated as of the date of grant using the Black-Scholes
option-pricing model.
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Net income, as reported $ 20,630,000 $ 12,222,000 $ 15,226,000
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 2,000 3,000 38,000
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects (1,481,000) (1,724,000) (3,883,000)
-------------- -------------- --------------
Pro forma net income $ 19,151,000 $ 10,501,000 $ 11,381,000
============== ============== ==============
Net income per share:
Basic - as reported $ .86 $ .53 $ .66
Basic - pro forma $ .80 $ .45 $ .49
Diluted - as reported $ .80 $ .50 $ .62
Diluted - pro forma $ .74 $ .43 $ .46
CONTINGENCIES
Losses for contingencies such as product warranties, litigation and
environmental matters are recognized in income when they are probable and can be
reasonably estimated. Gain contingencies are not recognized in income until they
have been realized.
NEW ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46(R), or FIN
46(R), "Consolidation of Variable Interest Entities". FIN 46(R) replaces FIN 46
and addresses consolidation by business enterprises of variable interest
entities. This Interpretation shall be applied to variable interest entities or
potential variable interest entities commonly referred to as special-purpose
entities by the end of the first reporting period ending after December 15, 2003
and applied to all variable interest entities by the end of the first reporting
period ending after March 15, 2004. The adoption of FIN 46(R) did not have a
material effect on the Company's results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". SFAS No. 123(R) focuses primarily on
39
the accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires companies to
recognize in the statement of operations the cost of employee services received
in exchange for awards of equity instruments based on the grant-date fair value
of those awards (with limited exceptions). This Statement is effective as of the
first reporting period that begins after June 15, 2005. Accordingly, the Company
will adopt SFAS 123(R) in its fourth quarter of fiscal 2005. The Company is
currently evaluating the provisions of SFAS 123(R) and has not yet determined
the impact that this Statement will have on its results of operations or
financial position.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
ACQUISITIONS
In November 2001, the Company, through a subsidiary, acquired certain
assets and liabilities of Jetseal, Inc. (Jetseal). Jetseal is engaged in the
manufacture of compression seals. In May 2003, the Company, through a
subsidiary, acquired substantially all of the assets and liabilities of Niacc
Technology, Inc. (Niacc). Niacc is engaged in the repair and overhaul of
aircraft components and accessories principally serving the regional commuter
and business aircraft market. The Company paid the purchase prices of these
acquisitions primarily by using proceeds from its revolving credit facility.
In December 2003, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired an 80% interest in the assets and business of Sierra
Microwave Technology, Inc., (Sierra). Under the transaction, the Company formed
a new subsidiary, Sierra Microwave Technology, LLC (Sierra LLC), which acquired
substantially all of the assets and assumed certain liabilities of Sierra. The
new subsidiary is owned 80% by the Company and 20% by certain members of
Sierra's management group. The purchase price was paid in cash using proceeds
from the Company's revolving credit facility and with shares of HEICO's Class A
Common Stock. Sierra LLC is engaged in the design and manufacture of certain
niche microwave components used in satellites and military products. As part of
the agreement to acquire an 80% interest in Sierra, the Company has the right to
purchase the minority interests 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.
All of the acquisitions described above were accounted for using the
purchase method of accounting and the results of each company were included in
the Company's results from their effective purchase dates. The purchase price of
each acquisition was not significant to the Company's consolidated financial
statements and the pro forma consolidated operating results assuming each
acquisition had been consummated as of the beginning of its respective fiscal
year would not have been materially different from the reported results. The
costs of each acquisition have been allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
values as of the date of acquisition as determined by management. The excess of
the purchase price over the net of the amounts assigned to assets acquired and
liabilities assumed has been recorded as goodwill (See Note 18, Supplemental
Disclosures of Cash Flow Information, of the Notes to Consolidated Financial
Statements). The aggregate cost of acquisitions, including payments made in cash
and with shares of the Company's common stock and contingent payments, was $31.1
million, $1.6 million and $4.5 million in fiscal 2004, 2003 and 2002,
respectively.
STRATEGIC ALLIANCES AND SALE OF MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
In October 1997, the Company entered into a strategic alliance with
Lufthansa Technik AG, the technical services subsidiary of Lufthansa German
Airlines, whereby Lufthansa Technik invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid over four years to HEICO Aerospace
pursuant to
40
a research and development cooperation agreement, which has partially funded the
accelerated development of additional Federal Aviation Administration
(FAA)-approved replacement parts for jet engines and aircraft components. The
funds received as a result of the research and development cooperation agreement
reduced research and development expenses in the periods such expenses were
incurred. In addition, Lufthansa Technik and HEICO Aerospace have agreed to
cooperate regarding technical services and marketing support for jet engine and
aircraft component replacement parts on a worldwide basis. In connection with
subsequent acquisitions by HEICO Aerospace, Lufthansa Technik invested
additional amounts aggregating to approximately $21 million pursuant to its
option to maintain a 20% equity interest.
In March 2001, the Company entered into a joint venture with AMR
Corporation to develop, design and sell FAA-approved jet engine and aircraft
component replacement parts through HEICO Aerospace. As part of the joint
venture, AMR Corporation will reimburse HEICO Aerospace a portion of new product
research and development costs. The funds received as a result of the new
product research and development costs paid by AMR Corporation generally reduce
new product research and development expenses in the period such expenses are
incurred. The balance of the development costs are incurred by the joint
venture, which is 16% owned by AMR Corporation. In addition, AMR Corporation and
HEICO Aerospace have agreed to cooperate regarding technical services and
marketing support on a worldwide basis.
3. SALE OF PRODUCT LINE
In September 2000, the Company consummated the sale of all of the
outstanding capital stock of HEICO Electronic's wholly-owned subsidiary,
Trilectron Industries, Inc. (Trilectron), to a subsidiary of Illinois Tool Works
Inc. The sale of Trilectron resulted in a pretax gain in fiscal 2000 of
$17,296,000 ($10,542,000 or $.44 per diluted share, net of income tax). In
fiscal 2002, the Company recognized an additional pretax gain of $1,230,000
($765,000 or $.03 per diluted share, net of income tax) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions entered into in connection with the
sale of Trilectron.
4. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
AS OF OCTOBER 31,
----------------------------
2004 2003
------------ ------------
Accounts receivable $ 37,380,000 $ 29,455,000
Less: Allowance for doubtful accounts (582,000) (635,000)
------------ ------------
Accounts receivable, net $ 36,798,000 $ 28,820,000
============ ============
In fiscal 2002, the Company wrote off receivables aggregating $813,000,
as a result of bankruptcy filings by certain customers. The charge is included
in selling, general and administrative expenses in the Company's Consolidated
Statements of Operations. The charge reduced fiscal 2002 net income by $442,000.
Write offs of receivables did not have a material effect on net income in fiscal
2004 or fiscal 2003.
41
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
AS OF OCTOBER 31,
-----------------------------
2004 2003
------------- -------------
Costs incurred on uncompleted contracts $ 14,798,000 $ 9,635,000
Estimated earnings 8,686,000 7,861,000
------------- -------------
23,484,000 17,496,000
Less: Billings to date (19,663,000) (15,223,000)
------------- -------------
$ 3,821,000 $ 2,273,000
============= =============
Included in accompanying consolidated balance
sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 4,612,000 $ 3,520,000
Accrued expenses and other current liabilities (billings
in excess of costs and estimated earnings) (791,000) (1,247,000)
------------- -------------
$ 3,821,000 $ 2,273,000
============= =============
Changes in estimates did not have a material effect on net income or
diluted net income per share in fiscal 2004, 2003, or 2002.
