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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2006 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0341002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
per share Class A Common Stock,
$.01 par value per share New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Rights to Purchase Series B Junior Participating Preferred Stock
Rights to Purchase Series C Junior Participating Preferred Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant was $676,405,000 based on the closing price
of Common Stock and Class A Common Stock as of April 30, 2006 (the last business
day of the registrant's most recently completed second fiscal quarter) as
reported by the New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of
common stock, as of January 2, 2007:
Common Stock, $.01 par value 10,414,778 shares
Class A Common Stock, $.01 par value 15,134,223 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2007 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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HEICO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
Item 1. Business................................................................................. 1
Item 1A. Risk Factors............................................................................. 11
Item 1B. Unresolved Staff Comments................................................................ 15
Item 2. Properties............................................................................... 16
Item 3. Legal Proceedings........................................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders...................................... 17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.................................................................... 18
Item 6. Selected Financial Data.................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 36
Item 8. Financial Statements and Supplementary Data.............................................. 37
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..... 74
Item 9A. Controls and Procedures.................................................................. 74
Item 9B. Other Information........................................................................ 74
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 75
Item 11. Executive Compensation................................................................... 75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters................................................................................. 75
Item 13. Certain Relationships and Related Transactions........................................... 75
Item 14. Principal Accountant Fees and Services................................................... 75
PART IV
Item 15. Exhibits and Financial Statement Schedules............................................... 76
SIGNATURES............................................................................................. 81
PART I
ITEM 1. BUSINESS
THE COMPANY
HEICO Corporation through its subsidiaries (collectively, "HEICO",
"we", "us", "our" or the "Company") believes it is the world's largest
manufacturer of Federal Aviation Administration ("FAA")-approved jet engine and
aircraft component replacement parts, other than the original equipment
manufacturers ("OEMs"), and their subcontractors. HEICO also believes it is a
leading manufacturer of various types of electronic equipment for the aviation,
defense, space, medical, telecommunications, and electronics industries.
Our business is comprised of two operating segments:
The Flight Support Group. Our Flight Support Group, consisting of HEICO
Aerospace Holdings Corp. ("HEICO Aerospace") and its subsidiaries, accounted for
71%, 71% and 74% of our net sales in fiscal 2006, 2005 and 2004, respectively.
This Group uses proprietary technology to design and manufacture jet engine and
aircraft component replacement parts for sale at lower prices than those
manufactured by OEMs. These parts are approved by the FAA and are the functional
equivalent of parts sold by OEMs. In addition, the Flight Support Group repairs,
refurbishes and overhauls jet engine and aircraft components, avionics and
instruments for domestic and foreign commercial air carriers and aircraft repair
companies, and military and business aircraft operators; manufactures thermal
insulation products and other component parts primarily for aerospace, defense
and commercial applications; and distributes FAA-approved hydraulic, pneumatic,
mechanical and electromechanical components for commercial, regional and general
aviation markets.
The Flight Support Group competes with the leading industry OEMs and,
to a lesser extent, with a number of smaller, independent parts distributors.
Historically, the three principal jet engine OEMs, General Electric (including
CFM International), Pratt & Whitney, and Rolls Royce, have been the sole source
of substantially all jet engine replacement parts for their jet engines. Other
OEMs have been the sole source of replacement parts for their aircraft component
parts. While we believe that we currently supply less than 2% of the market for
jet engine and aircraft component replacement parts, we have consistently been
adding new products to our line and currently hold Parts Manufacturer Approvals,
which we refer to as "PMAs," for over 5,000 jet engine and aircraft component
replacement parts.
We believe that, based on our competitive pricing, reputation for high
quality, short lead time requirements, strong relationships with domestic and
foreign commercial air carriers and repair stations (companies that overhaul
aircraft engines and/or components), strategic relationships with Lufthansa and
other major airlines and successful track record of receiving PMAs from the FAA,
we are uniquely positioned to continue to increase our product lines and gain
market share.
The Electronic Technologies Group. Our Electronic Technologies Group,
consisting of HEICO Electronic Technologies Corp. and its subsidiaries,
accounted for 29%, 29% and 26% of our net sales in fiscal 2006, 2005 and 2004,
respectively. Through our Electronic Technologies Group, which derived
approximately 44% of its sales in fiscal 2006 from the sale of products and
services to U.S. and foreign military agencies, we design, manufacture and sell
various types of electronic, microwave and electro-optical products, including
infrared simulation and test equipment, laser rangefinder receivers, electrical
power supplies, back-up power supplies, electromagnetic interference and radio
frequency interference shielding, high power capacitor charging power supplies,
amplifiers, photodetectors, amplifier modules,
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flash lamp drivers, laser diode drivers, arc lamp power supplies, custom power
supply designs, cable assemblies, high voltage interconnection devices and wire,
and high-speed interface products that link devices such as telemetry receivers,
digital cameras, high resolution scanners, simulation systems and test systems
to almost any computer.
In October 1997, we entered into a strategic alliance with Lufthansa.
Lufthansa is the world's largest independent provider of engineering and
maintenance services for aircraft components and jet engines and supports over
200 airlines, governments and other customers. As part of this strategic
alliance, Lufthansa has invested approximately $50 million in our company, to
acquire and maintain a 20% minority interest in HEICO Aerospace, and to
partially fund the accelerated development of additional FAA-approved
replacement parts for jet engines and aircraft components over the subsequent
four years pursuant to a research and development cooperation agreement. This
strategic alliance has enabled us to expand domestically and internationally by
enhancing our ability to (i) identify key jet engine and aircraft component
replacement parts with significant profit potential by utilizing Lufthansa's
extensive operating data on engine and component parts; (ii) introduce those
parts throughout the world in an efficient manner due to Lufthansa's testing and
diagnostic resources; and (iii) broaden our customer base by capitalizing on
Lufthansa's established relationships and alliances within the airline industry.
In March 2001, we entered into a joint venture with American Airlines,
one of the world's largest airlines, to develop, design and sell FAA-approved
jet engine and aircraft component replacement parts through HEICO Aerospace. The
joint venture is partly owned by American Airlines. American Airlines and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
support on a worldwide basis. During fiscal years 2002 through 2004, we entered
into additional strategic relationships with other leading airlines such as
United Airlines (May 2002), Delta Air Lines (February 2003), Air Canada (March
2003) and Japan Airlines (March 2004). These relationships accelerate HEICO's
efforts in developing a broad range of jet engine and aircraft component
replacement parts for FAA approval. Each of the aforementioned airlines purchase
these newly developed parts, and most of HEICO Aerospace's current FAA-approved
parts product line, on an exclusive basis from HEICO Aerospace.
In February 2006, we entered into a Joint Cooperation Agreement with
China Aviation Import and Export Group Corporation ("CASGC") of the Peoples
Republic of China to promote HEICO Aerospace FAA-approved aircraft and engine
replacement products in China. CASGC is a state-owned company, which is a
comprehensive service provider for aviation supplies, primarily engaged in the
import and export of aviation-related products in China including aircraft
engines, spares, ground support and safety equipment. CASGC's business scope
also covers leasing maintenance, component repair and overhaul, consignment
stores, manufacturing, and training.
We have continuously operated in the aerospace industry for more than
50 years. Since assuming control in 1990, our current management has achieved
significant sales and profit growth through a broadened line of product
offerings, an expanded customer base, increased research and development
expenditures, and the completion of a number of acquisitions. As a result of
internal growth and acquisitions, our net sales from continuing operations have
grown from $26.2 million in fiscal 1990 to $392.2 million in fiscal 2006, a
compound annual growth rate of approximately 18.4%. During the same period, we
improved our net income from continuing operations from $2.0 million to $31.9
million.
FLIGHT SUPPORT GROUP
Our Flight Support Group, headquartered in Hollywood, Florida, designs,
engineers, manufactures, distributes, repairs and overhauls jet engine and
aircraft component replacement parts such as combustion chambers, compressor
blades, vanes, avionics and instruments, seals and various other
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engine and aircraft parts. The Flight Support Group also manufactures specialty
aviation and defense components as a subcontractor. The Flight Support Group
serves a broad spectrum of the aviation industry, including (i) commercial
airlines and air cargo carriers; (ii) repair and overhaul facilities; (iii)
OEMs; and (iv) U.S. and foreign governments.
Jet engine and aircraft component replacement parts can be categorized
by their ongoing ability to be repaired and returned to service. The general
categories in which we participate are as follows: (i) rotable; (ii) repairable;
and (iii) expendable. A rotable is a part which is removed periodically as
dictated by an operator's maintenance procedures or on an as needed basis and is
typically repaired or overhauled and re-used an indefinite number of times. An
important subset of rotables is "life limited" parts. A life limited rotable has
a designated number of allowable flight hours and/or cycles (one take-off and
landing generally constitutes one cycle) after which it is rendered unusable. A
repairable is similar to a rotable except that it can only be repaired a limited
number of times before it must be discarded. An expendable is generally a part
which is used and not thereafter repaired for further use.
Jet engine and aircraft component replacement parts are classified
within the industry as (i) factory-new; (ii) new surplus; (iii) overhauled; (iv)
repairable; and (v) as removed. A factory-new or new surplus part is one that
has never been installed or used. Factory-new parts are purchased from
FAA-approved manufacturers (such as HEICO or OEMs) or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part is one that has
been completely repaired and inspected by a licensed repair facility such as
ours. An aircraft spare part is classified as "repairable" if it can be repaired
by a licensed repair facility under applicable regulations. A part may also be
classified as "repairable" if it can be removed by the operator from an aircraft
or jet engine while operating under an approved maintenance program and is
airworthy and meets any manufacturer or time and cycle restrictions applicable
to the part. A "factory-new," "new surplus," "overhauled" or "repairable" part
designation indicates that the part can be immediately utilized on an aircraft.
A part in "as removed" condition requires inspection and possibly functional
testing, repair or overhaul by a licensed facility prior to being returned to
service in an aircraft.
Factory-New Jet Engine and Aircraft Component Replacement Parts. The
principal business of the Flight Support Group is the research and development,
design, manufacture and sale of FAA-approved replacement parts that are sold to
domestic and foreign commercial air carriers and aircraft repair and overhaul
companies. Our principal competitors are Pratt & Whitney, a division of United
Technologies Corporation and General Electric Company, including its CFM
International joint venture. The Flight Support Group's factory-new replacement
parts include various jet engine and aircraft component replacement parts. A key
element of our growth strategy is the continued design and development of an
increasing number of Parts Manufacturer Approval ("PMA") replacement parts in
order to further penetrate our existing customer base and obtain new customers.
We select the jet engine and aircraft component replacement parts to design and
manufacture through a selection process which analyzes industry information to
determine which replacement parts are suitable candidates. As part of
Lufthansa's investment in the Flight Support Group, Lufthansa has the right to
select 50% of the parts for which we will seek PMAs, provided that such parts
are technologically and economically feasible and substantially comparable with
the profitability of our other PMA parts.
Repair and Overhaul Services. The Flight Support Group provides repair
and overhaul services on selected jet engine and aircraft component parts, as
well as on avionics, instruments, composites and flight surfaces of commercial
aircraft. The Flight Support Group also provides repair and overhaul services to
military aircraft operators and aircraft repair and overhaul companies. Our
repair and overhaul operations require a high level of expertise, advanced
technology and sophisticated equipment. Services include the repair,
refurbishment and overhaul of numerous accessories and parts mounted on gas
turbine engines and airframes. Components overhauled include fuel pumps,
generators, fuel controls, pneumatic
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valves, starters and actuators, turbo compressors and constant speed drives,
hydraulic pumps, valves and actuators, composite flight controls,
electro-mechanical equipment and auxiliary power unit accessories. The Flight
Support Group also provides commercial airlines, regional operators, asset
management companies, and MRO providers with high quality and cost effective
niche accessory component exchange services as an alternative to OEMs' spares
services.
Furthermore, the Flight Support Group repairs avionics and navigation
systems, as well as their subcomponents and other instruments, utilized in
military and commercial aircraft. Our customers include the United States
government, foreign military agencies, and both domestic and foreign commercial
airlines.
Manufacture of Specialty Aircraft/Defense Related Parts and
Subcontracting for OEMs. The Flight Support Group manufactures thermal
insulation blankets primarily for aerospace, defense and commercial
applications. The Flight Support Group also manufactures specialty components
for sale as a subcontractor to OEMs and the U.S. government.
Distribution. The Flight Support Group distributes FAA-approved parts
including hydraulic, pneumatic, mechanical and electro-mechanical components for
the commercial, regional and general aviation markets.
FAA Approvals and Product Design. Non-OEM manufacturers of jet engine
replacement parts must receive a Parts Manufacturer Approval ("PMA") from the
FAA to sell the replacement part. The PMA approval process includes the
submission of sample parts, drawings and testing data to one of the FAA's
Aircraft Certification Offices where the submitted data are analyzed. We believe
that an applicant's ability to successfully complete the PMA process is limited
by several factors, including (i) the agency's confidence level in the
applicant; (ii) the complexity of the part; (iii) the volume of PMAs being
filed; and (iv) the resources available to the FAA. We also believe that
companies such as HEICO that have demonstrated their manufacturing capabilities
and established favorable track records with the FAA generally receive a faster
turnaround time in the processing of PMA applications. Finally, we believe that
the PMA process creates a significant barrier to entry in this market niche
through both its technical demands and its limits on the rate at which
competitors can bring products to market.
As part of our growth strategy, we have continued to increase our
research and development activities. Research and development expenditures by
the Flight Support Group, which were approximately $300,000 in fiscal 1991,
increased to approximately $10.6 million in fiscal 2006, $8.8 million in fiscal
2005 and $8.6 million in 2004. We believe that our Flight Support Group's
research and development capabilities are a significant component of our
historical success and an integral part of our growth strategy.
Our expanded research and development activities have included
development of more complex jet engine and aircraft component replacement parts.
We now have approximately 3,000 parts approved by the FAA that are actively
being marketed and have cumulative FAA approvals for nearly 5,000 parts. We
believe the development and subsequent sale of PMA parts represents a
significant long-term market opportunity. In fiscal 2006, the FAA granted us
PMAs for approximately 350 new parts (excluding acquired PMAs); however, no
assurance can be given that the FAA will continue to grant PMAs or that we will
achieve acceptable levels of net sales and gross profits on such parts in the
future.
We benefit from our proprietary rights relating to certain design,
engineering and manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our
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unique manufacturing capabilities are required by the customer's specifications
or designs, thereby necessitating reliance on us for production of such designed
products.
We have no patents for the proprietary techniques, including software
and manufacturing expertise, we have developed to manufacture jet engine and
aircraft component replacement parts and instead, we rely on trade secret
protection. Although our proprietary techniques and software and manufacturing
expertise are subject to misappropriation or obsolescence, we believe that we
take appropriate measures to prevent misappropriation or obsolescence from
occurring by developing improved methods and processes and new techniques, which
we will continue on an ongoing basis as dictated by the technological needs of
our business.
ELECTRONIC TECHNOLOGIES GROUP
Much of our Electronic Technologies Group's strategy is centered around
producing equipment that helps the U.S. military and allied foreign military
agencies conduct stand-off operations from greater distances. Our activities in
this regard are focused on products that are placed in airborne, vehicle-based
or handheld targeting systems as well as in providing equipment used to develop,
test and calibrate such systems.
Electro-Optical Infrared Simulation and Test Equipment. The Electronic
Technologies Group believes it is a leading international designer and
manufacturer of niche state-of-the-art simulation, testing and calibration
equipment used in the development of missile seeking technology, airborne
targeting and reconnaissance systems, shipboard targeting and reconnaissance
systems, space-based sensors as well as ground vehicle-based systems. These
products include infrared scene projector equipment, such as our MIRAGE IR Scene
Simulator, high precision blackbody sources, software and integrated calibration
systems.
Simulation equipment allows the U.S. government and allied foreign
military to save money on missile testing, as it allows infrared-based missiles
to be tested on a multi-axis, rotating table, instead of requiring the launch of
a complete missile. In addition, several large military prime contractors have
elected to purchase such equipment from us instead of maintaining internal staff
to do so because we can offer a more cost-effective solution. Our customers
include major U.S. Department of Defense weapons laboratories as well as defense
prime contractors such as Lockheed Martin, Northrop Grumman and Boeing.
Electro-Optical Laser Products. The Electronic Technologies Group
believes it is a leading designer and maker of Laser Rangefinder Receivers and
other photodetectors used in airborne, vehicular and handheld targeting systems
manufactured by major prime military contractors, such as Northrop Grumman and
Lockheed Martin. Most of our Rangefinder Receiver product offering consists of
complex and patented products which detect reflected light from laser targeting
systems and allow the systems to confirm target accuracy and calculate target
distances prior to discharging a weapon system. These products are also used in
laser eye surgery systems for tracking ocular movement.
Electro-Optical, Microwave and Other Power Equipment. The Electronic
Technologies Group produces power supplies, amplifiers and flash lamp drivers
used in laser systems for military, medical and other applications that are
sometimes utilized with our Rangefinder Receivers. We also produce emergency
back-up power supplies and batteries used on commercial aircraft and business
jets for services such as emergency exit lighting, emergency fuel shut-off,
power door assists, cockpit voice recorders and flight computers. We offer
custom or standard designs that solve challenging OEM requirements and meet
stringent agency safety and emissions requirements. Our power electronics
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products include capacitor charger power supplies, laser diode drivers, arc lamp
power supplies and custom power supply designs.
Our microwave products are used in satellites and electronic warfare
systems. These products, which include isolators, bias tees, circulators,
latching ferrite switches and waveguide adapters are used in satellites to
control or direct energy according to operator needs. As satellites are
frequently used as sensors for stand-off warfare, we believe this product line
further supports our goal of increasing our activity in the stand-off market. We
believe we are a leading supplier of the niche products which we design and make
for this market, a market that includes commercial satellites. Our customers for
these products include satellite makers, such as Boeing, Northrop Grumman and
Thales.
Electromagnetic and Radio Interference Shielding. The Electronic
Technologies Group designs and makes shielding used to prevent electromagnetic
energy and radio frequencies from interfering with computers, telecommunication
devices, avionics, weapons systems and other electronic equipment. Our products
include a patented line of shielding applied directly to circuit boards and a
line of gasket-type shielding applied to computers and other electronic
equipment. Our customers consist essentially of medical, electronic,
telecommunication and defense equipment producers.
High Voltage Interconnection Devices. The Electronic Technologies Group
designs and manufactures high and very high voltage interconnection devices,
cable assemblies and wire for the medical equipment, defense and other
industrial markets. Among others, our products are utilized in aircraft missile
defense, fighter pilot helmet displays, avionic systems, medical applications,
wireless communications, as well as industrial applications including high
voltage test equipment and underwater monitoring systems.
High-Speed Interface Products: The Electronic Technologies Group
designs, manufactures and sells advanced high-technology, high-speed interface
products utilized in homeland security, defense, medical research, astronomical
and other applications across numerous industries.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS AND GEOGRAPHIC AREAS
See Note 16, Operating Segments, of the Notes to Consolidated Financial
Statements for financial information by operating segment and by geographic
areas.
SALES, MARKETING AND CUSTOMERS
Each of our operating segments independently conducts sales and
marketing efforts directed at their respective customers and industries and, in
some cases, collaborates with other operating divisions and subsidiaries within
its group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association, which we refer to as AIA, the leading trade association
representing the nation's manufacturers of commercial, military and business
aircraft, aircraft engines and related components and equipment. Due in large
part to our established industry presence, we enjoy strong customer relations,
name recognition and repeat business.
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We sell our products to a broad customer base consisting of domestic
and foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 21% of total net sales during the year
ended October 31, 2006.
COMPETITION
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing as a result of lower labor costs and other factors.
Our jet engine and aircraft component replacement parts business
competes primarily with Pratt & Whitney and General Electric. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the Flight Support Group, we compete with both the leading jet engine OEMs and a
large number of machining, fabrication and repair companies, some of which have
greater financial and other resources than we do. Competition is based mainly on
price, product performance, service and technical capability.
Competition for the repair and overhaul of jet engine and aircraft
components comes from three principal sources: OEMs, major commercial airlines
and other independent service companies. Some of these competitors have greater
financial and other resources than we do. Some major commercial airlines own and
operate their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own aircraft components and for third
parties. OEMs also maintain service centers that provide repair and overhaul
services for the components they manufacture. Other independent service
organizations also compete for the repair and overhaul business of other users
of aircraft components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
Our Electronic Technologies Group competes with several large and small
domestic and foreign competitors, some of which have greater financial and other
resources than we do. The market for our electronic products are niche markets
with several competitors with competition based mainly on design, technology,
quality, price and customer satisfaction.
RAW MATERIALS
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel,
pre-plated phosphor bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
BACKLOG
Our total backlog of unshipped orders was $80.0 million as of October
31, 2006 compared to $61.3 million as of October 31, 2005. The Flight Support
Group's backlog of unshipped orders was $34.4 million as of October 31, 2006 as
compared to $23.2 million as of October 31, 2005. This backlog
7
excludes forecasted shipments for certain contracts of the Flight Support Group
pursuant to which customers provide only estimated annual usage and not firm
purchase orders. The increase in the Flight Support Group's backlog is primarily
related to additional backlogs from fiscal 2006 acquisitions and improved demand
for its aftermarket replacement parts and repair and overhaul services, as well
as orders of new products and services. Our backlogs within the Flight Support
Group are typically short-lead in nature with many product orders being received
within the month of shipment. The Electronic Technologies Group's backlog of
unshipped orders was $45.6 million as of October 31, 2006 as compared to $38.1
million as of October 31, 2005. The increase in the Electronic Technologies
Group's backlog is primarily related to additional backlogs from fiscal 2006
acquisitions and orders of new products and services. Substantially the entire
backlog of orders as of October 31, 2006 is expected to be delivered during
fiscal 2007.
GOVERNMENT REGULATION
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aviation equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and equipment are prescribed by regulatory authorities
and can be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us.
There has been no material adverse effect to our consolidated financial
statements as a result of these government regulations.
ENVIRONMENTAL REGULATION
Our operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the Environmental Protection Agency. Among
other matters, these regulatory authorities impose requirements that regulate
the operation, handling, transportation, and disposal of hazardous materials,
the health and safety of workers, and require us to obtain and maintain licenses
and permits in connection with our operations. This extensive regulatory
framework imposes significant compliance burdens and risks on us.
Notwithstanding these burdens, we believe that we are in material compliance
with all federal, state, and local laws and regulations governing our
operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 mandates general requirements for safe workplaces for all
employees and established the Occupational Safety and Health Administration
("OSHA") in the Department of Labor. In particular, OSHA provides special
procedures and measures for the handling of some hazardous and toxic substances.
