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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2003 or
[ ] TRANSITION 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
incorporation or organization) Identification No.)
3000 Taft Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
(954) 987-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share New York Stock Exchange
Class A Common Stock, par value $.01 per share (Name of each exchange on which
(Title of each class) registered)
Securities registered pursuant to Section 12(g) of the Act:
Rights to Purchase Series B Junior Participating Preferred Stock
Rights to Purchase Series C Junior Participating Preferred Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity
held by nonaffiliates of the registrant was $125,000,000 based on the closing
price of Common Stock and Class A Common Stock as of April 30, 2003 (the last
business day of the registrant's most recently completed second fiscal quarter)
as reported by the New York Stock Exchange.
The number of shares outstanding of each of the registrant's classes of
common stock, as of December 31, 2003:
Common Stock, $.01 par value 9,691,095 shares
Class A Common Stock, $.01 par value 14,154,628 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2004
Annual Meeting of Shareholders are incorporated by reference into Part III. See
Item 15(a)(3) beginning on page 61 for a listing of exhibits.
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HEICO CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
Page
No.
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PART I
Item 1. Business.................................................................................. 2
Item 2. Properties................................................................................ 11
Item 3. Legal Proceedings......................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................... 13
Item 6. Selected Financial Data................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 27
Item 8. Financial Statements and Supplementary Data............................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 59
Item 9A. Controls and Procedures................................................................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 60
Item 11. Executive Compensation.................................................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 60
Item 13. Certain Relationships and Related Transactions............................................ 60
Item 14. Principal Accounting Fees and Services.................................................... 60
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 61
SIGNATURES........................................................................................... 65
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements contained herein that are not clearly historical in
nature may be forward-looking and the words "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Any forward-looking statements contained herein, in press releases,
written statements or other documents filed with the Securities and Exchange
Commission or in communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and conference
calls, concerning our operations, economic performance and financial condition
are subject to known and unknown risks, uncertainties and contingencies. We have
based these forward-looking statements on our current expectations and
projections about future events. All forward-looking statements involve risks
and uncertainties, many of which are beyond our control, which may cause actual
results, performance or achievements to differ materially from anticipated
results, performance or achievements. Also, forward-looking statements are based
upon management's estimates of fair values and of future costs, using currently
available information. Therefore, actual results may differ materially from
those expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
. Lower demand for commercial air travel or airline fleet changes,
which could cause lower demand for our goods and services;
. Product specification costs and requirements, which could cause
our costs to complete contracts to increase;
. Governmental and regulatory demands, export policies and
restrictions, military program funding by U.S. and non-U.S.
Government agencies or competition on military programs, which
could reduce our sales;
. HEICO's ability to introduce new products and product pricing
levels, which could reduce our sales or sales growth; and
. HEICO's ability to make acquisitions and achieve operating
synergies from acquired businesses, HEICO's ability to continue
to control costs and maintain quality, HEICO's ability to manage
customer credit and interest rate risks and economic conditions
within and outside of the aerospace, defense and electronics
industries, which could negatively impact our costs and
revenues.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
THE COMPANY
HEICO Corporation ("HEICO," "we," "us," "our" or "the Company") believes
it is the world's largest manufacturer of Federal Aviation Administration
(FAA)-approved jet engine and aircraft component replacement parts, other than
the original equipment manufacturers (OEMs) and their subcontractors. HEICO is
also a leading manufacturer of certain electronic equipment to the aerospace,
defense, medical, telecommunications and electronics industries. The Company's
businesses are comprised of two operating segments, the Flight Support Group
(FSG) consisting of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and its
subsidiaries and the Electronic Technologies Group (ETG) consisting of HEICO
Electronic Technologies Corp. (HEICO Electronic) and its subsidiaries. The FSG
uses proprietary technology to design and manufacture jet engine and aircraft
component replacement parts for sale at lower prices than those manufactured by
OEMs. These parts are approved by the FAA and are the functional equivalent of
parts sold by OEMs. In addition, the FSG repairs, refurbishes and overhauls jet
engine and aircraft components for domestic and foreign commercial air carriers
and aircraft repair companies, and manufactures thermal insulation products and
other component parts primarily for aerospace, defense and commercial
applications. In fiscal 2003, the FSG accounted for 73% of our revenues. The ETG
designs, manufactures and sells various types of electronic and electro-optical
products, including infrared simulation and test equipment, hybrid laser
rangefinder receivers, electrical power supplies, back-up power supplies,
electromagnetic interference and radio frequency interference shielding, high
power laser diode drivers, amplifiers, photodetectors, amplifier modules and
flash lamp drivers. In addition, the ETG also repairs and overhauls inertial
navigation systems and other avionics, instruments and components for
commercial, military and business aircraft operators. In fiscal 2003, the ETG
accounted for 27% of our revenues.
We have continuously operated in the aerospace industry for over 40
years. Since assuming control in 1990, current management has achieved
significant sales and profit growth through expanded product offerings, an
expanded customer base, increased research and development expenditures and the
completion of acquisitions. Since fiscal 1996, we have added thirteen
subsidiaries to our FSG and five subsidiaries to our ETG through acquisitions.
See Item 7 of this annual report, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," for details of our most recent
acquisitions. As a result of internal growth and acquisitions, our revenues from
continuing operations have grown from $34.6 million in fiscal 1996 to $176.5
million in fiscal 2003, a compound annual growth rate of approximately 26% over
the seven-year period.
In October 1997, we entered into a strategic alliance with Lufthansa
Technik AG (Lufthansa), the technical services subsidiary of Lufthansa German
Airlines AG. Lufthansa is the world's largest independent provider of
engineering and maintenance services for aircraft components and jet engines and
supports over 200 airlines, governments and other customers. As part of the
transaction, Lufthansa acquired a 20% minority interest in HEICO Aerospace, and
partially funded the accelerated development of additional FAA-approved
replacement parts for jet engines and aircraft components over the subsequent
four years pursuant to a research and development cooperation agreement. This
strategic alliance has enabled us to expand domestically and internationally by
enhancing our ability to (i) identify key jet engine and aircraft component
replacement parts with significant profit potential by utilizing Lufthansa's
extensive operating data on engine and component parts, (ii) introduce those
parts throughout the world in an efficient manner due to Lufthansa's testing and
diagnostic resources, and (iii) broaden our customer base by capitalizing on
Lufthansa's established relationships and alliances within the airline industry.
In February 2001, we entered into a joint venture with AMR Corporation
(AMR), parent company of American Airlines, one of the world's largest airlines,
to develop, design and sell FAA-approved jet engine and aircraft component
replacement parts through our subsidiary, HEICO Aerospace. As part of the joint
venture, AMR will reimburse HEICO Aerospace a portion of new product research
and development costs. The joint venture is 16% owned by AMR. AMR and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
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support on a worldwide basis. We believe that AMR's investment, along with its
vast technical experience as an operator and overhauler of aircraft and engines,
will allow us to accelerate the development of new FAA-approved replacement
parts and, accordingly, to manufacture and market such parts.
In May 2002, we entered into a strategic relationship with United
Airlines, Inc. (United Airlines) through our subsidiary, HEICO Aerospace. The
strategic relationship provides for the acceleration of HEICO's efforts in
developing a broad range of jet engine and aircraft component replacement parts
for FAA approval. United Airlines has agreed to purchase these newly developed
parts, and most of HEICO Aerospace's current FAA-approved parts product line, on
an exclusive basis from HEICO Aerospace.
In February 2003 and March 2003, we entered into five-year parts supply
and development agreements with Delta Air Lines, Inc. (Delta) and Air Canada,
respectively through our subsidiary, HEICO Aerospace. These strategic
relationships are the fourth and fifth such unique relationship between HEICO
Aerospace and a major international airline. These relationships will accelerate
HEICO's efforts in developing aircraft and engine parts slated for FAA approval.
Delta and Air Canada have each agreed to purchase these newly developed parts
and most of HEICO Aerospace's current FAA-approved parts on an exclusive basis
from HEICO Aerospace.
FLIGHT SUPPORT GROUP
The FSG is headquartered in Hollywood, Florida and designs, engineers,
manufactures, repairs and/or overhauls jet engine and aircraft parts and
components such as combustion chambers, compressor blades, vanes, seals and
various other engine and aircraft parts. The FSG also manufactures specialty
aviation and defense components as a subcontractor. The FSG serves a broad
spectrum of the aviation industry, including (i) commercial airlines and air
cargo carriers, (ii) repair and overhaul facilities, (iii) OEMs, and (iv) U.S.
and foreign governments.
Jet engine and aircraft component replacement parts can be categorized
by their ongoing ability to be repaired and returned to service. The general
categories (in all of which we participate) are as follows: (i) rotable; (ii)
repairable; and (iii) expendable. A rotable is a part which is removed
periodically as dictated by an operator's maintenance procedures or on an as
needed basis and is typically repaired or overhauled and re-used an indefinite
number of times. An important subset of rotables is "life limited" parts. A life
limited rotable has a designated number of allowable flight hours and/or cycles
(one take-off and landing generally constitutes one cycle) after which it is
rendered unusable. A repairable is similar to a rotable except that it can only
be repaired a limited number of times before it must be discarded. An expendable
is generally a part which is used and not thereafter repaired for further use.
