SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------------------------
FORM 10-Q
-----------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2001, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __ TO __.
COMMISSION FILE NUMBER 0-18863
ARMOR HOLDINGS, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 741-5400
-------------------------------------------------------
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 outstanding of the registrant's Common Stock as of July 31,
2001 is 22,988,144.
ARMOR HOLDINGS, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS....................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................ 21
PART II - OTHER INFORMATION................................................ 23
ITEM 1. LEGAL PROCEEDINGS.......................................... 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.................................................. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Armor Holdings, Inc. (the "Company") and its wholly-owned subsidiaries include
all adjustments (consisting only of normal recurring accruals and the
elimination of all intercompany items and transactions) which management
considers necessary for a fair presentation of operating results as of June 30,
2001 and for the three and six month period ended June 30, 2001 and June 30,
2000.
These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
3
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 2001 DECEMBER 31, 2000
----------------- ---------------------
(UNAUDITED) *
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,981 $ 7,257
Accounts receivable (net of allowance for
doubtful accounts of $1,128 and $1,133) 51,591 44,590
Inventories 30,474 23,675
Prepaid expenses and other current assets 19,612 13,313
----------------- ---------------------
Total current assets 106,658 88,835
PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $12,496 and
$10,146) 26,790 24,590
GOODWILL (net of accumulated amortization
of $7,220 and $6,451) 87,713 95,649
PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $1,716 and
$1,518) 6,689 6,907
OTHER ASSETS 9,356 9,976
----------------- ---------------------
TOTAL ASSETS $ 237,206 $ 225,957
================= =====================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
JUNE 30, 2001 DECEMBER 31, 2000
---------------------- -------------------------
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 514 $ 1,072
Short-term debt 2,216 1,157
Accounts payable, accrued expenses and other
current liabilities 16,994 18,347
Income taxes payable - 322
---------------------- -------------------------
Total current liabilities 19,724 20,898
LONG-TERM DEBT , less current portion 47,089 38,288
---------------------- -------------------------
Total liabilities 66,813 59,186
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 25,308,178 and 25,063,534 issued and
22,983,519 and 22,685,475 outstanding at June 30,
2001 and December 31, 2000 respectively 253 250
Additional paid-in capital 153,851 150,254
Retained earnings 44,251 43,663
Accumulated other comprehensive loss (2,593) (1,684)
Treasury stock (25,369) (25,712)
---------------------- -------------------------
Total stockholders' equity 170,393 166,771
---------------------- -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 237,206 $ 225,957
====================== =========================
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
---------------- --------------- ---------------- ----------------
REVENUES:
Products $ 36,977 $ 34,053 $ 65,790 $ 65,501
Services 25,079 21,414 47,140 39,832
---------------- --------------- ---------------- ----------------
Total Revenues 62,056 55,467 112,930 105,333
---------------- --------------- ---------------- ----------------
COSTS AND EXPENSES:
Cost of sales 38,407 34,357 69,707 65,465
Operating expenses 13,573 12,191 27,118 22,956
Amortization 888 770 1,778 1,482
Equity in earnings of investee - (53 ) (87)
Restructuring and related charges 1,259 - 9,959 -
Integration and other non-recurring charges 362 765 836 1,456
---------------- --------------- ---------------- ----------------
OPERATING INCOME 7,567 7,437 3,532 14,061
Interest expense, net 844 539 1,514 586
Other expense (income), net 9 (1,886 ) (227 ) (1,888)
---------------- --------------- ---------------- ----------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,714 8,784 2,245 15,363
---------------- --------------- ---------------- ----------------
PROVISION FOR INCOME TAXES 2,416 3,248 1,343 5,747
NET INCOME $ 4,298 $ 5,536 $ 902 $ 9,616
================ =============== ================ ================
BASIC EARNINGS PER SHARE $ 0.19 $ 0.25 $ 0.04 $ 0.42
================ =============== ================ ================
DILUTED EARNINGS PER SHARE $ 0.18 $ 0.24 $ 0.04 $ 0.41
================ =============== ================ ================
WEIGHTED AVERAGE SHARES - BASIC 23,007 22,595 22,934 22,839
================ =============== ================ ================
WEIGHTED AVERAGE SHARES - DILUTED 23,682 23,350 23,670 23,574
================ =============== ================ ================
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
---------------------------------------------
JUNE 30, 2001 JUNE 30, 2000
--------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 902 $ 9,616
Adjustments to reconcile net income to cash used
