<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 27, 1997
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)
<TABLE>
<S> <C>
Delaware 41-0404230
- ------------------------------------ --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
</TABLE>
<TABLE>
<S> <C>
111 South Calvert Street, Baltimore, Maryland 21202
- --------------------------------------------- -----
(Address of principal executive offices) (Zip code)
</TABLE>
(410) 528-2755
- ------------------------------------------------------
(Registrant'(1)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'(1)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 2, 1998.
<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--December 31, 1997
and June 30, 1997...................................... 3
Consolidated Statements of Operations--Three months
ended December 31, 1997 and December 31, 1996; and
the six months ended December 31, 1997 and
December 31, 1996...................................... 4
Condensed Consolidated Statements of Cash Flows--
Six months ended December 31, 1997 and
December 31, 1996...................................... 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...................................... 13
Item 1. Legal Proceedings...................................... 13
Item 6. Exhibits and Reports on Form 8-K....................... 13
Signatures............................................. 14
</TABLE>
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,
1997 1997
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents........................................................... $ 11,544 $ 10,827
Accounts receivable................................................................. 224,349 233,405
Inventories......................................................................... 123,381 124,192
Other current assets................................................................ 6,039 6,858
------------ ----------
Total current assets.............................................................. 365,313 375,282
Property, plant and equipment, net.................................................... 145,179 150,214
Cost in excess of net assets acquired and other identifiable intangibles, net......... 260,014 266,784
Other assets and deferred charges..................................................... 18,551 18,088
------------ ----------
Total Assets..................................................................... $ 789,057 $ 810,368
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Short-term borrowings.............................................................. $ 52,688 $ 58,703
Current maturities of long-term debt............................................... 12,234 12,091
Accounts payable, trade............................................................ 115,388 116,877
Accrued warranty................................................................... 13,772 12,979
Other accrued liabilities.......................................................... 83,170 86,369
------------ ----------
Total current liabilities........................................................ 277,252 287,019
Long-term debt....................................................................... 199,689 217,030
Other liabilities.................................................................... 104,186 102,038
------------ ----------
Total liabilities................................................................ 581,127 606,087
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.................................................................. 33,496 29,074
Foreign currency translation adjustment............................................ (5,731) (4,958)
------------ ----------
Total Stockholder's Equity.................................................... 207,930 204,281
------------ ----------
Total Liabilities and Stockholder's Equity........................................... $ 789,057 $ 810,368
------------ ----------
------------ ----------
</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
-------------------------- --------------------------
<S> <C> <C> <C> <C>
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net Sales.............................................. $ 233,380 $ 231,818 $ 478,506 $ 458,911
Cost of Sales.......................................... 171,596 170,875 349,635 336,059
------------ ------------ ------------ ------------
Gross Profit........................................... 61,784 60,943 128,871 122,852
Operating Expenses:
Selling, general and administrative.................. 53,494 49,203 108,701 99,463
Amortization of intangible assets.................... 2,950 2,878 5,850 5,753
------------ ------------ ------------ ------------
56,444 52,081 114,551 105,216
------------ ------------ ------------ ------------
Income from operations................................. 5,340 8,862 14,320 17,636
Interest expense, net.................................. 6,618 6,513 13,176 13,352
Other (income) expense, net............................ (7,181) 303 (7,333) 306
------------ ------------ ------------ ------------
Income before income taxes............................. 5,903 2,046 8,477 3,978
Minority interest earnings (loss)...................... (115) (99) (241) (35)
Income taxes........................................... 2,656 1,006 3,814 1,894
------------ ------------ ------------ ------------
Net income............................................. $ 3,132 $ 941 $ 4,422 $ 2,049
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
December 31, December 31,
