HEI 07.31.2014 Q3 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, 2014 |
| | |
| | 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 26, 2014 is as follows:
|
| | | |
Common Stock, $.01 par value | 26,837,839 |
| shares |
Class A Common Stock, $.01 par value | 39,683,381 |
| shares |
HEICO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
|
| | | |
| | | Page |
Part I. | Financial Information | |
| | | |
| Item 1. | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Item 2. | | |
| | | |
| Item 3. | | |
| | | |
| Item 4. | | |
| | | |
Part II. | Other Information | |
| | | |
| Item 6. | | |
| | | |
| | |
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, 2014 | | October 31, 2013 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | |
| $20,944 |
| |
| $15,499 |
|
Accounts receivable, net | | 149,160 |
| | 157,022 |
|
Inventories, net | | 221,129 |
| | 218,893 |
|
Prepaid expenses and other current assets | | 9,905 |
| | 17,022 |
|
Deferred income taxes | | 32,148 |
| | 33,036 |
|
Total current assets | | 433,286 |
| | 441,472 |
|
| | | | |
Property, plant and equipment, net | | 95,130 |
| | 97,737 |
|
Goodwill | | 689,323 |
| | 688,489 |
|
Intangible assets, net | | 214,179 |
| | 241,558 |
|
Deferred income taxes | | 1,357 |
| | 1,791 |
|
Other assets | | 73,848 |
| | 61,968 |
|
Total assets | |
| $1,507,123 |
| |
| $1,533,015 |
|
| | | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | | |
Current maturities of long-term debt | |
| $466 |
| |
| $697 |
|
Trade accounts payable | | 48,680 |
| | 54,855 |
|
Accrued expenses and other current liabilities | | 86,067 |
| | 105,734 |
|
Income taxes payable | | 494 |
| | — |
|
Total current liabilities | | 135,707 |
| | 161,286 |
|
| | | | |
Long-term debt, net of current maturities | | 385,867 |
| | 376,818 |
|
Deferred income taxes | | 115,527 |
| | 128,482 |
|
Other long-term liabilities | | 86,623 |
| | 83,976 |
|
Total liabilities | | 723,724 |
| | 750,562 |
|
| | | | |
Commitments and contingencies (Note 11) | |
| |
|
| | | | |
Redeemable noncontrolling interests (Note 3) | | 38,105 |
| | 59,218 |
|
| | | | |
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; 26,829 and 26,790 shares issued and outstanding | | 268 |
| | 268 |
|
Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 39,674 and 39,586 shares issued and outstanding | | 397 |
| | 396 |
|
Capital in excess of par value | | 266,029 |
| | 255,889 |
|
Deferred compensation obligation | | 1,138 |
| | 1,138 |
|
HEICO stock held by irrevocable trust | | (1,138 | ) | | (1,138 | ) |
Accumulated other comprehensive (loss) income | | (2,571 | ) | | 144 |
|
Retained earnings | | 408,148 |
| | 349,649 |
|
Total HEICO shareholders’ equity | | 672,271 |
| | 606,346 |
|
Noncontrolling interests | | 73,023 |
| | 116,889 |
|
Total shareholders’ equity | | 745,294 |
| | 723,235 |
|
Total liabilities and equity | |
| $1,507,123 |
| |
| $1,533,015 |
|
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, |
| 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | |
Net sales |
| $840,088 |
| |
| $721,331 |
| |
| $291,030 |
| |
| $267,133 |
|
| | | | | | | |
Operating costs and expenses: | | | | | | | |
Cost of sales | 544,722 |
| | 456,754 |
| | 187,703 |
| | 169,593 |
|
Selling, general and administrative expenses | 145,697 |
| | 136,544 |
| | 53,214 |
| | 49,134 |
|
| | | | | | | |
Total operating costs and expenses | 690,419 |
| | 593,298 |
| | 240,917 |
| | 218,727 |
|
| | | | | | | |
Operating income | 149,669 |
| | 128,033 |
| | 50,113 |
| | 48,406 |
|
| | | | | | | |
Interest expense | (4,166 | ) | | (2,540 | ) | | (1,444 | ) | | (1,097 | ) |
Other income | 591 |
| | 505 |
| | 83 |
| | 59 |
|
| | | | | | | |
Income before income taxes and noncontrolling interests | 146,094 |
| | 125,998 |
| | 48,752 |
| | 47,368 |
|
| | | | | | | |
Income tax expense | 43,400 |
| | 37,200 |
| | 11,400 |
| | 12,600 |
|
| | | | | | | |
Net income from consolidated operations | 102,694 |
| | 88,798 |
| | 37,352 |
| | 34,768 |
|
| | | | | | | |
Less: Net income attributable to noncontrolling interests | 13,506 |
| | 16,193 |
| | 3,986 |
| | 5,821 |
|
| | | | | | | |
Net income attributable to HEICO |
| $89,188 |
| |
| $72,605 |
| |
| $33,366 |
| |
| $28,947 |
|
| | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | |
Basic |
| $1.34 |
| |
| $1.10 |
| |
| $.50 |
| |
| $.44 |
|
Diluted |
| $1.32 |
| |
| $1.09 |
| |
| $.49 |
| |
| $.43 |
|
| | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | |
Basic | 66,442 |
| | 66,275 |
| | 66,497 |
| | 66,342 |
|
Diluted | 67,427 |
| | 66,895 |
| | 67,474 |
| | 67,015 |
|
| | | | | | | |
Cash dividends per share |
| $.470 |
| |
| $1.816 |
| |
| $.060 |
| |
| $.056 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME – UNAUDITED
(in thousands)
|
| | | | | | | | | | | | | | | |
| Nine months ended July 31, | | Three months ended July 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | |
