<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended December 31, 1998
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 1-13041
WATERLINK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1788678
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
---------------------------------
4100 Holiday Street N.W., Suite 201
Canton, Ohio 44718
(Address of Principal Executive Offices)
(Zip Code)
---------------------------------
330-649-4000
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value - 12,635,861 shares outstanding as of January 31,
1999
================================================================================
<PAGE> 2
INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1998 and
December 31, 1998 3 - 4
Consolidated statements of income - Three months
ended December 31, 1997 and 1998 5
Consolidated statements of cash flows - Three months
ended December 31, 1997 and 1998 6
Notes to consolidated financial statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE> 3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
-------- --------
<S> <C> <C>
ASSETS (In thousands)
Current Assets:
Cash and cash equivalents $ 3,925 $ 4,097
Accounts receivable:
Trade, net 29,906 25,536
Other 2,757 2,702
Inventories 22,160 24,095
Costs in excess of billings 17,195 17,182
Refundable income taxes 840 170
Other current assets 3,111 3,330
-------- --------
Total Current Assets 79,894 77,112
Property, plant and equipment, at cost:
Land, buildings and improvements 4,095 2,935
Machinery and equipment 8,293 7,578
Office equipment 2,899 3,176
-------- --------
15,287 13,689
Less accumulated depreciation 1,557 1,721
-------- --------
13,730 11,968
Other assets:
Goodwill, net 79,936 79,311
Patents, net 1,408 1,395
Other assets 8,593 11,231
-------- --------
89,937 91,937
-------- --------
Total Assets $183,561 $181,017
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED (CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
--------- ---------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 15,133 $ 13,812
Accrued expenses 18,881 19,429
Additional purchase consideration payable 1,000 -
Billings in excess of cost 3,392 2,649
Accrued income taxes 1,158 1,107
Deferred income taxes 164 177
Current portion of long-term obligations 9,429 6,204
--------- ---------
Total Current Liabilities 49,157 43,378
Long-term obligations:
Long-term debt 73,639 77,937
Convertible subordinated notes-related parties 4,250 3,250
Other long-term obligations 1,637 1,157
--------- ---------
79,526 82,344
Shareholders' equity:
Preferred Stock, $.001 par value per share,
10,000,000 shares authorized, none issued and
outstanding - -
Common Stock, voting, $.001 par value per share,
Authorized - 40,000,000 shares
Issued and outstanding - 12,225,604 shares at
September 30, 1998 and 12,635,861 at
December 31, 1998 12 13
Additional paid-in capital 71,973 72,966
Accumulated other comprehensive income 231 (875)
Retained (deficit) (17,338) (16,809)
--------- ---------
Total Shareholders' Equity 54,878 55,295
--------- ---------
Total Liabilities and Shareholders' Equity $ 183,561 $ 181,017
========= =========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1998
-------- --------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 32,080 $ 41,368
Cost of sales 19,986 27,888
-------- --------
Gross Profit 12,094 13,480
Selling, general and
administrative expenses 8,069 10,319
Special charges - 219
Amortization 432 537
-------- --------
Operating Income 3,593 2,405
Other income (expense):
Interest expense (289) (1,800)
Interest income and other items- net 27 95
-------- --------
Income Before Income Taxes 3,331 700
Income taxes 1,316 171
-------- --------
Net Income $ 2,015 $ 529
======== ========
Earnings per Common Share:
Basic $ 0.17 $ 0.04
Assuming dilution $ 0.16 $ 0.04
Weighted Average Common Shares Outstanding:
Basic 11,907 12,316
Assuming dilution 12,843 12,336
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1998
------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,015 $ 529
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 663 990
Deferred income taxes 497 13
Changes in working capital:
Accounts receivable 5,891 4,503
Inventories (323) (1,969)
Costs in excess of billings (3,662) 14
Refundable income taxes 137 670
Other assets (2,057) (765)
Accounts payable (1,814) (1,347)
Accrued expenses (469) 69
Billings in excess of cost (1,926) (752)
Accrued income taxes 624 (42)
------- -------
Net cash provided (used) by operating activities (424) 1,913
INVESTING ACTIVITIES
Purchases of equipment (517) (937)
Purchases of subsidiaries, net of cash acquired (1,274) (1,477)
------- -------
Net cash used in investing activities (1,791) (2,414)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 3,387 1,131
Payments on long-term borrowings (730) (58)
Proceeds from sale of common stock 400 -
------- -------
Net cash provided by financing activities 3,057 1,073
Effect of exchange rate changes on cash (282) (400)
------- -------
Increases in cash and cash equivalents 560 172
Cash and cash equivalents at beginning of period 2,482 3,925
------- -------
Cash and cash equivalents at end of period $ 3,042 $ 4,097
======= =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED
DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended December 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998.
