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, 2000
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 May 31, 2000:
Title of Class Shares Outstanding
Common Stock, $.01 par value 8,428,198
Class A Common Stock, $.01 par value 7,354,958
<PAGE>
<TABLE>
<CAPTION>
HEICO CORPORATION
INDEX
Page No.
<S> <C>
Part I. Financial Information:
Item 1. Consolidated Condensed Balance Sheets as of
April 30, 2000 (unaudited) and October 31, 1999 2
Consolidated Condensed Statements of Operations (unaudited)
for the six and three months ended April 30, 2000 and 1999 3
Consolidated Condensed Statements of Cash Flows (unaudited)
for the six months ended April 30, 2000 and 1999 4
Notes to Consolidated Condensed Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risks 18
Part II. Other Information:
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 19
</TABLE>
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<PAGE>
<TABLE>
PART I. Item 1. FINANCIAL INFORMATION
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<CAPTION>
April 30, 2000 October 31, 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,708,000 $ 6,031,000
Accounts receivable, net 46,985,000 35,326,000
Inventories 49,149,000 45,172,000
Prepaid expenses and other current assets 4,516,000 2,527,000
Deferred income taxes 1,800,000 1,534,000
------------- -------------
Total current assets 105,158,000 90,590,000
Property, plant and equipment less accumulated depreciation
of $19,302,000 and $18,588,000, respectively 31,356,000 28,336,000
Intangible assets less accumulated amortization of
$9,328,000 and $5,911,000, respectively 146,696,000 143,557,000
Unexpended bond proceeds 287,000 280,000
Long-term investments 3,089,000 3,231,000
Deferred income taxes 521,000 1,366,000
Other assets 9,249,000 5,803,000
------------- -------------
Total assets $ 296,356,000 $ 273,163,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 494,000 $ 551,000
Trade accounts payable 12,156,000 11,070,000
Accrued expenses and other current liabilities 18,378,000 15,299,000
Income taxes payable -- 392,000
------------- -------------
Total current liabilities 31,028,000 27,312,000
Long-term debt, net of current maturities 79,750,000 72,950,000
Other non-current liabilities 3,574,000 3,590,000
------------- -------------
Total liabilities 114,352,000 103,852,000
------------- -------------
Minority interest in consolidated subsidiary 31,890,000 30,022,000
------------- -------------
Commitments and contingencies (Notes 2 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 - 8,428,032 and 8,408,821 shares,
respectively 84,000 84,000
Class A Common Stock, $.01 par value; Authorized - 30,000,000 shares;
Issued and outstanding - 7,354,875 and 7,334,750 shares,
respectively 74,000 73,000
Capital in excess of par value 93,042,000 91,094,000
Accumulated other comprehensive loss (2,322,000) (2,235,000)
Retained earnings 60,687,000 52,280,000
------------- -------------
151,565,000 141,296,000
Less: Note receivable from employee savings and
investment plan (1,451,000) (2,007,000)
------------- -------------
Total shareholders' equity 150,114,000 139,289,000
------------- -------------
Total liabilities and shareholders' equity $ 296,356,000 $ 273,163,000
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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<TABLE>
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
<CAPTION>
Six months ended April 30, Three months ended April 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 101,488,000 $ 60,942,000 $ 53,548,000 $ 32,731,000
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 63,951,000 35,830,000 33,869,000 19,302,000
Selling, general and administrative
expenses 17,896,000 10,563,000 9,126,000 5,657,000
------------- ------------- ------------- -------------
Total operating costs and expenses 81,847,000 46,393,000 42,995,000 24,959,000
------------- ------------- ------------- -------------
Operating income 19,641,000 14,549,000 10,553,000 7,772,000
Interest expense (2,597,000) (821,000) (1,379,000) (225,000)
Interest and other income 335,000 547,000 125,000 321,000
------------- ------------- ------------- -------------
Income before income taxes
and minority interest 17,379,000 14,275,000 9,299,000 7,868,000
Income tax expense 6,747,000 5,151,000 3,593,000 2,844,000
------------- ------------- ------------- -------------
Income before minority interest 10,632,000 9,124,000 5,706,000 5,024,000
Minority interest 1,828,000 1,831,000 917,000 934,000
------------- ------------- ------------- -------------
Net income $ 8,804,000 $ 7,293,000 $ 4,789,000 $ 4,090,000
============= ============= ============= =============
Net income per share:
Basic $ .56 $ .52 $ .30 $ .27
===== ===== ===== =====
Diluted $ .49 $ .43 $ .27 $ .23
===== ===== ===== =====
