<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -----------
Commission file number
-------------
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 [X] No [ ]
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 November 11, 1999
-------------------------------- --------------------------------------
Common Stock, $.01 par value 1,000,000
<PAGE> 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 Statement of Operations -
Three months and six months ended September 30,
1999 and September 30, 1998 4
Consolidated Condensed Balance Sheet -
September 30, 1999 and March 31, 1999 5
Consolidated Condensed Statement of Cash Flows -
Three months and six months ended September 30,
1999 and September 30, 1998 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Signature Page 18
Exhibit Index 19
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<PAGE> 4
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $56,779 $66,512 $106,420 $105,928
Cost of goods sold 44,009 51,890 83,059 80,298
------- ------- -------- ---------
Gross margin 12,770 14,622 23,361 25,630
Costs and expenses:
Selling, general and administrative 9,568 11,732 18,901 20,268
Restructuring charges 594 - 834 4,720
------- ------- -------- ---------
10,162 11,732 19,735 24,988
------- ------- -------- ---------
Operating income 2,608 2,890 3,626 642
Other income (expense):
Interest income 45 112 98 173
Interest expense (3,747) (3,658) (7,520) (5,199)
Other, net 31 39 (84) 134
------- ------- -------- ---------
(3,671) (3,507) (7,506) (4,892)
Loss before income taxes, minority
interest, and extraordinary item (1,063) (617) (3,880) (4,250)
Income tax benefit (412) (189) (1,450) (1,300)
Minority interest in earnings of
consolidated subsidiary 78 96 127 160
------- ------- -------- ---------
Net loss before extraordinary item (729) (524) (2,557) (3,110)
Extraordinary item, net of tax
benefit of $840 - - - 1,260
------- ------- -------- ---------
Net loss $ (729) $ (524) $ (2,557) $ (4,370)
Preferred stock dividends (103) (103) (206) (258)
------- ------- -------- ---------
Net loss applicable to common $ (832) $ (627) $ (2,763) $(4,628)
======= ======= ======== =========
PER SHARE DATA:
Basic net loss per share of common
stock $ (0.83) $ (0.63) $ (2.76) $ (4.63)
Diluted net loss per share of
common stock $ (0.83) $ (0.63) $ (2.76) $ (4.63)
</TABLE>
The accompanying notes to the consolidated condensed financial statements are
an integral part of this statement.
<PAGE> 5
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 246 $ 5,498
Accounts receivable, less allowances of $972
at September 30, 1999 and $848 at March 31, 1999 46,313 39,432
Revenues in excess of billings 10,020 9,754
Inventories 22,961 25,929
Deferred income taxes 6,438 6,438
Prepaid expenses and other current assets 3,679 5,788
-------- --------
Total current assets 89,657 92,839
Property, plant and equipment - net 35,170 36,290
Intangible assets, less accumulated amortization of
$1,983 at September 30, 1999 and $1,334 at March 31, 1999 37,262 37,745
Deferred income taxes 3,304 3,304
Other assets 7,828 8,053
-------- --------
TOTAL ASSETS $173,221 $178,231
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Trade 16,937 16,797
Other 5,528 4,465
Billings in excess of revenues 3,543 4,580
Compensation and profit sharing 4,106 4,500
Accrued restructuring costs 1,713 2,531
Accrued interest 3,560 3,516
Accrued litigation settlements -- 375
Other accrued expenses 11,908 12,884
-------- --------
Total current liabilities 47,295 49,648
Long-term debt 125,000 125,000
Other long-term liabilities 5,022 5,078
-------- --------
Total other liabilities 130,022 130,078
Minority interest in a consolidated subsidiary 612 486
Preferred stock with mandatory redemption provisions 5,069 4,944
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at September 30, 1999 and March 31, 1999 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (9,805) (7,050)
Accumulated other comprehensive income (loss) (72) 25
-------- --------
Total stockholders' equity (deficit) (9,777) (6,925)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $173,221 $178,231
======== ========
</TABLE>
The accompanying notes to the consolidated condensed financial statements are
an integral part of this statement.
