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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 33-96190
AEARO CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 13-3840450
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5457 West 79th Street
Indianapolis, Indiana 46268
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(Address of principal executive offices) (Zip Code)
(317) 692-6666
(Registrant's telephone number, including area code)
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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
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AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-20
---------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
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ITEM 2. CHANGES IN SECURITIES 21
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 21
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ITEM 5. OTHER INFORMATION 21
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
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SIGNATURE PAGE 22
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PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1999 1998
----------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,020 $ 6,737
Accounts receivable (net of reserve for doubtful accounts of $1,195
and $1,239 respectively) 43,984 44,486
Inventories 31,154 30,466
Deferred and prepaid expenses 3,816 3,572
-------- --------
Total current assets 83,974 85,261
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 54,583 57,729
INTANGIBLE ASSETS, NET 128,843 137,848
OTHER ASSETS 4,326 5,909
-------- --------
Total assets $271,726 $286,747
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITy
(DOLLARS IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1999 1998
---------- -------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 14,583 $ 14,573
Accounts payable and accrued liabilities 36,306 37,957
Accrued interest 6,570 3,732
U.S. and foreign income taxes 4,319 3,506
--------- ---------
Total current liabilities 61,778 59,768
--------- ---------
LONG-TERM DEBT 199,747 218,592
DEFERRED INCOME TAXES 1,541 959
OTHER LIABILITIES 2,649 2,586
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--45,000 shares -- --
Common stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--102,588 and 102,338 at
June 30, 1999 and September 30, 1998, respectively 1 1
Additional paid-in capital 32,545 32,383
Accumulated deficit (12,653) (16,715)
Cumulative foreign currency translation adjustments (13,882) (10,827)
--------- ---------
Total stockholders' equity 6,011 4,842
Total liabilities and stockholders' equity $271,726 $ 286,747
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------------------------ -------------------------------
NET SALES $ 75,384 $ 76,312 $ 216,903 $ 217,803
COST OF SALES 40,363 43,112 117,816 121,973
--------- --------- --------- ---------
Gross profit 35,021 33,200 99,087 95,830
SELLING AND ADMINISTRATIVE 21,956 23,083 65,381 66,395
RESEARCH AND TECHNICAL SERVICES 1,180 1,266 3,424 3,577
AMORTIZATION OF INTANGIBLES 1,673 1,707 5,088 5,130
OTHER (INCOME) CHARGES, NET (7) 94 578 (549)
RESTRUCTURING CHARGE -- -- -- 1,585
--------- --------- --------- ---------
Operating income 10,219 7,050 24,616 19,692
INTEREST EXPENSE, NET 5,974 6,436 18,402 19,698
--------- --------- --------- ---------
Income (loss) before provision for
income taxes 4,245 614 6,214 (6)
PROVISION FOR INCOME TAXES 1,041 986 2,152 2,302
--------- --------- --------- ---------
Net income (loss) 3,204 (372) 4,062 (2,308)
PREFERRED STOCK DIVIDEND ACCRUED 2,313 2,037 6,725 5,925
--------- --------- --------- ---------
Net income (loss) applicable to
Common Shareholders $ 891 $ (2,409) $ (2,663) $ (8,233)
========= ========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ 8.70 $ (23.65) $ (25.99) $ (83.25)
========= ========= ========= =========
DILUTED WEIGHTED AVERAGE COMMON
SHARES 102,587.5 101,872.7 102,474.9 98,890.5
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements
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AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
FOR THE NINE MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,062 $ (2,308)
Adjustments to reconcile net income (loss) to cash provided by operating
activities-
Depreciation 7,119 8,952
Amortization of intangible assets and deferred financing costs 6,625 6,562
Deferred income taxes (41) 335
Other, net 253 131
Changes in assets and liabilities-
Accounts receivable (450) 3,050
Inventories (1,318) (2,325)
Accounts payable and accrued liabilities 1,826 2,076
Other, net 1,587 470
-------- --------
Net cash provided by operating activities 19,663 16,943
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,040) (4,164)
Proceeds provided by disposals of property, plant and equipment 22 28
-------- --------
Net cash used by investing activities (5,018) (4,136)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving credit facility, net (5,000) (5,150)
Repayment of term loans (9,242) (7,473)
Repayment of external long-term debt (1,350) (161)
Sale of common stock, net 50 1,044
Increase (decrease) in shareholder notes, net 112 (1,185)
-------- --------
Net cash used by financing activities (15,430) (12,925)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (932) (97)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,717) (215)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,737 5,476
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,020 $ 5,261
======== ========
CASH PAID FOR:
Interest $ 14,077 $ 15,440
======== ========
Income taxes $ 1,280 $ 1,097
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted of
only normal recurring items. The results of operations for the interim
periods shown in this report are not necessarily indicative of results for
any future interim period or for the entire year. These condensed
consolidated financial statements do not include all disclosures associated
with annual financial statements and accordingly should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10K.
