SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2000, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 MARSH LANDING PARKWAY
SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
----------------
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
--- ---
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock as of
November 3, 2000 is 22,496,828.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. (the "Company") and its direct and indirect wholly owned
subsidiaries include all adjustments (consisting only of normal recurring
accruals and the elimination of all intercompany items and transactions) which
management considers necessary for a fair presentation of operating results as
of September 30, 2000 and for the three and nine month periods ended September
30, 2000 and September 30, 1999.
These unaudited condensed consolidated financial statements and notes
thereto should be read in conjunction with the financial statements included in
the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999.
2
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,537 $ 13,246
Accounts receivable (net of allowance for
doubtful accounts of $1,597 and $1,691) 43,696 35,528
Inventories 19,839 16,452
Prepaid expenses and other current assets 15,340 7,215
-------- --------
Total current assets 85,412 72,441
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $8,982 and
$6,279) 23,170 16,367
GOODWILL (net of accumulated amortization
of $5,465 and $3,593) 81,742 74,586
REORGANIZATION VALUE IN EXCESS
OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS (net of accumulated
Amortization of $2,602 and $2,564) 1,473 1,511
PATENTS AND TRADEMARKS (net of
Accumulated amortization of $1,420 and 6,775 7,008
$1,124)
OTHER ASSETS 7,760 7,009
-------- --------
TOTAL ASSETS $206,332 $178,922
======== ========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 1,969 $ 1,924
Current portion of long-term debt and capitalized
lease obligations 1,067 509
Accounts payable, accrued expenses and other
current liabilities 17,295 15,974
--------- ---------
Total current liabilities 20,331 18,407
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion 25,647 2,453
--------- ---------
Total liabilities 45,978 20,860
MINORITY INTEREST 188 179
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 24,805,062 and 24,513,830 issued and
22,467,867 and 23,302,958 outstanding 248 245
Additional paid-in capital 148,481 145,480
Retained earnings 38,691 26,615
Accumulated other comprehensive income:
Cumulative translation adjustments (1,574) (1,351)
Treasury stock (25,680) (13,106)
--------- ---------
Total stockholders' equity 160,166 157,883
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 206,332 $ 178,922
========= =========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------- --------- --------- ---------
REVENUES:
Products $34,548 $28,398 $100,049 $ 68,487
Services 22,570 16,693 62,402 42,355
------- ------- -------- --------
Total Revenues $57,118 $45,091 $162,451 $110,842
COSTS AND EXPENSES:
Cost of sales 35,345 27,241 100,810 66,726
Operating expenses:
Litigation settlements 1,918 - 1,950 -
Other operating expenses 13,414 10,121 36,338 26,790
Amortization 790 741 2,272 1,776
Equity in earnings of investees -- - (87) (166)
Integration and other non-recurring charges 1,081 643 2,537 1,289
------- ------- -------- --------
OPERATING INCOME 4,570 6,345 18,631 14,427
Interest (income) expense, net 600 (41) 1,186 (91)
Other expense (income), net 51 - (1,837) (816)
------- ------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,919 6,386 19,282 15,334
PROVISION FOR INCOME TAXES 1,459 2,484 7,206 5,857
------- ------- -------- --------
NET INCOME $ 2,460 $ 3,902 $ 12,076 $ 9,477
======= ======= ======== ========
BASIC EARNINGS PER SHARE $ 0.11 $ 0.16 $ 0.53 $ 0.47
======= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.11 $ 0.16 $ 0.51 $ 0.45
======= ======= ======== ========
WEIGHTED AVERAGE SHARES - BASIC 22,442 23,885 22,706 20,119
======= ======= ======== ========
WEIGHTED AVERAGE SHARES - DILUTED 23,351 24,473 23,613 20,855
======= ======= ======== ========
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
OPERATING ACTIVITIES:
Net income $ 12,076 $ 9,477
Adjustments to reconcile net income to cash (used in)
provided by operating activities, net of effects of
acquisitions:
Depreciation and amortization 4,335 3,636
Gain on sales of investments (1,719) -
Earnings from investees (87) (166)
Increase in accounts receivable (7,096) (2,651)
Increase in inventories (2,759) (1,841)
Increase in prepaid expenses and other assets (8,207) (4,230)
Net change in accounts payable, accrued expenses
and other current liabilities 50 (4,095)
Change in minority interest 9 (8)
-------- --------
Net cash (used in) provided by operating activities (3,398) 122
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,399) (2,944)
Purchases of businesses, net of cash acquired (8,889) (31,171)
Purchases of investments (1,682) -
Proceeds from sale of investment 3,598 -
Dividends received from associated companies 87 145
-------- --------
Net cash used in investing activities (10,285) (33,970)
-------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 709 842
Proceeds from the issuance of common stock - 61,082
Net borrowings under short-term debt (420) -
Borrowings under long-term debt 46,072 (5,332)
Repayments under long-term debt (26,590) (4,889)
Repurchase of common stock (12,574) -
-------- --------
Net cash provided by financing activities 7,197 51,703
-------- --------
Net effect of translation of foreign currencies (223) (590)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,709) 17,265
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,246 6,789
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,537 $ 24,054
======== ========
See notes to condensed consolidated financial statements.
