<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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------------
Commission file number
--------------------------
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 14, 2000
---------------------------- --------------------------------
Common Stock, $.01 par value 1,000,000
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INDEX TO
QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1 -Financial Statements (Unaudited) 3
Consolidated Condensed Statement of Operations -
Three and six month periods ended
September 30, 2000 and September 30, 1999 4
Consolidated Condensed Balance Sheet -
September 30, 2000 and March 31, 2000 5
Consolidated Condensed Statement of Cash Flows -
Six months ended September 30, 2000 and September 30, 1999 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 15
Signature Page 16
Exhibit Index 17
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
3
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $57,151 $53,221 $115,114 $ 98,507
Cost of goods sold 42,307 41,327 85,797 77,161
---------------- --------------- --------------- ---------------
Gross margin 14,844 11,894 29,317 21,346
Selling, general and administrative expense 9,950 8,579 20,091 16,852
Restructuring charges - 594 - 834
---------------- --------------- --------------- ---------------
9,950 9,173 20,091 17,686
---------------- --------------- --------------- ---------------
Operating income 4,894 2,721 9,226 3,660
Other income (expense):
Interest income 96 45 197 98
Interest expense (3,694) (3,749) (7,425) (7,520)
Other, net 135 31 18 (84)
---------------- --------------- --------------- ---------------
(3,463) (3,673) (7,210) (7,506)
Income (loss) from continuing
operations before income
taxes and minority interest 1,431 (952) 2,016 (3,846)
Income tax expense (benefit) 852 (369) 1,058 (1,437)
Minority interest in earnings
of consolidated subsidiary 120 78 208 127
---------------- --------------- --------------- ---------------
Income (loss) from continuing
operations before extraordinary item 459 (661) 750 (2,536)
Extraordinary gain from repurchase of
outstanding notes, net of tax expense of $222 333 - 333 -
---------------- --------------- --------------- ---------------
Net income (loss) before discontinued
operations 792 (661) 1,083 (2,536)
Discontinued operations:
Loss from discontinued
operations, net of tax benefit
of $43 and $13 respectively - 70 - 21
---------------- --------------- --------------- ---------------
Net income (loss) $ 792 $ (731) $ 1,083 $ (2,557)
---------------- --------------- --------------- ---------------
Preferred stock dividends 103 103 206 206
---------------- --------------- --------------- ---------------
Net income (loss) applicable to common $ 689 $ (834) $ 877 $ (2,763)
================ =============== =============== ===============
PER SHARE DATA:
Basic:
Income (loss) from continuing
operations $ .69 $ (.76) $ .88 $ (2.74)
Income (loss)from discontinued operations - (.07) - (.02)
---------------- --------------- --------------- ---------------
Income (loss) per common share $ .69 $ (0.83) .88 $ (2.76)
================ =============== =============== ===============
Diluted:
Income (loss) from continuing
operations $ .69 $ (.76) $ .88 $ (2.74)
Income (loss)from discontinued operations - (.07) - (.02)
---------------- --------------- --------------- ---------------
Income (loss) per common share $ .69 $ (0.83) $ .88 $ (2.76)
================ =============== =============== ===============
</TABLE>
The accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 2000 2000
------------------ ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,599 $ 7,326
Accounts receivable, less allowances of $667
at September 30, 2000 and $830 at March 31, 2000 35,421 36,870
Revenues in excess of billings 12,144 6,939
Inventories 21,291 26,063
Deferred income taxes 6,230 6,230
Prepaid expenses and other current assets 1,909 1,727
------------------ ---------------
Total current assets 88,594 85,155
Property, plant and equipment - net 31,532 32,576
Intangible assets, less accumulated amortization of
$3,250 at September 30, 2000 and $2,522 at March 31, 2000 36,646 37,373
Deferred income taxes 7,498 7,498
Other assets 6,574 6,987
------------------ ---------------
TOTAL ASSETS $ 170,844 $ 169,589
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings $ - $ 500
Accounts payable
Trade 16,255 15,637
Other 4,740 5,547
Billings in excess of revenues 3,361 4,463
Compensation and profit sharing 4,615 3,509
Accrued restructuring costs 593 1,406
Accrued interest 3,456 3,591
Net liabilities of discontinued operations 3,729 3,445
Other accrued expenses 14,368 10,767
------------------ ---------------
Total current liabilities 51,117 48,865
Long-term debt 123,064 125,189
Other long-term liabilities 5,548 5,399
------------------ ---------------
Total other liabilities 128,612 130,588
Minority interest in a consolidated subsidiary 810 602
Preferred stock with mandatory redemption provisions 5,195 4,970
Stockholders' equity:
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at September 30, 2000 and March 31, 2000 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (14,825) (15,684)
Accumulated other comprehensive income (loss) (165) 148
------------------ ---------------
Total stockholders' equity (deficit) (14,890) (15,436)
------------------ ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 170,844 $ 169,589
================== ===============
</TABLE>
The accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.
