<PAGE> 1
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 quarterly period ended December 31, 1997
Commission file number 33-96190
AEARO CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
Delaware 13-3840450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Washington Mall, Eighth Floor
Boston, Massachusetts 02108-2610
(Address of principal executive offices) (Zip Code)
(617) 371-4200
(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 [ ]
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AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED DECEMBER 31, 1997
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1997 (UNAUDITED) AND SEPTEMBER 30, 1997 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 AND 1996 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997 AND 1996 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE PAGE 15
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PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,111 $ 5,476
Accounts receivable( net of reserve for 40,951 45,876
doubtful accounts of $1,308 and
$1,301, respectively)
Inventories 39,114 36,693
Deferred and prepaid expenses 3,563 3,397
-------- --------
Total current assets 87,739 91,442
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 62,814 64,948
INTANGIBLE ASSETS, NET 142,516 146,906
OTHER ASSETS 7,103 7,580
-------- --------
Total assets $300,172 $310,876
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AEARO CORPORATION
BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 11,679 $ 10,937
Accounts payable and accrued liabilities 31,755 36,186
Accrued interest 6,850 3,769
U.S. and foreign income taxes 3,142 2,734
-------- --------
Total current liabilities 53,426 53,626
-------- --------
LONG-TERM DEBT 227,217 233,729
DEFERRED INCOME TAXES 954 883
OTHER LIABILITIES 2,625 2,688
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--45,000 shares -- --
Common stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--97,625 and 96,810 shares at
December 31, and September 30, 1997, respectively 1 1
Additional paid-in capital 32,535 32,476
Retained deficit (6,018) (5,269)
Cumulative foreign currency translation adjustments (10,568) (7,258)
-------- --------
Total stockholders' equity 15,950 19,950
-------- --------
Total liabilities and stockholders' equity $300,172 $310,876
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AEARO CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
------------------------------
1997 1996
------- -------
<S> <C> <C>
NET SALES $69,712 $66,589
COST OF SALES 39,062 38,599
------- -------
Gross profit 30,650 27,990
SELLING AND ADMINISTRATIVE 21,515 20,468
RESEARCH AND TECHNICAL SERVICES 1,271 1,327
AMORTIZATION OF INTANGIBLES 1,724 2,191
OTHER CHARGES (INCOME), NET (438) 450
------- -------
Operating income 6,578 3,554
INTEREST EXPENSE, NET 6,658 6,543
------- -------
loss before provision for income taxes (80) (2,989)
PROVISION (BENEFIT) FOR INCOME TAXES 669 (420)
------- -------
Net loss (749) (2,569)
PREFERRED STOCK DIVIDEND ACCRUED 1,934 1,703
------- -------
Loss applicable to Common Shareholders (2,683) (4,272)
======= =======
LOSS PER COMMON SHARE $(27.62) $(42.98)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 97,136 99,389
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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AEARO CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (749) $(2,569)
Adjustments to reconcile net income (loss) to cash provided (used) by
operating activities-
Depreciation 2,921 2,306
Amortization of intangible assets and deferred financing costs 2,202 2,665
Deferred income taxes 173 --
Other, net 5 (142)
Changes in assets and liabilities-
Accounts receivable 4,805 4,373
Inventory (2,635) (5,156)
Accounts payable and accruals (1,158) (907)
Other, net 184 (1,578)
------- -------
Net cash provided (used) by operating activities 5,748 (1,008)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,348) (1,835)
Proceeds provided by disposals of property, plant and equipment -- 800
------- -------
Net cash used by investing activities (1,348) (1,035)
------- -------
CASH Flows from Financing Activities:
Proceeds from (repayment of) revolving credit facility, net (3,300) 2,300
Repayment of term loans (2,491) (1,933)
Repayment of external long-term debt (35) (572)
Sale of common stock, net 248 488
Increase in shareholder notes, net (188) (11)
------- -------
Net cash provided (used) by financing activities (5,766) 272
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 705
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,365) (1,066)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,476 8,540
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,111 $ 7,474
======= =======
CASH PAID FOR:
Interest $ 3,204 $ 2,958
======= =======
Income taxes $ 98 $ 280
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted
of only normal recurring items. The results of operations for the interim
periods shown in this report are not necessarily indicative of results
for any future interim period or for the entire year. These condensed
consolidated financial statements do not include all disclosures
associated with annual financial statements and accordingly should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10K.
