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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2005 or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0341002
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of February 25, 2005:
Common Stock, $.01 par value 9,982,639 shares
Class A Common Stock, $.01 par value 14,460,116 shares
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets (unaudited)
as of January 31, 2005 and October 31, 2004....................................2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 2005 and 2004...........................3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 2005 and 2004...........................4
Notes to Condensed Consolidated Financial Statements (unaudited)..................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risks......................20
Item 4. Controls and Procedures..........................................................21
PART II. OTHER INFORMATION:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................22
Item 6. Exhibits.........................................................................22
Signature.......................................................................................23
1
PART I. ITEM 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
JANUARY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,517,000 $ 214,000
Accounts receivable, net 35,293,000 36,798,000
Inventories 52,450,000 48,020,000
Prepaid expenses and other current assets 3,703,000 3,208,000
Deferred income taxes 5,682,000 5,672,000
---------------- ----------------
Total current assets 101,645,000 93,912,000
Property, plant and equipment, net 40,124,000 40,558,000
Goodwill 228,248,000 216,674,000
Other assets 10,959,000 13,111,000
---------------- ----------------
Total assets $ 380,976,000 $ 364,255,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 58,000 $ 58,000
Trade accounts payable 7,566,000 7,969,000
Accrued expenses and other current liabilities 18,498,000 20,244,000
Income taxes payable -- 3,771,000
---------------- ----------------
Total current liabilities 26,122,000 32,042,000
Long-term debt, net of current maturities 31,057,000 18,071,000
Deferred income taxes 17,374,000 16,262,000
Other non-current liabilities 6,597,000 5,834,000
---------------- ----------------
Total liabilities 81,150,000 72,209,000
---------------- ----------------
Minority interests in consolidated subsidiaries 45,576,000 44,644,000
---------------- ----------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares Authorized;
300,000 shares designated as Series B Junior Participating Preferred
Stock and 300,000 shares designated as Series C Junior Participating
Preferred Stock; none issued -- --
Common Stock, $.01 par value per share; 30,000,000 shares authorized;
9,958,179 and 9,898,451 shares issued and outstanding, respectively 100,000 99,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 14,451,110 and 14,325,304 shares issued and outstanding,
respectively 145,000 143,000
Capital in excess of par value 190,975,000 187,950,000
Retained earnings 63,030,000 59,210,000
---------------- ----------------
Total shareholders' equity 254,250,000 247,402,000
---------------- ----------------
Total liabilities and shareholders' equity $ 380,976,000 $ 364,255,000
================ ================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED JANUARY 31,
--------------------------------
2005 2004
-------------- --------------
Net sales $ 56,981,000 $ 46,151,000
-------------- --------------
Operating costs and expenses:
Cost of sales 36,701,000 30,615,000
Selling, general and administrative expenses 11,619,000 8,963,000
-------------- --------------
Total operating costs and expenses 48,320,000 39,578,000
-------------- --------------
Operating income 8,661,000 6,573,000
Interest expense (233,000) (331,000)
Interest income and other income (expense) 36,000 (2,000)
-------------- --------------
Income before income taxes and minority interests 8,464,000 6,240,000
Income tax expense 2,923,000 2,155,000
-------------- --------------
Income before minority interests 5,541,000 4,085,000
Minority interests' share of income 1,113,000 844,000
-------------- --------------
Net income $ 4,428,000 $ 3,241,000
============== ==============
Net income per share:
Basic $ .18 $ .14
Diluted $ .17 $ .13
Weighted average number of common shares outstanding
Basic 24,328,337 23,745,244
Diluted 26,213,577 25,632,999
Cash dividend per share $ .025 $ .025
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED JANUARY 31,
--------------------------------
2005 2004
-------------- --------------
Operating Activities:
Net income $ 4,428,000 $ 3,241,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,724,000 1,609,000
Deferred income tax provision 1,102,000 1,176,000
