10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the quarterly period ended July 31, 2015 |
| | |
| | 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, 2015 is as follows:
|
| | | |
Common Stock, $.01 par value | 26,898,938 |
| shares |
Class A Common Stock, $.01 par value | 39,935,811 |
| 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 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, 2015 | | October 31, 2014 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | |
| $31,697 |
| |
| $20,229 |
|
Accounts receivable, net | | 150,930 |
| | 149,669 |
|
Inventories, net | | 236,235 |
| | 218,042 |
|
Prepaid expenses and other current assets | | 9,850 |
| | 8,868 |
|
Deferred income taxes | | 34,150 |
| | 34,485 |
|
Total current assets | | 462,862 |
| | 431,293 |
|
| | | | |
Property, plant and equipment, net | | 103,175 |
| | 93,865 |
|
Goodwill | | 713,127 |
| | 686,271 |
|
Intangible assets, net | | 220,514 |
| | 200,810 |
|
Deferred income taxes | | 974 |
| | 1,063 |
|
Other assets | | 87,762 |
| | 75,912 |
|
Total assets | |
| $1,588,414 |
| |
| $1,489,214 |
|
| | | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | | |
Current maturities of long-term debt | |
| $343 |
| |
| $418 |
|
Trade accounts payable | | 53,035 |
| | 57,157 |
|
Accrued expenses and other current liabilities | | 91,390 |
| | 92,578 |
|
Income taxes payable | | 2,062 |
| | 2,067 |
|
Total current liabilities | | 146,830 |
| | 152,220 |
|
| | | | |
Long-term debt, net of current maturities | | 299,126 |
| | 328,691 |
|
Deferred income taxes | | 114,618 |
| | 111,429 |
|
Other long-term liabilities | | 106,437 |
| | 82,289 |
|
Total liabilities | | 667,011 |
| | 674,629 |
|
| | | | |
Commitments and contingencies (Note 10) | |
| |
|
| | | | |
Redeemable noncontrolling interests (Note 3) | | 64,821 |
| | 39,966 |
|
| | | | |
Shareholders’ equity: | | | | |
Common Stock, $.01 par value per share; 75,000 shares authorized; 26,899 and 26,847 shares issued and outstanding | | 269 |
| | 268 |
|
Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 39,936 and 39,699 shares issued and outstanding | | 399 |
| | 397 |
|
Capital in excess of par value | | 283,490 |
| | 269,351 |
|
Deferred compensation obligation | | 1,296 |
| | 1,138 |
|
HEICO stock held by irrevocable trust | | (1,296 | ) | | (1,138 | ) |
Accumulated other comprehensive loss | | (24,562 | ) | | (8,289 | ) |
Retained earnings | | 516,007 |
| | 437,757 |
|
Total HEICO shareholders’ equity | | 775,603 |
| | 699,484 |
|
Noncontrolling interests | | 80,979 |
| | 75,135 |
|
Total shareholders’ equity | | 856,582 |
| | 774,619 |
|
Total liabilities and equity | |
| $1,588,414 |
| |
| $1,489,214 |
|
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, |
| | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | | |
Net sales | |
| $859,976 |
| |
| $840,088 |
| |
| $300,370 |
| |
| $291,030 |
|
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Cost of sales | | 552,593 |
| | 544,722 |
| | 192,278 |
| | 187,703 |
|
Selling, general and administrative expenses | | 146,679 |
| | 145,697 |
| | 49,582 |
| | 53,214 |
|
| | | | | | | | |
Total operating costs and expenses | | 699,272 |
| | 690,419 |
| | 241,860 |
| | 240,917 |
|
| | | | | | | | |
Operating income | | 160,704 |
| | 149,669 |
| | 58,510 |
| | 50,113 |
|
| | | | | | | | |
Interest expense | | (3,346 | ) | | (4,166 | ) | | (1,088 | ) | | (1,444 | ) |
Other income (expense) | | 375 |
| | 591 |
| | (184 | ) | | 83 |
|
| | | | | | | | |
Income before income taxes and noncontrolling interests | | 157,733 |
| | 146,094 |
| | 57,238 |
| | 48,752 |
|
| | | | | | | | |
Income tax expense | | 48,200 |
| | 43,400 |
| | 18,300 |
| | 11,400 |
|
| | | | | | | | |
Net income from consolidated operations | | 109,533 |
| | 102,694 |
| | 38,938 |
| | 37,352 |
|
| | | | | | | | |
Less: Net income attributable to noncontrolling interests | | 14,419 |
| | 13,506 |
| | 4,569 |
| | 3,986 |
|
| | | | | | | | |
Net income attributable to HEICO | |
| $95,114 |
| |
| $89,188 |
| |
| $34,369 |
| |
| $33,366 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.43 |
| |
| $1.34 |
| |
| $.51 |
| |
| $.50 |
|
Diluted | |
| $1.40 |
| |
| $1.32 |
| |
| $.51 |
| |
| $.49 |
|
| | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | |
Basic | | 66,706 |
| | 66,442 |
| | 66,813 |
