UNITED STATES 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 October 2, 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: 33-80701
AAF-MCQUAY INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 41-0404230
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
215 Central Avenue, Louisville, Kentucky 40208
- ---------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (502) 637-0011
-------------
Not Applicable
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check 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: 2,497 shares of Common Stock,
par value $100.00 per share, were outstanding as of November 5, 1999.
1
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
PAGE
PART I - Financial Information.............................................. 3
Item 1. Financial Statements (unaudited)................................... 3
Condensed Consolidated Balance Sheets as of -
September 30, 1999 and June 30, 1999............................... 3
Consolidated Statements of Operations -
Three months ended September 30, 1999 and
September 30, 1998................................................. 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1999 and September 30, 1998....... 5
Consolidated Statements of Comprehensive Income -
Three months ended September 30, 1999 and
September 30, 1998................................................. 6
Notes to the Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 11
Item 7A Quantitative and Qualitative Disclosure About Market Risk 14
PART II - Other Information.................................................. 15
Item 1. Legal Proceedings.................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................... 15
Signatures......................................................... 16
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAF-MCQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except per share data)
September 30, June 30,
1999 1999
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 12,078 $ 9,168
Accounts receivable........................................................ 234,302 227,844
Inventories................................................................ 113,651 118,163
Other current assets....................................................... 5,462 6,754
------- -------
Total current assets................................................ 365,493 361,929
Property, plant and equipment, net.................................................. 140,265 145,086
Cost in excess of net assets acquired and other identifiable intangibles, net....... 226,748 228,906
Other assets and deferred charges................................................... 19,662 19,274
------- -------
Total assets........................................................ $752,168 $755,195
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings...................................................... $ 97,947 $ 87,602
Current maturities of long-term debt....................................... 7,263 14,495
Accounts payable, trade.................................................... 107,620 115,986
Accrued warranty........................................................... 18,281 18,604
Other accrued liabilities.................................................. 92,293 83,208
------- -------
Total current liabilities........................................... 323,404 319,895
Long-term debt. 163,449 164,322
Deferred income taxes............................................................... 34,842 34,676
Other liabilities................................................................... 42,736 49,874
------- -------
Total liabilities................................................... 564,431 568,767
Stockholder's equity:
Preferred stock ($1 par value; 1,000 shares authorized, none issued)....... -- --
Common stock ($100 par value; 8,000 shares authorized, 2,497 shares
issued and outstanding)............................................ 250 250
Additional paid-in capital................................................. 179,915 179,915
Retained earnings.......................................................... 17,279 17,762
Accumulated other comprehensive income (loss).............................. (9,707) (11,499)
------- --------
Total stockholder's equity.......................................... 187,737 186,428
------- -------
Total liabilities and stockholder's equity.......................................... $ 752,168 $ 755,195
========= =========
See Notes To Consolidated Financial Statements
3
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
Three months ended
--------------------------------------
September 30, September 30,
1999 1998
----------------- -----------------
Net Sales $ 225,127 $ 251,400
Cost of Sales 165,153 183,865
----------------- -----------------
Gross Profit 59,974 67,535
Operating Expenses:
Selling, general and administrative 49,868 55,839
Restructuring 178 751
Amortization of intangible assets 2,829 2,902
----------------- -----------------
52,875 59,492
----------------- -----------------
Income from operations 7,099 8,043
Interest expense, net 5,873 6,506
Other (income) expense, net 2,082 (4,812)
----------------- -----------------
Income (loss) before income taxes (856) 6,349
Minority interest (earnings) loss 64 (10)
Provision for income taxes (437) 1,529
----------------- -----------------
Net income (loss) $ (483) $ 4,830
================= =================
See Notes To Consolidated Financial Statements
4
AAF-MCQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three months ended
--------------------------------------
September 30, September 30,
1999 1998
----------------- -----------------
Cash flows from operating activities
Net income (loss) $ (483) $ 4,830
Adjustments to reconcile to cash from
Operating activities:
Depreciation and amortization 7,709 6,858
Foreign currency transaction (gains) losses 453 (259)
Changes in operating assets and liabilities (3,690) (13,060)
----------------- -----------------
Net cash from operating activities 3,989 (1,631)
Cash flows from investing activities:
Capital expenditures, net (2,278) (5,241)
----------------- -----------------
Net cash from investing activities (2,278) (5,241)
Cash flows from financing activities:
Net borrowing (repayments) under short-term
borrowing arrangements 10,345 18,333
Payments on long-term-term debt (38,106) (13,886)
Proceeds from issuance of long-term debt 30,000 -
Payment of debt issuance costs (1,244) -
----------------- -----------------
Net cash from financing activities 995 4,447
Effect of exchange rate changes on cash 204 110
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 2,910 (2,315)
Cash and cash equivalents at beginning of period 9,168 9,697
----------------- -----------------
Cash and cash equivalents at end of period $ 12,078 $ 7,382
================= =================
See Notes To Consolidated Financial Statements
5
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Three Months Ended
-----------------------------------
September 30, September 30,
1999 1998
--------------- ----------------
Net income (loss)..................................... $(483) $ 4,830
Other comprehensive income:...........................
