Document
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, 2016 |
| | |
| | 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 24, 2016 is as follows:
|
| | | |
Common Stock, $.01 par value | 26,964,256 |
| shares |
Class A Common Stock, $.01 par value | 40,288,525 |
| 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, 2016 | | October 31, 2015 |
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | |
| $27,191 |
| |
| $33,603 |
|
Accounts receivable, net | | 189,617 |
| | 181,593 |
|
Inventories, net | | 286,679 |
| | 243,517 |
|
Prepaid expenses and other current assets | | 11,308 |
| | 9,369 |
|
Deferred income taxes | | 38,873 |
| | 35,530 |
|
Total current assets | | 553,668 |
| | 503,612 |
|
| | | | |
Property, plant and equipment, net | | 118,935 |
| | 105,670 |
|
Goodwill | | 865,533 |
| | 766,639 |
|
Intangible assets, net | | 376,828 |
| | 272,593 |
|
Deferred income taxes | | 590 |
| | 847 |
|
Other assets | | 101,766 |
| | 87,026 |
|
Total assets | |
| $2,017,320 |
| |
| $1,736,387 |
|
| | | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | | |
Current maturities of long-term debt | |
| $335 |
| |
| $357 |
|
Trade accounts payable | | 65,312 |
| | 64,682 |
|
Accrued expenses and other current liabilities | | 115,938 |
| | 100,155 |
|
Income taxes payable | | 4,672 |
| | 3,193 |
|
Total current liabilities | | 186,257 |
| | 168,387 |
|
| | | | |
Long-term debt, net of current maturities | | 509,570 |
| | 367,241 |
|
Deferred income taxes | | 107,687 |
| | 110,588 |
|
Other long-term liabilities | | 113,630 |
| | 105,618 |
|
Total liabilities | | 917,144 |
| | 751,834 |
|
| | | | |
Commitments and contingencies (Note 10) | |
| |
|
| | | | |
Redeemable noncontrolling interests (Note 3) | | 87,906 |
| | 91,282 |
|
| | | | |
Shareholders’ equity: | | | | |
Common Stock, $.01 par value per share; 75,000 shares authorized; 26,964 and 26,906 shares issued and outstanding | | 270 |
| | 269 |
|
Class A Common Stock, $.01 par value per share; 75,000 shares authorized; 40,274 and 39,967 shares issued and outstanding | | 403 |
| | 400 |
|
Capital in excess of par value | | 302,730 |
| | 286,220 |
|
Deferred compensation obligation | | 1,635 |
| | 1,783 |
|
HEICO stock held by irrevocable trust | | (1,635 | ) | | (1,783 | ) |
Accumulated other comprehensive loss | | (22,372 | ) | | (25,080 | ) |
Retained earnings | | 649,131 |
| | 548,054 |
|
Total HEICO shareholders’ equity | | 930,162 |
| | 809,863 |
|
Noncontrolling interests | | 82,108 |
| | 83,408 |
|
Total shareholders’ equity | | 1,012,270 |
| | 893,271 |
|
Total liabilities and equity | |
| $2,017,320 |
| |
| $1,736,387 |
|
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, |
| | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Net sales | |
| $1,012,959 |
| |
| $859,976 |
| |
| $356,084 |
| |
| $300,370 |
|
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Cost of sales | | 633,151 |
| | 552,593 |
| | 222,501 |
| | 192,278 |
|
Selling, general and administrative expenses | | 190,539 |
| | 146,679 |
| | 63,729 |
| | 49,582 |
|
| | | | | | | | |
Total operating costs and expenses | | 823,690 |
| | 699,272 |
| | 286,230 |
| | 241,860 |
|
| | | | | | | | |
Operating income | | 189,269 |
| | 160,704 |
| | 69,854 |
| | 58,510 |
|
| | | | | | | | |
Interest expense | | (6,194 | ) | | (3,346 | ) | | (2,294 | ) | | (1,088 | ) |
Other income (expense) | | 154 |
| | 375 |
| | 16 |
| | (184 | ) |
| | | | | | | | |
Income before income taxes and noncontrolling interests | | 183,229 |
| | 157,733 |
| | 67,576 |
| | 57,238 |
|
| | | | | | | | |
Income tax expense | | 56,600 |
| | 48,200 |
| | 20,600 |
| | 18,300 |
|
| | | | | | | | |
Net income from consolidated operations | | 126,629 |
| | 109,533 |
| | 46,976 |
| | 38,938 |
|
| | | | | | | | |
Less: Net income attributable to noncontrolling interests | | 14,699 |
| | 14,419 |
| | 4,974 |
| | 4,569 |
|
| | | | | | | | |
Net income attributable to HEICO | |
| $111,930 |
| |
| $95,114 |
| |
| $42,002 |
| |
| $34,369 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.67 |
| |
| $1.43 |
| |
| $.63 |
| |
| $.51 |
|
Diluted | |
| $1.64 |
| |
| $1.40 |
| |
| $.62 |
| |
| $.51 |
|
| | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | |
Basic | | 66,975 |
| | 66,706 |
| | 67,126 |
| | 66,813 |
|
Diluted | | 68,082 |
| | 67,790 |
| | 68,278 |
| | 67,901 |
|
| | | | | | | | |
Cash dividends per share | |
| $.16 |
| |
| $.14 |
| |
| $.08 |
| |
| $.07 |
|
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, |
| | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Net income from consolidated operations | |
