<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 APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 33-80701
---------------------------
AAF-MCQUAY INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 41-0404230
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
215 Central Avenue, Louisville, Kentucky 40208
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (502) 637-0011
-------------------
Not Applicable
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report.
Indicate by check 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 May 11, 2000.
1
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - Financial Information...............................................3
Item 1. Financial Statements (unaudited)....................................3
Condensed Consolidated Balance Sheets as of -
March 31, 2000 and June 30, 1999....................................3
Consolidated Statements of Operations -
Three and Nine Months Ended March 31, 2000 and 1999.................4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2000 and 1999...........................5
Consolidated Statements of Comprehensive Income -
Three and Nine months ended March 31, 2000 and 1999.................6
Notes to the Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........14
PART II - Other Information..................................................15
Item 1. Legal Proceedings..................................................15
Item 6. Exhibits and Reports on Form 8-K...................................15
Signatures.........................................................16
</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>
MARCH 31, JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 15,236 $ 9,168
Accounts receivable ................................................ 192,989 227,844
Inventories ........................................................ 108,767 118,163
Other current assets ............................................... 5,463 6,754
--------- ---------
Total current assets ........................................ 322,455 361,929
Property, plant and equipment, net .......................................... 128,671 145,086
Cost in excess of net assets acquired and other identifiable intangibles, net 217,486 228,906
Other assets and deferred charges ........................................... 18,839 19,274
--------- ---------
Total assets ................................................ $ 687,451 $ 755,195
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................................. $ 68,455 $ 87,602
Current maturities of long-term debt ............................... 7,929 14,495
Accounts payable, trade ............................................ 99,745 115,986
Accrued warranty ................................................... 18,572 18,604
Other accrued liabilities .......................................... 74,805 83,208
--------- ---------
Total current liabilities ................................... 269,506 319,895
Long-term debt .............................................................. 158,532 164,322
Deferred income taxes ....................................................... 33,295 34,676
Other liabilities ........................................................... 45,286 49,874
--------- ---------
Total liabilities ........................................... 506,619 568,767
Stockholders' 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 .................................................. 13,127 17,762
Accumulated other comprehensive loss ............................... (12,460) (11,499)
--------- ---------
Total stockholders' equity .................................. 180,832 186,428
--------- ---------
Total liabilities and stockholders' equity .................................. $ 687,451 $ 755,195
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales............................ $ 215,060 $ 221,634 $ 642,375 $ 688,748
Cost of Sales........................ 161,086 165,733 477,898 509,894
--------- --------- --------- ---------
Gross Profit......................... 53,974 55,901 164,477 178,854
Operating Expenses:
Selling, general and
administrative................ 45,791 48,468 139,992 153,281
Restructuring................... 1,669 720 1,847 1,289
Amortization of intangible
assets........................ 2,774 2,820 8,380 8,553
--------- --------- --------- ---------
50,234 52,008 150,219 163,123
--------- --------- --------- ---------
Income from operations............... 3,740 3,893 14,258 15,731
Interest expense, net................ 5,421 5,731 16,840 17,975
Other (income) expense, net......... (23) 773 1,839 (4,700)
--------- --------- --------- ---------
Income (loss) before income taxes.... (1,658) (2,611) (4,421) 2,456
Minority interest income (loss)...... (99) 125 (235) (165)
Provision for income taxes........... 710 681 (21) 1,597
--------- --------- --------- ---------
Net income (loss).................... $ (2,467) $ (3,417) $ (4,635) $ 694
========= ========= ========= =========
</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>
NINE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
2000 1999
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (4,635) $ 694
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization 22,553 21,214
Foreign currency transaction (gains) losses 242 (421)
Restructuring spending (1,847) (4,259)
Loss on sale of business 1,331 --
Changes in operating assets and liabilities 14,880 (4,381)
------------ ---------
Net cash from operating activities 32,524 12,847
Cash flows from investing activities:
Capital expenditures, net (5,514) (14,610)
Proceeds from sale of business 12,996 --
------------ ---------
Net cash from investing activities 7,482 (14,610)
Cash flows from financing activities:
Net borrowings (repayments) under short-term
borrowing arrangements (19,147) 23,228
Payments on long-term debt (42,377) (21,217)
Proceeds from issuance of long-term debt 30,000 --
Payment of debt issuance costs (1,387) --
------------ ---------
Net cash from financing activities (32,911) 2,011
Effect of exchange rate changes on cash (1,027) (99)
------------ ---------
Net increase (decrease) in cash and cash equivalents 6,068 149
Cash and cash equivalents at beginning of period 9,168 9,697
------------ ---------
Cash and cash equivalents at end of period $ 15,236 $ 9,846
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -----------------------
2000 1999 2000 1999
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss)................................ $ (2,467) $ (3,417) $ (4,635) $ 694
Other comprehensive income(loss):................