1997 1996
------------ ---------------
<S> <C> <C>
Cash flows from operating activities
Net income...................................................................... $ 4,422 $ 2,049
Adjustments to reconcile to cash from operating activities:
Depreciation and amortization................................................... 13,374 12,745
Foreign currency transaction (gains) losses..................................... (24) 164
Gain on sale of business........................................................ (6,626) 0
Changes in operating assets and liabilities..................................... 5,147 (16,593)
------------ ---------------
Net cash from operating activities................................................ 16,293 (1,635)
Cash flows from investing activities:
Capital expenditures, net....................................................... (9,318) (5,371)
Proceeds from sale of business.................................................. 17,133 0
------------ ---------------
Net cash from investing activities................................................ 7,815 (5,371)
Cash flows from financing activities:
Net repayments under short-term borrowing arrangements.......................... (6,015) (3,730)
Payments on long-term debt...................................................... (17,198) (4,430)
------------ ---------------
Net cash from financing activities................................................ (23,213) (8,160)
Effect of exchange rate changes on cash........................................... (178) 133
------------ ---------------
Net increase (decrease) in cash and cash equivalents.............................. 717 (15,033)
Cash and cash equivalents at beginning of period.................................. 10,827 20,824
------------ ---------------
Cash and cash equivalents at end of period........................................ $ 11,544 $ 5,791
------------ ---------------
------------ ---------------
</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 Annual Report on Form 10-K (the
"Annual Report") for the year ended June 30, 1997. 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, 1997 and December 31, 1996, the balance sheets at
December 31, 1997, and June 30, 1997, and the consolidated statements of cash
flows for the six months ended December 31, 1997 and December 31, 1996.
The operating results for the six months ended December 31, 1997 are not
necessarily indicative of the operating results that may be expected for the
full year ending June 30, 1998. The Company's period end is the closest
Saturday to the end of the month. 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:
<TABLE>
<CAPTION>
December 31, June 30,
(Dollars in thousands) 1997 1997
----------- ----------
<S> <C> <C>
FIFO Cost:
Raw Materials............. $ 47,921 $ 51,393
Work-in-process........... 30,189 27,618
Finished goods............ 41,989 42,109
---------- ----------
120,099 121,120
LIFO adjustment........... 3,282 3,072
---------- ----------
$ 123,381 $ 124,192
---------- ----------
---------- ----------
</TABLE>
Note 3. Income Taxes:
The difference between the Company's reported tax provision, for the second
quarter and the six months ended December 31, 1997 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 unbenefitted
foreign losses.
Note 4. Employee Benefit Plans:
In fiscal year 1997, the Company adopted a Stock Option Plan which provides
for the grant of non-qualified stock options to certain members of the
management team and key employees to purchase the common stock of the
Company's parent AAF-McQuay Group, Inc. In November, the Company granted
options for approximately 4.7% of AAF-McQuay Group, Inc.'s outstanding
shares.
6
<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 an indemnification obligation
for losses relating to certain environmental, tax, and litigation matters.
On January 29, 1997, the Company instituted an action before the American
Arbitration Association in Dallas, Texas, to enforce the Company's rights to
indemnification of all its claimed losses. On January 26, 1998, the arbitration
panel issued its ruling which, among other things, limited the right of the
Company to recover certain environmental losses. The panel held that the Company
is entitled to include as indemnified losses only those remediation and related
expense paid on or before May 2, 1999. The Company's estimate of costs
associated with the environmental, tax and litigation indemnified matters is
accrued if, in management's judgment, the likelihood of loss is probable. The
accrual is included in non-current liabilities.
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, among other
things, impose potential liability on the Company for the cost of remediation of
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 12 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 related
expenses paid on or before May 2, 1999 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 may be
obligated under the tax indemnification agreement to make payments to the
former owners of the Predecessor Company to allow them to defray the
remainder of the tax liabilities which would be imposed on them under
Subchapter S of the Internal Revenue Code. That agreement may also entitle
the Company to payments from the former shareholders of certain tax benefits
which the former owners may realize. Payments by the Company under the tax
indemnification 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 may have to be subtracted from losses which are subject
to indemnification.