| | 66,497 |
|
Diluted | | 67,790 |
| | 67,427 |
| | 67,901 |
| | 67,474 |
|
| | | | | | | | |
Cash dividends per share | |
| $.14 |
| |
| $.47 |
| |
| $.07 |
| |
| $.06 |
|
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, |
| | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | | |
Net income from consolidated operations | |
| $109,533 |
| |
| $102,694 |
| |
| $38,938 |
| |
| $37,352 |
|
Other comprehensive loss: | | | | | | | | |
Foreign currency translation adjustments | | (17,177 | ) | | (2,715 | ) | | (5,442 | ) | | (2,064 | ) |
Total other comprehensive loss | | (17,177 | ) | | (2,715 | ) | | (5,442 | ) | | (2,064 | ) |
Comprehensive income from consolidated operations | | 92,356 |
| | 99,979 |
| | 33,496 |
| | 35,288 |
|
Less: Net income attributable to noncontrolling interests | | 14,419 |
| | 13,506 |
| | 4,569 |
| | 3,986 |
|
Less: Foreign currency translation adjustments attributable to noncontrolling interests | | (904 | ) | | — |
| | (94 | ) | | — |
|
Comprehensive income attributable to noncontrolling interests | | 13,515 |
| | 13,506 |
| | 4,475 |
| | 3,986 |
|
Comprehensive income attributable to HEICO | |
| $78,841 |
| |
| $86,473 |
| |
| $29,021 |
| |
| $31,302 |
|
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 Loss | | Retained Earnings | | Noncontrolling Interests | | Total Shareholders' Equity |
Balances as of October 31, 2014 |
| $39,966 |
| |
| $268 |
| |
| $397 |
| |
| $269,351 |
| |
| $1,138 |
| |
| ($1,138 | ) | |
| ($8,289 | ) | |
| $437,757 |
| |
| $75,135 |
| |
| $774,619 |
|
Comprehensive income (loss) | 3,880 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16,273 | ) | | 95,114 |
| | 9,635 |
| | 88,476 |
|
Cash dividends ($.14 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,343 | ) | | — |
| | (9,343 | ) |
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | 1 |
| | — |
| | 5,090 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,091 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 4,394 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,394 |
|
Proceeds from stock option exercises | — |
| | — |
| | 2 |
| | 3,256 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,258 |
|
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 1,404 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,404 |
|
Redemptions of common stock related to share-based compensation | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) |
Noncontrolling interests assumed related to acquisitions | 17,076 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (3,623 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,791 | ) | | (3,791 | ) |
Adjustments to redemption amount of redeemable noncontrolling interests | 7,522 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,522 | ) | | — |
| | (7,522 | ) |
Deferred compensation obligation | — |
| | — |
| | — |
| | — |
| | 158 |
| | (158 | ) | | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Balances as of July 31, 2015 |
| $64,821 |
| |
| $269 |
| |
| $399 |
| |
| $283,490 |
| |
| $1,296 |
| |
| ($1,296 | ) | |
| ($24,562 | ) | |
| $516,007 |
| |
| $80,979 |
| |
| $856,582 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
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, |
| 2015 | | 2014 |
Operating Activities: | | | |
Net income from consolidated operations |
| $109,533 |
| |
| $102,694 |
|
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | |
Depreciation and amortization | 35,066 |
| | 36,270 |
|
Impairment of intangible assets | — |
| | 9,200 |
|
Share-based compensation expense | 4,394 |
| | 5,874 |
|
Employer contributions to HEICO Savings and Investment Plan | 4,482 |
| | 3,849 |
|
Deferred income tax benefit | (4,909 | ) | | (11,549 | ) |
Tax benefit from stock option exercises | 1,404 |
| | 93 |
|
Excess tax benefit from stock option exercises | (1,404 | ) | | (93 | ) |
Decrease in accrued contingent consideration, net | (412 | ) | | (19,516 | ) |
Foreign currency transaction adjustments, net | (3,981 | ) | | — |
|
Changes in operating assets and liabilities, net of acquisitions: | | | |
Decrease in accounts receivable | 4,482 |
| | 7,909 |
|
Increase in inventories | (10,653 | ) | | (2,289 | ) |
(Increase) decrease in prepaid expenses and other current assets | (548 | ) | | 7,048 |
|
Decrease in trade accounts payable | (6,570 | ) | | (6,129 | ) |
