<PAGE> 1
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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, 1999
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 -19,211,091 shares outstanding as of January 15,
2000
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INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1999 and
December 31, 1999 3 - 4
Consolidated statements of operations - Three months
ended December 31, 1998 and 1999 5
Consolidated statements of cash flows - Three months
ended December 31, 1998 and 1999 6
Notes to consolidated financial statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
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
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------ -----------
<S> <C> <C>
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 1,734 $ 1,157
Accounts receivable:
Trade, net 37,883 31,805
Other 2,163 2,178
Inventories 23,761 23,178
Costs in excess of billings 18,641 25,058
Other current assets 3,198 3,627
-------- --------
Total current assets 87,380 87,003
Property, plant and equipment, at cost:
Land, buildings and improvements 3,022 3,090
Machinery and equipment 8,501 8,773
Office equipment 3,271 3,673
-------- --------
14,794 15,536
Less accumulated depreciation 2,660 3,159
-------- --------
12,134 12,377
Other assets:
Goodwill, net 77,777 76,794
Patents, net 1,316 1,292
Other assets 6,788 6,085
-------- --------
85,881 84,171
-------- --------
Total assets $185,395 $183,551
======== ========
</TABLE>
See notes to consolidated financial statements
3
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED (CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------- ------------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 22,197 $ 17,608
Accrued expenses 16,266 18,337
Additional purchase price payable 298 --
Billings in excess of cost 4,022 1,905
Accrued income taxes 1,360 1,307
Deferred income taxes 160 195
Current portion of long-term debt 8,218 7,136
--------- ---------
Total current liabilities 52,521 46,488
Long-term obligations:
Long-term debt 78,449 67,263
Convertible subordinated notes-related parties 3,250 2,250
Other long-term obligations 1,189 1,104
--------- ---------
82,888 70,617
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, voting, $.001 par value,
authorized - 40,000,000 shares,
issued and outstanding - 12,635,861 shares
at September 30, 1999 and 19,211,091
at December 31, 1999 13 19
Additional paid-in capital 73,781 90,747
Accumulated other comprehensive loss (2,288) (4,252)
Accumulated deficit (21,520) (20,068)
--------- ---------
Total shareholders' equity 49,986 66,446
--------- ---------
Total liabilities and shareholders' equity $ 185,395 $ 183,551
========= =========
</TABLE>
See notes to consolidated financial statements
4
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1999
-------- --------
(In thousands,
except per share data)
<S> <C> <C>
Net sales $ 41,368 $ 49,851
Cost of sales 27,888 34,653
-------- --------
Gross profit 13,480 15,198
Selling, general and
administrative expenses 10,319 11,094
Special charges 219 --
Amortization 537 476
-------- --------
Operating income 2,405 3,628
Other income (expense):
Interest expense (1,800) (1,741)
Interest income and other items-net 95 (128)
-------- --------
Income before income taxes 700 1,759
Income taxes 171 307
-------- --------
Net income $ 529 $ 1,452
======== ========
Earnings per common share:
Basic $ 0.04 $ 0.08
Assuming dilution $ 0.04 $ 0.08
Weighted average common shares outstanding:
Basic 12,316 18,889
Assuming dilution 12,336 19,183
</TABLE>
See notes to consolidated financial statements
5
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 529 $ 1,452
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 990 1,046
Deferred income taxes 13 43
Changes in working capital:
Accounts receivable 4,503 5,471
Inventories (1,969) 276
Costs in excess of billings 14 (6,701)
Refundable income taxes 670 --
Other assets (765) (775)
Accounts payable (1,347) (4,242)
Accrued expenses 69 2,152
Billings in excess of cost (752) (2,073)
Accrued income taxes (42) (42)
-------- --------
Net cash provided (used) by operating activities 1,913 (3,393)
INVESTING ACTIVITIES
Purchases of equipment (937) (924)
Proceeds from sale of building -- 889
Purchases of subsidiaries, net of cash acquired (1,477) (519)
-------- --------
Net cash used in investing activities (2,414) (554)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 1,131 37
Payments on long-term borrowings (58) (12,569)
Proceeds from sale of common stock -- 16,222
-------- --------
Net cash provided by financing activities 1,073 3,690
Effect of exchange rate changes on cash (400) (320)
-------- --------
Increase (decrease) in cash and cash equivalents 172 (577)
Cash and cash equivalents at beginning of period 3,925 1,734
-------- --------
Cash and cash equivalents at end of period $ 4,097 $ 1,157
======== ========
</TABLE>
See notes to consolidated financial statements
6
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE
THREE-MONTH PERIODS ENDED DECEMBER 31,
1998 AND 1999 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,
1999 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2000. 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,
1999.
2. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
----------- ----------
<S> <C> <C>
Raw materials and supplies $13,836 $14,052
Work in process 4,394 3,569
Finished goods 5,531 5,557
------- -------
$23,761 $23,178
======= =======
</TABLE>
3. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
----------- -----------
<S> <C> <C>
Contract costs incurred to date $64,062 $54,799
Estimated profits 25,439 21,017
------- -------
Contract revenue earned to date 89,501 75,816
Less billings to date 74,882 52,663
------- -------
Cost and estimated earnings in excess of billings, net $14,619 $23,153
======= =======
</TABLE>
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The above amounts are included in the accompanying consolidated balance sheets
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------ -----------
<S> <C> <C>
Costs in excess of billings $18,641 $25,058
Billings in excess of cost 4,022 1,905
------- -------
$14,619 $23,153
======= =======
</TABLE>
4. CAPITALIZATION
During October 1999, the Company sold 6,300,000 shares of Common Stock in a
public offering to certain investors. The aggregate net proceeds of $16,222,000
were used to repay a portion of its outstanding indebtedness. In October 1999,
the $1,600,000 balance of a convertible subordinated note was paid in cash. Also
during October 1999, $750,000 of the $1,000,000 balance outstanding of a
convertible subordinated note was converted in exchange for 275,230 shares of
Common Stock, with the remaining principal being paid in cash.
In addition, the Company sold its facility located in Winnipeg, Manitoba, Canada
in December 1999. The net proceeds of approximately $889,000 were used to repay
a portion of outstanding indebtedness.
Long-term obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------- ------------
<S> <C> <C>
Long-term debt:
Revolving credit agreements with a bank $32,269 $32,880
Term note payable to a bank 48,836 38,602
Note payable to a bank 2,570 1,640
Other notes payable to various parties 1,392 1,277
Convertible subordinated notes - related parties:
Note payable to former shareholders of Meva 1,600 --
Note payable to a former shareholder of Hycor 1,000 --
Note payable to former shareholders of C'treat 2,250 2,250
------- -------
89,917 76,649
Less current maturities 8,218 7,136
------- -------
$81,699 $69,513
======= =======
</TABLE>
8
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A progression of shareholders' equity follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Accumu- Total
Common Paid-in Income lated Shareholders'
Stock Capital (Loss) Deficit Equity
-------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $ 13 $ 73,781 $ (2,288) $(21,520) $ 49,986
Net income 1,452 1,452
Foreign currency translation
adjustments (1,964) (1,964)
--------
Comprehensive (loss) (512)
Sale of 6,300,000 shares of common stock 6 16,216 16,222
Issuance of 275,230 shares of common
stock in connection with the conversion
of convertible subordinated notes -- 750 750
-------- -------- -------- -------- --------
Balance at December 31, 1999 $ 19 $ 90,747 $ (4,252) $(20,068) $ 66,446
======== ======== ======== ======== ========
</TABLE>
5. SPECIAL CHARGES
During fiscal 1999, the Company completed the implementation of its 1999
Strategic Operating Plan (the "1999 Plan"). The Company was restructured from a
holding company with 23 operating companies into five integrated divisions that
focus on specific market segments. The 1999 Plan has eliminated redundant costs
and is intended to improve operating efficiencies. The plan included costs
associated with the exiting and consolidation of certain facilities and employee
termination costs. In conjunction with the 1999 Plan the Company reduced its
workforce by approximately 122 people, 98 of which have received, or are
currently receiving, termination benefits in accordance with Company guidelines
or local laws. In addition, seven facilities were closed or relocated.
