<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, 1999
Commission file number 33-96190
AEARO CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
<TABLE>
<S> <C>
Delaware 13-3840450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5457 West 79th Street
Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip Code)
</TABLE>
(317) 692-6666
(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
--- ---
<PAGE> 2
AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999
(UNAUDITED) AND SEPTEMBER 30, 1999 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE PAGE 20
</TABLE>
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS -- ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,186 $ 4,050
Accounts receivable (net of reserve for doubtful accounts of $1,322
and $1,296 respectively) 39,399 43,801
Inventories 37,959 33,286
Deferred and prepaid expenses 4,229 3,750
-------- --------
Total current assets 85,773 84,887
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 55,087 55,881
INTANGIBLE ASSETS, NET 136,284 137,776
OTHER ASSETS 3,280 3,749
-------- --------
Total assets $280,424 $282,293
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE> 4
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS -- LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 15,958 $ 16,093
Accounts payable and accrued liabilities 37,219 40,528
Accrued interest 6,593 3,400
U.S. and foreign income taxes 3,781 3,758
--------- ---------
Total current liabilities 63,551 63,779
--------- ---------
LONG-TERM DEBT 199,414 198,716
DEFERRED INCOME TAXES 609 825
OTHER LIABILITIES 2,521 2,499
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 -- 102,538 and 105,338 at
December 31, 1999 and September 30, 1999, respectively 1 1
Additional paid-in capital 32,548 32,566
Accumulated deficit (8,989) (9,662)
Cumulative foreign currency translation adjustments (9,231) (6,431)
--------- ---------
Total stockholders' equity 14,329 16,474
--------- ---------
Total liabilities and stockholders' equity $ 280,424 $ 282,293
========= =========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE> 5
AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET SALES $ 72,194 $ 69,113
COST OF SALES 38,648 38,584
--------- ---------
Gross profit 33,546 30,529
SELLING AND ADMINISTRATIVE 23,608 21,623
RESEARCH AND TECHNICAL SERVICES 1,327 1,137
AMORTIZATION OF INTANGIBLES 1,725 1,713
OTHER CHARGES (INCOME), NET (35) 236
--------- ---------
Operating income 6,921 5,820
INTEREST EXPENSE, NET 5,947 6,324
--------- ---------
Income (loss) before provision for income taxes 974 (504)
PROVISION FOR INCOME TAXES 301 394
--------- ---------
Net income (loss) 673 (898)
PREFERRED STOCK DIVIDEND ACCRUED 2,492 2,195
--------- ---------
Net loss applicable to Common Shareholders (1,819) (3,093)
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (17.74) $ (30.22)
========= =========
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 102,538 102,338
========= =========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE> 6
AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 673 $ (898)
Adjustments to reconcile net income (loss) to cash provided by operating
activities -
Depreciation 2,440 2,506
Amortization of intangible assets and deferred financing costs 2,202 2,205
Deferred income taxes 28 (28)
Other, net 7 (2)
Changes in assets and liabilities -
Accounts receivable 2,715 5,267
Inventories (3,796) (1,033)
Accounts payable and accrued liabilities 805 (1,727)
Other, net 303 (80)
------- -------
Net cash provided by operating activities 5,377 6,210
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,937) (2,050)
Acquisition of Norhammer (3,620) --
Proceeds provided by disposals of property, plant and equipment 10 3
------- -------
Net cash used by investing activities (5,547) (2,047)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) revolving credit facility, net 5,250 (2,600)
Repayment of term loans (3,627) (3,132)
Repayment of long-term debt (122) (1,032)
Repurchase of common stock, net -- (17)
Issuance of shareholder notes, net (18) --
------- -------
Net cash provided (used) by financing activities 1,483 (6,781)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,177) (176)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 136 (2,794)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,050 6,737
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,186 $ 3,943
======= =======
CASH PAID FOR:
Interest $ 2,285 $ 3,005
======= =======
Income taxes $ 331 $ 248
======= =======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
<PAGE> 7
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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, a Delaware corporation, and its direct wholly-owned
subsidiary, Aearo Company, a Delaware corporation (collectively referred
to herein as "the Company") manufactures and sells products under the
brand names: AOSafety(R), E-A-R(R), and Peltor(R). These products are
sold through three reportable segments which are Safety Products, Safety
Prescription Eyewear and Specialty Composites. The Safety Products
segment manufactures and sells hearing protection devices,
non-prescription safety eyewear, face shields, reusable and disposable
respirators, hard hats and first aid kits. The Safety Prescription
Eyewear segment manufactures and sells prescription eyewear products that
are designed to protect the eyes from the typical hazards encountered in
the industrial work environment. The Company's Safety Prescription
Eyewear segment purchases component parts (lenses and the majority of its
frames) from various suppliers, grinds, shapes and applies coatings to
the lenses in accordance with the customer's prescription, and then
assembles the glasses using the customer's choice of frame. The Specialty
Composites segment manufactures and sells a wide array of
energy-absorbing materials that are incorporated into other
manufacturers' products to control noise, vibration and shock.