in operating activities:
Depreciation and amortization 4,046 2,312
Gain on sale of investments - (1,850)
Non-cash restructuring charges, primarily write-off of goodwill 8,937 -
Deferred income tax benefit (933) -
Equity in earnings of investee - (87)
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (7,081) (5,972)
Increase in inventories (6,799) (2,455)
Increase in prepaid expenses and other assets (7,015) (8,823)
Increase (decrease) in accounts payable, accrued
liabilities and other current liabilities 600 (1,252)
Increase in minority interest - 9
Increase (decrease) in income taxes payable (322) -
--------------------- ----------------------
Net cash used in operating activities (7,665) (8,502)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,543) (1,972)
Purchase of businesses, net of cash acquired - (7,919)
Additional consideration for purchased businesses (3,033) -
Purchases of investments - (1,682)
Proceeds from sale of investments - 3,598
Dividends received from associated companies - 87
Proceeds from sale of equity securities 843 -
--------------------- ----------------------
Net cash used in investing activities (5,733) (7,888)
--------------------- ----------------------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 2,700 311
Repurchases of treasury shares (667) (11,993)
Proceeds from issuance of treasury shares for the exercise
of stock options 696 -
Borrowings under line of credit 31,330 39,776
Repayments under line of credit (22,028) (18,944)
--------------------- ----------------------
Net cash provided by financing activities 12,031 9,150
Effect of exchange rate changes on cash and cash
equivalents: (909) (132)
--------------------- ----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,276) (7,372)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,257 13,246
--------------------- ----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,981 $ 5,874
===================== ======================
See notes to condensed consolidated financial statements.
7
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The accompanying condensed quarterly financial statements represent the
consolidation of Armor Holdings, Inc. (the "Company") and its wholly-owned
subsidiaries. These statements are unaudited and include all adjustments
(consisting only of normal recurring accruals) considered necessary by
management to present a fair statement of the results of operations, financial
position and cash flows. They have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The results of operations for the three and six month periods are not
necessarily indicative of the results to be expected for the full year and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000. Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE 2 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of taxes of $272,000 and
$189,000 for the three months ended June 30, 2001 and 2000, respectively and
$489,000 and $242,000 for the six months ended June 30, 2001 and 2000,
respectively, are listed below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
---------------- --------------- ---------------- ----------------
Net income $ 4,298 $ 5,536 $ 902 $ 9,616
Other comprehensive loss:
Foreign currency translations, net of tax (505) (315) (909) (403)
---------------- --------------- ---------------- ----------------
Comprehensive income (loss): $ 3,793 $ 5,221 $ (7) $ 9,213
================ =============== ================ ================
8
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 3 - INVENTORIES
The inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(IN THOUSANDS)
Raw material $18,469 $ 13,756
Work-in-process 2,264 1,999
Finished goods 9,741 7,920
------------------------ -----------------------
Total inventories $30,474 $ 23,675
======================== =======================
NOTE 4 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities are
summarized as follows:
JUNE 30, 2001 DECEMBER 31, 2000
------------------------ ------------------------
(IN THOUSANDS)
Trade and other payables.................................... $ 6,718 $ 4,432
Accrued expenses other current liabilities ................. 8,976 9,365
Additional purchase price for acquisition earnouts.......... - 3,000
Deferred consideration for acquisitions..................... 1,300 1,550
======================== =======================
$16,994 $ 18,347
======================== =======================
NOTE 5 - RESTRUCTURING CHARGE
In January 2001, the Company's ArmorGroup Services division approved a
restructuring plan to close its U.S. investigative businesses, realign the
division's organization, eliminate excess facilities and reduce overhead in its
businesses worldwide. In connection with this restructuring plan, the division
performed a review of its long-lived assets to identify potential impairments.
Pursuant to this restructuring plan, ArmorGroup i) eliminated 26 employees,
primarily from its investigative businesses, ii) eliminated an additional 24
employees, from its security business, iii) incurred lease and other exit costs
as a result of the closure of its investigative businesses, and iv) wrote-down
the value of both tangible and intangible assets as a result of the impairment
review. ArmorGroup expects to substantially complete the initiatives in its
restructuring plan within nine months. Most of the significant actions have been
completed by June 30, 2001.