INVENTORIES
AS OF OCTOBER 31,
-----------------------------
2004 2003
------------- -------------
Finished products $ 24,222,000 $ 28,958,000
Work in process 9,597,000 9,333,000
Materials, parts, assemblies and supplies 14,201,000 12,949,000
------------- -------------
Total inventories $ 48,020,000 $ 51,240,000
============= =============
Inventories related to long-term contracts were not significant as of
October 31, 2004 and 2003.
PROPERTY, PLANT AND EQUIPMENT
AS OF OCTOBER 31,
-----------------------------
2004 2003
------------- -------------
Land $ 2,157,000 $ 1,750,000
Buildings and improvements 20,007,000 18,981,000
Machinery, equipment and tooling 55,869,000 50,949,000
Construction in progress 2,239,000 1,623,000
------------- -------------
80,272,000 73,303,000
Less: Accumulated depreciation and amortization (39,714,000) (33,520,000)
------------- -------------
Property, plant and equipment, net $ 40,558,000 $ 39,783,000
============= =============
The amounts set forth above include tooling costs having a net book
value of $3,652,000 and $4,246,000 as of October 31, 2004 and 2003,
respectively. Amortization expense on capitalized tooling was $1,484,000,
$1,639,000 and $1,435,000 for the fiscal years ended October 31, 2004, 2003 and
2002, respectively. Expenditures for capitalized tooling costs were $955,000,
$952,000 and $2,485,000 in fiscal 2004, 2003 and 2002, respectively.
42
Depreciation and amortization expense, exclusive of tooling, on
property, plant and equipment, amounted to approximately $4,841,000, $4,659,000
and $4,193,000 for the fiscal years ended October 31, 2004, 2003 and 2002,
respectively.
Included in the Company's property, plant and equipment is rotable
equipment located at various customer locations in connection with certain
repair and maintenance agreements. The rotables are stated at a net book value
of $3,781,000 and $3,912,000 as of October 31, 2004 and 2003, respectively.
Under the terms of the agreements, the customers may purchase the equipment at
specified prices, which are no less than net book value, upon termination of the
agreements. The equipment is currently being depreciated over its estimated
life.
In fiscal 2003, the Company consolidated the operations of two of its
Florida-based owned facilities utilized by its Flight Support Group. The Company
listed the resultant vacated property for sale with a real estate agent and
reclassified the building and associated land as held for sale. The carrying
value of the property is $3,468,000 and is included within other assets in the
Company's Consolidated Balance Sheets.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
AS OF OCTOBER 31,
-----------------------------
2004 2003
------------- -------------
Accrued customer rebates and credits $ 5,961,000 $ 5,008,000
Accrued employee compensation and related payroll taxes 9,105,000 4,079,000
Billings in excess of costs and estimated earnings on
uncompleted percentage-of-completion contracts 791,000 1,247,000
Other 4,387,000 4,028,000
------------- -------------
Total accrued expenses and other current liabilities $ 20,244,000 $ 14,362,000
============= =============
Other non-current liabilities include deferred compensation of
$5,216,000 and $5,075,000 as of October 31, 2004 and 2003, respectively,
principally related to elective deferrals of salary and bonuses under a Company
sponsored non-qualified deferred compensation plan available to selected
employees. The Company makes no contributions to this plan. The assets of this
plan related to this deferred compensation liability are held within an
irrevocable trust and classified within other assets (long-term) in the
accompanying Consolidated Balance Sheets.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (FSG)
and the Electronic Technologies Group (ETG). Changes in the carrying amount of
goodwill during fiscal 2004 and 2003 by operating segment are as follows:
SEGMENT
----------------------------- CONSOLIDATED
FSG ETG TOTALS
------------- ------------- -------------
Balances as of October 31, 2002 $ 118,706,000 $ 68,971,000 $ 187,677,000
Goodwill acquired 400,000 -- 400,000
Adjustments to goodwill 623,000 -- 623,000
------------- ------------- -------------
Balances as of October 31, 2003 119,729,000 68,971,000 188,700,000
Goodwill acquired -- 27,349,000 27,349,000
Adjustments to goodwill 559,000 66,000 625,000
------------- ------------- -------------
Balances as of October 31, 2004 $ 120,288,000 $ 96,386,000 $ 216,674,000
============= ============= =============
43
The goodwill acquired during fiscal 2004 is a result of the Company's
acquisition, through a subsidiary, of an 80% interest in the assets and business
of Sierra in December 2003 (see Note 2, Acquisitions and Strategic Alliances, of
the Notes to Consolidated Financial Statements). Adjustments to goodwill consist
primarily of additional purchase price payments and contingent purchase price
payments to previous owners of acquired businesses.
Other intangible assets are recorded within other assets in the
Company's Consolidated Balance Sheets. Other intangible assets subject to
amortization consist primarily of licenses, patents, and non-compete covenants.
The gross carrying amount of other intangible assets was $1,448,000 and
$1,420,000 as of October 31, 2004 and 2003, respectively. Accumulated
amortization of other intangible assets was $259,000 and $147,000 as of October
31, 2004 and 2003, respectively. Amortization expense of other intangible assets
was $112,000, $98,000 and $104,000 for the fiscal years ended October 31, 2004,
2003 and 2002, respectively. Amortization expense for each of the next five
fiscal years is expected to be $113,000 in fiscal 2005, $113,000 in fiscal 2006,
$113,000 in fiscal 2007, $112,000 in fiscal 2008, and $97,000 in fiscal 2009.
6. LONG-TERM DEBT
Long-term debt consists of:
AS OF OCTOBER 31,
-----------------------------
2004 2003
------------- -------------
Borrowings under revolving credit facility $ 16,000,000 $ 30,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 149,000 33,000
------------- -------------
18,129,000 32,013,000
Less: Current maturities of long-term debt (58,000) (29,000)
------------- -------------
$ 18,071,000 $ 31,984,000
============= =============
The aggregate amount of long-term debt maturing by fiscal year is
$58,000 in fiscal 2005, $58,000 in fiscal 2006, $16,033,000 in fiscal 2007 and
$1,980,000 in fiscal 2008.
REVOLVING CREDIT FACILITY
In April 2004, the Company extended the term of its $120 million
revolving credit agreement with a bank syndicate by one year to May 2007. The
revolving credit facility may be used for working capital and general corporate
needs of the Company, including letters of credit, and to finance acquisitions
(generally not in excess of an aggregate total of $30 million over any trailing
twelve-month period without the requisite approval of the bank syndicate). The
Company can extend the revolving credit term for an additional one-year period
subject to requisite bank syndicate approval. Advances under the revolving
credit facility accrue interest at the Company's choice of the London Interbank
Offered Rate (LIBOR) or the "Base Rate" plus applicable margins (based on the
Company's ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization, or "leverage ratio"). The Base Rate is the higher
of (i) the Prime Rate or (ii) the Federal Funds rate plus .50%. The applicable
margins range from 1.00% to 2.25% for LIBOR based borrowings and from .00% to
..75% for Base Rate based borrowings. A fee is charged on the amount of the
unused commitment ranging from .25% to .50% (depending on the leverage ratio of
the Company). The revolving credit facility is secured by substantially all
assets other than real property of the Company and its subsidiaries and contains
44
covenants which require, among other things, the maintenance of the leverage
ratio and a fixed charge coverage ratio as well as minimum net worth
requirements.
