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, 2010 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
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
3000
Taft Street, Hollywood, Florida
|
33021
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (954) 987-4000
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which
registered
|
|
|
Common
Stock, $.01 par value per share
|
New
York Stock Exchange
|
|
|
Class
A Common Stock, $.01 par value per share
|
|
New
York Stock Exchange
|
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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x
No ¨
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 (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer o Non−accelerated
filer o
Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant was $1,140,620,000 based on the closing price of
HEICO Common Stock and Class A Common Stock as of April 30, 2010 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 December 17, 2010:
|
Common
Stock, $.01 par value
|
13,249,534
shares
|
|
Class
A Common Stock, $.01 par value
|
19,916,953
shares
|
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
proxy statement for the 2011 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Annual Report on Form 10-K.
HEICO
CORPORATION
INDEX
TO ANNUAL REPORT ON FORM 10-K
|
Page
|
||
|
PART
I
|
||
|
PART
II
|
||
|
PART
III
|
||
|
PART
IV
|
||
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,
telecommunication and electronic industries.
The Company was originally organized in
1957 as a holding company known as HEICO Corporation. As part of a
reorganization completed in 1993, the original holding company (formerly known
as HEICO Corporation) was renamed as HEICO Aerospace Corporation and a new
holding corporation known as HEICO Corporation was created. The
reorganization did not result in any change in the business of the Company, its
consolidated assets or liabilities or the relative interests of its
shareholders.
Our business is comprised of two
operating segments:
The Flight Support
Group. Our Flight Support Group (“FSG”), consisting of HEICO
Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, accounted for
67%, 73% and 75% of our net sales in fiscal 2010, 2009 and 2008,
respectively. The Flight Support 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, overhauls and
distributes jet engine and aircraft components, avionics and instruments for
domestic and foreign commercial air carriers and aircraft repair companies as
well as military and business aircraft operators; and manufactures thermal
insulation products and other component parts primarily for aerospace, defense
and commercial applications.
The Electronic Technologies
Group. Our Electronic Technologies Group (“ETG”), consisting
of HEICO Electronic Technologies Corp. and its subsidiaries, accounted for 33%,
27% and 25% of our net sales in fiscal 2010, 2009 and 2008,
respectively. Through our Electronic Technologies Group, which
derived approximately 57% of its sales in fiscal 2010 from the sale of products
and services to U.S. and foreign military agencies, prime defense contractors
and both commercial and defense satellite and spacecraft manufacturers, 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,
power conversion products, underwater locator beacons, electromagnetic
interference and radio frequency interference shielding, high power capacitor
charging power supplies, amplifiers, traveling wave tube amplifiers,
photodetectors, amplifier modules, microwave power modules, flash lamp drivers,
laser diode drivers, arc lamp power supplies, custom power supply designs, cable
assemblies, high voltage power supplies, high voltage interconnection devices
and wire, high voltage energy generators, high frequency power delivery systems
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.
1
HEICO has 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 $617.0 million in fiscal 2010, a compound annual growth rate of
approximately 17%. During the same period, we improved our net income
from $2.0 million to $54.9 million, representing a compound annual growth rate
of approximately 18%.
Flight
Support Group
The Flight Support Group, headquartered
in Hollywood, Florida, 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.
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 in
recent years been adding new products to our line at a rate of over 400 Parts
Manufacturer Approvals (“PMA” or “PMAs”) per year. We currently offer
to our customers over 5,000 parts for which PMAs have been received from the
FAA.
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” or
“overhauled” part designation indicates that the part can be immediately
utilized on an aircraft. A part in “as removed” or “repairable”
condition requires inspection and possibly functional testing, repair or
overhaul by a licensed facility prior to being returned to service in an
aircraft.
2
Factory-New Jet Engine and Aircraft
Component Replacement Parts. The Flight Support Group engages
in 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 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.
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 operated by domestic and foreign commercial airlines. The
Flight Support Group also provides repair and overhaul services including
avionics and navigation systems as well as subcomponents and other instruments
utilized on military aircraft operated by the United States government and
foreign military agencies and for aircraft repair and overhaul
companies. Our repair and overhaul operations require a high level of
expertise, advanced technology and sophisticated equipment. Services
include the repair, refurbishment and overhaul of numerous accessories and parts
mounted on gas turbine engines and airframes. Components overhauled
include fuel pumps, generators, fuel controls, pneumatic valves, starters and
actuators, turbo compressors and constant speed drives, hydraulic pumps, valves
and actuators, composite flight controls, electro-mechanical equipment and
auxiliary power unit accessories. Some of the repair and overhaul
services provided by the Flight Support Group are proprietary repairs approved
by an FAA-qualified designated engineering representative
(“DER”). Such FAA-approved repairs (DER-approved repairs) typically
create cost savings or provide engineering flexibility. The Flight
Support Group also provides commercial airlines, regional operators, asset
management companies and Maintenance, Repair and Overhaul (“MRO”) providers with
high quality and cost effective niche accessory component exchange services as
an alternative to OEMs’ spares services.
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.
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 for aerospace and industrial original
equipment manufacturers and the United States government.
FAA Approvals and Product
Design. Non-OEM manufacturers of jet engine and aircraft
component replacement parts must receive a 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.
3
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 $11.8 million in fiscal 2010, $11.5 million in fiscal 2009 and
$11.1 million in fiscal 2008. 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. In
recent years, the FAA granted us PMAs for over 400 new parts and approximately
200 DER-approved repairs per year; however, no assurance can be given that the FAA
will continue to grant PMAs or DER-approved repairs or that we will achieve
acceptable levels of net sales and gross profits on such parts in the
future.
We benefit from our proprietary rights
relating to certain design, engineering and manufacturing processes and repair
and overhaul procedures. Customers often rely on us to provide initial and additional components, as
well as to redesign, re-engineer, replace or repair and provide overhaul
services on such aircraft components at every stage of their useful
lives. In addition, for some products, our unique manufacturing
capabilities are required by the customer’s specifications or designs, thereby
necessitating reliance on us for production of such designed
products.
We have no material 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 primarily 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 new
techniques and improving existing methods and processes, which we will continue
on an ongoing basis as dictated by the technological needs of our
business.
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),
and successful track record of receiving PMAs and DER-approved repairs from the
FAA, we are uniquely positioned to continue to increase the products and
services offered and gain market share.
Electronic
Technologies Group
Our Electronic Technologies Group’s
strategy is to design and produce mission-critical subcomponents for smaller,
niche markets, but which are utilized in larger systems – systems like
targeting, tracking, identification, simulation, testing, communications,
lighting, surgical, medical imaging, baggage scanning, telecom and computer
systems. These systems are, in turn, often located on another
platform, such as aircraft, satellites, ships, spacecrafts, land vehicles,
handheld devices and other platforms.
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 and defense prime
contractors.
4
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. 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. Some of 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 safety and emissions requirements. Our power electronics
products include capacitor charger power supplies, laser diode drivers, arc lamp
power supplies and custom power supply designs.
Our microwave products are used in both
commercial and military satellites, spacecrafts and in electronic warfare
systems. These products, which include isolators, bias tees,
circulators, latching ferrite switches and waveguide adapters, are used in
satellites and spacecrafts 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 manufacture for this market,
a market that includes commercial satellites. Our customers for these
products include satellite and spacecraft manufacturers.
Electromagnetic and Radio
Interference Shielding. The Electronic Technologies Group
designs and manufactures shielding used to prevent electromagnetic energy and
radio frequencies from interfering with other devices, such as 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-Speed Interface
Products. The Electronic Technologies Group designs and
manufactures advanced high-technology, high-speed interface products utilized in
homeland security, defense, medical research, astronomical and other
applications across numerous industries.
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, and industrial applications including high voltage test
equipment and underwater monitoring systems.
5
High Voltage Advanced Power
Electronics. The Electronic Technologies Group designs and
manufactures a patented line of high voltage energy generators for medical,
baggage inspection and industrial imaging systems, and offers a patented line of
high frequency power delivery systems for the commercial sign
industry. We also produce high voltage power supplies found in
satellite communications, CT scanners and in medical and industrial x-ray
systems.
Power Conversion Products.
The Electronic Technologies Group designs and provides innovative power
conversion products principally serving the high-reliability military, space and
commercial avionics end-markets. These high density, low profile and lightweight
DC-to-DC converters and electromagnetic interference filters, which include
thick film hermetically sealed hybrids, military commercial-off-the-shelf and
custom designed and assembled products, have become the primary specified
components of their kind on a generation of complex military, space and avionics
equipment.
Underwater Locator
Beacons. The Electronic Technologies Group designs and
manufactures Underwater Locator Beacons (“ULBs”) used to locate aircraft Cockpit
Voice Recorders and Flight Data Recorders, marine ship Voyage Recorders and
various other devices which have been submerged under water. ULBs are required
equipment on all U.S. FAA and European Aviation Safety Agency (“EASA”) approved
Flight Data and Cockpit Voice Recorders used in aircraft and on similar systems
utilized on large marine shipping vessels.
Traveling Wave Tube Amplifiers
(“TWTAs”) and Microwave Power Modules (“MPMs”). The Electronic
Technologies Group designs and manufactures TWTAs and MPMs predominately used in
radar, electronic warfare, on-board jamming and countermeasure systems in
aircraft, ships and detection platforms deployed by U.S. and allied non-U.S.
military forces.
As part of our growth strategy, we have
continued to increase our research and development
activities. Research and development expenditures by the Electronic
Technologies Group were $10.9 million in fiscal 2010, $8.2 million in fiscal
2009 and $7.3 million in fiscal 2008. We believe that our Electronic
Technologies Group’s research and development capabilities are a significant
component of our historical success and an integral part of our growth
strategy.
Financial
Information About Operating Segments and Geographic Areas
See Note 15, Operating Segments, of the
Notes to Consolidated Financial Statements for financial information by
operating segment and by geographic areas.
Distribution,
Sales, Marketing and Customers
Each of our operating segments
independently conducts distribution, 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 manufacturers’
representatives. Generally, the in-house sales personnel receive a
base salary plus commission and manufacturers’ 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.
6
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 as well
as medical, telecommunication, 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 18% of total net sales during the year ended October 31,
2010.
Competition
The aerospace product and service
industry is characterized by intense competition. 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, General
Electric, and other OEMs. The competition is principally based on
price and service to the extent that 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
markets for our electronic products are niche markets with several competitors
with competition based mainly on design, technology, quality, price, service 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 metals 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.
7
Backlog
Our total backlog of unshipped orders
was $142.5 million as of October 31, 2010 compared to $104.5 million as of
October 31, 2009. The Flight Support Group’s backlog of unshipped
orders was $48.3 million as of October 31, 2010 as compared to $32.9 million as
of October 31, 2009. This backlog excludes forecasted shipments for
certain contracts of the Flight Support Group pursuant to which customers
provide only estimated annual usage and not firm purchase orders. Our
backlogs within the Flight Support Group are typically short-lead in nature with
many product orders being received within the month of shipment. The
Electronic Technologies Group’s backlog of unshipped orders was $94.2 million as
of October 31, 2010 as compared to $71.6 million as of October 31,
2009. The increase in the Electronic Technologies Group’s backlog is
principally related to backlog of the business acquired during fiscal
2010. Substantially the entire backlog of orders as of October 31,
2010 is expected to be delivered during fiscal 2011.
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. Our businesses which sell defense products directly to the United
States Government or for use in systems delivered to the United States
Government can be subject to various laws and regulations governing pricing and
other factors.
