Growth and ConsistenCy
Heico® corporation annual report
FinanCial hiGhliGhts
Year ended October 31,(1)
(in thousands, except per share data)
Operating Data:
Net sales
Operating income
Interest expense
Net income attributable to HEICO
Weighted average number of common shares outstanding:(2)
Basic
Diluted
Per Share Data:(2)
Net income per share attributable to HEICO shareholders:
Basic
Diluted
Cash dividends per share(2)
Balance Sheet Data (as of October 31):
Total assets
Total debt (including current portion)
Redeemable noncontrolling interests(3)
Total shareholders’ equity(3)
2008
2009
2010
$ 582,347
105,788(4)
2,314
48,511(4)
$ 538,296
88,255
615
44,626(5)
$ 617,020
109,173(6)
508
54,938(6)
32,886
34,054
32,756
33,780
32,833
33,771
$
1.48(4)
1.42(4)
.080
$
1.36(5)
1.32(5)
.096
$
1.67(6)
1.62(6)
.108
$ 676,542
37,601
48,736
453,002
$ 732,910
55,431
56,937
490,658
$ 781,643
14,221
55,048
554,826
(1) Results include the results of acquisitions from each respective effective date.
(2) All share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in April 2010.
(3) Amounts for the years ended October 31, 2008 and 2009 have been adjusted retrospectively to conform to new accounting guidance on accounting for noncontrolling
interests (formerly referred to as minority interests) that we adopted effective November 1, 2009. See Note 1, Summary of Significant Accounting Policies, of the Notes
to Consolidated Financial Statements for more information.
(4) Operating income was reduced by an aggregate of $1,835 in impairment losses related to the write-down of certain intangible assets within the Electronic Technologies
Group (“ETG”) to their estimated fair values. The impairment losses were recorded as a component of selling, general and administrative expenses and decreased net
income attributable to HEICO by $1,140, or $.03 per basic and diluted share.
(5) Includes a benefit related to a settlement with the Internal Revenue Service concerning the income tax audit claimed by the Company on its U.S. federal filings for
qualified research and development activities incurred during fiscal years 2002 through 2005 as well as an aggregate reduction to the related liability for unrecognized
tax benefits for fiscal years 2006 through 2008, which increased net income attributable to HEICO by approximately $1,225, or $.04 per basic and diluted share.
(6) Operating income was reduced by an aggregate of $1,438 in impairment losses related to the write-down of certain intangible assets within the ETG to their estimated
fair values. The impairment losses were recorded as a component of selling, general and administrative expenses and decreased net income attributable to HEICO by
$889, or $.03 per basic and diluted share.
Forward-lookinG statements
Certain statements in this annual report constitute forward-looking statements which may involve risks and uncertainties. HEICO’s actual ex-
perience may differ materially from that discussed as a result of factors, including, but 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; HEICO’s ability to make acquisi-
tions and achieve operating synergies from acquired businesses, customer credit risk, interest and income tax rates and economic conditions
within and outside of the aviation, defense, space, medical, telecommunication and electronic industries, which could negatively impact our
costs and revenues. Parties receiving this material are encouraged to review all of HEICO’s filings with the Securities and Exchange Commission,
including, but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
manaGement messaGe
From left to right: eric a. mendelson, laurans a. mendelson, Victor h. mendelson, and thomas s. irwin.
heiCo’s senior manaGement
FoCused on Growth, ConsistenCy, and teamwork
For the past 20 years, HEICO Corporation’s Board of Directors has placed the Company’s management in
the hands of an executive team consisting of Chairman and Chief Executive Officer, Laurans A. Mendelson,
Co-Presidents, Eric A. Mendelson and Victor H. Mendelson, and Executive Vice President and Chief Financial
Officer, Thomas S. Irwin. While HEICO was experiencing financial and operating difficulties in the late 1980s,
Laurans, Eric and Victor Mendelson became the Company’s largest shareholders after Victor Mendelson
suggested that they seek to take over management of the Company in order to build a strong manufacturing
and service company.
After taking over in 1990, along with Thomas Irwin, they set out to build HEICO into a successful and
profitable business which would yield superior returns to the Company’s shareholders over time. Together,
they have collaborated in HEICO’s transformation from a company with a net loss of $519 thousand, net sales
of approximately $26 million and a market capitalization of approximately $25 million in 1990 to a diversified
aerospace and defense company with fiscal 2010 operating income of more than $109 million on sales of
slightly more than $617 million and with a market capitalization of approximately $1.5 billion.
Dear Fellow Shareholder:
compound annual growth in sales and operating
Since 1990, HEICO Corporation has experienced
another excellent year for us. Net income increased
income of approximately 20%. Fiscal 2010 was
We believe the upturn in commercial aircraft-related
activity will continue in 2011. HEICO is perfectly
situated to reap the benefits of this upturn through our
commercial aircraft aftermarket businesses and our
23% to a record $54,938,000, or $1.62 per diluted share,
commercial OEM activities relating to new aircraft
up from $44,626,000, or $1.32 per diluted share, in
production. While we cannot be certain of the future
fiscal 2009. Our operating income increased 24%
and there are risks and uncertainties (which are listed
to a record $109,173,000, up from $88,255,000 in
at the bottom of the inside cover of this report), we
fiscal 2009. Our net sales increased 15% to a record
believe both the short and long term outlooks for
$617,020,000, up from $538,296,000 in fiscal 2009.
commercial aviation remain strong, as commercial air
HEICO declared its 65th consecutive semi-annual
cash dividend since 1979 and, in April 2010, declared
travel has recovered beyond 2008 levels and capacity
is, once again, being added to the system.
a 5-for-4 stock split, which was the 11th stock dividend
We also remain committed to our defense, space,
or stock split declared since the company started
medical and other markets. Although we do not know
making them in 1995. We also completed the
which military programs will be altered in the future,
acquisition of dB Control and were named one of the
preliminary proposals from the U.S. Department of
“Best 100 Small Companies” by Forbes Magazine.
Defense indicate that HEICO’s defense companies will
Our growth was broadly based across nearly all of
see limited impact in the near-term.
our product lines and markets served. As the year
We thank all of our fellow shareholders, our remarkable
progressed, our commercial aviation aftermarket
Team Members and the members of our Board of
businesses witnessed greater growth than in the first
Directors for their continuing support and confidence.
half of the year, while our defense, space, commercial
Equally important, we thank our customers for their
aircraft OEM and medical-markets also grew. We
confidence in HEICO and our people.
credit our incredible Team Members for making
this happen.
Sincerely,
Gone are the days when HEICO relied exclusively on
a small number of parts or a single jet engine program
for the bulk of its revenues. HEICO generates its revenues
from a plethora of platforms in several industries or
sub-industries. As a well diversified growth company,
HEICO is structured to minimize the deleterious
effects of downturns and to accentuate growth during
more normal times.
Laurans A. Mendelson
Eric A. Mendelson
Chairman &
Co-President
Chief Executive Officer
Thomas S. Irwin
Victor H. Mendelson
Executive Vice President &
Co-President
Chief Financial Officer
cOrpOrate prOfile
HEICO Corporation is a rapidly growing aerospace, defense
and electronics company focused on niche markets and
cost-saving solutions for its customers. HEICO’s products
are found in the most demanding applications requiring
high-reliability parts and components, such as aircraft,
spacecraft, defense equipment, medical equipment, and
Net SaleS
(in millions)
$617.0
$582.3
$507.9
$538.3
$392.2
06
07
08
09
10
OperatiNg iNcOme
(in millions)
telecommunications systems. Through our Flight Support
$105.8
$109.2
Group, we are: the world’s largest provider of commercial,
$86.0
$88.3
non-OEM, FAA-approved aircraft replacement parts; a
$66.9
significant provider of aircraft accessories component repair
& overhaul services for avionic, electro-mechanical, flight
surface, hydraulic and pneumatic applications; a leader in
niche aircraft parts distribution; and a manufacturer of other
critical aircraft parts.
Our Electronic Technologies Group designs and manufactures
mission-critical niche electronics, electro-optical, microwave
and other components found in defense, space, medical,
homeland security, telecom and other complex equipment
used worldwide.
HEICO’s customers include most of the world’s airlines,
airmotives, numerous prime defense contractors, satellite
manufacturers, medical equipment manufacturers,
government agencies, telecommunications equipment
suppliers and others.
06
07
08
09
10
Net iNcOme
(in millions)
$54.9
$48.5
$44.6
$39.0
$31.9
06
07
08
09
10
Net iNcOme per Share
(diluted)
$1.62
$1.42
$1.32
$1.16
$.96
06
07
08
09
10
QueStiONS & aNSwerS Q&A
Below is a Question and Answer Session with the members of HEICO’s Office of the
CEO — Chairman & CEO, Laurans A. Mendelson, Executive Vice President & CFO,
Thomas S. Irwin, and Co-Presidents, Eric A. Mendelson and Victor H. Mendelson.
The questions about HEICO and issues impacting it are the ones we most commonly
receive from shareholders and other investors. We believe the answers provide
further insight into HEICO’s strategy and operations.
Q: What do you think the outlook is for commercial aviation?
A: Presently, we are optimistic about commercial aviation for both fiscal 2011 and the long term. Commercial
aviation’s recovery started slowly in late 2009 and continued to build throughout 2010. As air travel demand
returned to pre-2008 levels, aircraft operators needed and should continue to need replacement parts and
services which HEICO offers.
Q: How do you view the defense market’s outlook?
A: While there is uncertainty in the United States’ and certain other countries’ defense budgets, we continue to
believe there is opportunity for HEICO if we focus on products found across multiple platforms and which
are basic, mission-critical and high reliability subcomponents. During the past twelve months, we made two
defense-related acquisitions serving niche markets which we believe are growing. We will continue to seek
appropriate opportunities in this sector.
Q: Speaking of acquisitions, please tell us about HEICO’s acquisitions in the past 12 months?
A: In calendar 2010, HEICO acquired dB Control, a leading manufacturer of Traveling Wavetube Amplifiers,
which are used in very high powered radar, electronic warfare and jamming applications. dB Control
has deep penetration in the growing Unmanned Aerial Vehicle market, and is an important supplier on
a variety of recent and in-production programs.
In December 2010, we acquired Blue Aerospace, a distributor and supplier of critical airframe and other
components for military aircraft, such as the C-130 and its derivatives, the F-16 and the P-3. Blue’s primary
markets are foreign military agencies which often acquire retired aircraft from the United States military and
require a wide range of repair and overhaul services for their operations. Blue fills this niche by providing
much-needed parts and services with unmatched customer service.
2 | 3
Q: Does HEICO plan to continue making acquisitions?
A: Definitely. We remain as active in the acquisition market as ever and fully intend to continue acquiring
top-notch companies looking for an excellent home. We value the entrepreneurial approach to businesses
which we acquired from the founders-owners-managers of these businesses and HEICO is particularly
adept at allowing these businesses to continue under existing management, while ensuring the businesses
follow HEICO’s financial and regulatory discipline. The overwhelming majority of people who sold
companies to us remain with us today by their own choice. We are very proud that they continue to call
their companies home even after they sell the businesses to HEICO.
Q: How does HEICO’s capital structure look?
A: HEICO is extremely well capitalized, which gives us room to finance our business and make acquisitions.
We utilize our $300 million line of credit for acquisitions and pay it down with our strong cash flow from
operations, which was approximately 185% of our 2010 net income. In fact, during each of the past 4 years,
HEICO has paid back all or most of its borrowings during the year through our strong cash generation.
While we are willing to take on greater debt for larger acquisitions which we deem appropriate, we are
averse to adding debt for purposes which do not enhance our growth. We have followed this formula for the
past 20 years and it has inured to the company’s benefit, as well as to the benefit of our shareholders and
Team Members.
Q: Where there any significant personnel changes in fiscal 2010?
A: Luis J. Morell, the President of the HEICO Repair Group, also assumed responsibility for the HEICO Parts
Group and now leads our parts and services aftermarket operations. Luis is a truly talented Team Member
who started as Controller of one of our subsidiaries in 1992, rose to run and successfully build our aircraft
accessories component repair and overhaul businesses to significant market leadership and is someone who
fits perfectly with HEICO’s culture. We also saw a fairly typical amount of movement between positions,
retirements and new additions to the company. We are very proud that HEICO has a stable Team Member
base upon which we rely. We recognize that our business is rendered successful by our remarkable people,
not by equipment, financing or desks full of computers. We know that if we treat people properly and fairly,
they will do the same for us and that there is plenty of room to grow together.
Q: What market expansion opportunities do you think are available to HEICO?
A: Market expansion opportunities exist both geographically and by end use. We continue to increase our
efforts to work with international partners in selling opportunities, engineering opportunities and production
opportunities. We also continue to work on penetrating new segments of existing product markets, like
aviation, medical, space and defense equipment.
cOmmercial aviatiON: a healthY OutlOOK
synonymous with quality, service, dependability
O ver the years, the HEICO name has become
industry. HEICO pioneered and developed an industry segment
and cost-saving solutions in the commercial aviation
whereby we use advanced engineering techniques to develop
a broad range of FAA-approved jet engine replacement parts
offered as an alternative to higher cost parts. After achieving
widespread success, we expanded our efforts to include a host
of other aircraft controls and accessories located throughout
the plane.
As our parts business has grown, we have also dramatically
developed and expanded our accessories component repair and
overhaul operations to provide avionic, electro-mechanical,
flight surface, hydraulic, pneumatic and wheel & brake
components through our ten FAA and EASA licensed repair
above: a jet engine part produced
stations. As is the case with HEICO’s parts operations, the
by heicO’s parts group. these high
HEICO Repair Group is synonymous with high quality and,
quality parts and ones like them save
airlines significant sums every year.
often, proprietary repairs for the growing aviation community.
HEICO’s distribution businesses are value-added companies
which provide critical services to customers and principals
alike. While these businesses are distinct from our parts and
repair companies, they are equally committed to delivering
unparalleled quality and dependability to the market place.
4 | 5
above: heicO’s parts and repair services are
found in nearly all large commercial aircraft and
many regional aircraft in operation today. heicO
is committed to serving this growing market.
right: a team member at a heicO repair
group facility in miami, florida inspects a
recently overhauled aircraft engine cowling.
heicO’s repair group is a significant participant
in the aircraft accessories component repair
and overhaul industry.
reSearch & maNufacturiNg: a StaNDarD Of eXcelleNce
products. Although others turned away from new product development during the recent economic
K ey to HEICO’s success has been our ability to constantly design, manufacture or repair very complex
downturn, HEICO companies remained fully committed to expanding our product offering by retaining
and attracting uniquely qualified engineering talent to solve our customers’ problems.
HEICO will continue to invest in research, engineering and product development, as we recognize this is the
lifeblood of our future and has been responsible for much of our success.
We also know that advanced manufacturing and production capability is critical to our ability to offer new
products and services, as well as to produce them in a cost-efficient manner. This allows us to provide our
solutions to our customers at a reasonable cost, thus furthering the value we provide to these customers.
HEICO will continue to invest in and upgrade its production capabilities, but will do so in a sensible fashion
whereby we utilize the correctly sized equipment for tasks and not focus on large equipment beyond our needs.
6 | 7
Opposite: A HEICO engineering Team Member adjusts the lenses on a
computerized microscope during the aircraft parts product development
process. Advanced technology and equipment are key ingredients in our
product development efforts.
Above: An advanced robotic stamping system at the Electronic
Technologies Group’s Tampa, Florida facility manufactures components
for electronic systems.
Right: Electromagnetic and Radio Frequency Interference Shielding
produced by the Electronic Technologies Group’s Leader Tech subsidiary.
OppOrtuNitieS: ServiNg Niche marKetS
in fiscal 2010, heicO dramatically
expanded its presence in the
advanced radar market by
acquiring dB control, a leading
supplier of traveling wavetube
amplifiers used in high powered
radar systems. we believe this
is a growing market.
By doing this, we believe we truly answer specific needs and are not a “me too” supplier to our markets.
P roviding products and services in markets which are inadequately served by others is HEICO’s specialty.
deeply develop products whereby customers come to know HEICO’s subsidiaries as the “go to” source for certain
This niche product strategy allows our companies to have singular focus on their product lines and to
specific components.
HEICO’s niche products leave a broad footprint over a number of industries. Examples of our niche products in-
clude our line of hybrid DC-to-DC power converters, laser rangefinder receivers, microwave satellite components,
infrared testing equipment, electromagnetic and radio frequency interference shielding, high voltage connectors
traveling wavetube amplifiers, FAA-approved aircraft replacement parts and others. HEICO looks forward to
finding more niche products to offer to our customers at existing HEICO companies and companies we acquire.
These niche products are utilized on both commercial and military aircraft, missiles, targeting systems, satellites,
rockets, medical imaging equipment, medical lasers, telecommunications equipment and a host of other systems.
Many of these niche products are utilized by more than one industry, which provides HEICO with greater stability
and a wide array of experience that serves as an important knowledge base.
8 | 9
above: an emergency back-up power supply
is assembled at the company’s radiant power
corp. subsidiary. these faa-required systems
are among radiant’s specialties.
left: Numerous electronic technologies group
companies produce critical components found
in medical equipment, such as ct scanners.
Our products on this type of equipment include
power supplies, high-voltage connectors, cable
assemblies and other items which are critical to
system operations.
iNterNatiONal StrategY: cOmmitmeNt aND Service
that, as the world develops, there is enormous opportunity
H EICO has developed an international reach. We recognize
operations in England, Canada and the United States, and with sales
for us outside of the United States. With manufacturing
or service operations in China, Dubai, England, Germany, India and
Singapore, we truly cover the globe. Nearly one-third of HEICO’s sales
are derived from outside of the United States, including sales from our
top: heicO team members
creative airline partnerships with non-U.S. carriers, such as British
review aircraft parts and sales
Airways, China Aviation Import and Export Group, Japan Airlines and
campaigns at the company’s
Lufthansa. We embrace and participate in aviation’s truly global nature.
worldwide headquarters
facility in hollywood, florida.
the exterior of the facility is
shown above.
10 | 11
Our defense-related businesses also serve a growing number of foreign
military agencies allied with the United States.
While growing our international business, HEICO continues to focus
and grow in our product lines in the United States market. Examples
of unique partnerships with United States carriers that help fuel our
growth expectations include our strategic relationships with American
Airlines, Delta Air Lines and United Airlines. Similarly, our United
States defense-related business continues to grow, as the domestic market
is, and will remain, the largest defense market for us.
above: heicO’s flight Support group operates internationally to serve growing
markets. among its significant partners is lufthansa, which owns 20% of heicO’s
flight Support group.
fiNaNcial StatemeNtS
aND Other iNfOrmatiON
Selected Financial Data
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity
and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management’s Report on Internal Control Over
Financial Reporting and Executive Officer Certifications
Report of Independent Registered Public
Accounting Firm
Market for Company’s Common Equity and
Related Stockholder Matters
13
14
26
27
28
30
31
55
56
57
12 |
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
Selected Financial data
Year ended October 31,(1)
2006
2007
2008
2009
2010
(in thousands, except per share data)
Operating Data:
Net sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income (expense)
Net income attributable to HEICO
Weighted average number of
common shares outstanding:(2)
Basic
Diluted
Per Share Data:(2)
Net income per share attributable to
HEICO shareholders:
Basic
Diluted
Cash dividends per share(2)
$ 392,190
142,513
75,646
66,867
3,523
639
31,888(4)
$ 507,924
177,458
91,444
86,014
3,293
95
39,005(5)
$ 582,347
210,495
104,707
105,788(6)
2,314
(637)
48,511(6)
$ 538,296
181,011
92,756
88,255
615
205
44,626(7)
$ 617,020
222,347
113,174
109,173(8)
508
390
54,938(8)
31,356
33,248
32,145
33,664
32,886
34,054
32,756
33,780
32,833
33,771
$
1.02(4)
0.96(4)
.064
$
1.21(5)
1.16(5)
.064
$
1.48(6)
1.42(6)
.080
$
1.36(7)
1.32(7)
.096
$
1.67(8)
1.62(8)
.108
Balance Sheet Data (as of October 31):
Cash and cash equivalents
Total assets
Total debt (including current portion)
Redeemable noncontrolling interests(3)
Total shareholders’ equity(3)
$
4,999
534,815
55,061
49,525
331,034
$
4,947
631,302
55,952
49,370
395,169
$ 12,562
676,542
37,601
48,736
453,002
$
7,167
732,910
55,431
56,937
490,658
$
6,543
781,643
14,221
55,048
554,826
(1) Results include the results of acquisitions from each respective effective date. See Note 2, Acquisitions, of the Notes to Consolidated Financial Statements for
more information.
(2) All share and per share information has been adjusted retrospectively to reflect a 5-for-4 stock split effected in April 2010.