2. INVENTORIES
Inventories consisted of the following (thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
---- ----
<S> <C> <C>
Raw materials and supplies $11,843 $13,485
Work in process 3,500 5,771
Finished goods 6,817 4,839
------- -------
$22,160 $24,095
======= =======
</TABLE>
3. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows (thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
---- ----
<S> <C> <C>
Contract costs incurred to date $57,435 $49,984
Estimated profits 24,497 20,157
------- -------
Contract revenue earned to date 81,932 70,141
Less billings to date 68,129 55,608
------- -------
Cost and estimated earnings in excess of billings, net $13,803 $14,533
======= =======
</TABLE>
7
<PAGE> 8
The above amounts are included in the accompanying consolidated balance sheets
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
------- -------
<S> <C> <C>
Costs in excess of billings $17,195 $17,182
Billings in excess of cost 3,392 2,649
------- -------
$13,803 $14,533
======= =======
</TABLE>
4. CAPITALIZATION
During the quarter ended December 31, 1998 the Company entered into an agreement
with one of its existing holders of convertible subordinated notes to reduce the
note principal amount from $2,000,000 to $1,000,000 in exchange for 410,257
shares of Common Stock. In addition, the maturity date of the $1,000,000
principal amount of the convertible subordinated note was extended from
September 30, 1999 to October 1, 2000; the interest rate on the remaining note
balance was increased from 5.81% to 6.06%; and the conversion rate was decreased
from $22.25 per share to $6.75 per share.
A progression of shareholders' equity follows (thousands of dollars):
<TABLE>
<CAPTION>
Accumulated
Additional Other Retained Total
Common Paid-in Comprehensive Earnings Shareholders'
Stock Capital Income (Deficit) Equity
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ 12 $ 71,973 $ 231 $(17,338) $ 54,878
Net income 529 529
Foreign currency translation
adjustments (1,106) (1,106)
--------
Comprehensive income (577)
Issuance of 410,257 shares of common
stock in connection with the conversion
of convertible subordinated notes 1 999 1,000
Other (6) (6)
-------- -------- -------- -------- --------
Balance at December 31, 1998 $ 13 $ 72,966 $ (875) $(16,809) $ 55,295
======== ======== ======== ======== ========
</TABLE>
5. SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the Company's Board of Directors
approved the 1999 Strategic Operating Plan (the "1999 Plan"), which is designed
to restructure the Company from a holding company with 23 operating companies
into five integrated divisions that focus on specific market segments. The 1999
Plan, which will eliminate redundant costs and improve operating efficiencies,
is expected to be substantially completed by the end of fiscal 1999. The plan
includes costs associated with the exiting and consolidation of certain
facilities and employee termination costs. In conjunction with the 1999 Plan,
the Company expects to reduce
8
<PAGE> 9
the Company's domestic and foreign workforce by approximately 75 people and
eliminate certain administrative and production-related functions no longer
required. Through December 31, 1998, 73 employees have been terminated in
conjunction with the 1999 Plan, of which 49 people received, or are currently
receiving, termination benefits in accordance with Company guidelines or local
laws. Further, four facilities have been closed or relocated as of December 31,
1998. Due to the timing of certain termination benefits and facility
consolidation costs, the reserve is expected to be utilized throughout fiscal
1999 and 2000. Other costs associated with the 1999 Plan of approximately
$1,300,000, which did not meet the criteria for recognition at September 30,
1998, are expected to be incurred during fiscal 1999, of which, the Company
incurred $219,000 during the quarter ended December 31, 1998. The following
table summarizes the provisions, payments and remaining reserves associated with
the 1999 Plan:
<TABLE>
<CAPTION>
TERMINATION OTHER EXIT
BENEFITS COSTS TOTAL
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Provision in fiscal 1998 $ 1,076 $ 1,782 $ 2,858
Payments in fiscal 1998 (120) (480) (600)
----------------------------------
Reserve at September 30, 1998 956 1,302 2,258
Provision in fiscal 1999 41 178 219
Payments in fiscal 1999 (363) (378) (741)
----------------------------------
Reserve at December 31, 1998 $ 634 $ 1,102 $ 1,736
==================================
</TABLE>