Foreign currency translation adjustments..... (1,811) (3,574) (1,790) (2,228)
Write off of accumulated foreign currency
translation adjustments due to sale of
business.................................. -- -- 829 --
---------- ---------- --------- --------
Comprehensive income(loss)....................... $ (4,278) $ (6,991) $ (5,596) $ (1,534)
========== ========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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
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, 1999. 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 nine months ended March 31, 2000 and 1999, the
balance sheets at March 31, 2000 and June 30, 1999, and the consolidated
statements of cash flows for the nine months ended March 31, 2000 and 1999.
The operating results for the nine months ended March 31, 2000 are
not necessarily indicative of the operating results that may be expected for
the full year ending June 30, 2000. The Company's period end is the Saturday
closest to March 31. For clarity in presentation all periods presented herein
are shown to end on the last calendar day of the month. Certain
reclassifications of amounts in the consolidated financial statements have
been made to reflect comparability.
During the first quarter of fiscal year 1999, the Company made a change in
accounting estimate related to its warranty provision. The Company increased its
warranty provision by $2.5 million due to current activity related to new
product introductions and discontinued product lines.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FIFO Cost:
Raw Materials ................. $ 39,072 $ 39,838
Work-in-process ............... 24,236 25,884
Finished goods ................ 44,741 51,063
-------- --------
108,049 116,815
LIFO adjustment ............... 718 1,348
-------- --------
$108,767 $118,163
======== ========
</TABLE>
3. NET OTHER (INCOME)EXPENSE
During the third quarter of fiscal year 2000, the Company had net other
income of $0.02 million compared to net other expense of $0.8 million in the
third quarter of fiscal year 1999. Year-to-date the Company had net other
expense of $1.8 million as compared to net other income of $4.7 million for the
same period in fiscal year 1999. The year-to-date decrease is primarily related
to events that occurred in the first quarters of fiscal years 2000 and 1999. In
the first quarter of fiscal year 2000, the Company accrued a $1.3 million loss
related to the sale of the commercial air conditioning and refrigeration
operation in France in October 1999. Additionally, in conjunction with the
Company's refinancing, discussed in Note 5, the Company wrote off certain
unamortized income and debt issuance costs resulting in a charge of $0.3 million
in the first quarter of fiscal year 2000. In the first quarter of fiscal year
1999 the Company recognized $2.9 million in other income as a result of
favorable developments in the IRS audit and the tax indemnification settlement
with former shareholders of the Company. The Company also recorded a $1.5
million gain related to the termination of a pension plan in Canada. The
remaining components of other income and expenses resulted from foreign currency
and equity affiliate transactions.
