HEI 07.31.2012 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2012
OR
|
| | |
¨ | | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _______
Commission File Number: 1-4604
HEICO CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
Florida | | 65-0341002 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
3000 Taft Street, Hollywood, Florida | | 33021 |
(Address of principal executive offices) | | (Zip Code) |
(954) 987-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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 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 ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the registrant’s classes of common stock as of August 21, 2012 is as follows:
|
| | | |
Common Stock, $.01 par value | 21,331,762 |
| shares |
Class A Common Stock, $.01 par value | 31,379,204 |
| shares |
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
|
| | | |
| | | Page |
Part I. | Financial Information | | |
| | | |
Item 1. | | | |
| | | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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Part II. | Other Information | | |
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Item 2. | | | |
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Item 6. | | | |
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PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data)
|
| | | | | | | | |
| | July 31, 2012 | | October 31, 2011 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | |
| $13,965 |
| |
| $17,500 |
|
Accounts receivable, net | | 113,747 |
| | 106,414 |
|
Inventories, net | | 192,887 |
| | 164,967 |
|
Prepaid expenses and other current assets | | 7,478 |
| | 5,471 |
|
Deferred income taxes | | 27,078 |
| | 22,286 |
|
Total current assets | | 355,155 |
| | 316,638 |
|
| | | | |
Property, plant and equipment, net | | 78,828 |
| | 67,074 |
|
Goodwill | | 531,594 |
| | 443,402 |
|
Intangible assets, net | | 147,210 |
| | 78,157 |
|
Deferred income taxes | | 2,538 |
| | 2,374 |
|
Other assets | | 43,874 |
| | 33,424 |
|
Total assets | |
| $1,159,199 |
| |
| $941,069 |
|
| | | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | | |
Current maturities of long-term debt | |
| $304 |
| |
| $335 |
|
Trade accounts payable | | 41,746 |
| | 43,547 |
|
Accrued expenses and other current liabilities | | 68,678 |
| | 76,376 |
|
Income taxes payable | | 3,678 |
| | 3,132 |
|
Total current liabilities | | 114,406 |
| | 123,390 |
|
| | | | |
Long-term debt, net of current maturities | | 152,615 |
| | 39,823 |
|
Deferred income taxes | | 91,351 |
| | 58,899 |
|
Other long-term liabilities | | 51,152 |
| | 33,373 |
|
Total liabilities | | 409,524 |
| | 255,485 |
|
Commitments and contingencies (Note 12) | | | | |
| | | | |
Redeemable noncontrolling interests (Note 9) | | 59,096 |
| | 65,430 |
|
Shareholders’ equity: | | | | |
Preferred Stock, $.01 par value per share; 10,000 shares authorized; 300 shares designated as Series B Junior Participating Preferred Stock and 300 shares designated as Series C Junior Participating Preferred Stock; none issued | | — |
| | — |
|
Common Stock, $.01 par value per share; 75,000 shares authorized; 21,332 and 21,318 shares issued and outstanding | | 213 |
| | 171 |
|
Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 31,378 and 31,278 shares issued and outstanding | | 314 |
| | 250 |
|
Capital in excess of par value | | 242,125 |
| | 226,120 |
|
Deferred compensation obligation | | 522 |
| | 522 |
|
HEICO stock held by irrevocable trust | | (522 | ) | | (522 | ) |
Accumulated other comprehensive (loss) income | | (7,380 | ) | | 3,033 |
|
Retained earnings | | 355,163 |
| | 299,497 |
|
Total HEICO shareholders’ equity | | 590,435 |
| | 529,071 |
|
Noncontrolling interests | | 100,144 |
| | 91,083 |
|
Total shareholders’ equity | | 690,579 |
| | 620,154 |
|
Total liabilities and equity | |
| $1,159,199 |
| |
| $941,069 |
|
| | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2012 | | 2011 | | 2012 | | 2011 |
| | | | | | | | |
Net sales | |
| $654,938 |
| |
| $555,972 |
| |
| $225,969 |
| |
| $197,267 |
|
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Cost of sales | | 417,240 |
| | 355,850 |
| | 141,717 |
| | 127,442 |
|
Selling, general and administrative expenses | | 120,010 |
| | 99,131 |
| | 41,797 |
| | 34,119 |
|
| | | | | | | | |
Total operating costs and expenses | | 537,250 |
| | 454,981 |
| | 183,514 |
| | 161,561 |
|
| | | | | | | | |
Operating income | | 117,688 |
| | 100,991 |
| | 42,455 |
| | 35,706 |
|
| | | | | | | | |
Interest expense | | (1,816 | ) | | (99 | ) | | (552 | ) | | (7 | ) |
Other income (expense) | | 190 |
| | 149 |
| | (131 | ) | | (57 | ) |
| | | | | | | | |
Income before income taxes and noncontrolling interests | | 116,062 |
| | 101,041 |
| | 41,772 |
| | 35,642 |
|
| | | | | | | | |
Income tax expense | | 38,700 |
| | 30,000 |
| | 13,100 |
| | 9,250 |
|
| | | | | | | | |
Net income from consolidated operations | | 77,362 |
| | 71,041 |
| | 28,672 |
| | 26,392 |
|
| | | | | | | | |
Less: Net income attributable to noncontrolling interests | | 16,006 |
| | 16,735 |
| | 5,544 |
| | 5,990 |
|
| | | | | | | | |
Net income attributable to HEICO | |
| $61,356 |
| |
| $54,306 |
| |
| $23,128 |
| |
| $20,402 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.17 |
| |
| $1.05 |
| |
| $.44 |
| |
| $.39 |
|
Diluted | |
| $1.15 |
| |
| $1.02 |
| |
| $.43 |
| |
| $.38 |
|
| | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | |
Basic | | 52,651 |
| | 51,965 |
| | 52,695 |
| | 52,161 |
|
Diluted | | 53,290 |
| | 53,099 |
| | 53,288 |
| | 53,212 |
|
| | | | | | | | |
Cash dividends per share | |
| $.108 |
| |
| $.086 |
| |
| $.060 |
| |
| $.048 |
|
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME – UNAUDITED
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | HEICO Shareholders' Equity | | | | |
| Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2011 |
| $65,430 |
| |
| $171 |
| |
| $250 |
| |
| $226,120 |
| |
| $522 |
| |
| ($522 | ) | |
| $3,033 |
| |
| $299,497 |
| |
| $91,083 |
| |
| $620,154 |
|
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | 6,945 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 61,356 |
| | 9,061 |
| | 70,417 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,264 | ) | | — |
| | — |
| | (10,264 | ) |
Total comprehensive income | 6,945 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,264 | ) | | 61,356 |
| | 9,061 |
| | 60,153 |
|
Cash dividends ($.108 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,689 | ) | | — |
| | (5,689 | ) |