Decrease in accrued expenses and other current liabilities | (7,977 | ) | | (12,456 | ) |
(Decrease) increase in income taxes payable | (401 | ) | | 420 |
|
Other long-term assets and liabilities, net | (1,217 | ) | | 5,908 |
|
Net cash provided by operating activities | 121,289 |
| | 127,233 |
|
| | | |
Investing Activities: | | | |
Acquisitions, net of cash acquired | (56,198 | ) | | (8,737 | ) |
Capital expenditures | (13,767 | ) | | (12,261 | ) |
Other | 171 |
| | (30 | ) |
Net cash used in investing activities | (69,794 | ) | | (21,028 | ) |
| | | |
Financing Activities: | | | |
Borrowings on revolving credit facility | 68,696 |
| | 112,000 |
|
Payments on revolving credit facility | (95,000 | ) | | (102,000 | ) |
Distributions to noncontrolling interests | (7,414 | ) | | (76,717 | ) |
Cash dividends paid | (9,343 | ) | | (31,215 | ) |
Acquisitions of noncontrolling interests | — |
| | (1,243 | ) |
Revolving credit facility issuance costs | — |
| | (767 | ) |
Redemptions of common stock related to share-based compensation | (5 | ) | | (273 | ) |
Proceeds from stock option exercises | 3,258 |
| | 594 |
|
Excess tax benefit from stock option exercises | 1,404 |
| | 93 |
|
Other | (290 | ) | | (1,082 | ) |
Net cash used in financing activities | (38,694 | ) | | (100,610 | ) |
| | | |
Effect of exchange rate changes on cash | (1,333 | ) | | (150 | ) |
| | | |
Net increase in cash and cash equivalents | 11,468 |
| | 5,445 |
|
Cash and cash equivalents at beginning of year | 20,229 |
| | 15,499 |
|
Cash and cash equivalents at end of period |
| $31,697 |
| |
| $20,944 |
|
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, 2014. The October 31, 2014 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, 2015 are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company has 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.
New Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The Company adopted ASU 2013-05 in the first quarter of fiscal 2015, resulting in no impact on the Company's 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. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 by one year. Accordingly, ASU 2014-09 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2017, or in fiscal 2019 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 and cash flows.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure inventories at the lower of cost or net realizable value. Under current guidance, inventories are measured at the lower of cost or market. ASU 2015-11 must be applied prospectively and 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 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 and cash flows.
2. ACQUISITIONS
In January 2015, the Company, through its HEICO Flight Support Corp. subsidiary, acquired 80% of the equity of Aeroworks International Holdings, B.V. (“Aeroworks”). Aeroworks, which is headquartered in The Netherlands and maintains a significant portion of its production facilities in Thailand and Laos, is a manufacturer of both composite and metal parts used primarily in aircraft interior applications, including seating, galleys, lavatories, doors, and overhead bins. The remaining 20% interest continues to be owned by a certain member of Aeroworks' management team (see Note 3, Selected Financial Statement Information, for additional information). The total consideration includes an accrual representing the estimated fair value of contingent consideration that the Company may be obligated to pay should Aeroworks meet certain earnings objectives during each of the first four years following the acquisition. See Note 7, Fair Value Measurements, for additional information regarding the Company’s contingent consideration obligation.
In January 2015, the Company, through its HEICO Flight Support Corp. subsidiary, acquired 80.1% of the equity of Harter Aerospace, LLC ("Harter"). Harter is a globally recognized component and accessory maintenance, repair, and overhaul (MRO) station specializing in commercial aircraft accessories, including thrust reverse actuation systems and pneumatics, and electromechanical components. The remaining 19.9% interest continues to be
owned by certain members of Harter's management team (see Note 3, Selected Financial Statement Information, for additional information).