Foreign currency translation adjustments............ 1,792 3,396
----- -----
Comprehensive income.................................. $1,309 $ 8,226
====== =======
See Notes To Consolidated Financial Statements
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All inter-company transactions have
been eliminated. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-K. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K (the "Annual Report") for the year ended
June 30, 1999. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying financial statements reflect the statements of
operations for the three months ended September 30, 1999 and 1998, the balance
sheets at September 30, 1999 and June 30, 1999, and the consolidated statements
of cash flows for the three months ended September 30, 1999 and 1998.
The operating results for the three months ended September 30, 1999 are not
necessarily indicative of the operating results that may be expected for the
full year ending June 30, 2000. The Company's period end is the Saturday closest
to September 30. For clarity in presentation all periods presented herein are
shown to end on the last calendar day of the month. Certain reclassifications of
amounts in the consolidated financial statements have been made to reflect
comparability.
During the first quarter of fiscal year 1999, the Company made a change
in accounting estimate related to its warranty provision and increased its
warranty provision by $2.5 million due to activity related to new product
introductions and discontinued product lines.
2. INVENTORIES
Inventories consist of the following:
September 30, June 30,
1999 1999
------------- ----------
(dollars in thousands)
FIFO Cost:
Raw Materials........................... $ 39,427 $ 39,838
Work-in-process......................... 25,812 25,884
Finished goods.......................... 48,235 51,063
------------ ----------
113,474 116,815
LIFO adjustment......................... 177 1,348
============ ==========
$ 113,651 $ 118,163
============ ==========
3. NET OTHER (INCOME)EXPENSE
During the first quarter of fiscal year 2000, the Company had expense of
$2.1 million compared to $4.8 million of income in the first quarter of fiscal
year 1999. In the first quarter of fiscal year 2000, the Company accrued a $1.3
million loss related to the sale of the commercial air conditioning and
refrigeration operation in France in October 1999. Additionally, in conjunction
with the Company's refinancing, discussed in Note 5, the Company wrote off
certain unamortized income and debt issuance costs resulting in a charge of
$318,000 in the first quarter of fiscal year 2000. In the first quarter of
fiscal year 1999 the Company recognized $2.9 million in other income as a result
of favorable developments in the IRS audit and the tax indemnification
settlement with former shareholders of the Company. The Company also recorded a
$1.5 million gain related to the termination of a pension plan in Canada. The
remaining components of other income and expenses resulted from foreign currency
and equity affiliate transactions.
4. PROVISION FOR INCOME TAXES
The tax provisions for the first quarters ended September 30, 1999 and
1998 are based on the estimated effective tax rates applicable for the full
years, and after giving effect to significant unusual items related
specifically to the interim periods. The difference between the Company's
reported tax provision, for the first quarters ended September 30, 1999 and
1998, and the tax provision computed based on U.S.