6
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Armor Holdings, Inc. (the "Company") and its direct and
indirect wholly owned subsidiaries. The financial statements have been prepared
in accordance with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All adjustments
(consisting only of normal recurring accruals and the elimination of all
significant intercompany items and transactions) which management considers
necessary for a fair representation of operating results, have been included in
the statements. Reclassifications of the prior year's results have been made to
conform to the current year's presentation. Operating results for the quarter
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
These condensed consolidated financial statements should be read in
conjunction with the financial statements, and notes thereto, included in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. All
amounts are reported in thousands except per share amounts.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues. The
Company has evaluated the impact of the reporting requirements of SAB No. 101
and has determined that there will be no material impact on its consolidated
results of operations, financial position or cash flows.
3. COMPREHENSIVE INCOME
Comprehensive income includes net income and several other items that
current accounting standards require to be recognized outside of net income.
During the three months ended September 30, 2000 and September 30, 1999,
comprehensive income was approximately $2.3 million and $4.1 million
respectively, consisting of net income and the change in unrealized gains or
losses on the Company's foreign currency translation adjustments net of tax.
During the nine months ended September 30, 2000 and September 30, 1999,
comprehensive income was approximately $11.9 million and $8.9 million
respectively consisting of net income and the change in unrealized gains or
losses on the Company's foreign currency translation adjustments net of tax.
7
4. INVENTORIES
The inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as followings (dollars in
thousands):
($ IN THOUSANDS) SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Raw material $12,629 $ 8,812
Work-in-process 1,168 1,243
Finished goods 6,042 6,397
------- -------
Total inventories $19,839 $16,452
======= =======
5. ACQUISITIONS
During the first and second quarter of 2000, the Company completed
several acquisitions including New Technologies Inc. ("NTI"), Network Audit
Systems ("NAS"), Special Clearance Services ("SCS"), OVG International Ltd.
("OVG"), Technisec, and Break-Free Inc. Proforma results of the acquisitions
assuming the transactions were consummated the beginning of 1999 and 2000 would
not be materially different from the results reported.
The Company completed the acquisitions of Safariland Ltd., Inc.
("Safariland"), The Parvus Company ("Parvus"), Alarm Systems Holding Company
("ASH") and Fire Alarm Service Corporation ("FAS") during the second quarter of
1999. The unaudited consolidated results of operations of the Company on a pro
forma basis as if the Company had consummated the acquisitions of Safariland,
Parvus, ASH and FAS, on Junuary 1, 1999 are as follows:
9 MONTHS
SEPTEMBER 30,
1999
-------------
Revenues $128,346
Net income $ 11,868
Diluted earnings per share $0.55
Weighted average shares - diluted 21,386
6. INFORMATION CONCERNING BUSINESS SEGMENTS
The Company is a leading global provider of security products and
security risk management services. leading manufacturer of security products for
law enforcement personnel around the world through its Armor Holdings Products
division. Armor Holdings is also a leading global provider of security risk
management services to multi-national corporations and government agencies
through its ArmorGroup Services division. Armor Holdings Products manufactures
and sells a broad range of high quality branded law enforcement equipment. Such
products include ballistic resistant vests and tactical armor, less-than-lethal
munitions, safety holsters, batons, anti-riot products and a variety of crime
scene related equipment, including narcotic identification kits. ArmorGroup
Services provides sophisticated security planning and risk management, data and
network security, electronic security systems integration, consulting and
training services, as well as intellectual property asset protection, business
intelligence and investigative services.
