<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 December 31, 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 February 10, 2000
- ----------------------- --------------------------------------
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 nine
months ended December 31,
1999 and December 31, 1998 4
Consolidated Condensed Balance Sheet -
December 31, 1999 and March 31, 1999 5
Consolidated Condensed Statement of
Cash Flows - Nine months ended
December 31, 1999 and
December 31, 1998 6
Notes to Consolidated Condensed Financial
Statements 7
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 16
Signature Page 17
Exhibit Index 18
<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 NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER DECEMBER
31, 1999 31, 1998 31, 1999 31, 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $55,695 $57,123 $162,116 $163,052
Cost of goods sold 42,901 43,830 125,960 124,130
------- ------- -------- ---------
Gross margin 12,794 13,293 36,156 38,922
Costs and expenses:
Selling, general and administrative 9,288 12,978 28,186 33,245
Restructuring charges 905 - 1,739 4,720
------- ------- -------- ---------
10,193 12,978 29,925 37,965
------- ------- -------- ---------
Operating income 2,601 315 6,231 957
Other income (expense):
Interest income 33 178 131 351
Interest expense (3,721) (3,825) (11,240) (9,023)
Other, net 15 (19) (68) 114
------- ------- -------- ---------
(3,673) (3,666) (11,177) (8,558)
Loss before income taxes, minority
interest, and extraordinary item (1,072) (3,351) (4,946) (7,601)
Income tax benefit (312) (1,175) (1,763) (2,475)
Minority interest in earnings of
consolidated subsidiary 96 57 222 217
------- ------- -------- ---------
Net loss before extraordinary item (856) (2,233) (3,405) (5,343)
Extraordinary item, net of tax
benefit of $840 - - - 1,260
------- ------- -------- ---------
Net loss $ (856) $(2,233) $ (3,405) $ (6,603)
Preferred stock dividends (103) (100) (309) (358)
------- ------- -------- ---------
Net loss applicable to common $ (959) $(2,333) $ (3,714) $ (6,961)
======= ======= ======== =========
PER SHARE DATA:
Basic net loss per share of common
stock $ (0.96) $ (2.33) $ (3.71) $ (6.96)
Diluted net loss per share of
common stock $ (0.96) $ (2.33) $ (3.71) $ (6.96)
</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>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,560 $ 5,498
Accounts receivable, less allowances of $1,060
at December 31, 1999 and $848 at March 31, 1999 42,265 39,432
Revenues in excess of billings 12,102 9,754
Inventories 23,721 25,929
Deferred income taxes 6,438 6,438
Prepaid expenses and other current assets 1,977 5,788
--------- ---------
Total current assets 88,063 92,839
Property, plant and equipment - net 35,174 36,290
Intangible assets, less accumulated amortization of
$2,050 at December 31, 1999 and $1,334 at March 31, 1999 36,999 37,745
Deferred income taxes 3,304 3,304
Other assets 7,428 8,053
--------- ---------
TOTAL ASSETS $170,968 $178,231
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings 7,500 --
Accounts payable
Trade 13,079 16,797
Other 5,317 4,465
Billings in excess of revenues 4,529 4,580
Compensation and profit sharing 4,211 4,500
Accrued restructuring costs 1,871 2,531
Accrued interest 1 3,516
Other accrued expenses 9,320 13,259
--------- ---------
Total current liabilities 45,828 49,648
Long-term debt 125,000 125,000
Other long-term liabilities 5,010 5,078
--------- ---------
Total other liabilities 130,010 130,078
Minority interest in a consolidated subsidiary 708 486
Preferred stock with mandatory redemption provisions 5,143 4,944
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at December 31, 1999 and March 31, 1999 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (10,764) (7,050)
Accumulated other comprehensive income (loss) (57) 25
--------- ---------
Total stockholders' equity (deficit) (10,721) (6,925)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $170,968 $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>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,405) $(6,603)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,540 4,283
Deferred tax expense -- 3
Minority interest in earnings of consolidated
subsidiary 222 217
Extraordinary item, net of tax benefit -- 1,260
Restructuring charges, net of cash expended of $2,399
and $44, respectively (660) 4,676
Increase (decrease) in cash due to changes in:
Accounts receivable (2,833) (4,911)
Revenues in excess of billings (2,348) (173)
Inventories 2,088 10,365