7
statutory rates is primarily attributable to nondeductible goodwill amortization
and unbenefitted foreign losses. Additionally, the Company's effective tax rate
for the first quarter ended September 30, 1998 reflects the effect of the
indemnification settlement agreement and the IRS settlement which was recognized
as income for financial reporting purposes but is not taxable for income tax
purposes.
5. DEBT AND FINANCIAL INSTRUMENTS
On September 30, 1999, as further discussed in the Company's Form 10K,
the Company entered into a new bank credit agreement. As a result of the bank
credit agreement refinancing that took place, the Company wrote off certain
unamortized debt issuance costs associated with the previous credit
agreement. In addition, the balance of the unamortized income from early
termination of the swap was eliminated. These actions resulted in net charge
to other (income) expense of $318,000 for the current quarter.
The Company secures pricing on a portion of its copper and aluminum
requirements through forward contracts executed with certain suppliers. At
September 30, 1999, contracts for 5.7 million pounds of copper at an average
price of $0.71 per pound and 1.4 million pounds of aluminum at an average price
of $0.68 per pound were in place. These contracts have various expiration dates
through June 30, 2000.
6. RESTRUCTURING
As described in Note 10 of the Annual Report, the Company implemented
several restructuring plans throughout fiscal year 1999 in both the Commercial
Air Conditioning and Refrigeration and Filtration Products groups. Through
September 30, 1999, the Company has spent $3.4 million of the $5.2 million
restructuring reserve recorded in fiscal year 1999 primarily for severance
arrangements. The Company continues to implement actions in accordance with the
restructuring plan.
7. CONTINGENCIES
ENVIRONMENTAL MATTERS - The Company is subject to potential liability under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (CERCLA), and other federal, state and local statutes and
regulations governing the discharge of pollutants into the environment and the
handling and disposal of hazardous substances and waste. These statutes and
regulations, among other things, impose potential liability on the Company for
the cost of remediation of contamination arising from the Company's past and
present operations and from former operations of other entities at sites later
acquired and now owned by the Company. Many of the Company's facilities have
operated for many years, and substances which are or might be considered
hazardous were generated, used, and disposed of at some locations, both on- and
off-site. Therefore, it is possible that environmental liabilities in addition
to those described in note 14 of the Annual Report may arise in the future. The
Company records liabilities if, in management's judgment, environmental
assessments or remedial efforts are probable and the costs can be reasonably
estimated. These accrued liabilities are not discounted. Such estimates are
adjusted if necessary based upon the completion of a formal study or the
Company's commitment to a formal plan of action.
LITIGATION - The Company is involved in various lawsuits in the ordinary
course of business. These lawsuits primarily involve claims for damages arising
out of the use of the Company's products. The Company is also involved in
litigation and administrative proceedings involving employment matters and
commercial disputes. Some of these lawsuits include claims for punitive as well
as compensatory damages. The Company is insured for product liability claims for
amounts in excess of established deductibles and accrues for the estimated
liability on a case-by-case basis up to the limits of the deductibles. All other
claims and lawsuits are also handled on a case-by-case basis.
8
8. BUSINESS SEGMENTS INFORMATION
The Company serves the global commercial heating, ventilation, air
conditioning and refrigeration ("HVAC&R") industry with two industry segments:
Commercial Air Conditioning and Refrigeration, the manufacture, sale and
distribution of heating, ventilating, air conditioning, industrial refrigeration
and freezing equipment products, and Filtration Products, the manufacture and
sale of air filtration products and systems. Information relating to operations
in each industry segment is as follows as of and for the three months ended
September 30, 1999 and 1998:
THREE MONTHS ENDED
CLASSIFIED BY INDUSTRY: SEPTEMBER 30,
--------------------------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
Net Sales:
Commercial Air Conditioning and Refrigeration. $147,900 $ 166,756
Filtration Products............................. 77,737 88,444
Eliminations.................................... (510) (3,800)
-------- ---------
Total................................... $225,127 $ 251,400
======== =========
Operating Income (Loss):
Commercial Air Conditioning and Refrigeration... $ 2,173 $ 3,819
Filtration Products ............................ 5,302 4,499
Corporate (376) (275)
-------- ---------
Total................................... $ 7,099 $ 8,043
======== =========
Depreciation/Amortization:
Commercial Air Conditioning and Refrigeration. $ 5,198 $ 4,210
Filtration Products............................. 2,497 2,620
Corporate 14 28
-------- ---------
Total................................... $ 7,709 $ 6,858
======== =========
Capital Expenditures:
Commercial Air Conditioning and Refrigeration. $ 1,443 $ 4,637
Filtration Products............................. 835 604
-------- ---------
Total................................... $ 2,278 $ 5,241
======== ========
The Company estimates corporate expenses and determines fixed allocations
of these expenses for each business segment at the beginning of the fiscal year.
