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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
------------------------
APPLIED EXTRUSION TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19188 51-0295865
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification No.)
</TABLE>
3 CENTENNIAL DRIVE
PEABODY, MASSACHUSETTS 01960
(Address of Principal Executive Offices)
(978) 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 / /.
The number of shares of the Registrant's Common Stock, $.01 par value per share,
outstanding as of August 1, 2000 was 11,836,036.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,266 $ 5,323
Accounts receivable, net of allowance for doubtful accounts of $1,639
at June 30, 2000 and $1,554 at September 30, 1999....................... 45,477 36,857
Inventory...................................................................... 48,216 38,611
Prepaid expenses and deferred taxes............................................ 6,144 6,522
-------- --------
Total current assets................................................... 102,103 87,313
Property, plant and equipment, net................................................. 277,365 278,118
Intangibles and deferred finance charges, net...................................... 2,749 3,035
Long-term note receivable and other assets......................................... 8,555 6,584
--------- ---------
$ 390,772 $ 375,050
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 13,431 $ 18,144
Accrued interest............................................................... 5,763 9,113
Accrued expenses and other current liabilities................................. 31,721 28,311
--------- ---------
Total current liabilities.............................................. 50,915 55,568
Long-term debt..................................................................... 207,500 182,500
Deferred taxes and other credits................................................... 28,175 37,941
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 1,000 shares, of which 300 are
designated Junior Preferred Stock; no stock outstanding
Common stock, $.01 par value; 30,000 shares authorized; 11,968 and
11,575 shares issued at June 30, 2000 and September 30, 1999,
respectively .............................................................. 120 116
Additional paid-in capital......................................................... 100,038 97,701
Retained earnings.................................................................. 8,251 5,269
Accumulated other comprehensive loss............................................... (1,853) (1,528)
--------- ---------
106,556 101,558
Treasury stock, at cost, and other, 245 and 247 shares at June 30, 2000
and September 30, 1999, respectively....................................... (2,374) (2,517)
--------- ---------
Total stockholders' equity ........................................................ 104,182 99,041
--------- ---------
$ 390,772 $ 375,050
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED)
<S> <C> <C>
SALES............................................. $ 73,700 $ 62,269
Cost of sales..................................... 59,398 48,512
--------- --------
GROSS PROFIT...................................... 14,302 13,757
OPERATING EXPENSES:
Selling, general and administrative........... 7,029 6,903
Research and development...................... 1,779 1,933
--------- --------
Total operating expenses.................. 8,808 8,836
--------- --------
OPERATING PROFIT.................................. 5,494 4,921
NON-OPERATING EXPENSES:
Interest expense, net......................... 5,461 4,597
--------- --------
Total non-operating expenses.............. 5,461 4,597
--------- --------
Income before income taxes........................ 33 324
Income tax expense................................ 12 130
--------- --------
NET INCOME........................................ $ 21 $ 194
========= ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE....... $ .00 $ 0.02
========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic......................................... 11,786 11,439
Diluted....................................... 11,938 11,439
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
Net income........................................ $ 21 $ 194
Exchange rate changes............................. (478) 764
--------- --------
COMPREHENSIVE INCOME (LOSS)....................... $ (457) $ 958
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED)
<S> <C> <C>
SALES............................................. $202,596 $176,693
Cost of sales..................................... 156,631 143,343
-------- --------
GROSS PROFIT...................................... 45,965 33,350
OPERATING EXPENSES:
Selling, general and administrative........... 20,492 19,165
Research and development...................... 5,173 5,411
-------- --------
Total operating expenses.................. 25,665 24,576
-------- --------
OPERATING PROFIT.................................. 20,300 8,774
NON-OPERATING EXPENSES:
Interest expense, net......................... 15,641 14,320
Acquisition costs............................. -- 3,462
-------- --------
Total non-operating expenses.............. 15,641 17,782
-------- --------
Income (loss) before income taxes................. 4,659 (9,008)
Income tax expense (benefit)...................... 1,677 (3,603)