As of October 31, 2004 and 2003, the Company had a total of $16 million
and $30 million, respectively, borrowed under its $120 million revolving credit
facility at weighted average interest rates of 2.9% and 2.6%, respectively. The
amounts were primarily borrowed to partially fund acquisitions (see Note 2,
Acquisitions and Strategic Alliances, of the Notes to Consolidated Financial
Statements).
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds outstanding as of October 31,
2004 represent bonds issued by Broward County, Florida in 1988 (the 1988 bonds).
The 1988 bonds are due April 2008 and bear interest at a variable rate
calculated weekly (1.8% and 1.2% as of October 31, 2004 and 2003, respectively).
The 1988 bonds as amended are secured by a $2.0 million letter of credit
expiring April 2008 and a mortgage on the related properties pledged as
collateral.
7. INCOME TAXES
The provision for income taxes on income before income taxes and
minority interests for each of the three fiscal years ended October 31 is as
follows:
2004 2003 2002
------------- ------------- -------------
Current:
Federal $ 6,088,000 $ 3,908,000 $ 849,000
State 735,000 444,000 164,000
------------- ------------- -------------
6,823,000 4,352,000 1,013,000
Deferred 4,125,000 3,520,000 3,917,000
------------- ------------- -------------
Total income tax expense $ 10,948,000 $ 7,872,000 $ 4,930,000
============= ============= =============
In fiscal 2002, a tax audit of the Company's fiscal 1998 and fiscal 1999
income tax returns was completed by the Internal Revenue Service that resulted
in the recovery of a portion of income taxes paid in prior years. The recovery
was based on a settlement reached with the Internal Revenue Service under which
a portion of the reimbursements received pursuant to a research and development
cooperation agreement was treated as shareholder reimbursements excluded from
taxable income. The recovery, net of expenses (including related professional
fees and interest), increased net income in fiscal 2002 by $2.1 million.
The following table reconciles the federal statutory tax rate to the
Company's effective tax rate for each of the three fiscal years ended October
31:
2004 2003 2002
------ ------ ------
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, less applicable federal income tax reduction 2.2 2.5 2.8
Net tax benefit related to non-taxable life insurance proceeds (4.8) -- --
Net tax benefit on export sales (2.3) (2.3) (2.7)
Net tax benefit (liability) on minority interest's share of income (.9) .4 .5
Recovery of taxes paid in prior years resulting from tax audit -- -- (11.6)
Other, net .7 -- (1.0)
------ ------ ------
Effective tax rate 29.9% 35.6% 23.0%
====== ====== ======
45
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
AS OF OCTOBER 31,
------------------------------
2004 2003
------------- -------------
Deferred tax assets:
Inventories $ 3,744,000 $ 2,770,000
Deferred compensation liability 2,096,000 2,034,000
Capitalized research and development expenses 709,000 897,000
Customer rebates accruals 623,000 346,000
Other 1,827,000 1,381,000
------------- -------------
Total deferred tax assets 8,999,000 7,428,000
------------- -------------
Deferred tax liabilities:
Intangible asset amortization 15,545,000 10,841,000
Accelerated depreciation 3,966,000 2,974,000
Other 78,000 78,000
------------- -------------
Total deferred tax liabilities 19,589,000 13,893,000
------------- -------------
Net deferred tax liability $ (10,590,000) $ (6,465,000)
============= =============
The net deferred tax liability is classified on the balance sheet as
follows:
AS OF OCTOBER 31,
-----------------------------
2004 2003
------------- -------------
Current asset $ 5,672,000 $ 3,872,000
Long-term liability (16,262,000) (10,337,000)
------------- -------------
Net deferred tax liability $ (10,590,000) $ (6,465,000)
============= =============
A deferred tax charge of $144,000 relating to an unrealized gain on an
interest rate swap was recorded as an adjustment to shareholders' equity in
fiscal 2002.
No deferred tax assets or liabilities were assumed in connection with
the Company's acquisitions in fiscal 2004, 2003 or 2002.
46
8. SHAREHOLDERS' EQUITY
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company's Board of Directors adopted, as of November 2, 2003, a new
Shareholder Rights Agreement (the "2003 Plan") to replace the expiring one (the
"1993 Plan"). Pursuant to the 2003 Plan, the Board declared a dividend of one
preferred share purchase right for each outstanding share of Common Stock and
Class A Common Stock (with the preferred share purchase rights collectively as
"the Rights"). The Rights trade with the common stock and are not exercisable or
transferable apart from the Common Stock and Class A Common Stock until after a
person or group either acquires 15% or more of the outstanding common stock or
commences or announces an intention to commence a tender offer for 15% or more
of the outstanding common stock. Absent either of the aforementioned events
transpiring, the Rights will expire as of the close of business on November 2,
2013.
The Rights have certain anti-takeover effects and, therefore, will cause
substantial dilution to a person or group who attempts to acquire the Company on
terms not approved by the Company's Board of Directors or who acquires 15% or
more of the outstanding common stock without approval of the Company's Board of
Directors. The Rights should not interfere with any merger or other business
combination approved by the Board since they may be redeemed by the Company at
$.01 per Right at any time until the close of business on the tenth day after a
person or group has obtained beneficial ownership of 15% or more of the
outstanding common stock or until a person commences or announces an intention
to commence a tender offer for 15% or more of the outstanding common stock. The
2003 Plan also contains a provision to help ensure a potential acquiror pays all
shareholders a fair price for the Company.
COMMON STOCK AND CLASS A COMMON STOCK
Each share of Common Stock is entitled to one vote per share. Each share
of Class A Common Stock is entitled to a 1/10 vote per share. Holders of the
Company's Common Stock and Class A Common Stock are entitled to receive when, as
and if declared by the Board of Directors, dividends and other distributions
payable in cash, property, stock, or otherwise. In the event of liquidation,
after payment of debts and other liabilities of the Company, and after making
provision for the holders of preferred stock, if any, the remaining assets of
the Company will be distributable ratably among the holders of all classes of
common stock.
SHARE REPURCHASES
In accordance with the Company's share repurchase program, 22,000 shares
of Class A Common Stock were repurchased at a total cost of $120,000 in fiscal
2003 and 36,300 shares of Class A Common Stock were repurchased at a total cost
of $200,000 in fiscal 2002. No shares were repurchased in fiscal 2004.
STOCK DIVIDEND
In January 2004, the Company paid a 10% stock dividend on both classes
of common stock outstanding with shares of Class A Common Stock. The 10%
dividend was valued based on the closing market price of the Company's Class A
Common Stock as of the day prior to the declaration date. All net income per
share, dividend per share, price and other data per share, exercise price, stock
option, and common share data has been adjusted retroactively to give effect to
the stock dividend.
