FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- -----
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 033-17921
---------
Air & Water Technologies Corporation
__________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3418759
-------- ----------
(State or other Jurisdiction of Corporation) (I.R.S. Employer Identification
Number)
U.S. Highway 22 West and Station Road, Branchburg, NJ 08876
------------------------------------------------------------
(Address of Principal Executive Offices)
Telephone: (908) 685-4600
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 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 July 31, 1996.
Class A
$.001 Par Value Common Stock 32,018,004
- ---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1996 AND OCTOBER 31,1995
-------------------------------------------------------------------
(in thousands , except share data)
--------------------------------
[CAPTION]
ASSETS 1996 1995
------ ---- ----
(unaudited)
---------
CURRENT ASSETS:
Cash and cash equivalents $ 10,094 $ 11,168
Accounts receivable, net 97,520 102,360
Costs and estimated earnings in excess of
billings on uncompleted contracts 47,566 44,730
Inventories 13,876 13,047
Prepaid expenses and other current assets 11,399 11,835
------- -------
Total current assets 180,455 183,140
PROPERTY, PLANT AND EQUIPMENT, net 37,198 37,498
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 22,048 22,545
GOODWILL 270,349 276,549
OTHER ASSETS 30,003 28,185
-------- --------
Total assets $540,053 $547,917
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current installments of long-term debt $ 355 $ 366
Accounts payable 65,363 65,425
Accrued expenses 85,670 101,278
Billings in excess of costs and estimated earnings
on uncompleted contracts 25,306 25,862
Income taxes payable 2,886 2,777
------- -------
Total current liabilities 179,580 195,708
------- -------
LONG-TERM DEBT 304,836 289,120
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, authorized
2,500,000 shares; issued 1,200,000 shares;
liquidation value $60,000 12 12
Common stock, par value $.001, authorized
100,000,000 shares; issued 32,107,906 shares 32 32
Additional paid-in capital 427,028 427,028
Accumulated deficit (371,048) (363,865)
Common stock in treasury, at cost (108) (108)
Cumulative currency translation adjustment (279) (10)
------- -------
Total stockholders' equity 55,637 63,089
------- -------
Total liabilities and stockholders' equity $540,053 $547,917
======= =======
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 31, 1996 AND 1995
------------------------------------------------------------------
(in thousands, except share data)
-------------------------------
(unaudited)
---------
Three Months Nine Months
Ended July 31 Ended July 31
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
SALES $177,164 $146,174 $503,861 $450,457
COST OF SALES 138,002 102,675 388,573 329,929
------- ------- ------- -------
Gross margin 39,162 43,499 115,288 120,528
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 28,080 32,042 86,480 98,012
DEPRECIATION AND AMORTIZATION 4,730 4,572 14,806 13,350
------- ------- ------- -------
Operating income 6,352 6,885 14,002 9,166
INTEREST EXPENSE (5,732) (6,263) (16,964) (18,310)
INTEREST INCOME 106 315 700 647
OTHER EXPENSE, NET (832) (228) (1,445) (1,110)
------- ------- ------- -------
Income (loss) before income taxes
and minority interest (106) 709 (3,707) (9,607)
INCOME TAXES 352 604 1,001 1,164
MINORITY INTEREST - - - 98
------- ------- ------- -------
NET INCOME (LOSS) $ (458) $ 105 $ (4,708) $(10,869)
======= ======= ======= =======
LOSS PER COMMON SHARE
(AFTER PREFERRED STOCK
DIVIDENDS) $ (.04) $ (.02) $ (.22) $ (.42)
======= ======= ======= =======
Weighted average number of
shares outstanding 32,018 32,018 32,018 32,018
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1996 AND 1995
-------------------------------------------------------
(in thousands)
------------
(unaudited)
---------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,708) $(10,869)
Adjustments to reconcile net loss to net cash
provided by (used for) continuing operations -
Depreciation and amortization 14,806 13,350
Other, net 621 (88)
Changes in assets and liabilities -
(Increase) decrease in assets -
Accounts receivable, net 3,837 9,084
Costs and estimated earnings in excess of
billings on
uncompleted contracts (1,635) 5,804
Inventories (828) (222)
Prepaid expenses and other current assets (2,362) (1,707)
Other assets 755 (3,352)
Increase (decrease) in liabilities -
Accounts payable (52) (5,398)
Accrued expenses (13,319) (21,841)
Billings in excess of costs and estimated
earnings on uncompleted contracts 572 (5,849)
Income taxes payable 49 944
------- -------
Net cash used for continuing operations (2,264) (20,144)
Net cash provided by discontinued operations 149 861
------- -------
Net cash used for operating activities (2,115) (19,283)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business 2,353 12,962
Capital expenditures (5,281) (5,140)
Investment in environmental treatment facilities 582 598
Other, net (8,835) (4,387)
------- -------
Net cash provided by (used for) investing
