HEICO CORP - Quarter Report: 2010 July (Form 10-Q)
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 July 31,
2010
OR
|
o
|
TRANSACTION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ______
to _______
Commission
File Number: 1-4604
HEICO
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Florida
|
65-0341002
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
|
|
3000
Taft Street, Hollywood, Florida
|
33021
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(954)
987-4000
(Registrant’s
telephone number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No
o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes x No
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated filer o Non-accelerated
filer o Smaller
reporting company o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x
The number of shares outstanding of
each of the registrant’s classes of common stock as of August 27, 2010 is as
follows:
|
Common
Stock, $.01 par value
|
13,126,005
shares
|
|
Class
A Common Stock, $.01 par value
|
19,817,872
shares
|
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
|
Page
|
|||
|
Part
I.
|
Financial
Information:
|
||
|
|
|||
|
Part
II.
|
Other
Information:
|
||
1
HEICO
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS – UNAUDITED
|
July
31, 2010
|
October
31, 2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 11,037,000 | $ | 7,167,000 | ||||
|
Accounts
receivable, net
|
84,078,000 | 77,864,000 | ||||||
|
Inventories,
net
|
140,712,000 | 137,585,000 | ||||||
|
Prepaid
expenses and other current assets
|
5,364,000 | 4,290,000 | ||||||
|
Deferred
income taxes
|
18,534,000 | 16,671,000 | ||||||
|
Total
current assets
|
259,725,000 | 243,577,000 | ||||||
|
|
||||||||
|
Property,
plant and equipment, net
|
59,803,000 | 60,528,000 | ||||||
|
Goodwill
|
380,709,000 | 365,243,000 | ||||||
|
Intangible
assets, net
|
51,949,000 | 41,588,000 | ||||||
|
Other
assets
|
25,853,000 | 21,974,000 | ||||||
|
Total
assets
|
$ | 778,039,000 | $ | 732,910,000 | ||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 199,000 | $ | 237,000 | ||||
|
Trade
accounts payable
|
28,290,000 | 26,978,000 | ||||||
|
Accrued
expenses and other current liabilities
|
38,292,000 | 36,978,000 | ||||||
|
Income
taxes payable
|
1,196,000 | 1,320,000 | ||||||
|
Total
current liabilities
|
67,977,000 | 65,513,000 | ||||||
|
Long-term
debt, net of current maturities
|
47,093,000 | 55,194,000 | ||||||
|
Deferred
income taxes
|
43,126,000 | 41,340,000 | ||||||
|
Other
long-term liabilities
|
27,836,000 | 23,268,000 | ||||||
|
Total
liabilities
|
186,032,000 | 185,315,000 | ||||||
|
Commitments
and contingencies (Note 11)
|
||||||||
|
Redeemable
noncontrolling interests (Note 12)
|
56,053,000 | 56,937,000 | ||||||
|
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
|
¾ | ¾ | ||||||
|
Common
Stock, $.01 par value per share; 30,000,000 shares
authorized
|
||||||||
|
13,126,005
and 13,011,426 shares issued and outstanding, respectively
|
131,000 | 104,000 | ||||||
|
Class
A Common Stock, $.01 par value per share; 30,000,000
|
||||||||
|
shares
authorized; 19,815,122 and 19,641,543 shares issued
|
||||||||
|
and
outstanding, respectively
|
198,000 | 157,000 | ||||||
|
Capital
in excess of par value
|
227,215,000 | 224,625,000 | ||||||
|
Accumulated
other comprehensive loss
|
(498,000 | ) | (1,381,000 | ) | ||||
|
Retained
earnings
|
225,206,000 | 189,485,000 | ||||||
|
Total
HEICO shareholders’ equity
|
452,252,000 | 412,990,000 | ||||||
|
Noncontrolling
interests
|
83,702,000 | 77,668,000 | ||||||
|
Total
shareholders’ equity
|
535,954,000 | 490,658,000 | ||||||
|
Total
liabilities and equity
|
$ | 778,039,000 | $ | 732,910,000 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
2
HEICO
CORPORATION AND SUBSIDIARIES
|
Nine
months ended July 31,
|
Three
months ended July 31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
sales
|
$ | 447,650,000 | $ | 394,689,000 | $ | 158,270,000 | $ | 134,086,000 | ||||||||
|
Operating
costs and expenses:
|
||||||||||||||||
|
Cost
of sales
|
286,351,000 | 262,456,000 | 100,717,000 | 88,275,000 | ||||||||||||
|
Selling,
general and administrative expenses
|
81,805,000 | 68,039,000 | 28,560,000 | 24,389,000 | ||||||||||||
|
Total
operating costs and expenses
|
368,156,000 | 330,495,000 | 129,277,000 | 112,664,000 | ||||||||||||
|
Operating
income
|
79,494,000 | 64,194,000 | 28,993,000 | 21,422,000 | ||||||||||||
|
Interest
expense
|
(422,000 | ) | (484,000 | ) | (136,000 | ) | (177,000 | ) | ||||||||
|
Other
income (expense)
|
392,000 | 186,000 | (31,000 | ) | 184,000 | |||||||||||
|
Income
before income taxes and noncontrolling
|
||||||||||||||||
|
interests
|
79,464,000 | 63,896,000 | 28,826,000 | 21,429,000 | ||||||||||||
|
Income
tax expense
|
27,000,000 | 19,331,000 | 9,300,000 | 6,511,000 | ||||||||||||
|
Net
income from consolidated operations
|
52,464,000 | 44,565,000 | 19,526,000 | 14,918,000 | ||||||||||||
|
Less:
Net income attributable to noncontrolling
|
||||||||||||||||
|
interests
|
13,168,000 | 11,575,000 | 4,596,000 | 3,786,000 | ||||||||||||
|
Net
income attributable to HEICO
|
$ | 39,296,000 | $ | 32,990,000 | $ | 14,930,000 | $ | 11,132,000 | ||||||||
|
Net
income per share attributable to HEICO
|
||||||||||||||||
|
shareholders:
|
||||||||||||||||
|
Basic
|
$ | 1.20 | $ | 1.01 | $ | .45 | $ | .34 | ||||||||
|
Diluted
|
$ | 1.16 | $ | .98 | $ | .44 | $ | .33 | ||||||||
|
|
||||||||||||||||
|
Weighted
average number of common shares
|
||||||||||||||||
|
outstanding:
|
||||||||||||||||
|
Basic
|
32,793,137 | 32,799,101 | 32,917,530 | 32,603,643 | ||||||||||||
|
Diluted
|
33,753,414 | 33,816,980 | 33,797,471 | 33,632,863 | ||||||||||||
|
|
||||||||||||||||
|
Cash
dividends per share
|
$ | .108 | $ | .096 | $ | .060 | $ | .048 | ||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
HEICO
CORPORATION AND SUBSIDIARIES
AND
COMPREHENSIVE INCOME – UNAUDITED
|
HEICO
Shareholders' Equity
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Redeemable
|
Class
A
|
Capital
in
|
Other
|
Total
|
||||||||||||||||||||||||||||
|
Noncontrolling
|
Common
|
Common
|
Excess
of
|
Comprehensive
|
Retained
|
Noncontrolling
|
Shareholders'
|
|||||||||||||||||||||||||
|
Interests
|
Stock
|
Stock
|
Par
Value
|
Loss
|
Earnings
|
Interests
|
Equity
|
|||||||||||||||||||||||||
|
Balances
as of October 31, 2009
|
||||||||||||||||||||||||||||||||
|
(as
previously reported)
|
$ | ― | $ | 104,000 | $ | 157,000 | $ | 224,625,000 | $ | (1,381,000 | ) | $ | 234,348,000 | $ | ― | $ | 457,853,000 | |||||||||||||||
|
Retrospective
adjustments related to
|
||||||||||||||||||||||||||||||||
|
adoption
of accounting guidance for
|
||||||||||||||||||||||||||||||||
|
noncontrolling
interests
|
56,937,000 | — | — | — | — | (44,863,000 | ) | 77,668,000 | 32,805,000 | |||||||||||||||||||||||
|
Balances
as of October 31, 2009
|
||||||||||||||||||||||||||||||||
|
(as
adjusted)
|
56,937,000 | 104,000 | 157,000 | 224,625,000 | (1,381,000 | ) | 189,485,000 | 77,668,000 | 490,658,000 | |||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
7,134,000 | — | — | — | — | 39,296,000 | 6,034,000 | 45,330,000 | ||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
— | — | — | — | 877,000 | — | — | 877,000 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
7,134,000 | — | — | — | 877,000 | 39,296,000 | 6,034,000 | 46,207,000 | ||||||||||||||||||||||||
|
Cash
dividends ($.108 per share)
|
— | — | — | — | — | (3,546,000 | ) | — | (3,546,000 | ) | ||||||||||||||||||||||
|
Five-for-four
common stock split
|
— | 26,000 | 40,000 | (66,000 | ) | — | (68,000 | ) | — | (68,000 | ) | |||||||||||||||||||||
|
Proceeds
from stock option exercises
|
— | 1,000 | 1,000 | 1,465,000 | — | — | — | 1,467,000 | ||||||||||||||||||||||||
|
Tax
benefit from stock option exercises
|
— | — | — | 951,000 | — | — | — | 951,000 | ||||||||||||||||||||||||
|
Stock
option compensation expense
|
— | — | — | 921,000 | — | — | — | 921,000 | ||||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
(7,184,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
|
Acquisitions
of noncontrolling interests
|
(795,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
|
Redemptions
of common stock related to
|
||||||||||||||||||||||||||||||||
|
stock
option exercises
|
— | — | — | (681,000 | ) | — | — | — | (681,000 | ) | ||||||||||||||||||||||
|
Adjustments
to redemption amount of
|
||||||||||||||||||||||||||||||||
|
redeemable
noncontrolling interests
|
(39,000 | ) | — | — | — | — | 39,000 | — | 39,000 | |||||||||||||||||||||||
|
Other
|
— | — | — | — | 6,000 | — | — | 6,000 | ||||||||||||||||||||||||
|
Balances
as of July 31, 2010
|
$ | 56,053,000 | $ | 131,000 | $ | 198,000 | $ | 227,215,000 | $ | (498,000 | ) | $ | 225,206,000 | $ | 83,702,000 | $ | 535,954,000 | |||||||||||||||
|
HEICO
Shareholders' Equity
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Redeemable
|
Class
A
|
Capital
in
|
Other
|
Total
|
||||||||||||||||||||||||||||
|
Noncontrolling
|
Common
|
Common
|
Excess
of
|
Comprehensive
|
Retained
|
Noncontrolling
|
Shareholders'
|
|||||||||||||||||||||||||
|
Interests
|
Stock
|
Stock
|
Par
Value
|
Loss
|
Earnings
|
Interests
|
Equity
|
|||||||||||||||||||||||||
|
Balances
as of October 31, 2008
|
||||||||||||||||||||||||||||||||
|
(as
previously reported)
|
$ | ― | $ | 106,000 | $ | 158,000 | $ | 229,443,000 | $ | (4,819,000 | ) | $ | 192,872,000 | $ | ― | $ | 417,760,000 | |||||||||||||||