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and assuming dilution
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1998
------- -------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share-net income $ 2,015 $ 529
Effect of dilutive securities-interest on convertible subordinated
notes, net of tax 8 -
------- -------
Numerator for diluted earnings per share-income available to
common stockholders after assumed conversions $ 2,023 $ 529
======= =======
Denominator:
Average shares outstanding- basic 11,907 12,316
Effect of dilutive securities:
Stock options and warrants 858 20
Convertible subordinated notes 78 -
------- -------
Denominator for diluted earnings per share-
weighted average shares and assumed conversions 12,843 12,336
======= =======
Earnings per common share:
Basic $ 0.17 $ 0.04
Assuming dilution $ 0.16 $ 0.04
</TABLE>
9
<PAGE> 10
For the quarters ended December 31, 1998 and 1997, certain issuances of
potential common stock and certain outstanding convertible subordinated notes
were excluded from the computation of diluted earnings per share since their
inclusion in the computation would have an anti-dilutive effect.
10
<PAGE> 11
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WATERLINK, INC. AND SUBSIDIARIES
OVERVIEW
Waterlink is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. Waterlink was incorporated in Delaware on December 7, 1994 and has
grown externally by completing thirteen acquisitions and internally through
industry wide expansion as well as Waterlink sponsored programs.
The current focus of Waterlink is the implementation of its 1999
Strategic Operating Plan (the "1999 Plan"). The 1999 Plan is being implemented
in three phases: the restructuring phase, the cost reduction phase, and the
growth phase.
The restructuring phase was completed prior to October 1, 1998, the
beginning of Waterlink's fiscal year, and restructured Waterlink from 23
separate operating companies into the following five fully integrated divisions
that are focused on their specific markets:
- Biological Wastewater Treatment Division
- Separations Division
- Pure Water Division
- Specialty Products Division
- European Water and Wastewater Division
This divisional structure allows Waterlink to utilize the strengths of
its complementary product lines and work closer with customers through the
Waterlink brand name.
The cost reduction phase established goals of reducing selling, general
and administrative expenses by $4.3 million in fiscal 1999, principally by
reducing the number of employees by 75, or 10% of the work force, and by closing
seven facilities. Through December 31, 1998 the annualized cost savings of $4.3
million was achieved and the reduction of 75 employees substantially was
achieved. With regard to facilities, four have been closed and the remaining
three are scheduled to close before September 30, 1999, the end of Waterlink's
fiscal year.
The cost reduction phase also includes an initiative to reduce
production costs by identifying common suppliers among divisions and
consolidating purchases to increase Waterlink's purchasing power. These supply
contracts with vendors are expected to provide cost savings to help Waterlink
remain competitive in the long term.
11
<PAGE> 12
During the second quarter of fiscal 1999, additional employee
reductions of approximately 25 people will be made in connection with the
closing of facilities. The savings from these additional employee reductions
will be reinvested in sales and engineering personnel during the remainder of
the fiscal year to help implement the growth phase of the 1999 Plan. The
restructuring and cost reduction phases of the 1999 Plan provide the foundation
for the growth phase.
The improved communications and specific identification of markets and
products resulting from the restructuring of Waterlink, together with the
reinvestment in sales and engineering professionals, will allow Waterlink to
pursue more significant orders in the future. Two specific areas of focus are
the implementation of our strategic alliance program with selected design and
engineering firms to increase recognition of the Waterlink brand name, and our
integrated systems effort that is expected to provide more interdivisional cross
selling opportunities. Waterlink is also developing sales strategies in
continents where we do not currently have a significant presence. The growth
phase of the 1999 Plan is expected to help build Waterlink into a sales,
marketing and engineering leader in the industry, focused on profitable growth
over the long term.