(2) FORMATION ACQUISITION AND FINANCING
Aearo Corporation, a Delaware corporation, and its direct wholly-owned
subsidiary, Aearo Company, a Delaware corporation (collectively referred to
herein as "the Company") manufacture and sell hearing protection devices
(ear plugs and ear muffs), prescription and non-prescription safety
eyewear, face shields, reusable and disposable respirators, hard hats and
first aid kits which are protection segments of the personal protection
equipment market world-wide. Additionally, the Company manufactures and
sells worldwide, a wide array of energy-absorbing materials that are
incorporated into other manufacturer's products to control noise, vibration
and shock.
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in
June, 1995 to effect the acquisition (the Formation Acquisition) of
substantially all of the assets and liabilities of Aearo Company (formerly
Cabot Safety Corporation) and certain affiliates (the Predecessor). The
Predecessor was wholly owned by Cabot Corporation (Cabot) prior to the
Formation Acquisition. The Formation Acquisition closed on July 11, 1995,
when Aearo Corporation acquired substantially all of the assets and certain
liabilities of the Predecessor for cash, preferred stock and a 42.5% common
equity interest in Aearo Corporation. Aearo Corporation immediately
contributed the acquired assets and liabilities to Aearo Company, a wholly
owned subsidiary of Aearo Corporation, pursuant to an asset transfer
agreement dated June 13, 1995. Aearo Corporation has no other materials
assets, liabilities or operations other than those that result from its
ownership of the common stock of Aearo Company.
The Formation Acquisition has been accounted for as a purchase transaction
effective as of July 11, 1995, in accordance with Accounting Principles
Board Opinion No. 16, Business Combinations, and EITF Issue No. 88-16,
Basis in Leveraged Buyout Transactions, and accordingly, the consolidated
financial statements for the periods subsequent to July 11, 1995 reflect
the purchase price, including transaction costs, allocated to tangible and
intangible assets acquired and liabilities assumed, based on a portion of
their estimated fair values as of July 11, 1995. The valuation of assets
and liabilities acquired reflect carryover basis for the percentage
ownership retained by Cabot.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
(3) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Reclassifications. Certain amounts included in the prior years' financial
statements may have been reclassified to conform to the current period
presentation.
Foreign Currency Translation. Assets and liabilities of the Company's
foreign operations are translated at period-end exchange rates. Revenues
and expenses are translated at the approximate average monthly rate during
the period. Translation gains and losses are reflected as a separate
component of stockholders' equity. Foreign currency gains and losses
arising from transactions by any of the Company's subsidiaries are
reflected in net income.
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Intangible Assets. Intangible assets consist primarily of the costs of
goodwill, patents, and trademarks purchased in business acquisitions.
Intangible assets are amortized on the straight-line basis over either 25
years or an estimated useful life, whichever is shorter.
Income (Loss) per Common Share. Income (loss) per common share has been
computed by dividing income (loss) applicable to common shareholders for
the period by the weighted average number of common shares outstanding
during the period.
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. Basic earnings per common share is
computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per
common share is calculated the same as basic except, if not antidilutive,
stock options are included using the treasury stock method to the extent
that the average share trading price exceeds the exercise price. The
implementation of this standard did not have an effect on earnings per
common share for the periods presented and, therefore, did not require
restatement.
Effective October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires the reporting of comprehensive
income in addition to net income from operations. The Company's only item
of comprehensive income relates to foreign currency translation
adjustments, and is presented separately on the balance sheet as required.
If presented on the statements of operations comprehensive income would be
approximately $3.1 million, and $3.9 million less than reported net income
due to foreign currency translation adjustments for the nine months ended
June 30, 1999, and June 30, 1998, respectively.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
In June 1997, the Financial Accounting Standards board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 requires companies to present segment information using the
management approach. The management approach is based upon the way that
management organizes the segments within a Company for making operating
decisions and assessing performance. SFAS No. 131 is effective for the
Company beginning September 30, 1999. Adoption of this standard will not
impact the Company's consolidated financial position, results of operations
or cash flows, and any effect will be limited to the form and content of
its disclosures.
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities- Deferral of the Effective Date of SFAS
No. 133 - an Amendment of SFAS No. 133 issued in June 1999, is effective
for fiscal quarters of all fiscal years beginning after June 15, 2000. A
company may implement SFAS No. 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No.
133, as amended by SFAS No. 137, must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantially modified after either
January 1, 1998 or January 1, 1999 as selected by the Company.
