<PAGE>
UNITED STATES 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 March 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 33-80701
AAF-MCQUAY INC.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-0404230
- - ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
111 South Calvert Street, Baltimore, Maryland 21202
- - --------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(410) 528-2755
- - ----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- - ------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
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 _____ No __X__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,497 shares of Common Stock,
par value $100.00 per share, were outstanding as of March 30,1996.
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - Financial Information.................................. 3
Item 1. Financial Statements (unaudited)....................... 3
Consolidated Balance Sheets as of -
March 30, 1996 and July 1, 1995........................ 3
Consolidated Statements of Operations -
Three months ended March 30, 1996 and
April 1, 1995; Nine months ended March 30,
1996 and April 1, 1995................................. 4
Consolidated Statement of Cash Flows -
Nine months ended March 30, 1996 and
April 1, 1995.......................................... 5
Notes to the Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
PART II - Other Information...................................... 13
Item 6. Exhibits and Reports on Form 8-K....................... 13
Signatures............................................................. 14
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 30, July 1,
1996 1995
----------- --------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 22,020 $ 16,242
Accounts receivable 206,452 179,982
Inventories 112,941 110,000
Other current assets 5,876 7,638
----------- --------
Total current assets 347,289 313,862
Property, plant and equipment, net 145,996 145,504
Cost in excess of net assets acquired and
other identifiable intangibles, net 277,552 262,634
Other assets and deferred charges 14,187 9,328
----------- --------
Total Assets $785,024 $731,328
----------- --------
----------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Short-term borrowings $ 57,267 $ 66,453
Current maturities of long-term debt 9,194 26,062
Accounts payable, trade 110,268 93,036
Accrued warranty 14,379 12,473
Other accrued liabilities 71,870 72,280
----------- --------
Total current liabilities 262,978 270,304
Senior term debt 67,000 149,200
Senior unsecured notes 125,000
Other long-term debt 38,319 29,013
Other liabilities 100,793 93,983
----------- --------
Total liabilities 594,090 542,500
Stockholder's equity:
Preferred stock ($1 par value;
1,000 shares authorized, none issued)
Common stock ($100 par value;
8,000 shares authorized, 2,497 shares
issued and outstanding) 250 250
Additional paid-in capital 179,915 179,915
Retained earnings 14,362 7,537
Foreign currency translation adjustment (3,593) 1,126
----------- --------
Total Stockholder's Equity 190,934 188,828
----------- --------
Total Liabilities and Stockholder's Equity $785,024 $731,328
----------- --------
----------- --------
</TABLE>
See Notes To Consolidated Financial Statements
3
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------- ----------------------
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales $218,849 $208,905 $652,972 $582,220
Cost of Sales 158,999 148,337 471,882 413,596
--------- -------- --------- --------
Gross Profit 59,850 60,568 181,090 168,624
Operating Expenses:
Selling, general and administration 47,383 50,335 137,337 133,223
Amortization of intangibles 3,715 3,938 10,569 10,463
--------- -------- --------- --------
51,098 54,273 147,906 143,686
Income from operations 8,752 6,295 33,184 24,938
--------- -------- --------- --------
Interest expense, net 6,542 5,894 18,391 16,977
Other (income) expense, net (1,338) (1,316) (3,265) (1,025)
--------- -------- --------- --------
Income before income taxes and
extraordinary item 3,548 1,717 18,058 8,986
Income taxes 1,509 889 9,598 7,039
--------- -------- --------- --------
Income before extraordinary item 2,039 828 8,460 1,947
Extraordinary item, net of income tax 1,635 -- 1,635 --
--------- -------- --------- --------
Net income $ 404 $ 828 $ 6,825 $ 1,947
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
------------------------
March 30, April 1,
1996 1995
------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,825 $ 1,947
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,669 17,978
Extraordinary item 2,681 --
Foreign currency transaction (gains) losses (1,348) (1,093)
Changes in operating assets and liabilities:
Accounts receivable (12,809) (4,615)
Inventories 1,451 (5,737)
Other assets/liabilities, net 10,828 4,888
Accounts payable and other accrued liabilities 2,781 (4,739)
--------- ---------
Net cash provided by operating activities 30,078 8,629
Cash flows from investing activities:
Capital expenditures, net (8,897) (10,401)
Purchase of J&E Hall (29,799) --
--------- ---------
Net cash used in investing activities (38,696) (10,401)
Cash flows from financing activities:
