HEICO CORP - Interim / Quarterly Report 2010

10-Q 1 k176015_10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2010

o TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __ to _____

Commission File Number: 1-4604

HEICO CORPORATION

(Exact name of registrant as specified in its charter)

Florida	65-0341002
(State
or other jurisdiction of	(I.R.S.
Employer Identification No.)
incorporation
or organization)
3000
Taft Street, Hollywood, Florida	33021
(Address
of principal executive offices)	(Zip
Code)

(954) 987-4000

(Registrant’s telephone number, including area code)

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

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

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

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

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

The number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2010 is as follows:

| Common
Stock, $.01 par value | 10,431,225
shares |
| --- | --- |
| Class
A Common Stock, $.01 par value | 15,748,524
shares |

HEICO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Part I.	Financial Information:	Page
Item 1.	Condensed Consolidated Balance Sheets
(unaudited)
	as of January 31, 2010 and October 31,
2009	2
	Condensed Consolidated Statements of Operations
(unaudited)
	for the three months ended January 31, 2010 and
2009	3
	Condensed Consolidated Statements of Shareholders’ Equity
and
	Comprehensive Income (unaudited) for the three months
ended
	January 31, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows
(unaudited)
	for the three months ended January 31, 2010 and
2009	5
	Notes to Condensed Consolidated Financial Statements
(unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial
Condition
	and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market
Risk.	27
Item 4.	Controls and Procedures	27
Part II.	Other Information:
Item 2.	Unregistered Sales of Equity Securities and Use of
Proceeds	28
Item 6.	Exhibits	28
Signature		29

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PART I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS

HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS – UNAUDITED

| | January
31, 2010 | | | |
| --- | --- | --- | --- | --- |
| ASSETS | | | | |
| Current
assets: | | | | |
| Cash
and cash equivalents | $ 7,524,000 | $ | 7,167,000 | |
| Accounts
receivable, net | 74,491,000 | | 77,864,000 | |
| Inventories,
net | 141,640,000 | | 137,585,000 | |
| Prepaid
expenses and other current assets | 5,641,000 | | 4,290,000 | |
| Deferred
income taxes | 16,503,000 | | 16,671,000 | |
| Total
current assets | 245,799,000 | | 243,577,000 | |
| Property,
plant and equipment, net | 60,063,000 | | 60,528,000 | |
| Goodwill | 366,415,000 | | 365,243,000 | |
| Intangible
assets, net | 40,028,000 | | 41,588,000 | |
| Other
assets | 25,527,000 | | 21,974,000 | |
| Total
assets | $ 737,832,000 | $ | 732,910,000 | |
| LIABILITIES
AND EQUITY | | | | |
| Current
liabilities: | | | | |
| Current
maturities of long-term debt | $ 240,000 | $ | 237,000 | |
| Trade
accounts payable | 28,146,000 | | 26,978,000 | |
| Accrued
expenses and other current liabilities | 31,500,000 | | 36,978,000 | |
| Income
taxes payable | 5,516,000 | | 1,320,000 | |
| Total
current liabilities | 65,402,000 | | 65,513,000 | |
| Long-term
debt, net of current maturities | 43,159,000 | | 55,194,000 | |
| Deferred
income taxes | 41,570,000 | | 41,340,000 | |
| Other
long-term liabilities | 27,040,000 | | 23,268,000 | |
| Total
liabilities | 177,171,000 | | 185,315,000 | |
| Commitments
and contingencies (Note 11) | | | | |
| Redeemable
noncontrolling interests (Note 12) | 56,937,000 | | 56,937,000 | |
| Shareholders’
equity: | | | | |
| Preferred
Stock, $.01 par value per share; 10,000,000 shares | | | | |
| authorized;
300,000 shares designated as Series B Junior | | | | |
| Participating
Preferred Stock and 300,000 shares designated | | | | |
| as
Series C Junior Participating Preferred Stock; none issued | ¾ | | ¾ | |
| Common
Stock, $.01 par value per share; 30,000,000 shares
authorized | | | | |
| 10,431,225
and 10,409,141 shares issued and outstanding, respectively | 104,000 | | 104,000 | |
| Class
A Common Stock, $.01 par value per share; 30,000,000 | | | | |
| shares
authorized; 15,738,448 and 15,713,234 shares issued | | | | |
| and
outstanding, respectively | 157,000 | | 157,000 | |
| Capital
in excess of par value | 225,759,000 | | 224,625,000 | |
| Accumulated
other comprehensive loss | (1,402,000 | ) | (1,381,000 | ) |
| Retained
earnings | 199,406,000 | | 189,485,000 | |
| Total
HEICO shareholders’ equity | 424,024,000 | | 412,990,000 | |
| Noncontrolling
interests | 79,700,000 | | 77,668,000 | |
| Total
shareholders' equity | 503,724,000 | | 490,658,000 | |
| Total
liabilities and equity | $ 737,832,000 | $ | 732,910,000 | |

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

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HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

| | Three
months ended January 31, — 2010 | 2009 | | |
| --- | --- | --- | --- | --- |
| Net
sales | $ 135,535,000 | $ | 130,437,000 | |
| Operating
costs and expenses: | | | | |
| Cost
of sales | 85,415,000 | | 86,533,000 | |
| Selling,
general and administrative expenses | 25,576,000 | | 22,451,000 | |
| Total
operating costs and expenses | 110,991,000 | | 108,984,000 | |
| Operating
income | 24,544,000 | | 21,453,000 | |
| Interest
expense | (119,000 | ) | (195,000 | ) |
| Other
income (expense) | 155,000 | | (47,000 | ) |
| Income
before income taxes and noncontrolling interests | 24,580,000 | | 21,211,000 | |
| Income
tax expense | 8,550,000 | | 5,860,000 | |
| Net
income from consolidated operations | 16,030,000 | | 15,351,000 | |
| Less: Net
income attributable to noncontrolling interests | (4,237,000 | ) | (4,034,000 | ) |
| Net
income attributable to HEICO | $ 11,793,000 | $ | 11,317,000 | |
| Net
income per share attributable to HEICO shareholders: | | | | |
| Basic | $ .45 | $ | .43 | |
| Diluted | $ .44 | $ | .42 | |
| Weighted
average number of common shares outstanding: | | | | |
| Basic | 26,146,872 | | 26,410,681 | |
| Diluted | 26,961,534 | | 27,241,961 | |
| Cash
dividends per share | $ .06 | $ | .06 | |

