<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.
March 31, 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: 10,426,076 shares of Common
Stock, $.01 par value per share, as of May 6, 1996.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED EXTRUSION TECHNOLOGIES, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<CAPTION>
MARCH SEPTEMBER
31, 1996 30, 1995
-------- ---------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 14,384 $ 20,475
Investment securities 12,044
Accounts receivable, net of allowance for doubtful accounts of $773
on March 31, 1996 and $806 on September 30, 1995 34,745 33,467
Inventory 27,412 27,606
Prepaid expenses and deferred taxes 7,671 5,908
-------- --------
Total current assets 84,212 99,500
Property, plant and equipment, net 226,086 206,743
Intangibles and deferred finance charges, net 6,470 7,081
Long-term note receivable and other assets 4,134 1,153
-------- --------
$320,902 $314,477
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 12,078 $ 18,123
Accrued expenses 11,570 17,160
Accrued interest 8,796 8,776
Current portion of long-term debt 4,000
-------- --------
Total current liabilities 36,444 44,059
Long-term debt 160,500 156,500
Deferred taxes and other credits 21,157 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, 10,401 at
March 31, 1996 and 9,986 shares at September 30, 1995 104 100
Nonvoting -- 135 shares at September 30, 1995 1
Additional paid-in capital 87,423 84,823
Retained earnings 17,687 14,780
Cumulative translation adjustments 295 501
-------- --------
105,509 100,205
Treasury stock and other, 345 and 149 shares at March 31, 1996
and September 30, 1995, respectively (2,708) (1,147)
-------- --------
Total stockholders' equity 102,801 99,058
-------- --------
$320,902 $314,477
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE> 3
APPLIED EXTRUSION TECHNOLOGIES, INC.
<TABLE>
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
SALES $62,565 $58,105
Cost of sales 50,087 41,080
------- -------
GROSS PROFIT 12,478 17,025
OPERATING EXPENSES:
Selling, general and administrative 4,745 5,406
Research and development 1,918 1,597
------- -------
Total operating expenses 6,663 7,003
------- -------
OPERATING PROFIT 5,815 10,022
NON-OPERATING EXPENSES:
Interest expense, net 3,308 4,913
------- -------
Income before income taxes 2,507 5,109
Income tax expense 1,003 2,044
------- -------
NET INCOME $ 1,504 $ 3,065
======= =======
EARNINGS PER COMMON SHARE $ .14 $ .43
======= =======
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 11,012 7,165
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 4
APPLIED EXTRUSION TECHNOLOGIES, INC.
<TABLE>
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
SALES $112,816 $108,847
Cost of sales 88,993 77,366
-------- --------
GROSS PROFIT 23,823 31,481
OPERATING EXPENSES:
Selling, general and administrative 8,946 9,817
Research and development 3,496 3,048
-------- --------
Total operating expenses 12,442 12,865
-------- --------
OPERATING PROFIT 11,381 18,616
NON-OPERATING EXPENSES
Interest expense, net 6,536 9,895
Litigation settlement 1,400
-------- --------
Total non-operating expenses 6,536 11,295
-------- --------
Income before income taxes 4,845 7,321
Income tax expense 1,938 2,929
-------- --------
NET INCOME $ 2,907 $ 4,392
======== ========
EARNINGS PER COMMON SHARE $ .27 $ .62
======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 10,942 7,101
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 5
APPLIED EXTRUSION TECHNOLOGIES, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(In thousands)
(Unaudited)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,907 $ 4,392
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Provision for doubtful accounts 82 78
Depreciation and amortization 6,766 6,532
Deferred income taxes 693 1,726
Changes in assets and liabilities which provided (used) cash:
Prepaid expenses and other current assets (4,744) 750
Accounts payable and accrued expenses (6,011) 2,834
Accounts receivable and inventory (1,166) (7,276)
-------- --------
Net cash provided by (used in) operating activities (1,473) 9,036
INVESTING ACTIVITIES:
Purchases of investment securities (4,055)
Proceeds from maturities of investment securities 16,099
Additions to property, plant and equipment (25,498) (9,210)
Deferred costs and other (209)
-------- --------
Net cash used in investing activities (13,454) (9,419)
FINANCING ACTIVITIES:
Borrowings under revolving term credit facility 8,000
Repayments under line of credit agreement, net (2,000)
Purchase of treasury stock and other (1,561)
Proceeds from issuance of stock 2,603 1,856
-------- --------
Net cash provided by (used in) financing activities 9,042 (144)
Effect of exchange rate changes on cash (206) (129)
-------- --------
Decrease in cash and cash equivalents, net (6,091) (656)
Cash and cash equivalents, beginning 20,475 13,927
-------- --------
Cash and cash equivalents, ending $ 14,384 $ 13,271
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest of $2,656 and $135, respectively $ 6,384 $ 9,345
Income taxes 2,141 2,019
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 6
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 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 March 31, 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 March 31, 1996 and September 30, 1995
consisted of the following:
<CAPTION>
MARCH SEPTEMBER
1996 1995
---- ----
<S> <C> <C>
Raw materials $10,056 $10,926
Finished goods 17,356 16,680
-------- --------
Total $27,412 $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 $22,187 at March 31, 1996, and anticipates
approximately $37,500 of additional expenditures to which it has not yet
committed. The Company has entered into foreign exchange contracts, the
last of which expires in September, 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 March 31, 1996, the Company
had outstanding foreign exchange contracts with a $1,777 notional value.