Net borrowing under short-term borrowing
arrangements (14,467) 39,980
Payments on long-term debt (100,512) (248,511)
Proceeds from issuance of long-term debt 134,812 190,000
Payment of debt issuance cost (4,736) --
Proceeds from contribution of capital -- 10,165
--------- ---------
Net cash provided by (used in) financing activities 15,097 (8,366)
Effect of exchange rate changes on cash (701) (1,638)
--------- ---------
Net increase (decrease) in cash and cash equivalents 5,778 (11,776)
Cash and cash equivalents at beginning of period 16,242 23,952
--------- ---------
Cash and cash equivalents at end of period $ 22,020 $ 12,176
--------- ---------
--------- ---------
</TABLE>
See Notes To Consolidated Financial Statements
5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All inter-company transactions have
been eliminated. The accompanying unaudited consolidated financial statements
contained herein have been prepared in accordance with generally accepted
accounting principles for interim reporting and with the instructions to Form
10-Q and Article 10 of Regulation S-K. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's registration statement on Form S-1
(the "Registration Statement"), which became effective February 9, 1996. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The
accompanying financial statements reflect the statements of operations for the
quarters and nine months ended April 1, 1995, and March 30, 1996, the balance
sheets at July 1, 1995, and March 30, 1996, and the consolidated statements of
cash flows for the nine months ended April 1, 1995 and March 30, 1996.
During 1995 the Company changed its year-end to the Saturday closest to
June 30 from the Saturday closest to December 31. The accompanying financial
statements present comparable year to date amounts based on the Company's
current fiscal year-end. The operating results for the quarter and nine month
period ended April, 1, 1995, and March 30, 1996, are not necessarily indicative
of the operating results for the full year.
During the quarter ended April 1, 1995, the closing date for certain
foreign subsidiaries was changed to reflect the Company's current period. Prior
to this quarter, certain foreign subsidiaries reported on fiscal periods which
ended one month prior ( the "Lag Month" ) to the Company's period end. As a
result, the financial statements, for the quarter and nine month period ended
April 1, 1995, include the Lag Month of these foreign subsidiaries. The impact,
on the financial results, for the quarter and nine months ended April 1, 1995,
was an increase of $19.1 million and $0.7 million in sales and income from
operations, respectively.
NOTE 2. INVENTORIES:
Inventories consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
March 30, July 1,
1996 1995
--------- --------
<S> <C> <C>
FIFO Cost:
Raw Materials................................... $ 47,348 $ 44,858
Work-in-process................................. 26,496 22,175
Finished goods.................................. 37,128 40,729
-------- --------
110,972 107,762
LIFO adjustment................................. 1,969 2,238
-------- --------
$112,941 $110,000
-------- --------
-------- --------
</TABLE>
6
<PAGE>
NOTE 3. INCOME TAXES:
The difference between the Company's reported tax provision for the quarter
and nine months ended April 1, 1995, and March 30, 1996, and the tax provision
computed based on U.S. statutory rates is primarily attributed to nondeductible
goodwill amortization, foreign tax rate differentials and foreign losses not
benefited, and U.S. taxes on foreign unrepatriated earnings.
NOTE 4. REFINANCING:
The Company completed its refinancing plan during the quarter ended March
30, 1996, as described in the Registration Statement. This refinancing included
amending the existing credit facility, an initial public debt offering and a
program for continuous securitization of U.S. dollar trade receivables.
In February 1996, an amendment to the Bank Agreement was executed in which
the lenders consented to the issuance of the $125 million Senior Unsecured Notes
and the $80 million Receivables Securitization Program (the "Refinancing"). The
February 1996 amendment significantly restated commitment amounts, repayment
terms, interest rates, and security provisions. The amended Revolving Credit
portion of the Bank Agreement ("Revolver") has a five year term (expiring in
February, 2001) and provides for maximum aggregate short-term borrowings of
$35 million and up to $35 million for letters of credit. However, the combined
amount of short-term borrowings plus letters of credit cannot exceed
$35 million, subject to reduction if inventory levels fall below certain
minimum amounts. Such minimum amounts are comprised of 60% of eligible
inventory, consisting of finished goods and raw materials plus 20% of work in
progress. At March 30, 1996, no borrowings were outstanding under this
facility, $0.1 million in letters of credit were issued and outstanding and
the Company had approximately $30.0 million in additional borrowing
availability. The Company is required to pay a commitment fee of 3/8% on the
unused portion of the Revolver.