4. PROVISION FOR INCOME TAXES
7
<PAGE>
The tax provisions for the third quarter and nine month periods ended March
31, 2000 and 1999 are based on the estimated effective tax rates applicable for
the full years, and after giving effect to significant unusual items related
specifically to the interim periods. In the third quarter of fiscal years
2000 and 1999, the Company changed its estimated effective tax rates for the
full fiscal years. The difference between the Company's reported tax provision,
for the third quarter and nine month periods ended March 31, 2000 and 1999,
and the tax provision computed based on U.S. statutory rates is primarily
attributable to nondeductible goodwill amortization and unbenefitted foreign
losses. Additionally, the Company's effective tax rate for the third quarter
and nine month period ended March 31, 2000 reflects the effect of the sale
of a foreign subsidiary. Also, the effective tax rate for the nine months
ended March 31, 1999 reflects the effect of the indemnification and the
IRS Settlement.
5. DEBT AND FINANCIAL INSTRUMENTS
On September 30, 1999, as further discussed in the Company's Form 10K, the
Company entered into a new bank credit agreement. As a result of the bank credit
agreement refinancing that took place, the Company wrote off certain unamortized
debt issuance costs associated with the previous credit agreement. In addition,
the balance of the unamortized income from early termination of the swap was
eliminated. These actions resulted in net charge to other (income) expense of
$0.3 million in the first quarter of fiscal year 2000.
The Company secures pricing on a portion of its copper requirements through
forward contracts executed with certain suppliers. At March 31, 2000, contracts
for 2.5 million pounds of copper were in place. These contracts have various
expiration dates through December 31, 2000.
In January 2000, the Company entered into an interest rate swap transaction
whereby the Company receives a fixed rate and pays a floating rate on the basis
of 3-month LIBOR. The January 2000 swap has a three year term and a notional
amount of $30 million and effectively converts a portion of the Company's fixed
rate borrowings to a floating rate.
6. RESTRUCTURING
In the third quarter of fiscal 2000, the Company commenced a restructuring
of J&E Hall, a wholly-owned, U.K. based subsidiary of the Company engaged in
manufacturing industrial refrigeration and freezer products and service.
Approximately 50 positions were eliminated with corresponding severance
costs of approximately $1.7 million recorded.
As described in Note 10 of the Annual Report, the Company implemented
several restructuring plans throughout fiscal year 1999 in both the Commercial
Air Conditioning and Refrigeration and Filtration Products groups. Through March
31, 2000, the Company has spent $4.0 million of the $5.2 million restructuring
reserve recorded in fiscal year 1999 primarily for severance arrangements. The
Company continues to implement actions in accordance with the restructuring
plan.
7. CONTINGENCIES
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 14 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.
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
8
<PAGE>
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 and litigation matters will have a material adverse
effect on it.
8. BUSINESS SEGMENTS INFORMATION
The Company serves the global commercial heating, ventilation, air
conditioning and refrigeration ("HVAC&R") industry with two industry segments:
Commercial Air Conditioning and Refrigeration, the manufacture, sale and
distribution of heating, ventilating, air conditioning, industrial refrigeration
and freezing equipment products, and Filtration Products, the manufacture and
sale of air filtration products and systems. Information relating to operations
in each industry segment is as follows as of and for the three and nine months
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
CLASSIFIED BY INDUSTRY 2000 1999 2000 1999
---------------------- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
Commercial Air Conditioning and Refrigeration $ 129,638 $ 144,270 $ 399,093 $ 446,103
Filtration Products ......................... 85,864 79,018 244,597 250,940
Eliminations ................................ (442) (1,654) (1,315) (8,295)
--------- --------- --------- ---------
Total ............................... $ 215,060 $ 221,634 $ 642,375 $ 688,748
========= ========= ========= =========
Operating Income (Loss):
Commercial Air Conditioning and Refrigeration $ (1,283) $ (3,523) $ (689) $ (837)
Filtration Products ......................... 4,778 4,468 15,068 13,801
Corporate ................................... 245 2,948 (121) 2,767
--------- --------- --------- ---------
Total ............................... $ 3,740 $ 3,893 $ 14,258 $ 15,731
========= ========= ========= =========
Depreciation/Amortization:
Commercial Air Conditioning and Refrigeration $ 4,982 $ 4,987 $ 15,136 $ 13,388
Filtration Products ......................... 2,444 2,543 7,388 7,745
Corporate ................................... 6 25 28 80
--------- --------- --------- ---------
Total ............................... $ 7,432 $ 7,555 $ 22,552 $ 21,213
========= ========= ========= =========
Capital Expenditures:
Commercial Air Conditioning and Refrigeration $ 749 $ 3,804 $ 2,594 $ 12,696
Filtration Products ......................... 1,413 875 2,845 1,914
Corporate ................................... 75 -- 75 --
--------- --------- --------- ---------
Total .......................... $ 2,237 $ 4,679 $ 5,514 $ 14,610
========= ========= ========= =========
</TABLE>
The Company estimates corporate expenses and determines fixed allocations
of these expenses for each business segment at the beginning of the fiscal year.