47
9. STOCK OPTIONS
The Company currently has two stock option plans, the 2002 Stock Option
Plan (2002 Plan) and the Non-Qualified Stock Option Plan under which stock
options may be granted. The Company's 1993 Stock Option Plan (1993 Plan)
terminated in March 2003 on the tenth anniversary of its effective date. No
options may be granted under the 1993 Plan after such termination date; however,
options outstanding as of the termination date may be exercised pursuant to
their terms. In addition, the Company granted stock options to two former
shareholders of an acquired business pursuant to employment agreements entered
into in connection with the acquisition in fiscal 1999. A total of 4,192,570
shares of the Company's stock are reserved for issuance to employees, directors,
officers, and consultants as of October 31, 2004, including 4,035,267 shares
currently under option and 157,303 shares available for future grants. Options
issued under the 2002 Plan may be designated as incentive stock options or
non-qualified stock options. Incentive stock options are granted at not less
than 100% of the fair market value as of date of grant (110% thereof in certain
cases) and are exercisable in percentages specified as of the date of grant over
a period up to ten years. Only employees are eligible to receive incentive stock
options. Non-qualified stock options under the 2002 Plan may be granted at less
than fair market value and may be immediately exercisable. Options granted under
the Non-Qualified Stock Option Plan may be granted at no less than the fair
market value as of the date of grant and are generally exercisable in four equal
annual installments commencing one year from the date of grant. The options
granted pursuant to the 2002 Plan may be with respect to Common Stock and/or
Class A Common Stock, in such proportions as shall be determined by the Board of
Directors or the Stock Option Plan Committee in its sole discretion. The stock
options granted to two former shareholders of SBIR were fully vested and
transferable as of the grant date and expire ten years from the date of grant.
The exercise price of such options was the fair market value as of the date of
grant. Options under all stock option plans expire not later than ten years
after the date of grant, unless extended by the Stock Option Plan Committee or
the Board of Directors.
Information concerning stock option activity for each of the three
fiscal years ended October 31 is as follows:
SHARES UNDER OPTION
SHARES ------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------- ----------- ----------------
Outstanding as of October 31, 2001 213,453 4,567,501 $ 8.24
Shares approved by Board of Directors for
grant to former shareholders of an
acquired business 275,000 -- --
Shares approved by the Shareholders for the
2002 Stock Option Plan 572,000 -- --
Granted (770,990) 770,990 $ 9.74
Cancelled 49,128 (306,839) $ 13.75
Exercised -- (165,151) $ 2.65
----------- -----------
Outstanding as of October 31, 2002 338,591 4,866,501 $ 8.31
Granted (503,250) 503,250 $ 7.20
Cancelled 331,082 (334,749) $ 13.10
Exercised -- (586,327) $ 2.30
----------- -----------
Outstanding as of October 31, 2003 166,423 4,448,675 $ 8.62
Granted (10,000) 10,000 $ 13.19
Cancelled 880 (20,332) $ 12.26
Exercised -- (403,076) $ 2.75
----------- -----------
Outstanding as of October 31, 2004 157,303 4,035,267 $ 9.20
=========== ===========
48
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of October 31, 2004 is as follows:
COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- -------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (YEARS) EXERCISABLE EXERCISE PRICE
- ------------------ -------------- -------------- ------------------------- -------------- --------------
$ 1.16 - $ 2.90 160,010 $ 1.72 0.1 160,010 $ 1.72
$ 2.91 - $ 7.00 358,903 $ 4.55 1.6 358,903 $ 4.55
$ 7.01 - $ 12.00 703,275 $ 9.04 6.4 447,274 $ 9.46
$ 12.01 - $ 21.92 502,751 $ 14.55 6.2 350,750 $ 14.75
-------------- --------------
1,724,939 $ 9.03 4.7 1,316,937 $ 8.59
============== ==============
CLASS A COMMON STOCK
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- -------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (YEARS) EXERCISABLE EXERCISE PRICE
- ------------------ -------------- -------------- ------------------------- -------------- --------------
$ 1.16 - $ 2.90 209,277 $ 1.66 0.1 209,277 $ 1.66
$ 2.91 - $ 7.00 470,061 $ 4.90 3.4 362,261 $ 4.71
$ 7.01 - $ 12.00 926,097 $ 8.66 6.1 713,579 $ 8.48
$ 12.01 - $ 21.92 704,893 $ 15.43 5.3 608,480 $ 15.80
-------------- --------------
2,310,328 $ 9.33 4.8 1,893,597 $ 9.36
============== ==============
If there were a change in control of the Company, options outstanding
for an additional 307,414 shares of Common Stock and 384,894 shares of Class A
Common Stock would become immediately exercisable.
The estimated weighted average fair value of options granted was $6.16
per share for Class A Common Stock in fiscal 2004, $4.64 per share for Common
Stock and $3.55 per share for Class A Common Stock in fiscal 2003 and $7.30 per
share for Common Stock and $5.35 per share for Class A Common Stock in fiscal
2002. There were no grants of Common Stock options in fiscal 2004.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions for each of the three fiscal years ended October 31:
2004 2003 2002
------------------- ------------------- -------------------
CLASS A CLASS A CLASS A
COMMON COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
-------- -------- -------- -------- -------- --------
Expected stock price volatility -- 46.87% 52.65% 52.24% 53.61% 52.87%
Risk free interest rate -- 3.28% 3.37% 3.43% 4.51% 4.12%
Dividend yield -- .38% .26% .33% .25% .32%
Expected option life (years) -- 6 8 8 8 8
49
10. RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the
Plan) under which eligible employees of the Company and its participating
subsidiaries may contribute up to 15% of their annual compensation as defined by
the Plan. The Company generally contributes a 25% or 50% matching contribution,
as determined by the Board of Directors, based on a participant's Elective
Deferral Contribution up to 6% of the Participant's compensation for the
Elective Deferral Contribution period. The match is made in the Company's common
stock or cash, as determined by the Company. Effective January 2002, the
Company's match of employee contributions paid in common stock is based on the
fair market value of the shares at the date of contribution. Prior to January
2002, the Company made matching contributions through the promissory note
discussed below. The Plan also provides that the Company may contribute
additional amounts in its common stock or cash at the discretion of the Board of
Directors. Employee contributions can not be invested in Company stock.
In 1992, the Company sold 987,699 shares of the Company's Common Stock
and 984,242 shares of Class A Common Stock to the Plan for an aggregate price of
$4,122,000 entirely financed through a promissory note with the Company. The
promissory note was payable in nine equal annual installments, inclusive of
principal and interest at the rate of 8% per annum, with a final installment due
in September 2002. The promissory note was fully paid off effective December
2001. As the Plan accrued each payment of principal, an appropriate percentage
of stock was allocated to eligible employees' accounts in accordance with
applicable regulations under the Internal Revenue Code. The unallocated shares
of stock collateralized the 1992 promissory note. The per share cost to the Plan
for the 1992 stock sale ($2.09 per share) was determined based on the average
closing market price of the Company's stock on the twenty business days prior to
the effective date of the sale. In accordance with the provisions of the Plan,
the Company was obligated to make cash contributions in amounts sufficient to
meet the debt service requirements on the promissory note. Principal amounts
repaid on the promissory note were determined based on the value of the shares
released during the preceding twelve months but could not be less than the
minimum annual installments required. Dividends on allocated shares were issued
to participants' accounts. Dividends on unallocated shares were held in the Plan
and could be used to make note payments.