Minority interests' share of income 1,113,000 844,000
Tax benefit from stock option exercises 2,538,000 1,258,000
Changes in assets and liabilities, net of acquisitions:
Decrease in accounts receivable 2,893,000 2,591,000
(Increase) decrease in inventories (2,806,000) 2,144,000
Increase in prepaid expenses and other current assets (491,000) (406,000)
Decrease in trade accounts payables, accrued
expenses and other current liabilities (2,836,000) (3,441,000)
Decrease in income taxes payable (3,771,000) (787,000)
Other 63,000 (482,000)
-------------- --------------
Net cash provided by operating activities 3,957,000 7,747,000
-------------- --------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (14,679,000) (27,337,000)
Capital expenditures (944,000) (1,147,000)
Proceeds from sale of building held for sale 3,520,000 --
Other (235,000) (138,000)
-------------- --------------
Net cash used in investing activities (12,338,000) (28,622,000)
-------------- --------------
Financing Activities:
Borrowings on revolving credit facility, net 13,000,000 22,000,000
Cash dividend paid (610,000) (596,000)
Proceeds from stock option exercises 488,000 123,000
Other (194,000) (26,000)
-------------- --------------
Net cash provided by financing activities 12,684,000 21,501,000
-------------- --------------
Net increase in cash and cash equivalents 4,303,000 626,000
Cash and cash equivalents at beginning of year 214,000 4,321,000
-------------- --------------
Cash and cash equivalents at end of period $ 4,517,000 $ 4,947,000
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of HEICO Corporation and its subsidiaries (the "Company") have been prepared in
conformity with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-Q. Therefore, the condensed consolidated financial
statements do not include all information and footnotes normally included in
annual consolidated financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended October 31, 2004. The
October 31, 2004 Condensed Consolidated Balance Sheet has been derived from the
Company's audited consolidated financial statements. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the condensed consolidated balance sheets, statements of
operations and statements of cash flows for such interim periods presented. The
results of operations for the three months ended January 31, 2005 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
STOCK BASED COMPENSATION
The Company currently accounts for stock-based employee compensation
using the intrinsic value method (see "New Accounting Pronouncements" below for
a discussion of a recently issued pronouncement on the accounting for
share-based payments, which is effective as of the Company's fourth quarter of
fiscal 2005). Accordingly, compensation expense has been recorded in the
accompanying condensed consolidated financial statements for any stock options
granted below the fair market value of the underlying stock as of the date of
grant. The following table illustrates the pro forma effects on net income and
net income per share as if the Company had applied the fair-value recognition
provisions (an alternative method) to stock-based employee compensation. The
fair value of each option grant is estimated as of the date of grant using the
Black-Scholes option-pricing model.
THREE MONTHS ENDED JANUARY 31,
--------------------------------
2005 2004
-------------- --------------
Net income, as reported $ 4,428,000 $ 3,241,000
Deduct: stock-based employee compensation expense
determined under a fair-value method, net of tax (324,000) (386,000)
-------------- --------------
Pro forma net income $ 4,104,000 $ 2,855,000
============== ==============
Net income per share:
Basic - as reported $ .18 $ .14
Basic - pro forma $ .17 $ .12
Diluted - as reported $ .17 $ .13
Diluted - pro forma $ .16 $ .11
5
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"),
"Inventory Costs, an amendment of ARB No. 43, Chapter 4". SFAS No. 151 requires
the allocation of fixed production overhead costs be based on the normal
capacity of the production facilities and unallocated overhead costs recognized
as an expense in the period incurred. The Statement also clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the
provisions of SFAS No. 151, but does not currently believe the adoption of the
Statement will have a material effect on its results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". 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 beginning after June 15, 2005. Accordingly, the Company will adopt SFAS
No. 123(R) in its fourth quarter of fiscal 2005. The Company is currently
evaluating the provisions of SFAS No. 123(R) and has not yet determined the
impact that this Statement will have on its results of operations or financial
position.