(3) Amounts for the years ended October 31, 2006 to 2009 have been adjusted retrospectively to conform to new accounting guidance on accounting for non-
controlling interests (formerly referred to as minority interests) that we adopted effective November 1, 2009. See Note 1, Summary of Significant Accounting
Policies, of the Notes to Consolidated Financial Statements for more information.
(4) Includes the benefit of a tax credit (net of related expenses) for qualified research and development activities claimed for certain prior years, which increased
net income by $1,002, or $.03 per basic and diluted share.
(5) Includes the benefit of a tax credit (net of related expenses) for qualified research and development activities recognized for the full fiscal 2006 year pursuant
to the retroactive extension in December 2006 of Section 41, “Credit for Increasing Research Activities,” of the Internal Revenue Code, which increased net
income by $535, or $.02 per basic and diluted share.
(6) Operating income was reduced by an aggregate of $1,835 in impairment losses related to the write-down of certain intangible assets within the Electronic Tech-
nologies Group (“ETG”) to their estimated fair values. The impairment losses were recorded as a component of selling, general and administrative expenses
and decreased net income attributable to HEICO by $1,140 or $.03 per basic and diluted share.
(7) Includes a benefit related to a settlement with the Internal Revenue Service concerning the income tax credit claimed by the Company on its U.S. federal filings
for qualified research and development activities incurred during fiscal years 2002 through 2005 as well as an aggregate reduction to the related liability for
unrecognized tax benefits for fiscal years 2006 through 2008, which increased net income attributable to HEICO by approximately $1,225, or $.04 per basic and
diluted share.
(8) Operating income was reduced by an aggregate of $1,438 in impairment losses related to the write-down of certain intangible assets within the ETG to their
estimated fair values. The impairment losses were recorded as a component of selling, general and administrative expenses and decreased net income attribut-
able to HEICO by $889, or $.03 per basic and diluted share.
| 13
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
ManaGeMent’S diScUSSiOn and analYSiS
OF Financial cOnditiOn and ReSUltS OF OPeRatiOnS
O verview
Our business is comprised of two operating segments, the Flight Support Group (“FSG”) and the Electronic Technologies
Group (“ETG”).
The Flight Support Group consists of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, which
primarily:
• Designs, Manufactures, Repairs, Overhauls and Distributes Jet Engine and Aircraft Component Replacement Parts. The
Flight Support Group designs, manufactures, repairs, overhauls and distributes jet engine and aircraft component replacement
parts. The parts and services are approved by the Federal Aviation Administration (“FAA”). The Flight Support Group also
manufactures and sells specialty parts as a subcontractor for aerospace and industrial original equipment manufacturers and
the United States government.
The Electronic Technologies Group consists of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries,
which primarily:
• Designs and Manufactures Electronic, Microwave and Electro-Optical Equipment, High-Speed Interface Products, High
Voltage Interconnection Devices and High Voltage Advanced Power Electronics. The Electronic Technologies Group designs,
manufactures and sells various types of electronic, microwave and electro-optical equipment and components, including
power supplies, laser rangefinder receivers, infrared simulation, calibration and testing equipment; power conversion products
serving the high-reliability military, space and commercial avionics end-markets; underwater locator beacons used to locate
data and voice recorders utilized on aircraft and marine vessels; electromagnetic interference shielding for commercial and
military aircraft operators, traveling wave tube amplifiers and microwave power modules used in radar, electronic warfare, on-
board jamming and countermeasure systems, electronics companies and telecommunication equipment suppliers; advanced
high-technology interface products that link devices such as telemetry receivers, digital cameras, high resolution scanners,
simulation systems and test systems to computers; high voltage energy generators interconnection devices, cable assemblies
and wire for the medical equipment, defense and other industrial markets; high frequency power delivery systems for the
commercial sign industry; and high voltage power supplies found in satellite communications, CT scanners and in medical
and industrial x-ray systems.
Our results of operations during each of the past three fiscal years have been affected by a number of transactions. This discus-
sion of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included herein. All per share information has been adjusted retrospectively to reflect a 5-for-4 stock split
effected in April 2010. See Note 1, Summary of Significant Accounting Policies – Stock Split, of the Notes to Consolidated Financial
Statements for additional information regarding this stock split. For further information regarding the acquisitions discussed below,
see Note 2, Acquisitions, of the Notes to Consolidated Financial Statements. Acquisitions are included in our results of operations
from the effective dates of acquisition. See Critical Accounting Policies below for more information regarding how we account for
acquisitions in accordance with new accounting guidance adopted as of the beginning of fiscal 2010.
In November 2007, we acquired, through an 80%-owned subsidiary of HEICO Aerospace, all of the stock of a European
company that supplies aircraft parts for sale and exchange and provides repair management services.
In January 2008, we acquired, through HEICO Aerospace, certain assets and assumed certain liabilities of a U.S. company that
designs and manufactures FAA-approved aircraft and engine parts primarily for the commercial aviation market. We have since
combined the operations of the acquired entity within other subsidiaries of HEICO Aerospace.
In February 2008, we acquired, through HEICO Aerospace, an 80.1% interest in certain assets and certain liabilities of a U.S.
company that is an FAA-approved repair station which specializes in avionics primarily for the commercial aviation market. The
remaining noncontrolling interest is principally owned by certain members of the acquired company’s management.
In May 2009, we acquired, through HEICO Electronic, 82.5% of the stock of VPT, Inc. (“VPT”). VPT is a designer and provider
of power conversion products principally serving the defense, space and aviation industries. The remaining 17.5% continues to be
owned by an existing VPT shareholder which is also a supplier to the acquired company.
In October 2009, we acquired, through HEICO Electronic, the business, assets and certain liabilities of the Seacom division of
privately-held Dukane Corp. and formed a new subsidiary, Dukane Seacom, Inc. (“Seacom”). Seacom is a designer and manufacturer
of underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship voyage recorders and
various other devices which have been submerged under water.
In February 2010, we acquired, through HEICO Electronic, substantially all of the assets and assumed certain liabilities of dB
Control. dB Control produces high-power devices used in both defense and commercial applications.
14 |
The purchase price of each of the above referenced acquisitions was paid in cash using proceeds from our revolving credit
facility and is not material or significant to our consolidated financial statements. The aggregate cost paid in cash for acquisitions,
including additional purchase consideration payments, was $39.1 million, $59.8 million and $24.8 million in fiscal 2010, 2009 and
2008, respectively.
In April 2008, we acquired, through HEICO Aerospace, an additional 7% equity interest in one of our subsidiaries, which
increased our ownership interest to 58%. In December 2008, we acquired, through HEICO Aerospace, an additional 14% equity
interest in the subsidiary, which increased our ownership interest to 72%.
Critical Accounting Policies
We believe that the following are our 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 is recognized on the percentage-of-completion
method, measured by the percentage of costs incurred to date to estimated total costs for each contract. This method is used because
management considers costs incurred to be the best available measure of progress on these contracts. Variations in actual labor
performance, changes to estimated profitability and final contract settlements may result in revisions to cost estimates. Revisions
in cost estimates as contracts progress have the effect of increasing or decreasing profits in the period of revision. Provisions for
estimated losses on uncompleted contracts are made in the period in which such losses are determined. For fixed price contracts in
which costs cannot be dependably estimated, revenue is recognized on the completed-contract method. A contract is considered
complete when all significant costs have been incurred or the item has been accepted by the customer. The percentage of our net
sales recognized under the percentage-of-completion method was approximately 2%, 1% and 3% in fiscal 2010, 2009 and 2008,
respectively. The aggregate effects of changes in estimates relating to long-term contracts did not have a significant effect on net
income or net income per share in fiscal 2010, 2009 or 2008.
Valuation of Accounts Receivable
The valuation of accounts receivable requires that we set up an allowance for estimated uncollectible accounts and record a
corresponding charge to bad debt expense. We estimate uncollectible receivables based on such factors as our prior experience, our
appraisal of a customer’s ability to pay and economic conditions within and outside of the aviation, defense, space, medical, telecom-
munication and electronic industries. Actual bad debt expense could differ from estimates made.
Valuation of Inventory
Inventory is stated at the lower of cost or market, with cost being determined on the first-in, first-out or the average cost basis.
Losses, if any, are recognized fully in the period when identified.
We periodically evaluate the carrying value of inventory, giving consideration to factors such as its physical condition, sales
patterns and expected future demand in order to estimate the amount necessary to write down its slow moving, obsolete or damaged
inventory. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inven-
tory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
In accordance with industry practice, all inventories are classified as a current asset including portions with long production
cycles, some of which may not be realized within one year.
Business Combinations
As further explained in New Accounting Pronouncements below, we adopted new accounting guidance for business combina-
tions effective prospectively for acquisitions consummated on or after November 1, 2009 (the beginning of fiscal 2010). Under the
new guidance, any contingent consideration is recognized as a liability at fair value as of the acquisition date with subsequent fair
value adjustments recorded in operations and acquisition costs are generally expensed as incurred. For acquisitions consummated
prior to fiscal 2010, contingent consideration is accounted for as an additional cost of the respective acquired entity when paid and
acquisition costs were capitalized as part of the purchase price.
We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabili-
ties assumed based on their estimated fair values, with any excess recorded as goodwill. Determining the fair value of assets acquired
and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including
assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. We
determine the fair values of such assets, principally intangible assets, generally in consultation with third-party valuation advisors.
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OF Financial cOnditiOn and ReSUltS OF OPeRatiOnS
Valuation of Goodwill and Other Intangible Assets
We test goodwill 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 fully recoverable. In evaluating the recoverability of goodwill, we compare the fair value of
each of our 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 is recognized in the amount
by which the carrying value of the reporting unit’s goodwill exceeds its implied fair value, if any. The fair values of our reporting units
were determined using a weighted average of a market approach and an income approach. Under the market approach, fair values are
estimated using an average of published multiples for the industry sectors in which our reporting units operate. We calculate fair values
under the income approach by taking estimated future cash flows that are based on internal projections and other assumptions deemed
reasonable by management and discounting them using our estimated weighted average cost of capital. Based on the annual goodwill
impairment test as of October 31, 2010, 2009 and 2008, we determined there was no impairment of our goodwill. The fair value of each
of our reporting units as of October 31, 2010 significantly exceeded their carrying value.
We test each non-amortizing intangible asset (principally trade names) for impairment annually as of October 31, or more fre-
quently if events or changes in circumstances indicate that the asset might be impaired. To derive the fair value of our trade names,
we utilize an income approach, which relies upon management’s assumptions of royalty rates, projected revenues and discount rates.
We also test each amortizing intangible asset for impairment if events or circumstances indicate that the asset might be impaired.
The test consists of determining whether the carrying value of such assets will be recovered through undiscounted expected future
cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an
impairment loss based on the excess of the carrying amount over the fair value of the assets. The determination of fair value requires
us to make a number of estimates, assumptions and judgments of such factors as projected revenues and earnings and discount rates.
Based on the intangible impairment tests conducted during fiscal 2010, 2009 and 2008, we recognized pre-tax impairment losses
related to the write-down of certain customer relationships of $1.1 million, $.2 million and $1.3 million respectively, and the write-
down of certain trade names of $.3 million, $.1 million and $.5 million respectively, within the ETG to their estimated fair values.
The impairment losses were recorded as a component of selling, general and administrative expenses in the Company’s Consolidated
Statements of Operations.
Assumptions utilized to determine fair value in the goodwill and intangible assets impairment tests are highly judgmental. If
there is a material change in such assumptions or if there is a material change in the conditions or circumstances influencing fair
value, we could be required to recognize a material impairment charge.
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 Consolidated Statements of Operations:
Year ended October 31,
Net sales
Cost of sales
Selling, general and administrative expenses
Total operating costs and expenses
Operating income
Net sales by segment:
Flight Support Group
Electronic Technologies Group
Intersegment sales
Operating income by segment:
Flight Support Group
Electronic Technologies Group
Other, primarily corporate
16 |
2010
$ 617,020,000
394,673,000
113,174,000
507,847,000
$ 109,173,000
$ 412,337,000
205,648,000
(965,000)
$ 617,020,000
$
67,896,000
56,126,000
(14,849,000)
$ 109,173,000
2009
2008
$ 538,296,000
357,285,000
92,756,000
450,041,000
88,255,000
$
$ 395,423,000
143,372,000
(499,000)
$ 538,296,000
$
$
60,003,000
39,981,000
(11,729,000)
88,255,000
$ 582,347,000
371,852,000
104,707,000
476,559,000
$ 105,788,000
$ 436,810,000
146,044,000
(507,000)
$ 582,347,000
$ 81,184,000
38,775,000
(14,171,000)
$ 105,788,000
Table continues on next page
Year ended October 31,
2010
2009
2008
Net sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income (expense)
Income tax expense
Net income attributable to noncontrolling interests
Net income attributable to HEICO
100.0%
36.0%
18.3%
17.7%
.1%
.1%
5.9%
2.8%
8.9%
Comparison of Fiscal 2010 to Fiscal 2009
Net Sales
100.0%
33.6%
17.2%
16.4%
.1%
–
5.2%
2.8%
8.3%
100.0%
36.1%
18.0%
18.2%
.4%
(.1%)
6.1%
3.2%
8.3%
Net sales in fiscal 2010 increased by 14.6% to a record $617.0 million, as compared to net sales of $538.3 million in fiscal 2009.
The increase in net sales reflects an increase of $62.3 million (a 43.4% increase) to a record $205.6 million in net sales within the
ETG and an increase of $16.9 million (a 4.3% increase) to $412.3 million in net sales within the FSG. The net sales increase in the
ETG reflects the additional net sales totaling approximately $40 million contributed by a February 2010 acquisition and two fiscal
2009 acquisitions as well as organic growth of approximately 12%. The organic growth in the ETG principally reflects strength in
customer demand for certain of our medical equipment, defense, electronic and satellite products. The 4.3% increase in net sales of
the FSG, which is entirely organic growth, is primarily attributable to higher net sales of our industrial products as well as higher net
sales of our commercial aviation products reflecting the recent capacity growth of our commercial airline customers during the third
and fourth quarters.
Our net sales in fiscal 2010 and 2009 by market approximated 62% and 68%, respectively, from the commercial aviation
industry, 23% and 20%, respectively, from the defense and space industries, and 15% and 12%, respectively, from other industrial
markets including medical, electronics and telecommunications.
Gross Profit and Operating Expenses
Our consolidated gross profit margin increased to 36.0% in fiscal 2010 as compared to 33.6% in fiscal 2009, mainly reflecting
higher margins within the FSG principally due to a more favorable product sales mix. Consolidated cost of sales in fiscal 2010 and
2009 includes approximately $22.7 million and $19.7 million, respectively, of new product research and development expenses.
Selling, general and administrative (“SG&A”) expenses were $113.2 million and $92.8 million in fiscal 2010 and fiscal 2009,
respectively. The increase in SG&A expenses is mainly due to the operating costs of the fiscal 2010 and fiscal 2009 acquisitions
referenced above, and higher operating costs, principally personnel related, associated with the growth in consolidated net sales.
SG&A expenses as a percentage of net sales increased from 17.2% in 2009 to 18.3% in fiscal 2010 reflecting a higher level of accrued
performance awards based on the improved consolidated operating results.
Operating Income
Operating income in fiscal 2010 increased by 23.7% to a record $109.2 million as compared to operating income of $88.3
million in fiscal 2009. The increase in operating income reflects a $16.1 million increase (a 40.4% increase) to a record $56.1 million
in operating income of the ETG in fiscal 2010, up from $40.0 million in fiscal 2009 and a $7.9 million increase (a 13.2% increase)
in operating income of the FSG to $67.9 million in fiscal 2010, up from $60.0 million in fiscal 2009, partially offset by a $3.1 million
increase in corporate expenses. The increase in operating income for the ETG in fiscal 2010 reflects the impact of the fiscal 2010 and
2009 acquisitions and organic sales growth. The increase in operating income for the FSG in fiscal 2010 reflects the aforementioned
higher gross profit margins. The increase in corporate expenses in fiscal 2010 is primarily due to the higher level of accrued
performance awards discussed previously.
As a percentage of net sales, our consolidated operating income increased to 17.7% in fiscal 2010, up from 16.4% in fiscal 2009.
The increase in consolidated operating income as a percentage of net sales reflects an increase in the FSG’s operating income as a
percentage of net sales to 16.5% in fiscal 2010 from 15.2% in fiscal 2009 resulting primarily from the favorable product mix previ-
ously referenced. The ETG’s operating income as a percentage of net sales was 27.3% in fiscal 2010, compared to 27.9% reported in
fiscal 2009, reflecting variations in product mix, including the impact of certain recently acquired businesses.
Interest Expense
Interest expense in fiscal 2010 and 2009 was not material.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
ManaGeMent’S diScUSSiOn and analYSiS
OF Financial cOnditiOn and ReSUltS OF OPeRatiOnS
Other Income
Other income in fiscal 2010 and 2009 was not material.
Income Tax Expense
Our effective tax rate for fiscal 2010 increased to 33.7% from 31.9% in fiscal 2009. The effective tax rate for fiscal 2009 was lower
due to a settlement reached with the Internal Revenue Service (“IRS”) pertaining to the income tax credit claimed on HEICO’s U.S.
federal filings for qualified research and development activities incurred for fiscal years 2002 through 2005 and a resulting reduction
to the related liability for unrecognized tax benefits for fiscal years 2006 through 2008 based on new information obtained during the
examination. In addition, the effective tax rate for fiscal 2010 was higher than fiscal 2009 as the fiscal 2010 tax expense only reflects
a credit for qualifying research and development activities through December 31, 2009 due to the expiration of such tax credits and
was higher due to an increased effective state income tax rate principally as a result of the previously mentioned fiscal 2010 and
2009 acquisitions. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which was approved
December 17, 2010, includes an extension of research and development tax credits retroactive to December 31, 2009. No research
and development tax credits have been included for periods after December 31, 2009 pending completion of a study of qualifying
research and development activities under the new law.
For a detailed analysis of the provision for income taxes, see Note 6, Income Taxes, of the Notes to Consolidated Financial
Statements.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held in the FSG and the noncon-
trolling interests held in certain subsidiaries of the FSG and ETG. The increase in net income attributable to noncontrolling interests
in fiscal 2010 compared to fiscal 2009 is related to higher earnings of certain FSG and ETG subsidiaries in which noncontrolling
interests exist.
Net Income Attributable to HEICO
Net income attributable to HEICO was a record $54.9 million, or $1.62 per diluted share, in fiscal 2010 compared to $44.6
million, or $1.32 per diluted share, in fiscal 2009 reflecting the increased operating income referenced above. Diluted net income per
share attributable to HEICO shareholders in fiscal 2009 included a $.04 per diluted share benefit from the aforementioned favorable
IRS settlement.
Outlook
As we look forward to fiscal 2011, HEICO will continue its focus on developing new products and services, further market
penetration, additional acquisition opportunities and maintaining its financial strength. As the commercial airline industry expects
an increase in capacity during 2011, we are targeting growth in fiscal 2011 full year net sales and net income over fiscal 2010 levels.
In our electronic, defense and space markets, we are pleased with increasing demand for some of our commercial products and
overall stable demand for our defense products.
Comparison of Fiscal 2009 to Fiscal 2008
Net Sales
Net sales in fiscal 2009 decreased by 7.6% to $538.3 million compared to net sales of $582.3 million in fiscal 2008. The decrease
in net sales reflects a decrease of $41.4 million (a 9.5% decrease) to $395.4 million in net sales within the FSG and a decrease of $2.7
million (a 1.8% decrease) to $143.4 million in net sales within the ETG. The net sales decline in both the FSG and the ETG reflects
the impact of the continued global recession on our businesses, which has resulted in a reduction in customer demand. The net sales
decrease within the FSG reflects lower demand for our aftermarket replacement parts and repair and overhaul services resulting
from worldwide airline capacity cuts and efforts to reduce spending and conserve cash by the airline industry. Within the ETG, we
are generally seeing some strength in our defense related businesses, including space and homeland security products, but continued
weakness in customer demand for certain of our medical, telecommunication and electronic products. The net sales decline in the
ETG was partially offset by the favorable impact on net sales from acquisitions of approximately $17 million.
Our net sales in fiscal 2009 and 2008 by market approximated 68% and 69%, respectively, from the commercial aviation
industry, 20% and 16%, respectively, from the defense and space industries, and 12% and 15%, respectively, from other industrial
markets including medical, electronics and telecommunications.