activities (11,181) 4,033
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and long-term debt (295) (532)
Net borrowings under credit facilities 16,000 38,500
Accounts receivable repurchased - (20,000)
Cash dividends paid (2,475) (2,475)
Other, net (1,008) (2,204)
------- -------
Net cash provided by financing activities 12,222 13,289
------- -------
Net decrease in cash and cash equivalents (1,074) (1,961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,168 11,021
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,094 $ 9,060
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 18,869 $ 19,599
======= =======
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
JULY 31, 1996
-------------
(unaudited)
---------
(1) Basis of Presentation:
---------------------
The interim consolidated financial statements and the
following notes should be read in conjunction with the notes
to the consolidated financial statements of Air & Water
Technologies Corporation and its consolidated subsidiaries
(the "Company") as included in its Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended
October 31, 1995. The interim information reflects all
adjustments, including normal recurring accruals, which are,
in the opinion of management, necessary for a fair
presentation of the results for the interim period. Results
for the interim period are not necessarily indicative of
results to be expected for the full year.
(2) Commitments and Contingencies:
-----------------------------
The Company and its subsidiaries are parties to various
legal actions arising in the normal course of their
businesses, some of which involve claims for substantial
sums. The Company believes that the disposition of such
actions, individually or in the aggregate, will not have a
material adverse effect on the consolidated financial
position or results of operations of the Company taken as a
whole.
(3) Reclassifications:
-----------------
Certain reclassifications have been made to conform the 1995
consolidated financial statements to the 1996 presentation.
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following information should be read in conjunction with the
unaudited interim consolidated financial statements and the notes
thereto included in this Quarterly Report and the audited
financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the
Company's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended October 31, 1995.
Results of Operations
- ---------------------
Summarized below is certain financial information relating to the
core segments of the Company (in thousands):
Three Months Ended July 31 Nine Months Ended July 31
-------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
Sales:
PSG (Contract Operations) $ 68,167 $ 42,321 $195,474 $123,920
Metcalf & Eddy 52,561 53,580 150,663 160,353
Research - Cottrell 57,640 50,174 160,615 163,553
Other and eliminations (1,204) 99 (2,891) 2,631
------- ------- ------- -------
$177,164 $146,174 $503,861 $450,457
======= ======= ======= =======
Cost of Sales:
PSG (Contract Operations) $ 60,859 $ 35,830 $172,871 $104,279
Metcalf & Eddy 32,395 30,686 90,357 96,948
Research - Cottrell 45,952 36,711 128,236 128,098
Other and eliminations (1,204) (552) (2,891) 604
------- ------- ------- -------
$138,002 $102,675 $388,573 $329,929
======= ======= ======= =======
Selling, General and Administrative Expenses:
PSG (Contract Operations) $ 3,535 $ 2,947 $ 10,753 $ 9,239
Metcalf & Eddy 14,418 17,515 46,047 53,090
Research - Cottrell 8,416 9,043 24,506 27,319
Other and eliminations - 639 - 1,827
Corporate (unallocated) 1,711 1,898 5,174 6,537
------- ------- ------- -------
$ 28,080 $ 32,042 $ 86,480 $ 98,012
======= ======= ======= =======
Depreciation and Amortization:
PSG (Contract Operations) $ 1,667 $ 1,312 $ 5,710 $ 3,934
Metcalf & Eddy 1,514 1,469 4,489 4,244
Research - Cottrell 1,451 1,566 4,283 4,483
Other and eliminations - 66 0 246
Corporate (unallocated) 98 159 324 443
------- ------- ------- -------
$ 4,730 $ 4,572 $ 14,806 $ 13,350
======= ======= ======= =======
Operating Income (Loss):
PSG (Contract Operations) $ 2,106 $ 2,232 $ 6,140 $ 6,468
Metcalf & Eddy 4,234 3,910 9,770 6,071
Research - Cottrell 1,821 2,854 3,590 3,653
Other and eliminations 0 (54) 0 (46)
Corporate (unallocated) (1,809) (2,057) (5,498) (6,980)
------- ------- ------- -------
$ 6,352 $ 6,885 $ 14,002 $ 9,166
======= ======= ======= =======
Overview and Outlook
- --------------------
As discussed in more detail with the comparison of each
segment's results, the Company's net loss was reduced from
$10.9 million during the nine month period ended July 31,
1995 to $4.7 million during the nine month period ended July
31, 1996. This was accomplished primarily through overhead
reductions within Metcalf & Eddy, Research-Cottrell and
Corporate. Sales have increased from $450.5 million to
$503.9 million primarily due to increased service revenues
associated with PSG's contract with PRASA. At July 31,
1996, the Company's backlog was approximately $1.1 billion
and consisted of PSG ($782 million), Metcalf & Eddy ($233
million) and Research-Cottrell ($102 million).