|
Retrospective
adjustments related to
|
||||||||||||||||||||||||||||||||
|
adoption
of accounting guidance for
|
||||||||||||||||||||||||||||||||
|
noncontrolling
interests
|
48,736,000 | — | — | — | — | (35,896,000 | ) | 71,138,000 | 35,242,000 | |||||||||||||||||||||||
|
Balances
as of October 31, 2008
|
||||||||||||||||||||||||||||||||
|
(as
adjusted)
|
48,736,000 | 106,000 | 158,000 | 229,443,000 | (4,819,000 | ) | 156,976,000 | 71,138,000 | 453,002,000 | |||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
5,938,000 | — | — | — | — | 32,990,000 | 5,637,000 | 38,627,000 | ||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
— | — | — | — | 2,859,000 | — | — | 2,859,000 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
5,938,000 | — | — | — | 2,859,000 | 32,990,000 | 5,637,000 | 41,486,000 | ||||||||||||||||||||||||
|
Repurchases
of common stock
|
— | (2,000 | ) | (2,000 | ) | (8,094,000 | ) | — | — | — | (8,098,000 | ) | ||||||||||||||||||||
|
Cash
dividends ($.096 per share)
|
— | — | — | — | — | (3,150,000 | ) | — | (3,150,000 | ) | ||||||||||||||||||||||
|
Proceeds
from stock option exercises
|
— | — | 1,000 | 821,000 | — | — | — | 822,000 | ||||||||||||||||||||||||
|
Tax
benefit from stock option exercises
|
— | — | — | 1,889,000 | — | — | — | 1,889,000 | ||||||||||||||||||||||||
|
Stock
option compensation expense
|
— | — | — | 15,000 | — | — | — | 15,000 | ||||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
(5,533,000 | ) | — | — | — | — | — | (461,000 | ) | (461,000 | ) | |||||||||||||||||||||
|
Acquisitions
of noncontrolling interests
|
(10,015,000 | ) | — | — | — | — | 6,845,000 | — | 6,845,000 | |||||||||||||||||||||||
|
Noncontrolling
interests assumed
|
||||||||||||||||||||||||||||||||
|
related
to acquistion
|
7,505,000 | — | — | — | — | (4,202,000 | ) | — | (4,202,000 | ) | ||||||||||||||||||||||
|
Adjustments
to redemption amount of
|
||||||||||||||||||||||||||||||||
|
redeemable
noncontrolling interests
|
971,000 | — | — | — | — | (971,000 | ) | — | (971,000 | ) | ||||||||||||||||||||||
|
Other
|
— | — | — | — | 164,000 | 1,000 | — | 165,000 | ||||||||||||||||||||||||
|
Balances
as of July 31, 2009
|
$ | 47,602,000 | $ | 104,000 | $ | 157,000 | $ | 224,074,000 | $ | (1,796,000 | ) | $ | 188,489,000 | $ | 76,314,000 | $ | 487,342,000 | |||||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
HEICO
CORPORATION AND SUBSIDIARIES
|
Nine
months ended July 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Operating
Activities:
|
||||||||
|
Net
income from consolidated operations
|
$ | 52,464,000 | $ | 44,565,000 | ||||
|
Adjustments
to reconcile net income from consolidated operations
|
||||||||
|
to
net cash provided by operating activities:
|
||||||||
|
Depreciation
and amortization
|
13,578,000 | 10,951,000 | ||||||
|
Impairment
of intangible assets
|
281,000 | — | ||||||
|
Deferred
income tax benefit
|
(80,000 | ) | (1,376,000 | ) | ||||
|
Tax
benefit from stock option exercises
|
951,000 | 1,889,000 | ||||||
|
Excess
tax benefit from stock option exercises
|
(669,000 | ) | (1,572,000 | ) | ||||
|
Stock
option compensation expense
|
921,000 | 15,000 | ||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||
|
(Increase)
decrease in accounts receivable
|
(2,988,000 | ) | 20,207,000 | |||||
|
Decrease
(increase) in inventories
|
3,625,000 | (9,282,000 | ) | |||||
|
Increase
in prepaid expenses and other current assets
|
(1,051,000 | ) | (2,271,000 | ) | ||||
|
Decrease
in trade accounts payable
|
(177,000 | ) | (2,995,000 | ) | ||||
|
Increase
(decrease) in accrued expenses and other current
liabilities
|
1,744,000 | (15,776,000 | ) | |||||
|
Decrease
in income taxes payable
|
(794,000 | ) | (1,080,000 | ) | ||||
|
Other
|
116,000 | 444,000 | ||||||
|
Net
cash provided by operating activities
|
67,921,000 | 43,719,000 | ||||||
|
|
||||||||
|
Investing
Activities:
|
||||||||
|
Acquisitions,
net of cash acquired
|
(39,061,000 | ) | (34,562,000 | ) | ||||
|
Capital
expenditures
|
(6,743,000 | ) | (7,784,000 | ) | ||||
|
Other
|
(18,000 | ) | 73,000 | |||||
|
Net
cash used in investing activities
|
(45,822,000 | ) | (42,273,000 | ) | ||||
|
|
||||||||
|
Financing
Activities:
|
||||||||
|
Payments
on revolving credit facility
|
(45,000,000 | ) | (49,000,000 | ) | ||||
|
Borrowings
on revolving credit facility
|
37,000,000 | 68,000,000 | ||||||
|
Acquisitions
of noncontrolling interests
|
(795,000 | ) | (11,268,000 | ) | ||||
|
Repurchases
of common stock
|
— | (8,098,000 | ) | |||||
|
Distributions
to noncontrolling interests
|
(7,184,000 | ) | (5,994,000 | ) | ||||
|
Cash
dividends paid
|
(3,614,000 | ) | (3,150,000 | ) | ||||
|
Redemptions
of common stock related to stock option exercises
|
(681,000 | ) | — | |||||
|
Proceeds
from stock option exercises
|
1,467,000 | 822,000 | ||||||
|
Excess
tax benefit from stock option exercises
|
669,000 | 1,572,000 | ||||||
|
Other
|
(152,000 | ) | (158,000 | ) | ||||
|
Net
cash used in financing activities
|
(18,290,000 | ) | (7,274,000 | ) | ||||
|
|
||||||||
|
Effect
of exchange rate changes on cash
|
61,000 | 214,000 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
3,870,000 | (5,614,000 | ) | |||||
|
Cash
and cash equivalents at beginning of year
|
7,167,000 | 12,562,000 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 11,037,000 | $ | 6,948,000 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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
(collectively, “HEICO,” or 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, 2009. The
October 31, 2009 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 principally of 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 nine months ended July
31, 2010 are not necessarily indicative of the results which may be expected for
the entire fiscal year.
Stock Split
In March 2010, the Company’s Board of
Directors declared a 5-for-4 stock split on both classes of the Company’s common
stock. The stock split was effected as of April 27, 2010 in the form
of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information has been
adjusted retrospectively to give effect to the 5-for-4 stock split.
Noncontrolling
Interests
Effective
November 1, 2009, the Company adopted new accounting guidance that requires the
recognition of certain noncontrolling interests (previously referred to as
minority interests) as a separate component within equity in the consolidated
balance sheet. It also requires the amount of consolidated net income
attributable to the parent and the noncontrolling interests be clearly
identified and presented within the consolidated statement of
operations. The adoption of this new guidance has affected the
presentation of noncontrolling interests in the Company’s condensed consolidated
financial statements on a retrospective basis. For example, under
this guidance, “Net income from consolidated operations” is comparable to what
was previously presented as “Income before minority interests” and “Net income
attributable to HEICO” is comparable to what was previously presented as “Net
income.” Further, acquisitions of noncontrolling interests are
considered a financing activity under the new accounting guidance and are no
longer presented as an investing activity.
6
Effective November 1, 2009, the Company
also adopted new accounting guidance that affects the financial statement
classification and measurement of redeemable noncontrolling
interests. As further detailed in Note 15, Commitments and
Contingencies, of the Notes to Consolidated Financial Statements of the
Company’s Annual Report on Form 10-K for the year ended October 31, 2009, the
holders of equity interests in certain of the Company’s subsidiaries have rights
(“Put Rights”) that require the Company to provide cash consideration for their
equity interests (the “Redemption Amount”) at fair value or at a formula that
management intended to reasonably approximate fair value based solely on a
multiple of future earnings over a measurement period. The Put Rights
are embedded in the shares owned by the noncontrolling interest holders and are
not freestanding. Previously, the Company recorded such redeemable
noncontrolling interests at historical cost plus an allocation of subsidiary
earnings based on ownership interest, less dividends paid to the noncontrolling
interest holders. Effective November 1, 2009, the Company adjusted
its redeemable noncontrolling interests in accordance with this new accounting
guidance to the higher of their carrying cost or management’s estimate of the
Redemption Amount with a corresponding decrease to retained earnings and
classified such interests outside of permanent equity. Under this
guidance, subsequent adjustments to the carrying amount of redeemable
noncontrolling interests to reflect any changes in the Redemption Amount at the
end of each reporting period will be recorded in the same
manner. Such adjustments to Redemption Amounts based on fair value
will have no effect on net income per share attributable to HEICO shareholders
whereas the portion of periodic adjustments to the carrying amount of redeemable
noncontrolling interests based solely on a multiple of future earnings that
reflect a redemption amount in excess of fair value will effect net income per
share attributable to HEICO shareholders under the two-class
method.
