PART
I
BUSINESS
The
Company
HEICO Corporation through its
subsidiaries (collectively, “HEICO,” “we,” “us,” “our” or the “Company”)
believes it is the world’s largest manufacturer of Federal Aviation
Administration (“FAA”)-approved jet engine and aircraft component replacement
parts, other than the original equipment manufacturers (“OEMs”) and their
subcontractors. HEICO also believes it is a leading manufacturer of
various types of electronic equipment for the aviation, defense, space, medical,
telecommunication and electronic industries.
The Company was originally organized in
1957 as a holding company known as HEICO Corporation. As part of a
reorganization completed in 1993, the original holding company (formerly known
as HEICO Corporation) was renamed as HEICO Aerospace Corporation and a new
holding corporation known as HEICO Corporation was created. The
reorganization did not result in any change in the business of the Company, its
consolidated assets or liabilities or the relative interests of its
shareholders.
Our business is comprised of two
operating segments:
The Flight Support
Group. Our Flight Support Group (“FSG”), consisting of HEICO
Aerospace Holdings Corp. (“HEICO Aerospace”) and its subsidiaries, accounted for
67%, 73% and 75% of our net sales in fiscal 2010, 2009 and 2008,
respectively. The Flight Support Group uses proprietary technology to
design and manufacture jet engine and aircraft component replacement parts for
sale at lower prices than those manufactured by OEMs. These parts are
approved by the FAA and are the functional equivalent of parts sold by
OEMs. In addition, the Flight Support Group repairs, overhauls and
distributes jet engine and aircraft components, avionics and instruments for
domestic and foreign commercial air carriers and aircraft repair companies as
well as military and business aircraft operators; and manufactures thermal
insulation products and other component parts primarily for aerospace, defense
and commercial applications.
The Electronic Technologies
Group. Our Electronic Technologies Group (“ETG”), consisting
of HEICO Electronic Technologies Corp. and its subsidiaries, accounted for 33%,
27% and 25% of our net sales in fiscal 2010, 2009 and 2008,
respectively. Through our Electronic Technologies Group, which
derived approximately 57% of its sales in fiscal 2010 from the sale of products
and services to U.S. and foreign military agencies, prime defense contractors
and both commercial and defense satellite and spacecraft manufacturers, we
design, manufacture and sell various types of electronic, microwave and
electro-optical products, including infrared simulation and test equipment,
laser rangefinder receivers, electrical power supplies, back-up power supplies,
power conversion products, underwater locator beacons, electromagnetic
interference and radio frequency interference shielding, high power capacitor
charging power supplies, amplifiers, traveling wave tube amplifiers,
photodetectors, amplifier modules, microwave power modules, flash lamp drivers,
laser diode drivers, arc lamp power supplies, custom power supply designs, cable
assemblies, high voltage power supplies, high voltage interconnection devices
and wire, high voltage energy generators, high frequency power delivery systems
and high-speed interface products that link devices such as telemetry receivers,
digital cameras, high resolution scanners, simulation systems and test systems
to almost any computer.
1
HEICO has continuously operated in the
aerospace industry for more than 50 years. Since assuming control in
1990, our current management has achieved significant sales and profit growth
through a broadened line of product offerings, an expanded customer base,
increased research and development expenditures and the completion of a number
of acquisitions. As a result of internal growth and acquisitions, our
net sales from continuing operations have grown from $26.2 million in fiscal
1990 to $617.0 million in fiscal 2010, a compound annual growth rate of
approximately 17%. During the same period, we improved our net income
from $2.0 million to $54.9 million, representing a compound annual growth rate
of approximately 18%.
Flight
Support Group
The Flight Support Group, headquartered
in Hollywood, Florida, serves a broad spectrum of the aviation industry,
including (i) commercial airlines and air cargo carriers; (ii) repair and
overhaul facilities; (iii) OEMs; and (iv) U.S. and foreign
governments.
The Flight Support Group competes with
the leading industry OEMs and, to a lesser extent, with a number of smaller,
independent parts distributors. Historically, the three principal jet
engine OEMs, General Electric (including CFM International), Pratt & Whitney
and Rolls Royce, have been the sole source of substantially all jet engine
replacement parts for their jet engines. Other OEMs have been the
sole source of replacement parts for their aircraft component
parts. While we believe that we currently supply less than 2% of the
market for jet engine and aircraft component replacement parts, we have in
recent years been adding new products to our line at a rate of over 400 Parts
Manufacturer Approvals (“PMA” or “PMAs”) per year. We currently offer
to our customers over 5,000 parts for which PMAs have been received from the
FAA.
Jet engine and aircraft component
replacement parts can be categorized by their ongoing ability to be repaired and
returned to service. The general categories in which we participate
are as follows: (i) rotable; (ii) repairable; and (iii) expendable. A
rotable is a part which is removed periodically as dictated by an operator’s
maintenance procedures or on an as needed basis and is typically repaired or
overhauled and re-used an indefinite number of times. An important
subset of rotables is “life limited” parts. A life limited rotable
has a designated number of allowable flight hours and/or cycles (one take-off
and landing generally constitutes one cycle) after which it is rendered
unusable. A repairable is similar to a rotable except that it can
only be repaired a limited number of times before it must be discarded. An
expendable is generally a part which is used and not thereafter repaired for
further use.