In May 2015, the Company, through its HEICO Flight Support Corp. subsidiary, acquired all of the stock of Thermal Energy Products, Inc. (“TEP”). TEP engineers, designs and manufactures removable/reusable insulation systems for industrial, commercial, aerospace and defense applications.
The purchase prices of the fiscal 2015 acquisitions were paid in cash principally using proceeds from the Company’s revolving credit facility and the total consideration for the acquisitions is not material or significant to the Company's condensed consolidated financial statements. The allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed for the fiscal 2015 acquisitions is preliminary until the Company obtains final information regarding their fair values.
The operating results of the fiscal 2015 acquisitions were included in the Company’s results of operations from the effective acquisition dates. The amount of net sales and earnings of the fiscal 2015 acquisitions included in the Condensed Consolidated Statements of Operations is not material. Had the fiscal 2015 acquisitions been consummated as of November 1, 2013, 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, 2015 and July 31, 2014 would not have been materially different than the reported amounts.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
|
| | | | | | | | |
(in thousands) | | July 31, 2015 | | October 31, 2014 |
Accounts receivable | |
| $153,185 |
| |
| $151,812 |
|
Less: Allowance for doubtful accounts | | (2,255 | ) | | (2,143 | ) |
Accounts receivable, net | |
| $150,930 |
| |
| $149,669 |
|
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
|
| | | | | | | | |
(in thousands) | | July 31, 2015 | | October 31, 2014 |
Costs incurred on uncompleted contracts | |
| $22,814 |
| |
| $24,437 |
|
Estimated earnings | | 11,761 |
| | 11,747 |
|
| | 34,575 |
| | 36,184 |
|
Less: Billings to date | | (35,284 | ) | | (29,829 | ) |
| |
| ($709 | ) | |
| $6,355 |
|
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings) | |
| $4,695 |
| |
| $8,161 |
|
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) | | (5,404 | ) | | (1,806 | ) |
| |
| ($709 | ) | |
| $6,355 |
|
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, 2015 and 2014.
Inventories
|
| | | | | | | | |
(in thousands) | | July 31, 2015 | | October 31, 2014 |
Finished products | |
| $113,626 |
| |
| $106,229 |
|
Work in process | | 32,871 |
| | 30,056 |
|
Materials, parts, assemblies and supplies | | 87,598 |
| | 79,163 |
|
Contracts in process | | 4,508 |
| | 2,594 |
|
Less: Billings to date | | (2,368 | ) | | — |
|
Inventories, net of valuation reserves | |
| $236,235 |
| |
| $218,042 |
|
Contracts in process represents accumulated capitalized costs associated with fixed price contracts. 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, 2015 | | October 31, 2014 |
Land | |
| $4,954 |
| |
| $4,501 |
|
Buildings and improvements | | 69,091 |
| | 60,332 |
|
Machinery, equipment and tooling | | 152,249 |
| | 139,963 |
|
Construction in progress | | 6,630 |
| | 6,905 |
|
| | 232,924 |
| | 211,701 |
|
Less: Accumulated depreciation and amortization | | (129,749 | ) | | (117,836 | ) |
Property, plant and equipment, net | |
| $103,175 |
| |
| $93,865 |
|
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $7.8 million and $10.9 million as of July 31, 2015 and October 31, 2014, respectively. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2015 and 2014 was $4.3 million and $5.3 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2015 and 2014 was $1.4 million and $1.9 million, respectively. The decrease in the amount of accrued customer rebates and credits since October 31, 2014 principally reflects payments made during fiscal 2015.