<PAGE> 6
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,557) $(4,370)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,028 2,694
Minority interest in earnings of consolidated
subsidiary 127 160
Extraordinary item, net of tax benefit -- 1,260
Restructuring charges, net of cash expended of $1,652
and $0, respectively (818) 4,720
Increase (decrease) in cash due to changes in:
Accounts receivable (6,881) (10,938)
Revenues in excess of billings (266) (51)
Inventories 2,907 7,244
Prepaid expenses and other current assets (121) (1,420)
Accounts payable 1,203 (3,126)
Billings in excess of revenues (1,037) (2,222)
Accrued expenses and other current liabilities (1,701) 1,145
Other, net 420 (1,373)
------- -------
Total adjustments (3,139) (1,907)
------- -------
Net cash used in operating activities (5,696) (6,277)
Cash flows from investing activities:
Purchase of National Dynamics Corporation -- (47,900)
Proceeds from sales of property, plant and
equipment 1,433 44
Proceeds from notes receivable 2,231 --
Additions to property, plant and equipment (3,160) (1,188)
------- -------
Net cash provided by (used in) investing activities 504 (49,044)
Cash flows from financing activities:
Issuance of Notes -- 125,000
Proceeds from revolving credit agreement -- 3,000
Net principal payments on debt -- (63,012)
Redemption of Series A Preferred Stock -- (3,000)
Deferred financing costs -- (5,027)
Dividends paid (60) (282)
------- -------
Net cash provided by (used in) financing activities (60) 56,679
Net increase (decrease) in cash and cash
equivalents (5,252) 1,358
Cash and cash equivalents at beginning of period 5,498 4,756
------- -------
Cash and cash equivalents at end of period $ 246 $ 6,114
======= =======
Cash paid (received) during the period for:
Interest $ 7,097 $ 2,909
Income Taxes (1,594) 2,012
Details of Acquisition of National Dynamics
Corporation in 1998:
Fair value of assets acquired $38,487
Goodwill 26,751
Liabilities assumed (17,338)
-------
Cash paid for assets $47,900
=======
</TABLE>
The accompanying notes to the consolidated condensed financial statements are
an integral part of this statement.
<PAGE> 7
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
(1) In the opinion of management, the accompanying unaudited financial
statements of Aqua-Chem, Inc. ("Aqua-Chem" or the "Company")contain all
adjustments which are of a normal recurring nature necessary to present
fairly the financial position as of September 30, 1999, 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. These
statements should be read in conjunction with the Aqua-Chem, Inc.
Consolidated Financial Statements as of March 31, 1999 as reported on
Form 10-K/A.
(3) Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ------------
<S> <C> <C>
Raw materials and work-in-process $18,376 $20,859
Finished goods 4,585 5,070
------- -------
Total inventories $22,961 $25,929
======= =======
</TABLE>
(4) 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 a portion of Aqua-Chem's Series A Preferred Stock, to
acquire substantially all of the assets of National Dynamics Corporation
("NDC") (see note (6)), 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 September 30, 1999 there were no borrowings outstanding.
Among other restrictions, the credit agreement contains covenants
relating to financial ratios and other limitations, as defined by the
agreement. As of September 30, 1999, the Company was in compliance with
these covenants.
(5) On June 25, 1998 the Board of Directors approved a plan of closure for
the Greenville, Mississippi facility ("1998 Plan") and the agreement
reached with the labor union representing the facility's production
workers. As a result, the Company recorded a restructuring charge of
$4,720 to operations in June 1998. The work performed at the facility
has been transferred to other Company facilities or outsourced. The
plant closed in June 1999 resulting in the elimination of 149 positions.
The Company transferred some of the fixed assets to other facilities and
will sell or dispose of the remaining assets. Approximately $2,900 of
the restructuring charge was for the write down of assets representing
<PAGE> 8
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
the estimated impairment of assets at the Greenville facility as a
direct result of the closing of this facility. The valuation adjustment
to reflect that impairment was based upon the estimated fair value of
the assets at the date of commitment as compared to their carrying
values. A charge of $955 was for employee termination payments
representing the employee cash severance costs to reduce personnel as a
result of the closure of the Greenville facility. These termination
payments included the cost of severance and contractual benefits in
accordance with collective bargaining arrangements and Company policy.
The remaining charge of $865 included facility exit costs, such as
employee costs associated with the plant closure that are to be
incurred after operations have ceased, and the write-off of other
plant-related assets not included in property, plant, and equipment.
