<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 and 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended DECEMBER 31, 1996
-----------------
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 1-10728
-------
UNITED STATES FILTER CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0266015
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
40-004 COOK STREET, PALM DESERT, CA 92211
------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (619) 340-0098
--------------
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
------- -------
The number of shares of common stock, $.01 par value, outstanding as of February
10, 1997, is 71,622,869 shares.
Total number of pages 20
-----------
Exhibit Index on page 20
-----------
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 311,920,000 18,405,000
Short-term investments 767,000 65,000
Accounts receivable, net 372,281,000 218,855,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 89,240,000 33,575,000
Inventories 175,414,000 75,313,000
Prepaid expenses 13,967,000 7,922,000
Deferred taxes 7,822,000 7,771,000
Other current assets 10,463,000 10,073,000
--------------- -----------
Total current assets 981,874,000 371,979,000
--------------- -----------
Property, plant and equipment, net 233,812,000 165,989,000
Investment in leasehold interests, net 23,625,000 27,688,000
Cost in excess of net assets of businesses acquired, net 626,508,000 271,891,000
Other assets 69,522,000 38,958,000
--------------- -----------
$ 1,935,341,000 876,505,000
=============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 181,077,000 100,224,000
Accrued liabilities 154,999,000 102,415,000
Current portion of long-term debt 8,147,000 7,892,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 27,337,000 15,797,000
Other current liabilities 15,711,000 21,894,000
------------ -----------
Total current liabilities 387,271,000 248,222,000
------------ -----------
Notes payable 4,943,000 35,756,000
Long-term debt, excluding current portion 10,987,000 9,788,000
Convertible subordinated debentures 554,000,000 200,000,000
Deferred taxes 1,849,000 1,223,000
Other liabilities 31,308,000 13,015,000
------------ -----------
Total liabilities 990,358,000 508,004,000
------------ -----------
</TABLE>
(Continued)
2
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
Shareholders' equity:
Common stock, par value $.01. Authorized 150,000,000
shares; 69,730,440 and 47,873,133 shares issued and
outstanding at December 31, 1996 and March 31, 1996,
respectively 697,000 338,000
Additional paid-in capital 903,034,000 351,254,000
Currency translation adjustment 1,981,000 1,836,000
Retained earnings 39,271,000 15,073,000
-------------- -----------
Total shareholders' equity 944,983,000 368,501,000
-------------- -----------
$1,935,341,000 876,505,000
============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
------------------------- ---------------------------
1996 1995 1996 1995
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 339,259,000 186,663,000 772,978,000 518,763,000
Costs of sales 253,468,000 137,491,000 568,866,000 384,585,000
------------------ ----------- ----------- -----------
Gross profit 85,791,000 49,172,000 204,112,000 134,178,000
Selling, general and
administrative expenses 64,133,000 37,648,000 150,273,000 102,016,000
Merger expenses - - 5,581,000 -
------------------ ----------- ----------- -----------
64,133,000 37,648,000 155,854,000 102,016,000
------------------ ----------- ----------- -----------
Operating income 21,658,000 11,524,000 48,258,000 32,162,000
Other income (expense):
Interest expense (5,395,000) (4,107,000) (13,367,000) (10,655,000)
Other 1,777,000 2,424,000 2,781,000 3,787,000
------------------ ----------- ----------- -----------
(3,618,000) (1,683,000) (10,586,000) (6,868,000)
------------------ ----------- ----------- -----------
Income before taxes 18,040,000 9,841,000 37,672,000 25,294,000
Income taxes 4,963,000 2,839,000 10,367,000 7,582,000
------------------ ----------- ----------- -----------
Net income $ 13,077,000 7,002,000 27,305,000 17,712,000
================== =========== =========== ===========
Net income
per common share $0.22 0.15 0.51 0.43
===== ========== =========== ===========
Weighted average number
of shares outstanding 60,146,000 45,392,000 53,738,000 40,404,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,305,000 17,712,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for bad debts 2,425,000 1,247,000
Depreciation and amortization 31,895,000 20,396,000
Deferred income taxes - 9,000
Stock option compensation - 84,000
Decrease in closure reserves - (1,888,000)
Loss on sale of assets 2,000 144,000
Change in operating assets and liabilities:
Decrease in accounts receivable 48,192,000 291,000
Increase in costs and estimated earnings
on uncompleted contracts (27,236,000) (3,811,000)
Increase in inventories (15,627,000) (10,345,000)
Increase in other assets (20,413,000) (16,027,000)
Decrease in accounts payable and
accrued expenses (31,363,000) (20,340,000)
Decrease in billings in excess of costs and