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP FAS No.
109-1"), "Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004". FSP FAS No. 109-1 states that qualified production
activities should be accounted for as a special deduction under SFAS No. 109 and
not be treated as a rate reduction. Accordingly, the special deduction has no
effect on the Company's deferred tax assets and liabilities existing as of the
enactment date. The Company is currently evaluating the impact of the American
Jobs Creation Act of 2004, which will allow the Company to claim a deduction
from taxable income attributable to qualified domestic production activities
beginning in fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 is based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The Statement eliminates the
exception of nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e. the future cash flows of the entity are not expected
to change significantly as a result of the exchange). The provisions of SFAS No.
153 are effective as of the first reporting period beginning after June 15,
2005. The Company does not expect the adoption of SFAS No. 153 to have a
material effect on its results of operations or financial position.
6
2. ACQUISITION
In December 2004, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets and assumed certain
liabilities of Connectronics, Corp. and its affiliate, Wiremax, Ltd.
(collectively "Connectronics"). The results of operations of Connectronics were
included in the Company's results of operations effective December 2004. The
purchase price was paid in cash using proceeds from the Company's revolving
credit facility and was not significant to the Company's consolidated financial
statements. The Company's pro forma consolidated operating results assuming
Connectronics had been acquired as of the beginning of fiscal 2005 would not
have been materially different from the reported results. The allocation of the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed in these condensed consolidated financial statements is
preliminary until the Company obtains final information regarding their fair
values. Subject to meeting certain earnings objectives during the first four
years following the acquisition, the Company may be obligated to pay additional
consideration of up to $3.8 million in the aggregate. Connectronics is engaged
in the production of specialty high voltage interconnection devices and wire
primarily for defense applications and other markets.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
JANUARY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Accounts receivable $ 36,063,000 $ 37,380,000
Less: Allowance for doubtful accounts (770,000) (582,000)
---------------- ----------------
Accounts receivable, net $ 35,293,000 $ 36,798,000
================ ================
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
JANUARY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Costs incurred on uncompleted contracts $ 13,434,000 $ 14,798,000
Estimated earnings 7,536,000 8,686,000
---------------- ----------------
20,970,000 23,484,000
Less: Billings to date (16,502,000) (19,663,000)
---------------- ----------------
$ 4,468,000 $ 3,821,000
================ ================
Included in accompanying condensed consolidated
balance sheets under the following captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 5,015,000 $ 4,612,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (547,000) (791,000)
---------------- ----------------
$ 4,468,000 $ 3,821,000
================ ================
Changes in prior estimates did not have a material effect on reported
net income in the three months ended January 31, 2005 and 2004.
7
INVENTORIES
JANUARY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Finished products $ 26,289,000 $ 24,222,000
Work in process 10,214,000 9,597,000
Materials, parts, assemblies and supplies 15,947,000 14,201,000
---------------- ----------------
Total inventories $ 52,450,000 $ 48,020,000
================ ================
Inventories related to long-term contracts were not significant as of
January 31, 2005 and October 31, 2004.
PROPERTY, PLANT AND EQUIPMENT
JANUARY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Land $ 2,157,000 $ 2,157,000
Buildings and improvements 20,188,000 20,007,000
Machinery, equipment and tooling 56,305,000 55,869,000
Construction in progress 1,949,000 2,239,000
---------------- ----------------
80,599,000 80,272,000
Less: Accumulated depreciation and amortization (40,475,000) (39,714,000)
---------------- ----------------
Property, plant and equipment, net $ 40,124,000 $ 40,558,000
================ ================
In January 2005, the Company received proceeds of $3,520,000 from the
sale of a vacated building and associated land previously classified as held for
sale. The $3,468,000 carrying value of the property was included within other
assets in the Company's Consolidated Balance Sheet as of October 31, 2004.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (FSG)
and the Electronic Technologies Group (ETG). Changes in the carrying amount of
goodwill by operating segment for the three months ended January 31, 2005 are as
follows:
SEGMENT
------------------------------- CONSOLIDATED
FSG ETG TOTALS
-------------- -------------- --------------
Balances as of October 31, 2004 $ 120,288,000 $ 96,386,000 $ 216,674,000
Goodwill acquired during the period -- 11,558,000 11,558,000
Adjustments to goodwill 16,000 -- 16,000
-------------- -------------- --------------
Balances as of January 31, 2005 $ 120,304,000 $ 107,944,000 $ 228,248,000
============== ============== ==============
The goodwill acquired during the period is a result of the acquisition
described in Note 2, Acquisition. Adjustments to goodwill consist primarily of
contingent purchase price payments to previous owners of acquired businesses.