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

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HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME – UNAUDITED


						Accumulated
	Redeemable			Class
A	Capital
in	Other						Total
	Noncontrolling	Common		Common	Excess
of	Comprehensive			Retained	Noncontrolling		Shareholders'
	Interests	Stock		Stock	Par
Value	Loss			Earnings	Interests		Equity
Balances
as of October 31, 2009
(as
previously reported)	$ ―	$	104,000	$ 157,000	$ 224,625,000	$	(1,381,000	)	$ 234,348,000	$	―	$ 457,853,000
Retrospective
adjustments related to
adoption
of accounting guidance for
noncontrolling
interests	56,937,000		—	—	—		—		(44,863,000	)	77,668,000	32,805,000
Balances
as of October 31, 2009
(as
adjusted)	56,937,000		104,000	157,000	224,625,000		(1,381,000	)	189,485,000		77,668,000	490,658,000
Comprehensive
income:
Net
income	2,205,000		—	—	—		—		11,793,000		2,032,000	13,825,000
Foreign
currency translation adjustments	—		—	—	—		(23,000	)	—		—	(23,000	)
Total
comprehensive income	2,205,000		—	—	—		(23,000	)	11,793,000		2,032,000	13,802,000
Cash
dividends ($.06 per share)	—		—	—	—		—		(1,570,000	)	—	(1,570,000	)
Tax
benefit from stock option exercises	—		—	—	947,000		—		—		—	947,000
Proceeds
from stock option exercises	—		—	—	232,000		—		—		—	232,000
Redemptions
of common stock related to
stock
option exercises	—		—	—	(353,000	)	—		—		—	(353,000	)
Distributions
to noncontrolling interests	(2,508,000	)	—	—	—		—		—		—	—
Adjustments
to redemption amount of
redeemable
noncontrolling interests	302,000		—	—	—		—		(302,000	)	—	(302,000	)
Stock
option compensation expense	—		—	—	308,000		—		—		—	308,000
Other	1,000		—	—	—		2,000		—		—	2,000
Balances
as of January 31, 2010	$ 56,937,000	$	104,000	$ 157,000	$ 225,759,000	$	(1,402,000	)	$ 199,406,000	$	79,700,000	$ 503,724,000


						Accumulated
	Redeemable			Class
A	Capital
in	Other					Total
	Noncontrolling	Common		Common	Excess
of	Comprehensive		Retained	Noncontrolling		Shareholders'
	Interests	Stock		Stock	Par
Value	Loss		Earnings	Interests		Equity
Balances
as of October 31, 2008
(as
previously reported)	$ ―	$	106,000	$ 158,000	$ 229,443,000	$ (4,819,000	)	$ 192,872,000	$	―	$	417,760,000
Retrospective
adjustments related to
adoption
of accounting guidance for
noncontrolling
interests	48,736,000		—	—	—	—		(35,896,000	)	71,138,000		35,242,000
Balances
as of October 31, 2008
(as
adjusted)	48,736,000		106,000	158,000	229,443,000	(4,819,000	)	156,976,000		71,138,000		453,002,000
Comprehensive
income:
Net
income	1,911,000		—	—	—	—		11,317,000		2,123,000		13,440,000
Foreign
currency translation adjustments	—		—	—	—	(775,000	)	—		—		(775,000	)
Total
comprehensive income	1,911,000		—	—	—	(775,000	)	11,317,000		2,123,000		12,665,000
Cash
dividends ($.06 per share)	—		—	—	—	—		(1,585,000	)	—		(1,585,000	)
Tax
benefit from stock option exercises	—		—	—	2,139,000	—		—		—		2,139,000
Proceeds
from stock option exercises	—		—	1,000	321,000	—		—		—		322,000
Acquisition
of noncontrolling interests	(9,315,000	)	—	—	—	—		6,349,000		—		6,349,000
Distributions
to noncontrolling interests	(929,000	)	—	—	—	—		—		(461,000	)	(461,000	)
Adjustments
to redemption amount of
redeemable
noncontrolling interests	(893,000	)	—	—	—	—		893,000		—		893,000
Stock
option compensation expense	—		—	—	4,000	—		—		—		4,000
Other	—		—	—	—	135,000		1,000		—		136,000
Balances
as of January 31, 2009	$ 39,510,000	$	106,000	$ 159,000	$ 231,907,000	$ (5,459,000	)	$ 173,951,000	$	72,800,000	$	473,464,000

