<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 December 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-040423
- ------------------------------- ------------------------------
(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 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 February 10, 1997.
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
Page
----
PART I - Financial Information. . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements (unaudited) . . . . . . . . . . . . . . 3
Consolidated Balance Sheets as of -
December 31, 1996 and June 30,1996 . . . . . . . . . . . . . 3
Consolidated Statements of Operations - Three months
ended December 31, 1996 and December 31, 1995; and the
six months ended December 31, 1996 and December 31, 1995 . . 4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 1996 and December 31,1995. . . 5
Notes to the Consolidated Financial Statements . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 8
PART II - Other Information. . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 11
Signatures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
<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>
December 31, June 30,
1996 1996
----------- --------
(unaudited)
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 5,791 $ 20,824
Accounts receivable. . . . . . . . . . . . . . . . . . . . 213,029 225,337
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 125,496 115,273
Other current assets . . . . . . . . . . . . . . . . . . . 5,154 5,055
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . 349,470 366,489
Property, plant and equipment, net . . . . . . . . . . . . . 147,949 149,235
Cost in excess of net assets acquired
and other intangibles, net . . . . . . . . . . . . . . . . 266,587 271,840
Other assets and deferred charges. . . . . . . . . . . . . . 20,395 19,390
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 784,401 $ 806,954
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS EQUITY:
Current liabilities:
Short-term borrowings. . . . . . . . . . . . . . . . . . . $ 61,808 $ 65,538
Current maturities of long-term debt . . . . . . . . . . . 9,934 9,879
Accounts payable, trade. . . . . . . . . . . . . . . . . . 99,094 108,792
Accrued warranty . . . . . . . . . . . . . . . . . . . . . 15,277 14,256
Other accrued liabilities. . . . . . . . . . . . . . . . . 68,997 75,411
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 255,110 273,876
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 223,006 227,490
Other liabilities. . . . . . . . . . . . . . . . . . . . . . 103,216 106,305
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . 581,332 607,671
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. . . . . . . . . . . . . . . . . . . . . 24,486 22,437
Foreign currency translation adjustment. . . . . . . . . . (1,582) (3,319)
---------- ----------
Total stockholder's equity . . . . . . . . . . . . . . . 203,069 199,283
---------- ----------
Total liabilities and stockholders equity. . . . . . . . . . $ 784,401 $ 806,954
---------- ----------
---------- ----------
</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 Six months ended
----------------------------- -----------------------------
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . . . $ 231,818 $ 214,102 $ 458,911 $ 434,123
Cost of Sales. . . . . . . . . . . . 170,875 155,351 336,059 312,883
---------- ---------- --------- ----------
Gross Profit . . . . . . . . . . . . 60,943 58,751 122,852 121,240
Operating Expenses:
Selling, general and
administrative . . . . . . . . . 49,203 44,845 99,463 89,954
Amortization of intangible
assets . . . . . . . . . . . . . . 2,878 3,498 5,753 6,854
---------- ---------- --------- ----------
52,081 48,343 105,216 96,808
---------- ---------- --------- ----------
Income from operations . . . . . . . 8,862 10,408 17,636 24,432
Interest expense, net. . . . . . . . 6,513 6,070 13,352 11,849
Other (income) expense, net. . . . . 402 (2,018) 341 (1,927)
---------- ---------- --------- ----------
Income before income taxes . . . . . 1,947 6,356 14,510 3,943
Income taxes . . . . . . . . . . . . 1,006 4,004 1,894 8,089
---------- ---------- --------- ----------
Net income . . . . . . . . . . . . . $ 941 $ 2,352 $ 2,049 $ 6,421
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six months ended
---------------------------
December 31, December 31,
1996 1995
------------- ------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 2,049 $ 6,421
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization. . . . . . . . . . . 12,745 12,785
Foreign currency transaction (gains) losses. . . . 164 (1,340)
Changes in operating assets and liabilities. . . . (16,593) 8,041
-------- -------
Net cash (used in) provided by operating
activities. . . . . . . . . . . . . . . . . . . . (1,635) 25,907
Cash flows from investing activities:
Capital expenditures, net. . . . . . . . . . . . . (5,371) (5,915)
Purchase of J&E Hall . . . . . . . . . . . . . . . -- (29,799)
-------- -------
Net cash (used in) investing activities. . . . . . . (5,371) (35,714)
Cash flows from financing activities:
Net borrowings (repayments) under short-term
borrowing arrangements. . . . . . . . . . . . . (3,730) 15,224
Payments on long-term debt . . . . . . . . . . . . (4,430) (12,932)
Proceeds from issuance of long-term debt . . . . . -- 9,812
-------- -------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . . . (8,160) 12,104
Effect of exchange rate changes on cash. . . . . . . 133 (411)
-------- -------
Net increase (decrease) in cash equivalents. . . . . (15,033) 1,856
Cash and cash equivalents at beginning of period . . 20,824 16,242
-------- -------
Cash and cash equivalents at end of period . . . . . $ 5,791 $ 18,098
-------- -------
-------- -------
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 Annual Report on Form 10-K (the
"Annual Report") for the year ended June 30, 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 and six
month periods ended December 31, 1996 and December 31, 1995, the balance sheets
at December 31, 1996 and June 30, 1996 and the consolidated statements of cash
flows for the six months ended December 31, 1996 and December 31, 1995.
