<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 JANUARY 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.
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(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
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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 January 28, 2000.
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - Financial Information..................................................... 3
- ------
Item 1. Financial Statements (unaudited).......................................... 3
Condensed Consolidated Balance Sheets as of -
December 31, 1999 and June 30, 1999....................................... 3
Consolidated Statements of Operations -
Three and Six Months Ended December 31, 1999 and 1998..................... 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1999 and 1998............................... 5
Consolidated Statements of Comprehensive Income -
Three and Six Months Ended December 31, 1999 and 1998..................... 6
Notes to the Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 14
PART II - Other Information......................................................... 16
- -------
Item 1. Legal Proceedings......................................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................................... 16
Signatures................................................................ 17
</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 share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
---------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................. $ 13,181 $ 9,168
Accounts receivable....................................................... 199,055 227,844
Inventories............................................................... 106,747 118,163
Other current assets...................................................... 5,855 6,754
--------- --------
Total current assets............................................... 324,838 361,929
Property, plant and equipment, net................................................. 132,120 145,086
Cost in excess of net assets acquired and other identifiable intangibles, net...... 220,625 228,906
Other assets and deferred charges.................................................. 19,003 19,274
--------- --------
Total assets....................................................... $ 696,586 $755,195
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................................... $ 68,982 $ 87,602
Current maturities of long-term debt...................................... 8,547 14,495
Accounts payable, trade................................................... 100,793 115,986
Accrued warranty.......................................................... 18,378 18,604
Other accrued liabilities................................................. 74,980 83,208
---------- ---------
Total current liabilities.......................................... 271,680 319,895
Long-term debt. 160,276 164,322
Deferred income taxes.............................................................. 33,330 34,676
Other liabilities.................................................................. 46,190 49,874
---------- ---------
Total liabilities.................................................. 511,476 568,767
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......................................................... 15,594 17,762
Accumulated other comprehensive loss...................................... (10,649) (11,499)
---------- ---------
Total stockholders' equity......................................... 185,110 186,428
---------- ---------
Total liabilities and stockholders' equity......................................... $ 696,586 $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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net Sales............................ $ 202,188 $ 215,715 $ 427,315 $ 467,115
Cost of Sales........................ 151,659 160,297 316,812 344,162
------------- ------------ ------------- -------------
Gross Profit......................... 50,529 55,418 110,503 122,953
Operating Expenses:
Selling, general and
administrative.................. 44,333 48,792 94,201 104,631
Restructuring................... --- --- 178 751
Amortization of intangible
assets.......................... 2,777 2,831 5,606 5,733
------------- ------------- ------------- -------------
47,110 51,623 99,985 111,115
------------- ------------- ------------- -------------
Income from operations............... 3,419 3,795 10,518 11,838
Interest expense, net................ 5,546 5,738 11,419 12,244
Other (income) expense, net......... (220) (661) 1,862 (5,473)
------------- ------------ ------------- -------------
Income (loss) before income taxes.... (1,907) (1,282) (2,763) 5,067
Minority interest loss .............. (72) (50) (136) (40)
Provision for income taxes........... (294) (613) (731) 916
------------- ------------ ------------- -------------
Net income (loss).................... $ (1,685) $ (719) $ (2,168) $ 4,111
============= ============ ============= =============
</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,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (2,168) $ 4,111
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization 15,121 13,658
Foreign currency transaction (gains) losses 122 (232)
Restructuring spending ---- (3,764)
Loss on sale of business 1,331 ----
Changes in operating assets and liabilities 9,623 1,750
------------ -------------
Net cash from operating activities 24,029 15,523
Cash flows from investing activities:
Capital expenditures, net (3,277) (9,931)
Proceeds from sale of business 12,996 ----
------------ -------------
Net cash from investing activities 9,719 (9,931)
Cash flows from financing activities:
Net borrowings (repayments) under short-term
borrowing arrangements (18,620) 11,039
Payments on long-term debt (39,995) (17,243)
Proceeds from issuance of long-term debt 30,000 ---
Payments of debt issuance costs (1,334) ---
------------ -------------
Net cash from financing activities (29,949) (6,204)
Effect of exchange rate changes on cash 214 135
------------ -------------
Net increase (decrease) in cash and cash equivalents 4,013 (477)
Cash and cash equivalents at beginning of period 9,168 9,697
------------ -------------
Cash and cash equivalents at end of period $ 13,181 $ 9,220
============ =============
</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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- --------------------------
1999 1998 1999 1998
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss)................................ $ (1,685) $ (719) $ (2,168) $ 4,111
Other comprehensive income(loss):................