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

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HEICO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

| | Three
months ended January 31, — 2010 | 2009 | | |
| --- | --- | --- | --- | --- |
| Operating
Activities: | | | | |
| Net
income from consolidated operations | $ 16,030,000 | $ | 15,351,000 | |
| Adjustments
to reconcile net income from consolidated operations | | | | |
| to
net cash provided by operating activities: | | | | |
| Depreciation
and amortization | 4,251,000 | | 3,471,000 | |
| Deferred
income tax provision | 429,000 | | 87,000 | |
| Tax
benefit from stock option exercises | 947,000 | | 2,139,000 | |
| Excess
tax benefit from stock option exercises | (666,000 | ) | (1,796,000 | ) |
| Stock
option compensation expense | 308,000 | | 4,000 | |
| Changes
in operating assets and liabilities, net of acquisitions: | | | | |
| Decrease
in accounts receivable | 3,401,000 | | 13,619,000 | |
| Increase
in inventories | (4,082,000 | ) | (7,830,000 | ) |
| Increase
in prepaid expenses and other current assets | (1,352,000 | ) | (1,600,000 | ) |
| Increase
(decrease) in trade accounts payable | 1,179,000 | | (2,935,000 | ) |
| Decrease
in accrued expenses and other current liabilities | (4,486,000 | ) | (15,129,000 | ) |
| Increase
(decrease) in income taxes payable | 4,387,000 | | (353,000 | ) |
| Other | (69,000 | ) | 178,000 | |
| Net
cash provided by operating activities | 20,277,000 | | 5,206,000 | |
| Investing
Activities: | | | | |
| Acquisitions
and related costs, net of cash acquired | (2,182,000 | ) | (2,216,000 | ) |
| Capital
expenditures | (2,158,000 | ) | (2,616,000 | ) |
| Other | (3,000 | ) | 14,000 | |
| Net
cash used in investing activities | (4,343,000 | ) | (4,818,000 | ) |
| Financing
Activities: | | | | |
| Payments
on revolving credit facility | (13,000,000 | ) | (13,000,000 | ) |
| Borrowings
on revolving credit facility | 1,000,000 | | 16,000,000 | |
| Acquisitions
of noncontrolling interests | — | | (10,568,000 | ) |
| Distributions
to noncontrolling interests | (2,508,000 | ) | (1,390,000 | ) |
| Cash
dividends paid | (1,570,000 | ) | (1,585,000 | ) |
| Redemptions
of common stock related to stock option exercises | (353,000 | ) | — | |
| Excess
tax benefit from stock option exercises | 666,000 | | 1,796,000 | |
| Proceeds
from stock option exercises | 232,000 | | 322,000 | |
| Other | (34,000 | ) | (45,000 | ) |
| Net
cash used in financing activities | (15,567,000 | ) | (8,470,000 | ) |
| Effect
of exchange rate changes on cash | (10,000 | ) | (97,000 | ) |
| Net
increase (decrease) in cash and cash equivalents | 357,000 | | (8,179,000 | ) |
| Cash
and cash equivalents at beginning of year | 7,167,000 | | 12,562,000 | |
| Cash
and cash equivalents at end of period | $ 7,524,000 | $ | 4,383,000 | |

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

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HEICO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–UNAUDITED

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of HEICO Corporation and its subsidiaries (collectively, “HEICO,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Therefore, the condensed consolidated financial statements do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2009. The October 31, 2009 Condensed Consolidated Balance Sheet has been derived from the Company’s audited consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations and statements of cash flows for such interim periods presented. The results of operations for the three months ended January 31, 2010 are not necessarily indicative of the results which may be expected for the entire fiscal year.

Noncontrolling Interests

Effective November 1, 2009, the Company 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 has affected the presentation of noncontrolling interests in the Company’s condensed 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 affects the financial statement classification and measurement of redeemable noncontrolling interests. As further detailed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2009, 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

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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 noncontrolling 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, subsequent 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 Condensed 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.

New Accounting Pronouncements

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. In February 2008, the FASB issued additional guidance which delayed 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 portions of the new guidance that were delayed 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.

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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. The Company adopted the new guidance 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. ASU 2010-06 is effective for reporting periods beginning after December 15, 2009, or as of the second quarter of fiscal 2010 for HEICO, except the additional Level 3 disclosures, which are effective in fiscal years beginning after December 15, 2010, or as of fiscal 2012 for HEICO. The Company is currently evaluating the effect the adoption of ASU 2010-06 will have on its results of operations, financial position and cash flows.

ACQUISITIONS

During the first quarter of fiscal 2010, the Company, through its HEICO Electronic Technologies Corp. (“HEICO Electronic”) subsidiary, paid $1.9 million of additional purchase consideration pursuant to the terms of the purchase agreement associated with a prior year acquisition. The amount paid, of which $1.8 million was accrued as additional goodwill as of October 31, 2009, was based on a multiple of the subsidiary’s earnings relative to target. Since this amount was not contingent upon the former shareholders of the acquired entity remaining employed by the Company or providing future services to the Company, the payment was recorded as an additional cost of the acquired entity.

As of January 31, 2010, the Company, through HEICO Electronic, accrued $1.0 million of additional purchase consideration related to a prior year acquisition for which the earnings objective was met. The Company expects to pay the amount accrued during fiscal 2010. The amount accrued was based on a multiple of the subsidiary’s earnings relative to target and was not contingent upon the former shareholders of the acquired entity remaining employed by the Company or providing future services to the Company. Accordingly, the accrual was recorded as additional goodwill.

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During fiscal 2009, the Company made certain acquisitions, as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2009. The operating results of each of the Company’s fiscal 2009 acquisitions were included in the Company’s results of operations from their effective acquisition date. Had the fiscal 2009 acquisitions been consummated as of the beginning of fiscal 2009, net sales, net income attributable to HEICO, and basic and diluted net income per share attributable to HEICO shareholders on a pro forma basis for the first quarter of fiscal 2009 would have been $139,169,000, $12,120,000, $.46 and $.44, respectively. 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 acquisitions had taken place as of the beginning of fiscal 2009. The unaudited pro forma financial information includes adjustments to historical amounts such as additional amortization expense related to intangible assets acquired, increased interest expense associated with borrowings to finance the acquisitions, and applicable adjustments to net income attributable to noncontrolling interests as well as the exclusion of any acquisition-related expenses.