The following table summarizes the provisions, payments and the unpaid balances
associated with the 1999 Plan. The unpaid balances, or reserve, are expected to
be utilized through fiscal 2000 (in thousands):
<TABLE>
<CAPTION>
TERMINATIONS OTHER EXIT
BENEFITS COSTS TOTAL
------------------- ---------------- ---------------
<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 1,093 900 1,993
Payments in fiscal 1999 (1,444) (1,918) (3,362)
--------------------------------------------------
Reserve at September 30, 1999 605 284 889
Payments in fiscal 2000 (172) (214) (386)
---------------------------------------------------
Reserve at December 31, 1999 $ 433 $ 70 $ 503
===================================================
</TABLE>
9
<PAGE> 10
In addition to the $2,858,000 recorded during fiscal 1998 in connection with the
1999 plan, the Company also incurred special charges of $1,494,000 during fiscal
1998 primarily attributable to contractual obligations of the Company to its
former chief executive officer who resigned in June 1998, and of $550,000 during
fiscal 1999 attributable to contractual obligations of the Company in connection
with the retirement of its former chairman of the board.
With regard to these special charges, approximately $1,156,000 remains reserved
for future payment at December 31, 1999, which will be paid over the next two
fiscal years.
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,
1998 1999
---- ----
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share-
net income $ 529 $ 1,452
======= =======
Denominator:
Average shares outstanding- basic 12,316 18,889
Effect of dilutive securities:
Stock options and warrants 20 294
------- -------
Denominator for diluted earnings per share-
weighted average shares and assumed conversions 12,336 19,183
======= =======
Earnings per common share:
Basic $ 0.04 $ 0.08
Assuming dilution $ 0.04 $ 0.08
</TABLE>
For each period presented, certain issuances of potential common stock and
certain outstanding convertible subordinated notes were excluded from the
computation of earnings per share, assuming dilution, since their inclusion in
the computation would have an anti-dilutive effect.
7. SEGMENT INFORMATION
In fiscal 1999, the Company adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way public companies report information about operating
segments. The reportable segments are the five divisions the Company established
as part of its 1999 plan, which are:
- the Biological Wastewater Treatment Division
- the Separations Division
- the Pure Water Division
- the Specialty Products Division
- the European Water and Wastewater Division
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Prior to the adoption of SFAS No. 131 the Company reported under one industry
segment. The information for the prior year has been restated to reflect the
division structure described above. As of December 31, 1999, no measurement
changes have been made to the basis of segmentation or the measurement of profit
or loss from that reported in the Company's 1999 Annual Report on Form 10-K
filed with the Securities and Exchange Commission, and there were no material
changes to total assets by segment.
The following table summarizes the Company's operations by the five divisions,
or segments, and corporate (in thousands):
<TABLE>
<CAPTION>
Biological European
Wastewater Pure Specialty Water and
Treatment Separations Water Products Wastewater
Division Division Division Division Division Corporate Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended December 31,1999
Net sales from external customers $ 5,254 $ 9,485 $ 4,172 $16,441 $14,499 -- $49,851
Intersegment net sales -- 12 22 2 1,436 (1,472) --
Segment operating income (loss) 469 534 434 1,891 1,073 (773) 3,628
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended December 31,1998
Net sales from external customers 4,734 7,314 3,894 13,380 12,046 -- 41,368
Intersegment net sales 8 25 -- 59 153 (245) --
Special charges 79 64 9 -- 67 -- 219
Segment operating income (loss) 38 384 490 1,482 861 (850) 2,405
</TABLE>
A reconciliation of the reportable segments' operating income to consolidated
income before income taxes follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1998
-------------------------------
<S> <C> <C>
Total operating income for
reportable segments, including corporate $ 2,405 $ 3,628
Interest expense (1,800) (1,741)
Interest income and other items-net 95 (128)
-------------------------------
$ 700 $ 1,759
===============================
</TABLE>
11
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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.