(2) FORMATION ACQUISITION AND FINANCING
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in
June, 1995 to effect the acquisition (the Formation Acquisition) of
substantially all of the assets and liabilities of Aearo Company
(formerly Cabot Safety Corporation) and certain affiliates (the
Predecessor). The Predecessor was wholly owned by Cabot Corporation
(Cabot) prior to the Formation Acquisition. The Formation Acquisition
closed on July 11, 1995, when Aearo Corporation acquired substantially
all of the assets and certain liabilities of the Predecessor for cash,
preferred stock and a 42.5% common equity interest in Aearo Corporation.
Aearo Corporation immediately contributed the acquired assets and
liabilities to Aearo Company, a wholly owned subsidiary of Aearo
Corporation, pursuant to an asset transfer agreement dated June 13, 1995.
Aearo Corporation has no other materials assets, liabilities or
operations other than those that result from its ownership of the common
stock of Aearo Company.
The Formation Acquisition has been accounted for as a purchase
transaction effective as of July 11, 1995, in accordance with Accounting
Principles Board Opinion No. 16, Business Combinations, and EITF Issue
No. 88-16, Basis in Leveraged Buyout Transactions, and accordingly, the
consolidated financial statements for the periods subsequent to July 11,
1995 reflect the purchase price, including transaction costs, allocated
to tangible and intangible assets acquired and liabilities assumed, based
on a portion of their estimated fair values as of July 11, 1995. The
valuation of assets and liabilities acquired reflect carryover basis for
the percentage ownership retained by Cabot.
(3) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
(4) SIGNIFICANT ACCOUNTING POLICIES
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Intangible Assets. Intangible assets consist primarily of the costs of
goodwill, patents, and trademarks purchased in business acquisitions.
Intangible assets are amortized on the straight-line basis over either 25
years or an estimated useful life, whichever is shorter.
Loss per Common Share. Loss per common share has been computed by
dividing loss applicable to common shareholders for the period by the
weighted average number of common shares outstanding during the period.
On October 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, which improves the earnings
per share information provided in the financial statements by simplifying
the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of earnings per share on an
international basis. SFAS No. 128 requires restatement of all
prior-period earnings per share data presented. Prior period earnings
(loss) per share in these financial statements were not affected under
this new pronouncement.
(5) INVENTORIES
Inventories consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
----------- ------------
(unaudited)
<S> <C> <C>
Raw materials $11,579 $10,031
Work in process 8,761 9,982
Finished goods 18,774 16,680
------- -------
$39,114 $36,693
======= =======
</TABLE>
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
(6) DEBT
The In addition, Aearo Company issued $100.0 million of Senior
Subordinated Notes due 2005 (Notes). In May, 1996, Aearo Company and the
Syndicated Lenders amended and restated the Agreement to provide (i) term
loans denominated in U.S., Canadian, British, and German currencies
aggregating $140.0 million (Term Loans and (ii) a revolving credit
facility providing for up to $25.0 million (Revolving Credit Facility),
8
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
(6) DEBT (CONTINUED)
(collectively the Senior Bank Facilities). Under the terms of both the
Senior Bank Facilities and the Notes indenture, Aearo Company is required
to comply with certain financial covenants and restrictions with which
Aearo Company was in compliance at December 31, 1997. At December 31,
1997, the amounts outstanding on the term loans and the revolving credit
facility were $127.2 million and $6.9 million, respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and administrative
proceedings which are being handled in the ordinary course of business.
In the opinion of management of the Company, these suits and claims
should not result in final judgments or settlements which, in the
aggregate, would have a material adverse effect on the Company's
financial condition or results of operations.
During fiscal 1997 the Company received a complaint from Gargoyles, Inc.
alleging that one of the Company's recently introduced plano eyewear
products (Fectoids) infringes a patented lens shape utilized in the
plaintiff's sun and sporting glasses. The Company is defending this
allegation vigorously and the matter is expected to go to trial in fiscal
1998. The ultimate outcome of this case and its impact on the Company's
financial condition and results of operations cannot currently be
determined.
