<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 June 30, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 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 -19,604,201 shares outstanding as of July 31, 2000
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<PAGE> 2
INDEX
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1999 and
June 30, 2000 3 - 4
Consolidated statements of operations - Three months ended June 30,
1999 and 2000; Nine months ended
June 30, 1999 and 2000 5
Consolidated statements of cash flows - Nine months
ended June 30, 1999 and 2000 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 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED
<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
------------- ------------
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,734 $ 1,838
Accounts receivable:
Trade, net 37,883 33,040
Other 2,163 1,526
Inventories 23,761 19,930
Costs in excess of billings 18,641 25,227
Other current assets 3,198 3,298
-------- --------
Total current assets 87,380 84,859
Property, plant and equipment, at cost:
Land, buildings and improvements 3,022 3,619
Machinery and equipment 8,501 8,147
Office equipment 3,271 3,781
-------- --------
14,794 15,547
Less accumulated depreciation 2,660 4,017
-------- --------
12,134 11,530
Other assets:
Goodwill, net 77,777 75,130
Patents, net 1,316 1,243
Other assets 6,788 6,321
-------- --------
85,881 82,694
-------- --------
Total assets $185,395 $179,083
======== ========
</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, June 30,
1999 2000
------------- -------------
(In thousands,
LIABILITIES AND SHAREHOLDERS' EQUITY except share data)
<S> <C> <C>
Current liabilities:
Accounts payable-trade $ 22,197 $ 17,299
Accrued expenses 16,266 18,306
Additional purchase price payable 298 -
Billings in excess of cost 4,022 1,922
Accrued income taxes 1,360 1,044
Deferred income taxes 160 148
Current portion of long-term obligations 8,218 11,178
--------- ---------
Total current liabilities 52,521 49,897
Long-term obligations:
Long-term debt 78,449 64,998
Convertible subordinated notes-related parties 3,250 -
Other long-term obligations 1,189 518
--------- ---------
82,888 65,516
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 19,604,201
at June 30, 2000 13 20
Additional paid-in capital 73,781 91,958
Accumulated other comprehensive loss (2,288) (6,572)
Accumulated deficit (21,520) (21,736)
--------- ---------
Total shareholders' equity 49,986 63,670
--------- ---------
Total liabilities and shareholders' equity $ 185,395 $ 179,083
========= =========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 2000 1999 2000
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 43,083 $ 43,877 $ 128,858 $ 135,338
Cost of sales 31,229 30,934 88,707 94,352
--------- --------- --------- ---------
Gross profit 11,854 12,943 40,151 40,986
Selling, general and
administrative expenses 11,600 10,461 32,829 33,040
Special charges 2,084 - 2,787 -
Amortization 515 543 1,569 1,539
--------- --------- --------- ---------
Operating income (loss) (2,345) 1,939 2,966 6,407
Other expense:
Interest expense (1,702) (2,077) (5,092) (5,596)
Other items-net (147) (77) (163) (334)
--------- --------- --------- ---------
Income (loss) before income taxes (4,194) (215) (2,289) 477
Income taxes 367 125 869 693
--------- --------- --------- ---------
Net loss $ (4,561) $ (340) $ (3,158) $ (216)
========= ========= ========= =========
Loss per common share:
Basic $ (0.36) $ (0.02) $ (0.25) $ (0.01)
Assuming dilution $ (0.36) $ (0.02) $ (0.25) $ (0.01)
Weighted average common shares outstanding:
Basic 12,636 19,486 12,529 19,194
Assuming dilution 12,636 19,486 12,529 19,194
</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>
Nine Months Ended
June 30,
1999 2000
------------ -----------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,158) $ (216)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Special charges 2,183 -
Depreciation and amortization 2,962 3,119
Deferred income taxes 379 515
Changes in working capital:
Accounts receivable (991) 4,090
Inventories 40 3,381
Costs in excess of billings (9,128) (7,317)
Refundable income taxes 840 -
Other assets 3,073 (1,487)
Accounts payable 4,568 (4,129)
