<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 SEPTEMBER 30, 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)
10300 ORMSBY PARK PLACE, SUITE 600
LOUISVILLE, KENTUCKY 40223
(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 October 26, 2000.
1
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000........................... 3
Consolidated Statements of Operations -
Three months ended September 30, 2000 and 1999................. 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999................. 5
Consolidated Statements of Comprehensive Income -
Three months ended September 30, 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 7A Quantitative and Qualitative Disclosure About Market Risk...... 13
PART II - Other Information
Item 1. Legal Proceedings.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 14
Signatures..................................................... 15
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAF-MCQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 14,900 $ 11,522
Accounts receivable........................................................ 205,502 204,523
Inventories................................................................ 107,610 103,835
Other current assets....................................................... 8,548 8,216
-------- --------
Total current assets................................................ 336,560 328,096
Property, plant and equipment, net.................................................. 123,631 124,998
Cost in excess of net assets acquired and other identifiable intangibles, net....... 211,602 214,311
Other assets and deferred charges................................................... 16,762 17,995
-------- --------
Total assets........................................................ $688,555 $685,400
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings...................................................... $ 66,222 $ 57,859
Current maturities of long-term debt....................................... 6,582 7,319
Accounts payable, trade.................................................... 104,481 105,637
Accrued warranty........................................................... 20,099 18,743
Other accrued liabilities.................................................. 77,927 77,394
-------- --------
Total current liabilities........................................... 275,311 266,952
Long-term debt. 151,775 153,676
Deferred income taxes............................................................... 34,810 34,911
Other liabilities................................................................... 44,262 46,353
-------- --------
Total liabilities................................................... 506,158 501,892
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.......................................................... 18,894 17,864
Accumulated other comprehensive income (loss).............................. (16,662) (14,521)
-------- --------
Total stockholder's equity.......................................... 182,397 183,508
-------- --------
Total liabilities and stockholder's equity.......................................... $688,555 $685,400
======== ========
</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
--------------------------------------
September 30, September 30,
2000 1999
----------------- -----------------
<S> <C> <C>
Net sales................................................................... $ 215,009 $ 225,127
Cost of sales............................................................... 156,662 165,153
----------------- -----------------
Gross profit................................................................ 58,347 59,974
Operating expenses:
Selling, general and administrative.................................... 44,723 49,868
Restructuring charges.................................................. 3,506 178
Amortization of intangible assets...................................... 2,758 2,829
----------------- -----------------
50,987 52,875
----------------- -----------------
Income from operations...................................................... 7,360 7,099
Interest expense, net....................................................... 5,223 5,873
Other (income) expense, net................................................. (96) 2,082
----------------- -----------------
Income (loss) before income taxes........................................... 2,233 (856)
Minority interest loss...................................................... 65 64
Provision (benefit) for income taxes........................................ 1,138 (437)
----------------- -----------------
Net income (loss)........................................................... $ 1,030 $ (483)
================= =================
</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>
Three months ended
--------------------------------------
September 30, September 30,
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)......................................................... $ 1,030 $ (483)
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization............................................. 7,319 7,709
Foreign currency transaction losses....................................... 98 453
Changes in operating assets and liabilities............................... (6,075) (3,690)
----------------- -----------------
Net cash from operating activities.............................................. 2,372 3,989
Cash flows from investing activities:
Capital expenditures, net................................................. (4,392) (2,278)
----------------- -----------------
Net cash from investing activities.............................................. (4,392) (2,278)
Cash flows from financing activities:
Net borrowings under short-term
borrowing arrangements.................................................. 8,363 10,345
Payments on long-term-term debt........................................... (2,637) (38,106)
Proceeds from issuance of long-term....................................... - 30,000
Payment of debt issuance costs............................................ - (1,244)
----------------- -----------------
Net cash from financing activities.............................................. 5,726 995
Effect of exchange rate changes on cash......................................... (328) 204
----------------- -----------------
Net increase in cash and cash equivalents....................................... 3,378 2,910
Cash and cash equivalents at beginning of period................................ 11,522 9,168
----------------- -----------------
Cash and cash equivalents at end of period...................................... $ 14,900 $ 12,078
================= =================
</TABLE>
See Notes To Consolidated Financial Statements
5
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
September 30, September 30,
2000 1999
--------------- ----------------
<S> <C> <C>
Net income (loss)............................................................... $ 1,030 $ (483)
Other comprehensive income:.....................................................
