<PAGE> 1
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -----------
Commission file number
-------------
AQUA-CHEM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1900496
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7800 NORTH 113TH STREET
P.O. BOX 421
MILWAUKEE, WISCONSIN
(Address of Principal Executive Offices)
53201
(Zip Code)
(414) 359-0600
(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 [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 12, 1999
-------------------------------- --------------------------------------
Common Stock, $.01 par value 1,000,000
<PAGE> 2
2
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
Page No.
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) 3
Consolidated Condensed Statements of Operations -
Three and nine months ended December 31, 1998
and the three and five months ended December 31, 1997
and the four months ended July 31, 1997 4
Consolidated Condensed Balance Sheets -
December 31, 1998 and March 31, 1998 5
Consolidated Condensed Statements of Cash Flows -
Nine months ended December 31, 1998 and the five months
ended December 31, 1997 and the four months
ended July 31, 1997 6
Notes to Consolidated Condensed Financial
Statements 8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Part II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Signature Page 18
Exhibit Index 19
<PAGE> 3
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<PAGE> 4
4
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
POST-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
BASIS OF ACCOUNTING BASIS OF ACCOUNTING BASIS OF
ACCOUNTING
------------------- ------------------- ---------------
THREE THREE NINE FIVE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED FOUR MONTHS
DECEMBER DECEMBER DECEMBER DECEMBER ENDED JULY
31, 1998 31, 1997 31, 1998 31, 1997 31, 1997
---------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 57,123 $ 55,665 163,052 $ 91,541 $ 64,646
Cost of goods sold 43,830 40,206 124,130 66,333 47,380
--------- --------- --------- --------- ---------
Gross margin 13,293 15,459 38,922 25,208 17,266
Costs and expenses:
Selling, general
and administrative 12,978 10,142 33,245 17,136 14,896
Restructuring charges -- -- 4,720 -- --
--------- --------- --------- --------- ---------
12,978 10,142 37,965 17,136 14,896
--------- --------- --------- --------- ---------
Operating income 315 5,317 957 8,072 2,370
Other income (expense):
Interest income 178 139 351 202 266
Interest expense (3,825) (1,556) (9,023) (2,559) (446)
Other, net (19) 25 114 57 94
--------- --------- --------- --------- ---------
(3,666) (1,392) (8,558) (2,300) (86)
Income (loss) before
income taxes, minority
interest, and extraordinary
item (3,351) 3,925 (7,601) 5,772 2,284
Income tax expense
(benefit) (1,175) 1,550 (2,475) 2,289 373
Minority interest in
earnings of consolidated
subsidiary 57 108 217 174 116
--------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item (2,233) 2,267 (5,343) 3,309 1,795
Extraordinary item, net of
tax benefit of $840 -- -- 1,260 -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (2,233) $ 2,267 $ (6,603) $ 3,309 $ 1,795
Preferred stock dividends (100) (171) (358) (260) --
--------- --------- --------- --------- ---------
Net income (loss)
applicable to common $ (2,333) $ 2,096 $ (6,961) $ 3,049 $ 1,795
========= ========= ========= ========= =========
Other comprehensive
income (loss)
Foreign currency
translation adjustment 65 (416) (252) 56 (275)
Comprehensive income
(loss) $ (2,268) $ 1,680 $ (7,213) $ 3,105 $ 1,520
PER SHARE DATA:
Basic net income (loss) per share
of common stock $ (2.33) $ 2.10 $ (6.96) $ 3.05 N.A.
Diluted net income (loss) per share
of common stock $ (2.33) $ 1.78 $ (6.96) $ 2.59 N.A.