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; protect 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.
There has
been no material adverse effect to our consolidated financial statements as a
result of these environmental regulations.
8
Other Regulation
We are also subject to a variety of
other regulations including work-related and community safety
laws. The Occupational Safety and Health Act of 1970 mandates general
requirements for safe workplaces for all employees and established the
Occupational Safety and Health Administration (“OSHA”) in the Department of
Labor. In particular, OSHA provides special procedures and measures
for the handling of some hazardous and toxic substances. In addition,
specific safety standards have been promulgated for workplaces engaged in the
treatment, disposal or storage of hazardous waste. Requirements under
state law, in some circumstances, may mandate additional measures for facilities
handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA’s health and safety
requirements.
Insurance
We are a named insured under policies
which include the following coverage: (i) product liability, including
grounding; (ii) personal property, inventory and business income at our
facilities; (iii) general liability coverage; (iv) employee benefit liability;
(v) international liability and automobile liability; (vi) umbrella liability
coverage; and (vii) various other activities or items subject to certain limits
and deductibles. We believe that our insurance coverage is adequate
to insure against the various liability risks of our business.
Employees
As of October 31, 2010, we had
approximately 2,300 full-time and part-time employees including approximately
1,400 in the Flight Support Group and approximately 900 in the Electronic
Technologies Group. None of our employees are represented by a
union. Our management believes 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 the
Investors section of 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. Our Code of Ethics for Senior Financial Officers and Other
Officers is part of our Code of Business Conduct, which 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
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 17, 2010:
|
Name
|
Age
|
Position(s)
|
Director
Since
|
|||
|
Laurans
A. Mendelson
|
72
|
Chairman
of the Board and Chief Executive Officer
|
1989
|
|||
|
|
|
|||||
|
Eric
A. Mendelson
|
45
|
Co-President
and Director; President and Chief Executive Officer of HEICO Aerospace
Holdings Corp.
|
1992
|
|||
|
|
||||||
|
Victor
H. Mendelson
|
43
|
Co-President
and Director; President and Chief Executive Officer of HEICO Electronic
Technologies Corp.
|
1996
|
|||
|
|
||||||
|
Thomas
S. Irwin
|
64
|
Executive
Vice President and Chief Financial Officer
|
─
|
|||
|
|
||||||
|
William
S. Harlow
|
|
62
|
|
Vice
President of Corporate Development
|
|
─
|
Laurans A. Mendelson has
served as our Chairman of the Board since December 1990. He has also
served as our Chief Executive Officer since February 1990 and served as our
President from September 1991 through September 2009. Mr. Mendelson
serves on the Board of Governors of Aerospace Industries Association (“AIA”) in
Washington D.C., of which HEICO is a member. He is also former
Chairman of the Board of Trustees, former Chairman of the Executive Committee
and a current member of the Society of Mount Sinai Founders of Mount Sinai
Medical Center in Miami Beach,
Florida. In addition, Mr. Mendelson is a Trustee Emeritus of Columbia
University in The City of New York, where he previously served as Trustee and
Chairman of the Trustees’ Audit Committee. Mr. Mendelson is a
Certified Public Accountant. Laurans Mendelson is the father of Eric
Mendelson and Victor Mendelson.
Eric A. Mendelson has served
as our Co-President since October 2009 and served as our Executive Vice
President from 2001 through September 2009. He also has served as
President and Chief Executive Officer of HEICO Aerospace Holdings Corp., a
subsidiary of ours, since its formation in 1997; and President of HEICO
Aerospace Corporation since 1993. 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. In
addition, Mr. Mendelson is a member of the Advisory Board of Trustees of Mt.
Sinai Medical Center in Miami Beach, Florida and a member of the Board of
Trustees of Ransom Everglades School in Coconut Grove, Florida, as well as a
member of the Board of Directors of the Columbia College Alumni
Association. Eric Mendelson is the son of Laurans Mendelson and the
brother of Victor Mendelson.
10
Victor H. Mendelson has
served as our Co-President since October 2009 and served as our Executive Vice
President from 2001 through September 2009. He also has served as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of ours, since its formation in September 1996. He served
as our General Counsel from 1993 to September 2008 and our Vice President from
1996 to 2001. In addition, Mr. Mendelson was the Chief Operating
Officer of our former MediTek Health Corporation subsidiary from 1995 until its
profitable sale in 1996. 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 member of
the Board of Visitors of Columbia College in New York City, a Trustee of St.
Thomas University in Miami Gardens, Florida and is President of the Board of
Directors of the Florida Grand Opera. Victor Mendelson is the son of
Laurans Mendelson and the brother of Eric Mendelson.
Thomas S. Irwin has served as
our Executive Vice President and Chief Financial Officer since September 1991;
our Senior Vice President from 1986 to 1991; and our Vice President and
Treasurer from 1982 to 1986. Mr. Irwin is a Certified Public
Accountant. He is a Trustee of the Greater Hollywood Chamber of
Commerce and a member of the Board of Directors of the Broward
Alliance.
William S. Harlow has served
as our Vice President of Corporate Development since 2001 and served as Director
of Corporate Development from 1995 to 2001.
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.
General global industry and economic
conditions that affect the aviation industry also affect our
business. We are subject to macroeconomic cycles and when recessions
occur, we may experience reduced orders, payment delays, supply chain
disruptions or other factors as a result of the economic challenges faced by our
customers, prospective customers and suppliers. Further, 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 sales and greater credit risk. Demand for commercial
air travel can be influenced by airline industry profitability, world trade
policies, government-to-government relations, terrorism, disease outbreaks,
environmental constraints imposed upon aircraft operations, technological
changes and price and other competitive factors. These global
industry and economic conditions 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 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.
11
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 repairs, refurbishes and overhauls jet engine and
aircraft components. If aircraft or engines 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, space or homeland security spending by U.S. and/or foreign customers
could reduce our revenues.
In fiscal 2010, approximately 57% of
the sales of our Electronic Technologies Group were derived from the sale of
defense, commercial and defense satellite and spacecraft components and homeland
security products. A decline in defense, space or homeland security
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.
We
are subject to the risks associated with sales to foreign customers, which could
harm our business.
We market our products and services in
approximately 100 countries, with 31% of our consolidated net sales in fiscal
2010 derived from sales to foreign customers. We expect that sales to
foreign customers will continue to account for a significant portion of our
revenues in the foreseeable future. As a result, we are subject to
risks of doing business internationally, including the following:
|
|
·
|
Changes
in regulatory requirements;
|
|
|
·
|
Fluctuations
in currency exchange rates;
|
|
|
·
|
Volatility
in foreign political and economic
environments;
|
|
|
·
|
Uncertainty
of the ability of foreign customers to finance
purchases;
|
|
|
·
|
Uncertainties
and restrictions concerning the availability of funding credit or
guarantees;
|
|
|
·
|
Imposition
of taxes, export controls, tariffs, embargoes and other trade
restrictions; and
|
|
|
·
|
Compliance
with a variety of international laws, as well as U.S. laws affecting the
activities of U.S. companies abroad such as the U.S. Foreign Corrupt
Practices Act.
|
While the impact of these factors is
difficult to predict, any one or more of these factors may have a material
adverse effect on our business, financial condition and results of
operations.
12
Intense
competition from existing and new competitors may harm our
business.
We face significant competition in each
of our businesses.
Flight
Support Group
|
|
·
|
For
jet engine and aircraft component replacement parts, we compete with the
industry’s leading jet engine and aircraft component OEMs, particularly
Pratt & Whitney and General
Electric.
|
|
|
·
|
For
the overhaul and repair of jet engine and aircraft 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
|
|
·
|
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.
|
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, medical,
telecommunication and electronic 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:
13
|
|
·
|
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;
|
|
|
·
|
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;
|
|
|
·
|
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
|
|
·
|
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.
The
inability to obtain certain components and raw materials from suppliers could
harm our business.
Our business is affected by the
availability and price of the raw materials and component parts that we use to
manufacture our products. Our ability to manage inventory and meet
delivery requirements may be constrained by our suppliers’ ability to adjust
delivery of long-lead time products during times of volatile
demand. The supply chains for our business could also be disrupted by
external events such as natural disasters, extreme weather events, labor
disputes, governmental actions and legislative or regulatory
changes. As a result, our suppliers may fail to perform according to
specifications as and when required and we may be unable to identify alternate
supplier or to otherwise mitigate the consequences of their
non-performance. Transitions to new suppliers may result in
significant costs and delays, including those related to the required
recertification of parts obtained from new suppliers with our customers and/or
regulatory agencies. Our inability to fill our supply needs could
jeopardize our ability to fulfill obligations under customer contracts, which
could result in reduced revenues and profits, contract penalties or
terminations, and damage to customer relationships. Further,
increased costs of such raw materials or components could reduce our profits if
we were unable to pass along such price increases to our customers.
Product
specification costs and requirements could cause an increase to our costs to
complete contracts.
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.
14
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 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
may incur damages or disruption to our business caused by natural disasters and
other factors that may not be covered by insurance.
Several of our facilities, as a result
of their locations, could be subject to a catastrophic loss caused by
hurricanes, tornadoes, floods, fire, power loss, telecommunication and
information systems failure or similar events. Our corporate
headquarters and facilities located in Florida are particularly susceptible to
hurricanes, storms, tornadoes or other natural disasters that could disrupt our
operations, delay production and shipments, and result in large expenses to
repair or replace the facility or facilities. Should insurance or
other risk transfer mechanisms, such as our existing disaster recovery and
business continuity plans, be insufficient to recover all costs, we could
experience a material adverse effect on our business, financial condition and
results of operations.
Tax
changes could affect our effective tax rate and future
profitability.
We file income tax returns in the U.S.
federal jurisdiction, multiple state jurisdictions and certain jurisdictions
outside the U.S. In fiscal 2010, our effective tax rate was 33.7% of
our income before income taxes and noncontrolling interests. Our
future effective tax rate may be adversely affected by a number of factors,
including the following:
|
|
·
|
Changes
in available tax credits or tax
deductions;
|
|
|
·
|
Changes
in tax laws or the interpretation of such tax laws and changes in
generally accepted accounting
principles;
|
15
|
|
·
|
The
amount of income attributable to noncontrolling
interests;
|
|
|
·
|
Changes
in the mix of earnings in jurisdictions with differing statutory tax
rates;
|
|
|
·
|
Changes
in stock option compensation
expense;
|
|
|
·
|
Adjustments
to estimated taxes upon finalization of various tax returns;
and/or
|
|
|
·
|
Resolution
of issues arising from tax audits with various tax
authorities.
|
Any significant increase in our future
effective tax rates could have a material adverse effect on net income for
future periods.
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 effectively 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:
|
|
·
|
Availability
of suitable acquisition candidates;
|
|
|
·
|
Availability
of capital;
|
|
|
·
|
Diversion
of management’s attention;
|
|
|
·
|
Effective
integration of the operations and personnel of acquired
companies;
|
|
|
·
|
Potential
write downs of acquired intangible
assets;
|
|
|
·
|
Potential
loss of key employees of acquired
companies;
|
|
|
·
|
Use
of a significant portion of our available
cash;
|
|
|
·
|
Significant
dilution to our shareholders for acquisitions made utilizing our
securities; and
|
|
|
·
|
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.
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 and Chief Executive Officer, Eric A.
Mendelson, our Co-President, and Victor H. Mendelson, our
Co-President. 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.