estimated earnings on uncompleted contracts (3,931,000) (2,451,000)
Increase (decrease) in other liabilities (5,643,000) 6,908,000
------------- ------------
Net cash provided by (used in) operating activities 5,606,000 (8,071,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property, plant & equipment (32,970,000) (26,036,000)
Payment for purchase of acquisitions, net of cash acquired (404,478,000) (182,631,000)
Proceeds from disposal of equipment 384,000 1,635,000
(Purchase) sale of short-term investments (702,000) 7,646,000
------------- ------------
Net cash used in investing activities (437,766,000) (199,386,000)
------------- ------------
</TABLE>
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 358,351,000 97,536,000
Net proceeds from sale of convertible
subordinated debentures 403,650,000 136,249,000
Repurchase of preferred stock - (4,709,000)
Principal payments on debt (6,604,000) (74,026,000)
Net (payments) proceeds from borrowings on notes payable (30,813,000) 60,997,000
Proceeds from exercise of common stock options 1,487,000 1,676,000
Dividends paid (396,000) (1,416,000)
------------ -----------
Net cash provided by financing activities 725,675,000 216,307,000
------------ -----------
Net increase in cash 293,515,000 8,850,000
Cash balance at March 31, 1996 and 1995 18,405,000 20,020,000
----------- ----------
Cash balance at December 31, 1996 and 1995 $311,920,000 28,870,000
============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 13,077,000 7,159,000
============ ==========
Cash paid during the period for income taxes $ 6,096,000 3,913,000
============ ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Operations and Significant Accounting Policies
----------------------------------------------
The accompanying condensed consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
regulations. The condensed consolidated financial statements reflect all
adjustments and disclosures which are, in the opinion of management, necessary
for a fair presentation of the information contained therein. All such
adjustments are of a normal recurring nature. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto that are contained in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996. The
results of operations for the interim periods are not necessarily indicative of
the results of the full fiscal year.
Income per Common Share
- -----------------------
Income per common share is computed based on the weighted average number of
shares outstanding. Common stock equivalents, consisting of options are
included in the computation of income per share when their effect is dilutive.
All income per share data in the accompanying condensed consolidated financial
statements have been restated to reflect a three for two common stock split paid
by way of a stock dividend on July 15, 1996.
Primary and fully diluted income per common share for the three and nine month
periods ended December 31, 1996 and 1995, were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $13,077,000 7,002,000 27,305,000 17,712,000
Dividends on preferred stock - (179,000) - (537,000)
----------- ---------- ---------- ----------
Adjusted net income applicable to
common shares $13,077,000 6,823,000 27,305,000 17,175,000
=========== ========= ========== ==========
Weighted average shares outstanding 57,728,000 44,041,000 51,683,000 39,359,000
Add:
Exercise of options and warrants reduced by
the number of shares purchased with proceeds 2,418,000 1,351,000 2,055,000 1,045,000
----------- ---------- ---------- ----------
Adjusted weighted average shares outstanding 60,146,000 45,392,000 53,738,000 40,404,000
=========== ========== ========== ==========
Income per common share:
Net income $ 0.22 0.15 0.51 0.44
Dividends on preferred stock - - - (0.01)
----------- ---------- ---------- ----------
Adjusted income per common share $ 0.22 0.15 0.51 0.43
=========== ========== ========== ==========
</TABLE>
7
<PAGE>
Note 2. Inventories
-----------
Inventories at December 31, 1996 and March 31, 1996 consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
Raw Materials $ 36,584,000 21,578,000
Work-in-Process 46,345,000 17,997,000
Finished Goods 92,485,000 35,738,000
------------ ----------
$175,414,000 75,313,000
============ ==========
</TABLE>
Note 3. Acquisitions
------------
On May 31, 1996, a wholly owned subsidiary of the Company merged with and into
Zimpro Environmental, Inc. ("Zimpro"), in a tax free reorganization. In
connection with this acquisition, the Company issued 877,611 shares of the
Company's common stock for all of the outstanding common and preferred shares of
Zimpro pursuant to an Agreement and Plan of Merger among the Company, Landegger
Environmental Holdings, Inc., The Black Clawson Company, a trust, and two
limited partnerships in the John Hancock Capital Growth Fund ("The Hancock
Funds") (collectively the "Stockholders"). In addition, the Company liquidated
existing indebtedness to The Hancock Funds in exchange for 172,491 shares of
Company common stock and $1,000,000 in cash.