Net income from consolidated operations |
| $102,694 |
| |
| $88,798 |
| |
| $37,352 |
| |
| $34,768 |
|
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation adjustments | (2,715 | ) | | 842 |
| | (2,064 | ) | | 598 |
|
Total other comprehensive (loss) income | (2,715 | ) | | 842 |
| | (2,064 | ) | | 598 |
|
Comprehensive income from consolidated operations | 99,979 |
| | 89,640 |
| | 35,288 |
| | 35,366 |
|
Less: Comprehensive income attributable to noncontrolling interests | 13,506 |
| | 16,193 |
| | 3,986 |
| | 5,821 |
|
Comprehensive income attributable to HEICO |
| $86,473 |
| |
| $73,447 |
| |
| $31,302 |
| |
| $29,545 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEICO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - 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, 2013 |
| $59,218 |
| |
| $268 |
| |
| $396 |
| |
| $255,889 |
| |
| $1,138 |
| |
| ($1,138 | ) | |
| $144 |
| |
| $349,649 |
| |
| $116,889 |
| |
| $723,235 |
|
Comprehensive income (loss) | 4,180 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,715 | ) | | 89,188 |
| | 9,326 |
| | 95,799 |
|
Cash dividends ($.47 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31,215 | ) | | — |
| | (31,215 | ) |
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | — |
| | — |
| | 3,849 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,849 |
|
Share-based compensation expense | — |
| | — |
| | 1 |
| | 5,873 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,874 |
|
Proceeds from stock option exercises | — |
| | — |
| | — |
| | 594 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 594 |
|
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 93 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 93 |
|
Redemptions of common stock related to share-based compensation | — |
| | — |
| | — |
| | (273 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (273 | ) |
Distributions to noncontrolling interests | (4,141 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (72,576 | ) | | (72,576 | ) |
Acquisitions of noncontrolling interests | (1,243 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Reclassification of redeemable noncontrolling interests to noncontrolling interests | (19,383 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,383 |
| | 19,383 |
|
Adjustments to redemption amount of redeemable noncontrolling interests | (526 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 526 |
| | — |
| | 526 |
|
Other | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 5 |
|
Balances as of July 31, 2014 |
| $38,105 |
| |
| $268 |
| |
| $397 |
| |
| $266,029 |
| |
| $1,138 |
| |
| ($1,138 | ) | |
| ($2,571 | ) | |
| $408,148 |
| |
| $73,023 |
| |
| $745,294 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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, 2012 |
| $67,166 |
| |
| $213 |
| |
| $315 |
| |
| $244,632 |
| |
| $823 |
| |
| ($823 | ) | |
| ($3,572 | ) | |
| $375,085 |
| |
| $103,086 |
| |
| $719,759 |
|
Comprehensive income | 6,127 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 842 |
| | 72,605 |
| | 10,066 |
| | 83,513 |
|
Cash dividends ($1.816 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (120,361 | ) | | — |
| | (120,361 | ) |
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | — |
| | — |
| | 2,625 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,625 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 3,455 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,455 |
|
Proceeds from stock option exercises | — |
| | 1 |
| | 1 |
| | 344 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 346 |
|
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 5,180 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,180 |
|
Redemptions of common stock related to share-based compensation | — |
| | — |
| | — |
| | (2,364 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,364 | ) |
Distributions to noncontrolling interests | (5,968 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Acquisitions of noncontrolling interests | (16,610 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Adjustments to redemption amount of redeemable noncontrolling interests | 1,327 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,327 | ) | | — |
| | (1,327 | ) |
Deferred compensation obligation | — |
| | — |
| | — |
| | — |
| | 105 |
| | (105 | ) | | — |
| | — |
| | — |
| | — |
|
Other | 402 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 3 |
| | (2 | ) | | 24 |
| | 26 |
|
Balances as of July 31, 2013 |
| $52,444 |
| |
| $214 |
| |
| $317 |
| |
| $253,872 |
| |
| $928 |
| |
| ($928 | ) | |
| ($2,727 | ) | |
| $326,000 |
| |
| $113,176 |
| |
| $690,852 |
|
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, |
| | 2014 | | 2013 |
Operating Activities: | | | | |
Net income from consolidated operations | |
| $102,694 |
| |
| $88,798 |
|
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 36,270 |
| | 25,900 |
|
Impairment of intangible assets | | 9,200 |
