<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File No.
June 30, 1996 0-19188
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0295865
(State of Incorporation) (I.R.S. Employer
Identification No.)
3 Centennial Drive
Peabody, Massachusetts 01960
(Address of principal executive offices)
(508) 538-1500
(Registrant's telephone number, including area code)
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 / /.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 10,260,911 shares of Common
Stock, $.01 par value per share, as of July 26, 1996.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
JUNE SEPTEMBER
30, 1996 30, 1995
-------- --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,974 $ 20,475
Investment securities 12,044
Accounts receivable, net of allowance for doubtful accounts of $819
on June 30, 1996 and $806 on September 30, 1995 32,350 33,467
Inventory 27,618 27,606
Prepaid expenses and deferred taxes 9,930 5,908
-------- --------
Total current assets 74,872 99,500
Property, plant and equipment, net 236,745 206,743
Intangibles and deferred finance charges, net 6,166 7,081
Long-term note receivable and other assets 4,184 1,153
-------- --------
$321,967 $314,477
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 16,234 $ 18,123
Accrued expenses 13,347 17,160
Accrued interest 4,427 8,776
-------- --------
Total current liabilities 34,008 44,059
Long-term debt 163,500 156,500
Deferred taxes and other credits 18,176 14,860
Commitments
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000 shares,
no shares outstanding
Common stock, $.01 par value:
Voting -- authorized, 14,865 shares; issued, 10,241 at
June 30, 1996 and 9,986 shares at September 30, 1995 102 100
Nonvoting -- 135 shares at September 30, 1995 1
Additional paid-in capital 88,727 84,823
Retained earnings 19,668 14,780
Cumulative translation adjustments 294 501
-------- --------
108,791 100,205
Treasury stock and other, 320 and 149 shares at June 30, 1996
and September 30, 1995, respectively (2,508) (1,147)
-------- --------
Total stockholders' equity 106,283 99,058
-------- --------
$321,967 $314,477
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
<TABLE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
SALES $61,043 $64,143
Cost of sales 47,225 46,107
------- -------
GROSS PROFIT 13,818 18,036
OPERATING EXPENSES:
Selling, general and administrative 5,363 5,325
Research and development 1,906 1,770
------- -------
Total operating expenses 7,269 7,095
------- -------
OPERATING PROFIT 6,549 10,941
NON-OPERATING EXPENSES:
Interest expense, net 3,247 4,916
------- -------
Income before income taxes 3,302 6,025
Income tax expense 1,321 2,410
------- -------
NET INCOME $ 1,981 $ 3,615
======= =======
EARNINGS PER COMMON SHARE $ .18 $ .48
======= =======
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,979 7,595
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
<TABLE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
SALES $173,859 $172,990
Cost of sales 136,218 123,473
-------- --------
GROSS PROFIT 37,641 49,517
OPERATING EXPENSES:
Selling, general and administrative 14,309 15,142
Research and development 5,402 4,818
-------- --------
Total operating expenses 19,711 19,960
-------- --------
OPERATING PROFIT 17,930 29,557
NON-OPERATING EXPENSES
Interest expense, net 9,783 14,811
Litigation settlement 1,400
-------- --------
Total non-operating expenses 9,783 16,211
-------- --------
Income before income taxes 8,147 13,346
Income tax expense 3,259 5,339
-------- --------
NET INCOME $ 4,888 $ 8,007
======== ========
EARNINGS PER COMMON SHARE $ .45 $ 1.06
======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,954 7,536
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
<TABLE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands)
(Unaudited)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,888 $ 8,007
Adjustment to reconcile net income to net cash provided by operating
activities:
Provision for doubtful accounts 125 185
Depreciation and amortization 10,214 9,807
Deferred income taxes 882 2,525
Changes in assets and liabilities which provided (used) cash:
Prepaid expenses and other assets (5,121) (33)
