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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ --------------
Commission file number
-------------------------------------
AQUA-CHEM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1900496
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7800 NORTH 113TH STREET
P.O. BOX 421
MILWAUKEE, WISCONSIN
(Address of Principal Executive Offices)
53201
(Zip Code)
(414) 359-0600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 14, 2001
---------------------------- --------------------------------
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 Statement of Operations -
Three and nine month periods ended
December 31, 2000 and December 31, 1999 4
Consolidated Balance Sheet -
December 31, 2000 and March 31, 2000 5
Consolidated Statement of Cash Flows -
Nine months ended December 31, 2000 and December 31, 1999 6
Notes to Consolidated Financial
Statements 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
Signature Page 16
2
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
3
4
AQUA-CHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
Net sales $ 53,103 $ 53,788 $ 168,217 $ 152,296
Cost of goods sold 38,686 41,325 124,483 118,485
--------- --------- --------- ---------
Gross margin 14,417 12,463 43,734 33,811
Selling, general and administrative expense 9,484 8,267 29,575 25,117
Restructuring charges -- 904 -- 1,738
--------- --------- --------- ---------
9,484 9,171 29,575 26,855
--------- --------- --------- ---------
Operating income 4,933 3,292 14,159 6,956
Other income (expense):
Interest income 194 33 391 131
Interest expense (3,648) (3,721) (11,073) (11,240)
Other, net (88) 14 (70) (68)
--------- --------- --------- ---------
(3,542) (3,674) (10,752) (11,177)
Income (loss) from continuing
operations before income
taxes and minority interest 1,391 (382) 3,407 (4,221)
Income tax expense (benefit) 686 (52) 1,744 (1,490)
Minority interest in earnings
of consolidated subsidiary 70 96 278 222
--------- --------- --------- ---------
Income (loss) from continuing
operations before extraordinary item 635 (426) 1,385 (2,953)
Extraordinary gain from repurchase of
outstanding notes, net of tax expense of $222 -- -- 333 --
--------- --------- --------- ---------
Net income (loss) before discontinued
operations 635 (426) 1,718 (2,953)
Discontinued operations:
Loss from discontinued
operations, net of tax benefit
of $260 and $273 respectively -- 430 -- 452
--------- --------- --------- ---------
Net income (loss) $ 635 $ (856) $ 1,718 $ (3,405)
--------- --------- --------- ---------
Preferred stock dividends 149 103 355 309
--------- --------- --------- ---------
Net income (loss) applicable to common $ 486 $ (959) $ 1,363 $ (3,714)
========= ========= ========= =========
PER SHARE DATA:
Basic:
Income (loss) from continuing
operations $ .49 $ (.53) $ 1.36 $ (3.26)
Loss from discontinued operations -- (.43) -- (.45)
--------- --------- --------- ---------
Income (loss) per common share $ 0.49 $ (0.96) $ 1.36 $ (3.71)
========= ========= ========= =========
Diluted:
Income (loss) from continuing
operations $ .49 $ (.53) $ 1.36 $ (3.26)
Loss from discontinued operations -- (.43) -- (.45)
--------- --------- --------- ---------
Income (loss) per common share $ 0.49 $ (0.96) $ 1.36 $ (3.71)
========= ========= ========= =========
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
4
5
AQUA-CHEM, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
December 31, March 31,
ASSETS 2000 2000
------------- ----------
Current assets:
Cash and cash equivalents $ 16,258 $ 7,326
Accounts receivable, less allowances of $808
at December 31, 2000 and $830 at March 31, 2000 32,699 36,870
Revenues in excess of billings 9,513 6,939
Inventories 19,283 26,063
Deferred income taxes 5,106 6,230
Prepaid expenses and other current assets 2,137 1,727
--------- ---------
Total current assets 84,996 85,155
Property, plant and equipment - net 31,551 32,576
Intangible assets, less accumulated amortization of
$3,612 at December 31, 2000 and $2,522 at March 31, 2000 36,327 37,373
Deferred income taxes 7,498 7,498
Other assets 6,481 6,987
--------- ---------
TOTAL ASSETS $ 166,853 $ 169,589
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings $ -- $ 500
Accounts payable
Trade 13,118 15,637
Other 3,634 5,547
Billings in excess of revenues 1,429 4,463
Compensation and benefits 6,195 4,020
Accrued interest 6,912 3,591
Net liabilities of discontinued operations 3,120 3,445
Other accrued expenses 13,236 11,662
--------- ---------
Total current liabilities 47,644 48,865
Long-term debt 123,064 125,189
Other long-term liabilities 5,623 5,399
--------- ---------