Interest on Revolver advances is generally payable quarterly based, at the
Company's option, on (1) the higher of the bank prime rate or a rate based upon
the Federal Funds Rate plus a specified premium, or (2) the average rate at
which Eurodollar deposits are offered to prime banks in the London interbank
market (LIBOR) plus a specified premium. The interest rate premiums are
determined by an interest rate matrix which is based on certain quarterly
financial ratios as described in the Bank Agreement. As of March 30, 1996, the
Company's interest rate premiums were LIBOR + 1.50% or prime + 0.50% based on
the applicable financial ratios. The interest rate premiums are subject to
0.375% increase or may decrease by as much as 0.50%, depending on the applicable
quarterly financial ratios
The term loan portion of the Bank Agreement consists of Senior Term Loans
that are a direct obligation of the Company. These term loans are secured by
substantially all the domestic assets (except U.S. trade receivables) of the
Company and its domestic subsidiaries and a portion of the capital stock of
certain foreign subsidiaries. The Senior Term Loans are payable in quarterly
installments of varying amounts through March 2001. Interest is generally
payable quarterly based on the same interest rate structure as the Revolver.
In February 1996, the Company issued the 8.875% Senior Unsecured Notes
("Senior Notes") with the proceeds being used to reduce indebtedness under the
Bank Agreement. The Senior Notes were issued under an indenture agreement
which, among other things, contains restrictive covenants relating to dividend
distributions, additional debt, sale of assets, transactions with affiliates,
guarantees and investments by the Company and its subsidiaries. The Senior
Notes are not redeemable prior to maturity (February 15, 2003) and are not
subject to any sinking fund requirement.
In February 1996, the Company entered into a five-year agreement to sell,
on a revolving basis, an undivided percentage ownership interest in a designated
pool of trade accounts receivable ("Securitization Program"). The
Securitization Program provides for up to $80 million in short-term borrowings.
Availability is based on the amount of U.S. dollar trade receivables determined
to be eligible for the program. At March 30, 1996, the Company had $37.0
million of outstanding borrowings under this arrangement and approximately $2
million in additional borrowing availability. Both the accounts receivable and
related short-term debt continue to be included in the Company's consolidated
balance sheet. Financing costs, which currently accrue at an average rate of
approximately 6.1%, are included in interest expense.
7
<PAGE>
NOTE 5. CONTINGENCIES:
INDEMNIFICATION AGREEMENT:
On May 2, 1994, O.Y.L. Industries Berhad ("OYL") purchased all of the
outstanding stock of SnyderGeneral Corporation and SnyderGeneral Holding Company
(collectively, the "Predecessor Company"). Subsequent to this acquisition, the
names of these entities were changed to AAF-McQuay Inc. and AAF-McQuay Holdings
Inc., respectively. The purchase agreement between OYL and the former owners of
the Predecessor Company contains certain indemnifications relating to specified
contingencies that existed as of the acquisition date. Specifically, the former
owners of the Predecessor Company have indemnified the Company from losses
relating to certain environmental, tax, and litigation matters. The purchase
agreement between OYL and the former owners of the Predecessor Company contains
certain indemnifications relating to specified contingencies that existed as of
the acquisition date. Specifically, the former owners of the Predecessor Company
have indemnified the Company from losses relating to certain environmental, tax,
and litigation matters.
Under terms of the purchase agreement, the Company is responsible for the
first $5.8 million of indemnified losses. Indemnified losses (net of recoveries)
exceeding $5.8 million are the obligation of the former owners of the
Predecessor Company up to a maximum of $18 million. If the ultimate amount
expended by the Company for contingencies subject to indemnification exceeds
$23.8 million, the excess will be borne by the Company. If the aggregate amount
expended is less than $23.8 million, the Company will first offset amounts
exceeding $5.8 million against a $11.5 million promissory note (as discussed in
note 7 to the consolidated financial statements in the Registration Statement).
Indemnified losses in excess of $17.3 million would then be reimbursed to the
Company by the former owners of the Predecessor Company up to $6.5 million. The
Company believes that the ultimate liability for indemnified losses will exceed
$23.8 million and has recognized this non-current liability in the accompanying
Consolidated Balance Sheets.