16
Our
executive officers and directors have significant influence over our management
and direction.
As of December 17, 2010, collectively
our executive officers and entities controlled by them, our 401(k) Plan and
members of the Board of Directors beneficially owned approximately 23% of our
outstanding Common Stock and approximately 6% 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.
Item 2. PROPERTIES
We own or lease a number of facilities,
which are utilized by our Flight Support Group (“FSG”), Electronic Technologies
Group (“ETG”) and corporate office. As of October 31, 2010, all of
the facilities listed below were in good operating condition, well maintained
and in regular use. We believe that our existing facilities are
sufficient to meet our operational needs for the foreseeable
future. Summary information on the facilities utilized within the FSG
and the ETG to support their principal operating activities is as
follows:
Flight Support
Group
|
Square
Footage
|
||||||
|
Location
|
Leased
|
Owned
|
Description
|
|||
|
United
States facilities (8 states)
|
307,000
|
177,000
|
Manufacturing,
engineering and distribution
|
|||
|
facilities,
and corporate headquarters
|
||||||
|
United
States facilities (6 states)
|
125,0000
|
127,000
|
Repair
and overhaul facilities
|
|||
|
International
facilities (3 countries)
|
10,000
|
—
|
Manufacturing,
engineering and distribution
|
|||
|
-
India, Singapore and United
|
facilities
|
|||||
|
Kingdom
|
||||||
Electronic Technologies
Group
|
Square
Footage
|
||||||
|
Location
|
Leased
|
Owned
|
Description
|
|||
|
United
States facilities (9 states)
|
227,000
|
76,000
|
Manufacturing
and engineering facilities
|
|||
|
International
facilities (2 countries)
|
52,000
|
12,000
|
Manufacturing
and engineering facilities
|
|||
|
-
Canada and United Kingdom
|
||||||
Corporate
|
Square
Footage
|
||||||
|
Location
|
Leased
|
Owned
(1)
|
Description
|
|||
|
United
States facilities (1 state)
|
—
|
4,000
|
Administrative
offices
|
|||
|
(1)
|
Represents
the square footage of our corporate offices in Miami, Florida. The square
footage of our corporate headquarters in Hollywood, Florida is included
within the square footage under the caption “United States facilities (8
states)” under Flight Support
Group.
|
17
Item 3. LEGAL
PROCEEDINGS
We are involved in various legal
actions arising in the normal course of business. Based upon the
Company’s and our 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 our results of operations, financial position or cash
flows.
Item 4. (REMOVED AND
RESERVED)
18
PART
II
|
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Our 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 set forth, for the periods
indicated, the high and low share prices for our Class A Common Stock and our
Common Stock as reported on the NYSE, as well as the amount of cash dividends
paid per share during such periods.
In March 2010, the Company’s Board of
Directors declared a 5-for-4 stock split on both classes of the Company’s common
stock. The stock split was effected as of April 27, 2010 in the form
of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information in this Item 5
has been adjusted retrospectively for the 5-for-4 stock split.
Class A Common
Stock
|
High
|
Low
|
Cash Dividends
Per Share
|
||||||||||
|
Fiscal
2009:
|
||||||||||||
|
First
Quarter
|
$ | 25.09 | $ | 14.62 | $ | .048 | ||||||
|
Second
Quarter
|
24.50 | 13.87 | ― | |||||||||
|
Third
Quarter
|
26.21 | 18.61 | .048 | |||||||||
|
Fourth
Quarter
|
28.00 | 20.81 | ― | |||||||||
|
Fiscal
2010:
|
||||||||||||
|
First
Quarter
|
$ | 29.57 | $ | 24.03 | $ | .048 | ||||||
|
Second
Quarter
|
35.67 | 26.16 | ― | |||||||||
|
Third
Quarter
|
34.22 | 25.78 | .060 | |||||||||
|
Fourth
Quarter
|
37.48 | 25.24 | ― | |||||||||
As of December 17, 2010, there were 515
holders of record of our Class A Common Stock.
Common
Stock
|
High
|
Low
|
Cash Dividends
Per Share
|
||||||||||
|
Fiscal
2009:
|
||||||||||||
|
First
Quarter
|
$ | 34.22 | $ | 19.44 | $ | .048 | ||||||
|
Second
Quarter
|
33.31 | 17.12 | ― | |||||||||
|
Third
Quarter
|
32.40 | 21.06 | .048 | |||||||||
|
Fourth
Quarter
|
35.22 | 28.00 | ― | |||||||||
|
Fiscal
2010:
|
||||||||||||
|
First
Quarter
|
$ | 36.98 | $ | 29.58 | $ | .048 | ||||||
|
Second
Quarter
|
45.36 | 32.88 | ― | |||||||||
|
Third
Quarter
|
44.61 | 34.67 | .060 | |||||||||
|
Fourth
Quarter
|
50.75 | 34.58 | ― | |||||||||
As of December 17, 2010, there were 538
holders of record of our Common Stock.
19
Performance
Graphs
The following graph and table compare
the total return on $100 invested in HEICO Common Stock and HEICO Class A Common
Stock with the total return of $100 invested in the New York Stock Exchange
(NYSE) Composite Index and the Dow Jones U.S. Aerospace Index for the five-year
period from October 31, 2005 through October 31, 2010. The NYSE
Composite Index measures all common stock listed on the NYSE. The Dow
Jones U.S. Aerospace Index is comprised of large companies which make aircraft,
major weapons, radar and other defense equipment and systems as well as
providers of satellites and spacecrafts used for defense
purposes. The total returns include the reinvestment of cash
dividends.
|
Cumulative
Total Return as of October 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
|
HEICO
Common Stock
|
$ | 100.00 | $ | 164.13 | $ | 246.78 | $ | 174.82 | $ | 173.35 | $ | 284.50 | ||||||||||||
|
HEICO
Class A Common Stock
|
100.00 | 177.68 | 257.32 | 167.22 | 184.59 | 278.79 | ||||||||||||||||||
|
NYSE
Composite Index
|
100.00 | 118.05 | 138.73 | 81.54 | 90.67 | 101.08 | ||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
100.00 | 130.74 | 172.63 | 103.95 | 116.94 | 159.85 | ||||||||||||||||||
The following graph and table compare
the total return on $100 invested in HEICO Common Stock since October 31, 1990
using the same indices shown on the five-year performance graph
above. October 31, 1990 was the end of the first fiscal year
following the date the current executive management team assumed leadership of
the Company. No Class A Common Stock was outstanding as of October
31, 1990. As with the five-year performance graph, the total returns
include the reinvestment of cash dividends.
20
|
Cumulative
Total Return as of October 31,
|
||||||||||||||||||||||||||||
|
1990
|
1991
|
1992
|
1993
|
1994
|
1995
|
1996
|
||||||||||||||||||||||
|
HEICO
Common Stock
|
$ | 100.00 | $ | 141.49 | $ | 158.35 | $ | 173.88 | $ | 123.41 | $ | 263.25 | $ | 430.02 | ||||||||||||||
|
NYSE
Composite Index
|
100.00 | 130.31 | 138.76 | 156.09 | 155.68 | 186.32 | 225.37 | |||||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
100.00 | 130.67 | 122.00 | 158.36 | 176.11 | 252.00 | 341.65 | |||||||||||||||||||||
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
||||||||||||||||||||||
|
HEICO
Common Stock
|
$ | 1,008.31 | $ | 1,448.99 | $ | 1,051.61 | $ | 809.50 | $ | 1,045.86 | $ | 670.39 | $ | 1,067.42 | ||||||||||||||
|
NYSE
Composite Index
|
289.55 | 326.98 | 376.40 | 400.81 | 328.78 | 284.59 | 339.15 | |||||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
376.36 | 378.66 | 295.99 | 418.32 | 333.32 | 343.88 | 393.19 | |||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||||||||
|
HEICO
Common Stock
|
$ | 1,366.57 | $ | 1,674.40 | $ | 2,846.48 | $ | 4,208.54 | $ | 2,872.01 | $ | 2,984.13 | $ | 4,772.20 | ||||||||||||||
|
NYSE
Composite Index
|
380.91 | 423.05 | 499.42 | 586.87 | 344.96 | 383.57 | 427.61 | |||||||||||||||||||||
|
Dow
Jones U.S. Aerospace Index
|
478.49 | 579.77 | 757.97 | 1,000.84 | 602.66 | 678.00 | 926.75 | |||||||||||||||||||||
Dividend
Policy
We have historically paid semi-annual
cash dividends on both our Class A Common Stock and Common Stock. In
July 2010, we paid our 64th
consecutive semi-annual cash dividend since 1979. The cash dividend
of $.06 per share represents a 25% increase over the prior semi-annual per share
amount of $.048. Effective with this increase, the current annual
cash dividend is $.12. Our Board of Directors presently intends to
continue the payment of regular semi-annual cash dividends on both classes of
our common stock. In December 2010, the Board of Directors declared a
regular semi-annual cash dividend of $.06 per share payable in January
2011. Our ability to pay dividends could be affected by future
business performance, liquidity, capital needs, alternative investment
opportunities and loan covenants under our revolving credit
facility.
21
Equity
Compensation Plan Information
The following table summarizes
information about our equity compensation plans as of October 31,
2010:
|
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)
|
2,032,448 | $ | 15.60 | 1,445,072 | ||||||||
|
Equity
compensation plans not
|
||||||||||||
|
approved
by security holders (2)
|
105,000 | $ | 5.89 | ― | ||||||||
|
Total
|
2,137,448 | $ | 15.13 | 1,445,072 | ||||||||
__________________
|
(1)
|
Represents
aggregated information pertaining to our three equity compensation plans:
the 1993 Stock Option Plan, the Non-Qualified Stock Option Plan and the
2002 Stock Option Plan. See Note 9, Stock Options, of the Notes
to Consolidated Financial Statements for further information regarding
these plans.
|
|
(2)
|
Represents
stock options granted in fiscal 2002 to a former shareholder of a business
acquired 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
During March 2009, we repurchased
242,170 shares of our Class A Common Stock at an average price of $16.06 per
share and 230,625 shares of our Common Stock at an average price of $18.25 per
share under a pre-existing share repurchase program that was announced by our
Board of Directors in October 2002. We did not repurchase any shares
of our Class A Common Stock and/or Common Stock during fiscal 2008.
In March 2009, our Board of Directors
approved an increase in our share repurchase program by an aggregate 1,250,000
shares of either or both Class A Common Stock and Common Stock, bringing the
total authorized for future purchase to 1,280,928 shares. The
remaining shares authorized for repurchase can be executed, at management’s
discretion, in the open market or via private transactions and are subject to
certain restrictions included in our revolving credit agreement. The
repurchase program does not have a fixed termination date.
During December 2009, we repurchased
9,143 shares of our Common Stock at an average price of $31.54 and 2,613 shares
of our Class A Common Stock at an average price of $24.78. During May
2010, we repurchased 8,434 shares of our Common Stock at an average price of
$38.88 per share. The fiscal 2010 transactions occurred as settlement
for employee taxes due pertaining to exercises of non-qualified stock options
and did not impact the shares that may be purchased under our existing share
repurchase program.
Recent
Sales of Unregistered Securities
There were no unregistered sales of our
equity securities during fiscal 2010.