Zimpro, based in Wisconsin, manufactures wastewater treatment equipment with
proprietary technologies in wet air oxidation, landfill leachate treatment
systems, ground water remediation, filtration and sludge treatment systems.
This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts and operations of
Zimpro.
On August 23, 1996, the Company completed the acquisition of Davis Water & Waste
Industries, Inc. ("Davis"). The Company issued 4,817,349 shares of the
Company's common stock in exchange for all of the outstanding common shares and
rights to acquire common shares of Davis pursuant to an Agreement and Plan of
Merger between the Company and Davis.
Davis manufactures and markets products relating to the distribution of water
and wastewater. Davis also designs, engineers, manufactures, sells and installs
water and wastewater treatment equipment to comply with applicable health and
water quality standards.
This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts and operations of
Davis.
8
<PAGE>
Separate results of operations of the combined entities for the three and nine
months ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1995
------------------- ------------------
<S> <C> <C>
Revenues:
U.S. Filter (as previously reported) $126,907,000 326,754,000
Zimpro 7,299,000 21,001,000
Davis 52,457,000 171,008,000
----------- -----------
Combined $186,663,000 518,763,000
============ ===========
Net Income (loss)
U.S. Filter (as previously reported) 5,880,000 13,748,000
Zimpro (34,000) (170,000)
Davis 1,156,000 4,134,000
----------- ----------
Combined 7,002,000 17,712,000
=========== ===========
Net income per common share and common
equivalent share:
As previously reported $ 0.14 0.38
============ ==========
As restated $ 0.15 0.43
============ ==========
</TABLE>
Merger expenses incurred to consummate the Davis transaction totaled $5,581,000
and consisted primarily of investment banking fees, printing, stock transfer
fees, accounting fees, legal fees, governmental filing fees and certain other
costs related to existing Davis pension plans and change in control payments.
On October 25, 1996, the Company acquired all of the outstanding capital stock
of The Utility Supply Group, Inc. ("USG") in a tax-free merger pursuant to an
Agreement and Plan of Merger. The Company issued 771,157 shares of its common
stock in exchange for all of the outstanding capital stock of USG. The Company
also assumed and/or repaid approximately $21,750,000 in third party debt. USG
is a leading provider of water and wastewater related products and services to
industrial and municipal customers through more than 30 offices in the United
States.
USG had revenues of $156,838,000 and net income of $1,049,000 for the year ended
December 31, 1995. The transaction was accounted for as a purchase.
On October 28, 1996, the Company acquired all of the outstanding capital stock
of WaterPro Supplies Corporation ("WaterPro") pursuant to a Stock Purchase
Agreement. The Company issued as the entire consideration an aggregate of
3,201,507 shares of its common stock in exchange for all of the capital stock of
WaterPro (1,157,734 shares) and in consideration for the repayment of related
party debt (2,043,773 shares). WaterPro is the largest U.S. distributor of
water and wastewater related products and services for municipal water, sewer
authorities and underground contractors, and has 43 locations throughout the
United States.
WaterPro had revenues of $187,540,000 and net income of $2,329,000 for the
period April 7, 1995 to December 31, 1995. The transaction was accounted for as
a purchase.
9
<PAGE>
On December 2, 1996, the Company acquired the Wheelabrator Water Systems and
Manufacturing Group ("WSMG") from Wheelabrator Technologies Inc. Pursuant to
the terms of a Purchase and Sale Agreement, the Company paid approximately
$369,600,000 in cash for WSMG, subject to adjustment. WSMG provides a broad
range of water and wastewater engineering, technology and systems and has
manufacturing and sales offices throughout the world.
WSMG had revenues of $293,207,000, $364,335,000 and $452,134,000 for the years
ended December 31, 1993, 1994 and 1995, respectively. In addition, WSMG had net
income of $13,454,000, $13,226,000 and $16,361,000 for the years ended December
31, 1993, 1994, 1995, respectively. The transaction was accounted for as a
purchase.
Summarized below are the unaudited pro forma results of operations of the
Company as though USG, WaterPro and WSMG had been acquired at the beginning of
the nine month periods ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
---------------------------------
1996 1995
---------------- --------------
<S> <C> <C>
Revenues $ 1,323,000,000 1,149,423,000
================= =============
Net income $ 43,462,000 31,585,000
================= =============
Net income per common share $ 0.66 0.55
================= =============
</TABLE>
Note 4. Notes Payable
-------------
The Company has an unsecured multicurrency bank line-of-credit of up to
$400,000,000 of which $4,943,000 was outstanding at December 31, 1996. The
line-of-credit expires December 2001 and bears interest at variable rates of up
to 2.25% above certain Eurocurrency rates or 0.50% above The First National Bank
of Boston's base rate. At December 31, 1996 $37,239,000 of standby letters of
credit were outstanding under this line-of-credit.