Prepaid expenses and other current assets 1,757 (287)
Accounts payable (2,866) (5,321)
Billings in excess of revenues (51) 613
Accrued expenses and other current liabilities (7,743) 3,758
Other, net 518 (372)
------- -------
Total adjustments (7,376) 14,111
------- -------
Net cash provided by (used in) operating activities (10,781) 7,508
Cash flows from investing activities:
Purchase of National Dynamics Corporation -- (48,500)
Proceeds from sales of property, plant and
equipment 1,433 --
Proceeds from notes receivable 2,279 100
Additions to property, plant and equipment (4,279) (2,519)
------- --------
Net cash used in investing activities (567) (50,919)
Cash flows from financing activities:
Issuance of Notes -- 125,000
Proceeds from revolving credit agreement 7,500 3,000
Net principal payments on debt -- (63,063)
Redemption of Series A Preferred Stock -- (3,000)
Deferred financing costs -- (5,153)
Dividends paid (90) (309)
------- --------
Net cash provided by financing activities 7,410 56,475
Net increase (decrease) in cash and cash
equivalents (3,938) 13,064
Cash and cash equivalents at beginning of period 5,498 4,756
------- --------
Cash and cash equivalents at end of period $ 1,560 $17,820
======= ========
Cash paid (received) during the period for:
Interest $14,195 $ 1,482
Income taxes (1,609) 215
</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 December 31, 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>
DECEMBER 31, MARCH 31,
1999 1999
------------- ------------
<S> <C> <C>
Raw materials and work-in-process $18,924 $20,859
Finished goods 4,797 5,070
------- -------
Total inventories $23,721 $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 and began 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 December 31, 1999 there were $7,500 of borrowings
outstanding. Among other restrictions, the credit agreement contains
covenants relating to financial ratios and other limitations, as defined
by the agreement. As of December 31, 1999 and January 31, 2000, 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
<PAGE> 8
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
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 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 DECEMBER 31,
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 (623) 203
Costs related to closing the existing
facility 865 -- 865 (338) 527
------ ------- ------ ----- ------
Total Restructuring $4,720 $(3,029) $1,691 $(961) $ 730
====== ======= ====== ===== ======
</TABLE>
During the nine months ended December 31, 1999 the Company also
recognized $313 of relocation charges which, under generally
accepted accounting principles, 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 nine months
ended December 31, 1999 the Company made payments of $656 against
this reserve leaving a balance of $184.
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 December 31,
1999, the Company had made payments of $548 against these reserves.
In October 1999, Aqua-Chem recognized an additional restructuring
charge of $905, $141 for additional employee termination payments
and other related costs associated with the September 1999
restructuring plan and $764 was recognized for severance payments
for 2 members of upper management that resigned. As of December 31,
1999, the Company had made payments of $234 against these reserves.
<PAGE> 9
9
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
(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 $27,351 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.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $162,116 $172,680
Loss before extraordinary item (3,405) (6,286)
Net loss applicable to common shares (3,714) (7,904)
Loss per common share (basic) (3.71) (7.90)
Loss per common share (diluted) (3.71) (7.90)
</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.
<PAGE> 10
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
SEGMENT 1999 1998 1999 1998
------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES:
Boiler $47,863 $50,972 $ 136,032 $ 139,662
Water Technologies 7,832 6,151 26,084 23,390
------- ------- -------- --------
Total $55,695 $57,123 $162,116 $163,052
======= ======= ======== ========
Income (loss) before income taxes,
minority interest and extraordinary
item:
Boiler $ 4,241 $ 2,533 $ 8,934 $ 3,103
Water Technologies (608) (1,351) (1,029) (628)
Other (4,705) (4,533) (12,851) (10,076)
------- ------- -------- --------
Total $(1,072) $(3,351) $ (4,946) $ (7,601)
======= ======= ======== ========
</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.