Accrued expenses 2,764 2,499
Billings in excess of cost (465) (1,999)
Accrued income taxes (730) (287)
-------- --------
Net cash provided (used) by operating activities 2,337 (1,831)
INVESTING ACTIVITIES
Purchases of equipment (1,470) (1,411)
Proceeds from sale of building 519 889
Purchases of subsidiaries, net of cash acquired (1,902) (519)
-------- --------
Net cash used in investing activities (2,853) (1,041)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 3,106 337
Payments on long-term borrowings (2,341) (13,305)
Proceeds from sale of common stock - 16,222
-------- --------
Net cash provided by financing activities 765 3,254
Effect of exchange rate changes on cash (2,563) (278)
-------- --------
(Decrease) increase in cash and cash equivalents (2,314) 104
Cash and cash equivalents at beginning of period 3,925 1,734
-------- --------
Cash and cash equivalents at end of period $ 1,611 $ 1,838
======== ========
</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
JUNE 30, 2000
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE THREE AND NINE-MONTH PERIODS
ENDED JUNE 30, 1999 AND 2000 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 and nine-month periods ended June
30, 2000 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, June 30,
1999 2000
---- ----
<S> <C> <C>
Raw materials and supplies $ 13,836 $ 11,883
Work in process 4,394 2,017
Finished goods 5,531 6,030
-------- --------
$ 23,761 $ 19,930
======== ========
</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, June 30,
1999 2000
---- ----
<S> <C> <C>
Contract costs incurred to date $ 64,062 $ 75,739
Estimated profits 25,439 28,966
-------- --------
Contract revenue earned to date 89,501 104,705
Less billings to date 74,882 81,400
-------- --------
Cost and estimated earnings in excess of billings, net $ 14,619 $ 23,305
======== ========
</TABLE>
7
<PAGE> 8
The above amounts are included in the accompanying consolidated balance sheets
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
---- ----
<S> <C> <C>
Costs in excess of billings $ 18,641 $ 25,227
Billings in excess of cost 4,022 1,922
-------- --------
$ 14,619 $ 23,305
======== ========
</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 April 2000,
pursuant to the terms of the original acquisition agreement, 393,110 shares of
Common Stock were issued to the former shareholders of an acquired business in
satisfaction of additional purchase price consideration earned during the twelve
months ended March 31, 2000.
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, June 30,
1999 2000
------------- ------------
<S> <C> <C>
Long-term debt:
Revolving credit agreements with a bank $32,269 $34,800
Term note payable to a bank 48,836 37,602
Note payable to a bank 2,570 496
Other notes payable to various parties 1,392 1,028
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 76,176
Less current maturities 8,218 11,178
------- -------
$81,699 $64,998
======= =======
</TABLE>
8
<PAGE> 9
A progression of shareholders' equity follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Additional Other Accumu- Total
Common Paid-in Comprehensive 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 loss (216) (216)
Foreign currency translation adjustments (4,284) (4,284)
-------
Comprehensive loss (4,500)
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
Issuance of 393,110 shares of common
stock in connection with an acquisition 1 999 1,000
Other 212 212
----- ------- ------- --------- -------
Balance at June 30, 2000 $ 20 $91,958 $(6,572) $ (21,736) $63,670
===== ======= ======= ========= =======
</TABLE>
The comprehensive loss for the three months ended June 30, 2000 and 1999 was
$2,152,000 and $6,654,000, respectively. The comprehensive loss for the nine
months ended June 30, 1999 was $8,223,000.
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 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 (519) (250) (769)
----------- ---------- ----------
Reserve at June 30, 2000 $ 86 $ 34 $ 120
=========== ========== ==========
</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 all of these special charges, approximately $541,000 remains
reserved for future payment at June 30, 2000, which will be paid over the next
two fiscal years.
6. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and assuming dilution
earnings (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share-
net loss $ (4,561) $ (340) $ (3,158) $ (216)
======== ======== ======== ========
Denominator:
Average shares outstanding- basic 12,636 19,486 12,529 19,194
Effect of dilutive securities:
Stock options and warrants - - - -
-------- -------- -------- --------
Denominator for diluted earnings per share-
weighted average shares and assumed conversions 12,636 19,486 12,529 19,194
======== ======== ======== ========
Earnings (loss) per common share:
Basic $ (0.36) $ (0.02) $ (0.25) $ (0.01)
Assuming dilution $ (0.36) $ (0.02) $ (0.25) $ (0.01)
</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
10
<PAGE> 11
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 June 30, 2000, 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>
Nine months ended June 30, 2000
Net sales from external customers $ 11,943 $ 26,490 $ 12,305 $ 49,783 $ 34,817 $ - $ 135,338
Intersegment net sales 50 78 43 30 1,016 (1,217) -
Segment operating income (loss) (801) 1,343 1,347 5,436 1,600 (2,518) 6,407
-----------------------------------------------------------------------------------------------------------------------
Nine months ended June 30, 1999
Net sales from external customers 14,053 25,590 11,557 41,992 35,666 - 128,858
Intersegment net sales 8 202 629 93 558 (1,490) -
Special charges 1,880 198 70 - 378 261 2,787
Segment operating income (loss) (1,414) (1,250) 1,393 4,934 2,308 (3,005) 2,966
-----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2000
Net sales from external customers 3,520 9,220 4,711 16,647 9,779 - 43,877
Intersegment net sales 34 9 21 20 471 (555) -
Segment operating income (loss) (48) 547 714 1,549 89 (912) 1,939
-----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999
Net sales from external customers 3,996 9,211 3,107 15,388 11,381 - 43,083
Intersegment net sales - - 628 33 295 (956) -
Special charges 1,513 103 57 - 150 261 2,084
Segment operating income (loss) (1,623) (2,047) 340 1,755 634 (1,404) (2,345)
</TABLE>
A reconciliation of the reportable segments' operating income (loss) to
consolidated income (loss) before income taxes follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 31,
1999 2000 1999 2000
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Total operating income for
reportable segments, including corporate $ (2,345) $ 1,939 $ 2,966 $ 6,407
Interest expense (1,702) (2,077) (5,092) (5,596)
Other items-net (147) (77) (163) (334)
---------------------------- ---------------------------
$ (4,194) $ (215) $ (2,289) $ 477
============================ ===========================
</TABLE>
11
<PAGE> 12
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.
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
We believe that this divisional structure allows Waterlink to better
utilize the strengths of its complementary product lines and brand name to work
closer with customers.
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 and performance bonds, 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 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. As of June 30, 2000,
Waterlink's total backlog was approximately $49.3 million, consisting of $35.2
million of written purchase orders for capital goods equipment and $14.1 million
of firm commitments to purchase recurring revenue products from our specialty
12
<PAGE> 13
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.
Waterlink's board of directors has authorized management to explore all
strategic alternatives that could maximize shareholder value. Consistent with
this objective, Waterlink has retained Banc of America Securities LLC as
financial advisors to explore strategic options that may be available to
Waterlink, including without limitation, alternatives involving the sale of
Waterlink.
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 Nine Months Ended
June 30, June 30,
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 72.5 70.5 68.8 69.7
----- ----- ----- -----
Gross profit 27.5 29.5 31.2 30.3
Selling, general and administrative expenses 26.9 23.9 25.5 24.4
Special charges 4.8 -- 2.2 --
Amortization 1.2 1.2 1.2 1.2
----- ----- ----- -----
Operating income (loss) (5.4) 4.4 2.3 4.7
Other expense:
Interest expense (4.0) (4.7) (4.0) (4.1)
Other items-net (0.3) (0.2) (0.1) (0.3)
----- ----- ----- -----
Income (loss) before income taxes (9.7) (0.5) (1.8) 0.3
Income taxes 0.9 0.3 0.7 0.5
----- ----- ----- -----
Net loss (10.6)% (0.8)% (2.5)% (0.2)%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net Sales: Net sales for the three months ended June 30, 2000 were $43,877,000,
an increase of $794,000, or 1.8%, from the comparable prior period. The increase
can primarily be attributed to our specialty products and pure water divisions,
partially offset by a decrease in our european division. Our specialty products
division experienced an 8.1% increase in sales as a result of an increase in
carbon revenues due primarily to a small asset purchase by Waterlink at the
beginning of the fiscal year and from other new business, partially offset by a
decrease in their solvent recovery systems sales. The improvement in our pure
water division was largely the result of an increase in bookings activity over
the prior year quarter which helped to generate a 26.7% increase in sales. In
our european division sales declined by 12.3% from the prior year quarter due
mainly to low bookings activity within our U.K. operation.
13
<PAGE> 14
Gross Profit: Gross profit for the three months ended June 30, 2000 was
$12,943,000, an increase of $1,089,000 from the comparable prior period. The
gross profit in 1999 was reduced by $2,137,000 of costs associated with the exit
of our Great Lakes facility. Gross margin was 29.5% for the three months ended
June 30, 2000, compared to 27.5 % for the three months ended June 30, 1999.