ENVIRONMENTAL MATTERS:
The Company is subject to potential liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
(CERCLA), and other federal, state and local statutes and regulations governing
the discharge of pollutants into the environment and the handling and disposal
of hazardous substances and waste. These statutes and regulations, amongst other
things, impose potential liability on the Company for remediating contamination
arising from the Company's past and present operations and from former
operations of other entities at sites later acquired and now owned by the
Company. Many of the Company's facilities have operated for many years, and
substances which are or might be considered hazardous were generated, used, and
disposed of at some locations, both on- and off-site. Therefore, it is possible
that environmental liabilities in addition to those described below may arise in
the future. The Company records liabilities if, in management's judgment,
environmental assessments or remedial efforts are probable and the costs can be
reasonably estimated. These accrued liabilities are not discounted. Such
estimates are adjusted if necessary based upon the completion of a formal study
or the Company's commitment to a formal plan of action. The Company believes
that all significant environmental matters are subject to the indemnification
agreement with the former owners of the Predecessor Company described above.
The Company is currently a plaintiff in several legal suits, assessing
insurance coverage, or pursuing other actions in an attempt to recover the cost
associated with above liabilities. No amounts have been recorded in the
accompanying Consolidated Balance Sheets relating to any such possible
recoveries.
INCOME TAX:
The Predecessor Company's U.S. federal income tax returns for the taxable
years ending in 1987, 1988, 1989 and 1990 have been examined by the Internal
Revenue Service. Adjustments to the taxable income for each of these years have
been proposed. Portions of the resulting tax liabilities would be imposed
directly on the Company or its subsidiaries, and the Company is obligated under
the purchase agreement to make payments to the former owners of the Predecessor
Company to compensate for the remainder of the tax
8
<PAGE>
liabilities which would be imposed on them under Subchapter S of the Internal
Revenue Code. That agreement also entitles the Company to payments from the
former shareholders of certain tax refunds or benefits which the former
owners may realize. Payments by the Company under this agreement are
indemnified losses under the purchase agreement (as discussed above), and
receipts by the Company from the former owners, as well as certain other
future tax benefits which the Company may realize on its own tax returns must
be subtracted from losses which are subject to indemnification.
On March 23, 1995, the Internal Revenue Service opened an examination of
the Predecessor Company's tax returns for the years ending in 1991, 1992,
1993 and 1994. Other than issues originating in earlier years which would
also affect these years; there have been no issues raised in this examination.
These tax matters are also covered by the indemnification agreement with the
former owners of the Predecessor Company.
LITIGATION:
The Company is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Company's products. The Company is also involved in litigation and
administrative proceedings involving employment matters and commercial disputes.
Some of these lawsuits include claims for punitive as well as compensatory
damages. The Company is insured for product liability claims for amounts in
excess of established deductibles and accrues for the estimated liability on a
case-by-case basis up to the limits of the deductibles. All other claims and
lawsuits are also handled on a case-by-case basis.
The Company does not believe that the potential liability from the ultimate
outcome of environmental, income tax and litigation matters will have a material
adverse effect on the Company.
NOTE 6. EXTRAORDINARY ITEMS:
During the quarter ended March 30, 1996, the Company completed the
Refinancing. As part of the Refinancing the Company used some of the proceeds
from the offering to repay long-term debt as described in the Registration
Statement. As a result, the Company recorded an extraordinary item of $1.6
million ($2.7 million net of $1.1 million tax benefit) relating to unamortized
debt issuance cost.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
During the quarter ended April 1, 1995, the closing date for certain
foreign subsidiaries was changed to reflect the Company's current period. Prior
to this quarter, certain foreign subsidiaries reported on fiscal periods which
ended one month prior (the "Lag Month" ) to the Company's period end. As a
result, the financial statements, for the quarter and nine month period ended
April 1, 1995, include the Lag Month of these foreign subsidiaries. The impact
on the financial results for the quarter and nine months ended April 1, 1995,
was an increase of $19.1 million on sales and $0.7 million in income from
operations. When meaningful, management will discuss the financial results
excluding the Lag Month in order to improve comparability.