An analysis of the 1998 Plan is summarized in the table below:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
1998 RESERVES MARCH 31, RESERVES SEPTEMBER 30,
PLAN UTILIZED 1999 UTILIZED 1999
------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Writedown of property, plant and
equipment $2,900 $(2,900) $ -- $ -- $ --
Employee termination payments 955 (129) 826 (471) 355
Costs related to closing the existing
facility 865 -- 865 (312) 553
------ ------- ------ ----- ------
Total Restructuring $4,720 $(3,029) $1,691 $(783) $ 908
====== ======= ====== ===== ======
</TABLE>
During the six months ended September 30, 1999 the Company also
recognized $313 of relocation charges which could not be accrued as part
of the 1998 Plan.
In January 1999, Aqua-Chem recognized a restructuring charge of $1,161
("1999 Plan"). The charge for the 1999 Plan consists of employee
termination payments associated with the termination of 35 personnel.
These termination payments include the cost of severance and
outplacement services. As of March 31, 1999, the Company had made
payments of $321 against this reserve. During the six months ended
September 30, 1999 the Company made payments of $549 against this
reserve leaving a balance of $291.
In April 1999, Aqua-Chem recognized a restructuring charge of $240
("2000 Plan"). The charge for the 2000 Plan consists of employee
termination payments associated with the termination of 23 personnel.
These termination payments include the cost of severance and
outplacement services. In September 1999, Aqua-Chem recognized an
additional restructuring charge of $594, $367 for employee termination
payments associated with the termination of an additional 11 personnel
and $227 for incremental contractual payments as a result of the
restructuring plan. As of September 30, 1999, the Company had made
payments of $320 against these reserves.
(6) On June 23, 1998, Aqua-Chem acquired substantially all the assets of NDC
for $65,838, which includes $17,338 of liabilities assumed and now
conducts NDC's former operations through its National Dynamics Division
("National Dynamics"). The acquisition was accounted for using the
purchase method of accounting. The total purchase price was allocated
first to identified tangible assets and liabilities based upon their
respective fair values, with the remainder of $26,751 being allocated to
goodwill, which is being amortized on a straight-line basis over 40
years.
(7) The following information presents unaudited pro forma condensed
consolidated statements of operations assuming the acquisition of NDC by
Aqua-Chem had occurred as of April 1, 1998. Such information includes
adjustments to reflect additional interest expense, depreciation expense
and amortization of goodwill and other intangibles.
<PAGE> 9
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Net sales $106,420 $115,556
Loss before extraordinary item (2,557) (4,053)
Net loss applicable to common shares (2,760) (5,571)
Loss per common share (basic) (2.76) (5.57)
Loss per common share (diluted) (2.76) (5.57)
</TABLE>
(8) In 1999, Aqua-Chem adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information". Aqua-Chem's reportable
business segments are:
Boiler: consists of packaged firetube, commercial and industrial
watertube boilers, burners and aftermarket parts.
Water Technologies: consists of water purification and desalination
systems.
Other: includes the operations of the corporate office, interest
expense on Aqua-Chem's current and long-term debt obligations, interest
income, and any eliminating entries.
Aqua-Chem's reportable segments are strategic business units that
offer different products and services. They are managed differently as
each business requires different technology and marketing strategies.
The Boiler segment includes both the Cleaver-Brooks Division
("Cleaver-Brooks") and National Dynamics due to their similarity in
products and services, production processes, type of customer, and the
methods used to distribute their products.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
SEGMENT 1999 1998 1999 1998
------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES:
Boiler $48,119 $58,472 $ 88,169 $ 88,689
Water Technologies 8,660 8,040 18,251 17,239
------- ------- -------- --------
Total $56,779 $66,512 $106,420 $105,928
======= ======= ======== ========
Income (loss) before income taxes,
minority interest and extraordinary
item:
Boiler $ 3,221 $ 3,152 $ 4,607 $ 570
Water Technologies (349) 210 (347) 724
Other (3,935) (3,979) (8,140) (5,544)
------- ------- -------- --------
Total $(1,063) $ (617) $ (3,880) $ (4,250)
======= ======= ======== ========
</TABLE>
(9) In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. This statement must be adopted no later than April
1, 2001, although earlier application is permitted. The Company is
currently evaluating the impact of adopting SFAS No. 133 but does not
expect the impact to be material to its financial position or results of
operations.
<PAGE> 10
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The Company adopted SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities," effective April 1, 1999. The adoption of this statement did
not have a material effect on the Company's financial position or
results of operations.
(10) Accumulated other comprehensive income consists solely of cumulative
translation adjustments as of September 30, 1999 and March 31, 1999, as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
-------- ---------
<S> <C> <C>
Cumulative translation adjustment $ (72) $ 25
===== =====
</TABLE>
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.
