<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, 1997 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: 10,538,686 shares of Common
Stock, $.01 par value per share, as of August 11, 1997.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE SEPTEMBER
30, 1997 30, 1996
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,674 $ 3,266
Accounts receivable, net of allowance for doubtful accounts of $920
on june 30, 1997 and $750 on september 30, 1996 40,498 34,937
Inventory 33,820 30,582
Prepaid expenses and deferred taxes 7,202 9,407
-------- --------
Total current assets 87,194 78,192
Property, plant and equipment, net 271,027 245,546
Intangibles and deferred finance charges, net 5,007 5,860
Long-term note receivable and other assets 2,459 2,106
-------- --------
$365,687 $331,704
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 16,914 $ 16,294
Accrued expenses 15,946 17,009
Accrued interest 5,050 8,978
Current portion of long-term debt 4,000
-------- --------
Total current liabilities 41,910 42,281
Long-term debt 191,500 165,500
Deferred taxes and other credits 18,458 15,588
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, 10,762 at
June 30, 1997 and 10,529 shares at September 30, 1996 108 105
Additional paid-in capital 91,963 89,638
Retained earnings 24,996 21,444
Cumulative translation adjustments (24) 277
-------- --------
117,043 111,464
Treasury stock and other, 327 and 320 shares at June 30, 1997
and September 30, 1996, respectively (3,224) (3,129)
-------- --------
Total stockholders' equity 113,819 108,335
-------- --------
$365,687 $331,704
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 3
<TABLE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
SALES $70,076 $61,043
Cost of sales 54,731 47,225
------- -------
GROSS PROFIT 15,345 13,818
OPERATING EXPENSES:
Selling, general and administrative 6,204 5,363
Research and development 2,122 1,906
------- -------
Total operating expenses 8,326 7,269
------- -------
OPERATING PROFIT 7,019 6,549
NON-OPERATING EXPENSES:
Acquisition costs 1,500
Interest expense, net 4,278 3,247
------- -------
Total non-operating expenses 5,778 3,247
Income before income taxes 1,241 3,302
Income tax expense 496 1,321
------- -------
NET INCOME $ 745 $ 1,981
======= =======
EARNINGS PER COMMON SHARE $ .07 $ .18
======= =======
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 11,241 10,979
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
<TABLE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
SALES $198,014 $173,859
Cost of sales 153,916 136,218
-------- --------
GROSS PROFIT 44,098 37,641
OPERATING EXPENSES:
Selling, general and administrative 17,572 14,309
Research and development 6,245 5,402
-------- --------
Total operating expenses 23,817 19,711
-------- --------
OPERATING PROFIT 20,281 17,930
NON-OPERATING EXPENSES:
Acquisition costs 1,500
Interest expense, net 12,861 9,783
-------- --------
Total non-operating expenses 14,361 9,783
-------- --------
Income before income taxes 5,920 8,147
Income tax expense 2,368 3,259
-------- --------
NET INCOME $ 3,552 $ 4,888
======== ========
EARNINGS PER COMMON SHARE $ .32 $ .45
======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 11,176 10,954
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,552 $ 4,888
Adjustment to reconcile net income to net cash provided by
Operating activities:
Provision for doubtful accounts 231 125
Depreciation and amortization 13,029 10,214
Deferred income taxes 2,686 882
Changes in assets and liabilities which provided (used) cash:
Prepaid expenses and other assets 1,852 (5,121)
Accounts payable and accrued expenses (4,282) (9,720)
Accounts receivable and inventory (9,030) 980
-------- --------
Net cash provided by operating activities 8,038 2,248
INVESTING ACTIVITIES:
Purchases of investment securities (4,055)
Proceeds from maturities of investment securities 16,270
Additions to property, plant and equipment (37,657) (39,301)
-------- --------
Net cash used in investing activities (37,657) (27,086)
FINANCING ACTIVITIES:
Borrowings under credit agreement 46,000 11,000
Repayments under line of credit agreement, net (16,000) (4,000)
Purchase of treasury stock and other (1,361)
Proceeds from issuance of stock 2,328 3,905
-------- --------
Net cash provided by financing activities 32,328 9,544
Effect of exchange rate changes on cash (301) (207)
-------- --------
Increase (decrease) in cash and cash equivalents, net 2,408 (15,501)
Cash and cash equivalents, beginning 3,266 20,475
-------- --------
Cash and cash equivalents, ending $ 5,674 $ 4,974
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest of $3,435 and $5,106, respectively $ 16,110 $ 13,712
Income taxes 2 1,669
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(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, 1997 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, 1996, filed with the Securities and Exchange Commission
on Form 10-K.
