SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(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, 2001, or
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS 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
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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 _
The number of shares outstanding of the registrant's Common Stock as of November
9, 2001 is 24,638,053.
ARMOR HOLDINGS, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................. 27
PART II - OTHER INFORMATION........................................ 29
ITEM 1. LEGAL PROCEEDINGS.................................... 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 29
SIGNATURES 30
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. (the "Company") and its 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, 2001 and for the three and nine month periods ended September 30, 2001 and
September 30, 2000.
These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
-------------------- --------------------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,890 $ 7,257
Accounts receivable (net of allowance for
doubtful accounts of $2,631 and $1,133) 74,924 44,590
Inventories 55,592 23,675
Prepaid expenses and other current assets 18,540 13,313
-------------------- --------------------
Total current assets 160,946 88,835
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $13,403 and
$10,146) 43,447 24,590
GOODWILL (net of accumulated amortization
of $8,027 and $6,451) 120,838 95,649
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $1,815 and $1,518) 6,802 6,907
OTHER ASSETS 8,889 9,976
-------------------- --------------------
TOTAL ASSETS $ 340,922 $ 225,957
==================== ====================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
-------------------- -------------------
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,066 $ 1,072
Short-term debt 4,113 1,157
Accounts payable 25,939 4,432
Accrued expenses and other current liabilities 27,524 13,915
Income taxes payable 197 322
-------------------- -------------------
Total current liabilities 59,839 20,898
LONG-TERM DEBT, less current portion 89,181 38,288
-------------------- -------------------
Total liabilities 149,020 59,186
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 26,833,400 and 25,063,534 issued and
24,508,741 and 22,685,475 outstanding at 268 250
September 30, 2001 and December 31, 2000
respectively
Additional paid-in capital 172,482 150,254
Retained earnings 48,064 43,663
Accumulated other comprehensive loss (3,488) (1,684)
Treasury stock (25,424) (25,712)
-------------------- -------------------
Total stockholders' equity 191,902 166,771
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,922 $ 225,957
==================== ===================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------ ------------------ ------------------
REVENUES:
Products $ 37,330 $ 34,548 $103,121 $ 100,049
Mobile Security 9,349 - 9,349 -
Services 27,067 22,570 74,206 62,402
------------------ ------------------ ------------------ ------------------
Total Revenues 73,746 57,118 186,676 162,451
------------------ ------------------ ------------------ ------------------
COSTS AND EXPENSES:
Cost of sales 48,856 35,345 118,563 100,810
Operating expenses
Litigation settlements - 1,918 - 1,950
Other operating expenses 16,645 13,414 43,763 36,338
Amortization 843 790 2,621 2,272
Equity in earnings of investee - - - (87)
Restructuring and related charges - - 9,959 -
Integration and other non-recurring
charges 964 1,081 1,800 2,537
------------------ ------------------ ------------------ ------------------
OPERATING INCOME 6,438 4,570 9,970 18,631
Interest expense, net 1,125 600 2,639 1,186
Other expense (income), net 175 51 (52) (1,837)
------------------ ------------------ ------------------ ------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 5,138 3,919 7,383 19,282
PROVISION FOR INCOME TAXES 1,315 1,459 2,658 7,206
------------------ ------------------ ------------------ ------------------
NET INCOME $ 3,823 $ 2,460 $ 4,725 $ 12,076
================== ================== ================== ==================
BASIC EARNINGS PER SHARE $ 0.16 $ 0.11 $ 0.20 $ 0.53
================== ================== ================== ==================
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.11 $ 0.20 $ 0.51
================== ================== ================== ==================
WEIGHTED AVERAGE SHARES - BASIC 23,645 22,442 23,190 22,706
================== ================== ================== ==================
WEIGHTED AVERAGE SHARES - DILUTED 24,317 23,351 23,905 23,613
================== ================== ================== ==================
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,725 $ 12,076
Adjustments to reconcile net income to cash used
in operating activities:
Depreciation and amortization 5,789 4,335
Gain on sale of investments - (1,719)
Non-cash restructuring charges, primarily write-off of goodwill 8,022 -
Deferred income taxes (846) -
Equity in earnings of investee - (87)
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (13,805) (7,096)
Increase in inventories (6,654) (2,759)
Increase in prepaid expenses and other assets (2,905) (8,207)
Increase in accounts payable, accrued
expenses and other current liabilities 7,060 50
Increase in minority interest - 9
Increase in income taxes payable (441) -
------------------ ------------------
Net cash provided by (used in) operating activities 945 (3,398)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of patents and trademarks (34) -
Purchase of property and equipment (5,661) (3,399)
Purchase of businesses, net of cash acquired (44,827) (8,889)
Additional consideration for purchased businesses (3,230) -
Purchases of investments - (1,682)
Proceeds from sale of investment - 3,598
Dividends received from associated companies - 87
Proceeds from sale of equity securities 843 -
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Net cash used in investing activities (52,909) (10,285)
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FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 6,548 709
Repurchases of common stock (722) (12,574)
Proceeds from issuance of treasury shares for the exercise
of stock options 686 -
Net borrowings under short-term debt - (420)
Net repayment of long-term debt (300) -
Borrowings under line of credit 90,267 46,072
Repayments under line of credit (38,078) (26,590)
------------------ ------------------
Net cash provided by financing activities 58,401 7,197
Effect of exchange rate changes on cash and cash equivalents (1,804) (223)
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NET DECREASE IN CASH AND CASH EQUIVALENTS 4,633 (6,709)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,257 13,246
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,890 $ 6,537
================== ==================
See notes to condensed consolidated financial statements.