Waterlink's new organization is also designed to more efficiently
integrate future acquisitions. In the future, acquisitions are expected to
continue to play a strategic role in Waterlink's future to increase
competitiveness, spur revenue and earnings growth, and enhance its total
solutions capability.
All acquisitions have been accounted for under the purchase method of
accounting and are included in the results of operations for the period
subsequent to the effective date of acquisition. Due to the timing and magnitude
of these acquisitions, results of operations for the periods presented are not
necessarily comparable or indicative of operating results for current or future
periods.
The majority of the systems and equipment produced by Waterlink are
custom designed and take a number of months to produce. Revenues from large
contracts are recognized using the percentage of completion method of accounting
in the proportion that costs bear to total estimated costs at completion.
Revisions of estimated costs or potential contract losses, if any, are
recognized in the period in which they are determined. Provisions are made
currently for all known or anticipated losses. Variations from estimated
contract performance could result in a material adjustment to operating results
for any fiscal quarter or year. Claims for extra work or changes in scope of
work are included in revenues when collection is probable. Revenues from
remaining systems and equipment sales are recognized when shipped.
In the past Waterlink has experienced quarterly fluctuations in
operating results due to the contractual nature of its business and the
consequent timing of these orders. As part of its strategic plan, Waterlink
expects that it may receive contracts that are significantly larger than those
received by Waterlink historically. In addition, certain of the contracts will
be subject to the customer's ability to finance, or fund from government
sources, the actual costs of completing the project as well as the ability to
receive any necessary permits to commence the
12
<PAGE> 13
project. Therefore, Waterlink expects that its future operating results could
fluctuate significantly, especially on a quarterly basis, due to the timing of
the awarding of such contracts, the ability to fund project costs, and the
recognition by Waterlink of revenues and profits. In addition, Waterlink has
historically operated with a moderate backlog. However, as a result of its
strategic plan, Waterlink anticipates that both the dollar volume and number of
contracts in its backlog will increase significantly. As of December 31, 1998,
Waterlink's backlog was approximately $32.6 million. In addition, Waterlink also
had $6.5 million of firm commitments to purchase recurring revenue products from
its Specialty Products Division at December 31, 1998. Therefore, quarterly sales
and operating results may be affected by the volume and timing of contracts
received and performed within the quarter, which are difficult to forecast. Any
significant deferral or cancellation of a contract could have a material adverse
effect on Waterlink's operating results in any particular quarter. Because of
these factors, Waterlink believes that period-to-period comparisons of its
operating results are not necessarily indicative of future performances.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1998
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 62.3 67.4
----- -----
Gross profit 37.7 32.6
Selling, general and administrative expenses 25.2 24.9
Special charges - 0.6
Amortization 1.3 1.3
----- -----
Operating income 11.2 5.8
Other income (expense):
Interest expense (0.9) (4.3)
Interest income and other items - net 0.1 0.2
----- -----
Income before income taxes 10.4 1.7
Income taxes 4.1 0.4
----- -----
Net income 6.3% 1.3%
===== =====
</TABLE>
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Net Sales: Net sales for the three months ended December 31, 1998 were
$41,368,000, an increase of $9,288,000 from the comparable prior period. The
increase was due to the acquisition of Chemitreat Services, Inc, on March 2,
1998; of Aquafine Engineering Services Limited and Purac Engineering
Incorporated in a single transaction on March 25, 1998; and of Barnebey &
Sutcliffe Corporation, Sutcliffe Speakman Carbons Limited and Sutcliffe
Croftshaw
13
<PAGE> 14
Limited (collectively referred to as the "Specialty Products Division") in a
single transaction on June 5, 1998. Waterlink experienced negative internal
growth for the quarter of 30.7%, resulting primarily from German-based sales
activity and a Utah-based land development wastewater project that generated
significant revenues in the first quarter of fiscal 1998. Excluding these two
factors, internal growth would have declined by 7.8% due to the timing of orders
at two specific domestic locations. Waterlink measures internal growth by
comparing each subsidiary's net sales from the months subsequent to their
respective acquisition dates during the prior year to those same months in the
current year.