Employee Retirement Plan
The components of net pension income for the nine and three months ended July 31, 2015 and 2014 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, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Expected return on plan assets | |
| $555 |
| |
| $555 |
| |
| $185 |
| |
| $185 |
|
Interest cost | | 420 |
| | 459 |
| | 140 |
| | 153 |
|
Net pension income | |
| $135 |
| |
| $96 |
| |
| $45 |
| |
| $32 |
|
Research and Development Expenses
The amount of new product research and development ("R&D") expenses included in cost of sales for the nine and three months ended July 31, 2015 and 2014 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2015 | | 2014 | | 2015 | | 2014 |
R&D expenses | |
| $28,860 |
| |
| $28,278 |
| |
| $9,421 |
| |
| $9,862 |
|
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 (inclusive of the fiscal 2015 transactions described below) that the Company could be required to pay at varying dates through fiscal 2023 is as follows (in thousands):
|
| | | | | | | | |
| | July 31, 2015 | | October 31, 2014 |
Redeemable at fair value | |
| $52,521 |
| |
| $27,666 |
|
Redeemable based on a multiple of future earnings | | 12,300 |
| | 12,300 |
|
Redeemable noncontrolling interests | |
| $64,821 |
| |
| $39,966 |
|
As discussed in Note 2, Acquisitions, the Company, through the FSG, acquired interests of 80% and 80.1% in Aeroworks and Harter, respectively, in January 2015. As part of the Aeroworks purchase agreement, the Company has the right to purchase the noncontrolling interest over a four-year period beginning in fiscal 2019, or sooner under certain conditions, and the noncontrolling interest holder has the right to cause the Company to purchase the same equity interest over the same period. As part of the Harter purchase agreement, the Company has the right to purchase the noncontrolling interests over a four-year period beginning in fiscal 2020, or sooner under certain conditions, and the noncontrolling interest holders have the right to cause the Company to purchase the same equity interests over the same period.
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the nine months ended July 31, 2015 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2014 | |
| ($8,348 | ) | |
| $59 |
| |
| ($8,289 | ) |
Unrealized loss | | (16,273 | ) | | — |
| | (16,273 | ) |
Balances as of July 31, 2015 | |
| ($24,621 | ) | |
| $59 |
| |
| ($24,562 | ) |
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment for the nine months ended July 31, 2015 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Segment | | Consolidated Totals |
| | FSG | | ETG | |
Balances as of October 31, 2014 | |
| $282,407 |
| |
| $403,864 |
| |
| $686,271 |
|
Goodwill acquired | | 36,064 |
| | — |
| | 36,064 |
|
Foreign currency translation adjustments | | (1,704 | ) | | (7,504 | ) | | (9,208 | ) |
Balances as of July 31, 2015 | |
| $316,767 |
| |
| $396,360 |
| |
| $713,127 |
|
The goodwill acquired pertains to the fiscal 2015 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 and noncontrolling interests assumed. The Company estimates that approximately $7 million of the goodwill acquired in fiscal 2015 will be deductible for income tax purposes.
Identifiable intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of July 31, 2015 | | As of October 31, 2014 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
| $156,119 |
| |
| ($60,058 | ) | |
| $96,061 |
| |
| $144,478 |
| |
| ($55,393 | ) | |
| $89,085 |
|
Intellectual property | | 83,760 |
| | (20,932 | ) | | 62,828 |
| | 73,005 |
| | (17,620 | ) | | 55,385 |
|
Licenses | | 2,900 |
| | (1,810 | ) | | 1,090 |
| | 2,900 |
| | (1,645 | ) | | 1,255 |
|
Non-compete agreements | | 915 |
| | (915 | ) | | — |
| | 1,020 |
| | (1,020 | ) | | — |
|
Patents | | 731 |
| | (432 | ) | | 299 |
| | 712 |
| | (405 | ) | | 307 |
|
Trade names | | 166 |
| | (33 | ) | | 133 |
| | 166 |
| | (17 | ) | | 149 |
|
| | 244,591 |
| | (84,180 | ) | | 160,411 |
| | 222,281 |
| | (76,100 | ) | | 146,181 |
|
Non-Amortizing Assets: | | | | | | | | | | | | |
Trade names | | 60,103 |
| | — |
| | 60,103 |
| | 54,629 |
| | — |
| | 54,629 |
|
| |
| $304,694 |
| |
| ($84,180 | ) | |
| $220,514 |
| |
| $276,910 |
| |
| ($76,100 | ) | |
| $200,810 |
|
The increase in the gross carrying amount of customer relationships, intellectual property and non-amortizing trade names as of July 31, 2015 compared to October 31, 2014 principally relates to such intangible assets recognized in connection with the fiscal 2015 acquisitions (see Note 2, Acquisitions). The weighted-average amortization period of the customer relationships and intellectual property acquired during fiscal 2015 is 10 and 12 years, respectively.