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The accompanying condensed quarterly financial statements represent the
consolidation of Armor Holdings, Inc. (the "Company") and its wholly-owned
subsidiaries. These statements are unaudited and include all adjustments
(consisting only of normal recurring accruals) considered necessary by
management to present a fair statement of the results of operations, financial
position and cash flows. They have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The results of operations for the three and nine month periods are not
necessarily indicative of the results to be expected for the full year and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000. Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of taxes of $496,000 and
$140,000 for the three months ended September 30, 2001 and 2000, respectively
and $999,000 and $120,000 for the nine months ended September 30, 2001 and 2000,
respectively, are listed below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Net income 3,823 2,460 4,725 12,076
Other comprehensive loss:
Foreign currency translations, net of tax (881) 237 (1,776) (202)
------------------ ------------------- ------------------ ------------------
Comprehensive income: $ 2,942 $ 2,697 $ 2,949 $ 11,874
================== =================== ================== ==================
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 3 - INVENTORIES
The inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
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(IN THOUSANDS)
Raw material $ 33,348 $13,756
Work-in-process 12,395 1,999
Finished goods 9,849 7,920
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Total inventories $55,592 $23,675
================== =================
NOTE 4 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
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(IN THOUSANDS)
Accrued expenses and other current liabilities ......... 26,224 9,365
Additional purchase price for acquisition earnouts...... - 3,000
Deferred consideration for acquisitions................. 1,300 1,550
------------------ -----------------
$ 27,524 $ 13,915
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9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 5 - DEBT
Credit Facility - On August 22, 2001, the Company entered into an Amended
and Restated Credit Agreement (the "Credit Agreement") with Bank of America,
Canadian Imperial Bank of Commerce, First Union National Bank, Suntrust Bank,
Republic Bank, Keybank National Association, and ING (U.S.) Capital LLC.
Pursuant to the Credit Agreement, the lenders established a $120,000,000 line
of credit for our benefit expiring on February 12, 2004. The Credit Agreement,
among other things, provides for (i) total aggregate maximum borrowings of
$120,000,000 and (ii) the capability for borrowings in foreign currencies. All
borrowings under the Credit Agreement bear interest at either (i) a base rate,
plus an applicable margin ranging from .000% to .375%, depending on certain
conditions, (ii) a eurodollar rate, plus an applicable margin ranging from
1.125% to 1.875%, depending on certain conditions, or (iii) with respect to
foreign currency loans, a fronted offshore currency rate, plus an applicable
margin ranging from 1.125% to 1.875%, depending on certain conditions.
Outstanding borrowings under the Credit Agreement bear interest at a variable
rate, currently 5.48% per annum. In addition, the Credit Agreement provides
that Bank of America will make swing-line loans to us of up to $5,000,000 for
working capital purposes only and will issue letters of credit on our behalf
of up to $20,000,000. At September 30, 2001, the Company had $82.7 million
outstanding under the line of credit and approximately $10 million outstanding
in letters of credit leaving approximately $27.3 million in availability under
the Credit Agreement. The Company also had approximately $6.9 million of other
long-term debt and capitalized lease obligations, net of current portion,
consisting primarily of $4.2 million of industrial revenue bonds. All
indebtedness under the Credit Agreement will mature on February 12, 2004,
which will bring the Company's expected 2004 maturities to approximately $83.6
million.
As part of the Credit Agreement, all of the Company's direct and indirect
domestic subsidiaries agreed to guarantee the Company's obligations under the
Credit Agreement. The Credit Agreement is collateralized by (1) a pledge of
all of the issued and outstanding shares of stock of certain domestic
subsidiaries of the Company pursuant to a pledge agreement and (2) a pledge of
65% of the issued and outstanding shares of the Company's first tier foreign
subsidiaries. The Credit Agreement includes both negative and affirmative
covenants customary for a credit facility of this nature, such as a limitation
on capital expenditures, foreign indebtedness, minimum fixed charge coverage
and a restriction against paying dividends.
NOTE 6 - ACQUISITIONS
On August 22, 2001, the Company, through a wholly owned subsidiary,
acquired all of the outstanding stock of O'Gara-Hess Eisenhardt Armoring
Company, The O'Gara Company, and O'Gara Security Associates, Inc. The acquired
companies (which are collectively referred to below as "O'Gara") constitute
the majority of what was formerly known as the Security Products and Services
Group (which is referred to below as "SPSG") of The Kroll-O'Gara Company
("Kroll"). In connection with the acquisition, the Company paid $52.2 million,
of which $37.2 million was paid in cash and $15 million was paid by issuing to
Kroll-O'Gara 1,009,422 shares of the Company's common stock (the "Shares")
and has recorded $33.5 million in goodwill related to the acquisition.
The entire cash portion of the transaction was paid by drawing down on the
Company's revolving credit facility.
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
The Company also deposited an additional $1.5 million in cash with an
escrow agent, to be held and distributed by the escrow agent pursuant to the
terms of an Escrow Agreement entered into between the Company and Kroll. The
Company also agreed to pay Kroll up to $2.0 million in contingent deferred
consideration if O'Gara achieves certain gross profit targets for the twelve
months ended December 31, 2001.
