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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2011

OR

¨
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number: 1-4604

HEICO CORPORATION
(Exact name of registrant as specified in its charter)

Florida
65-0341002
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

3000 Taft Street, Hollywood, Florida
33021
(Address of principal executive offices)
(Zip Code)

 (954) 987-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of each of the registrant’s classes of common stock as of May 24, 2011 is as follows:

Common Stock, $.01 par value
16,727,863 shares
Class A Common Stock, $.01 par value
24,987,301 shares

 
 

 

HEICO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

       
Page
           
Part I.
Financial Information:      
           
Item 1.
     
           
       
           
       
           
       
           
       
           
     
           
     
           
     
           
Part II.
Other Information:      
           
     
           
     
           
   
 
 
1

 

PART I.  FINANCIAL INFORMATION; Item 1.  FINANCIAL STATEMENTS
HEICO CORPORATION AND SUBSIDIARIES

   
April 30, 2011
   
October 31, 2010
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 7,760,000     $ 6,543,000  
Accounts receivable, net
    100,569,000       91,815,000  
Inventories, net
    153,676,000       138,215,000  
Prepaid expenses and other current assets
    7,006,000       3,769,000  
Deferred income taxes
    19,215,000       18,907,000  
Total current assets
    288,226,000       259,249,000  
                 
Property, plant and equipment, net
    57,759,000       59,003,000  
Goodwill
    391,339,000       385,016,000  
Intangible assets, net
    61,395,000       49,487,000  
Other assets
    36,188,000       28,888,000  
Total assets
  $ 834,907,000     $ 781,643,000  
                 
LIABILITIES AND EQUITY
 
Current liabilities:
               
Current maturities of long-term debt
  $ 50,000     $ 148,000  
Trade accounts payable
    36,722,000       28,604,000  
Accrued expenses and other current liabilities
    46,957,000       52,101,000  
Income taxes payable
    6,621,000       979,000  
Total current liabilities
    90,350,000       81,832,000  
                 
Long-term debt, net of current maturities
    7,055,000       14,073,000  
Deferred income taxes
    45,695,000       45,308,000  
Other long-term liabilities
    38,370,000       30,556,000  
Total liabilities
    181,470,000       171,769,000  
Commitments and contingencies (Note 13)
               
                 
Redeemable noncontrolling interests (Note 10)
    53,955,000       55,048,000  
Shareholders’ equity:
               
Preferred Stock, $.01 par value per share; 10,000,000 shares authorized; 300,000 shares designated as Series B Junior Participating Preferred Stock and 300,000 shares designated  as Series C Junior Participating Preferred Stock; none issued
           
Common Stock, $.01 par value per share; 30,000,000 shares authorized 16,727,863 and 16,407,506 shares issued and outstanding
    167,000       131,000  
Class A Common Stock, $.01 par value per share; 30,000,000 shares authorized; 24,987,301 and 24,829,465 shares issued and outstanding
    250,000       199,000  
Capital in excess of par value
    233,124,000       227,993,000  
Accumulated other comprehensive income (loss)
    1,743,000       (124,000 )
Retained earnings
    273,364,000       240,913,000  
Total HEICO shareholders’ equity
    508,648,000       469,112,000  
Noncontrolling interests
    90,834,000       85,714,000  
Total shareholders’ equity
    599,482,000       554,826,000  
Total liabilities and equity
  $ 834,907,000     $ 781,643,000  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
2

 

HEICO CORPORATION AND SUBSIDIARIES

   
Six months ended April 30,
   
Three months ended April 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales
  $ 358,705,000     $ 289,380,000     $ 184,486,000     $ 153,845,000  
                                 
Operating costs and expenses:
                               
Cost of sales
    228,408,000       185,634,000       118,115,000       100,219,000  
Selling, general and administrative expenses
    65,012,000       53,245,000       33,458,000       27,669,000  
                                 
Total operating costs and expenses
    293,420,000       238,879,000       151,573,000       127,888,000  
                                 
Operating income
    65,285,000       50,501,000       32,913,000       25,957,000  
                                 
Interest expense
    (92,000 )     (286,000 )     (38,000 )     (167,000 )
Other income
    206,000       423,000       151,000       268,000  
                                 
Income before income taxes and noncontrolling interests
    65,399,000       50,638,000       33,026,000       26,058,000  
                                 
Income tax expense
    20,750,000       17,700,000       10,900,000       9,150,000  
                                 
Net income from consolidated operations
    44,649,000       32,938,000       22,126,000       16,908,000  
                                 
Less: Net income attributable to noncontrolling interests
    10,745,000       8,572,000       5,296,000       4,335,000  
                                 
Net income attributable to HEICO
  $ 33,904,000     $ 24,366,000     $ 16,830,000     $ 12,573,000  
                                 
Net income per share attributable to HEICO shareholders:
                               
Basic
  $ .82     $ .60     $ .40     $ .31  
Diluted
  $ .80     $ .58     $ .40     $ .30  
                                 
Weighted average number of common shares outstanding:
                               
Basic
    41,493,461       40,913,676       41,627,329       40,972,865  
Diluted
    42,433,999       42,164,233       42,482,719       42,201,068  
                                 
Cash dividends per share
  $ .048     $ .038     $     $  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 

HEICO CORPORATION AND SUBSIDIARIES
AND COMPREHENSIVE INCOME – UNAUDITED

          
HEICO Shareholders' Equity
             
                            
Accumulated
                   
    
Redeemable
         
Class A
   
Capital in
   
Other
               
Total
 
    
Noncontrolling
   
Common
   
Common
   
Excess of
   
Comprehensive
   
Retained
   
Noncontrolling
   
Shareholders'
 