Amortization expense related to intangible assets for the nine months ended July 31, 2015 and 2014 was $19.7 million and $21.1 million, respectively. Amortization expense related to intangible assets for the three months ended July 31, 2015 and 2014 was $6.6 million and $7.0
million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2015 is estimated to be $6.5 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $25.2 million in fiscal 2016, $24.3 million in fiscal 2017, $22.5 million in fiscal 2018, $20.6 million in fiscal 2019, $18.1 million in fiscal 2020, and $43.2 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
| | | | | | | | |
| | July 31, 2015 | | October 31, 2014 |
Borrowings under revolving credit facility | |
| $297,046 |
| |
| $326,000 |
|
Capital leases | | 2,423 |
| | 3,109 |
|
| | 299,469 |
| | 329,109 |
|
Less: Current maturities of long-term debt | | (343 | ) | | (418 | ) |
| |
| $299,126 |
| |
| $328,691 |
|
During the first quarter of fiscal 2015, the Company elected to borrow €32 million under its revolving credit facility, which allows for borrowings made in foreign currencies up to a $50 million sublimit. The funds were used to facilitate an acquisition made during the same fiscal quarter. As of July 31, 2015, the United States ("U.S.") dollar equivalent of the Company's Euro borrowing was $35.0 million.
As of July 31, 2015 and October 31, 2014, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 1.3%. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 2015, the Company was in compliance with all such covenants.
6. INCOME TAXES
As of July 31, 2015, 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, 2015 is as follows (in thousands):
|
| | | | |
Balance as of October 31, 2014 | |
| $879 |
|
Increases related to current year tax positions | | 114 |
|
Increases related to prior year tax positions | | 14 |
|
Lapse of statute of limitations | | (52 | ) |
Balance as of July 31, 2015 | |
| $955 |
|
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, 2015. 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 2015 increased to 30.6% from 29.7% in the first nine months of fiscal 2014. The increase is principally due to the impact of a larger reduction in accrued contingent consideration in the first nine months of fiscal 2014 associated with a prior year acquisition acquired by means of a nontaxable stock transaction. This increase was partially offset by an income tax credit for qualified R&D activities for the last ten months of fiscal 2014 that was recognized in the first quarter of fiscal 2015 resulting from the retroactive extension of the U.S. federal R&D tax credit in December 2014 to cover calendar year 2014 and the benefit of recognizing additional foreign tax credits related to R&D activities at one of the Company's foreign subsidiaries inclusive of a prior year tax return amendment.
The Company’s effective tax rate in the third quarter of fiscal 2015 increased to 32.0% from 23.4% in the third quarter of fiscal 2014. The increase is principally due to the impact of a larger reduction in accrued contingent consideration in the third quarter of fiscal 2014 compared to fiscal 2015 associated with a prior year acquisition acquired by means of a nontaxable stock transaction.
The Company has not made a provision for U.S. income taxes on the undistributed earnings of a fiscal 2015 foreign acquisition as such earnings are considered permanently reinvested outside of the U.S. The amount of undistributed earnings is not material to the Company's condensed consolidated financial statements.
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, 2015 |
| | 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 | |
| $— |
| |
| $75,809 |
| |
| $— |
| |
| $75,809 |
|
Money market funds | | 2,482 |
| | — |
| | — |
| | 2,482 |
|
Equity securities | | 2,131 |
| | — |
| | — |
| | 2,131 |
|
Mutual funds | | 1,737 |
| | — |
| | — |
| | 1,737 |
|
Other | | 967 |
| | 50 |
| | — |
| | 1,017 |
|
Total assets | |
| $7,317 |
| |
| $75,859 |
| |
| $— |
| |
| $83,176 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $20,622 |
| |
| $20,622 |
|
|
| | | | | | | | | | | | | | | | |
| | As of October 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 | |
| $— |
| |
| $61,958 |
| |
| $— |
| |
| $61,958 |
|
Money market funds | | 3,974 |
| | — |
| | — |
| | 3,974 |
|
Equity securities | | 2,225 |
| | — |
| | — |
| | 2,225 |
|
Mutual funds | | 1,903 |
| | — |
| | — |
| | 1,903 |
|
Other | | 1,339 |
| | 50 |
| | — |
| | 1,389 |
|
Total assets | |
| $9,441 |
| |
| $62,008 |
| |
| $— |
| |
| $71,449 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $1,184 |
| |
| $1,184 |
|
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 and mutual funds that are classified within Level 1. The assets of both plans are held within irrevocable trusts and
classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $83.2 million as of July 31, 2015 and $71.4 million as of October 31, 2014, of which the LCP related assets were $78.3 million and $65.9 million as of July 31, 2015 and October 31, 2014, 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 $82.2 million as of July 31, 2015 and $70.5 million as of October 31, 2014, of which the LCP related liability was $77.3 million and $65.0 million as of July 31, 2015 and October 31, 2014, respectively.