(8) ACQUISITIONS
On May 30, 1996, the Company acquired Peltor Holding AB (the Acquisition)
for approximately $85.6 million. The Acquisition has been accounted for
as a purchase transaction in accordance with Accounting Principles Board
Opinion No. 16, and accordingly, the consolidated financial statements
for the periods subsequent to May 30, 1996, reflect the purchase price,
including transaction costs, allocated to tangible and intangible assets
acquired and liabilities assumed, based on the estimated fair values.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company, including notes thereto, appearing
elsewhere in this Report. This Report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in such forward-looking statements. The factors
that might cause such a difference include, among others, the following: risks
associated with indebtedness; risks related to acquisitions; risks associated
with the conversion to a new management information system; high level of
competition in the Company's markets; importance and costs of product
innovation; risks associated with international operations; product liability
exposure; unpredictability of patent protection and other intellectual property
issues; dependence on key personnel; the risk of adverse effect of economic and
regulatory conditions on sales; and risks associated with environmental matters.
1998 COMPARED TO 1997 RESULTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Change
------------------------- ------------------------ Increase (Decrease)
December 31, Percent of December 31, Percent of -------------------
1997 Net Sales 1996 Net Sales Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Safety Products $59,925 86.0 $58,065 87.2 $ 1,860 3.2
Specialty Composites 9,787 14.0 8,524 12.8 1,263 14.8
------- ----- ------- ----- -------
Total net sales 69,712 100.0 66,589 100.0 3,123 4.7
Cost of Sales 39,062 56.0 38,599 58.0 463 1.2
------- ----- ------- ----- -------
Gross Profit 30,650 44.0 27,990 42.0 2,660 9.5
Operating Expenses-
Selling and administrative 21,515 30.9 20,468 30.7 1,047 5.1
Research and technical service 1,271 1.8 1,327 2.0 (56) (4.2)
Amortization expense 1,724 2.5 2,191 3.3 (467) (21.3)
Other charges(income),net (438) (0.6) 450 0.7 (888) --
------- ----- ------- ----- -------
Operating income 6,578 9.4 3,554 5.3 3,024 85.1
Interest expense, net 6,658 9.5 6,543 9.8 115 1.8
------- ----- ------- ----- -------
Loss before provision for
income taxes (80) (0.1) (2,989) (4.5) (2,909) (97.3)
Provision for income taxes 669 1.0 (420) (0.6) 1,089 --
------- ----- ------- ----- -------
Net loss (749) (1.1) (2,569) (3.9) (1,820) (70.8)
Preferred stock dividend accrued 1,934 2.8 1,703 2.5 231 13.6
------- ----- ------- ----- -------
Loss applicable to common
shareholders (2,683) (3.9) (4,272) (6.4) (1,589) (37.2)
======= ===== ======= ===== =======
Loss per common share (27.62) (42.98) (15.36) (35.7)
======= ======= =======
EBITDA $11,215 16.1 $ 8,041 12.1 $ 3,174 39.5
======= ===== ======= ===== =======
</TABLE>
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RESULTS OF OPERATIONS -- THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1996
Net Sales. Net sales in the three months ended December 31, 1997 increased 4.7%
to $69.7 million from $66.6 million in the three months ended December 31, 1996.
Both operating segments enjoyed growth with Safety Products net sales in the
three months ended December 31, 1997 increasing 3.2% to $59.9 million from $58.1
million in the three months ended December 31, 1996. Sales increased in all
major market segments although growth in Europe was partially offset by the
effect of a stronger U.S. Dollar. Specialty Composites' net sales in the three
months ended December 31, 1997 increased 14.8% to $9.8 million from $8.5 million
in the three months ended December 31, 1996. The increase was primarily driven
by a rebound in the Class 8 truck market versus the period of a year ago.
Gross Profit. Gross Profit in the three months ended December 31, 1997 increased
9.5% to $30.7 million from $28.0 million in the three months ended December 31,
1996. Gross Profit as a percentage of net sales in the three months ended
December 31, 1997 was 44.0% as compared to 42.0% in the three months ended
December 31, 1996. The Gross Profit amount and percentage increased as the
Company overcame the difficulties triggered by the conversion to a new
management information system and the changes in manufacturing processes at the
Southbridge, Massachusetts facility. These improvements have resulted in
decreased spending at the Southbridge facility.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended December 31, 1997 increased 5.1% to $21.5 million from $20.5
million in the three months ended December 31, 1996. Within this increase is a
reduction of $0.2 million of distribution expenses. Although net sales were up
4.7%, distribution expenses decreased as the Company continued to improve
service levels and overcame the difficulties triggered by the conversion to the
new management information system. Sales and marketing expenses decreased by
$0.5 million. These reductions were more than offset by the $1.0 million accrual
of management and employee incentives in the current period compared to no
accrual in the year ago period. Selling and administrative expenses as a
percentage of net sales in the three months ended December 31, 1997 increased to
30.9% of net sales as compared to 30.7% of net sales in the three months ended
December 31, 1996.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended December 31, 1997 remained relatively flat, decreasing
4.2% to $1.27 million from $1.33 million in the three months ended December 31,
1996.