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 5
5
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,820 $ 4,756
Accounts receivable, less allowances of $2,434
at December 31, 1998 and $548 at March 31, 1998 40,439 24,301
Revenues in excess of billings 4,813 4,640
Inventories 25,689 24,409
Deferred income taxes 3,673 3,533
Prepaid expenses and other current assets 1,254 955
--------- ---------
Total current assets 93,688 62,594
Property, plant and equipment - net 37,780 31,568
Intangible assets, less accumulated amortization of
$939 at December 31, 1998 and $370 at March 31, 1998 39,180 10,059
Deferred income taxes 1,868 1,783
Other assets 11,872 4,246
--------- ---------
TOTAL ASSETS $ 184,388 $ 110,250
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $- $ 3,031
Accounts payable
Trade 7,281 10,149
Other 4,711 2,508
Billings in excess of revenues 10,151 3,165
Compensation and profit sharing 4,706 2,864
Accrued litigation settlements 900 3,725
Accrued expenses 26,493 12,179
--------- ---------
Total current liabilities 54,242 36,621
Long-term debt 125,000 57,640
Other long-term liabilities 5,057 5,480
--------- ---------
Total other liabilities 130,057 63,120
Minority interest 402 660
Preferred stock with mandatory redemption provisions 4,870 7,519
Stockholders' equity:
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at December 31, 1998 and March 31, 1998 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (5,112) 2,149
Accumulated other comprehensive income (loss) (171) 81
--------- ---------
Total stockholders' equity (deficit) (5,183) 2,330
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,388 $ 110,250
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 6
6
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
POST-ACQUISITION PRE-ACQUISITION
BASIS OF ACCOUNTING BASIS OF
ACCOUNTING
------------------------------ ---------------
NINE MONTHS FIVE MONTHS FOUR MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,603) $ 3,309 $ 1,795
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,283 1,284 829
Deferred tax expense 3 (1,784) (123)
Minority interest in earnings of consolidated
subsidiary 217 174 116
Extraordinary item, net of tax benefit 1,260
Restructuring charges, net 4,676
Increase (decrease) in cash due to changes in:
Accounts receivable (4,911) (4,852) (4,271)
Revenues in excess of billings (173) 3,096 (1,230)
Inventories 10,365 3,473 (56)
Prepaid expenses and other current assets (287) (332) (543)
Accounts payable-- trade (6,923) (931) (408)
Accounts payable-- other 1,602 674 2,480
Billings in excess of revenues 613 1,624 2,604
Accrued expenses and other current liabilities 3,758 3,800 2,009
Other, net (372) (224) (318)
--------- --------- ---------
Total adjustments 14,114 6,002 1,089
--------- --------- ---------
Net cash provided by operating activities 7,508 9,311 2,884
Cash flows from investing activities:
Management Buy-Out of Aqua-Chem, Inc. -- (52,102) --
Purchase of National Dynamics Corporation (48,500) -- --
Proceeds from sales of property, plant and
equipment and other assets -- 2,000 38
Additions to property, plant and equipment (2,519) (1,247) (1,845)
Proceeds from notes receivable 100 650 145
--------- --------- ---------
Net cash used in investing activities (50,919) (50,699) (1,662)
Cash flows from financing activities:
Issuance of Notes 125,000 -- --
Proceeds from revolving credit agreement 3,000 -- --
Proceeds from debt -- 65,573 --
Principal payments on debt (63,063) (26,016) (64)
Issuance of common stock -- 100 --
Issuance of warrants -- 433 --
Redemption of preferred stock and payment of
dividends (3,309) -- --
Issuance of preferred stock -- 2,655 --
</TABLE>
<PAGE> 7
7
<TABLE>
<S> <C> <C> <C>
Deferred financing costs (5,153) (2,030) --
--------- --------- ---------
Net cash provided by (used in) financing activities 56,475 40,715 (64)
Net increase (decrease) in cash and cash
equivalents 13,064 (673) 3,982
Cash and cash equivalents at beginning of period 4,756 12,609 8,627
--------- --------- ---------
Cash and cash equivalents at end of period $ 17,820 $ 11,936 $ 12,609
========= ========= =========
Cash paid during the period for:
Interest $ 1,482 $ 2,513 $ 378
Taxes $ 215 $ 1,214 $ --
Details of Acquisition of National Dynamics
Corporation in 1998 and Management
Buy-Out in 1997 :
Fair value of assets acquired $ 35,636 $ 116,058
Goodwill 29,670 9,689
Liabilities assumed (16,806) (69,196)
Issuance of Series A Cumulative Preferred Stock -- (4,449)
--------- ---------
Cash paid for assets $ 48,500 $ 52,102
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
integral part of these statements.
<PAGE> 8
8
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(1) In the opinion of Management, the accompanying unaudited financial
statements of Aqua-Chem, Inc. contain all adjustments which are of a
normal recurring nature necessary to present fairly the financial
position as of December 31, 1998, and the results of operations and cash
flows for the periods indicated. Interim financial results are not
necessarily indicative of operating results for an entire year.
(2) Certain notes and other information have been condensed or omitted from
these interim consolidated condensed financial statements. Therefore,
these statements should be read in conjunction with the Aqua-Chem, Inc.
Consolidated Financial Statements as of December 31, 1997 and 1996.
(3) On July 31, 1997, Aqua-Chem, Inc. ("OLDCO") entered into a definitive
merger agreement with A-C Acquisition Corp. ("A-C Acquisition"), a 100%
owned subsidiary of Rush Creek LLC ("Rush Creek"). Rush Creek is a
Limited Liability Company owned by certain management of OLDCO and
Whitney Equity Partners L.P. Also on July 31, 1997, A-C Acquisition
acquired the assets of OLDCO (the "Management Buy-Out") for $125,747,
which includes $69,196 of liabilities assumed and $5,000 of Series A
Cumulative Preferred Stock issued to the sellers. The amount paid does
not include contingent consideration to be paid to the sellers based on
cumulative earnings of certain operations of Aqua-Chem subsequent to the
Management Buy-Out. The Management Buy-Out was accounted for by
Aqua-Chem using the purchase method of accounting.