Gross Profit: Gross profit for the three months ended December 31, 1998 was
$13,480,000, an increase of $1,386,000 from the comparable prior period due to
the acquisitions. Gross margin was 32.6% for 1998 as compared to 37.7% for 1997.
The gross margin for 1998 has been impacted by the June 1998 acquisition of the
Specialty Products Division, which historically experiences lower margins as
compared to other Waterlink companies. The gross margin for 1997 was increased
by approximately 2.8% as a result of the previously mentioned land development
project that was substantially completed during the quarter ended December 31,
1997.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended December 31, 1998 were
$10,319,000, an increase of $2,250,000 from the comparable prior period. The
increase was primarily due to the acquisitions. Selling, general and
administrative expenses as a percentage of net sales were 24.9% in 1998 as
compared to 25.2% for the comparable prior period. This decrease primarily
reflects the costs savings realized from Waterlink's restructuring under its
1999 Plan; as well as the impact of the June 1998 acquisition of the Specialty
Products Division, which historically experiences a lower percentage of selling,
general and administrative expenses as a percentage of sales than other
Waterlink companies.
Special Charges: Special charges of $219,000 during the three months ended
December 31, 1998 related to continuing costs associated with the implementation
of Waterlink's 1999 Plan.
Amortization: Amortization expense for the three months ended December 31, 1998
was $537,000, an increase of $105,000 from the comparable prior period. The
increase was primarily due to the additional goodwill resulting from the
acquisitions, offset by $112,000 reduction in amortization expense resulting
from the exit of Waterlink's Bioclear business during the fourth quarter of
fiscal 1998.
Interest Expense: Interest expense for the three months ended December 31, 1998
was $1,800,000, an increase of $1,511,000 from the comparable prior period
primarily due to increased borrowings related to Waterlink's fiscal 1998
acquisitions.
Income Taxes: Waterlink recorded income taxes of $171,000 on pre-tax income of
$700,000, which is an effective tax rate of 24.4%. This effective rate is lower
than the United States federal statutory rate of 34% since federal income taxes
were not recorded on Waterlink's domestic earnings due to the utilization of its
net operating loss carryforward. The effective income tax rate of
14
<PAGE> 15
39.5% for the three months ended December 31, 1997 exceeds the United States
federal statutory rate of 34% due primarily to non-deductible goodwill
amortization related to certain acquisitions made by Waterlink as well as state
and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Waterlink's primary sources of liquidity have
been:
- borrowings available under credit facilities
- net proceeds from the sale of Waterlink's common and preferred
stock
- issuance of common stock and seller financing incurred in
connection with Waterlink's completed acquisitions
- cash flow from certain profitable acquisitions.
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth
at certain acquisitions
- the funding required for certain under-performing
acquisitions.
Waterlink does not currently anticipate making significant capital
investments in plant and equipment due to its focus on partnering with vendors
who manufacture most of the components used in Waterlink's systems and
equipment.
For the three months ended December 31, 1998, net cash provided by
operating activities was $1,913,000. This positive cash flow, along with
additional long-term borrowings, were used to fund purchases of equipment
totaling $937,000 and cash outlays related to the purchases of businesses of
$1,477,000.
In the fourth quarter of fiscal 1998, Waterlink's Board of Directors
approved the 1999 Plan. The 1999 Plan includes costs associated with the exiting
of certain facilities and employee termination costs. Costs associated with this
plan of totaled $2,858,000 during fiscal 1998 and $219,000 for the three months
ended December 31, 1998, of which approximately $1,736,000 is reserved for
future payment at December 31, 1998. Additional costs associated with the 1999
Plan of approximately $1,000,000 are expected to be recognized during the
remainder of fiscal 1999.
During fiscal 1998 Waterlink invested in Aquatec Water Systems,
Incorporated ("Aquatec"), a designer and manufacturer of specialized
multi-chamber pumps for the pure water industry, in the form of $1,400,000
subordinated debt instruments, which are convertible into approximately 30% of
the equity of Aquatec, together with other stock purchase options. Waterlink is
currently negotiating with an investor group to sell this investment at
approximately book value.