Five-for-four common stock split | — |
| | 42 |
| | 63 |
| | (105 | ) | | — |
| | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 13,144 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,144 |
|
Stock option compensation expense | — |
| | — |
| | — |
| | 2,888 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,888 |
|
Proceeds from stock option exercises | — |
| | — |
| | 1 |
| | 386 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 387 |
|
Acquisitions of noncontrolling interests | (7,616 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (6,794 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Redemptions of common stock related to stock options exercises | — |
| | — |
| | — |
| | (307 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (307 | ) |
Adjustments to redemption amount of redeemable noncontrolling interests | (93 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 93 |
| | — |
| | 93 |
|
Other | 1,224 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (149 | ) | | (78 | ) | | — |
| | (228 | ) |
Balances as of July 31, 2012 |
| $59,096 |
| |
| $213 |
| |
| $314 |
| |
| $242,125 |
| |
| $522 |
| |
| ($522 | ) | |
| ($7,380 | ) | |
| $355,163 |
| |
| $100,144 |
| |
| $690,579 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | HEICO Shareholders' Equity | | | | |
| Redeemable Noncontrolling Interests | | Common Stock | | Class A Common Stock | | Capital in Excess of Par Value | | Deferred Compensation Obligation | | HEICO Stock Held by Irrevocable Trust | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2010 |
| $55,048 |
| |
| $131 |
| |
| $199 |
| |
| $227,993 |
| |
| $— |
| |
| $— |
| |
| ($124 | ) | |
| $240,913 |
| |
| $85,714 |
| |
| $554,826 |
|
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | 8,507 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 54,306 |
| | 8,228 |
| | 62,534 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,680 |
| | — |
| | — |
| | 1,680 |
|
Total comprehensive income | 8,507 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,680 |
| | 54,306 |
| | 8,228 |
| | 64,214 |
|
Cash dividends ($.086 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,494 | ) | | — |
| | (4,494 | ) |
Five-for-four common stock split | — |
| | 33 |
| | 50 |
| | (83 | ) | | — |
| | — |
| | — |
| | (102 | ) | | — |
| | (102 | ) |
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 7,704 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,704 |
|
Proceeds from stock option exercises | — |
| | 3 |
| | 1 |
| | 2,084 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,088 |
|
Stock option compensation expense | — |
| | — |
| | — |
| | 1,813 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,813 |
|
Acquisitions of noncontrolling interests | (7,241 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (6,328 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Redemptions of common stock related to stock option exercises | — |
| | — |
| | — |
| | (5,432 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5,432 | ) |
Noncontrolling interests assumed related to acquisition | 5,612 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Adjustments to redemption amount of redeemable noncontrolling interests | (1,619 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,619 |
| | — |
| | 1,619 |
|
Other | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Balances as of July 31, 2011 |
| $53,979 |
| |
| $167 |
| |
| $250 |
| |
| $234,078 |
| |
| $— |
| |
| $— |
| |
| $1,556 |
| |
| $292,242 |
| |
| $93,943 |
| |
| $622,236 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
|
| | | | | | | | |
| | Nine months ended July 31, |
| | 2012 | | 2011 |
Operating Activities: | | | | |
Net income from consolidated operations | |
| $77,362 |
| |
| $71,041 |
|
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 22,175 |
| | 13,426 |
|
Deferred income tax (benefit) provision | | (1,191 | ) | | 422 |
|
Tax benefit from stock option exercises | | 13,144 |
| | 7,704 |
|
Excess tax benefit from stock option exercises | | (12,091 | ) | | (6,347 | ) |
Stock option compensation expense | | 2,888 |
| | 1,813 |
|
Increase in value of contingent consideration | | 143 |
| | — |
|
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Decrease (increase) in accounts receivable | | 1,212 |
| | (3,468 | ) |
Increase in inventories | | (13,171 | ) | | (8,053 | ) |
Increase in prepaid expenses and other current assets | | (1,775 | ) | | (2,083 | ) |
(Decrease) increase in trade accounts payable | | (3,603 | ) | | 2,184 |
|
(Decrease) increase in accrued expenses and other current liabilities | | (5,891 | ) | | 6,160 |
|
(Decrease) increase in income taxes payable | | (1,291 | ) | | 1,996 |
|
Other | | 392 |
| | 203 |
|
Net cash provided by operating activities | | 78,303 |
| | 84,998 |
|
| | | | |
Investing Activities: | | | | |
Acquisitions, net of cash acquired | | (171,501 | ) | | (29,215 | ) |
Capital expenditures | | (12,381 | ) | | (5,710 | ) |
Other | | (144 | ) | | 197 |
|
Net cash used in investing activities | | (184,026 | ) | | (34,728 | ) |
| | | | |
Financing Activities: | | | | |
Borrowings on revolving credit facility | | 173,000 |
| | 28,000 |
|
Payments on revolving credit facility | | (60,000 | ) | | (42,000 | ) |
Excess tax benefit from stock option exercises | | 12,091 |
| | 6,347 |
|
Acquisitions of noncontrolling interests | | (7,616 | ) | | (7,241 | ) |
Distributions to noncontrolling interests | | (6,794 | ) | | (6,328 | ) |
Redemptions of common stock related to stock option exercises | | (307 | ) | | (5,432 | ) |
Cash dividends paid | | (5,689 | ) | | (4,494 | ) |
Revolving credit facility issuance costs | | (3,028 | ) | | — |
|
Proceeds from stock option exercises | | 387 |
| | 2,088 |
|
Other | | 679 |
| | (233 | ) |
Net cash provided by (used in) financing activities | | 102,723 |
| | (29,293 | ) |
| | | | |
Effect of exchange rate changes on cash | | (535 | ) | | 68 |
|
| | | | |
Net (decrease) increase in cash and cash equivalents | | (3,535 | ) | | 21,045 |
|
Cash and cash equivalents at beginning of year | | 17,500 |
| | 6,543 |
|
Cash and cash equivalents at end of period | |
| $13,965 |
| |
| $27,588 |
|
| | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
HEICO CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2011. The October 31, 2011 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations and statements of cash flows for such interim periods presented. The results of operations for the nine months ended July 31, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year.