In addition, specific safety standards have been promulgated for workplaces
engaged in the treatment, disposal or storage of
8
hazardous waste. Requirements under state law, in some circumstances, may
mandate additional measures for facilities handling materials specified as
extremely dangerous. We believe that our operations are in material compliance
with OSHA's health and safety requirements.
INSURANCE
We are a named insured under policies which include the following
coverage: (i) product liability, including grounding; (ii) personal property,
inventory and business income at our facilities; (iii) general liability
coverage; (iv) employee benefit liability; (v) international liability and
automobile liability; (vi) umbrella liability coverage; and (vii) various other
activities or items subject to certain limits and deductibles. We believe that
our insurance coverage is adequate to insure against the various liability risks
of our business.
EMPLOYEES
As of October 31, 2006, we had 1,843 full-time and part-time employees,
of whom 1,286 were in the Flight Support Group, 533 were in the Electronic
Technologies Group, and 24 were Corporate. None of our employees is represented
by a union. We believe that we have good relations with our employees.
AVAILABLE INFORMATION
Our Internet web site address is http://www.heico.com. We make
available free of charge through our web site our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission ("SEC"). These materials are also available free of charge
on the SEC's website at http://www.sec.gov. The information on or obtainable
through our web site is not incorporated into this annual report on Form 10-K.
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller and other persons performing similar functions. The code of ethics is
located on our web site at http://www.heico.com. Any amendments to or waivers
from a provision of this code of ethics will be posted on the web site. Also
located on the web site are our Corporate Governance Guidelines, Finance/Audit
Committee Charter, Nominating & Corporate Governance Committee Charter and
Compensation Committee Charter.
Copies of the above referenced materials will be made available, free
of charge, upon written request to the Corporate Secretary at the Company's
headquarters.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are elected by the Board of Directors at the
first meeting following the annual meeting of shareholders and serve at the
discretion of the Board. The following table sets forth the names, ages of, and
positions and offices held by our executive officers as of December 31, 2006:
DIRECTOR
NAME AGE POSITION(S) SINCE
--------------------------- ----- ------------------------------------------------------ --------
Laurans A. Mendelson 68 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 60 Executive Vice President and Chief Financial _
Officer
Eric A. Mendelson 41 Executive Vice President and Director; President and 1992
Chief Executive Officer of HEICO Aerospace Holdings
Corp.
Victor H. Mendelson 39 Executive Vice President, General Counsel and 1996
Director; President and Chief Executive Officer
of HEICO Electronic Technologies Corp.
James L. Reum 75 Executive Vice President of HEICO _
Aerospace Holdings Corp.
Laurans A. Mendelson has served as Chairman of the Board of the Company
since December 1990. He has also served as Chief Executive Officer of the
Company since February 1990 and President of the Company since September 1991.
HEICO Corporation is a member of the Aerospace Industries Association ("AIA") in
Washington D.C., and Mr. Mendelson frequently serves on the Board of Governors
of AIA. He is also Chairman of the Board of Trustees, member of the Executive
Committee and member of the Society of Mt. Sinai Founders of Mt. Sinai Medical
Center in Miami Beach, Florida. In addition, Mr. Mendelson served as a Trustee
of Columbia University in The City of New York from 1995 to 2001, as well as
Chairman of the Trustees' Audit Committee. Mr. Mendelson currently serves as
Trustee Emeritus of Columbia University and is a member of the Trustees' Finance
and Audit Committees. Mr. Mendelson is a Certified Public Accountant. Laurans A.
Mendelson is the father of Eric Mendelson and Victor Mendelson.
Thomas S. Irwin has served as Executive Vice President and Chief
Financial Officer of the Company since September 1991 and served as Senior Vice
President of the Company from 1986 to 1991 and Vice President and Treasurer from
1982 to 1986. Mr. Irwin is a Certified Public Accountant and a Trustee of the
Greater Hollywood Chamber of Commerce.
Eric A. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1992 to 2001, and has been
President and Chief Executive Officer of HEICO Aerospace, a subsidiary of the
Company, since its formation in 1997 and President of HEICO Aerospace
Corporation since 1993. He also served as President of HEICO's Jet Avion
Corporation, a wholly owned subsidiary of HEICO Aerospace, from 1993 to 1996 and
served as Jet Avion's Executive Vice President and Chief Operating Officer from
1991 to 1993. From 1990 to 1991, Mr. Mendelson was Director of Planning and
Operations of the Company. Mr. Mendelson is a co-founder, and, since 1987, has
been Managing Director of Mendelson International Corporation, a private
investment company, which is a shareholder of HEICO. Eric Mendelson is the son
of Laurans Mendelson and the brother of Victor Mendelson.
10
Victor H. Mendelson has served as Executive Vice President of the
Company since 2001, Vice President of the Company from 1996 to 2001, as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of the Company, since September 1996 and as General Counsel of the
Company since 1993. He served as Executive Vice President of the Company's
former MediTek Health Corporation subsidiary from 1994 and its Chief Operating
Officer from 1995 until its sale in July 1996. He was the Company's Associate
General Counsel from 1992 until 1993. From 1990 until 1992, he worked on a
consulting basis with the Company, developing and analyzing various strategic
opportunities. Mr. Mendelson is a co-founder, and, since 1987, has been
President of Mendelson International Corporation, a private investment company,
which is a shareholder of HEICO. He is a Trustee of the Greater Miami Chamber of
Commerce, a Trustee of St. Thomas University in Miami Gardens, Florida and a
Director of the Florida Grand Opera. Victor Mendelson is the son of Laurans
Mendelson and the brother of Eric Mendelson.
James L. Reum retired from full-time service to HEICO Aerospace in
August 2001 and remains active on a part-time basis with HEICO Aerospace as
Executive Vice President. He served as Chief Operating Officer of HEICO
Aerospace and its predecessor from 1995 to 1999, President of LPI Industries
Corporation from 1991 to 1998 and President of Jet Avion Corporation from 1996
to 1998. From 1990 to 1991, he served as Director of Research and Development
for Jet Avion Corporation. From 1986 to 1989, Mr. Reum was self-employed as a
management and engineering consultant to companies primarily within the
aerospace industry. From 1957 to 1986, he was employed in various management
positions with Chromalloy Gas Turbine Corp., Cooper Airmotive (later named
Aviall, Inc.), United Airlines, Inc. and General Electric Company.
ITEM 1A. RISK FACTORS
Our business, financial condition, operating results, and cash flows
can be impacted by a number of factors, many of which are beyond our control,
including but not limited to those set forth below and elsewhere in this Annual
Report on Form 10-K, any one of which may cause our actual results to differ
materially from anticipated results:
OUR SUCCESS IS HIGHLY DEPENDENT ON THE PERFORMANCE OF THE AVIATION INDUSTRY,
WHICH COULD BE IMPACTED BY LOWER DEMAND FOR COMMERCIAL AIR TRAVEL OR AIRLINE
FLEET CHANGES CAUSING LOWER DEMAND FOR OUR GOODS AND SERVICES.
Economic factors and passenger security concerns that affect the
aviation industry also affect our business. The aviation industry has
historically been subject to downward cycles from time to time which reduce the
overall demand for jet engine and aircraft component replacement parts and
repair and overhaul services, and such downward cycles result in lower prices
and greater credit risk. These economic factors and passenger security concerns
may have a material adverse effect on our business, financial condition and
results of operations.
WE ARE SUBJECT TO GOVERNMENTAL REGULATION AND OUR FAILURE TO COMPLY WITH THESE
REGULATIONS COULD CAUSE THE GOVERNMENT TO WITHDRAW OR REVOKE OUR AUTHORIZATIONS
AND APPROVALS TO DO BUSINESS AND COULD SUBJECT US TO PENALTIES AND SANCTIONS
THAT COULD HARM OUR BUSINESS.
Governmental agencies throughout the world, including the FAA, highly
regulate the manufacture, repair and overhaul of aircraft parts and accessories.
We include with the replacement parts that we sell to our customers
documentation certifying that each part complies with applicable regulatory
requirements and meets applicable standards of airworthiness established by the
FAA or the equivalent regulatory agencies in other countries. In addition, our
repair and overhaul operations are subject to
11
certification pursuant to regulations established by the FAA. Specific
regulations vary from country to country, although compliance with FAA
requirements generally satisfies regulatory requirements in other countries. The
revocation or suspension of any of our material authorizations or approvals
would have an adverse effect on our business, financial condition and results of
operations. New and more stringent government regulations, if adopted and
enacted, could have an adverse effect on our business, financial condition and
results of operations. In addition, some sales to foreign countries of the
equipment manufactured by our Electronic Technologies Group require approval or
licensing from the U.S. government. Denial of export licenses could reduce our
sales to those countries and could have a material adverse effect on our
business.
THE RETIREMENT OF COMMERCIAL AIRCRAFT COULD REDUCE OUR REVENUES.
Our Flight Support Group designs, engineers, manufactures and
distributes jet engine and aircraft component replacement parts and also offers
repairs, refurbishments and overhauls of jet engine and aircraft components. If
aircraft for which we have replacement parts or supply repair and overhaul
services are retired and there are fewer aircraft that require these parts or
services our revenues may decline.
REDUCTIONS IN DEFENSE OR SPACE SPENDING BY U.S. AND/OR FOREIGN CUSTOMERS COULD
REDUCE OUR REVENUES.
In fiscal 2006, approximately 44% of the sales of our Electronic
Technologies Group were derived from the sale of products and services to U.S.
and foreign military agencies and their suppliers. A decline in defense or space
budgets or additional restrictions imposed by the U.S. government on sales of
products or services to foreign military agencies could lower sales of our
products and services.
INTENSE COMPETITION FROM EXISTING AND NEW COMPETITORS MAY HARM OUR BUSINESS.
We face significant competition in each of our businesses.
Flight Support Group
o For jet engine replacement parts, we compete with the industry's
leading jet engine OEMs, particularly Pratt & Whitney and General
Electric.
o For the overhaul and repair of jet engine and airframe components,
as well as avionics and navigation systems, we compete with:
- major commercial airlines, many of which operate their own
maintenance and overhaul units;
- OEMs, which manufacture, repair and overhaul their own parts;
and
- other independent service companies.
Electronic Technologies Group
o For the design and manufacture of various types of electronic and
electro-optical equipment as well as high voltage interconnection
devices and high speed interface products, we compete in a
fragmented marketplace with a number of companies, some of which
are well capitalized.
12
The aviation aftermarket supply industry is highly fragmented, has
several highly visible leading companies and is characterized by intense
competition. Some of our OEM competitors have greater name recognition than
HEICO, as well as complementary lines of business and financial, marketing and
other resources that HEICO does not have. In addition, OEMs, aircraft
maintenance providers, leasing companies and FAA-certificated repair facilities
may attempt to bundle their services and product offerings in the supply
industry, thereby significantly increasing industry competition. Moreover, our
smaller competitors may be able to offer more attractive pricing of parts as a
result of lower labor costs or other factors. A variety of potential actions by
any of our competitors, including a reduction of product prices or the
establishment by competitors of long-term relationships with new or existing
customers, could have a material adverse effect on our business, financial
condition and results of operations. Competition typically intensifies during
cyclical downturns in the aviation industry, when supply may exceed demand. We
may not be able to continue to compete effectively against present or future
competitors, and competitive pressures may have a material and adverse effect on
our business, financial condition and results of operations.
OUR SUCCESS IS DEPENDENT ON THE DEVELOPMENT AND MANUFACTURE OF NEW PRODUCTS,
EQUIPMENT AND SERVICES. OUR INABILITY TO DEVELOP, MANUFACTURE AND INTRODUCE NEW
PRODUCTS AND SERVICES AT PROFITABLE PRICING LEVELS COULD REDUCE OUR SALES OR
SALES GROWTH.
The aviation, defense, space and electronics industries are constantly
undergoing development and change and, accordingly, new products, equipment and
methods of repair and overhaul service are likely to be introduced in the
future. In addition to manufacturing electronic and electro-optical equipment
and selected aerospace and defense components for OEMs and the U.S. government
and repairing jet engine and aircraft components, we re-design sophisticated
aircraft replacement parts originally developed by OEMs so that we can offer the
replacement parts for sale at substantially lower prices than those manufactured
by the OEMs. Consequently, we devote substantial resources to research and
product development. Technological development poses a number of challenges and
risks, including the following:
o We may not be able to successfully protect the proprietary
interests we have in various aircraft parts, electronic and
electro-optical equipment and our repair processes;
o As OEMs continue to develop and improve jet engines and aircraft
components, we may not be able to re-design and manufacture
replacement parts that perform as well as those offered by OEMs or
we may not be able to profitably sell our replacement parts at
lower prices than the OEMs;
o We may need to expend significant capital to:
- purchase new equipment and machines,
- train employees in new methods of production and service, and
- fund the research and development of new products; and
o Development by our competitors of patents or methodologies that
preclude us from the design and manufacture of aircraft replacement
parts or electrical and electro-optical equipment could adversely
affect our business, financial condition and results of operations.
In addition, we may not be able to successfully develop new products,
equipment or methods of repair and overhaul service, and the failure to do so
could have a material adverse effect on our business, financial condition and
results of operations.
13
PRODUCT SPECIFICATION COSTS AND REQUIREMENTS COULD CAUSE AN INCREASE TO OUR
COSTS TO COMPLETE CONTRACTS.
Although our engineering teams have usually successfully foreseen
contract completion costs, the costs to meet customer specifications and
requirements could result in us having to spend more to design or manufacture
products and this could reduce our profit margins on current contracts or those
we obtain in the future.
WE MAY INCUR PRODUCT LIABILITY CLAIMS THAT ARE NOT FULLY INSURED.
Our jet engine and aircraft component replacement parts and repair and
overhaul services expose our business to potential liabilities for personal
injury or death as a result of the failure of an aircraft component that we have
designed, manufactured or serviced. The commercial aviation industry
occasionally has catastrophic losses that may exceed policy limits. An uninsured
or partially insured claim, or a claim for which third-party indemnification is
not available, could have a material adverse effect on our business, financial
condition and results of operations. Additionally, insurance coverage costs may
become even more expensive in the future. Our customers typically require us to
maintain substantial insurance coverage and our inability to obtain insurance
coverage at commercially reasonable rates could have a material adverse effect
on our business.
WE MAY NOT HAVE THE ADMINISTRATIVE, OPERATIONAL OR FINANCIAL RESOURCES TO
CONTINUE TO GROW THE COMPANY.
We have experienced rapid growth in recent periods and intend to
continue to pursue an aggressive growth strategy, both through acquisitions and
internal expansion of products and services. Our growth to date has placed, and
could continue to place, significant demands on our administrative, operational
and financial resources. We may not be able to grow effectively or manage our
growth successfully, and the failure to do so could have a material adverse
effect on our business, financial condition and results of operations.
WE MAY NOT BE ABLE TO EXECUTE OUR ACQUISITION STRATEGY, WHICH COULD SLOW OUR
GROWTH.
A key element of our strategy is growth through the acquisition of
additional companies. Our acquisition strategy is affected by and poses a number
of challenges and risks, including the following:
o Availability of suitable acquisition candidates;
o Availability of capital;
o Diversion of management's attention;
o Integration of the operations and personnel of acquired companies;
o Potential write downs of acquired intangible assets;
o Potential loss of key employees of acquired companies;
o Use of a significant portion of our available cash;
o Significant dilution to our shareholders for acquisitions made
utilizing our securities; and
o Consummation of acquisitions on satisfactory terms.
We may not be able to successfully execute our acquisition strategy,
and the failure to do so could have a material adverse effect on our business,
financial condition and results of operations.
14
WE MAY INCUR ENVIRONMENTAL LIABILITIES AND THESE LIABILITIES MAY NOT BE COVERED
BY INSURANCE.
Our operations and facilities are subject to a number of federal, state
and local environmental laws and regulations, which govern, among other things,
the discharge of hazardous materials into the air and water as well as the
handling, storage and disposal of hazardous materials. Pursuant to various
environmental laws, a current or previous owner or operator of real property may
be liable for the costs of removal or remediation of hazardous materials.
Environmental laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of hazardous materials.
Although management believes that our operations and facilities are in material
compliance with environmental laws and regulations, future changes in them or
interpretations thereof or the nature of our operations may require us to make
significant additional capital expenditures to ensure compliance in the future.
We do not maintain specific environmental liability insurance, and the
expenses related to these environmental liabilities, if we are required to pay
them, could have a material adverse effect on our business, financial condition
and results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL AND THE LOSS OF THESE KEY PERSONNEL COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR SUCCESS.
Our success substantially depends on the performance, contributions and
expertise of our senior management team led by Laurans A. Mendelson, our
Chairman, President and Chief Executive Officer. Technical employees are also
critical to our research and product development, as well as our ability to
continue to re-design sophisticated products of OEMs in order to sell competing
replacement parts at substantially lower prices than those manufactured by the
OEMs. The loss of the services of any of our executive officers or other key
employees or our inability to continue to attract or retain the necessary
personnel could have a material adverse effect on our business, financial
condition and results of operations.
OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SIGNIFICANT INFLUENCE OVER OUR
MANAGEMENT AND DIRECTION.
As of January 23, 2006, collectively our executive officers and
entities controlled by them, our 401(k) Plan and members of the Board of
Directors beneficially owned approximately 35% of our outstanding common stock
and approximately 14% of our outstanding Class A common stock. Accordingly, they
will be able to substantially influence the election of the Board of Directors
and control our business, policies and affairs, including our position with
respect to proposed business combinations and attempted takeovers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
15
ITEM 2. PROPERTIES
The Company owns or leases a number of facilities, which are utilized
by its Flight Support Group ("FSG"), Electronic Technologies Group ("ETG"), and
Corporate office. Summary information on the facilities utilized within the FSG
and the ETG to support their principal operating activities is as follows:
FLIGHT SUPPORT GROUP
Design, Manufacture and Distribution of Jet Engine and Aircraft Component
Replacement Parts
Location Square footage Owned/Leased Description
--------------------- -------------- ------------ ------------------------------------------
California 139,000 Leased Manufacturing and engineering facilities
Florida 121,000 Owned Manufacturing and engineering facilities,
warehouse and corporate headquarters
Florida 18,000 Leased Manufacturing and engineering facilities
Georgia 38,000 Owned Manufacturing and engineering facility
New Mexico 35,000 Leased Manufacturing and engineering facility
Washington 18,000 Leased Manufacturing and engineering facilities
New York 18,000 Leased Distribution facility
Connecticut 10,000 Leased Manufacturing and engineering facility
Indiana 7,000 Leased Manufacturing and engineering facility
Tennessee 6,000 Leased Manufacturing and engineering facility
India 3,000 Leased Sales office
Repair and Overhaul of Jet Engine and Aircraft Components, Avionics and
Instruments
Location Square footage Owned/Leased Description
--------------------- -------------- ------------ ------------------------------------------
Florida 135,000 Owned Repair and overhaul facilities
Florida 9,000 Leased Repair and overhaul facilities
California 27,000 Leased Repair and overhaul facility
Ohio 21,000 Leased Repair and overhaul facility
Illinois 19,000 Leased Repair and overhaul facility
ELECTRONIC TECHNOLOGIES GROUP
Location Square footage Owned/Leased Description
--------------------- -------------- ------------ ------------------------------------------
Massachusetts 56,000 Owned Manufacturing and engineering facility
Massachusetts 8,000 Leased Manufacturing and engineering facility
Florida 55,000 Leased Manufacturing and engineering facilities
Ohio 29,000 Leased Manufacturing and engineering facilities
California 26,000 Leased Manufacturing and engineering facility
Texas 20,000 Owned Manufacturing and engineering facility
United Kingdom 12,000 Owned Manufacturing and engineering facility
Oregon 7,000 Leased Manufacturing and engineering facility
CORPORATE
Location Square footage Owned/Leased Description
--------------------- -------------- ------------ ------------------------------------------
Florida 4,000 (1) Owned Corporate headquarters and administrative
offices
Florida 1,000 Leased Storage facility
(1) Represents the square footage of corporate headquarters and administrative
offices in Miami, Florida. The square footage of the Company's corporate
headquarters in Hollywood, Florida is included within the square footage
for Florida under the caption "FSG - Design, Manufacture and Distribution
of Jet Engine and Aircraft Component Replacement Parts."
16
All of the facilities listed in this Item 2 are in good operating
condition, are well maintained and are in regular use. The Company believes that
its existing facilities are sufficient to meet its operational needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2006.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Class A Common Stock and Common Stock are listed and
traded on the New York Stock Exchange ("NYSE") under the symbols "HEI.A" and
"HEI," respectively. The following tables sets forth, for the periods indicated,
the high and low share prices for the Class A Common Stock and the Common Stock
as reported on the NYSE, as well as the amount of cash dividends paid per share
during such periods.
CLASS A COMMON STOCK
CASH
DIVIDENDS
HIGH LOW PER SHARE
--------- --------- ---------
FISCAL 2005:
First Quarter $ 17.80 $ 13.70 $ .025
Second Quarter 17.63 14.67 --
Third Quarter 19.10 14.52 .025
Fourth Quarter 19.69 16.17 -
FISCAL 2006:
First Quarter $ 21.93 $ 16.90 $ .040
Second Quarter 29.65 19.73 --
Third Quarter 31.20 22.87 .040
Fourth Quarter 30.67 24.33 --
As of January 2, 2007, there were 906 holders of record of the
Company's Class A Common Stock.
COMMON STOCK
CASH
DIVIDENDS
HIGH LOW PER SHARE
--------- --------- ---------
FISCAL 2005:
First Quarter $ 23.41 $ 17.86 $ .025
Second Quarter 22.72 18.55 --
Third Quarter 25.08 18.32 .025
Fourth Quarter 25.41 21.03 --
FISCAL 2006:
First Quarter $ 27.45 $ 21.87 $ .040
Second Quarter 34.69 24.56 --
Third Quarter 35.87 26.95 .040
Fourth Quarter 37.12 29.25 --
As of January 2, 2007, there were 871 holders of record of the
Company's Common Stock.