| $126,629 |
| |
| $109,533 |
| |
| $46,976 |
| |
| $38,938 |
|
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustments | | 2,909 |
| | (17,177 | ) | | (3,639 | ) | | (5,442 | ) |
Total other comprehensive income (loss) | | 2,909 |
| | (17,177 | ) | | (3,639 | ) | | (5,442 | ) |
Comprehensive income from consolidated operations | | 129,538 |
| | 92,356 |
| | 43,337 |
| | 33,496 |
|
Less: Net income attributable to noncontrolling interests | | 14,699 |
| | 14,419 |
| | 4,974 |
| | 4,569 |
|
Less: Foreign currency translation adjustments attributable to noncontrolling interests | | 201 |
| | (904 | ) | | (353 | ) | | (94 | ) |
Comprehensive income attributable to noncontrolling interests | | 14,900 |
| | 13,515 |
| | 4,621 |
| | 4,475 |
|
Comprehensive income attributable to HEICO | |
| $114,638 |
| |
| $78,841 |
| |
| $38,716 |
| |
| $29,021 |
|
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, 2015 |
| $91,282 |
| |
| $269 |
| |
| $400 |
| |
| $286,220 |
| |
| $1,783 |
| |
| ($1,783 | ) | |
| ($25,080 | ) | |
| $548,054 |
| |
| $83,408 |
| |
| $893,271 |
|
Comprehensive income | 7,431 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,708 |
| | 111,930 |
| | 7,469 |
| | 122,107 |
|
Cash dividends ($.16 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,724 | ) | | — |
| | (10,724 | ) |
Issuance of common stock to HEICO Savings and Investment Plan | — |
| | 1 |
| | 1 |
| | 5,913 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,915 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 4,905 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,905 |
|
Proceeds from stock option exercises | — |
| | — |
| | 2 |
| | 4,829 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,831 |
|
Tax benefit from stock option exercises | — |
| | — |
| | — |
| | 867 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 867 |
|
Distributions to noncontrolling interests | (7,337 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,819 | ) | | (8,819 | ) |
Acquisitions of noncontrolling interests | (3,599 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Adjustments to redemption amount of redeemable noncontrolling interests | 129 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (129 | ) | | — |
| | (129 | ) |
Deferred compensation obligation | — |
| | — |
| | — |
| | — |
| | (148 | ) | | 148 |
| | — |
| | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | 50 |
| | 46 |
|
Balances as of July 31, 2016 |
| $87,906 |
| |
| $270 |
| |
| $403 |
| |
| $302,730 |
| |
| $1,635 |
| |
| ($1,635 | ) | |
| ($22,372 | ) | |
| $649,131 |
| |
| $82,108 |
| |
| $1,012,270 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
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 | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | 1 |
| | — |
| | (4 | ) |
Balances as of July 31, 2015 |
| $64,821 |
| |
| $269 |
| |
| $399 |
| |
| $283,490 |
| |
| $1,296 |
| |
| ($1,296 | ) | |
| ($24,562 | ) | |
| $516,007 |
| |
| $80,979 |
| |
| $856,582 |
|
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, |
| 2016 | | 2015 |
Operating Activities: | | | |
Net income from consolidated operations |
| $126,629 |
| |
| $109,533 |
|
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities: | | | |
Depreciation and amortization | 44,603 |
| | 35,066 |
|
Employer contributions to HEICO Savings and Investment Plan | 5,219 |
| | 4,482 |
|
Share-based compensation expense | 4,905 |
| | 4,394 |
|
Increase (decrease) in accrued contingent consideration | 2,635 |
| | (412 | ) |
Foreign currency transaction adjustments, net | 876 |
| | (3,981 | ) |
Deferred income tax benefit | (6,053 | ) | | (4,909 | ) |
Tax benefit from stock option exercises | 867 |
| | 1,404 |
|
Excess tax benefit from stock option exercises | (880 | ) | | (1,404 | ) |
Changes in operating assets and liabilities, net of acquisitions: | | | |
(Increase) decrease in accounts receivable | (2,974 | ) | | 4,482 |
|
Increase in inventories | (13,914 | ) | | (10,653 | ) |
Increase in prepaid expenses and other current assets | (1,943 | ) | | (548 | ) |
Decrease in trade accounts payable | (2,629 | ) | | (6,570 | ) |
Increase (decrease) in accrued expenses and other current liabilities | 15,630 |
| | (7,977 | ) |
Increase (decrease) in income taxes payable | 1,775 |
| | (401 | ) |
Other long-term assets and liabilities, net | (2,330 | ) | | (1,217 | ) |
Net cash provided by operating activities | 172,416 |
| | 121,289 |
|
| | | |
Investing Activities: | | | |
Acquisitions, net of cash acquired | (263,811 | ) | | (56,198 | ) |
Capital expenditures | (23,113 | ) | | (13,767 | ) |