Total other liabilities 128,687 130,588
Minority interest in a consolidated subsidiary 596 602
Preferred stock with mandatory redemption provisions 4,497 4,970
Stockholders' equity:
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at December 31, 2000 and March 31, 2000 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (14,363) (15,684)
Accumulated other comprehensive income (loss) (308) 148
--------- ---------
Total stockholders' equity (deficit) (14,571) (15,436)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 166,853 $ 169,589
========= =========
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
5
6
AQUA-CHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
December 31,
--------------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,718 $ (3,405)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,685 4,396
Deferred tax expense 1,124 --
Extraordinary gain from repurchase of
outstanding notes, net of tax (333) --
Minority interest in earnings of
consolidated subsidiary 278 222
Loss from discontinued operations, net of tax -- 452
Restructuring charges, net of cash
expended of $1,107 and $2,399
respectively (1,107) (660)
Increase (decrease) in cash due to changes in:
Accounts receivable 4,171 (3,771)
Revenues in excess of billings (2,574) (4,763)
Inventories 6,780 1,954
Prepaid expenses and other current assets (410) 1,757
Accounts payable--trade (2,519) (2,480)
Accounts payable--other (1,913) 738
Billings in excess of revenues (3,034) 900
Accrued expenses and other current liabilities 7,005 (7,490)
Other, net (397) 1,204
-------- --------
Total adjustments 11,756 (7,541)
-------- --------
Net cash provided by (used in) operating activities 13,474 (10,946)
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 62 1,433
Proceeds from disposal of discontinued operations 951 --
Proceeds from notes receivable -- 2,279
Additions to property, plant and equipment (2,737) (4,114)
-------- --------
Net cash used in investing activities (1,724) (402)
Cash flows from financing activities:
Net change in short-term borrowings (500) 7,500
Repurchase of outstanding notes (1,488) --
Redemption of Series A Preferred Stock (815) --
Dividends paid (15) (90)
-------- --------
Net cash used in financing activities (2,818) 7,410
Net increase (decrease) in cash and cash equivalents 8,932 (3,938)
Cash and cash equivalents at beginning of period 7,326 5,498
-------- --------
Cash and cash equivalents at end of period $ 16,258 $ 1,560
======== ========
Cash paid (received) during the period for:
Interest $ 7,031 $ 14,195
Taxes $ 30 $ (1,609)
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
6
7
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
In the opinion of Management, the accompanying unaudited financial statements of
Aqua-Chem, Inc. contain all adjustments which are of a normal recurring nature
necessary to present fairly the financial position of the Company as of December
31, 2000, and the results of operations and cash flows for the periods
indicated. Interim financial results are not necessarily indicative of operating
results for an entire year. Certain notes and other information have been
condensed or omitted from these interim consolidated condensed financial
statements. Therefore, these statements should be read in conjunction with the
Aqua-Chem, Inc. annual report on Form 10K for its fiscal year ended March 31,
2000.
(1) Inventories
Inventories consist of the following:
December 31, March 31,
2000 2000
------------- ----------
Raw materials and work-in-process $15,283 $20,813
Finished goods 4,000 5,250
------- -------
Total inventories $19,283 $26,063
======= =======
(2) Revolving Credit Facility
Aqua-Chem has a $45 million secured revolving credit facility with
three major banks. Borrowings under this facility are made in the form
of revolving credit notes. These notes bear interest at a rate of
either prime or a Eurocurrency-based rate as defined in the facility.
The revolving credit agreement matures on July 1, 2003. The facility is
secured by substantially all of the assets of the Company. Outstanding
borrowings totaled $0 and $500 at December 31, 2000 and March 31, 2000,
respectively. The amount available under the facility is reduced by
revolver usage, outstanding letters of credit, and certain reserves as
defined in the facility. At December 31, 2000, availability under this
line totaled $40.7 million. Among other restrictions, the credit
agreement contains covenants relating to financial ratios and other
limitations, as defined by the agreement. As of December 31, 2000, the
Company was in compliance with the covenants contained in the
agreement.
