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 APRIL 30, 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 June 2, 1999:
Title of Class Shares Outstanding
Common Stock, $.01 par value 8,475,532
Class A Common Stock, $.01 par value 7,229,383
<PAGE>
HEICO CORPORATION
INDEX
Page No.
Part I. Financial information:
Consolidated Condensed Balance Sheets as of
April 30, 1999 (unaudited) and October 31, 1998 2
Consolidated Condensed Statements of Operations (unaudited)
for the six and three months ended April 30, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows (unaudited)
for the six months ended April 30, 1999 and 1998 4
Notes to Consolidated Condensed Financial Statements (unaudited) 5 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,674,000 $ 8,609,000
Short-term investments 5,548,000 2,051,000
Accounts receivable, net 22,138,000 19,422,000
Inventories 31,456,000 24,327,000
Prepaid expenses and other current assets 3,117,000 1,768,000
Deferred income taxes 1,241,000 2,010,000
------------- -------------
Total current assets 81,174,000 58,187,000
------------- -------------
Property, plant and equipment 37,819,000 30,823,000
Less accumulated depreciation (16,834,000) (16,028,000)
------------- -------------
Property, plant and equipment, net 20,985,000 14,795,000
------------- -------------
Intangible assets less accumulated amortization of
$3,100,000 and $1,186,000, respectively 71,858,000 53,964,000
------------- -------------
Unexpended bond proceeds 1,795,000 2,252,000
------------- -------------
Deferred income taxes 1,724,000 495,000
------------- -------------
Other assets 5,480,000 3,368,000
------------- -------------
Total assets $ 183,016,000 $ 133,061,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 398,000 $ 377,000
Trade accounts payable 7,498,000 6,158,000
Accrued expenses and other current liabilities 7,981,000 10,401,000
Income taxes payable 286,000 664,000
------------- -------------
Total current liabilities 16,163,000 17,600,000
------------- -------------
Long-term debt, net of current maturities 10,009,000 30,143,000
------------- -------------
Other non-current liabilities 3,683,000 2,819,000
------------- -------------
Total liabilities 29,855,000 50,562,000
------------- -------------
Minority interest in consolidated subsidiary 19,550,000 14,892,000
------------- -------------
Commitments and contingencies (Notes 3, 7, 10 and 11)
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 -
8,471,334 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 - 7,227,449 and 4,140,404 shares,
respectively 72,000 41,000
Capital in excess of par value 92,649,000 34,474,000
Accumulated other comprehensive income (816,000) (1,142,000)
Retained earnings 43,628,000 36,649,000
------------- -------------
135,618,000 70,105,000
Less: Note receivable from employee savings and
investment plan (2,007,000) (2,498,000)
------------- -------------
Total shareholders' equity 133,611,000 67,607,000
------------- -------------
Total liabilities and shareholders' equity $ 183,016,000 $ 133,061,000
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-2-
<PAGE>
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 60,942,000 $ 42,456,000 $ 32,731,000 $ 22,673,000
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of sales 35,830,000 26,996,000 19,302,000 14,517,000
Selling, general and administrative
expenses 10,563,000 7,481,000 5,657,000 3,998,000
------------ ------------ ------------ ------------
Total operating costs and expenses 46,393,000 34,477,000 24,959,000 18,515,000
------------ ------------ ------------ ------------
Operating income 14,549,000 7,979,000 7,772,000 4,158,000
Interest expense (821,000) (253,000) (225,000) (124,000)
Interest and other income 547,000 1,099,000 321,000 585,000
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 14,275,000 8,825,000 7,868,000 4,619,000
Income tax expense 5,151,000 2,990,000 2,844,000 1,584,000
------------ ------------ ------------ ------------
Income before minority interest 9,124,000 5,835,000 5,024,000 3,035,000
Minority interest 1,831,000 1,102,000 934,000 584,000
------------ ------------ ------------ ------------
Net income $ 7,293,000 $ 4,733,000 $ 4,090,000 $ 2,451,000
============ ============ ============ ============
Net income per share:
Basic $ .52 $ .38 $ .27 $ .20
============ ============ ============ ============
Diluted $ .43 $ .31 $ .23 $ .16
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 13,911,609 12,452,808 15,307,866 12,471,549
============ ============ ============ ============
Diluted 16,845,280 15,509,149 18,158,909 15,708,522
============ ============ ============ ============
Cash dividends per share $ .025 $ .025
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-3-