Weighted average number of
common shares outstanding:
Basic 15,763,663 13,911,609 15,773,674 15,307,866
============= ============= ============= =============
Diluted 18,127,498 16,845,280 18,062,288 18,158,909
============= ============= ============= =============
Cash dividends per share $.025 $.025
===== =====
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-3-
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<TABLE>
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
<CAPTION>
Six months ended
April 30,
-----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,804,000 $ 7,293,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,413,000 2,411,000
Deferred income taxes 634,000 (636,000)
Minority interest in consolidated subsidiary 1,828,000 1,831,000
Change in assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (11,730,000) (1,418,000)
(Increase) in inventories (3,376,000) (5,178,000)
(Increase) in prepaid expenses and
other assets (2,301,000) (1,346,000)
Increase (decrease) in trade payables, accrued
expenses and other current liabilities 4,492,000 (1,832,000)
(Decrease) in income taxes payable (392,000) (378,000)
Other 571,000 172,000
------------ ------------
Net cash provided by operating activities 2,943,000 919,000
------------ ------------
Cash flows from investing activities:
Acquisitions and related costs, net of cash acquired (9,046,000) (21,960,000)
Capital expenditures (4,640,000) (6,977,000)
Net purchases of available-for-sale investments -- (2,995,000)
Payment received from employee savings and
investment plan note receivable 556,000 491,000
Other (1,153,000) (1,313,000)
------------ ------------
Net cash (used in) investing activities (14,283,000) (32,754,000)
------------ ------------
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 11,000,000 22,500,000
Bond reimbursement proceeds -- 513,000
Principal payments on long-term debt (4,445,000) (42,750,000)
Proceeds from the exercise of stock options 188,000 483,000
Tax benefit on stock option exercises 1,733,000 1,611,000
Cash dividends paid (394,000) (315,000)
Additional minority interest investment 40,000 2,827,000
Other (105,000) (156,000)
------------ ------------
Net cash provided by financing activities 8,017,000 40,900,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,323,000) 9,065,000
Cash and cash equivalents at beginning of year 6,031,000 8,609,000
------------ ------------
Cash and cash equivalents at end of period $ 2,708,000 $ 17,674,000
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-4-
<PAGE>
HEICO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED
April 30, 2000
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, 1999. 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, 2000 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. Accounts receivable are composed of the following:
<TABLE>
<CAPTION>
April 30, 2000 October 31, 1999
------------ ------------
<S> <C> <C>
Accounts receivable $ 47,564,000 $ 36,047,000
Less allowance for doubtful accounts (579,000) (721,000)
------------ ------------
Accounts receivable, net $ 46,985,000 $ 35,326,000
============ ============
</TABLE>
In May 2000, one of the Company's customers filed for bankruptcy. The bankruptcy
proceedings are in the early stages and the ultimate outcome is not certain at
this time. The Company is unable to determine what amount, if any, will be
uncollectible. Accordingly, no specific provision for loss has been made in the
consolidated condensed financial statements. A full loss of the Company's
outstanding receivable from this customer would result in a charge of
approximately $700,000 to net income.
Accounts receivable and accrued expenses and current liabilities include amounts
related to the production of products under fixed-price contracts exceeding
terms of one year. Certain of these contracts recognize revenues on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. This method is used because
management considers costs incurred to be the best available measure of progress
on these contracts. Certain other contracts have revenues recognized on the
completed-contract method. This method is used where the Company does not have
adequate historical data to ensure that estimates are reasonably dependable.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
percentage of completion contracts," included in accounts receivable, represents
revenues recognized in excess of amounts billed. The liability, "Billings in
excess of costs and estimated earnings on uncompleted
-5-
<PAGE>
percentage of completion contracts," included in accrued expenses and other
current liabilities, represents billings in excess of revenues recognized.
Billings are made based on the completion of certain milestones as provided for
in the contracts.