As part of the agreement to acquire a subsidiary by the FSG in the first quarter of fiscal 2015, the Company may be obligated to pay contingent consideration of up to €24.4 million in aggregate, which translates to approximately $26.8 million based on the July 31, 2015 exchange rate, should the acquired entity meet certain earnings objectives during each of the first four years following the acquisition. The estimated fair value of the contingent consideration as of the acquisition date was €18.1 million, or approximately $21.3 million. As of July 31, 2015, the estimated fair value of the contingent consideration was €18.8 million, or $20.6 million. The $.7 million decrease is principally attributed to the strengthening of the U.S. dollar relative to the Euro partially offset by revised earnings estimates that reflect more favorable projected market conditions during the earnout period and was recorded as a reduction to selling, general and administrative expenses ("SG&A") in the Company's Condensed Consolidated Statement of Operations.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2013, the Company may be obligated to pay contingent consideration of up to $30.0 million should the acquired entity meet certain earnings objectives during calendar years 2014 and 2015. The $1.2 million estimated fair value of the contingent consideration as of October 31, 2014 was recorded as a reduction to SG&A in the Company's Condensed Consolidated Statement of Operations in the second quarter of fiscal 2015. The decrease in the fair value of the contingent consideration is principally attributed to revised earnings estimates that reflect less favorable projected market conditions during the earnout period.
The estimated fair value of the fiscal 2015 contingent consideration arrangement described above 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. 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 amount was 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 value of the Company's contingent consideration liability as of July 31, 2015 were as follows:
|
| | | | |
| | Fiscal 2015 Acquisition |
Compound annual revenue growth rate range | | (3%) | - | 15% |
Weighted average discount rate | | 2.2% |
Changes in the Company’s contingent consideration liability measured at fair value on a recurring basis using unobservable inputs (Level 3) for the nine months ended July 31, 2015 are as follows (in thousands):
|
| | | | |
| | |
Balance as of October 31, 2014 | |
| $1,184 |
|
Contingent consideration related to acquisition | | 21,355 |
|
Decrease in accrued contingent consideration, net | | (412 | ) |
Foreign currency transaction adjustments | | (1,505 | ) |
Balance as of July 31, 2015 | |
| $20,622 |
|
| | |
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | | |
Accrued expenses and other current liabilities | |
| $6,119 |
|
Other long-term liabilities | | 14,503 |
|
| |
| $20,622 |
|
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended July 31, 2015.
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, 2015 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. 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, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Numerator: | | | | | | | | |
Net income attributable to HEICO | |
| $95,114 |
| |
| $89,188 |
| |
| $34,369 |
| |
| $33,366 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding - basic | | 66,706 |
| | 66,442 |
| | 66,813 |
| | 66,497 |
|
Effect of dilutive stock options | | 1,084 |
| | 985 |
| | 1,088 |
| | 977 |
|
Weighted average common shares outstanding - diluted | | 67,790 |
| | 67,427 |
| | 67,901 |
| | 67,474 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.43 |
| |
| $1.34 |
| |
| $.51 |
| |
| $.50 |
|
Diluted | |
| $1.40 |
| |
| $1.32 |
| |
| $.51 |
| |
| $.49 |
|
| | | | | | | | |
Anti-dilutive stock options excluded | | 352 |
| | 430 |
| | 445 |
| | 442 |
|
9. OPERATING SEGMENTS
Information on the Company’s two operating segments, the FSG and the ETG, for the nine and three months ended July 31, 2015 and 2014, respectively, is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Nine months ended July 31, 2015: | | | | | | | | |
Net sales | |
| $591,431 |
| |
| $277,439 |
| |
| ($8,894 | ) | |
| $859,976 |
|
Depreciation and amortization | | 17,563 |
| | 16,895 |
| | 608 |
| | 35,066 |
|
Operating income | | 107,498 |
| | 65,996 |