18 |
Gross Profit and Operating Expenses
Our consolidated gross profit margin decreased to 33.6% in fiscal 2009 as compared to 36.1% in fiscal 2008, mainly reflecting
lower margins within the FSG due principally to a less favorable product mix as well as the impact of lower sales volumes on fixed
manufacturing costs and a higher investment by HEICO in the research and development of new products and services. Consoli-
dated cost of sales in fiscal 2009 and 2008 includes approximately $19.7 million and $18.4 million, respectively, of new product
research and development expenses.
SG&A expenses were $92.8 million and $104.7 million in fiscal 2009 and 2008, respectively. The decrease in SG&A expenses
is mainly due to lower operating costs, principally personnel related, associated with cost reduction initiatives and the decline in net
sales discussed above, partially offset by the additional operating costs associated with the acquired businesses. These cost reductions
resulted in a decrease of SG&A expenses as a percentage of net sales from 18.0% in fiscal 2008 to 17.2% in fiscal 2009.
Operating Income
Operating income in fiscal 2009 decreased by 16.6% to $88.3 million, compared to operating income of $105.8 million in fiscal
2008. The decrease in operating income reflects a decrease of $21.2 million (a 26.1% decrease) to $60.0 million in operating income
of the FSG in fiscal 2009, partially offset by an increase of $1.2 million (a 3.1% increase) to $40.0 million in operating income of the
ETG in fiscal 2009 and a $2.4 million increase in corporate expenses.
As a percentage of net sales, operating income decreased to 16.4% in fiscal 2009 compared to 18.2% in fiscal 2008. The decrease
in operating income as a percentage of net sales reflects a decrease in the FSG’s operating income as a percentage of net sales to
15.2% in fiscal 2009 compared to 18.6% in fiscal 2008, partially offset by an increase in the ETG’s operating income as a percentage
of net sales from 26.6% in fiscal 2008 to 27.9% in fiscal 2009. The decrease in operating income as a percentage of net sales for the
FSG principally reflects the aforementioned impact of the lower sales volume and a less favorable product mix on gross profit and
operating income margins. The increase in operating income as a percentage of net sales for the ETG principally reflects a favorable
product mix.
Interest Expense
Interest expense decreased to $.6 million in fiscal 2009 from $2.3 million in fiscal 2008. The decrease was principally due to
lower variable interest rates under our revolving credit facility in 2009.
Other Income (Expense)
Other income (expense) in fiscal 2009 and 2008 was not material.
Income Tax Expense
Our effective tax rate for fiscal 2009 decreased to 31.9% from 34.5% in fiscal 2008. The decrease was principally related to
a settlement reached with the Internal Revenue Service (“IRS”) during fiscal 2009. The IRS settlement pertained to the income
tax credits claimed on HEICO’s U.S. federal filings for qualified research and development activities incurred for fiscal years 2002
through 2005 and a resulting reduction to the related reserve for fiscal years 2002 through 2008 based on new information obtained
during the examination, which increased net income by approximately $1,225,000, or $.04 per diluted share, for fiscal 2009.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held in the FSG and the noncon-
trolling interests held in certain subsidiaries of the FSG and the ETG. Net income attributable to noncontrolling interests decreased
to $15.2 million in fiscal 2009 from $18.9 million in fiscal 2008. The decrease in net income attributable to noncontrolling interests
for fiscal 2009 compared to fiscal 2008 is principally attributable to the acquired additional equity interests of certain FSG subsidiar-
ies in which noncontrolling interests exist as well as the lower earnings of the FSG, partially offset by the higher earnings of certain
ETG subsidiaries in which noncontrolling interests exist and the mid-year acquisition of an 82.5% interest in VPT.
Net Income Attributable to HEICO
Our net income attributable to HEICO was $44.6 million, or $1.32 per diluted share, in fiscal 2009 compared to $48.5 million,
or $1.42 per diluted share, in fiscal 2008 reflecting the decreased operating income referenced above, partially offset by the afore-
mentioned favorable IRS settlement, the decreased noncontrolling interests’ share of income of certain consolidated subsidiaries and
lower interest expense.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
ManaGeMent’S diScUSSiOn and analYSiS
OF Financial cOnditiOn and ReSUltS OF OPeRatiOnS
Inflation
We have generally experienced increases in our costs of labor, materials and services consistent with overall rates of inflation.
The impact of such increases on net income attributable to HEICO has been generally minimized by efforts to lower costs through
manufacturing efficiencies and cost reductions.
Liquidity and Capital Resources
Our capitalization was as follows:
As of October 31,
Cash and cash equivalents
Total debt (including current portion)
Shareholders’ equity
Total capitalization (debt plus equity)
Total debt to total capitalization
2010
2009
$
6,543,000
14,221,000
554,826,000
569,047,000
2%
$
7,167,000
55,431,000
490,658,000
546,089,000
10%
In addition to cash and cash equivalents of $6.5 million, we had approximately $284 million of unused availability under the
terms of our revolving credit facility as of October 31, 2010. Our principal uses of cash include acquisitions, payments of principal
and interest on debt, capital expenditures, cash dividends and increases in working capital. We finance our activities primarily from
our operating activities and financing activities, including borrowings under long-term credit agreements.
Based on our current outlook, we believe that our net cash provided by operating activities and available borrowings under our
revolving credit facility will be sufficient to fund cash requirements for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was $101.7 million for fiscal 2010, principally reflecting net income from consolidated
operations of $72.4 million, depreciation and amortization of $17.6 million, a decrease in net operating assets of $6.7 million, a de-
ferred income tax provision of $1.8 million, impairment losses of certain intangible assets aggregating $1.4 million and stock option
compensation expense of $1.4 million. The decrease in net operating assets (current assets used in operating activities net of current
liabilities) of $6.7 million primarily reflects higher accrued expenses associated with performance based awards and decreased
inventory levels due to continuing efforts to manage inventory levels, while meeting customer delivery requirements, partially offset
by increased accounts receivable related to higher net sales in fiscal 2010.
Net cash provided by operating activities was $75.8 million for fiscal 2009, principally reflecting net income from consolidated
operations of $59.8 million, depreciation and amortization of $15.0 million, a tax benefit related to stock option exercises of $1.9
million, and a decrease in net operating assets of $2.5 million, partially offset by the presentation of $1.6 million of excess tax benefit
from stock option exercises as a financing activity and a deferred income tax benefit of $2.7 million. The decrease in net operating
assets (current assets used in operating activities net of current liabilities) primarily reflects a decrease in accounts receivable due to
the timing of cash collections and lower net sales, partially offset by a decrease in accrued expenses, including employee compensa-
tion, customer rebates and credits and additional accrued purchase consideration since October 31, 2008.
Net cash provided by operating activities was $73.2 million for fiscal 2008, principally reflecting net income from consolidated
operations of $67.4 million, depreciation and amortization of $15.1 million, a tax benefit related to stock option exercises of $6.2
million, a deferred income tax provision of $3.6 million and impairment losses of certain intangible assets aggregating $1.8 million,
partially offset by an increase in net operating assets of $17.1 million and the presentation of $4.3 million of excess tax benefit from
stock option exercises as a financing activity. The increase in net operating assets (current assets used in operating activities net of
current liabilities) primarily reflects a higher investment in inventories by the FSG required to meet sales demand associated with
new product offerings, sales growth, and increased lead times on certain raw materials; and an increase in accounts receivable due to
sales growth; partially offset by higher current liabilities associated with increased sales and purchases and higher accrued employee
compensation and related payroll taxes.
20 |
Investing Activities
Net cash used in investing activities during the three-year fiscal period ended October 31, 2010 primarily relates to several
acquisitions, including payments of additional contingent purchase consideration, totaling $39.1 million in fiscal 2010, $59.8 million
in fiscal 2009 and $24.8 million in fiscal 2008. Further details on acquisitions may be found under the caption “Overview” and Note
2, Acquisitions, of the Notes to Consolidated Financial Statements. Capital expenditures aggregated $32.6 million over the last three
fiscal years, primarily reflecting the expansion, replacement and betterment of existing production facilities and capabilities, which
were generally funded using cash provided by operating activities.
Financing Activities
During the three-year fiscal period ended October 31, 2010, the Company borrowed an aggregate $178.0 million under its
revolving credit facility principally to fund acquisitions and for working capital needs, including $37.0 million in fiscal 2010, $91.0
million in fiscal 2009 and $50.0 million in fiscal 2008. Further details on acquisitions may be found under the caption “Overview”
and Note 2, Acquisitions, of the Notes to Consolidated Financial Statements. Repayments on the revolving credit facility aggregated
$217.0 million over the last three fiscal years, including $78.0 million in fiscal 2010, $73.0 million in fiscal 2009 and $66.0 million
in fiscal 2008. For the three-year fiscal period ended October 31, 2010, we made distributions to noncontrolling interest owners
aggregating $27.4 million, acquired certain noncontrolling interests aggregating $16.3 million, paid cash dividends aggregating
$9.3 million, and made repurchases of our common stock aggregating $8.1 million. For the three-year fiscal period ended October
31, 2010, we received proceeds from stock option exercises aggregating $5.4 million. Net cash provided by financing activities also
includes the presentation of $.7 million, $1.6 million and $4.3 million of excess tax benefit from stock option exercises in fiscal 2010,
2009 and 2008, respectively.
In May 2008, we amended our revolving credit facility by entering into a $300 million Second Amended and Restated Revolving
Credit Agreement (“Credit Facility”) with a bank syndicate, which matures in May 2013. Under certain circumstances, the maturity
may be extended for two one-year periods. The Credit Facility also includes a feature that will allow us to increase the Credit Facility,
at our option, up to $500 million through increased commitments from existing lenders or the addition of new lenders. The Credit
Facility may be used for working capital and general corporate needs of the company, including letters of credit, capital expenditures
and to finance acquisitions. Advances under the Credit Facility accrue interest at our choice of the “Base Rate” or the London
Interbank Offered Rate (“LIBOR”) plus applicable margins (based on our ratio of total funded debt to earnings before interest,
taxes, depreciation and amortization, minority interest and non-cash charges, or “leverage ratio”). The Base Rate is the higher of (i)
the Prime Rate or (ii) the Federal Funds rate plus .50%. The applicable margins for LIBOR-based borrowings range from .625% to
2.25%. A fee is charged on the amount of the unused commitment ranging from .125% to .35% (depending on our leverage ratio).
The Credit Facility also includes a $50 million sublimit for borrowings made in euros, a $30 million sublimit for letters of credit
and a $20 million swingline sublimit. The Credit Facility is unsecured and contains covenants that require, among other things, the
maintenance of the leverage ratio, a senior leverage ratio and a fixed charge coverage ratio. In the event our leverage ratio exceeds
a specified level, the Credit Facility would become secured by the capital stock owned in substantially all of our subsidiaries. As
of October 31, 2010, our leverage ratios were significantly below and our fixed charge coverage ratio was significantly above such
specified levels. See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements for further information regarding
the revolving credit facility.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
ManaGeMent’S diScUSSiOn and analYSiS
OF Financial cOnditiOn and ReSUltS OF OPeRatiOnS
Contractual Obligations
The following table summarizes our contractual obligations as of October 31, 2010:
Payments due by fiscal period
Total
2011
2012 - 2013
2014 - 2015
Thereafter
Long-term debt obligations(1)
Capital lease obligations(1)
Operating lease obligations(2)
Purchase obligations(3)(4)(5)
Other long-term liabilities(6)(7)
$
14,209,000
12,000
24,812,000
11,450,000
322,000
$
136,000
12,000
6,167,000
10,663,000
61,000
$ 14,073,000
–
9,648,000
787,000
114,000
$
–
–
4,486,000
–
66,000
$
–
–
4,511,000
–
81,000
Total contractual obligations
$
50,805,000
$
17,039,000
$ 24,622,000
$
4,552,000
$ 4,592,000
(1) Excludes interest charges on borrowings and the fee on the amount of any unused commitment that we may be obligated to pay under our revolving credit
facility as such amounts vary. Also excludes interest charges associated with notes payable and capital lease obligations as such amounts are not material.
See Note 5, Long-Term Debt, of the Notes to Consolidated Financial Statements and “Financing Activities” above for additional information regarding our
long-term debt obligations.
(2) See Note 16, Commitments and Contingencies – Lease Commitments, of the Notes to Consolidated Financial Statements for additional information regarding
our operating lease obligations.
(3) As further explained below in “New Accounting Pronouncements,” the noncontrolling interest holders of certain subsidiaries have rights (“Put Rights”) that
may be exercised on varying dates causing us to purchase their equity interests beginning in fiscal 2011 through fiscal 2018. The Put Rights provide that cash
consideration be paid for their noncontrolling interests (“Redemption Amount”). As of October 31, 2010, management’s estimate of the aggregate Redemption
Amount of all Put Rights that we would be required to pay is approximately $55 million, which is reflected within redeemable noncontrolling interests in our
Consolidated Balance Sheet. Of this amount $6,486,000 and $787,000 are included in the table as amounts payable in fiscal 2011 and 2012, respectively,
pursuant to past exercises of such Put Rights by the noncontrolling interest holders of certain of our subsidiaries. As the actual Redemption Amount payable in
fiscal 2012 is based on a multiple of future earnings, such amount will likely be different. The remaining Redemption Amounts have been excluded from the
table as the timing of such payments is contingent upon the exercise of the Put Rights.
(4) Also includes accrued additional contingent purchase consideration of $4,104,000 payable in fiscal 2011 relating to a prior year acquisition (see Note 2,
Acquisitions, of the Notes to Consolidated Financial Statements). The amounts in the table do not include the additional contingent purchase consideration
we may have to pay based on future earnings of certain acquired businesses. As of October 31, 2010, management’s estimate of the aggregate amount of such
contingent purchase consideration is approximately $9.9 million, which is payable beginning in fiscal 2011 through fiscal 2013. Of this total, $1.2 million is
related to a 2010 acquisition and has been accrued within other long-term liabilities in our Consolidated Balance Sheet as further described in Note 7,
Fair Value Measurements, of the Notes to Consolidated Financial Statements. The remaining contingent purchase consideration is further discussed in
“Off-Balance Sheet Arrangements – Additional Contingent Purchase Consideration” below.
(5) Also includes an aggregate $73,000 of commitments for capital expenditures. All purchase obligations of inventory and supplies in the ordinary course of
business (i.e., with deliveries scheduled within the next year) are excluded from the table.
(6) Represents payments aggregating $322,000 under our Directors Retirement Plan, for which benefits are presently being paid and excludes $190,000 of
payments for which benefit payments have not yet commenced. Our Directors Retirement Plan’s projected benefit obligation of $409,000 is accrued within
other long-term liabilities in our Consolidated Balance Sheet as of October 31, 2010. See Note 10, Retirement Plans, of the Notes to Consolidated Financial
Statements (the plan is unfunded and we pay benefits directly). The amounts in the table do not include liabilities related to the Leadership Compensation
Plan or our other deferred compensation arrangement as they are each fully supported by assets held within irrevocable trusts. See Note 3, Selected Financial
Statement Information – Other Long-Term Liabilities, of the Notes to Consolidated Financial Statements for further information about these two deferred
compensation plans.
(7) The amounts in the table do not include approximately $2,252,000 of our liability for unrecognized tax benefits due to the uncertainty with respect to the timing
of future cash flows associated with these unrecognized tax benefits as we are unable to make reasonably reliable estimates of the timing of any cash settlements.
See Note 6, Income Taxes, of the Notes to Consolidated Financial Statements for further information about our liability for unrecognized tax benefits.
Off-Balance Sheet Arrangements
Guarantees
We have arranged for a standby letter of credit for $1.5 million to meet the security requirement of our insurance company for
potential workers’ compensation claims, which is supported by our revolving credit facility.
Additional Contingent Purchase Consideration
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2007, we may be obligated to pay additional purchase
consideration of up to 73 million Canadian dollars in aggregate, which translates to approximately $72 million U.S. dollars based on
the October 31, 2010 exchange rate, should the subsidiary meet certain earnings objectives through fiscal 2012.
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional purchase
consideration of up to approximately $1.3 million in fiscal 2011 and $10.1 million in fiscal 2012 should the subsidiary meet certain
earnings objectives during the second and third years, respectively, following the acquisition.
22 |
As part of the agreement to acquire a subsidiary by the ETG in fiscal 2009, we may be obligated to pay additional purchase
consideration of up to approximately $7.6 million 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 us or providing future services to
us. 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 we could be required to pay is approximately $91 million payable
over future periods beginning in fiscal 2011 through 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 ag-
gregate amount of such contingent purchase consideration that we would be required to pay is approximately $9 million. The actual
contingent purchase consideration will likely be different.
For additional information on how we account for contingent consideration associated with acquisitions, see Note 1, Summary
of Significant Accounting Policies – Business Combinations, of the Notes to Consolidated Financial Statements.
New Accounting Pronouncements
Effective November 1, 2009, we adopted new accounting guidance that requires the recognition of certain noncontrolling
interests (previously referred to as minority interests) as a separate component within equity in the consolidated balance sheet. It
also requires the amount of consolidated net income attributable to the parent and the noncontrolling interests be clearly identified
and presented within the consolidated statement of operations. The adoption of this new guidance (which is included in Accounting
Standards Codification (“ASC”) 810, “Consolidation”) has affected the presentation of noncontrolling interests in our consolidated
financial statements on a retrospective basis. For example, under this guidance, “Net income from consolidated operations” is
comparable to what was previously presented as “Income before minority interests” and “Net income attributable to HEICO” is
comparable to what was previously presented as “Net income.” Further, acquisitions of noncontrolling interests are considered a
financing activity under the new accounting guidance and are no longer presented as an investing activity.
Effective November 1, 2009, we also adopted new accounting guidance that retrospectively affects the financial statement
classification and measurement of redeemable noncontrolling interests. This guidance is included in ASC 480, “Distinguishing
Liabilities from Equity.” As further detailed in Note 12, Redeemable Noncontrolling Interests, of the Notes to Consolidated Financial
Statements, the holders of equity interests in certain of our subsidiaries have rights (“Put Rights”) that require us to provide cash con-
sideration for their equity interests (the “Redemption Amount”) at fair value or at a formula that management intended to reason-
ably approximate fair value based solely on a multiple of future earnings over a measurement period. The Put Rights are embedded
in the shares owned by the noncontrolling interest holders and are not freestanding. Previously, we recorded such redeemable
noncontrolling interests at historical cost plus an allocation of subsidiary earnings based on ownership interest, less dividends paid to
the noncontrolling interest holders. Effective November 1, 2009, we adjusted our redeemable noncontrolling interests in accordance
with this new accounting guidance to the higher of their carrying cost or management’s estimate of the Redemption Amount with a
corresponding decrease to retained earnings and classified such interests outside of permanent equity. Under this guidance, subse-
quent adjustments to the carrying amount of redeemable noncontrolling interests to reflect any changes in the Redemption Amount
at the end of each reporting period will be recorded in the same manner. Such adjustments to Redemption Amounts based on fair
value 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 that reflect a redemption
amount in excess of fair value will effect net income per share attributable to HEICO shareholders under the two-class method.
As a result of adopting the new accounting guidance for noncontrolling interests and redeemable noncontrolling interests,
we (i) reclassified approximately $78 million from temporary equity (previously labeled as “Minority interests in consolidated
subsidiaries”) to permanent equity (labeled as “Noncontrolling interests”) pertaining to noncontrolling interests that do not contain
a redemption feature; and (ii) renamed temporary equity as “Redeemable noncontrolling interests” and recorded an approximately
$45 million increase to redeemable noncontrolling interests with a corresponding decrease to retained earnings in our Consolidated
Balance Sheet. The resulting $57 million of redeemable noncontrolling interests as of November 1, 2009 represents management’s
estimate of the aggregate Redemption Amount of all Put Rights that we would be required to pay of which approximately $25 million
is redeemable at fair value and approximately $32 million is redeemable based solely on a multiple of future earnings. The actual
Redemption Amount will likely be different. See Note 12, Redeemable Noncontrolling Interests, for additional information as well as
our Consolidated Statements of Shareholders’ Equity and Comprehensive Income, which have been retrospectively adjusted.
| 23
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
ManaGeMent’S diScUSSiOn and analYSiS
OF Financial cOnditiOn and ReSUltS OF OPeRatiOnS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued new guidance which defines fair value,
establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. This guidance is
included in ASC 820, “Fair Value Measurements and Disclosures.” In February 2008, the FASB issued additional guidance which de-
layed the effective date by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. These nonfinancial assets and liabilities include items such as goodwill, other intangible assets,
and property, plant and equipment that are measured at fair value resulting from impairment, if deemed necessary. We adopted the
provisions of this guidance related to nonfinancial assets and liabilities on a prospective basis as of the beginning of fiscal 2010, or
November 1, 2009. The adoption did not have a material effect on our results of operations, financial position or cash flows.