The Company is experiencing delays in awards of new
contracts in each of its segments and therefore is revising
its previously disclosed full year earnings expectations
from a slightly positive consolidated net income to a slight
consolidated net loss, which remains an improvement over the
prior full year loss of $8 million. This continuing trend
of improved results is contingent upon the level and timing
of additional contracts in each segment, the achievement of
the expected sales level increases, cost control, the
execution of the expected new projects and those projects in
backlog within the most recent cost estimates as well as the
favorable resolution of existing claims arising in the
ordinary course of business.
PSG (Contract Operations)
- ------------------------
Operating income was $2.1 million and $6.1 million during
the three and nine month periods ended July 31, 1996 and
reflects a $.1 million and $.3 million decrease from the
comparable prior periods due to additional selling, general
and administrative expenses as well as depreciation and
amortization related to growth initiatives which were
partially off-set by higher gross margins. The increase in
PSG's sales is a result of the PRASA contract which has not
had a proportional impact on operating income. Although
negotiations are progressing slower than previously
expected, PSG continues to pursue new business opportunities
and currently has several proposals pending or under
negotiation which if obtained, would significantly increase
future sales.
Metcalf & Eddy
- --------------
Although sales have decreased by approximately 6% Metcalf &
Eddy's operating income increased by $.3 million and $3.7
million during the three and nine month periods ended July
31, 1996. The higher operating income was attributable
primarily to overhead personnel, facilities and insurance
cost reductions during the latter half of the prior fiscal
year which resulted in a decrease in selling, general and
administrative expenses ($3.1 million and $7.0 million,
respectively). Sales decreased by $1.0 million and $9.7
million during the three and nine month periods ended July
31, 1996 as a result of delays in the release of certain
task orders. In addition, estimated favorable pricing
adjustments partially offset the impact of the reduced sales
volume.
Research-Cottrell
- -----------------
Operating income decreased by $1.0 million and $.1 million
during the three and nine month periods ended July 31, 1996.
The changes in operating income reflects the decreases in
margin rates in most business units, especially during the
three month period ended July 31, 1996. The lower margin
rates reflect price pressures from highly competitive markets,
unfavorable product line mix and project execution to a lesser extent.
Partially off-setting the reduced margins are lower selling,
general and administrative expenses of $.6 million and $2.8
million during the three and nine month periods ended July
31, 1996. R-C International sales volume has continued to
increase by $4.5 and $8.8 million during the aforementioned
periods. The higher sales related to international
activities and several other business units have been more
than off-set by lower sales volume in KVB of $10.4 million
during the nine month period ended July 31, 1996. KVB's
lower volume resulted from significantly reduced shipments
and services as compared to the prior period due to the
completion of requirements by utility customers under the
1990 Clean Air Act.
Corporate and Other
- -------------------
The corporate (unallocated) selling, general and
administrative expenses decreased by $.2 million and $1.4
million during the three and nine month periods ended July
31, 1996 due to cost reduction efforts, including personnel
related costs and professional fees.
Financial Condition
- -------------------
Cash used by operations for the nine month period ended July
31, 1996 amounted to $2.1 million primarily due to cash
outlays for the previously established unusual charge
reserves. The Company also utilized $13.5 million of cash
for capital expenditures, investments in environmental
treatment facilities and other investment activities during
the period. These cash requirements were funded principally
through proceeds from the prior year sale of its hazardous
waste transfer station operations and borrowings under the
Company's credit facility discussed below. As a result of
the above, net financial debt increased by $16.8 million
during the nine month period ended July 31, 1996.