SELECTED FINANCIAL STATEMENT INFORMATION

Accounts Receivable

| Accounts
receivable | January
31, 2010 — $ 77,419,000 | $ | 80,399,000 | |
| --- | --- | --- | --- | --- |
| Less: Allowance
for doubtful accounts | (2,928,000 | ) | (2,535,000 | ) |
| Accounts
receivable, net | $ 74,491,000 | $ | 77,864,000 | |

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

| Costs
incurred on uncompleted contracts | January
31, 2010 — $ 11,354,000 | $ | 10,280,000 | |
| --- | --- | --- | --- | --- |
| Estimated
earnings | 9,064,000 | | 8,070,000 | |
| | 20,418,000 | | 18,350,000 | |
| Less: Billings
to date | (14,411,000 | ) | (12,543,000 | ) |
| | $ 6,007,000 | $ | 5,807,000 | |
| Included
in the accompanying Condensed Consolidated | | | | |
| Balance
Sheets under the following captions: | | | | |
| Accounts
receivable, net (costs and estimated | | | | |
| earnings
in excess of billings) | $ 6,038,000 | $ | 5,832,000 | |
| Accrued
expenses and other current liabilities | | | | |
| (billings
in excess of costs and estimated earnings) | | | | |
| earnings) | (31,000 | ) | (25,000 | ) |
| | $ 6,007,000 | $ | 5,807,000 | |

Changes in estimates did not have a material effect on net income from consolidated operations for the three months ended January 31, 2010 and 2009.

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Inventories

| | January
31, 2010 | October
31, 2009 |
| --- | --- | --- |
| Finished
products | $ 81,407,000 | $ 79,665,000 |
| Work
in process | 14,941,000 | 14,279,000 |
| Materials,
parts, assemblies and supplies | 45,292,000 | 43,641,000 |
| Inventories,
net | $ 141,640,000 | $ 137,585,000 |

Inventories related to long-term contracts were not significant as of January 31, 2010 and October 31, 2009.

Property, Plant and Equipment

| Land | January
31, 2010 — $ 3,656,000 | $ | 3,656,000 | |
| --- | --- | --- | --- | --- |
| Buildings
and improvements | 38,092,000 | | 38,091,000 | |
| Machinery,
equipment and tooling | 82,263,000 | | 80,697,000 | |
| Construction
in progress | 5,864,000 | | 5,331,000 | |
| | 129,875,000 | | 127,775,000 | |
| Less: Accumulated
depreciation and amortization | (69,812,000 | ) | (67,247,000 | ) |
| Property,
plant and equipment, net | $ 60,063,000 | $ | 60,528,000 | |

Accrued Customer Rebates and Credits

The aggregate amount of accrued customer rebates and credits included within accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets was $11,531,000 and $9,689,000 as of January 31, 2010 and October 31, 2009, respectively. The total customer rebates and credits deducted within net sales for the three months ended January 31, 2010 and 2009 was $2,379,000 and $2,172,000, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has two operating segments: the Flight Support Group (“FSG”) and the Electronic Technologies Group (“ETG”). Changes in the carrying amount of goodwill by operating segment for the three months ended January 31, 2010 are as follows:

	Segment — FSG	ETG	Consolidated — Totals
Balances
as of October 31, 2009	$ 188,459,000	$ 176,784,000	$ 365,243,000
Accrued
additional purchase consideration	¾	997,000	997,000
Adjustments
to goodwill	¾	144,000	144,000
Foreign
currency translation adjustments	¾	31,000	31,000
Balances
as of January 31, 2010	$ 188,459,000	$ 177,956,000	$ 366,415,000

The accrued additional purchase consideration is related to a prior year acquisition for which the earnings objective was met during the first quarter of fiscal 2010 (see Note 2, Acquisitions).

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Identifiable intangible assets consist of the following:

| | As
of January 31, 2010 — Gross | | | Net | As
of October 31, 2009 — Gross | | | Net |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | Carrying | Accumulated | | Carrying | Carrying | Accumulated | | Carrying |
| | Amount | Amortization | | Amount | Amount | Amortization | | Amount |
| Amortizing
Assets: | | | | | | | | |
| Customer
relationships | $ 33,244,000 | $ (11,338,000 | ) | $ 21,906,000 | $ 33,237,000 | $ (9,944,000 | ) | $ 23,293,000 |
| Intellectual
property | 3,372,000 | (726,000 | ) | 2,646,000 | 3,369,000 | (628,000 | ) | 2,741,000 |
| Licenses | 1,000,000 | (566,000 | ) | 434,000 | 1,000,000 | (547,000 | ) | 453,000 |
| Non-compete
agreements | 1,222,000 | (997,000 | ) | 225,000 | 1,221,000 | (969,000 | ) | 252,000 |
| Patents | 579,000 | (257,000 | ) | 322,000 | 575,000 | (246,000 | ) | 329,000 |
| Trade
names | 569,000 | (29,000 | ) | 540,000 | 569,000 | ¾ | | 569,000 |
| | 39,986,000 | (13,913,000 | ) | 26,073,000 | 39,971,000 | (12,334,000 | ) | 27,637,000 |
| Non-Amortizing
Assets: | | | | | | | | |
| Trade
names | 13,955,000 | ¾ | | 13,955,000 | 13,951,000 | ¾ | | 13,951,000 |
| | $ 53,941,000 | $ (13,913,000 | ) | $ 40,028,000 | $ 53,922,000 | $ (12,334,000 | ) | $ 41,588,000 |

Amortization expense related to intangible assets for the three months ended January 31, 2010 and 2009 was $1,576,000 and $941,000, respectively. Amortization expense related to intangible assets for the fiscal year ending October 31, 2010 is estimated to be $6,162,000.