SFAS No. 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or a liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on
the consolidated financial statements and has not determined the timing of
or method of the adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
(4) INVENTORIES
Inventories consisted of the following (dollars in thousands):
JUNE 30, SEPTEMBER 30,
1999 1998
----------- ------------
(unaudited)
Raw materials $ 9,587 $ 9,113
Work in process 7,631 9,257
Finished goods 13,936 12,096
------- -------
$31,154 $30,466
Inventories, which include materials, labor and manufacturing overhead, are
stated at the lower of cost or market, cost being determined using the
first-in, first-out method.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
(5) DEBT
The Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i)
term loans denominated in U.S., Canadian, British, and German currencies
(Term Loans) and (ii) a revolving credit facility providing for up to $25.0
million (Revolving Credit Facility), (collectively the Senior Bank
Facilities). Under the terms of both the Senior Bank Facilities and the
Notes indenture, Aearo Company is required to comply with certain financial
covenants and restrictions with which Aearo Company was in compliance at
June 30, 1999. At June 30, 1999, the amounts outstanding on the term loans
and the revolving credit facility were approximately $108.1 million and
$3.0 million, respectively.
(6) COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases certain transportation vehicles,
warehouse facilities, office space, and machinery and equipment under
cancelable and noncancelable leases, most of which expire within 10 years
and may be renewed by the Company.
Contingencies. The Company is a defendant in various lawsuits and
administrative proceedings which are being handled in the ordinary course
of business. In the opinion of management of the Company, these suits and
claims should not result in final judgments or settlements, which in the
aggregate, would have a material adverse effect on the Company's financial
condition or results of operations.
(7) RESTRUCTURING CHARGE
During fiscal 1998 the Company recorded a restructuring charge of $11.6
million related to the restructuring plans announced by the Company during
the fiscal year. On February 3, 1998, the Company announced the appointment
of Michael A. McLain as President and Chief Executive Officer and on March
25, 1998 the Company announced plans to close the Boston headquarters and
relocate it to Indianapolis, Indiana, where the Company has substantial
operations. In addition, on September 30, 1998 the Company announced plans
to improve profitability through complexity reduction and restructuring.
The Company is eliminating certain product offerings in its Eyewear and
Respiratory product lines, reducing head count in North America through
restructuring and outsourcing, consolidating the branding in its Consumer
product line and reducing selling and manufacturing cost in its
Prescription eyewear product line.
The $11.6 million charge includes a $6.1 million provision for inventories
and product returns for products that are being discontinued. The charge
also provides $1.1 million for certain property, plant and equipment for
which the Company has determined there is no future use, and $0.1 million
related to intangibles on an abandoned product line. In addition, the
charge provides $4.3 million to cover mainly employee severance and other
contractual obligations.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
As of June 30, 1999, there is approximately $1.1 million of remaining
accruals related to cash charges for severance and non-cancelable lease
payments to be substantially paid in fiscal 1999. The Company has entered
into a sublease agreement for the Boston office space that was formerly
utilized as the Corporate Headquarters. This sublease was effective as of
May 1, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company, including notes thereto, appearing
elsewhere in this Report. This Report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in such forward-looking statements. The factors
that might cause such a difference include, among others, the following: risks
associated with indebtedness; risks related to acquisitions; risks associated
with the conversion to a new management information system; high level of
competition in the Company's markets; importance and costs of product
innovation; risks associated with international operations; product liability
exposure; unpredictability of patent protection and other intellectual property
issues; dependence on key personnel; the risk of adverse effect of economic and
regulatory conditions on sales; and risks associated with environmental matters.