22
Item 6. SELECTED FINANCIAL
DATA
|
Year ended October 31, (1)
|
||||||||||||||||||||
|
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||
|
(in thousands, except per share data)
|
||||||||||||||||||||
|
Operating
Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 392,190 | $ | 507,924 | $ | 582,347 | $ | 538,296 | $ | 617,020 | ||||||||||
|
Gross
profit
|
142,513 | 177,458 | 210,495 | 181,011 | 222,347 | |||||||||||||||
|
Selling,
general and administrative expenses
|
75,646 | 91,444 | 104,707 | 92,756 | 113,174 | |||||||||||||||
|
Operating
income
|
66,867 | 86,014 | 105,788 |
(6)
|
88,255 | 109,173 |
(8)
|
|||||||||||||
|
Interest
expense
|
3,523 | 3,293 | 2,314 | 615 | 508 | |||||||||||||||
|
Other
income (expense)
|
639 | 95 | (637 | ) | 205 | 390 | ||||||||||||||
|
Net
income attributable to HEICO
|
31,888 |
(4)
|
39,005 |
(5)
|
48,511 |
(6)
|
44,626 |
(7)
|
54,938 |
(8)
|
||||||||||
|
Weighted
average number of common shares outstanding: (2)
|
||||||||||||||||||||
|
Basic
|
31,356 | 32,145 | 32,886 | 32,756 | 32,833 | |||||||||||||||
|
Diluted
|
33,248 | 33,664 | 34,054 | 33,780 | 33,771 | |||||||||||||||
|
Per Share Data: (2)
|
||||||||||||||||||||
|
Net
income per share attributable to HEICO shareholders:
|
||||||||||||||||||||
|
Basic
|
$ | 1.02 |
(4)
|
$ | 1.21 |
(5)
|
$ | 1.48 |
(6)
|
$ | 1.36 |
(7)
|
$ | 1.67 |
(8)
|
|||||
|
Diluted
|
0.96 |
(4)
|
1.16 |
(5)
|
1.42 |
(6)
|
1.32 |
(7)
|
1.62 |
(8)
|
||||||||||
|
Cash
dividends per share (2)
|
.064 | .064 | .080 | .096 | .108 | |||||||||||||||
|
Balance
Sheet Data (as of October 31):
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 4,999 | $ | 4,947 | $ | 12,562 | $ | 7,167 | $ | 6,543 | ||||||||||
|
Total
assets
|
534,815 | 631,302 | 676,542 | 732,910 | 781,643 | |||||||||||||||
|
Total
debt (including current portion)
|
55,061 | 55,952 | 37,601 | 55,431 | 14,221 | |||||||||||||||
|
Redeemable
noncontrolling interests (3)
|
49,525 | 49,370 | 48,736 | 56,937 | 55,048 | |||||||||||||||
|
Total
shareholders’ equity (3)
|
331,034 | 395,169 | 453,002 | 490,658 | 554,826 | |||||||||||||||
_________________
|
(1)
|
Results
include the results of acquisitions from each respective effective
date. See Note 2, Acquisitions, of the Notes to Consolidated
Financial Statements for more
information.
|
|
(2)
|
All
share and per share information has been adjusted retrospectively to
reflect a 5-for-4 stock split effected in April
2010.
|
|
(3)
|
Amounts
for the years ended October 31, 2006 to 2009 have been adjusted
retrospectively to conform to new accounting guidance on accounting for
noncontrolling interests (formerly referred to as minority interests) that
we adopted effective November 1, 2009. See Note 1, Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements for more information.
|
|
(4)
|
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 $.03 per basic and diluted
share.
|
|
(5)
|
Includes
the benefit of a tax credit (net of related expenses) for qualified
research and development activities recognized for the full fiscal 2006
year pursuant to the retroactive extension in December 2006 of Section 41,
“Credit for Increasing Research Activities,” of the Internal Revenue Code,
which increased net income by $535, or $.02 per basic and diluted
share.
|
|
(6)
|
Operating
income was reduced by an aggregate of $1,835 in impairment losses related
to the write-down of certain intangible assets within the Electronic
Technologies Group (ETG) to their estimated fair values. The
impairment losses were recorded as a component of selling, general and
administrative expenses and decreased net income attributable to HEICO by
$1,140 or $.03 per basic and diluted
share.
|
|
(7)
|
Includes
a benefit related to a settlement with the Internal Revenue Service
concerning the income tax credit claimed by the Company on its U.S.
federal filings for qualified research and development activities incurred
during fiscal years 2002 through 2005 as well as an aggregate reduction to
the related liability for unrecognized tax benefits for fiscal years 2006
through 2008, which increased net income attributable to HEICO by
approximately $1,225, or $.04 per basic and diluted
share.
|
|
(8)
|
Operating
income was reduced by an aggregate of $1,438 in impairment losses related
to the write-down of certain intangible assets within the ETG to their
estimated fair values. The impairment losses were recorded as a
component of selling, general and administrative expenses and decreased
net income attributable to HEICO by $889, or $.03 per basic and diluted
share.
|
23
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Our business is 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:
|
|
·
|
Designs, Manufactures,
Repairs, Overhauls and Distributes Jet Engine and Aircraft Component
Replacement Parts. The Flight Support Group designs,
manufactures, repairs, overhauls and distributes jet engine and aircraft
component replacement parts. The parts and services are
approved by the Federal Aviation Administration (“FAA”). The
Flight Support Group also manufactures and sells specialty parts as a
subcontractor for aerospace and industrial original equipment
manufacturers and the United States
government.
|
The Electronic Technologies Group
consists of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its
subsidiaries, which primarily:
|
|
·
|
Designs and Manufactures
Electronic, Microwave and Electro-Optical Equipment, High-Speed Interface Products,
High Voltage Interconnection Devices and High Voltage Advanced Power
Electronics. 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, infrared simulation, calibration and testing
equipment; power conversion products serving the high-reliability
military, space and commercial avionics end-markets; underwater locator
beacons used to locate data and voice recorders utilized on aircraft and
marine vessels; electromagnetic interference shielding for commercial and
military aircraft operators, traveling wave tube amplifiers and microwave
power modules used in radar, electronic warfare, on-board jamming and
countermeasure systems, electronics companies and telecommunication
equipment suppliers; advanced high-technology interface products that link
devices such as telemetry receivers, digital cameras, high resolution
scanners, simulation systems and test systems to computers; high voltage
energy generators interconnection devices, cable assemblies and wire for
the medical equipment, defense and other industrial markets; high
frequency power delivery systems for the commercial sign industry; and
high voltage power supplies found in satellite communications, CT scanners
and in medical and industrial x-ray
systems.
|
Our results of operations during each
of the past three fiscal years have been affected by a number of
transactions. This discussion of our financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein. All per share
information has been adjusted retrospectively to reflect a 5-for-4 stock split
effected in April 2010. See Note 1, Summary of Significant Accounting
Policies – Stock Split, of the Notes to Consolidated Financial Statements for
additional information regarding this stock split. For further
information regarding the acquisitions discussed below, see Note 2,
Acquisitions, of the Notes to Consolidated Financial
Statements. Acquisitions are included in our results of operations
from the effective dates of acquisition. See Critical Accounting
Policies below for more information regarding how we account for acquisitions in
accordance with new accounting guidance adopted as of the beginning of fiscal
2010.
24
In November 2007, we acquired, through
an 80%-owned subsidiary of HEICO Aerospace, all of the stock of a European
company that supplies aircraft parts for sale and exchange and provides repair
management services.
In January 2008, we acquired, through
HEICO Aerospace, certain assets and assumed certain liabilities of a U.S.
company that designs and manufactures FAA-approved aircraft and engine parts
primarily for the commercial aviation market. We have since combined
the operations of the acquired entity within other subsidiaries of HEICO
Aerospace.
In February 2008, we acquired, through
HEICO Aerospace, an 80.1% interest in certain assets and certain liabilities of
a U.S. company that is an FAA-approved repair station which specializes in
avionics primarily for the commercial aviation market. The remaining
noncontrolling interest is principally owned by certain members of the acquired
company’s management.
In May 2009, we acquired, through HEICO
Electronic, 82.5% of the stock of VPT, Inc. (“VPT”). VPT is a
designer and provider of power conversion products principally serving the
defense, space and aviation industries. The remaining 17.5% continues
to be owned by an existing VPT shareholder which is also a supplier to the
acquired company.
In October 2009, we acquired, through
HEICO Electronic, the business, assets and certain liabilities of the Seacom
division of privately-held Dukane Corp. and formed a new subsidiary, Dukane
Seacom, Inc. (“Seacom”). Seacom is a designer and manufacturer of
underwater locator beacons used to locate aircraft cockpit voice recorders,
flight data recorders, marine ship voyage recorders and various other devices
which have been submerged under water.
In February 2010, we acquired, through
HEICO Electronic, substantially all of the assets and assumed certain
liabilities of dB Control. dB Control produces high-power devices
used in both defense and commercial applications.
The purchase price of each of the above
referenced acquisitions was paid in cash using proceeds from our revolving
credit facility and is not material or significant to our consolidated financial
statements. The aggregate cost paid in cash for acquisitions,
including additional purchase consideration payments, was $39.1 million, $59.8
million and $24.8 million in fiscal 2010, 2009 and 2008,
respectively.
In April 2008, we acquired, through
HEICO Aerospace, an additional 7% equity interest in one of our subsidiaries,
which increased our ownership interest to 58%. In December 2008, we
acquired, through HEICO Aerospace, an additional 14% equity interest in the
subsidiary, which increased our ownership interest to
72%.
Critical
Accounting Policies
We believe that the following are our
most critical accounting policies, some of which require management to make
judgments about matters that are inherently uncertain.
25
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. This method is used because management
considers costs incurred to be the best available measure of progress on these
contracts. 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. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. 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 our net sales recognized
under the percentage-of-completion method was approximately 2%, 1% and 3% in
fiscal 2010, 2009 and 2008, respectively. The aggregate effects of
changes in estimates relating to long-term contracts did not have a significant
effect on net income or net income per share in fiscal 2010, 2009 or
2008.
Valuation
of Accounts Receivable
The valuation of accounts receivable
requires that we set up an allowance for estimated uncollectible accounts and
record a corresponding charge to bad debt expense. We estimate
uncollectible receivables based on such factors as our prior experience, our
appraisal of a customer’s ability to pay and economic conditions within and
outside of the aviation, defense, space, medical, telecommunication and
electronic 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.
We periodically evaluate the carrying
value of inventory, giving consideration to factors such as its physical
condition, sales patterns and expected future demand in order to estimate
the amount necessary
to write down its slow moving, obsolete or damaged inventory. These
estimates could vary significantly from actual amounts 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.
In
accordance with industry practice, all inventories are classified as a current
asset including portions with long production cycles, some of which may not be
realized within one year.
Business
Combinations
As further explained in New Accounting
Pronouncements below, we adopted new accounting guidance for business
combinations effective prospectively for acquisitions consummated on or after
November 1, 2009 (the beginning of fiscal 2010). Under the new
guidance, any contingent consideration is recognized as a liability at fair
value as of the acquisition date with subsequent fair value adjustments recorded
in operations and acquisition costs are generally expensed as
incurred. For acquisitions consummated prior to fiscal 2010,
contingent consideration is accounted for as an additional cost of the
respective acquired entity when paid and acquisition costs were capitalized as
part of the purchase price.
We allocate the purchase price of
acquired entities to the underlying tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair 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, principally intangible assets, generally in consultation with
third-party valuation advisors.