8
The Company has invested substantial resources outside of the United
States and plans to continue to do so in the future. A substantial portion of
the operations of the Company's services segment are conducted in emerging
markets in Africa, Asia, CIS and South America. These operations are subject to
the risk of new and different legal and regulatory requirements in local
jurisdictions, tariffs and trade barriers, potential difficulties in staffing
and managing local operations, potential imposition of restrictions on
investments, potentially adverse tax consequences, including imposition or
increase of withholding and other taxes on remittances and other payments by
subsidiaries, and local economic, political and social conditions.
Revenues, income from operations (operating income before amortization
expense, equity in earnings of investee, merger and integration expenses), and
total assets for each of the Company's segments for the nine months ended
September 30, 2000 and September 30, 1999 were as follows:
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
Revenues:
Products $100,049 $ 68,487
Services 62,402 42,355
-------- --------
Total revenues $162,451 $110,842
Income from operations:
Products 21,669 14,339
Services $7,021 $ 4,903
Corporate (5,337) (1,916)
-------- --------
Total income from operations $ 23,353 $ 17,326
Total assets:
Products $112,815 $101,598
Services 62,705 63,772
Corporate 30,812 24,036
-------- --------
Total assets $206,332 $189,406
======== ========
9
7. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for net income:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Net income $ 2,460 $ 3,902 $12,076 $ 9,477
------- ------- ------- -------
Denominator for basic earnings per share
Weighted average shares: 22,442 23,885 22,706 20,119
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 909 588 907 736
------- ------- ------- -------
Denominator for diluted earnings per
Share- Adjusted weighted average shares 23,351 24,473 23,613 20,855
------- ------- ------- -------
Basic earnings per share $ 0.11 $ 0.16 $ 0.53 $ 0.47
======= ======= ======= =======
Diluted earnings per share $ 0.11 $ 0.16 $ 0.51 $ 0.45
======= ======= ======= =======
8. SUBSEQUENT EVENTS
On November 13, 2000, the Company announced that it completed two
strategic acquisitions for its law enforcement equipment division, Armor
Holdings Products. Armor acquired all of the outstanding stock of Monadnock
Lifetime Products, Inc. ("Monadnock") and its affiliates, a leading manufacturer
and distributor of police batons. In a separate and unrelated transaction, the
Company also acquired substantially all of the assets of Lightning Powder
Company, Inc. ("Lightning Powder"), a leading manufacturer and distributor of
crime scene investigation equipment. The specific terms of these transactions
were not disclosed; however, the combined businesses had FY 1999 revenues of
$9.0 million. In the aggregate, the Company used approximately $11.0 million in
cash from its $100 million revolving line of credit to finance the combined
purchases.
9. INCOME STATEMENT
During the quarter ended September 30, 2000, the Company incurred a
total of $4.1 million in expenses related to the Company's ongoing merger and
integration program, as well as, additional expenses for litigation settlements,
the retention of Bear, Stearns & Co. Inc. to assist the Company with a review of
its strategic alternatives, and other unusual expenses, relating to the move of
the ArmorGroup accounting function to London, and to a $350,000 reduction in the
carrying value of Safariland inventory which is included in the cost of sales
for three and nine months ended September 30, 2000, See Item 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the Company's results of operations and
analysis of financial condition for the three and nine months ended September
30, 2000. The results of operations for the business combinations accounted for
as purchase transactions are included since their effective acquisition dates.
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and management's
discussion and analysis contained in the our Annual Report on Form 10-K/A for
the year ended December 31, 1999, as filed with the Securities and Exchange
Commission.
10
Revenue Recognition. The Company records product revenues at gross
amounts to be received, including amounts to be paid to international agents as
commissions, at the time the product is shipped to the customer. Although
product returns are permitted in certain circumstances within 30 days from the
date of purchase, these returns are minimal and usually consist of minor
modifications to the ordered product. The Company records service revenue as the
service is provided on a contract by contract basis.