Any over or under allocation of actual expenses incurred results in income or
expense reported at the corporate level. The $0.38 and $0.28 million noted above
represent the under allocation of expenses for the three month period ended
September 30, 1999 and 1998, respectively. A reconciliation of segment profit to
the Company's earnings before taxes for each quarter is as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
--------- --------
(DOLLARS IN THOUSANDS)
Operating Income from Business Segments $ 7,475 $ 8,318
Over allocation of corporate expenses (376) (275)
Interest expense, net 5,873 6,506
Other (income) expense 2,082 (4,812)
------- --------
Income (loss) before income taxes $ (856) $6,349
======== ======
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES for the first quarter of fiscal year 2000 were $225.1 million.
This represents a decrease of $26.3 million, or 10.5%, from $251.4 million for
the first quarter of fiscal year 1999. The Company estimates that approximately
$17.3 million, or 65.9%, of the decrease is attributable to having one less week
of sales in the first quarter of fiscal year 2000 as compared to the first
quarter of fiscal year 1999. The first quarter of fiscal year 2000 reflects a 13
week period as compared to a 14 week period for the first quarter of fiscal year
1999.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP net sales decreased
$18.9 million, or 11.3%, to $147.9 million in the first quarter of fiscal
year 2000 as compared to the first quarter in fiscal year 1999. The Company
estimates that approximately $11.4 million, or 60.3%, of the decrease is
attributable to one less week of sales in the first quarter of fiscal 2000 as
compared to the first quarter of fiscal 1999. The remaining decrease of $7.5
million is primarily attributable to decreased sales in the chiller products
and terminal air conditioning systems business units. Chiller product net
sales decreased 16.9% in the first quarter of fiscal year 2000 compared to
the first quarter of fiscal year 1999 as a result of the restructuring of the
chiller business unit. Terminal air conditioning products net sales decreased
16.0% in the first quarter of fiscal 2000 as compared to the first quarter of
fiscal year 1999 as a result of the product rationalization in North America
and a related market reaction as a result of the changes in product
offerings. The sales decreases in the chiller products and terminal air
conditioning products business units were partially offset by increased sales
in the service and parts business units as a result of strong demand for
replacement parts, and increased sales from the operations in Italy and Dubai.
Backlog for the Commercial Air Conditioning and Refrigeration Group was
$135.0 million at September 30, 1999 as compared to $125.5 and $133.7 million at
September 30, 1998 and June 30, 1999, respectively.
FILTRATION PRODUCTS GROUP net sales were $77.7 million in the first
quarter of fiscal year 2000, a decrease of $10.7 million, or 12.1%, from
$88.4 million in the first quarter of fiscal year 1999. The Company estimates
that approximately $6.0 million, or 55.8%, of the decrease is attributable to
one less week of sales in the first quarter of fiscal 2000 as compared to
fiscal 1999. The remaining decrease of $4.7 million is attributable to slow
MFAS sales in the United States due to soft market conditions and a decrease
in air pollution control sales in Europe.