LONG-TERM DEBT

Long-term debt consists of the following:

| Borrowings
under revolving credit facility | January
31, 2010 — $ 43,000,000 | $ | 55,000,000 | |
| --- | --- | --- | --- | --- |
| Notes
payable, capital leases and equipment loans | 399,000 | | 431,000 | |
| | 43,399,000 | | 55,431,000 | |
| Less:
Current maturities of long-term debt | (240,000 | ) | (237,000 | ) |
| | $ 43,159,000 | $ | 55,194,000 | |

As of January 31, 2010 and October 31, 2009, the weighted average interest rate on borrowings under the Company’s $300 million revolving credit facility was .9%. The revolving credit facility contains both financial and non-financial covenants. As of January 31, 2010, the Company was in compliance with all such covenants.

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INCOME TAXES

As of January 31, 2010, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $3,484,000 of which $2,989,000 would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits for the three months ended January 31, 2010 is as follows:

| Balance
as of October 31, 2009 | $ |
| --- | --- |
| Increases
related to current year tax positions | 156,000 |
| Balance
as of January 31, 2010 | $ 3,484,000 |

There were no material changes in the liability for unrecognized tax positions resulting from tax positions taken during the current or a prior year, settlements with other taxing authorities or a lapse of applicable statutes of limitations. The accrual of interest and penalties related to the unrecognized tax benefits was not material for the three months ended January 31, 2010. Further, the Company does not expect the total amount of unrecognized tax benefits to materially change in the next twelve months.

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.

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The following table sets forth by level within the fair value hierarchy, the Company’s assets and liabilities that were measured at fair value on a recurring basis as of January 31, 2010:

| | Level
1 | Level
2 | Level
3 | Total |
| --- | --- | --- | --- | --- |
| Assets: | | | | |
| Deferred
compensation plans | | | | |
| Corporate
owned life insurance | $ — | $ 20,494,000 | $ — | $ 20,494,000 |
| Mutual
funds | 1,569,000 | — | — | 1,569,000 |
| Equity
securities | 1,272,000 | — | — | 1,272,000 |
| Other | 1,000 | 140,000 | — | 141,000 |
| Total | $ 2,842,000 | $ 20,634,000 | $ — | $ 23,476,000 |
| 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 publicly-traded equity securities and are classified within Level 1. The assets of the Company’s other deferred compensation plan are principally invested in publicly-traded mutual funds and equity securities and a life insurance policy, and the fair values of this plan’s assets are classified within Level 1 and Level 2, respectively. The assets of both plans are held within irrevocable trusts and classified within other assets in the Company’s Condensed Consolidated Balance Sheets. The related liabilities of the two deferred compensation plans are included within other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets and have an aggregate value of $23,102,000 as of January 31, 2010.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses and other current liabilities approximate fair value as of January 31, 2010 due to the relatively short maturity of the respective instruments. The carrying amount of long-term debt approximates fair value due to its variable interest rates.

RESEARCH AND DEVELOPMENT EXPENSES

Cost of sales for the three months ended January 31, 2010 and 2009 includes approximately $5.1 million and $4.8 million, respectively, of new product research and development expenses.

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NET INCOME PER SHARE ATTRIBUTABLE TO HEICO SHAREHOLDERS

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

| | Three
months ended January 31, — 2010 | 2009 |
| --- | --- | --- |
| Numerator: | | |
| Net
income attributable to HEICO | $ 11,793,000 | $ 11,317,000 |
| Denominator: | | |
| Weighted
average common shares outstanding-basic | 26,146,872 | 26,410,681 |
| Effect
of dilutive stock options | 814,662 | 831,280 |
| Weighted
average common shares outstanding - diluted | 26,961,534 | 27,241,961 |
| Net
income per share attributable to HEICO shareholders -
basic | $ .45 | $ .43 |
| Net
income per share attributable to HEICO shareholders -
diluted | $ .44 | $ .42 |
| Anti-dilutive
stock options excluded | 347,500 | ¾ |

No portion of the adjustments to the redemption amount of redeemable noncontrolling interests of $302,000 for the three months ended January 31, 2010 reflect a redemption amount in excess of fair value and therefore no portion of the adjustments effect basic or diluted net income per share attributable to HEICO shareholders.

OPERATING SEGMENTS

Information on the Company’s two operating segments, the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. and its subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. and its subsidiaries, for the three months ended January 31, 2010 and 2009, respectively, is as follows:

			Other,
			Primarily
	Segment		Corporate
and		Consolidated
	FSG	ETG	Intersegment		Totals
For the three months
ended January 31, 2010:
Net
sales	$ 93,779,000	$ 42,058,000	$ (302,000	)	$ 135,535,000
Depreciation
and amortization	2,464,000	1,688,000	99,000		4,251,000
Operating
income	16,720,000	11,170,000	(3,346,000	)	24,544,000
Capital
expenditures	1,949,000	206,000	3,000		2,158,000
For the three months
ended January 31, 2009:
Net
sales	$ 99,562,000	$ 30,959,000	$ (84,000	)	$ 130,437,000
Depreciation
and amortization	2,411,000	951,000	109,000		3,471,000
Operating
income	15,641,000	8,542,000	(2,730,000	)	21,453,000
Capital
expenditures	2,291,000	314,000	11,000		2,616,000

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Total assets by operating segment as of January 31, 2010 and October 31, 2009 are as follows:

	Segment		Other, — Primarily	Consolidated
	FSG	ETG	Corporate	Totals
Total
assets as of January 31, 2010	$ 416,264,000	$ 284,141,000	$ 37,427,000	$ 737,832,000
Total
assets as of October 31, 2009	414,030,000	285,602,000	33,278,000	732,910,000

COMMITMENTS AND CONTINGENCIES

Guarantees

The Company has arranged for a standby letter of credit for $1.5 million to meet the security requirement of its insurance company for potential workers’ compensation claims, which is supported by the Company’s revolving credit facility. As of January 31, 2010, one of the Company’s subsidiaries has guaranteed its performance related to a customer contract through a letter of credit for $.6 million, expiring May 2010, which is supported by the Company’s revolving credit facility. The subsidiary is also a beneficiary of a letter of credit related to the same contract.