These contracts had no carrying value and a net unrealized gain of $27 as
of March 31, 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 SIX MONTHS ENDED
MARCH 31, 1996 AND MARCH 31, 1995
INTRODUCTION
AET is a leading developer and manufacturer of highly 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 six month
periods ended March 31, 1996 and 1995 are referred to as the second quarter and
six 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 SIX MONTHS ENDED
------------------ ----------------
MARCH 31 MARCH 31
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 80.1 70.7 78.9 71.1
Gross profit........................... 19.9 29.3 21.1 28.9
Selling, general and administrative.... 7.6 9.3 7.9 9.0
Research and development............... 3.1 2.7 3.1 2.8
Operating profit....................... 9.3 17.2 10.1 17.1
Interest expense....................... 5.3 8.5 5.8 9.1
Net income............................. 2.4 5.3 2.6 4.0
</TABLE>
Sales for the second quarter of fiscal 1996 of $62,565 exceeded the same quarter
of fiscal 1995 by 7.7 percent, as a result of a 13.6 percent increase in volume
offset in part by lower average selling prices. For the six months ended March
31, 1996, sales of $112,816 were slightly ahead of sales for the same period in
1995. The rebound in demand in the second quarter reflected the end of the
inventory correction experienced by the industry since late fiscal 1995. Sales
volumes in the first fiscal quarter were negatively impacted by this softness in
demand as end users and converters of OPP films worked down their inventories in
anticipation of lower films pricing due to rapid declines in resin costs. Resin
costs, which had decreased 23 percent from September 1995 to December 1995,
stabilized during the second fiscal quarter and, as discussed below, are
expected by some industry sources to increase this summer and stabilize later in
the year. The Company's average selling prices were lower in the second quarter
of 1996 due to competitors' price reductions in reaction to the temporary
softness experienced in the first fiscal quarter and a less favorable product
mix. For the three and six months ended March 31, 1996, foreign sales were 11
percent of total sales versus 13 percent for the comparable periods of 1995.
Certain of the end use markets for the Company's OPP films are seasonal. For
example, overall demand in the snack food, soft drink and candy markets is
generally higher in the spring and summer, typically leading to higher revenues
during these seasons.
6
<PAGE> 8
Gross profit decreased in the second quarter of 1996 primarily as a result of
the previously discussed inventory correction related reductions in average
selling price. In the first fiscal quarter, several OPP films manufacturers
reacted to the previously discussed softness by lowering prices. In certain
cases, competitors lowered prices in excess of cost declines. Further impacting
the Company's average selling prices was an unfavorable shift in product mix as
the Company sold more lower margin products, and sold into typically lower price
markets in order to fill capacity early in the second quarter. Profit levels are
expected to increase in the second half of the year as incremental capacity from
the Company's previously announced new eight-meter tenter line is sold,
however, margin growth will be dependent on a number of industry and market
factors, including a return by the industry to more rational pricing. In
addition, resin suppliers recently increased polypropylene resin costs by $.03
per pound in May and have announced another $.03 per pound increase this summer.
Price increases by the Company will be necessary to cover these cost increases.
The Company has announced such price increases, and is currently assessing
market reaction.
Operating expenses for the three and six months ended March 31, 1996 were below
comparable 1995 levels by $340 and $423, respectively. These decreases were the
result of cost reduction programs implemented throughout the Company as well as
lower accruals for incentive-based compensation, reflecting the lower operating
profit levels of the Company. These reductions in selling, general and
administrative expenses were offset in part by increased investment in research
and development and selling expenses. The Company remains committed to filling
its increased capacity over the next two years and beyond with high-value films,
and has therefore increased its investment in product development. As a result,
six new products or product enhancements have been introduced in the first six
months of this fiscal year, with another six anticipated by fiscal year end. The
sales and marketing organization has also been expanded to support this recent
increase in OPP films capacity.