In December 2007, the FASB issued new guidance for business combinations that retains the fundamental requirements of
previous guidance that the acquisition method of accounting (formerly the “purchase accounting” method) be used for all business
combinations and for an acquirer to be identified for each business combination. However, the new guidance changes the approach
of applying the acquisition method in a number of significant areas, including that acquisition costs will generally be expensed as
incurred; noncontrolling interests will be valued at fair value as of the acquisition date; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset as of the acquisition date; restructuring costs associated with a business
combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances
and income tax uncertainties after the acquisition date generally will affect income tax expense. Further, any contingent consid-
eration will be recognized as a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in
operations. Contingent consideration was previously accounted for as an additional cost of the respective acquired entity when paid.
We adopted the new guidance (which is included in ASC 805, “Business Combinations”) on a prospective basis as of the beginning
of fiscal 2010 for all business combinations consummated on or after November 1, 2009. The adoption did not have a material effect
on our results of operations, financial position or cash flows.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures About Fair Value
Measurements,” which requires new 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. We adopted ASU 2010-06 as of the beginning of the
second quarter 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 us. The adoption did not have a material effect on our results of operations, financial position or
cash flows. The Company will make the additional Level 3 disclosures, if applicable, as of the date of adoption.
In December 2010, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 10-G, “Disclosure of Supplementary Pro Forma
Information for Business Combinations.” Under EITF Issue 10-G, 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. EITF Issue 10-G is effective for business combinations consummated in periods
beginning after December 15, 2010, or in the second quarter of fiscal 2011 for HEICO. Early adoption is permitted. We will make
the required disclosures prospectively as of the date of the adoption for any material business combinations or series of immaterial
business combinations that are material in the aggregate.
24 |
Forward-Looking Statements
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
“anticipate,” “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 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 an increase to our costs to complete contracts;
• Governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security
spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales;
• Our ability to introduce new products and product pricing levels, which could reduce our sales or sales growth; and
• Our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest and
income tax rates and economic conditions within and outside of the aviation, defense, space, medical, telecommunication and
electronic industries, which could negatively impact our costs and revenues.
For further information on these and other factors that potentially could materially affect our financial results, see Risk Factors.
We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
Quantitative and Qualitative Disclosures About Market Risk
The primary market risk to which we have exposure is interest rate risk, mainly related to our revolving credit facility, which has
variable interest rates. Interest rate risk associated with our variable rate debt is the potential increase in interest expense from an
increase in interest rates. Periodically, we enter into interest rate swap agreements to manage our interest expense. We did not have
any interest rate swap agreements in effect as of October 31, 2010. Based on our aggregate outstanding variable rate debt balance of
$14 million as of October 31, 2010, a hypothetical 10% increase in interest rates would not have a material effect on our results of
operations, financial position or cash flows.
We maintain a portion of our 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, 2010 would not have a
material effect on our results of operations, financial position or cash flows.
We are also exposed to foreign currency exchange rate fluctuations on the United States dollar value of our foreign currency
denominated transactions, which are principally in Canadian dollar and British pound sterling. A hypothetical 10% weakening in
the exchange rate of the Canadian dollar or British pound sterling to the United States dollar as of October 31, 2010 would not have a
material effect on our results of operations, financial position or cash flows.
| 25
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
cOnSOlidated Balance SHeetS
As of October 31,
2010
2009
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt
Trade accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Total current liabilities
Long-term debt, net of current maturities
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 2 and 16)
Redeemable noncontrolling interests (Note 12)
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;
13,126,005 and 13,011,426 shares issued and outstanding
Class A Common Stock, $.01 par value per share; 30,000,000
shares authorized; 19,863,572 and 19,641,543 shares issued
and outstanding
Capital in excess of par value
Accumulated other comprehensive loss
Retained earnings
Total HEICO shareholders’ equity
Noncontrolling interests
Total shareholders’ equity
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
26 |
$
6,543,000
91,815,000
138,215,000
3,769,000
18,907,000
259,249,000
59,003,000
385,016,000
49,487,000
28,888,000
$ 781,643,000
$
148,000
28,604,000
52,101,000
979,000
81,832,000
14,073,000
45,308,000
30,556,000
171,769,000
$
7,167,000
77,864,000
137,585,000
4,290,000
16,671,000
243,577,000
60,528,000
365,243,000
41,588,000
21,974,000
$ 732,910,000
$
237,000
26,978,000
36,978,000
1,320,000
65,513,000
55,194,000
41,340,000
23,268,000
185,315,000
55,048,000
56,937,000
–
–
131,000
104,000
199,000
227,993,000
(124,000)
240,913,000
469,112,000
85,714,000
554,826,000
$ 781,643,000
157,000
224,625,000
(1,381,000)
189,485,000
412,990,000
77,668,000
490,658,000
$ 732,910,000
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
cOnSOlidated StateMentS OF OPeRatiOnS
Year ended October 31,
2010
2009
2008
Net sales
$ 617,020,000
$ 538,296,000
$ 582,347,000
Operating costs and expenses:
Cost of sales
Selling, general and administrative expenses
394,673,000
113,174,000
357,285,000
92,756,000
371,852,000
104,707,000
Total operating costs and expenses
507,847,000
450,041,000
476,559,000
Operating income
109,173,000
88,255,000
105,788,000
Interest expense
Other income (expense)
(508,000)
390,000
(615,000)
205,000
(2,314,000)
(637,000)
Income before income taxes and noncontrolling
interests
109,055,000
87,845,000
102,837,000
Income tax expense
36,700,000
28,000,000
35,450,000
Net income from consolidated operations
72,355,000
59,845,000
67,387,000
Less: Net income attributable to noncontrolling
interests
17,417,000
15,219,000
18,876,000
Net income attributable to HEICO
$
54,938,000
$
44,626,000
$ 48,511,000
Net income per share attributable to HEICO
shareholders (Note 13):
Basic
Diluted
Weighted average number of common shares
outstanding:
Basic
Diluted
$
$
1.67
1.62
$
$
1.36
1.32
$
$
1.48
1.42
32,832,508
33,770,830
32,755,999
33,780,039
32,886,424
34,054,195
The accompanying notes are an integral part of these consolidated financial statements.
| 27
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
cOnSOlidated StateMentS OF SHaReHOldeRS’ eQUitY
and cOMPReHenSiVe incOMe
HEICO Shareholders’ Equity
Redeemable
Noncontrolling
Interests
Common
Stock
Class A
Common
Stock
Capital in
Excess of
Par Value
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling Shareholders’
Interests
Equity
Total
Balances as of October 31, 2007
(as previously reported)
Retrospective adjustments related to
adoption of accounting guidance for
noncontrolling interests (Note 1)
Balances as of October 31, 2007
(as retrospectively adjusted)
Comprehensive income:
Net income
Foreign currency translation
adjustments
Total comprehensive income
Cash dividends ($.080 per share)
Cumulative effect of adopting FIN 48
Proceeds from stock option exercises
Tax benefit from stock option exercises
Stock option compensation expense
Distributions to noncontrolling
interests
Acquisitions of noncontrolling
interests
Noncontrolling interests assumed
Adjustments to redemption amount of
redeemable noncontrolling interests
Contributions from noncontrolling
interests
Other
Balances as of October 31, 2008
(as retrospectively adjusted)
Comprehensive income:
Net income
Foreign currency translation
adjustments
Total comprehensive income
Repurchases of common stock (Note 8)
Cash dividends ($.096 per share)
Proceeds from stock option exercises
Tax benefit from stock option exercises
Stock option compensation expense
Distributions to noncontrolling
$ —
$ 105,000
$156,000 $220,658,000 $3,050,000 $147,632,000
$ — $371,601,000
49,370,000
—
—
—
—
(37,983,000) 61,551,000
23,568,000
49,370,000
105,000
156,000 220,658,000 3,050,000 109,649,000 61,551,000 395,169,000
9,611,000
—
—
—
—
48,511,000 9,265,000
57,776,000
—
9,611,000
—
—
—
—
—
(7,456,000)
(4,277,000)
(558,000)
—
—
—
—
—
—
1,000
—
—
—
—
—
—
—
—
—
—
—
—
2,000
—
—
— (7,706,000)
— (7,706,000)
—
—
—
—
—
2,395,000
—
6,248,000
—
142,000
—
48,511,000
(2,631,000)
(639,000)
—
—
—
—
9,265,000
—
—
—
—
—
(7,706,000)
50,070,000
(2,631,000)
(639,000)
2,398,000
6,248,000
142,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,086,000
—
—
—
3,086,000
—
(1,267,000)
—
(1,267,000)
—
268,000
290,000
558,000
—
(163,000)
—
(1,000)
32,000
—
32,000
(164,000)
48,736,000
106,000
158,000
229,443,000 (4,819,000) 156,976,000 71,138,000
453,002,000
8,228,000
—
—
—
—
44,626,000
6,991,000
51,617,000
—
8,228,000
—
—
—
—
—
—
—
(2,000)
—
—
—
—
—
—
(2,000)
—
1,000
—
—
— 3,276,000
— 3,276,000
—
—
—
—
—
(8,094,000)
—
1,206,000
1,890,000
181,000
—
44,626,000
—
(3,150,000)
—
—
—
—
6,991,000
—
—
—
—
—
3,276,000
54,893,000
(8,098,000)
(3,150,000)
1,207,000
1,890,000
181,000
related to acquisition
2,046,000
interests
Acquisitions of noncontrolling
interests
Noncontrolling interests assumed
related to acquisition
Adjustments to redemption
amount of redeemable
noncontrolling interests
Other
Balances as of October 31, 2009
(as retrospectively adjusted)
28 |
(9,130,000)
(10,015,000)
7,505,000
11,613,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(461,000)
(461,000)
—
6,845,000
—
6,845,000
—
(4,200,000)
—
(4,200,000)
—
(1,000)
—
162,000
(11,613,000)
1,000
—
—
(11,613,000)
162,000
$56,937,000
$104,000
$157,000 $224,625,000 ($1,381,000) $189,485,000 $77,668,000 $490,658,000
Table continues on next page
HEICO Shareholders’ Equity
Redeemable
Noncontrolling
Interests
Common
Stock
Class A
Common
Stock
Capital in
Excess of
Par Value
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling Shareholders’
Interests
Equity
Total
Balances as of October 31, 2009
(as previously reported)
Retrospective adjustments related to
adoption of accounting guidance for
noncontrolling interests (Note 1)
Balances as of October 31, 2009
(as retrospectively adjusted)
Comprehensive income:
Net income
Foreign currency translation
adjustments
Total comprehensive income
Cash dividends ($.108 per share)
Five-for-four common stock split
Redemptions of common stock related
to stock option exercises (Note 8)
Proceeds from stock option exercises
Tax benefit from stock option exercises
Stock option compensation expense
Distributions to noncontrolling
interests
Acquisitions of noncontrolling
interests
Adjustments to redemption amount of
redeemable noncontrolling interests
Other
Balances as of October 31, 2010
$ —
$104,000
$157,000 $224,625,000 ($1,381,000) $234,348,000
$ — $457,853,000
56,937,000
—
—
—
—
(44,863,000) 77,668,000
32,805,000
56,937,000
104,000
157,000
224,625,000 (1,381,000) 189,485,000 77,668,000
490,658,000
9,370,000
—
—
—
—
54,938,000
8,047,000
62,985,000
—
9,370,000
—
—
—
—
—
—
(10,360,000)
(795,000)
—
—
—
26,000
—
1,000
—
—
—
—
—
—
—
40,000
—
2,000
—
—
—
—
— 1,271,000
— 1,271,000
—
—
—
(66,000)
—
—
54,938,000 8,047,000
—
(3,546,000)
—
(68,000)
1,271,000
64,256,000
(3,546,000)
(68,000)
(681,000)
1,812,000
951,000
1,353,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(681,000)
1,815,000
951,000
1,353,000
—
—
(104,000)
—
$55,048,000
—
—
$131,000
—
—
104,000
(16,000)
$199,000 $227,993,000 ($124,000) $240,913,000 $85,714,000 $554,826,000
104,000
—
—
(14,000)
—
(1,000)
—
(1,000)
The accompanying notes are an integral part of these consolidated financial statements.
| 29
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
cOnSOlidated StateMentS OF caSH FlOWS
Year ended October 31,
2010
2009
2008
Operating Activities:
Net income from consolidated operations
Adjustments to reconcile net income from consolidated
operations to net cash provided by operating activities:
Depreciation and amortization
Impairment of intangible assets
Deferred income tax provision (benefit)
Tax benefit from stock option exercises
Excess tax benefit from stock option exercises
Stock option compensation expense
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable
Decrease (increase) in inventories
Decrease in prepaid expenses and other current assets
Increase (decrease) in trade accounts payable
Increase (decrease) in accrued expenses and other
current liabilities
Decrease in income taxes payable
Other
Net cash provided by operating activities
Investing Activities:
Acquisitions, net of cash acquired
Capital expenditures
Other
Net cash used in investing activities
Financing Activities:
Payments on revolving credit facility
Borrowings on revolving credit facility
Distributions to noncontrolling interests
Acquisitions of noncontrolling interests
Repurchases of common stock
Cash dividends paid
Payment of industrial development revenue bonds
Redemptions of common stock related to stock option exercises
Proceeds from stock option exercises
Excess tax benefit from stock option exercises
Other
Net cash used in financing activities
$ 72,355,000
$ 59,845,000
$ 67,387,000
17,597,000
1,438,000
1,817,000
951,000
(669,000)
1,353,000
(10,684,000)
6,359,000
549,000
125,000
11,474,000
(1,196,000)
248,000
101,717,000
14,967,000
300,000
(2,651,000)
1,890,000
(1,573,000)
181,000
15,214,000
(87,000)
5,216,000
(5,619,000)
(11,296,000)
(936,000)
366,000
75,817,000
(39,061,000)
(8,877,000)
(325,000)
(48,263,000)
(59,798,000)
(10,253,000)
20,000
(70,031,000)
(78,000,000)
37,000,000
(10,360,000)
(795,000)
—
(3,546,000)
—
(681,000)
1,815,000
669,000
(294,000)
(54,192,000)
(73,000,000)
91,000,000
(9,591,000)
(11,268,000)
(8,098,000)
(3,150,000)
—
—
1,207,000
1,573,000
(219,000)
(11,546,000)
15,052,000
1,835,000
3,617,000
6,248,000
(4,324,000)
142,000
(4,749,000)
(16,597,000)
650,000
808,000
3,803,000
(1,040,000)
330,000
73,162,000
(24,761,000)
(13,455,000)
166,000
(38,050,000)
(66,000,000)
50,000,000
(7,456,000)
(4,277,000)
—
(2,631,000)
(1,980,000)
—
2,398,000
4,324,000
(1,158,000)
(26,780,000)
Effect of exchange rate changes on cash
114,000
365,000
(717,000)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(624,000)
7,167,000
6,543,000
$
(5,395,000)
12,562,000
$ 7,167,000
7,615,000
4,947,000
$ 12,562,000
The accompanying notes are an integral part of these consolidated financial statements.
30 |
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
NOTE 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
HEICO Corporation, through its principal subsidiaries HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and HEICO
Electronic Technologies Corp. (“HEICO Electronic”) and their subsidiaries (collectively, the “Company”), is principally engaged in
the design, manufacture and sale of aerospace, defense and electronic related products and services throughout the United States and
internationally. The Company’s customer base is primarily the aviation, defense, space, medical, telecommunication and electronic
industries.
Basis of Presentation
The consolidated financial statements include the accounts of HEICO Corporation and its subsidiaries, all of which are
wholly-owned except for HEICO Aerospace, which is 20%-owned by Lufthansa Technik AG, the technical services subsidiary of
Lufthansa German Airlines. In addition, HEICO Aerospace consolidates three subsidiaries which are 72%, 80%, and 82.3% owned,
respectively, and a joint venture formed in March 2001, which is 16% owned by American Airlines’ parent company, AMR Corpora-
tion. Also, HEICO Electronic consolidates three subsidiaries, which are 80%, 93.3% and 82.5% owned, respectively (see Note 12,
Redeemable Noncontrolling Interests). All significant intercompany balances and transactions are eliminated.
Stock Split
In March 2010, 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 27, 2010 in the form of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.
Use of Estimates and Assumptions
The preparation of 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 financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company considers all highly liquid investments such as U.S.
Treasury bills and money market funds with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist of amounts billed and currently due from customers and unbilled costs and estimated earnings
related to revenue from certain fixed price contracts recognized on the percentage-of-completion method that have been recog-
nized for accounting purposes, but not yet billed to customers. 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, age of
receivables outstanding and economic conditions within and outside of the aviation, defense, space, medical, telecommunication
and electronic industries.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary
cash investments and trade accounts receivable. The Company places its temporary cash investments with high credit quality
financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their
dispersion across many different geographical regions. The Company performs ongoing credit evaluations of its customers, but does
not generally require collateral to support customer receivables.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Inventory
Inventory is stated at the lower of cost or market, with cost being determined on the first-in, first-out or the average cost basis.
Losses, if any, are recognized fully in the period when identified.
The Company periodically evaluates the carrying value of inventory, giving consideration to factors such as its physical condi-
tion, sales patterns and expected future demand in order to estimate the amount necessary to write down its slow moving, obsolete
or damaged inventory. These estimates could vary significantly from actual amounts based upon future economic conditions,
customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
In accordance with industry practice, all inventories are classified as a current asset including portions with long production
cycles, some of which may not be realized within one year.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation and amortization is generally provided on the straight-line
method over the estimated useful lives of the various assets. The Company’s property, plant and equipment is depreciated over the
following estimated useful lives:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 to 40 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 20 years
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years
Tooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 5 years
The costs of major additions and improvements are capitalized. Leasehold improvements are amortized over the shorter of the
leasehold improvement’s useful life or the lease term. Repairs and maintenance are expensed as incurred. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected within earnings.
Business Combinations
As further explained in New Accounting Pronouncements below, the Company adopted new accounting guidance for business
combinations effective prospectively for acquisitions consummated on or after November 1, 2009 (the beginning of fiscal 2010). Un-
der the new guidance, any contingent consideration is recognized as a liability at fair value as of the acquisition date with subsequent
fair value adjustments recorded in operations. Acquisition costs are generally expensed as incurred. For acquisitions consummated
prior to fiscal 2010, contingent consideration is accounted for as an additional cost of the respective acquired entity when paid and
acquisition costs were capitalized as part of the purchase price.
The Company allocates the purchase price of acquired entities to the underlying tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values, with any excess recorded as goodwill. The operating results of
acquired businesses are included in the Company’s results of operations beginning as of their effective acquisition dates.
Goodwill and Other Intangible Assets
The Company tests goodwill for impairment annually as of October 31, or more frequently if events or changes in circumstanc-
es indicate that the carrying amount of goodwill 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 is recognized
in the amount by which the carrying value of the reporting unit’s goodwill exceeds its implied fair value, if any.
The Company’s intangible assets not subject to amortization consist principally of its trade names. The Company’s intangible
assets subject to amortization are amortized on the straight-line method over the following estimated useful lives:
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 10 years
Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 to 15 years
Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 to 17 years
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 7 years
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 19 years
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 10 years
32 |
Amortization expense of intellectual property, licenses and patents is recorded as a component of cost of sales, and amortiza-
tion expense of customer relationships, non-compete agreements and trade names is recorded as a component of selling, general
and administrative expenses in the Company’s Consolidated Statement of Operations. The Company tests each non-amortizing
intangible asset for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that
the asset might be impaired. To derive the fair value of its trade names, the Company utilizes an income approach. The Company
also tests each amortizing intangible asset for impairment if events or circumstances indicate that the asset might be impaired. The
test consists of determining whether the carrying value of such assets will be recovered through undiscounted expected future cash
flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, the Company recognizes an
impairment loss based on the excess of the carrying amount over the fair value of the assets.
Investments
Investments are stated at fair value based on quoted market prices. Investments that are intended to be held for less than one year
are included within prepaid expenses and other current assets in the Company’s Consolidated Balance Sheets, while those intended to
be held for longer than one year are classified within other assets. Unrealized gains or losses associated with available-for-sale securities
are reported net of tax within other comprehensive income in shareholders’ equity. Unrealized gains or losses associated with trading
securities are recorded as a component of other income in the Company’s Consolidated Statement of Operations.
Derivative Instruments
From time to time, the Company utilizes certain derivative instruments (e.g. interest rate swap agreements and foreign currency
forward contracts) to hedge the variability of expected future cash flows of certain transactions. On an ongoing basis, the Company
assesses whether derivative instruments used in hedging transactions are highly effective in offsetting changes in cash flows of the
hedged items and therefore qualify as cash flow hedges. For a derivative instrument that qualifies as a cash flow hedge, the effective
portion of changes in fair value of the derivative is deferred and recorded as a component of other comprehensive income until the
hedged transaction occurs and is recognized in earnings. All other portions of changes in the fair value of a cash flow hedge are
recognized in earnings immediately.