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in
June 1995 to effect the acquisition of substantially all of the assets
and liabilities of Cabot Safety Corporation and certain affiliates (the
Predecessor) all of which were wholly owned by Cabot Corporation (Cabot),
(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 material 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.
7
<PAGE> 8
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(3) SIGNIFICANT ACCOUNTING POLICIES
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 periods. Actual results could differ from
those estimates.
Reclassifications. Certain amounts included in the prior years' financial
statements may have been reclassified to conform to the current period
presentation.
Foreign Currency Translation. Assets and liabilities of the Company's
foreign operations are translated at period-end exchange rates. Revenues
and expenses are translated at the approximate average monthly rate
during the period. Translation gains and losses are reflected as a
separate component of stockholders' equity. Foreign currency gains and
losses arising from transactions by any of the Company's subsidiaries are
reflected in net income.
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 currently enacted tax rates.
Intangible Assets. Intangible assets consist primarily 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.
Basic loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the
year. Diluted loss per common share is calculated the same as basic
except, if not antidilutive, stock options are included using the
treasury stock method to the extent that the average share trading price
exceeds the exercise price.
Comprehensive Income. The Company's only item of comprehensive income
relates to foreign currency translation adjustments, and is presented
separately on the balance sheet as required. If presented on the
statements of operations comprehensive income would be approximately $2.8
million and $1.4 million less than reported net income (loss) due to
foreign currency translation adjustments for the three months ended
December 31, 1999, and 1998, respectively.
Accounting for Derivative Instruments and Hedging Activities. The Company
is required to adopt the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (as amended by SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133 - an Amendment of SFAS No.
133 issued in June 1999) no later than the first quarter of the fiscal
year beginning October 1, 2000. A company may implement SFAS No. 133 as
of the beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be
applied retroactively. SFAS No. 133, as amended by SFAS No. 137, must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantially modified after either January 1, 1998 or January 1, 1999,
as selected by the company.
8
<PAGE> 9
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or a liability measured at its fair value. SFAS No.
133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate
and assess the effectiveness of transactions that receive hedge
accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on
the consolidated financial statements and has not determined the timing
of or method of the adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
(4) INVENTORIES
Inventories consisted of the following (dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(unaudited)
<S> <C> <C>
Raw materials $ 9,364 $ 8,725
Work in process 8,786 7,649
Finished goods 19,809 16,912
------- -------
$37,959 $33,286
======= =======
</TABLE>
Inventories, which include materials, labor and manufacturing overhead,
are stated at the lower of cost or market, cost being determined using
the first-in, first-out method.
(5) DEBT
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
SeniorBank 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, 1999. At December 31,
1999, the amounts outstanding on the term loans and the revolving credit
facility were approximately $101.3 million and $11.1 million,
respectively.
