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, 1999
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 (I.R.S. Employer Identification No.)
incorporation or organization)
3000 TAFT STREET, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices) (Zip Code)
(954) 987-6101
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
The number of shares outstanding of each of the Registrant's classes of common
stock as of September 8, 1999:
Title of Class Shares Outstanding
Common Stock, $.01 par value 8,477,998
Class A Common Stock, $.01 par value 7,345,751
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HEICO CORPORATION
INDEX
Page No.
Part I. Financial information:
Consolidated Condensed Balance Sheets as of
July 31, 1999 (unaudited) and October 31, 1998 2
Consolidated Condensed Statements of Operations (unaudited)
for the nine and three months ended July 31, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows (unaudited)
for the nine months ended July 31, 1999 and 1998 4
Notes to Consolidated Condensed Financial Statements (unaudited) 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information:
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
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PART I. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
JULY 31, 1999 OCTOBER 31, 1998
------------- ----------------
(UNAUDITED)
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Current assets:
Cash and cash equivalents $ 6,734,000 $ 8,609,000
Short-term investments 4,817,000 2,051,000
Accounts receivable, net 27,515,000 19,422,000
Inventories 38,998,000 24,327,000
Prepaid expenses and other current assets 3,361,000 1,768,000
Deferred income taxes 1,512,000 2,010,000
------------- -------------
Total current assets 82,937,000 58,187,000
------------- -------------
Property, plant and equipment 42,197,000 30,823,000
Less accumulated depreciation (17,594,000) (16,028,000)
------------- -------------
Property, plant and equipment, net 24,603,000 14,795,000
------------- -------------
Intangible assets less accumulated amortization of
$2,637,000 and $1,186,000, respectively 126,020,000 53,964,000
------------- -------------
Unexpended bond proceeds 1,815,000 2,252,000
------------- -------------
Deferred income taxes 1,553,000 495,000
------------- -------------
Other assets 5,945,000 3,368,000
------------- -------------
Total assets $ 242,873,000 $ 133,061,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 503,000 $ 377,000
Trade accounts payable 10,698,000 6,158,000
Accrued expenses and other current liabilities 11,245,000 10,401,000
Income taxes payable 412,000 664,000
------------- -------------
Total current liabilities 22,858,000 17,600,000
------------- -------------
Long-term debt, net of current maturities 58,639,000 30,143,000
------------- -------------
Other non-current liabilities 3,737,000 2,819,000
------------- -------------
Total liabilities 85,234,000 50,562,000
------------- -------------
Minority interest in consolidated subsidiary 20,450,000 14,892,000
------------- -------------
Commitments and contingencies (Notes 3 and 10)
Shareholders' equity:
Preferred stock, par value $.01 per share;
Authorized - 10,000,000 shares
issuable in series; 200,000 designated as Series A
Junior Participating Preferred Stock, none issued -- --
Common Stock, $.01 par value; Authorized -
30,000,000 shares; Issued and outstanding -
8,475,032 and 8,323,036 shares, respectively 85,000 83,000
Class A Common Stock, $.01 par value;
Authorized - 30,000,000 shares; Issued and
outstanding - 7,232,828 and 4,140,404 shares,
respectively 72,000 41,000
Capital in excess of par value 92,725,000 34,474,000
Accumulated other comprehensive income (1,267,000) (1,142,000)
Retained earnings 47,581,000 36,649,000
------------- -------------
139,196,000 70,105,000
Less: Note receivable from employee savings and
investment plan (2,007,000) (2,498,000)
------------- -------------
Total shareholders' equity 137,189,000 67,607,000
------------- -------------
Total liabilities and shareholders' equity $ 242,873,000 $ 133,061,000
============= =============
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
.