RESULTS OF OPERATIONS
Composition of net sales for Cleaver-Brooks, the Water Technologies
Division ("Water Technologies"), and National Dynamics for the periods indicated
is listed below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Net sales:
<S> <C> <C> <C> <C>
Cleaver-Brooks $40.2 $33.6 $ 70.4 $ 61.2
Water Technologies 8.0 8.7 17.2 18.2
National Dynamics 18.3 14.6 18.3 27.0
----- ----- ------ ------
Total $66.5 $56.8 $105.9 $106.4
===== ===== ====== ======
Gross Margin:
Cleaver-Brooks $10.4 $ 8.3 $ 19.0 $ 14.3
Water Technologies 2.1 1.5 4.5 3.7
National Dynamics 2.1 2.9 2.1 5.3
----- ----- ------ ------
Total $14.6 $12.8 $ 25.6 $ 23.3
===== ===== ====== ======
Selling, general and administrative
expenses $11.7 $ 9.6 $ 20.3 $ 18.9
Restructuring charges - 0.6 4.7 0.8
----- ----- ------ ------
Operating income (loss) $ 2.9 $ 2.6 $ 0.6 $ 3.6
===== ===== ====== ======
Other income (expense) $(3.5) $(3.7) $ (4.9) $ (7.5)
===== ===== ====== ======
Income tax benefit $(0.2) $(0.5) $ (1.3) $ (1.5)
===== ===== ====== ======
Minority interest in earnings of
Consolidated subsidiary $ 0.1 $ 0.1 $ 0.2 $ 0.1
===== ===== ====== ======
Extraordinary Item $ - $ - $ 1.2 $ -
===== ===== ====== ======
Net loss $(0.6) $(0.7) $ (4.4) $ (2.5)
===== ===== ====== ======
</TABLE>
<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales for the three month period ended September 30,
1999 decreased $9.7 million (14.6%) to $56.8 million from $66.5 million for the
comparable period of the prior fiscal year. The decrease is due primarily to
Cleaver-Brooks which declined $6.6 million (16.4%). The decline was primarily
due to continued market softness in the firetube boiler premium product line and
the transfer of production of industrial watertube boilers to National Dynamics
during October 1998. Additionally, National Dynamics' sales for such period
declined $3.7 million (20.2%) due to the recognition of sales on several large
contracts which were in process at the date of acquisition and were subsequently
completed during the three months ended September 30, 1998. Water Technologies
sales increased $0.7 million (8.8%) during the same period.
Gross Margin. Gross margin for the three month period ended
September 30, 1999 declined $1.9 million (13.0%) to $12.7 million from $14.6
million for the comparable period of the prior fiscal year. This decrease is
primarily due to the reduced sales volume discussed above and partially offset
by improvements in the gross margin percentage. The gross margin percentage for
the three month period ended September 30, 1999 increased 0.5 percentage points
to 22.5% for the comparable period of the prior fiscal year. The increase is due
primarily to an 8.4 percentage point increase at National Dynamics. The margins
for the prior year period reflect an inventory write-up of $1.4 million as a
result of the acquisition. Adjusting for this write-up, National Dynamics' gross
margin would have been 19.1% compared to 19.9% for the current period. The
increase in gross margin percentage was partially offset by declines at Water
Technologies and Cleaver-Brooks. Water Technologies' gross margin percentage
declined 9.1 percentage points to 17.2% primarily as a result of manufacturing
inefficiencies due to the learning curve on the deaerator product that
previously was manufactured at the Greenville facility. Additionally, volume of
its higher margin aftermarket parts business declined. Cleaver-Brooks' gross
margin percentage declined 1.2 percentage points to 24.7% due to changing sales
mix weighted more heavily to the sale of lower priced, lower margin products as
well as pricing pressures due to the softness in its markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the three month period ended September 30, 1999
decreased $2.1 million (17.9%) to $9.6 million from $11.7 million for the
comparable period of the prior fiscal year. The decrease is due primarily to
lower commissions paid due to lower sales volumes at Cleaver-Brooks and to
savings from the restructuring actions taken in January and April of 1999 and
the closure of the Greenville, MS facility.
Restructuring Charges. In its continuing effort to maximize
earnings, Aqua-Chem implemented an expansion of its restructuring plan in the
current period to reduce headcount. As a result, Aqua-Chem recorded a
restructuring charge of $0.6 million related to employee termination payments
and outplacement services.