2. INVENTORIES
Inventories are valued at the lower of cost or market, using the weighted
average cost method. Inventories on June 30, 1997 and September 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
JUNE SEPTEMBER
1997 1996
---- ----------
<S> <C> <C>
Raw materials $ 9,059 $ 11,693
Finished goods 24,761 18,889
---------- -----------
Total $ 33,820 $ 30,582
========== ===========
</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 $14,262 at June 30, 1997, and anticipates
approximately $13,000 of additional expenditures to which it has not yet
committed. The Company has entered into foreign exchange contracts, the
last of which expires in February 1998, to hedge certain firm purchase
commitments denominated in German Marks, Pounds Sterling and Japanese Yen.
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,
1997, the Company had outstanding foreign exchange contracts with a
notional value of $6,562. These contracts had no carrying value and a net
unrealized loss of $347 as of June 30, 1997. The Company does not enter
into foreign exchange contracts for trading purposes.
5
<PAGE> 7
4. NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
which will be effective during the fourth calendar quarter of 1997. SFAS
No. 128 will require the Company to restate all previously reported
earnings per share information to conform with the new pronouncement's
requirements. The Company will adopt SFAS No. 128 in the first fiscal
quarter of 1998. Had SFAS No. 128 been effective for the quarters ended
June 30, 1997 and 1996, reported earnings per share on a pro forma basis
would have been as follows:
JUNE 30, JUNE 30,
1997 1996
---- ----
Primary $ .07 $ .19
Fully diluted .07 .19
The Financial Accounting Standards Board has issued Statement No.'s 130
"Reporting Comprehensive Income" and No. 131 "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income (revenues, expenses, gains and losses) be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The provisions of this statement are effective for fiscal
years beginning after December 15, 1997. Management believes that changes made
to comply with this statement will not affect financial position or net income
as previously reported.
Statement No. 131 requires public business enterprises to report financial and
descriptive information about its operating segments. The provisions of this
statement are effective for periods beginning after December 15, 1997.
Management believes that implementation of this statement will not affect
financial position or results of operations as previously reported, but may
impact the level of disclosure of its segment information.
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,
1997 AND JUNE 30, 1996
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. AET is a leader in the North American OPP and apertured films markets.
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.
In March 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will
be effective during the fourth quarter of calendar 1997. SFAS No. 128, which
relates to a new method to calculate earnings per share, will require the
Company to restate all previously reported earnings per share information to
conform with the new pronouncement's requirements.
For the purposes of this discussion and analysis, the three and nine month
periods ended June 30, 1997 and 1996 are referred to as the third quarter and
nine months of 1997 and 1996, respectively.
6
<PAGE> 8
RESULTS OF OPERATIONS
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30 JUNE 30
------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 78.1 77.4 77.7 78.4
Gross profit........................... 21.9 22.6 22.3 21.6
Selling, general and administrative.... 8.9 8.8 8.9 8.2
Research and development............... 3.0 3.1 3.2 3.1
Operating profit....................... 10.0 10.7 10.2 10.3
Interest expense....................... 6.1 5.3 6.5 5.6
Net income............................. 1.1 3.2 1.8 2.8
</TABLE>
Sales for the third quarter of 1997 of $70,076 exceeded the third quarter of
1996 by $9,033, or 14.8%. This increase was due primarily to a 21% higher
volume of OPP films sold during the 1997 third quarter compared to the same
quarter of 1996, offset in part by lower average selling prices. The lower
average selling prices result from a less favorable sales mix, impacted by a
higher percentage of secondary material production due in part to the
manufacture of a number of new products. For the nine months ended June 30,
1997, the Company reported sales of $198,014 which represents a 13.9% increase
over the nine months ended June 30, 1996. This sales revenue growth was
facilitated by new capacity brought on-stream late in fiscal 1996, investments
in new product development and an expanded sales and marketing organization.
Approximately 40% of fiscal 1997 year-to date sales were from new products or
enhancements developed by the Company within the past three years. Foreign
sales comprised 10% of total sales and foreign operating profit was 11% of total
operating profit for the nine months ended June 30, 1997.
Gross profit of $15,345 for the third fiscal quarter of 1997 increased by
$1,527, or 11.1%, over the comparable 1996 period. Gross profit as a percentage
of sales was 21.9% for the three months ended June 30, 1997 versus 22.6% for the
same period of 1996. For the nine months ended June 30, 1997, gross profit was
$44,098 or $6,457 higher than the same fiscal 1996 period. The increases were
primarily the result of significantly higher sales volume as a result of both
new capacity and investments made in new product development offset in part by
higher manufacturing costs and production inefficiencies. These inefficiencies
related primarily to process equipment downtime and the production of secondary
materials as discussed above.