Foreign Currency Translation. In accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation," assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the current rate of exchange as of the balance sheet date and revenues and
expenses are translated at the average monthly exchange rates. The cumulative
change in the translation adjustment, which represents the effect of translating
assets and liabilities of the Company's foreign operations, was a loss of
approximately $1.6 million as of September 30, 2000 and $1.4 million as of
December 31, 1999 and results primarily from the devaluation of the British
Pound.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Products revenues. Product revenues increased $6.1 million, or 21.7%,
to $34.5 million in the three months ended September 30, 2000 compared to $28.4
million in the three months ended September 30, 1999. This increase was due to
internal growth of over 19% and the inclusion of the acquisitions of Break-Free
in the first quarter of 2000. This acquisition was accounted for as a purchase,
and the results of its operations are recorded only from the date of
acquisition.
Service revenues. Service revenues increased $5.9 million, or 35.2%, to
$22.6 million in the three months ended September 30, 2000 compared to $16.7
million in the three months ended September 30, 1999. This increase was due to
internal growth of over 27% and the inclusion of the acquisitions of Parvus, ASH
and FAS acquired in 1999 and Technisec, SCS, NTI, NAS and OVG, each of which
were acquired in 2000. These acquisitions were accounted for as purchases, and
the results of their operations are recorded only from the date of acquisition.
Cost of sales. Cost of sales increased $8.1 million, or 29.7%, to $35.3
million in the three months ended September 30, 2000 compared to $27.2 million
in the three months ended September 30, 1999. The increase was primarily due to
the increased revenues for the three months ended September 30, 2000 over the
three months ended September 30, 1999. As a percentage of total revenues, cost
of sales increased to 61.9% for the three months ended September 30, 2000 from
60.4% for the three months ended September 30, 1999, due to a change in the mix
of products and services sold and the shipments of several large international
and governmental orders for products at margins somewhat below our typical
margins.
Operating expenses - litigation settlements. The Company settled its
long standing lawsuit with Second Chance Body Armor, Inc., which claimed
trademark infringement and unfair competition. This settlement, in addition to
several smaller lawsuits also settled during the three months ended September
30, 2000, brings the total of all settlements and associated legal fees to
11
$2.0 million for the period then ended. There were no such settlements in the
three months ended September 30, 1999.
Operating expenses - Other operating expenses. Other operating expenses
increased $3.3 million, or 32.5%, to $13.4 million (23.5% of total revenues) in
the three months ended September 30, 2000 compared to $10.1 million (22.4% of
total revenues) in the three months ended September 30, 1999. This increase was
primarily due to increases in revenue, but also included $1.0 million of unusual
charges, including the retention of an investment banker to review the Company's
strategic alternatives. In addition, operating expenses increased due to the
acquisitions completed since September 30, 1999, which are included in the three
months ended September 30, 2000, but not in the three months ended September 30,
1999.
Amortization. Amortization expense increased $49,000 or 6.6%, to
$790,000 in the three months ended September 30, 2000 compared to $741,000 in
the three months ended September 30, 1999. This increase was primarily due to
additional amortization of intangible assets acquired as a result of the
acquisitions of Break-Free, Technisec, SCS, NTI, NAS and OVG during the first
and second quarters of 2000 that would not have been reflected in the quarter
ended September 30,1999.
Integration and other non-recurring charges. Integration charges
increased $438,000 or 68.1% to $1.1 million in the three months ended September
30, 2000 compared to $643,000 in the three months ended September 30, 1999. This
increase was primarily due to the engagement of outside consultants to review
the Company's domestic and international tax structures with the objective of
significantly reducing its overall effective tax rate. As a result of the
Company's acquisition program and the geographic diversity of its operations,
the Company determined that it would be beneficial to simplify its legal
structure with an aim toward reducing overall tax expense.
Operating income. Operating income decreased $1.8 million or 28.0% to
$4.6 million in the three months ended September 30, 2000 compared to $6.3
million in the three months ended September 30, 1999, primarily due to the
factors discussed above.
Interest (income) expense, net. Net interest expense increased $641,000
to $600,000 in the three months ended September 30, 2000 compared to net
interest income of $41,000 in the three months ended September 30, 1999. This
increase was the result of interest on and amortization of the fees associated
with the Company's $100 million credit facility, and the amortization of the
discount on certain liabilities acquired as part of the Safariland acquisition.
Other expense (income). Other expense was $51,000 in the three months
ended September 30, 2000. This expense relates to the unrealized loss on the
Company's investment in certain marketable equity securities. The Company had no
such other expense or income in the quarter ended September 30, 1999.