| | — |
|
Share-based compensation expense | | 5,874 |
| | 3,455 |
|
Issuance of common stock to HEICO Savings and Investment Plan | | 3,849 |
| | 2,625 |
|
Tax benefit from stock option exercises | | 93 |
| | 5,180 |
|
Excess tax benefit from stock option exercises | | (93 | ) | | (5,115 | ) |
Deferred income tax benefit | | (11,549 | ) | | (2,393 | ) |
Decrease in accrued contingent consideration | | (19,516 | ) | | (1,195 | ) |
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Decrease (increase) in accounts receivable | | 7,909 |
| | (8,375 | ) |
Increase in inventories | | (2,289 | ) | | (15,623 | ) |
Decrease (increase) in prepaid expenses and other current assets | | 7,048 |
| | (2,472 | ) |
(Decrease) increase in trade accounts payable | | (6,129 | ) | | 1,044 |
|
(Decrease) increase in accrued expenses and other current liabilities | | (12,456 | ) | | 2,671 |
|
Increase (decrease) in income taxes payable | | 420 |
| | (2,753 | ) |
Other long-term assets and liabilities, net | | 5,908 |
| | 545 |
|
Net cash provided by operating activities | | 127,233 |
| | 92,292 |
|
| | | | |
Investing Activities: | | | | |
Capital expenditures | | (12,261 | ) | | (13,496 | ) |
Acquisitions, net of cash acquired | | (8,737 | ) | | (134,414 | ) |
Other | | (30 | ) | | 4 |
|
Net cash used in investing activities | | (21,028 | ) | | (147,906 | ) |
| | | | |
Financing Activities: | | | | |
Borrowings on revolving credit facility | | 112,000 |
| | 287,000 |
|
Payments on revolving credit facility | | (102,000 | ) | | (99,000 | ) |
Distributions to noncontrolling interests | | (76,717 | ) | | (5,968 | ) |
Cash dividends paid | | (31,215 | ) | | (120,361 | ) |
Acquisitions of noncontrolling interests | | (1,243 | ) | | (16,610 | ) |
Revolving credit facility issuance costs | | (767 | ) | | (570 | ) |
Redemptions of common stock related to share-based compensation | | (273 | ) | | (2,364 | ) |
Payment of contingent consideration | | — |
| | (601 | ) |
Excess tax benefit from stock option exercises | | 93 |
| | 5,115 |
|
Proceeds from stock option exercises | | 594 |
| | 346 |
|
Other | | (1,082 | ) | | (96 | ) |
Net cash (used in) provided by financing activities | | (100,610 | ) | | 46,891 |
|
| | | | |
Effect of exchange rate changes on cash | | (150 | ) | | 43 |
|
| | | | |
Net increase (decrease) in cash and cash equivalents | | 5,445 |
| | (8,680 | ) |
Cash and cash equivalents at beginning of year | | 15,499 |
| | 21,451 |
|
Cash and cash equivalents at end of period | |
| $20,944 |
| |
| $12,771 |
|
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, 2013. The October 31, 2013 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, statements of comprehensive income, statements of shareholders' equity and statements of cash flows for such interim periods presented. The results of operations for the nine months ended July 31, 2014 are not necessarily indicative of the results which may be expected for the entire fiscal year.
Stock Split
All applicable fiscal 2013 share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in October 2013.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires disclosure about changes in and amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The Company adopted ASU 2013-02 in the first quarter of fiscal 2014, resulting in only expanded disclosure regarding the changes in accumulated other comprehensive income and no impact on the Company's consolidated results of operations, financial position or cash flows.
In March 2013, the FASB issued ASU 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” which clarifies the applicable guidance for the release of any cumulative translation adjustments into net earnings. ASU 2013-05 specifies that the entire amount of cumulative translation adjustments should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the investment in the foreign entity. ASU 2013-05 is effective prospectively for fiscal years and interim reporting periods within those years beginning after December 15, 2013, or in fiscal 2015 for HEICO. Early adoption is permitted. The Company is currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, or in fiscal 2018 for HEICO. Early adoption is not permitted. ASU 2014-09 shall be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The Company is currently evaluating which transition method it will elect and the effect the adoption of this guidance will have on its consolidated results of operations, financial position or cash flows.
2. ACQUISITION
In June 2014, the Company, through a subsidiary of its HEICO Flight Support Corp. subsidiary, acquired certain assets and liabilities of Quest Aviation Supply, Inc. (“Quest Aviation”). Quest Aviation is a niche supplier of parts to repair thrust reversers on various aircraft engines. The purchase price of this acquisition was paid in cash, principally using proceeds from the Company's revolving credit facility.