<PAGE>
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,293,000 $ 4,733,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,411,000 1,099,000
Deferred income taxes (636,000) (291,000)
Deferred financing costs -- (25,000)
Minority interest in consolidated subsidiary 1,831,000 1,102,000
Change in assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (1,418,000) (2,467,000)
(Increase) in inventories (5,178,000) (4,709,000)
(Increase) in prepaid expenses and
other current assets (1,346,000) (809,000)
(Increase) in unexpended bond proceeds (67,000) --
(Decrease) increase in trade payables, accrued
expenses and other current liabilities (1,832,000) 4,724,000
(Decrease) in income taxes payable (378,000) (490,000)
Other 239,000 (138,000)
------------ ------------
Net cash provided by operating activities 919,000 2,729,000
------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (21,960,000) --
Net change in short-term investments (2,995,000) (4,492,000)
Purchases of property, plant and equipment (6,977,000) (1,916,000)
Payment received from employee savings and
investment plan note receivable 491,000 444,000
Other (1,313,000) (72,000)
------------ ------------
Net cash (used in) investing activities (32,754,000) (6,036,000)
------------ ------------
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 22,500,000 --
Bond reimbursement proceeds 513,000 931,000
Other -- 94,000
Principal payments on long-term debt (42,750,000) (234,000)
Proceeds from the exercise of stock options 483,000 420,000
Tax benefit on stock option exercises 1,611,000 --
Repurchases of common stock (105,000) --
Cash dividends paid (315,000) (329,000)
Additional minority interest investment 2 ,827,000 --
Other (51,000) --
------------ ------------
Net cash provided by financing activities 40,900,000 882,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 9,065,000 (2,425,000)
Cash and cash equivalents at beginning of year 8,609,000 24,199,000
------------ ------------
Cash and cash equivalents at end of period $ 17,674,000 $ 21,774,000
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-4-
<PAGE>
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED
April 30, 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 six months ended April 30, 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. (Note 11). The
remaining proceeds are being used for working capital and general corporate
purposes, including possible acquisitions.
3. Effective December 4, 1998, the Company, through a subsidiary, acquired
substantially all of the assets of Rogers-Dierks, Inc. (Rogers-Dierks). In
consideration of this acquisition, the Company paid $14.2 million in cash, and
committed to pay $1.1 million in deferred payments over the next two years. The
source of the purchase price was proceeds from the Company's Credit Facility.
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. This
acquisition has been accounted for using the purchase method of accounting and
the results of operations of Rogers-Dierks were included in the Company's
results effective December 4, 1998. Had Rogers-Dierks been acquired as of the
beginning of fiscal 1998, the pro forma consolidated results would not have been
materially different from the reported results.
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
Holdings Corp. (HEICO Aerospace) representing 20% of the initial cash
consideration.
-5-
<PAGE>
Effective February 4, 1999, the Company, through its subsidiary Radiant Power
Corp., acquired the assets of the Radiant Power product line from Derlan, Inc.
In consideration of this acquisition, the Company paid $6.4 million in cash. The
source of the purchase price was proceeds from the Company's Credit Facility.
The acquisition is being accounted for using the purchase method of accounting
and the results of operations of Radiant were included in the Company's results
effective February 4, 1999. Had Radiant been acquired as of the beginning of
fiscal 1998, the proforma consolidated results would not have been materially
different from the reported results. The Radiant Power product line includes
back-up power supplies and battery packs for a variety of commercial aircraft
applications.
4. Short-term investments consist of equity securities with an aggregate cost of
$6,859,000 and $3,864,000 as of April 30, 1999 and October 31, 1998,
respectively. These investments are classified as available-for-sale and stated
at a fair value of $5,548,000 and $2,051,000 as of April 30, 1999 and October
31, 1998, respectively. The gross unrealized losses were $1,311,000 and
$1,813,000 as of April 30, 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 six months of fiscal 1999. There were no realized losses
during these periods.