(3) Restructuring Reserves
As of March 31, 2000, the Company's restructuring reserves totaled
$1,406. During the first nine months of Fiscal 2001, the Company
utilized $1,107 of these reserves primarily for severance and related
termination costs leaving a balance of $299 at December 31, 2000.
Management believes the remaining reserve, which is included in "Other
Accrued Expenses", adequately reflects the Company's remaining
liability associated with past restructuring actions.
(4) Discontinued Operations
During the fourth quarter of Fiscal 2000, the Company decided to exit
the Seawater and Industrial Business (the "S&I Business") and has
adjusted its reporting for all periods to reflect this business as a
discontinued operation.
During the second quarter of Fiscal 2001, the Company sold to Aquatech
International Corporation ("Aquatech") certain assets and technology of
its Seawater and Industrial Business for approximately $1 million. The
agreement also provides for potential future payments to Aqua-Chem
based upon Aquatech's sales of certain products during the five years
following this transaction. In conjunction with this transaction, five
employees of Aqua-Chem's Seawater and Industrial Business agreed to
become employees of Aquatech. To complete this transaction, the Company
amended its Indenture dated June 23, 1998 related to its 11 1/4% Senior
Subordinated Notes Due 2008 ("Notes") with the consent of the holders
of a majority of the outstanding Notes to reflect that a disposition or
7
8
discontinuance of all or a portion of the Company's Seawater and
Industrial Business shall not constitute an asset disposition as
defined by the Indenture.
The Company intends to complete all active contracts of the remaining
S&I Business and to fulfill its commitments for warranty service,
payments to vendors, and all other appropriate liabilities. While the
Company intends to fulfill those commitments of the remaining S&I
Business within one year, management is pursuing other, more
cost-effective, strategic alternatives, including opportunities to sell
the remaining portions of the discontinued business. However, no
assurances can be given that any other such alternatives will be
consummated.
In accordance with its treatment of the S&I Business as a discontinued
operation, the Company has separately delineated the net liabilities
and net operating results of the S&I Business on its Consolidated
Condensed Financial Statements. The following tables present certain
additional financial information with respect to the S&I Business:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------- ------------- ------------
Net sales $ 1,577 $ 1,907 $ 4,709 $ 9,820
Cost of goods sold 897 1,576 3,521 7,475
------- ------- ------- -------
Gross margin 680 331 1,188 2,345
Selling, general and administrative expenses 556 1,021 2,131 3,070
------- ------- ------- -------
Operating gain (loss) 124 (690) (943) (725)
Income tax benefit -- (260) -- (273)
------- ------- ------- -------
Net gain (loss) $ 124 $ (430) $ (943) $ (452)
======= ======= ======= =======
The Company charged the net pre-tax loss of $943 incurred by the S&I
Business during the nine months ended December 31, 2000 against the
reserve established at March 31, 2000 to provide for the orderly exit
from the S&I Business. Management believes that this reserve, which is
included in the Company's net liabilities of discontinued operations,
adequately reflects the Company's remaining net liability associated
with the exit from the S&I Business.
(5) Extraordinary Gain From Repurchase of Outstanding Notes
During the second quarter of Fiscal 2001, the Company purchased, on the
open market, $2,125 of the Company's 11 1/4% Senior Subordinated Notes
due July 1, 2008 ("Notes") at a price of $1,488, or 70% of face value.
The Company recognized a related pre-tax gain of $555, after fees and
the early amortization of a pro-rata portion of original issuance costs
which were being amortized over the life of the Notes. The after-tax
gain on this transaction totaled $333. At December 31, 2000, the
remaining Notes outstanding totaled $122,875.
8
9
(6) Segment Information
Aqua-Chem's reportable business segments are:
Boiler Group: consists of packaged firetube, commercial and
industrial watertube boilers, burners and aftermarket parts.
F&M Business: consists of water purification and desalination
systems.
Other: includes the operations of the corporate office, interest
expense on Aqua-Chem's current and long-term debt obligations,
interest income, and any eliminating entries.