Other | (3,005 | ) | | 171 |
|
Net cash used in investing activities | (289,929 | ) | | (69,794 | ) |
| | | |
Financing Activities: | | | |
Borrowings on revolving credit facility | 260,000 |
| | 68,696 |
|
Payments on revolving credit facility | (118,000 | ) | | (95,000 | ) |
Distributions to noncontrolling interests | (16,156 | ) | | (7,414 | ) |
Cash dividends paid | (10,724 | ) | | (9,343 | ) |
Payment of contingent consideration | (6,960 | ) | | — |
|
Acquisitions of noncontrolling interests | (3,599 | ) | | — |
|
Proceeds from stock option exercises | 4,831 |
| | 3,258 |
|
Excess tax benefit from stock option exercises | 880 |
| | 1,404 |
|
Other | (272 | ) | | (295 | ) |
Net cash provided by (used in) financing activities | 110,000 |
| | (38,694 | ) |
| | | |
Effect of exchange rate changes on cash | 1,101 |
| | (1,333 | ) |
| | | |
Net (decrease) increase in cash and cash equivalents | (6,412 | ) | | 11,468 |
|
Cash and cash equivalents at beginning of year | 33,603 |
| | 20,229 |
|
Cash and cash equivalents at end of period |
| $27,191 |
| |
| $31,697 |
|
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, 2015. The October 31, 2015 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, 2016 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. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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, as amended, 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 in the year preceding the effective date is 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.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. ASU 2015-17 may be applied either prospectively or retrospectively 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 which transition method it will elect. The adoption of this guidance will only effect the presentation of deferred taxes in the Company's consolidated statement of financial position.
In February 2016, the FASB issued ASU 2016-02, "Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, or in fiscal 2020 for HEICO. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects related to accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits and tax deficiencies are to be recognized in the statement of operations as a component of income tax expense rather than as capital in excess of par value, and the tax effects will be presented within the statement of cash flows as an operating cash flow rather than as a financing activity. ASU 2016-09 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 permitted. The recognition of the tax effects in the statement of operations, as well as related changes to the computation of diluted earnings per share are to be applied prospectively and entities may elect to apply the change in the presentation of the statement of cash flows either prospectively or retrospectively. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
2. ACQUISITIONS
In December 2015, the Company, through a subsidiary of HEICO Electronic, acquired certain assets of a company that designs and manufactures underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship voyage recorders and other devices which have been submerged under water. The total consideration includes an accrual of $1.2 million representing the estimated fair value of contingent consideration the Company may be obligated to pay in aggregate during the first five years following the acquisition. The maximum amount of contingent consideration that the Company could be required to pay is $2.0 million. See Note 7, Fair Value Measurements, for additional information regarding the Company's contingent consideration obligation. The purchase price of this acquisition was paid using cash provided by operating activities and the total consideration for the acquisition is not material or significant to the Company’s condensed consolidated financial statements.
On January 11, 2016, the Company, through HEICO Electronic, acquired all of the limited liability company interests of Robertson Fuel Systems, LLC ("Robertson"). The purchase price of this acquisition was paid in cash using proceeds from the Company’s revolving credit facility. Robertson is a world leader in the design and production of mission-extending, crashworthy and ballistically self-sealing auxiliary fuel systems for military rotorcraft. The Company believes that this acquisition is consistent with HEICO’s practice of acquiring outstanding niche designers and manufacturers of critical components in the defense industry and will further enable the Company to broaden its product offerings, technologies and customer base.