Note 5. Convertible Subordinated Notes
------------------------------
On December 11, 1996 the Company sold $ 414,000,000 aggregate principal amount
of 4.5% Convertible Subordinated Notes due 2001. The notes are convertible into
common stock at any time prior to maturity, redemption or repurchase at a
conversion price of $39.50 per share, subject to adjustment in certain
circumstances. The notes are not redeemable prior to December 15, 1999 at which
time the notes are redeemable at the option of the Company, in whole or in part,
at specified redemption prices plus accrued and unpaid interest to the date of
redemption. Interest is payable semi-annually on June 15 and December 15 of
each year, commencing on June 15, 1997.
On September 12, 1996, the Company provided notice, pursuant to terms of its
Indenture dated October 20, 1993, of its intent to redeem on October 25, 1996
all of its outstanding 5% Convertible Subordinated Debentures due 2000. As of
October 25, 1996, all holders of the debentures converted the debentures into a
total of approximately 4,390,000 shares of Company common stock pursuant to the
terms of the Debentures.
10
<PAGE>
Note 6. Stockholders' Equity
--------------------
On July 15, 1996, the Company effected, by way of a stock dividend, a three for
two split of the Company's common stock. All references to income per share and
other common stock information in the accompanying condensed consolidated
financial statements and notes thereto have been restated to reflect the stock
dividend.
On December 11, 1996, the Company completed an underwritten public offering of
11,804,206 shares of its common stock at a price equal to $31.625 per share.
Also, pursuant to the exercise of the underwriters' over-allotment option,
certain selling stockholders sold an aggregate of 845,794 shares of common stock
in such offering. The net proceeds to the Company, after underwriting,
discounts and commissions and before other related expenses were
$358,553,000.
Note 7. Subsequent Events
-----------------
On January 6, 1997, the Company completed the acquisition of the Process
Equipment Division ("PED") from United Utilities PLC pursuant to a Purchase and
Sale Agreement. The Company paid approximately $160,000,000 and 1,320,312 shares
of the Company's common stock, subject to post-closing adjustments for PED,
which provides a broad range of water and wastewater engineering technology and
systems.
PED had revenues of $254,955,000 and $267,358,000 for the years ended March 31,
1995 and 1996, respectively, and net losses of $13,576,000 and $39,496,000 for
the years ended March 31, 1995 and 1996 respectively.
On February 3, 1997, the Company announced that it had entered into a letter of
intent to acquire Wheelabrator EOS Inc. ("EOS") from Wheelabrator Technologies
Inc. for $77,400,000, subject to adjustment. The total consideration for EOS
will be paid in shares of the Company's common stock. EOS manages water,
wastewater and ground water treatment facilities for both the municipal and
industrial water and wastewater industry. EOS had revenues for calendar year
1996 of approximately $55,000,000. The proposed transaction is expected to be
completed in April 1997, and will be accounted for as a purchase.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Revenues for the three months ended December 31, 1996 were $339,259,000, an
increase of $152,596,000 or 81.7% from the $186,663,000 for the three months
ended December 31, 1995. For the nine months ended December 31, 1996, revenues
increased $254,215,000 or 49.0% from the corresponding period in the prior year.
These increases were due primarily to acquisitions completed by the Company
subsequent to December 31, 1995. For the three months ended December 31, 1996,
revenues from capital equipment sales represented 37.5% of total revenues, while
revenues from services, operations, replacement parts and consumables
represented 28.5% of total revenues, and revenues from distribution, represented
34.0% of total revenues.
Gross profit as a percentage of revenue ("gross margin") was 25.3% for the three
months ended December 31, 1996 compared to 26.3% in the corresponding period in
the prior year. For the nine months ended December 31, 1996, the Company's
gross margin was 26.4% as compared to 25.9% for the corresponding period in the
prior year. This decrease in gross margin for the three months ended December
31, 1996 was due primarily to the effect of adding revenue from the Company's
recently completed acquisitions of USG and WaterPro, each of which are in the
waterworks distribution business.
For the three months ended December 31, 1996, selling, general and
administrative expenses increased $26,485,000 to $64,133,000 as compared to the
$37,648,000 in the comparable period in the prior year. During this period,
selling, general and administrative expenses were 18.9% of revenues compared to
20.2% for the comparable period in the prior year. For the nine months ended
December 31, 1996, selling, general and administrative expenses, excluding
merger expenses (described below), were 19.4% compared to 19.7 % for the
corresponding period in the prior year.