The Company has previously utilized interest rate swap agreements to manage interest expense related to its revolving credit
facility. Interest rate risk associated with the Company’s variable rate revolving credit facility is the potential increase in interest expense
from an increase in interest rates. The Company did not enter into any interest rate swap agreements in fiscal 2010, 2009 or 2008.
During fiscal 2008, the Company entered into a one year foreign currency forward contract to mitigate foreign exchange risk
at one of its foreign subsidiaries for transactions denominated in a currency other than its functional currency. The impact of this
forward contract did not have a material effect on the Company’s results of operations, financial position or cash flows in fiscal 2009
or 2008. The Company did not enter into any foreign currency forward contracts in fiscal 2010 or 2009.
Customer Rebates and Credits
The Company records accrued customer rebates and credits as a component of accrued expenses and other current liabilities
in the Company’s Consolidated Balance Sheets. These amounts generally relate to discounts negotiated with customers as part of
certain sales contracts that are usually tied to sales volume thresholds. The Company accrues customer rebates and credits as a
reduction within net sales as the revenue is recognized based on the estimated level of discount rate expected to be earned by each
customer over the life of the contract period (generally one year). Accrued customer rebates and credits are monitored by manage-
ment and discount levels are updated at least quarterly.
Product Warranties
Product warranty liabilities are estimated at the time of shipment and recorded as a component of accrued expenses and other
current liabilities in the Company’s Consolidated Balance Sheets. The amount recognized is based on historical claims experience.
Revenue Recognition
Revenue is recognized on an accrual basis, primarily upon the shipment of products and the rendering of services. Revenue
earned from rendering services represented less than 10% of consolidated net sales for all periods presented. Revenue from certain
fixed price contracts for which costs can be dependably estimated is recognized on the percentage-of-completion method, measured
by the percentage of costs incurred to date to estimated total costs for each contract. The percentage of the Company’s net sales rec-
ognized under the percentage-of-completion method was approximately 2%, 1%, and 3% in fiscal 2010, 2009 and 2008, respectively.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred.
| 33
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the period of revision.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Variations in
actual labor performance, changes to estimated profitability, and final contract settlements may result in revisions to cost estimates
and are recognized in income in the period in which the revisions are determined.
The asset, “costs and estimated earnings in excess of billings” on uncompleted percentage-of-completion contracts, included in
accounts receivable, represents revenue recognized in excess of amounts billed. The liability, “billings in excess of costs and estimated
earnings,” included in accrued expenses and other current liabilities, represents billings in excess of revenue recognized on contracts
accounted for under either the percentage-of-completion method or the completed-contract method. Billings are made based on the
completion of certain milestones as provided for in the contracts.
For fixed price contracts in which costs cannot be dependably estimated, revenue is recognized on the completed-contract
method. A contract is considered complete when all significant costs have been incurred or the item has been accepted by the
customer. The aggregate effects of changes in estimates relating to long-term contracts did not have a material effect on net income
from consolidated operations in fiscal 2010, 2009 or 2008.
Stock-Based Compensation
The Company records compensation expense associated with stock options in its Consolidated Statements of Operations based
on the grant date fair value of those awards. The fair value of each stock option on the date of grant is estimated using the Black-
Scholes pricing model based on certain valuation assumptions. Expected volatilities are based on the Company’s historical stock
prices over the contractual terms of the options and other factors. The risk-free interest rates used are based on the published U.S.
Treasury yield curve in effect at the time of the grant for instruments with a similar life. The dividend yield reflects the Company’s
expected dividend yield at the date of grant. The expected life represents the period that the stock options are expected to be
outstanding, taking into consideration the contractual terms of the options and employee historical exercise behavior. The Company
generally recognizes stock option compensation expense ratably over the award’s vesting period.
The Company calculates the amount of excess tax benefit that is available to offset future write-offs of deferred tax assets, or
additional paid-in-capital pool (“APIC Pool”) by tracking each stock option award granted after November 1, 1996 on an employee-
by-employee basis and on a grant-by-grant basis to determine whether there is a tax benefit situation or tax deficiency situation for
each such award. The Company then compares the fair value expense to the tax deduction received for each stock option grant and
aggregates the benefits and deficiencies, which have the effect of increasing or decreasing, respectively, the APIC Pool. Should the
amount of future tax deficiencies be greater than the available APIC Pool, the Company will record the excess as income tax expense
in its Consolidated Statements of Operations. The excess tax benefit resulting from tax deductions in excess of the cumulative
compensation expense recognized for stock options exercised is presented as a financing activity in the Company’s Consolidated
Statements of Cash Flows. All other tax benefits related to stock options have been presented as a component of operating activities.
Income Taxes
Income tax expense includes United States and foreign income taxes, plus the provision for United States taxes on undistributed
earnings of foreign subsidiaries not deemed to be permanently invested. Deferred income taxes are provided on elements of income
that are recognized for financial accounting purposes in periods different from periods recognized for income tax purposes.
The Company accounts for uncertainty in income taxes and evaluates tax positions utilizing a two-step process. The first step
is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination based on the technical
merits of the position. The second step is to measure the benefit to be recorded from tax positions that meet the more-likely-than-
not recognition threshold by determining the largest amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement and recognizing that amount in the financial statements. As a result of adopting the provisions of the new
guidance relating to the accounting for uncertainty in income taxes effective November 1, 2007, the Company recognized a cumula-
tive effect adjustment that decreased retained earnings as of the beginning of fiscal 2008 by $639,000. The Company’s policy is to
recognize interest and penalties related to income tax matters as a component of income tax expense. Further information regarding
income taxes can be found in Note 6, Income Taxes.
34 |
Noncontrolling Interests
Effective November 1, 2009, the Company adopted new accounting guidance that requires the recognition of certain noncon-
trolling interests (previously referred to as minority interests) as a separate component within equity in the consolidated balance
sheet. It also requires the amount of consolidated net income attributable to the parent and the noncontrolling interests be clearly
identified and presented within the consolidated statement of operations. The adoption of this new guidance (which is included
in Accounting Standards Codification (“ASC”) 810, “Consolidation”) has affected the presentation of noncontrolling interests in
the Company’s consolidated financial statements on a retrospective basis. For example, under this guidance, “Net income from
consolidated operations” is comparable to what was previously presented as “Income before minority interests” and “Net income
attributable to HEICO” is comparable to what was previously presented as “Net income.” Further, acquisitions of noncontrolling
interests are considered a financing activity under the new accounting guidance and are no longer presented as an investing activity.
Effective November 1, 2009, the Company also adopted new accounting guidance that retrospectively affects the financial
statement classification and measurement of redeemable noncontrolling interests. This guidance is included in ASC 480, “Distin-
guishing Liabilities from Equity.” As further detailed in Note 12, Redeemable Noncontrolling Interests, the holders of equity interests
in certain of the Company’s subsidiaries have rights (“Put Rights”) that require the Company to provide cash consideration for their
equity interests (the “Redemption Amount”) 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. The Put Rights are embedded in the shares owned
by the noncontrolling interest holders and are not freestanding. Previously, the Company recorded such redeemable noncontrolling
interests at historical cost plus an allocation of subsidiary earnings based on ownership interest, less dividends paid to the noncon-
trolling interest holders. Effective November 1, 2009, the Company adjusted its redeemable noncontrolling interests in accordance
with this new accounting guidance to the higher of their carrying cost or management’s estimate of the Redemption Amount with a
corresponding decrease to retained earnings and classified such interests outside of permanent equity. Under this guidance, subse-
quent adjustments to the carrying amount of redeemable noncontrolling interests to reflect any changes in the Redemption Amount
at the end of each reporting period will be recorded in the same manner. Such adjustments to Redemption Amounts based on fair
value 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 that reflect a redemption
amount in excess of fair value will effect net income per share attributable to HEICO shareholders under the two-class method.
As a result of adopting the new accounting guidance for noncontrolling interests and redeemable noncontrolling interests, the
Company (i) reclassified approximately $78 million from temporary equity (previously labeled as “Minority interests in consolidated
subsidiaries”) to permanent equity (labeled as “Noncontrolling interests”) pertaining to noncontrolling interests that do not contain
a redemption feature; and (ii) renamed temporary equity as “Redeemable noncontrolling interests” and recorded an approximately
$45 million increase to redeemable noncontrolling interests with a corresponding decrease to retained earnings in the Company’s
Consolidated Balance Sheet. The resulting $57 million of redeemable noncontrolling interests as of November 1, 2009 represents
management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay of which
approximately $25 million is redeemable at fair value and approximately $32 million is redeemable based solely on a multiple of
future earnings. The actual Redemption Amount will likely be different. See Note 12, Redeemable Noncontrolling Interests, for
additional information as well as the Company’s Consolidated Statements of Shareholders’ Equity and Comprehensive Income,
which have been retrospectively adjusted.
Net Income per Share Attributable to HEICO Shareholders
Basic net income per share attributable to HEICO shareholders is computed by dividing net income attributable to HEICO
by the weighted average number of common shares outstanding during the period. Diluted net income per share attributable to
HEICO shareholders is computed by dividing net income attributable to HEICO by the weighted average number of common shares
outstanding during the period plus potentially dilutive common shares arising from the assumed exercise of stock options, if dilutive.
The dilutive impact of potentially dilutive common shares is determined by applying the treasury stock method.
As further detailed in “Noncontrolling Interests” above, the portion of periodic adjustments to the carrying amount of redeem-
able noncontrolling interests based solely on a multiple of future earnings that reflect a redemption amount in excess of fair value
are deducted from net income attributable to HEICO for purposes of determining net income per share attributable to HEICO
shareholders under the two-class method (see Note 13, Net Income per Share Attributable to HEICO Shareholders).
| 35
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries that do not utilize the United States dollar as its functional currency are
translated at period-end exchange rates, while revenue and expenses are translated using average exchange rates for the period.
Unrealized translation gains or losses are reported as foreign currency translation adjustments through other comprehensive income
in shareholders’ equity.
Contingencies
Losses for contingencies such as product warranties, litigation and environmental matters are recognized in income when they
are probable and can be reasonably estimated. Gain contingencies are not recognized in income until they have been realized.
New Accounting Pronouncements
As discussed within “Noncontrolling Interests” above, the Company adopted new guidance related to the recognition, measure-
ment and classification of noncontrolling interests.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued new guidance which defines fair value,
establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. This guidance is
included in ASC 820, “Fair Value Measurements and Disclosures.” In February 2008, the FASB issued additional guidance which de-
layed the effective date by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. These nonfinancial assets and liabilities include items such as goodwill, other intangible assets,
and property, plant and equipment that are measured at fair value resulting from impairment, if deemed necessary. The provisions
of this guidance related to nonfinancial assets and liabilities were adopted by the Company on a prospective basis as of the beginning
of fiscal 2010, or November 1, 2009. The adoption did not have a material effect on the Company’s results of operations, financial
position or cash flows.
In December 2007, the FASB issued new guidance for business combinations that retains the fundamental requirements of
previous guidance that the acquisition method of accounting (formerly the “purchase accounting” method) be used for all business
combinations and for an acquirer to be identified for each business combination. However, the new guidance changes the approach
of applying the acquisition method in a number of significant areas, including that acquisition costs will generally be expensed
as incurred; noncontrolling interests will be valued at fair value as of the acquisition date; in-process research and development
will be recorded at fair value as an indefinite-lived intangible asset as of the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation
allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. Further, any contingent
consideration will be recognized as a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded
in operations. Contingent consideration was previously accounted for as an additional cost of the respective acquired entity when
paid. The Company adopted the new guidance (which is included in ASC 805, “Business Combinations”) on a prospective basis as of
the beginning of fiscal 2010 for all business combinations consummated on or after November 1, 2009. The adoption did not have a
material effect on the Company’s results of operations, financial position or cash flows.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures About Fair Value
Measurements,” which requires new 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 the second quarter of fiscal 2010, except the additional Level 3 disclosures, which are effective in fiscal years beginning after De-
cember 15, 2010, or as of fiscal 2012 for HEICO. The adoption did not have a material effect on the Company’s results of operations,
financial position or cash flows. The Company will make the additional Level 3 disclosures, if applicable, as of the date of adoption.
In December 2010, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 10-G, “Disclosure of Supplementary Pro Forma
Information for Business Combinations.” Under EITF Issue 10-G, 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. EITF Issue 10-G is effective for business combinations consummated in periods
beginning after December 15, 2010, or in the second quarter of fiscal 2011 for HEICO. Early adoption is permitted. The Company
will make the required disclosures prospectively as of the date of the adoption for any material business combinations or series of
immaterial business combinations that are material in the aggregate.
36 |
NOTE 2 | ACQUISITIONS
In November 2007, the Company, through an 80%-owned subsidiary of HEICO Aerospace, acquired all of the stock of a
European company. The acquired company supplies aircraft parts for sale and exchange as well as repair management services to
commercial and regional airlines, asset management companies and FAA overhaul and repair facilities.
In January 2008, the Company, through HEICO Aerospace, acquired certain assets and assumed certain liabilities of a U.S.
company that designs and manufactures FAA-approved aircraft and engine parts primarily for the commercial aviation market. The
Company has since combined the operations of the acquired entity within other subsidiaries of HEICO Aerospace.
In February 2008, the Company, through HEICO Aerospace, acquired an 80.1% interest in certain assets and certain liabilities
of a U.S. company that is an FAA-approved repair station which specializes in avionics primarily for the commercial aviation market.
The remaining noncontrolling interest is principally owned by certain members of the acquired company’s management.
In May 2009, the Company, through HEICO Electronic, acquired 82.5% of the stock of VPT, Inc., a U.S. company that designs
and provides power conversion products principally serving the defense, space and aviation industries. The remaining 17.5%
continues to be owned by an existing VPT shareholder which is also a supplier to the acquired company. During the first year fol-
lowing the acquisition, VPT met certain earnings objectives which obligated the Company to pay additional purchase consideration
of $1.3 million in the third quarter of fiscal 2010. In addition, subject to meeting certain earnings objectives during the second and
third year following the acquisition, the Company may be obligated to pay additional purchase consideration of up to approximately
$1.3 million in fiscal 2011 and $10.1 million in fiscal 2012.
In October 2009, the Company, through HEICO Electronic, acquired the business, assets and certain liabilities of the Seacom
division of privately-held Dukane Corp. and formed a new subsidiary, Dukane Seacom, Inc. (“Seacom”). Seacom is a designer
and manufacturer of underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship
voyage recorders and various other devices which have been submerged under water. Subject to meeting certain earnings objectives
during the first two years following the acquisition, the Company may be obligated to pay additional purchase consideration of up to
approximately $11.7 million in aggregate. Based on the subsidiary’s earnings in the first year following the acquisition, the Company
accrued $4.1 million of additional purchase consideration as of October 31, 2010, which it expects to pay in fiscal 2011.
In February 2010, the Company, through HEICO Electronic, acquired substantially all of the assets and assumed certain
liabilities of dB Control. dB control produces high-power devices used in both defense and commercial applications. As further
detailed in Note 7, Fair Value Measurements, the Company may be obligated to pay contingent consideration of up to $2.0 million in
fiscal 2013 should dB Control meet certain earnings objectives during the second and third years following the acquisition.
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 fiscal 2010, the Company, through HEICO Electronic, paid $4.2 million of such additional
purchase consideration of which $1.8 million was accrued as of October 31, 2009. During fiscal 2009, the Company, through
HEICO Electronic, paid $3.8 million of such additional purchase consideration of which $2.2 million was accrued as of October
31, 2008. During fiscal 2008, the Company, through HEICO Aerospace and HEICO Electronic, paid $7.0 million and $4.7 million,
respectively, of such additional purchase consideration, all of which was accrued as of October 31, 2007. The amounts paid in fiscal
2010, 2009 and 2008 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
16, Commitments and Contingencies.
The purchase price of each of the above referenced acquisitions was paid in cash using proceeds from the Company’s revolving
credit facility and is not material or significant to the Company’s consolidated financial statements. The aggregate cost paid in cash
for acquisitions, including additional purchase consideration payments, was $39.1 million, $59.8 million and $24.8 million in fiscal
2010, 2009 and 2008, respectively. The allocation of the purchase price of each acquisition to the tangible and identifiable intangible
assets acquired and liabilities assumed is based on their estimated fair values as of the date of acquisition. The Company determines
the fair values of such assets and liabilities, generally in consultation with third-party valuation advisors. The excess of the purchase
price over the estimated fair values is recorded as goodwill (see Note 17, Supplemental Disclosures of Cash Flow Information).
| 37
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
The operating results of the Company’s fiscal 2010 acquisition were included in the Company’s results of operations from the
effective acquisition date. The amount of net sales and earnings of the 2010 acquisition included in the Consolidated Statements
of Operations is not material. The following table presents unaudited pro forma financial information for fiscal 2009 as if the fiscal
2010 acquisition had occurred as of November 1, 2008 for purposes of the information presented for the year ended October 31,
2009. Had the fiscal 2010 acquisition been consummated as of November 1, 2009, net sales, net income from consolidated opera-
tions, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro
forma basis for fiscal 2010 would not have been materially different than the reported amounts. The pro forma financial information
is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been
achieved if the acquisition had taken place as of November 1, 2008. The unaudited pro forma financial information includes adjust-
ments to historical amounts such as additional amortization expense related to intangible assets acquired and increased interest
expense associated with borrowings to finance the acquisition.
Year ended October 31,
Net sales
Net income from consolidated operations
Net income attributable to HEICO
Net income per share attributable to HEICO shareholders:
Basic
Diluted
2009
$ 563,025,000
61,966,000
$
46,747,000
$
$
$
1.43
1.38
NOTE 3 | SELECTED FINANCIAL STATEMENT INFORMATION
Accounts Receivable
As of October 31,
Accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
2010
2009
$ 94,283,000
(2,468,000)
$ 91,815,000
$ 80,399,000
(2,535,000)
$ 77,864,000
Costs and Estimated Earnings on Uncompleted Percentage-of-Completion Contracts
As of October 31,
Costs incurred on uncompleted contracts
Estimated earnings
Less: Billings to date
Included in the accompanying Consolidated Balance
Sheets under the following captions:
Accounts receivable, net (costs and estimated earnings in excess of billings)
Accrued expenses and other current liabilities
(billings in excess of costs and estimated earnings)
2010
2009
$
$
6,323,000
7,603,000
13,926,000
(8,967,000)
4,959,000
$ 10,280,000
8,070,000
18,350,000
(12,543,000)
5,807,000
$
$
5,135,000
$
5,832,000
(176,000)
4,959,000
$
(25,000)
5,807,000
$
Changes in estimates pertaining to percentage of completion contracts did not have a material effect on net income from
consolidated operations in fiscal 2010, 2009 or 2008.
Inventories
As of October 31,
Finished products
Work in process
Materials, parts, assemblies and supplies
Inventories, net of valuation reserves
2010
2009
$ 72,263,000
19,034,000
46,918,000
$ 138,215,000
$ 79,665,000
14,279,000
43,641,000
$ 137,585,000
Inventories related to long-term contracts were not significant as of October 31, 2010 and 2009.
38 |
Property, Plant and Equipment
As of October 31,
Land
Buildings and improvements
Machinery, equipment and tooling
Construction in progress
Less: Accumulated depreciation and amortization
Property, plant and equipment, net
2010
2009
$
3,656,000
38,772,000
85,095,000
6,319,000
133,842,000
(74,839,000)
$ 59,003,000
$
3,656,000
38,091,000
80,697,000
5,331,000
127,775,000
(67,247,000)
$ 60,528,000
The amounts set forth above include tooling costs having a net book value of $4,479,000 and $4,369,000 as of October 31, 2010
and 2009, respectively. Amortization expense on capitalized tooling was $1,857,000, $1,825,000 and $1,575,000 for the fiscal years
ended October 31, 2010, 2009 and 2008, respectively. Expenditures for capitalized tooling costs were $1,750,000, $2,193,000 and
$1,412,000 in fiscal 2010, 2009 and 2008, respectively.
Depreciation and amortization expense, exclusive of tooling, on property, plant and equipment was $8,668,000, $8,365,000 and
$7,990,000 for the fiscal years ended October 31, 2010, 2009 and 2008, respectively.
Included in the Company’s property, plant and equipment is rotable equipment located at various customer locations in
connection with certain repair and maintenance agreements. The rotables are stated at a net book value of $219,000 and $631,000 as
of October 31, 2010 and 2009, respectively.