The results of SPSG have been included in the Company's results since
August 22, 2001. The unaudited consolidated results of operations of the Company
on a pro forma basis as if the Company had consummated the acquisition of SPSG
on January 1, 2001 and 2000 are as follows:
9 MONTHS 12 MONTHS
SEPTEMBER 30, 2001 DECEMBER 31, 2000
-------------------- --------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues $ 265,490 $333,375
Net Income $ 1,050 $ 14,325
Diluted Earnings per Share $ 0.04 $ 0.59
Weighted Average Shares-Diluted 24,767 24,365
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 7 - RESTRUCTURING CHARGE
In January 2001, the Company's ArmorGroup Services division approved a
restructuring plan to close its U.S. investigative businesses, realign the
division's organization, eliminate excess facilities and reduce overhead in its
businesses worldwide. In connection with this restructuring plan, the division
performed a review of its long-lived assets to identify potential impairments.
Pursuant to this restructuring plan, ArmorGroup i) eliminated 26 employees,
primarily from its investigative businesses, ii) eliminated an additional 24
employees from its security business, iii) incurred lease and other exit costs
as a result of the closure of its investigative businesses, and iv) wrote-down
the value of both tangible and intangible assets as a result of the impairment
review. Most of the significant actions contemplated by the restructuring plan
have been completed.
As a result of the restructuring plan, the Company has recorded a
pre-tax charge of $10 million. As of September 30, 2001, the Company had a
remaining liability of $382,000 relating to lease termination and other exit
costs after current quarter utilization of the reserves for employee termination
costs ($569,000) and lease related costs ($346,000). This liability has been
classified in accrued expenses and other current liabilities on the consolidated
balance sheet and will be funded through cash provided by operating activities
and the Company's credit facility. A summary of the restructuring charges and
the remaining accrual follows:
Lease Termination
Employee Termination and Other Closing Asset Asset Removal
Costs Costs Impairment & Related Costs Total
---------------------- ----------------- ------------ --------------- -----------
Additions $ 531,000 $ 541,000 $ 291,000 $ 7,337,000 $ 8,700,000
Utilization (531,000) (85,000) (291,000) (7,337,000) (8,244,000)
---------------------- ----------------- ------------ --------------- -----------
Balance at March 31, 2001 $ - $ 456,000 $ - $ - $ 456,000
Additions $ 844,000 $ 415,000 $ - $ - $ 1,259,000
Utilization (275,000) (143,000) - - (418,000)
---------------------- ----------------- ------------ --------------- -----------
Balance at June 30, 2001 $ 569,000 $ 728,000 $ - $ - $ 1,297,000
Additions $ - $ - $ - $ - $ -
Utilization (569,000) (346,000) - - (915,000)
---------------------- ----------------- ------------ --------------- -----------
BALANCE AT SEPTEMBER 30, 2001 $ - $ 382,000 $ - $ - $ 382,000
====================== ================= ============ =============== ===========
NOTE 8 - INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
The Company is a leading manufacturer and provider of security products,
vehicle armor systems and security risk management services. The Company's
products and services are used by military, law enforcement, security and
corrections personnel throughout the world, as well as governmental agencies,
multinational corporations and non-governmental organizations. The Company is
organized and operated under three business segments: Armor Holdings Products;
Armor Mobile Security; and ArmorGroup Services.
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Armor Holdings Products. The Armor Holdings Products division
manufactures and sells a broad range of high quality equipment marketed under
brand names that are well-known and respected in the military and law
enforcement communities. Products manufactured by this division include body
armor, tactical armor, hard armor, duty gear, less-lethal munitions, anti-riot
products, police batons, forensic products and weapon maintenance products.
Armor Mobile Security. The Armor Mobile Security division manufactures
and installs ballistic and blast protection armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt, the Company is the sole-source provider
to the U.S. military for the supply of armoring and blast protection systems as
well as maintenance services for the High Mobility Multi-purpose Wheeled Vehicle
(HMMWV, commonly known as the Humvee). Additionally, the Company has been
subcontracted to develop a ballistically armored and sealed truck cab for the
High Mobility Artillery Rocket System (HIMARS) currently in development for the
U.S. Army. The Company armors a variety of commercial vehicles including
limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles, to protect against varying degrees of ballistic and
blast threats. The Armor Mobile Security Division consists of SPSG less
International Training, Inc., which is now included in ArmorGroup Services
division.
ArmorGroup Services. The ArmorGroup Services division provides a broad
range of sophisticated security risk management solutions to multinational
corporations in diverse industries such as natural resources, financial services
and consumer products, and to governmental and non-governmental agencies such as
the U.S. Departments of State and Defense, the United Nations and CARE
International. Services provided include security planning, advice and
management, security systems integration, intellectual property asset
protection, due diligence investigations and training programs in
counterintelligence, counter-surveillance, advanced driving techniques, computer
forensics and ballistics.
The Company has invested substantial resources outside of the United
States and plans to continue to do so in the future. Significant operations of
ArmorGroup Services division are conducted in certain emerging markets in
Africa, Asia and South America, while the Armor Mobile Security division has
invested substantial resources in Europe 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. 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. Moreover,
applicable agreements relating to the Company's interests in it 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.