    
Interests
   
Stock
   
Stock
   
Par Value
   
Income (Loss)
   
Earnings
   
Interests
   
Equity
 
                                                  
Balances as of October 31, 2010
  $ 55,048,000     $ 131,000     $ 199,000     $ 227,993,000     $ (124,000 )   $ 240,913,000     $ 85,714,000     $ 554,826,000  
Comprehensive income:
                                                               
Net income
    5,625,000                               33,904,000       5,120,000       39,024,000  
Foreign currency translation adjustments
                            1,867,000                   1,867,000  
Total comprehensive income
    5,625,000                         1,867,000       33,904,000       5,120,000       40,891,000  
Cash dividends ($.048 per share)
                                  (1,990,000 )           (1,990,000 )
Five-for-four common stock split
          33,000       50,000       (83,000 )           (102,000 )           (102,000 )
Tax benefit from stock option exercises
                      7,718,000                         7,718,000  
Proceeds from stock option exercises
          3,000       1,000       1,802,000                         1,806,000  
Stock option compensation expense
                      1,128,000                         1,128,000  
Acquisitions of noncontrolling interests
    (7,241,000 )                                          
Redemptions of common stock related to stock option exercises
                      (5,432,000 )                       (5,432,000 )
Distributions to noncontrolling interests
    (4,450,000 )                                          
Noncontrolling interests assumed related to acquisition
    5,612,000                                            
Adjustments to redemption amount of redeemable noncontrolling interests
    (639,000 )                             639,000             639,000  
Other
                      (2,000 )                       (2,000 )
Balances as of April 30, 2011
  $ 53,955,000     $ 167,000     $ 250,000     $ 233,124,000     $ 1,743,000     $ 273,364,000     $ 90,834,000     $ 599,482,000  
 
          
HEICO Shareholders' Equity
             
                            
Accumulated
                   
    
Redeemable
         
Class A
   
Capital in
   
Other
               
Total
 
    
Noncontrolling
   
Common
   
Common
   
Excess of
   
Comprehensive
   
Retained
   
Noncontrolling
   
Shareholders'
 
    
Interests
   
Stock
   
Stock
   
Par Value
   
Income (Loss)
   
Earnings
   
Interests
   
Equity
 
                                                 
Balances as of October 31, 2009
  $ 56,937,000     $ 104,000     $ 157,000     $ 224,625,000     $ (1,381,000 )   $ 189,485,000     $ 77,668,000     $ 490,658,000  
Comprehensive income:
                                                               
Net income
    4,668,000                               24,366,000       3,904,000       28,270,000  
Foreign currency translation adjustments
                            1,512,000                   1,512,000  
Total comprehensive income
    4,668,000                         1,512,000       24,366,000       3,904,000       29,782,000  
Cash dividends ($.038 per share)
                                  (1,570,000 )           (1,570,000 )
Five-for-four common stock split
          26,000       40,000       (66,000 )           (68,000 )           (68,000 )
Tax benefit from stock option exercises
                      952,000                         952,000  
Proceeds from stock option exercises
          1,000       1,000       1,383,000                         1,385,000  
Stock option compensation expense
                      610,000                         610,000  
Acquisitions of noncontrolling interests
    (727,000 )                                          
Redemptions of common stock related to stock option exercises
                      (353,000 )                       (353,000 )
Distributions to noncontrolling interests
    (4,446,000 )                                          
Adjustments to redemption amount of redeemable noncontrolling interests
    (311,000 )                             311,000             311,000  
Other
                      (1,000 )     4,000                   3,000  
Balances as of April 30, 2010
  $ 56,121,000     $ 131,000     $ 198,000     $ 227,150,000     $ 135,000     $ 212,524,000     $ 81,572,000     $ 521,710,000  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 

HEICO CORPORATION AND SUBSIDIARIES

   
Six months ended April 30,
 
   
2011
   
2010
 
             
Operating Activities:
           
Net income from consolidated operations
  $ 44,649,000     $ 32,938,000  
Adjustments to reconcile net income from consolidated operations to net cash provided by operating activities:
               
Depreciation and amortization
    8,891,000       8,878,000  
Impairment of intangible assets
          281,000  
Deferred income tax provision
    242,000       610,000  
Tax benefit from stock option exercises
    7,718,000       952,000  
Excess tax benefit from stock option exercises
    (6,358,000 )     (670,000 )
Stock option compensation expense
    1,128,000       610,000  
Changes in operating assets and liabilities, net of acquisitions:
               
(Increase) decrease in accounts receivable
    (3,597,000 )     1,863,000  
Increase in inventories
    (6,153,000 )     (184,000 )
Increase in prepaid expenses and other current assets
    (2,777,000 )     (1,435,000 )
Increase (decrease) in trade accounts payable
    4,119,000       (614,000 )
Decrease in accrued expenses and other current liabilities
    (2,969,000 )     (2,250,000 )
Increase (decrease) in income taxes payable
    5,985,000       (688,000 )
Other
    203,000       (28,000 )
Net cash provided by operating activities
    51,081,000       40,263,000  
                 
Investing Activities:
               
Acquisitions, net of cash acquired
    (27,936,000 )     (36,189,000 )
Capital expenditures
    (3,845,000 )     (4,600,000 )
Other
    3,000       (2,000 )
Net cash used in investing activities
    (31,778,000 )     (40,791,000 )
                 