9
<PAGE> 10
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(6) COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases certain transportation vehicles,
warehouse facilities, office space, and machinery and equipment under
cancelable and non-cancelable leases, most of which expire within 10
years and may be renewed by the Company.
Contingencies. The Company is a defendant in various lawsuits and
administrative proceedings that 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.
(7) RESTRUCTURING CHARGE
During fiscal 1998 the Company recorded a restructuring charge of $11.6
million related to the restructuring plans announced by the Company
during the fiscal year. On February 3, 1998, the Company announced the
appointment of Michael A. McLain as President and Chief Executive Officer
and on March 25, 1998 the Company announced plans to close the Boston
headquarters and relocate it to Indianapolis, Indiana, where the Company
has substantial operations. In addition, on September 30, 1998 the
Company announced plans to improve profitability through complexity
reduction and restructuring. The Company is eliminating certain product
offerings in its Eyewear and Respiratory product lines, reducing head
count in North America through restructuring and outsourcing,
consolidating the branding in its Consumer product line and reducing
selling and manufacturing cost in its Prescription eyewear product line.
The $11.6 million charge included a $6.1 million provision for
inventories and product returns for products that were discontinued. The
charge also provided $1.1 million for certain property, plant and
equipment for which the Company determined there was no future use, and
$0.1 million related to intangibles on an abandoned product line. In
addition, the charge provided $4.3 million to cover mainly employee
severance and other contractual obligations.
As of December 31, 1999, these restructuring initiatives were
substantially completed and the associated accruals had been depleted.
(8) ACQUISITIONS
On October 28, 1999, the Company acquired Ontario based Norhammer Limited
for approximately Canadian $5.5 million. The transaction was accounted
for using the purchase method of accounting, and accordingly, the
operating results of Norhammer have been included with those of the
Company subsequent to October 28, 1999.
10
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
(9) SEGMENT REPORTING
The Company manufactures and sells products under the brand names:
AOSafety(R), E-A-R(R), and Peltor(R). These products are sold through
three reportable segments, which are Safety Products, Safety Prescription
Eyewear and Specialty Composites. The Safety Products segment
manufactures and sells hearing protection devices, non-prescription
safety eyewear, face shields, reusable and disposable respirators, hard
hats and first aid kits. The Safety Prescription Eyewear segment
manufactures and sells prescription eyewear products that are designed to
protect the eyes from the typical hazards encountered in the industrial
work environment. The Company's Safety Prescription Eyewear segment
purchases component parts (lenses and the majority of its frames) from
various suppliers, grinds, shapes and applies coatings to the lenses in
accordance with the customer's prescription, and then assembles the
glasses using the customer's choice of frame. The Specialty Composites
segment manufactures a wide array of energy-absorbing materials that are
incorporated into other manufacturers' products to control noise,
vibration and shock.
NET SALES TO EXTERNAL CUSTOMERS BY BUSINESS SEGMENT (DOLLARS IN
THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
<S> <C> <C>
Safety Products $51,674 $50,743
Safety Prescription Eyewear 9,028 8,197
Specialty Composites 11,492 10,173
------- -------
TOTAL $72,194 $69,113
======= =======
</TABLE>
Intersegment sales of the Specialty Composites segment to the Safety
Products segment totaled $1.1 million and $1.0 million for the three
months ended December 31, 1998 and 1999, respectively. The intersegment
sales value is determined at fully absorbed inventory cost at standard
rates plus 25%.
11
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
EBITDA BY BUSINESS SEGMENT AND RECONCILIATION TO INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31
1999 1998
<S> <C> <C>
Safety Products $ 9,985 $ 8,316
Safety Prescription Eyewear 540 576
Specialty Composites 1,035 703
Reconciling Items (459) 460
------- -------
Total EBITDA 11,101 10,055
Depreciation 2,440 2,506
Amortization 1,725 1,713
Non-operating Costs 15 16
Interest 5,947 6,324
------- -------
Income (Loss) before provision for income taxes $ 974 $ (504)
======= =======
</TABLE>
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 above 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.