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
Revenues, operating income and total assets for each of the Company's segments
are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------------ ------------------------
(IN THOUSANDS)
Revenues:
Products $ 103,121 $ 100,049
Mobile Security 9,349 -
Services 74,206 62,402
------------------------ ------------------------
Total revenues $ 186,676 $ 162,451
======================== ========================
Operating income:
Products $ 19,015 $ 19,485
Mobile Security 1,166 -
Services (5,639) 5,657
Corporate (4,572) (6,511)
------------------------ ------------------------
Total operating income $ 9,970 $ 18,631
======================== ========================
Total assets:
Products $ 145,815 $ 112,815
Mobile Security 98,871 -
Services 84,278 62,705
Corporate 11,958 30,812
------------------------ ------------------------
Total assets $ 340,922 $ 206,332
======================== ========================
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
The following unaudited information with respect to revenues and
operating income (operating income before amortization expense, equity in
earnings of investee, restructuring charges and integration expense) to
principal geographic areas are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
---------------------- ----------------------
(IN THOUSANDS)
Revenues:
North America $ 109,395 $ 100,873
South America 20,606 16,953
Africa 17,799 15,621
Europe/Asia 38,876 29,004
---------------------- ----------------------
Total revenue $ 186,676 $ 162,451
====================== ======================
Geographic operating income:
North America $ 14,770 $16,448
South America 2,462 2,431
Africa 2,751 4,801
Europe/Asia 4,367 (327)
---------------------- ----------------------
Total operating income $ 24,350 $ 23,353
====================== ======================
Total assets:
North America $ 247,713 $145,353
South America 13,697 6,727
Africa 21,290 13,023
Europe/Asia 58,222 41,229
---------------------- ----------------------
Total assets $ 340,922 $ 206,332
====================== ======================
A reconciliation of consolidated geographic operating income to
consolidated operating income follows:
NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
---------------------- ----------------------
(IN THOUSANDS)
Consolidated geographic operating income $ 24,350 $ 23,353
Amortization (2,621) (2,272)
Equity in earnings of investee - 87
Restructuring and related charges (9,959) -
Integration and other non-recurring charges (1,800) (2,537)
---------------------- ----------------------
Operating income $ 9,970 $ 18,631
====================== =======================
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 9. EARNINGS PER SHARE
The company follows SFAS No. 128, Earnings Per Share, which requires the
presentation of basic and diluted 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 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings
per share:
Net income $ 3,823 $ 2,460 $ 4,725 $ 12,076
------------- ------------- ------------- -------------
Denominator for basic earnings per share
Weighted average shares: 23,645 22,442 23,190 22,706
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 672 909 715 907
------------- ------------- ------------- -------------
Denominator for diluted earnings per
share- Adjusted weighted average shares 24,317 23,351 23,905 23,613
------------- ------------- ------------- -------------
Basic earnings per share $ 0.16 $ 0.11 $ 0.20 $ 0.53
============= ============= ============= =============
Diluted earnings per share $ 0.16 $ 0.11 $ 0.20 $ 0.51
============= ============= ============= =============
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (SFAS 141), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142). SFAS 141 requires that all business combinations be accounted for under
a single method - the purchase method. Use of the pooling-of-interest method
is no longer permitted. SFAS 141 requires that the purchase method be used for
all business combinations initiated after June 30, 2001. SFAS 142 requires,
among other things, that goodwill no longer be amortized to earnings, but
instead reviewed for impairment annually. Under SFAS 142, the amortization of
goodwill ceases upon adoption of the statement, which will become effective
for the Company on January 1, 2002. The Company has historically amortized its
goodwill over its estimated useful lives. Under SFAS 142, the amortization of
goodwill resulting from acquisitions prior to July 1, 2001 will cease to be
amortized effective January 1, 2002. The goodwill resulting from acquisitions
made by the Company subsequent to June 30, 2001 is immediately subject to the
non-amortization provisions of SFAS 142. The effects of adopting these
standards have not been completely determined.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. SFAS 143 requires the recognition of the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the asset retirement obligation is incurred,
the liability shall be recognized when a reasonable estimate of fair value can
be made. The fair value of a liability for an asset retirement obligation is the
amount at which that liability could be settled in a current transaction between
willing parties, that is, other than in a forced or liquidation transaction.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The provisions of SFAS 143 will become effective for the
Company on January 1, 2003. The effects of adopting this standard have not been
determined.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
SFAS 144 requires that a long-lived asset to be (1) abandoned, (2) exchanged for
a similar productive asset, or (3) distributed to owners in a spin-off be
considered held and used until it is abandoned, exchanged, or distributed. SFAS
144 requires (1) that spin-offs and exchanges of similar productive assets to be
recorded at the lower of carrying value or fair value, and that such assets be
classified as held and used until disposed of and (2) that any impairment loss
resulting from a spin-off or exchange of similar productive assets be recognized
when the asset is disposed of. The provisions of SFAS 144 will be come effective
for the Company on January 1, 2002. The effects of adopting this standard have
not been determined.
NOTE 11. SUBSEQUENT EVENT
On October 30, 2001, the Company announced that it filed a registration
statement with the Securities and Exchange Commission relating to the proposed
offering of 5.0 million common shares that includes 4.5 million shares to be
sold by the Company and 0.5 million shares to be sold by certain shareholders.
An additional 750,000 shares may be sold by a certain shareholder to the
underwriters to cover all over allotments. As of November 9, 2001, the Company
had approximately 24.6 million common shares outstanding.
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
(IN THOUSANDS)
Non-cash investing and financing activities:
Stock issued as additional consideration
for purchased businesses $ 900 $ 201
================== ==================
Stock issued for purchase of businesses $ 14,798 $ 2,094
================== ==================
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and analysis
of financial condition for the three and nine months ended September 30, 2001.
The results of operations for purchase business combinations 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
our Annual Report on Form 10-K for the year ended December 31, 2000, as filed
with the Securities and Exchange Commission.
Revenue Recognition. The Company records product revenues at gross amounts
to be received including amounts to be paid to agents as commissions, at the
time the product is shipped to the distributor. Although, in certain
circumstances, product returns are permitted 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 services revenue as the service is
provided on a contract-by-contract basis.