The operating results for the three and six months ended December 31, 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 last calendar day of the month.
NOTE 2. INVENTORIES:
Inventories consist of the following (dollars in thousands):
December 31, June 30,
1996 1996
------------- -----------
FIFO Cost:
Raw Materials. . . . . . . . . . . . . . . . $ 49,952 $ 46,870
Work-in-process . . . . . . . . . . . . . 31,154 23,365
Finished goods. . . . . . . . . . . . . . 41,334 42,067
----------- -----------
. . . . . . . . . . . . . . . . . . . . . 122,440 112,302
LIFO adjustment . . . . . . . . . . . . . 3,056 2,971
----------- -----------
$ 125,496 $ 115,273
----------- -----------
----------- -----------
NOTE 3. INCOME TAXES:
The difference between the Company's reported tax provision, for the second
quarter and the six months ended December 31, 1996 and the comparable periods of
the prior year, 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. 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 indemnification's 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 be indemnified 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
6
<PAGE>
amounts exceeding $5.8 million against a $11.5 million promissory note (see
footnote 7 on page 43 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 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
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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Consolidated net sales were $231.8 million and $458.9 million for the
quarter and six months ended December 31, 1996, respectively. This represents
an increase in net sales, as compared to the comparable prior year periods, of
8.3% for the quarter and 5.7% for the half year. Income from operations was
$8.9 million or 3.8% of sales versus $10.4 million or 4.9% of sales for the
second quarter of fiscal years 1997 and 1996, respectively. Income from
operations for six months ended December 31, 1996 and 1995 was $17.6 million or
3.8% of sales and $24.4 million or 5.6%, respectively. The Company's ongoing
implementation of certain cost improvement and strategic initiatives, in both
the Commercial Air Conditioning and Filtration Products groups, has unfavorably
impacted operating income during the quarter and six months ended December 31,
1996. The implementation of these initiatives has resulted in extended delivery
times for some products, higher than anticipated manufacturing costs and
operating expenses. These strategic initiatives involve the integration and
relocation of certain product manufacturing lines, opening operations in Asia,
start-up of new products, implementation of new software systems and the
consolidation of certain field sales' offices. In spite of the higher than
anticipated transition costs, the Company remains committed to these strategic
initiatives in order to realize the expected benefits.
NET SALES
Consolidated net sales were $231.8 million and $458.9 million for the
quarter and six months ended December 31, 1996, respectively. This represents
an increase in net sales, as compared to the comparable prior year periods, of
8.3% for the quarter and 5.7% for the half year. The Industrial Refrigeration
segment was acquired in December, 1995 and thus the prior year quarter and six
months do not reflect full periods. The following table presents the Company's
net sales by business segment.