Stock Split
In March 2012, 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 25, 2012 in the form of a 25% stock dividend distributed to shareholders of record as of April 13, 2012. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures About Fair Value Measurements,” which requires additional disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements and more detailed information of activity in Level 3 fair value measurements. The Company adopted ASU 2010-06 as of the beginning of fiscal 2010, except the additional Level 3 disclosures, which were adopted in the first quarter of fiscal 2012. ASU 2010-06 affects financial statement disclosures only and the Company will make the required additional disclosures as applicable.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends current fair value measurement and disclosure guidance to converge with International Financial Reporting Standards and provides increased transparency around valuation inputs and investment
categorization. ASU 2011-04 also requires new disclosures about qualitative and quantitative information regarding the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The Company adopted ASU 2011-04 in the second quarter of fiscal 2012, resulting in only expanded fair value disclosures and no impact on the Company’s results of operations, financial position or cash flows.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which requires the presentation of total comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate, but consecutive statements. ASU 2011-05 eliminates the option to present other comprehensive income and its components in the statement of shareholders’ equity. ASU 2011-05 must be applied retroactively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011, or in the first quarter of fiscal 2013 for HEICO. The Company is currently evaluating which presentation option it will elect, but the adoption of these provisions will have no effect on its results of operations, financial position or cash flows.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which is intended to reduce the complexity and cost of performing a quantitative test for impairment of goodwill by permitting an entity the option to perform a qualitative evaluation about the likelihood of goodwill impairment in order to determine whether it should calculate the fair value of a reporting unit. The update also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, or in fiscal 2013 for HEICO’s annual impairment test. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.
In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which is intended to reduce the complexity and cost of performing a quantitative test for impairment of indefinite-lived intangible assets by permitting an entity the option to perform a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired in order to determine whether it should calculate the fair value of the asset. The update also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, or in fiscal 2013 for HEICO’s annual impairment test. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or cash flows.
2. ACQUISITIONS
On November 22, 2011, the Company, through its HEICO Electronic Technologies Corp. (“HEICO Electronic”) subsidiary, acquired Switchcraft, Inc. (“Switchcraft”) through the purchase of all of the stock of Switchcraft’s parent company, Switchcraft Holdco, Inc., for approximately $143.2 million, net of cash acquired. The purchase price of this acquisition was paid in cash, principally using proceeds from the Company’s revolving credit facility. Switchcraft is a leading designer and manufacturer of high performance, high reliability and harsh environment electronic connectors and other interconnect products. This acquisition is consistent with HEICO’s practice of acquiring outstanding, niche designers and manufacturers of critical components in the aerospace and electronic industries and will further enable the Company to broaden its product offerings, technologies and customer base.
The following table summarizes the allocation of the purchase price of Switchcraft to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands).
|
| | | | |
Assets acquired: | | |
Goodwill | |
| $76,581 |
|
Identifiable intangible assets | | 72,500 |
|
Inventories | | 13,086 |
|
Property, plant and equipment | | 10,166 |
|
Accounts receivable | | 6,123 |
|
Other assets | | 1,570 |
|
Total assets acquired, excluding cash | |
| $180,026 |
|
| | |
Liabilities assumed: | | |
Deferred income taxes | |
| $30,448 |
|
Accrued expenses | | 2,252 |
|
Income taxes payable | | 2,016 |
|
Accounts payable | | 1,889 |
|
Other liabilities | | 258 |
|
Total liabilities assumed | |
| $36,863 |
|
Net assets acquired, excluding cash | |
| $143,163 |
|
The allocation of the purchase price to the tangible and identifiable assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of Switchcraft and the value of its assembled workforce that do not qualify for separate recognition. The operating results of Switchcraft were included in the Company’s results of operations from the effective acquisition date. The Company’s consolidated net sales and net income attributable to HEICO for the nine months ended July 31, 2012, includes approximately $40.1 million and $2.5 million, respectively, from the acquisition of Switchcraft. The Company’s consolidated net sales and net income
attributable to HEICO for the three months ended July 31, 2012, includes approximately $14.6 million and $1.0 million, respectively, from the acquisition of Switchcraft.