5. Accounts receivable are composed of the following:
<TABLE>
<CAPTION>
APRIL 30, 1999 OCTOBER 31, 1998
--------------- ----------------
<S> <C> <C>
Accounts receivable $ 22,564,000 $ 19,681,000
Less allowance for doubtful accounts (426,000) (259,000)
--------------- ----------------
Accounts receivable, net $ 22,138,000 $ 19,422,000
=============== ================
</TABLE>
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:
<TABLE>
<CAPTION>
APRIL 30, 1999 OCTOBER 31, 1998
--------------- ----------------
<S> <C> <C>
Finished products $ 12,656,000 $ 9,306,000
Work in process 7,428,000 5,213,000
Materials, parts, assemblies and supplies 11,372,000 9,808,000
--------------- ----------------
Total inventories $ 31,456,000 $ 24,327,000
=============== ================
</TABLE>
Inventories related to long-term contracts were not significant as of April 30,
1999 and October 31, 1998.
-6-
<PAGE>
6. Long-term debt consists of:
APRIL 30, 1999 OCTOBER 31, 1998
--------------- ----------------
Borrowings under revolving credit facility $ -- $ 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 932,000 1,045,000
------------ ------------
10,407,000 30,520,000
Less current maturities (398,000) (377,000)
------------ ------------
$ 10,009,000 $ 30,143,000
============ ============
In July 1998, the Company entered into a $120 million revolving credit facility
(Credit Facility) with a bank syndicate. Funds are available for funding
acquisitions, working capital and general corporate requirements on a revolving
basis through July 2001. In February 1999, the Company repaid $42.5 million
outstanding under the Credit Facility with a portion of the proceeds from the
equity offering (Note 2). The weighted average interest rate for the six months
ended April 30, 1999 was approximately 6%.
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).
As of April 30, 1999, unexpended proceeds of the Series 1997A and 1997C bonds of
$293,000, including investment earnings, are held by the trustee and are
available for future qualified expenditures. The Series 1997A and 1997C bonds
bear interest at 4.15% as of April 30, 1999.
As of April 30, 1999, unexpended proceeds of the Series 1996 bonds of
$1,502,000, including investment earnings, are held by the trustee and are
available for future qualified expenditures. The Series 1996 and Series 1988
bonds bear interest as of April 30, 1999, at 4.15% and 4.05%, respectively.
Equipment loans bear interest at rates ranging from 8.25% to 8.75% as of
April 30, 1999.
7. On January 22, 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
disputes 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.
-7-
<PAGE>
8. Research and development expenses for the first six months of fiscal 1999 and
1998 totaled $550,000 in each of the six month periods. The expenses for the
first six months of 1999 and 1998 are net of $3.3 million and $1.5 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 April 30, 1999 and 1998 were $588,000 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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net income $ 7,293,000 $ 4,733,000 $ 4,090,000 $ 2,451,000
Other comprehensive income
Unrealized holding gain
(loss) on investments 502,000 616,000 (975,000) 616,000
Tax (expense) benefit (176,000) (237,000) 374,000 (237,000)
----------- ----------- ----------- -----------
Comprehensive income $ 7,619,000 $ 5,112,000 $ 3,489,000 $ 2,830,000
=========== =========== =========== ===========
</TABLE>
Accumulated other comprehensive income as of April 30, 1999 and October 31, 1998
includes unrealized gain (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 gain on investments,
net of tax expense of $176,000 326,000
-----------
Balance, April 30, 1999 $ (816,000)
===========
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's appeal rights have not yet expired. 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.
-8-
<PAGE>
In July and November 1995, the Company filed its answers to UTC's complaint
denying the allegations. In addition, the Company filed counterclaims against
UTC for, among other things, malicious prosecution, trade disparagement,
tortious interference, unfair competition and antitrust violations. The Company
is seeking treble, 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.
The Company intends to vigorously defend Travelers' claim and 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 effect on the Company's consolidated
financial statements.
11. Effective May 1, 1999, the Company, through a subsidiary, acquired all of
the outstanding stock of Air Radio & Instruments Corp. (Air Radio). In
consideration of this acquisition, the Company paid $3.5 million in cash at the
closing. Subject to meeting certain earnings objectives, the former shareholders
of Air Radio could receive additional consideration of up to $1.25 million. The
purchase price will be adjusted based on the final determination of the actual
net worth of the net assets acquired as of the effective date. The acquisition
is being accounted for using the purchase method of accounting and the results
of operations of Air Radio will be included in the Company's results effective
May 1, 1999 as part of the Company's Flight Support Group. Air Radio is engaged
in the overhaul and repair of avionics, instruments and electronic equipment for
commercial aircraft.