During fiscal 1999 Waterlink focused on the implementation of its 1999
Strategic Operating Plan. The 1999 plan was implemented in three phases: the
restructuring phase, the cost reduction phase, and the growth phase. With the
restructuring and cost reduction phases being complete, during fiscal 2000
Waterlink will focus on the continuation of the growth phase through revenue
growth and key customer alliances. Management efforts during fiscal 2000 are
also directed toward cost and expense containment. Further, during fiscal 2000
Waterlink expects to evaluate certain small product lines to determine if they
meet the criteria for long-term strategic value.
Prior to the beginning of fiscal 1999, Waterlink restructured from a
holding company consisting of 23 separate operating companies into the following
five fully integrated operating divisions that are focused on their specific
markets:
- the Biological Wastewater Treatment Division
- the Separations Division
- the Pure Water Division
- the Specialty Products Division
- the European Water and Wastewater Division
This divisional structure allows Waterlink to utilize the strengths of
its complementary product lines and brand name to work closer with customers.
The cost reduction phase of the 1999 plan established goals of reducing
selling, general and administrative expenses by $4.3 million in fiscal 1999,
principally by reducing the number of employees and by closing seven facilities.
Waterlink has decided to curtail its manufacturing activities whenever possible,
in favor of partnering with vendors who manufacture components used in our
systems and equipment. The annualized cost savings goal of $4.3 million was
surpassed by approximately $1.1 million, largely due to reducing the number of
employees by 122 as compared to the goal of 75. With regard to facilities, seven
have been closed.
The growth phase of the 1999 plan has added 20 sales and marketing
professionals in order to improve revenue performance over the long term. These
additional costs are being funded, in
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part, by the additional $1.1 million of annualized savings as a result of the
cost reduction phase of the 1999 plan.
The improved communications and specific identification of markets and
products resulting from the restructuring of Waterlink, together with the
reinvestment in sales and marketing professionals, will allow Waterlink to
increase its sales efforts. Two specific areas of focus are the implementation
of a key account program with selected worldwide buyers of Waterlink product
offerings, and our integrated systems effort that is expected to provide more
interdivisional cross selling opportunities with certain key customers.
Waterlink is also developing sales strategies in regions where we do not
currently have a significant presence or wish to increase our opportunities,
such as South America, as well as servicing companies competing for municipal
privatization contracts in the United States. In the future, we believe these
efforts will build Waterlink into a sales, marketing and engineering leader in
the industry, focused on profitable growth over the long term.
Waterlink continues to focus on cost containment programs. For example,
selected efforts in reducing the amount of working capital required to support
Waterlink's business activities are being supported this fiscal year, in an
effort to reduce interest expense. Also, Waterlink is making efforts to
consolidate its vendor base, which is expected to improve efficiencies and
contain costs increases.
Waterlink's divisional structure is also designed to more efficiently
integrate future acquisitions. Waterlink's current capital structure does not
support an aggressive acquisition program. Waterlink intends to improve its
capital structure through a combination of improved operating performance and
access to capital markets, which we expect will enable us to resume our
acquisition program. Acquisitions are expected to play a strategic role in
Waterlink's future to increase competitiveness, spur revenue and earnings
growth, and enhance our total solutions capability.
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 incurred 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 in the past, Waterlink expects that it may
receive contracts that are significantly larger than our average contract award.