Jet engine and aircraft component replacement parts are classified
within the industry as (i) factory-new, (ii) new surplus, (iii) overhauled, (iv)
serviceable, and (v) as removed. A factory-new or new surplus part is one that
has never been installed or used. Factory-new parts are purchased from
FAA-approved manufacturers (such as HEICO or OEMs) or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part is one that has
been completely repaired and inspected by a licensed repair facility such as
ours. An aircraft spare part is classified as "repairable" if it can be repaired
by a licensed repair facility under applicable regulations. A part may also be
classified as "repairable" if it can be removed by the operator from an aircraft
or engine while operating under an approved maintenance program and is airworthy
and meets any manufacturer or time and cycle restrictions applicable to the
part. A "factory-new," "new surplus," "overhauled" or "serviceable" part
designation indicates that the part can be immediately utilized on an aircraft.
A part in "as removed" condition requires inspection and possibly functional
testing, repair or overhaul by a licensed facility prior to being returned to
service in an aircraft.
Factory-New Jet Engine and Aircraft Component Replacement Parts. The
principal business of the FSG is the research and development, design,
manufacture and sale of FAA-approved replacement parts that are sold to domestic
and foreign commercial air carriers and aircraft repair and overhaul companies.
Our principal competitors
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are Pratt & Whitney, a division of United Technologies Corporation (UTC) and
General Electric Company (General Electric), including its CFM International
joint venture. The FSG's factory-new replacement parts include various jet
engine and aircraft component replacement parts. A key element of our growth
strategy is the continued design and development of an increasing number of
Parts Manufacturer Approval (PMA) replacement parts in order to further
penetrate our existing customer base and obtain new customers. We select the jet
engine and aircraft component replacement parts to design and manufacture
through a selection process which analyzes industry information to determine
which replacement parts are expected to generate the greatest profitability. As
part of Lufthansa's investment in the FSG, Lufthansa has the right to select 50%
of the parts for which we will seek PMAs, provided that such parts are
technologically and economically feasible and substantially comparable with the
profitability of our other PMA parts.
Repair and Overhaul Services. The FSG provides repair and overhaul
services on selected jet engine and aircraft component parts, as well as on
avionics, instruments, composites and flight surfaces of commercial aircraft.
The FSG also provides repair and overhaul services to military aircraft
operators and aircraft repair and overhaul companies. Our repair and overhaul
operations require a high level of expertise, advanced technology and
sophisticated equipment. Services include the repair, refurbishment and overhaul
of numerous accessories and parts mounted on gas turbine engines and airframes.
Components overhauled include fuel pumps, generators, fuel controls, pneumatic
valves, starters and actuators, turbo compressors and constant speed drives,
hydraulic pumps, valves and actuators, composite flight controls,
electro-mechanical equipment and auxiliary power unit accessories.
Manufacture of Specialty Aircraft/Defense Related Parts and
Subcontracting for OEMs. The FSG manufactures thermal insulation blankets
primarily for aerospace, defense and commercial applications. The FSG also
manufactures specialty components for sale as a subcontractor to OEMs and the
U.S. government.
FAA Approvals and Product Design
Non-OEM manufacturers of jet engine replacement parts must receive a
Parts Manufacture Approval (PMA) from the FAA to sell the part. The PMA approval
process includes the submission of sample parts, drawings and testing data to
one of the FAA's Aircraft Certification Offices where the submitted data are
analyzed. We believe that an applicant's ability to successfully complete the
PMA process is limited by several factors, including (i) the agency's confidence
level in the applicant, (ii) the complexity of the part, (iii) the volume of
PMAs being filed, and (iv) the resources available to the FAA. We also believe
that companies such as HEICO that have demonstrated their manufacturing
capabilities and established favorable track records with the FAA generally
receive a faster turnaround time in the processing of PMA applications. Finally,
we believe that the PMA process creates a significant barrier to entry in this
market niche through both its technical demands and its limits on the rate at
which competitors can bring products to market.
As part of our growth strategy, we have continued to increase our
research and development activities. Research and development expenditures by
the FSG increased from approximately $300,000 in 1991 to approximately $7.0
million in fiscal 2003. We believe that our FSG's research and development
capabilities are a significant component of our historical success and an
integral part of our growth strategy.
Our expanded research and development activities have included
development of more complex jet engine and aircraft component replacement parts.
In October 1999, we received our first PMA for a compressor blade from the FAA
and we are continuing research and development of other complex parts. We
believe the development and sale of complex parts represents a significant
long-term market opportunity. In fiscal 2003, the FAA granted us PMAs for
approximately 300 new parts; however, no assurance can be given that the FAA
will continue to grant PMAs or that we will achieve acceptable levels of net
sales and gross profits on such parts in the future.
We benefit from our proprietary rights relating to certain designs,
engineering, manufacturing processes and repair and overhaul procedures.
Customers often rely on us to provide initial and additional components, as well
as
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to redesign, re-engineer, replace or repair and provide overhaul services on
such aircraft components at every stage of their useful lives. In addition, for
some products, our unique manufacturing capabilities are required by the
customer's specifications or designs, thereby necessitating reliance on us for
production of such designed products.
While we have developed proprietary techniques, software and
manufacturing expertise for the manufacture of jet engine and aircraft component
replacement parts, we have no patents for these proprietary techniques and
choose to rely on trade secret protection. We believe that although our
proprietary techniques, software and expertise are subject to misappropriation
or obsolescence, development of improved methods and processes and new
techniques by us will continue on an ongoing basis as dictated by the
technological needs of our business.
Continuing Impact of September 11, 2001 and the Economic Softness Thereafter
In the aftermath of the September 11, 2001 terrorist attacks and the
weak economy that followed, passenger traffic on commercial flights has been
significantly lower than prior to the attacks. In addition, many commercial
airlines have reduced their operating schedules and are struggling to return to
profitability. As a result, we have seen a direct decline in sales to commercial
aerospace markets, particularly sales of JT8D PMA replacement parts. However,
over 70% of our PMA parts offered for sale are non-JT8D and we are continually
working to increase our market penetration on non-JT8D parts and to develop new
FAA-approved replacement parts. In fiscal 2003, only approximately one-third of
the total of our sales of PMA parts were JT8D related.
We believe our products and services offer our customers substantial
opportunities for cost savings. In addition, our diversification of operations
beyond the commercial aerospace markets we have historically served has
cushioned the impact of the events of September 11, 2001 and the economic
softness thereafter. Revenues from the defense industry and other markets,
including industrial, medical, electronics and telecommunications, represented
approximately one-third of our total Company-wide revenues in fiscal 2003 with
defense customers representing approximately 22% of revenues.
ELECTRONIC TECHNOLOGIES GROUP
The ETG is headquartered in Miami, Florida and designs, manufactures and
sells various types of electrically and electro-optical engineered products,
such as power supplies, shielding for communications, computer and aerospace
applications, infrared simulation and test equipment, laser diode drivers and
hybrid laser rangefinder receivers. In addition, the ETG also repairs and
overhauls inertial navigation systems and other avionics, instruments and
components used on commercial, military and business aircraft.
Products of the ETG include:
. Electro-optical Infrared Simulation and Test Equipment. The ETG
is a leading international designer and manufacturer of
state-of-the-art aerospace and defense electro-optical infrared
simulation and test equipment. These products include high
precision blackbody sources, optical systems and fully
integrated test calibration systems. In addition, the MIRAGE IR
Scene Simulator is used to project infrared scenes to assist
with product development and training for complex infrared
targeting and imaging systems and other items.
. Electro-optical Laser Products. The ETG is engaged in the design
and manufacture of electro-optical laser products primarily for
use in the laser industry. These products include hybrid laser
rangefinder receivers, amplifiers, photodetectors, amplifier
modules, flash lamp drivers and power supplies.
. On-board Aircraft Power Supplies and Batteries. The ETG
manufactures power supply and current control products and
replacement components used in aircraft. These products include
battery and charger units to support emergency lighting,
emergency fuel shut-off devices, emergency exit door power
assists, static
5
inverters for emergency lighting and cockpit lighting dimmers.
While entire units may require replacement periodically, there
is an ongoing replacement market for batteries, which have an
estimated service life of approximately 3 to 5 years. These
products are mainly sold to OEM customers and customers in the
retrofit and modification market.
. Circuit Board Shielding. The ETG manufactures electromagnetic
interference and radio frequency interference shielding for
circuit boards and other items utilized in telecommunications,
aerospace, and microwave applications. The circuit board
shielding technology reduces electronic noise and protects
sensitive components. The ETG has a line of patented products
and the ability to fabricate in a wide variety of shapes and
applications, which we believe is a manufacturing advantage.
. Repair and Overhaul Services. The ETG is engaged in the repair
and overhaul of inertial navigation systems which are used by
commercial and military aircraft operators to ascertain their
location during flight operations. In addition, the ETG also
repairs and overhauls various avionics, instruments and other
components for a wide array of commercial, military and business
aircraft operators.
In December 2003, we expanded our capabilities within the ETG by an
acquisition within the satellite microwave component industry. See Note 17 to
the Consolidated Financial Statements for additional information.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
See Note 14 to the Consolidated Financial Statements for financial
information by operating segment and information about foreign and domestic
operations as well as export sales.