Participants receive 100% vesting in employee contributions. Vesting in
Company contributions is based on a participant's number of years of vesting
service. Contributions to the Plan charged to income in fiscal 2004, 2003, and
2002 totaled $189,000, $403,000 and $691,000, respectively, exclusive of
interest income earned on the note received from the Plan of $9,000 in fiscal
2002. The decline in charges to income results principally from the use of
forfeited shares within the Plan to make Company contributions. As of October
31, 2004, the Plan held approximately 276,188 forfeited shares of Common Stock
and 269,866 forfeited shares of Class A Common Stock, which are available to
make future Company contributions.
In 1991, the Company established a Directors Retirement Plan covering
its then current directors. The net assets of this plan as of October 31, 2004,
2003 and 2002 are not material to the financial position of the Company. During
fiscal 2004, 2003, and 2002, $88,000, $34,000 and $34,000, respectively, were
expensed for this plan.
50
11. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales amounts in fiscal 2004, 2003, and 2002 include
approximately $10,446,000, $9,224,000 and $9,742,000, respectively, of new
product research and development expenses. The expenses are net of
reimbursements pursuant to research and development cooperation and joint
venture agreements (see Note 2, Acquisitions and Strategic Alliances, of the
Notes to Consolidated Financial Statements). Such reimbursements were not
significant in fiscal 2004, 2003 and 2002.
12. RESTRUCTURING EXPENSES
In fiscal 2004, the Company incurred $850,000 of restructuring expenses
within certain subsidiaries of the Flight Support Group that provide repair and
overhaul services ("repair and overhaul subsidiaries"). The unexpected death of
an executive of certain of the repair and overhaul subsidiaries (see Note 13,
Life Insurance Proceeds, of the Notes to Consolidated Financial Statements
below) was the impetus for the commencement of the restructuring activities,
which the Company believes will allow it to better service its customers and
improve operating margins. The restructuring expenses include $350,000 of
inventory write-downs, which were recorded within cost of sales in the
accompanying Consolidated Statements of Operations, and $261,000 of management
hiring/relocation related expenses, $168,000 of moving costs and other
associated expenses and $71,000 of contract termination costs that were all
recorded within selling, general and administrative expenses. The inventory
written down is related to older generation aircraft for which repair and
overhaul services are being discontinued by the Company. The management
hiring/relocation related expenses include one-time employee termination/hiring
benefits and relocation costs. The moving costs and other associated expenses
consist of moving costs related to the consolidation of two repair and overhaul
facilities. Contract termination costs include the lease termination on a
facility. The repair and overhaul subsidiaries' restructuring expenses decreased
net income (after income taxes and the minority interest's share of the
expenses) in fiscal 2004 by $427,000.
The following table summarizes the restructuring expenses and associated
accrual, the latter which is included within accrued expenses and other current
liabilities in the Company's Consolidated Balance Sheets:
MANAGEMENT MOVING
HIRING / COSTS AND
RELOCATION OTHER CONTRACT
INVENTORY RELATED ASSOCIATED TERMINATION
WRITE-DOWNS EXPENSES EXPENSES COSTS TOTALS
----------- ----------- ----------- ----------- -----------
Balances as of November 1, 2003 $ - $ - $ - $ - $ -
Restructuring expenses 350,000 261,000 168,000 71,000 850,000
Cash payments - (197,000) (57,000) - (254,000)
Non-cash amount (350,000) - - - (350,000)
----------- ----------- ----------- ----------- -----------
Balances as of October 31, 2004 $ - $ 64,000 $ 111,000 $ 71,000 $ 246,000
=========== =========== =========== =========== ===========
13. LIFE INSURANCE PROCEEDS
In July 2004, the Company received $5.0 million in proceeds from the
death benefit of a key-person life insurance policy maintained by a subsidiary
of the Flight Support Group that provides repair and overhaul services. The life
insurance proceeds, which are non-taxable, increased fiscal 2004 net income
(after the minority interest's share of the income) by $4.0 million, or $.16 per
diluted share.
51
14. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for each of the three fiscal years ended October 31:
2004 2003 2002
------------ ------------ ------------
Numerator:
Net income $ 20,630,000 $ 12,222,000 $ 15,226,000
============ ============ ============
Denominator:
Weighted average common shares outstanding - basic 24,036,980 23,236,841 23,003,784
Effect of dilutive stock options 1,717,618 1,294,439 1,728,895
------------ ------------ ------------
Weighted average common shares outstanding - diluted 25,754,598 24,531,280 24,732,679
============ ============ ============
Net income per share - basic $ .86 $ .53 $ .66
Net income per share - diluted $ .80 $ .50 $ .62
Anti-dilutive stock options excluded 579,837 2,144,694 1,431,543
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Net sales:
2004 $ 46,151,000 $ 52,793,000 $ 55,820,000 $ 60,980,000
2003 41,788,000 41,591,000 45,412,000 47,662,000
2002 41,012,000 43,001,000 42,587,000 45,512,000
Gross profit:
2004 15,536,000 18,714,000 19,616,000 21,946,000
2003 13,776,000 13,901,000 15,136,000 15,291,000
2002 14,850,000 15,359,000 14,936,000 16,357,000
Net income:
2004 3,241,000 4,108,000 8,115,000 5,166,000
2003 2,834,000 2,608,000 3,240,000 3,540,000
2002 2,828,000 3,970,000 2,829,000 5,599,000
Net income per share:
Basic
2004 $ .14 $ .17 $ .34 $ .21
2003 .12 .11 .14 .15
2002 .12 .17 .12 .24
Diluted
2004 .13 .16 .32 .20
2003 .12 .11 .13 .14
2002 .11 .16 .11 .23
During the third quarter of fiscal 2004, the Company received $5.0
million in life insurance proceeds as referenced in Note 13, Life Insurance
Proceeds, of the Notes to Consolidated Financial
52
Statements, which increased net income (after the minority interest's share of
the income) by $4.0 million, or $.16 per diluted share.
During the third and fourth quarters of fiscal 2004, the Company
incurred restructuring expenses within certain subsidiaries of its Flight
Support Group as referenced in Note 12, Restructuring Expenses, of the Notes to
Consolidated Financial Statements. In the third quarter of fiscal 2004,
restructuring expenses decreased gross profit by $350,000 and net income by
$301,000. During the third and fourth quarters of fiscal 2004, the Company
incurred legal and other costs related to litigation brought by a subsidiary of
the Electronic Technologies Group as referenced in Note 17, Commitments and
Contingencies-Litigation, of the Notes to Consolidated Financial Statements. In
the third quarter of fiscal 2004, the litigation-related expenses decreased net
income by $148,000. The net impact of the restructuring expenses and the
litigation-related expenses in the fourth quarter of fiscal 2004 was not
significant.
Net income in the second quarter of fiscal 2002 includes an additional
gain on the sale of Trilectron as referenced in Note 3, Sale of Product Line, of
the Notes to Consolidated Financial Statements. The impact of the gain was an
increase to net income of $765,000.
Net income in the fourth quarter of fiscal 2002 includes the recovery of
a portion of taxes paid in prior years resulting from a tax audit as referenced
in Note 7, Income Taxes, of the Notes to Consolidated Financial Statements. The
impact of the recovery was an increase to net income of $2,107,000.