Any over or under allocation of actual expenses incurred results in income or
expense reported at the corporate level. A reconciliation of segment profit to
the Company's earnings before taxes is as follows:
9
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating income from business segments ..... $ 3,495 $ 945 $ 14,379 $ 12,964
Over (under) allocation of corporate expenses 245 2,948 (121) 2,767
Interest expense, net ....................... 5,421 5,731 16,840 17,975
Other (income) expense ...................... (23) 773 1,839 (4,700)
-------- -------- -------- --------
Income (loss) before income taxes ........... $ (1,658) $ (2,611) $ (4,421) $ 2,456
======== ======== ======== ========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES were $215 million in the three months ended March 31, 2000,
which represents a decrease of $6.6 million, or 3.0%, as compared to the same
period in the prior year. Net sales were $642.4 million for the nine months
ended March 31, 2000, which represents a decrease of $46.4 million, or 6.7%,
as compared to the same period in the prior year. The decrease is primarily
attributable to the sale of the commercial air conditioning and refrigeration
operation in France in October 1999, which contributed sales of $39.3 million
in the first nine months of fiscal year 1999 as compared to $11.6 million in
the first nine months of fiscal year 2000. The sale of this operation is in
keeping with the Company's overall strategic plan to exit non-core
businesses. This in conjunction with the restructuring that has occurred in
the Chiller business unit discussed further below, and at J&E Hall discussed
in footnote six (6) to the financial statements have resulted in an expected
decrease in sales. Additionally, the Company estimates that approximately
$17.3 million of the year-to-date decrease in sales is attributable to having
one less week of sales in the first quarter of fiscal year 2000 as compared
to fiscal year 1999. Excluding the impact of France and the additional week,
the year-to-date decrease in net sales is less than 1.0%.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP net sales for the three
months ended March 31, 2000 decreased $14.6 million, or 10.1%, to $129.6
million. This decrease is primarily attributable to the sale of the commercial
air conditioning and refrigeration operation in France in October 1999. The
France operation contributed $12.8 million of sales volume in the third quarter
of fiscal year 1999 as compared to no sales in the third quarter of fiscal year
2000 due to the sale. Additional decreases were seen in the chiller products and
terminal air conditioning systems business units. Chiller product net sales
decreased 12.6% in the third quarter of fiscal year 2000 compared to the third
quarter of fiscal year 1999. This decrease was expected primarily as a result of
the restructuring of the chiller business unit in the prior year. Terminal air
conditioning products net sales decreased 9.9% in the third quarter of fiscal
2000 as compared to the third quarter of fiscal year 1999 as a result of the
product rationalization in North America and a related market reaction as a
result of the changes in product offerings. The sales decreases noted were
partially offset by increased sales in Applied Air Handling business unit as a
result of strong demand for VisionTM air handlers, and increased sales from
operations in the United Kingdom and Italy.
Year-to-date sales decreased $47.0 million, or 10.5%, to $399.1 million.