-------- --------
NET INCOME (LOSS)................................. $ 2,982 $ (5,405)
======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic......................................... $ .26 $ (0.48)
Diluted....................................... .25 (0.48)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic......................................... 11,658 11,287
Diluted....................................... 11,982 11,287
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
Net income (loss)................................. $ 2,982 $ (5,405)
Exchange rate changes............................. (325) 712
-------- --------
COMPREHENSIVE INCOME (LOSS)....................... $ 2,657 $ (4,693)
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
APPLIED EXTRUSION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ..................................................................... $ 2,982 $ (5,405)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for doubtful accounts.................................................... 319 767
Depreciation and amortization...................................................... 15,728 14,827
Deferred taxes and other credits................................................... (10,364) (11,315)
Changes in assets and liabilities which provided (used) cash:
Prepaid expenses and other current assets...................................... (1,276) (1,080)
Accounts payable and accrued expenses.......................................... (4,656) (5,791)
Accounts receivable and inventory.............................................. (18,543) 7,637
-------- --------
Net cash used in operating activities...................................... (15,810) (360)
INVESTING ACTIVITIES:
Additions to property, plant and equipment............................................. (14,263) (16,460)
Acquisition of AEP assets.......................................................... -- (13,316)
Proceeds from sale/leaseback transaction........................................... -- 29,940
-------- --------
Net cash provided by (used in) investing activities........................ (14,263) 164
FINANCING ACTIVITIES:
Borrowings under line of credit agreement, net......................................... 25,000 1,000
Proceeds from issuance of stock, net................................................... 2,341 2,175
-------- -------
Net cash provided by financing activities.................................. 27,341 3,175
Effect of exchange rate changes on cash................................................ (325) 712
-------- -------
Increase (decrease) in cash and cash equivalents, net.................................. (3,057) 3,691
Cash and cash equivalents, beginning................................................... 5,323 2,279
-------- -------
Cash and cash equivalents, ending...................................................... $ 2,266 $ 5,970
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, including capitalized interest of $1,801 and $2,182, respectively........ $ 20,191 $16,904
Income taxes....................................................................... 174 --
</TABLE>
See notes to condensed consolidated financial statements.
5
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APPLIED EXTRUSION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
(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
consolidated results of operations of Applied Extrusion Technologies, Inc. and
its consolidated subsidiaries (collectively, the "Company" or "AET") for the
periods indicated. Results of operations for the interim periods ended June 30,
2000 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 on Form 10-K for the
year ended September 30, 1999, filed with the Securities and Exchange
Commission.
2. INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
using an average-cost method. Inventories consisted of the following on June 30,
2000 and September 30, 1999:
<TABLE>
<CAPTION>
JUNE SEPTEMBER
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 9,426 $ 7,191
Finished goods 38,790 31,420
-------- ---------
Total $ 48,216 $ 38,611
======== =========
</TABLE>
3. EARNINGS PER SHARE
For the three and nine months ended June 30, 2000, basic income per share of
$.00 and $.26, respectively, was computed based on the weighted average number
of common shares outstanding during the period. Diluted income per share also
includes the impact of 152,000 and 324,000 potential shares from options for the
three and nine months ended June 30, 2000, respectively, computed using the
treasury stock method.
6
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARATIVE RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED
JUNE 30, 2000 WITH THE QUARTER AND NINE MONTHS ENDED JUNE 30, 1999
INTRODUCTION
The Company is the largest producer of oriented polypropylene ("OPP") films in
North America. Consumer product companies worldwide use AET's OPP films in
labeling, packaging and overwrap applications that often require special
attributes such as high gloss, vivid graphics, exceptional clarity and barriers
to air, light and moisture to preserve freshness. The Company generally sells
its film products to converters, which are companies specializing in processes
such as laminating multiple films or other materials together and printing text
and graphics to form the final label or packaging material for end-users.