26
Valuation
of Goodwill and Other Intangible Assets
We test
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. In evaluating the recoverability of
goodwill, we compare the fair value of each of our 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 is
recognized in the amount by which the carrying value of the reporting unit’s
goodwill exceeds its implied fair value, if any. The fair values of
our reporting units were determined using a weighted average of a market
approach and an income approach. Under the market approach, fair
values are estimated using an average of published multiples for the industry
sectors in which our reporting units operate. We calculate fair
values under the income approach by taking estimated future cash flows that are
based on internal projections and other assumptions deemed reasonable by
management and discounting them using our estimated weighted average cost of
capital. Based on the annual goodwill impairment test as of October
31, 2010, 2009 and 2008, we determined there was no impairment of our
goodwill. The fair value of each of our reporting units as of October
31, 2010 significantly exceeded their carrying value.
We test
each non-amortizing intangible asset (principally trade names) for impairment
annually as of October 31, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. To derive
the fair value of our trade names, we utilize an income approach, which relies
upon management’s assumptions of royalty rates, projected revenues and discount
rates. We also test each amortizing intangible asset for impairment
if events or circumstances indicate that the asset might be
impaired. The test consists of determining whether the carrying value
of such assets will be recovered through undiscounted expected future cash
flows. If the total of the undiscounted future cash flows is less
than the carrying amount of those assets, we recognize an impairment loss based
on the excess of the carrying amount over the fair value of the
assets. The determination of fair value requires us to make a number
of estimates, assumptions and judgments of such factors as projected revenues
and earnings and discount rates. Based on the intangible impairment
tests conducted during fiscal 2010, 2009 and 2008, we recognized pre-tax
impairment losses related to the write-down of certain customer relationships of
$1.1 million, $.2 million and $1.3 million respectively, and the write-down of
certain trade names of $.3 million, $.1 million and $.5 million respectively,
within the ETG to their estimated fair values. The impairment losses
were recorded as a component of selling, general and administrative expenses in
the Company’s Consolidated Statements of Operations.
Assumptions
utilized to determine fair value in the goodwill and intangible assets
impairment tests are highly judgmental. If there is a material change
in such assumptions or if there is a material change in the conditions or
circumstances influencing fair value, we could be required to recognize a
material impairment charge. See Item 1A., Risk Factors, for a list of
factors of which any may cause our actual results to differ materially from
anticipated results.
27
Results
of Operations
The following table sets forth the
results of our operations, net sales and operating income by segment and the
percentage of net sales represented by the respective items in our Consolidated
Statements of Operations:
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net
sales
|
$ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | ||||||
|
Cost
of sales
|
394,673,000 | 357,285,000 | 371,852,000 | |||||||||
|
Selling,
general and administrative expenses
|
113,174,000 | 92,756,000 | 104,707,000 | |||||||||
|
Total
operating costs and expenses
|
507,847,000 | 450,041,000 | 476,559,000 | |||||||||
|
Operating
income
|
$ | 109,173,000 | $ | 88,255,000 | $ | 105,788,000 | ||||||
|
Net
sales by segment:
|
||||||||||||
|
Flight
Support Group
|
$ | 412,337,000 | $ | 395,423,000 | $ | 436,810,000 | ||||||
|
Electronic
Technologies Group
|
205,648,000 | 143,372,000 | 146,044,000 | |||||||||
|
Intersegment
sales
|
(965,000 | ) | (499,000 | ) | (507,000 | ) | ||||||
| $ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | |||||||
|
Operating
income by segment:
|
||||||||||||
|
Flight
Support Group
|
$ | 67,896,000 | $ | 60,003,000 | $ | 81,184,000 | ||||||
|
Electronic
Technologies Group
|
56,126,000 | 39,981,000 | 38,775,000 | |||||||||
|
Other,
primarily corporate
|
(14,849,000 | ) | (11,729,000 | ) | (14,171,000 | ) | ||||||
| $ | 109,173,000 | $ | 88,255,000 | $ | 105,788,000 | |||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Gross
profit
|
36.0 | % | 33.6 | % | 36.1 | % | ||||||
|
Selling,
general and administrative expenses
|
18.3 | % | 17.2 | % | 18.0 | % | ||||||
|
Operating
income
|
17.7 | % | 16.4 | % | 18.2 | % | ||||||
|
Interest
expense
|
.1 | % | .1 | % | .4 | % | ||||||
|
Other
income (expense)
|
.1 | % | ― | (.1 | )% | |||||||
|
Income
tax expense
|
5.9 | % | 5.2 | % | 6.1 | % | ||||||
|
Net
income attributable to noncontrolling interests
|
2.8 | % | 2.8 | % | 3.2 | % | ||||||
|
Net
income attributable to HEICO
|
8.9 | % | 8.3 | % | 8.3 | % | ||||||
Comparison
of Fiscal 2010 to Fiscal 2009
Net
Sales
Net sales in fiscal 2010 increased by
14.6% to a record $617.0 million, as compared to net sales of $538.3 million in
fiscal 2009. The increase in net sales reflects an increase of $62.3
million (a 43.4% increase) to a record $205.6 million in net sales within the
ETG and an increase of $16.9 million (a 4.3% increase) to $412.3 million in net
sales within the FSG. The net sales increase in the ETG reflects the
additional net sales totaling approximately $40 million contributed by a
February 2010 acquisition and two fiscal 2009 acquisitions as well as organic
growth of approximately 12%. The organic growth in the ETG
principally reflects strength in customer demand for certain of our medical
equipment, defense, electronic and satellite products. The 4.3%
increase in net sales of the FSG, which is entirely organic growth, is primarily
attributable to higher net sales of our industrial products as well as higher
net sales of our commercial aviation products reflecting the recent capacity
growth of our commercial airline customers during the third and fourth
quarters.
28
Our net sales in fiscal 2010 and 2009
by market approximated 62% and 68%, respectively, from the commercial aviation
industry, 23% and 20%, respectively, from the defense and space industries, and
15% and 12%, respectively, from other industrial markets including medical,
electronics and telecommunications.
Gross
Profit and Operating Expenses
Our consolidated gross profit margin
increased to 36.0% in fiscal 2010 as compared to 33.6% in fiscal 2009, mainly
reflecting higher margins within the FSG principally due to a more favorable
product sales mix. Consolidated cost of sales in fiscal 2010 and 2009
includes approximately $22.7 million and $19.7 million, respectively, of new
product research and development expenses.
Selling, general and administrative
(“SG&A”) expenses were $113.2 million and $92.8 million in fiscal 2010 and
fiscal 2009, respectively. The increase in SG&A expenses is
mainly due to the operating costs of the fiscal 2010 and fiscal 2009
acquisitions referenced above, and higher operating costs, principally personnel
related, associated with the growth in consolidated net
sales. SG&A expenses as a percentage of net sales increased from
17.2% in 2009 to 18.3% in fiscal 2010 reflecting a higher level of accrued
performance awards based on the improved consolidated operating
results.
Operating
Income
Operating income in fiscal 2010
increased by 23.7% to a record $109.2 million as compared to operating income of
$88.3 million in fiscal 2009. The increase in operating income
reflects a $16.1 million increase (a 40.4% increase) to a record $56.1 million
in operating income of the ETG in fiscal 2010, up from $40.0 million in fiscal
2009 and a $7.9 million increase (a 13.2% increase) in operating income of the
FSG to $67.9 million in fiscal 2010, up from $60.0 million in fiscal 2009,
partially offset by a $3.1 million increase in corporate
expenses. The increase in operating income for the ETG in fiscal 2010
reflects the impact of the fiscal 2010 and 2009 acquisitions and organic sales
growth. The increase in operating income for the FSG in fiscal 2010
reflects the aforementioned higher gross profit margins. The increase
in corporate expenses in fiscal 2010 is primarily due to the higher level of
accrued performance awards discussed previously.
As a percentage of net sales, our
consolidated operating income increased to 17.7% in fiscal 2010, up from 16.4%
in fiscal 2009. The increase in consolidated operating income as a
percentage of net sales reflects an increase in the FSG’s operating income as a
percentage of net sales to 16.5% in fiscal 2010 from 15.2% in fiscal 2009
resulting primarily from the favorable product mix previously
referenced. The ETG’s operating income as a percentage of net sales
was 27.3% in fiscal 2010, compared to 27.9% reported in fiscal 2009, reflecting
variations in product mix, including the impact of certain recently acquired
businesses.
Interest
Expense
Interest expense in fiscal 2010 and
2009 was not material.
29
Other
Income
Other income in fiscal 2010 and 2009
was not material.
Income
Tax Expense
Our effective tax rate for fiscal 2010
increased to 33.7% from 31.9% in fiscal 2009. The effective tax rate
for fiscal 2009 was lower due to a settlement reached with the Internal Revenue
Service (“IRS”) pertaining to the income tax credit claimed on HEICO’s U.S.
federal filings for qualified research and development activities incurred for
fiscal years 2002 through 2005 and a resulting reduction to the related
liability for unrecognized tax benefits for fiscal years 2006 through 2008 based
on new information obtained during the examination. In addition, the
effective tax rate for fiscal 2010 was higher than fiscal 2009 as the fiscal
2010 tax expense only reflects a credit for qualifying research and development
activities through December 31, 2009 due to the expiration of such tax credits
and was higher due to an increased effective state income tax rate principally
as a result of the previously mentioned fiscal 2010 and 2009
acquisitions. The Tax Relief, Unemployment Insurance Reauthorization
and Job Creation Act of 2010, which was approved December 17, 2010, includes an
extension of research and development tax credits retroactive to December 31,
2009. No research and development tax credits have been included for
periods after December 31, 2009 pending completion of a study of qualifying
research and development activities under the new law.
For a
detailed analysis of the provision for income taxes, see Note 6, Income Taxes,
of the Notes to Consolidated Financial Statements.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests relates to the 20% noncontrolling interest held in the
FSG and the noncontrolling interests held in certain subsidiaries of the FSG and
ETG. The increase in net income attributable to noncontrolling
interests in fiscal 2010 compared to fiscal 2009 is related to higher earnings
of certain FSG and ETG subsidiaries in which noncontrolling interests
exist.
Net
Income Attributable to HEICO
Net income attributable to HEICO was a
record $54.9 million, or $1.62 per diluted share, in fiscal 2010 compared to
$44.6 million, or $1.32 per diluted share, in fiscal 2009 reflecting the
increased operating income referenced above. Diluted net income per
share attributable to HEICO shareholders in fiscal 2009 included a $.04 per
diluted share benefit from the aforementioned favorable IRS
settlement.
Outlook
As we look forward to fiscal 2011,
HEICO will continue its focus on developing new products and services, further
market penetration, additional acquisition opportunities and maintaining its
financial strength. As the commercial airline industry expects an
increase in capacity during 2011, we are targeting growth in fiscal 2011 full
year net sales and net income over fiscal 2010 levels. In our
electronic, defense and space markets, we are pleased with increasing demand for
some of our commercial products and overall stable demand for our defense
products.
30
Comparison
of Fiscal 2009 to Fiscal 2008
Net
Sales
Net sales in fiscal 2009 decreased by
7.6% to $538.3 million compared to net sales of $582.3 million in fiscal
2008. The decrease in net sales reflects a decrease of $41.4 million
(a 9.5% decrease) to $395.4 million in net sales within the FSG and a decrease
of $2.7 million (a 1.8% decrease) to $143.4 million in net sales within the
ETG. The net sales decline in both the FSG and the ETG reflects the
impact of the continued global recession on our businesses, which has resulted
in a reduction in customer demand. The net sales decrease within the
FSG reflects lower demand for our aftermarket replacement parts and repair and
overhaul services resulting from worldwide airline capacity cuts and efforts to
reduce spending and conserve cash by the airline industry. Within the
ETG, we are generally seeing some strength in our defense related businesses,
including space and homeland security products, but continued weakness in
customer demand for certain of our medical, telecommunication and electronic
products. The net sales decline in the ETG was partially offset by
the favorable impact on net sales from acquisitions of approximately $17
million.