The Company estimates that approximately $11.4 million, or 24.3%, of the
decrease is attributable to one less week of sales in the first quarter of
fiscal 2000 as compared to the first quarter of fiscal 1999. The remaining
decrease of $35.6 million is primarily attributable to the sale of the
commercial air conditioning and refrigeration operation in France in October
1999, which contributed sales of $39.3 million in the first nine months of
fiscal year 1999 as compared to $11.6 million in the first nine months of fiscal
year 2000. Additional decreases were seen in the chiller products and terminal
air conditioning systems business units. Chiller product year-to-date net sales
decreased 14.5%. This decrease was expected primarily as a result of the
restructuring of the chiller business unit in the prior year. Terminal air
conditioning products year to date net sales decreased 11.3% as a result of the
product rationalization in North America and a related market reaction as a
result of the changes in product offerings. The sales decreases noted were
partially offset by increased sales in the Applied Air Handling business unit
as a result of strong demand for Vision-TM- air handlers, and increased sales
from the operations in the United Kingdom and Italy.
Backlog for the Commercial Air Conditioning and Refrigeration Group was
$99.4 million at March 31, 2000 as compared to $133.7 and $124.4 million at June
30, 1999 and March 31, 1999, respectively. The decrease in backlog is
attributable to a decrease in sales volume and the sale of the commercial air
conditioning and refrigeration operation in France in October 1999. Excluding
France backlog at June 30, 1999 and March 31, 1999, would have been $127.6 and
$116.9 million, respectively.
FILTRATION PRODUCTS GROUP net sales for the three months ended March 31,
2000 increased $6.8 million, or 8.7%, to $85.9 million. The increase is
primarily attributable to increased sales in Latin America and Asia. Each of
these regions had a large non-recurring project being completed in the third
quarter of fiscal year 2000. There were no such projects in fiscal year 1999.
Additionally, Clear Room product line sales increased as a result of the
continued strong demand for semiconductors worldwide.
Year-to-date sales decreased $6.3 million, or 2.5%, to $244.6 million. The
decrease is attributable to the net impact of increased sales in the third
quarter offset by continued slow MFAS sales in the United States due to soft
market conditions and a decrease in air pollution control sales in Europe.
Additionally, the Company
11
<PAGE>
estimates that year-to-date sales are down by approximately $6.0 million due to
one less week of sales in the first quarter of fiscal 2000 as compared to the
first quarter of fiscal 1999.
GROSS PROFIT decreased to $54.0 million, or 25.1%, of sales for the three
months ended March 31, 2000, as compared to $55.9 million, or 25.2% of sales for
the same period in the prior year. Year-to-date gross profit decreased to $164.5
million, or 25.6%, of sales. In the Commercial Air Conditioning and
Refrigeration Group, year-to-date gross profit as a percentage of sales was
24.1% as compared to 24.6% for the same period in fiscal year 1999. This
decrease in gross margin resulted primarily from unfavorable manufacturing
performance. The Filtration Products Group's year-to-date gross profit as a
percentage of sales increased from 28.3% in fiscal year 1999 to 28.6% for the
same period in fiscal year 2000. This increase resulted from improved
manufacturing performance and cost reduction programs.
OPERATING EXPENSES were $50.2 million, or 23.4% of sales, for the third
quarter of fiscal year 2000 versus $52.0 million, or 23.5% of sales, for the
third quarter of fiscal year 1999. Excluding the restructuring charges operating
expenses were 22.6% and 23.1% of sales in the third quarter of fiscal year 2000
and 1999, respectively. Year-to date operating expenses decreased $12.9 million
to $150.2 million, or 23.4% of sales in fiscal year 2000 as compared to $163.1
million, or 23.7% of sales in fiscal year 1999. Excluding the restructuring
charges operating expenses were 23.1% and 23.5% of sales in the first nine
months of fiscal year 2000 and 1999, respectively. The Company estimates that
approximately $4.1 million, or 33.8%, of the decrease is attributable to one
less week of operating expenses in the first quarter of fiscal 2000 as compared
to the first quarter of fiscal 1999. The remaining decrease of $8.0 million is
primarily attributable to a reduction in commissions, selling and warranty
expenses.