Jet engine and aircraft component
replacement parts are classified within the industry as (i) factory-new; (ii)
new surplus; (iii) overhauled; (iv) repairable; and (v) as removed. A
factory-new or new surplus part is one that has never been installed or
used. Factory-new parts are purchased from FAA-approved manufacturers
(such as HEICO or OEMs) or their authorized distributors. New surplus
parts are purchased from excess stock of airlines, repair facilities or other
redistributors. An overhauled part is one that has been completely
repaired and inspected by a licensed repair facility such as ours. An
aircraft spare part is classified as “repairable” if it can be repaired by a
licensed repair facility under applicable regulations. A part may
also be classified as “repairable” if it can be removed by the operator from an
aircraft or jet engine while operating under an approved maintenance program and
is airworthy and meets any manufacturer or time and cycle restrictions
applicable to the part. A “factory-new,” “new surplus” or
“overhauled” part designation indicates that the part can be immediately
utilized on an aircraft. A part in “as removed” or “repairable”
condition requires inspection and possibly functional testing, repair or
overhaul by a licensed facility prior to being returned to service in an
aircraft.
2
Factory-New Jet Engine and Aircraft
Component Replacement Parts. The Flight Support Group engages
in the research and development, design, manufacture and sale of FAA-approved
replacement parts that are sold to domestic and foreign commercial air carriers
and aircraft repair and overhaul companies. Our principal competitors
are Pratt & Whitney, a division of United Technologies Corporation, and
General Electric Company, including its CFM International joint venture. The
Flight Support Group’s factory-new replacement parts include various jet engine
and aircraft component replacement parts. A key element of our growth
strategy is the continued design and development of an increasing number of PMA
replacement parts in order to further penetrate our existing customer base and
obtain new customers. We select the jet engine and aircraft component
replacement parts to design and manufacture through a selection process which
analyzes industry information to determine which replacement parts are suitable
candidates.
Repair and Overhaul
Services. The Flight Support Group provides repair and
overhaul services on selected jet engine and aircraft component parts, as well
as on avionics, instruments, composites and flight surfaces of commercial
aircraft operated by domestic and foreign commercial airlines. The
Flight Support Group also provides repair and overhaul services including
avionics and navigation systems as well as subcomponents and other instruments
utilized on military aircraft operated by the United States government and
foreign military agencies and for aircraft repair and overhaul
companies. Our repair and overhaul operations require a high level of
expertise, advanced technology and sophisticated equipment. Services
include the repair, refurbishment and overhaul of numerous accessories and parts
mounted on gas turbine engines and airframes. Components overhauled
include fuel pumps, generators, fuel controls, pneumatic valves, starters and
actuators, turbo compressors and constant speed drives, hydraulic pumps, valves
and actuators, composite flight controls, electro-mechanical equipment and
auxiliary power unit accessories. Some of the repair and overhaul
services provided by the Flight Support Group are proprietary repairs approved
by an FAA-qualified designated engineering representative
(“DER”). Such FAA-approved repairs (DER-approved repairs) typically
create cost savings or provide engineering flexibility. The Flight
Support Group also provides commercial airlines, regional operators, asset
management companies and Maintenance, Repair and Overhaul (“MRO”) providers with
high quality and cost effective niche accessory component exchange services as
an alternative to OEMs’ spares services.
Distribution. The
Flight Support Group distributes FAA-approved parts including hydraulic,
pneumatic, mechanical and electro-mechanical components for the commercial,
regional and general aviation markets.
Manufacture of Specialty
Aircraft/Defense Related Parts and Subcontracting for
OEMs. The Flight Support Group manufactures thermal insulation
blankets primarily for aerospace, defense and commercial
applications. The Flight Support Group also manufactures specialty
components for sale as a subcontractor for aerospace and industrial original
equipment manufacturers and the United States government.
FAA Approvals and Product
Design. Non-OEM manufacturers of jet engine and aircraft
component replacement parts must receive a PMA from the FAA to sell the
replacement part. The PMA approval process includes the submission of
sample parts, drawings and testing data to one of the FAA’s Aircraft
Certification Offices where the submitted data are analyzed. We
believe that an applicant’s ability to successfully complete the PMA process is
limited by several factors, including (i) the agency’s confidence level in the
applicant; (ii) the complexity of the part; (iii) the volume of PMAs being
filed; and (iv) the resources available to the FAA. We also believe
that companies such as HEICO that have demonstrated their manufacturing
capabilities and established favorable track records with the FAA generally
receive a faster turnaround time in the processing of PMA
applications. Finally, we believe that the PMA process creates a
significant barrier to entry in this market niche through both its technical
demands and its limits on the rate at which competitors can bring products to
market.