Foreign currency translation adjustments..... (1,771) (1,772) 21 1,342
Write off of accumulated foreign currency
translation adjustments due to sale of
business................................... 829 --- 829 ---
------------- ------------- ------------ ------------
Comprehensive income(loss)....................... $ (2,627) $ (2,491) $ (1,318) $ 5,453
============= ============= ============ ===========
</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 six months ended December 31, 1999 and December 31,
1998, the balance sheets at December 31, 1999 and June 30, 1999, and the
consolidated statements of cash flows for the six months ended December 31, 1999
and December 31, 1998.
The operating results for the six months ended December 31, 1999 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 December 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>
DECEMBER 31, JUNE 30,
1999 1999
----------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FIFO Cost:
Raw Materials.......................... $ 38,167 $ 39,838
Work-in-process........................ 23,430 25,884
Finished goods......................... 44,327 51,063
------------- -------------
105,924 116,815
LIFO adjustment........................ 823 1,348
============= =============
$ 106,747 $ 118,163
============= =============
</TABLE>
3. NET OTHER (INCOME)EXPENSE
During the second quarter of fiscal year 2000, the Company had net other
income of $0.2 million compared to $0.7 million in the second quarter of fiscal
year 1999. Year-to-date the Company had other expense of $1.9 million as
compared to other income of $5.5 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.
7
<PAGE>
4. PROVISION FOR INCOME TAXES
The tax provisions for the second quarter and six month periods ended
December 31, 1999 and 1998 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, for the second quarter and six month periods
ended December 31, 1999 and 1998, 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 second quarter and six month period ended December 31, 1999 reflects the
effect of the sale of a foreign subsidiary. Also, the effective tax rate for the
six months ended December 31, 1998 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 December 31, 1999,
contracts for 3.5 million pounds of copper were in place. These contracts have
various expiration dates through September 30, 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
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
December 31, 1999, the Company has spent $3.8 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.
8
<PAGE>
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 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 six months
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
CLASSIFIED BY INDUSTRY 1999 1998 1999 1998
---------------------- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
Commercial Air Conditioning and Refrigeration.... $ 121,555 $ 135,077 $ 269,455 $ 301,834
Filtration Products.............................. 80,996 83,478 158,733 171,923
Eliminations..................................... (363) (2,840) (873) (6,642)
--------- --------- --------- ---------
Total.................................... $ 202,188 $ 215,715 $ 427,315 $ 467,115
========= ========= ========= =========
Operating Income (Loss):
Commercial Air Conditioning and Refrigeration.... $ (1,579) $ (1,633) $ 594 $ 2,686
Filtration Products ............................. 4,988 4,834 10,290 9,333
Corporate 10 594 (366) (181)
--------- --------- --------- ---------
Total.................................... $ 3,419 $ 3,795 $ 10,518 $ 11,838
========= ========= ========= =========
Depreciation/Amortization:
Commercial Air Conditioning and Refrigeration.... $ 4,957 $ 4,191 $ 10,155 $ 8,401
Filtration Products.............................. 2,447 2,582 4,944 5,202
Corporate 8 27 22 55
--------- --------- --------- ---------
Total.................................... $ 7,412 $ 6,800 $ 15,121 $ 13,658
========= ========= ========= =========
Capital Expenditures:
Commercial Air Conditioning and Refrigeration.... $ 402 $ 4,255 $ 1,845 $ 8,892
Filtration Products.............................. 597 435 1,432 1,039
--------- --------- --------- ---------
Total.............................. $ 999 $ 4,690 $ 3,277 $ 9,931
========= ========= ========= =========
</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 for each quarter is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating income from business segments $ 3,409 $ 3,201 $ 10,884 $ 12,019
Over (under) allocation of corporate expenses 10 594 (366) (181)
Interest expense, net 5,546 5,738 11,419 12,244
Other (income) expense (220) (661) 1,862 (5,473)
--------- --------- --------- --------
Income (loss) before income taxes $ (1,907) $ (1,282) $ (2,763) $ 5,067
========= ========= ========= ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES were $202.2 million in the three months ended December 31, 1999,
which represents a decrease of $13.5 million, or 6.3%, as compared to the same
period in the prior year. Net sales were $427.3 million for the six months ended
December 31, 1999, which represents a decrease of $39.8 million, or 8.5%, as
compared to the same period in the prior year. 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 additional week, the
year-to-date decrease in net sales is 4.8%.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP net sales for the
three months ended December 31, 1999 decreased $13.5 million, or 10.0%, to
$121.5 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 $12.5 million of sales volume in the
second quarter of fiscal year 1999 as compared to no sales in the second
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 13.8% in the second quarter of fiscal
year 2000 compared to the second quarter of fiscal year 1999. This decrease
was expected primarily as a result of the restructuring of the chiller
business unit. Terminal air conditioning products net sales decreased 21.8%
in the second quarter of fiscal 2000 as compared to the second 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
Vision-TM- air handlers, and increased sales from operations in the United
Kingdom and Italy.
Year-to-date sales decreased $32.4 million, or 10.7%, to $269.4 million.