Financing Activities:
               
Payments on revolving credit facility
    (35,000,000 )     (28,000,000 )
Borrowings on revolving credit facility
    28,000,000       37,000,000  
Acquisitions of noncontrolling interests
    (7,241,000 )     (727,000 )
Redemptions of common stock related to stock option exercises
    (5,432,000 )     (353,000 )
Distributions to noncontrolling interests
    (4,450,000 )     (4,446,000 )
Cash dividends paid
    (2,092,000 )     (1,638,000 )
Excess tax benefit from stock option exercises
    6,358,000       670,000  
Proceeds from stock option exercises
    1,806,000       1,385,000  
Other
    (125,000 )     (102,000 )
Net cash (used in) provided by financing activities
    (18,176,000 )     3,789,000  
                 
Effect of exchange rate changes on cash
    90,000       97,000  
                 
Net increase in cash and cash equivalents
    1,217,000       3,358,000  
Cash and cash equivalents at beginning of year
    6,543,000       7,167,000  
Cash and cash equivalents at end of period
  $ 7,760,000     $ 10,525,000  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
5

 

HEICO CORPORATION AND SUBSIDIARIES

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q.  Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2010.  The October 31, 2010 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations and statements of cash flows for such interim periods presented.  The results of operations for the six months ended April 30, 2011 are not necessarily indicative of the results which may be expected for the entire fiscal year.

Stock Split

In March 2011, the Company’s Board of Directors declared a 5-for-4 stock split on both classes of the Company’s common stock.  The stock split was effected as of April 26, 2011 in the form of a 25% stock dividend distributed to shareholders of record as of April 15, 2011.  All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures About Fair Value Measurements,” which requires additional disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements and more detailed information of activity in Level 3 fair value measurements.  The Company adopted ASU 2010-06 as of the beginning of fiscal 2010, except the additional Level 3 disclosures, which are effective in fiscal years beginning after December 15, 2010, or as of fiscal 2012 for HEICO.  The Company will make the additional Level 3 disclosures, if applicable, as of the date of adoption.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”  Under ASU 2010-29, supplemental pro forma information disclosures pertaining to acquisitions should be presented as if the business combination(s) occurred as of the beginning of the prior annual period when comparative financial statements are presented.  ASU 2010-29 is effective for business combinations

 
6

 

consummated in fiscal periods beginning after December 15, 2010.  Early adoption is permitted and the Company adopted the new guidance on a prospective basis as of December 2010.

2.      ACQUISITIONS

In December 2010, the Company, through its HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) subsidiary, acquired 80.1% of the assets and assumed certain liabilities of Blue Aerospace LLC.  Blue Aerospace is a supplier, distributor, and integrator of military aircraft parts and support services primarily to foreign military organizations allied with the United States.  The remaining 19.9% interest continues to be owned by certain members of Blue Aerospace’s management team (see Note 10, Redeemable Noncontrolling Interests, for additional information).  The total consideration for this acquisition and related allocation to the tangible and identifiable intangible assets acquired and liabilities assumed is not material or significant to the Company’s condensed consolidated financial statements.  The purchase price was paid in cash principally using proceeds from the Company’s revolving credit facility.

The operating results of the Company’s fiscal 2011 acquisition were included in the Company’s results of operations from the effective acquisition date.  The amount of net sales and earnings of the fiscal 2011 acquisition included in the Condensed Consolidated Statements of Operations is not material.  Had the fiscal 2011 acquisition been consummated as of November 1, 2009, net sales, net income from consolidated operations, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the six months and three months ended April 30, 2011 and 2010 would not have been materially different than the reported amounts.

As part of the purchase agreements associated with certain prior year acquisitions, the Company may be obligated to pay additional purchase consideration based on the acquired subsidiary meeting certain earnings objectives following the acquisition.  For acquisitions consummated prior to fiscal 2010, the Company accrues an estimate of additional purchase consideration when the earnings objectives are met.  During the second quarter of fiscal 2011, the Company, through its HEICO Electronic Technologies Corp. (“HEICO Electronic”) subsidiary, paid $4.1 million of such additional purchase consideration, which was accrued as of October 31, 2010, using cash provided by operating activities and also accrued $1.3 million of additional purchase consideration related to a prior year acquisition for which the earnings objectives were met during fiscal 2011.  The aforementioned amounts paid and accrued were based on a multiple of each applicable subsidiary’s earnings relative to target and were not contingent upon the former shareholders of the respective acquired entity remaining employed by the Company or providing future services to the Company.  Accordingly, these amounts represent an additional cost of the respective entity recorded as additional goodwill.  Information regarding additional contingent purchase consideration related to acquisitions prior to fiscal 2010 may be found in Note 13, Commitments and Contingencies.

 
7

 

3.      SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable

   
April 30, 2011
   
October 31, 2010
 
Accounts receivable
  $ 102,970,000     $ 94,283,000  
Less:  Allowance for doubtful accounts
    (2,401,000 )     (2,468,000 )
Accounts receivable, net
  $ 100,569,000     $ 91,815,000  

Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts

   
April 30, 2011
   
October 31, 2010
 
Costs incurred on uncompleted contracts
  $ 5,972,000     $ 6,323,000  
Estimated earnings
    5,846,000       7,603,000  
      11,818,000       13,926,000  
Less:  Billings to date
    (7,699,000 )     (8,967,000 )
    $ 4,119,000     $ 4,959,000  
Included in the accompanying Condensed Consolidated
               
Balance Sheets under the following captions:
               
Accounts receivable, net (costs and estimated earnings in excess of billings)
  $ 4,119,000     $ 5,135,000  
Accrued expenses and other current liabilities
               
(billings in excess of costs and estimated earnings)
          (176,000 )
    $ 4,119,000     $ 4,959,000  

The percentage of the Company’s net sales recognized under the percentage-of-completion method was not material for the six months ended April 30, 2011 and 2010.  Changes in estimates pertaining to percentage-of-completion contracts did not have a material effect on net income from consolidated operations for the six months ended April 30, 2011 and 2010.