The following table presents unaudited pro forma financial information for the nine and three months ended July 31, 2011 as if the acquisition of Switchcraft had occurred as of November 1, 2010 (in thousands).
|
| | | | | | | | |
| | Nine months ended | | Three months ended |
| | July 31, 2011 | | July 31, 2011 |
Net sales | |
| $600,593 |
| |
| $212,480 |
|
Net income from consolidated operations | |
| $74,877 |
| |
| $27,944 |
|
Net income attributable to HEICO | |
| $58,142 |
| |
| $21,954 |
|
Net income per share attributable to HEICO shareholders: | | | | |
Basic | |
| $1.12 |
| |
| $.42 |
|
Diluted | |
| $1.09 |
| |
| $.41 |
|
The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2010. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to intangible assets acquired, increased interest expense associated with borrowings to finance the acquisition and inventory purchase accounting adjustments charged to cost of sales as the inventory is sold. Had the acquisition been consummated as of November 1, 2010, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the nine and three months ended July 31, 2012 would not have been materially different than the reported amounts.
In March 2012, the Company, through HEICO Electronic, acquired the business and substantially all of the assets of Ramona Research, Inc. (“Ramona Research”). Ramona Research designs and manufactures RF and microwave amplifiers, transmitters and receivers primarily used to support military communications on unmanned aerial systems, other aircraft, helicopters and ground-based data/communications systems. The purchase price of this acquisition was paid in cash principally using proceeds from the Company’s revolving credit facility. The total consideration includes an accrual of approximately $10.8 million representing the fair value of contingent consideration in aggregate that the Company may be obligated to pay should Ramona Research meet certain earnings objectives during each of the first five years following the acquisition. The maximum amount of contingent consideration that the Company could be required to pay is $14.6 million in aggregate. See Note 7, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation.
In April 2012, the Company, through a subsidiary of HEICO Electronic, acquired certain aerospace assets of Moritz Aerospace, Inc. (“Moritz Aerospace”) in an aerospace product line
acquisition. The Moritz Aerospace product line designs and manufactures next generation wireless cabin control systems, solid state power distribution and management systems and fuel level sensing systems for business jets and for general aviation, as well as for the military/defense market segments. The purchase price of this acquisition was paid using cash provided by operating activities.
The total consideration and related allocation to the tangible and identifiable intangible assets acquired and liabilities assumed for the acquisitions of Ramona Research and Moritz Aerospace is not material or significant to the Company’s condensed consolidated financial statements. The operating results of Ramona Research and Moritz Aerospace were included in the Company’s results of operations from the effective acquisition dates. The amount of net sales and earnings of Ramona Research and Moritz Aerospace included in the Condensed Consolidated Statements of Operations is not material. Had the Ramona Research and Moritz Aerospace acquisitions been consummated as of November 1, 2010, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the nine and three months ended July 31, 2012 and 2011 would not have been materially different than the reported amounts.
As part of the purchase agreements associated with certain prior year acquisitions, the Company may be obligated to pay additional purchase consideration based on the acquired subsidiary meeting certain earnings objectives following the acquisition. For acquisitions consummated prior to fiscal 2010, the Company accrues an estimate of additional purchase consideration when the earnings objectives are met. During the third quarter of fiscal 2012, the Company, through HEICO Electronic, paid $10.1 million of such additional purchase consideration using cash provided by operating activities. During the second and third quarters of fiscal 2011, the Company, through HEICO Electronic, paid $4.1 million and $1.3 million, respectively, of such additional purchase consideration using cash provided by operating activities. During the third quarter of fiscal 2011, HEICO Electronic accrued $1.2 million of additional purchase consideration related to a prior year acquisition for which the earnings objectives were met during fiscal 2011. The amount paid in fiscal 2012 and the amounts paid and accrued in fiscal 2011 were based on a multiple of the respective subsidiary’s earnings relative to target and were not contingent upon the former shareholders of the respective acquired entity remaining employed by the Company or providing future services to the Company. Accordingly, these amounts represent an additional cost of the respective entity recorded as additional goodwill.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
|
| | | | | | | | |
(in thousands) | | July 31, 2012 | | October 31, 2011 |
Accounts receivable | |
| $116,232 |
| |
| $109,081 |
|
Less: Allowance for doubtful accounts | | (2,485 | ) | | (2,667 | ) |
Accounts receivable, net | |
| $113,747 |
| |
| $106,414 |
|
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
|
| | | | | | | | |
(in thousands) | | July 31, 2012 | | October 31, 2011 |
Costs incurred on uncompleted contracts | |
| $6,179 |
| |
| $4,443 |
|
Estimated earnings | | 5,524 |
| | 4,206 |
|
| | 11,703 |
| | 8,649 |
|
Less: Billings to date | | (6,867 | ) | | (4,876 | ) |
| |
| $4,836 |
| |
| $3,773 |
|
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings) | |
| $4,836 |
| |
| $3,773 |
|
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) | | — |
| | — |
|
| |
| $4,836 |
| |
| $3,773 |
|
The percentage of the Company’s net sales recognized under the percentage-of-completion method was not material for the nine and three months ended July 31, 2012 and 2011. Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the nine and three months ended July 31, 2012 and 2011.
Inventories
|
| | | | | | | | |
(in thousands) | | July 31, 2012 | | October 31, 2011 |
Finished products | |
| $97,451 |
| |
| $86,487 |
|
Work in process | | 20,356 |
| | 19,708 |
|
Materials, parts, assemblies and supplies | | 67,514 |
| | 52,173 |
|
Contracts in process | | 8,354 |
| | 8,291 |
|
Less: Billings to date | | (788 | ) | | (1,692 | ) |
Inventories, net of valuation reserves | |
| $192,887 |
| |
| $164,967 |
|
Contracts in process represents accumulated capitalized costs associated with fixed price
contracts for which revenue is recognized on the completed-contract method. Related progress billings and customer advances (“billings to date”) are classified as a reduction to contracts in process, if any, and any excess is included in accrued expenses and other liabilities.