18
DIVIDEND POLICY
The Company has historically paid semi-annual cash dividends on both
its Class A Common Stock and Common Stock. In July 2006, HEICO paid its 56th
consecutive semi-annual cash dividend since 1979. HEICO's Board of Directors
presently intends to continue the payment of regular semi-annual cash dividends
on both classes of its common stock. The Company's ability to pay dividends
could be affected by future business performance, liquidity, capital needs,
alternative investment opportunities, and loan covenants under its revolving
credit facility.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of October 31, 2006.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
-------------------------------------- -------------------- -------------------- -----------------------
Equity compensation plans approved by
security holders (1) 2,206,626 $ 9.92 162,683
Equity compensation plans not
approved by security holders (2) 527,392 $ 11.19 --
-------------------- -----------------------
Total 2,734,018 $ 10.16 162,683
==================== =======================
----------
(1) Represents aggregated information pertaining to the Company's three equity
compensation plans: the 1993 Stock Option Plan, the Non-Qualified Stock
Option Plan and the 2002 Stock Option Plan. See Note 8, Stock Options, of
the Notes to Consolidated Financial Statements for further information
regarding these plans.
(2) Represents stock options granted to two former shareholders of an acquired
business pursuant to employment agreements entered into in connection with
the acquisition in fiscal 1999. Such stock options were fully vested and
transferable as of the grant date and expire ten years from the date of
grant. The exercise price of such options was the fair market value as of
the date of grant.
ISSUER PURCHASES OF EQUITY SECURITIES
As announced by the Company on October 21, 2002, the Company's Board of
Directors has authorized the repurchase of up to 425,000 shares of its Class A
Common Stock and/or Common Stock to be executed, at management's discretion, in
the open market or via private transactions. From October 21, 2002 through
October 31, 2003, the Company repurchased 22,000 shares of its Class A Common
Stock. The remaining 403,000 shares authorized for repurchase are subject to
certain restrictions included in the Company's revolving credit agreement. The
Company did not repurchase any shares of its Class A Common Stock and/or Common
Stock during fiscal 2006, 2005 or 2004. The repurchase program does not have a
fixed termination date.
19
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, (1)
-----------------------------------------------------------------------
2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
OPERATING DATA:
Net sales $ 172,112 $ 176,453 $ 215,744 $ 269,647 $ 392,190
---------- ---------- ---------- ---------- ----------
Gross profit 61,502 58,104 75,812 100,996 142,513
Selling, general and administrative expenses 39,102 34,899 43,193 56,347 75,646
---------- ---------- ---------- ---------- ----------
Operating income 22,400 23,205 32,619(5) 44,649 66,867
---------- ---------- ---------- ---------- ----------
Interest expense 2,248 1,189 1,090 1,136 3,523
---------- ---------- ---------- ---------- ----------
Interest and other income 97 93 26 528 639
---------- ---------- ---------- ---------- ----------
Life insurance proceeds -- -- 5,000(6) -- --
---------- ---------- ---------- ---------- ----------
Gain on sale of product line 1,230(3) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income $ 15,226(4) $ 12,222 $ 20,630(5)(6) $ 22,812 $ 31,888(7)
========== ========== ========== ========== ==========
Weighted average number of common shares
outstanding:(2)
Basic 23,004 23,237 24,037 24,460 25,085
Diluted 24,733 24,531 25,755 26,323 26,598
PER SHARE DATA:(2)
Net income:
Basic $ .66(4) $ .53 $ .86(5)(6) $ .93 $ 1.27(7)
Diluted .62(4) .50 .80(5)(6) .87 1.20(7)
Cash dividends .045 .045 .050 .050 .080
BALANCE SHEET DATA (AS OF OCTOBER 31):
Total assets $ 336,332 $ 333,244 $ 364,255 $ 435,624 $ 534,815
Total debt (including current portion) 55,986 32,013 18,129 34,124 55,061
Minority interests in consolidated subsidiaries 38,313 40,577 44,644 49,035 63,301
Shareholders' equity 207,064 221,518 247,402 273,503 317,258
----------
(1) Results include the results of acquisitions from each respective effective
date.
(2) Information has been adjusted retroactively to give effect to a 10% stock
dividend paid in shares of Class A Common Stock in January 2004.
(3) Represents an increase in the gain on sale of Trilectron Industries, Inc.,
a product line sold in September 2000, of $1,230 ($765, or $.03 per basic
and diluted share, net of tax) resulting from the elimination of certain
reserves upon expiration of indemnification provisions of the sale.
(4) Includes the recovery of a portion of taxes paid in prior years resulting
from an income tax audit, which increased net income by $2,107, or $.09 per
basic and diluted share, net of related expenses. The aggregate increase in
net income from the gain on sale of a product line (see Note 3 above) and
the recovery of taxes was $2,872, or $.12 per basic and diluted share.
(5) Operating income was reduced by an aggregate of $850 in restructuring
expenses recorded by certain subsidiaries of the Flight Support Group that
provide repair and overhaul services including $350 recorded in cost of
sales and $500 recorded in selling, general and administrative expenses.
The restructuring expenses decreased net income by $427, or $.02 per basic
and diluted share.
(6) Represents proceeds from a $5,000 key-person life insurance policy
maintained by a subsidiary of the Flight Support Group. The minority
interest's share of this income totaled $1,000, which is reported as a
component of minority interests' share of income. Accordingly, the life
insurance proceeds increased net income by $4,000, or $.17 per basic and
$.16 per diluted share.
(7) Includes the benefit of a tax credit (net of related expenses) for
qualified research and development activities claimed for certain prior
years, which increased net income by $1,002, or $.04 per basic and diluted
share.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's operations are comprised of two operating segments, the
Flight Support Group ("FSG") and the Electronic Technologies Group ("ETG").
The Flight Support Group consists of HEICO Aerospace Holdings Corp.
("HEICO Aerospace") and its subsidiaries, which primarily:
o Designs, Manufactures and Distributes Jet Engine and Aircraft Component
Replacement Parts. The Flight Support Group designs, manufactures and
distributes jet engine and aircraft component replacement parts for
sale at lower prices than those manufactured by original equipment
manufacturers. The parts are approved by the Federal Aviation
Administration ("FAA") and they are the functional equivalent of parts
sold by original equipment manufacturers. The Flight Support Group also
manufactures and sells specialty parts as a subcontractor for original
equipment manufacturers and the United States government. The Flight
Support Group also distributes hydraulic, pneumatic, mechanical and
electro-mechanical components for the commercial, regional and general
aviation markets.
o Repairs and Overhauls Jet Engine and Aircraft Components, Avionics and
Instruments. The Flight Support Group repairs and overhauls jet engine
and aircraft components and inertial navigation systems and other
avionics, instruments, and components for domestic and foreign
commercial air carriers, military aircraft operators and aircraft
repair and overhaul companies. The Flight Support Group also provides
commercial airlines, regional operators, asset management companies,
and MRO providers with high quality and cost effective niche accessory
component exchange services as an alternative to OEMs' spares services.
The Electronic Technologies Group consists of HEICO Electronic
Technologies Corp. ("HEICO Electronic") and its subsidiaries, which primarily:
o Designs and Manufactures Electronic and Electro-Optical Equipment. The
Electronic Technologies Group designs, manufactures and sells various
types of electronic, microwave and electro-optical equipment and
components, including power supplies, laser rangefinder receivers,
infra-red simulation, calibration and testing equipment and
electromagnetic interference shielding for commercial and military
aircraft operators, electronics companies and telecommunications
equipment suppliers.
o Designs and Manufactures High-Speed Interface Products. The Electronic
Technologies Group designs, manufactures and sells advanced
high-technology interface products that link devices such as telemetry
receivers, digital cameras, high resolution scanners, simulation
systems and test systems to almost any computer.
o Designs and Manufactures High Voltage Interconnection Devices. The
Electronic Technologies Group designs and manufactures high voltage
interconnection devices, cable assemblies and wire for the medical
equipment, defense and other industrial markets.
The Company's results of operations during each of the past three
fiscal years have been affected by a number of transactions. This discussion of
the Company's financial condition and results of
21
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein. For further information regarding
the acquisitions discussed below, see Note 2, Acquisitions, of the Notes to
Consolidated Financial Statements. The acquisitions have been accounted for
using the purchase method of accounting and are included in the Company's
results of operations from the effective dates of acquisition.
During fiscal 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired Connectronics, Corp. and its affiliate,
Wiremax, Ltd. (collectively "Connectronics") in December 2004, Lumina Power,
Inc. ("Lumina") in February 2005, and an 85% interest in HVT Group, Inc. ("HVT")
in September 2005. The remaining 15% interest is held by certain members of
HVT's management group.
In November 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired all of the stock of Engineering Design
Team, Inc. and substantially all of the assets of its affiliate (collectively
"EDT") and through its HEICO Aerospace Holdings Corp. subsidiary, acquired a 51%
interest in Seal Dynamics LLC ("Seal LLC"). The remaining 49% interest is
principally owned by a member of Seal LLC's management group.
In May 2006 and September 2006, the Company, through its HEICO
Aerospace Holdings Corp. subsidiary, acquired all of the stock of Arger
Enterprises, Inc. and its related companies (collectively "Arger") and an 80%
interest in Prime Air, Inc. and its affiliate (collectively "Prime"),
respectively. Under the Prime transaction, the Company formed a new subsidiary,
Prime Air, LLC ("Prime Air"), which acquired substantially all of the assets and
assumed certain liabilities of Prime. The new subsidiary is owned 80% by the
Company and 20% by certain members of Prime's management group.
The operating results of each acquired company were included in the
Company's results from their effective acquisition date. The purchase price of
each fiscal 2005 and 2006 acquisition was principally paid in cash using
proceeds from the Company's revolving credit facility and was not significant to
the Company's consolidated financial statements individually or in aggregate.
CRITICAL ACCOUNTING POLICIES
The Company believes that the following are its most critical
accounting policies, some of which require management to make judgments about
matters that are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated is recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Variations in actual labor
performance, changes to estimated profitability and final contract settlements
may result in revisions to cost estimates. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For fixed price contracts in which costs cannot be
dependably estimated, revenue is recognized on the completed-contract method. A
contract is considered complete when all significant costs have been incurred or
the item has been accepted by the customer. The percentage of the Company's net
sales recognized under the percentage-of-completion method was approximately 4%,
6% and 6% in fiscal 2006, 2005 and 2004, respectively. The aggregate effects of
changes in estimates relating to inventories and/or long-term contracts did not
have a significant effect on net income or diluted net income per share in
fiscal 2006, 2005 or 2004.
22
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company set up
an allowance for estimated uncollectible accounts and record a corresponding
charge to bad debt expense. The Company estimates uncollectible receivables
based on such factors as its prior experience, its appraisal of a customer's
ability to pay, and economic conditions within and outside of the aviation,
defense, space, and electronics industries. Actual bad debt expense could differ
from estimates made.
Valuation of Inventory
Inventory is stated at the lower of cost or market, with cost being
determined on the first-in, first-out or the average cost basis. Losses, if any,
are recognized fully in the period when identified.
The Company periodically evaluates the carrying value of inventory,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates the amount necessary to write-down its
slow moving, obsolete or damaged inventory. These estimates could vary
significantly from actual requirements based upon future economic conditions,
customer inventory levels or competitive factors that were not foreseen or did
not exist when the estimated write-downs were made.
Valuation of Goodwill
The Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any. The determination of fair value requires the Company
to make a number of estimates, assumptions and judgments of such factors as
earnings multiples, projected revenues and operating expenses and the Company's
weighted average cost of capital. If there is a material change in such
assumptions used by the Company in determining fair value or if there is a
material change in the conditions or circumstances influencing fair value, the
Company could be required to recognize a material impairment charge. Based on
the annual goodwill test for impairment as of October 31, 2006, the Company
determined there is no impairment of its goodwill.
Purchase Accounting
The Company applies the purchase method of accounting to its
acquisitions. Under this method, the purchase price, including any capitalized
acquisition costs, is allocated to the underlying tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
market values, with any excess recorded as goodwill. Determining the fair value
of assets acquired and liabilities assumed requires management's judgment and
often involves the use of significant estimates and assumptions, including
assumptions with respect to future cash inflows and outflows, discount rates,
asset lives and market multiples, among other items. We determine the fair
values of such assets and liabilities, generally in consultation with
third-party valuation advisors.
23
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations,
net sales and operating income by operating segment, and the percentage of net
sales represented by the respective items in the Company's Consolidated
Statements of Operations:
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------
2004 2005 2006
-------------- -------------- --------------
Net sales $ 215,744,000 $ 269,647,000 $ 392,190,000
-------------- -------------- --------------
Cost of sales 139,932,000 168,651,000 249,677,000
Selling, general and administrative expenses 43,193,000 56,347,000 75,646,000
-------------- -------------- --------------
Total operating costs and expenses 183,125,000 224,998,000 325,323,000
-------------- -------------- --------------
Operating income $ 32,619,000 $ 44,649,000 $ 66,867,000
============== ============== ==============
Net sales by segment: (1)
Flight Support Group $ 158,643,000 $ 191,989,000 $ 277,255,000
Electronic Technologies Group 57,243,000 77,821,000 115,021,000
Intersegment sales (142,000) (163,000) (86,000)
-------------- -------------- --------------
$ 215,744,000 $ 269,647,000 $ 392,190,000
============== ============== ==============
Operating income by segment: (1)
Flight Support Group $ 22,435,000 $ 32,795,000 $ 46,840,000
Electronic Technologies Group 17,075,000 20,978,000 34,026,000
Other, primarily corporate (6,891,000) (9,124,000) (13,999,000)
-------------- -------------- --------------
$ 32,619,000 $ 44,649,000 $ 66,867,000
============== ============== ==============
Net sales 100.0% 100.0% 100.0%
Gross profit 35.1% 37.5% 36.3%
Selling, general and administrative expenses 20.0% 20.9% 19.3%
Operating income 15.1% 16.6% 17.0%
Interest expense 0.5% 0.4% 0.9%
Interest and other income -- 0.2% 0.2%
Life insurance proceeds 2.3% -- --
Income tax expense 5.1% 6.0% 5.3%
Minority interests' share of income 2.3% 1.9% 2.9%
Net income 9.6% 8.5% 8.1%
(1) During fiscal 2006, one of the Company's subsidiaries formerly included in
the Electronic Technologies Group was reclassified to the Flight Support Group.
Prior period amounts have been retroactively restated to reflect the revised
segment classification.
24
COMPARISON OF FISCAL 2006 TO FISCAL 2005
Net Sales
Net sales in fiscal 2006 increased by 45.4% to $392.2 million, as
compared to net sales of $269.6 million in fiscal 2005. The increase in net
sales reflects an increase of $85.3 million (a 44.4% increase) to $277.3 million
in net sales within the FSG, and an increase of $37.2 million (a 47.8% increase)
to $115.0 million in net sales within the ETG. The FSG's net sales increase
reflects the acquisition of Seal LLC, Arger and Prime Air and organic growth of
approximately 14%. The organic growth reflects increased sales of new products
and services as well as improved demand for the FSG's aftermarket replacement
parts and repair and overhaul services associated with continued recovery within
the commercial airline industry. The ETG's net sales increase reflects the
acquisitions of Connectronics, Lumina, HVT and EDT and organic growth of
approximately 8% reflecting increased demand for certain products.
The Company's net sales in fiscal 2006 by market approximated 64% from
the commercial aviation industry, 19% from the defense and space industries and
17% from other industrial markets including medical, electronics and
telecommunications. The Company's net sales in fiscal 2005 by market
approximated 64% from the commercial aviation industry, 23% from the defense and
space industries and 13% from other industrial markets including medical,
electronics and telecommunications.
Gross Profit and Operating Expenses
The Company's gross profit margin decreased slightly to 36.3% in fiscal
2006 as compared to 37.5% in fiscal 2005, reflecting slightly lower margins
within the FSG offset by an increase in the ETG margin. The FSG's gross profit
margin decrease was due principally to a less favorable product mix including
the expected impact of lower margins realized on products distributed by SDI and
Arger. The ETG's gross profit margin increase was principally from improved
product mix, including a higher margin product mix contributed by recent
acquisitions. Consolidated cost of sales in fiscal 2006 and 2005 includes
approximately $15.3 million and $11.3 million, respectively, of new product
research and development expenses.
Selling, general and administrative ("SG&A") expenses were $75.6
million and $56.3 million in fiscal 2006 and fiscal 2005, respectively. The
increase in SG&A expenses was mainly due to higher operating costs, principally
personnel related, associated with the aforementioned acquisitions, the increase
in net sales discussed above, an increase in corporate expenses and stock option
compensation expense (see "Stock Based Compensation", which follows within this
Item 7). The increase in corporate expenses reflects higher compensation and
performance awards ($2.0 million) as well as professional fees ($.7 million)
associated with a qualified research and development activities claim (see
"Income Tax Expense" below).
As a percentage of net sales, SG&A expenses decreased to 19.3% in
fiscal 2006 compared to 20.9% in fiscal 2005. The decrease as a percentage of
net sales is due to continued efficiencies in controlling costs while increasing
revenues.
Operating Income
Operating income in fiscal 2006 increased by 49.8% to $66.9 million,
compared to operating income of $44.6 million in fiscal 2005. The increase in
operating income reflects an increase of $14.0 million (a 42.8% increase) to
$46.8 million in operating income of the FSG in fiscal 2006 from $32.8 fiscal
2005. Operating income of the ETG increased $13.0 million (a 62.2% increase) to
$34.0 million in fiscal 2006 from $21.0 million in fiscal 2005. These increases
were partially offset by the aforementioned
25
increase in corporate expenses. As a percentage of net sales, operating income
increased from 16.6% in fiscal 2005 to 17.0% in fiscal 2006. The increase in
operating income as a percentage of net sales reflects a slight decrease in the
FSG's operating income as a percentage of net sales from 17.1% in fiscal 2005 to
16.9% in fiscal 2006 offset by an increase in the ETG's operating income as a
percentage of net sales from 27.0% in fiscal 2005 to 29.6% in fiscal 2006. The
decrease in the FSG's operating income as a percentage of net sales reflects the
lower gross profit margins discussed previously, partially offset by improved
operating efficiencies within SG&A expenses. The increase in the ETG's operating
income as a percentage of net sales reflects the increased gross profit margins
discussed previously.
Interest Expense
Interest expense increased to $3,523,000 in 2006 from $1,136,000 in
fiscal 2005. The increase was principally due to a higher weighted average
balance outstanding under the revolving credit facility in fiscal 2006 and
higher interest rates. Additional information about the Company's revolving
credit facility may be found within "Financing Activities", which follows within
this Item 7.
Interest and Other Income
Interest and other income in fiscal 2006 and fiscal 2005 were not
material.
Income Tax Expense
The Company's effective tax rate for fiscal 2006 decreased to 32.7%
from 36.6% in fiscal 2005. The decrease is principally due to a higher amount of
the minority interests' share of income excluded from the Company's fiscal 2006
consolidated income subject to federal income taxes, as well as an income tax
credit for qualified research and development activities claimed in its income
tax return for fiscal 2005 and amended returns for previous tax years that were
filed in the third and fourth quarters of fiscal 2006. The aggregate tax credit,
net of expenses, increased net income by approximately $1.0 million in fiscal
2006. For a detailed analysis of the provision for income taxes see Note 6,
Income Taxes, of the Notes to Consolidated Statements of Operations.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries
relates to the minority interests held in HEICO Aerospace, including the 20%
minority interest held in HEICO Aerospace, the 49% minority interest held in
Seal LLC and the 20% minority interest held in Prime Air; and the minority
interests held in the ETG, which consist of the 20% minority interest held in
Sierra Microwave Technology, LLC ("Sierra") and the 15% minority interest held
in HVT. The increase in the minority interests' share of income in fiscal 2006
compared to fiscal 2005 is attributable to the acquisitions of Seal LLC
(November 2005), HVT (September 2005), and Prime Air (September 2006) and the
higher earnings of the FSG and Sierra.
Net Income
The Company's net income was $31.9 million, or $1.20 per diluted share,
in fiscal 2006 compared to $22.8 million, or $.87 per diluted share, in fiscal
2005 reflecting the increased operating income referenced above.
26
Outlook
Both the FSG and the ETG reported significantly improved sales and
operating income in fiscal 2006 compared to fiscal 2005. Operating margins
within the FSG and the ETG continued at a strong level.
As the Company looks forward to fiscal 2007 and beyond, HEICO will
continue its focus on developing new products and services, further market
penetration, additional acquisition opportunities and maintaining its financial
strength. Based on current economic and market conditions and including the
results of the Company's recent acquisitions, the Company is targeting growth in
fiscal 2007 net sales and earnings over fiscal 2006 results.
COMPARISON OF FISCAL 2005 TO FISCAL 2004
Net Sales
Net sales in fiscal 2005 increased by 25.0% to $269.6 million, as
compared to net sales of $215.7 million in fiscal 2004. The increase in net
sales reflects an increase of $33.3 million (a 21.0% increase) to $192.0 million
in net sales within the FSG, and an increase of $20.6 million (a 35.9% increase)
to $77.8 million in net sales within the ETG. The FSG's net sales increase
primarily reflects improved demand for its aftermarket replacement parts and
repair and overhaul services, which reflects continuing recovery within the
commercial airline industry, as well as increased sales of new products. The
increase in net sales within the ETG primarily resulted from the acquisition of
Connectronics in December 2004, Lumina in February 2005 and HVT in September
2005 as well as improved demand for the Company's defense and industrial
electronics components.
The Company's net sales in fiscal 2005 by market approximated 64% from
the commercial aviation industry, 23% from the defense and space industries and
13% from other industrial markets including medical, electronics and
telecommunications. Net sales in fiscal 2004 by market approximated 63% from the
commercial aviation industry, 24% from the defense and space industries and 13%
from other markets.
Gross Profit and Operating Expenses
The Company's gross profit margin improved to 37.5% in fiscal 2005 as
compared to 35.1% in fiscal 2004, reflecting higher margins within the FSG
offset by a slight decrease in the ETG margin. The FSG's gross profit margin
increase was due principally to improved operating efficiencies resulting from
the higher sales volumes within the FSG, lower new product research and
development expenses as a percentage of net sales and lower charges related to
excess or slow-moving inventory. The ETG's gross profit margin decrease was
primarily due to softness in the commercial satellite market. Consolidated cost
of sales in fiscal 2005 and fiscal 2004 included approximately $11.3 million and
$10.4 million, respectively, of new product research and development expenses.
SG&A expenses were $56.3 million and $43.2 million in fiscal 2005 and
fiscal 2004, respectively. The increase in SG&A expenses was mainly due to
higher operating costs, principally personnel related, associated with the
increase in net sales discussed above, the acquisitions of Connectronics, Lumina
and HVT Group and an increase in corporate expenses. Corporate expenses are up
due to increased costs to comply with the Sarbanes-Oxley Act of 2002 and higher
accrued performance awards. As a percentage of net sales, SG&A expenses
increased slightly to 20.9% in fiscal 2005 compared to 20.0% in fiscal 2004,
primarily due to increased costs to comply with the Sarbanes-Oxley Act of 2002.