5
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
---------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,083 $ (2,557)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 3,158 2,924
Extraordinary gain from repurchase of
outstanding notes, net of tax (333) -
Minority interest in earnings of
consolidated subsidiary 208 127
Loss from discontinued operations, net of tax - 21
Restructuring charges, net of cash
Expended of $813 and $1,652,
Respectively (813) (818)
Increase (decrease) in cash due to changes in:
Accounts receivable 1,449 (3,660)
Revenues in excess of billings (5,205) (2,459)
Inventories 4,772 2,821
Prepaid expenses and other current assets (182) (122)
Accounts payable--trade 618 (494)
Accounts payable--other (807) 985
Billings in excess of revenues (1,102) 63
Accrued expenses and other current 3,684 (1,448)
liabilities
Other, net 158 (1,209)
---------------- ---------------
Total adjustments 5,605 (3,269)
---------------- ---------------
Net cash provided by (used in) operating activities 6,688 (5,826)
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 52 1,433
Proceeds from disposal of discontinued
operations 951 -
Proceeds from notes receivable - 2,231
Additions to property, plant and equipment (1,430) (3,030)
---------------- ---------------
Net cash provided by (used in) investing activities (427) 634
Cash flows from financing activities:
Net change in short-term borrowings (500) -
Repurchase of outstanding notes (1,488) -
Dividends paid - (60)
---------------- ---------------
Net cash used in financing activities (1,988) (60)
Net increase (decrease) in cash and cash equivalents 4,273 (5,252)
Cash and cash equivalents at beginning of period 7,326 5,498
---------------- ---------------
Cash and cash equivalents at end of period $ 11,599 $ 246
================ ===============
Cash paid (received) during the period for:
Interest $ 7,031 $ 7,097
Taxes $ 17 $ (1,594)
</TABLE>
The accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.
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AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
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 of the Company as of
September 30, 2000, 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. 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. annual report on Form 10-K for its fiscal year ended March 31,
2000.
(1) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
---------------------- ----------------
<S> <C> <C>
Raw materials and work-in-process $16,424 $20,813
Finished goods 4,867 5,250
---------------------- ----------------
Total inventories $21,291 $26,063
====================== ================
</TABLE>
(2) Revolving Credit Facility
Aqua-Chem has a $45 million secured revolving credit facility with
three major banks. Borrowings under this facility are made in the form
of revolving credit notes. These notes bear interest at a rate of
either prime or a Eurocurrency-based rate as defined in the facility.
The revolving credit agreement matures on July 1, 2003. The facility is
secured by substantially all of the assets of the Company. Outstanding
borrowings totaled $0 and $500 at September 30, 2000 and March 31,
2000, respectively. The amount available under the facility is reduced
by revolver usage, outstanding letters of credit, and certain reserves
as defined in the facility. At September 30, 2000, availability under
this line totaled $40.4 million. Among other restrictions, the credit
agreement contains covenants relating to financial ratios and other
limitations, as defined by the agreement. As of September 30, 2000, the
Company was in compliance with the covenants contained in the
agreement.
(3) Restructuring Reserves
As of March 31, 2000, the Company's restructuring reserves totaled
$1,406. During the first six months of Fiscal 2001, the Company
utilized $813 of these reserves primarily for severance and related
termination costs leaving a balance of $593 at September 30, 2000.
Management believes the remaining reserve adequately reflects the
Company's remaining liability associated with past restructuring
actions.