Inventories

   
April 30, 2011
   
October 31, 2010
 
Finished products
  $ 82,601,000     $ 72,263,000  
Work in process
    23,171,000       19,034,000  
Materials, parts, assemblies and supplies
    47,904,000       46,918,000  
Inventories, net of valuation reserves
  $ 153,676,000     $ 138,215,000  

Inventories related to long-term contracts were not significant as of April 30, 2011 and October 31, 2010.

 
8

 

Property, Plant and Equipment

   
April 30, 2011
   
October 31, 2010
 
Land
  $ 3,656,000     $ 3,656,000  
Buildings and improvements
    39,480,000       38,772,000  
Machinery, equipment and tooling
    88,687,000       85,095,000  
Construction in progress
    5,657,000       6,319,000  
      137,480,000       133,842,000  
Less:  Accumulated depreciation and amortization
    (79,721,000 )     (74,839,000 )
Property, plant and equipment, net
  $ 57,759,000     $ 59,003,000  

Accrued Customer Rebates and Credits

The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $5,737,000 and $9,230,000 as of April 30, 2011 and October 31, 2010, respectively.  The total customer rebates and credits deducted within net sales for the six months ended April 30, 2011 and 2010 was $4,416,000 and $4,398,000, respectively.  The total customer rebates and credits deducted within net sales for the three months ended April 30, 2011 and 2010 was $1,836,000 and $2,019,000, respectively.

4.      GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has two operating segments: the Flight Support Group (“FSG”) and the Electronic Technologies Group (“ETG”).  Changes in the carrying amount of goodwill by operating segment for the six months ended April 30, 2011 are as follows:

   
Segment
   
Consolidated
 
   
FSG
   
ETG
   
Totals
 
Balances as of October 31, 2010
  $ 188,459,000     $ 196,557,000     $ 385,016,000  
Goodwill acquired
    3,898,000             3,898,000  
Accrued additional purchase consideration
          1,278,000       1,278,000  
Foreign currency translation adjustments
          1,147,000       1,147,000  
Balances as of April 30, 2011
  $ 192,357,000     $ 198,982,000     $ 391,339,000  

The goodwill acquired pertains to the current year acquisition described in Note 2, Acquisitions, and represents the residual value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed.  The accrued additional purchase consideration is the result of a subsidiary of the ETG meeting certain earnings objectives in fiscal 2011.  See Note 2 and Note 13, Commitments and Contingencies, for additional information regarding additional contingent purchase consideration.

 
9

 

 Identifiable intangible assets consist of the following:

   
As of April 30, 2011
   
As of October 31, 2010
 
    
Gross
         
Net
   
Gross
         
Net
 
    
Carrying
   
Accumulated
   
Carrying
   
Carrying
   
Accumulated
   
Carrying
 
    
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
Amortizing Assets:
                                   
Customer relationships
  $ 46,813,000     $ (15,125,000 )   $ 31,688,000     $ 37,338,000     $ (12,142,000 )   $ 25,196,000  
Intellectual property
    7,402,000       (1,840,000 )     5,562,000       7,281,000       (1,372,000 )     5,909,000  
Licenses
    2,900,000       (721,000 )     2,179,000       1,000,000       (621,000 )     379,000  
Non-compete agreements
    1,378,000       (1,121,000 )     257,000       1,170,000       (1,019,000 )     151,000  
Patents
    575,000       (294,000 )     281,000       554,000       (270,000 )     284,000  
Trade names
    569,000       (168,000 )     401,000       569,000       (112,000 )     457,000  
      59,637,000       (19,269,000 )     40,368,000       47,912,000       (15,536,000 )     32,376,000  
Non-Amortizing Assets:
                                               
Trade names
    21,027,000             21,027,000       17,111,000             17,111,000  
    $ 80,664,000     $ (19,269,000 )   $ 61,395,000     $ 65,023,000     $ (15,536,000 )   $ 49,487,000  

The increase in the gross carrying amount of customer relationships, licenses, non-compete agreements and non-amortizing trade names as of April 30, 2011 compared to October 31, 2010 principally relates to such intangible assets recognized in connection with an acquisition made during the first quarter of fiscal 2011 (see Note 2, Acquisitions).  The weighted average amortization period of the customer relationships, licenses and non-compete agreements acquired is 10 years, 10 years and 2 years, respectively.

Amortization expense related to intangible assets for the six months ended April 30, 2011 and 2010 was $3,544,000 and $3,470,000, respectively.  Amortization expense related to intangible assets for the three months ended April 30, 2011 and 2010 was $1,893,000 and $1,894,000, respectively.  Amortization expense related to intangible assets for the fiscal year ending October 31, 2011 is estimated to be $7,310,000.  Amortization expense for each of the next five fiscal years and thereafter is estimated to be $6,821,000 in fiscal 2012, $6,249,000 in fiscal 2013, $5,899,000 in fiscal 2014, $4,711,000 in fiscal 2015, $3,689,000 in fiscal 2016 and $9,233,000 thereafter.