-9-
<PAGE>
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
Notes 3 and 11 to our 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 date of
acquisition.
Effective December 4, 1998, through our Flight Support Group, we acquired
Rogers-Dierks for approximately $14.2 million in cash and approximately $1.1
million in deferred payments over the next two years, with additional contingent
consideration of up to approximately $7.3 million payable in cash or shares of
our Class A Common Stock. Subsequent to the closing of the transaction,
Lufthansa made an additional investment of approximately $3 million in HEICO
Aerospace representing 20% of the initial cash consideration.
Effective February 4, 1999, through our Electronics & Ground Support Group
(formerly referred to as the Ground Support Group), we acquired the assets of
the Radiant Power product line from Derlan, Inc. for $6.4 million in cash.
In February and March 1999, we completed, through a public offering, the
issuance of an aggregate of 2,994,050 shares of Class A Common Stock resulting
in net proceeds to the Company of $56.2 million. A portion of the proceeds of
the offering were used to repay $42.5 million outstanding under our Credit
Facility and to acquire Air Radio. The remaining proceeds are being used for
working capital and general corporate purposes, including possible acquisitions.
Effective May 1, 1999, through our Flight Support Group, we acquired Air Radio
for approximately $3.5 million in cash with additional contingent consideration
of up to approximately $1.25 million.
-10-
<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>
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
-------------------------- -----------------------------
1999 1998 1999 1998
---------- --------- ------------ ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Net sales
Flight Support $ 43,018 $ 29,334 $ 22,250 $ 15,404
Electronics & Ground Support 17,924 13,122 10,481 7,269
--------- --------- --------- ---------
$ 60,942 $ 42,456 $ 32,731 $ 22,673
========= ========= ========= =========
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 41.2% 36.4% 41.0% 35.8%
Selling, general and
administrative expenses 17.3% 17.6% 17.3% 17.6%
Operating income 23.9% 18.8% 23.7% 18.3%
Interest expense 1.3% .6% .7% .5%
Interest and other income .9% 2.6% 1.0% 2.6%
Income tax expense 8.5% 7.0% 8.7% 7.0%
Minority interest 3.0% 2.6% 2.9% 2.6%
Net income 12.0% 11.1% 12.5% 10.8%
</TABLE>
COMPARISON OF FIRST SIX MONTHS OF 1999 TO FIRST SIX MONTHS OF 1998
NET SALES
Net sales for the first six months of 1999 totaled $60.9 million, up 44% when
compared to sales for the first six months of 1998 of $42.5 million.
The increase in sales for the first six months of 1999 reflects an increase of
$13.7 million (a 47% increase) to $43.0 million from the Company's Flight
Support products and services. This increase includes sales of McClain
International, Inc. (McClain), Associated Composite, Inc. (Associated) and
Rogers-Dierks (each acquired during the period July to December 1998)
aggregating $9.0 million, with the balance reflecting increased sales volumes of
repair and overhaul services for, and jet engine replacement parts to, the
Company's commercial airline industry customers and favorable sales price terms
under certain contracts. The net sales increase also reflects an increase of
$4.8 million (a 37% increase) to $17.9 million in revenues from the Company's
Electronics & Ground Support products. This increase is principally due to sales
of new products and increased market penetration and also includes sales of
Radiant (acquired in February 1999) totaling $945,000.
GROSS PROFITS AND OPERATING EXPENSES
The Company's gross profit margins averaged 41.2% for the first six months of
1999 as compared to 36.4% for the first six months of 1998. This increase
reflects an improvement in gross margins in the Flight Support operations
resulting from higher gross profit margins contributed by the newly-acquired
McClain and Rogers-Dierks operations as well as the reimbursement of research
and development costs from Lufthansa, favorable sales price terms under certain
contracts and cost controls.
-11-
<PAGE>
Selling, general and administrative (SG&A) expenses were $10.6 million for the
first six months of 1999 and $7.5 million for the first six months of 1998. The
increase results from the inclusion of SG&A expenses of McClain, Associated,
Rogers-Dierks and Radiant, including additional goodwill amortization, and
higher general corporate expenses. As a percentage of net sales, SG&A expenses
declined to 17.3% for the first six months of 1999 from 17.6% for the first six
months of 1998 reflecting continuing efforts to control costs while increasing
revenues.