Operating Income. For the reasons set forth above, operating income
for the three month period ended September 30, 1999 declined $0.3 million
(10.3%) to $2.6 million from $2.9 million for the comparable period of the prior
fiscal year. Excluding the restructuring charge described above, operating
income improved $0.1 million (3.4%) to $3.0 million compared to $2.9 million for
the three months ended September 30, 1998.
Other Income (Expense). Other income (expense) for the three months
ended September 30, 1999 was an expense of $3.7 million as compared to an
expense of $3.5 million for the same period in 1998, resulting in a difference
of $0.2 million.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales for the six month period ended September 30,
1999 increased $0.5 million (0.5%) to $106.4 million from $105.9 million for the
comparable period of the prior fiscal year. The increase was due primarily to
the acquisition of National Dynamics on June 23, 1998. A full six months of
sales are reflected in 1999 while only three months of sales are reflected in
1998, resulting in an increase of $8.7 million (47.5%). Additionally, Water
Technologies sales increased $1.0 million (5.8%) during the same period. These
increases in sales are partially offset by Cleaver-Brooks' sales which declined
<PAGE> 12
$9.2 million (13.1%). The decline is primarily due to continued market softness
in the firetube boiler premium product line and the transfer of production of
industrial watertube boilers to National Dynamics during October 1998.
Gross Margin. Gross margin for the six month period ended September
30, 1999 declined $2.3 million (9.0%) to $23.3 million from $25.6 million for
the comparable period of the prior fiscal year. This decrease is primarily due
to declines in the gross margin percentage. The gross margin percentage
decreased 2.2 percentage points to 22.0%. The gross margin decrease is
attributed primarily to declines at Water Technologies and Cleaver-Brooks. Water
Technologies' gross margin percentage declined 5.9 percentage points to 20.3%
primarily as a result of manufacturing inefficiencies due to the learning curve
on the deaerator product line that previously was manufactured at the Greenville
facility. Additionally, volume of its higher margin aftermarket parts business
declined. Cleaver-Brooks' gross margin percentage declined 3.6 percentage points
to 23.4% due to changing sales mix weighted more heavily to the sale of lower
priced, lower margin products as well as pricing pressures due to the softness
in its markets. The decrease in gross margin percentage was partially offset by
an 8.1 percentage point increase at National Dynamics. The margins for the prior
year period reflect an inventory write-up of $1.4 million as a result of the
acquisition. Adjusting for this write-up, National Dynamics' gross margin would
have been 19.1% compared to 19.6% for the current period.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the six month period ended September 30, 1999
decreased $1.4 million (6.9%) to $18.9 million from $20.3 million for the
comparable period of the prior fiscal year. The decrease was due primarily to
lower commissions paid due to lower sales volumes at Cleaver-Brooks and savings
from the restructuring actions taken in January and April of 1999 and the
closure of the Greenville, MS facility. This decline was partially offset by the
acquisition of National Dynamics on June 23, 1998, for which six months of costs
were incurred in 1999 and only three months of costs were incurred in 1998.
Adjusting for the National Dynamics acquisition on a pro forma basis, total
selling, general and administrative expense decreased $3.1 million.
Restructuring Charges. A restructuring charge of $4.7 million was
recorded in the prior year to accrue for the costs of the closure of the
Greenville, MS facility. The provision included $2.9 million to write down the
value of certain fixed assets, $1.0 million for employee termination payments
and $0.8 million for other costs related to closing the existing facility. In
response to a worldwide decline in demand for boiler equipment as compared to
previous years and continuing efforts to maximize profits, Aqua-Chem management
implemented two restructuring plans in the current period to reduce headcount
and mitigate the effects of this decreased demand. As a result, Aqua-Chem
recorded an additional restructuring charge of $0.8 million related to employee
termination payments and outplacement services. The restructuring plans are
progressing as scheduled.
Operating Income. For the reasons set forth above, operating income
for the six month period ended September 30, 1999 improved $3.0 million (500.0%)
to $3.6 million from $0.6 million for the comparable period of the prior fiscal
year. Excluding the restructuring charges described, operating income decreased
$1.1 million (20.8%) to $4.2 million compared to $5.3 million for the six months
ended September 30, 1998.