The following table summarizes the total consideration for the acquisition of Robertson (in thousands):
|
| | | |
Cash paid |
| $256,293 |
|
Less: cash acquired | (3,271 | ) |
Total consideration |
| $253,022 |
|
The following table summarizes the allocation of the total consideration for the acquisition of Robertson to the estimated fair values of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):
|
| | | |
Assets acquired: | |
Goodwill |
| $91,705 |
|
Customer relationships | 55,100 |
|
Intellectual property | 39,600 |
|
Trade name | 28,400 |
|
Inventories | 27,955 |
|
Property, plant and equipment | 7,200 |
|
Accounts receivable | 5,000 |
|
Other assets | 1,883 |
|
Total assets acquired, excluding cash | 256,843 |
|
| |
Liabilities assumed: | |
Accounts payable | 3,174 |
|
Accrued expenses | 647 |
|
Total liabilities assumed | 3,821 |
|
Net assets acquired, excluding cash |
| $253,022 |
|
The allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. The amortization period of the customer relationships, intellectual property and trade name acquired is 15 years, 22 years and indefinite, respectively.
The primary items that generated the goodwill recognized were the premiums paid by the Company for the future earnings potential of Robertson and the value of its assembled workforce that do not qualify for separate recognition. Acquisition costs associated with the purchase of Robertson totaled $3.1 million for the nine months ended July 31, 2016 and were recorded as a component of selling, general and administrative ("SG&A") expenses in the Company's Condensed Consolidated Statements of Operations. The operating results of Robertson were included in the Company’s results of operations from the effective acquisition date. The Company's consolidated net sales and net income attributable to HEICO for the nine months ended July 31, 2016, includes approximately $60.1 million and $8.8 million, respectively, from the acquisition of Robertson, exclusive of the aforementioned acquisition costs. The Company's consolidated net sales and net income attributable to HEICO for the three months ended July 31, 2016, includes approximately $30.6 million and $5.0 million, respectively, from the acquisition of Robertson.
The following table presents unaudited pro forma financial information for the nine and three months ended July 31, 2016 and July 31, 2015 as if the acquisition of Robertson had occurred as of November 1, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| Nine months ended July 31, | | Three months ended July 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net sales |
| $1,034,293 |
| |
| $921,563 |
| |
| $356,084 |
| |
| $325,527 |
|
Net income from consolidated operations |
| $133,078 |
| |
| $113,946 |
| |
| $47,435 |
| |
| $42,726 |
|
Net income attributable to HEICO |
| $118,379 |
| |
| $99,527 |
| |
| $42,461 |
| |
| $38,157 |
|
Net income per share attributable to HEICO shareholders: | | | | | | | |
Basic |
| $1.77 |
| |
| $1.49 |
| |
| $.63 |
| |
| $.57 |
|
Diluted |
| $1.74 |
| |
| $1.47 |
| |
| $.62 |
| |
| $.56 |
|
The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place as of November 1, 2014. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to intangible assets acquired, increased interest expense associated with borrowings to finance the acquisition, the reclassification of acquisition costs associated with the purchase of Robertson from fiscal 2016 to fiscal 2015, and inventory purchase accounting adjustments charged to cost of sales as the inventory is sold.
3. SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
|
| | | | | | | | |
(in thousands) | | July 31, 2016 | | October 31, 2015 |
Accounts receivable | |
| $192,875 |
| |
| $183,631 |
|
Less: Allowance for doubtful accounts | | (3,258 | ) | | (2,038 | ) |
Accounts receivable, net | |
| $189,617 |
| |
| $181,593 |
|
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts |
| | | | | | | | |
(in thousands) | | July 31, 2016 | | October 31, 2015 |
Costs incurred on uncompleted contracts | |
| $31,831 |
| |
| $22,645 |
|
Estimated earnings | | 25,608 |
| | 16,116 |
|
| | 57,439 |
| | 38,761 |
|
Less: Billings to date | | (48,652 | ) | | (36,442 | ) |
| |
| $8,787 |
| |
| $2,319 |
|
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: | | | | |
Accounts receivable, net (costs and estimated earnings in excess of billings) | |
| $10,628 |
| |
| $6,263 |
|
Accrued expenses and other current liabilities (billings in excess of costs and estimated earnings) | | (1,841 | ) | | (3,944 | ) |
| |
| $8,787 |
| |
| $2,319 |
|
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, 2016 and 2015.