Amortization of Intangibles. Amortization expense in the three months ended
December 31, 1997 decreased 21.3% to $1.7 million from $2.2 million in the three
months ended December 31, 1996. The decrease was due to final purchase
accounting adjustments associated with the acquisition of Peltor. Other Charges
(Income), Net. Other Charges (Income), Net improved to income of $0.4 million
for the three months ended December 31, 1997 as compared to expense of $0.5
million for the three months ended December 31, 1996. This change was a result
of foreign currency transaction gains in the three months ended December 31,
1997 as compared to foreign currency transaction losses in the three months
ended December 31, 1996.
Operating Income. Mainly as a result of an increase in net sales, the Company's
improved service levels, the changes in manufacturing at the Southbridge,
Massachusetts facility, the change in the Peltor acquisition amortization and
the income from foreign currency transaction gains, operating income increased
85.1% to $6.6 million in the three months ended December 31, 1997 from $3.6
million in the three months ended December 31, 1996. Operating income as a
percentage of net sales in the three months ended December 31, 1997 was 9.4% as
compared to 5.3% in the three months ended December 31, 1996.
Provision (Benefit) For Income Taxes. The provision for income taxes in the
three months ended December 31, 1997 was $0.7 million compared to a benefit of
$0.4 million in the three months ended December 31, 1996. The
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Company's foreign subsidiaries have taxable income in their foreign
jurisdictions, but the domestic subsidiaries have a loss for income tax purposes
in the U.S. In the results for the three months ended December 31, 1997 the
Company has not recognized any of the tax benefits which will occur in future
periods if there is taxable income in the U.S.
Interest Expense, Net. Interest expense, net in the three months ended December
31, 1997 increased 1.8% to $6.7 million from $6.5 million in the three months
ended December 31, 1996.
Net Loss. For the three months ended December 31, 1997 the Company had a net
loss of $0.7 million as compared to a net loss of $2.6 million for the three
months ended December 31, 1996.
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. While the
Company believes EBITDA is a useful indicator of its ability to service debt,
EBITDA should not be considered as a substitute for net income determined in
accordance with generally accepted accounting principles as an indicator of
operating performance or as an alternative to cash flow as a measure of
liquidity. Investors should be aware that EBITDA as presented below may not be
comparable to similarly titled measures presented by other companies and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.
EBITDA CALCULATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Change
December 31, Favorable (Unfavorable)
1997 1996 Amount Percent
------- ------ ------ -----
<S> <C> <C> <C> <C>
Operating Income $ 6,578 $3,554 $3,024 85.1 %
Add Backs:
Depreciation 2,921 2,306 615 26.7%
Amortization of Intangibles 1,724 2,191 (467) (21.3)%
Non-operating Costs(Income) (1) (8) (10) 2 20.0 %
------- ------ ------
EBITDA $11,215 $8,041 $3,174 39.5%
======= ====== ====== =====
(1) OTHER CHARGES (INCOME), NET SUMMARY:
Non-operating Costs (Income), Net $ (8) $ (10) $ 2 (20.0)%
Foreign Exchange (430) 460 890 193.5 %
------- ------ ------ -----
Total Other Charges (Income), Net $ (438) $ 450 $ 888 197.3 %
======= ====== ====== =====
</TABLE>
EBITDA for the three months ended December 31, 1997 was $11.2 million as
compared to $8.0 million for the three months ended December 31, 1996. This
increase was due primarily to the increase in net sales, the Company's improved
service levels, the changes in manufacturing at the Southbridge, Massachusetts
facility, and the income from foreign currency transaction gains. EBITDA as a
percentage of net sales in the three months ended December 31, 1997 was 16.1% as
compared to 12.1% in the three months ended December 31, 1996.
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EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and Canada in local currency. While many of the Company's selling and
distribution costs are also denominated in these currencies, a large portion of
product costs are U.S. Dollar denominated. As a result, a decline in the value
of the U.S. Dollar relative to other currencies can have a favorable impact on
the profitability of the Company and an increase in the value of the U.S. Dollar
relative to these other currencies can have a negative effect on the
profitability of the Company. As a result of the acquisition of Peltor, the
Company's operations are also affected by changes in exchange rates relative to
the Swedish Krona. A decline in the value of the Krona relative to other
currencies can have a favorable impact on the profitability of the Company and
an increase in the value of the Krona relative to other currencies can have a
negative impact on the profitability of the Company. During the fourth quarter
of fiscal 1997, the Company initiated the use of forward foreign currency
contracts to mitigate the effects of changes in foreign currency rates on
profitability.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash flow
and debt financing. The Company's uses of those funds consist principally of
debt service, capital expenditures and acquisitions.
The Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i) term
loans denominated in U.S., Canadian, British and German currencies (Term Loans)
and (ii) a revolving credit facility providing for up to $25.0 million
(Revolving Credit Facility), (collectively the Senior Bank Facilities). Under
the terms of both the Senior Bank Facilities and the Notes indenture, Aearo
Company is required to comply with certain financial covenants and restrictions
with which Aearo Company was in compliance at December 31, 1997. At December 31,
1997, the amounts outstanding on the Term Loans and the Revolving Credit
Facility were $127.2 million and $6.9 million, respectively.
Maturities under the Company's Term Loans are: $8.1 million for the remainder of
fiscal 1998, $13.0 million in fiscal 1999, $15.9 million in fiscal 2000, $20.7
million in fiscal 2001, $34.3 million in fiscal 2002 and $35.2 million in fiscal
2003. Other than upon a change of control or as a result of certain asset sales,
or in the event that certain excess funds exist at the end of a fiscal year, the
Company will not be required to make any principal payments in respect of the
Notes until maturity. The Company is required to make interest payments with
respect to both the Senior Bank Facilities and the Notes.
The Company typically makes capital expenditures related primarily to the
maintenance and improvement of manufacturing facilities. Generally the capital
spending is of a relatively short duration, with the complete commitment process
typically involving less than one year. In the three months ended December 31,
1997 the Company spent $1.3 million for capital expenditures as compared to $1.8
million in the three months ended December 31, 1996. The major items included in
capital expenditures over the past three years were an aggregate of $5.4 million
for a casting line at the Newark, Delaware facility and $8.0 million for the new
management information system.
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<PAGE> 14
The Company's principal source of cash to fund these capital requirements is net
cash provided by operating activities. The Company's net cash provided by
operating activities for the three months ended December 31, 1997 totaled $5.7
million as compared to net cash used by operating activities of $1.0 million for
the three months ended December 31, 1996. The improvement was due primarily to
(i) improved operations which decreased the net loss by $1.8 million, (ii) a
reduction in the growth in inventory of $2.6 million, and (iii) comparative
improvements in accounts receivable collections of $0.4 million. The Company
realized improvements in working capital as inventory management ,shipping and
billing accuracy improved.
Net cash used by investing activities was $1.3 million for the three months
ended December 31, 1997 as compared to $1.0 million for the three months ended
December 31, 1996. Net cash used by investing activities consisted of $1.3
million of capital expenditures in the three months ended December 31, 1997 as
compared to $1.8 million in the three months ended December 31, 1996. Offsetting
the spending in the three months ended December 31, 1996 was $0.8 million in
proceeds from the sale of the Rhode Island facility of Peltor, Inc. as those
operations were consolidated into the Company's Southbridge, Massachusetts and
Indianapolis, Indiana facilities.
Net cash used by financing activities for the three months ended December 31,
1997 was $5.8 million as the Company reduced the borrowings under the Revolving
Credit Facility by $3.3 million and made scheduled principal repayments on the
Term Loans for $2.5 million. Net cash provided by financing activities for the
three months ended December 31, 1996 was $0.3 million as borrowings under the
Revolving Credit Facility increased by $2.3 million, more than offsetting the
scheduled principal repayments on the Term Loans of $1.9 million.
The Company has a substantial amount of indebtedness. The Company relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain customary drawing conditions) to
meet its liquidity needs. Throughout most of fiscal 1997, borrowing levels
remained high until the difficulties associated with the conversion to the new
management information system were largely resolved and the improvements in
production planning were beginning to be realized. Management believes that
improvements will continue to be realized during the current fiscal year. The
Company anticipates that operating cash flow will be adequate to meet its debt
service and capital expenditure requirements for the next several years,
although there can be no assurances that existing levels of sales and normalized
profitability, and therefore cash flow, will be maintained in the future. Levels
of sales and profitability may be impacted by service levels, continued new
product development, worldwide economic conditions and competitive pressures. In
addition, the Company may make additional acquisitions in the future and would
rely on internally generated funds and, to the extent necessary, on borrowings
to finance such acquisitions.