Property, Plant and Equipment
|
| | | | | | | | |
(in thousands) | | July 31, 2012 | | October 31, 2011 |
Land | |
| $4,497 |
| |
| $3,825 |
|
Buildings and improvements | | 53,504 |
| | 46,892 |
|
Machinery, equipment and tooling | | 105,421 |
| | 94,297 |
|
Construction in progress | | 5,733 |
| | 3,671 |
|
| | 169,155 |
| | 148,685 |
|
Less: Accumulated depreciation and amortization | | (90,327 | ) | | (81,611 | ) |
Property, plant and equipment, net | |
| $78,828 |
| |
| $67,074 |
|
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $10.3 million and $9.6 million as of July 31, 2012 and October 31, 2011, respectively. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2012 and 2011 was $2.1 million and $6.7 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2012 and 2011 was $1.0 million and $2.3 million, respectively. The decrease in customer rebates and credits principally reflects a reduction in the net sales volume of certain customers eligible for rebates as well as a reduction in associated rebate percentages.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has two operating segments: the Flight Support Group (“FSG”) and the Electronic Technologies Group (“ETG”). Changes in the carrying amount of goodwill by operating segment for the nine months ended July 31, 2012 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Segment | | Consolidated Totals |
| | FSG | | ETG | |
Balances as of October 31, 2011 | |
| $192,357 |
| |
| $251,045 |
| |
| $443,402 |
|
Goodwill acquired | | — |
| | 84,101 |
| | 84,101 |
|
Adjustments to goodwill | | — |
| | 10,145 |
| | 10,145 |
|
Foreign currency translation adjustments | | — |
| | (6,363 | ) | | (6,363 | ) |
Other | | 309 |
| | — |
| | 309 |
|
Balances as of July 31, 2012 | |
| $192,666 |
| |
| $338,928 |
| |
| $531,594 |
|
The goodwill acquired pertains to the current year acquisitions described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed. The adjustments to goodwill during fiscal 2012 represent additional purchase price consideration paid relating to a prior year acquisition for which the earnings objectives were met in fiscal 2012. See Note 2, Acquisitions, for additional information regarding additional contingent purchase consideration. The Company estimates that approximately $13 million of the goodwill recognized in fiscal 2012 will be deductible for income tax purposes.
Identifiable intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of July 31, 2012 | | As of October 31, 2011 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
| $98,313 |
| |
| ($22,318 | ) | |
| $75,995 |
| |
| $51,934 |
| |
| ($18,085 | ) | |
| $33,849 |
|
Intellectual property | | 38,164 |
| | (4,656 | ) | | 33,508 |
| | 18,493 |
| | (2,236 | ) | | 16,257 |
|
Licenses | | 2,900 |
| | (1,051 | ) | | 1,849 |
| | 2,900 |
| | (854 | ) | | 2,046 |
|
Non-compete agreements | | 1,338 |
| | (1,283 | ) | | 55 |
| | 1,364 |
| | (1,203 | ) | | 161 |
|
Patents | | 625 |
| | (357 | ) | | 268 |
| | 576 |
| | (313 | ) | | 263 |
|
Trade names | | 566 |
| | (308 | ) | | 258 |
| | 569 |
| | (224 | ) | | 345 |
|
| | 141,906 |
| | (29,973 | ) | | 111,933 |
| | 75,836 |
| | (22,915 | ) | | 52,921 |
|
Non-Amortizing Assets: | | | | | | | | | | | | |
Trade names | | 35,277 |
| | — |
| | 35,277 |
| | 25,236 |
| | — |
| | 25,236 |
|
| |
| $177,183 |
| |
| ($29,973 | ) | |
| $147,210 |
| |
| $101,072 |
| |
| ($22,915 | ) | |
| $78,157 |
|
The increase in the gross carrying amount of customer relationships, intellectual property and non-amortizing trade names as of July 31, 2012 compared to October 31, 2011 principally relates to such intangible assets recognized in connection with acquisitions made during fiscal 2012 (see Note 2, Acquisitions). The weighted average amortization period of the customer relationships and intellectual property acquired is 10 years and 11 years, respectively.
Amortization expense related to intangible assets for the nine months ended July 31, 2012 and 2011 was $11.7 million and $5.4 million, respectively. Amortization expense related to intangible assets for the three months ended July 31, 2012 and 2011 was $4.2 million and $1.9 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2012 is estimated to be $4.2 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $16.1 million in fiscal 2013, $15.5 million in fiscal 2014, $14.0 million in fiscal 2015, $12.6 million in fiscal 2016, $12.0 million in fiscal 2017 and $37.5 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
| | | | | | | | |
| | July 31, 2012 | | October 31, 2011 |
Borrowings under revolving credit facility | |
| $149,000 |
| |
| $36,000 |
|
Capital lease and notes payable | | 3,919 |
| | 4,158 |
|
| | 152,919 |
| | 40,158 |
|
Less: Current maturities of long-term debt | | (304 | ) | | (335 | ) |
| |
| $152,615 |
| |
| $39,823 |
|
On December 14, 2011, the Company entered into a $670 million Revolving Credit Agreement (“New Credit Facility”) with a bank syndicate, which matures in December 2016. Under certain circumstances, the maturity of the New Credit Facility may be extended for two one-year periods. The New Credit Facility also includes a feature that will allow the Company to increase the New Credit Facility by $130 million, at its option, to become an $800 million facility through increased commitments from existing lenders or the addition of new lenders. The New Credit Facility may be used for working capital and general corporate needs of the Company, including capital expenditures and to finance acquisitions. The New Credit Facility replaced the $300 million Second Amended and Restated Revolving Credit Facility Agreement.