7
<PAGE>
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
<PAGE>
Item 2. Management's Discussion And Analysis of Financial Condition
And Results of Operations
Results of Operations:
Net Sales
Consolidated net sales were $233.4 million and $478.5 million for the
quarter and six months ended December 31, 1997. This represented an increase
in net sales of 0.7% for the quarter and 4.3% for the half year as compared
to the comparable periods in the prior year. Both the Commercial Air
Conditioning and Refrigeration and the Filtration Products segments reported
higher net sales for the half year versus the comparable period in the prior
year despite the decrease in the Filtration Products segment second quarter
sales versus the comparable period in the prior year. The following table
presents the Company's revenues by business segment.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------- ----------------------------
December 31, December 31, December 31, December 31,
(Dollars in thousands) 1997 1996 1997 1996
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Commercial Air Conditioning and Refrigeration....... $ 144,670 $ 143,209 $ 302,254 $ 288,584
Filtration Products................................. 92,007 92,774 181,945 178,048
Eliminations/ other................................. (3,297) (4,165) (5,693) (7,721)
---------- ---------- ---------- ----------
Total............................................. $ 233,380 $ 231,818 $ 478,506 $ 458,911
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Commercial Air Conditioning and Refrigeration net sales increased $1.5
million or 1.0% to $144.7 million for the second quarter of fiscal year 1998
and increased $13.7 million or 4.7% to $302.3 million for the six months
ended December 31, 1997 versus the comparable periods ended December 31,
1996. Domestic sales increased slightly for the second quarter and increased
$5.9 million or 2.8% for the first half year as compared to the comparable
periods in the prior year. Applied air handling products net sales increased
10.9% and 8.1% for the second quarter and six month period ended December 31,
1997 versus the comparable periods in the prior year. Strong market demand
for the air handling rooftop product continued from the first quarter of
fiscal year 1998 with demand for new air handling products increasing volume
$1.2 million and $2.3 million for the second quarter and first half of fiscal
year 1998, respectively. Chiller sales increased 3.1% for the first half of
fiscal year 1998 versus the comparable period in the prior year due to
increased exports to the Asian market and introductions of new dual chiller
products in the first quarter despite reduced second quarter volume. Chiller
products experienced lower demand in the second quarter versus the comparable
period in the prior year due to manufacturing inefficiencies experienced by
the start up of new air handling products in fiscal year 1997 as noted in the
Company's Annual Report. Additionally, a newly established sales office
contributed net sales of $1.8 million and $4.5 million for the quarter and
six months ended December 31, 1997, respectively. The sale of the industrial
fan business in October 1997 resulted in sales volume loss of $3.1 million
and $2.5 million for the quarter and six month period ended December 31,
1997, respectively, as compared to the comparable periods in the prior year.
Export sales to Asia are expected to slow due to weakening Asian market
conditions. In the Commercial Air Conditioning and Refrigeration business
segment, international sales volume decreased 1.2% for the second quarter of
fiscal year 1998 versus the second quarter of fiscal year 1997 primarily due
to unfavorable currency variances experienced in the current half year. Two
large refrigeration contracts in the first quarter, strong chiller sales in
the UK and Italy and increased market demand in the Middle East combined to
increase international sales $7.8 million or 8.8% for the half year versus
the prior year despite an unfavorable currency impact of $3.5 million.
Backlog for the Commercial Air Conditioning and Refrigeration segment was
$128.4 million at the end of the second quarter of fiscal year 1998 as
compared to $147.9 million and $156.0 million at the end of the second
quarter and fiscal year end 1997, respectively. The decreased backlog is
attributable to lower lead times throughout the business segment.
9
<PAGE>
Filtration Products net sales decreased slightly for the second quarter
compared to the prior year while net sales for the six month period ending
December 31, 1997 increased $3.9 million or 2.2%. Compared to the comparable
periods in the prior year, domestic net sales decreased 9.1% and 6.1% for the
second quarter and half year ended December 31, 1997. During the same
periods, international sales increased 8.2% and 10.9%, respectively. The
decreases in domestic sales for the second quarter and the first half of
fiscal year 1998 versus the comparable periods of the prior year were the
result of an overall weak clean room filter market, the impact of longer life
filter products in the transportation unit and the relative flatness in
retail markets. Additionally, lower sales volume in environmental products
due to soft market conditions contributed to the decrease. European sales
increased 10.4% the second quarter and 6.9% the first half of fiscal year
1998 compared to the second quarter and first half of fiscal year 1997. The
increase is attributable to volume increases in environmental products
resulting from the acquisition of an engineering company in the third quarter
of fiscal year 1997 and a large air pollution control contract in France in
the current year. Asian sales volume increased $1.5 million for the second
quarter and $7.0 million for the six month period ended December 31, 1997 as
compared to the comparable periods in fiscal year 1997 as both air filtration
and the environmental products businesses continued to grow in the market.