Accounts payable and accrued expenses (9,720) (2,199)
Accounts receivable and inventory 980 (5,099)
-------- --------
Net cash provided by operating activities 2,248 13,193
INVESTING ACTIVITIES:
Purchases of investment securities (4,055)
Proceeds from maturities of investment securities 16,270
Additions to property, plant and equipment (39,301) (17,384)
Deferred costs and other (287)
-------- --------
Net cash used in investing activities (27,086) (17,671)
FINANCING ACTIVITIES:
Borrowings under revolving term credit facility 11,000
Repayments under line of credit agreement, net (4,000) (3,000)
Purchase of treasury stock and other (1,361)
Proceeds from issuance of stock 3,905 2,432
-------- --------
Net cash provided by (used in) financing activities 9,544 (568)
Effect of exchange rate changes on cash (207) (24)
-------- --------
Decrease in cash and cash equivalents, net (15,501) (5,070)
Cash and cash equivalents, beginning 20,475 13,927
-------- --------
Cash and cash equivalents, ending $ 4,974 $ 8,857
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest of $4,368 and $719, respectively $ 13,712 $ 18,896
Income taxes 1,669 2,494
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands, except per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The information set forth in these statements is unaudited and may be subject
to normal year-end adjustments. The information reflects all adjustments
that, in the opinion of management, are necessary to present a fair statement
of the results of operations of Applied Extrusion Technologies, Inc. (the
"Company" or "AET") for the periods indicated. Results of operations for the
interim period ended June 30, 1996 are not necessarily indicative of the
results of operations for the full fiscal year.
Certain information in footnote disclosures normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. These statements
should be read in conjunction with the Company's Annual Report for the year
ended September 30, 1995, filed with the Securities and Exchange Commission
on Form 10-K.
2. INVENTORIES
<TABLE>
Inventories are valued at the lower of cost or market, using the weighted
average cost method. Inventories on June 30, 1996 and September 30, 1995
consisted of the following:
<CAPTION>
JUNE SEPTEMBER
1996 1995
---- ----
<S> <C> <C>
Raw materials $12,009 $10,926
Finished goods 15,609 16,680
------- -------
Total $27,618 $27,606
======= =======
</TABLE>
3. COMMITMENTS AND FOREIGN EXCHANGE CONTRACTS
In connection with the plant expansion projects previously announced by the
Company, management has entered into commitments for future capital expenditures
of approximately $15,175 at June 30, 1996, and anticipates approximately $36,500
of additional expenditures to which it has not yet committed. The Company has
entered into foreign exchange contracts, the last of which expires in November,
1996, to hedge certain firm purchase commitments denominated in German Marks and
Pounds Sterling. Gains and losses on these contracts which result from market
risk associated with changes in the market values of the underlying currencies
are deferred and reported as part of the capitalized asset. At June 30, 1996,
the Company had outstanding foreign exchange contracts with a notional value of
$3,086. These contracts had no carrying value and a net unrealized loss of $22
as of June 30, 1996. The Company does not enter into foreign exchange contracts
for trading purposes.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND JUNE 30, 1995
INTRODUCTION
AET is a leading developer and manufacturer of specialized oriented
polypropylene ("OPP") and apertured films used in consumer product labeling,
flexible packaging, health care and other applications. AET was organized in
1986 to acquire, own and operate certain assets in the plastics products
industry. Through its technological innovations, AET is a leader in the North
American OPP and apertured films markets.
For the purposes of this discussion and analysis, the three and nine month
periods ended June 30, 1996 and 1995 are referred to as the third quarter and
nine months of 1996 and 1995, respectively.