NET SALES
Consolidated net sales were $218.8 million and $653.0 million for the
quarter and nine month period ended March 30, 1996, respectively. The
Industrial Refrigeration segment is composed of the J&E Hall company, which was
acquired in December of 1995. The following table summarizes the Company's net
sales, adjusted for the Lag Month, by business segment:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------------------- -------------------------
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
--------- ---------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales:
Commercial Air Conditioning. . . . . . . . . . . . $124,725 $112,570 $382,758 $323,928
Filtration Products. . . . . . . . . . . . . . . . 84,023 77,643 255,832 240,331
Industrial Refrigeration . . . . . . . . . . . . . 11,846 -- 19,823 --
Lag Month. . . . . . . . . . . . . . . . . . . . . -- 19,101 -- 19,101
Eliminations/other . . . . . . . . . . . . . . . . (1,745) (409) (5,440) (1,140)
--------- ---------- ---------- --------
Total. . . . . . . . . . . . . . . . . . . . . . $218,849 $208,905 $652,972 $582,220
--------- ---------- ---------- --------
--------- ---------- ---------- --------
</TABLE>
Commercial Air Conditioning net sales increased $12.2 million or 10.8% and
$58.8 million or 18.2% for the quarter and nine month period ended March 30,
1996, respectively, as compared to the comparable 1995 periods. Domestic and
international gross sales increased 10.0% and 23.9%, respectively, for the
quarter ended March 30, 1996 as compared to the quarter ended April 1, 1995.
For the nine months ended March 30, 1996, gross domestic sales increased 11.3%
and gross international sales increased 34.6%, as compared to the nine months
ended April 1, 1995. Sales increases in U.S. operations, both for the quarter
and year to date, primarily reflect increased Chiller Product sales due to the
strong replacement market, growing exports to Southeast Asia and increased sales
from new products. International sales growth for both periods, primarily in
Europe, was the result of improved distribution channels, the introduction of
new screw chiller products and favorable market conditions in Europe.
Filtration Products net sales increased $6.4 million or 8.2% and $15.5
million or 6.4% for the quarter and nine month period ended March 30, 1996,
respectively, as compared to the comparable periods in 1995. The growth in net
sales for the quarter was primarily the result of international operations which
increased gross sales 19.3% as compared to the prior year quarter. The
increases in international sales were due to favorable markets in Europe and
Asia. European environmental product (air pollution control and machinery
filtration and acoustical systems) sales for the quarter showed strong gains
compared to the prior year quarter. In addition, international sales of air
filters and pollution control products benefited from improved distribution
channels and aggressive marketing strategies in Asia. Net sales from U.S.
10
<PAGE>
operations were essentially level for the quarter as compared to the 1995
quarter. Substantial quarterly sales increases in U.S. air filters were more
than offset by declines in environmental product sales plus the inclusion of
a non-recurring nuclear contract of approximately $2 million in the prior year
quarter. For the nine months ended March 30, 1996, sales increased 34.6% from
international operations and 11.3% domestically, as compared to the nine
months ended April 1, 1995. Strong North American air filter sales plus air
pollution control and machinery filtration and acoustical system sales,
particularly in Europe, all exceeded prior year sales.
GROSS PROFIT
Gross profit was $59.9 million and $181.1 million for the quarter and
nine month period ended March 30, 1996, and $60.6 million and $168.6 million
for the quarter and nine months ended April l, 1995, respectively. After
eliminating the lag month from the quarter ended April 1, 1995, gross profit
for such period would be $55.6 million ("Adjusted Gross Profit"). The
Adjusted Gross Profit of $59.9 million for the quarter ended March 30, 1996
respresents an increase of $4.2 million over the April 1, 1995 quarter. For
the nine month period ended March 30, 1996, Adjusted Gross Profit increased
$17.4 million to $181.1 million as compared to $163.7 million Adjusted Gross
Profit for the nine month period ended April 1, 1995. The increase in
Adjusted Gross Profit for the quarter and nine month period ended March 30,
1996, was the result of increased volume and the acquisition of J&E Hall.
Adjusted Gross Profit as a percentage of sales was 27.3%, a decrease of 2.0%
from 29.3% for the quarters ended March 30, 1996, and April 1, 1995,
respectively. For the nine month period ended March 30, 1996, Adjusted Gross
Profit as a percentage of sales decreased 1.4% to 27.7% as compared to 29.1%
for the nine month period ended April 1, 1995. For the quarter and nine
month period ended March 30, 1996, the acquisition of J&E Hall contributed to
a portion of this decline as J&E Hall has lower margin rates than the
Company's other business segments. Further, Adjusted Gross Profit as a
percentage of sales was adversely affected in Commercial Air Conditioning due
to production start up costs on a new product. Additionally, certain product
lines in both Filtration Products and Commercial Air Conditioning segments
experienced margin rate deterioration due to competitive price pressures.