As a result of the restructuring plan, the Company has recorded a pre-tax
charge of $10 million. The Company recorded $8.7 million in the first quarter
and has recorded $1.3 million in the second quarter of fiscal 2001. The second
quarter pre-tax charge included i) $844,000 in employee termination and related
costs including severance, relocation, medical and other
9
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
benefits and ii) $415,000 in lease termination and other exit costs. As of June
30, 2001, the Company had a remaining liability of $1,297,000 relating to
employee termination costs and lease termination and other exit costs. This
liability has been classified in accounts payable, accrued expenses and other
current liabilities on the consolidated balance sheet and will be funded through
cash provided by operating activities and the Company's credit facility. A
summary of the restructuring charges and the remaining accrual follows:
Lease Asset
Employee Termination Removal
Termination and Other Asset & Related
Costs Closing Costs Impairment Costs Total
--------------- --------------- --------------- --------------- ---------------
Additions $ 531,000 $ 541,000 $ 291,000 $ 7,337,000 $ 8,700,000
Utilization (531,000) (85,000) (291,000) (7,337,000) (8,244,000)
--------------- --------------- --------------- --------------- ---------------
Balance at March 31, 2001 $ -- $ 456,000 $ -- $ -- $ 456,000
Additions 844,000 415,000 -- -- 1,259,000
Utilization (275,000) (143,000) -- -- (418,000)
=============== =============== =============== =============== ===============
Balance at June 30, 2001 $ 569,000 $ 728,000 $ -- $ -- $ 1,297,000
=============== =============== =============== =============== ===============
NOTE 6 - INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL SALES
The Company is a leading global provider of security risk management
services and products to multi-national corporations, governmental agencies and
law enforcement personnel through two operating divisions -- Armor Holdings
Products and ArmorGroup Services. The Armor Holdings Products division
manufactures and sells a broad range of high quality branded law enforcement
equipment. The ArmorGroup Services division provides sophisticated security
planning and risk management, electronic security systems integration,
consulting and training services, as well as intellectual property asset
protection, business intelligence and investigative services.
The Company has invested substantial resources outside of the United States
and plans to continue to do so in the future. Substantially all of the
operations of the services segment are conducted in emerging markets in Africa,
Asia and South America. These operations are subject to the risk of new and
different legal and regulatory requirements in local jurisdictions, tariffs and
trade barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments, potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social conditions. Governments of many developing
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. Government actions in the future could have
a significant adverse effect on economic conditions in a developing country or
may otherwise have a material adverse effect on the Company and its operating
companies. The Company does not have political risk insurance in the countries
in which it currently conducts business. Moreover, applicable agreements
relating to the Company's interests in it operating companies are frequently
governed by foreign law. As a result, in the event of a dispute, it may be
difficult for the Company to
10
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
enforce its rights. Accordingly, the Company may have little or no recourse upon
the occurrence of any of these developments.
Revenues, operating income and total assets for each of the Company's
segments are as follows:
SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
-------------------- -------------------
(IN THOUSANDS)
Revenues:
Products $ 65,790 $ 65,501
Services 47,140 39,832
--------------------- --------------------
Total revenues $112,930 $ 105,333
===================== ====================
Operating income:
Products $ 12,534 $ 12,944
Services (6,636) 3,820
Corporate (2,366) (2,703)
--------------------- --------------------
Total operating income $ 3,532 $ 14,061
===================== ====================
Total assets:
Products $ 132,916 $ 110,230
Services 51,254 61,427
Corporate 53,036 30,809
--------------------- --------------------
Total assets $ 237,206 $ 202,466
===================== ====================
11
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The following unaudited information with respect to revenues and
operating income (operating income before amortization expense, equity in
earnings of investee, restructuring charges and integration expense) to
principal geographic areas are as follows:
SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
-------------------- -------------------
(IN THOUSANDS)
Revenues:
North America $ 65,344 $ 68,403
South America 13,172 8,789
Africa 10,777 9,727
Europe/Asia 23,637 18,414
--------------------- --------------------
Total revenue $112,930 $105,333
===================== ====================
Geographic operating income:
North America $10,475 $ 12,195
South America 2,140 1,713
Africa 1,532 2,231
Europe/Asia 1,958 773
--------------------- --------------------
Total operating income $16,105 $ 16,912
===================== ====================
Total assets:
North America $173,331 $160,707
South America 7,745 6,025
Africa 18,489 3,390
Europe/Asia 37,641 32,344
--------------------- --------------------
Total assets $237,206 $202,466
===================== ====================
A reconciliation of consolidated geographic operating income to
consolidated operating income follows:
SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
---------------------- ------------------
(IN THOUSANDS)
Consolidated geographic operating income $16,105 $16,912
Amortization (1,778) (1,482)
Equity in earnings of investee - 87
Restructuring and related charges (9,959) -
Integration and other non-recurring charges (836) (1,456)
---------------------- ------------------
Operating income $ 3,532 $ 14,061
====================== ==================
12
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 8. EARNINGS PER SHARE
