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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 September 28, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-0404230
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State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
111 SOUTH CALVERT STREET, BALTIMORE, MARYLAND 21202
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(410) 528-2755
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 X No
------- ------
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 September 28,1996.
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INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
Page
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Part I - Financial Information 3
Item 1. Financial Statements (unaudited) 3
Consolidated Balance Sheets as of
September 28, 1996 and June 29, 1996 3
Consolidated Statements of Operations
Three months ended September 28, 1996 and
September 30, 1995 4
Condensed Consolidated Statements of Cash Flows
Three months ended September 28, 1996 and
September 30, 1995 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
SEPTEMBER 30, JUNE 30,
1996 1996
------------- ---------
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 9,853 $ 20,824
Accounts receivable 207,469 225,337
Inventories 121,382 115,273
Other current assets 4,275 5,055
-------- --------
Total current assets 342,979 366,489
Property, plant and equipment, net 147,860 149,235
Cost in excess of net assets acquired and
other identifiable intangibles, net 269,227 271,840
Other assets and deferred charges 19,455 19,390
--------- --------
Total Assets $779,521 $806,954
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Short-term borrowings $ 57,724 $ 65,538
Current maturities of long-term debt 10,294 9,879
Accounts payable, trade 99,837 108,792
Accrued warranty 14,126 14,256
Other accrued liabilities 65,616 75,411
--------- --------
Total current liabilities 247,597 273,876
Long-term debt 225,004 227,490
Other liabilities 106,402 106,305
-------- --------
Total liabilities 579,003 607,671
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 23,545 22,437
Foreign currency translation adjustment (3,192) (3,319)
-------- --------
Total Stockholder's Equity 200,518 199,283
-------- -------
Total Liabilities and Stockholder's Equity $779,521 $806,954
======== ========
See Notes to Consolidated Financial Statements
3
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AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
THREE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ -------------
Net Sales $227,093 $220,021
Cost of Sales 165,184 157,532
-------- --------
Gross Profit 61,909 62,489
Operating Expenses:
Selling, general and administrative 50,260 45,109
Amortization of intangible assets 2,875 3,356
-------- --------
53,135 48,465
-------- --------
Income from operations 8,774 14,024
Interest expense, net 6,839 5,779
Other (income) expense, net (61) 91
-------- --------
Income before income taxes 1,996 8,154
Income taxes 888 4,085
-------- --------
Net income $ 1,108 $ 4,069
======== ========
See Notes To Consolidated Financial Statements
4
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AAF-MCQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
Cash flows from operating activities
Net income $ 1,108 $ 4,069
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization 6,312 6,215
Foreign currency transaction (gains) losses 20 (541)
Changes in operating assets and liabilities (7,529) (2,218)
------- -------
Net cash provided by (used in) operating
activities (89) 7,525
Cash flows from investing activities:
Capital expenditures, net (1,930) (2,316)
-------- -------
Net cash (used in) investing activities (1,930) (2,316)
Cash flows from financing activities:
Net borrowing (repayments) under short-term
borrowing arrangements (6,912) 2,436
Payments on long-term debt (2,071) (6,350)
-------- --------
Net cash (used in) financing activities (8,983) (3,914)
Effect of exchange rate changes on cash 31 (67)
-------- --------
Net increase (decrease) in cash and cash
equivalents (10,971) 1,228
Cash and cash equivalents at beginning of period 20,824 16,242
-------- --------
Cash and cash equivalents at end of period $ 9,853 $17,470
======== =======
See Notes To Consolidated Financial Statements
5
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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 Annual Report on Form 10-K (the "Annual Report") for the year ended
June 29, 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 three months ended September 30, 1996 and September 30,
1995, the balance sheets at September 30, 1996, and June 30, 1996, and the
consolidated statements of cash flows for the three months ended September
30, 1996 and September 30, 1995.
The accompanying financial statements present comparable year to date
amounts based on the Company's current fiscal year-end. The operating
results for the three months ended September 30, 1996 are not necessarily
indicative of the operating results that may be expected for the full year
ending June 30, 1997. For clarity in presentation all periods presented
herein are shown to end on the 30th of the month.