INCOME FROM OPERATIONS for the third quarter and year-to-date decreased
slightly as compared to the same periods in fiscal year 1999. For the third
quarter income from operations decreased to $3.7 million, or 1.7% of sales, as
compared to $3.9 million, or 1.8% of net sales, in the third quarter of fiscal
1999. Excluding the restructuring charges income from operations was 2.5% and
2.1% of sales in the third quarter of fiscal year 2000 and 1999, respectively.
Year-to-date income from operations decreased to $14.3 million, or 2.2% of
sales, as compared to $15.7 million, or 2.3% of sales, in fiscal year 2000 and
1999, respectively. Excluding the restructuring charges income from operations
was flat at 2.5% of sales in the first nine months of fiscal years 1999
and 2000.
The Commercial Air Conditioning and Refrigeration Group's income (loss)
from operations decreased in the third quarter of fiscal year 2000 at $(1.3)
million, or (1.0)% of sales, as compared to $(3.5) million, or (2.4)% of sales,
in the third quarter of fiscal year 1999. Year-to-date income (loss) from
operations decreased from $(0.8) million to $(0.7) million but remained flat at
(0.2)% of sales, for the first nine months of fiscal year 2000 as compared to
the first nine months of fiscal year 1999, respectively.
The Filtration Products Group had an increase in income from operations in
the third quarter of fiscal year 2000 from $4.5 million, or 5.7% of sales, to
$4.8 million, or 5.6% of sales for the same period in fiscal year 1999.
Year-to-date income from operations increased from $13.8 million, or 5.5% of
sales, during the first nine months of fiscal year 1999 to $15.1 million, or
6.2% of sales, for the first nine months of fiscal year 2000.
NET INTEREST EXPENSE decreased to $5.4 million and $16.8 million during the
third quarter and nine months ended March 31, 2000 from $5.7 million and $18.0
million for the comparable periods ended March 31, 1999. This decrease is
primarily attributable lower debt levels as well as having one less week of
activity in the first nine months of fiscal year 2000 as compared to the first
nine months of fiscal year 1999.
NET OTHER (INCOME) EXPENSE for the third quarter of fiscal year 2000 was
income of $0.02 million compared to net other expense of $0.8 million in the
third quarter of fiscal year 1999. Year-to-date the Company had expense of $1.8
million as compared to income of $4.7 million for the same period in fiscal year
1999. See Note 3 to the unaudited condensed financial statements for further
discussion.
LIQUIDITY AND CAPITAL RESOURCES
12
<PAGE>
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 nine months of fiscal year 2000, funds generated by operating
activities were $32.5 million as compared to $12.9 million of funds generated in
the prior fiscal year for the comparable period. During the first nine months of
fiscal year 2000, cash provided from investing activities was $7.5 million,
which is comprised of proceeds from the sale of the Company's commercial air
conditioning business in France for $13.0 million, reduced by capital
expenditures of $5.5 million. Capital spending for the first nine months has
been reduced from $14.6 million in the prior year to $5.5 million this year due
to lower spending on the information technology project which was completed in
September 1999. On September 30, 1999, the Company refinanced its Bank Credit
Agreement with a New Term Loan of $30 million and a new Revolving Credit
Facility of $90 million ("New Bank Credit Agreement"). The New Bank Credit
Agreement has a three-year term, was used to retire all obligations under the
previous Bank Agreement and is designed to provide added flexibility and
borrowing availability. The New Bank Credit Agreement also provides favorable
interest rates and other fees compared to the previous Bank Credit Agreement. At
March 31, 2000, remaining borrowing availability under the new Revolving Credit
portion of the New Bank Credit Agreement was $42 million. Total net payments on
long term debt for the first nine months were $12.4 million which is a result of
new borrowing under the New Term Loan of $30.0 million, repayment of the balance
on the previous Bank Term Loan of $37.3 million and other long term debt
payments of $5.1 million. Cash of $19.1 million was used to reduce borrowings
under short term borrowing arrangements during the nine month period. Total debt
of the Company was reduced from $266.4 million at June 30, 1999 to $234.9
million at March 31, 2000.