Aqua-Chem's reportable segments are strategic business units that offer
different products and services. They are managed differently as each
business requires different technology and marketing strategies.
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Segment
Net sales:
Boiler Group $ 48,024 $ 47,863 $155,016 $136,032
F&M Business 5,079 5,925 13,201 16,264
-------- -------- -------- --------
Total $ 53,103 $ 53,788 $168,217 $152,296
======== ======== ======== ========
Income (loss) before income
taxes, minority interest and
extraordinary item:
Boiler Group $ 4,817 $ 4,241 $ 15,482 $ 8,934
F&M Business 285 82 (317) (304)
Other (3,711) (4,705) (11,758) (12,851)
-------- -------- -------- --------
Total $ 1,391 $ (382) $ 3,407 $ (4,221)
======== ======== ======== ========
(7) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. This statement must be adopted no later
than April 1, 2001, although earlier application is permitted. The
Company plans to adopt SFAS No. 133 effective April 1, 2001 and does
not expect the impact of adopting this Standard to be material to its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue
recognition in financial statements. In June 2000, the SEC issued SAB
No. 101B to defer the effective date of implementation of SAB No. 101
until the fourth quarter of Fiscal 2001. The Company will adopt SAB 101
during the fourth quarter of Fiscal 2001 and does not expect the
adoption of this reporting requirement to have a material impact on its
financial position or results of operations.
In September 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (the "EITF") issued EITF 00-10 which
provided guidance for the accounting for shipping and handling fees and
costs. With respect to this issue, EITF 00-10 requires companies to
classify as revenues shipping and handling fees billed to customers.
The related costs should be reflected within cost of sales or within
selling, general and administrative expense. Currently the Company
offsets these costs as a reduction of gross sales. Upon implementation,
9
10
the Company will reclassify the costs to cost of goods sold. The
Company will adopt EITF 00-10 during the fourth quarter of Fiscal 2001.
The implementation of EITF 00-10 will not impact the Company's reported
gross margin, operating income, or net income.
(8) Accumulated Comprehensive Income
Accumulated other comprehensive income consists solely of cumulative
translation adjustments as of December 31, 2000 and March 31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF AQUA-CHEM
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated condensed financial
statements of the Company appearing elsewhere in this document.
RESULTS OF OPERATIONS
Net sales and gross margins for the Boiler Group and the F&M Business
for the periods indicated are listed below. These amounts exclude activity
associated with the S&I Business.
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- ----------------
(Dollars in Millions)
-------------------------------------------------------------------
Net sales:
Boiler Group $48.0 $ 47.9 $ 155.0 $ 136.0
F&M Business 5.1 5.9 13.2 16.3
----- ----- ------ ------
Total $53.1 $ 53.8 $ 168.2 $ 152.3
===== ===== ====== ======
Gross Margin:
Boiler Group $13.2 $ 11.5 $ 41.4 $ 31.1
F&M Business 1.2 1.0 2.3 2.7
----- ----- ------ ------
Total $14.4 $ 12.5 $ 43.7 $ 33.8
===== ===== ====== ======
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999
Net Sales. Net sales from continuing operations for the quarter ended
December 31, 2000 decreased $0.7 million (1.3%) to $53.1 million from $53.8
million for the comparable period of Fiscal 2000. Boiler Group revenue grew $0.1
million (0.2%) due to increased volume of firetube boilers and energy recovery
systems offset by lower volume of industrial watertube boilers. Net sales from
the F&M Business declined $0.8 million (13.6%) due to lower volume from its
military and pharmaceutical product lines offset partially by increased volume
from its aftermarket parts business and its bottled water product line.
Gross Margin. Gross margin for the quarter ended December 31, 2000
increased $1.9 million (15.2%) to $14.4 million from $12.5 million for the
comparable period of Fiscal 2000. The consolidated gross margin percentage
increased 3.9 percentage points to 27.1% from 23.2% for the comparable period
during Fiscal 2000. The Boiler Group's gross margin increased 3.5 percentage
points to 27.5% due to a sales mix favoring higher margin products combined with
improved selling prices as well as greater manufacturing efficiencies resulting
from higher shop utilization rates, recent capital additions, past restructuring
actions, and on-going continuous improvement programs. The F&M Business' gross
10
11
margin percentage increased 6.6 percentage points to 23.5% due to a sales mix
more heavily weighted toward higher margin aftermarket products offset partially
by lower shop utilization rates. The lower shop utilization rates resulted from
lower production volume following the removal of the deaerator product line from
the Knoxville, TN facility. Production volume was also negatively impacted by
lower order volume in the military product lines related to the timing of
military spending on projects that involve the Company's military products.