27
Operating Income
Operating income in fiscal 2005 increased by 36.9% to $44.6 million,
compared to operating income of $32.6 million in fiscal 2004. The increase in
operating income reflects an increase of $3.9 million (a 22.9% increase) in
operating income of the ETG from $17.1 million in fiscal 2004 to $21.0 million
in fiscal 2005 reflecting the acquisitions of Connectronics, Lumina and HVT and
an increase of $10.4 million (a 46.2% increase) in operating income of the FSG
from $22.4 million in fiscal 2004 to $32.8 million in fiscal 2005 reflecting the
higher net sales. These increases were partially offset by the increase in
corporate expenses. As a percentage of net sales, operating income increased
from 15.1% in fiscal 2004 to 16.6% in fiscal 2005. The improvement in operating
income as a percentage of net sales reflects an increase in the FSG's operating
income as a percentage of net sales from 14.1% in fiscal 2004 to 17.1% in fiscal
2005 and a decrease in the ETG's operating income as a percentage of net sales
from 29.8% in fiscal 2004 to 27.0% in fiscal 2005. The increase in the FSG's
operating income as a percentage of net sales reflects the improved gross
margins discussed previously. The decrease in the ETG's operating income as a
percentage of net sales reflects the decreased gross margins discussed
previously.
Interest Expense
Interest expense in fiscal 2005 and fiscal 2004 was comparable as the
lower weighted average balance outstanding under the revolving credit facility
in fiscal 2005 was offset by higher interest rates. Additional information about
the Company's revolving credit facility may be found within "Financing
Activities", which follows within this Item 7.
Interest and Other Income
Interest and other income increased to $528,000 in fiscal 2005 from
$26,000 in fiscal 2004. The increase was primarily due to the gain on the sale
of a 50%-owned joint venture in the third quarter of fiscal 2005 (see Note 11,
Sale of Investment in Joint Venture, of the Notes to Consolidated Financial
Statements).
Life Insurance Proceeds
In fiscal 2004, the Company received $5.0 million in proceeds from a
key-person life insurance policy maintained by a subsidiary of the FSG. The life
insurance proceeds, which are non-taxable, increased net income (after the
minority interest's share of the income) in fiscal 2004 by $4.0 million, or $.16
per diluted share.
Income Tax Expense
The Company's effective tax rate increased from 29.9% in fiscal 2004 to
36.6% in fiscal 2005. The increase is principally due to the aforementioned $5.0
million in life insurance proceeds received in fiscal 2004 that were excluded
from the Company's income that was subject to federal income taxes as well as
higher state taxes principally related to recent acquisitions and a reduction in
the tax benefit on export sales under the federal Extraterritorial Income
Exclusion provisions that began phasing out in fiscal 2005. For a detailed
analysis of the provision for income taxes see Note 6, Income Taxes, of the
Notes to Consolidated Financial Statements.
Minority Interests' Share of Income
Minority interests' share of income of consolidated subsidiaries
principally relates to the minority interests held in HEICO Aerospace and the
20% minority interest held in Sierra LLC. Minority interests'
28
share of income in fiscal 2005 approximated that of fiscal 2004 as higher
operating income of the FSG was offset by the minority interests' share of life
insurance proceeds received in fiscal 2004.
Net Income
The Company's net income was $22.8 million, or $.87 per diluted share,
in fiscal 2005 compared to $20.6 million, or $.80 per diluted share, in fiscal
2004. The net impact of the life insurance proceeds reduced by the restructuring
expenses increased net income by $3.6 million, or $.14 per diluted share in
fiscal 2004.
INFLATION
The Company has generally experienced increases in its costs of labor,
materials and services consistent with overall rates of inflation. The impact of
such increases on the Company's net income has been generally minimized by
efforts to lower costs through manufacturing efficiencies and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from its operating activities and
financing activities, including borrowings under short-term and long-term credit
agreements.
Principal uses of cash by the Company include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital.
The Company believes that its net cash provided by operating activities
and available borrowings under its revolving credit facility will be sufficient
to fund cash requirements for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $46.9 million for fiscal
2006, principally reflecting net income of $31.9 million, minority interests'
share of income of $11.2 million, depreciation and amortization of $10.6
million, a tax benefit related to stock option exercises of $2.2 million, a
deferred income tax provision of $2.6 million, and stock option compensation
expense of $1.4 million, partially offset by an increase in net operating assets
of $12.0 million and the presentation of $1.6 million of excess tax benefit from
stock option exercises as a financing activity in accordance with the provisions
of SFAS No. 123(R) (see "Stock Based Compensation" below.) The increase in net
operating assets (current assets used in operating activities net of current
liabilities) primarily reflects a higher investment in inventories required to
meet increased sales demand associated with new product offerings, sales growth,
and increased lead times on certain raw materials; an increase in accounts
receivable due to sales growth; partially offset by higher current liabilities
associated with increased sales and purchases and higher accrued employee
compensation and related payroll taxes.
Net cash provided by operating activities was $35.8 million for fiscal
2005, principally reflecting net income of $22.8 million, depreciation and
amortization of $7.4 million, minority interests' share of income of $5.1
million, a deferred income tax provision of $3.0 million and a tax benefit
related to stock option exercises of $2.8 million, partially offset by an
increase in net operating assets of $5.3 million. The increase in net operating
assets (current assets used in operating activities net of current liabilities)
primarily reflects a higher investment in inventories required to meet increased
sales demand associated with new product offerings, sales growth, and increased
lead times on certain raw materials; and an increase in
29
accounts receivable due to sales growth, partially offset by higher current
liabilities associated with increased sales and purchases and higher accrued
employee compensation and related payroll taxes.
Net cash provided by operating activities was $44.1 million for fiscal
2004, consisting primarily of net income of $20.6 million, including $4.0
million of cash proceeds from life insurance net of the minority interest's
share, depreciation and amortization of $6.8 million, minority interests' share
of income of consolidated subsidiaries of $5.0 million, a deferred income tax
provision of $4.1 million, a tax benefit on stock option exercises of $1.3
million, and a decrease in net operating assets of $6.6 million. The decrease in
net operating assets (current assets used in operating activities net of current
liabilities) primarily reflects lower inventories resulting from efforts to
improve inventory turnover by reducing the level of finished goods maintained on
hand, higher accounts receivable and current liabilities associated with
increased sales levels and higher income taxes payable resulting from the timing
of required income.
Investing Activities
Net cash used in investing activities during the three fiscal year
period ended October 31, 2006 primarily relates to several acquisitions,
including contingent payments, totaling $127.7 million, including $58.1 million
in fiscal 2006, $41.5 million in fiscal 2005, and $28.1 million in fiscal 2004.
Further details on acquisitions may be found at the beginning of this Item 7
under the caption "Overview". Capital expenditures aggregated $24.0 million over
the last three fiscal years, primarily reflecting the expansion of existing
production facilities and capabilities, which were generally funded using cash
provided by operating activities. In fiscal 2005, the Company received proceeds
of $3.5 million from the sale of a building held for sale.
Financing Activities
During the three fiscal year period ended October 31, 2006, the Company
borrowed an aggregate $123.0 million under its revolving credit facility to fund
the aforementioned acquisitions, including $59.0 million in fiscal 2006, $37.0
million in fiscal 2005, and $27.0 million in fiscal 2004. Further details on
acquisitions may be found at the beginning of this Item under the caption
"Overview". Repayments on the revolving credit facility aggregated $100.0
million over the last three fiscal years, including $38.0 million in fiscal
2006, $21.0 million in fiscal 2005, and $41.0 million in fiscal 2004. For the
three year fiscal period ended October 31, 2006, the Company received proceeds
from stock option exercises aggregating $7.8 million, made distributions to
minority interest owners aggregating $5.0 million, and paid cash dividends
aggregating $4.4 million, partially offset by net repayments of $2.0 million on
the Company's short-term line of credit. Net cash provided by financing
activities also includes the presentation of $1.6 million of excess tax benefit
from stock option exercises beginning in fiscal 2006 in accordance with the
provisions of SFAS No. 123(R).
In August 2005, the Company amended its revolving credit facility by
entering into a $130 million Amended and Restated Revolving Credit Agreement
("Credit Facility") with a bank syndicate, which expires in August 2010. The
Credit Facility includes a feature that will allow the Company to increase the
Credit Facility, at its option, up to an aggregate amount of $175 million
through increased commitments from existing lenders or the addition of new
lenders. The Credit Facility may be used for working capital and general
corporate needs of the Company, including letters of credit, capital
expenditures and to finance acquisitions. In July 2006, the Company amended the
Credit Facility principally to include a less restrictive covenant regarding
requisite approval of acquisitions by the bank syndicate. The prior covenant
relating to approval by the bank syndicate of acquisitions in excess of an
aggregate of $50 million over any twelve-month period was eliminated provided
the Company maintains an agreed upon, or lower, leverage ratio. Advances under
the Credit Facility accrue interest at the Company's choice of the "Base Rate"
or the London Interbank Offered Rate ("LIBOR") plus applicable
30
margins (based on the Company's ratio of total funded debt to earnings before
interest, taxes, depreciation and amortization, minority interest, and non-cash
charges or "leverage ratio"). The Base Rate is the higher of (i) the Prime Rate
or (ii) the Federal Funds rate plus .50%. The applicable margins range from .75%
to 2.00% for LIBOR based borrowings and from .00% to .50% for Base Rate based
borrowings. A fee is charged on the amount of the unused commitment ranging from
..20% to .50% (depending on the Company's leverage ratio). The Credit Facility
also includes a $10 million swingline sublimit and a $15 million sublimit for
letters of credit. The Credit Facility is secured by substantially all assets
other than real property of the Company and its subsidiaries and contains
covenants that require, among other things, the maintenance of the leverage
ratio and a fixed charge coverage ratio as well as minimum net worth
requirements. See Note 5, Short-Term and Long-Term Debt, of the Notes to
Consolidated Financial Statements for further information regarding the
revolving credit facility.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as
of October 31, 2006:
PAYMENTS DUE BY FISCAL PERIOD
---------------------------------------------------------
TOTAL 2007 2008 - 2009 2010 - 2011 THEREAFTER
------------ ------------ ------------ ------------ ------------
Long-term debt obligations (1) $ 54,980,000 $ -- $ 1,980,000 $ 53,000,000 $ --
Capital lease obligations
and equipment loans (1) 81,000 39,000 33,000 9,000 --
Operating lease obligations (2) 14,028,000 3,526,000 4,402,000 2,679,000 3,421,000
Purchase obligations (3) 7,537,000 7,537,000 -- -- --
Other long-term liabilities (4) 2,534,000 2,219,000 112,000 99,000 104,000
------------ ------------ ------------ ------------ ------------
Total contractual obligations $ 79,160,000 $ 13,321,000 $ 6,527,000 $ 55,787,000 $ 3,525,000
============ ============ ============ ============ ============
----------
(1) Excludes interest charges on borrowings and the fee on the amount of any
unused commitment that the Company may be obligated to pay under its
revolving credit facility as such amounts vary. Also excludes interest
charges associated with capital lease obligations and equipment loans as
such amounts are not material. See Note 5, Short-Term and Long-Term Debt,
of the Notes to Consolidated Financial Statements and "Financing
Activities" above for additional information regarding the Company's
long-term debt and capital lease obligations and equipment loans.
(2) See Note 17, Commitments and Contingencies - Lease Commitments, of the
Notes to Consolidated Financial Statements for additional information
regarding the Company's operating lease obligations.
(3) Includes additional purchase consideration aggregating $7,180,000 relating
to fiscal 2006 and 2005 acquisitions. See Note 2, Acquisitions, of the
Notes to Consolidated Financial Statements. Also includes $357,000 of
commitments for capitalized expenditures and excludes all purchase
obligations for inventory and supplies in the ordinary course of business.
(4) Includes projected payments aggregating $371,000 under our Directors
Retirement Plan, which is explained further in Note 9, Retirement Plans, of
the Notes to Consolidated Financial Statements. The plan is unfunded and we
pay benefits directly. Also includes $2,008,000 of discretionary
contributions under our Leadership Compensation Plan which is explained
further in Note 3, Selected Financial Statement Information - Other
Non-Current Liabilities, of the Notes to Consolidated Financial Statements.
The amounts in the table do not include amounts related to the Company's
other deferred compensation arrangement for which there is an offsetting
asset included in the Company's Consolidated Balance Sheets. Also includes
$155,000 of guaranteed minimum royalty payments as part of an agreement for
exclusive license rights to intellectual property.
31
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating $2.2
million to meet the security requirement of its insurance company for potential
workers' compensation claims, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
As part of the agreement to acquire an 80% interest in a subsidiary by
the ETG in fiscal 2004, the Company has the right to purchase the minority
interests beginning at approximately the tenth anniversary of the acquisition,
or sooner under certain conditions, and the minority holders have the right to
cause the Company to purchase their interests commencing on approximately the
fifth anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration of
up to $3.8 million in aggregate should the subsidiary meet certain earnings
objectives during the first four years following the acquisition. In fiscal
2006, the Company paid $2.2 million of such additional purchase consideration
based on the subsidiary's earnings relative to target for the first year, and
accrued the remaining $1.6 million based on the subsidiary's year-to-date
earnings relative to its target for the second year. The Company expects to pay
this accrued amount in fiscal 2007.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and fifth
years following the acquisition. The additional purchase consideration will be
accrued when the earnings objectives are met.
As part of the agreement to acquire an 85% interest in a subsidiary by
the ETG in fiscal 2005, the minority holders have the right to cause the Company
to purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire a 51% interest in a subsidiary by
the FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holders have the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal
2006, the Company may be obligated to pay additional consideration of up to
$53.0 million in aggregate during the first four years following the
acquisition. The maximum amount of additional consideration that may become
payable by year is $6.8 million in fiscal 2006, $9.2 million in fiscal 2007,
$17.8 million in fiscal 2008 and $19.2 million in fiscal 2009. The Company
accrued $5.6 million of such additional purchase consideration as of October 31,
2006 based on the subsidiary's first year earnings relative to its target, which
it expects to pay in fiscal 2007. The remaining additional purchase
consideration will be accrued when the earnings objectives are met.
32
As part of an agreement to acquire an 80% interest in a subsidiary by
the FSG in fiscal 2006, the Company may be obligated to pay additional purchase
consideration of up to $7.0 million in aggregate should the subsidiary meet
certain earnings objectives during the first two years following the
acquisition. The additional purchase consideration will be accrued when the
earnings objectives are met. Further, the Company has the right to purchase the
remaining 20% minority interests beginning at approximately the eighth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of an agreement for exclusive license rights to intellectual
property, one of the subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.2 million through fiscal 2007.
For additional information on the aforementioned acquisitions see Note
2, Acquisitions, of the Notes to Consolidated Financial Statements.
STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", as interpreted
by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107
and began recording compensation expense associated with stock options. SFAS No.
123(R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant date fair value of those awards (with limited exceptions). Prior to
the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation expense had only been recorded in the
consolidated financial statements for any stock options granted below fair
market value of the underlying stock as of the date of grant.
The Company adopted the modified prospective transition method provided
for under SFAS No. 123(R) and accordingly, prior period results have not been
retroactively adjusted. The modified prospective transition method requires that
stock-based compensation expense be recorded for (i) all new stock options
granted on or after November 1, 2005 based on the grant date fair value
determined under the provisions of SFAS No. 123(R) and (ii) all unvested stock
options granted prior to November 1, 2005 based on the grant date fair value as
determined under the provisions of SFAS No. 123.
Beginning in fiscal 2006, the Company has presented the cash flows
resulting from tax deductions in excess of the cumulative compensation cost
recognized for stock options exercised on or after November 1, 2005 ("excess tax
benefit") as a financing activity in the Consolidated Statements of Cash Flows
as prescribed by SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the
Company presented all tax benefits resulting from stock option exercises as an
operating activity in the Consolidated Statements of Cash Flows. For the fiscal
year ended October 31, 2006, the excess tax benefit from stock option exercises
of $1,550,000 was presented in financing activities in the Company's
Consolidated Statements of Cash Flows.
As a result of the adoption of SFAS No. 123(R), the Company's net
income for the fiscal year ended October 31, 2006 includes compensation expense
of $1,373,000 and income tax benefit related to the Company's stock options of
$391,000. Substantially all of the stock option compensation expense was
recorded as a component of selling, general and administrative expenses in the
Company's Consolidated Statements of Operations.
33
As of October 31, 2006, there was $.8 million of pretax unrecognized
compensation expense related to nonvested stock options, which is expected to be
recognized over a weighted average period of approximately 1.3 years.
Further information regarding stock options can be found in Note 8,
Stock Options, of the Notes to Consolidated Financial Statements.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4".
SFAS No. 151 requires the allocation of fixed production overhead costs be based
on the normal capacity of the production facilities and unallocated overhead
costs recognized as an expense in the period incurred. The Statement also
clarifies that abnormal inventory costs such as costs of idle facilities, excess
freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005. The adoption of the
SFAS No. 151 did not have a material effect on the Company's results of
operations, financial position, or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations--an interpretation of
FASB Statement No. 143." This Interpretation clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the
timing and (or) method of settling the obligation are conditional on a future
event that may or may not be within the control of the entity. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The adoption of FIN 47 did not have a material effect on the Company's results
of operations, financial position, or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 changes the requirements for the accounting and reporting of a
change in accounting principle. The Statement eliminates the requirement in APB
Opinion No. 20 to include the cumulative effect of changes in accounting
principle in the income statement in the period of change, and instead requires
that changes in accounting principle be retrospectively applied unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. The Statement applies to all voluntary changes in
accounting principle. SFAS No. 154 is effective for changes made in fiscal years
beginning after December 15, 2005. The Company does not expect the adoption of
SFAS No. 154 to have a material effect on its results of operations, financial
position, or cash flows.
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109," which seeks to
reduce the diversity in practice associated with the accounting and reporting
for uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in an income tax return. FIN 48 presents a two-step process for evaluating
a tax position. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
based on the technical merits of the position. The second step is to measure the
benefit to be recorded from tax positions that meet the more-likely-than-not
recognition threshold, by determining the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate settlement, and
recognizing that amount in the financial statements. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that the adoption of FIN 48 will have on its results of
operations, financial position, and cash flows.
34
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which provides enhanced guidance for using fair value to measure
assets and liabilities. SFAS No. 157 provides a common definition of fair value
and establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007. The Company is currently in the process
of evaluating the effect, if any, the adoption of SFAS No. 157 will have on its
results of operations, financial position, or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements". SAB No. 108 was issued in order to eliminate the diversity in
practice surrounding how public companies quantify financial statement
misstatements. SAB No. 108 requires that registrants quantify errors using both
a balance sheet (iron curtain) approach and an income statement (rollover)
approach then evaluate whether either approach results in a misstated amount
that, when all relevant quantitative and qualitative factors are considered, is
material. SAB No. 108 is effective for fiscal years ending after November 15,
2006. The Company does not expect the adoption of SAB No. 108 to have a material
effect on its results of operations, financial position, or cash flows.
FORWARD LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements contained herein that are not clearly historical in
nature may be forward-looking and the words "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Any forward-looking statements contained herein, in press releases,
written statements or other documents filed with the Securities and Exchange
Commission or in communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and conference
calls, concerning our operations, economic performance and financial condition
are subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o Lower demand for commercial air travel or airline fleet changes, which
could cause lower demand for our goods and services;
o Product specification costs and requirements, which could cause an
increase to our costs to complete contracts;
o Governmental and regulatory demands, export policies and restrictions,
reductions in defense or space spending by U.S. and/or foreign
customers, or competition from existing and new competitors, which
could reduce our sales;
o HEICO's ability to introduce new products and product pricing levels,
which could reduce our sales or sales growth;
35
o HEICO's ability to make acquisitions and achieve operating synergies
from acquired businesses, customer credit risk, interest rates and
economic conditions within and outside of the aviation, defense, space
and electronics industries, which could negatively impact our costs and
revenues; and
o HEICO's ability to maintain effective internal controls, which could
adversely affect our business and the market price of our common stock.
We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk to which the Company has exposure is interest
rate risk, mainly related to its revolving credit facility and industrial
revenue bonds, which have variable interest rates. Interest rate risk associated
with the Company's variable rate debt is the potential increase in interest
expense from an increase in interest rates. Periodically, the Company enters
into interest rate swap agreements to manage its interest expense. The Company
did not have any interest rate swap agreements in effect as of October 31, 2006.
Based on the Company's aggregate outstanding variable rate debt balance of $55
million as of October 31, 2006, a hypothetical 10% increase in interest rates
would increase the Company's interest expense by approximately $329,000 in
fiscal 2007.
The Company maintains a portion of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a hypothetical 10% increase in interest rates as of October 31,
2006 would not have a material effect on the Company's results of operations or
financial position.
The Company is also exposed to foreign currency exchange rate
fluctuations on the United States dollar value of its foreign currency
denominated transactions, which are principally in British pound sterling. A
hypothetical 10% weakening in the exchange rate of the British pound sterling to
the United States dollar as of October 31, 2006 would not have a material effect
on the Company's results of operations or financial position.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Management's Report on Internal Control Over Financial Reporting......................... 38
Reports of Independent Registered Public Accounting Firm................................. 39
Consolidated Balance Sheets as of October 31, 2006 and 2005.............................. 42
Consolidated Statements of Operations for the years ended October 31, 2006,
2005 and 2004........................................................................... 43
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended October 31, 2006, 2005 and 2004..................................... 44
Consolidated Statements of Cash Flows for the years ended October 31, 2006,
2005 and 2004........................................................................... 45
Notes to Consolidated Financial Statements............................................... 46
37
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of HEICO Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of,
the Company's principal executive and principal financial officers and effected
by the Company's board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial
statements.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of October 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Based on our assessment, management believes that, as of October 31,
2006, the Company's internal control over financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte &
Touche LLP, has issued an attestation report on our assessment of the Company's
internal control over financial reporting. Their report appears on the following
page.