As a result of adopting the new
accounting guidance for noncontrolling interests and redeemable noncontrolling
interests, the Company (i) reclassified approximately $78 million from temporary
equity (previously labeled as “Minority interests in consolidated subsidiaries”)
to permanent equity (labeled as “Noncontrolling interests”) pertaining to
noncontrolling interests that do not contain a redemption feature; and (ii)
renamed temporary equity as “Redeemable noncontrolling interests” and recorded
an approximately $45 million increase to redeemable noncontrolling interests
with a corresponding decrease to retained earnings in the Company’s Condensed
Consolidated Balance Sheet. The resulting $57 million of redeemable
noncontrolling interests as of November 1, 2009 represents management’s estimate
of the aggregate Redemption Amount of all Put Rights that the Company would be
required to pay of which approximately $25 million is redeemable at fair value
and approximately $32 million is redeemable based solely on a multiple of future
earnings. The actual Redemption Amount will likely be
different. See Note 12, Redeemable Noncontrolling Interests, for
additional information.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued new
guidance which defines fair value, establishes a framework for measuring fair
value, and requires expanded disclosures about fair value
measurements. In February 2008, the FASB issued additional guidance
which delayed the effective date by one year for nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. These nonfinancial assets and
liabilities include items such as goodwill,
7
other
intangible assets, and property, plant and equipment that are measured at fair
value resulting from impairment, if deemed necessary. The portions of
the new guidance that were delayed were adopted by the Company on a prospective
basis as of the beginning of fiscal 2010, or November 1, 2009. The
adoption did not have a material effect on the Company’s results of operations,
financial position or cash flows.
In
December 2007, the FASB issued new guidance for business combinations that
retains the fundamental requirements of previous guidance that the acquisition
method of accounting (formerly the “purchase accounting” method) be used for all
business combinations and for an acquirer to be identified for each business
combination. However, the new guidance changes the approach of
applying the acquisition method in a number of significant areas, including that
acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value as of the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset as of the acquisition date; restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. Further, any contingent consideration will be recognized as
a liability at fair value as of the acquisition date with subsequent fair value
adjustments recorded in operations. Contingent consideration was
previously accounted for as an additional cost of the respective acquired entity
when paid. The Company adopted the new guidance on a prospective
basis as of the beginning of fiscal 2010 for all business combinations
consummated on or after November 1, 2009. The adoption did not have a
material effect on the Company’s results of operations, financial position or
cash flows.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06,
“Improving Disclosures About Fair Value Measurements,” which requires new
disclosures regarding transfers in and out of Level 1 and Level 2 fair value
measurements and more detailed information of activity in Level 3 fair value
measurements. The Company adopted ASU 2010-06 as of the beginning of
the second quarter of fiscal 2010, except the additional Level 3
disclosures, which are effective in fiscal years beginning after December 15,
2010, or as of fiscal 2012 for HEICO. The adoption did not have a
material effect on the Company’s results of operations, financial position or
cash flows.
2. ACQUISITIONS
In
February 2010, the Company, through its HEICO Electronic Technologies Corp.
(“HEICO Electronic”) subsidiary, acquired substantially all of the assets and
assumed certain liabilities of dB Control. dB Control produces
high-power devices used in both defense and commercial
applications. The total consideration for this acquisition and
related allocation to the tangible and identifiable intangible assets acquired
and liabilities assumed is not material or significant to the Company’s
condensed consolidated financial statements. The purchase price
(including a post closing purchase price adjustment of approximately $1.6
million accrued as of the acquisition date and paid during the third quarter of
fiscal 2010) was paid in cash principally using proceeds from the Company’s
revolving credit facility. The total consideration includes an
accrual of approximately $1.2 million representing the fair value of contingent
consideration that the Company may be obligated to pay in fiscal 2013 should dB
Control meet certain earnings
8
objectives
during the second and third years following the acquisition. The
maximum amount of contingent consideration that the Company could be required to
pay is $2.0 million. See Note 7, Fair Value Measurements, for
additional information regarding the Company’s contingent consideration
obligation.
As part of the purchase agreements
associated with certain prior year acquisitions, the Company may be obligated to
pay additional purchase consideration based on the acquired subsidiary meeting
certain earnings objectives following the acquisition. The Company
accrues an estimate of additional purchase consideration when the earnings
objectives are met. During the first quarter of fiscal 2010, the
Company, through HEICO Electronic, paid $1.9 million of additional purchase
consideration of which $1.8 million was accrued as of October 31,
2009. During the second and third quarters of fiscal 2010, the
Company, through HEICO Electronic, paid $1.0 million and $1.3 million,
respectively, of additional purchase consideration related to prior year
acquisitions for which the earnings objectives were met during fiscal
2010. The aforementioned amounts paid were based on a multiple of
each applicable subsidiary’s earnings relative to target and were not contingent
upon the former shareholders of the respective acquired entity remaining
employed by the Company or providing future services to the
Company. Accordingly, these amounts represent an additional cost of
the respective entity recorded as additional goodwill. Information
regarding additional purchase consideration related to prior year acquisitions
may be found in Note 11, Commitments and Contingencies.
The
operating results of the Company’s fiscal 2010 acquisition were included in the
Company’s results of operations from the effective acquisition
date. The amount of net sales and earnings of the 2010 acquisition
included in the Condensed Consolidated Statements of Operations is not
material. The following table presents unaudited pro forma financial
information as if the fiscal 2010 acquisition had occurred as of November 1,
2008 for purposes of the information presented for the nine and three months
ended July 31, 2009. Had the fiscal 2010 acquisition been consummated
as of November 1, 2009, net sales, net income from consolidated operations, net
income attributable to HEICO, and basic and diluted net income per share
attributable to HEICO shareholders on a pro forma basis for the nine and three
months ended July 31, 2010 would not have been materially different than the
reported amounts. The pro forma financial information is presented
for comparative purposes only and is not necessarily indicative of the results
of operations that actually would have been achieved if the acquisition had
taken place as of November 1, 2008. The unaudited pro forma financial
information includes adjustments to historical amounts such as additional
amortization expense related to intangible assets acquired and increased
interest expense associated with borrowings to finance the
acquisition.
|
Nine
months ended
|
Three
months ended
|
|||||||
|
July
31, 2009
|
July
31, 2009
|
|||||||
|
Net
sales
|
$ | 412,717,000 | $ | 139,023,000 | ||||
|
Net
income from consolidated operations
|
$ | 45,882,000 | $ | 14,969,000 | ||||
|
Net
income attributable to HEICO
|
$ | 34,307,000 | $ | 11,183,000 | ||||
|
Net
income per share attributable
|
||||||||
|
to
HEICO shareholders:
|
||||||||
|
Basic
|
$ | 1.05 | $ | .34 | ||||
|
Diluted
|
$ | 1.01 | $ | .33 | ||||
9
3. SELECTED
FINANCIAL STATEMENT INFORMATION
Accounts
Receivable
|
July
31, 2010
|
October
31, 2009
|
|||||||
|
Accounts
receivable
|
$ | 86,962,000 | $ | 80,399,000 | ||||
|
Less: Allowance
for doubtful accounts
|
(2,884,000 | ) | (2,535,000 | ) | ||||
|
Accounts
receivable, net
|
$ | 84,078,000 | $ | 77,864,000 | ||||
Costs
and Estimated Earnings on Uncompleted Percentage-of-Completion
Contracts
|
July
31, 2010
|
October
31, 2009
|
|||||||
|
Costs
incurred on uncompleted contracts
|
$ | 4,548,000 | $ | 10,280,000 | ||||
|
Estimated
earnings
|
5,480,000 | 8,070,000 | ||||||
| 10,028,000 | 18,350,000 | |||||||
|
Less: Billings
to date
|
(7,251,000 | ) | (12,543,000 | ) | ||||
| $ | 2,777,000 | $ | 5,807,000 | |||||
|
Included
in the accompanying Condensed Consolidated
|
||||||||
|
Balance
Sheets under the following captions:
|
||||||||
|
Accounts
receivable, net (costs and estimated
|
||||||||
|
earnings
in excess of billings)
|
$ | 2,958,000 | $ | 5,832,000 | ||||
|
Accrued
expenses and other current liabilities
|
||||||||
|
(billings
in excess of costs and estimated earnings)
|
(181,000 | ) | (25,000 | ) | ||||
| $ | 2,777,000 | $ | 5,807,000 | |||||
Changes in estimates did not have a
material effect on net income from consolidated operations for the nine months
ended July 31, 2010 and 2009.
Inventories
|
July
31, 2010
|
October
31, 2009
|
|||||||
|
Finished
products
|
$ | 74,609,000 | $ | 79,665,000 | ||||
|
Work
in process
|
18,814,000 | 14,279,000 | ||||||
|
Materials,
parts, assemblies and supplies
|
47,289,000 | 43,641,000 | ||||||
|
Inventories,
net
|
$ | 140,712,000 | $ | 137,585,000 | ||||
Inventories related to long-term
contracts were not significant as of July 31, 2010 and October 31,
2009.