The company follows SFAS No. 128, Earnings Per Share, which requires the
presentation of basic and diluted earnings per share. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations for net income:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
---------------- ---------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Net income $ 4,298 $ 5,536 $ 902 $ 9,616
---------------- ---------------- -------------- -----------------
Denominator for basic earnings per share
Weighted average shares: 23,007 22,595 22,934 22,839
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 675 755 736 735
---------------- ---------------- -------------- -----------------
Denominator for diluted earnings per
share- Adjusted weighted average shares 23,682 23,350 23,670 23,574
---------------- ---------------- -------------- -----------------
Basic earnings per share $0.19 $ 0.25 $0.04 $ 0.42
================ ================ ============== =================
Diluted earnings per share $0.18 $ 0.24 $0.04 $ 0.41
================ ================ ============== =================
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (SFAS 141), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 requires that all business combinations be accounted for under a single
method - the purchase method. Use of the pooling-of-interest method is no longer
permitted. SFAS 141 requires that the purchase method be used for all business
combinations initiated after June 30, 2001 and also required application for
individual purchase business combinations completed after June 30, 2001. SFAS
142 requires, among other things, that goodwill no longer be amortized to
earnings, but instead reviewed for impairment annually. Under SFAS 142, the
amortization of goodwill ceases upon adoption of the statement, which will
become effective for the Company on January 1, 2002. The Company has
historically amortized its goodwill over its estimated useful lives. Beginning
with the adoption of SFAS 142, the company will cease amortizing its goodwill.
The effects of adopting this standard have not been determined.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company has reached a definitive agreement to acquire the
Security Products and Services Group ("SPSG") of The Kroll-O'Gara Company for
$54.5 million of which $15 million may be paid in common stock. In connection
with the acquisition of SPSG, the Company has filed a registration statement
on Form S-3 (the "Registration Statement") registering 1,250,000 shares of its
common stock. The Company intends to issue shares under the Registration
Statement valued up to $15 million, and the Company anticipates drawing up to
$39.5 million under its credit facility to finance the acquisition. Except as
described in the Registration Statement, the Company will not receive any
proceeds from sales of its common stock under this Registration Statement.
13
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and analysis of
financial condition for the three and six months ended June 30, 2001. The
results of operations for purchase business combinations are included since
their effective acquisition dates. The following discussion may be understood
more fully by reference to the financial statements, notes to the financial
statements, and management's discussion and analysis contained in our Annual
Report on Form 10-K for the year ended December 31, 2000, as filed with the
Securities and Exchange Commission.
Revenue Recognition. We record product revenues at gross amounts to be
received including amounts to be paid to agents as commissions, at the time the
product is shipped to the distributor. Although product returns are permitted in
certain circumstances within 30 days from the date of purchase, these returns
are minimal and usually consist of minor modifications to the ordered product.
We record services revenue as the service is provided on a contract by contract
basis.
Foreign Currency Translation. In accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation," assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the current rate of exchange as of the balance sheet date and revenues and
expenses are translated at the average monthly exchange rates. The cumulative
change in the translation adjustment, which represents the effect of translating
assets and liabilities of the Company's foreign operations, was a before tax
loss of approximately $4.0 million as of June 30, 2001 and $2.6 million as of
December 31, 2000.
New Accounting Pronouncements. In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," (SFAS 142). SFAS 141 requires that all business combinations
be accounted for under a single method - the purchase method. Use of the
pooling-of-interest method is no longer permitted. SFAS 141 requires that the
purchase method be used for all business combinations initiated after June 30,
2001 and also required application for individual purchase business combinations
completed after June 30, 2001. SFAS 142 requires, among other things, that
goodwill no longer be amortized to earnings, but instead reviewed for impairment
annually. Under SFAS 142, the amortization of goodwill ceases upon adoption of
the statement, which will become effective for the Company on January 1, 2002.
The Company has historically amortized its goodwill over its estimated useful
lives. Beginning with the adoption of SFAS 142, the company will cease
amortizing its goodwill. The effects of adopting this standard have not
been determined.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000.
Products revenues. Armor Holdings Products Division revenues increased by
$2.9 million, or 8.6%, to $37.0 million in the three months ended June 30, 2001
compared to $34.1 million in the three months ended June 30, 2000. The slight
increase was primarily due to the acquisitions of Monadnock Lifetime Products
Inc. ("Monadnock") and Lightning Powder, Inc. ("Lightning Powder") in November
2000.
Services revenues. ArmorGroup Services Division revenues increased by $3.7
million, or 17.1%, to $25.1 million in the three months ended June 30, 2001
compared to $21.4 million in the three months ended June 30, 2000. This increase
was due to 21.7% internal growth in the Company's security consulting business
complimented by a further 20.9% growth in the Integrated Systems business, which
served to offset a decline in the investigative business of 37.3% due to
restructuring.