Other Income (Expense). Other income (expense) for the six months
ended September 30, 1999 was an expense of $7.5 million as compared to an
expense of $4.9 million for the same period in 1998, resulting in a difference
of $2.6 million. This difference is primarily due to an increase in interest
expense of $2.3 million resulting from the issuance of $125 million of unsecured
senior subordinated notes in June 1998. Accordingly, the financial statements
for the six months ended September 30, 1998 reflect only three full months of
this increased interest cost while the financial statements for the comparable
period reflect a full six months of such costs.
<PAGE> 13
BACKLOG
Backlog increased $5.0 million (9.5%)to $57.8 million at September 30, 1999 from
$52.8 at March 31, 1999. This increase reflects higher order volume for the
Company's products without a commensurate increase in production capacity or
output.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $5.7 million for the six months ended
September 30, 1999 compared to cash used of $6.3 million for the six months
ended September 30, 1998. The decline in use of cash of $0.6 million was
attributable primarily to lower business volume and the resultant reduction in
working capital requirements, partially offset by payments associated with the
restructuring plans.
Net cash of $0.5 million was provided by investing activities for the six months
ended September 30, 1999 compared to cash used in investing activities of $49.0
million for the six months ended September 30, 1998. The prior year period
included $47.9 million for the acquisition of National Dynamics. Capital
expenditures for the current period were $3.2 million as compared to $1.2
million for the six months ended September 30, 1998. The current period included
cash proceeds of $1.4 million for the sale of the Lebanon, Pennsylvania plant
and surrounding land, which has been held for sale since 1995.
Cash used in financing activities was $0.1 million for the six months ended
September 30, 1999 compared to cash provided of $56.7 million for the six months
ended September 30, 1998. Cash from financing activities in the six months ended
September 30, 1998 included $125.0 million in proceeds from the Subordinated
Notes issued in connection with the acquisition of National Dynamics and
repayments of $63.0 million, of which $60.1 million related to repayment of
prior debt and $3.0 million related to the redemption of a portion of the
Preferred A stock. Additionally, $5.0 million was expended in 1998 for costs
associated with the issuance of the Subordinated Notes.
BORROWING AVAILABILITY AND LIMITATIONS.
The Company has a revolving credit facility that provides $45.0 million of
borrowing availability and is secured by substantially all assets of the
Company. Under the revolving 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 principal amount of
subordinated debt) of not less than $70 million plus (on a cumulative basis) for
each fiscal quarter, 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 revolving credit facility
as amended on May 25, 1999 requires the Company to maintain (I) a fixed charge
coverage ratio of not less than 1.0 to 1 for the quarters ended June 30, 1999
and September 30, 1999, 1.10 to 1 for the quarter ended December 31, 1999, 1.15
to 1 for the quarter ended March 31, 2000 and 1.25 to 1 for each subsequent
quarter, and (ii) a senior funded debt to consolidated EBITDA ratio of not more
than 3.5 to 1.
The Company intends to fund future working capital, capital expenditures and
debt service requirements through cash flows generated from operating activities
and from borrowings under the revolving credit facility. As expected by
management, the Company borrowed under the revolving credit facility in the
second quarter of fiscal 2000, but has repaid these borrowings by the end of the
quarter. As of November 11, 1999, there were no borrowings on the revolving
credit facility.
At September 30, 1999 the Company had $125 million of 11 1/4% Senior
Subordinated Notes (the "Notes") outstanding under an Indenture dated June 23,
1998 (the "Indenture"). The Indenture generally prohibits the incurrence by the
Company of additional debt unless the Company satisfies one of two requirements,
the Coverage Limitation or the Basket Limitation described below. Under the
Coverage Limitation, the Company may not incur 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
<PAGE> 14
1, 2000 and prior to January, 2001 or 2.5 to 1 thereafter (the "Coverage
Limitation"). As of September 30, 1999, the Company could not have incurred any
additional Indebtedness under the Coverage Limitation.
The Indenture permits the Company to incur additional indebtedness of certain
types up to certain limitations applicable to each type (the "Basket
Limitation") notwithstanding the Coverage Limitation. The Company could have
incurred approximately $78.2 million of additional indebtedness under the Basket
Limitations on September 30, 1999, including the following: (a) indebtedness
pursuant to the revolving credit agreement 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 (the limitation under clause
(ii) would have been approximately $50.8 million at September 30, 1999); (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.
The Company expects that its cash needs for debt service under the Indenture
during the fiscal 2000 will be approximately $14.1 million. Mandatory repayments
of the Company's outstanding indebtedness is $125 million subsequent to fiscal
year 2002. Mandatory redemptions of the Company's outstanding Series A Preferred
Stock subsequent to March 31, 2000 are $1 million in each of fiscal year 2001
and 2002.