(4) The consolidated condensed financial statements for the four months
ended July 31, 1997 were prepared using OLDCO's historical basis of
accounting (the "pre-acquisition basis of accounting"). The consolidated
condensed financial statements for the five months ended December 31,
1997 and for the nine months ended December 31, 1998 were prepared
under a new basis of accounting that reflects the fair values of assets
acquired and liabilities assumed, the related financing costs and all
debt incurred in connection with the Management Buy-Out (the
"post-acquisition basis of accounting"). Accordingly, the accompanying
financial statements are not comparable in all material respects since
those financial statements report financial position, results of
operations, and cash flows of two separate entities.
(5) Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------- ------------
<S> <C> <C>
Raw materials and work-in-process $21,702 $18,342
Finished goods 3,987 6,067
------- -------
Total inventories $25,689 $24,409
======= =======
</TABLE>
(6) On June 23, 1998 Aqua-Chem issued $125,000 in unsecured senior
subordinated notes. The notes carry an interest rate of 11 1/4% and are
due July 1, 2008. Interest is payable semi-annually beginning January 1,
1999. Proceeds from the notes were used to repay Aqua-Chem's existing
debt, to redeem $3,269 of Aqua-Chem's Series A Preferred Stock, to
acquire substantially all of the assets of National Dynamics Corporation
("NDC") (see note (8)), to pay the accrued interest and dividends, fees
and expenses associated with the foregoing, and for general corporate
purposes. The holders of the Series B Preferred Stock elected not to
require that the Series B Preferred be redeemed in connection with the
private offering.
In conjunction with the issuance of the notes and the acquisition of
NDC, Aqua-Chem entered into a revised $45,000 secured revolving credit
facility. Borrowings under this facility are made in the form of
revolving credit notes. These notes bear interest at a rate of either
eurocurrency plus a factor as defined in the agreement, prime, or
federal funds rate plus 100 basis points. The revolving credit agreement
will terminate June 23, 2003. The facility is secured by the assets of
the Company. At December 31, 1998 there were no borrowings outstanding.
<PAGE> 9
9
Among other restrictions, the credit agreement contains covenants
relating to financial ratios and other limitations, as defined by the
agreement. As of December 31, 1998, the Company was in compliance with
these covenants.
(7) On June 25, 1998 the Board of Directors approved a plan of closure for
the Greenville, Mississippi facility and the agreement reached with the
Union representing the facility's production workers. As a result, the
Company recorded a restructuring charge of $4,720 to operations in the
nine months ended December 31, 1998. Work currently performed at the
facility is in the process of being transferred to other Company
facilities and/or outsourced. The plan will result in the elimination of
149 positions and closure of the facility within approximately one year
from the date of approval. The Greenville facility has fixed assets with
a net book value of $3,800, which includes $1,828 of machinery and
equipment, $1,846 in lease and leasehold improvements and $126 in
furniture and fixtures. The Company intends to transfer some of the
fixed assets to other facilities and will sell or dispose of the
remaining assets by the closure date. The write down associated with the
assets to be sold or disposed of results in a restructuring charge of
$2,921. The remaining charge includes $100 to write down the value of
the inventory, $1,460 of employee termination benefits and $239 of other
costs related to post closure upkeep and maintenance of the facility.
(8) On June 23, 1998, Aqua-Chem acquired substantially all the assets of
National Dynamics Corporation for $65,306, which includes $16,806 of
liabilities assumed. The acquisition was accounted for using the
purchase method of accounting. The total purchase cost was allocated
first to identified tangible and intangible assets and liabilities based
upon their respective fair values, with the remainder of $29,670 being
allocated to goodwill, which will be amortized on a straight-line basis
over 40 years. The financial statements reflect the preliminary
estimates of allocating purchase price and may be revised at a later
date. The Company does not expect the final purchase price allocation to
be materially different from preliminary estimates.
(9) The following information presents pro forma condensed consolidated
statements of operations assuming OLDCO and National Dynamics
Corporation had been acquired by Aqua-Chem as of April 1, 1997. Such
information includes adjustments to reflect additional interest expense
and depreciation expense, amortization of goodwill and other
intangibles, a reduction of other expenses to Management Buy-Out-related
payments being made by OLDCO and the net elimination of employment costs
of the former owners of National Dynamics Corporation.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Net sales $173,786 $206,583
Net income (loss) applicable to common shares (5,260) 3,229
Earnings (loss) per common share (basic) $ (5.26) $ 3.23
Earnings (loss) per common share (diluted) $ (5.26) $ 2.74
</TABLE>
(10) Effective December 31, 1997, Aqua-Chem adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and
display of comprehensive income which includes foreign currency
translation adjustments accounted for under SFAS No. 52. SFAS No. 130
requires that an enterprise classify items of other comprehensive income
by their nature in a financial statement for the period in which they
are recognized. Aqua-Chem has chosen to disclose comprehensive income in
the Consolidated Statements of Operations. Prior years have been
restated to conform to the SFAS No. 130 requirements. Accumulated other
comprehensive income at December 31, 1998 and December 31, 1997 is
comprised of only foreign currency translation adjustments. Prior years
have been restated to conform to the SFAS No. 130 requirements.