14
<PAGE> 15
PART II
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after the Company's predecessor acquired the AOSafety
Division from American Optical Corporation in April 1990. The Company is
contingently liable with respect to numerous lawsuits involving respirators
manufactured by American Optical Corporation prior to the acquisition of the
AOSafety Division in April 1990. These lawsuits typically involve plaintiffs
alleging that they suffer from asbestosis or silicosis, and that such condition
results in part from respirators which were negligently designed or
manufactured. The defendants in these lawsuits are often numerous, and include,
in addition to respirator manufacturers, employers of the plaintiffs and
manufacturers of sand (used in sand blasting) and asbestos. Responsibility for
legal costs, as well as for settlements and judgments, is shared contractually
by the Company, American Optical Corporation and a prior owner of American
Optical Corporation. The Company and Cabot have entered into an arrangement
relating to certain respirator claims asserted after July 11, 1995 (the date of
the Company's formation) whereby, so long as the Company pays to Cabot an annual
fee of $400,000, which the Company has elected to pay, Cabot will retain
responsibility and liability for, and indemnify the Company against, certain
legal claims alleged to arise out of the use of respirators manufactured prior
to July 1995. The Company has the right to discontinue the payment of such
annual fee at any time, in which case the Company will assume responsibility for
and indemnify Cabot with respect to such claims.
During fiscal 1997 the Company received a complaint from Gargoyles, Inc.
alleging that one of the Company's recently introduced plano eyewear products
(Fectoids) infringes a patented lens shape utilized in the plaintiff's sun and
sporting glasses. The Company is defending this allegation vigorously and the
matter is expected to go to trial in fiscal 1998. The ultimate outcome of this
case and its impact on the Company's financial condition and results of
operations cannot currently be determined.
ITEM 2. CHANGES IN SECURITIES
On November 28, 1997 the Company sold 50 shares and 65 shares respectively of
its common stock, par value $.01 per share ("Common Stock"), to Jeffrey S.
Kulka, its Corporate Controller and James R. Jandl, its Corporate Director Human
Resources. In addition, on December 5, 1997 the Company sold 125 shares of its
Common Stock to Roland W. Cyr, Jr., its Chief Information Officer and on
December 23, 1997 the Company sold 625 shares of its Common Stock to Steven F.
Scott, its Vice President and General Counsel. All of such purchases were at a
purchase price per share of $300 in cash, except that Mr. Scott and Mr. Cyr
financed a portion ($152,500 and $34,000, respectively) of such purchases,
through loans from the Company. Such loans are secured by the Common Stock
purchased with the proceeds thereof, have a term of 5 years and bear interest at
an annual rate of 7%. The issuance of said shares was made pursuant to the
Company's 1995 Employee Stock Purchase Plan and was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), by virtue of
Section 4(2) of the act.
On October 8, 1997, the Company repurchased 50 shares of its Common Stock from
Jeffrey Hamer, an employee, upon his resignation from the Company for an
aggregate consideration of $6,793.22.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
15
<PAGE> 16
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 -- Financial Data Schedule
(b) Report on Form 8-K, dated October 22, 1997 in connection with release of
preliminary fourth quarter and fiscal 1997 results.
16
<PAGE> 17
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.
Date: February 4, 1998 AEARO CORPORATION
/s/ Bryan J. Carey
----------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS OF AEARO CORPORATION AS OF DECEMBER 31,
1997 (UNAUDITED) AND SEPTEMBER 30, 1997 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31,
1997 AND 1996 CONTAINED IN AEARO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,111
<SECURITIES> 0
<RECEIVABLES> 40,951
<ALLOWANCES> 0
<INVENTORY> 39,114
<CURRENT-ASSETS> 87,739
<PP&E> 83,502
<DEPRECIATION> 20,688
<TOTAL-ASSETS> 300,172
<CURRENT-LIABILITIES> 53,426
<BONDS> 227,217
0
0
<COMMON> 1
<OTHER-SE> 15,949
<TOTAL-LIABILITY-AND-EQUITY> 300,172
<SALES> 69,712
<TOTAL-REVENUES> 69,712
<CGS> 39,062
<TOTAL-COSTS> 39,062
<OTHER-EXPENSES> 24,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,658
<INCOME-PRETAX> (80)
<INCOME-TAX> 669
<INCOME-CONTINUING> (749)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (749)
<EPS-PRIMARY> (27.62)
<EPS-DILUTED> (27.62)
</TABLE>