GROSS PROFIT was $60.0 million or 26.6% of sales for the first quarter of
fiscal year 2000 versus $67.5 million or 26.9% of sales for the first quarter of
fiscal year 1999. In the Commercial Air Conditioning and Refrigeration Group,
gross profit as a percentage of sales was 24.5% in the first quarter of fiscal
year 2000 as compared to 25.4% of sales in the first quarter of fiscal year
1999. This decrease in gross margin resulted primarily from lower margin sales
of chiller and air handling products. The Filtration Products Group's gross
profit as a percentage of sales increased in the first quarter from 28.4% in
fiscal year 1999 to 30.5% in the first quarter of fiscal year 2000. This
increase resulted from improved manufacturing performance.
OPERATING EXPENSES were $52.9 million or 23.5% of sales for the first
quarter of fiscal year 2000 as compared to $59.5 million or 23.7% of sales
for the first quarter of fiscal year 1999. The Company estimates that
approximately $4.1 million, or 61%, of the decrease is attributable to one
less week of operating expenses in the first quarter of fiscal 2000 as
compared to the first quarter of fiscal 1999. The remaining decrease of $2.5
million is primarily attributable to a reduction in warranty expense offset
by an increase in depreciation expense related to the new Enterprise Resource
Planning systems.
INCOME FROM OPERATIONS for the first quarter of fiscal years 2000 and 1999
was $7.1 and $8.0 million, respectively. As a percentage of sales, income from
operations remained flat at 3.2% of sales for both of the first quarters of
fiscal years 2000 and 1999. The Commercial Air Conditioning and Refrigeration
Group had a decrease in income from operations from $3.8 million, or 2.3% of
sales, to $2.2 million, or 1.5% of sales, for the first quarter of fiscal year
2000 as compared to the first quarter of fiscal year 1999, respectively. The
10
Filtration Products segment had an increase in income from operations from $4.5
million, or 5.1% of sales, to $5.3 million, or 6.8% of sales, for the first
quarter of fiscal year 1999 as compared to the first quarter of fiscal year
2000.
NET INTEREST EXPENSE was $5.9 million in the first quarter of fiscal year
2000 as compared to $6.5 million for the first quarter of fiscal year 1999. This
decrease is primarily attributable to having one less week of activity in the
first quarter of fiscal year 2000 as compared to the first quarter of fiscal
year 1999.
NET OTHER (INCOME) EXPENSE for the first quarter of fiscal year 2000 was
expense of $2.1 million compared to income of $4.8 million in the first
quarter of fiscal year 1999. See Note 3 to the unaudited consolidated
financial statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are provided by cash generated from operating
activities and supplemented when necessary by short-term credit facilities.
During the first quarter of fiscal year 2000, funds generated by operating
activities were $4.0 million as compared to funds used by operating activities
of $1.6 million in the prior fiscal year for the comparable period. During the
first quarter of fiscal year 2000, cash used in investing activities was $2.3
million, which represents a $2.9 million reduction from the prior year first
quarter. The reduction in capital spending stems from recent completion of the
information technology enhancement project. On September 30, 1999, the Company
refinanced its Bank Credit Agreement with a New Term Loan of $30 million and a
new Revolving Credit Facility of $90 million ("New Bank Credit Agreement"). The
New Bank Credit Agreement has a three-year term, was used to retire all
obligations under the previous Bank Agreement and is designed to provide added
flexibility and borrowing availability. The New Bank Credit Agreement also
provides favorable interest rates and other fees compared to the previous Bank
Credit Agreement. At the closing date for the New Bank Credit Agreement and at
the end of the first quarter, remaining borrowing availability under the new
Revolving Credit portion of the New Bank Credit Agreement was $32 million. Total
net payments on long term debt for the first quarter were $8.1 million which is
a result of new borrowing under the New Term Loan of $30.0 million, repayment of
the balance on the previous Bank Term Loan of $37.3 million and other long term
debt payments of $0.8 million. Cash of $10.3 million was provided by net
borrowing under short term borrowing arrangements for long term debt repayment
and working capital requirements during the period.
A short-term credit facility provided to a subsidiary of the Company is
supported by a letter of credit from OYL which expires on September 30, 2000. In
addition, the Company has secured certain domestic letter of credit facilities
totaling $13.5 million that are supported by a letter of credit from OYL which
expires on March 21, 2000. Each of these support arrangements may be extended
for additional time periods with the consent of OYL and the banks providing the
facilities.