Accrued Expenses and Other Current Liabilities
As of October 31,
Accrued employee compensation and related payroll taxes
Accrued customer rebates and credits
Accrued additional purchase consideration
Other
Accrued expenses and other current liabilities
2010
2009
$ 26,556,000
9,230,000
4,104,000
12,211,000
$ 52,101,000
$ 14,745,000
9,689,000
1,775,000
10,769,000
$ 36,978,000
The increase in accrued employee compensation and related payroll taxes as of October 31, 2010 compared to October 31, 2009
reflects a higher level of accrued performance awards based on the improved consolidated operating results.
The total customer rebates and credits deducted within net sales for the fiscal years ended October 31, 2010, 2009 and 2008 were
$8,866,000, $8,315,000 and $10,249,000, respectively.
Other Long-Term Assets and Liabilities
The Company provides eligible employees, officers and directors of the Company the opportunity to voluntarily defer base
salary, bonus payments, commissions, long-term incentive awards and directors fees, as applicable, on a pre-tax basis through the
HEICO Corporation Leadership Compensation Plan (“LCP”), a nonqualified deferred compensation plan that conforms to Section
409A of the Internal Revenue Code. The Company matches 50% of the first 6% of base salary deferred by each participant. In fiscal
2008, the LCP was amended principally to allow director fees that would otherwise be payable in Company common stock to be
deferred into the Plan, and, when distributed, amounts would be distributable in actual shares of Company common stock. During
fiscal 2009, the LCP was amended to comply with the final Section 409A regulations issued by the Internal Revenue Service, which
became effective January 1, 2009. Further, while the Company has no obligation to do so, the LCP also provides the Company the
opportunity to make discretionary contributions. The Company’s matching contributions and any discretionary contributions are
subject to vesting and forfeiture provisions set forth in the LCP. Company contributions to the Plan charged to income in fiscal 2010,
2009 and 2008 totaled $2,862,000, $2,195,000 and $2,075,000, respectively. The aggregate liabilities of the LCP were $22,223,000
and $15,552,000 as of October 31, 2010 and 2009, respectively, and are classified within other long-term liabilities in the Company’s
Consolidated Balance Sheets. The assets of the LCP, totaling $22,604,000 and $15,811,000 as of October 31, 2010 and 2009, respec-
tively, are classified within other assets and principally represent cash surrender values of life insurance policies that are held within
an irrevocable trust that may be used to satisfy the obligations under the LCP.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Other long-term liabilities also includes deferred compensation of $4,283,000 and $3,953,000 as of October 31, 2010 and 2009,
respectively, principally related to elective deferrals of salary and bonuses under a Company sponsored non-qualified deferred
compensation plan available to selected employees. The Company makes no contributions to this plan. The assets of this plan,
which equaled the deferred compensation liability as of October 31, 2010 and 2009, respectively, are held within an irrevocable trust
and classified within other assets in the Company’s Consolidated Balance Sheets. Additional information regarding the assets of this
deferred compensation plan and the LCP may be found in Note 7, Fair Value Measurements.
NOTE 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 during fiscal 2010 and 2009 by operating segment are as follows:
Balances as of October 31, 2008
Goodwill acquired
Adjustments to goodwill
Accrued additional purchase consideration
Foreign currency translation adjustments
Balances as of October 31, 2009
Goodwill acquired
Adjustments to goodwill
Accrued additional purchase consideration
Foreign currency translation adjustments
Balances as of October 31, 2010
Segment
FSG
ETG
$
$
181,126,000
6,444,000
866,000
–
23,000
188,459,000
–
–
–
–
188,459,000
$ 142,267,000
29,269,000
1,612,000
1,775,000
1,861,000
176,784,000
12,920,000
1,960,000
4,104,000
789,000
$ 196,557,000
Consolidated
Totals
$ 323,393,000
35,713,000
2,478,000
1,775,000
1,884,000
365,243,000
12,920,000
1,960,000
4,104,000
789,000
$ 385,016,000
The goodwill acquired during fiscal 2010 relates to the current year acquisition described in Note 2, Acquisitions. The goodwill
acquired during fiscal 2009 relates to the prior year acquisitions described in Note 2, Acquisitions, as well as acquisitions of redeem-
able noncontrolling interests described in Note 12, Redeemable Noncontrolling Interests. The amounts represent the residual
value after the allocation of the total consideration to the tangible and identifiable intangible assets acquired and liabilities assumed
(inclusive of contingent consideration for the fiscal 2010 acquisition). The adjustments to goodwill during fiscal 2010 and 2009
principally represent additional purchase consideration paid relating to prior year acquisitions for which the earnings objectives
were met in fiscal 2010 and 2009, respectively. The accrued additional purchase consideration recognized in fiscal 2010 and 2009
is the result of certain subsidiaries of the ETG meeting certain earnings objectives in those respective fiscal years. See Note 2 and
Note 16, Commitments and Contingencies, for additional information regarding additional contingent purchase consideration. The
foreign currency translation adjustment reflects unrealized translation gains on the goodwill recognized in connection with foreign
subsidiaries. Foreign currency translation adjustments are included in other comprehensive income in the Company’s Consolidated
Statements of Shareholders’ Equity and Comprehensive Income. The Company estimates that approximately $19 million and $25
million of the goodwill recognized in fiscal 2010 and 2009, respectively, will be deductible for income tax purposes. Based on the
annual test for goodwill impairment as of October 31, 2010, the Company determined there is no impairment of its goodwill as the
fair value of each of the Company’s reporting units significantly exceeded their carrying value.
40 |
Identifiable intangible assets consist of:
As of October 31, 2010
As of October 31, 2009
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizing Assets:
Customer relationships
Intellectual property
Licenses
Non-compete agreements
Patents
Trade names
Non-Amortizing Assets:
Trade names
$ 37,338,000
7,281,000
1,000,000
1,170,000
554,000
569,000
47,912,000
$ (12,142,000)
(1,372,000)
(621,000)
(1,019,000)
(270,000)
(112,000)
(15,536,000)
$ 25,196,000
5,909,000
379,000
151,000
284,000
457,000
32,376,000
$ 33,237,000
3,369,000
1,000,000
1,221,000
575,000
569,000
39,971,000
$ (9,944,000) $ 23,293,000
2,741,000
453,000
252,000
329,000
569,000
27,637,000
(628,000)
(547,000)
(969,000)
(246,000)
–
(12,334,000)
17,111,000
$ 65,023,000
–
$ (15,536,000)
17,111,000
$ 49,487,000
13,951,000
$ 53,922,000
–
13,951,000
$(12,334,000) $ 41,588,000
The increase in the gross carrying amount of customer relationships, intellectual property and non-amortizing trade names
as of October 31, 2010 compared to October 31, 2009 principally relates to such intangible assets recognized in connection with an
acquisition made during the second quarter of fiscal 2010 (see Note 2, Acquisitions, and Note 17, Supplemental Disclosures of Cash
Flow Information). The increase in the gross carrying amount of customer relationships recognized in connection with the fiscal
2010 acquisition was partially offset by the write-off of certain such fully amortized intangible assets and a write-down to fair value
of certain other such intangible assets. During fiscal 2010 and 2009, the Company recognized impairment losses of approximately
$1.1 million and $.2 million, respectively, from the write-down of certain customer relationships and $.3 million and $.1 million,
respectively, from the write-down of trade names, within the ETG to their estimated fair values, due to reductions in future cash
flows associated with such intangible assets. The impairment losses were recorded as a component of selling, general and adminis-
trative expenses in the Company’s Consolidated Statement of Operations.
The weighted average amortization period of the customer relationships and intellectual property acquired during fiscal 2010
is eight years. Based on the final purchase price allocations during the allocation period for certain fiscal 2009 acquisitions, the
weighted average amortization period of the customer relationships and intellectual property acquired in fiscal 2009 is approximately
eight years and seven years, respectively. The weighted average amortization period of the finite-lived trade names and non-compete
agreements acquired during fiscal 2009 is approximately five years and two years, respectively.
Amortization expense of other intangible assets was $6,795,000, $4,499,000 and $5,156,000 for the fiscal years ended October
31, 2010, 2009 and 2008, respectively. Amortization expense for each of the next five fiscal years and thereafter is estimated to be
$6,100,000 in fiscal 2011, $5,396,000 in fiscal 2012, $4,936,000 in fiscal 2013, $4,639,000 in fiscal 2014, $3,495,000 in fiscal 2015 and
$7,810,000 thereafter.
NOTE 5 | LONG-TERM DEBT
Long-term debt consists of the following:
As of October 31,
Borrowings under revolving credit facility
Notes payable, capital leases and equipment loans
Less: Current maturities of long-term debt
2010
2009
$ 14,000,000
221,000
14,221,000
(148,000)
$ 14,073,000
$ 55,000,000
431,000
55,431,000
(237,000)
$ 55,194,000
The aggregate balance of long-term debt will mature within the next three fiscal years with $148,000 in fiscal 2011, $52,000 in
fiscal 2012 and $14,021,000 in fiscal 2013.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Revolving Credit Facility
In May 2008, the Company amended its revolving credit facility by entering into a $300 million Second Amended and Restated
Revolving Credit Agreement (“Credit Facility”) with a bank syndicate, which matures in May 2013. Under certain circumstances,
the maturity may be extended for two one-year periods. The Credit Facility also includes a feature that will allow the Company to
increase the Credit Facility, at its option, up to $500 million through increased commitments from existing lenders or the addition of
new lenders. The Credit Facility may be used for working capital and general corporate needs of the Company, including letters of
credit, capital expenditures and to finance acquisitions. Advances under the Credit Facility accrue interest at the Company’s choice
of the “Base Rate” or the London Interbank Offered Rate (“LIBOR”) plus applicable margins (based on the Company’s ratio of total
funded debt to earnings before interest, taxes, depreciation and amortization, noncontrolling interest and non-cash charges, or
“leverage ratio”). The Base Rate is the higher of (i) the Prime Rate or (ii) the Federal Funds rate plus .50%. The applicable margins
for LIBOR-based borrowings range from .625% to 2.25%. A fee is charged on the amount of the unused commitment ranging from
.125% to .35% (depending on the Company’s leverage ratio). The Credit Facility also includes a $50 million sublimit for borrowings
made in euros, a $30 million sublimit for letters of credit and a $20 million swingline sublimit. The Credit Facility is unsecured and
contains covenants that require, among other things, the maintenance of the leverage ratio, a senior leverage ratio and a fixed charge
coverage ratio. In the event the Company’s leverage ratio exceeds a specified level, the Credit Facility would become secured by the
capital stock owned in substantially all of the Company’s subsidiaries.
As of October 31, 2010 and 2009, the Company had a total of $14 million and $55 million, respectively, borrowed under its
revolving credit facility at a weighted average interest rate of .9% as of each period. The amounts were primarily borrowed to fund
acquisitions (see Note 2, Acquisitions) as well as for working capital and general corporate purposes. The revolving credit facility
contains both financial and non-financial covenants. As of October 31, 2010, the Company was in compliance with all such covenants.
NOTE 6 | INCOME TAXES
The components of the provision for income taxes on income before income taxes and noncontrolling interests are as follows:
Year ended October 31,
2010
2009
2008
Current:
Federal
State
Foreign
Deferred
Total income tax expense
$ 29,180,000
4,659,000
1,044,000
34,883,000
1,817,000
$ 36,700,000
$ 25,920,000
3,890,000
841,000
30,651,000
(2,651,000)
$ 28,000,000
$ 27,118,000
4,225,000
490,000
31,833,000
3,617,000
$ 35,450,000
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
Year ended October 31,
2010
2009
2008
Federal statutory income tax rate
State taxes, less applicable federal income tax reduction
Net tax benefit on noncontrolling interests’ share of income
Net tax benefit on qualified research and development activities
Net tax benefit on qualified domestic production activities
Other, net
Effective tax rate
35.0%
3.2
(2.6)
(1.0)
(.8)
(.1)
33.7%
35.0%
2.5
(2.7)
(2.9)
(.6)
.6
31.9%
35.0%
2.9
(3.0)
(.3)
(.7)
.6
34.5%
42 |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than
not that it will generate sufficient future taxable income to utilize all of its deferred tax assets and has therefore not recorded a
valuation allowance on any such asset. Significant components of the Company’s deferred tax assets and liabilities are as follows:
As of October 31,
Deferred tax assets:
Inventories
Deferred compensation liability
Foreign R&D carryforward and credit
Bonus accrual
Net operating loss carryforward of acquired business
Stock option compensation
Allowance for doubtful accounts receivable
Vacation accrual
Customer rebates accrual
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible asset amortization
Accelerated depreciation
Software development costs
Other
Total deferred tax liabilities
Net deferred tax liability
2010
2009
$ 14,196,000
9,969,000
2,788,000
1,568,000
1,395,000
1,068,000
896,000
769,000
558,000
1,864,000
35,071,000
55,750,000
3,044,000
1,905,000
773,000
61,472,000
$ (26,401,000)
$ 13,123,000
7,407,000
1,714,000
1,214,000
4,184,000
549,000
880,000
795,000
671,000
1,833,000
32,370,000
50,113,000
3,700,000
1,622,000
1,604,000
57,039,000
$ (24,669,000)
The net deferred tax liability is classified in the Company’s Consolidated Balance Sheets as follows:
As of October 31,
Current asset
Long-term liability
Net deferred tax liability
2010
2009
$ 18,907,000
45,308,000
$ (26,401,000)
$ 16,671,000
41,340,000
$ (24,669,000)
As of October 31, 2010 and 2009, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions
was $2,306,000 and $3,328,000, respectively, of which $1,927,000 and $2,859,000, respectively, 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 during the fiscal years ended October
31, 2010 and 2009 is as follows:
Year ended October 31,
Balances as of beginning of year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Settlements
Lapse of statutes of limitations
Balances as of end of year
2010
3,328,000
46,000
(1,229,000)
551,000
(31,000)
(359,000)
2,306,000
$
$
2009
5,742,000
91,000
(3,562,000)
1,234,000
(211,000)
34,000
3,328,000
$
$
The Company’s net liability for unrecognized tax benefits was $2,252,000 as of October 31, 2010, including $238,000 of interest
and $170,000 of penalties and net of $462,000 in related deferred tax assets. During the fiscal year ended October 31, 2010, the
Company accrued interest of $62,000 and penalties of $22,000 related to the unrecognized tax benefits noted above.
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H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
The $1,022,000 decrease in the liability during fiscal 2010 was principally related to the finalization of a study of qualifying
research and development activities used to prepare the Company’s fiscal 2009 U.S. federal and state income tax returns and the
settlement of the California Franchise Tax Board examination of the income tax credit claimed for qualified research and develop-
ment activities on the Company’s state of California filings for fiscal years 2001 through 2005. The decrease in the liability reduced
the Company’s income tax expense by $932,000.
The $2,414,000 decrease in the liability during fiscal 2009 was principally related to the release of liabilities for tax positions for
which the uncertainty was only related to the timing of such tax benefits and the effect of a favorable settlement reached with the IRS
during fiscal 2009, partially offset by increases related to current year tax positions. During the IRS’ examination of the income tax
credits claimed by the Company in its U.S. federal filings for qualified research and development activities incurred for fiscal years
2002 through 2005, new information was obtained that supported an aggregate reduction of the liability for uncertain tax positions
concerning research and development activities for fiscal years 2002 through 2008. As a result of the IRS settlement and associated
liability adjustment, the Company recognized a tax benefit, which increased net income attributable to HEICO by approximately
$1,225,000 for fiscal 2009. Further, during the second quarter of 2009, the Company filed an application with the IRS for an account-
ing methodology change that does not require the IRS’ advanced approval. As this change removed the uncertainty surrounding
certain tax positions that were related only to the timing of such tax benefits, the Company released the related liability, including
interest, and deferred tax asset upon filing the application, which did not have a material effect on net income for the fiscal year 2009.
The Company files income tax returns in the United States (“U.S.”) federal jurisdiction and in multiple state jurisdictions. The
Company is also subject to income taxes in certain jurisdictions outside the U.S., none of which are individually material to the
accompanying consolidated financial statements. Generally, the Company is no longer subject to U.S. federal or state examinations
by tax authorities for fiscal years prior to 2006.
The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, lapse of appli-
cable statutes of limitations and the recognition and measurement criteria under the guidance related to accounting for uncertainty
in income taxes. The Company is unable to estimate what this change could be within the next twelve months, but does not believe it
would be material to its consolidated financial statements.
NOTE 7 | FAIR VALUE MEASUREMENTS
The Company performs its fair value measurements according to accounting guidance that defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. The guidance also establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. The guidance
requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly
or indirectly; or
Level 3 — Unobservable inputs for the asset or liability where there is little or no market data, requiring management to
develop its own assumptions.
The following tables set 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 October 31, 2010 and 2009:
As of October 31, 2010
Level 1
Level 2
Level 3
Total
Assets:
Deferred compensation plans:
Corporate owned life insurance
Equity securities
Money market funds and cash
Mutual funds
Other
Total assets
Liabilities:
Contingent consideration
44 |
$
$
$
—
1,267,000
1,165,000
1,002,000
—
3,434,000
$ 22,908,000
—
—
—
545,000
$ 23,453,000
$
$
—
—
—
—
—
—
$ 22,908,000
1,267,000
1,165,000
1,002,000
545,000
$ 26,887,000
—
$
—
$
1,150,000
$ 1,150,000
As of October 31, 2009
Level 1
Level 2
Level 3
Total
Assets:
Deferred compensation plans:
Corporate owned life insurance
Equity securities
Money market funds and cash
Mutual funds
Other
Total assets
$
$
—
1,057,000
2,163,000
614,000
—
3,834,000
$ 15,687,000
—
—
—
243,000
$ 15,930,000
$
$
—
—
—
—
—
—
$ 15,687,000
1,057,000
2,163,000
614,000
243,000
$ 19,764,000
Liabilities
$ —
$ —
$ —
$ —
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. Certain other assets
of the LCP represent investments in HEICO common stock and money market funds that are classified within Level 1. The assets
of the Company’s other deferred compensation plan are principally invested in a life insurance policy that is classified within Level
2 and equity securities, mutual funds and money market funds that are classified within Level 1. The assets of both plans are held
within irrevocable trusts and classified within other assets in the Company’s Consolidated Balance Sheets. The related liabilities of
the two deferred compensation plans are included within other long-term liabilities in the Company’s Consolidated Balance Sheets
and have an aggregate value of $26,506,000 as of October 31, 2010 and $19,505,000 as of October 31, 2009.
The Company did not have any transfers between Level 1 and Level 2 fair value measurements during fiscal 2010.
As part of the agreement to acquire a subsidiary by the ETG in the second quarter of fiscal 2010, the Company may be obligated
to pay contingent consideration of up to $2.0 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 as of the
acquisition date was determined 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 October 31, 2010 and this obligation is included in other long-term liabilities in the Company’s Consolidated Balance Sheet.
Changes in the fair value of contingent consideration will be recorded in the Company’s consolidated statements of operations.
The carrying amounts of cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other
current liabilities approximate fair value as of October 31, 2010 due to the relatively short maturity of the respective instruments.
The carrying value of long-term debt approximates fair value due to its variable interest rates.
During fiscal 2010 and 2009, certain intangible assets within the ETG were measured at fair value on a nonrecurring basis,
resulting in the recognition of impairment losses aggregating $1.4 million and $.3 million, respectively (see Note 4, Goodwill and
Other Intangible Assets). The fair value of each asset was determined using a discounted cash flow model and internal estimates of
each asset’s future cash flows.
The following table sets forth the fair values as of October 31 of the Company’s nonfinancial assets and liabilities that were
measured at fair value on a nonrecurring basis, all of which are classified in Level 3, and related impairment losses recognized during
fiscal 2010 and 2009:
2010
2009
Carrying
Amount
Impairment
Loss
Fair Value
(Level 3)
Carrying
Amount
Impairment Fair Value
(Level 3)
Loss
Customer relationships
Trade names
Other intangible assets
Total
$ 1,871,000
1,937,000
28,000
$ (1,080,000)
(330,000)
(28,000)
$ (1,438,000)
$ 791,000
1,607,000
—
$
406,000
351,000
—
$
$
(200,000)
(100,000)
—
(300,000)
$ 206,000
251,000
—
| 45
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
NOTE 8 | SHAREHOLDERS’ EQUITY
Preferred Stock Purchase Rights Plan
The Company’s Board of Directors adopted, as of November 2, 2003, a Shareholder Rights Agreement (the “2003 Plan”). Pursu-
ant to the 2003 Plan, the Board declared a dividend of one preferred share purchase right for each outstanding share of Common
Stock and Class A Common Stock (with the preferred share purchase rights collectively as the “Rights”). The Rights trade with the
common stock and are not exercisable or transferable apart from the Common Stock and Class A Common Stock until after a person
or group either acquires 15% or more of the outstanding common stock or commences or announces an intention to commence a
tender offer for 15% or more of the outstanding common stock. Absent either of the aforementioned events transpiring, the Rights
will expire as of the close of business on November 2, 2013.