Property,
Plant and Equipment
|
July
31, 2010
|
October
31, 2009
|
|||||||
|
Land
|
$ | 3,656,000 | $ | 3,656,000 | ||||
|
Buildings
and improvements
|
38,750,000 | 38,091,000 | ||||||
|
Machinery,
equipment and tooling
|
86,276,000 | 80,697,000 | ||||||
|
Construction
in progress
|
6,028,000 | 5,331,000 | ||||||
| 134,710,000 | 127,775,000 | |||||||
|
Less: Accumulated
depreciation and amortization
|
(74,907,000 | ) | (67,247,000 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 59,803,000 | $ | 60,528,000 | ||||
10
Accrued
Customer Rebates and Credits
The aggregate amount of accrued
customer rebates and credits included within accrued expenses and other current
liabilities in the accompanying Condensed Consolidated Balance Sheets was
$7,692,000 and $9,689,000 as of July 31, 2010 and October 31, 2009,
respectively. The total customer rebates and credits deducted within net sales
for the nine months ended July 31, 2010 and 2009 was $6,642,000 and $6,757,000
respectively. The total customer rebates and credits deducted within
net sales for the three months ended July 31, 2010 and 2009 was $2,244,000 and
$2,023,000 respectively.
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 nine months ended July 31, 2010 are as
follows:
|
Segment
|
Consolidated
|
|||||||||||
|
FSG
|
ETG
|
Totals
|
||||||||||
|
Balances
as of October 31, 2009
|
$ | 188,459,000 | $ | 176,784,000 | $ | 365,243,000 | ||||||
|
Acquired
goodwill
|
¾ | 12,920,000 | 12,920,000 | |||||||||
|
Adjustments
to goodwill
|
¾ | 1,960,000 | 1,960,000 | |||||||||
|
Foreign
currency translation adjustment
|
¾ | 586,000 | 586,000 | |||||||||
|
Balances
as of July 31, 2010
|
$ | 188,459,000 | $ | 192,250,000 | $ | 380,709,000 | ||||||
The goodwill acquired pertains to a
current year acquisition and represents the residual value after the allocation
of the total consideration to the tangible and identifiable intangible assets
acquired and liabilities assumed (inclusive of contingent
consideration). The adjustments to goodwill principally represent
additional purchase consideration paid relating to prior year acquisitions for
which the earnings objectives were met in fiscal 2010. See Note 2,
Acquisitions, for additional information regarding the fiscal 2010 acquisition
and additional purchase consideration. The foreign currency
translation adjustment reflects unrealized translation gains on the goodwill
recognized in connection with a foreign subsidiary.
11
Identifiable
intangible assets consist of the following:
|
As
of July 31, 2010
|
As
of October 31, 2009
|
|||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||
|
Amortizing Assets:
|
||||||||||||||||||||||||
|
Customer
relationships
|
$ | 41,759,000 | $ | (14,360,000 | ) | $ | 27,399,000 | $ | 33,237,000 | $ | (9,944,000 | ) | $ | 23,293,000 | ||||||||||
|
Intellectual
property
|
7,303,000 | (1,247,000 | ) | 6,056,000 | 3,369,000 | (628,000 | ) | 2,741,000 | ||||||||||||||||
|
Licenses
|
1,000,000 | (603,000 | ) | 397,000 | 1,000,000 | (547,000 | ) | 453,000 | ||||||||||||||||
|
Non-compete
agreements
|
1,166,000 | (991,000 | ) | 175,000 | 1,221,000 | (969,000 | ) | 252,000 | ||||||||||||||||
|
Patents
|
558,000 | (261,000 | ) | 297,000 | 575,000 | (246,000 | ) | 329,000 | ||||||||||||||||
|
Trade
names
|
569,000 | (84,000 | ) | 485,000 | 569,000 | ¾ | 569,000 | |||||||||||||||||
| 52,355,000 | (17,546,000 | ) | 34,809,000 | 39,971,000 | (12,334,000 | ) | 27,637,000 | |||||||||||||||||
|
Non-Amortizing Assets:
|
||||||||||||||||||||||||
|
Trade
names
|
17,140,000 | ¾ | 17,140,000 | 13,951,000 | ¾ | 13,951,000 | ||||||||||||||||||
| $ | 69,495,000 | $ | (17,546,000 | ) | $ | 51,949,000 | $ | 53,922,000 | $ | (12,334,000 | ) | $ | 41,588,000 | |||||||||||
The increase in the gross carrying
amount of customer relationships, intellectual property and non-amortizing trade
names as of July 31, 2010 compared to October 31, 2009 principally relates to
such intangible assets recognized in connection with an acquisition made during
the second quarter of fiscal 2010 (see Note 2, Acquisitions). The
weighted average amortization period of the customer relationships and
intellectual property acquired during fiscal 2010 is eight years. Based on
the final purchase price allocations during the allocation period for certain
fiscal 2009 acquisitions, the weighted average amortization period of the
customer relationships and intellectual property acquired in fiscal 2009 is now
eight years and seven years, respectively.
Amortization expense related to
intangible assets for the nine months ended July 31, 2010 and 2009 was
$5,446,000 and $3,148,000, respectively. Amortization expense related to
intangible assets for the three months ended July 31, 2010 and 2009 was
$1,976,000 and $1,336,000, respectively. Amortization
expense related to intangible assets for the fiscal year ending October 31, 2010
is estimated to be $6,795,000. Amortization expense for each of the
next five fiscal years and thereafter is estimated to be $6,327,000 in fiscal
2011, $5,621,000 in fiscal 2012, $5,161,000 in fiscal 2013, $4,864,000 in fiscal
2014, $3,739,000 in fiscal 2015 and $7,748,000 thereafter.
5. LONG-TERM
DEBT
Long-term debt consists of the
following:
|
July
31, 2010
|
October
31, 2009
|
|||||||
|
Borrowings
under revolving credit facility
|
$ | 47,000,000 | $ | 55,000,000 | ||||
|
Notes
payable, capital leases and equipment loans
|
292,000 | 431,000 | ||||||
| 47,292,000 | 55,431,000 | |||||||
|
Less:
Current maturities of long-term debt
|
(199,000 | ) | (237,000 | ) | ||||
| $ | 47,093,000 | $ | 55,194,000 | |||||
As of July 31, 2010 and October 31,
2009, the weighted average interest rate of borrowings under the Company’s $300
million revolving credit facility was 1.0% and .9%, respectively. The
revolving credit facility contains both financial and non-financial
covenants. As of July 31, 2010, the Company was in compliance with
all such covenants.
12
6. INCOME
TAXES
As of July 31, 2010, the Company’s
liability for gross unrecognized tax benefits related to uncertain tax positions
was $2,596,000 of which $2,058,000 would decrease the Company’s income tax
expense and effective income tax rate if the tax benefits were
recognized. A reconciliation of the activity related to the liability
for gross unrecognized tax benefits for the nine months ended July 31, 2010 is
as follows:
|
Balance
as of October 31, 2009
|
$ | 3,328,000 | ||
|
Decreases
related to prior year tax positions
|
(837,000 | ) | ||
|
Increases
related to current year tax positions
|
393,000 | |||
|
Lapse
of statutes of limitations
|
(288,000 | ) | ||
|
Balance
as of July 31, 2010
|
$ | 2,596,000 |
The $732,000 net decrease in the
liability for gross unrecognized tax benefits was principally related to the
finalization of a study of qualifying research and development activities used
to prepare the Company’s fiscal 2009 U.S. federal and state income tax
returns. The decrease in the liability reduced the Company’s income
tax expense by $801,000.
The accrual of interest and penalties
related to the unrecognized tax benefits was not material for the nine months
ended July 31, 2010. Further, the Company does not expect the total
amount of unrecognized tax benefits to materially change in the next twelve
months.
7. FAIR
VALUE MEASUREMENTS
The Company performs its fair value
measurements according to accounting guidance that defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement
date. The guidance also establishes a three-level fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. An asset or liability’s level is based on the lowest
level of input that is significant to the fair value measurement. The
guidance requires that assets and liabilities carried at fair value be
classified and disclosed in one of the following three categories:
|
Level 1 —
|
Quoted
prices in active markets for identical assets or
liabilities;
|
|
Level 2 —
|
Inputs,
other than quoted prices included within Level 1, that are observable for
the asset or liability either directly or indirectly;
or
|
|
Level 3 —
|
Unobservable
inputs for the asset or liability where there is little or no market data,
requiring management to develop its own
assumptions.
|
13
The
following tables set forth by level within the fair value hierarchy, the
Company’s assets and liabilities that were measured at fair value on a recurring
basis:
|
As
of July 31, 2010
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Deferred
compensation plans:
|
||||||||||||||||
|
Corporate
owned life insurance
|
$ | — | $ | 20,672,000 | $ | — | $ | 20,672,000 | ||||||||
|
Equity
securities
|
964,000 | — | — | 964,000 | ||||||||||||
|
Mutual
funds
|
961,000 | — | — | 961,000 | ||||||||||||
|
Money
market funds and cash
|
832,000 | — | — | 832,000 | ||||||||||||
|
Other
|
— | 525,000 | — | 525,000 | ||||||||||||
|
Total
assets
|
$ | 2,757,000 | $ | 21,197,000 | $ | — | $ | 23,954,000 | ||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Contingent
consideration
|
$ | — | $ | — | $ | 1,150,000 | $ | 1,150,000 | ||||||||
|
As
of October 31, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Deferred
compensation plans:
|
||||||||||||||||
|
Corporate
owned life insurance
|
$ | — | $ | 15,687,000 | $ | — | $ | 15,687,000 | ||||||||
|
Equity
securities
|
1,057,000 | — | — | 1,057,000 | ||||||||||||
|
Mutual
funds
|
614,000 | — | — | 614,000 | ||||||||||||
|
Money
market funds and cash
|
2,163,000 | — | — | 2,163,000 | ||||||||||||
|
Other
|
— | 243,000 | — | 243,000 | ||||||||||||
|
Total
assets
|
$ | 3,834,000 | $ | 15,930,000 | $ | — | $ | 19,764,000 | ||||||||
|
Liabilities
|
— | — | — | — | ||||||||||||
The Company maintains two non-qualified
deferred compensation plans. The assets of the HEICO Corporation
Leadership Compensation Plan (the “LCP”) principally represent cash surrender
values of life insurance policies, which derive their fair values from
investments in mutual funds that are managed by an insurance company and are
classified within Level 2. Certain other assets of the LCP represent
investments in HEICO common stock and are classified within Level
1. The assets of the Company’s other deferred compensation plan are
principally invested in a life insurance policy that is classified within Level
2 and equity securities, mutual funds and money market funds that are classified
within Level 1. The assets of both plans are held within irrevocable
trusts and classified within other assets in the Company’s Condensed
Consolidated Balance Sheets. The related liabilities of the two
deferred compensation plans are included within other long-term liabilities in
the Company’s Condensed Consolidated Balance Sheets and have an aggregate value
of $23,667,000 as of July 31, 2010 and $19,505,000 as of October 31,
2009.