Date: January 12, 2007
/s/ LAURANS A. MENDELSON /s/ THOMAS S. IRWIN
------------------------- -----------------------
Laurans A. Mendelson Thomas S. Irwin
Chief Executive Officer Chief Financial Officer
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
HEICO Corporation
Hollywood, Florida
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that HEICO
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of October 31, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of October 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of October 31, 2006, based on the
39
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended October
31, 2006 of the Company and our report dated January 12, 2007 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 12, 2007
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
HEICO Corporation
Hollywood, Florida
We have audited the accompanying consolidated balance sheets of HEICO
Corporation and subsidiaries (the "Company") as of October 31, 2006 and 2005,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended October 31, 2006. Our audits also included the financial statement listed
in the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of HEICO Corporation and subsidiaries
as of October 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of October 31, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated January 12, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 12, 2007
41
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31,
-------------------------------
2006 2005
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,999,000 $ 5,330,000
Accounts receivable, net 65,012,000 47,668,000
Inventories, net 97,283,000 62,758,000
Prepaid expenses and other current assets 3,418,000 3,159,000
Deferred income taxes 9,309,000 7,218,000
-------------- --------------
Total current assets 180,021,000 126,133,000
Property, plant and equipment, net 49,489,000 46,663,000
Goodwill 275,116,000 248,229,000
Intangible assets 22,011,000 5,346,000
Other assets 8,178,000 9,253,000
-------------- --------------
Total assets $ 534,815,000 $ 435,624,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 39,000 $ 63,000
Trade accounts payable 22,386,000 11,129,000
Accrued expenses and other current liabilities 41,503,000 32,473,000
Income taxes payable 1,575,000 6,285,000
-------------- --------------
Total current liabilities 65,503,000 49,950,000
Long-term debt, net of current maturities 55,022,000 34,061,000
Deferred income taxes 28,052,000 22,431,000
Other non-current liabilities 5,679,000 6,644,000
-------------- --------------
Total liabilities 154,256,000 113,086,000
-------------- --------------
Minority interests in consolidated subsidiaries 63,301,000 49,035,000
-------------- --------------
Commitments and contingencies (Notes 2 and 17)
Shareholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares authorized;
300,000 shares designated as Series B Junior Participating Preferred
Stock and 300,000 shares designated as Series C Junior Participating
Preferred Stock; none issued -- --
Common Stock, $.01 par value par share; 30,000,000 shares authorized;
10,311,564 and 10,057,690 shares issued and outstanding, respectively 103,000 101,000
Class A Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 15,062,398 and 14,517,669 shares issued and
outstanding, respectively 151,000 145,000
Capital in excess of par value 206,260,000 192,523,000
Accumulated other comprehensive income (loss) 62,000 (65,000)
Retained earnings 110,682,000 80,799,000
-------------- --------------
Total shareholders' equity 317,258,000 273,503,000
-------------- --------------
Total liabilities and shareholders' equity $ 534,815,000 $ 435,624,000
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
42
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------
2006 2005 2004
------------- ------------- -------------
Net sales $ 392,190,000 $ 269,647,000 $ 215,744,000
------------- ------------- -------------
Operating costs and expenses:
Cost of sales 249,677,000 168,651,000 139,932,000
Selling, general and administrative expenses 75,646,000 56,347,000 43,193,000
------------- ------------- -------------
Total operating costs and expenses 325,323,000 224,998,000 183,125,000
------------- ------------- -------------
Operating income 66,867,000 44,649,000 32,619,000
Interest expense (3,523,000) (1,136,000) (1,090,000)
Interest and other income 639,000 528,000 26,000
Life insurance proceeds -- -- 5,000,000
------------- ------------- -------------
Income before income taxes and minority interests 63,983,000 44,041,000 36,555,000
Income tax expense 20,900,000 16,100,000 10,948,000
------------- ------------- -------------
Income before minority interests 43,083,000 27,941,000 25,607,000
Minority interests' share of income 11,195,000 5,129,000 4,977,000
------------- ------------- -------------
Net income $ 31,888,000 $ 22,812,000 $ 20,630,000
============= ============= =============
Net income per share:
Basic $ 1.27 $ .93 $ .86
Diluted $ 1.20 $ .87 $ .80
Weighted average number of common shares outstanding:
Basic 25,084,532 24,460,185 24,036,980
Diluted 26,597,603 26,323,302 25,754,598
The accompanying notes are an integral part of these
consolidated financial statements.
43
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED
CLASS A CAITAL IN OTHER
COMMON COMMON EXPCESS OF COMPREHENSIVE
STOCK STOCK PAR VALUE INCOME (LOSS)
--------------- --------------- --------------- ---------------
Balances as of October 31, 2003 $ 97,000 $ 117,000 $ 155,064,000 $ --
10% stock dividend on Common
Stock and Class A Common Stock
paid in shares of Class A Common
Stock (Note 7) -- 22,000 29,342,000 --
Net income -- -- -- --
Comprehensive income -- -- -- --
Shares issued in connection with
business acquisition (Note 2) -- 3,000 2,997,000 --
Proceeds from shares of common
stock sold in connection with
business acquisition (Note 17) -- -- -- --
Adjustment to guaranteed resale
value of shares of common stock
issued in connection with
business acquisition (Note 17) -- -- (1,673,000) --
Cash dividends ($.05 per share) -- -- -- --
Tax benefit from stock option exercises -- -- 1,258,000 --
Proceeds from stock option exercises 2,000 2,000 959,000 --
Stock option compensation expense -- -- 2,000 --
Other -- (1,000) 1,000 --
--------------- --------------- --------------- ---------------
Balances as of October 31, 2004 99,000 143,000 187,950,000 --
Net income -- -- -- --
Foreign currency translation adjustments -- -- -- (65,000)
(Note 1)
Comprehensive income -- -- -- --
Cash dividends ($.05 per share) -- -- -- --
Tax benefit from stock option exercises -- -- 2,830,000 --
Proceeds from stock option exercises 2,000 2,000 1,742,000 --
Stock option compensation expense -- -- 2,000 --
Other -- -- (1,000) --
--------------- --------------- --------------- ---------------
Balances as of October 31, 2005 101,000 145,000 192,523,000 (65,000)
Net income -- -- -- --
Foreign currency translation adjustments -- -- -- 127,000
(Note 1)
Comprehensive income -- -- -- --
Cash dividends ($.08 per share) -- -- -- --
Tax benefit from stock options exercises -- -- 7,300,000 --
Proceeds from stock option exercises 2,000 6,000 5,063,000 --
Stock option compensation expense -- -- 1,373,000 --
Other -- -- 1,000 --
--------------- --------------- --------------- ---------------
Balances as of October 31, 2006 $ 103,000 $ 151,000 $ 206,260,000 $ 62,000
=============== =============== =============== ===============
RETAINED NOTE COMPREHENSIVE
EARNINGS RECEIVABLE INCOME
--------------- ---------------- ---------------
Balances as of October 31, 2003 $ 69,172,000 $ (2,932,000)
10% stock dividend on Common
Stock and Class A Common Stock
paid in shares of Class A Common
Stock (Note 7) (29,393,000) --
Net income 20,630,000 -- $ 20,630,000
---------------
Comprehensive income -- -- $ 20,630,000
===============
Shares issued in connection with
business acquisition (Note 2) -- --
Proceeds from shares of common
stock sold in connection with
business acquisition (Note 17) -- 1,259,000
Adjustment to guaranteed resale
value of shares of common stock
issued in connection with
business acquisition (Note 17) -- 1,673,000
Cash dividends ($.05 per share) (1,201,000) --
Tax benefit from stock option exercises -- --
Proceeds from stock option exercises -- --
Stock option compensation expense -- --
Other 2,000 --
--------------- ---------------
Balances as of October 31, 2004 59,210,000 --
Net income 22,812,000 -- $ 22,812,000
Foreign currency translation adjustments -- -- (65,000)
(Note 1)
---------------
Comprehensive income -- -- $ 22,747,000
===============
Cash dividends ($.05 per share) (1,224,000) --
Tax benefit from stock option exercises -- --
Proceeds from stock option exercises -- --
Stock option compensation expense -- --
Other 1,000 --
--------------- ---------------
Balances as of October 31, 2005 80,799,000 --
Net income 31,888,000 -- $ 31,888,000
Foreign currency translation adjustments
(Note 1) -- -- 127,000
---------------
Comprehensive income -- -- $ 32,015,000
===============
Cash dividends ($.08 per share) (2,004,000) --
Tax benefit from stock options exercises -- --
Proceeds from stock option exercises -- --
Stock option compensation expense -- --
Other (1,000) --
--------------- ---------------
Balances as of October 31, 2006 $ 110,682,000 $ --
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
44
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------
2006 2005 2004
------------- ------------- -------------
Operating Activities:
Net income $ 31,888,000 $ 22,812,000 $ 20,630,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,565,000 7,409,000 6,779,000
Deferred income tax provision 2,557,000 3,031,000 4,125,000
Minority interests' share of income 11,195,000 5,129,000 4,977,000
Tax benefit from stock option exercises 2,210,000 2,830,000 1,258,000
Excess tax benefit from stock option exercises (1,550,000) -- --
Stock option compensation expense 1,373,000 2,000 2,000
Change in estimate of product warranty liability -- -- (535,000)
Restructuring expense related to inventory write-downs -- -- 350,000
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (5,018,000) (6,852,000) (6,193,000)
(Increase) decrease in inventories (13,148,000) (10,113,000) 3,576,000
Decrease (increase) in prepaid expenses and other current assets 431,000 (119,000) 263,000
Increase in trade account payables 3,696,000 2,301,000 460,000
Increase in accrued expenses and other current liabilities 1,698,000 7,247,000 5,576,000
Increase in income taxes payable 362,000 2,163,000 2,951,000
Other 649,000 (32,000) (169,000)
------------- ------------- -------------
Net cash provided by operating activities 46,908,000 35,808,000 44,050,000
------------- ------------- -------------
Investing Activities:
Acquisitions and related costs, net of cash acquired (58,117,000) (41,500,000) (28,099,000)
Capital expenditures (9,964,000) (8,273,000) (5,737,000)
Proceeds from sale of building held for sale -- 3,520,000 --
Other 520,000 357,000 (335,000)
------------- ------------- -------------
Net cash used in investing activities (67,561,000) (45,896,000) (34,171,000)
------------- ------------- -------------
Financing Activities:
Borrowings on revolving credit facility 59,000,000 37,000,000 27,000,000
Payments on revolving credit facility (38,000,000) (21,000,000) (41,000,000)
Borrowings on short-term line of credit 1,000,000 -- --
Payments on short-term line of credit (3,000,000) -- --
Cash dividends paid (2,004,000) (1,224,000) (1,201,000)
Proceeds from stock option exercises 5,071,000 1,746,000 963,000
Excess tax benefit from stock option exercises 1,550,000 -- --
Distributions to minority interest owners (3,306,000) (653,000) (1,075,000)
Proceeds from shares of common stock sold in connection
with business acquisition -- -- 1,259,000
Other (26,000) (647,000) 68,000
------------- ------------- -------------
Net cash provided by (used in) financing activities 20,285,000 15,222,000 (13,986,000)
------------- ------------- -------------
Effect of exchange rate changes on cash 37,000 (18,000) --
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (331,000) 5,116,000 (4,107,000)
Cash and cash equivalents at beginning of year 5,330,000 214,000 4,321,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 4,999,000 $ 5,330,000 $ 214,000
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
45
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HEICO Corporation, through its principal subsidiaries HEICO Aerospace
Holdings Corp. ("HEICO Aerospace") and HEICO Electronic Technologies Corp.
("HEICO Electronic") and their subsidiaries (collectively, the "Company"), is
principally engaged in the design, manufacture and sale of aerospace, defense,
and electronics related products and services throughout the United States and
internationally. The Company's customer base is primarily the commercial
airline, defense, space and electronics industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HEICO
Corporation and its subsidiaries, all of which are wholly-owned except for HEICO
Aerospace, which is 20%-owned by Lufthansa Technik AG, the technical services
subsidiary of Lufthansa German Airlines. In addition, HEICO Aerospace
consolidates a joint venture formed in March 2001, which is 16%-owned by
American Airlines' parent company, AMR Corporation, a 51%-owned subsidiary, and
two 80%-owned subsidiaries. Also, HEICO Electronic consolidates two
subsidiaries, which are 80% and 85% owned, respectively. (See Note 2,
Acquisitions, of the Notes to Consolidated Financial Statements.) All
significant intercompany balances and transactions are eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined on the first-in, first-out or the average cost basis. Losses, if any,
are recognized fully in the period when identified.
The Company periodically evaluates the carrying value of inventory,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates the amount necessary to write-down its
slow moving, obsolete or damaged inventory. These estimates could vary
significantly from actual requirements based upon future economic conditions,
customer inventory levels or competitive factors that were not foreseen or did
not exist when the estimated write-downs were made.
46
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided mainly on the straight-line method over the estimated
useful lives of the various assets. Property, plant and equipment useful lives
are as follows:
Buildings and improvements............................ 15 to 55 years
Leasehold improvements................................ 2 to 20 years
Machinery and equipment............................... 3 to 10 years
Tooling............................................... 2 to 5 years
The costs of major additions and improvements are capitalized.
Leasehold improvements are amortized over the shorter of the leasehold
improvement's useful life or the lease term. Repairs and maintenance are charged
to operations as incurred. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and any related gain or loss is
reflected in earnings.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company tests goodwill for impairment annually as of October 31 or
more frequently if events or changes in circumstances indicate that the carrying
amount of goodwill may not be fully recoverable. The test requires the Company
to compare the fair value of each of its reporting units to its carrying value
to determine potential impairment. If the carrying value of a reporting unit
exceeds its fair value, the implied fair value of that reporting unit's goodwill
is to be calculated and an impairment loss shall be recognized in the amount by
which the carrying value of a reporting unit's goodwill exceeds its implied fair
value, if any.
The Company's intangible assets subject to amortization are amortized
on the straight-line method over the following estimated useful lives:
Customer relationships................................ 3 to 7 years
Intellectual property................................. 4 years
Licenses.............................................. 12 to 17 years
Non-compete agreements................................ 1 to 7 years
Patents............................................... 6 to 18 years
The Company's intangible assets not subject to amortization consist of
trade names. The Company tests each non-amortizing asset for impairment annually
as of October 31, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The test consists of a comparison of
the fair value of each intangible asset to its carrying amount. If the carrying
amount of an intangible asset exceeds its fair value, an impairment loss shall
be recognized in an amount equal to that excess.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
trade accounts payable and accrued expenses and other current liabilities
approximate fair value due to the relatively short maturity of the respective
instruments. The carrying value of long-term debt approximates fair market value
due to its variable interest rates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its
47
temporary cash investments with high credit quality financial institutions and
limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different geographical regions.
Long-term investments (included within other assets in the Company's
Consolidated Balance Sheets) are stated at fair value based on quoted market
prices.
INTEREST RATE SWAP AGREEMENTS
Periodically, the Company enters into interest rate swap agreements to
manage interest expense related to its revolving credit facility. Interest rate
risk associated with the Company's variable rate revolving credit facility is
the potential increase in interest expense from an increase in interest rates. A
derivative instrument (e.g. interest rate swap agreement) that hedges the
variability of cash flows related to a recognized liability is designated as a
cash flow hedge.
On an ongoing basis, the Company assesses whether derivative
instruments used in hedging transactions are highly effective in offsetting
changes in cash flows of the hedged items and therefore qualify as cash flow
hedges. For a derivative instrument that qualifies as a cash flow hedge, the
effective portion of changes in fair value of the derivative is deferred and
recorded as a component of other comprehensive income until the hedged
transaction occurs and is recognized in earnings. All other portions of changes
in the fair value of a cash flow hedge are recognized in earnings immediately.
The Company did not enter into any interest rate swap agreements in
fiscal 2006, 2005 or 2004.
PRODUCT WARRANTIES
Product warranty liabilities are estimated at the time of shipment and
recorded as a component of accrued expenses and other current liabilities in the
Company's Consolidated Balance Sheets. The amount recognized is based on
historical claims cost experience.
REVENUE RECOGNITION
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated is recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For fixed price contracts in which costs cannot be
dependably estimated, revenue is recognized on the completed-contract method. A
contract is considered complete when all costs except insignificant items have
been incurred or the item has been accepted by the customer. The aggregate
effects of changes in estimates relating to inventories and/or long-term
contracts did not have a significant effect on net income or diluted net income
per share in fiscal 2006, 2005 or 2004. Revenues earned from rendering services
represented less than 10% of consolidated net sales for all periods presented.
LONG-TERM CONTRACTS
Accounts receivable and accrued expenses and other current liabilities
include amounts related to the production of products under fixed-price
contracts exceeding terms of one year. Revenues are recognized on the
percentage-of-completion method for certain of these contracts, measured by the
percentage of costs incurred to date to estimated total costs for each contract.
The percentage of the
48
Company's net sales recognized under the percentage-of-completion method was
approximately 4%, 6% and 6% in fiscal 2006, 2005 and 2004, respectively. This
method is used because management considers costs incurred to be the best
available measure of progress on these contracts. Revenues are recognized on the
completed-contract method for certain other contracts. This method is used when
the Company does not have adequate historical data to ensure that estimates are
reasonably dependable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Variations in actual labor performance, changes to
estimated profitability and final contract settlements may result in revisions
to cost estimates and are recognized in income in the period in which the
revisions are determined.
The asset, "costs and estimated earnings in excess of billings" on
uncompleted percentage-of-completion contracts, included in accounts receivable,
represents revenues recognized in excess of amounts billed. The liability,
"billings in excess of costs and estimated earnings," included in accrued
expenses and other current liabilities, represents billings in excess of
revenues recognized on contracts accounted for under either the
percentage-of-completion method or the completed-contract method. Billings are
made based on the completion of certain milestones as provided for in the
contracts.
INCOME TAXES
Deferred income taxes are provided on elements of income that are
recognized for financial accounting purposes in periods different from periods
recognized for income tax purposes.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period plus potentially dilutive
common shares arising from the assumed exercise of stock options, if dilutive.
The dilutive impact of potentially dilutive common shares is determined by
applying the treasury stock method.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries that do not utilize
the United States dollar as its functional currency are translated at year-end
rates of exchange, while revenues and expenses are translated at monthly
weighted average rates of exchange for the year. Unrealized translation gains or
losses are reported as foreign currency translation adjustments through other
comprehensive income (loss) in shareholders' equity.
STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment", as interpreted
by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107
and began recording compensation expense associated with stock options. SFAS No.
123(R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant date fair value of those awards (with limited exceptions). Prior to
the adoption of SFAS No. 123(R), the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed
49
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, compensation expense had only been recorded
in the consolidated financial statements for any stock options granted below
fair market value of the underlying stock as of the date of grant.
The Company adopted the modified prospective transition method provided
for under SFAS No. 123(R) and accordingly, prior period results have not been
retroactively adjusted. The modified prospective transition method requires that
stock-based compensation expense be recorded for (i) all new stock options
granted on or after November 1, 2005 based on the grant date fair value
determined under the provisions of SFAS No. 123(R) and (ii) all unvested stock
options granted prior to November 1, 2005 based on the grant date fair value as
determined under the provisions of SFAS No. 123.
Beginning in fiscal 2006, the Company has presented the cash flows
resulting from tax deductions in excess of the cumulative compensation cost
recognized for stock options exercised on or after November 1, 2005 ("excess tax
benefit") as a financing activity in the Consolidated Statements of Cash Flows
as prescribed by SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the
Company presented all tax benefits resulting from stock option exercises as an
operating activity in the Consolidated Statements of Cash Flows. For the fiscal
year ended October 31, 2006, the excess tax benefit from stock option exercises
of $1,550,000 was presented in financing activities in the Company's
Consolidated Statements of Cash Flows.
The Company has calculated the amount of excess tax benefit that is
available to offset future write-offs of deferred tax assets, or additional
paid-in-capital pool ("APIC Pool"), in accordance with paragraph 81 of SFAS No.
123(R). Accordingly, the Company tracks each stock option award granted after
November 1, 1996 on an employee-by-employee basis and on a grant-by-grant basis
to determine whether there is a tax benefit situation or tax deficiency
situation for each such award. The Company then compares the fair value expense
to the tax deduction received for each stock option grant and aggregates the
benefits and deficiencies, which have the effect of increasing or decreasing,
respectively, the APIC Pool. Should the amount of future tax deficiencies be
greater than the available APIC Pool, the Company will record the excess as
income tax expense in its consolidated statements of operations.
As a result of the adoption of SFAS No. 123(R), the Company's net
income for the fiscal year ended October 31, 2006 includes compensation expense
of $1,373,000 and income tax benefit related to the Company's stock options of
$391,000. Substantially all of the stock option compensation expense was
recorded as a component of selling, general and administrative expenses in the
Company's Consolidated Statements of Operations.
The following table illustrates the pro forma effects on net income and
net income per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation for each of the two
fiscal years ended October 31:
2005 2004
-------------- --------------
Net income, as reported $ 22,812,000 $ 20,630,000
Add: Stock-based employee compensation expense included
in reported net income, net of tax 2,000 2,000
Deduct: Stock-based employee compensation expense
determined under a fair value method, net of tax (1,162,000) (1,481,000)
-------------- --------------
Pro forma net income $ 21,652,000 $ 19,151,000
============== ==============
Net income per share:
Basic - as reported $ .93 $ .86
Basic - pro forma $ .89 $ .80
Diluted - as reported $ .87 $ .80
Diluted - pro forma $ .82 $ .74
50
Further information regarding stock options can be found in Note 8,
Stock Options, of the Notes to Consolidated Financial Statements.
CONTINGENCIES
Losses for contingencies such as product warranties, litigation and
environmental matters are recognized in income when they are probable and can be
reasonably estimated. Gain contingencies are not recognized in income until they
have been realized.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4".
SFAS No. 151 requires the allocation of fixed production overhead costs be based
on the normal capacity of the production facilities and unallocated overhead
costs recognized as an expense in the period incurred. The Statement also
clarifies that abnormal inventory costs such as costs of idle facilities, excess
freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005. The adoption of the
SFAS No. 151 did not have a material effect on the Company's results of
operations, financial position, or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations--an interpretation of
FASB Statement No. 143." This Interpretation clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the
timing and (or) method of settling the obligation are conditional on a future
event that may or may not be within the control of the entity. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The adoption of FIN 47 did not have a material effect on the Company's results
of operations, financial position, or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 changes the requirements for the accounting and reporting of a
change in accounting principle. The Statement eliminates the requirement in APB
Opinion No. 20 to include the cumulative effect of changes in accounting
principle in the income statement in the period of change, and instead requires
that changes in accounting principle be retrospectively applied unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. The Statement applies to all voluntary changes in
accounting principle. SFAS No. 154 is effective for changes made in fiscal years
beginning after December 15, 2005. The Company does not expect the adoption of
SFAS No. 154 to have a material effect on its results of operations, financial
position, or cash flows.