In addition, certain of the contracts will be subject to Waterlink's ability to
provide performance guarantees as well as 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
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permits to commence the 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. As of December 31,
1999, Waterlink's total backlog was approximately $50.5 million, consisting of
$42.2 million of written purchase orders for capital goods equipment and $8.3
million of firm commitments to purchase recurring revenue products from our
specialty products division. Quarterly sales and operating results will 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 period. 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,
1998 1999
----- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 67.4 69.5
------- -------
Gross profit 32.6 30.5
Selling, general and administrative expenses 24.9 22.2
Special charges 0.6 --
Amortization 1.3 1.0
------- -------
Operating income 5.8 7.3
Other income (expense):
Interest expense (4.3) (3.5)
Interest income and other items-net 0.2 (0.3)
------- -------
Income before income taxes 1.7 3.5
Income taxes 0.4 0.6
------- -------
Net income 1.3% 2.9%
======= =======
</TABLE>
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Net Sales: Net sales for the three months ended December 31, 1999 were
$49,851,000, an increase of $8,483,000, or 20.5%, from the comparable prior
period. The increase is due primarily to internal growth, as well as due to a
small asset purchase for the specialty products division, completed on September
30, 1999, which accounted for approximately $1,253,000 of the sales increase
during the quarter.
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<PAGE> 15
Every division showed sales improvement from last year primarily due to
the timing of orders, a more focused divisional selling effort and a
normalization of operations since the conclusion of the implementation of the
1999 plan. The separations, european and specialty products divisions each
provided revenue gains in excess of 20% as compared to last year while the pure
water division recorded a much smaller revenue gain of 7.1% which reflects, in
part, the delayed order flow for off-shore oil platform watermakers.
Gross Profit: Gross profit for the three months ended December 31, 1999 was
$15,198,000, an increase of $1,718,000 from the comparable prior period. The
increase in the gross profit is primarily due to the increases in revenues.
Gross margin was 30.5% for the three months ended December 31, 1999 as compared
to 32.6% for the comparable prior period.
The separations, pure water and european divisions each showed declines
in gross margins as compared to last year. The lower gross margins for these
divisions are due to a greater amount of lower margin municipal revenue in the
european and separations divisions and product mix at the pure water division.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended December 31, 1999 were
$11,094,000, an increase of $775,000 from the comparable prior period. The
increase was primarily due to variable expenses resulting from an increased
revenue base. Selling, general and administrative expenses as a percentage of
net sales were 22.2% for the three months ended December 31, 1999 as compared to
24.9% for the comparable prior period. This decrease primarily reflects certain
fixed costs spread over a larger revenue base, the savings realized from
Waterlink's 1999 plan and our continuing cost containment efforts.
Special Charges: Special charges of $219,000 during the three months ended
December 31, 1998 related to costs associated with the implementation of
Waterlink's 1999 plan.
Amortization: Amortization expense for the three months ended December 31, 1999
was $476,000 compared to $537,000 during the comparable prior period.
Interest Expense: Interest expense for the three months ended December 31, 1999
was $1,741,000, a decrease from the $1,800,000 from the comparable prior period.
This decrease is the result of the use of proceeds from Waterlink's October 1999
public offering of common stock to reduce indebtedness, which reduction was
partially offset by higher interest rates and increased borrowings to support
revenue growth and other working capital requirements. Due to higher interest
rates and working capital needs, interest expense is not expected to improve
over the remainder of the fiscal year.
Income Taxes: Waterlink recorded income taxes of $307,000 on pre-tax income of
$1,759,000 for the three months ended December 31, 1999. This income tax expense
was reduced by $380,000 as the result of utilizing a portion of its domestic net
operating loss carryforward. For the three months ended December 31, 1998,
Waterlink recorded income taxes of $171,000 on pre-tax
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<PAGE> 16
income of $700,000, as federal income taxes were not recorded on Waterlink's
domestic earnings due to the utilization of its net operating loss carryforward.
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
- non-revenue producing asset sales
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth of
certain acquisitions
- the funding required for certain under-performing acquisitions
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because of our efforts to partner with
vendors who manufacture most of the components used in our systems and
equipment.
For the three months ended December 31, 1999, net cash used by
operating activities was $3,393,000, purchases of equipment totaled $924,000 and
$519,000 of additional purchase consideration payments related to acquisitions
were made. These cash outlays were financed primarily by long-term borrowings
and the sale of certain assets.