A short-term credit facility provided to a subsidiary of the Company is
supported by a letter of credit from O.Y.L. Industries Berhad (OYL) which
expires on September 30, 2000. This support arrangement may be extended for
additional time periods with the consent of OYL and the bank providing the
facilities. Certain domestic letter of credit facilities totaling $13.5 million
that were supported by a letter of credit from OYL expired on March 21, 2000.
The related letter of credit requirements were transferred over to the New Bank
Credit Agreement.
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. In October 1999, the Company sold the commercial
air conditioning and refrigeration operation in France with the proceeds used to
reduce debt. The Company does not believe that the sale of the commercial air
conditioning and refrigeration operation in France will have a material effect
on the Company's future financial results.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the New
Bank Credit Agreement and other short-term credit facilities, 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. 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.
YEAR 2000
The Company experienced no significant disruptions in mission critical
information technology and non-information technology systems related to the
Year 2000 and believes it successfully responded to the Year 2000 date change.
The Company incurred charges of approximately $27 million during the 1996
through 1999 time period in connection with remediating its systems. This
spending was almost entirely for new ERP systems that resolved Y2K issues and
increased the Company's system capabilities. The Company is not aware of any
material problems resulting form Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
13
<PAGE>
EURO CONVERSION
Management has initiated an internal analysis of and planning for the
effect the Euro will have on the operating and financial condition of the
Company. The Euro is not expected to have a material effect on the Company's
operating results or competitive position. The Company's financial systems are
Euro compliant and opportunities will continue to be investigated for
European-wide system infrastructure.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the reported market risks since the
end of the most recent fiscal year. See Note 5 to the Consolidated Financial
Statements (unaudited) for disclosures of additional financial instruments that
have been entered into by the Company since the end of the most recent fiscal
year.
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, but are not limited
to, general economic conditions, environmental laws and regulations, the
weakening Asian markets, unforeseen competitive pressures, warranty expenses,
market acceptance of new products, unseasonably cool spring or summer weather, a
slow down in the chiller market, the inability to meet debt covenants,
unforeseen difficulties in maintaining mutually beneficial relationships with
strategic initiatives partners, the Year 2000 issue, and the results of
restructuring activities. 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.
14
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C> <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.
15
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AAF-MCQUAY INC.
DATE May 12, 2000 By:
---------------------- -----------------------------
Bruce D. Krueger
Vice President of Finance
Principal Accounting Officer and
Principal Financial Officer
16
<PAGE>
Exhibit Index
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
17
<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> 9-MOS
<FISCAL-YEAR-END> JUL-1-2000
<PERIOD-END> APR-1-2000
<CASH> 0
<SECURITIES> 15,236
<RECEIVABLES> 200,448
<ALLOWANCES> 7,459
<INVENTORY> 108,767
<CURRENT-ASSETS> 322,455
<PP&E> 201,816
<DEPRECIATION> 73,145
<TOTAL-ASSETS> 687,451
<CURRENT-LIABILITIES> 269,506
<BONDS> 158,532
0
0
<COMMON> 250
<OTHER-SE> 180,582
<TOTAL-LIABILITY-AND-EQUITY> 687,451
<SALES> 642,375
<TOTAL-REVENUES> 642,375
<CGS> 477,898
<TOTAL-COSTS> 477,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,840
<INCOME-PRETAX> (4,421)
<INCOME-TAX> (21)
<INCOME-CONTINUING> (4,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,635)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