Management believes this trend may slow during the remainder of the current
fiscal year due to the poor economic conditions currently being experienced
in the Asian market. Sales volume increases in the European and Asian markets
were diluted by unfavorable currency rates for both the second quarter and
six months ended December 31, 1997.
Gross Profit
Consolidated gross margin was flat versus the prior year's comparable
periods for both the second quarter and six month period ended December 31, 1997
at $61.8 million or 26.5% of sales and $128.9 million or 26.9% respectively. In
the Commercial Air Conditioning and Refrigeration segment, gross profit as a
percentage of sales increased 1.1 and 1.4 percentage points in the second
quarter and first half of fiscal year 1998 versus the comparable periods of
fiscal year 1997. Gains in gross margin resulted from increased prices in the
chiller market, increased sales volume from new air handling products and higher
prices and improved product mix in the terminal air conditioning market. These
gains were partially offset by lower margin product sales in the international
market and a changing commission structure. In the Filtration Products
businesses, product mix and pricing pressures aimed at gaining market share in
both the air filtration and environmental product lines contributed to decreases
of 1.1 percentage points in the second quarter and 1.4 percentage points for the
six months ended December 31, 1997 versus the comparable periods in the prior
year.
Operating Expenses
Operating expenses were $56.4 million or 24.2% of sales for the second
quarter of fiscal year 1998 versus $52.1 million or 22.5% of sales for the
second quarter of fiscal year 1997. For the six months ended December 31,
1997, operating expenses were $114.6 or 23.9% of sales versus $105.2 or 22.9%
for the comparable period in the prior year. Operating expenses increased
primarily due to acquisitions made during the second half of fiscal year
1997. General and administrative expenses have increased primarily due to
information technology costs associated with upgrading software systems to
improve business performance. During the second quarter of fiscal year 1998,
expenses relating to the granting of options under the Stock Option Plan
approved in fiscal year 1997 were incurred. Additionally, volume related
expenses in the Commercial Air Conditioning and Refrigeration business
segment and increased warranty expenses in both the Commercial Air
Conditioning and Refrigeration and Filtration Products segments during the
second quarter and first half of fiscal year 1998 contributed to increased
operating expense. These increases were reduced by Company wide cost
containment measures and decreased field service expenses in the Filtration
Products segment. The Company continues to incur certain strategic expenses
to enhance its position in the global market.
Income From Operations
Income from operations for the second quarter was $5.3 million or 2.3% of
sales and $8.9 million or 3.8% of sales for fiscal years 1998 and 1997,
respectively. For the six month periods ending December 31, 1997 and December
31, 1996, income from operations was $14.3 million or 3.0% of sales and $17.6
million or 3.8% of sales, respectively. The Commercial Air Conditioning and
Refrigeration segment had increases in income from operations in the second
quarter and the six month period ended December 31, 1997 versus the
10
<PAGE>
comparable periods in the prior year. The Filtration Products segment had
decreases in income from operations for the second quarter and six month
period ended December 31, 1997 as compared to the comparable periods in
fiscal year 1997.
Net Interest Expenses and Other (Income) Expense
Net interest expense was $6.6 million and $13.2 million during the second
quarter and six months ended December 31, 1997 and was relatively flat compared
to fiscal year 1997 expenses at $6.5 million and $13.4 million for the
comparable periods. This resulted from reduced borrowing levels offset by higher
interest rates. Net other income was $7.2 million and $7.3 million for the
quarter and six month period ended December 31, 1997 versus net other expense of
$0.3 million and $0.3 million for the comparable periods ended December 31,
1996. The increase in other income was primarily attributable to the gain on the
sale of the industrial fan business. Additionally, other income resulted from
currency gains and income from equity affiliates during the period.