Costs and estimated earnings on uncompleted percentage of completion contracts
are as follows:
<TABLE>
<CAPTION>
April 30, 2000
--------------
<S> <C>
Costs incurred on uncompleted contracts $ 3,621,000
Estimated earnings 4,529,000
--------------
8,150,000
Less: Billings to date (5,413,000)
--------------
$ 2,737,000
==============
Included in accompanying balance
sheets under the following captions:
Accounts receivable $ 2,763,000
Accrued expensed and other current liabilities (26,000)
--------------
$ 2,737,000
==============
</TABLE>
Costs and estimated earnings in excess of billings and billings in excess of
costs and estimated earnings on percentage of completion contracts were not
material in fiscal 1999.
3. Inventories are comprised of the following:
<TABLE>
<CAPTION>
April 30, 2000 October 31, 1999
-------------- ----------------
<S> <C> <C>
Finished products $ 16,328,000 $ 15,401,000
Work in process 13,922,000 12,801,000
Materials, parts, assemblies and supplies 18,899,000 16,970,000
-------------- ----------------
Total inventories $ 49,149,000 $ 45,172,000
============== ================
</TABLE>
Inventories related to long-term contracts were not significant as of April 30,
2000 and October 31, 1999.
4. In February 2000, the Company, through a subsidiary, acquired selected assets
of the former Air-A-Plane Corporation for cash. The purchase price was not
significant to the Company's consolidated financial statements.
5. Long-term debt consists of:
<TABLE>
<CAPTION>
April 30, 2000 October 31, 1999
-------------- ----------------
<S> <C> <C>
Borrowings under revolving credit facility $73,000,000 $66,000,000
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 Refunding Bonds - Series 1988 1,980,000 1,980,000
Equipment loans 1,269,000 1,526,000
-------------- -----------
80,244,000 73,501,000
Less current maturities (494,000) (551,000)
-------------- -----------
$79,750,000 $72,950,000
============== ===========
</TABLE>
-6-
<PAGE>
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 7.1% and 6.4% at April 30, 2000
and October 31, 1999, respectively.
In February 2000, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest based on three-month LIBOR
on a notional principal amount of $30 million for a fixed rate payment
obligation of 6.59% for a two-year period ending February 1, 2002. The fixing of
the interest rate for this period offsets the Company's exposure to the
uncertainty of floating interest rates on a portion of indebtedness under the
Credit Facility. The differential paid or received on the interest rate swap
will be recognized as an adjustment to interest expense. The bank has the option
to call the swap one year after the effective date.
The industrial development revenue bonds represent bonds issued by Broward
County, Florida 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 were $287,000 and
$280,000 as of April 30, 2000 and October 31, 1999, respectively, including
investment earnings. The balance of the unexpended proceeds will be used to
reduce the principal balance in the third quarter 2000. The Series 1997A and
1997C bonds interest rates were 5.3% and 3.8% at April 30, 2000 and October 31,
1999, respectively.
The Series 1988 bonds interest rates were 5.15% and 3.4% at April 30, 2000 and
October 31, 1999, respectively.
Equipment loans had interest rates ranging from 8.5% to 9.0% at April 30, 2000
and October 31, 1999.
6. Long-term investments consist of equity securities with an aggregate cost of
$6,858,000 as of April 30, 2000 and October 31, 1999. These investments are
classified as available-for-sale and stated at a fair value of $3,089,000 and
$3,231,000 as of April 30, 2000 and October 31, 1999, respectively. The gross
unrealized losses were $3,769,000 and $3,627,000 as of April 30, 2000 and
October 31, 1999, respectively. Unrealized gains and losses, net of deferred
taxes, are reflected as a component of comprehensive income (see Note 10). There
were no realized gains or losses during fiscal 1999 and through the first six
months of fiscal 2000. The investments are classified as long-term to correspond
with management's intentions to hold the investments a minimum of one year.
7. Research and development expenses for the first six months of fiscal 2000 and
1999, which are included as a component of cost of sales, totaled approximately
$1.3 million and $550,000, respectively in each of the six-month periods. The
expenses for the first six months of 2000 and 1999 are net of $3.0 million and
$3.3 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 April 30, 2000 and 1999 were $1.5
million and $588,000 million, respectively, and are recorded as a component of
accrued expenses and other current liabilities in the consolidated condensed
balance sheets.
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8. The Company's effective tax rate increased from 36.1% in the second quarter
1999 to 38.6% in the second quarter 2000 primarily due to increased state taxes
and non-deductible goodwill resulting from acquisitions.