Income before provision for income taxes. Income before provision for
income taxes decreased $2.5 million or 38.6% to $3.9 million in the three months
ended September 30, 2000 compared to $6.4 million in the three months ended
September 30, 1999, primarily due to the reasons discussed above.
12
Provision for income taxes. Provision for income taxes totaled $1.5
million in the three months ended September 30, 2000, as compared to $2.5
million in the three months ended September 30, 1999. The decrease in the
Company's effective tax rate to 37.2% from 38.9% last year is a result of the
implementation of recommendations from the Company's outside consultants hired
to review the domestic and international tax structures of the Company and its
subsidiaries. The provision was based on the Company's U.S. federal and state
statutory income tax rates of approximately 37% for its U.S.-based companies and
a 35% blended effective tax rate for foreign operations of the Company. The
effective tax rate for the Company's foreign operations is not necessarily
indicative of continued tax rates due to continually changing concentration of
income in each country in which the Company operates. The Company anticipates
additional tax savings and reduced effective tax rates in the future.
Net income. Net income decreased $1.4 million or 37.0% to $2.5 million
in the three months ended September 30, 2000 compared to $3.9 million in the
three months ended September 30, 1999, primarily due to the reasons discussed
above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Products revenues. Product revenues increased $31.6 million, or 46.1%,
to $100.0 million in the nine months ended September 30, 2000 compared to $68.5
million in the nine months ended September 30, 1999. This increase was due to
internal growth of 17% and the inclusion of the acquisitions of Safariland in
the second quarter of 1999 and of Break-Free in the first quarter of 2000. These
acquisitions were accounted for as purchases, and the results of their
operations are recorded only from the date of acquisition.
Service revenues. Service revenues increased $20 million, or 47.3%, to
$62.4 million in the nine months ended September 30, 2000 compared to $42.4
million in the nine months ended September 30, 1999. This increase was due to
internal growth and the inclusion of the acquisitions of Parvus, ASH and FAS
acquired in 1999 and Technisec, SCS, NTI, NAS and OVG, each of which were
acquired in 2000. These acquisitions were accounted for as purchases, and the
results of their operations are recorded only from the date of acquisition.
Internal growth within the Services Division was over 17% in the first nine
months of 2000 compared to the first nine months of 1999.
Cost of sales. Cost of sales increased $34.1 million, or 51.1%, to
$100.8 million in the nine months ended September 30, 2000 compared to $66.7
million in the nine months ended September 30, 1999. The increase was primarily
due to the increased revenues for the nine months ended September 30, 2000 over
the nine months ended September 30, 1999. As a percentage of total revenues,
cost of sales increased to 62.1% for the nine months ended September 30, 2000
from 60.2% for the nine months ended September 30, 1999, due to a change in the
mix of products and services sold and the shipments of several large
international and governmental orders for products at margins somewhat below our
typical margins.
Operating expenses - Litigation settlements. Litigation settlements
increased to $2.0 million for the nine months ended September 30, 2000. This
increase was primarily due to the settlement of the Company's long standing
lawsuit with Second Chance Body Armor, Inc., which claimed trademark
infringement and unfair competition. This settlement, in addition to several
smaller lawsuits settled during the nine months ended September 30, 2000,
brought the total of all settlements and associated legal fees to $2.0 million
for the period then ended. There were no such settlements in the nine months
ended September 30, 1999.
13
Operating expenses - Other operating expenses. Operating expenses
increased $9.5 million, or 35.6%, to $36.3 million (22.4% of total revenues) in
the nine months ended September 30, 2000 compared to $26.8 million (24.2% of
total revenues) in the nine months ended September 30, 1999. This increase was
primarily due the acquisition of Safariland, completed in the second quarter of
1999, as well as the acquisitions completed since September 30, 1999, which are
included in the nine months ended September 30, 2000, but not in the nine months
ended September 30, 1999. In addition to the acquisition related increase,
operating expenses increased as a result of certain non-recurring charges,
including the retention of an investment banker to review the Company's
strategic alternatives and costs associated with the implementation of specific
domestic and international tax savings programs which are included in the nine
months ended September 30, 2000.
Amortization. Amortization expense increased $476,000 or 26.8%, to $2.3
million in the nine months ended September 30, 2000 compared to $1.8 million in
the nine months ended September 30, 1999. This increase was primarily due to
additional amortization of intangible assets acquired as a result of the
acquisitions of Safariland, Break-Free, Technisec, SCS, NTI, NAS and OVG during
the first and second quarters of 2000 that would not have been reflected in
the nine months ended September 30,1999.