8
Other intangible assets are recorded within other assets in the
Company's Condensed Consolidated Balance Sheets. Other intangible assets subject
to amortization consist primarily of licenses, non-compete covenants and
patents. The gross carrying amount and accumulated amortization of other
intangible assets was $2,286,000 and $301,000, respectively, as of January 31,
2005. Amortization expense of other intangible assets for the three months ended
January 31, 2005 was $42,000. Amortization expense of other intangible assets
for the fiscal year ending October 31, 2005 is estimated to be $217,000.
Amortization expense for each of the next five fiscal years is estimated to be
$226,000 in fiscal 2006, $225,000 in fiscal 2007, $225,000 in fiscal 2008,
$210,000 in fiscal 2009 and $210,000 in fiscal 2010.
5. LONG-TERM DEBT
Long-term debt consists of:
JANUARY 31, 2005 OCTOBER 31, 2004
---------------- ----------------
Borrowings under revolving credit facility $ 29,000,000 $ 16,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 135,000 149,000
---------------- ----------------
31,115,000 18,129,000
Less: Current maturities of long-term debt (58,000) (58,000)
---------------- ----------------
$ 31,057,000 $ 18,071,000
================ ================
As of January 31, 2005 and October 31, 2004, the Company had a total of
$29 million and $16 million, respectively, borrowed under its $120 million
revolving credit facility at weighted average interest rates of 3.5% and 2.9%,
respectively. The revolving credit facility contains both financial and
non-financial covenants. As of January 31, 2005, the Company believes it is in
compliance with all such covenants.
The interest rates on the Series 1988 industrial development revenue
bonds were 1.9% and 1.8% as of January 31, 2005 and October 31, 2004,
respectively.
6. SHAREHOLDERS' EQUITY
Changes in consolidated shareholders' equity for the three months ended
January 31, 2005 are as follows:
CLASS A CAPITAL IN
COMMON COMMON EXCESS OF RETAINED
STOCK STOCK PAR VALUE EARNINGS
------------ ------------ ------------ ------------
Balances as of October 31, 2004 $ 99,000 $ 143,000 $187,950,000 $ 59,210,000
Net income -- -- -- 4,428,000
Cash dividend ($.025 per share) -- -- -- (610,000)
Tax benefit from stock option exercises -- -- 2,538,000 --
Proceeds from stock option exercises 1,000 1,000 486,000 --
Other -- 1,000 1,000 2,000
------------ ------------ ------------ ------------
Balances as of January 31, 2005 $ 100,000 $ 145,000 $190,975,000 $ 63,030,000
============ ============ ============ ============
9
7. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the three months ended January 31, 2005 and 2004
includes approximately $2.4 million and $2.1 million, respectively, of new
product research and development expenses. The expenses are net of
reimbursements pursuant to research and development cooperation and joint
venture agreements, which were not significant.
8. RESTRUCTURING EXPENSES
During the first quarter of fiscal 2005, the Company completed the
restructuring activities initiated in fiscal 2004 within certain subsidiaries of
the Flight Support Group that provide repair and overhaul services.