Merger expenses were incurred during the nine months ended December 31, 1996
relating to the Company's acquisition of Davis which was accounted for as a
pooling of interests. These merger expenses, which totaled $5,581,000,
consisted primarily of investment banking fees, printing, stock transfer fees,
accounting fees, legal fees, governmental filing fees and certain other costs
related to existing Davis pension plans and change of control payments.
12
<PAGE>
Interest expense increased to $5,395,000 for the three months ended December 31,
1996 from $4,107,000 for the corresponding period in the prior year. Interest
expense increased to $13,367,000 for the nine months ended December 31, 1996
from $10,655,000 for the corresponding period in the prior year. Interest
expense for the three and nine months ended December 31, 1996 consisted
primarily of interest on the Company's (i) 5% Convertible Subordinated
Debentures due 2000 (all of which have been, as of October 25, 1996, converted
into shares of the Company's common stock), (ii) 6% Convertible Subordinated
Notes issued on September 18, 1995 due 2005, (iii) 4.5% Convertible Subordinated
Notes issued on December 11, 1996 due 2001 and (iv) borrowings under the
Company's bank line of credit. At December 31, 1996, the Company had cash and
short-term investments of $312,687,000.
Income tax expense increased to $4,963,000 for the three months ended December
31, 1996, from $2,839,000 in the corresponding period in the prior year. Income
tax expense increased to $10,367,000 in the nine months ended December 31, 1996,
from $7,582,000 in the corresponding period in the prior year. The Company's
effective tax rate for the three and nine months ended December 31, 1996 was
27.5%.
Net income for the three months ended December 31, 1996 was $13,077,000, an
increase of $6,075,000 from the $7,002,000 for the three months ended December
31, 1995. For the nine months ended December 31, 1996, net income increased
$9,593,000 to $27,305,000 from $17,712,000 for the same period in the prior
year. Excluding Davis merger expenses, net income for the nine months ended
December 31, 1996 totaled $31,351,000, an increase of 77.0% over the same period
in the prior year. Net income per common share for the nine months ended
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Before merger expenses $ 0.58 0.43
======== ====
After merger expenses $ 0.51 0.43
======== ====
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of funds are cash and other working capital,
cash flow generated from operations and borrowings under the Company's bank line
of credit. At December 31, 1996, the Company had working capital of
$594,603,000, including cash and short-term investments of $312,687,000. The
Company's long-term debt at December 31, 1996, was $554,000,000 consisting of
$140,000,000 of 6.0% Convertible Subordinated Notes due 2005 and $414,000,000 of
4.5% Convertible Subordinated Notes due 2001. The Company also had other long-
term debt totaling $19,134,000 and bearing interest at rates ranging from 2.0%
to 11.5%.
As of December 31, 1996, the Company had an existing bank line of credit of
$400,000,000, of which there were outstanding borrowings of $4,943,000 and
outstanding letters of credit of $37,239,000. Borrowings under this credit
facility bears interest at variable rates of up to 2.25% above certain
Eurocurrency rates or 0.50% above The First National Bank of Boston's base rate
and have a five year maturity.
As of March 31, 1996, the Company had net operating loss carryforwards generated
from Societe des Ceramiques Techniques S.A. ("SCT") of approximately
$19,952,000, for which no financial statement benefit has been recognized.
Approximately $1,946,000 of net operating loss carryforwards will expire in
fiscal years 1997 and 1998, while the remainder have an indefinite carryforward
period. The Company also has net operating loss carryforwards in other
13
<PAGE>
European countries of approximately $7,338,000 which expire from fiscal 1997 to
2002 for which no financial statement benefit has been recognized. The Company
also has net operating loss carryforwards generated from Zimpro of approximately
$2,905,000 for which no financial statement benefit has been recognized. No
benefit has been given to these net operating loss carryforwards because of the
limited carryforward periods or the uncertain business conditions relating to
the operations giving rise to such carryforwards. Future recognition of these
net operating carryforwards will occur if the operations of SCT and Zimpro
generate sufficient earnings before the expiration of the respective net
operating loss carryforwards. In addition, in the case of SCT, until March 31,
1997, the benefit, if any, of such carryforwards is to be shared equally between
the Company and Aluminum Company of America ("ALCOA"). On December 10, 1996, the
Company paid a subsidiary of ALCOA $219,000 pursuant to such arrangement.