15
<PAGE> 16
Waterlink is also in the process of disposing of other non-revenue
producing assets. A Waterlink-owned facility vacated during fiscal 1998 was
recently sold, the proceeds of $519,000 were received during January 1999.
Waterlink is also in the process of selling its land, building and equipment in
Winnipeg, Manitoba, Canada, the former site of its Bioclear manufacturing
facility.
Waterlink intends to continue pursuing attractive acquisition
opportunities. The timing, size and success of any acquisition effort and the
associated potential capital commitments are unpredictable. As a result of the
Specialty Products Division acquisition and the implementation of the 1999 Plan,
Waterlink has caused its current and long-term debt to be in excess of
stockholder's equity and bears the risks associated with increased leverage.
Waterlink believes that through the end of fiscal 1999, sufficient
funds for its working capital needs, additional cash requirements of the 1999
Plan, acquisitions and additional contingent consideration related to
acquisitions will be provided by:
- future cash flow from operations
- borrowings under its credit facilities
- issuance of subordinated indebtedness, Common Stock and seller
financing incurred in connection with future acquisitions or
financings
- the sale of certain underperforming assets.
Acquisitions
During the three months ended December 31, 1998 Waterlink made
additional purchase consideration payments of $1,477,000 related to the
achievement of targeted operating results of two of its acquisitions. These
amounts have been recorded as additional goodwill.
Under the terms of certain of the purchase agreements, Waterlink may be
required to make additional purchase consideration payments of up to $1,983,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that are expected to be required for meeting fiscal 1999 and
2000 targets are $983,000 and $1,000,000, respectively. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
Credit Availability
Waterlink's credit facilities are comprised of (1) an $87,000,000
amended domestic facility with Bank of America National Trust & Savings
Association as agent, which expires on May 19, 2003 and (2) separate facilities
aggregating $7,000,000 at three of its overseas subsidiaries. The credit
facilities will be utilized to fund operating activities of Waterlink as well as
future acquisitions.
16
<PAGE> 17
Loans under the credit facilities bear interest at a designated
variable base rate plus spreads ranging from 0 to 25 basis points depending on a
leverage ratio of total consolidated indebtedness to Waterlink's earnings before
interest, taxes, depreciation and amortization. At Waterlink's option, the
credit facilities bear interest based on a designated London interbank offering
rate ("LIBOR") plus spreads ranging from 100 to 225 basis points, depending on
Waterlink's leverage ratio.
The credit facilities restrict or prohibit Waterlink from taking many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The banks that participate in the credit facilities also must approve
most acquisitions. Waterlink's obligations under the credit facilities are
secured by liens on substantially all of Waterlink's domestic assets, including
equipment, inventory, accounts receivable and general intangibles and the pledge
of most of the stock of Waterlink's subsidiaries. Waterlink has guaranteed the
payment by its three overseas subsidiaries of their obligations under the
overseas facilities. The three overseas subsidiaries have given a negative
pledge of their assets in connection with the overseas facilities.
Availability for future borrowings under the credit facilities are
based on a multiple of Waterlink's pro forma earnings before interest, taxes,
depreciation and amortization. At December 31, 1998, approximately $1.4 million
was available for future borrowings under the credit facilities. Availability
for future borrowings may increase or decrease based on the pro forma operating
performance of Waterlink.
Waterlink also has in place a $3,000,000 credit facility with Royal
Bank of Canada to fund Canadian working capital requirements including banker's
acceptances and letters of credit. Interest rates are negotiated on an
individual borrowing basis and are related to the Royal Bank of Canada's prime
rate. At December 31, 1998 the Canadian credit facility was fully utilized.
Borrowings under the Canadian credit facility are payable upon demand and are
guaranteed by the real and personal property of Bioclear. Waterlink is currently
negotiating an amendment to the Canadian credit facility that is supportive of
the 1999 Plan.
Waterlink's earnings are affected by changes in interest rates charged
on its domestic facility. During 1998, Waterlink entered into an interest rate
swap agreement with a major commercial bank to modify the interest
characteristics of its domestic facility. The agreement involves the exchange of
amounts based on a fixed rate of interest for an amount based on a LIBOR-based
floating rate over the life of the agreement without an exchange of the notional
amount upon which the payments are based. The agreement, which expires on
December 30, 1999, fixes Waterlink's LIBOR-based rate at 5.25% on a notional
amount of $75,000,000.