Our net sales in fiscal 2009 and 2008
by market approximated 68% and 69%, respectively, from the commercial aviation
industry, 20% and 16%, respectively, from the defense and space industries, and
12% and 15%, respectively, from other industrial markets including medical,
electronics and telecommunications.
Gross
Profit and Operating Expenses
Our consolidated gross profit margin
decreased to 33.6% in fiscal 2009 as compared to 36.1% in fiscal 2008, mainly
reflecting lower margins within the FSG due principally to a less favorable
product mix as well as the impact of lower sales volumes on fixed manufacturing
costs and a higher investment by HEICO in the research and development of new
products and services. Consolidated cost of sales in fiscal 2009 and
2008 includes approximately $19.7 million and $18.4 million, respectively, of
new product research and development expenses.
SG&A expenses were $92.8 million
and $104.7 million in fiscal 2009 and 2008, respectively. The
decrease in SG&A expenses is mainly due to lower operating costs,
principally personnel related, associated with cost reduction initiatives and
the decline in net sales discussed above, partially offset by the additional
operating costs associated with the acquired businesses. These cost
reductions resulted in a decrease of SG&A expenses as a percentage of net
sales from 18.0% in fiscal 2008 to 17.2% in fiscal 2009.
Operating
Income
Operating income in fiscal 2009
decreased by 16.6% to $88.3 million, compared to operating income of $105.8
million in fiscal 2008. The decrease in operating income reflects a
decrease of $21.2 million (a 26.1% decrease) to $60.0 million in operating
income of the FSG in fiscal 2009, partially offset by an increase of $1.2
million (a 3.1% increase) to $40.0 million in operating income of the ETG in
fiscal 2009 and a $2.4 million increase in corporate expenses.
As a percentage of net sales, operating
income decreased to 16.4% in fiscal 2009 compared to 18.2% in fiscal
2008. The decrease in operating income as a percentage of net sales
reflects a decrease in the FSG’s operating income as a percentage of net sales
to 15.2% in fiscal 2009 compared to 18.6% in fiscal 2008, partially offset by an
increase in the ETG’s operating income as a percentage of net sales from 26.6%
in fiscal 2008 to 27.9% in fiscal 2009. The decrease in operating
income as a percentage of net sales for the FSG principally reflects the
aforementioned impact of the lower sales volume and a less favorable product mix
on gross profit and operating income margins. The increase in
operating income as a percentage of net sales for the ETG principally reflects a
favorable product mix.
31
Interest
Expense
Interest expense decreased to $.6
million in fiscal 2009 from $2.3 million in fiscal 2008. The decrease
was principally due to lower variable interest rates under our revolving credit
facility in 2009.
Other
Income (Expense)
Other income (expense) in fiscal 2009
and 2008 was not material.
Income Tax
Expense
Our effective tax rate for fiscal 2009
decreased to 31.9% from 34.5% in fiscal 2008. The decrease was
principally related to a settlement reached with the Internal Revenue Service
(“IRS”) during fiscal 2009. The IRS settlement pertained to the
income tax credits claimed on HEICO’s U.S. federal filings for qualified
research and development activities incurred for fiscal years 2002 through 2005
and a resulting reduction to the related reserve for fiscal years 2002 through
2008 based on new information obtained during the examination, which increased
net income by approximately $1,225,000, or $.04 per diluted share, for fiscal
2009.
Net
Income Attributable to Noncontrolling Interests
Net income attributable to
noncontrolling interests relates to the 20% noncontrolling interest held in the
FSG and the noncontrolling interests held in certain subsidiaries of the FSG and
the ETG. Net income attributable to noncontrolling interests
decreased to $15.2 million in fiscal 2009 from $18.9 million in fiscal
2008. The decrease in net income attributable to noncontrolling
interests for fiscal 2009 compared to fiscal 2008 is principally attributable to
the acquired additional equity interests of certain FSG subsidiaries in which
noncontrolling interests exist as well as the lower earnings of the FSG,
partially offset by the higher earnings of certain ETG subsidiaries in which
noncontrolling interests exist and the mid-year acquisition of an 82.5% interest
in VPT.
Net
Income Attributable to HEICO
Our net income attributable to HEICO
was $44.6 million, or $1.32 per diluted share, in fiscal 2009 compared to $48.5
million, or $1.42 per diluted share, in fiscal 2008 reflecting the decreased
operating income referenced above, partially offset by the aforementioned
favorable IRS settlement, the decreased noncontrolling interests’ share of
income of certain consolidated subsidiaries and lower interest
expense.
Inflation
We have generally experienced increases
in our costs of labor, materials and services consistent with overall rates of
inflation. The impact of such increases on net income attributable to
HEICO has been generally minimized by efforts to lower costs through
manufacturing efficiencies and cost reductions.
32
Liquidity
and Capital Resources
Our capitalization was as
follows:
|
As
of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
and cash equivalents
|
$ | 6,543,000 | $ | 7,167,000 | ||||
|
Total
debt (including current portion)
|
14,221,000 | 55,431,000 | ||||||
|
Shareholders’
equity
|
554,826,000 | 490,658,000 | ||||||
|
Total
capitalization (debt plus equity)
|
569,047,000 | 546,089,000 | ||||||
|
Total
debt to total capitalization
|
2 | % | 10 | % | ||||
In addition to cash and cash
equivalents of $6.5 million, we had approximately $284 million of unused
availability under the terms of our revolving credit facility as of October 31,
2010. Our principal uses of cash include acquisitions, payments of
principal and interest on debt, capital expenditures, cash dividends and
increases in working capital. We finance our activities primarily
from our operating activities and financing activities, including borrowings
under long-term credit agreements.
Based on our current outlook, we
believe that our net cash provided by operating activities and available
borrowings under our revolving credit facility will be sufficient to fund cash
requirements for at least the next twelve months.
Operating
Activities
Net cash provided by operating
activities was $101.7 million for fiscal 2010, principally reflecting net income
from consolidated operations of $72.4 million, depreciation and amortization of
$17.6 million, a decrease in net operating assets of $6.7 million, a deferred
income tax provision of $1.8 million, impairment losses of certain intangible
assets aggregating $1.4 million and stock option compensation expense of $1.4
million. The decrease in net operating assets (current assets used in
operating activities net of current liabilities) of $6.7 million primarily
reflects higher accrued expenses associated with performance based awards and
decreased inventory levels due to continuing efforts to manage inventory levels,
while meeting customer delivery requirements, partially offset by increased
accounts receivable related to higher net sales in fiscal 2010.
Net cash provided by operating
activities was $75.8 million for fiscal 2009, principally reflecting net income
from consolidated operations of $59.8 million, depreciation and amortization of
$15.0 million, a tax benefit related to stock option exercises of $1.9 million,
and a decrease in net operating assets of $2.5 million, partially offset by the
presentation of $1.6 million of excess tax benefit from stock option exercises
as a financing activity and a deferred income tax benefit of $2.7
million. The decrease in net operating assets (current assets used in
operating activities net of current liabilities) primarily reflects a decrease
in accounts receivable due to the timing of cash collections and lower net
sales, partially offset by a decrease in accrued expenses, including employee
compensation, customer rebates and credits and additional accrued purchase
consideration since October 31, 2008.
Net cash provided by operating
activities was $73.2 million for fiscal 2008, principally reflecting net income
from consolidated operations of $67.4 million, depreciation and amortization of
$15.1 million, a tax benefit related to stock option exercises of $6.2 million,
a deferred income tax provision of $3.6 million and impairment losses of certain
intangible assets aggregating $1.8 million, partially offset by an increase in
net operating assets of $17.1 million and the presentation of $4.3 million of
excess tax benefit from stock option exercises as a financing
activity. The increase in net operating assets (current assets used
in operating activities net of current liabilities) primarily reflects a higher
investment in inventories by the FSG required to meet sales demand associated
with new product offerings, sales growth, and increased lead times on certain
raw materials; and 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.
33
Investing
Activities
Net cash used in investing activities
during the three-year fiscal period ended October 31, 2010 primarily relates to
several acquisitions, including payments of additional contingent purchase
consideration, totaling $39.1 million in fiscal 2010, $59.8 million in fiscal
2009 and $24.8 million in fiscal 2008. Further details on
acquisitions may be found at the beginning of this Item 7 under the caption
“Overview” and Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements. Capital expenditures aggregated $32.6 million over the
last three fiscal years, primarily reflecting the expansion, replacement and
betterment of existing production facilities and capabilities, which were
generally funded using cash provided by operating activities.
Financing
Activities
During the three-year fiscal period
ended October 31, 2010, the Company borrowed an aggregate $178.0 million under
its revolving credit facility principally to fund acquisitions and for working
capital needs, including $37.0 million in fiscal 2010, $91.0 million in fiscal
2009 and $50.0 million in fiscal 2008. Further details on
acquisitions may be found at the beginning of this Item 7 under the caption
“Overview” and Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements. Repayments on the revolving credit facility aggregated
$217.0 million over the last three fiscal years, including $78.0 million in
fiscal 2010, $73.0 million in fiscal 2009 and $66.0 million in fiscal
2008. For the three-year fiscal period ended October 31, 2010, we
made distributions to noncontrolling interest owners aggregating $27.4 million,
acquired certain noncontrolling interests aggregating $16.3 million, paid cash
dividends aggregating $9.3 million, and made repurchases of our common stock
aggregating $8.1 million. For the three-year fiscal period ended
October 31, 2010, we received proceeds from stock option exercises aggregating
$5.4 million. Net cash provided by financing activities also includes
the presentation of $.7 million, $1.6 million and $4.3 million of excess tax
benefit from stock option exercises in fiscal 2010, 2009 and 2008,
respectively.
In May 2008, we amended our revolving
credit facility by entering into a $300 million Second Amended and Restated
Revolving Credit Agreement (“Credit Facility”) with a bank syndicate, which
matures in May 2013. Under certain circumstances, the maturity may be
extended for two one-year periods. The Credit Facility also includes
a feature that will allow us to increase the Credit Facility, at our option, up
to $500 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. Advances under the
Credit Facility accrue interest at our choice of the “Base Rate” or the London
Interbank Offered Rate (“LIBOR”) plus applicable margins (based on our 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 for
LIBOR-based borrowings range from .625% to 2.25%. A fee is charged on
the amount of the unused commitment ranging from .125% to .35% (depending on our
leverage ratio). The Credit Facility also includes a $50 million
sublimit for borrowings made in euros, a $30 million sublimit for letters of
credit and a $20 million swingline sublimit. The Credit Facility is
unsecured and contains covenants that require, among other things, the
maintenance of the leverage ratio, a senior leverage ratio and a fixed charge
coverage ratio. In the event our leverage ratio exceeds a specified
level, the Credit Facility would become secured by the capital stock owned in
substantially all of our subsidiaries. As of October 31, 2010, our
leverage ratios were significantly below and our fixed charge coverage ratio was
significantly above such specified levels. See Note 5, Long-Term
Debt, of the Notes to Consolidated Financial Statements for further information
regarding the revolving credit facility.