Foreign currency translation adjustments................................. (2,141) 1,792
--------------- ---------------
Comprehensive income (loss)..................................................... $ (1,111) $ 1,309
=============== ================
</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, 2000. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying financial statements reflect the statements of
operations for the three months ended September 30, 2000 and 1999, the balance
sheets at September 30, 2000 and June 30, 2000, and the consolidated statements
of cash flows for the three months ended September 30, 2000 and 1999.
The operating results for the three months ended September 30, 2000 are not
necessarily indicative of the operating results that may be expected for the
full year ending June 30, 2001. The Company's period end is the Saturday closest
to September 30. For clarity in presentation all periods presented herein are
shown to end on the last calendar day of the month.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was amended
by Statement Nos. 137 and 138, in June 1999 and June 2000, respectively. The
Statement requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that do not receive hedge accounting treatment are
adjusted to fair value through income. If a derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The adoption of Statement No. 133, as
amended, on July 1, 2000 resulted in no cumulative effect of an accounting
change being recognized in the consolidated statements of operations or
comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"). SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements. The Company has not completed its evaluation of the
impact that SAB 101 will have on its earnings or financial position. The Company
is required to adopt SAB 101 in the fourth quarter of fiscal 2001.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---------------- ---------------
(dollars in thousands)
<S> <C> <C>
FIFO cost:
Raw materials..................................... $ 41,711 $ 42,278
Work-in-process................................... 22,138 19,313
Finished goods.................................... 44,035 42,325
---------------- ---------------
107,884 103,916
LIFO adjustment.............................. (274) (81)
================ ===============
$ 107,610 $ 103,835
================ ===============
</TABLE>
7
<PAGE>
3. OTHER (INCOME) EXPENSE, NET
During the first quarter of fiscal year 2001, the Company had income of
$0.1 million compared to $2.1 million of expense in the first quarter of fiscal
2000. In the first quarter of fiscal 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, as discussed in Note 5, the Company wrote off certain
unamortized income and debt issuance costs resulting in a charge of $318,000 in
the first quarter of fiscal 2000. The remaining components of other (income)
expense, net resulted from foreign currency and equity affiliate transactions.
4. PROVISION (BENEFIT) FOR INCOME TAXES
The tax provisions for the quarters ended September 30, 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. The difference between the Company's reported tax provision
(benefit), for the quarters ended September 30, 2000 and 1999, and the tax
provision (benefit) computed based on U.S. statutory rates is primarily
attributable to nondeductible goodwill amortization and unbenefitted foreign
losses.
5. DEBT AND FINANCIAL INSTRUMENTS
On September 30, 1999, as further discussed in the Company's Annual Report,
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 a
related interest rate swap was eliminated. These actions resulted in a net
charge to other (income) expense of $0.3 million in the first quarter of fiscal
year 2000.
In September 2000, the Company sold an interest rate floor with a notional
amount of $30 million, which requires the Company to make payments if 3-month
LIBOR falls below a certain level. Measurement dates and the maturity date match
those contained in the January 2000 swap transaction described below. The
Company received a payment of $165,000 as selling price for the floor. 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. Measurement dates and the maturity date of the
swap match interest payment dates and maturity date of the Company's $125
million Senior Notes.