(10) Accumulated other comprehensive income consists solely of
cumulative translation adjustments as of December 31, 1999 and
March 31, 1999, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
-------- ---------
<S> <C> <C>
Cumulative translation adjustment $ (57) $ 25
===== =====
</TABLE>
<PAGE> 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 and related notes 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Cleaver-Brooks $38.1 $33.2 $ 108.5 $ 94.4
Water Technologies 6.1 7.8 23.4 26.1
National Dynamics 12.9 14.7 31.2 41.6
----- ----- ------ ------
Total $57.1 $55.7 $163.1 $162.1
===== ===== ====== ======
Gross Margin:
Cleaver-Brooks $ 9.7 $ 8.9 $ 28.7 $ 23.2
Water Technologies 0.7 1.3 5.2 5.0
National Dynamics 2.9 2.6 5.0 7.9
----- ----- ------ ------
Total $13.3 $12.8 $ 38.9 $ 36.1
===== ===== ====== ======
Selling, general and administrative
expenses $13.0 $ 9.3 $ 33.2 $ 28.2
Restructuring charges - 0.9 4.7 1.7
----- ----- ------ ------
Operating income (loss) $ 0.3 $ 2.6 $ 1.0 $ 6.2
===== ===== ====== ======
Other income (expense) $(3.7) $(3.7) $ (8.6) $(11.2)
===== ===== ====== ======
Income tax benefit $(1.2) $(0.3) $ (2.5) $ (1.8)
===== ===== ====== ======
Minority interest in earnings of
Consolidated subsidiary $ 0.0 $ 0.1 $ 0.2 $ 0.2
===== ===== ====== ======
Extraordinary Item $ - $ - $ 1.3 $ -
===== ===== ====== ======
Net loss $(2.2) $(0.9) $ (6.6) $ (3.4)
===== ===== ====== ======
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Net Sales. Net sales for the three month period ended December 31, 1999
decreased $1.4 million (2.5%) to $55.7 million from $57.1 million for the
comparable period of the prior fiscal year. The decrease is due sales by to
Cleaver-Brooks which declined $4.9 million (12.9%). 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
increased $1.8 million (14.0%) due mainly to the transfer of production of
industrial watertube boilers from Cleaver-Brooks. Water Technologies sales
increased $1.7 million (27.9%) during the same period due mainly to increases in
the pharmaceutical product line.
Gross Margin. Gross margin for the three month period ended December
31, 1999 declined $0.5 million (3.8%) to $12.8 million from $13.3 million for
the comparable period of the prior fiscal year. This decrease is primarily due
to the reduced sales volume discussed above. The gross margin percentage for the
three month period ended December 31, 1999 decreased 0.3 percentage points to
23.0% for the comparable period of the prior fiscal year. The decrease is due
primarily to an 4.8 percentage point decrease at National Dynamics. The margins
for the prior year period reflect an inventory write-up of $0.4 million as a
result of the acquisition.
<PAGE> 12
Adjusting for this write-up, National Dynamics' gross margin would have been
25.6% compared to 17.7% for the current period. This decline is primarily due to
sales volume declines resulting from a soft market in the Energy Recovery
product line which sells at higher margins than National Dynamics' other boiler
product lines. The decrease in gross margin percentage was partially offset by
increases at Water Technologies and Cleaver-Brooks. Water Technologies' gross
margin percentage increased 5.2 percentage points to 16.7% primarily as a result
of manufacturing efficiency improvements on the deaerator product that
previously was manufactured at the Greenville facility. Cleaver-Brooks' gross
margin percentage increased 1.3 percentage points to 26.8% due primarily to cost
savings from the closure of the Greenville facility partially offset by
continued price pressure in the firetube boiler market.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the three month period ended December 31, 1999
decreased $3.7 million (28.5%) to $9.3 million from $13.0 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, April and September of
1999 and the closure of the Greenville, MS facility.