As part of the agreement to acquire a
subsidiary by the ETG in the second quarter of fiscal 2010, the Company may be
obligated to pay contingent consideration of up to $2.0 million in fiscal 2013
should the acquired entity meet certain earnings objectives during the second
and third years following the acquisition. The $1,150,000 fair value
of the contingent consideration
14
as of the
acquisition date was determined using a discounted cash flow model and
probability adjusted internal estimates of the subsidiary’s future earnings and
is classified in Level 3. There have been no subsequent changes in
the fair value of this contingent consideration as of July 31, 2010 and this
obligation is included in other long-term liabilities in the Company’s Condensed
Consolidated Balance Sheet. Changes in the fair value of contingent
consideration will be recorded in the Company’s condensed consolidated
statements of operations.
The carrying amounts of the Company’s
cash and cash equivalents, accounts receivable, trade accounts payable, and
accrued expenses and other current liabilities approximate fair value as of July
31, 2010 due to the relatively short maturity of the respective
instruments. The carrying amount of long-term debt approximates fair
value due to its variable interest rates.
8. RESEARCH
AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended
July 31, 2010 and 2009 includes approximately $16.5 million and $14.8 million,
respectively, of new product research and development expenses. Cost
of sales for the three months ended July 31, 2010 and 2009 includes
approximately $6.0 million and $5.1 million, respectively, of new product
research and development expenses.
9. NET
INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted
net income per share attributable to HEICO shareholders is as
follows:
|
Nine
months ended July 31,
|
Three
months ended July 31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net
income attributable to HEICO
|
$ | 39,296,000 | $ | 32,990,000 | $ | 14,930,000 | $ | 11,132,000 | ||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted
average common shares outstanding-basic
|
32,793,137 | 32,799,101 | 32,917,530 | 32,603,643 | ||||||||||||
|
Effect
of dilutive stock options
|
960,277 | 1,017,879 | 879,941 | 1,029,220 | ||||||||||||
|
Weighted
average common shares outstanding-diluted
|
33,753,414 | 33,816,980 | 33,797,471 | 33,632,863 | ||||||||||||
|
Net
income per share attributable to HEICO shareholders:
|
||||||||||||||||
|
Basic
|
$ | 1.20 | $ | 1.01 | $ | .45 | $ | .34 | ||||||||
|
Diluted
|
$ | 1.16 | $ | .98 | $ | .44 | $ | .33 | ||||||||
|
Anti-dilutive
stock options excluded
|
432,292 | 3,193 | 431,250 | 9,579 | ||||||||||||
No portion of the adjustments to the
redemption amount of redeemable noncontrolling interests of ($39,000) and
$272,000 for the nine months and three months ended July 31, 2010, respectively,
reflect a redemption amount in excess of fair value and therefore no portion of
the adjustments affect basic or diluted net income per share attributable to
HEICO shareholders.
15
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 nine months and three months ended July 31, 2010 and 2009,
respectively, is as follows:
|
Other,
|
||||||||||||||||
|
Primarily
|
||||||||||||||||
|
Segment
|
Corporate
and
|
Consolidated
|
||||||||||||||
|
FSG
|
ETG
|
Intersegment
|
Totals
|
|||||||||||||
|
For the nine months ended July 31,
2010:
|
||||||||||||||||
|
Net
sales
|
$ | 301,145,000 | $ | 147,231,000 | $ | (726,000 | ) | $ | 447,650,000 | |||||||
|
Depreciation
and amortization
|
7,467,000 | 5,817,000 | 294,000 | 13,578,000 | ||||||||||||
|
Operating
income
|
50,332,000 | 39,961,000 | (10,799,000 | ) | 79,494,000 | |||||||||||
|
Capital
expenditures
|
5,513,000 | 1,214,000 | 16,000 | 6,743,000 | ||||||||||||
|
For the nine months ended July 31,
2009:
|
||||||||||||||||
|
Net
sales
|
$ | 297,543,000 | $ | 97,523,000 | $ | (377,000 | ) | $ | 394,689,000 | |||||||
|
Depreciation
and amortization
|
7,330,000 | 3,287,000 | 334,000 | 10,951,000 | ||||||||||||
|
Operating
income
|
46,297,000 | 26,508,000 | (8,611,000 | ) | 64,194,000 | |||||||||||
|
Capital
expenditures
|
6,644,000 | 1,075,000 | 65,000 | 7,784,000 | ||||||||||||
|
For the three months ended July 31,
2010:
|
||||||||||||||||
|
Net
sales
|
$ | 104,323,000 | $ | 54,107,000 | $ | (160,000 | ) | $ | 158,270,000 | |||||||
|
Depreciation
and amortization
|
2,493,000 | 2,111,000 | 96,000 | 4,700,000 | ||||||||||||
|
Operating
income
|
17,557,000 | 15,198,000 | (3,762,000 | ) | 28,993,000 | |||||||||||
|
Capital
expenditures
|
1,696,000 | 434,000 | 13,000 | 2,143,000 | ||||||||||||
|
For the three months ended July 31,
2009:
|
||||||||||||||||
|
Net
sales
|
$ | 97,236,000 | $ | 37,054,000 | $ | (204,000 | ) | $ | 134,086,000 | |||||||
|
Depreciation
and amortization
|
2,521,000 | 1,409,000 | 113,000 | 4,043,000 | ||||||||||||
|
Operating
income
|
14,759,000 | 9,935,000 | (3,272,000 | ) | 21,422,000 | |||||||||||
|
Capital
expenditures
|
1,867,000 | 466,000 | 54,000 | 2,387,000 | ||||||||||||
Total assets by operating segment as of
July 31, 2010 and October 31, 2009 are as follows:
|
Other,
|
||||||||||||||||
|
Segment
|
Primarily
|
Consolidated
|
||||||||||||||
|
FSG
|
ETG
|
Corporate
|
Totals
|
|||||||||||||
|
Total
assets as of July 31, 2010
|
$ | 413,551,000 | $ | 324,822,000 | $ | 39,666,000 | $ | 778,039,000 | ||||||||
|
Total
assets as of October 31, 2009
|
414,030,000 | 285,602,000 | 33,278,000 | 732,910,000 | ||||||||||||
16
11. COMMITMENTS
AND CONTINGENCIES
Guarantees
The Company has arranged for a standby
letter of credit for $1.5 million to meet the security requirement of its
insurance company for potential workers’ compensation claims, which is supported
by the Company’s revolving credit facility.
Product
Warranty
Changes in the Company’s product
warranty liability for the nine months ended July 31, 2010 and 2009,
respectively, are as follows:
|
Nine
months ended July 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balances
as of beginning of fiscal year
|
$ | 1,022,000 | $ | 671,000 | ||||
|
Accruals
for warranties
|
1,251,000 | 1,163,000 | ||||||
|
Warranty
claims settled
|
(855,000 | ) | (645,000 | ) | ||||
|
Acquired
warranty liabilities
|
80,000 | — | ||||||
|
Balances
as of July 31
|
$ | 1,498,000 | $ | 1,189,000 | ||||
Additional
Contingent Purchase Consideration
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2007, the Company may be obligated to pay
additional purchase consideration of up to 73 million Canadian dollars in
aggregate, which translates to approximately $71 million U.S. dollars based on
the July 31, 2010 exchange rate, should the subsidiary meet certain earnings
objectives through fiscal 2012.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, the Company may be obligated to pay
additional purchase consideration of up to approximately $1.3 million in fiscal
2011 and $10.1 million in fiscal 2012 should the subsidiary meet certain
earnings objectives during the second and third years, respectively, following
the acquisition.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, the Company may be obligated to pay
additional purchase consideration of up to approximately $11.7 million should
the subsidiary meet certain earnings objectives during the first two years
following the acquisition.
The above referenced additional
contingent purchase consideration will be accrued when the earnings objectives
are met. Such additional contingent purchase consideration is based
on a multiple of earnings above a threshold (subject to a cap in certain cases)
and is not contingent upon the former shareholders of the acquired entities
remaining employed by the Company or providing future services to the
Company. Accordingly, such consideration will be recorded as an
additional cost of the respective acquired entity when paid. The
aggregate maximum amount of such contingent purchase consideration that the
Company could be required to pay is approximately $94 million payable over
future periods beginning in fiscal 2011 through fiscal
17
2012. Assuming
the subsidiaries perform over their respective future measurement periods at the
same earnings levels they have performed in the comparable historical
measurement periods, the aggregate amount of such contingent purchase
consideration that the Company would be required to pay is approximately $11
million. The actual contingent purchase consideration will likely be
different.
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, financial
position or cash flows.
12. REDEEMABLE
NONCONTROLLING INTERESTS
As further detailed in Note 15,
Commitments and Contingencies, of the Notes to Consolidated Financial Statements
of the Company’s Annual Report on Form 10-K for the year ended October 31, 2009,
the holders of equity interests in certain of the Company’s subsidiaries have
rights (“Put Rights”) that may be exercised on varying dates causing the Company
to purchase their equity interests beginning in fiscal 2011 through fiscal
2018. The Put Rights, all of which relate either to common shares or
membership interests in limited liability companies, provide that the cash
consideration to be paid for their equity interests (the “Redemption Amount”) be
at fair value or at a formula that management intended to reasonably approximate
fair value based solely on a multiple of future earnings over a measurement
period. As of July 31, 2010, management’s estimate of the aggregate
Redemption Amount of all Put Rights that the Company would be required to pay is
approximately $56 million. The actual Redemption Amount will likely
be different. The portion of the estimated Redemption Amount as of
July 31, 2010 redeemable at fair value is $25 million and the portion redeemable
based solely on a multiple of future earnings is $31 million. See
Note 1, Summary of Significant Accounting Policies, for more information
regarding how the Company accounts for its redeemable noncontrolling interests
in accordance with new accounting guidance adopted as of the beginning of fiscal
2010 and the Condensed Consolidated Statements of Shareholders’ Equity and
Comprehensive Income for a summary of changes in redeemable noncontrolling
interests for the nine months ended July 31, 2010 and 2009.