Product Warranty

Changes in the Company’s product warranty liability for the three months ended January 31, 2010 and 2009, respectively, are as follows:

| | Three
months ended January 31, — 2010 | 2009 | | |
| --- | --- | --- | --- | --- |
| Balances
as of beginning of fiscal year | $ 1,022,000 | $ | 671,000 | |
| Accruals
for warranties | 454,000 | | 222,000 | |
| Warranty
claims settled | (281,000 | ) | (248,000 | ) |
| Balances
as of January 31 | $ 1,195,000 | $ | 645,000 | |

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 up to 73 million Canadian dollars in aggregate, which translates to approximately $68 million U.S. dollars based on the January 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 2010, $1.3 million in fiscal 2011 and $10.1 million in fiscal 2012 should the subsidiary meet certain earnings objectives during each of the first three years following the acquisition.

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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 $11.7 million should the subsidiary meet certain earnings objectives during the first two years 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 $93 million payable over future periods beginning in fiscal 2010 through fiscal 2013. Assuming the subsidiaries perform over their respective future measurement periods at the same earnings levels they have performed in the comparable historical measurement periods, the aggregate amount of such contingent purchase consideration that the Company would be required to pay is approximately $9 million. The actual contingent purchase consideration will likely be different.

Litigation

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

REDEEMABLE NONCONTROLLING INTERESTS

As further detailed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended October 31, 2009, 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 2010 through fiscal 2018. The Put Rights, all of which relate either to common shares or membership interests in limited liability companies, provide that the cash consideration to be paid for their equity interests (the “Redemption Amount”) be at fair value or at a formula that management intended to reasonably approximate fair value based solely on a multiple of future earnings over a measurement period. As of January 31, 2010, management’s estimate of the aggregate Redemption Amount of all Put Rights that the Company would be required to pay is approximately $57 million. The actual Redemption Amount will likely be different. The portion of the estimated Redemption Amount as of January 31, 2010 redeemable at fair value is $25 million and the portion redeemable based solely on a multiple of future earnings is $32 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 Condensed Consolidated Statements of Shareholders’ Equity

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and Comprehensive Income for a summary of changes in redeemable noncontrolling interests for the three months ended January 31, 2010 and 2009.

During the three months ended January 31, 2009, the Company acquired certain redeemable noncontrolling interests and accounted for the transaction 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. As previously mentioned, the Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income for the three months ended January 31, 2009 is presented on a retrospective basis to reflect the adoption of new accounting guidance as of November 1, 2009 pertaining to 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 previous recorded decrease to retained earnings related to such redeemable noncontrolling interests recorded as part of the adoption of this new accounting guidance.

SUBSEQUENT EVENT

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. The total consideration for this acquisition was principally paid in cash using proceeds from the Company’s revolving credit facility. The total consideration for this acquisition and related allocation to the tangible and identifiable intangible assets acquired and liabilities assumed is not material or significant to the Company’s condensed consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

Our critical accounting policies, some of which require management to make judgments about matters that are inherently uncertain, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended October 31, 2009.

Our business is comprised of two operating segments: the Flight Support Group (“FSG”), consisting of HEICO Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, and the Electronic Technologies Group (“ETG”), consisting of HEICO Electronic Technologies Corp. (“HEICO Electronic”) and its subsidiaries.

Our results of operations for the three months ended January 31, 2010 have been affected by certain fiscal 2009 acquisitions as further detailed in Note 2, Acquisitions, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2009.

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Results of Operations

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

| | Three
months ended January 31, — 2010 | 2009 | | |
| --- | --- | --- | --- | --- |
| Net
sales | $ 135,535,000 | $ | 130,437,000 | |
| Cost
of sales | 85,415,000 | | 86,533,000 | |
| Selling,
general and administrative expenses | 25,576,000 | | 22,451,000 | |
| Total
operating costs and expenses | 110,991,000 | | 108,984,000 | |
| Operating
income | $ 24,544,000 | $ | 21,453,000 | |
| Net
sales by segment: | | | | |
| Flight
Support Group | $ 93,779,000 | $ | 99,562,000 | |
| Electronic
Technologies Group | 42,058,000 | | 30,959,000 | |
| Intersegment
sales | (302,000 | ) | (84,000 | ) |
| | $ 135,535,000 | $ | 130,437,000 | |
| Operating
income by segment: | | | | |
| Flight
Support Group | $ 16,720,000 | $ | 15,641,000 | |
| Electronic
Technologies Group | 11,170,000 | | 8,542,000 | |
| Other,
primarily corporate | (3,346,000 | ) | (2,730,000 | ) |
| | $ 24,544,000 | $ | 21,453,000 | |
| Net
sales | 100.0 | % | 100.0 | % |
| Gross
profit | 37.0 | % | 33.7 | % |
| Selling,
general and administrative expenses | 18.9 | % | 17.2 | % |
| Operating
income | 18.1 | % | 16.4 | % |
| Interest
expense | 0.1 | % | 0.1 | % |
| Other
income (expense) | 0.1 | % | — | |
| Income
tax expense | 6.3 | % | 4.5 | % |
| Net
income attributable to noncontrolling interests | 3.1 | % | 3.1 | % |
| Net
income attributable to HEICO | 8.7 | % | 8.7 | % |