The total consideration and related allocation to the tangible and identifiable intangible assets acquired and liabilities assumed for the acquisition of Quest Aviation is not material or significant to the Company’s condensed consolidated financial statements. The operating results of Quest Aviation were included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of Quest Aviation included in the Condensed Consolidated Statement of Operations is not material. Had the Quest Aviation acquisition been consummated as of November 1, 2012, 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, 2014 and 2013 would not have been materially different than the reported amounts.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
|
| | | | | | | | |
(in thousands) | | July 31, 2014 | | October 31, 2013 |
Accounts receivable | |
| $151,504 |
| |
| $160,118 |
|
Less: Allowance for doubtful accounts | | (2,344 | ) | | (3,096 | ) |
Accounts receivable, net | |
| $149,160 |
| |
| $157,022 |
|
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
|
| | | | | | | | |
(in thousands) | | July 31, 2014 | | October 31, 2013 |
Costs incurred on uncompleted contracts | |
| $28,198 |
| |
| $22,548 |
|
Estimated earnings | | 14,605 |
| | 25,391 |
|
| | 42,803 |
| | 47,939 |
|
Less: Billings to date | | (37,305 | ) | | (40,676 | ) |
| |
| $5,498 |
| |
| $7,263 |
|
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings)
| |
| $7,469 |
| |
| $9,540 |
|
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings)
| | (1,971 | ) | | (2,277 | ) |
| |
| $5,498 |
| |
| $7,263 |
|
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, 2014 and 2013.
Inventories
|
| | | | | | | | |
(in thousands) | | July 31, 2014 | | October 31, 2013 |
Finished products | |
| $108,072 |
| |
| $103,234 |
|
Work in process | | 29,057 |
| | 26,810 |
|
Materials, parts, assemblies and supplies | | 80,135 |
| | 79,863 |
|
Contracts in process | | 3,865 |
| | 9,941 |
|
Less: Billings to date | | — |
| | (955 | ) |
Inventories, net of valuation reserves | |
| $221,129 |
| |
| $218,893 |
|
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 current liabilities.
Property, Plant and Equipment
|
| | | | | | | | |
(in thousands) | | July 31, 2014 | | October 31, 2013 |
Land | |
| $4,510 |
| |
| $4,515 |
|
Buildings and improvements | | 60,547 |
| | 60,105 |
|
Machinery, equipment and tooling | | 140,659 |
| | 131,855 |
|
Construction in progress | | 5,843 |
| | 4,932 |
|
| | 211,559 |
| | 201,407 |
|
Less: Accumulated depreciation and amortization | | (116,429 | ) | | (103,670 | ) |
Property, plant and equipment, net | |
| $95,130 |
| |
| $97,737 |
|
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 $8.8 million and $14.8 million as of July 31, 2014 and October 31, 2013, respectively. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2014 and 2013 was $5.3 million and $6.0 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2014 and 2013 was $1.9 million and $2.5 million, respectively. The decrease in the amount of accrued customer rebates and credits since October 31, 2013 principally reflects the payments made in the second quarter of fiscal 2014.
Employee Retirement Plan
In connection with an acquisition during the third quarter of fiscal 2013, the Company assumed a frozen qualified defined benefit pension plan. The components of net pension income for the nine and three months ended July 31, 2014 and 2013 that were recorded within the Company's Condensed Consolidated Statements of Operations are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Expected return on plan assets | |
| $555 |
| |
| $128 |
| |
| $185 |
| |
| $128 |
|
Interest cost | | 459 |
| | 95 |
| | 153 |
| | 95 |
|
Net pension income | |
| $96 |
| |
| $33 |
| |
| $32 |
| |
| $33 |
|
Research and Development Expenses
The amount of new product research and development expenses (R&D expenses) included in costs of sales for the nine and three months ended July 31, 2014 and 2013 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2014 | | 2013 | | 2014 | | 2013 |
R&D expenses | |
| $28,278 |
| |
| $23,547 |
| |
| $9,862 |
| |
| $8,550 |
|
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have put rights that may be exercised on varying dates causing the Company to give cash consideration to purchase their equity interests based on fair value or a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. Management's estimate of the aggregate redemption amount of all put rights that the Company could be required to pay at varying dates through fiscal 2022 is as follows (in thousands):
|
| | | | | | | | |
| | July 31, 2014 | | October 31, 2013 |
Redeemable at fair value | |
| $27,969 |
| |
| $47,839 |
|
Redeemable based on a multiple of future earnings | | 10,136 |
| | 11,379 |
|
Redeemable noncontrolling interests | |
| $38,105 |
| |
| $59,218 |
|
The decrease in the aggregate redemption amount of put rights redeemable at fair value since the prior fiscal year end principally reflects a reclassification of the redemption amount pertaining to the equity interest in one of the Company's subsidiaries from redeemable noncontrolling interests (temporary equity) to noncontrolling interests (permanent equity) upon the expiration of the holder's put right in the second quarter of fiscal 2014.
Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income (loss) for the nine months ended July 31, 2014 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive Income (Loss) |
Balances at October 31, 2013 | |
| ($466 | ) | |
| $610 |
| |
| $144 |
|
Unrealized loss | | (2,715 | ) | | — |
| | (2,715 | ) |
Balances at July 31, 2014 | |
| ($3,181 | ) | |
| $610 |
| |
| ($2,571 | ) |
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, 2014 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Segment | | Consolidated Totals |
| | FSG | | ETG | |
Balances as of October 31, 2013 | |
| $279,855 |
| |
| $408,634 |
| |
| $688,489 |
|
Goodwill acquired | | 2,552 |
| | — |
| | 2,552 |
|
Foreign currency translation adjustments | | — |
| | (1,745 | ) | | (1,745 | ) |
Adjustment to goodwill | | — |
| | 27 |
| | 27 |
|
Balances as of July 31, 2014 | |
| $282,407 |
| |
| $406,916 |
| |
| $689,323 |
|
The goodwill acquired pertains to the current year acquisition described in Note 2, Acquisition, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed. The Company estimates that all of the goodwill acquired in fiscal 2014 will be deductible for income tax purposes.
Identifiable intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of July 31, 2014 | | As of October 31, 2013 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
| $148,786 |
| |
| ($51,109 | ) | |
| $97,677 |
| |
| $156,801 |
| |
| ($38,461 | ) | |
| $118,340 |
|
Intellectual property | | 75,599 |
| | (16,036 | ) | | 59,563 |
| | 75,095 |
| | (10,795 | ) | | 64,300 |
|
Licenses | | 2,900 |
| | (1,579 | ) | | 1,321 |
| | 2,900 |
| | (1,381 | ) | | 1,519 |
|
Non-compete agreements | | 1,125 |
| | (1,125 | ) | | — |
| | 1,132 |
| | (1,132 | ) | | — |
|
Patents | | 710 |
| | (394 | ) | | 316 |
| | 642 |
| | (351 | ) | | 291 |
|
Trade names | | 716 |
| | (535 | ) | | 181 |
| | 566 |
| | (448 | ) | | 118 |
|
| | 229,836 |
| | (70,778 | ) | | 159,058 |
| | 237,136 |
| | (52,568 | ) | | 184,568 |
|
Non-Amortizing Assets: | | | | | | | | | | | | |
Trade names | | 55,121 |
| | — |
| | 55,121 |
| | 56,990 |
| | — |
| | 56,990 |
|
| |
| $284,957 |
| |
| ($70,778 | ) | |
| $214,179 |
| |
| $294,126 |
| |
| ($52,568 | ) | |
| $241,558 |
|
The decrease in the gross carrying amount of customer relationships and non-amortizing trade names reflects impairment losses of $7.5 million and $1.7 million, respectively, recognized during the third quarter of fiscal 2014. The impairment losses were due to reductions in the future cash flows associated with such intangible assets within the ETG and were recorded as a component of selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations.
Amortization expense related to intangible assets for the nine months ended July 31, 2014 and 2013 was $21.1 million and $14.3 million, respectively. Amortization expense related to intangible assets for the three months ended July 31, 2014 and 2013 was $7.0 million and $5.4 million, respectively. The increase in amortization expense for the nine and three months ended July 31, 2014 compared to the nine and three months ended July 31, 2013 principally relates to the incremental amortization expense of intangible assets recognized in connection with fiscal 2013 acquisitions. Amortization expense related to intangible assets for the remainder of fiscal 2014 is estimated to be $6.6 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $24.8 million in fiscal 2015, $23.0 million in fiscal 2016, $22.1 million in fiscal 2017, $20.2 million in fiscal 2018, $18.1 million in fiscal 2019 and $44.3 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
| | | | | | | | |
| | July 31, 2014 | | October 31, 2013 |
Borrowings under revolving credit facility | |
| $383,000 |
| |
| $373,000 |
|
Capital leases and notes payable | | 3,333 |
| | 4,515 |
|
| | 386,333 |
| | 377,515 |
|
Less: Current maturities of long-term debt | | (466 | ) | | (697 | ) |
| |
| $385,867 |
| |
| $376,818 |
|
As of July 31, 2014 and October 31, 2013, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 1.4% and 1.3%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 2014, the Company was in compliance with all such covenants.
In November 2013, the Company entered into an amendment to extend the maturity date of its revolving credit facility by one year to December 2018 and to increase the aggregate principal amount to $800 million. Furthermore, the amendment includes a feature that will allow the Company to increase the aggregate principal amount by an additional $200 million to become a $1.0 billion facility through increased commitments from existing lenders or the addition of new lenders.
6. INCOME TAXES
As of July 31, 2014, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $1.0 million of which $.7 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, 2014 is as follows (in thousands):
|
| | | | |
Balance as of October 31, 2013 | |
| $1,072 |
|
Increases related to current year tax positions | | 81 |
|
Settlements | | (22 | ) |
Lapse of statutes of limitations | | (94 | ) |
Balance as of July 31, 2014 | |
| $1,037 |
|
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, 2014. Further, the Company does not expect the total amount of unrecognized tax benefits to materially change in the next twelve months.