Waterlink also has exposure to currency rate fluctuations related
primarily to the purchases of inventory. Waterlink continues to utilize a
limited number of foreign exchange instruments, primarily forward contracts, to
manage this exposure.
17
<PAGE> 18
Year 2000
The Year 2000 issue, as widely reported, could cause malfunctions in
certain computer-related applications with respect to dates on or after January
1, 2000. These malfunctions could relate to Information Technology ("IT") or
non-IT environments. Due to Waterlink's decentralized IT environments,
individual assessments, in accordance with Waterlink's Year 2000 Program, have
been conducted at Waterlink's operating companies. Collectively, these
assessments indicate that Waterlink's exposure to this segment of the Year 2000
issue is not significant as Waterlink does not extensively rely on IT systems
which require modification. Waterlink's externally developed system issues have
been assessed company-wide through inquiry of external vendors and testing
procedures where necessary. The appropriate upgrades, if required, have been (or
are scheduled to be) attained in order to make these systems Year 2000
compliant. Waterlink has tested internally developed software systems where
applicable and have developed programs to make these systems Year 2000
compliant. Testing of upgraded or modified systems has begun at Waterlink's
various operating units. Results of these testing procedures, which are
scheduled to be completed by the end of fiscal 1999, are incomplete.
The Year 2000 Program also addresses issues related to non-IT
environments. Collectively, these assessments indicate that Waterlink's exposure
to this segment of the Year 2000 issue is not significant due to Waterlink's
limited manufacturing operations and related capital equipment needs.
Waterlink's operating equipment has been assessed through inquiry of external
manufacturers and internal testing procedures. Remediation efforts have begun
where necessary. Collectively, Waterlink intends to complete and test remediated
assets by the end of fiscal 1999.
Waterlink's primary system interface with an external party involves
its banking institutions. Based on inquiries of its banking institutions,
Waterlink is not aware of any unresolved Year 2000 issues. Further, due to
Waterlink's decentralized operations, individual assessments, in accordance with
Waterlink's Year 2000 Program, have been conducted at Waterlink's operating
companies regarding significant suppliers and subcontractors. These assessments,
which are not complete, have been executed primarily through inquiry of its
various suppliers and subcontractors. To date, Waterlink is not aware of any
external party with an unresolved Year 2000 issue that would materially impact
Waterlink's operations and financial position. However, Waterlink has no means
of ensuring that external parties will be Year 2000 compliant. The inability of
external parties to resolve their Year 2000 issue in a timely manner could
impact Waterlink's operations and financial position. The effect of
non-compliance by external parties is not determinable.
Waterlink has utilized primarily internal resources to assess, test,
remediate and implement software and equipment related to the Year 2000. The
total cost of Waterlink's Year 2000 Program, excluding employee salaries, is
estimated at $300,000, primarily attributable to software upgrades and
modifications. Waterlink has incurred approximately $275,000 related to the
various phases of its Year 2000 Program.
Management of Waterlink believes that it has a program established to
resolve the Year 2000 issue in a timely manner. Collectively, Waterlink's Year
2000 Program has not been completed. In the event Waterlink does not complete
its remaining Year 2000 procedures,
18
<PAGE> 19
certain functions may be interrupted. Waterlink does not have a formal
contingency plan established if all phases of its Year 2000 Program are not
completed. However, appropriate actions, such as interim manual information
systems, will be instituted to mitigate such interruption. In addition,
disruptions in the economy generally resulting from unresolved Year 2000 issues
could also materially adversely affect Waterlink. The potential liability and
loss of revenue from these issues is not determinable.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income", which establishes standards for the reporting and display
of comprehensive income and its components. This Statement is intended to
address the concerns of financial statement users' for the increasing number of
items that bypass the income statement, such as foreign currency translation
adjustments. Waterlink adopted this Statement on October 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which changes the way public
companies report segment information in annual financial statements. The
Statement also requires public companies to report selected segment information
in interim financial reports to shareholders. The Statement is effective for
Waterlink's annual reporting in fiscal 1999 and restatement of comparative
information for earlier years is required in the initial year of adoption. The
implementation of the 1999 Strategic Operating Plan will require Waterlink to
present segmented industry information upon adoption of SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Statement will require, among other things, that all
derivatives be recorded on the balance sheet at fair value. The Statement is
effective for Waterlink in fiscal 2000. Waterlink has not yet determined what
the effect of adopting SFAS No. 133 will be on its operations or financial
position.