Under the Bank Credit Facility at July 31, 1996 the Company had
outstanding borrowings of $59.5 million (capacity of $71.7 million)
and issued and outstanding letters of credit of $26.7 million
(capacity of $58.3 million). The Company expects its operations
to generate sufficient cash in the near term to fund its estimated
working capital requirements, capital expenditures and cash outlays
for the reserves established in connection with fiscal year 1994
unusual charges. The Company believes that it has the ability to
manage its cash needs and stay within its borrowing capacity, and it is
currently continuing its efforts to control its expenses as well as
reduce its working capital requirements.
During August, 1996 the Company entered into a seven year
$60 million unsecured revolving credit facility with, Anjou
International Company ("Anjou Credit Facility"), an
affiliated company. The borrowings under the facility bear
interest at LIBOR plus .6%. In conjunction with this new
financing the Company reduced its more expensive $130
million Senior Secured Credit Facility ("Bank Credit
Facility") to $50 million. As of September 9, 1996, the
Company's outstanding borrowings under the Anjou Credit
Facility and the Bank Credit Facility totaled $50 million
and $20 million, respectively, and short-term investments of
$12 million.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the nine
months ended July 31, 1996 and the years ended October 31,
1995 and 1994 total capital expenditures were $5.3 million,
$7.9 million and $5.5 million, respectively. At July 31,
1996, the Company had no material outstanding purchase
commitments for capital expenditures.
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Statements contained in this report, including Management's
Discussion and Analysis, are forward looking statements that
involve a number of risks and uncertainties which may cause
the Company's actual operating results to differ materially
from the projected amounts. Among the factors that could
cause actual results to differ materially are risk factors
listed from time to time in the Company's SEC reports
including:
- the Company's highly competitive marketplace,
- changes in as well as enforcement levels of
federal, state and local environmental legislation
and regulations that change demand for a significant
portion of the Company's services,
- the ability to obtain new contracts (some of which
are significant) from existing and new clients,
- the execution of the expected new projects and
those projects in backlog within the most recent
cost estimates and;
- the favorable resolution of existing claims
arising in the ordinary course of business.
PART II. OTHER INFORMATION
ITEM I. Legal Proceedings
In connection with a broad investigation by the U.S. Department of
Justice into alleged illegal payments by various persons to members
of the Houston City Council, the Company's subsidiary, Professional
Services Group, Inc. ("PSG"), received a federal grand jury subpoena
on May 31, 1996 requesting documents regarding certain PSG
consultants and representatives that had been retained by PSG to
assist it in advising the City of Houston regarding the benefits that
could result from the privatization of Houston's water and wastewater
system. At the time the subpoena was received, the Department of
Justice advised PSG that it was not a target of the investigation.
PSG has cooperated and continues to cooperate with the Justice
Department which has informed the Company that it is reviewing
transactions among PSG and its consultants. The Company has retained
outside counsel and promptly initiated its own independent
investigation into these matters and placed PSG's chief executive
officer, who has denied any wrongdoing, on administrative leave of
absence with pay. During this leave of absence, PSG will be managed
by its chief operating officer with full support from the Company's
senior management. No charges of wrongdoing have been brought
against PSG or any PSG executive or employee by any grand jury or
other government authority. PSG does not believe that it has engaged
in any wrongdoing in connection with these matters. However, since
the government's investigation is still underway and is conducted
largely in secret, PSG lacks sufficient information to determine with
certainty its ultimate scope and whether the government authorities
with assert claims resulting from this investigation that could
implicate or reflect adversely upon PSG.
The Company and its subsidiaries are parties to various legal actions
arising in the normal course of their businesses, some of which
involve claims for substantial sums. The Company believes that the
disposition of such actions, individually or in the aggregate, will
not have a material adverse effect on the consolidated financial
position or results of operations of the Company taken as a whole.
ITEM 2-5
There are no reportable items under Part II, items 2 through 5.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of per share earnings.
Exhibit 27. Financial Data Supplement
SIGNATURE
---------
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.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
(registrant)
Date September 13, 1996 /s/ Alain Brunais
------------------ -----------------
Alain Brunais
Chief Financial Officer