-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1syf5jKcbS0gt4ySKT6kd5PNSVzrK2iAHuKks+pC8jUXkzEBul+YCffFEOOGOJM UQ2QKqiuM7b4wVxDj4dz3A== 0000950124-00-000491.txt : 20000211 0000950124-00-000491.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950124-00-000491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AQUA CHEM INC CENTRAL INDEX KEY: 0000006992 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 391900496 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-60759 FILM NUMBER: 530609 BUSINESS ADDRESS: STREET 1: 7800 NORTH 113TH ST STREET 2: P O BOX 421 CITY: MILWAUKEE STATE: WI ZIP: 53201 BUSINESS PHONE: 4145772723 10-Q 1 FORM 10-Q 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 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 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 4 AQUA-CHEM, INC. CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE THREE NINE NINE MONTHS MONTHS MONTHS MONTHS ENDED ENDED ENDED ENDED DECEMBER DECEMBER DECEMBER DECEMBER 31, 1999 31, 1998 31, 1999 31, 1998 ---------- ---------- ---------- ---------- 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)
The accompanying notes to the consolidated condensed financial statements are an integral part of this statement. 5 AQUA-CHEM, INC. CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, MARCH 31, 1999 1999 ------------ --------- 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 ========= =========
The accompanying notes to the consolidated condensed financial statements are an integral part of this statement. 6 AQUA-CHEM, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1999 1998 ------------- ------------ 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
The accompanying notes to the consolidated condensed financial statements are an integral part of this statement. 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:
DECEMBER 31, MARCH 31, 1999 1999 ------------- ------------ Raw materials and work-in-process $18,924 $20,859 Finished goods 4,797 5,070 ------- ------- Total inventories $23,721 $25,929 ======= =======
(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 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:
BALANCE AT BALANCE AT 1998 RESERVES MARCH 31, RESERVES DECEMBER 31, PLAN UTILIZED 1999 UTILIZED 1999 ------ -------- ---------- -------- ---------- 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 ====== ======= ====== ===== ======
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. 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.
NINE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ 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)
(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. 10 AQUA-CHEM, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT AS NOTED)
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 ------- ------------- ------------- ------------- ------------- 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) ======= ======= ======== ========
(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:
DECEMBER 31, MARCH 31, 1999 1999 -------- --------- Cumulative translation adjustment $ (57) $ 25 ===== =====
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.
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1999 1998 1999 ----- ----- ----- ----- (DOLLARS IN MILLIONS) 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) ===== ===== ====== ======
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. 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. 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 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 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. 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. 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 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) EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 3-MOS MAR-31-2000 APR-01-1999 DEC-31-1999 1,560 0 43,325 1,060 23,721 88,063 44,362 9,188 170,968 45,828 125,000 5,143 0 10 (10,731) 170,968 55,695 55,742 42,901 53,094 0 0 3,722 (1,072) (312) (856) 0 0 0 (856) (0.96) (0.96)
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