34
Contractual
Obligations
The following table summarizes our
contractual obligations as of October 31, 2010:
|
Payments due by fiscal period
|
||||||||||||||||||||
|
Total
|
2011
|
2012 - 2013
|
2014 - 2015
|
Thereafter
|
||||||||||||||||
|
Long-term
debt obligations (1)
|
$ | 14,209,000 | $ | 136,000 | $ | 14,073,000 | $ | ― | $ | ― | ||||||||||
|
Capital
lease obligations (1)
|
12,000 | 12,000 | ― | ― | ― | |||||||||||||||
|
Operating
lease obligations (2)
|
24,812,000 | 6,167,000 | 9,648,000 | 4,486,000 | 4,511,000 | |||||||||||||||
|
Purchase
obligations (3) (4)
(5)
|
11,450,000 | 10,663,000 | 787,000 | ― | ― | |||||||||||||||
|
Other
long-term liabilities (6)
(7)
|
322,000 | 61,000 | 114,000 | 66,000 | 81,000 | |||||||||||||||
|
Total
contractual obligations
|
$ | 50,805,000 | $ | 17,039,000 | $ | 24,622,000 | $ | 4,552,000 | $ | 4,592,000 | ||||||||||
________________
|
(1)
|
Excludes
interest charges on borrowings and the fee on the amount of any unused
commitment that we may be obligated to pay under our revolving credit
facility as such amounts vary. Also excludes interest charges
associated with notes payable and capital lease obligations as such
amounts are not material. See Note 5, Long-Term Debt, of the
Notes to Consolidated Financial Statements and “Financing Activities”
above for additional information regarding our long-term debt
obligations.
|
|
(2)
|
See
Note 16, Commitments and Contingencies – Lease Commitments, of the Notes
to Consolidated Financial Statements for additional information regarding
our operating lease obligations.
|
|
(3)
|
As
further explained below in “New Accounting Pronouncements,” the
noncontrolling interest holders of certain subsidiaries have rights (“Put
Rights”) that may be exercised on varying dates causing us to purchase
their equity interests beginning in fiscal 2011 through fiscal
2018. The Put Rights provide that cash consideration be paid
for their noncontrolling interests (“Redemption Amount”). As of
October 31, 2010, management’s estimate of the aggregate Redemption Amount
of all Put Rights that we would be required to pay is approximately $55
million, which is reflected within redeemable noncontrolling interests in
our Consolidated Balance Sheet. Of this amount $6,486,000 and
$787,000 are included in the table as amounts payable in fiscal 2011 and
2012, respectively, pursuant to past exercises of such Put Rights by the
noncontrolling interest holders of certain of our
subsidiaries. As the actual Redemption Amount payable in fiscal
2012 is based on a multiple of future earnings,
such amount will likely be different. The remaining Redemption
Amounts have been excluded from the table as the timing of such payments
is contingent upon the exercise of the Put
Rights.
|
|
(4)
|
Also
includes accrued additional contingent purchase consideration of
$4,104,000 payable in fiscal 2011 relating to a prior year acquisition
(see Note 2, Acquisitions, of the Notes to Consolidated Financial
Statements). The amounts in the table do not include the
additional contingent purchase consideration we may have to pay based on
future earnings of certain acquired businesses. As of October
31, 2010, management’s estimate of the aggregate amount of such contingent
purchase consideration is approximately $9.9 million, which is payable
beginning in fiscal 2011 through fiscal 2013. Of this total,
$1.2 million is related to a 2010 acquisition and has been accrued within
other long-term liabilities in our Consolidated Balance Sheet as further
described in Note 7, Fair Value Measurements, of the Notes to Consolidated
Financial Statements. The remaining contingent purchase
consideration is further discussed in “Off-Balance Sheet Arrangements –
Additional Contingent Purchase Consideration”
below.
|
|
(5)
|
Also
includes an aggregate $73,000 of commitments for capital
expenditures. All purchase obligations of inventory and
supplies in the ordinary course of business (i.e., with deliveries
scheduled within the next year) are excluded from the
table.
|
|
(6)
|
Represents
payments aggregating $322,000 under our Directors Retirement Plan, for
which benefits are presently being paid and excludes $190,000 of payments
for which benefit payments have not yet commenced. Our
Directors Retirement Plan’s projected benefit obligation of $409,000 is
accrued within other long-term liabilities in our Consolidated Balance
Sheet as of October 31, 2010. See Note 10, Retirement Plans, of
the Notes to Consolidated Financial Statements (the plan is unfunded and we pay benefits
directly). The amounts in the table do not include liabilities
related to the Leadership Compensation Plan or our other deferred
compensation arrangement as they are each fully supported by assets held
within irrevocable trusts. See Note 3, Selected Financial
Statement Information – Other Long-Term Liabilities, of the Notes to
Consolidated Financial Statements for further information about these two
deferred compensation plans.
|
35
|
(7)
|
The
amounts in the table do not include approximately $2,252,000 of our
liability for unrecognized tax benefits due to the uncertainty with
respect to the timing of future cash flows associated with these
unrecognized tax benefits as we are unable to make reasonably reliable
estimates of the timing of any cash settlements. See Note 6,
Income Taxes, of the Notes to Consolidated Financial Statements for
further information about our liability for unrecognized tax
benefits.
|
Off-Balance
Sheet Arrangements
Guarantees
We have arranged for a standby letter
of credit for $1.5 million to meet the security requirement of our insurance
company for potential workers’ compensation claims, which is supported by our
revolving credit facility.
Additional
Contingent Purchase Consideration
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2007, we may be obligated to pay additional
purchase consideration of up to 73 million Canadian dollars in aggregate, which
translates to approximately $72 million U.S. dollars based on the October 31,
2010 exchange rate, should the subsidiary meet certain earnings objectives
through fiscal 2012.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional
purchase consideration of up to approximately $1.3 million in fiscal 2011 and
$10.1 million in fiscal 2012 should the subsidiary meet certain earnings
objectives during the second and third years, respectively, following the
acquisition.
As part of the agreement to acquire a
subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional
purchase consideration of up to approximately $7.6 million should the subsidiary
meet certain earnings objectives during the second year following the
acquisition.
The above referenced additional
contingent purchase consideration will be accrued when the earnings objectives
are met. Such additional contingent purchase consideration is based
on a multiple of earnings above a threshold (subject to a cap in certain cases)
and is not contingent upon the former shareholders of the acquired entities
remaining employed by us or providing future services to
us. Accordingly, such consideration will be recorded as an additional
cost of the respective acquired entity when paid. The aggregate
maximum amount of such contingent purchase consideration that we could be
required to pay is approximately $91 million payable over future periods
beginning in fiscal 2011 through fiscal 2012. Assuming the
subsidiaries perform over their respective future measurement periods at the
same earnings levels they have performed in the comparable historical
measurement periods, the aggregate amount of such contingent purchase
consideration that we would be required to pay is approximately $9
million. The actual contingent purchase consideration will likely be
different.
For additional information on how we
account for contingent consideration associated with acquisitions, see Note 1,
Summary of Significant Accounting Policies – Business Combinations, of the Notes
to Consolidated Financial Statements.
36
New
Accounting Pronouncements
Effective
November 1, 2009, we adopted new accounting guidance that requires the
recognition of certain noncontrolling interests (previously referred to as
minority interests) as a separate component within equity in the consolidated
balance sheet. It also requires the amount of consolidated net income
attributable to the parent and the noncontrolling interests be clearly
identified and presented within the consolidated statement of
operations. The adoption of this new guidance (which is included in
Accounting Standards Codification (“ASC”) 810, “Consolidation”) has affected the
presentation of noncontrolling interests in our consolidated financial
statements on a retrospective basis. For example, under this
guidance, “Net income from consolidated operations” is comparable to what was
previously presented as “Income before minority interests” and “Net income
attributable to HEICO” is comparable to what was previously presented as “Net
income.” Further, acquisitions of noncontrolling interests are
considered a financing activity under the new accounting guidance and are no
longer presented as an investing activity.
Effective November 1, 2009, we also
adopted new accounting guidance that retrospectively affects the financial
statement classification and measurement of redeemable noncontrolling
interests. This guidance is included in ASC 480, “Distinguishing
Liabilities from Equity.” As further detailed in Note 12, Redeemable
Noncontrolling Interests, of the Notes to Consolidated Financial Statements, the
holders of equity interests in certain of our subsidiaries have rights (“Put
Rights”) that require us to provide cash consideration for their equity
interests (the “Redemption Amount”) at fair value or at a formula that
management intended to reasonably approximate fair value based solely on a
multiple of future earnings over a measurement period. The Put Rights
are embedded in the shares owned by the noncontrolling interest holders and are
not freestanding. Previously, we recorded such redeemable
noncontrolling interests at historical cost plus an allocation of subsidiary
earnings based on ownership interest, less dividends paid to the noncontrolling
interest holders. Effective November 1, 2009, we adjusted our
redeemable noncontrolling interests in accordance with this new accounting
guidance to the higher of their carrying cost or management’s estimate of the
Redemption Amount with a corresponding decrease to retained earnings and
classified such interests outside of permanent equity. Under this
guidance, subsequent adjustments to the carrying amount of redeemable
noncontrolling interests to reflect any changes in the Redemption Amount at the
end of each reporting period will be recorded in the same
manner. Such adjustments to Redemption Amounts based on fair value
will have no effect on net income per share attributable to HEICO shareholders
whereas the portion of periodic adjustments to the carrying amount of redeemable
noncontrolling interests based solely on a multiple of future earnings that
reflect a redemption amount in excess of fair value will effect net income per
share attributable to HEICO shareholders under the two-class
method.
As a result of adopting the new
accounting guidance for noncontrolling interests and redeemable noncontrolling
interests, we (i) reclassified approximately $78 million from temporary equity
(previously labeled as “Minority interests in consolidated subsidiaries”) to
permanent equity (labeled as “Noncontrolling interests”) pertaining to
noncontrolling interests that do not contain a redemption feature; and (ii)
renamed temporary equity as “Redeemable noncontrolling interests” and recorded
an approximately $45 million increase to redeemable noncontrolling interests
with a corresponding decrease to retained earnings in our Consolidated Balance
Sheet. The resulting $57 million of redeemable noncontrolling
interests as of November 1, 2009 represents management’s estimate of the
aggregate Redemption Amount of all Put Rights that we would be required to pay
of which approximately $25 million is redeemable at fair value and approximately
$32 million is redeemable based solely on a multiple of future
earnings. The actual Redemption Amount will likely be
different. See Note 12, Redeemable Noncontrolling Interests, for
additional information as well as our Consolidated Statements of Shareholders’
Equity and Comprehensive Income, which have been retrospectively
adjusted.
37
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued new guidance which defines fair
value, establishes a framework for measuring fair value, and requires expanded
disclosures about fair value measurements. This guidance is included
in ASC 820, “Fair Value Measurements and Disclosures.” In February
2008, the FASB issued additional guidance which delayed the effective date by
one year for nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring
basis. These nonfinancial assets and liabilities include items such
as goodwill, other intangible assets, and property, plant and equipment that are
measured at fair value resulting from impairment, if deemed
necessary. We adopted the provisions of this guidance related to
nonfinancial assets and liabilities on a prospective basis as of the beginning
of fiscal 2010, or November 1, 2009. The adoption did not have a
material effect on our results of operations, financial position or cash
flows.