The Company records revenue from its Mobile Security Division when the
vehicle is shipped except for commercial contracts greater than $1,250,000 and
longer than four months in length and government contract for the delivery of
HMMWVs to the U.S. Government. Revenue from commercial contracts greater than
$1,250,000 and longer than four months in length is recognized on the
percentage of completion units-of-work performed method. Revenues from the
sale of HMMWV's to the U.S. Government are recorded when the onsite Department
of Defense officer finishes the inspection of the HMMWV and approves it for
delivery.
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
pre-tax loss of approximately $5.4 million as of September 30, 2001 and $2.6
million as of December 31, 2000.
New Accounting Pronouncements. In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business
combinations be accounted for under a single method - the purchase method. Use
of the pooling-of-interest method is no longer permitted. SFAS 141 requires
that the purchase method be used for all business combinations initiated after
June 30, 2001. SFAS 142 requires, among other things, that goodwill no longer
be amortized to earnings, but instead reviewed for impairment annually. Under
SFAS 142, the amortization of goodwill ceases upon adoption of the statement,
which will become effective for the Company on January 1, 2002. The Company
has historically amortized its goodwill over its estimated useful lives. Under
SFAS 142, the amortization of goodwill resulting from acquisitions prior to
July 1, 2001 will cease to be amortized effective January 1, 2002. The
goodwill resulting from acquisitions made by the Company subsequent to June
30, 2001 is immediately subject to the non-amortization provisions of SFAS
142. The effects of adopting these standards have not been completely
determined.
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. SFAS 143 requires the recognition of the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the asset retirement obligation is incurred,
the liability shall be recognized when a reasonable estimate of fair value can
be made. The fair value of a liability for an asset retirement obligation is the
amount at which that liability could be settled in a current transaction between
willing parties, that is, other than in a forced or liquidation transaction.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The provisions of SFAS 143 will become effective for the
Company on January 1, 2003. The effects of adopting this standard have not been
determined.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
SFAS 144 requires that a long-lived asset to be (1) abandoned, (2) exchanged for
a similar productive asset, or (3) distributed to owners in a spin-off be
considered held and used until it is abandoned, exchanged, or distributed. SFAS
144 requires (1) that spin-offs and exchanges of similar productive assets to be
recorded at the lower of carrying value or fair value, and that such assets be
classified as held and used until disposed of and (2) that any impairment loss
resulting from a spin-off or exchange of similar productive assets be recognized
when the asset is disposed of. The provisions of SFAS 144 will be come effective
for the Company on January 1, 2002. The effects of adopting this standard have
not been determined.
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000.
Products revenues. Armor Holdings Products Division revenues increased
$2.8 million, or 8.1%, to $37.3 million in the three months ended September 30,
2001 compared to $34.5 million in the three months ended September 30, 2000.
This increase was due to internal growth of 4.7% as well as 3.4% growth from the
acquisitions of Monadnock Lifetime Products Inc. ("Monadnock") and Lightning
Powder, Inc. ("Lightning Powder") completed in November 2000.
Mobile Security revenues. Armor Mobile Security Division revenues
totaled $9.3 million in the three months ended September 30, 2001. The Mobile
Security Division was created with the O'Gara acquisition on August 22, 2001,
and its revenues are included from September 1, 2001.
Services revenues. ArmorGroup Services Division revenues increased $4.5
million, or 19.9%, to $27.1 million in the three months ended September 30, 2001
compared to $22.6 million in the three months ended September 30, 2000. This
increase was due to internal growth of 16.3% as well as 3.6% growth from
International Training, Inc., which was acquired in the O'Gara acquisition and
is included in the revenue of ArmorGroup Services Division.
Cost of sales. Cost of sales increased by $13.5 million, or 38.2%, to
$48.9 million in the three months ended September 30, 2001 compared to $35.3
million in the three months ended September 30, 2000. This increase was
primarily due to increased revenue for the three months ended September 30, 2001
compared to the three months ended September 30, 2000, as well as the O'Gara
acquisition. As a percentage of total revenues, cost of sales increased to 66.2%
of total revenues for the three months ended September 30, 2001 from 61.9% for
the three months ended September 30, 2000. The increase as a percentage of total
revenues was primarily due to the lower gross margins in the new Mobile Security
division as well as well as the revenue mix in the Company's Armor Holdings
Products and ArmorGroup Services divisions.
Operating expenses. Operating expenses increased by $1.3 million, or
8.6%, to $16.6 million (22.6% of total revenues) in the three months ended
September 30, 2001 compared to $15.3 million (26.8% of total revenues) in the
three months ended September 30, 2000. This increase was primarily due to
internal growth in the overall business as well as the operating expenses
associated with the operations of O'Gara, Monadnock, and Lightning Powder
acquired in August 2001 and November 2000 respectively. The reduction in
operating expenses as a percent of sales was a result of the restructuring
activities in ArmorGroup Services, and the Company's continued focus on lowering
operating costs.
Amortization. Amortization expense increased $53,000, or 6.7%, to
$843,000 in the three months ended September 30, 2001 compared to $790,000 in
the three months ended September 30, 2000. This increase was due to amortization
of intangible assets acquired as a result of the acquisitions of Monadnock and
Lightning Powder in November 2000, which are not reflected in the three months
ended September 30, 2000, offset by a reduction in amortization of goodwill
associated with the Company's impairment charges earlier this year.