The Company also has available at March 31, 1996, other net operating loss
carryforwards for U.S. federal income tax purposes of approximately $13,552,000
which expire from fiscal 2007 to 2010.
On January 6, 1997, the Company completed the acquisition of PED and paid
approximately $160,000,000 in cash and 1,320,312 shares of the Company's common
stock.
The Company believes its current cash position, cash flow from operations, and
available borrowings under the Company's line of credit will be adequate to meet
its anticipated cash needs from working capital, revenue growth, scheduled debt
repayment and capital investment objectives for at least the next twelve months.
Certain Trends and Uncertainties
- --------------------------------
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the United States Securities and Exchange Commission and in its
reports to stockholders. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
Acquisition Strategy. In pursuit of its strategic objective of becoming the
leading global single-source provider of water and wastewater treatment systems
and services, the Company has, since 1991, acquired and successfully integrated
more than 50 United States based and international businesses with strong market
positions and substantial water and wastewater treatment expertise. The Company
plans to continue to pursue acquisitions that complement its technologies,
products and services, broaden its customer base and expand its global
distribution network. The Company's acquisition strategy entails the potential
risks inherent in assessing the value, strengths, weaknesses, contingent or
other liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. Although the Company
generally has been successful in pursuing these acquisitions, there can be no
assurance that acquisition opportunities will continue to be available, that the
Company will have access to the capital required to finance potential
acquisitions, that the Company will continue to acquire businesses or that any
business acquired will be integrated successfully or prove profitable.
International Transactions. The Company has made and expects it will continue
to make acquisitions and expects to obtain contracts in markets outside the
United States. While these activities may provide important opportunities for
the Company to offer its products and services internationally, they also entail
the risks associated with conducting business internationally, including the
risk of currency fluctuations, slower payment of invoices, nationalization and
possible social, political and economic instability.
Reliance On Key Personnel. The Company's operations are dependent on the
continued efforts of senior management, in particular Richard J. Heckmann, the
Company's Chairman of the Board, President and Chief Executive Officer. There
are no employment agreements between the Company and the members of its senior
management, except Thierry Reyners, the Company's Executive Vice President--
European Group. Should any of the senior managers be unable to continue in their
present roles, the Company's prospects could be adversely affected.
14
<PAGE>
Profitability Of Fixed Price Contracts. A significant portion of the Company's
revenues are generated under fixed price contracts. To the extent that original
cost estimates are inaccurate, costs to complete increase, delivery schedules
are delayed or progress under a contract is otherwise impeded, revenue
recognition and profitability from a particular contract may be adversely
affected. The Company routinely records upward or downward adjustments with
respect to fixed price contracts due to changes in estimates of costs to
complete such contracts. There can be no assurance that future downward
adjustments will not be material.
Cyclicality And Seasonality. The sale of capital equipment within the water
treatment industry is cyclical and influenced by various economic factors
including interest rates and general fluctuations of the business cycle. A
significant portion of the Company's revenues are derived from capital equipment
sales. While the Company sells capital equipment to customers in diverse
industries and in global markets, cyclicality of capital equipment sales and
instability of general economic conditions could have an adverse effect on the
Company's revenues and profitability.
The sale of water and wastewater distribution equipment and supplies is also
cyclical and influenced by various economic factors including interest rates,
land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in northern
climates. As a result of recent acquisitions, the sale of water and wastewater
distribution equipment and supplies is a significant component of the Company's
business. Cyclicality and seasonality of water and wastewater distribution
equipment and supplies sales could have an adverse effect on the Company's
revenues and profitability.
Potential Environmental Risks. The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions at
facilities owned, and the state of compliance with environmental laws, by
businesses acquired by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in cleanup
obligations, civil or criminal enforcement actions or private actions that could
have a material adverse effect on the Company. In that regard federal and state
environmental regulatory authorities have commenced civil enforcement actions
related to alleged multiple violations of applicable wastewater pretreatment
standards by a wholly owned subsidiary of the Company at a Connecticut ion
exchange regeneration facility acquired by the Company in October 1995 from
Anjou International Company ("Anjou"). A grand jury investigation is pending
which is believed to relate to the same conditions that were the subject of the
civil actions. The Company has certain rights of indemnification from Anjou
which may be available with respect to these matters. In addition, the Company's
activities as owner and operator of certain hazardous waste treatment and
recovery facilities are subject to stringent laws and regulations and compliance
reviews. Failure of these facilities to comply with those regulations could
result in substantial fines and the suspension or revocation of the facility's
hazardous waste permit. In other matters, the Company has been notified by the
United States Environmental Protection Agency that it is a potentially
responsible party under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") at certain sites to which the Company or its
predecessors allegedly sent waste in the past. It is possible that the Company
could receive other such notices under CERCLA or analogous state laws in the
future. The Company does not believe that its liability, if any, relating to
such matters will be material. However, there can be no assurance that such
matters will not be material. In addition, to some extent, the liabilities and
risks imposed by environmental laws on the Company's customers may adversely
impact demand for certain of the Company's products or services or impose
greater liabilities and risks on the Company, which could also have an adverse
effect on the Company's competitive or financial position.