12
<PAGE> 13
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. This Report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 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.
1999 COMPARED TO 1998 RESULTS
THREE MONTHS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
------------------ ------------------ Change - Favorable
(Unfavorable)
December 31, Percent of December 31, Percent of -------------
1999 Net Sales 1998 Net Sales Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Safety Products $ 51,674 71.6 $ 50,743 73.4 $ 931 1.8
Safety Prescription Eyewear 9,028 12.5 8,197 11.9 831 10.1
Specialty Composites 11,492 15.9 10,173 14.7 1,319 13.0
-------- ------- -------- ------- -------
Total net sales 72,194 100.0 69,113 100.0 3,081 4.5
Cost of Sales 38,648 53.5 38,584 55.8 (64) (0.2)
-------- ------- -------- ------- -------
Gross profit 33,546 46.5 30,529 44.2 3,017 9.9
Operating Expenses-
Selling and administrative 23,608 32.7 21,623 31.3 (1,985) (9.2)
Research and technical services 1,327 1.8 1,137 1.6 (190) (16.7)
Amortization of intangibles 1,725 2.4 1,713 2.5 (12) (0.7)
Other (income) charges, net (35) -- 236 0.3 271 --
-------- ------- -------- ------- -------
Operating income 6,921 9.6 5,820 8.4 1,101 18.9
Interest expense, net 5,947 8.2 6,324 9.2 377 6.0
-------- ------- -------- ------- -------
Income (loss) before provision for
income taxes 974 1.3 (504) (0.7) 1,478 --
Provision for income taxes 301 0.4 394 0.6 93 23.6
------- -------- ------- -------
Net income (loss) 673 0.9 (898) (1.3) 1,571 --
Preferred stock dividend accrued 2,492 3.5 2,195 3.2 (297) (13.5)
-------- ------- -------- ------- -------
Net loss applicable to
common shareholders $ (1,819) 2.5 $ (3,093) (4.5) $ 1,274 41.2
======== ======= ======== ======= =======
Basic and diluted net loss per
common share $(17.74) $(30.22) $ 12.48 41.3
======== ======= =======
EBITDA $ 11,101 15.4 $ 10,055 14.5 $ 1,046 10.4
======== ======= ======== ======= =======
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS -- THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1998
Net Sales. Net sales in the three months ended December 31, 1999 increased 4.5%
to $72.2 million from $69.1 million in the three months ended December 31, 1998.
The Safety Products segment net sales in the three months ended December 31,
1999 increased 1.8% to $51.7 million from $50.7 million in the three months
ended December 31, 1998. This increase was driven by growth in sales of hearing
protection products largely as a result of recent product introductions as well
as strong growth in the Company's sales to Consumer accounts. Although the
Safety Products local currency billings in Europe were higher in the three
months ended December 31, 1999, as compared to the three months ended December
31, 1998, the strength of the US dollar relative to European currencies had the
impact of reducing sales by approximately $1.4 million. The Safety Products
segment sales for the three months ended December 31, 1999 included $0.4 million
of incremental sales due to the acquisition of Norhammer that was purchased on
October 28, 1999. The Safety Prescription Eyewear segment net sales in the three
months ended December 31, 1999 increased 10.1% to $9.0 million from $8.2 million
in the three months ended December 31, 1998. The Safety Prescription Eyewear
segment net sales for the three months ended December 31, 1999 included $0.9
million of sales from Safety Optical that was acquired in August 1999. Specialty
Composites' net sales in the three months ended December 31, 1999 increased
13.0% to $11.5 million from $10.2 million in the three months ended December 31,
1998. The increase was primarily driven by increased sales into the electronics
market and the trucking market.