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 six months of fiscal year 1998, funds provided by operating
activities were $16.3 million as compared to net cash used by operations of $1.6
million in the prior year for the comparable period. The increase in cash
provided by operating activities for the first half of fiscal year 1998 reflects
slightly higher net income and lower working capital requirements which are
largely due to the sale of the net assets of the Company's industrial fan
business which was completed in October 1997. During the first six months of
fiscal year 1998, the Company expended approximately $4.6 million on improving
its information technology systems which represents nearly 50% of the $9.3
million in capital expenditures. Favorable cash flow during the first half of
the year combined with the net proceeds from the asset sale resulted in debt
obligations being reduced by $23.2 million which comprises cash used by
financing activities.
During the first quarter of fiscal year 1998, the Company amended its bank
credit facility to restate certain financial covenants. In addition, the
revolving credit portion of the bank credit facility was reduced from $100
million to $80 million. At the end of the second quarter of fiscal year 1998,
the Company had approximately $58 million in additional borrowing capacity under
the amended revolving credit facility.
During fiscal year 1997, the Company entered into an agreement to sell the
net assets of the industrial fan business. The sale transaction was completed
during the second quarter of fiscal year 1998 with the proceeds used to reduce
debt. The Company does not believe that the sale of the industrial fan business
will have a material effect on the Company's future financial results. On an
ongoing basis the Company strives to evaluate its various businesses and product
lines with the objective to enhance shareholder value. Consistent with this
strategy, the Company intends to pursue global business opportunities that are
synergistic with the Company's core businesses or exit low value added or
non-synergistic operations.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowing capacity
available 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 for the forseeable
future. Nevertheless, the Company expects to remain leveraged to a significant
extent and expects its debt service obligations to 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 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.
11
<PAGE>
Forward-Looking Statements
When used in this report by management of the Company, from time to time,
the words "believes", "anticipates", and "expects" and similar
expressions are intended to identify forward-looking statements that involve
certain risks and uncertainties. A variety of factors could cause actual results
to differ materially from those anticipated in the Company's forward-looking
statements, some of which include risk factors previously discussed in this and
other SEC reports filed by the Company. These risk factors include, however are
not limited to, general economic conditions, environmental laws and regulations,
the weakening Asian markets, unforeseen competitive pressures, warranty expenses
and market acceptance of new products. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
thereof. The Company undertakes no obligation to publicly release the results of
any events or circumstances after the date hereof to reflect the occurrence of
unanticipated events.
12
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Pursuant to a mediation on December 16, 1997, the Company is currently
attempting to settle with its primary insureer with respect to environmental
cleanup costs at its Scottsboro, Alabama manufacturing facility. The Company has
filed suit against its excess insurers in connection with this facility and
trial has been scheduled for June 1998.
Item 6. Exhibits And Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
Exhibit 27 Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the period.
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 February 6, 1998 By: /S/ ANDREW R. MORRISON
---------------- ----------------------
Andrew R. Morrison
Chief Financial Officer
DATE February 6, 1998 /S/ BRUCE D. KRUEGER
---------------- --------------------
Bruce D. Krueger
Controller
(Principal Accounting Officer)
14
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
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> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> DEC-27-1997
<CASH> 11544
<SECURITIES> 0
<RECEIVABLES> 232185
<ALLOWANCES> 7836
<INVENTORY> 123381
<CURRENT-ASSETS> 365313
<PP&E> 187367
<DEPRECIATION> 42188
<TOTAL-ASSETS> 789057
<CURRENT-LIABILITIES> 277252
<BONDS> 199689
0
0
<COMMON> 250
<OTHER-SE> 207680
<TOTAL-LIABILITY-AND-EQUITY> 789057
<SALES> 478506
<TOTAL-REVENUES> 478506
<CGS> 349635
<TOTAL-COSTS> 349635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13176
<INCOME-PRETAX> 8477
<INCOME-TAX> 3814
<INCOME-CONTINUING> 4422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4422
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