1999 COMPARED TO 1998 RESULTS
THREE MONTHS ENDED JUNE 30
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CHANGE - FAVORABLE
THREE MONTHS ENDED THREE MONTHS ENDED (UNFAVORABLE)
---------------------- --------------------- ---------------------
JUNE 30, PERCENT OF JUNE 30, PERCENT OF
1999 NET SALES 1998 NET SALES AMOUNT PERCENT
Net Sales
Safety Products $ 64,528 85.6 $ 66,542 87.2 $ (2,014) (3.0)
Specialty Composites 10,856 14.4 9,770 12.8 1,086 11.1
-------- ------ -------- ----- --------
Total net sales 75,384 100.0 76,312 100.0 (927) (1.2)
Cost of Sales 40,363 53.5 43,112 56.5 2,749 6.4
-------- ------ -------- ----- --------
Gross profit 35,021 46.5 33,200 43.5 1,821 5.5
Operating Expenses-
Selling and administrative 21,956 29.1 23,083 30.2 1,127 4.9
Research and technical services 1,180 1.6 1,266 1.7 86 6.8
Amortization of intangibles 1,673 2.2 1,707 2.2 34 2.0
Other (income) charges, net (7) -- 94 0.1 101 --
-------- ------ -------- ----- --------
Operating income 10,219 13.6 7,050 9.2 3,169 45.0
Interest expense, net 5,974 7.9 6,436 8.4 462 7.2
-------- ------ -------- ----- --------
Income before provision for
income taxes 4,245 5.6 614 0.8 3,631 --
Provision for income
taxes 1,041 1.4 986 1.3 (55) (5.6)
-------- ------ -------- ----- --------
Net income (loss) 3,204 4.3 (372) (0.5) 3,576 --
Preferred stock dividend accrued 2,313 3.1 2,037 2.7 (276) (13.5)
-------- ----- --------
Net income (loss) applicable to
common shareholders $ 891 1.2 $ (2,409) (3.2) $ 3,300 --
======== ====== ======== ===== ========
Basic and diluted net income loss per
common share $ 8.70 $ (23.65) $ 32.35 --
======== ======== ========
EBITDA $ 14,222 18.9 $ 11,970 15.7 $ 2,252 18.8
======== ====== ======== ===== ========
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RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales in the three months ended June 30, 1999 decreased 1.2% to
$75.4 million from $76.3 million in the three months ended June 30, 1998. Safety
Products net sales in the three months ended June 30, 1999 decreased 3.0% to
$64.5 million from $66.5 million in the three months ended June 30, 1998. Growth
in the Consumer channel was more than offset by the negative impact of foreign
exchange, primarily in Europe, and softness in North American industrial
accounts and in some of the export countries that the Company serves. The
strength of the US dollar relative to many European currencies as well as to the
Canadian dollar had the impact of reducing sales by approximately $0.8 million.
The Company has experienced the effect of lower levels of manufacturing
employment and increased competitive activity, particularly in protective
eyewear. Specialty Composites' net sales in the three months ended June 30, 1999
increased 11.1% to $10.9 million from $9.8 million in the three months ended
June 30, 1998. The increase was primarily driven by strong demand in the
trucking market.
Gross Profit. Gross Profit in the three months ended June 30, 1999 increased
5.5% to $35.0 million from $33.2 million in the three months ended June 30,
1998. Gross Profit as a percentage of net sales in the three months ended June
30, 1999 increased to 46.5% as compared to 43.5% in the three months ended June
30, 1998. This improvement in the Gross Profit percentage of net sales is
primarily due to an improved mix of product sales in the European and Consumer
channels, as well as improved operational control and productivity gains in the
manufacturing plants, and to a lesser extent, lower levels of depreciation.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended June 30, 1999 decreased 4.9% to $22.0 million from $23.1
million in the three months ended June 30, 1998. Within this decrease are
increases in selling and marketing in an effort to increase awareness of the
Company's brand names. The Company increased spending in selling and marketing,
primarily toward promotional and advertising programs in support of new
products, and also additional promotional support in existing eyewear lines in
light of enhanced competitive activity. Spending in the customer service,
distribution and administrative functions decreased. Administrative expenses in
the three months ended June 30, 1998 included an accrual in the amount of $0.6
million for potential costs related to a patent infringement claim by Gargoyles,
Inc. which was settled in the first quarter of fiscal 1999. Selling and
administrative expenses as a percentage of net sales in the three months ended
June 30, 1999 decreased to 29.1% of net sales as compared to 30.2% of net sales
in the three months ended June 30, 1998.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended June 30, 1999 decreased 6.8% to $1.2 million from $1.3
million in the three months ended June 30, 1998.
Operating Income. Operating income improved 45.0% to $10.2 million in the three
months ended June 30, 1999 from $7.1 million in the three months ended June 30,
1998. This improvement was due primarily to an improved mix of product sales,
improved operational control and productivity gains in the manufacturing plants,
lower levels of depreciation and reduced spending in selling and administrative.
Operating income as a percentage of net sales in the three months ended June 30,
1999 increased to 13.6% as compared to 9.2% in the three months ended June 30,
1998.
Provision For Income Taxes. The provision for income taxes remained unchanged at
$1.0 million for the three months ended June 30, 1999 and 1998. The Company's
foreign subsidiaries have taxable income in their foreign
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jurisdictions, but the domestic subsidiaries have a net operating loss
carryforward for income tax purposes in the U.S. In the results for the three
months ended June 30, 1999 and June 30, 1998, the Company has not recognized any
of the tax benefits that will occur in future periods if there is taxable income
in the U.S.
Interest Expense, Net. Interest expense, net in the three months ended June 30,
1999 decreased 7.2% to $6.02 million from $6.4 million in the three months ended
June 30, 1998. The reduction in interest expense was due to a reduction in
average borrowings as well as a reduction in the weighted average interest rates
in effect for the three months ended June 30, 1999 as compared to the three
months ended June 30, 1998.