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HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
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Net sales $ 96,535,000 $ 66,518,000 $ 35,593,000 $ 24,062,000
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of sales 56,944,000 42,250,000 21,114,000 15,254,000
Selling, general and administrative
expenses 16,608,000 11,845,000 6,045,000 4,364,000
------------ ------------ ------------ ------------
Total operating costs and expenses 73,552,000 54,095,000 27,159,000 19,618,000
------------ ------------ ------------ ------------
Operating income 22,983,000 12,423,000 8,434,000 4,444,000
Interest expense (1,072,000) (381,000) (251,000) (128,000)
Interest and other income 727,000 1,736,000 180,000 637,000
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 22,638,000 13,778,000 8,363,000 4,953,000
Income tax expense 8,263,000 4,723,000 3,112,000 1,733,000
------------ ------------ ------------ ------------
Income before minority interest 14,375,000 9,055,000 5,251,000 3,220,000
Minority interest 2,731,000 1,709,000 900,000 607,000
------------ ------------ ------------ ------------
Net income $ 11,644,000 $ 7,346,000 $ 4,351,000 $ 2,613,000
============ ============ ============ ============
Net income per share:
Basic $.80 $.59 $.28 $.21
==== ==== ==== ====
Diluted $.67 $.47 $.24 $.17
==== ==== ==== ====
Weighted average number of
common shares outstanding:
Basic 14,509,520 12,496,073 15,705,341 12,582,605
============ ============ ============ ============
Diluted 17,398,752 15,590,084 18,505,696 15,751,954
============ ============ ============ ============
Cash dividends per share $.05 $.05 $.025 $.025
==== ==== ===== =====
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
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HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED
JULY 31,
------------------------------
1999 1998
------------ ------------
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Cash flows from operating activities:
Net income $ 11,644,000 $ 7,346,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,057,000 1,658,000
Deferred income taxes (564,000) (314,000)
Deferred financing costs -- (990,000)
Minority interest in consolidated subsidiary 2,731,000 1,709,000
Change in assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (1,063,000) (1,593,000)
(Increase) in inventories (8,753,000) (6,552,000)
(Increase) decrease in prepaid expenses and
other current assets (508,000) 81,000
(Increase) in unexpended bond proceeds (118,000) --
Increase in trade payables, accrued
expenses and other current liabilities 72,000 3,963,000
(Decrease) in income taxes payable (252,000) (969,000)
Other 290,000 (164,000)
------------ ------------
Net cash provided by operating activities 7,536,000 4,175,000
------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (83,523,000) (35,328,000)
Net change in short-term investments (2,441,000) (3,771,000)
Purchases of property, plant and equipment (10,034,000) (3,989,000)
Payment received from employee savings and
investment plan note receivable 491,000 444,000
Other (1,842,000) 1,013,000
------------ ------------
Net cash (used in) investing activities (97,349,000) (41,631,000)
------------ ------------
Cash flows from financing activities:
Proceeds from Class A Common Stock offering 56,187,000 --
Proceeds from the issuance of long-term debt:
Proceeds from revolving credit facility 70,500,000 25,000,000
Bond reimbursement proceeds 513,000 2,469,000
Other 836,000 94,000
Principal payments on long-term debt (44,017,000) (496,000)
Proceeds from the exercise of stock options 530,000 519,000
Tax benefit on stock option exercises 1,622,000 --
Repurchases of common stock (105,000) --
Cash dividends paid (708,000) (644,000)
Additional minority interest investment 2 ,827,000 --
Other (247,000) (1,000)
------------ ------------
Net cash provided by financing activities 87,938,000 26,941,000
------------ ------------
Net (decrease) in cash and cash equivalents (1,875,000) (10,515,000)
Cash and cash equivalents at beginning of year 8,609,000 24,199,000
------------ ------------
Cash and cash equivalents at end of period $ 6,734,000 $ 13,684,000
============ ============
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
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HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED
July 31, 1999
1. The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes normally included in annual
consolidated financial statements and should be read in conjunction with the
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K for the year ended October 31, 1998. In the opinion of
management, the unaudited consolidated condensed financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the consolidated condensed balance sheets, statements of
operations and cash flows for such interim periods presented. The results of
operations for the nine months ended July 31, 1999 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. In February and March 1999, the Company completed, through a public offering,
the issuance of an aggregate of 2,994,050 shares of Class A Common Stock,
including over-allotment options granted to the underwriters. The net proceeds
of the offering to the Company were $56.2 million. A portion of the proceeds of
the offering were used to repay the outstanding balance under the Company's
Credit Facility and to acquire Air Radio & Instruments Corp., Turbine Kinetics,
Inc. and AeroKinetics, Inc. (See Note 3). The remaining proceeds were used for
working capital and general corporate purposes.
3. Between December 1998 and June 1999, the Company acquired substantially all
of the assets of Rogers-Dierks, Inc. (Rogers-Dierks), Radiant Power Corp.
(Radiant) and Turbine Kinetics, Inc. and AeroKinetics, Inc. (together "Turbine")
and all of the outstanding capital stock of Air Radio & Instruments Corp. (Air
Radio) and Leader Tech, Inc. (Leader Tech) for an aggregate purchase price of
approximately $51 million. Rogers-Dierks, Turbine and Air Radio were acquired
through HEICO Aerospace Holdings Corp. (HEICO Aerospace). The source of the
purchase price for these acquisitions was proceeds from the Company's Credit
Facility, excluding Air Radio and Turbine, which were funded from the proceeds
of the Company's public offering discussed in Note 2 above.