Restructuring Charges. During the three months ended December 31, 1999
Aqua-Chem recorded a restructuring charge of $0.9 million. Included in the
charge, $0.1 million related to additional employee termination payments and
incremental contractual payments under the September 1999 restructuring plan.
The remaining charge of $0.8 million was recorded for severance payments to the
President and Chief Executive Officer and the Vice Chairman that each resigned
during the three months ended December 31, 1999.
Operating Income. For the reasons set forth above, operating income for
the three month period ended December 31, 1999 increased $2.3 million to $2.6
million from $0.3 million for the comparable period of the prior fiscal year.
Excluding the restructuring charge described above, operating income improved
$3.2 million to $3.5 million compared to $0.3 million for the three months ended
December 31, 1998.
Other Income (Expense). Other income (expense) for the three months
ended December 31, 1999 and 1998 was an expense of $3.7 million and was
comprised primarily of interest expense.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
Net Sales. Net sales for the nine month period ended December 31, 1999
decreased $1.0 million (0.6%) to $162.1 million from $163.1 million for the
comparable period of the prior fiscal year. The decrease was due primarily to
Cleaver-Brooks' sales which declined $14.1 million (13.0%). 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. This decrease in sales is partially
offset by the acquisition of National Dynamics on June 23, 1998. A full nine
months of sales are reflected in 1999 while only six months of National
Dynamics' sales are reflected in 1998, resulting in an increase of $10.4 million
(33.3%). Additionally, Water Technologies sales increased $2.7 million (11.5%)
during the same period.
Gross Margin. Gross margin for the nine month period ended December 31,
1999 declined $2.8 million (7.2%) to $36.1 million from $38.9 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
1.6 percentage points to 22.2%. The gross margin decrease is attributed
primarily to margin declines at Water Technologies and Cleaver-Brooks. Water
Technologies' gross margin percentage declined 3.1 percentage points to 19.2%
primarily as a result of manufacturing inefficiencies from 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 $1.1 million to $5.7 million. Cleaver-Brooks' gross margin percentage
declined 1.9 percentage points to 24.6% due to changing sales mix weighted more
heavily to the sale of lower priced, lower margin products, pricing pressures
due to the softness in its markets and manufacturing inefficiencies prior to the
closure of the Greenville facility. The decrease in gross margin percentage was
partially offset by a 3.0 percentage point increase at National Dynamics. The
margins for the prior year period reflect an inventory write-up of $1.8 million
as a result of the acquisition. Adjusting for this write-up, National Dynamics'
gross margin would have been 21.8% compared to 19.0% for the current period.
This decline is due primarily to sales volume declines as a result of a soft
market in the Energy Recovery product line which sells at higher margins than
National Dynamics' other product lines.
<PAGE> 13
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the nine month period ended December 31, 1999
decreased $5.0 million (15.1%) to $28.2 million from $33.2 million for the
comparable period of the prior fiscal year. The decrease was due primarily to
lower commissions paid as a result of lower sales volumes at Cleaver-Brooks and
savings from the restructuring actions taken in January, April and September 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 nine
months of costs were incurred in 1999 and only six 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 $6.7 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. Additionally, restructuring charges were
recorded due to the resignation of members of upper management and the resulting
severance payments. As a result, Aqua-Chem recorded an additional restructuring
charge of $1.7 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 nine
month period ended December 31, 1999 improved $5.2 million (520.0%) to $6.2
million from $1.0 million for the comparable period of the prior fiscal year.
Excluding the restructuring charges described, operating income increased $2.2
million (38.6%) to $7.9 million compared to $5.7 million for the nine months
ended December 31, 1998.