Equity in earnings of investees. Equity in earnings of investees
decreased $79,000 to $87,000 in the nine months ended September 30, 2000,
compared to $166,000 in the nine months ended September 30, 1999. The equity in
earnings relates to the Company's 20% investment in Jardine Securicor Gurkha
Services Limited ("JSGS"). This investment was sold during the quarter ended
June 30, 2000.
Integration and other non-recurring charges. Integration charges
increased $1.2 million or 96.8% to $2.5 million in the nine months ended
September 30, 2000 compared to $1.3 million in the nine months ended September
30, 1999. This increase was primarily due to the engagement of outside
consultants to review the Company's domestic and international tax structures
with the objective of significantly reducing its overall effective tax rate. As
a result of the Company's acquisition program and the geographic diversity of
its operations, the Company determined that it would be beneficial to simplify
its legal structure with an aim toward reducing overall tax expense.
Operating income. Operating income increased $4.2 million or 29.1% to
$18.6 million in the nine months ended September 30, 2000 compared to $14.4
million in the nine months ended September 30, 1999, primarily due to the
factors discussed above.
Interest (income) expense, net. Net interest expense increased $1.3
million to $1.2 million in the nine months ended September 30, 2000 compared to
net interest income of $91,000 in the nine months ended September 30, 1999. This
increase was the result of interest on borrowings under and amortization of the
fees associated with the Company's $100 million credit facility, and the
amortization of the discount on certain liabilities acquired as part of the
Safariland acquisition.
14
Other income. Other income increased $1.0 million to $1.8 million in
the nine months ended September 30, 2000 compared to $800,000 in the nine months
ended September 30, 1999. This other income relates to the gain on the sale of
the Company's equity investment in JSGS completed during the period ending June
30, 2000 as well as realized and unrealized gains on other investments. The
first nine months of 1999 includes the gain on the sale of the Company's equity
investment in MACE Security International.
Income before provision for income taxes. Income before provision for
income taxes increased $3.9 million or 25.7% to $19.3 million in the nine months
ended September 30, 2000 compared to $15.3 million in the nine months ended
September 30, 1999, primarily due to the reasons discussed above.
Provision for income taxes. Provision for income taxes totaled $7.2
million in the nine months ended September 30, 2000, as compared to $5.9 million
in the nine months ended September 30, 1999. The decrease in the Company's
effective tax rate to 37.4% from 38.2% last year is a result of the
implementation of recommendations from the Company's outside consultants hired
to review the domestic and international tax structures of the Company and its
subsidiaries. The provision was based on the Company's U.S. federal and state
statutory income tax rates of approximately 38% for its U.S.-based companies and
a 37% blended effective tax rate for foreign operations of the Company. The
effective tax rate for the Company's foreign operations is not necessarily
indicative of continued tax rates due to continually changing concentration of
income in each country in which the Company operates. The Company anticipates
additional tax savings and reduced effective tax rates in the future.
Net income. Net income increased $2.6 million or 27.4% to $12.1 million
in the nine months ended September 30, 2000 compared to $9.5 million in the nine
months ended September 30, 1999, primarily due to the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash generated from operations and
borrowings under the Company's credit facility will enable the Company to meet
its liquidity, working capital and capital expenditure requirements during the
next 12 months. The Company, however, may require additional financing to pursue
its strategy of growth through acquisitions. If such financing is required,
there are no assurances that it will be available, or if available, that it can
be obtained on terms favorable to the Company or on a basis that is not dilutive
to stockholders.
The Company's spending for its fiscal 2000 capital expenditures will be
approximately $4.0 million, of which the Company has already spent approximately
$3.4 million.
As of September 30, 2000 and December 31, 1999, the Company had working
capital of $65.1 million and $54.0 million, respectively.
YEAR 2000 ACTIVITIES
Year 2000 Activities As described in the Form 10-K/A for the year ended
December 31, 1999, we had developed plans to address our potential exposures to
our systems related to the Year 2000. Since entering the Year 2000, we have not
experienced any significant disruptions to our business nor are we aware of any
significant Year 2000 related disruptions impacting our customers and suppliers.