Cost of sales. Cost of sales increased by $4.1 million, or 11.8%, to $38.4
million in the three months ended June 30, 2001 compared to $34.4 million in the
three months ended June 30, 2000. This increase was primarily due to increased
revenue in both the products and service businesses for the three months ended
June 30, 2001 compared to the three months ended June 30, 2000. As a percentage
of total revenues, cost of sales remained at 61.9% for the three months ended
June 30, 2001.
Operating expenses. Operating expenses increased by $1.4 million, or 11.3%,
to $13.6 million (21.9% of total revenues) in the three months ended June 30,
2001 compared to $12.2 million (22.0% of total revenues) in the three months
ended June 30, 2000. This increase was primarily due to additional operating
expenses in newly acquired companies.
14
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Amortization. Amortization expense increased by $118,000, or 15.3%, to
$888,000 in the three months ended June 30, 2001 compared to $770,000 in the
three months ended June 30, 2000. This increase was primarily due to additional
amortization of intangible assets acquired as a result of the acquisitions of
Monadnock and Lightning Powder in November 2000, which are not reflected in the
quarter ended June 30, 2000.
Equity in earnings of investee. The equity in earnings in the prior year
three months ended June 30, 2000, relates to the Company's 20% investment in
Jardine Securicor Gurkha Services Limited ("JSGS"), which was sold in the three
month period ended June 30, 2000.
Restructuring and related charges. In January 2001, the Company's
ArmorGroup Services division approved a restructuring plan to close its U.S.
investigative businesses, realign the division's organization, eliminate excess
facilities and reduce overhead in its businesses worldwide. In connection with
this restructuring plan, the division performed a review of its long-lived
assets to identify potential impairments. Pursuant to this restructuring plan,
ArmorGroup i) eliminated 26 employees, primarily from its investigative
businesses, ii) eliminated an additional 24 employees, from its security
business, iii) incurred lease and other exit costs as a result of the closure of
its investigative businesses, and iv) wrote-down the value of both tangible and
intangible assets as a result of the impairment review. ArmorGroup expects to
substantially complete the initiatives in its restructuring plan within nine
months. Most of the significant actions have been completed by June 30, 2001.
As a result of the restructuring plan, the Company has recorded a pre-tax
charge of $10 million. The Company recorded $8.7 million in the first quarter
and has recorded $1.3 million in the second quarter of fiscal 2001. The second
quarter pre-tax charge included i) $844,000 in employee termination and related
costs including severance, relocation, medical and other benefits and ii)
$415,000 in lease termination and other exit costs. As of June 30, 2001, the
Company had a remaining liability of $1,297,000 relating to employee termination
costs and lease termination and other exit costs. This liability has been
classified in accounts payable, accrued expenses and other current liabilities
on the consolidated balance sheet and will be funded through cash provided by
operating activities and the Company's credit facility.
Integration and other non-recurring charges. In the three month period
ended June 30, 2001, the Company incurred $362,000 in expenses and costs
associated with the integration of the Company's recent acquisitions. The
Company incurred $765,000 in such fees in the three months ended June 30, 2000.
Operating income. The operating income was $7.6 million in the three months
ended June 30, 2001, after a $1.3 million restructuring charge compared to
operating income of $7.4 million in the three months ended June 30, 2000, which
included $1.9 million of non-recurring gain from the sale of JSGS.
15
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Interest expense, net. Net interest expense increased by 56.6%, to $844,000
in the three months ended June 30, 2001 compared to $539,000 in the three months
ended June 31, 2000. This increase was the result of increased borrowings
primarily due to acquisitions funded with long-term debt. Interest expense
includes interest on and amortization of the fees associated with the Company's
$100 million credit facility, and the amortization of the discount on certain
liabilities acquired as part of the Safariland acquisition.
Other expense (income), net. Other expense, net was $9,000 in the three
months ended June 30, 2001 compared to other income, net of $1,886,000 for the
three months ended June 30, 2000. This other income in the three months ended
June 30, 2000 resulted from the sale of the Company's investment in JSGS .
Income before provision for income taxes. The income before provision for
income taxes was $6.7 million in the three months ended June 30, 2001 after a
$1.3 million restructuring charge, compared to income before provision for
income taxes of $8.8 million in the three months ended June 30, 2000, which
included $1.9 million of non-recurring gain from the sale of JSGS.
Provision for income taxes. The provision for income taxes decreased by
$832,000, to an expense of $2.4 million in the three months ended June 30, 2001
compared to an expense of $3.2 million in the three months ended June 30, 2000.