NOTE 2. INVENTORIES:
Inventories consist of the following:
(dollars in thousands)
SEPTEMBER 30, JUNE 30,
1996 1996
------------- ---------
FIFO Cost:
Raw Materials $ 47,722 $ 46,870
Work-in-process 29,051 23,365
Finished goods 41,646 42,067
-------- -------
118,419 112,302
LIFO adjustment 2,963 2,971
-------- --------
$121,382 $115,273
========= ========
NOTE 3. INCOME TAXES:
The difference between the Company's reported tax provision for the
first quarter of fiscal year 1997 and 1996 and the tax provision computed
based on U.S. statutory rates is primarily attributed to nondeductible
goodwill amortization, and foreign tax credits not utilized.
NOTE 4. DEBT
In August 1996, the Company canceled the Securitization Program (see
note 7 of the Annual Report) and increased the Revolving Credit portion of
the Bank Agreement ("Revolver") from $35 million to $100 million (the "August
1996 Amendment"). Trade accounts receivable previously encumbered under the
Securitization Program were consequently re-pledged under the Bank Agreement
via the August 1996 Amendment. In addition, the interest rate premiums
under the Bank Agreement were reduced to LIBOR + 1.375% or prime + 0.375%.
The overall net impact on the Company's average interest rate did not change
significantly. Borrowing capacity increased from a combined $50 million under
the Revolver and
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Securitization at June 30, 1996 to approximately $63 million of borrowing
availability under the Revolver after the August 1996 Amendment.
NOTE 4. 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 an indemnification obligation for 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 must beindemnified by 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
(see note 7 in the Annual Report). Indemnified losses in excess of $17.3
million would then be indemnified 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 in note 11 of the Annual Report 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
liabilities which would be imposed on them under Subchapter S of the Internal
Revenue Code. That agreement
7
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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 material adjustments proposed
during 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.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
NET SALES
Consolidated net sales for the first quarter of fiscal year 1997 increased
$7.1 million or 3.2% to $227.1 million versus $220.0 million for the first
quarter of fiscal year 1996. Industrial Refrigeration had first quarter net
sales of $13.8 million for fiscal year 1997 versus no reported sales for the
first quarter of fiscal year 1996 as the Company acquired the J&E Hall
industrial refrigeration company in the second quarter of fiscal year 1996. The
Commercial Air Conditioning and Filtration Products groups both reported lower
net sales versus the prior year quarter. The following table presents the
Company's revenues by business segment.
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(dollars in thousands)
Net sales:
Commercial Air Conditioning $132,259 $134,832
Filtration Products 82,620 87,148
Industrial Refrigeration 13,751 --
Eliminations/ other (1,537) (1,959)
-------- --------
Total $227,093 $220,021
======== ========
Commercial Air Conditioning net sales decreased $2.6 million or 1.9% to
$132.3 million for the first quarter of fiscal year 1997 versus the first
quarter of fiscal year 1996. Domestic sales increased 5.8%, while
international sales decreased 24.3% in the first quarter of fiscal year 1997
versus the first quarter of 1996. Sales increases in U.S. operations were
primarily due to a growing market and increased market share for Terminal Air
Conditioning Systems and continued acceptance of new products utilizing the
single screw technology. These domestic sales increases were partially offset
by lower sales in the softening CFC replacement market, a decrease in
absorption chiller product sales due to a reduction in the number of natural
gas incentive and rebate Programs and shipments delayed until the next
quarter on several large contracts. The decrease in international sales was
due to several large non-recurring projects in the prior year first quarter
which were not repeated in the current quarter plus softening economic
conditions in Europe. Backlog for the Commercial Air Conditioning group was
$122.9 million at the end of the first quarter of fiscal 1997 as compared to
$118.9 million and $121.0 million at the end of the first quarter and fiscal
year end 1996, respectively.
Filtration Products net sales decreased $4.5 million or 5.2% to $82.6
million for the first quarter of fiscal year 1997 versus the first quarter of
fiscal year 1996. Domestic net sales decreased 10.6% and international sales
were basically flat with a 0.9% increase in the first quarter of fiscal year
1997 versus the first quarter of fiscal year 1996. The decrease in domestic
sales was the result of a promotional program sponsored by a large retail
customer during the 1996 fiscal quarter that was not repeated during the current
quarter, several large environmental product orders being delayed at the
customer's request and some adverse effects from implementing certain new
marketing and manufacturing strategic programs during the first quarter of
fiscal year 1997. International sales were flat as soft market conditions in
Europe were offset by strong sales growth in emerging Asian and Latin American
markets.