Gross Profit. Gross Profit in the three months ended December 31, 1999 increased
9.9% to $33.5 million from $30.5 million in the three months ended December 31,
1998. Gross Profit as a percentage of net sales in the three months ended
December 31, 1999 increased to 46.5% as compared to 44.2% in the three months
ended December 31, 1998. This improvement in the Gross Profit percentage of net
sales is primarily due to improved operational control and productivity gains in
the manufacturing plants.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended December 31, 1999 increased 9.2% to $23.6 million from $21.6
million in the three months ended December 31, 1998. Selling and administrative
expenses as a percentage of net sales in the three months ended December 31,
1999 increased to 32.7% of net sales as compared to 31.3% of net sales in the
three months ended December 31, 1998. The increase is primarily due to an
increase in selling and marketing as part of the Company 's campaign to build
brand awareness and loyalty by more strongly promoting its global brands. The
Company increased spending in selling and marketing, in an effort to increase
awareness of the Company's brand names.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended December 31, 1999 increased 16.7% to $1.3 million from
$1.1 million in the three months ended December 31, 1998. The increase is
attributed to additional focus in the design and development of new products and
technologies.
Operating Income. Operating income improved 18.9% to $6.9 million in the three
months ended December 31, 1999 from $5.8 million in the three months ended
December 31, 1998. This improvement was due primarily to increased levels of
sales, improved operational control and productivity gains in the manufacturing
plants. Operating income as a percentage of net sales in the three months ended
December 31, 1999 increased to 9.6% as compared to 8.4% in the three months
ended December 31, 1998.
Other Charges (Income), Net. Other charges (income), net was income of $0.04
million for the three months ended December 31, 1999 as compared to expense of
$0.2 million for the three months ended December 31, 1998. This change was
attributed to a small net foreign currency transaction gain in the three months
ended December 31, 1999 as compared to a net foreign currency loss of $0.2
million in the three months ended December 31, 1998.
14
<PAGE> 15
Provision For Income Taxes. The provision for income taxes decreased 23.6% to
$0.3 million in the three months ended December 31, 1999 from $0.4 million in
the three months ended December 31, 1998. In the results for the three months
ended December 31, 1998, the Company's foreign subsidiaries had taxable income
in their foreign jurisdictions, but the domestic subsidiaries had a net
operating loss. Although the domestic subsidiaries have a loss carryforward for
income tax purposes in the U.S., during the three months ended December 31, 1998
the Company had not recognized any of the tax benefits that 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, 1999 decreased 6.0% to $5.9 million from $6.3 million in the three months
ended December 31, 1998. The reduction in interest expense was due to a
reduction in average borrowings as well as a reduction in the weighted average
interest rates in effect for the three months ended December 31, 1999 as
compared to the three months ended December 31, 1998.
Net Income (Loss). For the three months ended December 31, 1999 the Company had
net income of $0.7 million as compared to a net loss of $0.9 million for the
three months ended December 31, 1998.
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
THREE MONTHS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Change
December 31, Favorable (Unfavorable)
1999 1998 Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating Income $ 6,921 $ 5,820 $ 1,101 18.9%
Add Backs:
Depreciation 2,440 2,506 (66) (2.6%)
Amortization of intangibles 1,725 1,713 12 0.7%
Non-operating costs, net 15 16 (1) (6.3%)
------- ------- -------
EBITDA $11,101 $10,055 $ 1,046 10.4%
======= ======= =======
</TABLE>
EBITDA for the three months ended December 31, 1999 increased 10.4% to $11.1
million from $10.1 million for the three months ended December 31, 1998. EBITDA
as a percentage of net sales in the three months ended December 31, 1999 was
15.4% as compared to 14.5% in the three months ended December 31, 1998. This
improvement was due primarily to increased levels of sales, improved operational
control and productivity gains in the manufacturing plants.