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" was issued by
The American Institute of Certified Public Accountants in March of 1998
<PAGE> 10
10
and is effective for fiscal years beginning after December 15, 1998.
Aqua-Chem's accounting for costs of computer software developed or
obtained for internal use is consistent with the guidelines
established in the SOP and, as a result, Aqua-Chem does not
anticipate that the adoption of this statement will have a material
impact on Aqua-Chem's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes
accounting and reporting standards requiring that every derivative
instrument ( including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as an asset or liability
measured at its fair value. Statement 133 is effective for fiscal years
beginning after June 15, 1999. The Company has not determined the
timing of or method of adoption, but does not anticipate that the
adoption of this standard will have a material impact on its financial
statements.
<PAGE> 11
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF AQUA-CHEM
The following discussion should be read in conjunction with, and
is qualified in its entirety by reference to the consolidated condensed
financial statements of the Company appearing elsewhere in this document.
On July 31, 1997, certain members of management and a private
investor acquired the Company from its former owners (the "Management
Buy-Out"). The financial results of the Company for all periods prior to
July 31, 1997 reflect the operations of the Company under its prior
owners. The consolidated financial statements for subsequent periods
reflect the financial results of the Company under a new basis of
accounting that reflects the fair values of assets acquired and
liabilities assumed, the related financing costs, and all debt incurred
in connection with the Management Buy-Out. Accordingly, the financial
information for The Company before and after the Management Buy-Out are
not comparable in all material respects since those financial statements
report the financial position, results of operations and cash flows of
two separate entities.
RESULTS OF OPERATIONS
Composition of net sales for Cleaver-Brooks, Water Technologies,
and National Dynamics' for the periods indicated is listed below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Cleaver-Brooks $44.3 $38.0 $127.5 $108.4
Water Technologies 11.4 6.1 28.7 23.4
National Dynamics - 13.0 - 31.3
----- ----- ------ ------
Total $55.7 $57.1 $156.2 $163.1
===== ===== ====== ======
</TABLE>
THREE MONTHS ENDED December 31, 1998 COMPARED TO THREE MONTHS ENDED
December 31, 1997
Net Sales. Net sales for the three month period ended December
31, 1998 increased $1.4 million to $57.1 million from $55.7 million.
$13.0 million of the increase relates to the acquisition of National
Dynamics as of June 1998. Net sales of Cleaver-Brooks declined $6.3
million (14.2%)due mainly to softness in both the domestic and
international markets. Water Technologies sales decreased $5.3 million
(46.5%) during the same time period primarily due to a large
land-based desalination project in 1997 which was completed and
shipped earlier in 1998. Additionally, while the backlog of orders for
the packaged water product line was higher at the beginning of the
quarter in 1998 than for 1997, the delivery schedules resulted in 5
less units being completed in 1998. The effect was a decline in sales
of $1.2 million.
Gross Margin. Gross margin declined $2.2 million to $13.3
million from $15.5 million. The gross margin percentage decreased 4.5% to
23.3%. This decrease is due to the sale of lower priced, lower margin
products for Cleaver-Brooks and manufacturing inefficiencies due to the
lower volumes. Water Technologies experienced similar manufacturing
inefficiencies due to lower volumes and the sales of lower margin
products in the packaged water product line. Additionally, in 1998
National Dynamics' gross margin which is less than Aqua-Chem's historical
margins, is first included in operations.
Selling, General and Administrative Expenses. Selling, general
and administrative expense increased $2.8 million (28.0%) to $13.0
million. The acquisition of National Dynamics in June 1998 increased
selling, general and administrative expenses $2.0 million.
Operating Income. For the reasons set forth above, operating
income decreased $5.0 million to $0.3 million.
<PAGE> 12
12
Other Income (Expense). Other income (expense) for the three
months ended December 31, 1998 was an expense of $3.7 million as
compared to an expense of $1.4 million for the same period in 1997,
resulting in a difference of $2.3 million (163.4%). This difference
is primarily due to increased interest expense resulting from the
issuance of $125 million of unsecured senior subordinated notes.
NINE MONTHS ENDED December 31, 1998 COMPARED TO NINE MONTHS ENDED
December 31, 1997
Net Sales. Net sales for the nine month period ended December
31, 1998 increased $6.9 million (4.4%) to $163.1 million from $156.2
million. This increase was primarily attributable to the acquisition of
National Dynamics Corporation which occurred on June 23, 1998. The
National Dynamics Division ("National Dynamics") contributed $31.3
million in net sales since the date of acquisition. Net sales of
Cleaver-Brooks declined $19.1 million (15.0%). Approximately 22.1% of the
decrease resulted from the sale of the contract machining business in the
nine months ended December 31, 1997. The remainder is attributable to the
Asian crisis resulting in a decline in international sales and a
resulting delay in projects domestically, as well as pricing pressures
and the shift to lower priced products. Water Technologies sales
decreased $5.3 million (18.5%) during the same time period primarily due
to the revenue recognized on five large Navy contracts and two large
industrial water purification contracts during 1997 which was partially
offset by a large land base desalination project in 1998.