OPERATING INCOME
Operating income increased $6.6 million to $14.5 million (an 82% increase) for
the first six months of 1999 from $8.0 million for the first six 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 $568,000 to $821,000 from the first six months of
1998 to the first six 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 $552,000 to $547,000 from the first six
months of 1998 to the first six months of 1999 due principally to the decrease
in invested funds used for the acquisition of McClain in July 1998.
MINORITY INTEREST
Minority interest represents the 20% minority interest held by Lufthansa which
increased from the first six months of 1999 to the first six months of 1998 due
to higher net income of the Flight Support Group.
NET INCOME
The Company's net income totaled $7.3 million, or $.43 per diluted share, in the
first six months of 1999, improving 54% from net income of $4.7 million, or $.31
per diluted share, in the first six months of 1998.
The improvement in net income for the first six months of 1999 over the first
six months of 1998 is primarily attributable to the increased sales and
operating income partially offset by higher interest costs and the increase in
minority interest in earnings of the Flight Support Group discussed above.
-12-
<PAGE>
COMPARISON OF SECOND QUARTER 1999 TO SECOND QUARTER 1998
NET SALES
Net sales for the second quarter 1999 totaled $32.7 million, up 44% when
compared to the second quarter 1998 net sales of $22.7 million.
The increase in second quarter 1999 sales reflects an increase of $6.9 million
(a 44% increase) to $22.3 million from the Company's Flight Support products and
services. This increase includes sales of McClain, Associated and Rogers-Dierks
(each acquired during the period July to December 1998) aggregating $4.7
million, with the balance reflecting increased sales volumes of repair and
overhaul services for, and jet engine replacement parts to, the Company's
commercial airline industry customers and favorable sales price terms under
certain contracts. The net sales increase also reflects an increase of $3.2
million (a 44% increase) to $10.5 million in revenues from the Company's
Electronics & Ground Support products. This increase is principally due to sales
of new products and increased market penetration and also includes the
aforementioned sales of Radiant totaling $945,000.
GROSS PROFITS AND OPERATING EXPENSES
The Company's gross profit margins averaged 41.0% for the second quarter 1999 as
compared to 35.8% for the second quarter 1998. This increase reflects an
improvement in gross margins in the Flight Support operations resulting from
higher gross profit margins contributed by the newly-acquired McClain and
Rogers-Dierks operations as well as the reimbursement of research and
development costs from Lufthansa, favorable sales price terms under certain
contracts and cost controls.
Selling, general and administrative (SG&A) expenses were $5.7 million for the
second quarter 1999 and $4.0 million for the second quarter 1998. The increase
results from the inclusion of SG&A expenses of McClain, Associated,
Rogers-Dierks and Radiant, including additional goodwill amortization, and
higher general corporate expenses. As a percentage of net sales, SG&A expenses
declined to 17.3% for the second quarter 1999 from 17.6% for the second quarter
1998 reflecting continuing efforts to control costs while increasing revenues.
OPERATING INCOME
Operating income increased $3.6 million to $7.8 million (an 87% increase) for
the second quarter 1999 from $4.2 million for the second 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 $101,000 to $225,000 from the second quarter 1998 to
the second 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.
-13-
<PAGE>
INTEREST AND OTHER INCOME
Interest and other income decreased $264,000 to $321,000 from the second quarter
1998 to the second quarter 1999 due principally to the decrease in invested
funds used for the acquisition of McClain in July 1998.
MINORITY INTEREST
Minority interest represents the 20% minority interest held by Lufthansa which
increased from the second quarter 1999 to the second quarter of 1998 due to
higher net income of the Flight Support Group.
NET INCOME
The Company's net income totaled $4.1 million, or $.23 per diluted share, in the
second quarter 1999, improving 67% from net income of $2.5 million, or $.16 per
diluted share, in the second quarter 1998.
The improvement in net income for the second quarter 1999 over the second
quarter 1998 is primarily attributable to the increased sales and operating
income partially offset by higher interest costs and the increase in minority
interest in earnings of the Flight Support Group discussed above.
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 and proceeds
from the issuance of industrial development revenue bonds.
Principal uses of cash by the Company include payments of interest and principal
on debt, capital expenditures, increases in working capital and acquisitions.