Inventories
|
| | | | | | | | |
(in thousands) | | July 31, 2016 | | October 31, 2015 |
Finished products | |
| $130,523 |
| |
| $119,262 |
|
Work in process | | 36,333 |
| | 32,201 |
|
Materials, parts, assemblies and supplies | | 116,910 |
| | 89,739 |
|
Contracts in process | | 4,111 |
| | 4,521 |
|
Less: Billings to date | | (1,198 | ) | | (2,206 | ) |
Inventories, net of valuation reserves | |
| $286,679 |
| |
| $243,517 |
|
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, 2016 | | October 31, 2015 |
Land | |
| $5,092 |
| |
| $5,060 |
|
Buildings and improvements | | 75,732 |
| | 70,626 |
|
Machinery, equipment and tooling | | 168,735 |
| | 152,022 |
|
Construction in progress | | 10,189 |
| | 4,668 |
|
| | 259,748 |
| | 232,376 |
|
Less: Accumulated depreciation and amortization | | (140,813 | ) | | (126,706 | ) |
Property, plant and equipment, net | |
| $118,935 |
| |
| $105,670 |
|
Accrued Customer Rebates and Credits
The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $10.9 million and $8.1 million as of July 31, 2016 and October 31, 2015, respectively. The total customer rebates and credits deducted within net sales for the nine months ended July 31, 2016 and 2015 was $8.3 million and $4.3 million, respectively. The total customer rebates and credits deducted within net sales for the three months ended July 31, 2016 and 2015 was $3.1 million and $1.4 million, respectively.
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, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Nine months ended July 31, | | Three months ended July 31, |
| | 2016 | | 2015 | | 2016 | | 2015 |
R&D expenses | |
| $32,666 |
| |
| $28,860 |
| |
| $12,674 |
| |
| $9,421 |
|
Redeemable Noncontrolling Interests
The holders of equity interests in certain of the Company's subsidiaries have rights ("Put Rights") that may be exercised on varying dates causing the Company to purchase their equity interests through fiscal 2025. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the "Redemption Amount") be at fair value or 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 is as follows (in thousands):
|
| | | | | | | | |
| | July 31, 2016 | | October 31, 2015 |
Redeemable at fair value | |
| $73,553 |
| |
| $76,929 |
|
Redeemable based on a multiple of future earnings | | 14,353 |
| | 14,353 |
|
Redeemable noncontrolling interests | |
| $87,906 |
| |
| $91,282 |
|
During the second quarter of fiscal 2016, the holders of a 19.9% noncontrolling equity interest in a subsidiary of the FSG that was acquired in fiscal 2011 exercised their option to cause the Company to purchase their interest over a two-year period ending in fiscal 2017. Accordingly, the Company’s ownership interest in the subsidiary increased to 90.05% effective March 2016. The purchase price of the redeemable noncontrolling interest acquired was paid using cash provided by operating activities.
Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss for the nine months ended July 31, 2016 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Foreign Currency Translation | | Pension Benefit Obligation | | Accumulated Other Comprehensive Loss |
Balances as of October 31, 2015 | |
| ($24,368 | ) | |
| ($712 | ) | |
| ($25,080 | ) |
Unrealized gain | | 2,708 |
| | — |
| | 2,708 |
|
Balances as of July 31, 2016 | |
| ($21,660 | ) | |
| ($712 | ) | |
| ($22,372 | ) |
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment for the nine months ended July 31, 2016 are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Segment | | Consolidated Totals |
| | FSG | | ETG | |
Balances as of October 31, 2015 | |
| $337,507 |
| |
| $429,132 |
| |
| $766,639 |
|
Goodwill acquired | | — |
| | 98,580 |
| | 98,580 |
|
Foreign currency translation adjustments | | 262 |
| | 593 |
| | 855 |
|
Adjustments to goodwill | | (569 | ) | | 28 |
| | (541 | ) |
Balances as of July 31, 2016 | |
| $337,200 |
| |
| $528,333 |
| |
| $865,533 |
|
The goodwill acquired pertains to the fiscal 2016 acquisitions described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed. Foreign currency translation adjustments are included in other comprehensive income (loss) in the Company's Condensed Consolidated Statements of Comprehensive Income. The adjustments to goodwill represent immaterial measurement period adjustments to the purchase price allocation of certain fiscal 2015 acquisitions. The Company estimates that all of the goodwill acquired in fiscal 2016 will be deductible for income tax purposes.