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of FASB Statement No. 109," which seeks to
reduce the diversity in practice associated with the accounting and reporting
for uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in an income tax return. FIN 48 presents a two-step process for evaluating
a tax position. The first step is to determine whether it is
more-likely-than-not that a tax position will be sustained upon examination,
based on the technical merits of the position. The second step is to measure the
benefit to be recorded from tax positions that meet the more-likely-than-not
recognition threshold, by determining the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate settlement, and
recognizing that amount in the financial statements. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
51
evaluating the impact that the adoption of FIN 48 will have on its results of
operations, financial position, and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which provides enhanced guidance for using fair value to measure
assets and liabilities. SFAS No. 157 provides a common definition of fair value
and establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007. The Company is currently in the process
of evaluating the effect, if any, the adoption of SFAS No. 157 will have on its
results of operations, financial position, or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements". SAB No. 108 was issued in order to eliminate the diversity in
practice surrounding how public companies quantify financial statement
misstatements. SAB No. 108 requires that registrants quantify errors using both
a balance sheet (iron curtain) approach and an income statement (rollover)
approach then evaluate whether either approach results in a misstated amount
that, when all relevant quantitative and qualitative factors are considered, is
material. SAB No. 108 is effective for fiscal years ending after November 15,
2006. The Company does not expect the adoption of SAB No. 108 to have a material
effect on its results of operations, financial position, or cash flows.
2. ACQUISITIONS
In December 2003, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired an 80% interest in the assets and
business of Sierra Microwave Technology, Inc., ("Sierra"). Under the
transaction, the Company formed a new subsidiary, Sierra Microwave Technology,
LLC ("Sierra LLC"), which acquired substantially all of the assets and assumed
certain liabilities of Sierra. The new subsidiary is owned 80% by the Company
and 20% by certain members of Sierra's management group. The purchase price was
principally paid in cash using proceeds from the Company's revolving credit
facility and with shares of HEICO's Class A Common Stock. Sierra LLC is engaged
in the design and manufacture of certain niche microwave components used in
satellites and military products. As part of the agreement to acquire an 80%
interest in Sierra, the Company has the right to purchase the minority interests
beginning at approximately the tenth anniversary of the acquisition, or sooner
under certain conditions, and the minority holders have the right to cause the
Company to purchase their interests commencing at approximately the fifth
anniversary of the acquisition, or sooner under certain conditions.
In December 2004, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired substantially all of the assets and
assumed certain liabilities of Connectronics, Corp. and its affiliate, Wiremax,
Ltd. (collectively "Connectronics"). The purchase price was principally paid in
cash using proceeds from the Company's revolving credit facility. Subject to
meeting certain earnings objectives during the first four years following the
acquisition, the Company may be obligated to pay additional purchase
consideration of up to $3.8 million in aggregate. In fiscal 2006, the Company
paid $2.2 million of such additional purchase consideration based on the
subsidiary's earnings relative to its target for the first year, and accrued the
remaining $1.6 million based on the subsidiary's year-to-date earnings relative
to its target for the second year. The Company expects to pay this accrued
amount in fiscal 2007. Connectronics is engaged in the production of specialty
high voltage interconnection devices and wire primarily for defense applications
and other markets.
52
In February 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired substantially all of the assets and
assumed certain liabilities of Lumina Power, Inc. ("Lumina"). The purchase price
was principally paid in cash using proceeds from the Company's revolving credit
facility. Subject to meeting certain product line-related earnings objectives
during the fourth and fifth years following the acquisition, the Company may be
obligated to pay additional purchase consideration after the fifth year, which
is currently estimated to total up to $2.3 million. The additional purchase
consideration will be accrued when the earnings objectives are met. Lumina is
engaged in the design and manufacture of power supplies for the laser industry.
In September 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired an 85% interest in the stock of HVT
Group, Inc., ("HVT"). The remaining 15% interest is held by certain members of
HVT's management group. The purchase price was principally paid in cash using
proceeds from the Company's revolving credit facility. As part of the agreement
to acquire an 85% interest in HVT, the minority holders have the right to cause
the Company to purchase their interests over a four-year period starting around
the second anniversary of the acquisition, or sooner under certain conditions.
HVT is a leading provider of very high voltage interconnection devices and cable
assemblies for the medical equipment, defense and industrial markets.
In September 2005, the Company, through its HEICO Aerospace Holdings
Corp. subsidiary, acquired certain assets and assumed certain liabilities in an
aerospace and defense product line acquisition, which will be used in the
operations of one of its existing subsidiaries. The purchase price was paid in
cash provided by operating activities.
In November 2005, the Company, through its HEICO Aerospace Holdings
Corp. subsidiary, acquired a 51% interest Seal Dynamics LLC ("Seal LLC"). The
remaining 49% interest is principally owned by a member of Seal LLC's management
group. As part of the agreement to acquire a 51% interest in Seal LLC, the
Company has the right to purchase the remaining 49% interest over a seven-year
period beginning approximately after the second anniversary of the acquisition,
or sooner under certain conditions, and the minority holders have the right to
cause the Company to purchase the same equity interest over the same period.
Seal LLC is a distributor and designer of FAA-approved hydraulic, pneumatic,
mechanical and electro-mechanical components for the commercial, regional and
general aviation markets.
In November 2005, the Company, through its HEICO Electronic
Technologies Corp. subsidiary, acquired all of the stock of Engineering Design
Team, Inc. and substantially all of the assets of its affiliate (collectively
"EDT"). Subject to meeting certain earnings objectives during the first four
years following the acquisition, the Company may be obligated to pay additional
consideration of up to $53.0 million in aggregate. The Company accrued $5.6
million of such additional purchase consideration as of October 31, 2006 based
on the first year earnings of EDT relative to its target, which it expects to
pay in fiscal 2007. EDT specializes in the design, manufacture and sale of
advanced high-technology, high-speed interface products that link devices such
as telemetry receivers, digital cameras, high resolution scanners, simulation
systems and test systems to almost any computer. EDT's products are utilized in
homeland security, defense, medical, research, astronomical and other
applications across numerous industries.
In May 2006, the Company, through its HEICO Aerospace Holdings Corp.
subsidiary, acquired all of the stock of Arger Enterprises, Inc. and its related
companies (collectively "Arger"). Arger designs and distributes FAA-approved
aircraft and engine parts primarily for the commercial aviation market. The
Company has since combined the operations of Arger within other subsidiaries of
HEICO Aerospace Holdings Corp. As of the acquisition date, the Company
recognized a $1.8 million restructuring liability as part of the acquisition
costs consisting principally of employee termination and relocation costs,
moving costs and associated expenses and contract termination costs. During the
remainder of fiscal
53
2006, $1.1 million of such accrued costs were paid and $.6 million were deemed
not necessary and reversed, leaving a remaining accrual of $.1 million as of
October 31, 2006.
In September 2006, the Company, through its HEICO Aerospace Holding
Corp. subsidiary, acquired an 80% interest in the business, assets, and certain
liabilities of Prime Air, Inc., and its affiliate (collectively "Prime"). Under
the transaction, the former owners formed a new subsidiary, Prime Air, LLC
("Prime Air"), which acquired substantially all of the assets and assumed
certain liabilities of Prime. The new subsidiary is owned 80% by the Company and
20% by certain members of Prime's management group. Subject to meeting certain
earnings objectives during the first two years following the acquisition, the
Company may be obligated to pay additional consideration of up to $7.0 million
in aggregate. The additional purchase consideration will be accrued when the
earnings objectives are met. Further, the Company has the right to purchase the
remaining 20% minority interests beginning at approximately the eighth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period. Prime Air provides commercial airlines, regional
operators, asset management companies, and MRO providers with high quality and
cost effective niche accessory component exchange services as an alternative to
OEMs' spares services.
All of the acquisitions described above were accounted for using the
purchase method of accounting. The purchase price of each acquisition was not
significant to the Company's consolidated financial statements individually or
in aggregate. The results of operations of each acquired company were included
in the Company's results of operations from their effective acquisition date and
the pro forma consolidated operating results assuming each fiscal 2005 and 2004
acquisition had been consummated as of the beginning of its respective fiscal
year would not have been materially different from the reported results. The
following table presents the Company's unaudited pro forma consolidated
operating results assuming the fiscal 2006 acquisitions of Seal LLC, EDT, Arger,
and Prime Air had been consummated as of the beginning of fiscal 2005. The pro
forma financial information is presented for comparative purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved if the acquisitions had taken place as of the beginning fiscal
2005. The unaudited pro forma financial information includes adjustments to
historical amounts such as additional amortization expense related to acquired
intangible assets, increased interest expense associated with borrowings to
finance the acquisitions, increased performance awards under the terms of the
acquisitions and the incremental minority interest in the net income of Seal
LLC, Arger and Prime Air.
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------
2006 2005
--------------- ---------------
Net sales $ 430,864,000 $ 370,846,000
Net income $ 32,392,000 $ 26,250,000
Net income per share:
Basic $ 1.29 $ 1.07
Diluted $ 1.22 $ 1.00
The allocation of the purchase price of each acquisition to the
tangible and identifiable intangible assets acquired and liabilities assumed is
based on their estimated fair values as of the date of acquisition. The Company
determines the fair values of such assets and liabilities, generally in
consultation with third-party valuation advisors. The allocation of the purchase
price of Arger and Prime Air to the tangible and identifiable intangible assets
acquired and liabilities assumed in these consolidated financial statements is
preliminary until the Company obtains final information regarding their fair
values. The excess of the purchase price over the net of the amounts assigned to
assets acquired and liabilities assumed has been recorded as goodwill (See Note
18, Supplemental Disclosures of Cash Flow Information, of the Notes to
54
Consolidated Financial Statements). The aggregate cost of acquisitions,
including payments made in cash and with shares of the Company's common stock
and contingent payments, was $58.1 million, $41.5 million and $31.1 million in
fiscal 2006, 2005 and 2004, respectively.
3. SELECTED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Accounts receivable $ 67,905,000 $ 49,816,000
Less: Allowance for doubtful accounts (2,893,000) (2,148,000)
--------------- ---------------
Accounts receivable, net $ 65,012,000 $ 47,668,000
=============== ===============
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED PERCENTAGE-OF-COMPLETION CONTRACTS
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Costs incurred on uncompleted contracts $ 16,428,000 $ 18,344,000
Estimated earnings 12,221,000 11,252,000
--------------- ---------------
28,649,000 29,596,000
Less: Billings to date (21,614,000) (21,747,000)
--------------- ---------------
$ 7,035,000 $ 7,849,000
=============== ===============
Included in accompanying Consolidated
Balance Sheets under the following
captions:
Accounts receivable, net (costs and estimated
earnings in excess of billings) $ 7,204,000 $ 7,889,000
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings) (169,000) (40,000)
--------------- ---------------
$ 7,035,000 $ 7,849,000
=============== ===============
Changes in estimates did not have a material effect on net income or
diluted net income per share in fiscal 2006, 2005, or 2004.
INVENTORIES
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Finished products $ 52,245,000 $ 26,136,000
Work in process 13,805,000 12,634,000
Materials, parts, assemblies and supplies 31,233,000 23,988,000
--------------- ---------------
Inventories, net $ 97,283,000 $ 62,758,000
=============== ===============
Inventories related to long-term contracts were not significant as of
October 31, 2006 and 2005.
55
PROPERTY, PLANT AND EQUIPMENT
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Land $ 3,155,000 $ 3,155,000
Buildings and improvements 27,724,000 25,344,000
Machinery, equipment and tooling 59,052,000 53,460,000
Construction in progress 3,796,000 3,128,000
--------------- ---------------
93,727,000 85,087,000
Less: Accumulated depreciation and amortization (44,238,000) (38,424,000)
--------------- ---------------
Property, plant and equipment, net $ 49,489,000 $ 46,663,000
=============== ===============
The amounts set forth above include tooling costs having a net book
value of $3,910,000 and $3,441,000 as of October 31, 2006 and 2005,
respectively. Amortization expense on capitalized tooling was $1,304,000,
$1,346,000, and $1,484,000 for the fiscal years ended October 31, 2006, 2005 and
2004, respectively. Expenditures for capitalized tooling costs were $1,363,000,
$885,000, and $955,000 in fiscal 2006, 2005 and 2004, respectively.
Depreciation and amortization expense, exclusive of tooling, on
property, plant and equipment, amounted to approximately $5,786,000, $5,574,000,
and $4,841,000 for the fiscal years ended October 31, 2006, 2005 and 2004,
respectively.
Included in the Company's property, plant and equipment is rotable
equipment located at various customer locations in connection with certain
repair and maintenance agreements. The rotables are stated at a net book value
of $2,710,000 and $3,256,000 as of October 31, 2006 and 2005, respectively.
Under the terms of the agreements, the customers may purchase the equipment at
specified prices, which are no less than net book value, upon termination of the
agreements. The equipment is currently being depreciated over its estimated
life.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Accrued employee compensation and related payroll taxes $ 17,546,000 $ 13,794,000
Accrued customer rebates and credits 9,066,000 8,222,000
Accrued additional purchase consideration 7,180,000 3,045,000
Other 7,711,000 7,412,000
--------------- ---------------
Accrued expenses and other current liabilities $ 41,503,000 $ 32,473,000
=============== ===============
OTHER NON-CURRENT LIABILITIES
Other non-current liabilities include deferred compensation of
$4,999,000 and $5,847,000 as of October 31, 2006 and 2005, respectively,
principally related to elective deferrals of salary and bonuses under a Company
sponsored non-qualified deferred compensation plan available to selected
employees. The Company makes no contributions to this plan. The assets of this
plan related to this deferred compensation liability are held within an
irrevocable trust and classified within other assets (long-term) in the
accompanying Consolidated Balance Sheets.
During fiscal 2006, the Company established the HEICO Corporation
Leadership Compensation Plan ("LCP"), a nonqualified deferred compensation plan
that conforms to Section 409A of the Internal Revenue Code. The LCP is effective
October 1, 2006 and provides eligible employees, officers and
56
directors of the Company the opportunity to voluntarily defer base salary, bonus
payments, commissions, long-term incentive awards and directors fees, as
applicable, on a pre-tax basis. The Company will match 50% of the first 6% of
base salary deferred by each participant. While the Company has no obligation to
do so, the LCP also provides the Company the opportunity to make discretionary
contributions. The Company's matching contributions and any discretionary
contributions are subject to vesting and forfeiture provisions set forth in the
LCP. As of October 31, 2006, discretionary contributions for fiscal 2006
aggregating $985,000 were accrued in accrued expenses and other liabilities in
the accompany Consolidated Balance Sheets.
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 during fiscal 2006 and 2005 by operating segment are as
follows:
SEGMENT (1)
--------------------------------- CONSOLIDATED
FSG ETG TOTALS
--------------- --------------- ---------------
Balances as of October 31, 2004 $ 137,590,000 $ 79,084,000 $ 216,674,000
Goodwill acquired 1,092,000 26,757,000 27,849,000
Accrued additional purchase consideration -- 3,045,000 3,045,000
Adjustments to goodwill 661,000 -- 661,000
--------------- --------------- ---------------
Balances as of October 31, 2005 139,343,000 108,886,000 248,229,000
Goodwill acquired 17,325,000 3,118,000 20,443,000
Accrued additional purchase consideration -- 7,180,000 7,180,000
Adjustments to goodwill 536,000 (1,272,000) (736,000)
--------------- --------------- ---------------
Balances as of October 31, 2006 $ 157,204,000 $ 117,912,000 $ 275,116,000
=============== =============== ===============
(1) During fiscal 2006, one of the Company's subsidiaries formerly included
in the ETG was reclassified to the FSG. Prior year balances have been
retroactively restated to reflect the revised segment classification.
The goodwill acquired and accrued additional purchase consideration
recognized during fiscal 2006 are a result of the Company's acquisitions
described in Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements. Adjustments to goodwill consist primarily of adjustments related to
the preliminary allocation of the purchase price of prior year acquisitions to
the assets acquired and liabilities assumed, and contingent purchase price
payments to previous owners of acquired businesses.
57
Identifiable intangible assets, which are recorded within other assets
in the Company's Consolidated Balance Sheets consist of:
AS OF OCTOBER 31, 2006 AS OF OCTOBER 31, 2005
----------------------------------------------- -----------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------- ------------- ------------- ------------- ------------- -------------
Amortizing Assets:
Customer relationships $ 13,595,000 $ (2,138,000) $ 11,457,000 $ -- $ -- $ --
Intellectual property 1,992,000 (498,000) 1,494,000 -- -- --
Licenses 1,000,000 (326,000) 674,000 1,000,000 (252,000) 748,000
Non-compete agreements 800,000 (434,000) 366,000 660,000 (129,000) 531,000
Patents 560,000 (102,000) 458,000 477,000 (60,000) 417,000
------------- ------------- ------------- ------------- ------------- -------------
17,947,000 (3,498,000) 14,449,000 2,137,000 (441,000) 1,696,000
Non-Amortizing Assets:
Trade names 7,562,000 -- 7,562,000 3,650,000 -- 3,650,000
------------- ------------- ------------- ------------- ------------- -------------
$ 25,509,000 $ (3,498,000) $ 22,011,000 $ 5,787,000 $ (441,000) $ 5,346,000
============= ============= ============= ============= ============= =============
The increase in the gross carrying amount of customer relationships,
intellectual property, non-compete agreements and trade names as of October 31,
2006 compared to October 31, 2005 principally relates to such intangible assets
recognized in connection with recent acquisitions. (See Note 2, Acquisitions,
and Note 18, Supplemental Disclosures of Cash Flow Information, of the Notes to
Consolidated Financial Statements.) The weighted average amortization period of
the customer relationships, intellectual property, and non-compete agreements
recognized in fiscal 2006 is approximately six years, four years, and six years,
respectively.
Amortization expense of other intangible assets was $3,057,000,
$193,000 and $112,000 for the fiscal years ended October 31, 2006, 2005 and
2004, respectively. Amortization expense for each of the next five fiscal years
is expected to be $3,475,000 in fiscal 2007, $3,210,000 in fiscal 2008,
$2,603,000 in fiscal 2009, $2,105,000 in fiscal 2010, and $1,432,000 in fiscal
2011.
5. SHORT-TERM AND LONG-TERM DEBT
In June 2006, one of the Company's subsidiaries entered into a $7.0
million short-term line of credit with a bank, which expires in April 2007. The
line of credit may be used for inventory purchases and other working capital
needs and is secured by all the assets of the subsidiary. Advances under the
line of credit bear interest at the subsidiary's choice of the "Prime Rate
Advance" (prime rate less .75%) or "LIBOR Advance" (LIBOR rate plus .75%). As of
October 31, 2006, no borrowings were outstanding under the line of credit.
58
Long-term debt consists of:
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Borrowings under revolving credit facility $ 53,000,000 $ 32,000,000
Industrial Development Revenue Refunding
Bonds - Series 1988 1,980,000 1,980,000
Capital leases and equipment loans 81,000 144,000
--------------- ---------------
55,061,000 34,124,000
Less: Current maturities of long-term debt (39,000) (63,000)
--------------- ---------------
$ 55,022,000 $ 34,061,000
=============== ===============
The aggregate amount of long-term debt maturing by fiscal year is
$39,000 in fiscal 2007, $1,995,000 in fiscal 2008, $18,000 in fiscal 2009, and
$53,009,000 in fiscal 2010.
REVOLVING CREDIT FACILITY
In August 2005, the Company amended its revolving credit facility by
entering into a $130 million Amended and Restated Revolving Credit Agreement
("Credit Facility") with a bank syndicate, which expires in August 2010. The
Credit Facility includes a feature that will allow the Company to increase the
Credit Facility, at its option, up to an aggregate amount of $175 million
through increased commitments from existing lenders or the addition of new
lenders. The Credit Facility may be used for working capital and general
corporate needs of the Company, including letters of credit, capital
expenditures and to finance acquisitions. In July 2006, the Company amended the
Credit Facility principally to include a less restrictive covenant regarding
requisite approval of acquisitions by the bank syndicate. The prior covenant
relating to approval by the bank syndicate of acquisitions in excess of an
aggregate of $50 million over any twelve-month period was eliminated provided
the Company maintains an agreed upon, or lower, leverage ratio. Advances under
the Credit Facility accrue interest at the Company's choice of the "Base Rate"
or the London Interbank Offered Rate ("LIBOR") plus applicable margins (based on
the Company's ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization, minority interest, and non-cash charges or
"leverage ratio"). The Base Rate is the higher of (i) the Prime Rate or (ii) the
Federal Funds rate plus .50%. The applicable margins range from .75% to 2.00%
for LIBOR based borrowings and from .00% to .50% for Base Rate based borrowings.
A fee is charged on the amount of the unused commitment ranging from .20% to
..50% (depending on the Company's leverage ratio). The Credit Facility also
includes a $10 million swingline sublimit and a $15 million sublimit for letters
of credit. The Credit Facility is secured by substantially all assets other than
real property of the Company and its subsidiaries and contains covenants that
require, among other things, the maintenance of the leverage ratio and a fixed
charge coverage ratio as well as minimum net worth requirements.
As of October 31, 2006 and 2005, the Company had a total of $53 million
and $32 million, respectively, borrowed under its revolving credit facility at
weighted average interest rates of 6.1% and 4.7%, respectively. The amounts were
primarily borrowed to fund acquisitions (see Note 2, Acquisitions, of the Notes
to Consolidated Financial Statements). The revolving credit facility contains
both financial and non-financial covenants. As of October 31, 2006, the Company
believes it is in compliance with all such covenants.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds outstanding as of October 31,
2006 represent bonds issued by Broward County, Florida in 1988 (the "1988
bonds"). The 1988 bonds are due April 2008 and
59
bear interest at a variable rate calculated weekly (3.6% and 2.8% as of October
31, 2006 and 2005, respectively). The 1988 bonds as amended are secured by a
$2.0 million letter of credit expiring April 2008 and a mortgage on the related
properties pledged as collateral.