The following table details the restructuring activity that occurred in
fiscal 2005:
MANAGEMENT MOVING COSTS AND CONTRACT
HIRING/RELOCATION OTHER ASSOCIATED TERMINATION
RELATED EXPENSES EXPENSES COSTS TOTALS
----------------- ---------------- ------------ ------------
Balances as of October 31, 2004 $ 64,000 $ 111,000 $ 71,000 $ 246,000
Additional charges and reversals 69,000 (47,000) -- 22,000
Cash payments (133,000) (64,000) (71,000) (268,000)
----------------- ---------------- ------------ ------------
Balances as of January 31, 2005 $ -- $ -- $ -- $ --
================= ================ ============ ============
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for the three months ended January 31:
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2005 2004
-------------- --------------
Numerator:
Net income $ 4,428,000 $ 3,241,000
============== ==============
Denominator:
Weighted average common shares outstanding - basic 24,328,337 23,745,244
Effect of dilutive stock options 1,885,240 1,887,755
-------------- --------------
Weighted average common shares outstanding - diluted 26,213,577 25,632,999
============== ==============
Net income per share - basic $ .18 $ .14
Net income per share - diluted $ .17 $ .13
Anti-dilutive stock options excluded 220,173 550,595
10
10. OPERATING SEGMENTS
Information on the Company's two operating segments, the Flight Support
Group (FSG), consisting of HEICO Aerospace Holdings Corp. and its subsidiaries,
and the Electronic Technologies Group (ETG), consisting of HEICO Electronic
Technologies Corp. and its subsidiaries, for the three months ended January 31,
2005 and 2004, respectively, is as follows:
OTHER,
SEGMENT PRIMARILY
------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
-------------- -------------- -------------- --------------
For the three months ended January 31, 2005:
Net sales $ 42,263,000 $ 14,774,000 $ (56,000) $ 56,981,000
Depreciation and amortization 1,136,000 484,000 104,000 1,724,000
Operating income 7,598,000 2,462,000 (1,399,000) 8,661,000
Capital expenditures 734,000 208,000 2,000 944,000
For the three months ended January 31, 2004:
Net sales $ 34,257,000 $ 11,939,000 $ (45,000) $ 46,151,000
Depreciation and amortization 1,087,000 405,000 117,000 1,609,000
Operating income 5,326,000 2,484,000 (1,237,000) 6,573,000
Capital expenditures 626,000 518,000 3,000 1,147,000
The total assets held by each operating segment as of January 31, 2005
and October 31, 2004 is as follows:
SEGMENT OTHER,
------------------------------- PRIMARILY CONSOLIDATED
FSG ETG CORPORATE TOTALS
-------------- -------------- -------------- --------------
Total assets as of January 31, 2005 $ 212,710,000 $ 151,473,000 $ 16,793,000 $ 380,976,000
Total assets as of October 31, 2004 212,615,000 136,860,000 14,780,000 364,255,000
11. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has arranged for standby letters of credit aggregating $1.8
million to meet the security requirement of its insurance company for potential
workers' compensation claims. These letters of credit are supported by the
Company's $120 million revolving credit facility. In addition, the Company's
industrial development revenue bonds are secured by a $2.0 million letter of
credit expiring April 2008 and a mortgage on the related properties pledged as
collateral.
The following table sets forth the changes in the Company's product
warranty liability for the three months ended January 31, 2005 and 2004,
respectively:
2005 2004
---------- ----------
Balances as of beginning of fiscal year $ 129,000 $ 633,000
Change in estimate of warranty liability -- (491,000)
Accruals for warranties 130,000 34,000
Warranty claims settled (67,000) (33,000)
---------- ----------
Balances as of January 31, $ 192,000 $ 143,000
========== ==========
11
As part of the agreement to acquire an 80% interest in Sierra Microwave
Technology, Inc. the Company has the right to purchase the minority interests in
approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
As part of the agreement to purchase Connectronics (see Note 2,
Acquisition), the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in the aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition.