(4) Discontinued Operations
During the fourth quarter of Fiscal 2000, the Company decided to exit
the Seawater and Industrial Business (the "S&I Business") and has
adjusted its reporting for all periods to reflect this business as a
discontinued operation.
During the second quarter of Fiscal 2001, the Company sold to Aquatech
International Corporation ("Aquatech") certain assets and technology of
its Seawater and Industrial Business for approximately $1 million. The
agreement also provides for potential future payments to Aqua-Chem
based upon Aquatech's sales of certain products during the five years
following this transaction. In conjunction with this transaction, five
employees of Aqua-Chem's Seawater and Industrial Business agreed to
become employees of Aquatech. To complete this transaction, the Company
amended its Indenture dated June 23, 1998 related to its 11 1/4% Senior
Subordinated Notes Due 2008 ("Notes") with the consent of the holders
of a majority of the outstanding Notes to reflect that a disposition or
discontinuance of all or a portion of the
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Company's Seawater and Industrial Business shall not constitute an
asset disposition as defined by the Indenture.
The Company intends to complete all active contracts of the remaining
S&I Business and to fulfill its commitments for warranty service,
payments to vendors, and all other appropriate liabilities. While the
Company intends to fulfill those commitments of the remaining S&I
Business within one year, management is pursuing other, more
cost-effective, strategic alternatives, including opportunities to sell
the remaining portions of the discontinued business. However, no
assurances can be given that any other such alternatives will be
consummated.
In accordance with its treatment of the S&I Business as a discontinued
operation, the Company has separately delineated the net liabilities
and net operating results of the S&I Business on its Consolidated
Condensed Financial Statements. The following tables present certain
additional financial information with respect to the S&I Business:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales $1,610 $3,558 $ 3,132 $7,913
Cost of goods sold 1,343 2,682 2,624 5,898
---------------- ----------------- ----------------- ------------------
Gross margin 267 876 508 2,015
Selling, general and administrative expenses 668 989 1,575 2,049
---------------- ----------------- ----------------- ------------------
Operating loss (401) (113) (1,067) (34)
Income tax benefit - (43) - (13)
---------------- ----------------- ----------------- ------------------
Net loss $ (401) $ (70) $(1,067) $ (21)
================ ================= ================= ==================
</TABLE>
The Company charged the net pre-tax loss of $1,067 incurred by the S&I
Business during the six months ended September 30, 2000 against the
reserves established at March 31, 2000 to provide for the orderly exit
from the S&I Business. Management believes that these reserves, which
are included in the Company's net liabilities of discontinued
operations, adequately reflect the Company's remaining net liability
associated with the exit from the S&I Business.
(5) Extraordinary Gain From Repurchase of Outstanding Notes
During the second quarter of Fiscal 2001, the Company purchased, on the
open market, $2,125 of the Company's 11 1/4% Senior Subordinated Notes
due July 1, 2008 ("Notes") at a price of $1,488, or 70% of face value.
The Company recognized a related pre-tax gain of $555, after fees and
the early amortization of a pro-rata portion of original issuance costs
which were being amortized over the life of the Notes. The after-tax
gain on this transaction totaled $333. At September 30, 2000, the
remaining Notes outstanding totaled $122,875.
(6) Segment Information
Aqua-Chem's reportable business segments are:
Boiler Group: consists of packaged firetube, commercial and
industrial watertube boilers, burners and aftermarket parts.
F&M Business: 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
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different technology and marketing strategies.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Segment
Net sales:
Boiler Group $ 53,175 $ 48,119 $ 106,992 $ 88,169
F&M Business 3,976 5,102 8,122 10,338
---------------- --------------- ----------------- ----------------
Total $ 57,151 $ 53,221 $ 115,114 $ 98,507
================ =============== ================= ================
Income (loss) before income
taxes, minority interest and
extraordinary item:
Boiler Group $ 5,165 $ 3,221 $ 10,665 $ 4,607
F&M Business 180 (236) (602) (313)
Other (3,914) (3,937) (8,047) (8,140)
---------------- --------------- ----------------- ----------------
Total $ 1,431 $ (952) $ 2,016 $ (3,846)
================ =============== ================= ================
</TABLE>
(7) New Accounting Pronouncements
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.
(8) Accumulated Comprehensive Income
Accumulated other comprehensive income consists solely of cumulative
translation adjustments as of September 30, 2000 and March 31, 2000.