In connection with the Rogers-Dierks acquisition, the Company also committed to
pay $1.1 million in deferred payments over the next two years. Subject to
meeting certain earnings objectives, the former shareholders of Rogers-Dierks
could receive additional consideration of up to $7.3 million payable in cash or
shares of the Company's Class A Common Stock. Rogers-Dierks formerly designed
and manufactured FAA-approved, factory-new jet engine replacement parts for sale
to commercial airlines. The Company has continued to use the acquired assets for
the same purposes as formerly used by Rogers-Dierks. Subsequent to the closing
of the transaction, Lufthansa Technik AG (Lufthansa) made an additional
investment of approximately $3 million in HEICO Aerospace pursuant to
Lufthansa's option to maintain its 20% equity interest in HEICO Aerospace.
The Radiant Power product line includes back-up power supplies and battery packs
for a variety of commercial aircraft applications.
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Turbine is engaged in the design and manufacture of FAA-approved, factory-new
aircraft jet engine replacement parts.
Air Radio is engaged in the overhaul and repair of avionics, instruments and
electronic equipment for commercial aircraft. Subject to meeting certain
earnings objectives, the former shareholders of Air Radio could receive
additional consideration of up to $1.25 million under the terms of the
acquisition.
Subsequent to July 31, 1999, Lufthansa made an additional investment of $2.0
million in HEICO Aerospace pursuant to Lufthansa's option to maintain its 20%
equity interest in HEICO Aerospace.
Leader Tech manufactures electromagnetic and radio frequency shielding for
circuit boards primarily utilized in aerospace, telecommunications, and
microwave applications.
All of the acquisitions described above were accounted for using the purchase
method of accounting and the results of each company were included in the
Company's results from their effective dates. The excess of the purchase prices
over the fair value of the identifiable net assets acquired aggregated
approximately $46 million and is being amortized over a range of 20 to 30 years
using the straight-line method. Had each acquisition taken place as of the
beginning of fiscal 1998, the Company's proforma consolidated results would not
have been materially different from the reported results.
In June 1999, the Company, through its newly formed subsidiary, Trilectron
Europe, LTD, acquired 40% of the outstanding capital stock of R.H. Phillips and
Sons Engineers, LTD (Phillips) along with the exclusive worldwide rights to
Phillips' air start units. The purchase price of this transaction was
insignificant.
Effective June 30, 1999, the Company, through HEICO Aerospace, acquired all of
the outstanding capital stock of Thermal Structures, Inc. and its Quality
Honeycomb, Inc. affiliate (together "Thermal"). Thermal manufactures thermal
insulation products and related components primarily for aerospace and defense
applications. In consideration of this acquisition, the Company paid
approximately $29.1 million in cash at the closing, and assumed approximately $4
million in debt. The assumed debt was repaid by the Company at closing. Subject
to meeting certain earnings objectives, one of Thermal's selling shareholders
could receive additional consideration of up to $1 million over the three years
following the acquisition date. The purchase price will be adjusted based on the
actual net worth of Thermal as of June 30, 1999. The source of the purchase
price was proceeds from the Company's Credit Facility. This acquisition is being
accounted for using the purchase method of accounting and the results of
operations of Thermal were included in the Company's results effective June 30,
1999. The excess of the purchase price over the fair value of the identifiable
net assets acquired amounted to approximately $28 million, which is being
amortized over 30 years on a straight line basis.
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The following table presents unaudited pro forma consolidated operating results
as if the Company's acquisitions of McClain International, Inc. (McClain),
acquired July 31, 1998, and Thermal had been consummated as of November 1, 1997.
The unaudited pro forma results include adjustments to historical amounts
including additional amortization of the excess of costs over the fair value of
net assets acquired, increased interest on borrowings to finance the
acquisitions, discontinuance of certain compensation previously paid by the
acquired companies to their shareholders, reduced investment income on available
funds used to finance the acquisitions, and the incremental minority interest of
Lufthansa in the net income of the acquired companies. The pro forma
consolidated operating results do not purport to present actual operating
results had the acquisition been made at the beginning of fiscal 1998, or the
results which may occur in the future.
NINE MONTHS ENDED JULY 31,
--------------------------------
1999 1998
------------ -----------
Net sales $108,177,000 $90,220,000
============ ===========
Net income $ 11,817,000 $ 8,671,000
============ ===========
Net income per share:
Basic $0.81 $0.69
===== =====
Diluted $0.68 $0.56
===== =====
4. Short-term investments consist of equity securities with an aggregate cost of
$6,859,000 and $3,864,000 as of July 31, 1999 and October 31, 1998,
respectively. These investments are classified as available-for-sale and stated
at a fair value of $4,817,000 and $2,051,000 as of July 31, 1999 and October 31,
1998, respectively. The gross unrealized losses were $2,042,000 and $1,813,000
as of July 31, 1999 and October 31, 1998, respectively. Unrealized gains and
losses, net of deferred taxes, are reflected as a component of comprehensive
income. Gross realized gains on sales of securities classified as
available-for-sale, using the average cost method, were $288,000 in fiscal 1998
and zero in the first nine months of fiscal 1999. There were no realized losses
during these periods.