Selling, general and administrative expenses of $6,204 and $17,572 for the three
and nine months ended June 30, 1997, respectively, were $841 and $3,263 higher
than the comparable 1996 levels. Research and development expenses for the third
quarter and nine months ended June 30, 1997 were $216 and $843 higher than the
comparable prior year periods. The higher expense levels were attributable to
the ongoing initiatives of the Company to increase capacity, enhance its product
offerings and expand the reach of the sales and marketing organization. These
investments are integral parts of the Company's strategy to support the 60%
increase in its production capacity over a two year period, and are expected
to increase only nominally to support the second phase of this expansion in
fiscal 1998.
In the third quarter of fiscal 1997, the Company recorded a one-time charge of
$1,500 or $900 after taxes, representing costs incurred in connection with
acquisition discussions which were terminated during the quarter. The Company
also intends to divest certain of its non-films operations and to reinvest the
proceeds in its OPP films business. The core businesses not included in these
planned divestitures are OPP films and apertured films for the medical and
filtration markets.
7
<PAGE> 9
Net interest expense increased $1,031 and $3,078 for the quarter and nine months
ended June 30, 1997, respectively, over the same periods of 1996 due to reduced
levels of capitalized interest on construction projects as well as higher
outstanding debt balances primarily related to borrowings in connection with the
completed capacity expansion projects.
Income taxes of $496 and $2,368 for the third quarter and nine months of fiscal
1997, respectively, were lower than 1996, due to lower pre-tax earnings. Income
tax as a percent of before-tax income remained constant for the quarter and nine
months ended June 30, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In conjunction with the April 7, 1994 acquisition of substantially all the
assets of the packaging films group of Hercules, Inc. (the "Acquisition"), 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. 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. At June 30, 1997, the Company had $24,000 available under its
Revolving Credit Facility. As a result of the one-time charge discussed above in
connection with terminated acquisitions during the quarter, the Company's fixed
charge coverage ratio under the terms of the Credit Agreement was below the
required covenant level. The Company has received a waiver from the lending
group.
In addition to the Credit Agreement, the Company issued $150,000 in Senior Notes
to finance the 1994 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.
The Company generated $2,408 of cash and cash equivalents during the first nine
months of fiscal 1997. Operating activities in fiscal 1996 generated $8,038 in
cash, which was the result of $19,498 net income before depreciation and
amortization and other non-cash expenditures, offset in part by an $11,460 net
increase in working capital accounts. The net working capital increase resulted
from a combined $9,030 increase in accounts receivable and inventory, a $4,282
decrease in accounts payable and accrued expenses, partially offset by an
increase of $1,852 in prepaid expenses and other assets. Interest paid during
the first nine months of fiscal 1997, including two payments of semi-annual bond
interest, amounted to $19,545. Capital expenditures for the nine months ended
June 30, 1997 were $37,657 including $13,648 related to the Company's expansion
programs and were offset by net borrowings of $30,000.
8
<PAGE> 10
INFLATION
Management reviews the prices charged for its products on a regular basis. When
market conditions allow, adjustments are made to reflect changes in demand or
product costs due to fluctuations in the cost of materials, labor and inflation.
Raw materials make up a significant portion of the Company's costs and have
historically fluctuated. There can be no assurance, however, that future market
conditions will support a direct correlation between raw material cost
fluctuations and finished product films pricing.
Except for the historical information contained herein, the matters discussed in
this report are forward-looking statements that involve risks and uncertainties,
including those related to the timely development and acceptance of new
products, 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, the success of the Company's efforts to
expand into new markets and other risks detailed in the Company's prospectuses
dated August 16, 1995 and May 20, 1994, its Annual Report on Form 10-K for the
year ended September 30, 1996 and from time to time in the Company's other
reports filed with the Securities and Exchange Commission.
9
<PAGE> 11
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 14, 1997
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 5,674
<SECURITIES> 0
<RECEIVABLES> 41,418
<ALLOWANCES> 920
<INVENTORY> 33,820
<CURRENT-ASSETS> 87,194
<PP&E> 320,533
<DEPRECIATION> 49,506
<TOTAL-ASSETS> 365,687
<CURRENT-LIABILITIES> 41,910
<BONDS> 191,500
0
0
<COMMON> 108
<OTHER-SE> 113,711
<TOTAL-LIABILITY-AND-EQUITY> 365,687
<SALES> 198,014
<TOTAL-REVENUES> 198,014
<CGS> 153,916
<TOTAL-COSTS> 153,916
<OTHER-EXPENSES> 25,086
<LOSS-PROVISION> 231
<INTEREST-EXPENSE> 12,861
<INCOME-PRETAX> 5,920
<INCOME-TAX> 2,368
<INCOME-CONTINUING> 3,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,552
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