Identifiable intangible assets consist of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of July 31, 2016 | | As of October 31, 2015 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing Assets: | | | | | | | | | | | | |
Customer relationships | |
| $248,704 |
| |
| ($82,501 | ) | |
| $166,203 |
| |
| $190,450 |
| |
| ($63,461 | ) | |
| $126,989 |
|
Intellectual property | | 140,091 |
| | (30,704 | ) | | 109,387 |
| | 98,143 |
| | (22,912 | ) | | 75,231 |
|
Licenses | | 6,559 |
| | (2,174 | ) | | 4,385 |
| | 4,200 |
| | (1,882 | ) | | 2,318 |
|
Non-compete agreements | | 814 |
| | (814 | ) | | — |
| | 914 |
| | (914 | ) | | — |
|
Patents | | 774 |
| | (474 | ) | | 300 |
| | 746 |
| | (447 | ) | | 299 |
|
Trade names | | 466 |
| | (67 | ) | | 399 |
| | 166 |
| | (38 | ) | | 128 |
|
| | 397,408 |
| | (116,734 | ) | | 280,674 |
| | 294,619 |
| | (89,654 | ) | | 204,965 |
|
Non-Amortizing Assets: | | | | | | | | | | | | |
Trade names | | 96,154 |
| | — |
| | 96,154 |
| | 67,628 |
| | — |
| | 67,628 |
|
| |
| $493,562 |
| |
| ($116,734 | ) | |
| $376,828 |
| |
| $362,247 |
| |
| ($89,654 | ) | |
| $272,593 |
|
The increase in the gross carrying amount of customer relationships, intellectual property and amortizing and non-amortizing trade names as of July 31, 2016 compared to October 31, 2015 principally relates to such intangible assets recognized in connection with the fiscal 2016 acquisitions (see Note 2, Acquisitions).
Amortization expense related to intangible assets for the nine months ended July 31, 2016 and 2015 was $27.0 million and $19.7 million, respectively. Amortization expense related to intangible assets for the three months ended July 31, 2016 and 2015 was $9.4 million and $6.6 million, respectively. Amortization expense related to intangible assets for the remainder of fiscal 2016 is estimated to be $9.4 million. Amortization expense for each of the next five fiscal years and thereafter is estimated to be $36.6 million in fiscal 2017, $34.6 million in fiscal 2018, $32.5 million in fiscal 2019, $29.8 million in fiscal 2020, $27.3 million in fiscal 2021, and $110.5 million thereafter.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
| | | | | | | | |
| | July 31, 2016 | | October 31, 2015 |
Borrowings under revolving credit facility | |
| $507,743 |
| |
| $365,203 |
|
Capital leases | | 2,162 |
| | 2,395 |
|
| | 509,905 |
| | 367,598 |
|
Less: Current maturities of long-term debt | | (335 | ) | | (357 | ) |
| |
| $509,570 |
| |
| $367,241 |
|
As of July 31, 2016 and October 31, 2015, the weighted average interest rate on borrowings under the Company’s revolving credit facility was 1.7% and 1.3%, respectively. The revolving credit facility contains both financial and non-financial covenants. As of July 31, 2016, the Company was in compliance with all such covenants.
6. INCOME TAXES
The Company's effective tax rate in the first nine months of fiscal 2016 increased to 30.9% from 30.6% in the first nine months of fiscal 2015. The increase principally reflects the benefits recognized in the first nine months of fiscal 2015 from a prior year tax return amendment for additional foreign tax credits related to R&D activities at one of the Company's foreign subsidiaries and higher net income attributable to noncontrolling interests in subsidiaries structured as partnerships. These increases were partially offset by the benefits recognized in the first nine months of fiscal 2016 of a larger income tax credit for qualified R&D activities resulting from the permanent extension of the U.S. federal R&D tax credit in December 2015 and a higher deduction for manufacturing activities mainly resulting from a fiscal 2016 acquisition.
The Company's effective tax rate in the third quarter of fiscal 2016 decreased to 30.5% from 32.0% in the third quarter of fiscal 2015. The decrease principally reflects the previously mentioned higher deduction for manufacturing activities and larger income tax credit for qualified R&D activities as well as the favorable impact of higher tax-exempt unrealized gains in the cash surrender value of life insurance policies related to the HEICO Leadership
Compensation Plan. These decreases were partially offset by the aforementioned benefit of additional foreign tax credits related to a prior year tax return amendment and higher net income attributable to noncontrolling interests in subsidiaries structured as partnerships recognized in the first nine months of fiscal 2015.