5.      LONG-TERM DEBT

Long-term debt consists of the following:

   
April 30, 2011
   
October 31, 2010
 
Borrowings under revolving credit facility
  $ 7,000,000     $ 14,000,000  
Notes payable and capital leases
    105,000       221,000  
      7,105,000       14,221,000  
Less: Current maturities of long-term debt
    (50,000 )     (148,000 )
    $ 7,055,000     $ 14,073,000  

As of April 30, 2011 and October 31, 2010, the weighted average interest rate on borrowings under the Company’s $300 million revolving credit facility was .9% as of each date.  The revolving credit facility contains both financial and non-financial covenants.  As of April 30, 2011, the Company was in compliance with all such covenants.

 
10

 

6.      INCOME TAXES

As of April 30, 2011, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $2,701,000 of which $2,279,000 would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits for the six months ended April 30, 2011 is as follows:

Balance as of October 31, 2010
  $ 2,306,000  
Increases related to prior year tax positions
    104,000  
Increases related to current year tax positions
    291,000  
Balance as of April 30, 2011
  $ 2,701,000  

There were no material changes in the liability for unrecognized tax positions resulting from tax positions taken during the current or a prior year, settlements with other taxing authorities or a lapse of applicable statutes of limitations.  The accrual of interest and penalties related to the unrecognized tax benefits was not material for the six months ended April 30, 2011.  Further, the Company does not expect the total amount of unrecognized tax benefits to materially change in the next twelve months.

In December 2010, Section 41 of the Internal Revenue Code, “Credit for Increasing Research Activities,” was retroactively extended for two years to cover the period from January 1, 2010 to December 31, 2011.  As a result, the Company recognized an income tax credit for qualified research and development activities for the last ten months of fiscal 2010 in the first quarter of fiscal 2011.  The tax credit, net of expenses, increased net income attributable to HEICO by approximately $.8 million in the first quarter of fiscal 2011.

7.      FAIR VALUE MEASUREMENTS

The following tables sets forth by level within the fair value hierarchy, the Company’s assets and liabilities that were measured at fair value on a recurring basis:

   
As of April 30, 2011
 
    
Quoted Prices
   
Significant
   
Significant
       
    
in Active Markets
   
Other Observable
   
Unobservable
       
    
for Identical Assets
   
Inputs
   
Inputs
       
    
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Assets:
                       
Deferred compensation plans:
                       
Corporate owned life insurance
  $     $ 29,090,000     $     $ 29,090,000  
Equity securities
    1,973,000                   1,973,000  
Money market funds and cash
    922,000                   922,000  
Mutual funds
    1,102,000                   1,102,000  
Other
          408,000       579,000       987,000  
Total assets
  $ 3,997,000     $ 29,498,000     $ 579,000     $ 34,074,000  
                                 
Liabilities:
                               
Contingent consideration
  $     $     $ 1,150,000     $ 1,150,000  

 
11

 

   
As of October 31, 2010
 
    
Quoted Prices
   
Significant
   
Significant
       
   
in Active Markets
   
Other Observable
   
Unobservable
       
    
for Identical Assets
   
Inputs
   
Inputs
       
    
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Assets:
                       
Deferred compensation plans:
                       
Corporate owned life insurance
  $     $ 22,908,000     $     $ 22,908,000  
Equity securities
    1,267,000                   1,267,000  
Money market funds and cash
    1,165,000                   1,165,000  
Mutual funds
    1,002,000                   1,002,000  
Other
          545,000             545,000  
Total assets
  $ 3,434,000     $ 23,453,000     $     $ 26,887,000  
                                 
Liabilities:
                               
Contingent consideration
  $     $     $ 1,150,000     $ 1,150,000  

The Company maintains two non-qualified deferred compensation plans.  The assets of the HEICO Corporation Leadership Compensation Plan (the “LCP”) principally represent cash surrender values of life insurance policies, which derive their fair values from investments in mutual funds that are managed by an insurance company and are classified within Level 2 and are valued using a market approach.  Certain other assets of the LCP represent investments in HEICO common stock and money market funds that are classified within Level 1.  The majority of the assets of the Company’s other deferred compensation plan are principally invested in equity securities, mutual funds and money market funds that are classified within Level 1.  A portion of the assets within the other deferred compensation plan is currently invested in a fund that invests in future and forward contracts; most of which are privately negotiated with counterparties without going through a public exchange, and that use trading methods that are proprietary and confidential.  These assets are therefore classified within Level 3 and are valued using a market approach with corresponding gains and losses reported within other income in the Company’s Condensed Consolidated Statement of Operations.  The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $34,074,000 as of April 30, 2011 and $26,887,000 as of October 31, 2010, of which the LCP related assets were $29,741,000 and $22,604,000 as of April 30, 2011 and October 31, 2010, respectively.  The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $33,952,000 as of April 30, 2011 and $26,506,000 as of October 31, 2010, of which the LCP related liability was $29,619,000 and $22,223,000 as of April 30, 2011 and October 31, 2010, respectively.