The effective tax rate for the three months ended June 30, 2001 was an expense
of 36.0% compared to an expense of 37.0% for the three months ended June 30,
2000. The effective tax rate for the Company's foreign operations is not
necessarily indicative of continued tax rates due to continually changing
concentration of income in each country in which the Company operates.
Net income. Net income was $4.3 million in the three months ended June 30,
2001 after a $1.3 million restructuring charge, compared to net income of $5.5
million for the three months ended June 30, 2000, which included $1.9 million of
non-recurring gain from the sale of JSGS. The decrease is primarily due to the
factors discussed above.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000.
Products revenues. Armor Holdings Products Division revenues increased by
$0.3 million, or 0.4%, to $65.8 million in the six months ended June 30, 2001
compared to $65.5 million in the six months ended June 30, 2000. The slight
increase was due to the acquisitions of Monadnock and Lightning Powder in
November 2000, which offset declines in the first quarter from shipping delays
related to a large international order and postponed orders due to a delay in
the release of funds from the Bulletproof Vest Partnership Act.
Services revenues. ArmorGroup Services Division revenues increased by $7.3
million, or 18.3%, to $47.1 million in the six months ended June 30, 2001
compared to $39.8 million in the six months ended June 30, 2000. This increase
was due to 10.1% internal growth due to significant increases in the Company's
Security Consulting business of 27%, tempered by a decline of 37.7% in the
Investigative business.
16
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Cost of sales. Cost of sales increased by $4.2 million, or 6.5%, to $69.7
million in the six months ended June 30, 2001 compared to $65.5 million in the
six months ended June 30, 2000. This increase was primarily due to increased
revenues in the services business in the six months ended June 30, 2001 compared
to the six months ended June 30, 2000. As a percentage of total revenues, cost
of sales decreased to 61.7% of total revenues for the six months ended June 30,
2001 from 62.2% for the six months ended June 30, 2000 due to a change in the
mix of products and services sold.
Operating expenses. Operating expenses increased by $4.2 million, or 18.1%,
to $27.1 million (24.0% of total revenues) in the six months ended June 30, 2001
compared to $23.0 million (21.8% of total revenues) in the six months ended June
30, 2000. This increase was primarily due to additional operating expenses in
newly acquired companies.
Amortization. Amortization expense increased by $296,000, or 20%, to $1.8
million in the six months ended June 30, 2001 compared to $1.5 million in the
six months ended June 30, 2000. This increase was primarily due to additional
amortization of intangible assets acquired as a result of the acquisitions of,
OVG/Traquair June 16, 2000, Monadnock and Lightning Powder in November 2000,
which are not fully reflected in the six month period ended June 30, 2000.
Equity in earnings of investee. The equity in earnings in the prior year
six months ended June 30, 2000, relates to the Company's 20% investment in
Jardine Securicor Gurkha Services Limited ("JSGS"), which was sold during the
six month period ended June 30, 2000.
Restructuring and related charges. In January 2001, the Company's
ArmorGroup Services division approved a restructuring plan to close its U.S.
investigative businesses, realign the division's organization, eliminate excess
facilities and reduce overhead in its businesses worldwide. In connection with
this restructuring plan, the division performed a review of its long-lived
assets to identify potential impairments. Pursuant to this restructuring plan,
ArmorGroup i) eliminated 26 employees, primarily from its investigative
businesses, ii) eliminated an additional 24 employees, from its security
business, iii) incurred lease and other exit costs as a result of the closure of
its investigative businesses, and iv) wrote-down the value of both tangible and
intangible assets as a result of the impairment review. ArmorGroup expects to
substantially complete the initiatives in its restructuring plan within nine
months. Most of the significant actions have been completed by June 30, 2001.
As a result of the restructuring plan, the Company has recorded a pre-tax
charge of $10 million. The Company recorded $8.7 million in the first quarter
and has recorded $1.3 million in the second quarter of fiscal 2001. The pre-tax
charge in the six month period ending June 30, 2001 included approximately i)
$1,375,000 in employee termination and related costs including severance,
relocation, medical and other benefits, ii) $956,000 in lease termination and
other exit costs, iii) $291,000 in impairment charges related to tangible
assets, and iv) $7,337,000 in impairment charges related to intangible assets,
primarily goodwill. As of June 30, 2001, the Company had a remaining liability
of $1,297,000 relating to employee termination costs and lease termination and
other exit costs. This liability has been classified in accounts payable,
accrued expenses and other current liabilities on the consolidated balance sheet
and will be funded through cash provided by operating activities and the
Company's credit facility.