Due to changes in the average number of common shares outstanding, net
income per share for the full fiscal year may not equal the sum of the four
individual quarters.
16. OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group (FSG)
consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group (ETG), consisting of HEICO Electronic and its subsidiaries.
See Note 1, Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements for a list of operating subsidiaries
aggregated in each reportable operating segment. The Flight Support Group
designs and manufactures FAA-approved jet engine and aircraft component
replacement parts, provides FAA-authorized repair and overhaul services and
provides subcontracting services to original equipment manufacturers in the
aviation industry and the U.S. Government. The Electronic Technologies Group
designs and manufactures commercial and military power supplies, circuit board
shielding, laser and electro-optical products and infrared simulation and test
equipment and repairs and overhauls aircraft electronic equipment primarily for
the aerospace, defense, space, and electronics industries.
The Company's reportable business divisions offer distinctive products
and services that are marketed through different channels. They are managed
separately because of their unique technology and service requirements.
53
SEGMENT PROFIT OR LOSS
The accounting policies of the Company's operating segments are the same
as those described in Note 1, Summary of Significant Accounting Policies of the
Notes to Consolidated Financial Statements. Management evaluates segment
performance based on segment operating income.
SEGMENT PRIMARILY
-------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
------------- ------------- ------------- -------------
For the Year Ended October 31, 2004:
Net sales $ 153,238,000 $ 62,648,000 $ (142,000) $ 215,744,000
Depreciation and amortization 4,580,000 1,762,000 437,000 6,779,000
Operating income 24,251,000 (a) 15,259,000 (b) (6,891,000) 32,619,000
Total assets 212,615,000 136,860,000 14,780,000 364,255,000
Capital expenditures 3,964,000 1,767,000 6,000 5,737,000
For the year ended October 31, 2003:
Net sales $ 128,277,000 $ 48,597,000 $ (421,000) $ 176,453,000
Depreciation and amortization 4,895,000 1,399,000 426,000 6,720,000
Operating income 19,187,000 8,497,000 (4,479,000) 23,205,000
Total assets 214,292,000 103,798,000 15,154,000 333,244,000
Capital expenditures 2,102,000 2,617,000 4,000 4,723,000
For the year ended October 31, 2002:
Net sales $ 120,097,000 $ 52,510,000 $ (495,000) $ 172,112,000
Depreciation and amortization 4,447,000 1,213,000 307,000 5,967,000
Operating income 15,846,000 11,873,000 (5,319,000) 22,400,000
Total assets 219,903,000 103,260,000 13,169,000 336,332,000
Capital expenditures 5,568,000 1,969,000 801,000 8,338,000
- ----------
(a) Includes $850,000 of restructuring expenses (see Note 12, Restructuring
Expenses, of the Notes to Consolidated Financial Statements).
(b) Includes $410,000 of litigation-related expenses (see Note 17, Commitments
and Contingencies - Litigation of the Notes to Consolidated Financial
Statements).
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
No one customer accounted for 10 percent or more of the Company's
consolidated net sales during the last three fiscal years. The Company had no
material sales originating or long-lived assets held outside of the United
States during the last three fiscal years.
Export sales were $55,695,000 in fiscal 2004, $47,013,000 in fiscal 2003
and $51,061,000 in fiscal 2002.
54
17. COMMITMENTS AND CONTINGENCIES
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.
In fiscal 2004, the Company incurred $410,000 of legal and other costs
related to litigation brought by a subsidiary of the Electronic Technologies
Group against two former employees and related parties for breach of contract
and other possible causes of action against the former employees and others.
LEASE COMMITMENTS
The Company leases certain property and equipment, including
manufacturing facilities and office equipment under operating leases. Some of
these leases provide the Company with the option after the initial lease term
either to purchase the property at the then fair market value or renew the lease
at the then fair rental value. Generally, management expects that leases will be
renewed or replaced by other leases in the normal course of business.
Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows:
Year ending October 31,
2005......................................... $ 1,960,000
2006......................................... 1,566,000
2007......................................... 950,000
2008......................................... 709,000
2009......................................... 593,000
Thereafter................................... 1,081,000
------------
Total minimum lease commitments.............. $ 6,859,000
============
Total rent expense charged to operations for operating leases in fiscal
2004, fiscal 2003, and fiscal 2002 amounted to $2,737,000, $2,768,000 and
$2,956,000, respectively.
55
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. 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.
Changes in the Company's product warranty liability for fiscal 2004 and
2003 are as follows:
Balance as of October 31, 2002 $ 685,000
Accruals for warranties 147,000
Warranty claims settled (199,000)
-----------
Balance as of October 31, 2003 633,000
Change in estimate of warranty liability (535,000)
Accruals for warranties 345,000
Warranty claims settled (314,000)
-----------
Balance as of October 31, 2004 $ 129,000
===========
Based on an analysis of its historical claims cost experience, the
Company reduced its estimated warranty liability in the first and fourth
quarters of fiscal 2004.
As partial consideration in the acquisition of Inertial Airline
Services, Inc. (IAS) in August 2001, the Company issued $5 million in HEICO
Class A Common Stock (318,960 shares) and guaranteed that the resale value of
such Class A Common Stock would be at least $5 million through August 31, 2004.
Concurrent with the acquisition, the Company loaned the seller $5 million, which
was due August 31, 2004 and secured by the 318,960 shares of HEICO Class A
Common Stock. The loan has been shown as a reduction of shareholders' equity in
the Company's Consolidated Balance Sheets under the caption, "Note Receivable
Secured by Class A Common Stock." In October 2003, the seller sold 220,000
shares of the HEICO Class A Common Stock and the Company received the net
proceeds of $2.1 million to reduce the note receivable. In the second quarter of
fiscal 2004, the Company received the net proceeds of $1.2 million from the
seller upon the sale of the remaining 98,960 shares of the HEICO Class A Common
Stock. Pursuant to the Company's guarantee that the aggregate resale value of
the 318,960 shares of Class A Common Stock would be at least $5 million, the
$1.7 million difference between the guaranteed value and the $3.3 million of
aggregate net proceeds ($2.1 million received in October 2003 and $1.2 million
received in the second quarter of 2004) from the sales of the Class A Common
Stock has been recorded as a reduction of both capital in excess of par value
and the note receivable.
As part of the agreement to acquire an 80% interest in Sierra in
December 2003 (see Note 2, Acquisitions and Strategic Alliances, of the Notes to
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.
56
18. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was $1,099,000, $1,291,000 and $2,407,000 in
fiscal 2004, 2003, and 2002, respectively. Cash paid for income taxes was
$2,688,000, $3,460,000 and $1,373,000 in fiscal 2004, 2003, and 2002,
respectively. Cash received from income tax refunds in fiscal 2004, 2003 and
2002 was $72,000, $1,300,000 and $1,963,000, respectively.
Cash investing activities related to acquisitions, including contingent
payments, for each of the three fiscal years ended October 31, is as follows:
2004 2003 2002
------------- ------------- -------------
Fair value of assets acquired:
Liabilities assumed $ 684,000 $ 698,000 $ 247,000
Less:
Goodwill 24,974,000 1,023,000 3,578,000
Inventories 707,000 431,000 371,000
Accounts receivable 1,785,000 312,000 351,000
Property, plant and equipment 1,311,000 408,000 258,000
Other assets 6,000 78,000 204,000
------------- ------------- -------------
Cash paid, including contingent payments $ (28,099,000) $ (1,554,000) $ (4,515,000)
============= ============= =============
In connection with the purchase of Sierra in December 2003 (see Note 2,
Acquisitions and Strategic Alliances, of the Notes to Consolidated Financial
Statements), the Company issued shares of HEICO's Class A Common Stock valued at
$3 million, which was allocated to goodwill.