SALES, MARKETING AND CUSTOMERS
Each of our operating segments independently conducts sales and
marketing efforts directed at their respective customers and industries and, in
some cases, collaborates with other operating divisions and subsidiaries within
its group for cross-marketing efforts. Sales and marketing efforts are conducted
primarily by in-house personnel and, to a lesser extent, by independent
manufacturer's representatives. Generally, the in-house sales personnel receive
a base salary plus commission and manufacturer's representatives receive a
commission on sales.
We believe that direct relationships are crucial to establishing and
maintaining a strong customer base and, accordingly, our senior management is
actively involved in our marketing activities, particularly with established
customers. We are also a member of various trade and business organizations
related to the commercial aviation industry, such as the Aerospace Industries
Association (AIA), the leading trade association representing the nation's
manufacturers of commercial, military and business aircraft, aircraft engines
and related components and equipment. Due in large part to our established
industry presence, we enjoy strong customer relations, name recognition and
repeat business.
We sell our products to a broad customer base consisting of domestic and
foreign commercial and cargo airlines, repair and overhaul facilities, other
aftermarket suppliers of aircraft engine and airframe materials, OEMs, domestic
and foreign military units, electronic manufacturing services companies,
manufacturers for the defense industry and telecommunications companies as well
as medical, scientific and industrial companies. No one customer accounted for
sales of 10% or more of total consolidated sales from continuing operations
during any of the last three fiscal years. Net sales to our five largest
customers accounted for approximately 27% of total net sales during the year
ended October 31, 2003.
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COMPETITION
The aerospace product and service industry is characterized by intense
competition and some of our competitors have substantially greater name
recognition, inventories, complementary product and service offerings,
financial, marketing and other resources than we do. As a result, such
competitors may be able to respond more quickly to customer requirements than we
can. Moreover, smaller competitors may be in a position to offer more attractive
pricing of engine parts as a result of lower labor costs and other factors.
Our jet engine and aircraft component replacement parts business
competes primarily with Pratt & Whitney and General Electric. The competition is
principally based on price and service inasmuch as our parts are
interchangeable. With respect to other aerospace products and services sold by
the FSG, we compete with both the leading jet engine OEMs and a large number of
machining, fabrication and repair companies, some of which have greater
financial and other resources than we do. Competition is based mainly on price,
product performance, service and technical capability.
Competition for the repair and overhaul of jet engine and aircraft
components comes from three principal sources: OEMs, major commercial airlines
and other independent service companies. Some of these companies have greater
financial and other resources than we do. Some major commercial airlines own and
operate their own service centers and sell repair and overhaul services to other
aircraft operators. Foreign airlines that provide repair and overhaul services
typically provide these services for their own aircraft components and for third
parties. OEMs also maintain service centers that provide repair and overhaul
services for the components they manufacture. Other independent service
organizations also compete for the repair and overhaul business of other users
of aircraft components. We believe that the principal competitive factors in the
repair and overhaul market are quality, turnaround time, overall customer
service and price.
Our ETG competes with several large and small domestic and foreign
competitors, some of which have greater financial and other resources than we
do. The market for our electronic products are niche markets with several
competitors with competition based mainly on design, technology, quality, price
and customer satisfaction.
RAW MATERIALS
We purchase a variety of raw materials, primarily consisting of high
temperature alloy sheet metal and castings, forgings, pre-plated steel,
pre-plated phospher bronze and electrical components from various vendors. The
materials used by our operations are generally available from a number of
sources and in sufficient quantities to meet current requirements subject to
normal lead times.
BACKLOGS
Our total backlog of unshipped orders was $34.6 million on October 31,
2003 versus $36.3 million on October 31, 2002. Our FSG had a backlog of
unshipped orders as of October 31, 2003 of $12.7 million as compared to $13.1
million as of October 31, 2002. This backlog excludes forecasted shipments for
certain contracts of the FSG pursuant to which customers provide only estimated
annual usage and not firm purchase orders. Our backlogs within the FSG are
typically short-lead in nature with many product orders being received within
the month of shipment. Our ETG had a backlog of $21.9 million as of October 31,
2003 as compared to $23.1 million as of October 31, 2002. Substantially all of
the backlog of orders as of October 31, 2003 are expected to be delivered during
fiscal 2004.
GOVERNMENT REGULATION
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aviation equipment are continuously maintained
in
7
proper condition to ensure safe operation of the aircraft. Similar rules apply
in other countries. All aircraft must be maintained under a continuous condition
monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for the various
types of aircraft and equipment are prescribed by regulatory authorities and can
be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Aircraft operators must maintain logs concerning the
utilization and condition of aircraft engines, life-limited engine parts and
airframes. In addition, the FAA requires that various maintenance routines be
performed on aircraft engines, some engine parts and airframes at regular
intervals based on cycles or flight time. Engine maintenance must also be
performed upon the occurrence of certain events, such as foreign object damage
in an aircraft engine or the replacement of life-limited engine parts. Such
maintenance usually requires that an aircraft engine be taken out of service.
Our operations may in the future be subject to new and more stringent regulatory
requirements. In that regard, we closely monitor the FAA and industry trade
groups in an attempt to understand how possible future regulations might impact
us.
There has been no material adverse effect to our consolidated financial
statements as a result of these government regulations.
ENVIRONMENTAL REGULATION
Our operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the Environmental Protection Agency (the EPA).
Among other matters, these regulatory authorities impose requirements that
regulate the operation, handling, transportation, and disposal of hazardous
materials, the health and safety of workers, and require us to obtain and
maintain licenses and permits in connection with our operations. This extensive
regulatory framework imposes significant compliance burdens and risks on us.
Notwithstanding these burdens, we believe that we are in material compliance
with all federal, state, and local laws and regulations governing our
operations.
Other Regulation. We are also subject to a variety of other regulations
including work-related and community safety laws. The Occupational Safety and
Health Act of 1970 mandates general requirements for safe workplaces for all
employees and established the Occupational Safety and Health Administration
(OSHA) in the Department of Labor. In particular, OSHA provides special
procedures and measures for the handling of some hazardous and toxic substances.
In addition, specific safety standards have been promulgated for workplaces
engaged in the treatment, disposal or storage of hazardous waste. Requirements
under state law, in some circumstances, may mandate additional measures for
facilities handling materials specified as extremely dangerous. We believe that
our operations are in material compliance with OSHA's health and safety
requirements.
INSURANCE
We are a named insured under policies which include the following
coverage: (i) product liability, including grounding; (ii) personal property,
inventory and business income at our facilities; (iii) general liability
coverage; (iv) employee benefit liability; (v) international liability and
automobile liability; (vi) umbrella liability coverage; and (vii) various other
activities or items subject to certain limits and deductibles. We believe that
coverages are adequate to insure against the various liability risks of our
business.
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EMPLOYEES
As of October 31, 2003, we had 1,011 full-time employees, of which 744
were in the FSG, 254 were in the ETG, and 13 were corporate. None of our
employees are represented by a union. We believe that our employee relations are
good.
AVAILABLE INFORMATION
Our Internet web site address is http://www.heico.com. We make available
free of charge through our web site our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission. The information contained on or through our web site is not
incorporated into this annual report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers are elected by the Board of Directors at the
first meeting following the annual meeting of shareholders and serve at the
discretion of the Board. The names and ages of, and offices held by, the
executive officers of the Company are as follows:
NAME AGE POSITION(s) DIRECTOR SINCE
- ---- --- ----------- --------------
Laurans A. Mendelson 65 Chairman of the Board, President and Chief 1989
Executive Officer
Thomas S. Irwin 57 Executive Vice President and Chief Financial
Officer
Eric A. Mendelson 38 Executive Vice President and Director, President 1992
and Chief Executive Officer of HEICO
Aerospace Holdings Corp.
Victor H. Mendelson 36 Executive Vice President, General Counsel and 1996
Director, President and Chief Executive Officer
of HEICO Electronic Technologies Corp.
James L. Reum 72 Executive Vice President of HEICO
Aerospace Holdings Corp.
Laurans A. Mendelson has served as Chairman of the Board of the Company
since December 1990. Mr. Mendelson has also served as Chief Executive Officer of
the Company since February 1990, and as President of the Company since September
1991. Mr. Mendelson is a member of the Finance Committee of the Aerospace
Industries Association in Washington, D.C. and frequently serves on its board of
governors. Mr. Mendelson is also a member of the Board of Trustees, the
Executive Committee and Founders Club of Mount Sinai Medical Center in Miami
Beach, Florida. In addition, Mr. Mendelson served as a Trustee of Columbia
University in The City of New York from 1995 to 2001, as well as, Chairman of
the Trustees' Audit Committee. Mr. Mendelson currently serves as Trustee
Emeritus of Columbia University and maintains membership positions on the
Trustee Committees he had before becoming Trustee Emeritus. Mr. Mendelson is a
Certified Public Accountant. Laurans Mendelson is the father of Eric Mendelson
and Victor Mendelson.
Thomas S. Irwin has served as Executive Vice President and Chief
Financial Officer of the Company since September 1991 and served as Senior Vice
President of the Company from 1986 to 1991 and Vice President and Treasurer from
1982 to 1986. Mr. Irwin is a Certified Public Accountant.