Net Income (Loss). For the three months ended June 30, 1999 the Company had net
income of $3.2 million as compared to a net loss of $0.4 million for the three
months ended June 30, 1998.
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. While the
Company believes EBITDA is a useful indicator of its ability to service debt,
EBITDA should not be considered as a substitute for net income determined in
accordance with generally accepted accounting principles as an indicator of
operating performance or as an alternative to cash flow as a measure of
liquidity. Investors should be aware that EBITDA as presented below may not be
comparable to similarly titled measures presented by other companies and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.
EBITDA CALCULATION
THREE MONTHS ENDED JUNE 30
(DOLLARS IN THOUSANDS)
Three Months Ended Change
June 30, Favorable (Unfavorable)
1999 1998 AMOUNT PERCENT
---- ---- ------ -------
Operating Income $ 10,219 $ 7,050 $ 3,169 45.0%
Add Backs:
Depreciation 2,288 3,079 (791) (25.7%)
Amortization of intangibles 1,673 1,707 (34) (2.0%)
Non-operating costs, net (1) 42 134 (92) (68.7%)
-------- -------- --------
EBITDA $ 14,222 $ 11,970 $ 2,252 18.8%
======== ======== ========
(1) OTHER (INCOME) CHARGES, NET SUMMARY:
Non-operating costs, net $ 42 $ 134 $ 92 68.7%
Foreign transaction (gains) (49) (40) 9 22.5%
-------- -------- --------
Total Other (Income) Charges, Net $ (7) 94 $ 101 107.4%
======== ======== =======
EBITDA for the three months ended June 30, 1999 increased 18.8% to $14.2 million
from $12.0 million for the three months ended June 30, 1998. This improvement
was due primarily to an improved mix of product sales, improved operational
control and productivity gains in the manufacturing plants, and reduced spending
in selling and administrative. EBITDA as a percentage of net sales in the three
months ended June 30, 1999 was 18.9% as compared to 15.7% in the three months
ended June 30, 1998.
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1999 COMPARED TO 1998 RESULTS
NINE MONTHS ENDED JUNE 30
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED NINE MONTHS ENDED CHANGE - FAVORABLE
------------------------- ------------------------- (UNFAVORABLE)
JUNE 30, PERCENT OF JUNE 30, PERCENT OF ---------------------
1999 NET SALES 1998 NET SALES AMOUNT PERCENT
Net Sales
Safety Products $ 184,839 85.2 $ 188,106 86.4 $ (3,267) (1.7)
Specialty Composites 32,064 14.8 29,697 13.6 2,367 8.0
--------- ----- --------- ----- ---------
Total net sales 216,903 100.0 217,803 100.0 (900) (0.4)
Cost of Sales 117,816 54.3 121,973 56.0 4,157 3.4
--------- ----- --------- ----- ---------
Gross profit 99,087 45.7 95,830 44.0 3,257 3.4
Operating Expenses-
Selling and administrative 65,381 30.1 66,395 30.5 1,104 1.5
Research and technical services 3,424 1.6 3,577 1.6 153 4.3
Amortization of intangibles 5,088 2.3 5,130 2.4 42 0.8
Other (income) charges, net 578 0.3 (549) (0.3) (1,127) (105.3)
Restructuring charge -- -- 1,585 0.7 1,585 --
--------- ---- --------- ----- ---------
Operating income 24,616 11.3 19,692 9.0 4,924 25.0
Interest expense, net 18,402 8.5 19,698 9.0 1,296 6.6
--------- ---- --------- ----- ---------
Income (loss) before provision
for income taxes 6,214 2.9 (6) -- 6,220 --
Provision for income
taxes 2,152 1.0 2,302 1.1 150 6.5
--------- ----- --------- ----- ---------
Net income (loss) 4,062 1.9 (2,308) (1.1) 6,370 --
Preferred stock dividend accrued 6,725 3.1 5,925 2.7 (800) (13.5)
--------- ----- --------- ----- ---------
Loss applicable to common shareholders
$ (2,663) (1.2) $ (8,233) (3.8) $ 5,570 67.7
========= ===== ========= ===== =========
Basic and diluted loss per common share
$ (25.99) $ (83.25) $ 57.26 68.8
========= ========= =========
EBITDA $ 36,872 17.0 $ 33,870 15.6 $ 3,002 8.9
========= ===== ========= ===== =========
RESULTS OF OPERATIONS -- NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS
ENDED JUNE 30, 1998
Net Sales. Net sales in the nine months ended June 30, 1999 decreased $0.9
million to $216.9 million from $217.8 million in the nine months ended June 30,
1998. Safety Products net sales in the nine months ended June 30, 1999 decreased
1.7% to $184.8 million from $188.1 million in the nine months ended June 30,
1998 as growth in Europe and the Consumer channel was more than offset by the
negative impact of foreign exchange and softness in North American industrial
accounts and in some of the export countries that the Company serves. The
Company has experienced the effect of lower levels of manufacturing employment
and increased competitive activity, particularly in protective eyewear. The
strength of the US dollar relative to many European currencies as well as to the
Canadian dollar had the impact of reducing sales by approximately $0.7 million.