During the year ended March 31, 2000, the Company expects to make approximately
$2.8 million of capital expenditures related to the Thomasville facility to
improve the facility's efficiency. Additionally, the Company expects various
other capital expenditures of approximately $2.0 million. Apart from these
items, the Company believes that its manufacturing facilities and computer
software and hardware are generally adequate to meet projected needs.
Management believes that cash generated from operating activities together with
borrowing availability under the revolving 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.
At September 30, 1999, the Company had no material market risk exposure (e.g.,
interest rate risk, foreign currency exchange rate risk or commodity price
risk).
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
<PAGE> 15
spending on hardware totaling $0.2 million. Additionally, the Company has spent
$2.3 million on new financial systems software, of which $2.1 million has been
capitalized. These systems are replacing software that has been in use since the
early 1980's and are purported to be Year 2000 compliant. The IT financial
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, accounts receivable,
accounts payable and reporting packages have been implemented, while the human
resource/payroll package is in the installation phase with a November 1999
targeted completion date. Management believes this project is currently on
schedule to meet this target date.
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
upgraded 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 required upgrading to
address the Year 2000 Issue. The databases for all these systems have been
expanded and regenerated. All of these systems have now been put into
production. Other non-Year 2000 IT efforts have not been materially delayed or
impacted by Year 2000 initiatives.
As one final assurance that all of the Company's efforts to bring its IT systems
into Year 2000 compliance have been successful, the Company will perform a full
test of its mainframe systems in a test environment during November 1999. This
test will simulate the operation of these mainframe systems during 2000. The
Company is expecting these systems to function properly.
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 verbal assurances that these systems are Year 2000 compliant. Written
certifications of Year 2000 compliance for these systems have been requested
from the manufacturers or vendors. The Company is currently reviewing the
responses it has received to date and has sent a follow up letter to any
manufacturers or vendors who have not responded.
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.
Approximately 97% of the suppliers contacted have responded. Follow up letters
have been sent and telephone calls have been made to those suppliers who have
not yet responded. 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 $0.5 million. The Company estimates total costs remaining to
be incurred prior to the year 2000 range from $0.1 million to $0.2 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
<PAGE> 16
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 October 18, 1999 David Tenniswood was elected President and Chief Executive
Officer of Aqua-Chem. Jeffrey Miller, who resigned as President and Chief
Executive Officer, will continue to serve as Chairman of the Board of Directors.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include general
economic conditions, the cyclical nature of its business, its customers' access
to credit, political uncertainty and civil unrest in various areas of the world,
pricing, product initiatives and other actions taken by competitors, disruptions
in production capacity, excess inventory levels, the effect of changes in laws
and regulations (including government subsidies and international trade
regulations), technological difficulties (including the Year 2000 Issue),
changes in environmental laws, and employee and labor relations.
<PAGE> 17
PART II
OTHER INFORMATION
From time to time the Company is involved in various litigation matters arising
in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except
for the matters reported in the Company's Annual Report of Form 10-K/A for the
year ended March 31, 1999. There were no material developments subsequent to
March 31, 1999 in the litigation matters previously disclosed.
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
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: November 11, 1999 By: /s/ James A. Kettinger
----------------------
James A. Kettinger
Senior Vice President and
Chief Financial Officer
<PAGE> 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 9/30/99)
<PAGE> 20
END OF DOCUMENT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheet as of September 30, 1999 and the
consolidated condensed statement of operations for the three months ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 246
<SECURITIES> 0
<RECEIVABLES> 47,285
<ALLOWANCES> 972
<INVENTORY> 22,961
<CURRENT-ASSETS> 89,657
<PP&E> 42,655
<DEPRECIATION> 7,485
<TOTAL-ASSETS> 173,221
<CURRENT-LIABILITIES> 47,295
<BONDS> 125,000
5,069
0
<COMMON> 10
<OTHER-SE> (9,767)
<TOTAL-LIABILITY-AND-EQUITY> 173,221
<SALES> 56,779
<TOTAL-REVENUES> 56,855
<CGS> 44,009
<TOTAL-COSTS> 54,171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,747
<INCOME-PRETAX> (1,063)
<INCOME-TAX> (412)
<INCOME-CONTINUING> (729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (729)
<EPS-BASIC> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