Other Income (Expense). Other income (expense) for the nine months ended
December 31, 1999 was an expense of $11.2 million as compared to an expense of
$8.6 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
$2.2 million resulting from the issuance of $125 million of unsecured senior
subordinated notes in June 1998. Accordingly, the financial statements for the
nine months ended December 31, 1999 reflect a full nine months of this increased
interest cost while the financial statements for the comparable period reflect
only six full months of such costs.
BACKLOG
Backlog increased $0.4 million (0.8%)to $53.2 million at December 31, 1999 from
$52.8 at March 31, 1999. This increase reflects a slightly higher order volume
for the Company's products without a commensurate increase in production
capacity or output. The Company achieved very strong order volume in each of
its divisions in the month of January, 2000 which increased backlog to $64.5
million at January 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $10.8 million for the nine months ended
December 31, 1999 compared to cash provided of $7.5 million for the nine months
ended December 31, 1998. The increase in use of cash of $18.3 million was
attributable primarily to a few large unusual prepayments on
percentage-of-completion contracts at December 31, 1998 without a similar
situation at December 31, 1999. Additional interest payments of $12.7
million and payments associated with the restructuring plans also contributed
to the greater use of cash.
Net cash of $0.6 million was used in investing activities for the nine months
ended December 31, 1999 compared to cash used in investing activities of $50.9
million for the nine months ended December 31, 1998. The prior year period
included $48.5 million for the acquisition of National Dynamics. Capital
expenditures for the current period were $4.3 million as compared to $2.5
million for the nine months ended December 31, 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 provided by financing activities was $7.4 million for the nine months ended
December 31, 1999 compared to cash provided of $56.5 million for the nine months
ended December 31, 1998. In order to make the interest payment on the
<PAGE> 14
subordinated debt due January 1, 2000, the Company borrowed $7.0 million during
the nine months ended December 31, 1999. Cash from financing activities in the
nine months ended December 31, 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, $5.2 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 1.10 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 at the end
of the third quarter of fiscal 2000, but has since repaid much of these
borrowings. As of February 9, 2000, there were $1.2 million of borrowings on the
revolving credit facility.
At December 31, 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
1, 2000 and prior to January, 2001 or 2.5 to 1 thereafter (the "Coverage
Limitation"). As of December 31, 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 $77.7 million of additional indebtedness under the Basket
Limitations on December 31, 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 $47.8 million at December 31, 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 fiscal 2000 will be approximately $14.1 million. Mandatory repayments of
theCompany'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
<PAGE> 15
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 December 31, 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
The Company did not directly, or indirectly through vendors, experience any
significant Year 2000 problems.
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.
<PAGE> 16
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> 17
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 10, 2000 By: /s/ James A Kettinger
-------------------------
James A. Kettinger
Senior Vice President and
Chief Financial Officer
<PAGE> 18
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 12/31/99)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheet as of December 31, 1999 and the
consolidated condensed statement of operations for the three months ended
December 31, 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> DEC-31-1999
<CASH> 1,560
<SECURITIES> 0
<RECEIVABLES> 43,325
<ALLOWANCES> 1,060
<INVENTORY> 23,721
<CURRENT-ASSETS> 88,063
<PP&E> 44,362
<DEPRECIATION> 9,188
<TOTAL-ASSETS> 170,968
<CURRENT-LIABILITIES> 45,828
<BONDS> 125,000
5,143
0
<COMMON> 10
<OTHER-SE> (10,731)
<TOTAL-LIABILITY-AND-EQUITY> 170,968
<SALES> 55,695
<TOTAL-REVENUES> 55,742
<CGS> 42,901
<TOTAL-COSTS> 53,094
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,722
<INCOME-PRETAX> (1,072)
<INCOME-TAX> (312)
<INCOME-CONTINUING> (856)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (856)
<EPS-BASIC> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