Specialty Composites' net sales in the nine months ended June 30, 1999 increased
8.0% to $32.1 million from $29.7 million in the nine months ended June 30, 1998.
The increase was primarily driven by strong demand in the trucking market.
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Gross Profit. Gross Profit in the nine months ended June 30, 1999 increased 3.4%
to $99.1 million from $95.8 million in the nine months ended June 30, 1998.
Gross Profit as a percentage of net sales in the nine months ended June 30, 1999
increased to 45.7% as compared to 44.0% in the nine months ended June 30, 1998.
This improvement in the Gross Profit percentage of net sales is primarily due to
an improved mix of product sales as well as improved operational control and
productivity gains in the manufacturing plants, and to a lesser extent, lower
levels of depreciation.
Selling and Administrative Expenses. Selling and administrative expenses in the
nine months ended June 30, 1999 decreased 1.5% to $65.4 million from $66.4
million in the nine months ended June 30, 1998. Within this decrease are
increases in selling and marketing in an effort to increase awareness of the
Company's brand names. The Company increased spending in selling and marketing,
primarily toward promotional and advertising programs in support of new
products, and also additional promotional support in existing eyewear lines in
light of enhanced competitive activity. Spending in the customer service,
distribution and administrative functions decreased. Administrative expenses in
the three months ended June 30, 1998 included an accrual in the amount of $0.6
million for potential costs related to a patent infringement claim by Gargoyles,
Inc. which was settled in the first quarter of fiscal 1999. Selling and
administrative expenses as a percentage of net sales in the nine months ended
June 30, 1999 decreased to 30.1% of net sales as compared to 30.5% of net sales
in the nine months ended June 30, 1998.
Research and Technical Service Expenses. Research and technical service expenses
in the nine months ended June 30, 1999 decreased 4.3% to $3.4 million from $3.6
million in the nine months ended June 30, 1998.
Other Charges (Income), Net. Other charges (income), net was an expense of $0.6
million for the nine months ended June 30, 1999 as compared to income of $0.3
million for the nine months ended June 30, 1998. This change was primarily a
result of net foreign currency transaction losses in the nine months ended June
30, 1999 as compared to net foreign currency transaction gains in the nine
months ended June 30, 1998.
Restructuring Charge. During fiscal 1998 the Company recorded a restructuring
charge related to the restructuring plans announced by the Company during the
fiscal year. In the nine months ended June 30, 1998 the Company recorded
restructuring charges of $1.6 million.
Operating Income. Operating income improved 25.0% to $24.6 million in the nine
months ended June 30, 1999 from $19.7 million in the nine months ended June 30,
1998. This improvement was due primarily to an improved mix of product sales,
improved operational control and productivity gains in the manufacturing plants,
lower levels of depreciation, reduced spending in selling and administrative as
well as the absence of a restructuring charge in the nine months ended June 30,
1999, partially offset as a result of the change in net foreign currency
transaction gains and losses. Operating income as a percentage of net sales in
the nine months ended June 30, 1999 increased to 10.2% as compared to 9.0% in
the nine months ended June 30, 1998.
Provision For Income Taxes. The provision for income taxes in the nine months
ended June 30, 1999 was $2.2 million compared to $2.3 million in the nine months
ended June 30, 1998. The Company's foreign subsidiaries have taxable income in
their foreign jurisdictions, but the domestic subsidiaries have a net operating
loss carryforward for income tax purposes in the U.S. In the results for the
nine months ended June 30, 1999 and June 30, 1998, the Company has not
recognized any of the tax benefits that will occur in future periods if there is
taxable income in the U.S.
Interest Expense, Net. Interest expense, net in the nine months ended June 30,
1999 decreased 6.6% to $18.4 million from $19.7 million in the nine months ended
June 30, 1998.
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Net Income (Loss). For the nine months ended June 30, 1999 the Company had net
income of $4.1 million as compared to a net loss of $2.3 million for the nine
months ended June 30, 1998.
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. While the
Company believes EBITDA is a useful indicator of its ability to service debt,
EBITDA should not be considered as a substitute for net income determined in
accordance with generally accepted accounting principles as an indicator of
operating performance or as an alternative to cash flow as a measure of
liquidity. Investors should be aware that EBITDA as presented below may not be
comparable to similarly titled measures presented by other companies and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.