FORWARD LOOKING STATEMENTS
With the exception of historical information, the matters discussed in
this report may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which Waterlink has little or no
control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause Waterlink's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following:
19
<PAGE> 20
- changes in world economic conditions including, but not
limited to, the potential instability of governments and
legal systems in countries in which Waterlink conducts
business, and significant changes in currency valuations
- changes in customer demand as they affect sales and product
mix including, but not limited to, the effect of strikes at
customers' facilities, variations in backlog and the impact of
changes in industrial business cycles
- competitive factors including, but not limited to, changes in
market penetration and the introduction of new products by
existing and new competitors
- changes in operating costs including, but not limited to, the
effect of changes in Waterlink's manufacturing processes;
changes in costs associated with varying levels of operations;
changes resulting from different levels of customers demands;
the effects of unplanned work stoppages; changes in cost of
labor and benefits; and the cost and availability of raw
materials and energy
- the success of Waterlink's strategic plan including, but not
limited to, its ability to achieve the total planned benefits
of its 1999 Plan (including its ability to increase orders and
revenues, to eliminate costs, and to improve operating
efficiencies), its ability to find and integrate acquisitions
into Waterlink operations, and the ability of recently
acquired companies to meet satisfactory operating results
- unanticipated litigation, claims or assessments including, but
not limited to, claims or problems related to product warranty
and environmental issues
Readers are referred to the "Forward-Looking Statements" section,
commencing on page 21, in Waterlink's 1998 Annual Report on Form 10-K filed on
December 4, 1998, which identifies important risk factors that could cause
actual results to differ from those contained in the forward-looking statements
herein.
20
<PAGE> 21
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
- ---------------------------------------------------------
At the annual meeting of stockholders of Waterlink held on January 21, 1999 the
following actions took place:
(i) The following directors were elected to terms expiring in 2002:
Class II Directors For Against Withheld
------------------ --- ------- --------
Rollin S. Reiter 10,953,360 303,784 0
T. Scott King 11,214,579 42,565 0
In addition, the following Directors' term of office continued after
the meeting:
John R. Miller
Robert P. Pinkas
Theodore F. Savastano
Dr. Paul M. Sutton
(ii) The stockholders ratified the appointment of Ernst & Young LLP as
independent certified public auditors of Waterlink:
For Against Withheld
--- ------- --------
11,182,853 7,986 66,305
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
27.1 Financial Data Schedule as of and for the three months ended
December 31, 1998
(b) Reports on Form 8-K.
None.
21
<PAGE> 22
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.
Waterlink, Inc.
(Registrant)
By: /s/ T. Scott King
-----------------
T. Scott King
President and Chief Executive Officer
By: /s/ Michael J. Vantusko
-----------------------
Michael J. Vantusko
Chief Financial Officer
Dated: February 12, 1999
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,097,000
<SECURITIES> 0
<RECEIVABLES> 28,238,000
<ALLOWANCES> 0
<INVENTORY> 24,095,000
<CURRENT-ASSETS> 77,112,000
<PP&E> 13,689,000
<DEPRECIATION> 1,721,000
<TOTAL-ASSETS> 181,017,000
<CURRENT-LIABILITIES> 43,378,000
<BONDS> 0
0
0
<COMMON> 13,000
<OTHER-SE> 55,282,000
<TOTAL-LIABILITY-AND-EQUITY> 181,017,000
<SALES> 41,368,000
<TOTAL-REVENUES> 41,368,000
<CGS> 27,888,000
<TOTAL-COSTS> 27,888,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,800,000
<INCOME-PRETAX> 700,000
<INCOME-TAX> 171,000
<INCOME-CONTINUING> 529,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529,000
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