For the purposes of this discussion and analysis, the periods ended June 30,
2000 and 1999 are referred to as the third quarters of 2000 and 1999,
respectively. All dollar amounts are in thousands.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 80.6 77.9 77.3 81.1
Gross profit.......................... 19.4 22.1 22.7 18.9
Selling, general and administrative... 9.5 11.1 10.1 10.8
Research and development.............. 2.4 3.1 2.6 3.1
Operating profit...................... 7.5 7.9 10.0 5.0
Interest expense...................... 7.4 7.4 7.7 8.1
Net income (loss)..................... 0.0 .3 1.5 (3.1)
</TABLE>
The Company reported third quarter sales of $73,700, an increase of $11,431 or
18.4 percent over the same quarter in 1999, resulting from both a 16 percent
increase in OPP films sales volume and higher average selling prices. Sales in
the first nine months of 2000 increased 14.7 percent to $202,596 compared with
$176,693 in the first nine months of fiscal 1999. Average annual OPP films
industry demand growth of approximately 6.0 percent continued to absorb excess
industry capacity, and should allow more favorable pricing starting in fiscal
2001. Sales and operating profit derived from sales outside the United States
were 19.6 percent of sales and 2.6 percent of operating profit, respectively,
for the three months ended June 30, 2000, compared with 18.6 percent of sales
and 8.0 percent of operating profit for the three months ended June 30, 1999.
For the nine months ended June 30, 2000, sales and operating profit derived from
sales outside the United States were 18.8 percent of sales and 6.8 percent of
operating profit, respectively, compared to 18.6 percent of sales and 7.6
percent of operating profit for the nine months ended June 30, 1999.
Gross profit for the third quarter was $14,302 or 19.4 percent of sales,
compared with $13,757 or 22.1 percent of sales in the third quarter of 1999,
due to significantly higher raw material costs partially offset by improved
manufacturing efficiencies and higher average selling prices. The cost of
polypropylene resin, the Company's primary raw material, has risen
unexpectedly as the result of the dramatic increase in the price of crude
oil. Specifically, polypropylene resin prices have increased 74 percent from
the second quarter of fiscal 1999 and 27 percent over the past five months.
Only a portion of these resin cost increases have been successfully passed on
to the Company's customers in the form of price increases, due to the excess
capacity that still exists in the OPP films industry.
Gross profit for the nine months ended June 30, 2000 was $45,965, or 37.8
percent higher than gross profit in the same period of 1999. Gross margin for
the first nine months of 2000 was 22.7 percent of sales, compared with 20.5
percent in 1999, after adjusting for the cost of a temporary plant shutdown
recorded in the first quarter of 1999. Increased
7
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volume, improvements in manufacturing efficiency and high-end differentiated
products continued to drive profitability, although significantly increased raw
material costs offset their impact, resulting in a decrease in gross margin from
the second to the third fiscal quarter
Total operating expenses of $8,808 for the third quarter of fiscal 2000
represented 12.0 percent of sales compared with $8,836, or 14.2 percent of sales
in the third quarter of 1999. For the nine months ended June 30, 2000 and June
30, 1999, operating expenses were 12.7 and 13.9 percent of sales, respectively,
as sales grew faster than operating expenses in the latter period. This resulted
in a 73.8 percent increase in operating profit, after adjusting for the cost of
a temporary plant shutdown recorded in the first quarter of 1999.
Net interest expense for the third quarter of 2000 of $5,461 was $864 higher
than net interest expense in the third quarter of 1999 due to a higher average
debt balance and higher interest rates on the Revolving Credit Facility in the
third quarter of 2000.
Income tax as a percent of income before income taxes was 36 percent for the
three and nine months ended June 30, 2000 and 40 percent for the three and nine
months ended June 30, 1999. The lower percentage reflects the benefit of tax
planning and is expected to remain at this level for at least the next two
years.