Integration and other non-recurring charges. In the six month period ended
June 30, 2001, the Company incurred $836,000 in expenses and costs associated
with the integration of the Company's
17
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
recent acquisitions. The Company incurred $1,456,000 in such fees in the six
months ended June 30, 2000.
Operating income. The operating income was $3.5 million in the six months
ended June 30, 2001, after a $10.0 million restructuring charge compared to
operating income of $14.1 million in the six months ended June 30, 2000, which
included $1.9 million of non-recurring gain from the sale of JSGS.
Interest expense, net. Net interest expense increased by 158.4%, to
$1,514,000 in the six months ended June 30, 2001 compared to $586,000 in the
three months ended June 31, 2000. This increase was the result of increased
borrowings primarily due to acquisitions funded with long-term debt. Interest
expense includes interest on and amortization of the fees associated with the
Company's $100 million credit facility, and the amortization of the discount on
certain liabilities acquired as part of the Safariland acquisition.
Other income, net. Other income, net was $227,000 in the six months ended
June 30, 2001 compared to $1,888,000 for the six months ended June 30, 2000.
This other income, net in the prior year six month period resulted from the sale
of the Company's investment in JSGS.
Income before provision for income taxes. The income before provision for
income taxes was $2.3 million in the six months ended June 30, 2001, compared to
income of $15.4 million in the six months ended June 30, 2000, due to the
factors discussed above.
Provision for income taxes. The provision for income taxes decreased by
$4.4 million, to an expense of $1.3 million in the six months ended June 30,
2001 compared to an expense $5.7 million in the six months ended June 30, 2000.
The effective tax rate for the six months ended June 30, 2001 was an expense of
59.8% compared to an expense of 37.4% for the six months ended June 30, 2000.
The higher than normal effective tax rate is due to the impact of non-deductible
goodwill amortization. The effective tax rate for the Company's foreign
operations is not necessarily indicative of continued tax rates due to
continually changing concentration of income in each country in which the
Company operates.
Net income. Net income was $902,000, in the six months ended June 30, 2001
after a $10.0 million restructuring charge, compared to net income of $9.6
million for the six months ended June 30, 2000, which included $1.9 million of
non-recurring gain from the sale of JSGS. The decrease is primarily due to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash generated from operations and borrowings
under the Company's credit facility will enable the Company to meet its
liquidity, working capital and capital expenditure requirements during the next
12 months. The Company is currently negotiating to increase its credit facility
to $120 million in connection with its proposed acquisition of the Security
Products and Services Group of The Kroll-O'Gara Company. In addition, the
Company may require additional financing to pursue its strategy of growth
through acquisitions. If such financing is required, there are no assurances
that it will be available, or if available, that it can be obtained on terms
favorable to the Company or on a basis that is not dilutive to stockholders.
The Company's spending for its fiscal 2001 capital expenditures will be
approximately $6.0 million, of which the Company has already spent approximately
$3.8 million. As of June 30, 2001 and December 31, 2000, the Company had working
capital of $86.5 million and $67.9 million, respectively.
18
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
On April 20, 2001, the Company announced it had reached a definitive
agreement (the "Agreement") to acquire the Security Products and Services Group
("SPSG") of The Kroll-O'Gara Company for $54.5 million of which $15 million may
be paid in common stock. In connection with the acquisition of SPSG, the Company
has filed a registration statement on Form S-3 (the "Registration Statement")
registering 1,250,000 shares of its common stock. The Company intends to issue
shares under the Registration Statement valued up to $15 million, and the
Company anticipates drawing up to $39.5 million under its credit facility to
finance the acquisition. Except as described in the Registration Statement, the
Company will not receive any proceeds from sales of its common stock under this
Registration Statement.
19
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, but not
limited to, the Company's failure to continue to develop and market new and
innovative products and services and to keep pace with technological change;
competitive pressures; failure to obtain or protect intellectual property
rights; the ultimate effect of various domestic and foreign political and
economic issues on the Company's business, financial condition or results of
operations; quarterly fluctuations in revenues and volatility of stock prices;
contract delays; cost overruns; the Company's ability to attract and retain key
personnel; currency and customer financing risks; dependence on certain
suppliers; changes in the financial or business condition of the Company's
distributors or resellers; the Company's ability to successfully manage
acquisitions, alliances and integrate past and future business combinations;
regulatory, legal, political and economic changes and other risks, uncertainties
and factors inherent in the Company's business and otherwise discussed elsewhere
in this Form 10-Q and in the Company's other filings with the Securities and
Exchange Commission or in materials incorporated therein by reference.