In April 2010, the Company, through
HEICO Electronic, acquired an additional 3.4% equity interest in one of its
subsidiaries, which increased the Company’s ownership interest to
93.3%. In May 2010, the Company, through its HEICO Aerospace Holdings
Corp. subsidiary, acquired an additional 2.2% equity interest in one of its
subsidiaries, which increased the Company’s ownership interest to
82.3%. The purchase prices of the redeemable noncontrolling interests
acquired were paid using cash provided by operating activities. The
acquisitions resulted in a decrease to redeemable noncontrolling interests and
had no effect on HEICO shareholders’ equity.
18
During the nine months ended July 31,
2009, the Company acquired certain redeemable noncontrolling interests and
accounted for the transactions under the accounting guidance in effect at that
time pertaining to step acquisitions. The excess of the purchase
price paid over the carrying amount was allocated principally to goodwill under
such guidance. As mentioned in Note 1, Summary of Significant
Accounting Policies, the Condensed Consolidated Statement of Shareholders’
Equity and Comprehensive Income for the nine months ended July 31, 2009 is
presented on a retrospective basis to reflect the adoption of new accounting
guidance as of November 1, 2009 pertaining to redeemable noncontrolling
interests, which resulted in an increase to redeemable noncontrolling interests
and a decrease to retained earnings. The subsequent acquisition of
certain redeemable noncontrolling interests on a retrospective basis results in
a reversal of any previously recorded decrease to retained earnings related to
such redeemable noncontrolling interests recorded as part of the adoption of
this new accounting guidance.
19
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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.
Our critical accounting policies, 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 our Annual Report on Form 10-K for the year ended
October 31, 2009. One such
critical accounting policy pertains to the valuation of our goodwill which we
test for impairment annually as of October 31, or more frequently if events or
changes in circumstances indicate that the carrying amount of goodwill may not
be fully recoverable. Based on the results of our annual goodwill
impairment testing as of October 31, 2009, the fair value of each of our
reporting units exceeded their carrying value. No events or changes
in circumstances have occurred since the last annual impairment test to indicate
potential goodwill impairment.
Our business is comprised of 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. (“HEICO Electronic”) and its subsidiaries.
Our results of operations for the nine
months and three months ended July 31, 2010 have been affected by certain fiscal
2010 and 2009 acquisitions as further detailed in Note 2, Acquisitions, of the
Notes to Condensed Consolidated Financial Statements of this quarterly report
and of the Notes to Consolidated Financial Statements of our Annual Report on
Form 10-K for the year ended October 31, 2009.
All per share information has been
adjusted retrospectively to reflect a 5-for-4 stock split effected in April
2010. See Note 1, Summary of Significant Accounting Policies – Stock
Split, of the Notes to Condensed Consolidated Financial Statements for
additional information regarding this stock split.
20
Results
of Operations
The following table sets forth the
results of our operations, net sales and operating income by segment and the
percentage of net sales represented by the respective items in our Condensed
Consolidated Statements of Operations.
|
Nine
months ended July 31,
|
Three
months ended July 31,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
sales
|
$ | 447,650,000 | $ | 394,689,000 | $ | 158,270,000 | $ | 134,086,000 | ||||||||
|
Cost
of sales
|
286,351,000 | 262,456,000 | 100,717,000 | 88,275,000 | ||||||||||||
|
Selling,
general and administrative expenses
|
81,805,000 | 68,039,000 | 28,560,000 | 24,389,000 | ||||||||||||
|
Total
operating costs and expenses
|
368,156,000 | 330,495,000 | 129,277,000 | 112,664,000 | ||||||||||||
|
Operating
income
|
$ | 79,494,000 | $ | 64,194,000 | $ | 28,993,000 | $ | 21,422,000 | ||||||||
|
Net
sales by segment:
|
||||||||||||||||
|
Flight
Support Group
|
$ | 301,145,000 | $ | 297,543,000 | $ | 104,323,000 | $ | 97,236,000 | ||||||||
|
Electronic
Technologies Group
|
147,231,000 | 97,523,000 | 54,107,000 | 37,054,000 | ||||||||||||
|
Intersegment
sales
|
(726,000 | ) | (377,000 | ) | (160,000 | ) | (204,000 | ) | ||||||||
| $ | 447,650,000 | $ | 394,689,000 | $ | 158,270,000 | $ | 134,086,000 | |||||||||
|
Operating
income by segment:
|
||||||||||||||||
|
Flight
Support Group
|
$ | 50,332,000 | $ | 46,297,000 | $ | 17,557,000 | $ | 14,759,000 | ||||||||
|
Electronic
Technologies Group
|
39,961,000 | 26,508,000 | 15,198,000 | 9,935,000 | ||||||||||||
|
Other,
primarily corporate
|
(10,799,000 | ) | (8,611,000 | ) | (3,762,000 | ) | (3,272,000 | ) | ||||||||
|
|
$ | 79,494,000 | $ | 64,194,000 | $ | 28,993,000 | $ | 21,422,000 | ||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Gross
profit
|
36.0 | % | 33.5 | % | 36.4 | % | 34.2 | % | ||||||||
|
Selling,
general and administrative expenses
|
18.3 | % | 17.2 | % | 18.0 | % | 18.2 | % | ||||||||
|
Operating
income
|
17.8 | % | 16.3 | % | 18.3 | % | 16.0 | % | ||||||||
|
Interest
expense
|
.1 | % | .1 | % | .1 | % | .1 | % | ||||||||
|
Other
income (expense)
|
.1 | % | — | — | .1 | % | ||||||||||
|
Income
tax expense
|
6.0 | % | 4.9 | % | 5.9 | % | 4.9 | % | ||||||||
|
Net
income attributable to noncontrolling
|
||||||||||||||||
|
interests
|
2.9 | % | 2.9 | % | 2.9 | % | 2.8 | % | ||||||||
|
Net
income attributable to HEICO
|
8.8 | % | 8.4 | % | 9.4 | % | 8.3 | % | ||||||||
Comparison
of First Nine Months of Fiscal 2010 to First Nine Months of Fiscal
2009
Net
Sales
Net sales for the first nine months of
fiscal 2010 increased by 13.4% to a record $447.7 million, as compared to net
sales of $394.7 million for the first nine months of fiscal 2009. The
increase in net sales reflects an increase of $49.7 million (a 51.0% increase)
to a record $147.2 million in net sales within the ETG and an increase of $3.6
million (a 1.2% increase) to $301.1 million in net sales within the
FSG. The net sales increase in the ETG reflects the additional net
sales totaling approximately $31 million contributed by a February 2010
acquisition and two fiscal 2009 acquisitions as well as organic growth of
approximately 14%. The organic growth in the ETG reflects continued
strength in demand for certain of our medical equipment, electronic, satellite
and defense products. The net sales increase within the FSG, which is
entirely organic growth, reflects higher net sales of our industrial products,
partially offset by lower net sales of our other FSG products and services for
which demand has been lower principally as a result of reduced airline
capacity.
Gross
Profit and Operating Expenses
Our consolidated gross profit margin
increased to 36.0% for the first nine months of fiscal 2010 as compared to 33.5%
for the first nine months of fiscal 2009, mainly reflecting higher margins
within the FSG principally due to a more favorable product sales
mix. Consolidated cost of sales for the first nine months of fiscal
2010 and 2009 includes approximately $16.5 million and $14.8 million,
respectively, of new product research and development expenses.
Selling, general and administrative
(“SG&A”) expenses were $81.8 million and $68.0 million for the first nine
months of fiscal 2010 and fiscal 2009, respectively. The increase in
SG&A expenses was mainly due to the operating costs of the fiscal 2010 and
fiscal 2009 acquisitions referenced above, and higher operating costs,
principally personnel related, associated with the growth in consolidated net
sales. SG&A expenses as a percentage of net sales increased from
17.2% for the first nine months of fiscal 2009 to 18.3% for the first nine
months of fiscal 2010 reflecting an increase in amortization expense of
intangible assets associated with the recent acquisitions and a higher level of
accrued performance awards based on the improved consolidated operating
results.
Operating
Income
Operating income for the first nine
months of fiscal 2010 increased by 23.8% to a record $79.5 million as compared
to operating income of $64.2 million for the first nine months of fiscal
2009. The increase in operating income reflects a $13.5 million
increase (a 50.8% increase) to a record $40.0 million in operating income of the
ETG in the first nine months of fiscal 2010, up from $26.5 million for the first
nine months of fiscal 2009 and a $4.0 million increase (a 8.7% increase) in
operating income of the FSG to $50.3 million for the first nine months of fiscal
2010, up from $46.3 million for the first nine months of fiscal 2009, partially
offset by a $2.2 million increase in corporate expenses. The increase
in operating income for the
22
ETG in
the first nine months of fiscal 2010 reflects the impact of the fiscal 2010 and
2009 acquisitions and organic sales growth. The increase in operating
income for the FSG in the first nine months of fiscal 2010 reflects the
aforementioned higher gross profit margins. The increase in corporate
expenses for the first nine months of fiscal 2010 is primarily due to the higher
level of accrued performance awards discussed previously.
