Q2 2003 Armor Holdings, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the second-quarter 2003 Armor Holdings Inc. conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Armor Holdings Inc.

UNIDENTIFIED CORPORATE PARTICIPANT: In accordance with Regulation FD for fair disclosure, we will be webcasting this conference call. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Armor Holdings is strictly prohibited. Please note that on this call we expect to discuss events or results that have not yet occurred or been realized, commonly referred to as forward-looking statements. Such discussion and statements often will contain words such as expect, anticipate, believe, intend, and estimate.

Actual results, which may differ materially from forward-looking statements, will be dependent upon various factors and risks including, but not limited to, the Company's ability to successfully complete and integrate the acquisition of Simula, sell the ArmorGroup services division on favorable terms, manufacture and market its core products, provide a variety of products and services to its customers on a global basis, respond to new laws and regulations, continue its strategy of growth by acquisition, manage the impact of foreign currency exchange, and manage general worldwide security issues, economic conditions, uncertainties and risks including those described from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's registration statement on form S3, it's 2002 Form 10-K, and most recent form 10-Qs.

Please note that certain pro forma data provided herein, which is provided as alternative for understanding the Company's operating results, is not in conformance with GAAP and may be different from pro forma measures used by other companies or our competitors. In accordance with Statement of Accounting Standards 144, accounting for impairment or disposal of long-lived assets, the assets and liabilities of the company's Services Division are classified as held for sale with its operating results reported as discontinued operations in the Company's statement of operations for all periods reported in our most recently filed Form 10-K and first quarter 10-Q. The content of this webcast contains time sensitive information that is accurate only as of this broadcast, Wednesday, August 13, 2003. The Company undertakes no obligation to make any revisions to the statements contained in our remarks or to update them to reflect events or circumstances occurring after this conference call.

In our earnings announcement released yesterday afternoon, we disclosed certain non-GAAP financial measures as well as a reconciliation of such measures as required by Regulation G under the Securities Exchange Act of 1934. Such non-GAAP financial measures are comprised of net income from continuing operations before integration and other non-recurring charges, EBITDA from continuing operations and EBITDA from our discontinued operations excluding the integrated services businesses which we sold in April, 2003. A copy of our press release can be accessed by selecting the financial releases link on the Investor Relations homepage of our website.

ROBERT SCHILLER, COO AND CFO, ARMOR HOLDINGS, INC.: Good morning everyone and thank you for joining us. My name is Rob Schiller and I am the Chief Operating Officer and Chief Financial Officer of Armor Holdings. I'm joined this morning by Steve Croskrey, Products Division President, and Glenn Heiar, our Chief Accounting Officer. By now, each of you should have seen our second-quarter results which we released yesterday after the market closed. As many of you know, we've been extremely busy since we last spoke to you in mid-May. In addition to reporting second-quarter earnings in line with our guidance and expectations, the Company generated strong operating cash flow, raised $150 million in 8 1/4 percent Senior Subordinated Notes, completed a new credit agreement and executed a letter of intent to acquire Simula Inc., The Pheonix based defense contractor.

In this conference call we intend to discuss these developments, provide you a little color on our second-quarter performance, and provide you with insight into our expectations for the third quarter of this year. After our prepared remarks, we will open up the lines for questions from our securities analysts. For the three months ended June 30, 2003, revenues from continuing operations increased 14 percent to $81.7 million. Internal revenue growth from continuing operations was 7.8 percent during the same period, of which 1.8 percent related to foreign currency movements caused by the weakening of the dollar against the euro and the British pound, and partially offset by the strengthening of the dollar against various Latin American currencies.

Actual income and diluted earnings per share from continuing operations were $3.5 million and 13 cents per share compared to $4.8 million and 15 cents per share in the same period last year. Actual income includes $3.8 million of non-recurring charges, of which $3.3 million relates to the recent departure of Jonathan Spiller, our former Chief Executive, and the balance of $522,000 relates to merger and integration expenses for requisitions completed in the prior 12 months. Net income and diluted earnings per share from continuing operations before integration and other non-recurring charges was $5.8 million and 21 cents per share. Overall, our performance is in line with our guidance and represents a 16.7 percent increase in pro forma earnings per share over the same period last year. As predicted, we have significantly reduced our acquisition related merger integration charges, and at the same time significantly increased both operating and free cash flow during the period which Glenn Heiar will address during his remarks.

Finally, ArmorGroup Services, our discontinued operations, also posted strong second-quarter results in line with our expectations and our annual guidance. Net income from discontinued operations was $1.1 million, compared to a loss of $749,000 in the prior year. The second-quarter net income includes a loss of $366,000 from the sale of ArmorGroup Integrated Systems, which was sold on April 17, 2003. Excluding the loss on sale, net income from discontinued operations for the three months ended June 30th was $1.5 million and EBITDA was $2.3 million. We're pleased with ArmorGroup's profitability. These results suggest that ArmorGroup appears to have turned the corner towards increased profitability, and we remain optimistic that we can conclude a sale of this business by the end of this year.

As most of you are probably aware, yesterday we completed the private placement of $150 million in Senior Subordinated Notes. Net proceeds from this transaction were $146 million. These are 10 year non amortizing 8.25 percent notes. In addition, we have reduced our five-year undrawn senior secured revolving credit facility with our banks to $60 million from $120 million. Our organization moved very quickly to get this issue to market and we feel fortunate to have placed these notes when we did, as the credit markets became extremely volatile during the process. While we plan to repay existing indebtedness, we expect to use these funds primarily as growth capital to fund future acquisitions as well as for general, corporate and working capital purposes.

Many of you probably read that on July 23rd we announced the execution of a letter of intent to acquire Simula for $110.5 million, our largest acquisition to date. We are working to execute a merger agreement with Simula at the end of August and complete the transaction during the fourth quarter. We believe Simula is a strong strategic fit with our business, as one of the largest producers of SAPI plates for military body armor for each of the U.S. Army and the U.S. Marine Corps over the last 12 months and was the sole source provider of crash worthy seats in a number of different helicopter and fixed wing …