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Comparison of First Quarter of Fiscal 2010 to First Quarter of Fiscal 2009

Net Sales

Net sales for the first quarter of fiscal 2010 increased by 3.9% to $135.5 million, as compared to net sales of $130.4 million for the first quarter of fiscal 2009. The increase in net sales reflects an increase of $11.1 million (a 35.9% increase) to $42.1 million in net sales within the ETG partially offset by a decrease of $5.8 million (a 5.8% decrease) to $93.8 million in net sales within the FSG. The net sales increase in the ETG reflects the additional net sales contributed by two fiscal 2009 acquisitions (one in May 2009 and the other in October 2009) as well as organic growth of approximately 6%. The organic growth in the ETG reflects some strengthening in demand for certain of our satellite, defense and medical equipment products. The net sales decrease within the FSG reflects reduced demand for our FSG products and services, which continue to be impacted by reduced airline capacity.

Gross Profit and Operating Expenses

Our consolidated gross profit margin increased to 37.0% for the first quarter of fiscal 2010 as compared to 33.7% for the first quarter of fiscal 2009, mainly reflecting higher margins within the FSG principally due to a more favorable product sales mix, including the favorable impact from the sale of some products previously written down as slow-moving. Consolidated cost of sales for the first quarter of fiscal 2010 and 2009 includes approximately $5.1 million and $4.8 million, respectively, of new product research and development expenses.

Selling, general and administrative (“SG&A”) expenses were $25.6 million and $22.5 million for the first quarter of fiscal 2010 and fiscal 2009, respectively. The increase in SG&A expenses was mainly due to the operating costs of the two fiscal 2009 acquisitions referenced above. SG&A expenses as a percentage of net sales increased from 17.2% for the first quarter of fiscal 2009 to 18.9% for the first quarter of fiscal 2010 reflecting the lower net sales volumes within the FSG and an increase in amortization expense of intangible assets associated with the prior year ETG acquisitions.

Operating Income

Operating income for the first quarter of fiscal 2010 increased by 14.4% to $24.5 million as compared to operating income of $21.5 million for the first quarter of fiscal 2009. The increase in operating income reflects a $2.6 million increase (a 30.8% increase) to $11.2 million in operating income of the ETG in the first quarter of fiscal 2010, up from $8.5 million for the first quarter of fiscal 2009 and a $1.1 million increase (a 6.9% increase) in operating income of the FSG to $16.7 million for the first quarter of fiscal 2010, up from $15.6 million for the first quarter of fiscal 2009, partially offset by a $.6 million increase in corporate expenses. The increase in operating income for the ETG in the first quarter of 2010 reflects the impact of the fiscal 2009 acquisitions and organic sales growth. The increase in operating income for the FSG in the first quarter of 2010 reflects the aforementioned higher gross profit margins.

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As a percentage of net sales, our consolidated operating income increased to 18.1% for the first quarter of fiscal 2010, up from 16.4% for the first quarter of 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 17.8% in the first quarter of fiscal 2010 from 15.7% in the first quarter of fiscal 2009, partially offset by a decrease in the ETG’s operating income as a percentage of net sales from 27.6% in the first quarter of fiscal 2009 to 26.6% in the first quarter of fiscal 2010. The increase in operating income as a percentage of net sales for the FSG principally reflects the aforementioned impact of a more favorable product sales mix.

Interest Expense

Interest expense in the first quarter of fiscal 2010 and 2009 was not material.

Other Income (Expense)

Other income (expense) in the first quarter of fiscal 2010 and 2009 was not material.

Income Tax Expense

Our effective tax rate for the first quarter of fiscal 2010 increased to 34.8% from 27.6% for the first quarter of fiscal 2009. The effective tax rate for the first quarter of fiscal 2009 reflects a settlement reached with the Internal Revenue Service 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 reserve for fiscal years 2006 through 2008 based on new information obtained during the examination, which increased net income attributable to HEICO by approximately $1,083,000, or $.04 per diluted share.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to the 20% noncontrolling interest held in the FSG and the noncontrolling interests held in certain subsidiaries of the FSG and ETG. The increase in net income attributable to noncontrolling interests for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 is principally related to the May 2009 acquisition of an ETG subsidiary in which a noncontrolling interest exists as well as higher earnings of certain other ETG subsidiaries in which noncontrolling interests exist.

Net Income Attributable to HEICO

Net income attributable to HEICO was $11.8 million, or $.44 per diluted share, for the first quarter of fiscal 2010 compared to $11.3 million, or $.42 per diluted share, for the first quarter of fiscal 2009 reflecting the increased operating income referenced above. Diluted net income per share attributable to HEICO shareholders in the first quarter of fiscal 2009 included the $.04 per diluted share benefit from the aforementioned favorable IRS settlement.

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Outlook

As we look to the balance of fiscal 2010, we expect continued softness during the first half of calendar 2010 in our commercial aviation markets, which represent approximately 68% of our annual net sales. While the consensus opinion within the industry continues to expect a recovery within the airline industry in the later half of 2010, the strength and exact timing of such a recovery is uncertain at this time. Based on this aviation market outlook and conditions within our other major markets, we are targeting full year growth in net sales, earnings and net cash provided by operating activities in fiscal 2010 over fiscal 2009 results.

Liquidity and Capital Resources

Our principal uses of cash include payments of principal and interest on debt, acquisitions, capital expenditures, distributions to noncontrolling interests, cash dividends and increases in working capital.

We finance our activities primarily from our operating activities and financing activities, including borrowings under our revolving credit facility. As of January 31, 2010, our net debt to shareholders’ equity ratio was a low 7.1%, with net debt (total debt less cash and cash equivalents) of $35.9 million. We have no significant debt maturities until fiscal 2013.