5. Accounts receivable are composed of the following:
JULY 31, 1999 OCTOBER 31, 1998
------------- ----------------
Accounts receivable $28,074 ,000 $19,681,000
Less allowance for
doubtful accounts (559,000) (259,000)
------------ -----------
Accounts receivable, net $27,515 ,000 $19,422,000
============ ===========
Revenue amounts set forth in the accompanying Consolidated Condensed Statements
of Operations do not include any material amounts in excess of billings relating
to long-term contracts.
Inventories are comprised of the following:
JULY 31, 1999 OCTOBER 31, 1998
------------- ----------------
Finished products $15,632 ,000 $ 9,306,000
Work in process 9,805,000 5,213,000
Materials, parts, assemblies
and supplies 13,561,000 9,808,000
------------ -----------
Total inventories $ 38,998,000 $24,327,000
============ ===========
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Inventories related to long-term contracts were not significant as of July 31,
1999 and October 31, 1998.
6. Long-term debt consists of:
JULY 31, 1999 OCTOBER 31, 1998
------------- ----------------
Borrowings under revolving
credit facility $48,000,000 $20,000,000
Industrial Development Revenue
Bonds - Series 1997A 3,000,000 3,000,000
Industrial Development Revenue
Bonds - Series 1997C 995,000 995,000
Industrial Development Revenue
Bonds - Series 1996 3,500,000 3,500,000
Industrial Development Revenue
Refunding Bonds - Series 1988 1,980,000 1,980,000
Equipment loans 1,667,000 1,045,000
----------- -----------
59,142,000 30,520,000
Less current maturities (503,000) (377,000)
---------- -----------
$58,639,000 $30,143,000
=========== ===========
Pursuant to the Company's $120 million revolving credit facility (Credit
Facility), funds are available for funding acquisitions, working capital and
general corporate requirements on a revolving basis through July 2002. The
weighted average interest rate was approximately 6.0% and 6.38% at July 31, 1999
and October 31, 1998, respectively.
The industrial development revenue bonds represent bonds issued by Broward
County, Florida in 1996 (Series 1996 bonds) and in 1988 (Series 1988 bonds), and
bonds issued by Manatee County, Florida in 1997 (Series 1997A and Series 1997C
bonds).
Unexpended proceeds of the Series 1997A and 1997C bonds of $298,000 and $785,000
as of July 31, 1999 and October 31, 1998, respectively, including investment
earnings, were held by the trustee and were available for future qualified
expenditures. The Series 1997A and 1997C bonds interest rates were 3.35% and
3.25% at July 31, 1999 and October 31, 1998, respectively.
Unexpended proceeds of the Series 1996 bonds of $1.5 million as of July 31, 1999
and October 31, 1998 including investment earnings, were held by the trustee. In
September 1999, the Company redeemed its Series 1996 bonds using the related
unexpended bond proceeds and proceeds of the $2.0 million additional minority
interest investment by Lufthansa (See Note 3). The $3.5 million balance of the
Series 1996 bonds was excluded from current liabilities as of July 31, 1999 as
the source of funds were of a long-term nature. The Series 1996 bonds interest
rates were 3.40% and 3.20% at July 31, 1999 and October 31, 1998, respectively.
The Series 1988 bonds interest rates were 3.15% and 3.05% at July 31, 1999 and
October 31, 1998, respectively.
Equipment loans had interest rates ranging from 8.25% to 8.75% at July 31, 1999
and October 31, 1998.
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7. In January 1999, the Company received notice of a proposed adjustment
pursuant to an examination by the Internal Revenue Service of the Company's
fiscal 1995 and 1996 tax returns, disallowing the utilization of a $4.6 million
capital loss carryforward to offset the gain recognized by the Company in
connection with the sale of its health care operations in July 1996. The Company
has filed a protest requesting an appeal of such proposed adjustment, which
would result in additional taxes of approximately $1.8 million on the gain on
the sale of the discontinued health care operations.
8. Research and development expenses for the first nine months of fiscal 1999
and 1998 totaled approximately $850,000 in each of the nine-month periods. The
expenses for the first nine months of 1999 and 1998 are net of $5.0 million and
$2.3 million, respectively, received from Lufthansa pursuant to a research and
development cooperation agreement entered into on October 30, 1997. Amounts
received from Lufthansa and not used as of July 31, 1999 and 1998 were $3.1
million and $990,000, respectively, and are recorded as a component of accrued
expenses and other current liabilities in the consolidated condensed balance
sheets.
9. Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
The Company's comprehensive income consists of:
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NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
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Net income $11,644,000 $7,346,000 $4,351,000 $2,613,000
Other comprehensive income
Unrealized holding (loss)
on investments (229,000) (134,000) (731,000) (750,000)
Tax benefit 104,000 52,000 280,000 289,000
----------- ---------- ---------- ----------
Comprehensive income $11,519,000 $7,264,000 $3,900,000 $2,152,000
=========== ========== ========== ==========
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Accumulated other comprehensive income as of July 31, 1999 and October 31, 1998
includes unrealized (loss) on investments as follows:
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------
Balance, October 31, 1997 $ --
Unrealized holding (loss) on investments,
net of tax benefit of $671,000 (1,142,000)
-----------
Balance, October 31, 1998 (1,142,000)
Unrealized holding (loss) on investments,
net of tax benefit of $104,000 (125,000)
-----------
Balance, July 31, 1999 $(1,267,000)
===========
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10. In November 1989, HEICO Aerospace Corporation and Jet Avion were named
defendants in a complaint filed by United Technologies Corporation (UTC) in the
United States District Court for the Southern District of Florida. All counts of
UTC's complaint that were not previously withdrawn by UTC have been dismissed by
the court. UTC has appealed the dismissal. The complaint, as amended in fiscal
1995, alleged infringement of a patent, misappropriation of trade secrets and
unfair competition relating to certain jet engine parts and coatings sold by Jet
Avion in competition with Pratt & Whitney, a division of UTC. UTC sought
approximately $8 million in damages for the patent infringement and
approximately $30 million in damages for the misappropriation of trade secrets
and unfair competition claims. The aggregate damages referred to in the
preceding sentence did not exceed approximately $30 million because a portion of
the misappropriation and unfair competition damages duplicate the patent
infringement damages. UTC also sought, among other things, pre-judgment interest
and treble damages.
The Company has counterclaims against UTC for, among other things, malicious
prosecution, trade disparagement, tortious interference and unfair competition.
The Company is seeking compensatory and punitive damages in amounts to be
determined at trial. UTC filed an answer denying the counterclaims. No trial
date is currently set.
The ultimate outcome of this litigation is not certain at this time and no
provision for gain or loss, if any, has been made in the consolidated financial
statements.
In May 1998, the Company and its HEICO Aerospace Corporation and Jet Avion
Corporation subsidiaries were served with a lawsuit by Travelers Casualty &
Surety Co., f/k/a The Travelers Casualty and Surety Co. (Travelers). The
complaint seeks reimbursement of legal fees and costs totaling in excess of $15
million paid by Travelers in defending the Company in the above referenced
litigation with UTC. In addition, Travelers seeks a declaratory judgement that
the Company did not and does not have insurance coverage under certain insurance
policies with Travelers and accordingly, that Travelers did not have and does
not have a duty to defend or indemnify the Company under such policies. Also
named as defendants in Travelers' lawsuit are UTC and one of the law firms
representing the Company in the UTC litigation. In June 1999, the Travelers
lawsuit was dismissed by the federal court based on a lack of jurisdiction.
Travelers has appealed the dismissal.
The Company believes that it has significant counterclaims for damages. After
taking into consideration legal counsel's evaluation of Travelers' claim,
management is of the opinion that the outcome of the Travelers litigation will
not have a significant adverse effect on the Company's consolidated financial
statements.
The Company is involved in various other legal actions arising in the normal
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that the outcome of these other
matters will not have a significant adverse effect on the Company's consolidated
financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our results of operations during the current period and prior fiscal year have
been affected by a number of significant transactions. This discussion of our
financial condition and results of operations should be read in conjunction with
our Consolidated Condensed Financial Statements and Notes thereto included
herein. For further information regarding the acquisitions discussed below, see
Note 3 to the Condensed Consolidated Financial Statements. These acquisitions
have been accounted for using the purchase method of accounting and are included
in the Company's results of operations from the effective date of acquisition.
Between December 1998 and June 1999, the Company acquired substantially all of
the assets of Rogers-Dierks, Radiant and Turbine and all of the outstanding
capital stock of Air Radio and Leader Tech for an aggregate purchase price of
approximately $51 million. Rogers-Dierks, Turbine and Air Radio were acquired
through HEICO Aerospace.
In connection with the Rogers-Dierks acquisition, the Company also committed to
pay $1.1 million in deferred payments over the next two years. Subject to
meeting certain earnings objectives, the former shareholders of Rogers-Dierks
could receive additional consideration of up to $7.3 million payable in cash or
shares of the Company's Class A Common Stock. Subsequent to the closing of the
transaction, Lufthansa made an additional investment of approximately $3 million
in HEICO Aerospace pursuant to Lufthansa's option to maintain its 20% equity
interest in HEICO Aerospace.
Subject to meeting certain earnings objectives, the former shareholders of Air
Radio could receive additional consideration of up to $1.25 million under the
terms of the acquisition.