GROSS PROFIT
Consolidated gross margin was $61.9 million or 27.3% of sales for the first
quarter fiscal year 1997 versus $62.5 million or 28.4% of sales for the first
quarter fiscal year 1996. The consolidated gross margin rate decrease was
partially attributable to the acquisition of J&E Hall which has a lower margin
rate than the Company's other business segments. In addition, gross profit
margin rates declined in both Commercial Air Conditioning and Filtration
Products due to high production costs resulting from decreased volume, setbacks
9
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in implementing new manufacturing initiatives and start-up production of 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 and pricing strategies aimed
at increasing market share.
OPERATING EXPENSES
Operating expenses were $53.1 million or 23.4% of sales for the first
quarter of fiscal year 1997 versus $48.5 million or 22.0% of sales for the first
quarter of fiscal year 1996. The increase in operating expenses was primarily
the result of the addition of the J&E Hall company acquired late in the second
quarter of fiscal year 1996. J&E Hall operating expenses, $3.3 million, are
included in the current quarter expenses but not included in the prior year. In
addition, the Company incurred certain strategic expenses to enhance its
position in the global market. These strategic initiatives included an increase
in general and administrative expenses to staff a new Asian office, software
consulting and increases in research and development engineering to help meet
the growing demand for new products. These expense increases were partially
offset by a decrease in amortization expense due to a change in certain
intangible assets estimated lives made in the fourth quarter of the prior fiscal
year.
INCOME FROM OPERATIONS
Income from operations for the first quarter of fiscal years 1997 and 1996
was $8.8 million and $14.0 million, respectively. As a percentage of sales,
income from operations was 3.9% for the first quarter of 1997 and 6.4% for the
first quarter of 1996. Both the Commercial Air Conditioning and the Air
Filtration Products groups had decreases in income from operations in the first
quarter of fiscal year 1997 as compared to the same period in 1996. Income from
operations for the Industrial Refrigeration group was not material for the
quarter.
NET INTEREST EXPENSES AND OTHER (INCOME) EXPENSE
Net interest expense was $6.8 million in the first quarter of fiscal year
1997 an increase of $1.0 million versus $5.8 million for the first quarter of
fiscal year 1996. The increase in interest expense is the result of slightly
higher interest rates, as a result of the refinancing (see note 2 in the Annual
Report) and the increased borrowing as a result of the acquisition of J&E Hall.
Net other (income) expense was not material in either year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are provided by cash generated from operating
activities and supplemented when necessary by short-term credit facilities. In
the first quarter of fiscal year 1997, funds provided by earnings, including
non-cash items, were offset by funds used to cover changes in net operating
assets. This compared to a generation of $7.5 million by operating activities
in the prior year for the same period. The comparative decrease in operating
cash provided in the first quarter of fiscal year 1997 reflects lower net
income, operating cash usage by the recently acquired industrial refrigeration
business, J&E Hall, and increased inventory levels due to finished products
awaiting customer shipping dates. During the first quarter of fiscal year 1997,
cash used in investing activities was $1.9 million and cash used in financing
activities was $9.0 million. Cash balances decreased due to the application of
excess cash, at foreign subsidiaries, against short-term debt.
During the second quarter of fiscal 1997, the Company plans to amend its
bank credit facility to allow multi-currency borrowings on the Revolver with
the objectives of reducing interest expense by accessing lower interest rate
currencies, managing various foreign currency asset exposures and providing
an alternative for obtaining foreign currency funding. The Company may hedge
its exposure to currency fluctuations for such borrowings, depending on
operational exposures and its view of the market conditions.
Management believes, based upon current levels of operations and
forecasted earnings, that cash flow from operations, together with borrowings
under the Amended Credit Facility will be adequate to make payments of
principal and interest on debt, to permit anticipated capital expenditures
and to fund working capital requirements and other cash needs. Nevertheless,
the Company will remain leveraged to a significant
10
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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.
11
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
Exhibit 27 Financial Data Schedule ( filed herewith)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the period.
12
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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 November 8, 1996 BY: /S/ MICHAEL J. CHRISTOPHER
---------------- ----------------------------
Michael J. Christopher
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE November 8, 1996 /S/ JOHN M. SICHTER
---------------- -----------------------------
John M. Sichter
Controller
(Principal Accounting Officer)
13
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Exhibit Index
Number Description
- ------ -----------
27 Financial Data Schedule
14
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<PERIOD-START> SEP-28-1996
<PERIOD-END> SEP-28-1996
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<PP&E> 174390
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<BONDS> 225004
0
0
<COMMON> 250
<OTHER-SE> 200268
<TOTAL-LIABILITY-AND-EQUITY> 779521
<SALES> 227093
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