In the fourth quarter of fiscal 1998, Waterlink's board of directors
approved the 1999 plan. The 1999 plan provided for costs associated with the
exiting of certain facilities and employee termination costs. Costs associated
with this plan totaled $2,858,000 during fiscal 1998 and $1,993,000 for the year
ended September 30, 1999. Waterlink also recorded special charges during fiscal
1998 of $1,494,000 related to the resignation of our chief executive officer who
resigned in June 1998. In addition, Waterlink recorded $550,000 of special
charges during fiscal 1999 related to the announced retirement of our chairman
of the board. With regard to these special charges, approximately $1,156,000
remains reserved for future payment at December 31, 1999, which will be paid
over the next two fiscal years.
Waterlink is pursuing in the United States District Court for the
District of Utah the collection of a $1.6 million promissory note and $2.4
million of accounts receivable related to a Utah-based land development project,
plus interest and penalties. The amounts are collateralized by certain assets
relating to the development as well as certain personal guarantees of the
16
<PAGE> 17
landowners. Management believes that the above amounts will be collected in due
course and no provision for losses are necessary at this time.
During the quarter ended December 31, 1999, Waterlink completed the
sale of its land, building and equipment in Winnipeg, Manitoba, Canada, the
former site of its Bioclear manufacturing facility. The net sales proceeds of
approximately $889,000 were used to repay a portion of the Canadian credit
facility and the domestic credit facility.
During fiscal 1998, Waterlink invested in Aquatec Water Systems,
Incorporated, a designer and manufacturer of specialized multi-chamber pumps for
the pure water industry, in the form of two $700,000 subordinated notes,
convertible into approximately 30% of the equity of Aquatec, together with other
stock purchase options. Waterlink reached an agreement to sell both notes at
their face value of $700,000 each plus interest to a group of investors.
Waterlink received $1,375,000 as partial payment for the notes and anticipates
receiving the balance of $25,000 during fiscal 2000.
Acquisitions
Waterlink's current capital structure does not support an aggressive
acquisition program. Waterlink intends to improve its capital structure
through a combination of improved operating performance and access to capital
markets, which we expect will enable us to resume our acquisition program.
Acquisitions are expected to play a strategic role in Waterlink's future to
increase competitiveness, spur revenue and earnings growth, and enhance our
total solutions capability. The timing, size and success of any acquisition
effort and the associated potential capital commitments are unpredictable at
this time. As a result of the specialty products division acquisition in fiscal
1998 and the implementation of our 1999 plan, our debt is in excess of our
stockholders' equity and we bear the risks associated with increased leverage.
During the quarter ended December 31, 1999, Waterlink made additional
purchase consideration payments of $519,000 related to the achievement of
targeted operating results of two of our 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 $1,000,000
in cash or common stock at the option of Waterlink, contingent upon the
achievement of specified operating results during fiscal 2000. Any additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
Credit Availability
Waterlink's credit facilities are comprised of (1) a $76,000,000
domestic facility with Bank of America National Trust & Savings Association as
agent, which expires on May 19, 2003 and (2) separate facilities aggregating
approximately $6,000,000 at three of its overseas subsidiaries. The credit
facilities will be utilized to primarily fund operating activities of Waterlink
and, to a lesser extent, fund future acquisitions.
17
<PAGE> 18
Effective with the sale of 6,300,000 shares of Waterlink common stock
at $2.725 per share on October 5, 1999, Waterlink entered into an amendment of
our domestic facility waiving certain financial covenants that were not
satisfied at September 30, 1999. At December 31, 1999 Waterlink is in compliance
with the financial covenants as defined in the amendment. The net proceeds from
the sale of common stock were used to repay a portion of the domestic credit
facility.
Availability for future borrowings was approximately $2,200,000 at
December 31, 1999. Availability for future borrowings may increase or decrease
based on the operating performance of Waterlink. Although a course of action has
not been determined, Waterlink is exploring various financing alternatives in
order to gain more credit availability during fiscal 2000.