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Integration and other non-recurring charges. Integration and other
non-recurring charges decreased by $117,000, or 10.8%, to $964,000 in the three
month period ended September 30, 2001 compared to $1.1 million in the three
months ended September 30, 2000 and are related to the integration of the
Company's recent acquisitions and its on-going global tax minimization plan.
Operating income. Operating income increased $1.9 million, or 40.9%, to
$6.4 million in the three months ended September 30, 2001 compared to $4.6
million in the three months ended September 30, 2000 due to the factors
discussed above.
Interest expense, net. Interest expense, net increased by $525,000, or
87.5%, to $1,125,000 in the three months ended September 30, 2001 compared to
$600,000 in the three months ended September 30, 2000. This increase was due to
increased borrowings for the acquisitions of Monadnock, Lightning Powder and
O'Gara, each of which was funded with long-term debt, offset by reductions in
the interest cost of debt the Company is currently paying on its long-term debt.
Interest expense includes interest on and amortization of the fees associated
with the Company's $120 million credit facility, and the amortization of the
discount on certain long-term liabilities acquired as part of the Safariland
acquisition.
Other expense, net. Other expense, net, was $175,000 in the three
months ended September 30, 2001, compared to $51,000 for the three months ended
September 30, 2000. Other expenses, net for the three months ended September 30,
2001 were primarily expenses associated with O'Gara from the date of purchase to
September 1, 2001.
Income before provision for income taxes. Income before provision for
income taxes increased by $1.2 million, or 31%, to $5.1 million in the three
months ended September 30, 2001 compared to $3.9 million in the three months
ended September 30, 2000 due to the factors discussed above.
Provision for income taxes. Provision for income taxes decreased by
$144,000, or 9.9%, to $1.3 million in the three months ended September 30, 2001
compared to $1.5 million in the three months ended September 30, 2000. The
effective tax rate for the three months ended September 30, 2001 was 25.6%
compared to 37.2% for the three months ended September 30, 2000. The decrease in
the Company's effective tax rate in the three month ended September 30, 2001 was
due to the realization of benefits associated with the Company's tax planning
strategies in the current period and the reduced impact of non-deductible
goodwill amortization on the Company's effective tax rate. The Company's
effective tax rate is continually changing as estimated future income from the
Company's foreign operations can vary significantly from period to period. The
effective tax rate for the three months ended September 30, 2001 is not
necessarily indicative of continued tax rates due to continually changing
concentration of income in each country in which the Company operates.
Net income. Net income increased by $1.4 million, or 55%, to $3.8
million in the three months ended September 30, 2001 compared to $2.5 million
for the three months ended September 30, 2000 due to the factors discussed
above.
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000.
Products revenues. Armor Holdings Products Division revenues increased
$3.1 million, or 3.1%, to $103.1 million in the nine months ended September 30,
2001 compared to $100.0 million in the nine months ended September 30, 2000.
This increase was due to the acquisitions of Monadnock and Lightning Powder in
November 2000.
Mobile Security revenues. Armor Mobile Security Division revenues
totaled $9.3 million in the three months ended September 30, 2001. The Mobile
Security Division was created with the O'Gara acquisition on August 22, 2001,
and its revenues are included from September 1, 2001.
Services revenues. ArmorGroup Services Division revenues increased
$11.8 million, or 18.9%, to $74.2 million in the nine months ended September 30,
2001 compared to $62.4 million in the nine months ended September 30, 2000. This
increase was due to internal growth of 16.9% as well as 2.0% growth from
International Training, Inc., which was acquired in the O'Gara acquisition and
is included in the revenue of ArmorGroup Services Division.
Cost of sales. Cost of sales increased by $17.8 million, or 17.6%, to
$118.6 million in the nine months ended September 30, 2001 compared to $100.8
million in the nine months ended September 30, 2000. This increase was primarily
due to increased revenues in the ArmorGroup Services Division for the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000 as well as the acquisition of the Mobile Security Division. As a percentage
of total revenues, cost of sales increased to 63.5% of total revenues for the
nine months ended September 30, 2001 compared to 62.1% for the nine months ended
September 30, 2000. This increase was primarily due to the acquisition of O'Gara
as well as higher revenues in the ArmorGroup Services Division, both of which
operate at lower average gross margins than the Armor Holdings Products
Division.
Operating expenses. Operating expenses increased $5.5 million, or
14.3%, to $43.8 million (23.4% of total revenues) in the nine months ended
September 30, 2001 compared to $38.3 million (23.6% of total revenues) in the
nine months ended September 30, 2000. This increase was primarily due to
internal growth in the overall business as well as the operating expenses
associated with O'Gara, Monadnock, and Lightning Powder acquired in August 2001
and November 2000 respectively.
Amortization. Amortization expense increased $349,000, or 15.4%, to
$2.6 million in the nine months ended September 30, 2001 compared to $2.3
million in the nine months ended September 30, 2000. This increase was due to
the amortization of intangible assets acquired as a result of the acquisitions
of OVG/Traquair, Monadnock and Lightning Powder, which are not fully reflected
in the nine months ended September 30, 2000, offset by a reduction in
amortization of goodwill associated with the Company's impairment charges
earlier this year.
Equity in earnings of investee. Equity in earnings of investee was
$87,000 in the nine months ended September 30, 2000 and relates to the Company's
20% investment in Jardine Securicor Gurkha Services Limited ("JSGS"), which was
sold during the nine month period ended September 30, 2000.