Gross Margin. Gross margin declined $3.6 million (8.4%) to $38.9
million from $42.5 million for the same period in 1997. The gross margin
percentage decreased 3.3% to 23.9% primarily due to the inclusion of
National Dynamics operations for the first time in 1998. Margins at
National Dynamics were impacted by the purchase accounting adjustment of
$1.8 million associated with writing up inventory to fair market value at
the date of the acquisition. Additionally, excluding the impact of this
adjustment, National Dynamics' gross margin of 21.5% which is
substantially less than Aqua-Chem's normal margins without National
Dynamics. Also, Cleaver-Brooks margins declined due to the shift in sales
to lower margin products, the decline in higher margin international
sales and manufacturing inefficiencies due to reduced volumes.
Improvement in the margins on the large industrial and land based
projects partially offset manufacturing inefficiencies at the Water
Technologies division.
Selling, General and Administrative Expenses. Selling, general
and administrative expense increased $1.2 million (3.8%) to $33.2
million. The acquisition of National Dynamics in June 1998 increased
selling, general and administrative expenses $3.4 million. Increases in
salaries due to general merit increases, increased depreciation and
amortization due to the Management Buy-Out and the settlement of a
lawsuit for product performance were offset by $1.3 million of certain
non-recurring expenses in 1997 related to the Management Buy-Out.
Additionally, Commissions to independent representatives and to internal
sales personnel were $0.9 million lower in the current period due to the
reduced sales volume.
Restructuring Charges. A restructuring charge of $4.7 million
was recorded in the current period as a result of the Board of Directors'
approval of the 1998 Restructuring. The provision included $3.0 million
to write down the value of certain fixed assets and inventory, $1.5
million for employee severance and additional workers compensation
related costs and $0.2 million for other related costs.
Operating Income. For the reasons set forth above, operating
income decreased $9.5 million to $1.0 million. Excluding the $4.7 million
restructuring charge, operating income decreased $4.7 million to $5.7
million compared to $10.4 million for the nine months ended December 31,
1997. The inclusion of National Dynamic's operations contributed $1.6
million to operating income.
Other Income (Expense). Other income (expense) for the nine
months ended December 31, 1998 was an expense of $8.6 million as
compared to an expense of $2.4 million for the same period in 1997,
<PAGE> 13
13
resulting in a difference of $6.2 million (258.7%). This difference is
primarily due to increased interest expense resulting from the
issuance of $125 million of unsecured senior subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $7.5 million for the
nine months ended December 31, 1998 compared to $12.2 million for the
same period in 1997. The decrease of $4.7 million is due primarily to a
$7.1 decrease in accounts payable, and $2.8 million in litigation
settlement payments. These decreases are partially offset by a reduction
in inventories of $6.9 million.
Cash used in investing activities was $50.9 million for the nine
months ended December 31, 1998 compared to $52.4 million for the same
period in 1997. The current period included $48.5 million for the
purchase of National Dynamics Corporation and capital expenditures of
$2.5 million. The prior period included $52.1 million for the Management
Buy-Out of the Company and $3.1 million of capital expenditures partially
offset by $0.8 million in proceeds from notes receivable.
Cash provided by financing activities was $56.5 million for the
nine months ended December 31, 1998 compared to $40.7 million for the
same period in 1997. The current period included $125.0 million of
proceeds from the issuance of notes and advances under the revolving
credit agreement and repayments of senior and subordinated debt and
preferred stock of $66.4 million in conjunction with the 11 1/4% notes
offering. The increase was also offset by deferred financing costs of
$5.2 million related to the issuance of the notes in the current period.
The prior year period included $68.2 million of proceeds from senior and
subordinated debt and the issuance of preferred stock in conjunction with
the Management Buy-Out. This increase was partially offset by the
repayment of debt of $26.1 million and deferred financing costs of $2.0
million related to the Management Buy-Out.
Management believes that cash generated from operating
activities together with borrowing availability under the New Credit
Facility will be adequate to cover the Company's working capital, debt
service and capital expenditure requirements on a short and long term
basis. The Company may, however, consider other options available to it
in connection with funding future working capital and capital expenditure
needs, including the issuance of additional debt and the issuance of
equity securities.
Under the New Credit Facility the Company is required to
maintain an adjusted consolidated tangible net worth (consolidated
tangible net worth plus an amount equal to the aggregate outstanding
principle amount of subordinated debt) of not less than $70 million plus
(on a cumulative basis) for each fiscal quarter ending on or after June
23, 1998, the sum of (a) 50% of consolidated net income if positive and
100% of the cash proceeds of the issuance of any equity interest of the
Company during such fiscal quarter. In addition, the New Credit Facility
requires the Company to maintain a fixed charge coverage ratio of not
less than 1.25 to 1 and a senior funded debt to consolidated EBITDA ratio
of not more than 3.5 to 1.