6. RESTRUCTURING CHARGES
During the first quarter of fiscal 2001, the Company approved and commenced
restructuring actions in its Commercial Air Conditioning and Refrigeration and
Filtration Products groups, recording reserves of $3.5 million. In July 2000,
the Company announced its intention to close its manufacturing facility in
Scottsboro, Alabama. Related to this closure, the Company recorded a
restructuring reserve of $2.0 million primarily representing severance accruals
related to the elimination of approximately 330 employees. In addition, the
Company also recognized severance accruals approximating $1.5 million related to
the elimination of approximately 60 employees in the Commercial Air Conditioning
and Refrigeration Group in the United Kingdom and approximately 10 employees in
the Filtration Products Group in Germany. Through September 30, 2000, the
Company has spent approximately $.8 million of the $3.5 million of reserves
recorded in the first quarter of fiscal 2001.
As described in Note 9 of the Annual Report, the Company implemented
several restructuring plans throughout fiscal 2000 in both the Commercial Air
Conditioning and Refrigeration and Filtration Products groups. Through September
30, 2000, the Company has spent $3.0 million of the $3.5 million restructuring
reserves recorded in fiscal 2000 primarily for severance arrangements.
These restructuring efforts are expected to be completed by the end of fiscal
2001.
8
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS- The Company secures pricing on a portion of its
copper requirements through forward contracts executed with certain suppliers.
At September 30, 2000, contracts for 3.75 million pounds of copper were in
place. These contracts have various expiration dates through September 30, 2001.
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. As described in greater
detail in Note 15 to the Annual Report, 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 15 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 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.
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 which includes the manufacture,
sale and distribution of heating, ventilating, air conditioning, industrial
refrigeration and freezing equipment products; and FILTRATION PRODUCTS which
includes the manufacture and sale of air filtration products and systems.
Information relating to operations in each industry segment is as follows for
the three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
CLASSIFIED BY INDUSTRY: SEPTEMBER 30,
-------------------------------- -----------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Sales:
Commercial Air Conditioning and Refrigeration................. $135,273 $147,900
Filtration Products........................................... 80,110 77,737
Eliminations.................................................. (374) (510)
-------- --------
Total................................................. $215,009 $225,127
======== ========
Operating Income (Loss):
Commercial Air Conditioning and Refrigeration................. $ 3,666 $ 2,173
Filtration Products........................................... 4,199 5,302
Corporate..................................................... (505) (376)
-------- --------
Total................................................. $ 7,360 $ 7,099
======== ========
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Depreciation/Amortization:
Commercial Air Conditioning and Refrigeration................. $5,022 $5,198
Filtration Products........................................... 2,291 2,497
Corporate..................................................... 6 14
------ ------
Total................................................. $7,319 $7,709
====== ======
Capital Expenditures:
Commercial Air Conditioning and Refrigeration................. $3,447 $1,443
Filtration Products........................................... 945 835
------ ------
Total............................................ $4,392 $2,278
====== ======
</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. The $0.51 and $0.38 million noted above
represent the under allocation of expenses for the three month periods ended
September 30, 2000 and 1999, respectively. A reconciliation of segment profit to
the Company's earnings before taxes for each quarter is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating income from business segments.............................. $7,865 $7,475
Under allocation of corporate expenses............................... (505) (376)
Interest expense, net................................................ 5,223 5,873
Other (income) expense, net.......................................... (96) 2,082
------ ------
Income (loss) before income taxes.................................... $2,233 $ (856)
====== ======
</TABLE>
9. SUBSEQUENT EVENTS
In October 2000, the Company completed the sale of property in Dartford, United