In June 1999, the Company, through its newly-formed subsidiary, Trilectron
Europe, LTD, acquired 40% of the outstanding capital stock of Phillips along
with the exclusive worldwide rights to Phillips' air start units. The purchase
price of this transaction was insignificant.
Effective June 30, 1999, the Company, through HEICO Aerospace, acquired all of
the outstanding capital stock of Thermal. In consideration of this acquisition,
the Company paid approximately $29.1 million in cash at the closing, and assumed
approximately $4 million in debt. The assumed debt was repaid by the Company at
closing. Subject to meeting certain earnings objectives, one of Thermal's
selling shareholders could receive additional consideration of up to $1 million
over the three years following the acquisition date.
Subsequent to July 31, 1999, Lufthansa made an additional investment of $2.0
million and approved an additional $6.7 million investment in HEICO Aerospace
pursuant to Lufthansa's option to maintain its 20% equity interest in HEICO
Aerospace. The additional investments represent Lufthansa's pro-rata portion of
certain acquisitions made through HEICO Aerospace.
-11-
<PAGE>
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth net sales by product
and the percentage of net sales represented by the respective items in the
Company's Consolidated Condensed Statements of Operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
-------------------------- ---------------------------
1999 1998 1999 1998
------- ------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales
Flight Support $66,447 $44,880 $23,429 $15,545
Electronics & Ground Support 30,088 21,638 12,164 8,517
------- ------- ------- -------
$96,535 $66,518 $35,593 $24,062
======= ======= ======= =======
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 41.0% 36.5% 40.7% 36.6%
Selling, general and
administrative expenses 17.2% 17.8% 17.0% 18.1%
Operating income 23.8% 18.7% 23.7% 18.5%
Interest expense 1.1% .6% .7% .5%
Interest and other income .8% 2.6% .5% 2.6%
Income tax expense 8.6% 7.1% 8.7% 7.2%
Minority interest 2.8% 2.6% 2.5% 2.5%
Net income 12.1% 11.0% 12.2% 10.9%
</TABLE>
COMPARISON OF FIRST NINE MONTHS OF 1999 TO FIRST NINE MONTHS OF 1998
NET SALES
Net sales for the first nine months of 1999 totaled $96.5 million, up 45% when
compared to sales for the first nine months of 1998 of $66.5 million.
The increase in sales for the first nine months of 1999 reflects an increase of
$21.5 million (a 48% increase) to $66.4 million from the Company's Flight
Support products and services and an increase of $8.5 million (a 39% increase)
to $30.1 million in revenues from the Company's Electronics & Ground Support
products. These increases include sales of McClain, Associated Composite, Inc.
(Associated), Rogers-Dierks, Radiant, Air Radio, Turbine, Leader Tech and
Thermal (each acquired during the period July 1998 to June 1999) aggregating $20
million, with the balance reflecting increased sales volumes of repair and
overhaul services and new products to the Company's commercial airline industry
customers and favorable sales price terms under certain contracts.
GROSS PROFITS AND OPERATING EXPENSES
The Company's gross profit margins averaged 41.0% for the first nine months of
1999 as compared to 36.5% for the first nine months of 1998. This increase
reflects an improvement in gross margins in the Flight Support operations
resulting from favorable sales price terms under certain contracts, continuing
efforts to lower manufacturing costs and the reimbursement of research and
development costs from Lufthansa. The gross margin improvement also reflects
higher gross profit margins contributed by newly-acquired businesses.
-12-
<PAGE>
Selling, general and administrative (SG&A) expenses were $16.6 million for the
first nine months of 1999 and $11.8 million for the first nine months of 1998.
The increase results from the inclusion of SG&A expenses of the newly acquired
companies, including additional goodwill amortization. As a percentage of net
sales, SG&A expenses declined to 17.2% for the first nine months of 1999 from
17.8% for the first nine months of 1998 reflecting continuing efforts to control
costs while increasing revenues.
OPERATING INCOME
Operating income increased $10.6 million to $23.0 million (an 85% increase) for
the first nine months of 1999 from $12.4 million for the first nine months of
1998. The improvement in operating income was due primarily to increases in
sales and gross profits of the Flight Support and Electronics & Ground Support
operations discussed above.
INTEREST EXPENSE
Interest expense increased $691,000 to $1.1 million from the first nine months
of 1998 to the first nine months of 1999. The increase was principally due to
increased outstanding debt balances during the period related to borrowings on
the Company's Credit Facility used principally to finance the Company's
acquisitions.
INTEREST AND OTHER INCOME
Interest and other income decreased $1.0 million to $727,000 from the first nine
months of 1998 to the first nine months of 1999 due principally to the decrease
in invested funds used for acquisitions.
MINORITY INTEREST
Minority interest represents the 20% minority interest held by Lufthansa which
increased from the first nine months of 1999 to the first nine months of 1998
due to higher net income of the Flight Support Group.