The Indenture prohibits the Company from incurring additional
Indebtedness unless, on the date of such incurrence and after giving
effect thereto, the Consolidated Coverage Ratio exceeds 2.0 to 1 if such
Indebtedness is incurred prior to January 1, 2000, 2.25 to 1 if such
Indebtedness is incurred on or after January 1, 2000 and prior to January
1, 2001 or 2.5 to 1 thereafter (the "Coverage Limitation"). As of
December 31, 1998, the Company could not have incurred any additional
Indebtedness under the Coverage Limitation.
The Indenture further provides that, in addition to the
additional indebtedness which the Company may incur under the Coverage
Limitation, the Company may incur additional Indebtedness of certain
types up to certain limitations applicable to each type (the "Basket
Limitations"). The Basket Limitations are described under "Description of
the Notes - Certain Covenants - Limitation on Indebtedness." The amount
of additional Indebtedness which the Company could have incurred as of
December 31, 1998 under certain of the Basket Limitations is impossible
<PAGE> 14
14
to quantify as of the date of this filing because those Basket
Limitations relate to transactions or other events or conditions that had
not occurred or did not exist as of such date, and the applicable dollar
limitations thereunder depend upon the nature of such events or the
nature and terms of such transactions. Certain of the Basket Limitations
relate to intercompany transactions and guarantees, which would not
increase the aggregate amount of additional Indebtedness that may be
incurred. However, the Company could have incurred approximately $77.4
million of additional Indebtedness under the remaining Basket Limitations
on December 31, 1998, including the following: (a) Indebtedness pursuant
to the New Credit Facility of up to the greater of (I) $45.0 million or
(ii) the sum of 50% of the book value of inventory and 85% of the book
value of accounts receivable as of such date (however, the limitation
under clause (ii) would have been approximately $47.2 million at December
31, 1998; this limitation would not have affected the maximum amount that
could have been borrowed under the New Credit Facility as of December 31,
1998 because the maximum amount of the New Credit Facility on that date
was $45.0 million); (b) Indebtedness by foreign subsidiaries not
exceeding the sum of (I) 60% of the book value of inventory and (ii)
85% of the book value of accounts receivable; (c) purchase money
Indebtedness not exceeding the greater of (I) $20 million or (ii) 5%
of the consolidated net worth of the Company; and (d) an additional
$10 million without regard to the nature or purpose of such Indebtedness.
YEAR 2000
Many computer software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the year. These
products may be unable to distinguish between dates in the year 2000 and dates
in the year 1900. That inability (referred to as the "Year 2000 Issue"), if not
addressed, could cause applications, equipment or systems to fail or provide
incorrect information after December 31, 1999, or when using dates after
December 31, 1999. The Company uses a number of computer software programs,
operating systems, and types of equipment with computer chips in its internal
operations, including applications used in its financial business systems, order
entry and manufacturing systems, manufacturing processes and administrative
functions. The Company also manufactures products that incorporate components
purchased from other manufacturers that contain computer chips. To the extent
that the above listed items contain source code or computer chips that are
unable to interpret appropriately the upcoming calendar year 2000,
distinguishing it from the year 1900, some level of modification or possible
replacement will be necessary.
STATE OF READINESS - The Company has assessed and continues to assess the
impact of the Year 2000 Issue on its operations. The Company's assessments have
focused on the three major elements of the Year 2000 Issue: IT systems; Non-IT
systems; and third party relationships.
IT SYSTEMS - Since 1996 the Company has been executing an IT system
upgrade plan, which includes leasing a new mainframe computer at an annual cost
of $0.6 million, and the expansion of and improvements to, its networks and
capital spending on hardware totaling $0.2 million. Additionally, the Company
has spent $1.5 million on new financial systems software, of which $1.3 million
has been capitalized. These systems are replacing software that has been in use
since the early 1980's. The IT system upgrade plan was not undertaken in
response to the Year 2000 Issue, nor was it accelerated due to the Year 2000
Issue.
Of these new financial systems, the general ledger and reporting packages have
been implemented, while the accounts receivable and accounts payable packages
are in the installation phase with a March 1999 targeted completion date.
Management believes these projects are currently on schedule to meet this target
date. The current human resource/payroll system is being replaced with the
target date for completion being the fall of 1999. This new system is believed
to be Year 2000 compliant. Upgrades to remote location financial systems are
scheduled to be completed by April 1999.
The Company has received written assurances from the manufacturers that the
following hardware and software are Year 2000 compliant as a result of the IT
upgrade plan: mainframe hardware; mainframe systems software; mainframe
operating system; LAN/WAN hardware; LAN/WAN operating systems; LAN/WAN system
software; personal computers and related software; and financial systems
software.
The Company's order entry and manufacturing systems are in the process of being
upgraded to address the Year 2000 Issue. The databases for all these systems
<PAGE> 15
15
have been expanded and regenerated. One of the division's systems has been
converted and placed into production with the other division' systems to be
converted and placed in production in the spring of 1999. Other non-Year 2000 IT
efforts have not been materially delayed or impacted by Year 2000 initiatives.