9. Information on operating segments for the six months and quarter ended April
30, 2000 and 1999, respectively, for the Flight Support Group (FSG) and the
Electronics and Ground Support Group (EGSG) are as follows:
<TABLE>
<CAPTION>
Segments
-----------------------------
Other,
Primarily Consolidated
FSG EGSG Corporate Totals
--- ---- --------- ------------
<S> <C> <C> <C> <C>
For the six months ended April 30, 2000:
---------------------------------------
Net sales $ 57,540,000 $ 43,948,000 $ -- $101,488,000
Depreciation and amortization 3,144,000 1,167,000 102,000 4,413,000
Operating income 15,984,000 6,062,000 (2,405,000) 19,641,000
Capital expenditures 4,009,000 630,000 1,000 4,640,000
For the six months ended April 30, 1999:
---------------------------------------
Net sales $ 43,018,000 $ 17,924,000 $ -- $ 60,942,000
Depreciation and amortization 1,991,000 341,000 79,000 2,411,000
Operating income 15,427,000 1,716,000 (2,594,000) 14,549,000
Capital expenditures 6,361,000 601,000 15,000 6,977,000
For the quarter ended April 30, 2000:
------------------------------------
Net sales $ 29,345,000 $ 24,203,000 $ -- $ 53,548,000
Depreciation and amortization 1,541,000 602,000 51,000 2,194,000
Operating income 8,082,000 3,531,000 (1,060,000) 10,553,000
Capital expenditures 2,209,000 487,000 -- 2,696,000
For the quarter ended April 30, 1999:
------------------------------------
Net sales $ 22,250,000 $ 10,481,000 $ -- $ 32,731,000
Depreciation and amortization 950,000 195,000 34,000 1,179,000
Operating income 7,920,000 1,253,000 (1,401,000) 7,772,000
Capital expenditures 2,964,000 (106,000) 10,000 2,868,000
</TABLE>
Total assets held by the operating segments as of April 30, 2000 and October 31,
1999 are as follows:
<TABLE>
<CAPTION>
Segments
-----------------------------
Other,
Primarily Consolidated
FSG EGSG Corporate Totals
--- ---- --------- ------------
<S> <C> <C> <C> <C>
As of April 30, 2000 $181,395,000 $105,090,000 $ 9,871,000 $296,356,000
As of October 31, 1999 173,635,000 89,486,000 10,042,000 273,163,000
</TABLE>
10. The Company's comprehensive income consists of:
<TABLE>
<CAPTION>
Six months ended April 30, Three months ended April 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 8,804,000 $ 7,293,000 $ 4,789,000 $ 4,090,000
Other comprehensive (loss) income:
Unrealized holding (loss) gain
on investments (142,000) 502,000 752,000 (975,000)
Tax benefit (expense) 55,000 (176,000) (289,000) 374,000
----------- ----------- ----------- -----------
Comprehensive income $ 8,717,000 $ 7,619,000 $ 5,252,000 $ 3,489,000
=========== =========== =========== ===========
</TABLE>
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Accumulated other comprehensive loss as of April 30, 2000 and October 31, 1999
includes unrealized (loss) on investments as follows:
Accumulated Other
Comprehensive Loss
------------------
Balance, October 31, 1998 $ (1,142,000)
Unrealized holding (loss) on investments,
net of tax benefit of $721,000 (1,093,000)
------------
Balance, October 31, 1999 (2,235,000)
Unrealized holding (loss) on investments,
net of tax benefit of $55,000 (87,000)
------------
Balance, April 30, 2000 $ (2,322,000)
============
11. 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. 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. The Company filed counterclaims against UTC. UTC filed an
answer denying the counterclaims.
In March 2000, the Company settled the litigation with UTC. As part of the
settlement, the Company received a permanent license to make and sell parts
which were the subject of the litigation, and UTC was paid a pre-paid sum for
such license. The settlement is not expected to materially affect the Company's
earnings or financial condition.
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 Aetna Casualty and Surety Co. (Travelers). In June 1999,
the Travelers lawsuit was dismissed by the federal court based on a lack of
jurisdiction. Travelers has appealed the dismissal. The complaint sought
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 sought a declaratory judgment 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 believes that it has significant counterclaims against Travelers 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. No provision for gain or loss, if any, has
been made in the consolidated condensed financial statements.