Changes in the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended April 30, 2011 are as follows:

Balance as of October 31, 2010
  $  
Purchases
    550,000  
Total unrealized gains
    29,000  
Balance as of April 30, 2011
  $ 579,000  

 
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The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the six months ended April 30, 2011.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2010, the Company may be obligated to pay contingent consideration of up to $2,000,000 million in fiscal 2013 should the acquired entity meet certain earnings objectives during the second and third years following the acquisition.  The $1,150,000 fair value of the contingent consideration was determined as of the acquisition date using a discounted cash flow model and probability adjusted internal estimates of the subsidiary’s future earnings and is classified in Level 3.  There have been no subsequent changes in the fair value of this contingent consideration as of April 30, 2011 and this obligation is included in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheet.  Changes in the fair value of contingent consideration will be recorded in the Company’s condensed consolidated statements of operations.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of April 30, 2011 due to the relatively short maturity of the respective instruments.  The carrying amount of long-term debt approximates fair value due to its variable interest rates.

8.      SHAREHOLDERS’ EQUITY

During the six months ended April 30, 2011, the Company repurchased an aggregate 102,931 shares of Common Stock at a total cost of approximately $4.7 million and an aggregate 21,953 shares of Class A Common Stock at a total cost of approximately $.7 million.  The transactions occurred as settlement for employee taxes due pertaining to exercises of non-qualified stock options and did not impact the number of shares authorized for future purchase under the Company’s share repurchase program.

9.      RESEARCH AND DEVELOPMENT EXPENSES

Cost of sales for the six months ended April 30, 2011 and 2010 includes approximately $11.7 million and $10.5 million, respectively, of new product research and development expenses.  Cost of sales for the three months ended April 30, 2011 and 2010 includes approximately $6.1 million and $5.4 million, respectively, of new product research and development expenses.

 
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10.      REDEEMABLE NONCONTROLLING INTERESTS

The holders of equity interests in certain of the Company’s subsidiaries have rights (“Put Rights”) that may be exercised on varying dates causing the Company to purchase their equity interests beginning in fiscal 2012 through fiscal 2018.  The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the “Redemption Amount”) be at fair value or at a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period.  As of April 30, 2011, management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay is approximately $54 million.  The actual Redemption Amount will likely be different.  The aggregate Redemption Amount of all Put Rights was determined using probability adjusted internal estimates of future earnings of the Company’s subsidiaries with Put Rights while considering the earliest exercise date, the measurement period and any applicable fair value adjustments.  The portion of the estimated Redemption Amount as of April 30, 2011 redeemable at fair value is approximately $31 million and the portion redeemable based solely on a multiple of future earnings is approximately $23 million.  The portion of periodic adjustments to the Redemption Amount based on fair value, if any, will have no effect on net income per share attributable to HEICO shareholders whereas the portion of periodic adjustments to the carrying amount of redeemable noncontrolling interests based solely on a multiple of future earnings in excess of fair value, if any, will affect net income per share attributable to HEICO shareholders.

As discussed in Note 2, Acquisitions, the Company entered into an agreement to acquire an 80.1% interest in a subsidiary by the FSG in December 2010.  As part of the agreement, the Company has the right to purchase the noncontrolling interests over a two-year period beginning in fiscal 2015, or sooner under certain conditions, and the noncontrolling interest holders have the right to cause the Company to purchase the same equity interests over the same period.  The estimated amount of Put Rights related to the acquisition is included in the aggregate Redemption Amount above.

In February 2011, the Company, through HEICO Aerospace, acquired an additional 8% equity interest in one of its subsidiaries, which increased the Company’s ownership interest to 80%.  In April 2011, the Company, through HEICO Electronic, acquired an additional 2.6% equity interest in one of its subsidiaries, which increased the Company’s ownership interest to 95.9%.  The purchase prices of the redeemable noncontrolling interests acquired during the second quarter of fiscal 2011 were paid using cash provided by operating activities.

 
14

 

11.      NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS

The computation of basic and diluted net income per share attributable to HEICO shareholders is as follows:

   
Six months ended April 30,
   
Three months ended April 30,
 
    
2011
   
2010
   
2011
   
2010
 
Numerator:
                       
Net income attributable to HEICO
  $ 33,904,000     $ 24,366,000     $ 16,830,000     $ 12,573,000  
                                 
Denominator:
                               
Weighted average common shares outstanding-basic
    41,493,461       40,913,676       41,627,329       40,972,865  
Effect of dilutive stock options
    940,538       1,250,557       855,390       1,228,203  
Weighted average common shares outstanding-diluted
    42,433,999       42,164,233       42,482,719       42,201,068  
                                 
Net income per share attributable to HEICO shareholders:
                               
Basic
  $ .82     $ .60     $ .40     $ .31  
Diluted
  $ .80     $ .58     $ .40     $ .30  
                                 
Anti-dilutive stock options excluded
    396,563       541,016       523,125       539,063  

No portion of the adjustments to the redemption amount of redeemable noncontrolling interests of ($639,000) and ($311,000) for the six months ended April 30, 2011 and 2010, respectively, and ($513,000) and ($613,000) for the three months ended April 30, 2011 and 2010, respectively, reflect a redemption amount in excess of fair value and therefore no portion of the adjustments affect basic or diluted net income per share attributable to HEICO shareholders.