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 operation or financial position.
12. SUBSEQUENT EVENT
In February 2005, the Company, through its HEICO Electronic Technologies
Corp. subsidiary, acquired substantially all of the assets of a company that
engages in the design and manufacture of power supplies for the laser industry.
The purchase price was not significant to the Company's consolidated financial
statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements and notes thereto included herein. The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates if different assumptions were used or different events
ultimately transpire.
The Company's critical accounting policies, some of which require
management to make judgments about matters that are inherently uncertain, are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the year ended October
31, 2004.
The Company has two operating segments: the Flight Support Group (FSG),
consisting of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and its
subsidiaries, and the Electronic Technologies Group (ETG), consisting of HEICO
Electronic Technologies Corp. and its subsidiaries.
13
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations,
net sales and operating income by segment, and the percentage of net sales
represented by the respective items in the Company's Condensed Consolidated
Statements of Operations.
THREE MONTHS ENDED JANUARY 31,
---------------------------------
2005 2004
-------------- --------------
Net sales $ 56,981,000 $ 46,151,000
-------------- --------------
Cost of sales 36,701,000 30,615,000
Selling, general and administrative expenses 11,619,000 8,963,000
-------------- --------------
Total operating costs and expenses 48,320,000 39,578,000
-------------- --------------
Operating income $ 8,661,000 $ 6,573,000
============== ==============
Net sales by segment:
Flight Support Group $ 42,263,000 $ 34,257,000
Electronic Technologies Group 14,774,000 11,939,000
Intersegment sales (56,000) (45,000)
-------------- --------------
$ 56,981,000 $ 46,151,000
============== ==============
Operating income by segment:
Flight Support Group $ 7,598,000 $ 5,326,000
Electronic Technologies Group 2,462,000 2,484,000
Other, primarily corporate (1,399,000) (1,237,000)
-------------- --------------
$ 8,661,000 $ 6,573,000
============== ==============
Net sales 100.0% 100.0%
Gross profit 35.6% 33.7%
Selling, general and administrative expenses 20.4% 19.4%
Operating income 15.2% 14.2%
Interest expense 0.4% 0.7%
Interest income and other income (expense) 0.1% --
Income tax expense 5.1% 4.7%
Minority interests' share of income 2.0% 1.8%
Net income 7.8% 7.0%
14
COMPARISON OF FIRST QUARTER OF FISCAL 2005 TO FIRST QUARTER OF FISCAL 2004
Net Sales
Net sales for the first quarter of fiscal 2005 increased by 23% to $57.0
million, as compared to net sales of $46.2 million for the first quarter of
fiscal 2004. The increase in net sales reflects an increase of $8.0 million (a
23% increase) to $42.3 million in sales within the FSG, and an increase of $2.8
million (a 24% increase) to $14.8 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 continued
recovery within the commercial airline industry, as well as increased sales of
new products. The ETG's sales increase reflects the acquisition of Connectronics
(see Note 2, Acquisition, of the Notes to Condensed Consolidated Financial
Statements) and increased demand for certain products.
Gross Profits and Operating Expenses
The Company's gross profit margin improved to 35.6% for the first
quarter of fiscal 2005 as compared to 33.7% for the first quarter of fiscal
2004, reflecting higher margins within the FSG offset by a decrease in the ETG
margin. The FSG's gross profit margin increase was due principally to improved
operating efficiencies within the FSG. The ETG's gross profit margin decrease
was primarily due to lower sales of higher margin products. Consolidated cost of
sales for the first quarter of fiscal 2005 and 2004 includes approximately
$2.4 million and $2.1 million, respectively, of new product research and
development expenses.
SG&A expenses were $11.6 million and $9.0 million for the first quarter
of fiscal 2005 and fiscal 2004, respectively. The increase in SG&A expenses is
mainly due to higher sales within the FSG and ETG. As a percentage of net sales,
SG&A expenses increased to 20.4% for the first quarter of fiscal 2005 compared
to 19.4% for the first quarter of fiscal 2004 primarily as a result of higher
personnel costs.