The Company is involved in various other legal actions arising in the normal
course of business. Based upon the amounts sought by the plaintiffs in these
actions, management is of the opinion that the outcome of these other matters
will not have a significant effect on the Company's consolidated condensed
financial statements.
-9-
<PAGE>
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. The outcome of this matter is uncertain;
accordingly, no provision for additional taxes, if any, has been made in the
consolidated condensed financial statements.
12. In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends FASB Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company will
adopt SFAS 133 beginning November 1, 2000. The Company has not yet quantified
the impact of adopting SFAS 133 on the Company's consolidated financial
statements.
13. In June 2000, the Company, through a subsidiary, acquired substantially all
of the assets and certain liabilities of Future Aviation, Inc. (Future) for $14
million in cash paid at closing. Future is engaged in the repair and overhaul of
aircraft accessory components principally serving the regional and commuter
aircraft market.
-10-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our results of operations during the current period and the same period in the
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.
Our Flight Support Group (FSG) consists of HEICO Aerospace Holdings Corp. and
its subsidiaries; HEICO Aerospace Corporation, Jet Avion Corporation (Jet
Avion), LPI Industries Corporation (LPI), Aircraft Technology, Inc. (ATI),
Northwings Accessories Corp. (Northwings), McClain International, Inc.
(McClain), Associated Composite, Inc. (ACI), Rogers-Dierks, Inc. (Rogers-Dierks)
acquired December 1998, Air Radio & Instruments Corp. (Air Radio) acquired May
1999, Turbine Kinetics, Inc. (Turbine) acquired June 1999, and Thermal
Structures, Inc. (Thermal) acquired June 1999.
Our Electronics & Ground Support Group (EGSG) consists of HEICO Aviation
Products Corp. and its subsidiaries; Trilectron Industries, Inc. (Trilectron),
Radiant Power Corp. (Radiant) acquired January 1999, Leader Tech, Inc. (Leader
Tech) acquired May 1999, and Santa Barbara Infrared, Inc. (SBIR) acquired
September 1999.
In February 2000, the Company, through a subsidiary, acquired selected assets of
the former Air-A-Plane Corporation for cash. The purchase price was not
significant to the Company's consolidated financial statements.
In February 2000, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest based on three-month LIBOR
on a notional principal amount of $30 million for a fixed rate payment
obligation of 6.59% for a two-year period ending February 1, 2002. The fixing of
the interest rate for this period offsets the Company's exposure to the
uncertainty of floating interest rates on a portion of indebtedness under the
Credit Facility. The differential paid or received on the interest rate swap
will be recognized as an adjustment to interest expense. The bank has the option
to call the swap one year after the effective date.
In March 2000, the Company settled its litigation with United Technologies
Corporation (UTC) discussed in Note 11 to the consolidated financial statements.
As part of the settlement, the Company received a permanent license to make and
sell parts which were the subject of the litigation, and UTC was paid a pre-paid
sum for such license. The settlement is not expected to materially affect the
Company's earnings or financial condition.
In May 2000, one of our customers filed for bankruptcy. This customer
contributed sales of approximately $2 million in the first half of fiscal year
2000. The ultimate outcome of the bankruptcy proceedings is not certain at this
time and the Company is unable to determine what amount, if any, will be
uncollectible. Accordingly, no specific provision for loss has been made in the
consolidated condensed financial statements. A full loss of the Company's
outstanding receivable from this customer would result in a charge of
approximately $700,000 to net income.
-11-
<PAGE>
Results of Operations
For the periods indicated, the following table sets forth net sales by operating
segment 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,
-------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Net sales
FSG $ 57,540 $ 43,018 $ 29,345 $ 22,250
EGSG 43,948 17,924 24,203 10,481
---------- --------- --------- ---------
$ 101,488 $ 60,942 $ 53,548 $ 32,731
========== ========= ========= =========
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 37.0% 41.2% 36.8% 41.0%
Selling, general and
administrative expenses 17.6% 17.3% 17.0% 17.3%
Operating income 19.4% 23.9% 19.7% 23.7%
Interest expense 2.6% 1.3% 2.6% 0.7%
Interest and other income 0.3% 0.9% 0.2% 1.0%
Income tax expense 6.7% 8.5% 6.7% 8.7%
Minority interest 1.8% 3.0% 1.7% 2.9%
Net income 8.7% 12.0% 8.9% 12.5%
</TABLE>
Comparison of First Six Months of 2000 to First Six Months of 1999
Net Sales
Net sales for the first six months of 2000 totaled $101.5 million, up 67% when
compared to the first six months of 1999 net sales of $60.9 million.