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth, for the periods indicated, the percentages of
the Company's sales represented by certain income and expense items in its
income statement:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30 JUNE 30
------- -------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 77.4 71.9 78.4 71.4
Gross profit .......................... 22.6 28.1 21.6 28.6
Selling, general and administrative ... 8.8 8.3 8.2 8.8
Research and development .............. 3.1 2.8 3.1 2.8
Operating profit ...................... 10.7 17.1 10.3 17.1
Interest expense ...................... 5.3 7.7 5.6 8.6
Net income ............................ 3.2 5.6 2.8 4.6
</TABLE>
Sales for the third quarter of fiscal 1996 were $61,043 versus $64,143 for the
comparable period of fiscal 1995. For the nine months ended June 30, 1996, sales
of $173,859 were slightly ahead of sales for the same period in 1995. The
reduction in sales revenue for the quarter was primarily the result of the lower
selling prices experienced throughout the OPP films industry due to increasingly
competitive pricing initiated during the inventory correction experienced in the
first half of fiscal 1996. The financial impact of the lower selling prices has
been compounded during the quarter by increases in polypropylene resin costs,
the Company's primary raw material. The anticipated rebound in OPP films price
levels has not yet occurred despite strong demand and a tight supply of OPP
films experienced since the second fiscal quarter of 1996. The Company announced
a price increase during the quarter in an effort to restore prices to more
rational levels and also in response to announced increases in resin costs. Our
major domestic competitor did follow with a price increase several weeks later,
but it was smaller and was not implemented or maintained in a consistent manner.
Volume of OPP films sales in the current quarter was flat when compared to sales
in the same quarter of fiscal 1995. As a result of very low levels of finished
inventories at the beginning of the quarter, volume sold was limited by the
Company's production capacity and not customer demand. For the three and nine
months ended June 30, 1996, foreign sales were 5 percent and 8 percent of total
sales, respectively.
Gross profit of $13,818 for the third fiscal quarter of 1996 was lower than the
comparable period of 1995 primarily as a result of insufficient price
realization coupled with increases in resin costs during the quarter. The strong
demand for OPP films in combination with the low level of finished goods
inventory on hand further impacted gross margins due to the impact on
productivity. Record numbers of product changeovers
6
<PAGE> 8
were required to satisfy customers' requirements during this period of tight
film supply, lowering the total pounds produced, and thereby increasing
operating costs per pound. The new eight-meter OPP films line was successfully
brought on-stream during the quarter, and is expected to make a major
contribution to production volume during the fourth quarter.
Operating expenses of $7,269 and $19,711 for the three and nine months ended
June 30, 1996, respectively were comparable to same periods in 1995. Increases
in research and development expense of $174 and $584 for the three and nine
months ended June 30, 1996, respectively, were due to the addition of new
technical personnel. As a result of these additions, the Company introduced
three new products during the third fiscal quarter bringing the number of new or
enhanced products developed in the first nine months of the fiscal year to a
total of nine. The sales and marketing organization has been expanded to support
the 60 percent increase in film production capacity of the Company over the 1996
through 1998 time period and has therefore resulted in higher selling, general
and administrative expenses during the third fiscal quarter of 1996. This
expansion includes the Company's recent strategic initiative for Europe, Latin
America and the Asia Pacific region.
Net interest expense decreased $1,669 and $5,028 for the quarter and nine months
ended June 30, 1996, respectively, over the comparable 1995 periods. These
decreases are due to capitalized interest of $1,660 and $4,368 during the
quarter and nine months ended June 30, 1996, respectively, as well as
proportionately lower amounts of debt outstanding during the 1996 periods versus
1995.
In January 1995, the Company agreed to a settlement of its previously disclosed
shareholder litigation. The Company's portion of the settlement is shown in the
first nine months of 1995 as a non-operating expense of $1,400 or $850 on an
after-tax basis. While the Company believes the litigation was without merit,
management believes it was in the best interest of the Company to settle the
matter.