OPERATING EXPENSES
Operating expenses were $51.1 million and $147.9 million for the quarter
and nine month period ended March 30, 1996, and $54.3 million and $143.7
million for the quarter and nine months ended April l, 1995, respectively.
After eliminating the lag month from the quarter ended April 1, 1995,
operating expenses for such period would be $50.0 million ("Adjusted
Operating Expenses"). Adjusted Operating Expenses of $51.1 million for the
quarter ended March 30, 1996, respresents an increase of $1.1 million over the
April 1, 1995 quarter. For the nine month period ended March 30, 1996,
Adjusted Operating Expenses increased $8.5 million to $147.9 million as
compared to $139.4 million for the nine month period ended April 1, 1995.
Increased sales activity and the acquisition of J&E Hall were the primary
reasons for the increase in Adjusted Operating Expenses for the quarter and
nine month period ended March 30, 1996. Adjusted Operating Expenses as a
percentage of sales were 23.4%, a decrease of 2.9% from 26.3% for the
quarters ended March 30, 1996, and April 1, 1995, respectively. For the nine
month period ended March 30, 1996, Adjusted Operating Expenses as a
percentage of sales decreased 2.1% to 22.7% as compared to 24.8% for the nine
month period ended April 1, 1995. The primary reason for the Adjusted
Operating Expenses percentage of sales decreases for the quarter and nine
month periods ended March 30, 1996, as compared to the prior year, was due to
cost containment actions and the realization of cost saving strategies
implemented by the Company during fiscal year 1995.
INCOME FROM OPERATIONS
Income from operations was $8.8 million and $33.2 million for the
quarter and nine month period ended March 30, 1996, and $6.3 million and
$24.9 million for the quarter and nine months ended April l, 1995,
respectively. After eliminating the lag month from the quarter ended April 1,
1995, income from operations for such period would be $5.6 million ("Adjusted
Income from Operations"). Adjusted Income from Operations of $8.8 million for
the quarter ended March 30, 1996 represents an increase of $3.2 million
over the April 1, 1995 quarter. For the nine month period ended March
30, 1996, Adjusted Income from Operations increased $9.0 million to $33.2
million as compared to $24.2 million for the nine month period ended April 1,
1995. Adjusted Income from Operations as a percentage of sales was 4.0%, an
increase of 1.0% from 3.0% for the quarters ended March 30, 1996, and April
1, 1995, respectively. For the nine month period ended March 30, 1996, total
Company Adjusted Income from Operations as a percentage of sales increased
0.8 percentage points to 5.1% as compared to 4.3% for the nine month period
ended April 1, 1995. The Commercial Air Conditioning Adjusted Income from
Operations as a percentage of sales increased 1.9 and 0.5 percentage points,
respectively, for the quarter and nine month comparisons. The Filtration
Products Adjusted Income from Operations as a percentage of sales remained
essentially level for the quarter comparison and increased 2.1 percentage
points for the nine month comparison. The Industrial Refrigeration
11
<PAGE>
segment had an insignificant loss from operations for the quarter and nine
month period ended March 30, 1996.
NET INTEREST EXPENSE AND OTHER (INCOME) EXPENSE
Net interest expense was $6.5 million an increase of $0.6 million from
$5.9 million for the quarters ended March 30, 1996, and April 1, 1995,
respectively. For the nine month period ended March 30, 1996, net interest
expense increased $1.4 million to $18.4 million as compared to $17.0 million
for the nine month period ended April 1, 1995. The increase for the quarter
and nine month period ended March 30, 1996, was largely attributable to an
increase in borrowing to fund the acquisition of J&E Hall. Net Other income
remained flat at $1.3 million for the quarters ended March 30, 1996, and
April 1, 1995, and was $3.3 million and $1.0 million for the nine months
ended March 30, 1996, and April 1, 1995, respectively. Net Other income
consists primarily of net foreign currency transaction gains and net equity
earnings in affiliates.
EXTRAORDINARY ITEM
The Company recorded an extraordinary item of $2.7 million (or $1.6
million, net of tax) relating to unamortized debt issuance cost written off
during February 1996 as part of the Refinancing (see note 6 of the consolidated
notes to the financial statements).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first nine months of
fiscal 1996 was $30.1 million, compared to $8.6 million for the first nine
months of fiscal 1995. The increase in net cash provided by operating
activities is due primarily to an increase in operating income as a result of
increased sales volume and reduction in net working capital during fiscal 1996.