The increase in sales for the first six months of 2000 reflects an increase of
$14.5 million (a 34% increase) to $57.5 million in revenues from the FSG and an
increase of $26.0 million (a 145% increase) to $43.9 million in revenues from
the EGSG. The FSG sales increase represents revenues of $9.4 million from
newly-acquired businesses (Air Radio and Thermal). The balance of $5.1 million
reflects increases in sales of new products and services, including newly
developed and acquired FAA-approved jet engine replacement parts. The EGSG sales
increase reflects $14.7 million from internal growth and $11.3 from acquired
businesses (Radiant, Leader Tech and SBIR). The internal growth in the EGSG is
primarily attributed to sales of new products and increased market penetration.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 37.0% for the first six months of
2000 as compared to 41.2% for the first six months of 1999. This decrease
reflects lower margins within the FSG contributed by certain acquired
businesses, softness in demand for our higher margin replacement parts, less
favorable product mix, and the benefit realized in fiscal 1999 from favorable
pricing under certain contracts. Lower gross margins in the FSG were partially
offset by increased margins
-12-
<PAGE>
in the EGSG resulting primarily from higher gross profit margins contributed by
the acquired businesses. Cost of sales amounts for the first six months of 2000
and first six months of 1999 include approximately $1,323,000 and $550,000 of
new product and development expenses, respectively. These amounts are net of
$3.0 million and $3.3 million received from Lufthansa in the first six months of
2000 and 1999, respectively. Pursuant to the research and development agreement
with Lufthansa, a total of $2.8 million remained available to reimburse new
product and development expenses at April 30, 2000. Accordingly, total new
product development expense is likely to increase by approximately $1 million
for the full fiscal 2000.
Selling, general and administrative (SG&A) expenses increased $7.3 million to
$17.9 million for the first six months of 2000 from $10.6 million for the first
six months of 1999. The increase results primarily from the inclusion of SG&A
expenses of acquired companies, including additional goodwill amortization and
increases in both operating segments related to internal sales growth. As a
percentage of net sales, SG&A expenses increased to 17.6% for the first six
months of 2000 compared to 17.3% for the first six months of 1999 primarily
resulting from higher selling costs in the FSG associated with expanding product
lines and higher goodwill amortization resulting from acquired businesses.
Operating Income
Operating income increased $5.1 million to $19.6 million (a 35% increase) for
the first six months of 2000 from $14.5 million for the first six months of
1999. The increase in operating income reflects an increase of $600,000 (a 4%
increase) from $15.4 million to $16 million in the Company's FSG and an increase
of $4.4 million (a 253% increase) from $1.7 million to $6.1 million in the
Company's EGSG. The increases in operating income were due primarily to
increases in sales in the EGSG and FSG, and higher gross profit margins in the
EGSG offset by lower margins in the FSG discussed above.
As a percentage of net sales, operating income decreased from 23.9% in the first
six months of 1999 to 19.4% in the first six months of 2000 primarily reflecting
lower gross profit margins within the FSG and the increase in SG&A expenses as a
percentage of net sales discussed above. The FSG's operating income as a
percentage of net sales declined from 35.9% in the first six months of 1999 to
27.8% in the first six months of 2000 due to lower gross profit margins, higher
selling costs and higher goodwill amortization discussed above. The EGSG's
operating income as a percentage of net sales improved from 9.6% in the first
six months of 1999 to 13.8% in the first six months of 2000. This improvement
reflects higher gross margins contributed by acquired businesses.
Interest Expense
Interest expense increased $1,776,000 to $2,597,000 from the first six months of
1999 to the first six months of 2000. 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 in fiscal 1999.
Interest and Other Income
Interest and other income decreased $212,000 to $335,000 from the first six
months of 1999 to the first six months of 2000 due principally to the decrease
in invested funds used for acquisitions in fiscal 1999.
-13-
<PAGE>
Minority Interest
Minority interest represents the 20% minority interest held by Lufthansa.