The Company's effective tax rate in the first nine months of fiscal 2014 increased to 29.7% from 29.5% in the first nine months of fiscal 2013. The increase is principally due to an income tax credit for qualified research and development activities for the last ten months of fiscal 2012 that was recognized in the first quarter of fiscal 2013 resulting from the retroactive extension of the U.S research and development tax credit and its subsequent expiration on December 31, 2013 that limited the tax credit recognized in fiscal 2014 to just two months. Additionally, the increase reflects a larger income tax deduction recognized in the prior year for the special and extraordinary cash dividend paid to participants of the HEICO Savings and Investment Plan ("SIP") holding HEICO common stock and the benefit in the prior year from higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation Leadership Compensation Plan ("LCP"). These increases to the effective tax rate were partially offset by the impact of a nontaxable reduction in accrued contingent consideration during fiscal 2014 associated with a fiscal 2013 acquisition acquired by means of a stock transaction.
The Company's effective tax rate in the third quarter of fiscal 2014 decreased to 23.4% from 26.6% in the third quarter of fiscal 2013. The decrease is principally attributed to the previously mentioned reduction in accrued contingent consideration partially offset by the previously mentioned lower research and development tax credits recognized in fiscal 2014 due to expiration of the U.S. research and development tax credit, larger prior year income tax deduction for the cash dividends paid to participants of the HEICO SIP and higher tax-exempt unrealized gains in the prior year related to the LCP.
7. FAIR VALUE MEASUREMENTS
The Company’s assets and liabilities that were measured at fair value on a recurring basis are set forth by level within the fair value hierarchy in the following tables (in thousands): |
| | | | | | | | | | | | | | | | |
| | As of July 31, 2014 |
| | 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 | |
| $— |
| |
| $61,046 |
| |
| $— |
| |
| $61,046 |
|
Money market funds | | 2,774 |
| | — |
| | — |
| | 2,774 |
|
Equity securities | | 2,260 |
| | — |
| | — |
| | 2,260 |
|
Mutual funds | | 1,882 |
| | — |
| | — |
| | 1,882 |
|
Other | | 1,261 |
| | 50 |
| | — |
| | 1,311 |
|
Total assets | |
| $8,177 |
| |
| $61,096 |
| |
| $— |
| |
| $69,273 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $9,794 |
| |
| $9,794 |
|
|
| | | | | | | | | | | | | | | | |
| | As of October 31, 2013 |
| | 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 | |
| $— |
| |
| $52,655 |
| |
| $— |
| |
| $52,655 |
|
Equity securities | | 1,940 |
| | — |
| | — |
| | 1,940 |
|
Mutual funds | | 1,529 |
| | — |
| | — |
| | 1,529 |
|
Money market deposit accounts | | 1,470 |
| | — |
| | — |
| | 1,470 |
|
Other | | — |
| | 46 |
| | — |
| | 46 |
|
Total assets | |
| $4,939 |
| |
| $52,701 |
| |
| $— |
| |
| $57,640 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $29,310 |
| |
| $29,310 |
|
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 valued using a market approach. Certain other assets of the LCP represent investments in money market funds that are classified within Level 1. The assets of the Company’s other deferred compensation plan are principally invested in equity securities, mutual funds, and money market
deposit accounts that are classified within Level 1. The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $69.3 million as of July 31, 2014 and $57.6 million as of October 31, 2013, of which the LCP related assets were $63.8 million and $52.7 million as of July 31, 2014 and October 31, 2013, 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 $68.5 million as of July 31, 2014 and $56.9 million as of October 31, 2013, of which the LCP related liability was $63.0 million and $51.9 million as of July 31, 2014 and October 31, 2013, respectively.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2013, the Company may have been obligated to pay contingent consideration of up to $20.0 million had the acquired entity met certain earnings objectives during the last three months of the calendar year of acquisition and may be obligated to pay contingent consideration of up to $30.0 million should the acquired entity meet certain earnings objectives during each of the next two calendar years (2014 and 2015). In December 2013, the acquired entity incurred unanticipated costs associated with certain contracts for which revenue is recognized on the percentage-of-completion method and as a result, did not meet its calendar 2013 related earnings objectives. Accordingly, the $7.0 million contingent consideration accrued as of October 31, 2013 was recorded as a reduction to selling, general and administrative expenses ("SG&A") in the Company's Condensed Consolidated Statement of Operations in the first quarter of fiscal 2014. The estimated fair value of the contingent consideration for the calendar 2014 and 2015 earnings period was $1.2 million as of July 31, 2014 compared to $13.7 million as of October 31, 2013. The aggregate $12.5 million decrease is principally attributed to revised earnings estimates that reflect less favorable projected market conditions resulting in fair value adjustments of $2.3 million and $10.2 million recorded as reductions to SG&A expenses in the second and third quarters of fiscal 2014, respectively.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2012, the Company may be obligated to pay contingent consideration of up to $10.6 million in aggregate should the acquired entity meet certain earnings objectives during each of the next three years following the second anniversary date of the acquisition. As of July 31, 2014 and October 31, 2013, the estimated fair value of the contingent consideration was $8.6 million.