Operating Income
Operating income of $8.7 million for the first quarter of fiscal 2005
was 32% higher than operating income of $6.6 million for the first quarter of
fiscal 2004. The improvement in operating income reflects a $2.3 million
increase in operating income of the FSG from $5.3 million for the first quarter
of fiscal 2004 to $7.6 million for the first quarter to fiscal 2005 partially
offset by a $0.2 million increase in Corporate expenses. Operating income of the
ETG was $2.5 million for both the first quarter of fiscal 2005 and 2004. As a
percentage of net sales, operating income increased from 14.2% in the first
quarter of fiscal 2004 to 15.2% in the first quarter of fiscal 2005. The
increase in operating income as a percentage of net sales reflects an increase
in the FSG's operating income as a percentage of net sales from 15.5% in the
first quarter of fiscal 2004 to 18.0% in the first quarter of fiscal 2005 and a
decrease in the ETG's operating income as a percentage of net sales from 20.8%
in the first quarter of fiscal 2004 to 16.7% in the first quarter of fiscal
2005. The increase in the FSG's operating income as a percentage of net sales
reflects the improved gross margins discussed previously. The decrease in the
ETG's operating income as a percentage of net sales reflects the decreased gross
margins discussed previously.
15
Interest Expense
Interest expense decreased to $233,000 in the first quarter of fiscal
2005 from $331,000 in the first quarter of fiscal 2004. The decrease was
principally due to a lower weighted average balance outstanding under the
revolving credit facility in the first quarter of fiscal 2005, partially offset
by higher interest rates.
Interest and Other Income (Expense)
Interest and other income (expense) in the first quarter of fiscal 2005
and fiscal 2004 were not material.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries relates
to the minority interests held in HEICO Aerospace and the 20% minority interest
held in Sierra Microwave Technology, LLC. The increase from the first quarter
of fiscal 2004 to the first quarter of fiscal 2005 was primarily attributable to
higher earnings of the FSG.
Net Income
The Company's net income was $4.4 million, or $0.17 per diluted share,
for the first quarter of fiscal 2005 compared to $3.2 million, or $0.13 per
diluted share, for the first quarter of fiscal 2004 reflecting the increased
operating income referenced above.
OUTLOOK
The Company reported increased sales in its two business segments
reflecting both organic growth and growth through acquisitions. The Company
believes that the FSG's operating margins will continue to show year over year
improvement during the balance of fiscal 2005 while operating margins in the ETG
are expected to return to levels approximating those experienced in fiscal 2004.
Based on the current strengthening of the markets in which the Company
participates and the Company's continued success in introducing new products and
services, the Company continues to target growth in fiscal 2005 sales and net
income over fiscal 2004 results.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities
and available borrowings under its revolving credit facility will be sufficient
to fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $4.0 million for the first
three months of fiscal 2005, consisting primarily of net income of $4.4 million,
a tax benefit on stock option exercises of $2.5 million, depreciation and
amortization of $1.7 million, minority interests' share of income of
consolidated subsidiaries of $1.1 million, a deferred income tax provision of
$1.1 million, and an increase in net operating assets of $6.9 million. The
increase in net operating assets (current assets used in operating activities
net of current liabilities) primarily reflects the payment of income taxes that
were accrued as of October 31, 2004 and a higher investment in inventories
required to meet increased sales demand and associated with new product
offerings. Net cash provided by operating activities decreased from $7.7 million
for the first three months of fiscal 2004 principally as a result of the
increase in net operating assets referenced above.
Investing Activities
Net cash used in investing activities during the first three months of
fiscal 2005 related primarily to acquisitions and related costs (principally
Connectronics) of $14.7 million and capital expenditures totaling $0.9 million,
partially offset by proceeds of $3.5 million from the sale of a building held
for sale (see Note 3, Selected Financial Statement Information - Property, Plant
and Equipment).