9
Eric A. Mendelson has served as Executive Vice President of the Company
since 2001, Vice President of the Company from 1992 to 2001, and has been
President and Chief Executive Officer of HEICO Aerospace, a subsidiary of the
Company, since its formation in 1997 and President of HEICO Aerospace
Corporation since 1993. He also served as President of HEICO's Jet Avion
Corporation, a wholly owned subsidiary of HEICO Aerospace, from 1993 to 1996 and
served as Jet Avion's Executive Vice President and Chief Operating Officer from
1991 to 1993. From 1990 to 1991, Mr. Mendelson was Director of Planning and
Operations of the Company. Mr. Mendelson is a co-founder, and, since 1987, has
been Managing Director of Mendelson International Corporation (MIC), a private
investment company, which is a shareholder of HEICO. Eric Mendelson is the son
of Laurans Mendelson and the brother of Victor Mendelson.
Victor H. Mendelson has served as Executive Vice President of the
Company since 2001, Vice President of the Company from 1996 to 2001, as
President and Chief Executive Officer of HEICO Electronic Technologies Corp., a
subsidiary of the Company, since September 1996 and as General Counsel of the
Company since 1993. He served as Executive Vice President of the Company's
former MediTek Health Corporation subsidiary from 1994 and its Chief Operating
Officer from 1995 until its sale in July 1996. He was the Company's Associate
General Counsel from 1992 until 1993. From 1990 until 1992, he worked on a
consulting basis with the Company, developing and analyzing various strategic
opportunities. Mr. Mendelson is a co-founder, and, since 1987, has been
President of MIC, a private investment company, which is a shareholder of HEICO.
He is a Trustee of the Greater Miami Chamber of Commerce and a Director of the
Florida Grand Opera. Victor Mendelson is the son of Laurans Mendelson and the
brother of Eric Mendelson.
James L. Reum retired from full-time service to HEICO Aerospace in
August 2001 and remains active on a part-time basis with HEICO Aerospace as
Executive Vice President. He served as Chief Operating Officer of HEICO
Aerospace and its predecessor from 1995 to 1999, President of LPI Industries
Corporation from 1991 to 1998 and President of Jet Avion Corporation from 1996
to 1998. From 1990 to 1991, he served as Director of Research and Development
for Jet Avion Corporation. From 1986 to 1989, Mr. Reum was self-employed as a
management and engineering consultant to companies primarily within the
aerospace industry. From 1957 to 1986, he was employed in various management
positions with Chromalloy Gas Turbine Corp., Cooper Airmotive (later named
Aviall, Inc.), United Airlines, Inc. and General Electric Company.
10
ITEM 2. PROPERTIES
The Company owns or leases a number of facilities, which are utilized by
its Flight Support Group (FSG), Electronic Technologies Group (ETG), and
Corporate office. Summary information on the facilities utilized within the FSG
and the ETG to support its principal operating activities is as follows:
FLIGHT SUPPORT GROUP
Manufacture of Jet Engine and Aircraft Component Replacement Parts
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 121,000 Owned Manufacturing and engineering facilities,
warehouse and corporate headquarters
Florida 2,000 Leased Engineering facility
California 93,000 Leased Manufacturing and engineering facility
New Mexico 35,000 Leased Manufacturing and engineering facility
Georgia 38,000 Owned Manufacturing and engineering facility
Washington 16,000 Leased Manufacturing and engineering facilities
Connecticut 10,000 Leased Manufacturing and engineering facility
Tennessee 6,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Jet Engine and Aircraft Components
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 104,000 Owned Overhaul and repair facility
Florida 10,000 Leased Overhaul and repair facility
California 54,000 Leased Overhaul and repair facilities
ELECTRONIC TECHNOLOGIES GROUP
Manufacture of Electronic and Electro-Optical Equipment
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 59,000 Leased Manufacturing and engineering facilities
California 26,000 Leased Manufacturing and engineering facility
Repair and Overhaul of Aircraft Electronic Equipment
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Ohio 21,000 Leased Overhaul and repair facility
11
CORPORATE
Location Square footage Owned/Leased Description
------------- -------------- ------------ -----------------------------------------
Florida 4,000/(1)/ Owned Corporate headquarters and administrative
offices
- ----------
(1) Represents the square footage of administrative offices within Florida.
The square footage of the Company's corporate headquarters is included
within the square footage for Florida under the caption "FSG -
Manufacture of Jet Engine and Aircraft Component Replacement Parts."
All of the facilities listed in this Item 2 are in good operating
condition, are well maintained and are in regular use. The Company believes that
its existing facilities are sufficient to meet its operational needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various 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 matters will not
have a material adverse effect on the Company's results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2003.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock and Class A Common Stock are listed and
traded on the New York Stock Exchange (NYSE) under the symbols "HEI" and
"HEI.A," respectively. The following table sets forth, for the periods
indicated, the high and low share prices for the Common Stock and the Class A
Common Stock as reported on the NYSE, as well as the amount of cash dividends
paid per share during such periods. Lufthansa Technik AG, as a 20% shareholder
of our FSG, will be entitled to 20% of any dividends paid by our FSG with the
balance payable to the Company.
On December 15, 2003, the Company's Board of Directors declared a 10%
stock dividend on both classes of common stock outstanding payable in shares of
Class A Common Stock on January 16, 2004 to shareholders of record as of January
6, 2004. The quarterly high and low share prices and cash dividends per share
amounts set forth below have been adjusted retroactively to give effect to the
stock dividend.
COMMON STOCK
CASH DIVIDENDS
HIGH LOW PER SHARE
--------- --------- --------------
FISCAL 2002:
First Quarter .............................. $ 16.45 $ 12.45 $ .023
Second Quarter ............................. 15.95 12.91 --
Third Quarter .............................. 15.68 10.18 $ .023
Fourth Quarter ............................. 12.17 6.95 --
FISCAL 2003:
First Quarter .............................. $ 11.09 $ 8.18 $ .023
Second Quarter ............................. 10.11 6.68 --
Third Quarter .............................. 11.58 6.75 $ .023
Fourth Quarter ............................. 14.30 9.16 --
As of December 31, 2003, there were 1,038 holders of record of the
Company's Common Stock.
CLASS A COMMON STOCK
CASH DIVIDENDS
HIGH LOW PER SHARE
--------- --------- --------------
FISCAL 2002:
First Quarter .............................. $ 12.95 $ 9.68 $ .023
Second Quarter ............................. 13.16 11.05 --
Third Quarter .............................. 13.17 8.36 $ .023
Fourth Quarter ............................. 9.44 5.32 --
FISCAL 2003:
First Quarter .............................. $ 8.64 $ 6.59 $ .023
Second Quarter ............................. 7.79 5.18 --
Third Quarter .............................. 8.63 5.53 $ .023
Fourth Quarter ............................. 11.43 7.10 --
As of December 31, 2003, there were 1,044 holders of record of the
Company's Class A Common Stock.
13
DIVIDEND POLICY
The Company has historically paid regular semi-annual cash dividends on
both classes of its common stock. In fiscal 2003, HEICO paid its 50th
consecutive semi-annual cash dividend since 1979. HEICO's Board of Directors
presently intends to continue the payment of regular semi-annual cash dividends
on both classes of its common stock. The Company's ability to pay dividends
could be affected by future business performance, liquidity, capital needs,
alternative investment opportunities, and loan covenants.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of October 31, 2003. All common share data and per share
data has been adjusted retroactively to give effect to a 10% stock dividend
payable in shares of Class A Common Stock on January 16, 2004 as further
detailed in Note 17 to the Consolidated Financial Statements.
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE WEIGHTED-AVERAGE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE UNDER EQUITY
EXERCISE OF OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS WARRANTS AND REFLECTED IN COLUMN (a))
PLAN CATEGORY AND RIGHTS (a) RIGHTS (b) (c)
- ---------------------------------------- ------------------ ---------------- -------------------------
Equity compensation plans approved by
security holders/(1)/ 3,921,283 $ 8.27 166,423
Equity compensation plans not approved
by security holders/(2)/ 527,392 $ 11.19 -
------------------ ------------------------
Total 4,448,675 $ 8.62 166,423
================== ========================
- ----------
(1) Represents aggregated information pertaining to the Company's three
equity compensation plans: the 1993 Stock Option Plan, the Non-Qualified
Stock Option Plan and the 2002 Stock Option Plan. See Note 9 to the
Consolidated Financial Statements for further information regarding
these plans.
(2) Represents stock options granted to two former shareholders of Santa
Barbara Infrared, Inc. (SBIR) pursuant to employment agreements entered
into in connection with the Company's acquisition of SBIR in fiscal
1999. Such stock options were fully vested and transferable at the grant
date and expire ten years from the date of grant. The exercise price of
such options was the fair market value as of the date of grant.