The Company estimates that approximately $11.4 million, or 35.2%, 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 $21.0 million is primarily attributable to the sale of the
commercial air conditioning and refrigeration operation in France in October
1999, which contributed sales of $26.4 million in the first six months of fiscal
year 1999 as compared to $11.6 million in the first six 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 15.5%. This decrease was expected primarily as a result of the
restructuring of the chiller business unit. Terminal air conditioning products
year to date net sales decreased 18.1% 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 from the operations in the United Kingdom and Italy.
Backlog for the Commercial Air Conditioning and Refrigeration Group was
$100.4 million at December 31, 1999 as compared to $133.7 and $127.3 million at
June 30, 1999 and December 31, 1998, 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 December 31, 1998, would have been $127.6
and $118.7 million, respectively.
FILTRATION PRODUCTS GROUP net sales for the three months ended December 31,
1999 decreased $2.5 million, or 3.0%, to $81.0 million. The decrease is
primarily attributable to continued slow MFAS sales in the United States due to
soft market conditions and a decrease in air pollution control sales in Europe.
Year-to-date sales decreased $13.2 million, or 7.7%, to $158.7 million. The
Company estimates that approximately $6.0 million, or 45.5%, 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 $7.2
million is primarily attributable to continued slow MFAS sales in the United
States due to soft market conditions and a decrease in air pollution control
sales in Europe.
GROSS PROFIT decreased to $50.5 million, or 25.0%, of sales for the three
months ended December 31, 1999. Year-to-date gross profit decreased to $110.5
million, or 25.9%, of sales. In the Commercial Air
10
<PAGE>
Conditioning and Refrigeration Group, year-to-date gross profit as a percentage
of sales was 23.5% as compared to 24.7% 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 28.1% in fiscal year 1999 to 29.5% for the
same period in fiscal year 2000. This increase resulted from improved
manufacturing performance and cost reduction programs.
OPERATING EXPENSES were $47.1 million, or 23.3% of sales, for the second
quarter of fiscal year 2000 versus $51.6 million, or 23.9% of sales, for the
second quarter of fiscal year 1999. For the first half of fiscal years 2000 and
1999, operating expenses were $99.8 million, or 23.4% of sales, versus $110.4
million, or 23.6% of sales, respectively. Year-to-date, the Company estimates
that approximately $4.1 million, or 38.7%, 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 $6.5
million is primarily attributable to a reduction in commissions, selling and
warranty expenses offset by an increase in depreciation expense related to the
new Enterprise Resource Planning systems.
INCOME FROM OPERATIONS for the second quarter and year-to-date decreased
slightly as compared to the same periods in fiscal year 1999. For the second
quarter income from operations decreased to $3.4 million, or 1.7% of sales, as
compared to $3.8 million, or 1.8% of net sales, in the second quarter of fiscal
1999. Year-to-date income from operations decreased to $10.5 million as compared
to $11.8 million but remained flat as a percent of sales at 2.5% in fiscal year
2000 and 1999.
The Commercial Air Conditioning and Refrigeration Group's income from
operations remained flat in the second quarter of fiscal year 2000 at $(1.6)
million, or (1.3%) of sales, as compared $(1.6) million, or (1.2%) of sales in
the second quarter of fiscal year 1999. Year-to-date income from operations
decreased from $2.7 million, or 0.9% of sales, to $0.6 million, or 0.2% of
sales, for the first six months of fiscal year 2000 as compared to the first six
months of fiscal year 1999, respectively.
The Filtration Products Group had an increase in income from operations in
the second quarter of fiscal year 2000 from $4.8 million, or 5.8% of sales, to
$5.0 million, or 6.2% of sales for the same period in fiscal year 1999.
Year-to-date income from operations increased from $9.3 million, or 5.4% of
sales, during the first six months of fiscal year 1999 to $10.3 million, or 6.5%
of sales, for the first six months of fiscal year 2000.
NET INTEREST EXPENSE decreased to $5.5 million and $11.4 million during the
second quarter and six months ended December 31, 1999 from $5.7 million and
$12.2 million for the comparable periods ended December 31, 1998. This decrease
is primarily attributable lower debt levels as well as having one less week of
activity in the first six months of fiscal year 2000 as compared to the first
six months of fiscal year 1999.
NET OTHER (INCOME) EXPENSE for the second quarter of fiscal year 2000 was
income of $0.2 million compared to $0.7million in the second quarter of fiscal
year 1999. Year-to-date the Company had expense of $1.9 million as compared to
income of $5.5 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
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 2000, funds generated by operating
activities were $24.0 million as compared to $15.5 million of funds generated in
the prior fiscal year for the comparable period. During the first six months of
fiscal year 2000, cash provided from investing activities was $9.7 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 $3.3 million. Capital spending for the first six months has been
reduced from $9.9 million in the prior year to $3.3 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
December 31, 1999, remaining borrowing availability under the new Revolving
Credit portion of the New
11
<PAGE>
Bank Credit Agreement was $45 million. Total net payments on long term debt for
the first six months were $10.0 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 $2.7
million. Cash of $18.6 million was used to reduce borrowings under short term
borrowing arrangements during the six month period. Total debt of the Company
was reduced from $266.4 million at June 30, 1999 to $237.8 million at December
31, 1999.