20
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our global operating and financial activities, we are
exposed to changes in raw material prices, interest rates and foreign currency
exchange rates, which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in raw material prices,
interest rates and foreign currency exchange rates through our regular operating
and financing activities. We do not utilize financial instruments for trading or
other speculative purposes, nor do we utilize leveraged financial instruments or
other derivatives.
MARKET RATE RISK
The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates and equity
security price risk. We do not use derivative financial instruments for
speculative or trading purposes.
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relate primarily to borrowings under our Credit Agreement and our
short-term monetary investments. Borrowings under our Credit Agreement are
variable based upon the lender's base rate or Eurodollar rate. Assuming level of
borrowings at June 30, 2001, a hypothetical one-percentage point increase in the
base rate or Eurodollar rate would increase our annual interest expense by
approximately $498,000. To the extent that, from time to time, the Company holds
short-term money market instruments, there is a market rate risk for changes in
interest rates on such instruments. To that extent, there is inherent rollover
risk in the short-term money market instruments 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 business
financing requirements. However, there is no risk of loss of principal in the
short-term money market instruments, only a risk related to a potential
reduction in future interest income. Derivative instruments are not presently
used to adjust the Company's interest rate risk profile. We do not use
derivative financial instruments to hedge this interest rate risk. However, in
the future, the Company may consider the use of financial instruments to hedge
interest rate risk.
Foreign Currency Exchange Rate Risk. The majority of our business is
denominated in U.S. dollars. There are costs associated with our operations in
foreign countries that require payments in the local currency. We partially
manage our foreign currency risk related to those payments by maintaining
operating accounts in these foreign countries, and by having several customers
pay us in those local currencies.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business in numerous countries, including emerging markets
in Africa, Asia, South America, Russia, and CIS. The Company has invested
substantial resources outside of the United States and plans to continue to do
so in the future. The Company's international operations are subject to the risk
of new and different legal and regulatory requirements in local jurisdictions,
tariffs and trade barriers, potential difficulties in staffing and managing
local operations, potential imposition of restrictions on investments,
potentially adverse tax consequences, including imposition or increase of
withholding and other taxes on remittances and other payments by subsidiaries,
and local economic,
21
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
political and social conditions. Governments of many developing countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector. Government actions in the future could have a significant
adverse effect on economic conditions in a developing country or may otherwise
have a material adverse effect on the Company and its operating companies. The
Company does not have political risk insurance in the countries in which it
currently conducts business, but does periodically analyze the need for and cost
associated with this type of policy. Moreover, applicable agreements relating to
the Company's interests in its operating companies are frequently governed by
foreign law. As a result, in the event of a dispute, it may be difficult for the
Company to enforce its rights. Accordingly, the Company may have little or no
recourse upon the occurrence of any of these developments.
22
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 for a description of
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on June 19, 2001. Of
the 23,035,636 shares of Common Stock entitled to vote at the meeting,
16,331,605 shares of Common Stock were present in person or by proxy and
entitled to vote. Such number of shares represented approximately 70.9% of the
Company's outstanding shares of Common Stock.
At the meeting, the Company's Stockholders approved the election of Warren
B. Kanders, Jonathan M. Spiller, Burtt R. Ehrlich, Nicholas Sokolow, Thomas W.
Strauss, Alair A. Townsend and Stephen B. Salzman to the Company's Board of
Directors. The Company's Stockholders voted as follows in connection with such
election:
For Against
--- -------
Warren B. Kanders 13,014,678 3,316,927
Jonathan M. Spiller 16,063,939 267,666
Burtt R. Ehrlich 15,783,260 548,345
Nicholas Sokolow 16,062,938 268,667
Thomas W. Strauss 16,063,939 267,666
Alair A. Townsend 16,063,939 267,666
Stephen B. Salzman 16,063,939 267,666
At the meeting, the Company's Stockholders approved the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditor for the
Company's fiscal year ending December 31, 2001. There were 15,964,842 votes in
favor, 362,600 votes against and 4,163 abstentions in connection with such
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are hereby filed as part of this Quarterly Report on
Form 10-Q.
None
(b) Reports on Form 8-K
23
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Current Report on Form 8-K filed on April 27, 2001 relating to the proposed
acquisition of SPSG.
24
ARMOR HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ARMOR HOLDINGS, INC.
/s/ Jonathan M. Spiller
----------------------------------
Jonathan M. Spiller
President, Chief Executive Officer
and Director
Dated: August 14, 2001
/s/ Robert R. Schiller
----------------------------------
Robert R. Schiller
Executive Vice President and Chief Financial Officer
Dated: August 14, 2001
25