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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
Net sales and gross margins for the Boiler Group and the F&M Business
for the periods indicated are listed below. These amounts exclude activity
associated with the S&I Business.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- ----------------
(Dollars in Millions)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Boiler Group $ 53.2 $ 48.1 $ 107.0 $ 88.2
F&M Business 3.9 5.1 8.1 10.3
-------------- ---------------- ---------------- ----------------
Total $ 57.1 $ 53.2 # 115.1 $ 98.5
============== ================ ================ ================
Gross Margin:
Boiler Group $ 13.8 $ 11.2 $ 28.2 $ 19.6
F&M Business 1.0 0.7 1.1 1.7
-------------- ---------------- ---------------- ----------------
Total $ 14.8 $ 11.9 $ 29.3 $ 21.3
============== ================ ================ ================
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net Sales. Net sales from continuing operations for the quarter ended
September 30, 2000 increased $3.9 million (7.3%) to $57.1 million from $53.2
million for the comparable period of Fiscal 2000. Boiler Group revenue grew
10.6% due to increased volume of firetube boilers, energy recovery systems, and
steel fabrication offset partially by lower volume of industrial watertube
boilers. Net sales from the F&M Business declined 23.5% due to lower volume from
its military and bottled water product lines.
Gross Margin. Gross margin for the quarter ended September 30, 2000
increased $2.9 million (24.4%) to $14.8 million from $11.9 million for the
comparable period of Fiscal 2000. The consolidated gross margin percentage
increased 3.5 percentage points to 25.9% from 22.4% for the comparable period
during Fiscal 2000. The Boiler Group's gross margin increased 2.6 percentage
points to 25.9% due to increased selling prices as well as greater manufacturing
efficiencies resulting from higher shop utilization rates, recent capital
additions, past restructuring actions, and on-going continuous improvement
programs. The F&M Business' gross margin percentage increased 11.9 percentage
points to 25.6% due to a sales mix more heavily weighted toward higher margin
aftermarket products offset partially by lower shop utilization rates. The lower
shop utilization rates resulted from lower production volume following the
removal of the deaerator product line from the Knoxville, TN facility.
Production volume was also negatively impacted by lower order volume in the
bottled water product line due to a decrease in market activity and lower order
volume in military product lines related to the timing of military spending on
projects that involve the Company's military products.
Selling, General and Administrative. Selling, General and
Administrative spending increased $1.4 million (16.3%) to $10.0 million from
$8.6 million for the comparable period of Fiscal 2000 due to higher commission
cost related to the higher Boiler Group sales volume, increased Boiler Group
research and development spending, and increased expense associated with
performance-based compensation resulting from improved operating results.
Restructuring. The Company recorded no restructuring costs during the
second
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quarter of Fiscal 2001. By comparison, during the second quarter of Fiscal 2000
the Company recorded a $.6 million restructuring charge attributable to employee
termination payments and related contractual and outplacement costs.
Operating Income. For the reasons set forth above, operating income
increased $2.2 million to $4.9 million from $2.7 million.
Other Expense. Other expense for the quarter ended September 30, 2000
was $3.5 million as compared to $3.7 million during the comparable period during
Fiscal 2000. Interest expense totaled $3.7 million during the second quarters of
Fiscal 2001 and Fiscal 2000, respectively.
Extraordinary Gain. During the second quarter of Fiscal 2001, the
Company purchased, on the open market, $2.1 million of the Company's 11 1/4%
Senior Subordinated Notes due July 1, 2008 ("Notes") at a price of $1.5 million,
or 70% of face value. The Company recognized a related pre-tax gain, after fees
and the early amortization of a pro-rata portion of original issuance costs
which were being amortized over the life of the Notes, of $.6 million. After
providing for income taxes, the extraordinary gain totaled $.3 million.
Discontinued Operations. During the quarter ended September 30, 2000,
the Company experienced a pre-tax loss on its S&I Business of $.4 million as
compared to a pre-tax loss of $.1 million during the comparable period of Fiscal
2000. The current period loss was charged to the reserve for discontinued
operations established by the Company during the fourth quarter of Fiscal 2000.