Restructuring and related charges. In January 2001, the Company's
ArmorGroup Services division approved a restructuring plan to close its U.S.
investigative businesses, realign the division's organization, eliminate excess
facilities and reduce overhead in its businesses worldwide. In connection with
this restructuring plan, the division performed a review of its long-lived
assets to identify potential impairments. Pursuant to this restructuring plan,
ArmorGroup i) eliminated 26 employees, primarily from its investigative
businesses, ii) eliminated an additional 24 employees from its security
business,
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
iii) incurred lease and other exit costs as a result of the closure of its
investigative businesses, and iv) wrote-down the value of both tangible and
intangible assets as a result of the impairment review. Most of the significant
actions have been completed.
As a result of the restructuring plan, the Company has recorded a
pre-tax charge of $10 million. As of September 30, 2001, the Company had a
remaining liability of $382,000 relating to lease termination and other exit
costs. This liability has been classified in accounts payable, accrued expenses
and other current liabilities on the consolidated balance sheet and will be
funded through cash provided by operating activities and the Company's credit
facility.
Integration and other non-recurring charges. Integration and other
non-recurring charges decreased $737,000, or 29.1%, to $1.8 million in the nine
months ended September 30, 2001, compared to $2.5 million in the nine months
ended September 30, 2000. Merger and integration expenses for the nine months
ended September 30, 2001 represent costs associated with the integration of
O'Gara, Monadnock and Lightning Powder, as well as costs associated with the
Company's tax minimization project. Merger and integration expenses in the nine
months ended September 30, 2000 represent costs associated with the integration
of Safariland, OVG/Traquair, Special Clearance Services and Breakfree, as well
as costs associated with the tax minimization project, the evaluation of
strategic alternatives and certain other one-time costs.
Operating income. Operating income decreased $8.7 million, or 46.5%, to
$10.0 million in the nine months ended September 30, 2001 compared to operating
income of $18.6 million in the nine months ended September 30, 2000 due to the
factors discussed above.
Interest expense, net. Interest expense, net increased $1.5 million, or
122.5%, to $2.6 million in the nine months ended September 30, 2001 compared to
$1.2 million in the nine months ended September 30, 2000. This increase resulted
from increased borrowings for the acquisitions of O'Gara, Monadnock and
Lightning Powder, each of which was funded with long-term debt. Increased debt
levels were offset by reductions in the cost of debt the Company is currently
paying on its bank credit facility due to lower interest rates. Net interest
expense includes interest on and amortization of the fees associated with the
Company's $120 million credit facility, and the amortization of the discount on
certain long-term liabilities acquired as part of the Safariland acquisition.
Other income, net. Other income, net decreased $1.8 million, or 97.2%,
to $52,000 in the nine months ended September 30, 2001 compared to $1.8 million
for the nine months ended September 30, 2000. Other income, net in the nine
months ended September 30, 2000 was due primarily to the sale of the Company's
investment in JSGS.
Income before provision for income taxes. Income before provision for
income taxes decreased $11.9 million, or 61.7%, to $7.4 million in the nine
months ended September 30, 2001 compared to $19.3 million in the nine months
ended September 30, 2000 due to the factors discussed above.
Provision for income taxes. Provision for income taxes decreased $4.5
million, or 63.1%, to $2.7 million in the nine months ended September 30, 2001
compared to $7.2 million in the nine months ended September 30, 2000. The
effective tax rate for the nine months ended September 30, 2001 was 36.0%
compared to 37.4% for the nine months ended September 30, 2000. The decrease in
the Company's effective tax rate in the nine month ended September 30, 2001 was
due to the realization of benefits associated with the Company's tax planning
strategies in the current period and the reduced
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
impact of non-deductible goodwill amortization on the Company's effective tax
rate. The Company's effective tax rate is continually changing as estimated
future income from the Company's foreign operations can vary significantly from
period to period. The effective tax rate for the nine months ended September 30,
2001 is not necessarily indicative of continued tax rates due to the continually
changing concentration of income in each country in which the Company operates.
Net income. Net income decreased $7.4 million, or 60.9%, to $4.7
million in the nine months ended September 30, 2001 compared to $12.1 million
for the nine months ended September 30, 2000 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On August 22, 2001, the Company entered into an Amended and Restated
Credit Agreement (the "Credit Agreement") with Bank of America, Canadian
Imperial Bank of Commerce, First Union National Bank, Suntrust Bank, Republic
Bank, Keybank National Association, and ING (U.S.) Capital LLC. Pursuant to the
Credit Agreement, the lenders established a $120,000,000 line of credit for the
Company's benefit expiring on February 12, 2004. The Credit Agreement, among
other things, provides for (i) total aggregate maximum borrowings of
$120,000,000 and (ii) the capability for borrowings in foreign currencies. All
borrowings under the Credit Agreement bear interest at either (i) a base rate,
plus an applicable margin ranging from .000% to .375%, depending on certain
conditions, (ii) a eurodollar rate, plus an applicable margin ranging from
1.125% to 1.875%, depending on certain conditions, or (iii) with respect to
foreign currency loans, a fronted offshore currency rate, plus an applicable
margin ranging from 1.125% to 1.875%, depending on certain conditions.
Outstanding borrowings under the Credit Agreement bear interest at a variable
rate, currently 5.48% per annum. In addition, the Credit Agreement provides that
Bank of America will make swing-line loans to us of up to $5,000,000 for working
capital purposes only and will issue letters of credit on our behalf of up to
$20,000,000. As of September 30, 2001, the Company had approximately $82.7
million outstanding and approximately $27.3 million available under the Credit
Agreement. All indebtedness under the Credit Agreement will mature on February
12, 2004. The Company has approximately $6.9 million in other long-term debt,
net of current portion, consisting primarily of $4.2 million in industrial
revenue and industrial development bonds.
