Mail Stop 0510
February 22, 2005
Via U.S. mail and facsimile
Michael A. McLain, President and Chief Executive Officer
Aearo Company I
5457 West 79th Street
Indianapolis, IN 46268
RE: Form 10-K for the fiscal year ended September 30, 2004
Form 10-Q for the period ended December 31, 2004
File No. 333-116676
Dear Mr. McLain:
We have reviewed these filings and have the following
comments. If you disagree with a comment, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2004
Comment applicable to your overall filing
1. Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response
what the revisions will look like. These revisions should be
included in your future filings.
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operation
Critical Accounting Policies
Revenue Recognition and Allowance for Doubtful Accounts, page 20
2. Your disclosure on page 7 indicates that you offer your
distributors certain programs, including sales rebate and reward
programs, as well as, cooperative advertising and marketing
incentives to customers. You disclosed certain provisions may be
recorded, including pricing discounts and incentives related to
these
programs. Please expand your disclosure here and in your
significant
accounting policy footnote to include your accounting policy for
each
of these types of arrangements, including the statement of income
line item that each type of arrangement is included in. For each
expense line item that includes these types of arrangements,
please
disclose in your footnotes the related amount included in that
line
item. For each type of arrangement treated as an expense rather
than
as a reduction of revenues, please tell us how this type of
arrangement meets the requirements in EITF 01-9. Please also
discuss
in MD&A any significant estimates resulting from these
arrangements.
Results of Operations
Fiscal 2004 Compared to Fiscal 2003, page 21
3. You have disclosed components that have contributed to the
change
in gross profits on a consolidated basis, as well as on a segment
basis. Please expand your disclosure to quantify the incremental
impact each of these components have had on the overall change in
gross profits.
4. You have disclosed in your notes to the financial statements in
your significant accounting policies that costs related to
shipping
and handling are included in selling and administrative expenses
in
your statement of operations. Please expand your disclosure to
indicate that your gross margins may not be comparable to those of
other entities, since some entities include all of these costs in
cost of sales and others, like you exclude a portion of them from
gross margin, instead including them in selling and administrative
expenses.
Liquidity and Capital Resources, page 24
5. Please expand your disclosure to provide additional details
relating to the following:
* Change and trends in product mix or volume, including any
offsetting results these changes may have with one another.
* Status of new products, your outlook on how these new products
will
likely impact, or have impacted your future growth, liquidity, and
capital commitments.
Contractual Obligations, page 26
6. Please revise your table of contractual cash obligations to
include planned funding of pension and other postretirement
benefit
obligations. Because the table is aimed at increasing
transparency
of cash flow, we believe these payments should be included in the
table. Please also disclose any assumptions you made to derive
these
amounts.
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows, page 39
7. Please present cash flows related to the change in other assets
separately from those related to the change in other liabilities.
Please also present these cash flows on a gross basis, rather than
a
net basis. Refer to paragraphs 11 to 13 of SFAS 95.
Consolidated Statements of Stockholder`s Equity, page 38
8. Please revise your statement of stockholder`s equity to display
the gross change in other comprehensive income or expand your
disclosures to include the gross change in a note to the financial
statements. Refer to paragraph 20 of SFAS 130.
Notes to Consolidated Financial Statements
1. Basis of Presentation, page 40
9. Please expand your disclosure to discuss the facts and
circumstances that caused the $17.1 million adjustment to
inventory.
10. Did the Merger, as described on page 40, result in any
purchased
research and development? If so, please describe to us in detail
how
this was accounted for. Refer to paragraphs 42 and 51(g) of SFAS
141.
11. Please expand your disclosure to include the disclosures
required
by paragraphs 52(a) to (c) of SFAS 141.
12. Please expand your disclosure to include the reason why the
purchase price allocation has not been finalized. Refer to
paragraph
51(h) of SFAS 141.
2. Significant Accounting Policies, page 41
13. Please disclose the types of expenses that you include in the
cost of sales line item and the types of expenses that you include
in
the selling and administrative expenses line item. Please also
disclose whether you include inbound freight charges, purchasing
and
receiving costs, inspection costs, warehousing costs, internal
transfer costs, and the other costs of your distribution network
in
the cost of sales line item. With the exception of warehousing
costs, if you currently exclude a portion of these costs from cost
of
sales, please disclose:
* in a footnote the line items that these excluded costs are
included
in and the amounts included in each line item for each period
presented, and
* in MD&A that your gross margins may not be comparable to those
of
other entities, since some entities include all of the costs
related
to their distribution network in cost of sales and others like you
exclude a portion of them from gross margin, including them
instead
in a line item, such as selling and administrative expenses.