We will continue to monitor our systems and operations until we are reasonably
assured that no
15
significant business interruptions will occur as a result of any Year 2000
issues. We spent a total of approximately $50,000 on the Year 2000 Project with
no significant additional expenses expected in 2000.
FORWARD LOOKING STATEMENTS
We believe that it is important to communicate our expectations to our
investors. Accordingly, this report contains discussion of events or results
that have not yet occurred or been realized. You can identify this type of
discussion, which is often termed "forward-looking statements", by such words
and phrases as "expects", "anticipates", "intends", "plans", "believes",
"estimates" and "could be". Execution of acquisition strategies, expansion of
product lines and increase of distribution networks or product sales are as,
among others, whose future success may be difficult to predict. You should read
forward-looking statements carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position, or state other expectations of future performance. The
actions of current and potential new competitors, changes in technology,
seasonality, business cycles and new regulatory requirements are factors that
impact greatly upon strategies and expectations and are outside our direct
control. There may be events in the future that we are not able accurately to
predict or to control. Any cautionary language in this report provide examples
of risks, uncertainties and events that may cause our actual results to differ
from the expectations we express in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of certain
of the events described in this report could adversely affect our business,
results of operations and financial position.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business in numerous countries, including emerging
markets in Africa, Asia and South America. The Company has invested substantial
resources outside of the United States and plans to continue to do so in the
future. The Company's international operations are subject to the risk of new
and different legal and regulatory requirements in local jurisdictions, tariffs
and trade barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments, potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social conditions. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a significant adverse effect on economic conditions in a developing country or
may otherwise have a material adverse effect on the Company and its operating
companies. The Company does not have political risk insurance in the countries
in which it currently conducts business, but does periodically analyze the need
for and cost associated with this type of policy. Moreover, applicable
agreements relating to the Company's interests in its operating companies are
frequently governed by foreign law. As a result, in the event of a dispute, it
may be difficult for the Company to enforce its rights. Accordingly, the Company
may have little or no recourse upon the occurrence of any of these developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its global operating and financial
activities, is exposed to changes in raw material prices, interest rates and
foreign currency exchange rates, which may adversely affect its results of
operations and financial position. In seeking to minimize the risks and/or costs
16
associated with such activities, the Company manages exposures to changes in raw
material prices, interest rates and foreign currency exchange rates through its
regular operating and financing activities. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments. The Company is exposed to interest rate
risk primarily through its short-term investments and short or long-term
borrowings under its credit agreement. There is inherent roll-over risk for
marketable securities as they mature and are renewed at current market rates,
and the interest rate under the credit agreement adjusts periodically. The
extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements.
However, there is no risk of loss of principal on its short-term investments,
only a risk related to potential reduction in future interest income. Derivative
instruments are not presently used to adjust the Company's interest rate risk
profile. The majority of the Company's business is denominated in U.S. dollars.
There are costs related to the London headquarters, which are denominated in the
British currency. Several other currencies are used by the Company for various
transactions, but their effect on the total business is minimal. By maintaining
a sterling bank account, the Company is able to eliminate any foreign currency
exchange gains or losses arising under cash paid out in British currency.
17
PART II
ITEM 1. LEGAL PROCEEDINGS
Without admitting liability, the Company settled its longstanding
lawsuit with Second Chance Body Armor, Inc., which claimed trademark
infringement and unfair competition. The dispute that led to this lawsuit was
filed in 1994 and related to infringements that were purported to have occurred
during the period from 1984 to 1994, prior to the Company's 1993 bankruptcy and
reorganization.
Separately, the Company has commenced litigation seeking to recover
its damages, including the settlement amount and legal expenses, from its
insurer who recently denied coverage. In addition, several smaller lawsuits
were also settled this quarter bringing the total of all settlements and
associated legal fees to $2.0 million.
In addition to the above, the Company, in the normal course of
business, is subjected to claims and litigation in the areas of product and
general liability. Management does not believe any of such claims will have a
material impact on the Company's financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are hereby filed as part of this Quarterly Report on
Form 10-Q.
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
ARMOR HOLDINGS, INC.
/s/ Jonathan M. Spiller
----------------------------------
Jonathan M. Spiller
President, Chief Executive Officer
and Director
Dated: November 17, 2000
/s/ Robert R. Schiller
----------------------------------
Executive Vice President,
Chief Financial Officer
Dated: November 17, 2000
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EXHIBIT INDEX
The following Exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
20