As a result, the accompanying Consolidated Condensed Statement of Operations
does not reflect a loss from discontinued operations for the quarter ended
September 30, 2000. See Note 4 to the Consolidated Condensed Financial
Statements for further information.
During the second quarter of Fiscal 2001, the Company sold to Aquatech
International Corporation ("Aquatech") certain assets and technology of its
Seawater and Industrial Business for approximately $1 million. The agreement
also provides for potential future payments to Aqua-Chem based upon Aquatech's
sales of certain products during the five years following this transaction. In
conjunction with this transaction, five employees of Aqua-Chem's Seawater and
Industrial Business agreed to become employees of Aquatech. To complete this
transaction, the Company amended its Indenture dated June 23, 1998 related to
its 11 1/4% Senior Subordinated Notes Due 2008 ("Notes") with the consent of the
holders of a majority of the outstanding Notes to reflect that a disposition or
discontinuance of all or a portion of the Company's Seawater and Industrial
Business shall not constitute an asset disposition as defined by the Indenture.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1999
Net Sales. Net sales from continuing operations for the six months
ended September 30, 2000 increased $16.6 million (16.9%) to $115.1 million from
$98.5 million for the comparable period of Fiscal 2000. Boiler Group revenue
grew 21.3% due to increased volume of premium firetube boilers, energy recovery
systems and steel fabrication offset partially by lower volume of industrial
watertube boilers. Net sales from the F&M Business declined 21.4% due to lower
volume from its bottled water and military product lines.
Gross Margin. Gross margin for the six months ended September 30, 2000
increased $8.0 million (37.6%) to $29.3 million from 21.3 million for the
comparable period of Fiscal 2000. The consolidated gross margin percentage
increased 3.9 percentage points to 25.5% from 21.6% for the comparable period
during Fiscal 2000. The Boiler Group's gross margin increased 4.2 percentage
points to 26.4% due to a sales mix weighted more heavily to higher margin
boilers and related equipment combined with improved selling prices as well as
greater manufacturing efficiencies resulting from higher shop utilization rates,
recent capital additions, past restructuring actions and on-going continuous
improvement programs. The F&M Business' gross margin percentage decreased 2.9
percentage points to 13.6% from 16.5% primarily as a result of manufacturing
disruption associated with the removal of the deaerator product line from its
Knoxville, TN facility combined with lower overall production volume at that
facility resulting from the aforementioned transfer of
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<PAGE> 12
the deaerator line. Lower order volume in the bottled water product line due to
a decrease in market activity and lower order volume in military product lines
related to the timing of military spending on projects that involve the
Company's military products also contributed to lower production volume.
Selling, General and Administrative. Selling, General, and
Administrative spending increased $3.2 million (18.9%) to $20.1 million from
$16.9 million for the comparable period during Fiscal 2000. The increase is due
primarily to higher commission cost related to the higher Boiler Group sales
volume and mix favoring higher margin product, which typically carry higher
commission rates, to increased Boiler Group research and development spending,
and to increased expense associated with performance-based compensation
resulting from improved operating results.
Restructuring. The Company recorded no restructuring charges during the
first six months of Fiscal 2001. By comparison, during the first six months of
Fiscal 2000, the Company recorded a $.8 million restructuring charge. These
charges were attributable to employee termination payments and related
contractual and outplacement costs.
Operating Income. For the reasons set forth above, operating income
increased $5.5 million to $9.2 million from 3.7 million.
Other Expense. Other Expense for the six months ended September 30,
2000 was $7.2 million as compared to $7.5 million during the comparable period
during Fiscal 2000. Interest expense totaled $7.4 and $7.5 million during the
first six months of Fiscal 2001 and Fiscal 2000, respectively.
Extraordinary Gain. During the second quarter of Fiscal 2001, the
Company purchased, on the open market, $2.1 million of the Company's 11 1/4%
Senior Subordinated Notes due July 1, 2008 ("Notes") at a price of $1.5 million,
or 70% of face value. The Company recognized a related pre-tax gain, after fees
and the early amortization of a pro-rata portion of original issuance costs
which were being amortized over the life of the Notes, of $.6 million. After
providing for income taxes, the extraordinary gain totaled $.3 million.