 
15

 

12.      OPERATING SEGMENTS

Information on the Company’s two operating segments, the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and its subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries, for the six months and three months ended April 30, 2011 and 2010, respectively, is as follows:

               
Other,
       
                
Primarily
       
    
Segment
   
Corporate and
   
Consolidated
 
    
FSG
   
ETG
   
Intersegment
   
Totals
 
Six months ended April 30, 2011:
                       
Net sales
  $ 254,445,000     $ 105,311,000     $ (1,051,000 )   $ 358,705,000  
Depreciation and amortization
    5,014,000       3,687,000       190,000       8,891,000  
Operating income
    43,834,000       29,183,000       (7,732,000 )     65,285,000  
Capital expenditures
    2,963,000       878,000       4,000       3,845,000  
                                 
Six months ended April 30, 2010:
                               
Net sales
  $ 196,822,000     $ 93,124,000     $ (566,000 )   $ 289,380,000  
Depreciation and amortization
    4,974,000       3,706,000       198,000       8,878,000  
Operating income
    32,775,000       24,763,000       (7,037,000 )     50,501,000  
Capital expenditures
    3,817,000       780,000       3,000       4,600,000  
                                 
Three months ended April 30, 2011:
                               
Net sales
  $ 133,804,000     $ 51,372,000     $ (690,000 )   $ 184,486,000  
Depreciation and amortization
    2,636,000       1,853,000       95,000       4,584,000  
Operating income
    23,405,000       13,645,000       (4,137,000 )     32,913,000  
Capital expenditures
    1,678,000       527,000       3,000       2,208,000  
                                 
Three months ended April 30, 2010:
                               
Net sales
  $ 103,043,000     $ 51,066,000     $ (264,000 )   $ 153,845,000  
Depreciation and amortization
    2,510,000       2,018,000       99,000       4,627,000  
Operating income
    16,055,000       13,593,000       (3,691,000 )     25,957,000  
Capital expenditures
    1,868,000       574,000             2,442,000  

Total assets by operating segment as of April 30, 2011 and October 31, 2010 are as follows:

               
Other,
       
    
Segment
   
Primarily
   
Consolidated
 
    
FSG
   
ETG
   
Corporate
   
Totals
 
                          
Total assets as of April 30, 2011
  $ 456,136,000     $ 327,834,000     $ 50,937,000     $ 834,907,000  
Total assets as of October 31, 2010
    410,666,000       328,577,000       42,400,000       781,643,000  
 
 
16

 

13.      COMMITMENTS AND CONTINGENCIES

Guarantees

The Company has arranged for a standby letter of credit for $1.5 million to meet the security requirement of its insurance company for potential workers’ compensation claims, which is supported by the Company’s revolving credit facility.

Product Warranty

Changes in the Company’s product warranty liability for the six months ended April 30, 2011 and 2010, respectively, are as follows:

   
Six months ended April 30,
 
    
2011
   
2010
 
Balances as of beginning of fiscal year
  $ 1,636,000     $ 1,022,000  
Accruals for warranties
    602,000       850,000  
Warranty claims settled
    (414,000 )     (570,000 )
Acquired warranty liabilities
          80,000  
Balances as of April 30
  $ 1,824,000     $ 1,382,000  

Additional Contingent Purchase Consideration

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2007, the Company may be obligated to pay additional purchase consideration of up to 73 million Canadian dollars in fiscal 2012, which translates to approximately $77 million U.S. dollars based on the April 30, 2011 exchange rate, should the subsidiary meet certain earnings objectives through June 2012.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2009, the Company may be obligated to pay additional purchase consideration of up to approximately $10.1 million in fiscal 2012 should the subsidiary meet certain earnings objectives during the third year following the acquisition.

As part of the agreement to acquire a subsidiary by the ETG in fiscal 2009, the Company may be obligated to pay additional purchase consideration of up to approximately $7.6 million in fiscal 2012 should the subsidiary meet certain earnings objectives during the second year following the acquisition.

The above referenced additional contingent purchase consideration will be accrued when the earnings objectives are met.  Such additional contingent purchase consideration is based on a multiple of earnings above a threshold (subject to a cap in certain cases) and is not contingent upon the former shareholders of the acquired entities remaining employed by the Company or providing future services to the Company.  Accordingly, such consideration will be recorded as an additional cost of the respective acquired entity when paid.  The aggregate maximum amount of such contingent purchase consideration that the Company could be required to pay is approximately $95 million payable in fiscal 2012.  Assuming the subsidiaries perform over their respective future measurement periods at the same earnings levels they have performed in the comparable historical measurement periods, the aggregate amount of such contingent purchase

 
17

 

consideration that the Company would be required to pay is approximately $14 million.  The actual contingent purchase consideration will likely be different.

Litigation

The Company is involved in various legal actions arising in the normal course of business.  Based upon the Company’s and its legal counsel’s evaluations of any claims or assessments, management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.

 
18

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein.  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates if different assumptions were used or different events ultimately transpire.

Our critical accounting policies, which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2010.  One such critical accounting policy pertains to the valuation of our goodwill which we test for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be full recoverable.  Based on the results of our annual goodwill impairment test as of October 31, 2010, we determined that there was no impairment of our goodwill and the fair value of each of our reporting units significantly exceeded their carrying value.  No events or changes in circumstances have occurred since the last annual impairment test to indicate potential goodwill impairment.

Our business is 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.

Our results of operations for the six and three months ended April 30, 2011 have been affected by the fiscal 2011 and the fiscal 2010 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements of this quarterly report and of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2010, respectively.

All per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in April 2011.  See Note 1, Summary of Significant Accounting Policies – Stock Split, of the Notes to Condensed Consolidated Financial Statements for additional information regarding this stock split.

 
19

 
 
Results of Operations

The following table sets forth the results of our operations, net sales and operating income by segment and the percentage of net sales represented by the respective items in our Condensed Consolidated Statements of Operations.