Advances under the New Credit Facility accrue interest at the Company’s choice of the “Base Rate” or the London Interbank Offered Rate (“LIBOR”) plus applicable margins (based on the Company’s ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, noncontrolling interests and non-cash charges, or “leverage ratio”). The Base Rate is the highest of (i) the Prime Rate; (ii) the Federal Funds rate plus .50% per annum; and (iii) the Adjusted LIBO Rate determined on a daily basis for an Interest Period of one month plus 1.00% per annum, as such capitalized terms are defined in the New Credit Facility. The applicable margins for LIBOR-based borrowings range from .75% to 2.25%. The applicable margins for Base Rate borrowings range from 0% to 1.25%. A fee is charged on the amount of the unused commitment ranging from .125% to .35% (depending on the Company’s leverage ratio). The New Credit Facility also includes a $50 million sublimit for borrowings made in foreign currencies, letters of credit and swingline borrowings. Outstanding principal, accrued and unpaid interest and other amounts payable under the New Credit Facility may be accelerated upon an event of default, as such events are described in the New Credit Facility. The New Credit Facility is unsecured and contains covenants that require, among other things, the maintenance of a total leverage ratio, a senior leverage ratio and a fixed charge coverage ratio. In the event the Company’s leverage ratio exceeds a specified level, the New Credit Facility would become secured by the capital stock owned in substantially all of the Company’s subsidiaries.
As of July 31, 2012 and October 31, 2011, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 1.3% and .9%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 2012, the Company was in compliance with all such covenants.
6. INCOME TAXES
As of July 31, 2012, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $1.8 million of which $1.2 million would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits for the nine months ended July 31, 2012 is as follows (in thousands):
|
| | | | |
Balance as of October 31, 2011 | |
| $1,834 |
|
Increases related to prior year tax positions | | 552 |
|
Decreases related to prior year tax positions | | (240 | ) |
Increases related to current year tax positions | | 216 |
|
Settlements | | (52 | ) |
Lapse of statutes of limitations | | (485 | ) |
Balance as of July 31, 2012 | |
| $1,825 |
|
There were no material changes in the liability for unrecognized tax positions resulting from tax positions taken during the current or a prior year, settlements with other taxing authorities or a lapse of applicable statutes of limitations. The accrual of interest and penalties related to the unrecognized tax benefits was not material for the nine months ended July 31, 2012. Further, the Company does not expect the total amount of unrecognized tax benefits to materially change in the next twelve months.
During the third quarter of fiscal 2012, the Company filed its fiscal 2011 U.S. federal and state tax returns and recognized an aggregate benefit, which increased net income attributable to HEICO by $.9 million, from higher fiscal 2011 research and development tax credits. The higher research and development tax credits reflect the finalization of a study of qualifying fiscal 2011 research and development activities and a reduction in the liability for gross unrecognized research and development related tax positions due to a lapse of the statute of limitations.
During the third quarter of fiscal 2011, the Company filed its fiscal 2010 U.S. federal and state tax returns and amended certain prior year state tax returns and recognized an aggregate benefit, which increased net income attributable to HEICO by $2.0 million, principally from state income apportionment updates ($.9 million) and higher research and development tax credits ($.9 million).
The Company's effective tax rate in the first nine months of fiscal 2012 increased to 33.3% from 29.7% in the first nine months of fiscal 2011. The effective tax rate for the first nine months of fiscal 2011 reflects the aforementioned benefit from state income apportionment updates recognized upon the filing of the Company’s fiscal 2010 state tax returns and the amendment of certain prior year state tax returns in the third quarter of fiscal 2011. The increase in the effective tax rate in fiscal 2012 is also due to the retroactive extension of Section 41 of the Internal Revenue Code, “Credit for Increasing Research Activities,” to cover the period from January 1, 2010 to December 31, 2011, which resulted in the recognition of an income tax credit for qualified research and development activities for the last ten months of fiscal 2010 in the first
quarter of fiscal 2011 and reduced the recognition of such income tax credit to just the first two months of qualifying research and development activities in fiscal 2012. In addition, the increase reflects a higher effective state income tax rate attributable to a fiscal 2012 acquisition and changes in certain state tax laws which impacted state apportionment factors. During fiscal 2011 and 2012, the Company purchased certain noncontrolling interests that also contributed to the comparative increase in the effective tax rate for the first nine months of fiscal 2012.
7. FAIR VALUE MEASUREMENTS
The following tables set forth by level within the fair value hierarchy, the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | | |
| | As of July 31, 2012 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Deferred compensation plans: | | | | | | | | |
Corporate owned life insurance | |
| $— |
| |
| $35,270 |
| |
| $— |
| |
| $35,270 |
|
Mutual funds | | 1,113 |
| | — |
| | — |
| | 1,113 |
|
Money market funds and cash | | 1,090 |
| | — |
| | — |
| | 1,090 |
|
Equity securities | | 936 |
| | — |
| | — |
| | 936 |
|
Other | | — |
| | 468 |
| | 577 |
| | 1,045 |
|
Total assets | |
| $3,139 |
| |
| $35,738 |
| |
| $577 |
| |
| $39,454 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent Consideration | |
| $— |
| |
| $— |
| |
| $10,921 |
| |
| $10,921 |
|
|
| | | | | | | | | | | | | | | | |
| | As of October 31, 2011 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Deferred compensation plans: | | | | | | | | |
Corporate owned life insurance | |
| $— |
| |
| $26,989 |
| |
| $— |
| |
| $26,989 |
|
Mutual funds | | 1,004 |
| | — |
| | — |
| | 1,004 |
|
Money market funds and cash | | 920 |
| | — |
| | — |
| | 920 |
|
Equity securities | | 1,150 |
| | — |
| | — |
| | 1,150 |
|
Other | | — |
| | 451 |
| | 573 |
| | 1,024 |
|
Total assets | |
| $3,074 |
| |
| $27,440 |
| |
| $573 |
| |
| $31,087 |
|
| | | | | | | | |
Liabilities: | |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
|
The Company maintains two non-qualified deferred compensation plans. The assets of the HEICO Corporation Leadership Compensation Plan (the “LCP”) principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company and are classified within Level 2 and are valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The majority of the assets of the Company’s other deferred compensation plan are principally invested in equity securities, mutual funds and money market funds that are classified within Level 1. A portion of the assets within the other deferred compensation plan is currently invested in a fund that invests in future and forward contracts, most of which are privately negotiated with counterparties without going through a public exchange and that use trading methods that are proprietary and confidential. These assets are therefore classified within Level 3 and are valued using a market approach with corresponding gains and losses reported within other income in the Company’s Condensed Consolidated Statements of Operations. The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $39.5 million as of July 31, 2012 and $31.1 million as of October 31, 2011, of which the LCP related assets were $35.3 million and $27.0 million as of July 31, 2012 and October 31, 2011, respectively. The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $39.0 million as of July 31, 2012 and $30.8 million as of October 31, 2011, of which the LCP related liability was $34.8 million and $26.7 million as of July 31, 2012 and October 31, 2011, respectively.