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. In addition, the Company has secured certain
domestic letter of credit facilities totaling $13.5 million that are supported
by a letter of credit from OYL which expires on March 21, 2000. Each of these
support arrangements may be extended for additional time periods with the
consent of OYL and the banks providing the facilities.
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. 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
By mid-December 1999, the Company had successfully completed its formal
Year 2000 program, comprised of two major components.
First, the Company completed its internal Year 2000 Compliance program
which consisted of converting existing systems to Year 2000 Compliant status,
primarily through implementing new state-of-the-art Enterprise Resource Planning
(ERP) systems. Even before the Year 2000 program started, the Company's
management believed that modernizing its information systems was critical for
the Company's stable and efficient growth. This modernization, through ERP
systems, also served as the basis of the Company's strategy for resolving its
Year 2000 issues. The final ERP implementation was completed by month-end
September 1999. Company expenditures for the new systems aggregated to
approximately $27.0 million, from mid-1996 through total project completion at
month-end September 1999. All other additional remedial actions beyond those
required to install new ERP systems were completed on schedule by mid-December;
expenditures for these actions (minor) were managed by the individual business
units and recognized in operating expenses.
Second, by mid-December the Company had completed its Year 2000 Business
Continuity and Contingency Plans (BCCP), for each of its businesses, in the
event that internal, external, or systemic failures occur on or about January 1,
2000.
12
<PAGE>
All identified Year 2000 activities were completed according to the chart
below:
<TABLE>
------------------------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C>
ACTIVITY STATUS STARTING ENDING
------------------------------------ ------------------ ----------------- -----------------
Assessment and inventory Complete September 1997 January 1998
------------------------------------ ------------------ ----------------- -----------------
Coordinator and Executive review Complete February 1998 May 1998
process
------------------------------------ ------------------ ----------------- -----------------
Industrial Refrigeration ERP Complete January 1997 April 1998
------------------------------------ ------------------ ----------------- -----------------
Filtration Products ERP Complete April 1997 July 1999
------------------------------------ ------------------ ----------------- -----------------
Commercial Air Conditioning ERP Complete September 1997 September 1999
------------------------------------ ------------------ ----------------- -----------------
Product compliance Complete May 1998 March 1999
------------------------------------ ------------------ ----------------- -----------------
Materials suppliers Complete June 1998 October 1999
------------------------------------ ------------------ ----------------- -----------------
Other IT issues including third Complete September 1998 October 1999
parties
------------------------------------ ------------------ ----------------- -----------------
Equipment and facilities Complete September 1998 October 1999
------------------------------------ ------------------ ----------------- -----------------
</TABLE>
The Company believes the completed Year 2000 activities are adequate to
address the Year 2000 risks faced by the Company. As of mid-January 2000, the
Company had experienced no significant Year 2000 related problems. While the
likelihood has greatly diminished, there still exists the possibility of failure
by the Company's third party suppliers and/or service providers to produce or
deliver critical components or to transport products/service. This could cause
disruption in the Company's ability to manufacture and/or deliver timely its
products to its customers, which could result in increased expenses, reduced
billings and potential litigation. The precise costs associated with such risks
are difficult to predict at this time.
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 infrastructures.
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.
13
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
Exhibit 27 Financial Data Schedule
(filed herewith)
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the
period.
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.
DATE February 14, 2000 By: ____________________________
---------------------- Bruce D. Krueger
Vice President of Finance
Principal Accounting Officer and
Principal Financial Officer
15
<PAGE>
Exhibit Index
NUMBER DESCRIPTION
27 Financial Data Schedule
16
<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> JUL-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 0
<SECURITIES> 13181
<RECEIVABLES> 206110
<ALLOWANCES> 7055
<INVENTORY> 106747
<CURRENT-ASSETS> 324838
<PP&E> 201486
<DEPRECIATION> 69367
<TOTAL-ASSETS> 696586
<CURRENT-LIABILITIES> 271680
<BONDS> 160276
0
0
<COMMON> 250
<OTHER-SE> 185110
<TOTAL-LIABILITY-AND-EQUITY> 696586
<SALES> 427315
<TOTAL-REVENUES> 427315
<CGS> 316812
<TOTAL-COSTS> 316812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11419
<INCOME-PRETAX> (2763)
<INCOME-TAX> (731)
<INCOME-CONTINUING> (2168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2168)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