14
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED OCTOBER 31, /(1)/
-------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
OPERATING DATA:
Net sales ........................................ $ 141,269 $ 202,909 $ 171,259 $ 172,112 $ 176,453
------------ ------------ ------------ ------------ ------------
Gross profit ..................................... 57,532 75,811 71,146 61,502 58,104
Selling, general and administrative expenses ..... 24,717 37,888 40,155 39,102 34,899
------------ ------------ ------------ ------------ ------------
Operating income ................................. 32,815 37,923 30,991 22,400 23,205
------------ ------------ ------------ ------------ ------------
Interest expense ................................. 2,173 5,611 2,486 2,248 1,189
------------ ------------ ------------ ------------ ------------
Interest and other income ........................ 894 929 1,598 97 93
------------ ------------ ------------ ------------ ------------
Gain on sale of product line ..................... -- 17,296/(2)/ -- 1,230/(3)/ --
------------ ------------ ------------ ------------ ------------
Income (loss):
From continuing operations ................... 16,337 27,739/(2)/ 15,833 15,226/(4)/ 12,222
From gain on sale of discontinued operations . -- (1,422)/(5)/ -- -- --
------------ ------------ ------------ ------------ ------------
Net income ....................................... $ 16,337 $ 26,317/(2)/ $ 15,833 $ 15,226/(4)/ $ 12,222
============ ============ ============ ============ ============
Weighted average number of common shares
outstanding:/(6)/
Basic ........................................ 19,726 21,026 21,917 23,004 23,237
Diluted ...................................... 23,483 24,099 24,536 24,733 24,531
PER SHARE DATA:/(6)/
Income from continuing operations:
Basic ........................................ $ .83 $ 1.32/(2)/ $ .72 $ .66/(4)/ $ .53
Diluted ...................................... .70 1.15/(2)/ .65 .62/(4)/ .50
Net income:
Basic ........................................ .83 1.25/(2)/ .72 .66/(4)/ .53
Diluted ...................................... .70 1.09/(2)/ .65 .62/(4)/ .50
Cash dividends ................................... .038 .039 .041 .045 .045
BALANCE SHEET DATA (as of October 31):
Working capital .................................. $ 63,278 $ 55,469 $ 71,515 $ 69,235 $ 71,798
Total assets ..................................... 273,163 281,732 325,640 336,332 333,244
Total debt (including current portion) ........... 73,501 40,042 67,014 55,986 32,013
Minority interests in consolidated subsidiaries .. 30,022 33,351 36,845 38,313 40,577
Shareholders' equity ............................. 139,289 169,844 188,769 207,064 221,518
- ----------
(1) Results include the results of acquisitions and disposition of a product
line from each respective effective date.
(2) Represents the pretax gain on the sale of Trilectron Industries, Inc.
(Trilectron) in September 2000. The gain on sale of Trilectron increased
income from continuing operations and net income in fiscal 2000 by
$10,542,000, or $.50 per basic share and $.44 per diluted share, net of
tax.
(3) Represents an increase in the gain on sale of the Trilectron product
line of $1,230,000 ($765,000, or $.03 per basic and diluted share, net
of tax) resulting from the elimination of certain reserves upon
expiration of indemnification provisions of the sale.
(4) Includes the recovery of a portion of taxes paid in prior years
resulting from an income tax audit, which increased net income by
$2,107,000, or $.09 per basic and diluted share, net of related
expenses. The aggregate increase in net income from the gain on sale of
a product line (see Note (3) above) and the recovery of taxes was
$2,872,000, or $.12 per basic and diluted share.
(5) Represents an adjustment to the gain from sale of discontinued health
care operations ($.07 per basic share and $.06 per diluted share, net of
tax) that were sold in fiscal 1996.
(6) Information has been adjusted retroactively to give effect to 10% stock
dividends paid in shares of Class A Common Stock in July 2000 and August
2001 and for a 10% stock dividend payable in shares of Class A Common
Stock on January 16, 2004 as further detailed in Note 17 to the
Consolidated Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's operations are comprised of two operating segments, the
Flight Support Group (FSG) and the Electronic Technologies Group (ETG).
The FSG consists of HEICO Aerospace Holdings Corp. (HEICO Aerospace) and
its subsidiaries, which primarily:
. Manufacture Jet Engine and Aircraft Component Replacement Parts
- The FSG designs and manufactures jet engine and aircraft
component replacement parts for sale at lower prices than those
manufactured by the original equipment manufacturers. The
Federal Aviation Administration (FAA) has approved these parts
and they are the functional equivalent of parts sold by original
equipment manufacturers. The FSG also manufactures and sells
specialty parts as a subcontractor for original equipment
manufacturers and the United States government.
. Repair and Overhaul Jet Engine and Aircraft Components - The FSG
repairs and overhauls jet engine and aircraft components for
domestic and foreign commercial air carriers, military aircraft
operators and aircraft repair and overhaul companies.
The ETG consists of HEICO Electronic Technologies Corp. (HEICO
Electronic) and its subsidiaries, which primarily:
. Manufacture Electronic and Electro-Optical Equipment - The ETG
designs, manufactures and sells electronic and electro-optical
equipment and components, including power supplies, laser
rangefinder receivers, infra-red simulation, calibration and
testing equipment and electromagnetic interference shielding for
commercial and military aircraft operators, electronics
companies and telecommunications equipment suppliers.
. Repair and Overhaul Aircraft Electronic Equipment - The ETG
repairs and overhauls inertial navigation systems and other
avionics equipment for commercial, military and business
aircraft operators.
The Company's results of operations during each of the past three fiscal
years have been affected by a number of transactions. This discussion of the
Company's financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included herein. For further information regarding the acquisitions and
strategic alliances discussed below, see Note 2 to the Consolidated Financial
Statements. The acquisitions have been accounted for using the purchase method
of accounting and are included in the Company's results of operations from the
effective dates of acquisition.
During fiscal 2001, the Company acquired Analog Modules, Inc., Aero
Design, Inc., Avitech Engineering Corporation, and Aviation Facilities, Inc. for
an aggregate purchase price of approximately $24.6 million. In addition, the
Company acquired Inertial Airline Services, Inc. for $20 million in cash and $5
million in HEICO Class A Common Stock (318,960 shares) paid at closing. The
Company guaranteed that the resale value of such Class A Common Stock would be
at least $5 million through August 31, 2002. Both parties originally agreed to
extend the guaranty to August 31, 2003 and then subsequently to August 31, 2004.
In October 2003, the seller sold 220,000 shares of the HEICO Class A Common
Stock and received net proceeds of $2.1 million. Based on the closing market
price of HEICO Class A Common Stock on October 31, 2003 and the value of the
remaining 98,960 shares, the Company would have been required to pay the seller
an additional amount of approximately $1.9 million in cash, which would have
been recorded as a reduction of shareholders' equity. Concurrent with the
purchase, the Company loaned the seller $5 million, which is due August 31, 2004
and was secured by the 318,960 shares of HEICO Class A Common Stock. The loan is
reflected as a reduction in the equity section of the Company's
16
consolidated balance sheet as a note receivable secured by Class A Common Stock.
The $2.1 million of net proceeds was used to reduce the $5 million loan.
During fiscal 2002 and fiscal 2003, the Company acquired Jetseal, Inc.
and Niacc Technology, Inc., respectively. The purchase price of each acquisition
was not significant to the Company's consolidated financial statements.
The purchase prices of these acquisitions were paid primarily by using
proceeds from the Company's credit facilities. Had the fiscal 2001, fiscal 2002,
and fiscal 2003 acquisitions been made at the beginning of their respective
fiscal years, the pro forma consolidated operating results would not have been
materially different from the reported results.
In October 1997, the Company entered into a strategic alliance with
Lufthansa Technik AG (Lufthansa), the technical services subsidiary of Lufthansa
German Airlines, whereby Lufthansa invested approximately $26 million in HEICO
Aerospace, including $10 million paid at closing pursuant to a stock purchase
agreement and approximately $16 million paid to HEICO Aerospace pursuant to a
research and development cooperation agreement, which has partially funded the
accelerated development of additional FAA-approved replacement parts for jet
engines and aircraft components. The funds received as a result of the research
and development cooperation agreement reduced research and development expenses
in the periods such expenses were incurred. In addition, Lufthansa and HEICO
Aerospace have agreed to cooperate regarding technical services and marketing
support for jet engine and aircraft component replacement parts on a worldwide
basis. In connection with subsequent acquisitions by HEICO Aerospace, Lufthansa
invested additional amounts aggregating to approximately $21 million pursuant to
its option to maintain a 20% equity interest.
In February 2001, the Company entered into a joint venture with AMR
Corporation (AMR) to develop, design and sell FAA-approved jet engine and
aircraft component replacement parts through its subsidiary, HEICO Aerospace. As
part of the joint venture, AMR will reimburse HEICO Aerospace a portion of new
product research and development costs. The funds received as a result of the
new product research and development costs paid by AMR generally reduce new
product research and development expenses in the period such expenses are
incurred. The balance of the development costs are incurred by the joint
venture, which is 16% owned by AMR. In addition, AMR and HEICO Aerospace have
agreed to cooperate regarding technical services and marketing support on a
worldwide basis.
The Company's Board of Directors declared in December 2003 a 10% stock
dividend on both its Common Stock and its Class A Common Stock payable in shares
of its Class A Common Stock. The dividend is payable on January 16, 2004 to
shareholders of record as of January 6, 2004. All common share data and per
share data has been adjusted retroactively to give effect to the stock dividend.
CRITICAL ACCOUNTING POLICIES
The Company believes that the following are its most critical accounting
policies, some of which require management to make judgments about matters that
are inherently uncertain.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon the shipment
of products and the rendering of services. Revenue from certain fixed price
contracts for which costs can be dependably estimated are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. Variations in actual labor
performance, changes to estimated profitability and final contract settlements
may result in revisions to the cost estimates. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
period of revision. For contracts in which costs cannot be dependably estimated,
revenue is recognized on the completed-contract method. A contract is considered
complete
17
when all costs except insignificant items have been incurred or the item has
been accepted by the customer. The aggregate effects of changes in estimates
relating to inventories and/or long-term contracts did not have a significant
impact on net income and diluted net income per share in fiscal 2003 or fiscal
2002. Changes in estimates increased net income and diluted net income per share
by $700,000, or $.03 per share in fiscal 2001 as further explained in Notes 4
and 13 to the Consolidated Financial Statements.