The Company believes that operating cash flow, proceeds from the Class A Common
Stock offering and available borrowings under the Company's Credit Facility will
be sufficient to fund cash requirements for the foreseeable future.
-14-
<PAGE>
OPERATING ACTIVITIES
The Company's cash flow from operations was $919,000 for the first six months of
1999, principally reflecting net income of $7.3 million, adjustments for
depreciation and amortization and minority interest of $2.4 million and $1.8
million, respectively, offset by an increase in working capital of $10.2
million. The increase in working capital primarily resulted from an increase in
inventories of $5.2 million to meet increased sales orders.
INVESTING ACTIVITIES
The principal cash used in investing activities in the first six months of 1999
was cash used in the acquisition of Rogers-Dierks and Radiant totaling $14.3
million and $6.7 million, respectively. Purchases of property, plant and
equipment totaled $7.0 million representing the purchase of a new facility and
improvements to existing facilities in our Flight Support Group. The Company
also purchased short-term investments totaling $3.2 million.
FINANCING ACTIVITIES
The Company's principal financing activities during the first six months of 1999
included proceeds from the Class A Common Stock offering of $56.2 million and
long-term debt of $23 million, including $22.5 million from the Company's Credit
Facility primarily to fund business 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 the $42.5 million
outstanding balance on its Credit Facility from proceeds of the equity offering.
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 has performed a detailed assessment of all internal computer systems and,
as discussed below, is developing and implementing plans to correct the
problems. We expect these projects to be successfully completed during 1999.
Year 2000 problems could affect our research and development, production,
distribution, financial, administrative and communication operations. Systems
critical to our business which have been identified as non-Year 2000 compliant
are either being replaced or corrected through programming modifications. In
addition, the project team is looking at Year 2000 readiness from other aspects
of our business, including customer order-taking, manufacturing, raw materials
supply and plant process equipment. Our goal is to have our remediated and
replaced systems operational by June 1999 to allow time for testing and
verification. 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.
-15-
<PAGE>
As part of our compliance process we are developing a contingency plan for those
areas that are critical to the Company's business. These plans will be 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 has been in the first half of 1999, with
the expectation that our business groups will have plans in place by June 1999.
Based on our current plans and efforts to date, we do not anticipate that Year
2000 problems will have a material effect on our results of operations or
financial condition.
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance are expensed as incurred. To date, we have
spent less than $100,000 on this project. Costs to be incurred in the remainder
of 1999 to fix Year 2000 problems are estimated at less than $100,000. Such
costs do not include normal system upgrades and replacements. We do not expect
the costs relating to Year 2000 remediation to have a material effect on our
results of operations or financial condition.
The above expectations are subject to uncertainties. For example, if we are
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 incur in connection with the Year 2000 problems will be
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 April 30, 1999 and October 31, 1998 included unrealized holding
gain (loss) from investments.
-16-
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on March 16, 1999, the
Company's shareholders elected eight directors and approved a proposal
to amend the 1993 Stock Option Plan (the Plan) to increase the number
of shares issuable pursuant to the Plan.
The number of votes cast for and withheld for each nominee for director
were as follows:
DIRECTOR FOR WITHHELD
-------- --- --------
Jacob T. Carwile 8,074,489 68,596
Samuel L. Higginbottom 8,074,489 68,596
Eric A. Mendelson 8,073,449 69,636
Laurans A. Mendelson 8,075,004 68,081
Victor H. Mendelson 8,073,607 69,478
Albert Morrison, Jr 8,074,489 68,596
Dr. Alan Schriesheim 8,075,004 68,081
Guy C. Shafer 8,074,489 68,596
The number of votes cast for and against the proposal to amend the
Plan, as well as the number of absentations, were as follows:
For: 6,775,908; Against: 1,307,350; and Abstain: 59,828.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4) Amendment No. 3 to the HEICO Corporation Combined Stock Option Plan
(27) Financial data schedule
-17-
<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)
JUNE 11, 1999 BY /s/ THOMAS S. IRWIN
- ---------------------- -------------------------------------
Date Thomas S. Irwin, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-18-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