Net cash used in investing activities was $38.7 million and $10.4 million for
the nine months ended March 30, 1996, and April 1, 1995, respectively. The
$38.7 million in investing activities consisted of $8.9 million in capital
expenditures and $29.8 million in net cash used to purchase J&E Hall. Net cash
provided by financing activities for the nine months ended March 30, 1996, was
$15.1 million. The $15.1 million in cash provided by financing activities
consisted of the $134.8 million in proceeds from the issuance of new long-term
debt, $4.7 million in payments for debt issuance cost and the repayment of $14.5
million and $100.5 million of short-term and long-term debt, respectively. The
financing activity during fiscal year 1996 was primarily the result of the
Refinancing, as discussed in footnote 4 to the consolidated financial
statements.
The Refinancing, consisted of $125 million of 8 7/8% Senior Notes - Due
2003, an $80 million trade receivables securitization facility and an Amended
Credit Facility of $110.0 million. The Refinancing increased the Company's
availability of short-term credit facilities, deferred debt amortization
requirements and extended the average life of indebtedness. Management does not
expect a material change in interest expense as result of the Refinancing.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
Amended Credit Facility and the Receivables Facility, will be adequate to make
payments of principal and interest on debt, including the Notes, to permit
anticipated capital expenditures and to fund working capital requirements and
other cash needs. Nevertheless, the Company will remain leveraged to a
significant extent and its debt service obligations will continue to be
substantial. If the Company's sources of funds were to fail to satisfy the
Company's requirements, the Company may need to refinance its existing debt or
obtain additional financing. There is no assurance that any such new financing
alternatives would be available, and, in any case, such new financing (if
available) would be expected to be more costly and burdensome than the debt
agreements currently in place.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) EXHIBITS
NUMBER DESCRIPTION
------ -----------
Exhibit 27 Financial Data Schedule (filed herewith)
(b) REPORTS ON FORM 8-K
The Company filed the following exhibits on Form 8-K dated April 26, 1996
NUMBER DESCRIPTION
------ -----------
4.1 Indenture dated as of February 14, 1996, with IBJ
Schroder Bank and Trust Company
10.1 Third Amendment to Credit Agreement dated February 7,
1996, with the Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial
institutions listed therein
10.2 Receivables Purchase Agreement dated February 14, 1996
with AAF-McQuay Funding Corporation
10.3 $80,000,000 Trade Receivables Purchase and Sale Agreement
dated as of February 14, 1996, with AAF-McQuay Funding
Corporation, Citibank, N.A., Citicorp North America, Inc.
and certain other parties listed therein
10.4 $80,000,000 Trade Receivables Purchase and Sale Agreement
dated as of February 14, 1996, with AAF-McQuay Funding
Corporation, Citibank, N.A., Citicorp North America, Inc.
and Corporate Receivables Corporation
</TABLE>
13
<PAGE>
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.
AAF-MCQUAY INC.
DATE May 13, 1996 /S/ MICHAEL J. CHRISTOPHER
---------------- ----------------------------------------------
Michael J. Christopher
Vice President and Chief Financial Officer
(Principal Financial Officer)
DATE May 13, 1996 /S/ JOHN M. SICHTER
---------------- ----------------------------------------------
John M. Sichter
Controller
(Principal Accounting Officer)
14
<PAGE>
Exhibit Index
NUMBER DESCRIPTION
- - ------ -----------
27 Financial Data Schedule
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-END> MAR-30-1996
<CASH> 22,020
<SECURITIES> 0
<RECEIVABLES> 212,167
<ALLOWANCES> 5,715
<INVENTORY> 112,941
<CURRENT-ASSETS> 347,289
<PP&E> 167,490
<DEPRECIATION> 21,494
<TOTAL-ASSETS> 785,024
<CURRENT-LIABILITIES> 262,978
<BONDS> 230,319
0
0
<COMMON> 250
<OTHER-SE> 190,684
<TOTAL-LIABILITY-AND-EQUITY> 785,024
<SALES> 652,972
<TOTAL-REVENUES> 652,972
<CGS> 471,882
<TOTAL-COSTS> 471,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,391
<INCOME-PRETAX> 18,058
<INCOME-TAX> 9,598
<INCOME-CONTINUING> 8,460
<DISCONTINUED> 0
<EXTRAORDINARY> 1,635
<CHANGES> 0
<NET-INCOME> 6,825
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