Income taxes of $3,259 for the first nine months of 1996 were less than the
comparable 1995 period, due to lower pre-tax earnings. Income tax as a percent
of before-tax income remained constant for the quarter and first nine months of
fiscal 1996 and 1995. Earnings per share decreased from 1995 proportionately
more than net income due to the 45 percent increase in shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilized $15,501 of cash and equivalents during the first nine
months of fiscal 1996. Operating activities in fiscal 1996 generated $2,248 in
cash, which was the result of $16,109 net income before depreciation and
amortization and other non-cash expenditures, offset in part by a $13,861 net
increase in working capital accounts. The net working capital increase resulted
from a $9,720 decrease in accounts payable and accrued expenses, an increase of
$5,121 in prepaid expenses and other assets offset in a small part by a decrease
in accounts receivable of $992. The decrease in accounts payable and accrued
expenses was due to lower average raw material costs during the current fiscal
quarter compared to the same quarter of fiscal 1995, the lack of bonuses
accrued due to lower operating profit levels and reduced interest accrual.
Interest paid during the nine months of fiscal 1996, which includes two
payments of semi-annual bond interest, amounted to $18,080. Cash and
equivalents and investment securities were utilized to fund capital expenditures
of $39,301, including $24,950 related to the two previously announced capacity
additions.
In conjunction with the April 7, 1994 acquisition of substantially all the
assets of the packaging films group of Hercules, Inc., the Company entered into
a Credit Agreement with a group of lenders to provide the Company with senior
bank financing in an amount up to $81,660. The Credit Agreement provided for a
$25,000 Term Loan Facility, a $50,000 Revolving Credit Facility, and a $6,660
standby letter of credit in support of the Company's currently outstanding
industrial revenue bond, each of which has a final maturity in 1999 and is
secured by all of the assets of the Company. In December 1994, the Company
amended the Credit Agreement to permit the Company to pay down any amounts
borrowed under the Term Loan Facility and later reborrow such amounts up to the
maximum availability. This Revolving Term Loan Facility
7
<PAGE> 9
provides for reductions in the maximum borrowing equal to $1,000 per quarter for
19 consecutive quarters, and a final reduction of $6,000. The Company has not
utilized any of its $50,000 Revolving Credit Facility and has $9,000 available
under its Revolving Term Loan Facility, after borrowings of $7,000 outstanding
at June 30, 1996.
In addition to the Credit Agreement, the Company issued $150,000 in Senior Notes
to finance the acquisition. The Senior Notes, which bear interest at 11.5
percent payable semiannually, do not require periodic principal payments and
mature, in full, in 2002.
INFLATION
Management reviews the prices charged for its products on a regular basis. When
market conditions allow, adjustments are made to reflect changes in product
costs due to fluctuations in the cost of materials and labor as well as
inflation. Raw materials make up a significant portion of the Company's costs
and have fluctuated over the past two years.
CAUTIONARY STATEMENTS
Except for the presentation and discussion of historical information contained
herein, the matters discussed in this report are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those contained in the forward-looking statements, including the
timely development and acceptance of new products, the ability to fill new
capacity, fluctuations in raw materials prices, the loss of one or more
significant customers, the impact of competitive products and pricing, the
timely completion of capital projects, and other risks detailed in the section
entitled "Risk Factors" in the Company's Prospectus, dated August 10, 1995 on
file with the Securities and Exchange Commission.
8
<PAGE> 10
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.
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Registrant)
By: /s/ Anthony J. Allott
-----------------------
Vice President and
Chief Financial Officer
August 1, 1996
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,974
<SECURITIES> 0
<RECEIVABLES> 33,169
<ALLOWANCES> 819
<INVENTORY> 27,618
<CURRENT-ASSETS> 8,658
<PP&E> 270,254
<DEPRECIATION> 34,009
<TOTAL-ASSETS> 320,275
<CURRENT-LIABILITIES> 31,316
<BONDS> 163,500
<COMMON> 102
0
0
<OTHER-SE> 106,181
<TOTAL-LIABILITY-AND-EQUITY> 320,275
<SALES> 173,859
<TOTAL-REVENUES> 173,859
<CGS> 136,218
<TOTAL-COSTS> 136,218
<OTHER-EXPENSES> 19,711
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 9,783
<INCOME-PRETAX> 8,147
<INCOME-TAX> 3,259
<INCOME-CONTINUING> 4,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,888
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