Absent the costs associated with the exit of the Great Lakes facility, the gross
margin in 1999 would have been 32.5%. The lower gross margin for 2000 compared
to the adjusted 1999 gross margin is attributed partially to an increase in
revenues during the current quarter from carbon sales within the specialty
products division, which has lower margins, and from additional contract costs
provided by the european division in the quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended June 30, 2000 were
$10,461,000, a decrease of $1,139,000 from the comparable prior period. The
decrease in the current quarter as compared to the prior year reflects the
following: (a) a $720,000 adjustment to our pension accrual in our european
division related to a refund of prior premiums, (b) commission expense being
$107,000 lower in the current year due to product mix, and (c) the prior year
including a write off of $255,000 of costs related to acquisition activity that
was abandoned during the quarter ended June 30, 1999. Selling, general and
administrative expenses as a percentage of net sales were 23.9% for the three
months ended June 30, 2000 as compared to 26.9% for the comparable prior period.
This decrease is attributable to the factors previously discussed.
Special Charges: Special charges totaled $2,084,000 during the three months
ended June 30, 1999. Costs associated with the implementation of Waterlink's
1999 strategic operating plan accounted for $784,000 of these costs, with the
remaining $1,300,000 resulting from the write down in value of the then
remaining assets of our former Bioclear operation.
Amortization: Amortization expense for the three months ended June 30, 2000 was
$543,000 compared to $515,000 during the comparable prior period.
Interest Expense: Interest expense for the three months ended June 30, 2000 was
$2,077,000, an increase of $375,000 from the comparable prior period. This
increase is principally the result of higher market interest rates and from
certain financing costs associated with Waterlink's May 2, 2000 amendment to our
domestic credit agreement. Due to these factors, interest expense is not
expected to improve over the remainder of the fiscal year.
Income Taxes: Waterlink recorded income taxes of $125,000 on a pre-tax loss of
$215,000 for the three months ended June 30, 2000. For the three months ended
June 30, 1999, Waterlink recorded income taxes of $367,000 on a pre-tax loss of
$4,194,000. The income tax expense results from taxes on earnings outside the
United States as well as state income taxes at certain domestic subsidiaries.
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999
Net Sales: Net sales for the nine months ended June 30, 2000 were $135,338,000,
an increase of $6,480,000, or 5.0%, from the comparable prior period. This
increase came principally from the specialty products division which experienced
an 18.4% growth in sales due to strong product
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demand, the impact of carbons sales to new customers, and additional sales
generated as the result of a small asset purchase by Waterlink at the beginning
of the fiscal year. Excluding the sales related to this asset purchase, the
internal growth at this division was 9.5%. Lower sales in the biological
division partially offset this growth.
Gross Profit: Gross profit for the nine months ended June 30, 2000 was
$40,986,000, an increase of $835,000 from the comparable prior period. The gross
profit in 1999 was reduced by $2,137,000 of costs associated with the exit of
our Great Lakes facility. Gross margin was 30.3% for the nine months ended June
30, 2000, compared to 31.2% for the nine months ended June 30, 1999. Absent the
costs associated with the exit of the Great Lakes facility, the gross margin in
1999 would have been 32.8%. The lower gross margin in the current year as
compared to the adjusted 1999 gross margin is primarily the result of issues in
the european and specialty products divisions. In the european division, margins
have been reduced by additional contract costs recorded in the third quarter and
from lower margin municipal jobs. Margins within the specialty products division
were lower mainly due to the mix of higher carbons sales which have lower
overall gross margins.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the nine months ended June 30, 2000 were
$33,040,000, an increase of $211,000, or 0.6%, from the comparable prior period.
Selling, general and administrative expenses as a percentage of net sales were
24.4% for the nine months ended June 30, 2000 as compared to 25.5% for the
comparable prior period. This percentage decrease reflects the higher level of
sales during the current year along with the current year pension adjustment of
$720,000 reflected in the third quarter.
Special Charges: Special charges totaled $2,787,000 during the nine months ended
June 30, 1999. Costs associated with the implementation of Waterlink's 1999
strategic operating plan accounted for $1,487,000 of these costs, with the
remaining $1,300,000 resulting from the write down in value of the then
remaining assets of our former Bioclear operation.
Amortization: Amortization expense for the nine months ended June 30, 2000 was
$1,539,000 compared to $1,569,000 during the comparable prior period.
Interest Expense: Interest expense for the nine months ended June 30, 2000 was
$5,596,000, an increase of $504,000 from the comparable prior period. This
increase is principally the result of higher market interest rates.