Valuation of Accounts Receivable
The valuation of accounts receivable requires that the Company set up an
allowance for estimated uncollectible accounts and record a corresponding charge
to bad debt expense. The Company estimates uncollectible receivables based on
such factors as its prior experience, its appraisal of a customer's ability to
pay, and economic conditions within and outside of the aerospace, defense and
electronics industries. Actual bad debt expense could differ from estimates
made.
Valuation of Inventories
Portions of the inventories are stated at the lower of cost or market,
with cost being determined on the first-in, first-out or the average cost basis.
The remaining portions of the inventories are stated at the lower of cost or
market, on a per contract basis, with estimated total contract costs being
allocated ratably to all units. The effects of changes in estimated total
contract costs are recognized in the period determined. Losses, if any, are
recognized fully when identified.
The Company periodically evaluates the carrying value of inventories,
giving consideration to factors such as its physical condition, sales patterns,
and expected future demand and estimates a reasonable amount to be provided for
slow moving, obsolete or damaged inventory. These estimates could vary
significantly, either favorably or unfavorably, from actual requirements based
upon future economic conditions, customer inventory levels or competitive
factors that were not foreseen or did not exist when the valuation allowances
were established.
Valuation of Goodwill
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 142,
the Company tests goodwill for impairment annually as of October 31 or more
frequently if events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The test requires the
Company to compare the fair value of each of its reporting units to its carrying
value to determine potential impairment. If the carrying value of a reporting
unit exceeds its fair value, the implied fair value of that reporting unit's
goodwill is to be calculated and an impairment loss shall be recognized in the
amount by which the carrying value of a reporting unit's goodwill exceeds its
implied fair value, if any. The determination of fair value requires the Company
to make a number of estimates, assumptions and judgments. If there is a material
change in such assumptions used by the Company in determining fair value or if
there is a material change in the conditions or circumstances influencing fair
value, the Company could be required to recognize a material impairment charge.
Based on the annual goodwill test for impairment as of October 31, 2003, the
Company determined there is no impairment of its goodwill.
One of the Company's reporting units has experienced a decline in sales
to foreign military customers over the past fiscal year. The reporting unit is
actively developing various expanded capabilities, which are expected to result
in sales and earnings beginning in the later half of fiscal 2004 that the
Company believes will eventually more than offset the decline in foreign
military sales. The timing of such sales and earnings are primarily based upon
certain regulatory and sales matters. Using management's best estimates of these
assumptions, the Company determined that there is no impairment of the reporting
unit's goodwill as of October 31, 2003. Should the reporting unit incur a
significant delay in developing the expanded capabilities and successfully
selling and marketing them, the Company could be required to recognize an
impairment of all or a portion of the reporting unit's goodwill, which had a
carrying value of $17.0 million as of October 31, 2003.
18
RESULTS OF OPERATIONS
The following table sets forth the results of the Company's operations, net
sales and operating income by operating segment, and the percentage of net sales
represented by the respective items in the Company's Consolidated Statements of
Operations.
For the year ended October 31,
---------------------------------------------------
2001 2002 2003
------------- ------------- -------------
Net sales $ 171,259,000 $ 172,112,000 $ 176,453,000
------------- ------------- -------------
Cost of sales 100,113,000 110,610,000 118,349,000
Selling, general and administrative expenses 40,155,000 39,102,000 34,899,000
------------- ------------- -------------
Total operating costs and expenses 140,268,000 149,712,000 153,248,000
------------- ------------- -------------
Operating income $ 30,991,000/(1)/ $ 22,400,000 $ 23,205,000
============= ============= =============
Net sales by segment:
Flight Support Group $ 132,459,000 $ 120,097,000 $ 128,277,000
Electronic Technologies Group 38,800,000 52,510,000 48,597,000
Intersegment sales -- (495,000) (421,000)
------------- ------------- -------------
$ 171,259,000 $ 172,112,000 $ 176,453,000
============= ============= =============
Operating income by segment:
Flight Support Group $ 27,454,000 $ 15,846,000 $ 19,187,000
Electronic Technologies Group 7,835,000 11,873,000 8,497,000
Other, primarily corporate (4,298,000) (5,319,000) (4,479,000)
------------- ------------- -------------
$ 30,991,000/(1)/ $ 22,400,000 $ 23,205,000
============= ============= =============
Net sales 100.0% 100.0% 100.0%
Gross profit 41.5% 35.7% 32.9%
Selling, general and administrative expenses 23.4% 22.7% 19.8%
Operating income 18.1% 13.0% 13.2%
Interest expense 1.5% 1.3% 0.7%
Interest and other income 0.9% 0.1% 0.1%
Gain on sale of product line -- 0.7% --
Income tax expense 6.7% 2.9% 4.5%
Minority interests 1.6% 0.8% 1.1%
Net income 9.2% 8.8% 6.9%
- ----------
(1) For the fiscal year ended October 31, 2001, pro forma operating income
as adjusted to exclude goodwill amortization as a result of the adoption
of SFAS No. 142, would have been $37,826,000 including pro forma
operating income of the Flight Support Group and the Electronic
Technologies Group of $32,469,000 and $9,655,000, respectively.
19
COMPARISON OF FISCAL 2003 TO FISCAL 2002
Net Sales
Net sales in fiscal 2003 totaled $176.5 million, up 3% when compared to
net sales of $172.1 million in fiscal 2002. The increase reflects higher sales
within the FSG, which increased 7% to $128.3 million in fiscal 2003 compared to
$120.1 million in fiscal 2002, partially offset by lower sales within the ETG,
which decreased 7% to $48.6 million in fiscal 2003 from $52.5 million in fiscal
2002. The sales increase within the FSG primarily reflects stronger repair and
overhaul related sales and higher commercial aftermarket parts and services
sales primarily attributable to sales of new products and services and improved
demand within the commercial aerospace industry in the later half of fiscal 2003
following the end of the impact of the military conflict in Iraq and SARS. The
sales decrease within the ETG is primarily attributed to a decline in demand
from certain foreign military customers.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 32.9% in fiscal 2003 as
compared to 35.7% in fiscal 2002. This decrease is primarily due to lower
margins within the ETG attributed to lower foreign military sales and lower
sales of other higher margin products. The FSG's gross profit margins in fiscal
2003 approximated fiscal 2002 margins. Cost of sales in fiscal 2003 and fiscal
2002 includes approximately $9.2 million and $9.7 million, respectively, of new
product research and development expenses net of reimbursements pursuant to
cooperation and joint venture agreements. The decline in new product research
and development expenses was in line with a decrease in the amount budgeted for
fiscal 2003 relative to actual fiscal 2002 expenses.
Selling, general and administrative (SG&A) expenses decreased $4.2
million to $34.9 million in fiscal 2003 from $39.1 million in fiscal 2002. The
decrease in SG&A expenses is mainly due to lower commission expenses within the
ETG due to the lower sales discussed previously, lower corporate expenses, and
reduced bad debt expenses within the FSG. Corporate expenses include the
reversal of approximately $400,000 of professional fees that were accrued in the
fourth quarter of fiscal 2002 pursuant to a contractual agreement, which was
renegotiated in the first quarter of fiscal 2003. Bad debt expenses were lower
within the FSG in fiscal 2003 due to bankruptcy filings by certain customers in
fiscal 2002. As a percentage of sales, SG&A expenses decreased to 19.8% in
fiscal 2003 compared to 22.7% in fiscal 2002. The decrease is primarily due to
higher sales volumes and lower bad debt expenses within the FSG, the reduction
in corporate expenses, and by lower sales of products bearing higher commission
rates within the ETG.
Operating Income
Operating income increased to $23.2 million in fiscal 2003 from $22.4
million in fiscal 2002. The increase in operating income reflects higher
operating income within the FSG, which increased to $19.2 million in fiscal 2003
from $15.8 million in fiscal 2002 and a $0.8 million reduction in corporate
expenses, partially offset by lower operating income within the ETG, which
decreased to $8.5 million in fiscal 2003 compared to $11.9 million in fiscal
2002. As a percentage of sales, operating income increased to 13.2% in fiscal
2003 from 13.0% in fiscal 2002. The increase in operating income as a percentage
of sales reflects an increase in the FSG's operating income as a percentage of
sales from 13.2% in fiscal 2002 to 15.0% in fiscal 2003, offset by a decrease in
the ETG's operating income as a percentage of sales from 22.6% in fiscal 2002 to
17.5% in fiscal 2003. The increase in the FSG's operating income as a percentage
of sales reflects the higher sales and lower bad debt expenses discussed above.
The decrease in the ETG's operating income as a percentage of sales reflects the
lower sales and gross profit margins discussed previously.
20
Interest Expense
Interest expense decreased to $1.2 million in fiscal 2003 from $2.2
million in fiscal 2002. The decrease was principally due to a lower weighted
average balance outstanding under the Company's revolving credit facilities in
fiscal 2003 and lower interest rates. Additional information about the Company's
credit facilities may be found within the caption "Financing Activities" which
follows within this Item 7.
Interest and Other Income
Interest and other income in fiscal 2003 approximated amounts in fiscal
2002.
Gain on Sale of Product Line
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 net of tax, or $.03 per diluted share) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions of the sales contract.