NON-IT SYSTEMS - The Company has reviewed all of its communication
systems (phone and data transmission systems), fax machines, photocopiers,
postage machines, elevators, HVAC systems, security systems and shop floor
equipment with the manufacturers or vendors of those systems and equipment and
has received written certification that these systems are Year 2000 compliant.
The Company has begun testing these systems to ensure their compliance with the
Year 2000 issue and is between 50% to 75% complete.
THIRD PARTY RELATIONSHIPS - All of the Company's suppliers of raw
materials, components, and other goods and services have been sent a
questionnaire regarding their Year 2000 compliance and their plans to be Year
2000 compliant. Over 75% of the suppliers contacted have responded. A follow up
letter has been sent to those suppliers who have yet to respond. For those
companies responding who continue to address the issue, the Company is following
up on the target dates supplied to ensure the companies become Year 2000
compliant. For those remaining suppliers who do not respond to this
questionnaire, or who do not have a Year 2000 compliance plan in place, the
Company has identified alternative suppliers and will use an alternative
supplier who has certified that it is Year 2000 compliant. For all suppliers of
equipment containing computer chips which are incorporated into the Company's
products, the Company has received written assurance that this equipment is Year
2000 compliant.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUE - Costs incurred by the
Company to date to address the Year 2000 Issue, excluding the IT system upgrade
costs, are approximately $0.1 million. The Company estimates total costs
remaining to be incurred prior to the year 2000 range from $0.2 million to $0.3
million. Maintenance or modification costs will be expensed as incurred, while
the costs of new software will be capitalized and amortized over the software's
useful life. These costs will be funded from operating cash flows.
RISKS AND CONTINGENCY PLANS - Although the Company believes its efforts
will adequately address its Year 2000 Issue internally, it is possible that the
Company will be adversely affected by problems encountered by its vendors or
suppliers. Despite any vendor's or supplier's certification regarding Year 2000
compliance, there can be no assurance that the vendor's or supplier's ability to
provide goods and services will not be adversely affected by the Year 2000
Issue. The most likely worst case scenario would be that a failure by the
Company or one or more of its vendors or suppliers to adequately and timely
address the Year 2000 Issue, interrupts manufacturing of the Company's products
for a undeterminable period of time. The Company has identified and will
continue to identify alternative vendors should a vendor's ability to meet the
Company's raw material and supply requirements be impacted by the Year 2000
Issue. While the Company believes it can minimize the impact of such
non-compliance through the use of these alternative vendors, a disruption in
production could have a material adverse impact on the Company. The Company does
not currently expect to develop a formal contingency plan.
GENERAL
The costs of the Company's efforts to address the Year 2000 Issue and the
dates on which the Company believes it will complete such efforts are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events. There can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the Company's ability to identify,
assess, remediate and test relevant computer codes and embedded technology, the
Company's reliance on third-party assurances and the variability of definitions
of " Year 2000 compliance" which may be used by such third parties, and similar
uncertainties.
RECENT DEVELOPMENTS
On January 19, 1999, the Company issued a press release announcing
plans to reduce its workforce by 34 positions that week, in addition to the
closure of its Greenville, Mississippi facility which had been announced earlier
in the year. The reduction was necessitated by a combination of product
rationalization of
<PAGE> 16
16
existing Aqua-Chem operations and a slowdown in new orders. The Company
will record a restructuring charge in the quarter ended March 31, 1999 of
approximately $1.1 million. A copy of said press release is filed as Exhibit
99.1 to this report and is incorporated herein by reference.
On June 23, 1998, the Company completed the private placement of $125
million aggregate principal amount of its 11-1/4% Senior Subordinated Notes due
2008 (the "Private Notes") in a transaction under Rule 144A under the Securities
Act of 1933, as amended (the "Act"). On January 5, 1999, the Company commenced
an Exchange Offer of up to $125 million of its 11-1/4% Senior Notes due 2008
(the "Exchange Notes") in exchange for a like amount of Private Notes. The
Exchange Notes were registered under Act (SEC Registration No. 333-60759).
The Exchange Offer expired at 5:00 p.m. New York time on February 5, 1999.
The holders of 100% ($125 million) of Private Notes elected to exchange their
Private Notes for Exchange Notes prior to the expiration time. Accordingly, as
of the date of this Report, the Company has zero dollars ($0) principal amount
of Private Notes issued and outstanding and one hundred twenty five million
dollars ($125,000,000) principal amount of Exchange Notes issued and
outstanding.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical facts included in this report, including, without limitation, such
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and located elsewhere herein, regarding the financial
position and capital expenditures of the Company are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations ("Cautionary
Statements") are disclosed in this report and other documents filed with the
Securities and Exchange Commission, including, without limitation, in the
Company's Registration Statement on Form S-4 filed with the Commission on August
6, 1998 (File no. 333-60759) and/or under the following sections therein: "Risk
Factors -- Substantial Leverage; Ability to Service the Notes,"
"--Implementation of Business Strategy," "-- Cyclical Nature of Industry;
Potential Fluctuations in Operating Results," "-- Realization of Benefits of the
Acquisition," "-- Restrictive Debt Covenants," "-- International Expansion,"
"--Control by Principal Shareholder," "-- Competition," "-- Prices of Raw
Materials and Component Parts," "-- Dependence on Key Personnel," "--
Environmental and Related Matters," "Product Liability Litigation," and "--
Labor Relations." All subsequent written or oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by the Cautionary Statements.