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 the foreseeable future.

Operating Activities

Net cash provided by operating activities was $20.3 million for the first quarter of fiscal 2010, an increase of $15.1 million from $5.2 million for the first quarter of fiscal 2009, and consisted primarily of net income from consolidated operations of $16.0 million and depreciation and amortization of $4.3 million.

Net cash provided by operating activities for the first quarter of fiscal 2009 included net income from consolidated operations of $15.4 million and depreciation and amortization of $3.5 million, but was impacted by a $14.2 million increase in net operating assets related to the payment of certain accrued employee compensation and accrued additional purchase consideration since the end of fiscal 2008 and a higher investment in inventories for new product offerings, partially offset by a decrease in accounts receivable due to the timing of cash collections.

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Investing Activities

Net cash used in investing activities during the first quarter of fiscal 2010 related primarily to acquisitions and related costs of $2.2 million and capital expenditures totaling $2.2 million. Acquisitions and related costs principally reflect additional purchase consideration paid pursuant to the terms of the purchase agreements associated with certain prior year acquisitions. See Note 2, Acquisitions, of the Notes to Condensed Consolidated Financial Statements for further details.

Financing Activities

Net cash used in financing activities during the first quarter of fiscal 2010 related primarily to net borrowings on our revolving credit facility of $12.0 million, distributions to noncontrolling interests of $2.5 million, and the payment of $1.6 million in cash dividends on our common stock, partially offset by the presentation of $.7 million of excess tax benefit from stock option exercises as a financing activity.

Contractual Obligations

There have not been any material changes to the amounts presented in the table of contractual obligations that was included in our Annual Report on Form 10-K for the year ended October 31, 2009.

See “New Accounting Pronouncements” below for additional information pertaining to our redeemable noncontrolling interests.

As discussed in “Off-Balance Sheet Arrangements – Acquisitions – Additional Contingent Purchase Consideration” below, we may be obligated to pay additional contingent purchase consideration based on future earnings of certain acquired businesses. The aggregate maximum amount of such contingent purchase consideration that we could be required to pay is approximately $93 million payable over future periods beginning in fiscal 2010 through fiscal 2013. Assuming the subsidiaries perform over their respective future measurement periods at the same earnings levels they have performed in the comparable historical measurement periods, the aggregate amount of such contingent purchase consideration that we would be required to pay is approximately $9 million. The actual contingent purchase consideration will likely be different.

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. As of January 31, 2010, one of our subsidiaries has guaranteed its performance related to a customer contract through a letter of credit for $.6 million, expiring May 2010, which is supported by our revolving credit facility. The subsidiary is also a beneficiary of a letter of credit related to the same contract.

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Acquisitions – 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 up to 73 million Canadian dollars in aggregate, which translates to approximately $68 million U.S. dollars based on the January 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 consideration of up to approximately $1.3 million in fiscal 2010, $1.3 million in fiscal 2011 and $10.1 million in fiscal 2012 should the subsidiary meet certain earnings objectives during each of the first three years following the acquisition.

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 $11.7 million should the subsidiary meet certain earnings objectives during the first two years following the acquisition.

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 has affected the presentation of noncontrolling interests in our condensed 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 affects the financial statement classification and measurement of redeemable noncontrolling interests. As further detailed in Note 15, Commitments and Contingencies, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended October 31, 2009, the holders of equity interests in certain of our subsidiaries have rights (“Put Rights”) that require us 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

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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, subsequent 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 Condensed 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.

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. In February 2008, the FASB issued additional guidance which delayed 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 portions of the new guidance that were delayed 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.

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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. We adopted the new guidance 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. ASU 2010-06 is effective for reporting periods beginning after December 15, 2009, or as of the second quarter of fiscal 2010 for us, except the additional Level 3 disclosures, which are effective in fiscal years beginning after December 15, 2010, or as of fiscal 2012 for us. We are currently evaluating the effect the adoption of ASU 2010-06 will have on our results of operations, financial position and cash flows.

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 known and unknown risks, uncertainties and contingencies. We have based these forward-looking statements on our current expectations and projections about future events. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to: lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause 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; HEICO’s ability to introduce new products and product pricing levels, which could reduce our sales or sales growth and; HEICO’s ability to

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make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest 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. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have not been any material changes in our assessment of HEICO’s sensitivity to market risk that was disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended October 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that HEICO’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation referred to above that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During December 2009, we repurchased 7,314 shares of our Common Stock at an average price of $39.43 and 2,090 shares of our Class A Common Stock at an average price of $30.98 as settlement for employee taxes due pertaining to exercises of non-qualified stock options. We made no repurchases of common stock under our existing share program during the first quarter of fiscal 2010 and the number of shares that may be repurchased is 1,024,742.

ITEM 6. EXHIBITS

Exhibit	Description
31.1	Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
*
31.2	Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
*
32.1	Section
1350 Certification of Chief Executive Officer. **
32.2	Section
1350 Certification of Chief Financial Officer.
**

Filed herewith.

** Furnished herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| /s/ THOMAS S.
IRWIN |
| --- |
| Thomas
S. Irwin |
| Executive
Vice President and |
| Chief
Financial Officer |
| (Principal
Financial and |
| Accounting
Officer) |

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EXHIBIT INDEX

Exhibit	Description
31.1	Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1	Section
1350 Certification of Chief Executive Officer.
32.2	Section
1350 Certification of Chief Financial Officer.

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HEICO CORP Interim / Quarterly Report 2010

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HEICO CORP — Interim / Quarterly Report 2010

30075_10-q_2010-03-05_f254009d-9ca6-463a-919e-90eafe27af98.zip

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HEICO CORP Interim / Quarterly Report 2010