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, 2016 |
| | 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 | |
| $— |
| |
| $87,458 |
| |
| $— |
| |
| $87,458 |
|
Equity securities | | 1,975 |
| | — |
| | — |
| | 1,975 |
|
Mutual funds | | 1,737 |
| | — |
| | — |
| | 1,737 |
|
Money market funds | | 1,514 |
| | — |
| | — |
| | 1,514 |
|
Other | | 1,017 |
| | 50 |
| | — |
| | 1,067 |
|
Total assets | |
| $6,243 |
| |
| $87,508 |
| |
| $— |
| |
| $93,751 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $18,777 |
| |
| $18,777 |
|
|
| | | | | | | | | | | | | | | | |
| | As of October 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 | |
| $— |
| |
| $73,238 |
| |
| $— |
| |
| $73,238 |
|
Equity securities | | 1,845 |
| | — |
| | — |
| | 1,845 |
|
Mutual funds | | 1,665 |
| | — |
| | — |
| | 1,665 |
|
Money market funds | | 3,832 |
| | — |
| | — |
| | 3,832 |
|
Other | | 946 |
| | 50 |
| | — |
| | 996 |
|
Total assets | |
| $8,288 |
| |
| $73,288 |
| |
| $— |
| |
| $81,576 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration | |
| $— |
| |
| $— |
| |
| $21,405 |
| |
| $21,405 |
|
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 $93.8 million as of July 31, 2016 and $81.6 million as of October 31, 2015, of which the LCP related assets were $89.0 million and $77.1 million as of July 31, 2016 and October 31, 2015, 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 $92.7 million as of July 31, 2016 and $80.7 million as of October 31, 2015, of which the LCP related liability was $87.9 million and $76.2 million as of July 31, 2016 and October 31, 2015, respectively.
As part of the agreement to acquire certain assets of a company by the ETG in fiscal 2016, the Company may be obligated to pay contingent consideration of up to $2.0 million in aggregate during the five year period following the acquisition. As of July 31, 2016, the estimated fair value of the contingent consideration was $1.3 million.
As part of the agreement to acquire a subsidiary by the FSG in fiscal 2015, the Company may be obligated to pay contingent consideration of up to €6.1 million per year, or €24.4 million in aggregate should the acquired entity meet certain earnings objectives during the first four years following the acquisition. During the third quarter of fiscal 2016, the Company paid €6.1 million, or $7.0 million, of contingent consideration based on the actual earnings of the acquired entity during the first year following the acquisition. As of July 31, 2016, the estimated fair value of the remaining contingent consideration was €15.7 million, or $17.5 million.
The estimated fair value 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 value of the Company's contingent consideration liability as of July 31, 2016 were as follows:
|
| | | | | | | | | |
| Fiscal 2016 Acquisition | | Fiscal 2015 Acquisition |
Compound annual revenue growth rate range | (3 | %) | - | 11% | | 4 | % | - | 17% |
Weighted average discount rate | 3.7% | | 1.7% |
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, 2016 are as follows (in thousands):
|
| | | | |
| | |
Balance as of October 31, 2015 | |
| $21,405 |
|
Increase in accrued contingent consideration | | 2,635 |
|
Contingent consideration related to acquisition | | 1,225 |
|
Payment of contingent consideration | | (6,960 | ) |
Foreign currency transaction adjustments | | 472 |
|
Balance as of July 31, 2016 | |
| $18,777 |
|
| | |
Included in the accompanying Condensed Consolidated Balance Sheet under the following captions: | | |
Accrued expenses and other current liabilities | |
| $6,963 |
|
Other long-term liabilities | | 11,814 |
|
| |
| $18,777 |
|
The Company recorded the increase in accrued contingent consideration and foreign currency transaction adjustments set forth in the table above within SG&A expenses in the Company's Condensed Consolidated Statement of Operations.
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended July 31, 2016.