Net income
The Company's net income totaled $8.8 million, or $.49 per diluted share, in the
first six months of 2000, improving 21% from net income of $7.3 million, or $.43
per diluted share, in the first six months of 1999.
The improvement in net income for the first six months of 2000 over the first
six months of 1999 is primarily attributable to the increased operating income
discussed above. The increase was partially offset by the aforementioned higher
interest costs, as well as an increase in the Company's effective tax rate. The
Company's effective tax rate increased from 36.1% for the first six months of
1999 to 38.8% in the first six months of 2000 primarily due to increased state
taxes and non-deductible goodwill resulting from acquisitions.
Cash earnings per share or net income per diluted share before goodwill
amortization (adjusted for the after tax impact of goodwill) increased 23% to
$.59 in the first six months of fiscal year 2000 from $.48 in the first half of
fiscal year 1999.
Comparison of Second Quarter 2000 to Second Quarter 1999
Net Sales
Net sales for the second quarter 2000 totaled $53.5 million, up 64% when
compared to the second quarter 1999 net sales of $32.7 million.
The increase in second quarter 2000 sales reflects an increase of $7.1 million
(a 32% increase) to $29.3 million in revenues from the FSG and an increase of
$13.7 million (a 131% increase) to $24.2 million in revenues from the EGSG. The
FSG sales increase represents revenues of $4.7 million from newly-acquired
businesses (Air Radio and Thermal). The balance of $2.4 million reflects
increases in sales of new products and services, including newly developed and
acquired FAA-approved jet engine replacement parts. The EGSG sales increase
reflects $8.5 million from internal growth and $5.2 from acquired businesses
(Leader Tech and SBIR). The internal growth in the EGSG is primarily attributed
to sales of new products and increased market penetration.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 36.8% for the second quarter 2000 as
compared to 41.0% for the second quarter 1999. This decrease reflects lower
margins within the FSG contributed by certain acquired businesses, softness in
demand for our higher margin replacement parts, less favorable product mix, and
the benefit realized in fiscal 1999 from favorable pricing under certain
contracts. Lower gross margins in the FSG were partially offset by increased
margins in the EGSG resulting primarily from higher gross profit margins
contributed by the acquired businesses. Cost of sales amounts for the second
quarter 2000 and second quarter 1999 include approximately $758,000 and
$298,000, respectively, of new product and development expenses. These amounts
are net of $1.6 million and $1.7 million received from Lufthansa in the second
quarter of 2000 and 1999, respectively.
-14-
<PAGE>
Selling, general and administrative (SG&A) expenses increased $3.4 million to
$9.1 million for the second quarter 2000 from $5.7 million for the second
quarter 1999. The increase results primarily from the inclusion of SG&A expenses
of acquired companies, including additional goodwill amortization and increases
in both operating segments related to internal sales growth. As a percentage of
net sales, SG&A expenses increased to 17.0% for the second quarter 2000 compared
to 17.3% for the second quarter 1999 primarily resulting from continuing efforts
to control costs while increasing revenues offset by higher selling costs in the
FSG associated with expanding product lines and higher goodwill amortization.
Operating Income
Operating income increased $2.8 million to $10.6 million (a 36% increase) for
the second quarter 2000 from $7.8 million for the second quarter 1999. The
increase in operating income reflects an increase of $200,000 (a 2% increase)
from $7.9 million to $8.1 million in the Company's FSG and an increase of $2.2
million (a 182% increase) from $1.3 million to $3.5 million in the Company's
EGSG. The increases in operating income were due primarily to increases in sales
in the EGSG and FSG and higher gross profit margins in the EGSG offset by lower
margins in the FSG discussed above.
As a percentage of net sales, operating income decreased from 23.7% in the
second quarter 1999 to 19.7% in the second quarter 2000 primarily reflecting
lower gross profit margins within the FSG and the increase in SG&A expenses as a
percentage of net sales discussed above. The FSG's operating income as a
percentage of net sales declined from 35.6% in the second quarter 1999 to 27.5%
in the second quarter 2000 due to lower gross profit margins, higher selling
costs, and higher goodwill amortization discussed above. The EGSG's operating
income as a percentage of net sales improved from 12.0% in the second quarter
1999 to 14.6% in the second quarter 2000. This improvement reflects higher gross
margins contributed by acquired businesses.