Loans under the credit facilities bear interest at a designated
variable base rate plus spreads ranging from 0 to 75 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, or LIBOR, plus spreads ranging from 100 to 275 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 our three overseas subsidiaries of their obligations under the
overseas facilities. The three overseas subsidiaries have given the lenders an
assurance that the subsidiaries would not pledge their assets to any other
party.
Waterlink also has in place a credit facility with Royal Bank of Canada
of approximately $1,640,000, which is fully utilized. Interest rates are based
on the Royal Bank of Canada prime rate plus 3%. Borrowings under the Canadian
credit facility are payable in approximately equal monthly installments during
the remainder of this fiscal year.
Waterlink believes that through the end of fiscal 2000, sufficient
funds for our working capital needs, additional cash requirements of the 1999
plan and other special charges and additional contingent consideration payments
related to acquisitions will be provided by:
- future cash flow from operations
- borrowings under its credit facilities
- issuance of subordinated indebtedness, common stock,
preferred stock and seller financing incurred in connection
with future financings or acquisitions
- the sale of certain assets or product lines
18
<PAGE> 19
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. We expect most material year 2000 compliance problems to have arisen on
or immediately after January 1, 2000. As of January 31, 2000, we are not aware
of any year 2000-related problems associated with our internal systems or
software or with the software and systems of our vendors, distributors or
suppliers. It is possible, however, that year 2000-related problems could arise
at a later date. While we do not have plans at this time to complete additional
work, we do not expect to experience any material adverse effects on our
business, financial condition or results of operations from any vendor,
distributor or supplier who may experience year 2000 problems.
Waterlink has primarily utilized 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, was
approximately $400,000, primarily attributable to software upgrades and
modifications.
Waterlink does not have a formal contingency plan established in the
event that the worst-case scenario arose in the future related to the year 2000
issue. The potential liability and loss of revenue from these issues is not
determinable.
Impact of Recently Issued Accounting Standards
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. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133", which
makes SFAS No. 133 effective for Waterlink beginning October 1, 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
- instability of governments and legal systems in countries
in which Waterlink conducts business
- significant changes in currency valuations
- recessionary environments
- year 2000 compliance issues relating to Waterlink's
programs and external parties, including suppliers and
customers
- the effects of military conflicts
- changes in customer demand and timing of orders as they affect sales
and product mix, including
- the effect of strikes at customer's facilities
- variations in backlog
- the impact of changes in industry business cycles
- competitive factors, including
- changes in market penetration
- introduction of new products by existing and new
competitors
- changes in operating costs, including
- changes in Waterlink's and its subcontractors'
manufacturing processes
- changes in costs associated with varying levels of
operations
- changes resulting from different levels of customers
demands
- effects of unplanned work stoppages
- changes in cost of labor and benefits
- the cost and availability of raw materials and energy
- the degree of success of Waterlink's strategic plan, including the
evaluation of certain product lines
- the ability to obtain additional credit availability to support
working capital requirements
- the cost of capital, including interest rate increases
- unanticipated litigation, claims or assessments
Readers are referred to the "Forward-Looking Statements" section, commencing on
page 23, in Waterlink's 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 1, 1999, 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 20, 2000 the
following actions took place:
(i) The following directors were elected as class III directors whose term
expire in 2003:
For Against Withheld
--- ------- --------
Robert P. Pinkas 14,958,390 57,453 0
John T. Hackett 14,958,390 57,453 0
The following director was elected as a class II director whose term
expires in 2002:
For Against Withheld
--- ------- --------
Dr. R. Gary Bridge 14,959,529 56,314 0
In addition, the following directors' terms of office continued after the
meeting:
T. Scott King
John R. Miller
Theodore F. Savastano
(ii) The stockholders ratified the appointment of Ernst & Young LLP as
independent public auditors of Waterlink:
For Against Withheld
--- ------- --------
14,981,128 18,535 16,180
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, 1999
(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: January 31, 2000
22
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