Financing Activities
Net cash provided by financing activities during the first three months
of fiscal 2005 primarily related to net borrowings of $13.0 million on the
Company's revolving credit facility and proceeds from stock option exercises of
$0.5 million, partially offset by the payment of $0.6 million in cash dividends
on the Company's common stock. The net borrowings on the revolving credit
facility reflect $19.0 million borrowed to fund the Connectronics acquisition,
to make required income tax payments and for other working capital needs, net of
repayments of $6.0 million.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating
$1.8 million to meet the
17
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., the Company has the right to purchase the minority interests
in approximately ten years, or sooner under certain conditions, and the minority
holders have the right to cause the Company to purchase their interests
commencing in approximately five years, or sooner under certain conditions.
As part of the agreement to purchase Connectronics (See Note 2,
Acquisition), the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in the aggregate should Connectronics meet
certain earnings objectives during the first four years following the
acquisition.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"),
"Inventory Costs, an amendment of ARB No. 43, Chapter 4". SFAS No. 151 requires
the allocation of fixed production overhead costs be based on the normal
capacity of the production facilities and unallocated overhead costs recognized
as an expense in the period incurred. The Statement also clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the
provisions of SFAS No. 151, but does not currently believe the adoption of the
Statement will have a material effect on its results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". 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 beginning after June 15, 2005. Accordingly, the Company will adopt SFAS
No. 123(R) in its fourth quarter of fiscal 2005. The Company is currently
evaluating the provisions of SFAS No. 123(R) and has not yet determined the
impact that this Statement will have on its results of operations or financial
position.
In December 2004, the FASB issued Staff Position No. FAS 109-1
("FSP FAS No. 109-1"), "Application of FASB Statement No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004". FSP FAS No. 109-1 states that
qualified production activities should be accounted for as a special deduction
under SFAS No. 109 and not be treated as a rate reduction. Accordingly, the
special
18
deduction has no effect on the Company's deferred tax assets and liabilities
existing as of the enactment date. The Company is currently evaluating the
impact of the American Jobs Creation Act of 2004, which will allow the Company
to claim a deduction from taxable income attributable to qualified domestic
production activities beginning in fiscal 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 is based
on the principle that exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The Statement eliminates the
exception of nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e. the future cash flows of the entity are not expected
to change significantly as a result of the exchange). The provisions of SFAS No.
153 are effective as of the first reporting period beginning after June 15,
2005. The Company does not expect the adoption of SFAS No. 153 to have a
material effect on its results of operations or financial position.
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 statement contained herein that are not clearly historical in
nature may be forward-looking and the words "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward looking
statements. Any forward-looking statements contained herein, in press releases,
written statements or other documents filed with the Securities and Exchange
Commission or in communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and conference
calls, concerning our operations, economic performance and financial condition
are subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed in or implied by those statements. Factors that could cause such
differences, but are not limited to: lower demand for commercial air travel or
airline fleet changes, which could cause lower demand for our goods and
services; product specification costs and requirements, which could cause and
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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Substantially all of the Company's borrowings bear interest at floating
interest rates. Based on the outstanding debt balance as of January 31, 2005, a
hypothetical 10% increase in interest rates would increase the Company's
interest expense by approximately $106,000 on an annual basis.
20
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this quarterly
report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not incur any unregistered sales of its equity
securities or repurchase any of its equity securities during the first quarter
of fiscal 2005.
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
------- ------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer. *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer. *
32.1 Section 1350 Certification of Chief Executive
Officer. **
32.2 Section 1350 Certification of Chief Financial
Officer. **
---------------
* Filed herewith.
** Furnished herewith.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEICO CORPORATION
Date: March 1, 2005 By: /s/ THOMAS S. IRWIN
-------------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.