Competition. The water and wastewater treatment industry is fragmented and
highly competitive. The Company competes with many United States based and
international companies in its global markets. The principal methods of
competition in the markets in which the Company competes are technology, prompt
availability of local service capability, price, product specifications,
customized design, product knowledge and reputation, ability to obtain
sufficient performance bonds, timely delivery, the relative ease of system
operation and maintenance, and the prompt
15
<PAGE>
availability of replacement parts. In the municipal contract bid process,
pricing and ability to meet bid specifications are the primary considerations.
While no competitor is considered dominant, there are competitors which have
significantly greater resources than the Company, which, among other things,
could be a competitive disadvantage to the Company in securing certain projects.
Technological And Regulatory Change. The water and wastewater treatment
business is characterized by changing technology, competitively imposed process
standards and regulatory requirements, each of which influences the demand for
the Company's products and services. Changes in regulatory or industrial
requirements may render certain of the Company's treatment products and
processes obsolete. Acceptance of new products may also be affected by the
adoption of new government regulations requiring stricter standards. The
Company's ability to anticipate changes in technology and regulatory standards
and to develop successfully and introduce new and enhanced products on a timely
basis will be a significant factor in the Company's ability to grow and to
remain competitive. There can be no assurance that the Company will be able to
achieve the technological advances that may be necessary for it to remain
competitive or that certain of its products will not become obsolete. In
addition, the Company is subject to the risks generally associated with new
product introductions and applications, including lack of market acceptance,
delays in development or failure of products to operate properly.
Municipal And Wastewater Market. Completion of certain recent and pending
acquisitions will increase significantly the percentage of the Company's
revenues derived from municipal customers. While municipalities represent an
important market in the water and wastewater treatment industry, contractor
selection processes and funding for projects in the municipal sector entail
certain additional risks not typically encountered with industrial customers.
Competition for selection of a municipal contractor typically occurs through a
formal bidding process which can require the commitment of significant resources
and greater lead times than industrial projects. In addition, demand in the
municipal market is dependent upon the availability of funding at the local
level, which may be the subject of increasing pressure as local governments are
expected to bear a greater share of the cost of public services. A company
recently acquired by the Company, Zimpro Environmental, Inc. ("Zimpro"), is
party to certain agreements (entered into in 1990 at the time Zimpro was
acquired from unrelated third parties by the entities from which it was later
acquired by the Company), pursuant to which Zimpro agreed, among other things,
to pay the original sellers a royalty of 3.0% of its annual consolidated net
sales of certain products in excess of $35.0 million through October 25, 2000.
Under certain interpretations of such agreements, with which the Company
disagrees, Zimpro could be liable for such royalties with respect to the net
sales attributable to products, systems and services of certain defined
wastewater treatment businesses acquired by Zimpro or the Company or the
Company's other subsidiaries after May 31, 1996. The defined businesses include,
among others, manufacturing machinery and equipment, and engineering,
installation, operation and maintenance services related thereto, for the
treatment and disposal of waste liquids, toxic waste and sludge. One of the
prior sellers has revealed in a letter to the Company an interpretation contrary
to that of the Company. The Company believes that it would have meritorious
defenses to any claim based upon any such interpretation and would vigorously
pursue the elimination of any threat to expand what it believes to be its
obligations pursuant to such agreements.
16
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
N/A
Item 2. CHANGES IN SECURITIES
(c) Privately Placed Securities
1. On October 24, 1996, the Company issued 75,786 shares of its common
stock, par value $.01 per share (the "Common Stock") to NI Industries,
Inc., a Delaware corporation, as partial consideration for the
acquisition of substantially all of the assets of Norris Environmental
Services, Inc., a California corporation. Such shares were issued in a
transaction exempt from registration pursuant to Section 4(2) of the
United States Securities Act of 1933, as amended (the "Securities
Act"). Pursuant to an agreement between the parties, such shares were
subsequently registered for resale and sold pursuant to a Registration
Statement on Form S-3 (Registration No. 333-20753).