Retained earnings were reduced by $29,393,000 in fiscal 2004 as a result
of the 10% stock dividend described in Note 8, Shareholders' Equity - Stock
Dividend, of the Notes to Consolidated Financial Statements.
There were no significant capital lease financing activities during
fiscal 2004, fiscal 2003, and fiscal 2002.
19. RESTATEMENT FOR CLASSIFICATION OF CAPITALIZED TOOLING COSTS
In fiscal 2004, the Company began classifying capitalized tooling costs
as a component of property, plant and equipment in the Company's Consolidated
Balance Sheet. In prior years, the Company classified capitalized tooling costs
generally as a component of other long-term assets (other assets) with a portion
classified as a current asset (prepaid expenses and other current assets). Upon
review of this matter, the Company determined that its prior method was not
appropriate under accounting principles generally accepted in the United States
of America. Accordingly, the accompanying Consolidated Balance Sheet as of
October 31, 2003 and Consolidated Statements of Cash Flows for the fiscal years
ended October 31, 2003 and 2002 have been restated as set forth below. The
change in the balance sheet classification of capitalized tooling costs had no
effect on the accompanying Consolidated Statements of Operations. Further, the
total assets, total liabilities and total shareholders' equity amounts in the
accompanying Consolidated Balance Sheet as of October 31, 2003 did
57
not change. A summary of the decrease in current assets and corresponding net
increase in long-term assets in the Company's Consolidated Balance Sheet as of
October 31, 2003 follows:
AS OF OCTOBER 31, 2003
-----------------------------
AS PREVIOUSLY AS
REPORTED RESTATED
------------- -------------
Current assets:
Prepaid expenses and other current assets $ 6,231,000 $ 3,003,000
Total current assets 94,484,000 91,256,000
Property, plant and equipment, net 35,537,000 39,783,000
Other assets 14,523,000 13,505,000
Net cash provided by operating activities and net cash used in investing
activities in the Company's Consolidated Statements of Cash Flows each increased
by $985,000 for the fiscal year ended October 31, 2003, and each increased by
$3,009,000 for the fiscal year ended October 31, 2002, as a result of the change
in balance sheet classification of capitalized tooling costs as follows:
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------- ------------- -------------
Operating Activities:
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization $ 5,081,000 $ 6,720,000 $ 4,532,000 $ 5,967,000
Changes in assets and liabilities,
net of acquisitions:
Decrease (increase) in inventories 3,705,000 3,705,000 (2,996,000) (3,996,000)
Decrease (increase) in prepaid expenses
and other current assets 1,653,000 999,000 (2,967,000) (393,000)
Net cash provided by operating activities 27,879,000 28,864,000 23,285,000 26,294,000
Investing Activities:
Capital expenditures (3,771,000) (4,723,000) (5,853,000) (8,338,000)
Other 118,000 85,000 (1,664,000) (2,188,000)
Net cash used in investing activities (5,207,000) (6,192,000) (11,384,000) (14,393,000)
20. SUBSEQUENT EVENT (UNAUDITED)
In December 2004, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Connectronics, Corp. and its affiliate, Wiremax, Ltd.
(collectively "Connectronics"). The purchase price was not significant to the
Company's consolidated financial statements. The purchase price was paid using
proceeds from the Company's revolving credit facility. Connectronics is engaged
in the production of specialty high voltage interconnection devices and wire
primarily for defense applications and other markets.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this Annual
Report. Based upon that evaluation, which took into consideration the
restatement for the reclassification of the Company's capitalized tooling costs
to property, plant and equipment during the fiscal year, 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 Annual Report on Form 10-K.
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.
ITEM 9B. OTHER INFORMATION
Not applicable.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company, including the
Finance/Audit Committee of the Board of Directors and its Finance/Audit
Committee Financial Expert, is hereby incorporated by reference to the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission (Commission) within 120 days after the close of fiscal 2004.
Information concerning the Executive Officers of the Company is set
forth in Item 1 of Part I hereof under the caption "Executive Officers of the
Registrant."
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. The code of ethics is
located on the Company's Internet web site at http://www.heico.com. Any
amendments to or waivers from a provision of this code of ethics will be posted
on the Company's web site.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners
and management is hereby incorporated by reference to the Company's definitive
proxy statement, which will be filed with the Commission within 120 days after
the close of fiscal 2004.
Equity compensation plan information is set forth in Item 5 of Part II
hereof under the caption "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the principal accountant's fees and services is
hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2004.
60
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
subsidiaries are included in Part II, Item 8:
Page
----
Report of Independent Registered Public Accounting Firm................ 30
Consolidated Balance Sheets at October 31, 2004 and 2003 (as restated). 31
Consolidated Statements of Operations for the years ended
October 31, 2004, 2003 and 2002....................................... 32
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended October 31, 2004, 2003 and 2002............ 33
Consolidated Statements of Cash Flows for the years ended
October 31, 2004, 2003 (as restated) and 2002 (as restated)........... 34
Notes to Consolidated Financial Statements............................. 35
(a)(2) FINANCIAL STATEMENT SCHEDULES
No schedules have been submitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a)(3) EXHIBITS
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------
2.1 -- Amended and Restated Agreement of Merger and Plan of
Reorganization, dated as of March 22, 1993, by and among HEICO
Corporation, HEICO Industries, Corp. and New HEICO, Inc. is
incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-57624)
Amendment No. 1 filed on March 19, 1993.*
2.2 -- Stock Purchase Agreement, dated August 1, 2000, by and between
HEICO Aviation Products Corp., N/K/A HEICO Electronic
Technologies Corp. and Hobart Brothers Company (without
schedules and exhibits) is incorporated by reference to Exhibit
2.1 to Form 8-K dated September 14, 2000.*
3.1 -- Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-4 (Registration No. 33-57624) Amendment No. 1 filed on
March 19, 1993.*
3.2 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated April 27, 1993, are incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
8-B dated April 29, 1993.*
61
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------
3.3 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated November 3, 1993, are incorporated by
reference to Exhibit 3.3 to the Form 10-K for the year ended
October 31, 1993.*
3.4 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated March 19, 1998, are incorporated by reference
to Exhibit 3.4 to the Company's Registration Statement on Form
S-3 (Registration No. 333-48439) filed on March 23, 1998.*
3.5 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated as of November 2, 2003, are incorporated by
reference to Exhibit 3.5 to the Form 10-K for the year ended
October 31, 2003.*
3.6 -- Bylaws of the Registrant are incorporated by reference to