On an ongoing basis the Company strives to evaluate its various
businesses and product lines with the objective to enhance shareholder value.
Consistent with this strategy, the Company intends to pursue global business
opportunities that are synergistic with the Company's core businesses or exit
low value added or non-synergistic operations. In October 1999, the Company
sold the commercial air conditioning and refrigeration operation in France
with the proceeds used to reduce debt. The Company does not believe that the
sale of the commercial air conditioning and refrigeration operation in France
will have a material effect on the Company's future financial results.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the New
Bank Credit Agreement and other short-term credit facilities, will be adequate
to make payments of principal and interest on debt, to permit anticipated
capital expenditures and to fund working capital requirements and other cash
needs. Nevertheless, the Company will remain leveraged to a significant extent
and its debt service obligations will continue to be substantial. If the
Company's sources of funds were to fail to satisfy the Company's requirements,
the
11
Company may need to refinance its existing debt or obtain additional financing.
There is no assurance that any such new financing alternatives would be
available, and, in any case, such new financing (if available) would be expected
to be more costly and burdensome than the debt agreements currently in place.
YEAR 2000
The Company established a formal Year 2000 program during fiscal year
ending June 30, 1998, which began with a worldwide assessment and development
of a central data base containing an inventory of the risk elements
associated with the Year 2000 issue for each of the Company's operations. The
Company also appointed an overall project coordinator and established an
executive review process. Prior to establishing a formal Year 2000 management
process, the Company had already decided to replace substantially all of its
old systems with new state-of-the-art Enterprise Resource Planning (ERP)
systems. The Company estimates expenditures for the new systems have
aggregated approximately $27.0 million through project completion at month-end
September 1999. Expenditures for additional remedial actions beyond those
required to install new systems are managed by the individual business units
and recognized in operating expenses. The Company's management believes that
modernizing its information systems is critical for the Company's stable and
efficient growth, and it is the basis of the Company's strategy for resolving
its Year 2000 issues.
During May 1998, the Company began its review of the products it
manufactures and sells, and the Company believes that its products, including
the control systems provided by the Company, are Year 2000 compliant. The
Company has also identified third parties upon whom the Company is dependent for
products or services, and commenced actions during fiscal year ending June 30,
1998, to ensure those products and services are compliant and will not be
interrupted as a result of Year 2000.
The scheduled Year 2000 activities and current status are summarized in the
chart below:
------------------------------------ ------------------ ----------------- -----------------
ACTIVITY STATUS STARTING ENDING
------------------------------------ ------------------ ----------------- -----------------
Assessment and inventory Complete September 1997 January 1998
------------------------------------ ------------------ ----------------- -----------------
Coordinator and Executive review Complete February 1998 May 1998
process
------------------------------------ ------------------ ----------------- -----------------
Industrial Refrigeration ERP Complete January 1997 April 1998
------------------------------------ ------------------ ----------------- -----------------
Filtration Products ERP Complete April 1997 July 1999
------------------------------------ ------------------ ----------------- -----------------
Commercial Air Conditioning ERP Complete September 1997 September 1999
------------------------------------ ------------------ ----------------- -----------------
Product compliance Complete May 1998 March 1999
------------------------------------ ------------------ ----------------- -----------------
Materials suppliers Complete* June 1998 October 1999
------------------------------------ ------------------ ----------------- -----------------
Other IT issues including third Complete* September 1998 October 1999
parties
------------------------------------ ------------------ ----------------- -----------------
Equipment and facilities Complete* September 1998 October 1999
------------------------------------ ------------------ ----------------- -----------------
* Complete indicates that the key components are complete, with minor
follow-up tasks still in process.
The final Year 2000 activities are currently on schedule. The Company has
successfully implemented the scheduled ERP projects and systems upgrades.