<PAGE> 17
17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See attached Exhibit Index.
(b) There were no reports filed on Form 8-K during the quarter for which this
report is filed.
<PAGE> 18
18
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.
AQUA-CHEM, INC. (Registrant)
Date: February 16, 1999 By: /s/ Jeffrey A. Miller
----------------------
Jeffrey A. Miller
Chairman, President and
Chief Executive Officer
<PAGE> 19
19
EXHIBIT INDEX
TO QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
- --------------------------------------------------------------------------------
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE HEREWITH
27 Financial Data Schedule X
(3 months ended 12/31/98)
99 Press Release announcing job
Reductions X
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,820
<SECURITIES> 0
<RECEIVABLES> 42,873
<ALLOWANCES> 2,434
<INVENTORY> 25,689
<CURRENT-ASSETS> 93,688
<PP&E> 42,660
<DEPRECIATION> 4,880
<TOTAL-ASSETS> 184,388
<CURRENT-LIABILITIES> 48,957
<BONDS> 125,000
4,870
0
<COMMON> 10
<OTHER-SE> (5,193)
<TOTAL-LIABILITY-AND-EQUITY> 184,388
<SALES> 57,123
<TOTAL-REVENUES> 57,301
<CGS> 43,830
<TOTAL-COSTS> 56,808
<OTHER-EXPENSES> 19
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,825
<INCOME-PRETAX> (3,351)
<INCOME-TAX> (1,175)
<INCOME-CONTINUING> (2,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,333)
<EPS-PRIMARY> (2.33)
<EPS-DILUTED> (2.33)
</TABLE>
<PAGE> 1
FOR IMMEDIATE RELEASE
January 19, 1998
AQUA-CHEM JOB REDUCTIONS CULMINATE LATEST
EFFORTS TO ENHANCE OVERALL PERFORMANCE
MILWAUKEE WI -- As part of its ongoing objective to enhance overall
company performance, Aqua-Chem, Inc. will have reduced its workforce by some 225
people since mid-1998 -- nearly 16 per cent of its total employee population --
including 81 positions which were affected throughout the company this week,
according to Jeffrey A. Miller, President and CEO. The company's executive staff
has also been realigned.
This latest personnel reduction is one of a series of business actions
following the company's mid-1998 acquisition of National Dynamics, Lincoln NE.
The National Dynamics acquisition yielded operating efficiencies
through combination of the company's existing industrial water tube boiler
business with that of National Dynamics. Simultaneously, Aqua-Chem began the
process of closing its boiler manufacturing facility in Greenville MS.
Aqua-Chem RIF -- 2
The combination of product rationalization related to the National
Dynamics acquisition, the continuing closing process of the Greenville MS plant
and a slowdown in new orders has necessitated this latest personnel reduction.
Aqua-Chem announced late last month that, while its order backlog
remains relatively high, sales were down compared with the same quarter a year
earlier. New order volume has continued to languish due largely to the general
international economic conditions.
In addition to these necessary cost management measures,
Robert D. Endacott, a business advisor to the company, at the recommendation of
the Board of Directors, has accepted the position of Vice Chairman. Endacott
will serve as liaison with the Board on development of growth and acquisition
strategies for Aqua-Chem.
Chief Financial Officer F. Scott Barton has elected to resign his
position effective mid-February 1999. The company will begin a search
immediately for Barton's successor while engaging an interim chief financial
officer until Barton's successor can be found. Barton will assist in the
transition.
Miller continues to execute direct management responsibilities for the
company's Cleaver-Brooks division, a role he assumed following the resignation
of that division's senior executive. The company is seeking an experienced
senior executive for its Cleaver-Brooks division.
Aqua-Chem RIF -- 3
<PAGE> 2
Aqua-Chem, headquartered In Milwaukee with manufacturing facilities
located in the United States, Canada and Mexico, is a world leader in engineered
energy and environmental products and services.
Aqua-Chem's Cleaver-Brooks division is recognized as the world's
largest manufacturer of commercial and industrial boilers. The Water
Technologies division of Aqua-Chem is known worldwide as a leader in the design
and production of water purification and treatment products and systems for
selected commercial, government, military and industrial applications. Its
National Dynamics division manufactures and markets industrial water tube
boilers and heat recovery and co-generation systems.
-end-
For further information, contact:
Jeffrey A. Miller
Aqua-Chem, Inc.
P. O. Box 421
Milwaukee WI 53201
414-577-3184