As a percentage of net sales, our
consolidated operating income increased to 17.8% for the first nine months of
fiscal 2010, up from 16.3% for the first nine months of fiscal
2009. The increase in consolidated operating income as a percentage
of net sales reflects an increase in the FSG’s operating income as a percentage
of net sales to 16.7% in the first nine months of fiscal 2010 from 15.6% in the
first nine months of fiscal 2009 resulting primarily from the favorable product
mix previously referenced. The ETG’s operating income as a percentage
of net sales was 27.1% in the first nine months of fiscal 2010, approximating
the 27.2% reported in the first nine months of fiscal 2009.
Interest
Expense
Interest expense in the first nine
months of fiscal 2010 and 2009 was not material.
Other
Income
Other income in the first nine months
of fiscal 2010 and 2009 was not material.
Income
Tax Expense
Our effective tax rate for the first
nine months of fiscal 2010 increased to 34.0% from 30.3% for the first nine
months of fiscal 2009. The effective tax rate for the first nine
months of fiscal 2009 was lower due to a settlement reached with the Internal
Revenue Service (“IRS”) pertaining to the income tax credit claimed on HEICO’s
U.S. federal filings for qualified research and development activities incurred
for fiscal years 2002 through 2005 and a resulting reduction to the related
liability for unrecognized tax benefits for fiscal years 2006 through 2008 based
on new information obtained during the examination. In addition, the
effective tax rate for the first nine months of fiscal 2010 was higher as it
reflects a credit for qualifying research and development activities for only
two months as the underlying provision of the IRS tax code expired in December
2009 and was higher due to an increased effective state income tax rate
principally as a result of the previously mentioned fiscal 2010 and 2009
acquisitions.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests relates to the 20% noncontrolling interest held in the
FSG and the noncontrolling interests held in certain subsidiaries of the FSG and
ETG. The increase in net income attributable to noncontrolling
interests for the first nine months of fiscal 2010 compared to the first nine
months of fiscal 2009 is related to higher earnings of certain ETG and FSG
subsidiaries in which noncontrolling interests exist.
23
Net
Income Attributable to HEICO
Net income attributable to HEICO was a
record $39.3 million, or $1.16 per diluted share, for the first nine months of
fiscal 2010 compared to $33.0 million, or $.98 per diluted share, for the first
nine months of fiscal 2009 reflecting the increased operating income referenced
above. Diluted net income per share attributable to HEICO
shareholders in the first nine months of fiscal 2009 included a $.04 per diluted
share benefit from the aforementioned favorable IRS settlement.
Comparison
of Third Quarter of Fiscal 2010 to Third Quarter of Fiscal 2009
Net
Sales
Net sales for the third quarter of
fiscal 2010 increased by 18.0% to a record $158.3 million, as compared to net
sales of $134.1 million for the third quarter of fiscal 2009. The
increase in net sales reflects an increase of $17.1 million (a 46.0% increase)
to a record $54.1 million in net sales within the ETG in addition to an increase
of $7.1 million (a 7.3% increase) to $104.3 million in net sales within the
FSG. The net sales increase in the ETG reflects organic growth of
approximately 22% as well as additional net sales totaling approximately $7
million contributed by a February 2010 acquisition and an October fiscal 2009
acquisition. The organic growth in the ETG reflects continued
strength in demand for certain of our medical equipment, electronic, satellite
and defense products. The net sales increase within the FSG, which is
entirely organic growth, principally reflects an increase in net sales to our
commercial aviation customers and higher net sales of our industrial
products.
Gross
Profit and Operating Expenses
Our consolidated gross profit margin
increased to 36.4% for the third quarter of fiscal 2010 as compared to 34.2% for
the third quarter of fiscal 2009, mainly reflecting higher margins within the
FSG principally due to a more favorable product sales
mix. Consolidated cost of sales for the third quarter of fiscal 2010
and 2009 includes approximately $6.0 million and $5.1 million, respectively, of
new product research and development expenses.
SG&A expenses were $28.6 million
and $24.4 million for the third quarter of fiscal 2010 and fiscal 2009,
respectively. The increase in SG&A expenses was mainly due to the
operating costs of the fiscal 2010 acquisition and the fiscal 2009 acquisition
referenced above, and higher operating costs, principally personnel related,
associated with the growth in consolidated net sales. SG&A
expenses as a percentage of net sales decreased slightly to 18.0% for the third
quarter of fiscal 2010 from 18.2% for the third quarter of fiscal 2009
reflecting the benefit of higher net sales on the portion of SG&A expenses
that are fixed costs, partially offset by an increase in amortization expense of
intangible assets associated with the recent acquisitions and the higher level
of accrued performance awards.
24
Operating Income
Operating income for the third quarter
of fiscal 2010 increased by 35.3% to a record $29.0 million as compared to
operating income of $21.4 million for the third quarter of fiscal
2009. The increase in operating income reflects a $5.3 million
increase (a 53.0% increase) to a record $15.2 million in operating income of the
ETG in the third quarter of fiscal 2010, up from $9.9 million for the third
quarter of fiscal 2009 and a $2.8 million increase (a 19.0% increase) in
operating income of the FSG to $17.6 million for the third quarter of fiscal
2010, up from $14.8 million for the third quarter of fiscal 2009, partially
offset by a $.5 million increase in corporate expenses. The increase
in operating income for the ETG in the third quarter of fiscal 2010 is primarily
due to the organic sales growth, as well as the impact of the fiscal 2010 and
2009 acquisitions. The increase in operating income for the FSG in
the third quarter of fiscal 2010 reflects the aforementioned higher gross profit
margins. The increase in corporate expenses for the third quarter of
fiscal 2010 is primarily due to the higher level of accrued performance awards
discussed previously.
As a percentage of net sales, our
consolidated operating income increased to 18.3% for the third quarter of fiscal
2010, up from 16.0% for the third quarter of fiscal 2009. The FSG’s
operating income as a percentage of net sales increased to 16.8% in the third
quarter of fiscal 2010, up from 15.2% in the third quarter of fiscal 2009
resulting primarily from the favorable product mix previously
referenced. The ETG’s operating income as a percentage of net sales
increased to 28.1% in the third quarter of fiscal 2010, up from 26.8% in the
third quarter of fiscal 2009 primarily due to the higher net sales and a
favorable product sales mix.
Interest
Expense
Interest expense in the third quarter
of fiscal 2010 and 2009 was not material.
Other
Income
Other income in the third quarter of
fiscal 2010 and 2009 was not material.
Income
Tax Expense
Our effective tax rate for the third
quarter of fiscal 2010 increased to 32.3% from 30.4% for the third quarter of
fiscal 2009. The increase principally reflects the expiration of an
income tax credit for qualified research and development activities as of
December 2009. Our effective tax rate of 32.3% for the third quarter
of fiscal 2010 is less than the effective tax rate of 35.0% experienced in the
first half of fiscal 2010 as the third quarter includes a $732,000 decrease in
the liability for unrecognized tax benefits that principally relates to the
finalization of a study of fiscal 2009 qualified research and development
activities as further explained in Note 6, Income Taxes, of the Notes to
Condensed Consolidated Financial Statements.
25
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests relates to the 20% noncontrolling interest held in the
FSG and the noncontrolling interests held in certain subsidiaries of the FSG and
ETG. The increase in net income attributable to noncontrolling
interests for the third quarter of fiscal 2010 compared to the third quarter of
fiscal 2009 is principally related to higher earnings of certain FSG and ETG
subsidiaries in which noncontrolling interests exist and higher earnings of the
FSG.
Net
Income Attributable to HEICO
Net income attributable to HEICO was a
record $14.9 million, or $.44 per diluted share, for the third quarter of fiscal
2010 compared to $11.1 million, or $.33 per diluted share, for the third quarter
of fiscal 2009 reflecting the increased operating income referenced
above.
Outlook
As we look forward to the balance of
fiscal 2010 and beyond, we are seeing some signs of improved product demand
within our commercial aviation markets, which represent over 60% of our
consolidated net sales. To date, the strengthening has been moderate,
but appears sustainable into fiscal 2011. Based on current market
conditions within our aviation and other major markets, we are raising our
fiscal 2010 net sales target to approximately 11% over fiscal 2009 and raising
our net income per diluted share target to a range of 14% - 16% over fiscal
2009. We expect fiscal 2010 cash flow provided by operating
activities to grow approximately 3% - 8% over fiscal 2009.
Liquidity
and Capital Resources
Our principal uses of cash include
acquisitions, payments of principal and interest on debt, capital expenditures,
distributions to noncontrolling interests, cash dividends and increases in
working capital.
We finance our activities primarily
from our operating activities and financing activities, including borrowings
under our revolving credit facility. As of July 31, 2010, our net
debt to shareholders’ equity ratio was 6.8%, with net debt (total debt less cash
and cash equivalents) of $36.3 million. We have no significant debt
maturities until fiscal 2013.
Based on our current outlook, we
believe that our net cash provided by operating activities and available
borrowings under our revolving credit facility will be sufficient to fund cash
requirements for the foreseeable future.
Operating
Activities
Net cash provided by operating
activities was $67.9 million for the first nine months of fiscal 2010 and
consisted primarily of net income from consolidated operations of $52.5 million
and depreciation and amortization of $13.6 million (a non-cash
item). Net cash provided by operating activities increased $24.2
million from $43.7 million in the first nine months of fiscal
26
2009 due
to higher net income from consolidated operations after adding back depreciation
and amortization, controlling our inventory levels in the first nine months of
fiscal 2010 and the lower accrual for performance based awards in fiscal 2009
coupled with the payment that year of such awards accrued in fiscal 2008,
partially offset by increased accounts receivable related to the higher net
sales in fiscal 2010 compared to fiscal 2009 and the timing of cash
collections.
Investing
Activities
Net cash used in investing activities
of $45.8 million during the first nine months of fiscal 2010 related primarily
to acquisitions of $39.1 million and capital expenditures totaling $6.7
million. Cash invested in acquisitions principally represents the
acquisition by the ETG of a subsidiary in the second quarter and additional
purchase consideration paid pursuant to the terms of the purchase agreements
associated with the current year and certain prior year
acquisitions. See Note 2, Acquisitions, of the Notes to Condensed
Consolidated Financial Statements for further details.