6. INCOME TAXES
The provision for income taxes on income before income taxes and
minority interests for each of the three fiscal years ended October 31 is as
follows:
2006 2005 2004
--------------- --------------- ---------------
Current:
Federal $ 15,301,000 $ 11,346,000 $ 6,088,000
State 2,780,000 1,667,000 735,000
Foreign 262,000 56,000 --
--------------- --------------- ---------------
18,343,000 13,069,000 6,823,000
Deferred 2,557,000 3,031,000 4,125,000
--------------- --------------- ---------------
Total income tax expense $ 20,900,000 $ 16,100,000 $ 10,948,000
=============== =============== ===============
The following table reconciles the federal statutory tax rate to the
Company's effective tax rate for each of the three fiscal years ended October
31:
2006 2005 2004
---------- ---------- ----------
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, less applicable federal income tax reduction 3.5 3.2 2.2
Net tax benefit related to non-taxable life insurance proceeds -- -- (4.8)
Net tax benefit on export sales (1.3) (1.8) (2.3)
Net tax benefit on minority interests' share of income (2.7) (.5) (.9)
Net tax benefit on qualified research and development activities claimed (2.4) -- --
Other, net .6 .7 .7
---------- ---------- ----------
Effective tax rate 32.7% 36.6% 29.9%
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company
believes that it is more likely than not that it will generate sufficient future
taxable income to utilize all of its deferred tax assets and has therefore not
recorded a valuation allowance on any such asset. Significant components of the
Company's deferred tax assets and liabilities are as follows:
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ----------------
Deferred tax assets:
Inventories $ 5,650,000 $ 4,268,000
Deferred compensation liability 2,289,000 2,286,000
Allowance for doubtful accounts receivable 895,000 810,000
Customer rebates accrual 800,000 739,000
Other 2,764,000 2,037,000
--------------- ----------------
Total deferred tax assets 12,398,000 10,140,000
--------------- ----------------
Deferred tax liabilities:
Intangible asset amortization 27,016,000 20,722,000
Accelerated depreciation 3,670,000 4,504,000
Other 455,000 127,000
--------------- ----------------
Total deferred tax liabilities 31,141,000 25,353,000
--------------- ----------------
Net deferred tax liability $ (18,743,000) $ (15,213,000)
=============== ================
60
The net deferred tax liability is classified in the accompanying
Consolidated Balance Sheets as follows:
AS OF OCTOBER 31,
----------------------------------
2006 2005
--------------- ---------------
Current asset $ 9,309,000 $ 7,218,000
Long-term liability (28,052,000) (22,431,000)
--------------- ---------------
Net deferred tax liability $ (18,743,000) $ (15,213,000)
=============== ===============
The increase in the net deferred tax liability from $15.2 million as of
October 31, 2005 to $18.7 million as of October 31, 2006 is due to the $2.6
million deferred income tax expense for fiscal 2006 and $0.9 million in net
deferred tax liabilities recognized through purchase accounting in connection
with recent acquisitions. In fiscal 2005, the Company recorded $1.6 million in
net deferred tax liabilities in connection with acquisitions. The net deferred
tax liabilities recognized principally relate to differences between the
assigned values and the tax bases of identifiable intangible assets and
property, plant and equipment acquired. No deferred tax assets or liabilities
were recognized in connection with the Company's acquisitions in fiscal 2004.
As previously reported, in 1999 - 2002 certain individual holders of
non-qualified stock options issued by the Company exchanged these options for
annuity contracts. As a result, the recognition of compensation income otherwise
reportable upon the exercise or transfer of stock options was deferred by the
individual holders. Based on agreements between the individuals, the Company and
the Internal Revenue Service, the remaining deferred compensation income was
accelerated and reported by the individuals. As a result, the Company's
corresponding compensation deduction benefit was recognized in its fiscal 2005
income tax return. The Company recorded a $5.1 million tax benefit from stock
option exercises during fiscal 2006 by increasing capital in excess of par
value, a component of shareholders' equity, and decreasing income taxes payable.
The Company claimed an income tax credit for qualified research and
development activities in its income tax return for fiscal 2005 and amended
returns for previous tax years that were filed in the third and fourth quarters
of fiscal 2006 upon completion of a study conducted by outside tax consultants.
The aggregate tax credit, net of expenses, increased net income by approximately
$1.0 million in fiscal 2006.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company's Board of Directors adopted, as of November 2, 2003, a
Shareholder Rights Agreement (the "2003 Plan"). Pursuant to the 2003 Plan, the
Board declared a dividend of one preferred share purchase right for each
outstanding share of Common Stock and Class A Common Stock (with the preferred
share purchase rights collectively as the "Rights"). The Rights trade with the
common stock and are not exercisable or transferable apart from the Common Stock
and Class A Common Stock until after a person or group either acquires 15% or
more of the outstanding common stock or commences or announces an intention to
commence a tender offer for 15% or more of the outstanding common stock. Absent
either of the aforementioned events transpiring, the Rights will expire as of
the close of business on November 2, 2013.
61
The Rights have certain anti-takeover effects and, therefore, will
cause substantial dilution to a person or group who attempts to acquire the
Company on terms not approved by the Company's Board of Directors or who
acquires 15% or more of the outstanding common stock without approval of the
Company's Board of Directors. The Rights should not interfere with any merger or
other business combination approved by the Board since they may be redeemed by
the Company at $.01 per Right at any time until the close of business on the
tenth day after a person or group has obtained beneficial ownership of 15% or
more of the outstanding common stock or until a person commences or announces an
intention to commence a tender offer for 15% or more of the outstanding common
stock. The 2003 Plan also contains a provision to help ensure a potential
acquiror pays all shareholders a fair price for the Company.
COMMON STOCK AND CLASS A COMMON STOCK
Each share of Common Stock is entitled to one vote per share. Each
share of Class A Common Stock is entitled to a 1/10 vote per share. Holders of
the Company's Common Stock and Class A Common Stock are entitled to receive
when, as and if declared by the Board of Directors, dividends and other
distributions payable in cash, property, stock, or otherwise. In the event of
liquidation, after payment of debts and other liabilities of the Company, and
after making provision for the holders of preferred stock, if any, the remaining
assets of the Company will be distributable ratably among the holders of all
classes of common stock.
SHARE REPURCHASES
The Company did not repurchase any shares of its common stock in fiscal
2006, 2005, or 2004.
STOCK DIVIDEND
In January 2004, the Company paid a 10% stock dividend on both classes
of common stock outstanding with shares of Class A Common Stock. The 10%
dividend was valued based on the closing market price of the Company's Class A
Common Stock as of the day prior to the declaration date. All net income per
share, dividend per share, price and other data per share, exercise price, stock
option, and common share data has been adjusted retroactively to give effect to
the stock dividend.
8. STOCK OPTIONS
The Company currently has two stock option plans, the 2002 Stock Option
Plan ("2002 Plan") and the Non-Qualified Stock option plan under which stock
options may be granted. The Company's 1993 Stock Option Plan ("1993 Plan")
terminated in March 2003 on the tenth anniversary of its effective date. No
options may be granted under the 1993 Plan after such termination date; however,
options outstanding as of the termination date may be exercised pursuant to
their terms. In addition, the Company granted stock options to two former
shareholders of an acquired business pursuant to employment agreements entered
into in connection with the acquisition in fiscal 1999. A total of 2,896,701
shares of the Company's stock are reserved for issuance to employees, directors,
officers, and consultants as of October 31, 2006, including 2,734,018 shares
currently under option and 162,683 shares available for future grants. Options
issued under the 2002 Plan may be designated as incentive stock options or
non-qualified stock options. Incentive stock options are granted with an
exercise price of not less than 100% of the fair market value of the Company's
common stock as of date of grant (110% thereof in certain cases) and are
exercisable in percentages specified as of the date of grant over a period up to
ten years. Only employees are eligible to receive incentive stock options.
Non-qualified stock options under the 2002 Plan may be granted at less than fair
market value and may be immediately exercisable. Options granted under the
Non-Qualified Stock Option Plan may be granted with an exercise price of no less
than
62
the fair market value of the Company's common stock as of the date of grant and
are generally exercisable in four equal annual installments commencing one year
from the date of grant. The options granted pursuant to the 2002 Plan may be
designated as Common Stock and/or Class A Common Stock in such proportions as
shall be determined by the Board of Directors or the Stock Option Plan Committee
in its sole discretion. The stock options granted to two former shareholders of
an acquired business were fully vested and transferable as of the grant date and
expire ten years from the date of grant. The exercise price of such options was
the fair market value as of the date of grant. Options under all stock option
plans expire not later than ten years after the date of grant, unless extended
by the Stock Option Plan Committee or the Board of Directors.
Information concerning stock option activity for each of the three
fiscal years ended October 31 is as follows:
SHARES UNDER OPTION
SHARES ----------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------------- --------------- ----------------
Outstanding as of October 31, 2003 166,423 4,448,675 $ 8.62
Granted (10,000) 10,000 $ 13.19
Cancelled 880 (20,332) $ 12.26
Exercised -- (403,076) $ 2.75
--------------- ---------------
Outstanding as of October 31, 2004 157,303 4,035,267 $ 9.20
Granted (1,000) 1,000 $ 19.08
Cancelled -- (82,637) $ 13.38
Exercised -- (364,950) $ 5.36
--------------- ---------------
Outstanding as of October 31, 2005 156,303 3,588,680 $ 9.50
Granted -- -- $ --
Cancelled 6,380 (10,371) $ 8.96
Exercised -- (844,291) $ 7.34
--------------- ---------------
Outstanding as of October 31, 2006 162,683 2,734,018 $ 10.16
=============== ===============
63
Information concerning stock options outstanding and stock options
exercisable by class of common stock as of October 31, 2006 is as follows:
COMMON STOCK
OPTIONS OUTSTANDING
---------------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (YEARS) VALUE
-------------------- --------------- --------------- --------------------- ---------------
$1.16 - $2.90 111,182 $ 1.84 0.9 $ 3,829,000
$2.91 - $7.00 125,500 $ 6.33 0.1 3,758,000
$7.01 - $12.00 572,925 $ 8.99 4.8 15,634,000
$12.01 - $21.92 454,000 $ 14.20 4.3 10,024,000
--------------- ---------------
1,263,607 $ 9.97 3.8 $ 33,245,000
=============== ===============
OPTIONS EXERCISABLE
--------------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES EXERCISABLE EXERCISE PRICE LIFE (YEARS) VALUE
-------------------- --------------- --------------- --------------------- ---------------
$1.16 - $2.90 111,182 $ 1.84 0.9 $ 3,828,000
$2.91 - $7.00 125,500 $ 6.33 0.1 3,758,000
$7.01 - $12.00 450,924 $ 9.22 4.5 12,203,000
$12.01 - $21.92 454,000 $ 14.20 4.3 10,024,000
--------------- ---------------
1,141,606 $ 10.16 3.6 $ 29,813,000
=============== ===============
CLASS A COMMON STOCK
OPTIONS OUTSTANDING
--------------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (YEARS) VALUE
-------------------- --------------- --------------- --------------------- ---------------
$1.16 - $2.90 95,795 $ 1.71 0.9 $ 2,709,000
$2.91 - $7.00 143,195 $ 5.68 5.0 3,482,000
$7.01 - $12.00 651,979 $ 8.26 4.5 14,167,000
$12.01 - $21.92 579,442 $ 15.24 3.4 8,547,000
--------------- ---------------
1,470,411 $ 10.33 3.9 $ 28,905,000
=============== ===============
OPTIONS EXERCISABLE
--------------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE AGGREGATE
RANGE OF NUMBER AVERAGE REMAINING CONTRACTUAL INTRINSIC
EXERCISE PRICES EXERCISABLE EXERCISE PRICE LIFE (YEARS) VALUE
-------------------- --------------- --------------- --------------------- ---------------
$1.16 - $2.90 95,795 $ 1.71 0.9 $ 2,709,000
$2.91 - $7.00 92,155 $ 5.75 4.3 2,234,000
$7.01 - $12.00 594,821 $ 8.20 4.4 12,958,000
$12.01 - $21.92 559,937 $ 15.32 3.3 8,215,000
--------------- ---------------
1,342,708 $ 10.54 3.7 $ 26,116,000
=============== ===============
The aggregate intrinsic values in the tables above are calculated based
on the difference between the closing price per share of the underlying common
stock as reported on the New York Stock Exchange as of October 31, 2006 less the
option exercise price (if a positive spread) multiplied by the number of stock
options.
64
If there were a change in control of the Company, options outstanding
for an additional 71,707 shares of Common Stock and 113,119 shares of Class A
Common Stock would become immediately exercisable.
Information concerning stock options exercised during the fiscal year
ended October 31, 2006 is as follows:
2006
-------------
Cash proceeds from stock option exercises $ 5,071,000
Tax benefit realized from stock option exercises 1,385,000
Intrinsic value of stock option exercises 16,105,000
Effective as of November 1, 2005, the Company generally recognizes
stock option compensation expense ratably over the vesting period. As of October
31, 2006, there was $819,000 of pretax unrecognized compensation expense related
to nonvested stock options, which is expected to be recognized over a weighted
average period of approximately 1.3 years.
The Company did not grant any stock options in fiscal 2006 and there
were no grants of Common Stock options in fiscal 2005 and 2004. The estimated
weighted average fair value of the Class A Common Stock options granted in
fiscal 2005 and 2004 was $9.16 and $6.16 per share, respectively.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions for each of the three fiscal years ended October 31:
2006 2005 2004
------------------- ------------------- -------------------
CLASS A CLASS A CLASS A
COMMON COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
-------- -------- -------- -------- -------- --------
Expected stock price volatility -- -- -- 43.84% -- 46.87%
Risk free interest rate -- -- -- 4.09% -- 3.28%
Dividend yield -- -- -- .38% -- .38%
Expected option life (years) -- -- -- 6 -- 6
9. RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the
"Plan") under which eligible employees of the Company and its participating
subsidiaries may make Elective Deferral Contributions, effective January 1,
2005, up to the limitations set forth in Section 402(g) of the Internal Revenue
Code. Prior to calendar 2005, deferrals were permitted up to 15% of an eligible
employee's annual compensation as defined by the Plan. The Company generally
makes a 25% or 50% Employer Matching Contribution, as determined by the Board of
Directors, based on a participant's Elective Deferral Contribution up to 6% of
the participant's Compensation for the Elective Deferral Contribution period.
The Employer Matching Contribution is made in the Company's common stock or
cash, as determined by the Company. The Company's match of a portion of a
participant's contribution paid in Company common stock is based on the fair
market value of the shares as of the date of contribution. The Plan also
provides that the Company may contribute additional amounts in its common stock
or cash at the discretion of the Board of Directors. Employee contributions can
not be invested in Company common stock.
65
Participants receive 100% vesting of employee contributions and cash
dividends received on Company common stock. Vesting in Company contributions is
based on a participant's number of years of vesting service. Contributions to
the Plan charged to income in fiscal 2006, 2005 and 2004 totaled $170,000,
$148,000 and $189,000, respectively. Company contributions are made with the use
of forfeited shares within the Plan. As of October 31, 2006, the Plan held
approximately 153,000 forfeited shares of Common Stock and 168,000 forfeited
shares of Class A Common Stock, which are available to make future Company
contributions.
In 1991, the Company established a Directors Retirement Plan covering
its then current directors. The net assets of this plan as of October 31, 2006,
2005 and 2004 are not material to the financial position of the Company. During
fiscal 2006, 2005 and 2004, $64,000, $59,000, and $88,000, respectively, were
expensed for this plan.
10. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales amounts in fiscal 2006, 2005 and 2004 include
approximately $15,347,000, $11,311,000 and $10,446,000 respectively, of new
product research and development expenses. The expenses are net of
reimbursements pursuant to research and development cooperation and joint
venture agreements. Such reimbursements were not significant in fiscal 2006,
2005 and 2004.
11. SALE OF INVESTMENT IN JOINT VENTURE
During fiscal 2005, the Company's HEICO Aerospace Holdings Corp.
subsidiary sold its investment in a 50%-owned joint venture that was accounted
for under the equity method and recognized a gain on the sale of $276,000, which
is included in interest and other income in the Company's Consolidated
Statements of Operations. The Company's investment in the 50%-owned joint
venture and its share of the operating results were not significant to the
Company's consolidated financial statements.
12. LIFE INSURANCE PROCEEDS
In fiscal 2004, the Company received $5.0 million in proceeds from the
death benefit of a key-person life insurance policy maintained by a subsidiary
of the Flight Support Group that provides repair and overhaul services. The life
insurance proceeds, which are non-taxable, increased fiscal 2004 net income
(after the minority interest's share of the income) by $4.0 million, or $.16 per
diluted share.
66
13. RESTRUCTURING EXPENSES
During the first quarter of fiscal 2005, the Company completed
restructuring activities initiated in fiscal 2004 within certain subsidiaries of
the Flight Support Group that provide repair and overhaul services. The
unexpected death of an executive of certain of the repair and overhaul
subsidiaries (see Note 12, Life Insurance Proceeds, of the Notes to Consolidated
Financial Statements) was the impetus for the commencement of the restructuring
activities, which the Company believes will allow it to better service its
customers and improve operating margins. The Company incurred $22,000 of
restructuring expenses in fiscal 2005 and $850,000 in fiscal 2004. The fiscal
2004 restructuring expenses include $350,000 of inventory write-downs, which
were recorded within cost of sales in the accompanying Consolidated Statements
of Operations, and $261,000 of management hiring/relocation related expenses,
$168,000 of moving costs and other associated expenses and $71,000 of contract
termination costs that were all recorded within selling, general and
administrative expenses. The inventory written down is related to older
generation aircraft for which repair and overhaul services are being
discontinued by the Company. The management hiring/relocation related expenses
include one-time employee termination/hiring benefits and relocation costs. The
moving costs and other associated expenses consist of moving costs related to
the consolidation of two repair and overhaul facilities. Contract termination
costs include the lease termination on a facility. The repair and overhaul
subsidiaries' restructuring expenses decreased net income (after income taxes
and the minority interest's share of the expenses) in fiscal 2004 by $427,000.
The following table details the restructuring activity that occurred in
fiscal 2005 and 2004:
MANAGEMENT MOVING
HIRING/ COSTS AND
INVENTORY RELOCATION OTHER CONTRACT
WRITE- RELATED ASSOCIATED TERMINATION
DOWNS EXPENSES EXPENSES COSTS TOTALS
------------ ------------ ------------ ------------ ------------
Balances as of November 1, 2003 $ - $ - $ - $ - $ -
Restructuring expenses 350,000 261,000 168,000 71,000 850,000
Cash payments - (197,000) (57,000) - (254,000)
Non-cash amount (350,000) - - - (350,000)
------------ ------------ ------------ ------------ ------------
Balances as of October 31, 2004 - 64,000 111,000 71,000 246,000
Additional charges and reversals - 69,000 (47,000) - 22,000
Cash payments - (133,000) (64,000) (71,000) (268,000)
------------ ------------ ------------ ------------ ------------
Balances as of October 31, 2005 $ - $ - $ - $ - $ -
============ ============ ============ ============ ============
For information on restructuring activities associated with
acquisitions, see Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements.
67
14. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share for each of the three fiscal years ended October 31:
2006 2005 2004
------------ ------------ ------------
Numerator:
Net income $ 31,888,000 $ 22,812,000 $ 20,630,000
============ ============ ============
Denominator:
Weighted average common shares outstanding - basic 25,084,532 24,460,185 24,036,980
Effect of dilutive stock options 1,513,071 1,863,117 1,717,618
------------ ------------ ------------
Weighted average common shares outstanding - diluted 26,597,603 26,323,302 25,754,598
============ ============ ============
Net income per share - basic $ 1.27 $ .93 $ .86
Net income per share - diluted $ 1.20 $ .87 $ .80
Anti-dilutive stock options excluded 12,540 181,760 579,837
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- --------------
Net sales:
2006 $ 88,101,000 $ 92,092,000 $ 102,172,000 $ 109,825,000
2005 56,981,000 66,973,000 69,169,000 76,524,000
Gross profit:
2006 32,052,000 33,536,000 37,585,000 39,340,000
2005 20,280,000 25,045,000 25,999,000 29,672,000
Net income:
2006 6,749,000 7,542,000 8,276,000 9,321,000
2005 4,428,000 5,713,000 6,046,000 6,625,000
Net income per share:
Basic:
2006 $ .27 $ .30 $ .33 $ .37
2005 .18 .23 .25 .27
Diluted:
2006 .26 .28 .31 .35
2005 .17 .22 .23 .25
During the fourth quarter of fiscal 2005, the Company increased its
allowance for doubtful accounts by $1.6 million as a result of bankruptcy
filings by certain customers in the aviation industry. The associated charge
decreased net income by $829,000, or $.03 per diluted share.
During the third and fourth quarters of fiscal 2006, the Company
recognized the benefit of a tax credit (net of related expenses) for qualified
research and development activities claimed for certain prior years, which
increased net income by $235,000 and $767,000, respectively, or $.01 and $.03
per diluted share, respectively.
Due to changes in the average number of common shares outstanding, net
income per share for the full fiscal year may not equal the sum of the four
individual quarters.
68
16. OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group
("FSG") consisting of HEICO Aerospace and its subsidiaries and the Electronic
Technologies Group ("ETG"), consisting of HEICO Electronic and its subsidiaries.
The Flight Support Group designs, manufactures and distributes FAA-approved jet
engine and aircraft component replacement parts, provides FAA-authorized repair
and overhaul services and provides subcontracting services to original equipment
manufacturers in the aviation industry and the U.S. Government. The Electronic
Technologies Group designs and manufactures commercial and military power
supplies, circuit board shielding, laser and electro-optical products, infrared
simulation and test equipment, high voltage interconnection devices, cable
assemblies and high-speed interface products primarily for the aviation,
defense, space, and electronics industries.
The Company's reportable operating segments offer distinctive products
and services that are marketed through different channels. They are managed
separately because of their unique technology and service requirements.
SEGMENT PROFIT OR LOSS
The accounting policies of the Company's operating segments are the
same as those described in Note 1, Summary of Significant Accounting Policies,
of the Notes to Consolidated Financial Statements. Management evaluates segment
performance based on segment operating income.
OTHER,
SEGMENT (1) PRIMARILY
------------------------------- CORPORATE AND CONSOLIDATED
FSG ETG INTERSEGMENT TOTALS
-------------- -------------- -------------- --------------
For the year ended October 31, 2006:
Net sales $ 277,255,000 $ 115,021,000 $ (86,000) $ 392,190,000
Depreciation and amortization 6,822,000 3,437,000 306,000 10,565,000
Operating income 46,840,000 34,026,000 (13,999,000) 66,867,000
Capital expenditures 8,189,000 1,607,000 168,000 9,964,000
Total assets 337,020,000 180,359,000 17,436,000 534,815,000
For the year ended October 31, 2005:
Net sales $ 191,989,000 $ 77,821,000 $ (163,000) $ 269,647,000
Depreciation and amortization 5,875,000 1,117,000 417,000 7,409,000
Operating income 32,795,000 20,978,000 (9,124,000) 44,649,000
Capital expenditures 7,459,000 763,000 51,000 8,273,000
Total assets 259,957,000 159,123,000 16,544,000 435,624,000
For the year ended October 31, 2004:
Net sales $ 158,643,000 $ 57,243,000 $ (142,000) $ 215,744,000
Depreciation and amortization 5,582,000 760,000 437,000 6,779,000
Operating income 22,435,000 17,075,000 (6,891,000) 32,619,000
Capital expenditures 4,723,000 1,008,000 6,000 5,737,000
Total assets 243,860,000 105,615,000 14,780,000 364,255,000
(1) During fiscal 2006, one of the Company's subsidiaries formerly included in
the ETG was reclassified to the FSG. Prior year balances have been retroactively
restated to reflect the revised segment classification.