The estimated fair values of the contingent consideration arrangements described above are classified within Level 3 and were 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. 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 reflecting the credit risk of a market participant. Changes in 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.
The Level 3 inputs used to derive the estimated fair values of the contingent consideration as of July 31, 2014 are as follows:
|
| | | | |
| | Fiscal 2013 Acquisition | | Fiscal 2012 Acquisition |
Compound annual revenue growth rate range | | (2%) - 24% | | (5%) - 18% |
Weighted average discount rate | | 2.9% | | 3.0% |
Changes in the Company’s contingent consideration measured at fair value on a recurring basis using unobservable inputs (Level 3) for the nine months ended July 31, 2014 are as follows (in thousands): |
| | | | |
| | Liabilities |
Balance as of October 31, 2013 | |
| $29,310 |
|
Decrease in accrued contingent consideration | | (19,516 | ) |
Balance as of July 31, 2014 | |
| $9,794 |
|
| | |
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | | |
Accrued expenses and other current liabilities | |
| $2,090 |
|
Other long-term liabilities | | 7,704 |
|
| |
| $9,794 |
|
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended July 31, 2014.
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, 2014 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.
During the third quarter of fiscal 2014, certain customer relationships and a non-amortizing trade name within the ETG were measured at fair value on a nonrecurring basis, resulting in the recognition of impairment losses aggregating $9.2 million (see Note 4, Goodwill and Other Intangible Assets). The fair values of the Company’s nonfinancial assets and liabilities that were measured at fair value on a nonrecurring basis, which are classified within Level 3, and the related impairment losses recognized in the third quarter of fiscal 2014 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Carrying Amount | | Impairment Loss | | Fair Value (Level 3) |
Assets: | | | | | | |
Customer relationships | |
| $15,316 |
| |
| ($7,500 | ) | |
| $7,816 |
|
Non-amortizing trade name | | 9,500 |
| | (1,700 | ) | | 7,800 |
|
Impairment of intangible assets | | | |
| ($9,200 | ) | | |
The fair values of such customer relationships and non-amortizing trade name were determined using variations of the income approach which apply an asset-specific discount rate to a forecast of asset-specific cash flows. These methods utilize certain significant unobservable inputs categorized as Level 3. The Level 3 inputs used to derive the estimated fair values of the customer relationships and non-amortizing trade name as of July 31, 2014 are as follows:
|
| | | | |
| | Customer Relationships | | Non-Amortizing Trade Name |
Valuation method | | Excess Earnings | | Relief from Royalty |
Discount rate | | 15.0% | | 14.0% |
Customer annual attrition rate | | 25.0% | | N/A |
Royalty rate | | N/A | | 2.5% |
8. SHAREHOLDERS' EQUITY
In January 2014, the Company paid a special and extraordinary $.35 per share cash dividend on both classes of HEICO's common stock as well as its regular semi-annual $.06 per share cash dividend. The dividends, which aggregated $27.2 million, were principally funded from borrowings under the Company's revolving credit facility.
Consistent with the Company's past practice of increasing its ownership in certain non-wholly-owned subsidiaries, on February 18, 2014, HEICO Corporation acquired the 20% noncontrolling interest held by Lufthansa Technik AG (“LHT”) in four of the Company's existing subsidiaries principally operating in the specialty products and distribution businesses within its HEICO Aerospace Holdings Corp. ("HEICO Aerospace") subsidiary (the “Transaction”). Pursuant to the Transaction, HEICO Aerospace paid dividends proportional to the ownership (80%/20%) to HEICO and LHT, and HEICO transferred the businesses to HEICO Flight Support Corp., a wholly-owned subsidiary of HEICO. HEICO did not record any gain or loss in connection with the Transaction. LHT’s dividend of $67.4 million was paid in cash, principally using proceeds from the Company’s revolving credit facility. LHT remains a 20% owner in HEICO Aerospace, a leading producer of PMA parts and component repair and overhaul services.
9. NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Numerator: | | | | | | | | |
Net income attributable to HEICO | |
| $89,188 |
| |
| $72,605 |
| |
| $33,366 |
| |
| $28,947 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding - basic | | 66,442 |
| | 66,275 |
| | 66,497 |
| | 66,342 |
|
Effect of dilutive stock options | | 985 |
| | 620 |
| | 977 |
| | 673 |
|
Weighted average common shares outstanding - diluted | | 67,427 |
| | 66,895 |
| | 67,474 |
| | 67,015 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.34 |
| |
| $1.10 |
| |
| $.50 |
| |
| $.44 |
|
Diluted | |
| $1.32 |
| |
| $1.09 |
| |
| $.49 |
| |
| $.43 |
|
| | | | | | | | |
Anti-dilutive stock options excluded | | 430 |
| | 826 |
| | 442 |
| | 799 |
|
10. OPERATING SEGMENTS
Information on the Company’s two operating segments, the Flight Support Group ("FSG"), consisting of HEICO Aerospace and HEICO Flight Support Corp. and their collective subsidiaries; and the Electronic Technologies Group ("ETG"), consisting of HEICO Electronic Technologies Corp. and its subsidiaries, for the nine and three months ended July 31, 2014 and 2013, respectively, is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Nine months ended July 31, 2014: | | | | | | | | |
Net sales | |
| $568,038 |
| |
| $279,298 |
| |
| ($7,248 | ) | |
| $840,088 |
|
Depreciation and amortization | | 14,883 |
| | 20,782 |
| | 605 |
| | 36,270 |
|
Operating income | | 103,323 |
| | 62,495 |
| | (16,149 | ) | | 149,669 |
|
Capital expenditures | | 7,339 |
| | 4,364 |
| | 558 |
| | 12,261 |
|
| | | | | | | | |
Nine months ended July 31, 2013: | | | | | | | | |
Net sales | |
| $475,560 |
| |
| $250,179 |
| |
| ($4,408 | ) | |
| $721,331 |
|
Depreciation and amortization | | 9,772 |
| | 15,542 |
| | 586 |
| | 25,900 |
|
Operating income | | 87,190 |
| | 57,311 |
| | (16,468 | ) | | 128,033 |
|
Capital expenditures | | 7,733 |
| | 5,498 |
| | 265 |
| | 13,496 |
|
| | | | | | | | |
Three months ended July 31, 2014: | | | | | | | | |
Net sales | |
| $191,561 |
| |
| $102,065 |
| |
| ($2,596 | ) | |
| $291,030 |
|
Depreciation and amortization | | 5,020 |
| | 6,911 |
| | 200 |
| | 12,131 |
|
Operating income | | 34,234 |
| | 21,455 |
| | (5,576 | ) | | 50,113 |
|
Capital expenditures | | 3,083 |
| | 1,605 |
| | 88 |
| | 4,776 |
|
| | | | | | | | |
Three months ended July 31, 2013: | | | | | | | | |
Net sales | |
| $181,331 |
| |
| $87,401 |
| |
| ($1,599 | ) | |
| $267,133 |
|
Depreciation and amortization | | 4,069 |
| | 5,226 |
| | 200 |
| | 9,495 |
|
Operating income | | 32,649 |
| | 21,516 |
| | (5,759 | ) | | 48,406 |
|
Capital expenditures | | 2,435 |
| | 1,673 |
| | 123 |
| | 4,231 |
|
Total assets by operating segment as of July 31, 2014 and October 31, 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Segment | | Other, Primarily Corporate | | Consolidated Totals |
| | FSG | | ETG | | |
Total assets as of July 31, 2014 | |
| $678,546 |
| |
| $721,775 |
| |
| $106,802 |
| |
| $1,507,123 |
|
Total assets as of October 31, 2013 | | 679,839 |
| | 759,807 |
| | 93,369 |
| | 1,533,015 |
|
11. COMMITMENTS AND CONTINGENCIES
Guarantees
As of July 31, 2014, the Company has arranged for standby letters of credit aggregating $2.8 million, which are supported by its revolving credit facility. One letter of credit in the amount of $1.5 million is to satisfy the security requirement of the Company's insurance company for potential workers' compensation claims and the remainder pertain to performance guarantees related to customer contracts entered into by certain of the Company's subsidiaries.
Product Warranty
Changes in the Company’s product warranty liability for the nine months ended July 31, 2014 and 2013, respectively, are as follows (in thousands):
|
| | | | | | | | |
| | Nine months ended July 31, |
| | 2014 | | 2013 |
Balances as of beginning of fiscal year | |
| $3,233 |
| |
| $2,571 |
|
Accruals for warranties | | 2,075 |
| | 795 |
|
Acquired warranty liabilities | | — |
| | 526 |
|
Warranty claims settled | | (1,429 | ) | | (866 | ) |
Balances as of July 31 | |
| $3,879 |
| |
| $3,026 |
|
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.
| |
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, 2013. There have been no material changes to our critical accounting policies during the nine months ended July 31, 2014.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and HEICO Flight Support Corp. and their collective 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, 2014 have been affected by the fiscal 2014 acquisition of certain noncontrolling interests as further detailed in Note 8, Shareholders' Equity, of the Notes to the Condensed Consolidated Financial Statements of this quarterly report and by the fiscal 2013 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2013.
All fiscal 2013 per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in October 2013.
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, |
| | 2014 | | 2013 | | 2014 | | 2013 |
Net sales | |
| $840,088 |
| |
| $721,331 |
| |
| $291,030 |
| |
| $267,133 |
|
Cost of sales | | 544,722 |
| | 456,754 |
| | 187,703 |
| | 169,593 |
|
Selling, general and administrative expenses | | 145,697 |
| | 136,544 |
| | 53,214 |
| | 49,134 |
|
Total operating costs and expenses | | 690,419 |
| | 593,298 |
| | |