15
<PAGE> 16
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. The Company utilizes
forward foreign currency contracts, and other hedging instruments, 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.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" is a flaw existing in many computer hardware and
software programs caused by historical use of dates represented by only two
digits (for example, 98 rather than 1998). This causes computer programs (both
system and application) that perform arithmetic operations, comparisons, or
sorting of data fields to yield incorrect results when working with years
outside the range of 1900-1999. To evaluate the impact of this the Company had
assembled a "Y2K" cross functional team which assessed the impact of year 2000
compliance with respect to Information Technology (IT) and manufacturing systems
as well as the Company's exposure to significant third party risks.
The Company had completed its Y2K preparations on all critical business
applications prior to December 31, 1999 and has experienced no significant Y2K
related problems to date. As of January 31, 2000, the Company is not aware of
any significant Y2K related problems associated with our internal systems or the
systems of our vendors, distributors, or customers.
The Company's Y2K preparations included contacting its major customers and
vendors regarding their readiness for year 2000 compliance, testing of all
Company critical business systems and standardization of personal computer
hardware and software systems.
Since the majority of the Company's products are passive in nature and do not
utilize date sensitive chip technologies, it was not anticipated that product
returns could materially impact the Company.
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, 1999. At December 31,
1999, the amounts outstanding on
16
<PAGE> 17
the Term Loans and the Revolving Credit Facility were approximately $101.3
million and $11.1 million, respectively.
Maturities under the Company's Term Loans are: $12.0 million for the remainder
of fiscal 2000, $20.2 million in fiscal 2001, $33.8 million in fiscal 2002, and
$35.3 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's net cash provided by operating activities for the three months
ended December 31, 1999 totaled $5.4 million as compared to $6.2 million for the
three months ended December 31, 1998. The decrease of $0.8 million was due
primarily to an increase of $2.4 million in the Company's net changes in assets
and liabilities, partially offset by a $1.6 million improvement in net income.
Net cash used by investing activities was $5.5 million for the three months
ended December 31, 1999 as compared to $2.0 million for the three months ended
December 31, 1998. The increase of $3.5 million in net cash used by investing
activities is primarily attributed to the acquisition of Ontario based Norhammer
Limited for $3.6 million.
Net cash provided by financing activities for the three months ended December
31, 1999 was $1.5 million compared with net cash used by financing activities
for the three months ended December 31, 1998 of $6.8 million. The increase of
cash provided from financing activities of $8.3 million is primarily attributed
to increased borrowings under the revolving credit facility of $5.2 million for
the three months ended December 31, 1999 compared to net repayments of $2.6
million in the three months ended December 31, 1998 as the Company utilized the
revolver to fund the Norhammer Limited acquisition for $3.6 million, a decrease
in the repayment of long term debt of $0.9 million, and an increase of $0.5
million in scheduled principal repayments on the Term Loans. Scheduled principal
repayments on the Term Loans were $3.6 million and $3.1 million for the three
months ended December 31, 1999, and 1998, respectively.
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. The Company anticipates that operating cash flow will
be adequate to meet its operating 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 particular, the Company expects that sales and
profitability over the remainder of fiscal year 2000 will be adversely affected
by the strength of the U.S. Dollar relative to the Euro. 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. It is also anticipated that over the next several
years the level of debt service and the requirements placed on the Company
through the related financial covenants under the Company's Senior Bank
Facilities will require that the Company amend its credit agreement with its
syndicate of lenders, or otherwise change its capital structure.
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to change in foreign currencies,
interest rates and commodity pricing. The Company uses derivatives to mitigate
impact of changes in foreign currencies and interest rates.
FOREIGN CURRENCY RISK
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. In particular, the Company expects that sales and
profitability over the remainder of fiscal year 2000 will be adversely affected
by the strength of the U.S. Dollar relative to the Euro. To mitigate the impacts
of changes in exchange rates the Company executes two hedging programs; one for
transaction exposures, and the other for the cash flow impact on European
operations. The Company utilizes forward contracts for transaction exposures and
a combination of forward contracts and zero premium collars for cash flow
exposures. During the three months ended December 31, 1999 transaction hedge
losses were $0.06 million, while cash flow hedges were a gain of $0.1 million.