Kingdom associated with its industrial refrigeration business. Proceeds from the
sale of approximately $6.9 million will be used to reduce debt. The Company
expects to report a gain of approximately $4.8 million before tax, related to
the sale, in its second quarter fiscal 2001 results. Any tax liability
associated with the gain will likely be offset by the tax benefit resulting from
current year operating losses of the industrial refrigeration business.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES for the first quarter of fiscal 2001 were $215.0 million. This
represents a decrease of $10.1 million, or 4.5%, from $225.1 million for the
first quarter of fiscal 2000. The decline in net sales is primarily attributable
to the sale of the Company's commercial air conditioning operation in France in
October 1999, which represents $11.6 million of the decrease. Additionally, the
Company estimates that approximately $7.9 million of the decrease in net sales
is attributable to the impact of unfavorable currency trends in translating
European sales activity. Excluding the sale of the operation in France and
unfavorable currency impact, net sales for the first quarter of fiscal 2001
increased $9.5 million or 4.6%.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP net sales decreased
$12.6 million, or 8.5%, to $135.3 million in the first quarter of fiscal 2001 as
compared to $147.9 million in the first quarter in fiscal 2000. The sale of the
operation in France represented $11.6 million of the decrease, with another
estimated $3.4 million due to the impact of unfavorable currency trends in
translating European sales activity. Excluding these two items, net sales
increased $2.4 million or 1.8%. The increase is primarily attributable to
improved applied air handling systems sales and increased field service revenue
in North America. Applied air handling net sales increased 15.9% primarily due
to continued strong demand for rooftop and self contained units. Service revenue
increased 14.9% due to increased project and after market service work in the
first quarter of fiscal 2001 versus 2000. These increases were partially offset
by net sales decreases in chiller and applied terminal systems units in North
America. Chiller product net sales decreased 8.5% and applied terminal systems
net sales decreased 11.9% in the first quarter of fiscal year 2001 compared to
the first quarter of fiscal year 2000. Chiller net sales decreased primarily due
to softer demand for centrifugal and reciprocating chillers, while the decrease
in applied terminal systems sales is attributable to lower than anticipated unit
ventilator sales. European net sales for the first quarter of fiscal 2001 were
essentially flat with the first quarter of fiscal 2000 after excluding the sale
of the operation in France and the unfavorable currency translation impact.
Backlog for the Commercial Air Conditioning and Refrigeration Group was
$130 million at September 30, 2000 as compared to $124 million at June 30, 2000
and $129 million at September 30, 1999, excluding backlog related to the
operation in France.
FILTRATION PRODUCTS GROUP net sales were $80.1 million in the first quarter
of fiscal 2001, an increase of $2.4 million, or 3.1%, from $77.7 million in the
first quarter of fiscal 2000. Excluding the impact of unfavorable currency
trends on translating European sales activity, which the Company estimates at
$4.6 million, net sales increased $7.0 million or 9.5%. Domestic sales increased
4.1% primarily due to strong clean room sales in the first quarter of fiscal
2001 versus 2000. International sales, excluding the impact of unfavorable
currency trends, increased $4.2 million or 11.4% primarily due to improving
market conditions in Asia and strong air pollution control sales in Europe,
partially offset by decreased sales in Latin America.
GROSS PROFIT was $58.3 million or 27.1% of sales for the first quarter of
fiscal 2001 versus $60.0 million or 26.6% of sales for the first quarter of
fiscal 2000. In the Commercial Air Conditioning and Refrigeration Group, gross
profit as a percentage of sales was 26.5% and 24.5% in the first quarter of
fiscal 2001and 2000, respectively. This increase in gross margin resulted
primarily from improved price management in chiller products and certain
manufacturing efficiencies achieved in the applied air handling systems business
unit. The Filtration Products Group's gross profit as a percentage of sales
decreased in the first quarter from 30.5% in fiscal 2000 to 28.1% in the first
quarter of fiscal 2001. This decrease is primarily attributable to competitive
pricing pressures in North America, Europe, and Asia in the replacement filter
business. Also, lower margin jobs in the Machinery Filtration and Acoustical
Systems (MFAS) business in Europe contributed to the overall decline in gross
margins.