NET INCOME
The Company's net income totaled $11.6 million, or $.67 per diluted share, in
the first nine months of 1999, improving 59% from net income of $7.3 million, or
$.47 per diluted share, in the first nine months of 1998.
The improvement in net income for the first nine months of 1999 over the first
nine months of 1998 is primarily attributable to the increased sales and
operating income discussed above. These increases were partially offset by the
aforementioned higher interest costs and increase in minority interest as well
as an increase in the Company's effective tax rate from 34.3% to 36.5%.
-13-
<PAGE>
COMPARISON OF THIRD QUARTER 1999 TO THIRD QUARTER 1998
NET SALES
Net sales for the third quarter 1999 totaled $35.6 million, up 48% when compared
to the third quarter 1998 net sales of $24.1 million.
The increase in third quarter 1999 sales reflects an increase of $7.9 million (a
51% increase) to $23.4 million from the Company's Flight Support products and
services and an increase of $3.7 million (a 43% increase) to $12.2 million in
revenues from the Company's Electronics & Ground Support products. These
increases include sales of newly-acquired businesses aggregating $10 million,
with the balance reflecting increased sales volumes of repair and overhaul
services and new products to the Company's commercial airline industry customers
and favorable sales price terms under certain contracts.
GROSS PROFITS AND OPERATING EXPENSES
The Company's gross profit margins averaged 40.7% for the third quarter 1999 as
compared to 36.6% for the third quarter 1998. This increase reflects an
improvement in gross margins in the Flight Support operations resulting from
favorable sales price terms under certain contracts, continuing efforts to lower
manufacturing costs and the reimbursement of research and development costs from
Lufthansa. The gross margin improvement also reflects higher gross profit
margins contributed by newly-acquired businesses.
Selling, general and administrative (SG&A) expenses were $6.0 million for the
third quarter 1999 and $4.4 million for the third quarter 1998. The increase
results from the inclusion of SG&A expenses of the newly-acquired companies,
including additional goodwill amortization. As a percentage of net sales, SG&A
expenses declined to 17.0% for the third quarter 1999 from 18.1% for the third
quarter 1998 reflecting continuing efforts to control costs while increasing
revenues and lower general corporate expenses.
OPERATING INCOME
Operating income increased $4.0 million to $8.4 million (a 90% increase) for the
third quarter 1999 from $4.4 million for the third quarter 1998. The improvement
in operating income was due primarily to increases in sales and gross profits of
the Flight Support and Electronics & Ground Support operations discussed above.
INTEREST EXPENSE
Interest expense increased $123,000 to $251,000 from the third quarter 1998 to
the third quarter 1999. The increase was principally due to increased
outstanding debt balances during the period related to borrowings on the
Company's Credit Facility used principally to finance the Company's
acquisitions.
-14-
INTEREST AND OTHER INCOME
Interest and other income decreased $457,000 to $180,000 from the third quarter
1998 to the third quarter 1999 due principally to the decrease in invested funds
used for acquisitions.
MINORITY INTEREST
Minority interest represents the 20% minority interest held by Lufthansa which
increased from the third quarter 1999 to the third quarter of 1998 due to higher
net income of the Flight Support Group.
NET INCOME
The Company's net income totaled $4.4 million, or $.24 per diluted share, in the
third quarter 1999, improving 67% from net income of $2.6 million, or $.17 per
diluted share, in the third quarter 1998.
The improvement in net income for the third quarter 1999 over the third quarter
1998 is primarily attributable to the increased sales and operating income
discussed above. These increases were partially offset by the aforementioned
higher interest costs and increase in minority interest as well as an increase
in the Company's effective tax rate from 35.0% to 37.2%.
INFLATION
The Company has generally experienced increases in its costs of labor, materials
and services consistent with overall rates of inflation. The impact of such
increases on the Company's net income has been generally minimized by efforts to
lower costs through manufacturing efficiencies and cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash primarily from operating activities and financing
activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of interest
and principal on debt, capital expenditures and increases in working capital.
The Company believes that operating cash flow and available borrowings under the
Company's Credit Facility will be sufficient to fund cash requirements for the
foreseeable future.
OPERATING ACTIVITIES
The Company's cash flow from operations was $7.5 million for the first nine
months of 1999, principally reflecting net income of $11.6 million, adjustments
for depreciation and amortization and minority interest of $4.0 million and $2.7
million, respectively, offset by an increase in working capital of $10.3
million. The increase in working capital primarily resulted from an increase in
inventories of $8.8 million to meet increased sales orders.
-15-
INVESTING ACTIVITIES
The principal cash used in investing activities in the first nine months of 1999
was cash used in acquisitions totaling $83.5 million. (See Note 3). Purchases of
property, plant and equipment totaled $10.0 million primarily representing the
purchase of a new facility and improvements to and expansion of existing
facilities in our Flight Support Group. The Company also purchased short-term
investments totaling approximately $3.0 million.