EBITDA CALCULATION
NINE MONTHS ENDED JUNE 30
(DOLLARS IN THOUSANDS)
Nine Months Ended Change
June 30, Favorable (Unfavorable)
1999 1998 AMOUNT PERCENT
---- ---- ------ -------
Operating Income $ 24,616 $ 19,692 $ 4,924 25.0%
Add Backs:
Depreciation 7,119 8,952 (1,833) (20.5%)
Amortization of intangibles 5,088 5,130 (42) (0.8%)
Non-operating costs, net (1) 49 96 (47) (49.0%)
-------- -------- --------
EBITDA $ 36,872 $ 33,870 $ 3,002 8.9%
======== ======== ========
(1) OTHER (INCOME) CHARGES, NET SUMMARY:
Non-operating costs, net $ 49 $ 96 $ 47 (49.0%)
Foreign transaction losses (gains) 529 (645) (1,174) (182.0%)
-------- -------- --------
Total Other Charges (Income), Net $ 578 $ (549) $ (1,127) (205.3%)
======== ======== ========
EBITDA for the nine months ended June 30, 1999 increased 8.9% to $36.9 million
from $33.9 million for the nine months ended June 30, 1998. This improvement was
due primarily to an improved mix of product sales, improved operational control
and productivity gains in the manufacturing plants, reduced spending in selling
and administrative as well as the absence of a restructuring charge in the nine
months ended June 30, 1999, partially offset as a result of the change in net
foreign currency transaction gains and losses. EBITDA as a percentage of net
sales in the nine months ended June 30, 1999 was 17.0% as compared to 15.6% in
the nine months ended June 30, 1998.
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EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and Canada in local currency. While many of the Company's selling and
distribution costs are also denominated in these currencies, a large portion of
product costs are U.S. Dollar denominated. As a result, a decline in the value
of the U.S. Dollar relative to other currencies can have a favorable impact on
the profitability of the Company and an increase in the value of the U.S. Dollar
relative to these other currencies can have a negative effect on the
profitability of the Company. As a result of the acquisition of Peltor, the
Company's operations are also affected by changes in exchange rates relative to
the Swedish Krona. A decline in the value of the Krona relative to other
currencies can have a favorable impact on the profitability of the Company and
an increase in the value of the Krona relative to other currencies can have a
negative impact on the profitability of the Company. The Company utilizes
forward foreign currency contracts, and other hedging instruments, to mitigate
the effects of changes in foreign currency rates on profitability.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" is a flaw existing in many computer hardware and
software programs caused by historical use of dates represented by only two
digits (for example, 98 rather than 1998). This causes computer programs (both
system and application) that perform arithmetic operations, comparisons, or
sorting of data fields to yield incorrect results when working with years
outside the range of 1900-1999. To evaluate the impact of this the Company has
assembled a "Y2K" cross functional team which has assessed the impact of year
2000 compliance with respect to Information Technology (IT) and manufacturing
systems as well as the Company's exposure to significant third party risks.
Accordingly, the Company has initiated and substantially completed a plan to
replace or modify existing systems and technology as required and to assure
itself that major customers and critical vendors are also addressing these
issues.
The Company's recent conversion to a new management information system (SAP)
that has been in use by a majority of the Company's operating units has brought
the advantage of year 2000 compliance to the bulk of the internal systems that
could potentially otherwise have material adverse impacts on the Company's
operations. However, due to the nature of the Company's prescription eyewear
business, it utilizes a management information system other than SAP for
portions of its business needs. The non-SAP software for this business has been
modified for year 2000 compliance and the implementation activity continues. It
is anticipated that this project will be completed by the end of fiscal 1999.
It is expected that other remaining IT and manufacturing systems conversions
will be substantially completed by the end of fiscal 1999, and at this time a
contingency plan is being developed in the event these systems conversions are
not completed on a timely basis. As it relates to internal E-mail and desktop
hardware and software systems, the Company has begun a desktop update and
standardization effort which in addition to providing efficiency tools to the
global organization will also address those remaining year 2000 compliance
issues that may exist in that environment. Including the remaining conversion
and desktop standardization initiatives and the costs of modifying internal
software for the prescription eyewear product line, the cost to achieve year
2000 compliance is anticipated to be less than $1.0 million.
The Company has contacted its major customers and vendors regarding their
readiness for year 2000 compliance and efforts continue with the evaluations of
any impact that their readiness may have on the Company's systems.
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However, there can be no assurance that year 2000 deficiencies in the systems of
other companies on which the Company's systems rely will be timely corrected or
that any such failure by another company to correct its deficiencies would not
have an adverse effect on the Company's systems, business or results of
operations. The Company is continuing its assessment of the remainder of its
internal systems and that of other companies on which the Company's systems
rely.