Discontinued Operations. During the six months ended September 30,
2000, the Company experienced a pre-tax loss on its S&I Business of $1.1 million
as compared to a pre-tax loss of less than $.1 million during the comparable
period of Fiscal 2000. The current period loss was charged to the reserve for
discontinued operations established by the Company during the fourth quarter of
Fiscal 2000. As a result, the accompanying Consolidated Condensed Statement of
Operations does not reflect a loss from discontinued operations for the quarter
ended September 30, 2000. See Note 4 to the Consolidated Condensed Financial
Statements for further information.
During the second quarter of Fiscal 2001, the Company sold to Aquatech
International Corporation ("Aquatech") certain assets and technology of its
Seawater and Industrial Business for approximately $1 million. The agreement
also provides for potential future payments to Aqua-Chem based upon Aquatech's
sales of certain products during the five years following this transaction. In
conjunction with this transaction, five employees of Aqua-Chem's Seawater and
Industrial Business agreed to become employees of Aquatech. To complete this
transaction, the Company amended its Indenture dated June 23, 1998 related to
its 11 1/4% Senior Subordinated Notes Due 2008 ("Notes") with the consent of the
holders of a majority of the outstanding Notes to reflect that a disposition or
discontinuance of all or a portion of the Company's Seawater and Industrial
Business shall not constitute an asset disposition as defined by the Indenture.
BACKLOG
The Company's backlog from continuing operations as of September 30,
2000 decreased $4.4 million to $59.3 million from $63.7 million at March 31,
2000. The Boiler Group's backlog decreased $5.4 million to $53.3 million from
$58.7 million due to strong shipment volume during the quarter following
unusually high order volume during the first calendar quarter of 2000 related to
the release of orders delayed until after December 31, 1999 associated with
concerns regarding the Year 2000 computer issue. Order volume during the
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second and third quarters of calendar 2000 represents more normalized order
levels. The F&M Business' backlog increased $1.0 million to $6.0 million from
$5.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $6.7 million during the six
months ended September 30, 2000 as compared to cash used of $5.8 million during
the comparable period of Fiscal 2000. The increase of $12.5 million is
attributable to improved operating results as well as accounts receivable and
inventory management offset partially by increased net revenue in excess of
billings resulting from a mix of larger projects with less favorable payment
terms.
Cash used in investing activities was $.4 million during the period as
compared to cash provided of $.6 million during the comparable period of Fiscal
2000. Capital spending during the period totaled $1.4 million whereas capital
spending during the comparable period of Fiscal 2000 totaled $3.0 million.
During the second quarter of Fiscal 2001, the Company received net proceeds of
$1.0 million related to the disposal of a portion of the S&I Business. During
the first six months of Fiscal 2000, the Company also received proceeds of $1.2
million related to the sale of its vacant manufacturing facility in Lebanon, PA
and $2.2 million related to the settlement of a note receivable associated with
the acquisition of National Dynamics Corporation's assets that occurred in June
1998.
Cash used in financing activities was $2.0 million during the period of
which $.5 million related to net repayments on the Company's revolving credit
facility and $1.5 million related to the repurchase of Notes.
BORROWING AVAILABILITY AND LIMITATIONS.
The Company has a $45.0 million revolving credit facility that is
secured by substantially all assets of the Company. Under the revolving credit
facility, the Company is required to comply with covenants included in the
agreement as amended. These covenants include a requirement to maintain a
specified level of consolidated tangible net worth, a specified fixed charge
coverage ratio, and a specified senior funded debt to consolidated EBITDA ratio.
As of September 30, 2000, under the amended revolving credit facility, the
Company was eligible to borrow $40.4 million, had no borrowings against the
facility, and had $11.6 million of cash and cash equivalents. As of November 10,
2000, under the amended revolving credit facility, the Company was eligible to
borrow $41.2 million, had no borrowings against the facility, and had $10.8
million of cash and cash equivalents. The Company intends to fund future working
capital, capital expenditures and debt service requirements through cash flows
generated from operating activities and, when necessary, from borrowings under
the revolving credit facility.
At September 30, 2000, the Company had $123 million of 11 1/4% Senior
Subordinated Notes (the "Notes") outstanding under an Indenture dated June 23,
1998 (the "Indenture"). The Company is able to incur additional debt, provided
that the Company satisfies certain requirements identified in the Indenture. The
Company's ability to incur such additional indebtedness, however, is limited by
covenants included in the Company's revolving credit facility.