FINANCING ACTIVITIES
The Company's principal financing activities during the first nine months of
1999 included proceeds from the Class A Common Stock offering of $56.2 million
and long-term debt of $71.8 million, including $70.5 million from the Company's
Credit Facility used primarily to fund acquisitions. In addition, the Company
received $2.8 million from Lufthansa representing its additional minority
interest investment required to maintain its 20% equity position in the Flight
Support Group due to the acquisition of Rogers-Dierks and a $1.6 million tax
benefit related to stock option exercises. The Company repaid $42.5 million of
the outstanding balance on its Credit Facility from proceeds of the equity
offering and $1.5 million in other long-term debt.
IMPACT OF THE YEAR 2000
Many older computer software programs refer to years in terms of their final two
digits only. Such programs may interpret the year 2000 to mean the year 1900
instead. If not corrected, those programs could cause date-related transaction
failures.
We developed a compliance assurance process to address this concern. A project
team performed a detailed assessment of all internal computer systems and
developed and implemented plans to correct any problems.
Year 2000 problems could affect our research and development, production,
distribution, financial, administrative and communication operations. Systems
critical to our business which were identified as non-Year 2000 compliant were
either replaced or corrected through programming modifications. In addition, the
project team looked at Year 2000 readiness from other aspects of our business,
including customer order-taking, manufacturing, raw materials supply and plant
process equipment. We remediated and replaced systems as needed and have been
successfully testing and verifying our modifications. In addition to our
in-house efforts, we have asked vendors, major customers, service suppliers,
communications providers and banks whose systems failures potentially could have
a significant impact on our operations to verify their Year 2000 readiness.
As part of our compliance process we developed a contingency plan for those
areas that are critical to the Company's business. These plans were designed to
mitigate serious disruptions to our business flow beyond the end of 1999, and
will operate independently of our external providers' Year 2000 compliance. The
major drive for contingency planning was in the first half of 1999. Based on our
efforts to date, we do not anticipate that any unforeseen Year 2000 problems
will have a material effect on our results of operations or financial condition.
-16-
<PAGE>
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance were expensed as incurred. To date, we have
spent less than $200,000 on this project. Such costs do not include normal
system upgrades and replacements.
The above expectations are subject to uncertainties. For example, if we were
unsuccessful in identifying or fixing all Year 2000 problems in our critical
operations, or if we are affected by the inability of suppliers or major
customers to continue operations due to such a problem, our results of
operations or financial condition could be materially impacted.
The total costs that we incurred in connection with the Year 2000 problems was
influenced by our ability to successfully identify Year 2000 systems' flaws, the
nature and amount of programming required to fix the affected programs, the
related labor and/or consulting costs for such remediation, and the ability of
third parties with whom we have business relationships to successfully address
their own Year 2000 concerns. These and other unforeseen factors could have a
material adverse effect on our results of operations or financial conditions.
NEW ACCOUNTING STANDARDS
Effective November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company's accumulated other comprehensive
income as of July 31, 1999 and October 31, 1998 included unrealized holding
losses from investments.
-17-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in previously reported
litigation involving the Company and its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial data schedule
(b) A report on Form 8-K was filed by the Company dated July 30,
1999, reported under Item 2, "Acquisition or Disposition of
Assets," relating to the purchase of substantially all of the
outstanding capital stock of Thermal Structures, Inc. and its
Quality Honeycomb, Inc. affiliate.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HEICO CORPORATION
-----------------
(Registrant)
SEPTEMBER 13, 1999 BY /S/ THOMAS S. IRWIN
------------------ --------------------------------
Date Thomas S. Irwin,
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-19-
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 6,734,000
<SECURITIES> 4,817,000
<RECEIVABLES> 28,074,000
<ALLOWANCES> (559,000)
<INVENTORY> 38,998,000
<CURRENT-ASSETS> 82,937,000
<PP&E> 42,197,000
<DEPRECIATION> (17,594,000)
<TOTAL-ASSETS> 242,873,000
<CURRENT-LIABILITIES> 22,858,000
<BONDS> 9,475,000
0
0
<COMMON> 157,000
<OTHER-SE> 137,032,000
<TOTAL-LIABILITY-AND-EQUITY> 242,873,000
<SALES> 96,535,000
<TOTAL-REVENUES> 96,535,000
<CGS> 56,944,000
<TOTAL-COSTS> 73,552,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,072,000
<INCOME-PRETAX> 22,638,000
<INCOME-TAX> 8,263,000
<INCOME-CONTINUING> 11,644,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,644,000
<EPS-BASIC> .80
<EPS-DILUTED> .67
</TABLE>