The Rights have certain anti-takeover effects and, therefore, will cause substantial dilution to a person or group who attempts to
acquire the Company on terms not approved by the Company’s Board of Directors or who acquires 15% or more of the outstanding
common stock without approval of the Company’s Board of Directors. The Rights should not interfere with any merger or other
business combination approved by the Board since they may be redeemed by the Company at $.01 per Right at any time until the close
of business on the tenth day after a person or group has obtained beneficial ownership of 15% or more of the outstanding common stock
or until a person commences or announces an intention to commence a tender offer for 15% or more of the outstanding common stock.
The 2003 Plan also contains a provision to help ensure a potential acquirer pays all shareholders a fair price for the Company.
Common Stock and Class A Common Stock
Each share of Common Stock is entitled to one vote per share. Each share of Class A Common Stock is entitled to a 1/10 vote
per share. Holders of the Company’s Common Stock and Class A Common Stock are entitled to receive when, as and if declared by
the Board of Directors, dividends and other distributions payable in cash, property, stock or otherwise. In the event of liquidation,
after payment of debts and other liabilities of the Company, and after making provision for the holders of preferred stock, if any, the
remaining assets of the Company will be distributable ratably among the holders of all classes of common stock.
Stock Split
In March 2010, 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 27, 2010 in the form of a 25% stock dividend distributed to shareholders of record as of April 16,
2010. All applicable share and per share information has been adjusted retrospectively to give effect to the 5-for-4 stock split.
Share Repurchases
In accordance with the Company’s share repurchase program, 242,170 shares of Class A Common Stock were repurchased at
a total cost of $3.9 million and 230,625 shares of Common Stock were repurchased at a total cost of $4.2 million during the second
quarter of 2009.
In March 2009, the Company’s Board of Directors approved an increase in the Company’s share repurchase program by an
aggregate 1,250,000 shares of either or both Class A Common Stock and Common Stock, bringing the total authorized for future
purchase to 1,280,928 shares.
During the first and second quarters of fiscal 2010, the Company repurchased an aggregate 17,577 shares of Common Stock
at a total cost of $.6 million and an aggregate 2,613 shares of Class A Common Stock at a total cost of $.1 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.
The Company did not repurchase any shares of its common stock in fiscal 2008.
NOTE 9 | STOCK OPTIONS
The Company currently has two stock option plans, the 2002 Stock Option Plan (“2002 Plan”) and the Non-Qualified Stock
Option Plan, under which stock options may be granted. The Company’s 1993 Stock Option Plan (“1993 Plan”) terminated in March
2003 on the tenth anniversary of its effective date. No options may be granted under the 1993 Plan after such termination date;
however, options outstanding as of the termination date may be exercised pursuant to their terms. In addition, the Company granted
stock options in fiscal 2002 to a former shareholder of an acquired business pursuant to an employment agreement entered into in
connection with the acquisition in fiscal 1999. A total of 3,582,520 shares of the Company’s stock are reserved for issuance to em-
ployees, directors, officers and consultants as of October 31, 2010, including 2,137,448 shares currently under option and 1,445,072
shares available for future grants. Options issued under the 2002 Plan may be designated as incentive stock options or non-qualified
stock options. Incentive stock options are granted with an exercise price of not less than 100% of the fair market value of the
46 |
Company’s common stock as of date of grant (110% thereof in certain cases) and are exercisable in percentages specified as of the
date of grant over a period up to ten years. Only employees are eligible to receive incentive stock options. Non-qualified stock op-
tions under the 2002 Plan may be immediately exercisable. In March 2008, the Company’s shareholders approved two amendments
to the 2002 Plan, which principally increased the number of shares available for issuance under the plan and now requires options
be granted with an exercise price of no less than fair market value of the Company’s common stock as of the date of the grant. The
options granted pursuant to the 2002 Plan may be designated as Common Stock and/or Class A Common Stock in such proportions
as shall be determined by the Board of Directors or the Stock Option Plan Committee at its sole discretion. Options granted under
the Non-Qualified Stock Option Plan may be granted with an exercise price of no less than the fair market value of the Company’s
common stock as of the date of grant and are generally exercisable in four equal annual installments commencing one year from the
date of grant. The stock options granted to a former shareholder of an acquired business were fully vested and transferable as of 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. Options under all stock option plans expire no later than ten years after the date of grant, unless extended by the Stock Option
Plan Committee or the Board of Directors.
Information concerning stock option activity for each of the three fiscal years ended October 31 is as follows:
Outstanding as of October 31, 2007
Shares approved by the Shareholders
for the 2002 Stock Option Plan
Cancelled
Exercised
Outstanding as of October 31, 2008
Granted
Exercised
Outstanding as of October 31, 2009
Granted
Cancelled
Exercised
Outstanding as of October 31, 2010
Shares
Available
For Grant
Shares Under Option
Shares
Weighted Average
Exercise Price
203,630
2,344,163
$
7.83
1,875,000
817
—
2,079,447
(421,875)
—
1,657,572
(212,500)
—
—
1,445,072
—
(887)
(313,598)
2,029,678
421,875
(122,725)
2,328,828
212,500
(744)
(403,136)
2,137,448
—
$
5.33
$
7.65
$
$
7.86
$ 29.16
$
9.83
$ 11.62
$ 40.86
$ 10.91
$
8.43
$ 15.13
Information concerning stock options outstanding and stock options exercisable by class of common stock as of October 31,
2010 is as follows:
Common Stock
Class A Common Stock
Common Stock
Class A Common Stock
Number
Outstanding
1,441,479
695,969
2,137,448
Number
Exercisable
1,041,479
545,969
1,587,448
Options Outstanding
Weighted
Average
Exercise Price
Weighted Average
Remaining Contractual
Life (Years)
Aggregate
Intrinsic
Value
$
$
$
16.98
11.29
15.13
3.9
3.4
3.8
$ 47,282,827
17,989,858
$ 65,272,685
Options Exercisable
Weighted
Average
Exercise Price
Weighted Average
Remaining Contractual
Life (Years)
Aggregate
Intrinsic
Value
$
$
$
9.39
7.38
8.70
1.8
1.9
1.9
$ 42,065,227
16,247,778
$ 58,313,005
| 47
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Information concerning stock options exercised is as follows:
Year ended October 31,
2010
2009
2008
Cash proceeds from stock option exercises
Tax benefit realized from stock option exercises
Intrinsic value of stock option exercises
$
1,815,000
951,000
10,379,000
$ 1,207,000
1,890,000
1,586,000
$
2,398,000
6,248,000
7,854,000
Net income attributable to HEICO for the fiscal years ended October 31, 2010, 2009 and 2008 includes compensation expense
of $1,353,000, $181,000 and $142,000, respectively, and an income tax benefit of $516,000, $64,000 and $43,000, respectively, related
to the Company’s stock options. Substantially all of the stock option compensation expense was recorded as a component of selling,
general and administrative expenses in the Company’s Consolidated Statements of Operations. As of October 31, 2010, there was
$9,131,000 of pre-tax unrecognized compensation expense related to nonvested stock options, which is expected to be recognized
over a weighted average period of approximately 4.3 years. The total fair value of stock options that vested in 2010, 2009 and 2008
was $1,212,000, $14,000 and $408,000, respectively.
For the fiscal years ended October 31, 2010, 2009 and 2008, the excess tax benefit resulting from tax deductions in excess of the
cumulative compensation cost recognized for stock options exercised was $669,000, $1,573,000 and $4,324,000, respectively, and is
presented as a financing activity in the Company’s Consolidated Statements of Cash Flows.
The weighted-average fair value of stock options granted during fiscal 2010 was $22.31 per share for Common Stock and $11.13
per share for Class A Common Stock. The weighted-average fair value of stock options granted during fiscal 2009 was $16.79 per
share for Common Stock and $10.76 per share for Class A Common Stock. The Company did not grant any stock options in fiscal
2008. If there were a change in control of the Company, all of the unvested options outstanding as of October 31, 2010 would
become immediately exercisable.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model based
on the following weighted average assumptions for the fiscal years ended October 31, 2010 and 2009:
Expected stock price volatility
Risk-free interest rate
Dividend yield
Forfeiture rate
Expected option life (years)
2010
2009
Common
Stock
42.01%
2.45%
.27%
.00%
9
Class A
Common
Stock
39.57%
3.02%
.33%
.00%
7
Common
Stock
44.13%
3.22%
.25%
.00%
9
Class A
Common
Stock
39.44%
2.80%
.33%
.00%
6
NOTE 10 | RETIREMENT PLANS
The Company has a qualified defined contribution retirement plan (the “Plan”) under which eligible employees of the Company
and its participating subsidiaries may make Elective Deferral Contributions up to the limitations set forth in Section 402(g) of the
Internal Revenue Code. The Company generally makes a 25% or 50% Employer Matching Contribution, as determined by the Board
of Directors, based on a participant’s Elective Deferral Contribution up to 6% of the participant’s Compensation for the Elective
Deferral Contribution period. The Employer Matching Contribution may be contributed to the Plan in the form of the Company’s
common stock or cash, as determined by the Company. The Company’s match of a portion of a participant’s contribution is invested
in Company common stock and is based on the fair value of the shares as of the date of contribution. The Plan also provides that
the Company may contribute to the Plan additional amounts in its common stock or cash at the discretion of the Board of Directors.
Employee contributions can not be invested in Company common stock.
Participants receive 100% vesting of employee contributions and cash dividends received on Company common stock. Vesting
in Company contributions is based on a participant’s number of years of vesting service. Contributions to the Plan charged to
income in fiscal 2010, 2009 and 2008 totaled $20,000, $40,000 and $230,000, respectively. Company contributions are made with
the use of forfeited shares within the Plan. As of October 31, 2010, the Plan held approximately 37,000 forfeited shares of Common
Stock and 84,000 forfeited shares of Class A Common Stock, which are available to make future Company contributions.
In 1991, the Company established a Directors Retirement Plan covering its then current directors. The net assets and expenses
of this plan as of October 31, 2010, 2009 and 2008 were not material to the financial position of the Company. The projected benefit
obligation of this plan was $409,000 and $441,000 as of October 31, 2010 and 2009, respectively, and is classified within other long-
term liabilities in the Company’s Consolidated Balance Sheets.
48 |
NOTE 11 | RESEARCH AND DEVELOPMENT EXPENSES
Cost of sales amounts in fiscal 2010, 2009 and 2008 include approximately $22.7 million, $19.7 million and $18.4 million,
respectively, of new product research and development expenses.
NOTE 12 | 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 2011 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 consider-
ation 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 October 31, 2010,
management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay is ap-
proximately $55 million. The actual Redemption Amount will likely be different. The portion of the estimated Redemption Amount
as of October 31, 2010 redeemable at fair value is approximately $25 million and the portion redeemable based solely on a multiple
of future earnings is approximately $30 million.
See Note 1, Summary of Significant Accounting Policies, for more information regarding how the Company accounts for its
redeemable noncontrolling interests in accordance with new accounting guidance adopted as of the beginning of fiscal 2010 and the
Company’s Consolidated Statements of Shareholders’ Equity and Comprehensive Income for a summary of changes in redeemable
noncontrolling interests for fiscal 2010. Acquisitions of redeemable noncontrolling interests are treated as equity transactions under
the new accounting guidance. During fiscal 2008 and 2009, the Company accounted for acquisitions of redeemable noncontrolling
interests under the accounting guidance in effect at that time pertaining to step acquisitions. The excess of the purchase price paid
over the carrying amount was allocated principally to goodwill under such guidance. The Company’s Consolidated Statement of
Shareholders’ Equity and Comprehensive Income for fiscal 2008 and 2009 is presented on a retrospective basis to reflect the adoption
of new accounting guidance as of November 1, 2009 pertaining to redeemable noncontrolling interests, which resulted in an increase
to redeemable noncontrolling interests and a decrease to retained earnings. The subsequent acquisition of certain redeemable
noncontrolling interests on a retrospective basis results in a reversal of any previously recorded decrease to retained earnings related
to such redeemable noncontrolling interests recorded as part of the adoption of this new accounting guidance.
The portion of adjustments to the redemption amount of redeemable noncontrolling interests determined to be in excess of
fair value in fiscal 2010 was $102,000, which affects the calculation of basic and diluted net income per share attributable to HEICO
shareholders under the two-class method. No portions of the adjustments to the redemption amount of redeemable noncontrolling
interests were determined to be in excess of fair value in fiscal 2009 and 2008. See Note 13, Net Income per Share Attributable to
HEICO Shareholders, for the computation of net income per share under the two-class method.
A summary of the put and call rights associated with the redeemable noncontrolling interests in certain of the Company’s
subsidiaries and transactions involving redeemable noncontrolling interests during fiscal 2010, 2009 and 2008 is as follows:
As part of the agreement to acquire an 80% interest in a subsidiary by the ETG in fiscal 2004, the noncontrolling interest holders
currently have the right to cause the Company to purchase their interests over a five-year period and the Company has the right to
purchase the noncontrolling interests over a five-year period beginning in fiscal 2015, or sooner under certain conditions.
Pursuant to the purchase agreement related to the acquisition of an 85% interest in a subsidiary by the ETG in fiscal 2005,
certain noncontrolling interest holders exercised their option during fiscal 2007 to cause the Company to purchase their aggregate
3% interest over a four-year period that ended in fiscal 2010. Pursuant to this same purchase agreement, certain other noncontrol-
ling interest holders exercised their option during fiscal 2009 to cause the Company to purchase their aggregate 10.5% interest over a
four-year period ending in fiscal 2012. Accordingly, the Company increased its ownership interest in the subsidiary by an aggregate
8.3% (or one-fourth of such applicable noncontrolling interest holders’ aggregate interest in fiscal years 2007 through 2010) to 93.3%
effective April 2010. The purchase prices of the acquired equity interests were paid using cash provided by operating activities.
Further, the remaining noncontrolling interest holders currently have the right to cause the Company to purchase their aggregate
1.5% interest over a four-year period.
| 49
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Pursuant to the purchase agreement related to the acquisition of a 51% interest in a subsidiary by the FSG in fiscal 2006, the
noncontrolling interest holders exercised their option during fiscal 2008 to cause the Company to purchase an aggregate 28% interest
over a four-year period ending in fiscal 2011. Accordingly, the Company increased its ownership interest in the subsidiary by 7% (or
one-fourth of such noncontrolling interest holders’ aggregate interest) to 58% effective April 2008. The Company and the noncon-
trolling interest holders agreed to accelerate the purchase of 14% of these equity interests (7% from April 2009 and 7% from April
2010), which increased the Company’s ownership interest to 72% effective December 2008. The remaining 7% interest is scheduled
to be purchased in April 2011. Further, the Company has the right to purchase the remaining 21% of the equity interests of the
subsidiary over a three-year period beginning in fiscal 2012, 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.
As part of the agreement to acquire an 80% interest in a subsidiary by the FSG in fiscal 2006, the Company has the right to
purchase the noncontrolling interests over a four-year period beginning in fiscal 2014, 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.
As part of the agreement to acquire an 80.1% interest in a subsidiary by the FSG in fiscal 2008, the Company has the right to
purchase the noncontrolling interests over a five-year period beginning in fiscal 2014, 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.
In May 2010, the Company, through the FSG, acquired an additional 2.2% equity interest in the subsidiary, which increased the
Company’s ownership interest to 82.3%. The additional equity interest acquired was pursuant to an amendment to the original
agreement which does not affect the put/call provisions pertaining to the remaining noncontrolling interests.
During the first quarter of fiscal 2009, the Company, through HEICO Aerospace, acquired the remaining 10% equity interest in
one of its subsidiaries, which increased the Company’s ownership interest to 100% effective October 31, 2008. The purchase price of
the acquired equity interest, which was accrued as of October 31, 2008, was paid using cash provided by operating activities.
As part of an agreement to acquire an 82.5% interest in a subsidiary by the ETG in fiscal 2009, the Company has the right to
purchase the noncontrolling interests beginning in fiscal 2014, or sooner under certain conditions, and the noncontrolling interest
holder has the right to cause the Company to purchase the same equity interests over the same period.
The purchase prices of the redeemable noncontrolling interests acquired in fiscal 2010 were paid using cash provided by
operating activities. The purchase prices of the redeemable noncontrolling interests acquired in fiscal 2009 and 2008 were paid in
cash using proceeds from the Company’s revolving credit facility unless otherwise noted. The aggregate cost of the redeemable
noncontrolling interests acquired was $.8 million, $11.3 million and $4.3 million in fiscal 2010, 2009 and 2008, respectively.
NOTE 13 | NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS
The computation of basic and diluted net income per share attributable to HEICO shareholders using the two-class method is as
follows:
Year ended October 31,
2010
2009
2008
Numerator:
Net income attributable to HEICO
Less: redemption amount of redeemable noncontrolling
interests in excess of fair value (see Note 12)
Net income attributable to HEICO, as adjusted
Denominator:
Weighted average common shares outstanding - basic
Effect of dilutive stock options
Weighted average common shares outstanding - diluted
Net income per share attributable to HEICO shareholders:
Basic
Diluted
$ 54,938,000
$ 44,626,000
$ 48,511,000
102,000
$ 54,836,000
—
$ 44,626,000
—
$ 48,511,000
32,832,508
938,322
33,770,830
32,755,999
1,024,040
33,780,039
32,886,424
1,167,771
34,054,195
$
$
1.67
1.62
$
$
1.36
1.32
$
$
1.48
1.42
Anti-dilutive stock options excluded
415,625
107,864
—
50 |
NOTE 14 | QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 135,535,000
$ 130,437,000
$ 153,845,000
$ 130,166,000
$ 158,270,000
$ 134,086,000
$ 169,370,000
$ 143,607,000
Net sales:
2010
2009
Gross profit:
2010
2009
Net income from consolidated operations:
2010
2009
Net income attributable to HEICO:
2010
2009
$
$
$
$
$
$
50,120,000
43,904,000
$ 53,626,000
$ 42,518,000
$ 57,553,000
$ 45,811,000
16,030,000
15,351,000
$ 16,908,000
$ 14,296,000
$ 19,526,000
$ 14,918,000
11,793,000
11,317,000
$ 12,573,000
$ 10,541,000
$ 14,930,000
$ 11,132,000
Net income per share attributable to HEICO:
Basic:
2010
2009
Diluted:
2010
2009
$
$
$
$
.36
.34
.35
.33
$
$
$
$
.38
.32
.37
.31
$
$
$
$
.45
.34
.44
.33
$
$
$
$
$
$
$
$
$
$
61,048,000
48,778,000
19,891,000
15,280,000
15,642,000
11,636,000
.47
.36
.46
.35
During the fourth quarter of fiscal 2010, the Company recorded impairment losses related to the write-down of certain
intangible assets to their estimated fair values, which decreased net income attributable to HEICO by $713,000, or $.02 per diluted
share, in aggregate.
During the first and second quarters of fiscal 2009, the Company reached a settlement with the Internal Revenue Service
concerning the income tax credit claimed by the Company on its U.S. federal filings for qualified research and development activities
incurred during fiscal years 2002 through 2005 as well as an aggregate reduction to the related liability for unrecognized tax benefits
for fiscal years 2006 through 2008, which increased net income attributable to HEICO by approximately $1,225,000, or $.04 per
diluted share.
Due to changes in the average number of common shares outstanding, net income per share for the full fiscal year may not
equal the sum of the four individual quarters.
NOTE 15 | OPERATING SEGMENTS
The Company has two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace and its
subsidiaries and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic and its subsidiaries. The Flight
Support Group designs, manufactures, repairs, overhauls and distributes jet engine and aircraft component replacement parts. The
parts and services are approved by the FAA. The FSG also manufactures and sells specialty parts as a subcontractor for aerospace
and industrial original equipment manufacturers and the United States government. The Electronic Technologies Group designs and
manufactures electronic, microwave, and electro-optical equipment and components, high-speed interface products, high voltage
interconnection devices, high voltage advanced power electronics products, power conversion products, underwater locator beacons
and traveling wave tube amplifiers primarily for the aviation, defense, space, medical, telecommunication and electronic industries.
The Company’s reportable operating segments offer distinctive products and services that are marketed through different
channels. They are managed separately because of their unique technology and service requirements.
| 51
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
Segment Profit or Loss
The accounting policies of the Company’s operating segments are the same as those described in Note 1, Summary of Signifi-
cant Accounting Policies. Management evaluates segment performance based on segment operating income.