In
December 2007, the FASB issued new guidance for business combinations that
retains the fundamental requirements of previous guidance that the acquisition
method of accounting (formerly the “purchase accounting” method) be used for all
business combinations and for an acquirer to be identified for each business
combination. However, the new guidance changes the approach of
applying the acquisition method in a number of significant areas, including that
acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value as of the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset as of the acquisition date; restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. Further, any contingent consideration will be recognized as
a liability at fair value as of the acquisition date with subsequent fair value
adjustments recorded in operations. Contingent consideration was
previously accounted for as an additional cost of the respective acquired entity
when paid. We adopted the new guidance (which is included in ASC 805,
“Business Combinations”) on a prospective basis as of the beginning of fiscal
2010 for all business combinations consummated on or after November 1,
2009. The adoption did not have a material effect on our results of
operations, financial position or cash flows.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures
About Fair Value Measurements,” which requires new disclosures regarding
transfers in and out of Level 1 and Level 2 fair value measurements and more
detailed information of activity in Level 3 fair value
measurements. We adopted ASU 2010-06 as of the beginning of the
second quarter of fiscal 2010, except the additional Level 3 disclosures,
which are effective in fiscal years beginning after December 15, 2010, or as of
fiscal 2012 for us. The adoption did not have a material effect on
our results of operations, financial position or cash flows. The
Company will make the additional Level 3 disclosures, if applicable, as of the
date of adoption.
In
December 2010, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 10-G,
“Disclosure of Supplementary Pro Forma Information for Business
Combinations.” Under EITF Issue 10-G, supplemental pro forma
information disclosures pertaining to acquisitions should be presented as if the
business combination(s) occurred as of the beginning of the prior annual period
when comparative financial statements are presented. EITF Issue 10-G
is effective for business combinations consummated in periods beginning after
December 15, 2010, or in the second quarter of fiscal 2011 for
HEICO. Early adoption is permitted. We will make the
required disclosures prospectively as of the date of the adoption for any
material business combinations or series of immaterial business combinations
that are material in the aggregate.
38
Forward-Looking
Statements
Certain statements in this report
constitute “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements contained
herein that are not clearly historical in nature may be forward-looking and the
words “anticipate,” “believe,” “expect,” “estimate” and similar expressions are
generally intended to identify forward-looking statements. Any
forward-looking statements contained herein, in press releases, written
statements or other documents filed with the Securities and Exchange Commission
or in communications and discussions with investors and analysts in the normal
course of business through meetings, phone calls and conference calls,
concerning our operations, economic performance and financial condition are
subject to 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:
|
|
·
|
Lower
demand for commercial air travel or airline fleet changes, which could
cause lower demand for our goods and
services;
|
|
|
·
|
Product
specification costs and requirements, which could cause an increase to our
costs to complete contracts;
|
|
|
·
|
Governmental
and regulatory demands, export policies and restrictions, reductions in
defense, space or homeland security spending by U.S. and/or foreign
customers or competition from existing and new competitors, which could
reduce our sales;
|
|
|
·
|
Our
ability to introduce new products and product pricing levels, which could
reduce our sales or sales growth;
and
|
|
|
·
|
Our
ability to make acquisitions and achieve operating synergies from acquired
businesses, customer credit risk, interest and income tax rates and
economic conditions within and outside of the aviation, defense, space,
medical, telecommunication and electronic industries, which could
negatively impact our costs and
revenues.
|
For further information on these and
other factors that potentially could materially affect our financial results,
see Item 1A, Risk Factors. 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 we
have exposure is interest rate risk, mainly related to our revolving credit
facility, which has variable interest rates. Interest rate risk
associated with our variable rate debt is the potential increase in interest
expense from an increase in interest rates. Periodically, we enter
into interest rate swap agreements to manage our interest expense. We
did not have any interest rate swap agreements in effect as of October 31,
2010. Based on our aggregate outstanding variable rate debt balance
of $14 million as of October 31, 2010, a hypothetical 10% increase in interest
rates would not have a material effect on our results of operations, financial
position or cash flows.
39
We maintain a portion of our 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, 2010 would not have a material
effect on our results of operations, financial position or cash
flows.
We are also exposed to foreign currency
exchange rate fluctuations on the United States dollar value of our foreign
currency denominated transactions, which are principally in Canadian dollar and
British pound sterling. A hypothetical 10% weakening in the exchange
rate of the Canadian dollar or British pound sterling to the United States
dollar as of October 31, 2010 would not have a material effect on our results of
operations, financial position or cash flows.
40
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
HEICO
CORPORATION AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
42
|
|
|
|
|
Consolidated
Balance Sheets as of October 31, 2010 and 2009
|
44
|
|
|
|
|
Consolidated
Statements of Operations for the years ended October 31,
2010,
|
|
|
2009
and 2008
|
45
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
|
|
for
the years ended October 31, 2010, 2009 and 2008
|
46
|
|
Consolidated
Statements of Cash Flows for the years ended October 31,
2010,
|
|
|
2009
and 2008
|
48
|
|
Notes
to Consolidated Financial Statements
|
49
|
|
Financial
Statement Schedule II, Valuation and Qualifying Accounts for
the
|
|
|
years
ended October 31, 2010, 2009 and 2008
|
87
|
41
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, 2010 and 2009, 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, 2010. Our audits also included the financial statement schedule listed
in the Index at Item 15. We also have audited the Company’s internal
control over financial reporting as of October 31, 2010, 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 these financial statements and the financial statement schedule,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule and an opinion
on the Company’s internal control over financial reporting 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 and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe
that our audits provide 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.
42
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of HEICO Corporation and
subsidiaries as of October 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2010, 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. Also, in our opinion,
the Company maintained, in all material respects, effective internal control
over financial reporting as of October 31, 2010, based on the criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As
discussed in Note 1 to the consolidated financial statements, the Company
retrospectively changed its method of accounting for noncontrolling interests to
adopt new accounting guidance contained in Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, and FASB ASC
480, Distinguishing
Liabilities from Equity.
/s/
DELOITTE & TOUCHE LLP
Certified
Public Accountants
Miami,
Florida
December
22, 2010
43
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
As of October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 6,543,000 | $ | 7,167,000 | ||||
|
Accounts
receivable, net
|
91,815,000 | 77,864,000 | ||||||
|
Inventories,
net
|
138,215,000 | 137,585,000 | ||||||
|
Prepaid
expenses and other current assets
|
3,769,000 | 4,290,000 | ||||||
|
Deferred
income taxes
|
18,907,000 | 16,671,000 | ||||||
|
Total
current assets
|
259,249,000 | 243,577,000 | ||||||
|
Property,
plant and equipment, net
|
59,003,000 | 60,528,000 | ||||||
|
Goodwill
|
385,016,000 | 365,243,000 | ||||||
|
Intangible
assets, net
|
49,487,000 | 41,588,000 | ||||||
|
Other
assets
|
28,888,000 | 21,974,000 | ||||||
|
Total
assets
|
$ | 781,643,000 | $ | 732,910,000 | ||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 148,000 | $ | 237,000 | ||||
|
Trade
accounts payable
|
28,604,000 | 26,978,000 | ||||||
|
Accrued
expenses and other current liabilities
|
52,101,000 | 36,978,000 | ||||||
|
Income
taxes payable
|
979,000 | 1,320,000 | ||||||
|
Total
current liabilities
|
81,832,000 | 65,513,000 | ||||||
|
Long-term
debt, net of current maturities
|
14,073,000 | 55,194,000 | ||||||
|
Deferred
income taxes
|
45,308,000 | 41,340,000 | ||||||
|
Other
long-term liabilities
|
30,556,000 | 23,268,000 | ||||||
|
Total
liabilities
|
171,769,000 | 185,315,000 | ||||||
|
Commitments
and contingencies (Notes 2 and 16)
|
||||||||
|
Redeemable
noncontrolling interests (Note 12)
|
55,048,000 | 56,937,000 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
Stock, $.01 par value per share; 10,000,000 shares
|
||||||||
|
authorized;
300,000 shares designated as Series B Junior
|
||||||||
|
Participating
Preferred Stock and 300,000 shares designated
|
||||||||
|
as
Series C Junior Participating Preferred Stock; none issued
|
¾ | ¾ | ||||||
|
Common
Stock, $.01 par value per share; 30,000,000 shares
authorized;
|
||||||||
|
13,126,005
and 13,011,426 shares issued and outstanding
|
131,000 | 104,000 | ||||||
|
Class
A Common Stock, $.01 par value per share; 30,000,000
|
||||||||
|
shares
authorized; 19,863,572 and 19,641,543 shares issued
|
||||||||
|
and
outstanding
|
199,000 | 157,000 | ||||||
|
Capital
in excess of par value
|
227,993,000 | 224,625,000 | ||||||
|
Accumulated
other comprehensive loss
|
(124,000 | ) | (1,381,000 | ) | ||||
|
Retained
earnings
|
240,913,000 | 189,485,000 | ||||||
|
Total
HEICO shareholders’ equity
|
469,112,000 | 412,990,000 | ||||||
|
Noncontrolling
interests
|
85,714,000 | 77,668,000 | ||||||
|
Total
shareholders’ equity
|
554,826,000 | 490,658,000 | ||||||
|
Total
liabilities and equity
|
$ | 781,643,000 | $ | 732,910,000 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
44
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year ended October 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net
sales
|
$ | 617,020,000 | $ | 538,296,000 | $ | 582,347,000 | ||||||
|
Operating
costs and expenses:
|
||||||||||||
|
Cost
of sales
|
394,673,000 | 357,285,000 | 371,852,000 | |||||||||
|
Selling,
general and administrative expenses
|
113,174,000 | 92,756,000 | 104,707,000 | |||||||||
|
Total
operating costs and expenses
|
507,847,000 | 450,041,000 | 476,559,000 | |||||||||
|
Operating
income
|
109,173,000 | 88,255,000 | 105,788,000 | |||||||||
|
Interest
expense
|
(508,000 | ) | (615,000 | ) | (2,314,000 | ) | ||||||
|
Other
income (expense)
|
390,000 | 205,000 | (637,000 | ) | ||||||||
|
Income
before income taxes and noncontrolling interests
|
109,055,000 | 87,845,000 | 102,837,000 | |||||||||
|
Income
tax expense
|
36,700,000 | 28,000,000 | 35,450,000 | |||||||||
|
Net
income from consolidated operations
|
72,355,000 | 59,845,000 | 67,387,000 | |||||||||
|
Less:
Net income attributable to noncontrolling interests
|
17,417,000 | 15,219,000 | 18,876,000 | |||||||||
|
Net
income attributable to HEICO
|
$ | 54,938,000 | $ | 44,626,000 | $ | 48,511,000 | ||||||
|
Net
income per share attributable to HEICO shareholders (Note
13):
|
||||||||||||
|
Basic
|
$ | 1.67 | $ | 1.36 | $ | 1.48 | ||||||
|
Diluted
|
$ | 1.62 | $ | 1.32 | $ | 1.42 | ||||||
|
Weighted
average number of common shares outstanding:
|
||||||||||||
|
Basic
|
32,832,508 | 32,755,999 | 32,886,424 | |||||||||
|
Diluted
|
33,770,830 | 33,780,039 | 34,054,195 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
45
HEICO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
|
HEICO Shareholders' Equity
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Redeemable
|
Class A
|
Capital in
|
Other
|
Total
|
||||||||||||||||||||||||||||
|
Noncontrolling
|
Common
|
Common
|
||||||||||||||||||||||||||||||