LIQUIDITY AND CAPITAL RESOURCES
In April 2000, the Company amended and restated its principal bank lending
agreement to increase the revolving credit facility (the "Revolving Credit
Facility") to $80,000 from $70,000. The Revolving Credit Facility has a final
maturity of the earlier of (i) November 1, 2001, if the AET Senior Notes are not
refinanced prior to such date; or (ii) January 29, 2003. The Revolving Credit
Facility is secured by all the assets of AET. It includes covenants that limit
borrowings based on certain asset levels, require AET to maintain a minimum
tangible net worth and specified interest coverage and leverage ratios, restrict
payment of cash dividends to stockholders and establish maximum capital
expenditure levels. It also contains other covenants customary in transactions
of this type. At June 30, 2000, AET had $51,000 outstanding under its Revolving
Credit Facility. The Company also has $150,000 of Senior Notes outstanding that
are due on April 7, 2002 with 11.5 percent interest due semiannually on October
1 and April 1 and $6,500 of Revenue Bonds outstanding that are due November 4,
2004.
Operating activities used $15,810 of cash for the nine months ended June 30,
2000, which was the result of net income of $8,665 before depreciation and
amortization and other non-cash expenditures offset by an increase in working
capital of $24,475. The net working capital increase was primarily the result of
decreases in accounts payable and accrued expenses of $4,656, and increases in
inventory, accounts receivable, prepaid expenses and other current assets of
$9,605, $8,938 and $1,276, respectively. In addition, during the quarter,
payments against restructuring reserves reduced such accounts by $534 to $10,112
at June 30, 2000.
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 costs of raw materials make up a significant portion of AET's
costs and have historically fluctuated. There can be no assurance, however, that
future market conditions will support any direct correlation between raw
material cost fluctuations and finished product films pricing as evidenced by
current market dynamics.
SEASONAL NATURE OF CERTAIN OPP MARKETS
Certain of the end-use markets for the Company's OPP films are seasonal. For
example, demand in the snack food, soft drink and candy markets is generally
higher in the spring and summer. As a result, sales and net income are generally
higher in those periods, although actual results can be influenced by numerous
factors, such as raw materials costs, competitive prices and other matters
discussed in this report.
8
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE CONTRACTS
None.
SHORT-TERM AND LONG-TERM DEBT
The Company is exposed to interest rate risk primarily through borrowings under
its Revolving Credit Facility. The Company's policy has been to utilize United
States Dollar denominated borrowings to fund its working capital and investment
needs. Short-term debt, if required, is used to meet working capital
requirements, while long term debt is generally used to finance long term
investments. There is inherent rollover risk for borrowings 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 the
Company's future financing requirements. At June 30, 2000, the Company had no
short-term debt outstanding and had long-term debt outstanding of $207,500, of
which $51,000 was outstanding on its Revolving Credit Facility, which has a
variable interest rate, based on either LIBOR or prime rates. A 10 percent
adverse change in interest rates on the portion of the Company's debt bearing
interest at a variable rate would result in an increase in interest expense of
approximately $495.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS, INCLUDING THOSE RELATED TO THE TIMELY DEVELOPMENT
AND ACCEPTANCE OF NEW PRODUCTS, FLUCTUATIONS IN RAW MATERIALS AND OTHER
PRODUCTION COSTS, 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 EXHIBIT 99 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 1999 AND FROM TIME TO TIME IN THE COMPANY'S OTHER REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
9
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PART II - OTHER INFORMATION
ITEMS 1-3. Not Applicable
ITEM 4. LEGAL PROCEEDINGS
The Company is periodically subject to legal proceedings and claims that have
arisen in the ordinary course of its business and have not been fully
adjudicated. These actions, when ultimately concluded and determined, will not,
in the opinion of management, have a material adverse effect upon the financial
position or results of operations of the Company.
ITEM 5. Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27* Financial Data Schedule.
99(a) Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995.
--------------
(a) Contained in Exhibits to the Registrant's Form 10-K for the fiscal year
ended September 30, 1999.
* Filed herewith
The above referenced exhibits are, as indicated, either filed herewith or have
heretofore been filed with the Commission under the Securities Act and the
Exchange Act and are referred to and incorporated herein by reference to such
filings.
B. REPORTS ON FORM 8-K
None.
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
----------------------------------------
Anthony J. Allott
Vice President, Chief Financial Officer
and Treasurer
August 4, 2000
10