(4) Amendment No. 3 to the HEICO Corporation Combined Stock Option Plan
(27) Financial data schedule
Exhibit 4
AMENDMENT NO. 3 TO THE
HEICO CORPORATION COMBINED STOCK OPTION PLAN
WHEREAS, on March 16, 1999, the Board of Directors of HEICO Corporation
(the "Board") approved an Amendment to the HEICO Combined Stock Option Plan (the
"Plan") amending Section 9 of the Plan (Exercise of Options);
NOW THEREFORE, in accordance with the terms of the Plan, the Plan is
hereby amended as follows:
1. Section 9 of the HEICO Corporation Combined Stock Option Plan is
hereby amended to read in its entirety:
9. EXERCISE OF OPTIONS. An Option shall be deemed exercised
when (i) the Company has received written notice of such exercise in
accordance with the terms of the Option, (ii) full payment of the
aggregate option price of the Shares as to which the Option is
exercised has been made, and (iii) arrangements that are satisfactory
to the Committee in its sole discretion have been made for the
Optionee's payment to the Company of the amount, if any, that is
necessary for the Company or Subsidiary employing the Optionee to
withhold in accordance with applicable Federal or state tax withholding
requirements. The consideration to be paid for the Shares to be issued
upon exercise of an Option, as well as the method of payment of the
exercise price and of any withholding and employment taxes applicable
thereto, shall be determined by the Committee or the Board and may, in
the discretion of the Committee or the Board, consist of: (1) cash, (2)
certified or official bank check, (3) money order, (4) Shares that have
been held by the Optionee for at least six (6) months (or such other
Shares, including the withholding of Shares issuable upon exercise of
the Option, as the Company determines will not cause the Company to
recognize for a financial accounting purposes a charge for compensation
expense, (5) pursuant to a "cashless exercise" procedure, by delivery
of a properly executed exercise notice together with such other
documentation, and subject to such guidelines, as the Board or the
Committee shall require to effect an exercise of the Option and
delivery to the Company by a licensed broker acceptable to the Company
of proceeds from the sale of Shares or a margin loan sufficient to pay
the exercise price and any applicable income or employment taxes, (6)
promissory note, or (7) in such other consideration as the Committee or
the Board deems appropriate, or by a combination of the above. In the
case of an Incentive Stock Option, the permissible methods of payment
shall be specified at the time the Option is granted. The Committee or
the Board in its sole discretion may accept a personal check in full or
partial payment of any Shares. If the exercise price is paid in whole
or in part with Shares, or through the withholding of Shares issuable
upon exercise of the Option, the value of the Shares surrendered or
withheld shall be their Fair Market Value on the date the Option is
exercised. The Company in its sole discretion may, on an individual
basis or pursuant to a general program established in connection with
this Plan, lend money to an Optionee, guarantee a loan to an Optionee,
or otherwise assist an Optionee to obtain
<PAGE>
the cash necessary to exercise all or a portion of an Option granted
hereunder or to pay any tax liability of the Optionee attributable to
such exercise. If the exercise price is paid in whole or part with
Optionee's promissory note, such note shall (i) provide for full
recourse to the maker, (ii) be collateralized by the pledge of the
Shares that the Optionee purchases upon exercise of such Option or such
other collateral as the Board shall require, (iii) bear interest at the
prime rate of the Company's principal lender, and (iv) contain such
other terms as the Board in its sole discretion shall reasonably
require. No Optionee shall be deemed to be a holder of any Shares
subject to an Option unless and until a stock certificate or
certificates for such Shares are issued to such person(s) under the
terms of this Plan. No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as expressly provided
herein.
2. The effective date of this Amendment No. 3 to the Plan shall be
March 16, 1999.
IN WITNESS WHEREOF, HEICO Corporation has caused this Amendment to be
executed this 16th day of March, 1999.
HEICO Corporation
BY: /s/ LAURANS A. MENDELSON
------------------------------------
Laurans A. Mendelson
Chairman of the Board, President
and Chief Executive Officer
ATTEST:
/s/ ELIZABETH R. LETENDRE
---------------------------------------
Elizabeth R. Letendre
Corporate Secretary
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<CASH> 17,674,000
<SECURITIES> 5,548,000
<RECEIVABLES> 22,564,000
<ALLOWANCES> (426,000)
<INVENTORY> 31,456,000
<CURRENT-ASSETS> 81,174,000
<PP&E> 37,819,000
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<TOTAL-ASSETS> 183,016,000
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0
0
<COMMON> 157,000
<OTHER-SE> 133,454,000
<TOTAL-LIABILITY-AND-EQUITY> 183,016,000
<SALES> 60,942,000
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