Financing
Activities
Net cash used in financing activities
of $18.3 million during the first nine months of fiscal 2010 related primarily
to net payments on our revolving credit facility of $8.0 million, distributions
to noncontrolling interests of $7.2 million, the payment of $3.6 million in cash
dividends on our common stock, and $.8 million in acquisitions of noncontrolling
interests, partially offset by proceeds from stock option exercises of $1.5
million.
Contractual
Obligations
There have not been any material
changes to the amounts presented in the table of contractual obligations that
was included in our Annual Report on Form 10-K for the year ended October 31,
2009.
See “New Accounting Pronouncements”
below for additional information pertaining to our redeemable noncontrolling
interests.
See “Off-Balance Sheet Arrangements –
Acquisitions – Additional Contingent Purchase Consideration” below for
additional information pertaining to any additional contingent purchase
consideration we may be obligated to pay based on future earnings of certain
acquired businesses.
Off-Balance
Sheet Arrangements
Guarantees
We have arranged for a standby letter
of credit for $1.5 million to meet the security requirement of our insurance
company for potential workers’ compensation claims, which is supported by our
revolving credit facility.
27
Acquisitions
– Additional Contingent Purchase Consideration
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2007, we may be obligated to pay additional
purchase consideration of up to 73 million Canadian dollars in aggregate, which
translates to approximately $71 million U.S. dollars based on the July 31, 2010
exchange rate, should the subsidiary meet certain earnings objectives through
fiscal 2012.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional
consideration of up to approximately $1.3 million in fiscal 2011 and $10.1
million in fiscal 2012 should the subsidiary meet certain earnings objectives
during the second and third years, respectively, following the
acquisition.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional
purchase consideration of up to approximately $11.7 million should the
subsidiary meet certain earnings objectives during the first two years following
the acquisition.
The above referenced additional
contingent purchase consideration will be accrued when the earnings objectives
are met. Such additional contingent purchase consideration is based
on a multiple of earnings above a threshold (subject to a cap in certain cases)
and is not contingent upon the former shareholders of the acquired entities
remaining employed by us or providing future services to
us. Accordingly, such consideration will be recorded as an additional
cost of the respective acquired entity when paid. The aggregate
maximum amount of such contingent purchase consideration that we could be
required to pay is approximately $94 million payable over future periods
beginning in fiscal 2011 through fiscal 2012. Assuming the
subsidiaries perform over their respective future measurement periods at the
same earnings levels they have performed in the comparable historical
measurement periods, the aggregate amount of such contingent purchase
consideration that we would be required to pay is approximately $11
million. The actual contingent purchase consideration will likely be
different.
New
Accounting Pronouncements
Effective
November 1, 2009, we adopted new accounting guidance that requires the
recognition of certain noncontrolling interests (previously referred to as
minority interests) as a separate component within equity in the consolidated
balance sheet. It also requires the amount of consolidated net income
attributable to the parent and the noncontrolling interests be clearly
identified and presented within the consolidated statement of
operations. The adoption of this new guidance has affected the
presentation of noncontrolling interests in our condensed consolidated financial
statements on a retrospective basis. For example, under this
guidance, “Net income from consolidated operations” is comparable to what was
previously presented as “Income before minority interests” and “Net income
attributable to HEICO” is comparable to what was previously presented as “Net
income.” Further, acquisitions of noncontrolling interests are
considered a financing activity under the new accounting guidance and are no
longer presented as an investing activity.
28
Effective
November 1, 2009, we also adopted new accounting guidance that affects the
financial statement classification and measurement of redeemable noncontrolling
interests. As further detailed in Note 15, Commitments and
Contingencies, of the Notes to Consolidated Financial Statements of our Annual
Report on Form 10-K for the year ended October 31, 2009, the holders of equity
interests in certain of our subsidiaries have rights (“Put Rights”) that require
us to provide cash consideration for their equity interests (the “Redemption
Amount”) at fair value or at a formula that management intended to reasonably
approximate fair value based solely on a multiple of future earnings over a
measurement period. The Put Rights are embedded in the shares owned
by the noncontrolling interest holders and are not
freestanding. Previously, we recorded such redeemable noncontrolling
interests at historical cost plus an allocation of subsidiary earnings based on
ownership interest, less dividends paid to the noncontrolling interest
holders. Effective November 1, 2009, we adjusted our redeemable
noncontrolling interests in accordance with this new accounting guidance to the
higher of their carrying cost or management’s estimate of the Redemption Amount
with a corresponding decrease to retained earnings and classified such interests
outside of permanent equity. Under this guidance, subsequent
adjustments to the carrying amount of redeemable noncontrolling interests to
reflect any changes in the Redemption Amount at the end of each reporting period
will be recorded in the same manner. Such adjustments to Redemption
Amounts based on fair value will have no effect on net income per share
attributable to HEICO shareholders whereas the portion of periodic adjustments
to the carrying amount of redeemable noncontrolling interests based solely on a
multiple of future earnings that reflect a redemption amount in excess of fair
value will effect net income per share attributable to HEICO shareholders under
the two-class method.
As a result of adopting the new
accounting guidance for noncontrolling interests and redeemable noncontrolling
interests, we (i) reclassified approximately $78 million from temporary equity
(previously labeled as “Minority interests in consolidated subsidiaries”) to
permanent equity (labeled as “Noncontrolling interests”) pertaining to
noncontrolling interests that do not contain a redemption feature; and (ii)
renamed temporary equity as “Redeemable noncontrolling interests” and recorded
an approximately $45 million increase to redeemable noncontrolling interests
with a corresponding decrease to retained earnings in our Condensed Consolidated
Balance Sheet. The resulting $57 million of redeemable noncontrolling
interests as of November 1, 2009 represents management’s estimate of the
aggregate Redemption Amount of all Put Rights that we would be required to pay
of which approximately $25 million is redeemable at fair value and approximately
$32 million is redeemable based solely on a multiple of future
earnings. The actual Redemption Amount will likely be
different. See Note 12, Redeemable Noncontrolling Interests, for
additional information.
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued new guidance which defines fair
value, establishes a framework for measuring fair value, and requires expanded
disclosures about fair value measurements. In February 2008, the FASB
issued additional guidance which delayed the effective date by one year for
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. These
nonfinancial assets and liabilities include items such as goodwill, other
intangible assets, and property, plant and equipment that are measured at fair
value resulting from impairment, if deemed necessary. We adopted the
portions of the new guidance that were delayed on a prospective basis as of the
beginning of fiscal 2010, or November 1, 2009.
29
The
adoption did not have a material effect on our results of operations, financial
position or cash flows.
In December 2007, the FASB issued new
guidance for business combinations that retains the fundamental requirements of
previous guidance that the acquisition method of accounting (formerly the
“purchase accounting” method) be used for all business combinations and for an
acquirer to be identified for each business combination. However, the
new guidance changes the approach of applying the acquisition method in a number
of significant areas, including that acquisition costs will generally be
expensed as incurred; noncontrolling interests will be valued at fair value as
of the acquisition date; in-process research and development will be recorded at
fair value as an indefinite-lived intangible asset as of the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. Further, any contingent
consideration will be recognized as a liability at fair value as of the
acquisition date with subsequent fair value adjustments recorded in
operations. Contingent consideration was previously accounted for as
an additional cost of the respective acquired entity when paid. We
adopted the new guidance on a prospective basis as of the beginning of fiscal
2010 for all business combinations consummated on or after November 1,
2009. The adoption did not have a material effect on our results of
operations, financial position or cash flows.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06,
“Improving Disclosures About Fair Value Measurements,” which requires new
disclosures regarding transfers in and out of Level 1 and Level 2 fair value
measurements and more detailed information of activity in Level 3 fair value
measurements. We adopted ASU 2010-06 as of the beginning of the
second quarter of fiscal 2010, except the additional Level 3 disclosures,
which are effective in fiscal years beginning after December 15, 2010, or as of
fiscal 2012 for us. The adoption did not have a material effect on
our results of operations, financial position or cash flows.
Forward-Looking
Statements
Certain statements in this report
constitute “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements contained
herein that are not clearly historical in nature may be forward-looking and the
words “anticipate,” “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
30
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, space or homeland security
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 and; 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, medical,
telecommunication and electronic industries, which could negatively impact our
costs and revenues. We undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
There have not been any material
changes in our assessment of HEICO’s sensitivity to market risk that was
disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market
Risk,” in our Annual Report on Form 10-K for the year ended October 31,
2009.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation
of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that HEICO’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 our internal
control over financial reporting identified in connection with the evaluation
referred to above that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
31
PART
II. OTHER INFORMATION
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During May 2010, we repurchased 8,434
shares of our Common Stock at an average price of $38.88 per share as settlement
for employee taxes due pertaining to exercises of non-qualified stock
options. We made no repurchases of common stock under our existing
share program during the third quarter of fiscal 2010 and the number of shares
that may be repurchased is 1,280,928.
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. **
|
|
|
101.INS
|
XBRL Instance
Document.**
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
Document.**
|
|
|
101.CAL
|
XBRL Taxonomy Extension
Calculation Linkbase Document.**
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
Document.**
|
|
|
101.LAB
|
XBRL Taxonomy Extension Labels
Linkbase Document.**
|
|
|
101.PRE
|
XBRL Taxonomy Extension
Presentation Linkbase
Document.**
|
|
|
*
|
Filed
herewith.
|
|
|
**
|
Furnished
herewith.
|
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: September
1, 2010
|
By:
|
/s/ THOMAS S. IRWIN | |
| Thomas S. Irwin | |||
|
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial and
Accounting
Officer)
|
|||
|
|
|||
33
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. **
|
|
|
101.INS
|
XBRL Instance
Document.**
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
Document.**
|
|
|
101.CAL
|
XBRL Taxonomy Extension
Calculation Linkbase Document.**
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
Document.**
|
|
|
101.LAB
|
XBRL Taxonomy Extension Labels
Linkbase Document.**
|
|
|
101.PRE
|
XBRL Taxonomy Extension
Presentation Linkbase
Document.**
|