Environment and Government

Aearo aiming for IPO: Giant in safety equipment wants to raise $230 million, plans overseas expansion

January 16, 2006

An Indianapolis company that makes earplugs, hard hats and other protection gear used by everyone from soldiers to construction workers has laid the foundation for an initial public stock offering.

Aearo Technologies Inc. plans to raise up to $230 million in the offering and list its shares on the New York Stock Exchange, according to its registration statement filed late last year with the U.S. Securities and Exchange Commission.

But the filing leaves blank a number of key details-such as the proposed offering price, the number of shares to be sold, and the timetable for the IPO.

Aearo posted 2004 revenue of $363 million, making it the 12th-largest private company in the Indianapolis area, according to IBJ research. Fiscal 2005 revenue rose to $423.4 million.

The company's products wear brand names such as AO Safety and E-A-R. They're a familiar sight in the hardware aisles and at national home improvement chains such as Lowe's and Home Depot.

In terms of market share, Aearo's registration statement says, "we believe we are the #1 manufacturer of passive hearing protection equipment, the #1 manufacturer of communication headsets and the #2 manufacturer of eye protection products in the world."

In the filing, the company laid out an aggressive product and overseas expansion strategy, and stated proceeds of the offering would go toward paying down debt. That includes a portion of the $123 million it owes on a senior loan, and all of the company's 12-percent bonds due in 2013. The company now has $54 million in 12-percent bonds outstanding, and is permitted to issue another $46 million by August.

As of the end of September, the company listed total long-term debt of $351.6 million- much of it stemming from New Yorkbased Bear Stearns & Co.'s $409 million acquisition of Aearo in April 2004. Bear financed the purchase from New Yorkbased Vestar Capital Partners with $304 million in new debt.

When private equity firms like Bear acquire companies, "typically they load these things up with debt," said Ken Skarbeck, principal of Indianapolis private investment firm Aldebaran Capital LLC.

Often, the buyer puts in as little equity as possible in hopes of boosting its chances of pocketing outsized returns when it later sells.

For investors considering such an IPO, "I think there's the risk of too much debt," said Skarbeck. "You're going to see a lot more of these because the IPO market is hot right now."

Indeed, Aearo notes in its registration statement: "We have significant debt." that "could harm our competitive position."

Aearo, like many companies in its business, also faces its share of product liability claims.

It pays $400,000 annually to Bostonbased Cabot Corp.-a specialty chemical maker that spun off Aearo in 1995-to indemnify Aearo for claims made on products made before the spin-off.

At the end of September, Aearo faced 12,714 product liability claims involving exposure to silica and 4,124 claims involving asbestos. At Sept. 30, Aearo had set aside $5.1 million, its estimate of the potential liability on the claims.

Aearo officials did not return phone calls.

According to company sources cited by the trade publication Occupational Health & Safety, "no final decision on the stock offering has been made."

Yet the company has been talking of going public since at least 1998.

"I'm here to take the company public. The company is highly leveraged. We've got a lot of work to do," Aearo CEO Michael McLain told IBJ then. He arrived at Aearo after turning around DowBrands, an Indianapolisbased maker of consumer products, and selling it to Wisconsin-based SC Johnson.

Aearo has been hammering home higher sales in recent years. Net sales between fiscal year 2003 and 2005 rose at a compound annual rate of 15.7 percent, according to the registration statement.

According to Aearo, the $15 billion personal-protection-equipment market has a historical annual growth rate of 3 percent to 4 percent a year. Aearo competes mostly in a $4 billion slice of that market that encompasses eye, face, head, hearing and respiratory products.

Historically, sales have risen with additional government regulation. Lately, though, "there really isn't anything in the regulatory environment that's driving growth. OSHA has been really quiet in rulemaking in recent years," said Jerry Laws, editor of Occupational Health and Safety.

Rather, Laws said, overseas sales have been the focus of growth in the industry.

In 2005, Aearo said, it established sales offices in China and Russia "and we expect to significantly increase our presence in these markets. In the long term, we plan to focus on large, locally owned enterprises and to work with local governments in promoting safety compliance programs."

Aearo also plans to focus on sales to multinational companies that impose their own safety standards worldwide.

About 40 percent of fiscal 2005 sales were in foreign countries.

The company also sees potential for higher sales from military and consumer uses. In recent years, Aearo tried to appeal to younger consumers, cranking out a line of colorful earplugs and fashion eyewear that appeal to do-it-yourselfers who want safety equipment that looks cool.

It also is trying to develop more premium versions of existing products, such as "push to listen" ear muffs that allow wearers to hear outside sounds without removing the gear. It's also begun marketing easier-to-remove respirator masks "and Bluetooth communication headsets that eliminate cables."

One of Aearo's hottest segments is composite material-essentially foam products. For example, it makes damping materials for the hard drive included in Apple Computer's iPod and other electronic products.

Besides diversifying product lines, Aearo says it is pursuing a "focused" acquisition strategy. The personal-protection equipment market is fragmented, with several hundred manufacturers, most of them small and independent, said Aearo, which has made 11 acquisitions since 1995.

Laws, of Occupational Health & Safety, said Aearo has two big competitors in the United States. One is Pittsburghbased Mine Safety Appliances, a publicly traded firm with annual sales topping $850 million. The other is Bacou-Dalloz, a French company with U.S. operations based in Smithfield, R.I.
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