<TABLE>
<CAPTION>
(dollars in thousands) Quarter ended Six months ended
------------------------------- -----------------------------
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Commercial Air Conditioning. . . . . . . . . . . . $ 123,522 $ 123,200 $ 255,781 $ 258,033
Filtration Products. . . . . . . . . . . . . . . . 89,112 84,660 171,732 171,808
Industrial Refrigeration . . . . . . . . . . . . . 20,351 7,976 34,102 7,976
Eliminations/ other. . . . . . . . . . . . . . . . (1,167) (1,734) (2,704) (3,694)
--------- ---------- --------- ---------
Total. . . . . . . . . . . . . . . . . . . . . $ 231,818 $ 214,102 $ 458,911 $ 434,123
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
Commercial Air Conditioning net sales increased slightly ($0.3 million) in
the second quarter and decreased $2.3 million or 0.9% for the six months ended
December 31, 1996, as compared to the comparable periods from the prior fiscal
year. Domestic sales increased 12.7%, while international sales decreased 24.6%
in the second quarter of fiscal year 1997 versus the second quarter of fiscal
year 1996. For the six months ended December 31, 1996, domestic sales increased
9.1% and international sales decreased 24.6%, as compared to the six months
ended December 31, 1995. Domestic sales increases for the second quarter and
six months ended December 31, 1996 were primarily due to a growing market and
increased market share for Terminal Air Conditioning Systems, continued
acceptance of new products utilizing the single screw technology and increased
exports to Asia and Latin America. Absorption chiller product sales continue to
be negatively affected by the reduction in the number of natural gas incentive
and rebate programs; however, this reduction was partially offset, in the second
quarter, by the shipment of several large contracts that were delayed during the
first quarter of 1997. The decrease in international sales was due to several
large non-recurring projects in the first and second quarters of fiscal year
1996 which were not repeated in the first half of fiscal year 1997, production
and shipment delays as the result of a nationwide truck drivers' union strike in
France, and a continued soft European market.
8
<PAGE>
Backlog for the Commercial Air Conditioning group at the end of the second
quarter for fiscal year 1997 was flat as compared to the prior year at $120
million.
Filtration Products net sales increased $4.5 million or 5.3% during the
second quarter of fiscal year 1997, as compared to the second quarter of fiscal
year 1996. Sales were essentially flat for the six months ended December 31,
1996, as compared to the prior year. In the second quarter of fiscal year 1997
domestic sales decreased 3.5% while international sales increased 14.9% versus
the second quarter of 1996. For the six months ended December 31, 1996, domestic
sales decreased 7.0% and international sales increased 7.7%, as compared to the
six months ended December 31, 1995. The decrease in domestic sales during the
second quarter and six months of fiscal 1996 was primarily attributed to
complexities in implementing new software systems, sales office consolidations
and manufacturing integration; all of which affected delivery schedules.
Management believes that the software systems' and manufacturing problems have
been largely overcome and the difficulties with field sales office consolidation
should be resolved by the end of the fiscal year. In addition, the domestics
sales decrease for the half was partially due to a promotional program sponsored
by a large retail customer during 1996 that was not repeated in the current
year. The increases in international sales, for the second quarter and six
months ended December 31, 1996, were due to strong growth in emerging markets in
Asia and Latin America. These increases were slightly offset due to soft market
conditions in Europe.
GROSS PROFIT
Consolidated gross margin was $60.9 million versus $58.8 million for the
second quarter of fiscal years 1997 and 1996, respectively. For the six months
ended December 31, 1996 and 1995, the consolidated gross margin was $122.9
million and $121.2 million, respectively. The increase in the consolidated
gross margin is attributable to the acquisition of J&E Hall late in the second
quarter of fiscal year 1996. The consolidated gross margin rate was 26.3%
versus 27.4% for the second quarter of fiscal years 1997 and 1996, respectively.
For the six months ended December 31, 1996 and 1995, the consolidated gross
margin rate was 26.8% and 27.9%, respectively. The consolidated gross margin
rate decrease was partially attributable to J&E Hall which has a lower margin
rate than the Company's other business segments. Furthermore, both Commercial
Air Conditioning and the Filtration Products groups' gross profit margin rates
declined due to high production costs resulting from difficulties in the
execution of certain strategic initiatives. 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 $52.1 million or 22.4% of sales versus $48.3
million or 22.6% of sales for the second quarter of fiscal year 1997 and 1996,
respectively. Operating expenses for the six months ended December 31, 1996 and
1995 were $105.2 million or 22.9% of sales and $96.8 million or 22.3% of sales,
respectively. The acquisition of J&E Hall late in the second quarter of fiscal
year 1996 accounted for approximately 60% of the increase in selling, general
and administrative ("SG&A") expenses for the second quarter and first half of
fiscal year 1997. Excluding J&E Hall, SG&A expenses increased approximately 4%
for the quarter and six months ended December 31, 1996, as compared to the prior
year. These spending increases for the quarter and current half year pertain
primarily to the Company's initiative to build a decentralized and global
organization. This initiative included increases in general and administrative
expenses such as staffing 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 the change in estimated lives for certain intangible
assets made in the fourth quarter of the prior fiscal year.