Since the majorities of the Company's products are passive in nature and do not
utilize chip technologies, it is not anticipated that product returns could
materially impact the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash flow
and debt financing. The Company's uses of those funds consist principally of
debt service, capital expenditures and acquisitions.
The Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i) term
loans denominated in U.S., Canadian, British and German currencies (Term Loans)
and (ii) a revolving credit facility providing for up to $25.0 million
(Revolving Credit Facility), (collectively the Senior Bank Facilities). Under
the terms of both the Senior Bank Facilities and the Notes indenture, Aearo
Company is required to comply with certain financial covenants and restrictions
with which Aearo Company was in compliance at June 30, 1999. At June 30, 1999,
the amounts outstanding on the Term Loans and the Revolving Credit Facility were
approximately $108.1 million and $3.0 million, respectively.
Maturities under the Company's Term Loans are: $3.6 million for the remainder of
fiscal 1999, $15.5 million in fiscal 2000, $20.1 million in fiscal 2001, $36.7
million in fiscal 2002, and $35.3 million in fiscal 2003. Other than upon a
change of control or as a result of certain asset sales, or in the event that
certain excess funds exist at the end of a fiscal year, the Company will not be
required to make any principal payments in respect of the Notes until maturity.
The Company is required to make interest payments with respect to both the
Senior Bank Facilities and the Notes.
The Company's net cash provided by operating activities for the nine months
ended June 30, 1999 totaled $19.7 million as compared to $16.9 million for the
nine months ended June 30, 1998. The increase was due primarily to the
improvement in net income (loss) which was partially offset by reduced
depreciation and the Company's net changes in assets and liabilities.
Net cash used by investing activities was $5.0 million for the nine months ended
June 30, 1999 as compared to $4.1 million for the nine months ended June 30,
1998. The increase in net cash used by investing activities is attributed to a
higher level of capital expenditures in the nine months ended June 30, 1999 as
compared to the nine months ended June 30, 1998.
Net cash used by financing activities for the three months ended June 30, 1999
was $15.4 million as the Company made net revolver payments of $5.0 million,
made scheduled principal repayments on the Term Loans for $9.2 million, and
reduced external long term debt by retiring a higher interest revenue bond for
$1.0 million. Net cash used by financing activities for the nine months ended
June 30, 1998 was $12.9 million as the Company made net revolver payments of
$5.2 million and made scheduled principal repayments on the Term Loans for $7.5
million.
The Company has a substantial amount of indebtedness. The Company relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain customary drawing conditions) to
meet its liquidity needs. The Company anticipates that operating cash flow will
be adequate to meet its debt service and capital expenditure requirements for
the next several years, although there can be no assurances that existing levels
of sales and normalized profitability, and therefore cash flow, will be
maintained in the future. Levels of sales and profitability may be impacted by
service levels, continued new product
19
20
development, worldwide economic conditions and competitive pressures. In
particular, the Company expects that sales and profitability in the fourth
quarter of fiscal 1999 will be adversely affected by the strength of the U.S.
Dollar relative to the Euro. In addition, the Company may make additional
acquisitions in the future and would rely on internally generated funds and, to
the extent necessary, on borrowings to finance such acquisitions.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after the Company's predecessor acquired the AOSafety
Division from American Optical Corporation in April 1990. The Company is
contingently liable with respect to numerous lawsuits involving respirators
manufactured by American Optical Corporation prior to the acquisition of the
AOSafety Division in April 1990. These lawsuits typically involve plaintiffs
alleging that they suffer from asbestosis or silicosis, and that such condition
results in part from respirators which were negligently designed or
manufactured. The defendants in these lawsuits are often numerous, and include,
in addition to respirator manufacturers, employers of the plaintiffs and
manufacturers of sand (used in sand blasting) and asbestos. Responsibility for
legal costs, as well as for settlements and judgments, is shared contractually
by the Company, American Optical Corporation and a prior owner of American
Optical Corporation. The Company and Cabot have entered into an arrangement
relating to certain respirator claims asserted after July 11, 1995 (the date of
the Company's formation) whereby, so long as the Company pays to Cabot an annual
fee of $400,000, which the Company has elected to pay, Cabot will retain
responsibility and liability for, and indemnify the Company against, certain
legal claims alleged to arise out of the use of respirators manufactured prior
to July 1995. The Company has the right to discontinue the payment of such
annual fee at any time, in which case the Company will assume responsibility for
and indemnify Cabot with respect to such claims.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
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.
Date: July 30 , 1999 AEARO CORPORATION
/s/ Bryan J. Carey
------------------------------------------
Bryan J. Carey Vice President, Chief
Financial Officer, Treasurer and Assistant
Secretary
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
27.1 Financial Data Schedule