14. Please disclose your policy regarding product warranties. If
product warranties exist, please include in your disclosure how
your
determined the liability and a reconciliation for the changes in
the
product warranties for the reporting period. Refer to paragraph
14
of FIN 45.
Fair Value of Financial Instruments, page 45
15. Please expand your disclosure to include the amounts charged
to
income/(expense) relating to your interest rate cap arrangement
and
the derivative asset relating to the embedded call option.
7. Debt
Employee Benefit Plans, page 53
16. Please expand the portion of your disclosure relating to
employee
benefit plans to include the effects, if any, the Merger had on
these
plans. If you conclude that the Merger did have an effect on
these
plans, please revise your disclosures to include a separate line
for
any effects the Merger had on the plans. Refer to paragraphs 5
and
11 of FAS 132(R).
Note 11. Commitments and Contingencies
Contingencies, page 61
17. You have probable product liabilities related primarily to
asbestos and silica-related claims. Please disclose separately
for
each of these types of claims the following:
* A rollforward for each period presented of your claims activity
that shows the number of claims at the beginning of the period,
increases in the number of claims, the number of claims settled,
and
the ending number of claims.
* The average settlement amount for cases closed in each period.
12. Acquisitions, page 62
18. Your disclosure regarding the acquisition of VH Industries,
Inc.,
indicates that the purchase price of $11.6 million included costs
to
restructure operations. Please expand your disclosure to include
the
following, if material:
* The total cost required to restructure operations,
* The accounting treatment and related guidance used in concluding
these amounts should be included in the purchase price, and
* A reconciliation of beginning and ending balances by each major
type of cost.
13. Segment Data, page 63
19. Please expand your disclosure to include the factors used to
identify that the business operates under three reportable
segments.
Refer to paragraph 26(a) of SFAS 131.
20. Please expand your disclosure to include the information
required
by paragraph 39 of SFAS 131 regarding revenue transactions of ten
percent or more generated from a single external customer.
Item 12. Security Ownership of Certain Beneficial Owners and
Management, page 85
21. Please expand your disclosure to include information relating
to
securities authorized for issuance under equity compensation
plans.
See Item 201(d) of Regulation S-K.
FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 2004
Comment applicable to your overall filing
22. Please address the comments above in your interim Forms 10-Q
as
well.
Item 1. Financial Statements
Notes to Consolidated Financial Statements
2. Company Background, Merger and Basis of Presentation
23. Please expand your disclosure regarding the Merger to describe
the nature and amounts of the adjustments made to deferred tax
liabilities and goodwill relating to the initial allocation of the
purchase price. Please include this explanation in your
significant
accounting policies as well. Refer to paragraph 51(h) of SFAS
141.
3. Significant Accounting Policies
24. You have disclosed that your tax benefits have been partially
offset by a valuation allowance. Please expand your disclosure to
include the total valuation allowance you have recorded for each
of
the periods presented.
Item 2. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations
25. Your segment footnote in your Form 10-K filed for the year
ended
September 30, 2004 indicates a decline in segment profit for the
safety prescription eyewear segment from Fiscal 2002 through
Fiscal
2004. Your segment footnote in your Form 10-Q for the period
ended
December 31, 2004 continues to show a decline in segment profit
for
this segment. Please expand your disclosure to address this
trend.
Please address items such as, but not limited to the following:
* Whether or not you expect this trend to continue, and if so what
your projections are relating to this segment,
* How this decline in segment profits will likely affect future
cash
flows and the results of operations, and
* Whether or not this decline coupled with your future
expectations
of growth and profitability in this segment will be enough to
prevent
the need for an impairment charge.
Liquidity and Capital Resources
26. Please expand your disclosure to discuss the $3.3 million
increase in deferred and prepaid expenses from September 30, 2004
to
December 31, 2004.
27. You have disclosed here and in your debt footnote that since
the
acquisition date your debt has been negatively impacted by $6.3
million relating to fluctuations in the relationship between the
euro
and the U.S. dollar. Please expand your disclosure to discuss any
measures you are taking to minimize this risk going forward.
* * * *
Please respond to these comments within 10 business days, or
tell us when you will provide us with a response. Please provide
us
with a supplemental response letter that keys your responses to
our
comments and provides any requested supplemental information.
Detailed letters greatly facilitate our review. Please file your
supplemental response on EDGAR as a correspondence file. Please
understand that we may have additional comments after reviewing
your
responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in their filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
If you have any questions regarding these comments, please
direct
them to Meagan Caldwell, Staff Accountant, at (202) 824-5578 or,
in
her absence, to the undersigned at (202) 942-1774.
Sincerely,
Rufus Decker
Accounting Branch Chief
??
??
??
??
Mr. Michael A. McLain
February 22, 2005
Page 1 of 8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0510
DIVISION OF
CORPORATION FINANCE