As part of the agreement to acquire a subsidiary by the ETG in the second quarter of fiscal 2012, the Company may be obligated to pay contingent consideration of up to $14.6 million in aggregate should the acquired entity meet certain earnings objectives during each of the first five years following the acquisition. The $10.8 million estimated fair value of the contingent consideration as of the acquisition date is classified within Level 3 and was determined using a probability-based scenario analysis approach. Under this method, a set of discrete potential future subsidiary earnings was determined using internal estimates based on various revenue growth rate assumptions for each scenario that ranged from a compound annual growth rate of (8%) to 20%. A probability of likelihood was assigned to each discrete potential future earnings estimate and the resultant contingent consideration was calculated. The resulting probability-weighted contingent consideration amounts were discounted using a weighted average discount rate of 3.5% reflecting the credit risk of a market participant. Significant changes to either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company’s condensed consolidated statements of operations. Changes in the fair value of this contingent consideration were not material during the period ended July 31, 2012. As of July 31, 2012, the estimated amount of such contingent consideration to be paid within the next twelve months of $1.6 million is included in accrued expenses and other current liabilities and the remaining $9.3 million is included in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheet.
Changes in the Company’s assets and liabilities measured at fair value on a recurring
basis using unobservable inputs (Level 3) for the nine months ended July 31, 2012 are as follows (in thousands): |
| | | | | | | | |
| | Assets | | Liabilities |
Balances as of October 31, 2011 | |
| $573 |
| |
| $— |
|
Contingent consideration related to acquisition | | — |
| | 10,778 |
|
Increase in value of contingent consideration | | — |
| | 143 |
|
Total unrealized gains | | 4 |
| | — |
|
Balances as of July 31, 2012 | |
| $577 |
| |
| $10,921 |
|
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended July 31, 2012.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of July 31, 2012 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.
8. RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales for the nine months ended July 31, 2012 and 2011 includes approximately $22.4 million and $18.2 million, respectively, of new product research and development expenses. Cost of sales for the three months ended July 31, 2012 and 2011 includes approximately $7.5 million and $6.5 million, respectively, of new product research and development expenses.
9. REDEEMABLE NONCONTROLLING INTERESTS
The holders of equity interests in certain of the Company’s subsidiaries have rights (“Put Rights”) that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2018. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the “Redemption Amount”) be at fair value or at a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. As of July 31, 2012, management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay is approximately $59 million. The actual Redemption Amount will likely be different. The aggregate Redemption Amount of all Put Rights was determined using probability adjusted internal estimates of future earnings of the Company’s subsidiaries with Put Rights while considering the earliest exercise date, the measurement period and any applicable fair value adjustments. The portion of the estimated Redemption Amount as of July 31, 2012 redeemable at fair value is approximately $34 million and the portion redeemable based solely on a multiple of future earnings is approximately $25 million. Adjustments to Redemption Amounts based on fair value will have no affect 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 affect net income per share attributable to HEICO shareholders.
In February 2012, the Company, through its HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) subsidiary, acquired an additional 6.7% equity interest in one of its subsidiaries, which increased the Company’s ownership interest to 86.7%. The purchase price of the redeemable noncontrolling interests acquired was paid using cash provided by operating activities.
10. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2012 | | 2011 | | 2012 | | 2011 |
Numerator: | | | | | | | | |
Net income attributable to HEICO | |
| $61,356 |
| |
| $54,306 |
| |
| $23,128 |
| |
| $20,402 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding-basic | | 52,651 |
| | 51,965 |
| | 52,695 |
| | 52,161 |
|
Effect of dilutive stock options | | 639 |
| | 1,134 |
| | 593 |
| | 1,051 |
|
Weighted average common shares outstanding-diluted | | 53,290 |
| | 53,099 |
| | 53,288 |
| | 53,212 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.17 |
| |
| $1.05 |
| |
| $.44 |
| |
| $.39 |
|
Diluted | |
| $1.15 |
| |
| $1.02 |
| |
| $.43 |
| |
| $.38 |
|
Anti-dilutive stock options excluded | | 667 |
| | 444 |
| | 720 |
| | 341 |
|
No portion of the adjustments to the redemption amount of redeemable noncontrolling interests of ($.1) million and ($1.6) million for the nine months ended July 31, 2012 and 2011, respectively, and ($.6) million and ($1.0) million for the three months ended July 31, 2012 and 2011, respectively, reflect a redemption amount in excess of fair value and therefore no portion of the adjustments affect basic or diluted net income per share attributable to HEICO shareholders.
11. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG, consisting of HEICO Aerospace and its subsidiaries, and the ETG, consisting of HEICO Electronic and its subsidiaries, for the nine and three months ended July 31, 2012 and 2011, respectively, is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Nine months ended July 31, 2012 | | | | | | | | |
Net sales | |
| $420,654 |
| |
| $237,225 |
| |
| ($2,941 | ) | |
| $654,938 |
|
Depreciation and amortization | | 7,604 |
| | 13,926 |
| | 645 |
| | 22,175 |
|
Operating income | | 78,523 |
| | 52,472 |
| | (13,307 | ) | | 117,688 |
|
Capital expenditures | | 5,389 |
| | 6,049 |
| | 943 |
| | 12,381 |
|
| | | | | | | | |
Nine months ended July 31, 2011 | | | | | | | | |
Net sales | |
| $395,193 |
| |
| $162,477 |
| |
| ($1,698 | ) | |
| $555,972 |
|
Depreciation and amortization | | 7,683 |
| | 5,458 |
| | 285 |
| | 13,426 |
|
Operating income | | 68,385 |
| | 44,556 |
| | (11,950 | ) | | 100,991 |
|
Capital expenditures | | 4,118 |
| | 1,555 |
| | 37 |
| | 5,710 |
|
| | | | | | | | |
Three months ended July 31, 2012 | | | | | | | | |
Net sales | |
| $140,761 |
| |
| $86,482 |
| |
| ($1,274 | ) | |
| $225,969 |
|
Depreciation and amortization | | 2,463 |
| | 5,079 |
| | 195 |
| | 7,737 |
|
Operating income | | 26,382 |
| | 20,950 |
| | (4,877 | ) | | 42,455 |
|
Capital expenditures | | 2,171 |
| | 1,987 |
| | 75 |
| | 4,233 |
|
| | | | | | | | |
Three months ended July 31, 2011 | | | | | | | | |
Net sales | |
| $140,748 |
| |
| $57,166 |
| |
| ($647 | ) | |
| $197,267 |
|
Depreciation and amortization | | 2,669 |
| | 1,771 |
| | 95 |
| | 4,535 |
|
Operating income | | 24,551 |
| | 15,373 |
| | (4,218 | ) | | 35,706 |
|
Capital expenditures | | 1,155 |
| | 677 |
| | 33 |
| | 1,865 |
|
Total assets by operating segment as of July 31, 2012 and October 31, 2011 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Segment | | Other, Primarily Corporate | | Consolidated Totals |
| | FSG | | ETG | | |
Total assets as of July 31, 2012 | |
| $461,503 |
| |
| $629,126 |
| |
| $68,570 |
| |
| $1,159,199 |
|
Total assets as of October 31, 2011 | | 458,624 |
| | 429,869 |
| | 52,576 |
| | 941,069 |
|
12. COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has arranged for a standby letter of credit for $1.5 million to meet the security requirement of its insurance company for potential workers’ compensation claims, which is supported by the Company’s revolving credit facility.
Product Warranty
Changes in the Company’s product warranty liability for the nine months ended July 31, 2012 and 2011, respectively, are as follows (in thousands):
|
| | | | | | | | |
| | Nine months ended July 31, |
| | 2012 | | 2011 |
Balances as of beginning of fiscal year | |
| $2,231 |
| |
| $1,636 |
|
Accruals for warranties | | 1,136 |
| | 1,052 |
|
Warranty claims settled | | (923 | ) | | (722 | ) |
Balances as of July 31 | |
| $2,444 |
| |
| $1,966 |
|
Additional Contingent Purchase Consideration
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2007, the Company may have been obligated to pay additional purchase consideration of up to 73 million Canadian dollars in aggregate, which translates to approximately $71 million U.S. dollars based on the June 30, 2012 exchange rate, had the subsidiary met certain earnings objectives through June 2012. Based on the subsidiary’s actual earnings through the measurement period, no additional purchase consideration will be paid.
Litigation
The Company is involved in various legal actions arising in the normal course of business. Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
13. SUBSEQUENT EVENT
In August 2012, the Company, through its HEICO Flight Support Corp. subsidiary, acquired 84% of the assets and assumed certain liabilities of CSI Aerospace, Inc. (“CSI Aerospace”). CSI Aerospace is a leading repair and overhaul provider of specialized components for airlines, military and other aerospace related organizations. The remaining 16% interest continues to be owned by certain members of CSI Aerospace’s management team. The purchase price was paid in cash principally using proceeds from the Company’s revolving credit facility. The total consideration for this acquisition and related allocation to the tangible and identifiable intangible assets acquired and liabilities assumed is not material or significant to the Company’s condensed consolidated financial statements.
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.
Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2011. There have been no material changes to our critical accounting policies during the nine months ended July 31, 2012.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
Our results of operations for the nine and three months ended July 31, 2012 have been affected by the fiscal 2012 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report and by the fiscal 2011 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2011.
All per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in April 2012. See Note 1, Summary of Significant Accounting Policies – Stock Split, of the Notes to Condensed Consolidated Financial Statements for additional information regarding this stock split.
Results of Operations
The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations (in thousands).
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2012 | | 2011 | | 2012 | | 2011 |
Net sales | |
| $654,938 |
| |
| $555,972 |
| |
| $225,969 |
| |
| $197,267 |
|
Cost of sales | | 417,240 |
| | 355,850 |
| | 141,717 |
| | 127,442 |
|
Selling, general and administrative expenses | | 120,010 |
| | 99,131 |
| | 41,797 |
| | 34,119 |
|
Total operating costs and expenses | | 537,250 |
| | 454,981 |
| | 183,514 |
| | 161,561 |
|
Operating income | |
| $117,688 |
| |
| $100,991 |
| |
| $42,455 |
| |
| $35,706 |
|
| | | | | | | | |
Net sales by segment: | | | | | | | | |
Flight Support Group | |
| $420,654 |
| |
| $395,193 |
| |
| $140,761 |
| |
| $140,748 |
|
Electronic Technologies Group | | 237,225 |
| | 162,477 |
| | 86,482 |
| | 57,166 |
|
Intersegment sales | | (2,941 | ) | | (1,698 | ) | | (1,274 | ) | | (647 | ) |
| |
| $654,938 |
| |
| $555,972 |
| | |