69
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
No one customer accounted for 10% or more of the Company's consolidated
net sales during the last three fiscal years. The Company's net sales
originating and long-lived assets held outside of the United States during each
of the last three fiscal years were not material.
The Company markets its products and services in over 100 countries.
Other than in the United States, the Company does not conduct business in any
other country in which its sales in that country exceed 10% of consolidated
sales. Sales are attributed to countries based on the location of customers. The
composition of the Company's sales to unaffiliated customers between those in
the United States and those in other locations for each of the three fiscal
years ended October 31 as follows:
2006 2005 2004
-------------- -------------- --------------
United States $ 284,048,000 $ 199,855,000 $ 160,049,000
Other 108,142,000 69,792,000 55,695,000
-------------- -------------- --------------
Total $ 392,190,000 $ 269,647,000 $ 215,744,000
============== ============== ==============
17. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain property and equipment, including
manufacturing facilities and office equipment under operating leases. Some of
these leases provide the Company with the option after the initial lease term
either to purchase the property at the then fair market value or renew the lease
at the then fair rental value. Generally, management expects that leases will be
renewed or replaced by other leases in the normal course of business.
Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows:
Year ending October 31,
2007 .................................................. $ 3,526,000
2008 .................................................. 2,773,000
2009 .................................................. 1,629,000
2010 .................................................. 1,558,000
2011 .................................................. 1,121,000
Thereafter ............................................ 3,421,000
------------
Total minimum lease commitments ....................... $ 14,028,000
============
Total rent expense charged to operations for operating leases in fiscal
2006, 2005 and 2004 amounted to $3,409,000, $2,679,000 and $2,737,000,
respectively.
GUARANTEES
The Company has arranged for standby letters of credit aggregating $2.2
million to meet the security requirement of its insurance company for potential
workers' compensation claims, which are supported by the Company's revolving
credit facility. In addition, the Company's industrial development revenue bonds
are secured by a $2.0 million letter of credit expiring April 2008 and a
mortgage on the related properties pledged as collateral.
70
Changes in the Company's product warranty liability for fiscal 2006 and
2005 are as follows:
Balance as of October 31, 2004 $ 129,000
Acquired warranty liabilities 89,000
Accruals for warranties 488,000
Warranty claims settled (311,000)
------------
Balance as of October 31, 2005 395,000
Acquired warranty liabilities 15,000
Accruals for warranties 635,000
Warranty claims settled (511,000)
------------
Balance as of October 31, 2006 $ 534,000
============
The acquired warranty liabilities pertain to the acquisitions made as
further discussed in Note 2, Acquisitions, of the Notes to Consolidated
Financial Statements.
As partial consideration in the acquisition of Inertial Airline
Services, Inc. ("IAS") in August 2001, the Company issued $5 million in HEICO
Class A Common Stock (318,960 shares) and guaranteed that the resale value of
such Class A Common Stock would be at least $5 million through August 31, 2004.
Concurrent with the acquisition, the Company loaned the seller $5 million, which
was due August 31, 2004 and secured by the 318,960 shares of HEICO Class A
Common Stock. The loan was reflected as a reduction of shareholders' equity in
the Company's Consolidated Balance Sheets under the caption, "Note Receivable
Secured by Class A Common Stock." In fiscal 2003, the seller sold 220,000 shares
of the HEICO Class A Common Stock and the Company received the net proceeds of
$2.1 million to reduce the note receivable. In fiscal 2004, the Company received
net proceeds of $1.2 million from the seller upon the sale of the remaining
98,960 shares of the HEICO Class A Common Stock. Pursuant to the Company's
guarantee that the aggregate resale value of the 318,960 shares of Class A
Common Stock would be at least $5 million, the $1.7 million difference between
the guaranteed value and the $3.3 million of aggregate net proceeds ($2.1
million received in fiscal 2003 and $1.2 million received in fiscal 2004) from
the sales of the Class A Common Stock was recorded in fiscal 2004 as a reduction
of both capital in excess of par value and the note receivable.
As part of the agreement to acquire an 80% interest in a subsidiary by
the ETG in fiscal 2004, the Company has the right to purchase the minority
interests beginning at approximately the tenth anniversary of the acquisition,
or sooner under certain conditions, and the minority holders have the right to
cause the Company to purchase their interests commencing on approximately the
fifth anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration of
up to $3.8 million in aggregate should the subsidiary meet certain earnings
objectives during the first four years following the acquisition. In fiscal
2006, the Company paid $2.2 million of such additional purchase consideration
based on the subsidiary's earnings relative to target for the first year, and
accrued the remaining $1.6 million based on the subsidiary's year-to-date
earnings relative to its target for the second year. The Company expects to pay
this accrued amount in fiscal 2007.
As part of the agreement to purchase a subsidiary by the ETG in fiscal
2005, the Company may be obligated to pay additional purchase consideration
currently estimated to total up to $2.3 million should the subsidiary meet
certain product line-related earnings objectives during the fourth and fifth
years following the acquisition. The additional purchase consideration will be
accrued when the earnings objectives are met.
71
As part of the agreement to acquire an 85% interest in a subsidiary by
the ETG in fiscal 2005, the minority holders have the right to cause the Company
to purchase their interests over a four-year period starting around the second
anniversary of the acquisition, or sooner under certain conditions.
As part of the agreement to acquire a 51% interest in a subsidiary by
the FSG in fiscal 2006, the Company has the right to purchase 28% of the equity
interests of the subsidiary over a four-year period beginning approximately
after the second anniversary of the acquisition, or sooner under certain
conditions, and the minority holders have the right to cause the Company to
purchase the same equity interest over the same period. Further, the Company has
the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning approximately after the fourth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of the agreement to acquire a subsidiary by the ETG in fiscal
2006, the Company may be obligated to pay additional consideration of up to
$53.0 million in aggregate during the first four years following the
acquisition. The maximum amount of additional consideration that may become
payable by year is $6.8 million in fiscal 2006, $9.2 million in fiscal 2007,
$17.8 million in fiscal 2008 and $19.2 million in fiscal 2009. The Company
accrued $5.6 million of such additional purchase consideration as of October 31,
2006 based on the subsidiary's first year earnings relative to its target, which
it expects to pay in fiscal 2007. The remaining additional purchase
consideration will be accrued when the earnings objectives are met.
As part of an agreement to acquire an 80% interest in a subsidiary by
the FSG in fiscal 2006, the Company may be obligated to pay additional purchase
consideration of up to $7.0 million in aggregate should the subsidiary meet
certain earnings objectives during the first two years following the
acquisition. The additional purchase consideration will be accrued when the
earnings objectives are met. Further, the Company has the right to purchase the
remaining 20% minority interests beginning at approximately the eighth
anniversary of the acquisition, or sooner under certain conditions, and the
minority holders have the right to cause the Company to purchase the same equity
interest over the same period.
As part of an agreement for exclusive license rights to intellectual
property, one of the subsidiaries of the ETG has guaranteed minimum royalty
payments aggregating $.2 million through fiscal 2007.
LITIGATION
The Company is involved in various legal actions arising in the normal
course of business. Based upon the Company's and its legal counsel's evaluations
of any claims or assessments, management is of the opinion that the outcome of
these matters will not have a material adverse effect on the Company's results
of operations, financial position, or cash flows.
72
18. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was $3,459,000, $1,062,000 and $1,099,000 in
fiscal 2006, 2005 and 2004, respectively. Cash paid for income taxes was
$15,823,000, $8,176,000, and $2,688,000 in fiscal 2006, 2005 and 2004,
respectively. Cash received from income tax refunds in fiscal 2006, 2005 and
2004 was $51,000, $101,000 and $72,000, respectively.
Cash investing activities related to acquisitions, including contingent
purchase price payments to previous owners of acquired businesses, and any
adjustments to the preliminary allocation of the purchase price of prior year
acquisitions to the assets acquired and liabilities assumed for each of the
three fiscal years ended October 31, is as follows:
2006 2005 2004
------------- ------------- -------------
Fair value of assets acquired:
Liabilities assumed $ 13,937,000 $ 5,202,000 $ 684,000
Minority interests in consolidated subsidiaries 6,301,000 -- --
Less:
Goodwill 19,707,000 28,510,000 24,974,000
Inventories, net 21,342,000 4,645,000 707,000
Identifiable intangible assets 19,640,000 4,210,000 --
Accounts receivable, net 12,213,000 4,055,000 1,785,000
Accrued additional purchase consideration 3,045,000 -- --
Property, plant and equipment 690,000 4,904,000 1,311,000
Other assets 1,718,000 378,000 6,000
------------- ------------- -------------
Acquisitions and related costs, net of cash acquired $ (58,117,000) $ (41,500,000) $ (28,099,000)
============= ============= =============
In connection with the purchase of Sierra in December 2003 (see Note 2,
Acquisitions of the Notes to Consolidated Financial Statements), the Company
issued shares of HEICO's Class A Common Stock valued at $3 million, which was
allocated to goodwill.
In connection with certain acquisitions, the Company accrued additional
purchase consideration aggregating $7.2 million and $3.0 million in fiscal 2006
and 2005, respectively, which was allocated to goodwill (see Note 2,
Acquisitions, of the Notes to Consolidated Financial Statements).
Retained earnings were reduced by $29,393,000 in fiscal 2004 as a
result of the 10% stock dividend described in Note 7, Shareholders' Equity -
Stock Dividend, of the Notes to Consolidated Financial Statements.
There were no significant capital lease and/or other equipment
financing activities during fiscal 2006, 2005, or 2004.
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based upon that evaluation, the Company's Chief Executive
Officer and its Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's report on the Company's internal control over financial
reporting is included in Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
ATTESTATION REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP's attestation report on the Company's assessment
of its internal control over financial reporting is included in Item 8,
Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is continuously seeking to improve the efficiency and
effectiveness of its operations and of its internal controls. This results in
refinements to processes throughout the Company. However, there have been no
changes in the Company's internal control over financial reporting that occurred
during the Company's most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company, including the
Finance/Audit Committee of the Board of Directors and its Finance/Audit
Committee Financial Expert, is hereby incorporated by reference to the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission ("Commission") within 120 days after the close of fiscal 2006.
Information concerning the Executive Officers of the Company is set
forth in Item 1 of Part I hereof under the caption "Executive Officers of the
Registrant."
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. The code of ethics is
located on the Company's Internet web site at http://www.heico.com. Any
amendments to or waivers from a provision of this code of ethics will be posted
on the Company's web site.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners
and management is hereby incorporated by reference to the Company's definitive
proxy statement, which will be filed with the Commission within 120 days after
the close of fiscal 2006.
Equity compensation plan information is set forth in Item 5 of Part II
hereof under the caption "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the principal accountant's fees and services is
hereby incorporated by reference to the Company's definitive proxy statement,
which will be filed with the Commission within 120 days after the close of
fiscal 2006.
75
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
subsidiaries are included in Part II, Item 8:
PAGE
----
Management's Report on Internal Control Over Financial Reporting ..... 38
Reports of Independent Registered Public Accounting Firm ............. 39
Consolidated Balance Sheets at October 31, 2006 and 2005 ............. 42
Consolidated Statements of Operations for the years ended
October 31, 2006, 2005 and 2004 .................................... 43
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended October 31, 2006, 2005 and 2004 ......... 44
Consolidated Statements of Cash Flows for the years ended
October 31, 2006, 2005 and 2004 .................................... 45
Notes to Consolidated Financial Statements ........................... 46
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company and
subsidiaries is included herein:
o Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information
is not applicable or the information is included in the consolidated financial
statements or notes thereto presented in Part II, Item 8.
(a)(3) EXHIBITS
EXHIBIT DESCRIPTION
------- -------------------------------------------------------------------
2.1 -- Amended and Restated Agreement of Merger and Plan of
Reorganization, dated as of March 22, 1993, by and among HEICO
Corporation, HEICO Industries, Corp. and New HEICO, Inc. is
incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-57624)
Amendment No. 1 filed on March 19, 1993.*
3.1 -- Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-4 (Registration No. 33-57624) Amendment No. 1 filed on March
19, 1993.*
3.2 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated April 27, 1993, are incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form 8-B
dated April 29, 1993.*
76
EXHIBIT DESCRIPTION
------- -------------------------------------------------------------------
3.3 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated November 3, 1993, are incorporated by reference
to Exhibit 3.3 to the Form 10-K for the year ended October 31,
1993.*
3.4 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated March 19, 1998, are incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on Form S-3
(Registration No. 333-48439) filed on March 23, 1998.*
3.5 -- Articles of Amendment of the Articles of Incorporation of the
Registrant, dated as of November 2, 2003, are incorporated by
reference to Exhibit 3.5 to the Form 10-K for the year ended
October 31, 2003.*
3.6 -- Bylaws of the Registrant are incorporated by reference to Exhibit
3.4 to the Form 10-K for the year ended October 31, 1996.*
4.0 -- The description and terms of the Preferred Stock Purchase Rights
are set forth in a Rights Agreement between the Company and
SunTrust Bank, N.A., as Rights Agent, dated as of November 2, 2003,
incorporated by reference to Exhibit 4.0 to the Form 8-K dated
November 2, 2003.*
10.1 -- Loan Agreement, dated March 1, 1988, between HEICO Corporation and
Broward County, Florida is incorporated by reference to Exhibit
10.1 to the Form 10-K for the year ended October 31, 1994.*
10.2 -- SunBank Reimbursement Agreement, dated February 28, 1994, between
HEICO Aerospace Corporation and SunBank/South Florida, N.A. is
incorporated by reference to Exhibit 10.2 to the Form 10-K for the
year ended October 31, 1994.*
10.3 -- Amendment, dated March 1, 1995, to the SunBank Reimbursement
Agreement dated February 28, 1994 between HEICO Aerospace
Corporation and SunBank/South Florida, N.A. is incorporated by
reference to Exhibit 10.3 to the Form 10-K from the year ended
October 31, 1995.*
10.4 -- Amendment and Extension, dated February 28, 1999 to the SunBank
Reimbursement Agreement dated February 28, 1994, between SunTrust
Bank, South Florida, N.A. and HEICO Aerospace Corporation is
incorporated by reference to Exhibit 10.4 to the Form 10-K for the
year ended October 31, 1999.*
10.5 -- Amendment, dated July 20, 2000, to the SunBank Reimbursement
Agreement dated February 28, 1994, between HEICO Aerospace
Corporation and SunTrust Bank is incorporated by reference to
Exhibit 10.5 to the Form 10-K for the year ended October 31, 2000.*
10.6 -- Amendment, dated as of January 14, 2004, to the SunBank
Reimbursement Agreement, dated as of February 28, 1994, between
HEICO Aerospace Corporation and SunTrust Bank is incorporated by
reference to Exhibit 10.1 to the Form 10-Q for the quarterly period
ended January 31, 2004.*
77
EXHIBIT DESCRIPTION
------- -------------------------------------------------------------------
10.7# -- HEICO Savings and Investment Plan, as amended and restated
effective as of January 1, 2002 is incorporated by reference to
Exhibit 10.6 to the Form 10-K for the year ended October 31, 2002.*
10.8# -- First Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.7 to the Form 10-K for the year ended October 31, 2003.*
10.9# -- Second Amendment, effective as of January 1, 2002, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.8 to the Form 10-K for the year ended October 31, 2003.*
10.10# -- Third Amendment, effective as of October 1, 2003, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.9 to the Form 10-K for the year ended October 31, 2003.*
10.11# -- Fourth Amendment, with portions effective as of January 1, 2005,
and other portions effective as of January 1, 2004, to the HEICO
Savings and Investment Plan, is incorporated by reference to
Exhibit 10.11 to the Form 10-K for the year ended October 31, 2004.
*
10.12# -- Fifth Amendment, effective as of March 28, 2005, to the HEICO
Savings and Investment Plan is incorporated by reference to Exhibit
10.1 to the Form 10-Q for the quarterly period ended April 30,
2005.*
10.13# -- Sixth Amendment, effective as of January 1, 2006, to the HEICO
Savings and Investment Plan is incorporated by reference to Exhibit
10.13 to the Form 10-K for the year ended October 31, 2005.*
10.14# -- Non-Qualified Stock Option Agreement for Directors, Officers and
Employees is incorporated by reference to Exhibit 10.8 to the Form
10-K for the year ended October 31, 1985.*
10.15# -- HEICO Corporation 1993 Stock Option Plan, as amended, is
incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81789)
filed on June 29, 1999.*
10.16# -- HEICO Corporation 2002 Stock Option Plan, effective March 19, 2002,
is incorporated by reference to Exhibit 10.10 to the Form 10-K for
the year ended October 31, 2002.*
10.17# -- HEICO Corporation Directors' Retirement Plan, as amended, dated as
of May 31, 1991, is incorporated by reference to Exhibit 10.19 to
the Form 10-K for the year ended October 31, 1992.*
10.18# -- Key Employee Termination Agreement, dated as of April 5, 1988,
between HEICO Corporation and Thomas S. Irwin is incorporated by
reference to Exhibit 10.20 to the Form 10-K for the year ended
October 31, 1992.*
10.19# -- HEICO Corporation Leadership Compensation Plan, effective October
1, 2006, is incorporated by reference to Exhibit 10.1 to the Form
8-K filed on October 31, 2006.*
78
EXHIBIT DESCRIPTION
------- -------------------------------------------------------------------
10.20 -- Shareholders Agreement, dated October 30, 1997, by and between
HEICO Aerospace Holdings Corp., HEICO Aerospace Corporation and all
of the shareholders of HEICO Aerospace Holdings Corp. and Lufthansa
Technik AG is incorporated by reference to Exhibit 10.32 to Form
10-K/A for the year ended October 31, 1997.*
10.21 -- Revolving Credit Agreement, dated as of May 15, 2003, among HEICO
Corporation and SunTrust Bank, as Administrative Agent, is
incorporated by reference to Exhibit 10.1 to the Form 8-K filed on
May 29, 2003.*
10.22 -- Consent to Extension dated as of April 5, 2004 to the Revolving
Credit Agreement dated as of May 15, 2003 among HEICO Corporation
and SunTrust Bank, is incorporated by reference to Exhibit 10.1 to
the Form 10-Q for the quarterly period ended April 30, 2004.*
10.23 -- First Amendment, effective as of April 13, 2005, to the Revolving
Credit Agreement among HEICO Corporation as Borrower, the lenders
from time to time party hereto, and SunTrust Bank, as
Administrative Agent, is incorporated by reference to Exhibit 10.1
to Form 10-Q for the quarterly period ended July 31, 2005.*
10.24 -- Amended and Restated Revolving Credit Agreement, dated as of August
4, 2005, among HEICO Corporation, as Borrower, the lenders from
time to time party hereto, and SunTrust Bank, as Administrative
Agent; Wachovia Bank, National Association as Syndication Agent;
and HSBC Bank USA, as Documentation Agent, is incorporated by
reference to Exhibit 10.1 to the Form 8-K filed on August 8, 2005.*
10.25 -- First Amendment, effective as of July 14, 2006, to the Amended and
Restated Revolving Credit Agreement among HEICO Corporation, as a
Borrower, the lenders from time to time party hereto, and SunTrust
Bank, as Administrative Agent; Wachovia Bank, National Association
as Syndication Agent; and HSBC Bank USA, as Documentation Agent, is
incorporated by reference to Exhibit 10.1 to the Form 10-Q for the
quarterly period ended July 31, 2006.*
21 -- Subsidiaries of HEICO Corporation.**
23 -- Consent of Independent Registered Public Accounting Firm.**
31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.**
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.**
32.1 -- Section 1350 Certification of Chief Executive Officer.***
32.2 -- Section 1350 Certification of Chief Financial Officer.***
----------
# Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
* Previously filed.
** Filed herewith.
*** Furnished herewith.
79
HEICO CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Allowance as of beginning of year $ 2,148,000 $ 582,000 $ 635,000
Additions (deductions) charged (credited) to costs and
expenses 653,000 1,867,000 316,000
Additions from acquisitions 287,000 10,000 4,000
Deductions (a) (195,000) (311,000) (373,000)
------------ ------------ ------------
Allowance as of end of year $ 2,893,000(b) $ 2,148,000(b) $ 582,000
============ ============ ============
(a) Principally write-offs of uncollectible accounts receivables, net of
recoveries.
(b) Increase in allowance for doubtful accounts as of end of year principally
relates to additions charged to costs and expenses for certain customers
as a result of bankruptcy filings.
INVENTORY VALUATION RESERVES:
Reserves as of beginning of year $ 16,488,000 $ 14,487,000 $ 12,142,000
Additions charged to costs and expenses 3,521,000 2,218,000 4,553,000
Additions from acquisitions 4,779,000 402,000 152,000
Deductions (a) (234,000) (619,000) (2,360,000)
------------ ------------ ------------
Reserves as of end of year $ 24,554,000 $ 16,488,000 $ 14,487,000
============ ============ ============
(a) Principally write-offs of slow moving, obsolete or damaged inventory.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEICO CORPORATION
Date: January 12, 2007 By: /s/ THOMAS S. IRWIN
----------------------------
Thomas S. Irwin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ LAURANS A. MENDELSON Chairman, President,
-------------------------- Director (Principal
Laurans A. Mendelson Executive Officer)
/s/ SAMUEL L. HIGGINBOTTOM Director
--------------------------
Samuel L. Higginbottom
/s/ WOLFGANG MAYRHUBER Director
--------------------------
Wolfgang Mayrhuber
/s/ ERIC A. MENDELSON Director
--------------------------
Eric A. Mendelson
/s/ VICTOR H. MENDELSON Director
--------------------------
Victor H. Mendelson
/s/ ALBERT MORRISON, JR Director
--------------------------
Albert Morrison, Jr.
/s/ JOSEPH W. PALLOT Director
--------------------------
Joseph W. Pallot
Director
--------------------------
Alan Schriesheim
/s/ FRANK J. SCHWITTER Director
--------------------------
Frank J. Schwitter
81
EXHIBIT INDEX
EXHIBIT DESCRIPTION
-------- -------------------------------------------------------------------
21 -- Subsidiaries of HEICO Corporation.
23 -- Consent of Independent Registered Public Accounting Firm.
31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 -- Section 1350 Certification of Chief Executive Officer.
32.2 -- Section 1350 Certification of Chief Financial Officer.
82