Failure by the Company's third party suppliers and/or service providers to
produce or deliver critical components or to transport services could cause
disruption in the Company's ability to manufacture and/or deliver timely its
products to its customers, which could result in increased expenses, reduced
billings and potential litigation. The precise costs associated with such risks
are difficult to predict at this time. The Company currently is developing its
Business Continuity and Contingency Plans, for each of its businesses, in the
event that internal, external, or systemic failures occur on or about January 1,
2000.
12
The Company believes the Year 2000 activities are adequate to address the
Year 2000 risks faced by the Company; however, there can be no assurance that
the Year 2000 procedures and activities, even if completed, will be adequate to
address the Company's Year 2000 risk.
EURO CONVERSION
Management has initiated an internal analysis of and planning for the
effect the Euro will have on the operating and financial condition of the
Company. The Euro is not expected to have a material effect on the Company's
operating results or competitive position. The Company's financial systems are
Euro compliant and opportunities will continue to be investigated for
European-wide system infrastructures.
FORWARD-LOOKING STATEMENTS
When used in this report by management of the Company, from time to time,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements that involve certain risks and
uncertainties. A variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward-looking statements,
some of which include risk factors previously discussed in this and other SEC
reports filed by the Company. These risk factors include, but are not limited
to, general economic conditions, environmental laws and regulations, the
weakening Asian markets, unforeseen competitive pressures, warranty expenses,
market acceptance of new products, unseasonably cool spring or summer weather, a
slow down in the chiller market, the inability to meet debt covenants,
unforeseen difficulties in maintaining mutually beneficial relationships with
strategic initiatives partners, the Year 2000 issue, and the results of
restructuring activities. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date thereof. The
Company undertakes no obligation to publicly release the results of any events
or circumstances after the date hereof to reflect the occurrence of
unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the reported market risks since the
end of the most recent fiscal year. See Note 5 to the Consolidated Financial
Statements (unaudited) for disclosures of additional financial instruments that
have been entered into by the Company since the end of the most recent fiscal
year.
13
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 5. OTHER EVENTS
On November 5, 1999, the Company announced the retirement, effective
December 31, 1999, of Joseph B. Hunter as President and Chief Executive
Officer. Mr. Hunter will continue to serve on the Company's Board of
Directors. The Company also announced the appointment of Mr. Ho Nyuk Choy as
President and Chief Executive Officer, effective November 1, 1999. Prior to
such appointment, Mr. Ho held and continues to hold the position of Group
Managing Director of the Company's parent company, OYL Industries Berhad, a
member of the Hong Leong Group Malaysia.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
NUMBER DESCRIPTION
------ -----------
Exhibit 10.16 Revolving Credit,
Term Loan and Security
Agreement dated September
30, 1999 with PNC Bank,
N.A.
Exhibit 10.17 First Amendment to Revolving Credit,
Term Loan and Security Agreement dated
October 25, 1999, with PNC Bank, N.A.
Exhibit 10.18 Second Amendment to Revolving Credit,
Term Loan and Security Agreement
dated November 12, 1999, with PNC
Bank, N.A.
Exhibit 27 Financial Data Schedule (filed herewith)
Exhibit 99.1 Press Release dated November 16, 1999
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the period.
14
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.
AAF-MCQUAY INC.
DATE NOVEMBER 12, 1999 By: /s/ BRUCE D. KRUEGER
-------------------- ------------------------
Bruce D. Krueger
Vice President of Finance and Controller
Principal Accounting Officer and
Principal Financial Officer
15
Exhibit Index
NUMBER DESCRIPTION
- ------ -----------
Exhibit 10.16 Revolving Credit,
Term Loan and Security
Agreement dated September
30, 1999 with PNC Bank,
N.A.
Exhibit 10.17 First Amendment to Revolving Credit,
Term Loan and Security Agreement dated
October 25, 1999, with PNC Bank, N.A.
Exhibit 10.18 Second Amendment to Revolving Credit,
Term Loan and Security Agreement
dated November 12, 1999, with PNC
Bank, N.A.
Exhibit 27 Financial Data Schedule (filed herewith)
16