Information on the Company’s two operating segments, the FSG and the ETG, for each of the last three fiscal years ended
October 31 is as follows:
Year ended October 31, 2010:
Net sales
Depreciation and amortization
Operating income
Capital expenditures
Total assets
Year ended October 31, 2009:
Net sales
Depreciation and amortization
Operating income
Capital expenditures
Total assets
Year ended October 31, 2008:
Net sales
Depreciation and amortization
Operating income
Capital expenditures
Total assets
Segment
FSG
ETG
$ 412,337,000
9,899,000
67,896,000
7,343,000
410,666,000
$ 395,423,000
9,801,000
60,003,000
8,518,000
414,030,000
$ 436,810,000
9,339,000
81,184,000
10,735,000
418,079,000
$ 205,648,000
7,308,000
56,126,000
1,502,000
328,577,000
$ 143,372,000
4,728,000
39,981,000
1,670,000
285,602,000
$ 146,044,000
5,238,000
38,775,000
2,093,000
220,888,000
Other,
Primarily
Corporate and
Intersegment
$
(965,000)
390,000
(14,849,000)
32,000
42,400,000
$
(499,000)
438,000
(11,729,000)
65,000
33,278,000
$
(507,000)
475,000
(14,171,000)
627,000
37,575,000
Consolidated
Totals
$ 617,020,000
17,597,000
109,173,000
8,877,000
781,643,000
$ 538,296,000
14,967,000
88,255,000
10,253,000
732,910,000
$ 582,347,000
15,052,000
105,788,000
13,455,000
676,542,000
Major Customer and Geographic Information
No one customer accounted for 10% or more of the Company’s consolidated net sales during the last three fiscal years. The
Company’s net sales originating and long-lived assets held outside of the United States during each of the last three fiscal years were
not material.
The Company markets its products and services in approximately 100 countries. The Company’s net sales to any country other
than the United States of America did not exceed 10% of consolidated net sales. Sales are attributed to countries based on the loca-
tion of customers. The composition of the Company’s net sales to customers located in the United States of America and to those in
other countries for each of the last three fiscal years ended October 31 is as follows:
Year ended October 31,
United States of America
Other countries
Total
2010
2009
2008
$ 423,916,000
193,104,000
$ 617,020,000
$ 367,736,000
170,560,000
$ 538,296,000
$ 400,447,000
181,900,000
$ 582,347,000
NOTE 16 | COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain property and equipment, including manufacturing facilities and office equipment under operating
leases. Some of these leases provide the Company with the option after the initial lease term either to purchase the property at the
then fair market value or renew the lease at the then fair rental value. Generally, management expects that leases will be renewed or
replaced by other leases in the normal course of business.
52 |
Future minimum payments under non-cancelable operating leases for the next five fiscal years and thereafter are estimated to
be as follows:
Year ending October 31,
2011
2012
2013
2014
2015
Thereafter
Total minimum lease commitments
$ 6,167,000
5,542,000
4,106,000
2,318,000
2,168,000
4,511,000
$ 24,812,000
Total rent expense charged to operations for operating leases in fiscal 2010, 2009 and 2008 amounted to $6,963,000, $6,274,000
and $6,074,000, respectively.
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 fiscal 2010 and 2009 are as follows:
Year ended October 31,
Balances as of beginning of year
Accruals for warranties
Warranty claims settled
Acquired warranty liabilities
Balances as of end of year
2010
2009
$
$
1,022,000
1,613,000
(1,079,000)
80,000
1,636,000
$
$
671,000
1,566,000
(1,228,000)
13,000
1,022,000
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 aggregate, which translates to approximately $72 million U.S. dollars
based on the October 31, 2010 exchange rate, should the subsidiary meet certain earnings objectives through fiscal 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 $1.3 million in fiscal 2011 and $10.1 million in fiscal 2012 should the subsidiary meet
certain earnings objectives during the second and third years, respectively, 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 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 $91 million payable over future periods beginning in fiscal 2011 through fiscal 2012. Assuming the subsid-
iaries 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 consideration that the Company would be
required to pay is approximately $9 million. The actual contingent purchase consideration will likely be different.
| 53
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
nOteS tO cOnSOlidated Financial StateMentS
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.
NOTE 17 | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest was $532,000, $617,000 and $2,443,000 in fiscal 2010, 2009 and 2008, respectively. Cash paid for income
taxes was $37,300,000, $30,209,000 and $26,669,000 in fiscal 2010, 2009 and 2008, respectively. Cash received from income tax
refunds in fiscal 2010, 2009 and 2008 was $3,031,000, $5,398,000 and $29,000 respectively.
Cash investing activities related to acquisitions, including contingent purchase price payments to previous owners of businesses
acquired prior to fiscal 2010, is as follows:
Year ended October 31,
Fair value of assets acquired:
Liabilities assumed
Noncontrolling interests in consolidated subsidiaries
Less:
Goodwill
Identifiable intangible assets
Accounts receivable
Inventories
Accrued additional purchase consideration
Property, plant and equipment
Other assets
Acquisitions, net of cash acquired
2010
2009
2008
$
3,952,000
—
$
3,881,000
3,305,000
$
1,561,000
779,000
15,372,000
15,400,000
6,685,000
3,184,000
1,775,000
573,000
24,000
$ (39,061,000)
30,389,000
21,562,000
4,720,000
4,249,000
2,212,000
553,000
3,299,000
$ (59,798,000)
7,181,000
3,355,000
2,045,000
1,328,000
11,736,000
1,381,000
75,000
$ (24,761,000)
In connection with certain acquisitions, the Company accrued additional purchase consideration aggregating $4.1 million,
$1.8 million and $2.2 million as of October 31, 2010, 2009 and 2008, respectively, which was allocated to goodwill (see Note 2,
Acquisitions, and Note 4, Goodwill and Other Intangible Assets).
There were no significant capital leases or other equipment financing activities during fiscal 2010, 2009 and 2008.
54 |
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
ManaGeMent’S RePORt On inteRnal cOntROl
OVeR Financial RePORtinG
Management of HEICO Corporation is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted account-
ing principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regard-
ing prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material
effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision of and with the participation of the Company’s Chief Executive Officer and the Chief
Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on
its assessment, management believes that the Company’s internal control over financial reporting is effective as of October 31, 2010.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial
statements and the effectiveness of internal controls over financial reporting as of October 31, 2010, as stated in their report included
on the following page.
execUtiVe OFFiceR ceRtiFicatiOnS
HEICO Corporation has filed with the U.S. Securities and Exchange Commission as exhibits 31.1. and 31.2 to its Form 10-K for
the year ended October 31, 2010, the required certifications of its Chief Executive Officer (CEO) and Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act regarding the quality of its public disclosures. HEICO Corporation’s CEO also has submitted
to the New York Stock Exchange (NYSE) following the March 2010 annual meeting of shareholders, the annual CEO certification
stating that he is not aware of any violation by HEICO Corporation of the NYSE’s corporate governance listing standards. All Board
of Directors Committee Charters, Corporate Governance Guidelines as well as HEICO’s Code of Ethics and Business Conduct are
located on HEICO’s web site at www.heico.com.
| 55
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
RePORt OF indePendent ReGiSteRed
PUBlic accOUntinG FiRM
To the Board of Directors and Shareholders of
HEICO Corporation
Hollywood, Florida
We have audited the accompanying consolidated balance sheets of HEICO Corporation and subsidiaries (the “Company”) as of
October 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and comprehensive income,
and cash flows for each of the three years in the period ended October 31, 2010. We also have audited the Company’s internal
control over financial reporting as of October 31, 2010, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible
for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authori-
zations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of HEICO Corporation and subsidiaries as of October 31, 2010 and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2010, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of October 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, the Company retrospectively changed its method of account-
ing for noncontrolling interests to adopt new accounting guidance contained in Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 810, Consolidation, and FASB ASC 480, Distinguishing Liabilities from Equity.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
December 22, 2010
56 |
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
MaRKet FOR cOMPanY’S cOMMOn eQUitY and
Related StOcKHOldeR MatteRS
Market Information
Our Class A Common Stock and Common Stock are listed and traded on the New York Stock Exchange (“NYSE”) under the
symbols “HEI.A” and “HEI,” respectively. The following tables set forth, for the periods indicated, the high and low share prices for
our Class A Common Stock and our Common Stock as reported on the NYSE, as well as the amount of cash dividends paid per
share during such periods.
In March 2010, 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 27, 2010 in the form of a 25% stock dividend distributed to shareholders of record as of
April 16, 2010. All applicable share and per share information has been adjusted retrospectively for the 5-for-4 stock split.
Fiscal 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Class A Common Stock
High
Low
Cash Dividends
Per Share
$ 25.09
24.50
26.21
28.00
$ 29.57
35.67
34.22
37.48
$ 14.62
13.87
18.61
20.81
$ 24.03
26.16
25.78
25.24
.048
$
—
.048
—
$
.048
—
.060
—
As of December 17, 2010, there were 515 holders of record of our Class A Common Stock.
Fiscal 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Common Stock
High
Low
Cash Dividends
Per Share
$ 34.22
33.31
32.40
35.22
$ 36.98
45.36
44.61
50.75
$ 19.44
17.12
21.06
28.00
$ 29.58
32.88
34.67
34.58
$
.048
—
.048
—
$
.048
—
.060
—
As of December 17, 2010, there were 538 holders of record of our Common Stock.
In addition, as of December 17, 2010, there were approximately 3,200 holders of the Company’s Class A Common Stock and
Common Stock who held their shares in brokerage or nominee accounts. The combined total of all record holders and brokerage or
nominee holders is approximately 4,300 holders of both classes of common stock.
In December 2010, the Board of Directors declared a regular semi-annual cash dividend of $.06 per share payable in January 2011.
| 57
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
MaRKet FOR cOMPanY’S cOMMOn eQUitY and
Related StOcKHOldeR MatteRS
Performance Graphs
The following graph and table compare the total return on $100 invested in HEICO Common Stock and HEICO Class A Com-
mon Stock with the total return of $100 invested in the New York Stock Exchange (NYSE) Composite Index and the Dow Jones U.S.
Aerospace Index for the five-year period from October 31, 2005 through October 31, 2010. The NYSE Composite Index measures all
common stock listed on the NYSE. The Dow Jones U.S. Aerospace Index is comprised of large companies which make aircraft, major
weapons, radar and other defense equipment and systems as well as providers of satellites and spacecrafts used for defense purposes.
The total returns include the reinvestment of cash dividends.
Comparison of Five-Year Cumulative Total Return
Heico common Stock
Heico class A
common Stock
NYSe composite index
Dow Jones
U.S. Aerospace index
$300
$250
$200
$150
$100
$50
$0
2005
2006
2007
2008
2009
2010
Cumulative Total Return as of October 31,
2005
2006
2007
2008
2009
2010
HEICO Common Stock(1)
HEICO Class A Common Stock(1)
NYSE Composite Index
Dow Jones U.S. Aerospace Index
$ 100.00
100.00
100.00
100.00
$ 164.13
177.68
118.05
130.74
$ 246.78
257.32
138.73
172.63
$ 174.82
167.22
81.54
103.95
$ 173.35
184.59
90.67
116.94
$ 284.50
278.79
101.08
159.85
(1) Information has been adjusted retrospectively for the 5-for-4 stock split effected April 27, 2010.
58 |
The following graph and table compare the total return on $100 invested in HEICO Common Stock since October 31, 1990 using the
same indices shown on the five-year performance graph on the prior page. October 31, 1990 was the end of the first fiscal year following
the date the current executive management team assumed leadership of the Company. No Class A Common Stock was outstanding
as of October 31, 1990. As with the five-year performance graph, the total returns include the reinvestment of cash dividends.
Comparison of Twenty-Year Cumulative Total Return
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
Heico common Stock
NYSe composite index
Dow Jones U.S. Aerospace index
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
Cumulative Total Return as of October 31,
1990
1991
1992
1993
1994
1995
1996
HEICO Common Stock(1)
NYSE Composite Index
Dow Jones U.S. Aerospace Index
$ 100.00
100.00
100.00
$ 141.49
130.31
130.67
$ 158.35
138.76
122.00
$ 173.88
156.09
158.36
$ 123.41
155.68
176.11
$ 263.25
186.32
252.00
$ 430.02
225.37
341.65
1997
1998
1999
2000
2001
2002
2003
HEICO Common Stock(1)
NYSE Composite Index
Dow Jones U.S. Aerospace Index
$ 1,008.31
289.55
376.36
$ 1,448.99
326.98
378.66
$ 1,051.61
376.40
295.99
$ 809.50
400.81
418.32
$ 1,045.86
328.78
333.32
$ 670.39
284.59
343.88
$ 1,067.42
339.15
393.19
2004
2005
2006
2007
2008
2009
2010
HEICO Common Stock(1)
NYSE Composite Index
Dow Jones U.S. Aerospace Index
$ 1,366.57
380.91
478.49
$ 1,674.40
423.05
579.77
$ 2,846.48
499.42
757.97
$ 4,208.54
586.87
1,000.84
$ 2,872.01
344.96
602.66
$ 2,984.13
383.57
678.00
$ 4,772.20
427.61
926.75
(1) Information has been adjusted retrospectively to give effect to all stock dividends paid during the twenty-year period.
| 59
H E I C O C O R P O R A T I O N A N D S U B S I D I A R I E S
OFFICERS & SENIOR LEADERSHIP
Laurans A. Mendelson
Chairman of the Board of Directors and
Chief Executive Officer,
HEICO Corporation
Walter Howard
Vice President and General Manager -
Avionics & Power Systems,
HEICO Parts Group
Jeff Andrews
Vice President and General Manager,
Niacc-Avitech Technologies Inc.
Vaughn Barnes
President,
HEICO Specialty Products Group and
Thermal Structures, Inc.
Jeffrey S. Biederwolf
Senior Vice President - Operations,
HEICO Parts Group
Russ Carlson
Vice President and General Manager -
Hardware & Accessories,
HEICO Parts Group
Vladimir Cervera
Vice President and General Manager,
HEICO Repair Group - Miami
Barry Cohen
President and Founder,
Prime Air, LLC
Ian D. Crawford
President and Founder,
Analog Modules, Inc.
John DeFries
President,
Essex X-Ray and Medical Equipment LTD
Vital Dumais
President and Co-Founder,
EMD Technologies Incorporated
Jerry Goldlust
President and Founder,
HVT Group, Inc. and Dielectric Sciences, Inc.
Thomas A. Greenacre
President,
Dukane Seacom, Inc.
Joseph Hajduk
President and Co-Founder,
dB Control Corp.
William S. Harlow
Vice President - Acquisitions,
HEICO Corporation
60 |
John F. Hunter
Senior Vice President,
HEICO Parts Group and
HEICO Repair Group
Tung Hyunh
President and Co-Founder,
Lumina Power, Inc.
Thomas S. Irwin
Executive Vice President and
Chief Financial Officer,
HEICO Corporation
Elizabeth R. Letendre
Corporate Secretary,
HEICO Corporation
Jack Lewis
Vice President and General Manager -
Engines & Accessories,
HEICO Parts Group
Omar Lloret
Vice President and General Manager,
HEICO Repair Group - Miami
David A. Lowry
President and Co-Founder,
Engineering Design Team, Inc.
Pat Markham
Vice President - Technical Services,
HEICO Parts Group
Steve McHugh
Chief Operating Officer,
Electronic Technologies Group and
President and Co-Founder,
Santa Barbara Infrared, Inc.
Eric A. Mendelson
Co-President,
HEICO Corporation
Victor H. Mendelson
Co-President,
HEICO Corporation
Luis J. Morell
President,
HEICO Parts Group and
HEICO Repair Group
Michael Navon
President and Founder,
Blue Aerospace LLC
Dario Negrini
President,
Leader Tech, Inc.
Joseph W. Pallot
General Counsel,
HEICO Corporation
Anish V. Patel
President,
Radiant Power Corp.
Jeffrey Perkins
Vice President and General Manager,
Seal Dynamics - Tampa
James L. Reum
Executive Vice President,
HEICO Aerospace Holdings Corp.
Rex Reum
Vice President and General Manager,
Jetseal, Inc.
Thomas L. Ricketts
CEO and Co-Founder,
Connectronics Corp. and Wiremax
Troy J. Rodriguez
President and Co-Founder,
Sierra Microwave Technology, LLC
James E. Roubian
Vice President - Manufacturing,
HEICO Parts Group
Dr. Daniel M. Sable
President and Co-Founder,
VPT, Inc.
Val Shelley
Vice President - Strategy,
HEICO Corporation
David Susser
President,
HEICO Distribution Group and
Seal Dynamics LLC
Gregg Tuttle
Vice President and General Manager,
Future Aviation, Inc.
Steven Walker
Corporate Controller and Assistant Treasurer,
HEICO Corporation
Nicholas “Tony” Wright
Vice President and General Manager,
Inertial Airline Services, Inc.
board of directorS
Samuel l. Higginbottom
retired Chairman, President and
Chief Executive Officer,
Rolls-Royce, Inc.
mark H. Hildebrandt
Partner, Waldman, Feluren,
Hildebrandt & Trigoboff, P.A.
Wolfgang mayrHuber
retired Chairman of the Executive Board
and Chief Executive Officer,
Deutsche Lufthansa AG
Chairman of the Supervisory Board,
Infineon Technologies AG
eric a. mendelSon
Co-President,
HEICO Corporation
lauranS a. mendelSon
Chairman and
Chief Executive Officer,
HEICO Corporation
Victor H. mendelSon
Co-President,
HEICO Corporation
mitcHell i. Quain
Managing Director,
One Equity Partners
dr. alan ScHrieSHeim
retired Director,
Argonne National Laboratory
frank J. ScHWitter
retired Partner,
Arthur Andersen LLP
Samuel l. Higginbottom
mark H. Hildebrandt
Wolfgang mayrhuber
eric a. mendelson
laurans a. mendelson
Victor H. mendelson
mitchell i. Quain
dr. alan Schriesheim
frank J. Schwitter
heico
corporation
Corporate Offices
3000 Taft Street
Hollywood, Florida 33021
Telephone: 954-987-4000
Facsimile: 954-987-8228
www.heico.com
SubSidiarieS
regiStrar & tranSfer agent
HEICO Aerospace Holdings Corp.
Hollywood, Florida
Blue Aerospace LLC
HEICO Parts Group
Aero Design, Inc.
Aircraft Technology, Inc.
DEC Technologies, Inc.
HEICO Aerospace Parts Corp.
Jet Avion Corporation
LPI Corporation
McClain International, Inc.
Turbine Kinetics, Inc.
HEICO Aerospace Corporation
HEICO Repair Group
Future Aviation, Inc.
HEICO Component Repair Group - Miami
Inertial Airline Services, Inc.
Niacc-Avitech Technologies Inc.
Prime Air, LLC and Prime Air Europe
Sunshine Avionics LLC
HEICO Specialty Products Group
Jetseal, Inc.
Thermal Structures, Inc.
HEICO Distribution Group
Seal Dynamics LLC
HEICO Electronic Technologies Corp.
Miami, Florida
Analog Modules, Inc.
Connectronics Corp. and Wiremax
dB Control Corp.
Dukane Seacom, Inc.
EMD Technologies Incorporated
Engineering Design Team, Inc.
HVT Group, Inc.
Dielectric Sciences, Inc.
Essex X-Ray & Medical Equipment LTD
Leader Tech, Inc.
Lumina Power, Inc.
Radiant Power Corp.
Santa Barbara Infrared, Inc.
Sierra Microwave Technology, LLC
VPT, Inc.
BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310-1900
Telephone: 1-800-307-3056
http://www.bnymellon.com/shareowner/equityaccess
new York Stock exchange
SYmbolS
Class A Common Stock - “HEI.A”
Common Stock - “HEI”
form 10-k and board of
directorS inquirieS
The Company’s Annual Report on Form 10-K
for 2010, as filed with the Securities and Exchange
Commission, is available without charge upon
written request to the Corporate Secretary at
the Company’s headquarters.
Any inquiry to any member of the Company’s Board of
Directors, including, but not limited to “independent”
Directors, should be addressed to such Director(s) care
of the Company’s Headquarters and such inquiries will
be forwarded to the Director(s) of whom the inquiry is
being made.
annual meeting
The Annual Meeting of Shareholders
will be held at the
JW Marriott Miami Hotel
1109 Brickell Avenue
Miami, FL 33131
Telephone: 305-329-3500 on Monday,
March 28, 2011 at 10:00 a.m.
Shareholder information
Elizabeth R. Letendre
Corporate Secretary
HEICO Corporation
3000 Taft Street
Hollywood, FL 33021
Telephone: 954-987-4000
Facsimile: 954-987-8228
eletendre@heico.com
Corporation