Income Taxes: Waterlink recorded income taxes of $693,000 on pre-tax income of
$477,000 for the nine months ended June 30, 2000. For the nine months ended June
30, 1999, Waterlink recorded income taxes of $869,000 on a pre-tax loss of
$2,289,000. The income tax expense reflects taxes on earnings outside the United
States as well as state income taxes at certain domestic subsidiaries.
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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 acquisitions
- 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 nine months ended June 30, 2000, net cash used by operating
activities was $1,831,000, purchases of equipment totaled $1,411,000, and
additional purchase consideration payments of $519,000 related to acquisitions
were made. These cash outlays were financed primarily by long-term borrowings
and the sale of certain assets.
During the fourth quarter of fiscal 1998 and throughout fiscal 1999,
Waterlink implemented its 1999 plan. Through September 30, 1999, the costs
associated with this plan and other special charges recognized totaled
$6,895,000. With regard to these special charges, at June 30, 2000 approximately
$541,000 remains reserved for future payments, which payments 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
landowners. Management believes that the above amounts will be collected in due
course and no provision for losses are necessary at this time.
In addition, Waterlink is in the process of trying to collect the
scheduled installment payments related to a project sold in fiscal 1999 that
total approximately $1,024,000. The customer is currently experiencing financial
difficulties and has filed suit against Waterlink, which in part disputes the
amount owed. The amount of any financial loss is not determinable at this time
and, as a result, no reserve for any uncollectible amounts has been established
as of June 30, 2000.
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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.
Acquisitions
During the nine months ended June 30, 2000, Waterlink made additional
purchase consideration payments of $519,000 related to the achievement of
targeted operating results of two of our acquisitions. In addition, additional
purchase consideration of $1,000,000 was earned at March 31, 2000, which was
satisfied by issuing 393,110 shares of Waterlink common stock during April 2000.
Both of these amounts have been recorded as additional goodwill. There are no
future additional purchase consideration payments that can be earned as of June
30, 2000 related to any of our acquisitions.
Credit Availability
Waterlink's credit facilities are comprised of (1) a $73,602,000
domestic credit facility with Bank of America, NA, as agent, which expires on
May 19, 2003, (2) a $2,000,000 additional term loan commitment as described in
the following paragraph, and (3) 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.
Effective May 2, 2000, Waterlink entered into an amendment to our
domestic credit facility, which waives certain financial covenants that were not
met at March 31, 2000, assuming Waterlink realizes certain operating income
levels through December 31, 2000. This waiver is also effective for the quarters
ending June 30 and September 30, 2000. As part of this amendment, $1 million of
principal payments were deferred from June 30, 2000 until September 29, 2000. In
addition, this amendment provides Waterlink with an additional $2,000,000 term
loan commitment through September 29, 2000, which can be extended until December
29, 2000 if certain conditions are met. In connection with the additional
$2,000,000 term loan commitment, Waterlink issued to Bank of America warrants to
purchase, in the aggregate, up to 100,000 shares of Waterlink common stock at an
exercise price of $.01 per share. Depending on the amount, if any, Waterlink
borrows under the additional $2,000,000 term loan commitment, up to an
additional 100,000 warrants to purchase shares of Waterlink common stock could
be issued under the same terms and conditions. As of June 30, 2000, no amounts
have been borrowed under the additional $2,000,000 term loan commitment. This
amendment also provides that all amounts outstanding under the domestic credit
facility will bear interest at a designated variable base rate plus 100 basis
points.
Availability for future borrowings was approximately $825,000 at June
30, 2000, excluding the additional $2,000,000 term loan commitment described in
the preceding paragraph.
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
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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 $496,000, 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 will be provided by:
- future cash flow from operations
- borrowings under its credit facilities
- the sale of certain assets or product lines
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. 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. We do not have
plans at this time to complete additional work, and 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 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.
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition". SAB No. 101 provides
guidance on numerous revenue recognition issues and is effective for Waterlink
in fiscal 2001. Waterlink has not yet determined what the effect of adopting SAB
No. 101 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:
- 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
- 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 success of Waterlink's exploration of strategic alternatives
- the cost of capital, including interest rate increases
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- 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 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
27.1 Financial Data Schedule as of and for the nine months ended
June 30, 2000
(b) Reports on Form 8-K.
None.
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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/ Mark E. Brody
-----------------
Mark E. Brody
Chief Financial Officer
Dated: August 2, 2000
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