In October 1999, the Company's Board of Directors approved a stock
repurchase program that is effective through December 31, 2001 and allows the
Company to repurchase up to 10% of its outstanding shares. Under the
program, the Company has repurchased 1,848,700 shares of common stock
at an average price of $10.67. The Company has the ability to repurchase up to
an additional 572,110 shares under this program. The Company expects
to continue its policy of repurchasing common stock at opportune intervals. In
addition, the Company's Credit Agreement permits the Company to repurchase
shares of its common stock up to a maximum amount of $30 million if the
Company's ratio of Consolidated Total Indebtedness to Consolidated EBITDA for
any Rolling Period (as such terms are defined in the Credit Agreement) is
greater than 2.00 to 1; provided that if such ratio is less than or equal to
2.00 to 1, there is no limitation under the Credit Agreement on the amount of
such stock repurchase by the Company. As of September 30, 2001, the Company had
the ability to repurchase up to an additional $7.6 million of shares of its
common stock under the Credit Agreement.
25
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
The Company had working capital of $101.1 million and $67.9 million as
of September 30, 2001 and December 31, 2000, respectively.
The Company anticipates that the cash generated from operations and
borrowings under the Credit Agreement will enable it to meet liquidity, working
capital and capital expenditure requirements during the next 12 months. The
Company may, however, 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 us or on a basis that is not dilutive to our stockholders.
The Company's capital expenditures were $3.4 million in fiscal
year 1999 and $7.8 million in fiscal year 2000. Capital expenditures for the
nine months ended September 30, 2001 were $5.7 million, for among other things,
leasehold improvements, information technology and communications infrastructure
equipment and software, and manufacturing machinery and equipment.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, but not
limited to, successfully completing the common stock offering discussed
previously, the Company's failure to continue to develop and market new and
innovative products and services and to keep pace with technological change;
competitive pressures; failure to obtain or protect intellectual property
rights; the ultimate effect of various domestic and foreign political and
economic issues on the Company's business, financial condition or results of
operations; quarterly fluctuations in revenues and volatility of stock prices;
contract delays; cost overruns; the Company's ability to attract and retain key
personnel; currency and customer financing risks; dependence on certain
suppliers; changes in the financial or business condition of the Company's
distributors or resellers; the Company's ability to successfully manage
acquisitions, alliances and integrate past and future business combinations;
regulatory, legal, political and economic changes and other risks, uncertainties
and factors inherent in the Company's business and otherwise discussed elsewhere
in this Form 10-Q and in the Company's other filings with the Securities and
Exchange Commission or in materials incorporated therein by reference.
26
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our global operating and financial activities, we are
exposed to changes in raw material prices, interest rates and foreign currency
exchange rates, which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in raw material prices,
interest rates and foreign currency exchange rates through our regular
operating and financing activities. We do not utilize financial instruments
for trading or other speculative purposes, nor do we utilize leveraged
financial instruments or other derivatives.
MARKET RATE RISK
The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates and
equity security price risk. We do not use derivative financial instruments for
speculative or trading purposes.
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relate primarily to borrowings under our Credit Agreement and
our short-term monetary investments. Borrowings under our Credit Agreement are
variable based upon the lender's base rate or Eurodollar rate. Assuming the
level of borrowings at September 30, 2001, a hypothetical one-percentage point
increase in the base rate or Eurodollar rate would increase our annual
interest expense by approximately $827,000. To the extent that, from time to
time, the Company holds short-term money market instruments, there is a market
rate risk for changes in interest rates on such instruments. To that extent,
there is inherent rollover risk in the short-term money market instruments as
they mature and are renewed at current market rates. 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 in the short-term money market instruments, only a risk
related to a potential reduction in future interest income. Derivative
instruments are not presently used to adjust the Company's interest rate risk
profile. We do not use derivative financial instruments to hedge this interest
rate risk. However, in the future, the Company may consider the use of
financial instruments to hedge interest rate risk.
Foreign Currency Exchange Rate Risk. The majority of our business is
denominated in U.S. dollars. There are costs associated with our operations in
foreign countries that require payments in the local currency. We partially
manage our foreign currency risk related to those payments by maintaining
operating accounts in these foreign countries. Where appropriate we receive
payment from several customers in such local currencies in amounts sufficient
to meet our local currency obligations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business in numerous countries, including emerging
markets in Africa, Asia, South America, Russia, and CIS. 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,
27
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
28
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 for a description of
legal proceedings. In addition, the United States Environmental Protection
Agency issued a request for information to us pursuant to Section 104(e) of the
Comprehensive Environmental Response, Compensation and Liability Act in August
2001, regarding the possible impact of our Casper, Wyoming tear gas facility on
the environment. We have responded to this request. The EPA's inquiry is in its
initial stage, and we cannot predict the outcome of this matter.
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.
None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K filed on September
7, 2001 relating to the amended and restated credit agreement which
increased the maximum borrowing amount from $100 million to $120
million.
The Company filed two Current Reports on Form 8-K filed on August
23, 2001 and August 22, 2001 relating to the acquisition of the
Security Products and Services Group from the Kroll-O'Gara Company.
29
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 14, 2001
/s/ Robert R. Schiller
-------------------------------------
Robert R. Schiller
Executive Vice President and Chief Financial Officer
Dated: November 14, 2001
/s/ Scott Vining
-------------------------------------
Scott Vining
Treasurer and Chief Accounting Officer
Dated: November 14, 2001
30