INCOME FROM OPERATIONS
Income from operations was $8.9 million or 3.8% of sales versus $10.4
million or 4.9% of sales for the second quarter of fiscal year 1997 and 1996,
respectively. Income from operations for the six months ended December 31, 1996
and 1995 was $17.6 million or 3.8% of sales and $24.4 million or 5.6%,
respectively. The
9
<PAGE>
Commercial Air Conditioning group had a decrease in income from operations while
the Air Filtration Products and Industrial Refrigeration groups were relatively
flat during the second quarter of fiscal year 1997, as compared to the same
period in 1996. During the six months ended December 31, 1996, the Commercial
Air Conditioning and the Filtration products groups both had decreases in income
from operations while the Industrial Refrigeration group was flat, as compared
to the prior year.
NET INTEREST EXPENSES AND OTHER (INCOME) EXPENSE
Net interest expense was $6.5 million and $13.4 million during the second
quarter and six months ended December 31, 1996 an increase of $0.4 million and
$1.5 million, respectively, as compared to the comparable periods in the prior
year. The increase in interest expense is the result of slightly higher
interest rates, as a result of the Refinancing (see footnote 7 on page 43 in the
Annual Report) and the increased borrowing as a result of the acquisition of J&E
Hall. Net other expense was $0.4 and $0.3 million for the second quarter and
six months ended December 31, 1996, respectively. Net other expense increased
$2.4 million and $2.3 million, respectively, as compared to the prior year.
This change in other expense is primarily due to currency gains and earnings
from equity affiliates during the prior year, which were not repeated.
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.
During the first half of fiscal year 1997, funds provided by earnings, including
non-cash items, were more than offset by funds used to cover changes in net
operating assets. This compared to a generation of $25.9 million in net cash
provided by operating activities in the prior year for the same period. The
comparative decrease in operating cash provided in the first half of fiscal year
1997 reflects lower net income, increased inventory levels, and reduced payables
and accrued expenses, partially offset by a reduction in receivables. During
the first half of fiscal year 1997, cash used in investing activities was $5.3
million and cash used in financing activities was $8.2 million. Cash balances
decreased due to the application of excess cash at foreign subsidiaries against
short-term debt.
The Company has postponed its plan to amend the bank credit facility to
allow multi-currency borrowings on the Revolver, as previously discussed in the
first quarter Form 10-Q (see Page 10 of Form 10-Q for the quarter ended
September 28, 1996).
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 extent and its debt service obligations will continue
to be substantial. In addition, the Bank Agreement (see note 7 in the Annual
Report) requirements become more restrictive in the future. If the Company's
sources of funds were to fail to satisfy the Company's requirements, the Company
may need to amend or 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.
10
<PAGE>
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.
11
<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 February 10, 1996 By: /S/ Michael J. Christopher
-------------------- --------------------------
Michael J. Christopher
Executive Vice President
DATE February 10, 1996 /S/ John M. Sichter
-------------------- --------------------------
John M. Sichter
Controller
(Principal Accounting Officer)
12
<PAGE>
Exhibit Index
Number Description
- ------ -----------
27 Financial Data Schedule
13
<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> 6-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> DEC-28-1996
<CASH> 5791
<SECURITIES> 0
<RECEIVABLES> 218968
<ALLOWANCES> 5939
<INVENTORY> 125496
<CURRENT-ASSETS> 349470
<PP&E> 0
<DEPRECIATION> 18076
<TOTAL-ASSETS> 166025
<CURRENT-LIABILITIES> 255110
<BONDS> 223006
0
0
<COMMON> 250
<OTHER-SE> 202819
<TOTAL-LIABILITY-AND-EQUITY> 784401
<SALES> 458911
<TOTAL-REVENUES> 458911
<CGS> 336059
<TOTAL-COSTS> 336059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13352
<INCOME-PRETAX> 3943
<INCOME-TAX> 1894
<INCOME-CONTINUING> 2049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2049
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