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, 2016 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, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Numerator: | | | | | | | | |
Net income attributable to HEICO | |
| $111,930 |
| |
| $95,114 |
| |
| $42,002 |
| |
| $34,369 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding - basic | | 66,975 |
| | 66,706 |
| | 67,126 |
| | 66,813 |
|
Effect of dilutive stock options | | 1,107 |
| | 1,084 |
| | 1,152 |
| | 1,088 |
|
Weighted average common shares outstanding - diluted | | 68,082 |
| | 67,790 |
| | 68,278 |
| | 67,901 |
|
| | | | | | | | |
Net income per share attributable to HEICO shareholders: | | | | | | | | |
Basic | |
| $1.67 |
| |
| $1.43 |
| |
| $.63 |
| |
| $.51 |
|
Diluted | |
| $1.64 |
| |
| $1.40 |
| |
| $.62 |
| |
| $.51 |
|
| | | | | | | | |
Anti-dilutive stock options excluded | | 675 |
| | 352 |
| | 574 |
| | 445 |
|
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, 2016 and 2015, respectively, is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate and Intersegment (1) | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Nine months ended July 31, 2016: | | | | | | | | |
Net sales | |
| $647,419 |
| |
| $372,933 |
| |
| ($7,393 | ) | |
| $1,012,959 |
|
Depreciation | | 8,973 |
| | 5,854 |
| | 166 |
| | 14,993 |
|
Amortization | | 12,414 |
| | 16,700 |
| | 496 |
| | 29,610 |
|
Operating income | | 118,757 |
| | 89,280 |
| | (18,768 | ) | | 189,269 |
|
Capital expenditures | | 13,449 |
| | 9,257 |
| | 407 |
| | 23,113 |
|
| | | | | | | | |
Nine months ended July 31, 2015: | | | | | | | | |
Net sales | |
| $591,431 |
| |
| $277,439 |
| |
| ($8,894 | ) | |
| $859,976 |
|
Depreciation | | 7,927 |
| | 5,036 |
| | 112 |
| | 13,075 |
|
Amortization | | 9,636 |
| | 11,859 |
| | 496 |
| | 21,991 |
|
Operating income | | 107,498 |
| | 65,996 |
| | (12,790 | ) | | 160,704 |
|
Capital expenditures | | 9,000 |
| | 4,457 |
| | 310 |
| | 13,767 |
|
| | | | | | | | |
Three months ended July 31, 2016: | | | | | | | | |
Net sales | |
| $222,553 |
| |
| $136,215 |
| |
| ($2,684 | ) | |
| $356,084 |
|
Depreciation | | 3,049 |
| | 1,878 |
| | 54 |
| | 4,981 |
|
Amortization | | 4,169 |
| | 6,105 |
| | 165 |
| | 10,439 |
|
Operating income | | 41,969 |
| | 33,609 |
| | (5,724 | ) | | 69,854 |
|
Capital expenditures | | 5,034 |
| | 2,516 |
| | 17 |
| | 7,567 |
|
| | | | | | | | |
Three months ended July 31, 2015: | | | | | | | | |
Net sales | |
| $206,599 |
| |
| $97,223 |
| |
| ($3,452 | ) | |
| $300,370 |
|
Depreciation | | 2,834 |
| | 1,688 |
| | 41 |
| | 4,563 |
|
Amortization | | 3,568 |
| | 3,629 |
| | 165 |
| | 7,362 |
|
Operating income | | 39,250 |
| | 24,372 |
| | (5,112 | ) | | 58,510 |
|
Capital expenditures | | 2,523 |
| | 1,600 |
| | 184 |
| | 4,307 |
|
| | | | | | | | |
| | | | | | | | |
(1) Intersegment activity principally consists of net sales from the ETG to the FSG. | | |
Total assets by operating segment as of July 31, 2016 and October 31, 2015 are as follows (in thousands): |
| | | | | | | | | | | | | | | | |
| | | | | | Other, Primarily Corporate | | Consolidated Totals |
| | Segment | | |
| | FSG | | ETG | | |
Total assets as of July 31, 2016 | |
| $867,968 |
| |
| $1,010,480 |
| |
| $138,872 |
| |
| $2,017,320 |
|
Total assets as of October 31, 2015 | | 868,218 |
| | 746,018 |
| | 122,151 |
| | 1,736,387 |
|
10. COMMITMENTS AND CONTINGENCIES
Guarantees
As of July 31, 2016, the Company has arranged for standby letters of credit aggregating $2.5 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, 2016 and 2015, respectively, are as follows (in thousands):
|
| | | | | | | | |
| | Nine months ended July 31, |
| | 2016 | | 2015 |
Balances as of beginning of fiscal year | |
| $3,203 |
| |
| $4,079 |
|
Accruals for warranties | | 1,765 |
| | 579 |
|
Acquired warranty liabilities | | — |
| | 35 |
|
Warranty claims settled | | (1,869 | ) | | (1,634 | ) |
Balances as of July 31 | |
| $3,099 |
| |
| $3,059 |
|
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.
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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, 2015. There have been no material changes to our critical accounting policies during the nine months ended July 31, 2016.
Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp. and their respective subsidiaries; and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries.
Our results of operations for the nine and three months ended July 31, 2016 have been
affected by the fiscal 2015 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2015 and the fiscal 2016 acquisition 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, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Net sales | |
| $1,012,959 |
| |
| $859,976 |
| |
| $356,084 |
| |
| $300,370 |
|
Cost of sales | | 633,151 |
| | 552,593 |
| | 222,501 |
| | 192,278 |
|
Selling, general and administrative expenses | | 190,539 |
| | 146,679 |
| | 63,729 |
| |