Income Tax Expense
The Company's effective tax rate was 35.6% in fiscal 2003 compared to
23.0% in fiscal 2002. Income tax expense in fiscal 2002 reflects the recovery of
a portion of taxes paid in prior years resulting from an income tax audit
completed in fiscal 2002, which increased net income by $2.1 million, or $.09
per diluted share, net of related expenses (including professional fees and
interest) as explained further in Note 7 to the Consolidated Financial
Statements. The recovery of taxes paid was the principal reason for the lower
effective tax in fiscal 2002. For a detailed analysis of the provision for
income taxes, see Note 7 to the Consolidated Financial Statements.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. Minority interests increased by $2.0 million
in fiscal 2003 as compared to an increase of $1.3 million in fiscal 2002 due
mainly to the higher earnings within the FSG.
Net Income
The Company's net income was $12.2 million, or $.50 per diluted share,
in fiscal 2003 compared to net income of $15.2 million, or $.62 per diluted
share in fiscal 2002. The lower net income in fiscal 2003 primarily reflects the
effect of the income tax recovery and gain on sale of a product line in fiscal
2002, which increased net income by an aggregate of $2.9 million, or $.12 per
diluted share, and higher minority interests in fiscal 2003 as discussed above
offset by slightly higher operating income in fiscal 2003.
Outlook
The Company experienced increased sales and operating income in the FSG
during fiscal 2003 compared to fiscal 2002. These improvements are a result of
the Company's ongoing new product development efforts and some strengthening in
the commercial aviation industry.
The Company's ETG saw improvement in sales and operating income during
the second half of fiscal 2003 compared to the prior year. The increase is
primarily due to strong product demand during the second half of the fiscal year
and the shipment of some products whose delivery was delayed in the first half
of the year.
21
The Company's acquisition within the satellite microwave component
industry (see Note 17 to the Consolidated Financial Statements) furthers its
product and customer diversification strategy. Revenues from the defense
industry and other markets, including industrial, medical, electronics and
telecommunications, represented approximately one-third of the Company's total
revenues in fiscal 2003.
Based on an anticipated strengthening of the economy, the Company's
continued success in introducing new products and services and the
aforementioned acquisition, the Company is targeting growth in fiscal 2004 sales
and earnings over fiscal 2003 results.
COMPARISON OF FISCAL 2002 TO FISCAL 2001
Net Sales
Net sales in fiscal 2002 totaled $172.1 million, up 1% when compared to
net sales of $171.3 million in fiscal 2001. The increase reflects higher sales
within the ETG, which increased 35% to $52.5 million in fiscal 2002 compared to
$38.8 million in fiscal 2001, partially offset by lower sales within the FSG,
which decreased 9% to $120.1 million in fiscal 2002 from $132.5 million in
fiscal 2001. The sales increase within the ETG is primarily attributed to
revenues resulting from acquisitions as the Company expanded its operations to
include laser and navigation technologies, partially offset by lower sales of
electromagnetic interference (EMI) shielding products to the electronics and
communications industries. The sales decrease within the FSG primarily reflects
lower commercial aftermarket parts and services sales as a result of the impact
of the September 11, 2001 terrorist attacks and continued weakness within the
commercial aviation industry, partially offset by sales from newly acquired
businesses. The fiscal 2002 increase in sales attributable to newly acquired
businesses of both the ETG and the FSG is approximately $22 million.
Gross Profits and Operating Expenses
The Company's gross profit margins averaged 35.7% in fiscal 2002 as
compared to 41.5% in fiscal 2001. This decrease is primarily due to lower
margins within the FSG attributed to lower sales of higher margin FAA-approved
replacement parts and a $1.9 million increase in new product research and
development expenses over fiscal 2001 spending. The decrease was partially
offset by slightly higher gross margins in the ETG due primarily to increased
sales of higher margin defense related products. Cost of sales in fiscal 2002
and fiscal 2001 includes approximately $9.7 million and $7.7 million,
respectively, of new product research and development expenses net of
reimbursements pursuant to cooperation and joint venture agreements. The fiscal
year-over-year increase in new product research and development expenses relates
primarily to the development of FAA-approved replacement parts. New product
development, which is critical to the Company's long-term growth, reduced
diluted earnings per share by approximately $.04 in fiscal 2002 versus fiscal
2001.
Selling, general and administrative (SG&A) expenses decreased $1.1
million to $39.1 million in fiscal 2002 from $40.2 million in fiscal 2001. The
decrease in SG&A expenses is mainly due to the elimination of goodwill
amortization as required under SFAS 142, partially offset by additional SG&A
expenses of newly acquired businesses and professional fees associated with a
recently completed income tax audit, which resulted in the recovery of a portion
of taxes paid in prior years as further explained within the caption "Income Tax
Expense" which follows within this Item 7. As a percentage of sales, SG&A
expenses decreased to 22.7% in fiscal 2002 compared to 23.4% in fiscal 2001. The
decrease is primarily due to the elimination of goodwill amortization, partially
offset by the impact of lower year-over-year sales, excluding sales from new
acquisitions, and the professional fees associated with the recently completed
income tax audit.
22
Operating Income
Operating income decreased to $22.4 million in fiscal 2002 from $31.0
million in fiscal 2001. As a percentage of sales, operating income decreased
from 18.1% in fiscal 2001 to 13.0% in fiscal 2002. The decrease in operating
income reflects lower operating income within the FSG, which decreased to $15.8
million in fiscal 2002 from $27.5 million in fiscal 2001, partially offset by
higher operating income within the ETG, which increased to $11.9 million in
fiscal 2002 compared to $7.8 million in fiscal 2001. The decline in operating
income as a percentage of sales reflects a decline in the FSG's operating income
as a percentage of sales from 20.7% in fiscal 2001 to 13.2% in fiscal 2002,
partially offset by an increase in the ETG's operating income as a percentage of
sales from 20.2% in fiscal 2001 to 22.6% in fiscal 2002. The decrease in the
FSG's operating income as a percentage of sales reflects the lower sales and
gross margins discussed above, partially offset by the elimination of goodwill
amortization. The increase in the ETG's operating income as a percentage of
sales reflects the higher sales and gross margins discussed above, and the
elimination of goodwill amortization.
Interest Expense
Interest expense decreased to $2.2 million in fiscal 2002 from $2.5
million in fiscal 2001. The decrease was principally due to lower interest rates
in fiscal 2002, partially offset by a higher weighted average balance
outstanding under the Company's former Credit Facility in fiscal 2002 related to
borrowings made during fiscal 2001 to fund acquisitions.
Interest and Other Income
Interest and other income decreased from $1.6 million in fiscal 2001 to
$97,000 in fiscal 2002. The decrease is mainly due to the inclusion in fiscal
2001 of a gain of $657,000 on the sale of property retained in the sale of the
Trilectron product line sold in fiscal 2000 and a realized gain of $180,000 on
the sale of long-term investments. The decrease also reflects lower investment
interest rates and other income in fiscal 2002.
Gain on Sale of Product Line
In fiscal 2002, the Company recognized an additional pretax gain of
$1,230,000 ($765,000 net of tax, or $.03 per diluted share) on the sale of the
Trilectron product line due to the elimination of certain reserves upon the
expiration of indemnification provisions of the sales contract.
Income Tax Expense
Income tax expense in fiscal 2002 reflects the recovery of a portion of
taxes paid in prior years resulting from a recently completed income tax audit,
which increased net income by $2.1 million, or $.09 per diluted share, net of
related expenses (including professional fees and interest) as explained further
in Note 7 to the Consolidated Financial Statements. The recovery was the
principal reason for the reduction in the Company's effective tax rate from
38.1% in fiscal 2001 to 23.0% in fiscal 2002. The elimination of goodwill
amortization also contributed to the year-over-year decline in the effective tax
rate. For a detailed analysis of the provision for income taxes, see Note 7 to
the Consolidated Financial Statements.
Minority Interests
Minority interests in consolidated subsidiaries represents the minority
interests held in HEICO Aerospace. Minority interests decreased by $1.3 million
in fiscal 2002 as compared to an increase of $2.8 million in fiscal 2001 due
mainly to the lower earnings within the FSG.
23
Net Income
The Company's net income was $15.2 million, or $.62 per diluted share,
in fiscal 2002 compared to net income of $15.8 million, or $.65 per diluted
share in fiscal 2001. The slightly lower net income in fiscal 2002 reflects the
lower operating income discussed above, partially offset by the income tax
recovery, gain on sale of product line, and lower minority interests as
discussed above. Net income for fiscal 2001 as adjusted on a pro forma basis for
the adoption of SFAS 142 would have been $20.2 million, or $.82 per diluted
share.
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 its operating activities and
financing activities, including borrowings under long-term credit agreements.
Principal uses of cash by the Company include acquisitions, payments of
interest and principal on debt, capital expenditures and increases in working
capital.
The Company believes that its 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
Cash flow from operations was $27.9 million for fiscal 2003, principally
reflecting net income of $12.2 million, depreciation and amortization of $5.1
million, deferred income tax provision of $3.5 million, minority interests in
consolidated subsidiaries of $2.0 million, and a decrease in net operating
assets of $4.7 million. The decrease in net operating assets (current assets
used in operations net of current liabilities) primarily reflects lower
inventories resulting from efforts to improve inventory turnover by reducing the
level of finished goods maintained on hand.