OPERATING EXPENSES were $51.0 million or 23.7% of sales for the first
quarter of fiscal 2001 as compared to $52.9 million or 23.5% of sales for the
first quarter of fiscal 2000. Excluding amortization and restructuring charges,
operating expenses were $44.7 million or 20.8% of sales as compared to $49.9
11
<PAGE>
million or 22.2% of sales in the first quarter of the prior year. This
decrease is primarily attributable to lower commissions due to favorable
sales mix and continued focus on cost control.
INCOME FROM OPERATIONS for the first quarter of fiscal years 2001 and 2000,
excluding amortization and restructuring charges, was $13.6 million and $10.1
million, respectively. As a percentage of sales, income from operations
increased from 4.5% to 6.3% for the first quarters of fiscal years 2000 and
2001, respectively. The Commercial Air Conditioning and Refrigeration Group had
an increase in income from operations from $3.9 million, or 2.6% of sales, to
$8.2 million, or 6.1% of sales, for the first quarter of fiscal year 2000 and
2001, respectively. The Filtration Products group had a decrease in income from
operations from $6.6 million, or 8.5% of sales in the first quarter of fiscal
2000, to $5.9 million, or 7.4% of sales, for the first quarter of fiscal 2001.
INTEREST EXPENSE, NET was $5.2 million in the first quarter of fiscal 2001
as compared to $5.9 million for the first quarter of fiscal 2000. This decrease
is primarily attributable to lower debt levels.
OTHER (INCOME) EXPENSE, NET for the first quarter of fiscal 2001 was $(0.1)
million compared to $2.1 million in the first quarter of fiscal 2000. See Note 3
to the unaudited condensed consolidated financial statements for further
discussion.
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 quarter of fiscal 2001, funds generated by operating activities
were $2.4 million as compared to $4.0 million of funds generated in the prior
fiscal year for the comparable period. During the first quarter of fiscal 2001,
cash used in investing activities, which is comprised of capital expenditures,
totaled $4.4 million. Capital spending for the first quarter increased from $2.3
million in the prior year to $4.4 million this year due to the relocation of the
Scottsboro, Alabama operation to the consolidated air handling operation in
Minnesota and new product development. After September 30, 2000, the Company
completed the sale of property in the United Kingdom associated with the
industrial refrigeration business. Proceeds from the sale of approximately $6.9
million will be used to reduce debt.
On September 30, 1999, the Company refinanced its U.S. bank credit
facilities with a Term Loan of $30 million and a Revolving Credit Facility of
$90 million (" Bank Credit Agreement"). The 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. At September 30, 2000, remaining borrowing availability under the
Revolving Credit portion of the Bank Credit Agreement was $44 million. Total net
payments on long-term debt for the first quarter of fiscal 2001were $2.6
million. Short-term borrowings increased by $8.4 million during the quarter to
fund the increased capital spending and working capital investments.
A short-term credit facility provided to a subsidiary of the Company is
supported by a letter of credit from the Company's parent, O.Y.L. Industries
Berhad (OYL), which expires on November 30, 2000. This support arrangement may
be extended for additional time periods with the consent of OYL and the bank
providing the facilities.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flows from operations, together with borrowings under the
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.
12
<PAGE>
EURO CONVERSION
Management has initiated an internal analysis of and planning for the
effect the adoption of the Euro currency by the European Union ("EU") countries
will have on the operating and financial condition of the Company. The Euro's
adoption as the EU's currency 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 infrastructures.
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, a weakening
in Latin American and Asian markets, unforeseen competitive pressures, warranty
expenses, market acceptance of new products, unseasonably cool spring or summer
weather, the inability to meet debt covenants, unforeseen difficulties in
maintaining mutually beneficial relationships with strategic partnerships and
alliances, 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.
ITEM 7A. 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.
13
<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>
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.
14
<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.
November 10, 2000 By: /S/ BRUCE D. KRUEGER
------------------------
Bruce D. Krueger
Vice President of Finance
(Principal Finance and Accounting Officer)
15
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule (filed herewith)
</TABLE>
16