Net interest expense decreased $1,605 and $3,359 for the quarter and six months
ended March 31, 1996, respectively, over the comparable periods of 1995. These
decreases are due to interest of $1,424 and $2,656 being capitalized in the
quarter and six months ended March 31, 1996, respectively, and 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 six 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 $1,938 for the first six months of 1996 were less than the
comparable period of 1995, due to lower pre-tax earnings. Income tax as a
percent of before tax income remained constant for the quarter and first six
months of fiscal 1996 and 1995. Earnings per share decreased from 1995
proportionately more than net income due to the 55 percent increase in shares
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilized $6,091 of cash and equivalents during the first six months
of fiscal 1996. Operating activities in 1996 used $1,473 in cash, which was the
result of $10,448 of net income before depreciation and amortization and other
non-cash expenditures, and a $11,921 net decrease in cash due to changes in
working capital accounts. The net working capital decrease resulted from a $194
decrease in inventory, a $6,011 decrease in accounts payable and accrued
expenses, offset by a $4,744 increase in prepaid expenses and other assets, and
an increase in accounts receivable of $1,360. The decrease in accounts payable
was due to lower raw material costs and the timing of certain significant raw
materials purchases and payments. Interest paid during the six months of 1996,
which includes the payment of semi-annual bond interest, amounted to $9,040.
Cash and equivalents and investment securities were utilized to fund capital
expenditures of $25,498, including $17,438 related to the two previously
announced capacity additions.
7
<PAGE> 9
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 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 $8,000 outstanding at March
31, 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%
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. The cost of raw materials for most of the Company's products
increased through most of fiscal year 1995. However, the demand for the
Company's products was also strong during this time, allowing for much of the
increases to be passed through to customers. Cost of these materials began to
decrease in the fourth quarter of fiscal 1995, continued to decrease into the
second quarter of fiscal 1996 and stabilized during the same quarter. Current
industry estimates are that resin costs will increase over the next several
months and then slowly decline.
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
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on January 30, 1996
(the "Annual Meeting"). Proxies for the Annual Meeting were solicited pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended. A total
of 8,663,716 shares of Common Stock were represented at the meeting by proxy.
At the Annual Meeting, Messrs. Amin J. Khoury, Thomas E. Williams and Mark
Harmeling were elected as Class I directors of the Company, for a term of three
years expiring at the Company's 1999 annual meeting. The voting for the Class I
directors was as follows: 8,615,352 in favor of and 48,364 withheld from Mr.
Khoury; 8,613,802 in favor of and 49,914 withheld from Mr. Williams; and
8,611,452 in favor of and 52,264 withheld from Mr. Harmeling.
At the Annual Meeting, the Company's adoption of the 1996 Employee Stock
Purchase Plan (the "1996 Plan") was approved and the voting was as follows:
5,867,070 in favor; 282,245 opposed; 34,871 abstained; and 2,479,530 did not
vote. The Company has reserved 500,000 shares of its Common Stock for issuance
and sale under the 1996 Plan.
At the Annual Meeting, the number of option shares available for grant under the
Company's 1994 Stock Option Plan (the "Option Plan") were increased by 350,000
shares. The voting for the amendment to the Option Plan was as follows:
3,341,958 in favor; 2,574,222 opposed; 308,756 abstained; and 2,438,780 did not
vote.
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/ David N. Terhune
-------------------------
Senior Vice President and
Chief Financial Officer
May 7, 1996
9
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000874389
<NAME>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 14,384
<SECURITIES> 0
<RECEIVABLES> 35,518
<ALLOWANCES> 773
<INVENTORY> 27,412
<CURRENT-ASSETS> 84,212
<PP&E> 256,949
<DEPRECIATION> 30,863
<TOTAL-ASSETS> 320,902
<CURRENT-LIABILITIES> 36,444
<BONDS> 160,500
<COMMON> 104
0
0
<OTHER-SE> 102,697
<TOTAL-LIABILITY-AND-EQUITY> 320,902
<SALES> 112,816
<TOTAL-REVENUES> 112,816
<CGS> 88,993
<TOTAL-COSTS> 88,993
<OTHER-EXPENSES> 12,442
<LOSS-PROVISION> 82
<INTEREST-EXPENSE> 6,536
<INCOME-PRETAX> 4,845
<INCOME-TAX> 1,938
<INCOME-CONTINUING> 2,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,907
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