In addition, the Company limits foreign exchange impacts on the balance sheet
with foreign denominated debt in Great Britain Pound Sterling (GBP) and German
Marks (DEM). The Company does not consider the notional amount of outstanding
hedge contracts at December 31, 1999 as material. It is anticipated that the
settlement of outstanding contracts will not have a material impact on the
profitability of the Company.
INTEREST RATES
The Company is exposed to market risk changes in interest rates through its
debt. The Company utilizes a zero premium collar agreement to reduce the impact
of increased interest rates in its floating rate debt. The collar allows the
Company the ability to maintain borrowing at the short end of the yield curve,
while retaining a hedge against an increase in rates. The zero premium collar
was modified in March of 1999 to expire in September 2001. The zero premium
collar has a notional amount of $100 million, a cap of 7.75% and floor of 5.33%
indexed off 3 month LIBOR. During 1999 LIBOR rates dropped to 5.03% and the
Company recorded additional interest expense of $.1 million. At December 31,
1999 LIBOR interest rates had increased to 6.04%. The Company is of the opinion
that it is well positioned to manage interest expense through 2001 and a change
in interest rates will not have a material impact on the profitability of the
Company.
COMMODITY RISK
The Company is subject to market risks with respect to industry pricing in paper
and crude oil as it relates to various commodity items. Items with potential
impact are paperboard, packaging films, nylons, resins, propylene, ethylene,
plasticizer and freight. In conjunction with purchase agreements that allow for
limited pricing movements the Company has built anticipated commodity price
increases into the fiscal year 2000 cost structure to cover industry pricing
pressures. The Company manages pricing exposures on larger volume commodities
such as polycarbonate, polyols and polyvinyl chloride via price negotiations
utilizing alternative supplier competitive pricing. The Company sources some
products and parts from Far East sources where resource availability,
competition, and infrastructure stability has provided a favorable purchasing
environment. The Company does not enter into derivative instruments to manage
commodity risk.
18
<PAGE> 19
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(R)
Division from American Optical Corporation in April 1990. The Company is
contingently liable with respect to numerous lawsuits involving respirators sold
by American Optical Corporation prior to the acquisition of the AOSafety(R)
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.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
On November 3, 1999, the Company filed a Current Report 8K containing
its press release regarding the acquisition of Norhammer of Ontario,
Canada.
19
<PAGE> 20
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 9, 2000 AEARO CORPORATION
/s/ Bryan J. Carey
___________________________________________________
Bryan J. Carey
Executive Vice President, Chief Financial Officer,
Treasurer, Assistant Secretary and Managing
Director - Europe
20
<PAGE> 21
EXHIBIT INDEX
EXHIBITS DESCRIPTION
27.1* -- Financial Data Schedule.
*Filed herewith.
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEETS OF AEARO CORPORATION AS OF DECEMBER 31,
1999 (UNAUDITED) AND SEPTEMBER 30, 1999 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31,
1999 AND 1998 CONTAINED IN AEARO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM
10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,186
<SECURITIES> 0
<RECEIVABLES> 39,399
<ALLOWANCES> 0
<INVENTORY> 37,959
<CURRENT-ASSETS> 85,773
<PP&E> 94,267
<DEPRECIATION> 39,180
<TOTAL-ASSETS> 280,424
<CURRENT-LIABILITIES> 63,551
<BONDS> 199,414
0
0
<COMMON> 1
<OTHER-SE> 14,328
<TOTAL-LIABILITY-AND-EQUITY> 280,424
<SALES> 72,194
<TOTAL-REVENUES> 72,194
<CGS> 38,648
<TOTAL-COSTS> 38,648
<OTHER-EXPENSES> 26,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,947
<INCOME-PRETAX> 974
<INCOME-TAX> 301
<INCOME-CONTINUING> 673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 673
<EPS-BASIC> (17.74)
<EPS-DILUTED> (17.74)
</TABLE>