2. On October 24, 1996, the Company issued 771,157 shares of Common Stock
to CGW Southeast Partners I. L.P., Mechelle C. Slaughter, Mickey Jordan
and Harry K. Hornish, Jr. in a tax-free merger pursuant to which the
Company acquired all of the outstanding capital stock of The Utility
Supply Group, Inc., a Georgia corporation. Such shares were issued in a
transaction exempt from registration pursuant to Section 4(2) of the
Securities Act, and 275,000 of such shares were subsequently registered
for resale and sold upon exercise of an underwriters' over-allotment
option pursuant to a Registration Statement on Form S-3 (Registration
No. 333-14277).
3. On October 28, 1996, the Company issued 3,201,507 shares of Common
Stock to Edmundson International, Inc., Hajoca Corporation, Richard J.
Klau and Christopher M. Pappo in exchange for all of the capital stock
of WaterPro Supplies Corporation ("WaterPro") (1,157,734 of such
shares) and in consideration of the repayment of related party debt of
WaterPro (2,043,773 of such shares) to Edmundson International, Inc.
Such shares were issued in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act, and were subsequently
registered for resale and sold in at-the-market transactions pursuant
to two Registration Statements on Form S-3 (Registration Nos. 333-18889
and 333-19489).
Item 3. DEFAULTS UPON SENIOR SECURITIES
N/A
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
N/A
Item 5. OTHER INFORMATION
N/A
17
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith or incorporated herein by reference:
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed three Current Reports on Form 8-K during the quarter
ended December 31, 1996 as follows:
1. Current Report on Form 8-K dated October 28, 1996 (as amended on Form
8-K/A dated December 19, 1996) reporting the acquisition of WaterPro
Supplies Corporation pursuant to Item 2, reporting the status of
certain other recent and pending acquisitions pursuant to Item 5, and
filing certain financial statements and pro forma financial
information related thereto. Such Current Report also reported the
filing and effectiveness of certain registration statements with
respect to domestic and international underwritten offerings of Common
Stock of the Company and an underwritten offering of 4 1/2%
Convertible Subordinated Notes due 2001 of the Company, which
offerings were subsequently completed. See Notes 4 and 5 to Financial
Statements in Item 1 of this Form 10-Q.
2. Current Report on Form 8-K dated November 6, 1996 filing an
accountant's consent.
3. Current Report on Form 8-K dated December 2, 1996 reporting
consummation of the acquisition of the Water Systems and Manufacturing
Group from Wheelabrator Technologies, Inc., filing certain financial
statements and pro forma financial information related thereto and
reporting the execution of an Amended and Restated Multicurrency
Credit Agreement among the Company and certain of its subsidiaries,
the lenders named therein, DLJ Capital Funding, Inc., as Documentation
Agent, ABN AMRO Bank, N.V., as Co-Agent, and The First National Bank
of Boston, as Managing Agent.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES FILTER CORPORATION
By: /s/ Kevin L. Spence
-------------------
Dated: February 14, 1997 Kevin L. Spence
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
27.0 Financial Data Schedule 21
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME OF UNITED STATES
FILTER CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-START> OCT-01-1996 APR-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 311,920,000 0
<SECURITIES> 767,000 0
<RECEIVABLES> 389,047,000 0
<ALLOWANCES> 16,766,000 0
<INVENTORY> 175,414,000 0
<CURRENT-ASSETS> 981,874,000 0
<PP&E> 336,267,000 0
<DEPRECIATION> 102,455,000 0
<TOTAL-ASSETS> 1,935,341,000 0
<CURRENT-LIABILITIES> 387,271,000 0
<BONDS> 573,134,000 0
0 0
0 0
<COMMON> 697,000 0
<OTHER-SE> 944,286,000 0
<TOTAL-LIABILITY-AND-EQUITY> 1,935,341,000 0
<SALES> 339,259,000 772,978,000
<TOTAL-REVENUES> 339,259,000 772,978,000
<CGS> 253,468,000 568,866,000
<TOTAL-COSTS> 253,468,000 568,866,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,376,000 2,425,000
<INTEREST-EXPENSE> 5,395,000 13,367,000
<INCOME-PRETAX> 18,040,000 37,672,000
<INCOME-TAX> 4,963,000 10,367,000
<INCOME-CONTINUING> 13,077,000 27,305,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 13,077,000 27,305,000
<EPS-PRIMARY> .22 .51
<EPS-DILUTED> .22 .51
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