   
Six months ended April 30,
   
Three months ended April 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net sales
  $ 358,705,000     $ 289,380,000     $ 184,486,000     $ 153,845,000  
Cost of sales
    228,408,000       185,634,000       118,115,000       100,219,000  
Selling, general and administrative expenses
    65,012,000       53,245,000       33,458,000       27,669,000  
Total operating costs and expenses
    293,420,000       238,879,000       151,573,000       127,888,000  
Operating income
  $ 65,285,000     $ 50,501,000     $ 32,913,000     $ 25,957,000  
                                 
Net sales by segment:
                               
Flight Support Group
  $ 254,445,000     $ 196,822,000     $ 133,804,000     $ 103,043,000  
Electronic Technologies Group
    105,311,000       93,124,000       51,372,000       51,066,000  
Intersegment sales
    (1,051,000 )     (566,000 )     (690,000 )     (264,000 )
    $ 358,705,000     $ 289,380,000     $ 184,486,000     $ 153,845,000  
                                 
Operating income by segment:
                               
Flight Support Group
  $ 43,834,000     $ 32,775,000     $ 23,405,000     $ 16,055,000  
Electronic Technologies Group
    29,183,000       24,763,000       13,645,000       13,593,000  
Other, primarily corporate
    (7,732,000 )     (7,037,000 )     (4,137,000 )     (3,691,000 )
    $ 65,285,000     $ 50,501,000     $ 32,913,000     $ 25,957,000  
                                 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Gross profit
    36.3 %     35.9 %     36.0 %     34.9 %
Selling, general and administrative expenses
    18.1 %     18.4 %     18.1 %     18.0 %
Operating income
    18.2 %     17.5 %     17.8 %     16.9 %
Interest expense
          .1 %           .1 %
Other income
    .1 %     .1 %     .1 %     .2 %
Income tax expense
    5.8 %     6.1 %     5.9 %     5.9 %
Net income attributable to noncontrolling interests
    3.0 %     3.0 %     2.9 %     2.8 %
Net income attributable to HEICO
    9.5 %     8.4 %     9.1 %     8.2 %
 
 
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Comparison of First Six Months of Fiscal 2011 to First Six Months of Fiscal 2010

Net Sales

Our net sales for the first six months of fiscal 2011 increased by 24% to a record $358.7 million, as compared to net sales of $289.4 million for the first six months of fiscal 2010.  The increase in net sales reflects an increase of $57.6 million (a 29% increase) to a record $254.4 million in net sales within the FSG as well as an increase of $12.2 million (a 13% increase) to a record $105.3 million in net sales within the ETG.  The net sales increase in the FSG reflects organic growth of approximately 22%, as well as additional net sales of approximately $14 million contributed by the acquisition of Blue Aerospace in the first quarter of fiscal 2011.  The organic growth principally reflects higher sales of new products and services and an increase in demand for the FSG’s aftermarket replacement parts and repair and overhaul services, which were aided by increased airline capacity.  The net sales increase in the ETG reflects organic growth of approximately 6% and additional net sales of approximately $7 million contributed by a fiscal 2010 acquisition.  The organic growth in the ETG reflects some strength in demand for certain of our defense, space and electronic products.

Gross Profit and Operating Expenses

Our consolidated gross profit margin improved to 36.3% for the first six months of fiscal 2011 as compared to 35.9% for the first six months of fiscal 2010.  The increase in the consolidated gross profit margin reflects higher margins within the FSG and ETG due principally to the efficiencies realized through higher sales volumes.  Consolidated cost of sales for the first six months of fiscal 2011 and 2010 includes approximately $11.7 million and $10.5 million, respectively, of new product research and development expenses.

Selling, general and administrative (“SG&A”) expenses were $65.0 million and $53.2 million for the first six months of fiscal 2011 and fiscal 2010, respectively.  The increase in SG&A expenses was mainly due to higher operating costs, principally personnel related, associated with the growth in net sales discussed above including the acquired businesses. SG&A expenses as a percentage of net sales decreased from 18.4% in the first six months of fiscal 2010 to 18.1% in the first six months of fiscal 2011 principally reflecting the impact of higher net sales volumes on the fixed portion of SG&A expenses.

Operating Income

Operating income in the first six months of fiscal 2011 increased by 29% to a record $65.3 million as compared to operating income of $50.5 million in the first six months of fiscal 2010.  The increase in operating income reflects an $11.1 million increase (a 34% increase) in operating income of the FSG to a record $43.8 million in the first six months of fiscal 2011, up from $32.8 million in the first six months of fiscal 2010 and a $4.4 million increase (an 18% increase) to a record $29.2 million in operating income of the ETG in the first six months of fiscal 2011, up from $24.8 million in the first six months of fiscal 2010.  The increase in operating income of both the FSG and ETG in the first six months of fiscal 2011 reflects both higher sales volumes and improved operating margins as discussed below.

 
21

 

As a percentage of net sales, our consolidated operating income increased to 18.2% in the first six months of fiscal 2011, up from 17.5% in the first six months of fiscal 2010.  The increase in consolidated operating income as a percentage of net sales principally reflects an increase in the FSG’s operating income as a percentage of net sales to 17.2% in the first six months of fiscal 2011, up from 16.7% in the first six months of fiscal 2010 and an increase in the ETG’s operating income as a percentage of net sales to 27.7% for the first six months of fiscal 2011, up from 26.6% in the first six months of fiscal 2010.  The increase in consolidated operating income as a percentage of net sales reflects the higher gross profit margins for the FSG and ETG and reduction in consolidated SG&A expenses as a percentage of net sales as discussed above.

Interest Expense

Interest expense in the first six months of fiscal 2011 and 2010 was not material.