Interest Expense
Interest expense increased $1,154,000 to $1,379,000 from the second quarter 1999
to the second quarter 2000. 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
in fiscal 1999.
Interest and Other Income
Interest and other income decreased $196,000 to $125,000 from the second quarter
1999 to the first quarter 2000 due principally to the decrease in invested funds
used for acquisitions in fiscal 1999.
Minority Interest
Minority interest represents the 20% minority interest held by Lufthansa.
Net income
The Company's net income totaled $4.8 million, or $.27 per diluted share, in the
second quarter 2000, improving 17% from net income of $4.1 million, or $0.23 per
diluted share, in the second quarter 1999.
-15-
<PAGE>
The improvement in net income for the second quarter 2000 over the second
quarter 1999 is primarily attributable to the increased operating income
discussed above. The increase was partially offset by the aforementioned higher
interest costs, as well as an increase in the Company's effective tax rate. The
Company's effective tax rate increased from 36.1% in the second quarter 1999 to
38.6% in the second quarter 2000 primarily due to increased state taxes and
non-deductible goodwill resulting from acquisitions.
Cash earnings per share or net income per diluted share before goodwill
amortization (adjusted for the after tax impact of goodwill) increased 28% to
$.32 per share in the second quarter of fiscal year 2000 from $.25 per share in
the second quarter of fiscal year 1999.
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 payments of interest and principal
on debt, acquisitions, 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 $2.9 million for the first six
months of 2000, principally reflecting net income of $8.8 million, adjustments
for depreciation and amortization and minority interest of 4.4 million and $1.8
million, respectively, offset by an increase in net operating assets of $13.2
million. The increase in net operating assets primarily resulted from an
increase in accounts receivable reflecting sales growth, extended payment terms
under certain EGSG contracts and an increase in inventories to meet higher
production requirements.
Investing Activities
The principal cash used in investing activities in the first six months of 2000
was cash used for payments for acquisitions and related costs totaling $9.0
million and capital expenditures, which totaled $4.6 million primarily
representing the construction of a new facility and purchases of machinery and
equipment.
-16-
<PAGE>
Financing Activities
The Company's principal financing activities during the first six months of 2000
included net proceeds of $7.0 million from the Company's Credit Facility. In
addition, the Company received $1.7 million in tax benefits related to stock
option exercises.
New Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends FASB Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company will
adopt SFAS 133 beginning November 1, 2000. The Company has not yet quantified
the impact of adopting SFAS 133 on the Company's consolidated financial
statements.
-17-
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The primary market risk to which the Company has exposure is interest rate risk.
Changes in interest rates can affect the Company's net income and cash flows. In
order to manage interest rate risk, in February 2000, the Company entered into
an interest rate swap with a bank pursuant to which it exchanged floating rate
interest based on three-month LIBOR on a notional principal amount of $30
million for a fixed rate payment obligation of 6.59% for a two-year period
ending February 1, 2002. This allows the Company to reduce the effects (positive
or negative) of interest rate changes on operations. This financial instrument
carries a number of risks, including a risk of non-performance on the part of
the counterparty and a risk that the financial instrument will not function as
expected. This risk is mitigated by entering into the agreement with a financial
institution with investment grade credit rating.
-18-
<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 except as
discussed in Note 11 to the consolidated condensed financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on March 21, 2000, the
Company's shareholders elected eight directors.
The number of votes cast for and withheld for each nominee for director
were as follows:
Director For Withheld
-------- --- --------
Jacob T. Carwile 8,226,909 93,029
Samuel L. Higginbottom 8,226,667 93,271
Eric A. Mendelson 8,237,200 82,738
Laurans A. Mendelson 8,241,443 78,495
Victor H. Mendelson 8,236,067 83,871
Albert Morrison, Jr. 8,240,443 79,495
Dr. Alan Schriesheim 8,240,828 79,110
Guy C. Shafer 8,226,835 93,103
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 March 17,
2000, reported under Item 5, "Other Events," related to the
Company's settlement agreement with United Technologies
Corporation ("UTC") for all litigation between UTC and the
Company.
-19-
<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 8, 2000 BY /s/Thomas S. Irwin
--------------------- -----------------------------
Date Thomas S. Irwin, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-20-
<PAGE>
EHXIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