| | (12,790 | ) | | 160,704 |
|
Capital expenditures | | 9,000 |
| | 4,457 |
| | 310 |
| | 13,767 |
|
| | | | | | | | |
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 |
|
| | | | | | | | |
Three months ended July 31, 2015: | | | | | | | | |
Net sales | |
| $206,599 |
| |
| $97,223 |
| |
| ($3,452 | ) | |
| $300,370 |
|
Depreciation and amortization | | 6,402 |
| | 5,317 |
| | 206 |
| | 11,925 |
|
Operating income | | 39,250 |
| | 24,372 |
| | (5,112 | ) | | 58,510 |
|
Capital expenditures | | 2,523 |
| | 1,600 |
| | 184 |
| | 4,307 |
|
| | | | | | | | |
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 |
|
Total assets by operating segment as of July 31, 2015 and October 31, 2014 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of July 31, 2015 | |
| $790,103 |
| |
| $672,910 |
| |
| $125,401 |
| |
| $1,588,414 |
|
Total assets as of October 31, 2014 | | 676,824 |
| | 703,144 |
| | 109,246 |
| | 1,489,214 |
|
10. COMMITMENTS AND CONTINGENCIES
Guarantees
As of July 31, 2015, the Company has arranged for standby letters of credit aggregating $2.3 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 insurance company used by the 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, 2015 and 2014, respectively, are as follows (in thousands):
|
| | | | | | | | |
| | Nine months ended July 31, |
| | 2015 | | 2014 |
Balances as of beginning of fiscal year | |
| $4,079 |
| |
| $3,233 |
|
Accruals for warranties | | 579 |
| | 2,075 |
|
Acquired warranty liabilities | | 35 |
| | — |
|
Warranty claims settled | | (1,634 | ) | | (1,429 | ) |
Balances as of July 31 | |
| $3,059 |
| |
| $3,879 |
|
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.
11. SUBSEQUENT EVENTS
In August 2015, the Company, through its HEICO Flight Support Corp. subsidiary, acquired 80.1% of the assets and assumed certain liabilities of Aerospace & Commercial Technologies, Inc. (“ACT”). ACT is a leading provider of products and services necessary to maintain up-to-date F-16 fighter aircraft operational capabilities. The remaining 19.9% continues to be owned by certain members of ACT’s management team.
In August 2015, the Company, through its HEICO Flight Support Corp. subsidiary, acquired all of the stock of Astroseal Products Mfg. Corporation (“Astroseal”). Astroseal makes expanded foil mesh which is integrated into composite aerospace structures for lighting strike protection in fixed and rotary wing aircraft.
In August 2015, the Company, through HEICO Electronic, acquired 80.1% of the equity of Midwest Microwave Solutions, Inc. (“MMS”). MMS designs, manufactures and sells unique Size, Weight, Power and Cost (SWAP-C) optimized Communications and Electronic Intercept
Receivers and Tuners for military and intelligence applications. The remaining 19.9% continues to be owned by certain members of MMS’s management team.
The purchase prices of these acquisitions were paid in cash principally using proceeds from the Company’s revolving credit facility and the total consideration for the acquisitions is not material or significant to the Company's condensed consolidated financial statements. The allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities and noncontrolling interests assumed for these acquisitions 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, 2014. There have been no material changes to our critical accounting policies during the nine months ended July 31, 2015.
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, 2015 have been affected by the fiscal 2015 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report.
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, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Net sales | |
| $859,976 |
| |
| $840,088 |
| |
| $300,370 |
| |
| $291,030 |
|
Cost of sales | | 552,593 |
| | 544,722 |
| | 192,278 |
| | 187,703 |
|
Selling, general and administrative expenses | | 146,679 |
| | 145,697 |
| | 49,582 |
| | 53,214 |
|
Total operating costs and expenses | | 699,272 |
| | 690,419 |
| | 241,860 |
| | 240,917 |
|
Operating income | |
| $160,704 |
| |
| $149,669 |
| |
| $58,510 |
| |
| $50,113 |
|
| | | | | | | | |
Net sales by segment: | | | | | | | | |
Flight Support Group | |
| $591,431 |
| |
| $568,038 |
| |
| $206,599 |
| |
| $191,561 |
|
Electronic Technologies Group | | 277,439 |
| | 279,298 |
| | 97,223 |
| | 102,065 |
|
Intersegment sales | | (8,894 | ) | | (7,248 | ) | | (3,452 | |