The Company expects that its cash needs for debt service under the
Indenture during the remainder of Fiscal 2001 will be approximately $7 million,
which is due in January 2001. When the Notes mature in 2008, the Company will be
obligated to repay $123 million to the holders of the Notes. Mandatory
redemptions of the Company's outstanding Series A Preferred Stock subsequent to
September 30, 2000 are $1 million in each of Fiscal 2001 and 2002.
The Company believes that its manufacturing facilities and computer
software and hardware are generally adequate to meet projected needs. During
Fiscal 2001, the Company expects to make approximately $4 million of capital
expenditures to be spent primarily at its manufacturing facilities on projects
and equipment designed to improve quality and efficiency. During the first six
months of Fiscal 2001, the Company's capital spending totaled $1.4 million.
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Management believes that its existing cash resources, cash generated
from operating activities, and its 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, 2000, the Company had no material market risk exposure
(e.g., interest rate risk, foreign currency exchange rate risk or commodity
price risk).
STRATEGY
The Board of Directors of the Company has, in the past and may, from
time to time in the future, consider a variety of strategic alternatives to
maximize shareholder value for the holders of common and preferred stock,
including, but not limited to, the disposition of one or more of its business
units, the repurchase of its outstanding notes, entering into partnerships,
joint ventures or other strategic alliances or the pursuit of acquisitions
within its industry.
LEGAL PROCEEDINGS
The Company has been named as one of a number of defendants in numerous
lawsuits alleging personal injury arising from exposure to asbestos-containing
materials contained in certain boilers manufactured by the Company many years
ago. To date, the Company has disposed of approximately 3,300 lawsuits of this
nature which included at least 27,000 plaintiffs, including the recent
settlement of several lawsuits which included over 1,000 plaintiffs each. In the
vast majority of these closed cases, neither the Company nor its insurers have
made payments to the plaintiffs. The Company has not admitted liability or been
found liable for the plaintiffs' injuries in any case.
Currently, there are at least 12,000 lawsuits pending against the
Company which include at least 47,000 plaintiffs. This represents an increase of
nearly 1,000 lawsuits and more than 6,000 plaintiffs from the quantities the
Company reported in its Annual Report filed on Form 10-K for the fiscal year
ended March 31, 2000. While the Company intends to continue to work to dispose
of these lawsuits, the number of cases filed and the number of plaintiffs per
case have continued to increase, and the Company expects that additional
lawsuits will be filed in the future. The Company believes that substantially
all of the pending lawsuits are without merit. The Company is vigorously
defending the open cases, although many may not be resolved for several years.
Because pleadings generally do not specify the amount of damages
sought, because the Company is typically only one of numerous defendants
initially named, and because it is impossible to determine the Company's
proportionate share of liability in these cases, the Company cannot calculate
its total potential liability in the cases currently pending. However, based
on its historical experience, the Company believes that its insurance coverage
from its primary and umbrella insurers should be adequate to cover future
liabilities in these cases. The Company is unable to predict with precision the
number of such cases that may be filed against it in the future or the potential
impact of any such lawsuits on the Company. Management is continuing to monitor
this situation and intends to take appropriate actions to assess the potential
impact of future cases on the Company. Although Aqua-Chem believes the costs and
liabilities associated with these matters will not have a material adverse
effect on its results of operations or financial condition, there can be no
assurance to this effect.
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, changes in environmental laws, and
employee and labor relations.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See attached Exhibit Index.
(b) In a Current Report on Form 8-K dated September 27, 2000, the Company
reported the sale of certain assets and technology of its Seawater and
Industrial Business to Aquatech International Corporation. The Company
also reported that, to effect this transaction, it amended its
Indenture dated June 23, 1998 related to its 11 1/4% Senior
Subordinated Notes due 2008 ("Notes") with the consent of the holders
of a majority of the outstanding Notes to reflect that a disposition or
discontinuance of all or a portion of the Company's Seawater and
Industrial Business shall not constitute an asset disposition as
defined by the Indenture.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUA-CHEM, INC. (Registrant)
Date: November 14, 2000 By: /s/James A. Kettinger
----------------------
James A. Kettinger
Senior Vice President and
Chief Financial Officer
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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 September 30, 2000)
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