Exhibit 3.4 to the Form 10-K for the year ended October 31,
1996.*
4.0 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunBank, N.A., as Rights Agent, dated as of November 2, 1993,
incorporated by reference to Exhibit 1 to the Form 8-K dated
November 2, 1993.*
4.1 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunTrust Bank, N.A., as Rights Agent, dated as of November 2,
2003, incorporated by reference to Exhibit 4.0 to the Form 8-K
dated November 2, 2003.*
10.1 -- Loan Agreement, dated March 1, 1988, between HEICO Corporation
and Broward County, Florida is incorporated by reference to
Exhibit 10.1 to the Form 10-K for the year ended October 31,
1994.*
10.2 -- SunBank Reimbursement Agreement, dated February 28, 1994,
between HEICO Aerospace Corporation and SunBank/South Florida,
N.A. is incorporated by reference to Exhibit 10.2 to the Form
10-K for the year ended October 31, 1994.*
10.3 -- Amendment, dated March 1, 1995, to the SunBank Reimbursement
Agreement dated February 28, 1994 between HEICO Aerospace
Corporation and SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.3 to the Form 10-K from the year ended
October 31, 1995.*
10.4 -- Amendment and Extension, dated February 28, 1999 to the SunBank
Reimbursement Agreement dated February 28, 1994, between
SunTrust Bank, South Florida, N.A. and HEICO Aerospace
Corporation is incorporated by reference to Exhibit 10.4 to the
Form 10-K for the year ended October 31, 1999.*
10.5 -- Amendment, dated July 20, 2000, to the SunBank Reimbursement
Agreement dated February 28, 1994, between HEICO Aerospace
Corporation and SunTrust Bank is incorporated by reference to
Exhibit 10.5 to the Form 10-K for the year ended October 31,
2000.*
62
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------
10.6 -- Amendment, dated as of January 14, 2004, to the SunBank
Reimbursement Agreement, dated as of February 28, 1994, between
HEICO Aerospace Corporation and SunTrust Bank is incorporated by
reference to Exhibit 10.1 to the Form 10-Q for the quarterly
period ended January 31, 2004. *
10.7# -- HEICO Savings and Investment Plan, as amended and restated
effective as of January 1, 2002 is incorporated by reference to
Exhibit 10.6 to the Form 10-K for the year ended October 31,
2002.*
10.8# -- First Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.7 to the Form 10-K for the year ended October 31,
2003.*
10.9# -- Second Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.8 to the Form 10-K for the year ended October 31,
2003.*
10.10# -- Third Amendment, effective as of October 1, 2003, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.9 to the Form 10-K for the year ended October 31,
2003.*
10.11# -- Fourth Amendment, with portions effective as of January 1, 2005,
and other portions effective as of January 1, 2004, to the
HEICO Savings and Investment Plan.**
10.12# -- Non-Qualified Stock Option Agreement for Directors, Officers and
Employees is incorporated by reference to Exhibit 10.8 to the
Form 10-K for the year ended October 31, 1985.*
10.13# -- HEICO Corporation 1993 Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81789)
filed on June 29, 1999.*
10.14# -- HEICO Corporation 2002 Stock Option Plan, effective March 19,
2002, is incorporated by reference to Exhibit 10.10 to the Form
10-K for the year ended October 31, 2002.*
10.15# -- HEICO Corporation Directors' Retirement Plan, as amended, dated
as of May 31, 1991, is incorporated by reference to Exhibit
10.19 to the Form 10-K for the year ended October 31, 1992.*
10.16# -- Key Employee Termination Agreement, dated as of April 5, 1988,
between HEICO Corporation and Thomas S. Irwin is incorporated by
reference to Exhibit 10.20 to the Form 10-K for the year ended
October 31, 1992.*
10.17 -- Stock Purchase Agreement, dated October 30, 1997, by and among
HEICO Corporation, HEICO Aerospace Holdings Corp. and Lufthansa
Technik AG is incorporated by reference to Exhibit 10.31 to Form
10-K/A for the year ended October 31, 1997.*
63
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------
10.18 -- Shareholders Agreement, dated October 30, 1997, by and between
HEICO Aerospace Holdings Corp., HEICO Aerospace Corporation and
all of the shareholders of HEICO Aerospace Holdings Corp. and
Lufthansa Technik AG is incorporated by reference to Exhibit
10.32 to Form 10-K/A for the year ended October 31, 1997.*
10.19 -- Credit Agreement among HEICO Corporation and SunTrust Bank,
South Florida, N.A., as Agent, dated as of July 30, 1998, is
incorporated by reference to Exhibit 10.2 to Form 8-K dated
August 4, 1998.*
10.20 -- First Amendment, dated July 30, 1998 to Credit Agreement among
HEICO Corporation and SunTrust Bank, South Florida, N.A., as
agent, dated as of July 31, 1998 is incorporated by reference to
Exhibit 10.31 to the Form 10-K for the year ended October 31,
1999.*
10.21 -- Second Amendment, dated May 12, 1999, to Credit Agreement among
HEICO Corporation and SunTrust Bank, South Florida, N.A., as
agent, dated as of July 31, 1998 is incorporated by reference to
Exhibit 10.32 to the Form 10-K for the year ended October 31,
1999.*
10.22 -- Third Amendment, dated as of June 23, 2000, to Credit Agreement
among HEICO Corporation and SunTrust Bank (formerly known as
SunTrust Bank, South Florida, N.A.) as Agent dated as of July
31, 1998, is incorporated by reference to Exhibit 10.1 to Form
10-Q for the quarterly period ended July 31, 2000.*
10.23 -- Revolving Credit Agreement, dated as of May 15, 2003, among
HEICO Corporation and SunTrust Bank, as Administrative Agent, is
incorporated by reference to Exhibit 10.1 to the Form 8-K filed
on May 29, 2003.*
10.24 -- Consent to Extension dated as of April 5, 2004 to the Revolving
Credit Agreement dated as of May 15, 2003 among HEICO
Corporation and SunTrust Bank, is incorporated by reference to
Exhibit 10.1 to the Form 10-Q for the quarterly period ended
April 30, 2004.*
21 -- Subsidiaries of HEICO Corporation.**
23 -- Consent of Independent Registered Public Accounting Firm.**
31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. **
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. **
32.1 -- Section 1350 Certification of Chief Executive Officer.***
32.2 -- Section 1350 Certification of Chief Financial Officer.***
- ----------
# Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
* Previously filed.
** Filed herewith.
*** Furnished herewith.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
Date: January 14, 2005 By: /s/ THOMAS S. IRWIN
----------------------------
Thomas S. Irwin
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ LAURANS A. MENDELSON Chairman, President,
- ---------------------------------------- Director (Principal
Laurans A. Mendelson Executive Officer)
/s/ SAMUEL L. HIGGINBOTTOM Director
- ----------------------------------------
Samuel L. Higginbottom
Director
- ----------------------------------------
Wolfgang Mayrhuber
/s/ ERIC A. MENDELSON Director
- ----------------------------------------
Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director
- ----------------------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR Director
- ----------------------------------------
Albert Morrison, Jr.
/s/ JOSEPH W. PALLOT Director
- ----------------------------------------
Joseph W. Pallot
/s/ ALAN SCHRIESHEIM Director
- ----------------------------------------
Alan Schriesheim
65
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------
10.11 -- Fourth Amendment, with portions effective as of January 1, 2005,
and other portions effective as of January 1, 2004, to the HEICO
Savings and Investment Plan.
21 -- Subsidiaries of HEICO Corporation.
23 -- Consent of Independent Registered Public Accounting Firm.
31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 -- Section 1350 Certification of Chief Executive Officer.
32.2 -- Section 1350 Certification of Chief Financial Officer.
66