Cash flow from operations was $23.3 million for fiscal 2002, principally
reflecting net income of $15.2 million, depreciation and amortization of $4.5
million, deferred income tax provision of $3.9 million, and a tax benefit
related to stock option exercises of $2.9 million, partially offset by an
increase in net operating assets of $3.4 million. The increase in net operating
assets (current assets used in operations net of current liabilities) primarily
resulted from higher inventories and capitalized tooling costs in the FSG
associated with new products.
Cash flow from operations was $16.5 million for fiscal 2001, principally
reflecting net income of $15.8 million, depreciation and amortization of $10.6
million, and minority interests in consolidated subsidiaries of $2.8 million,
partially offset by an increase in net operating assets of $12.9 million. The
increase in net operating assets (current assets used in operations net of
current liabilities) primarily resulted from an increase in inventories to meet
increased PMA sales and the payment of income taxes of approximately $7 million
on the fiscal 2000 gain from the sale of Trilectron.
Investing Activities
Cash used in investing activities during the three fiscal year period
ended October 31, 2003 primarily relates to various acquisitions, including
contingent payments, totaling $67.3 million, including $61.2 million in fiscal
2001. For further details on acquisitions, see the caption "Overview" within
this Item 7. Capital expenditures aggregated to $16.6
24
million over the last three fiscal years, primarily reflecting the purchases of
new facilities and the expansion of existing production facilities and
capabilities. In fiscal 2001, the Company received $12.4 million as a result of
the sale of the Trilectron product line in fiscal 2000 and also received
proceeds of $9.2 million from the sale of long-term investments and property
that was held for disposition.
Financing Activities
The Company used cash provided by operating activities to make net
payments on its revolving credit facilities of $24.0 million in fiscal 2003 and
$11.0 million in fiscal 2002. In fiscal 2001, the Company incurred net
borrowings of $27.0 million under its former revolving credit facility to fund
acquisitions as further detailed within the caption "Overview" within this Item
7. For the three fiscal year period ended October 31, 2003, the Company received
proceeds from stock option exercises of $3.9 million and paid cash dividends
aggregating to $3.0 million.
In May 2003, the Company entered into a new $120 million revolving
credit agreement (new Credit Facility) with a bank syndicate, which contains
both revolving credit and term loan features. Borrowings outstanding under the
previous credit facility were repaid with borrowings under the new Credit
Facility, which expires in May 2006. The new Credit Facility may be used for
working capital and general corporate needs of the Company, including letters of
credit, and to finance acquisitions (generally not in excess of an aggregate
total of $30 million over any trailing twelve-month period without the requisite
approval of the bank syndicate). The Company has the option to extend the
revolving credit term for two one-year periods or to convert outstanding
advances as of the initial expiration date to term loans amortizing over the
subsequent twelve-month period subject to requisite bank syndicate approval.
Advances under the new Credit Facility accrue interest at the Company's choice
of the London Interbank Offered Rate (LIBOR), or the "Base Rate," plus
applicable margins (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, or "leverage
ratio"). The new Credit Facility is secured by substantially all assets other
than real property of the Company and its subsidiaries and contains covenants
which require, among other things, the maintenance of a leverage ratio and a
fixed charge coverage ratio as well as minimum net worth requirements. See Note
6 to the Consolidated Financial Statements for further information regarding the
Credit Facility.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has arranged for standby letters of credit aggregating to
$1.2 million to meet the security requirement of its insurance company for
potential workers' compensation claims and one of the Company's subsidiaries has
guaranteed its performance related to a customer contract through a $0.5 million
letter of credit expiring July 2004. These letters of credit are supported by
the Company's Credit Facility. In addition, the Company's industrial development
revenue bonds are secured by a $2.0 million letter of credit expiring February
2004 and a mortgage on the related properties pledged as collateral.
NEW ACCOUNTING STANDARDS
On November 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board (APB) Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 develops one accounting model (based on
the model in SFAS No. 121) for long-lived assets that are to be disposed of by
sale, as well as addresses the principal implementation issues. SFAS No. 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of carrying value or fair value less cost to sell. That requirement
eliminates the requirement of APB Opinion No. 30 that discontinued operations be
measured at net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for
25
operating losses that have not yet occurred. Additionally, SFAS No. 144 expands
the scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS No. 144 did not have a material effect on the
Company's results of operations or financial position.
On November 1, 2002, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement eliminates the SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," requirement that gains and losses
from extinguishment of debt be classified as an extraordinary item, and requires
that such gains and losses be evaluated for extraordinary classification under
the criteria of APB Opinion No. 30. This statement also amends SFAS No. 13,
"Accounting for Leases," to require that certain lease modifications that have
economic effects that are similar to sales-leaseback transactions be accounted
for in the same manner as sales-leaseback transactions. SFAS No. 145 also makes
various other technical corrections to existing pronouncements. The adoption of
SFAS No. 145 did not have a material effect on the Company's results of
operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
(EITF 00-21). This Issue addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. EITF 00-21 provides guidance to determine how arrangement
consideration should be measured, whether an arrangement should be divided into
separate units of accounting, and how arrangement consideration should be
allocated among separate units of accounting. The provisions of EITF 00-21 are
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not have a material effect
on the Company's results of operations or financial position.
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statement
periods ending after December 15, 2002. The Company adopted FIN 45 effective as
of its first quarter of fiscal 2003, which did not have a material effect on the
Company's results of operations or financial position. The disclosures made
pursuant to FIN 45 may be found in Note 15 to the Consolidated Financial
Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002. The
transition guidance and annual disclosure requirements are effective for fiscal
years ending after December 15, 2002. The adoption of SFAS No. 148 did not have
a material effect on the Company's results of operations or financial position.
The disclosures pursuant to SFAS No. 148 may be found in Notes 1 and 9 to the
Consolidated Financial Statements.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination
26
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires recognition of a liability for a
cost associated with an exit or disposal activity at fair value when the
liability is incurred. Previously, a liability for an exit cost was recognized
when the entity committed to an exit plan under EITF Issue No. 94-3. The
adoption of SFAS No. 146 did not have a material effect on the Company's results
of operations or financial position, but may affect the timing and amounts of
the recognition of future restructuring costs.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an enterprise
to consolidate a variable interest entity if that enterprise will absorb a
majority of the entity's expected losses, is entitled to receive a majority of
the entity's expected residual returns, or both. FIN 46 also requires
disclosures about unconsolidated variable interest entities in which an
enterprise holds a significant variable interest. FIN 46 is currently effective
for variable interest entities created or entered into after January 31, 2003.
FASB Staff Position 46-6, which was issued in October 2003, delayed the
effective date of FIN 46 to the first reporting period ending after December 15,
2003 for variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
the adoption of FIN 46 to have a material effect on its results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language of an "underlying" to conform it to
language used in FIN 45, and amends certain other existing pronouncements. The
provisions of SFAS No. 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect
on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances),
which, under previous guidance, may have been classified as equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall generally be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's results
of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in values of
financial instruments, including interest rate risk and liquidity risk. The
Company engages in transactions in the normal course of business that expose it
to market risks. The primary market risk to which the Company has exposure is
interest rate risk, mainly related to its revolving credit facility and
industrial revenue bonds, which had an aggregate outstanding balance of $32.0
million at October 31, 2003. Interest rates on the revolving credit facility
borrowings are based on LIBOR plus a variable margin, while interest rates on
the industrial development revenue bonds are based on variable rates. Interest
rate risk associated with the Company's variable rate debt is the potential
increase in interest expense from an increase in interest rates. Based on the
outstanding debt balance at October 31, 2003, a hypothetical 10% increase in
interest rates would increase the Company's interest expense by approximately
$80,000 in fiscal 2004.
27
The Company maintains a portion of its cash and cash equivalents in
financial instruments with original maturities of three months or less. These
financial instruments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, a hypothetical 10% increase in interest rates as of October 31,
2003 would not have a material effect on the Company's results of operations or
financial position.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEICO CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.................................................................. 30
Consolidated Balance Sheets as of October 31, 2003 and 2002................................... 31
Consolidated Statements of Operations for the years ended October 31, 2003, 2002 and 2001..... 33
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years
ended October 31, 2003, 2002 and 2001........................................................ 34
Consolidated Statements of Cash Flows for the years ended October 31, 2003, 2002 and 2001..... 35
Notes to Consolidated Financial Statements.................................................... 36
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of HEICO Corporation:
We have audited the accompanying consolidated balance sheets of HEICO
Corporation and subsidiaries (the "Company") as of October 31, 2003 and 2002,
and the related consolidated statements of operations, of shareholders' equity
and comprehensive income, and of cash flows for each of the three years in the
period ended October 31, 2003. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
January 9, 2004
30
HEICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31,
--------------------------------
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 4,321,000 $ 4,539,000
Accounts receivable, net ..................................................... 28,820,000 28,407,000
Inventories .................................................................. 51,240,000 54,514,000
Prepaid expenses and other current assets .................................... 6,231,000 7,811,000
Deferred income taxes ........................................................ 3,872,000 3,295,000
-------------- --------------
Total current assets ....................................................... 94,484,000 98,566,000
Property, plant and equipment, net ............................................. 35,537,000 40,059,000
Goodwill, net .................................................................. 188,700,000 187,677,000
Other assets ................................................................... 14,523,000 10,030,000
-------------- --------------
Total assets .......................................