Selling, General and Administrative. Selling, General and
Administrative spending increased $1.2 million (14.7%) to $9.5 million from $8.3
million for the comparable period of Fiscal 2000 due to higher commission cost
related to the higher Boiler Group selling prices, increased Boiler Group
research and development spending, and increased expense associated with
performance-based compensation resulting from improved operating results.
Restructuring. The Company recorded no restructuring costs during the
third quarter of Fiscal 2001. By comparison, during the third quarter of Fiscal
2000 the Company recorded a $0.9 million restructuring charge attributable to
employee termination payments and related contractual costs.
Operating Income. For the reasons set forth above, operating income
increased $1.6 million to $4.9 million from $3.3 million.
Other Expense. Other expense for the quarter ended December 31, 2000
was $3.5 million as compared to $3.7 million during the comparable period during
Fiscal 2000. Interest expense totaled $3.6 million during the third quarter of
Fiscal 2001 as compared to $3.7 million during the comparable period during
Fiscal 2000. The decrease in interest expense resulted from lower long term
bonds outstanding combined with lower draws on the Company's operating line of
credit during third quarter of Fiscal 2001 as compared to the same period during
Fiscal 2000.
Discontinued Operations. During the quarter ended December 31, 2000,
the Company experienced a pre-tax gain on its S&I Business of $0.1 million as
compared to a pre-tax loss of $0.7 million during the comparable period of
Fiscal 2000. The current period gain was credited to the reserve for
discontinued operations established by the Company during the fourth quarter of
Fiscal 2000. See Note 4 to the Consolidated Financial Statements for further
information.
NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1999
Net Sales. Net sales from continuing operations for the nine months
ended December 31, 2000 increased $15.9 million (10.5%) to $168.2 million from
$152.3 million for the comparable period of Fiscal 2000. Boiler Group revenue
grew $19 million (14.0%) due to increased volume of premium firetube boilers,
energy recovery systems and steel fabrication offset partially by lower volume
of industrial watertube boilers. Net sales from the F&M Business declined $3.1
million (18.8%) due to lower volume from its pharmaceutical, bottled water and
military product lines.
Gross Margin. Gross margin for the nine months ended December 31, 2000
increased $9.9 million (29.3%) to $43.7 million from $33.8 million for the
comparable period of Fiscal 2000. The consolidated gross margin percentage
increased 3.8 percentage points to 26.0% from 22.2% for the comparable period
during Fiscal 2000. The Boiler Group's gross margin increased 3.8 percentage
points to 26.7% due to a sales mix favoring higher margin boilers and related
equipment combined with improved selling prices as well as greater manufacturing
efficiencies resulting from higher shop utilization rates, recent capital
additions, past restructuring actions and on-going continuous improvement
programs. The F&M Business' gross margin percentage increased 0.8 percentage
points to 17.4% from 16.6% primarily due to a sales mix more heavily weighted
toward higher margin aftermarket products offset partially by manufacturing
disruption associated with the removal of the deaerator product line from its
Knoxville, TN facility combined with lower overall production volume at that
facility resulting from the aforementioned transfer of the deaerator line. Lower
order volume in the bottled water and pharmaceutical product lines was due to a
decrease in market activity and an increasingly competitive environment. Lower
order volume in military product lines related to the timing of military
spending on projects that involve the Company's military products also
contributed to lower production volume.
Selling, General and Administrative. Selling, General, and
Administrative spending increased $4.5 million (17.7%) to $29.6 million from
$25.1 million for the comparable period during Fiscal 2000. The increase is due
11
12
primarily to higher commission cost related to the higher Boiler Group sales
volume, increased selling prices, and a mix favoring higher margin product,
which typically carry higher commission rates, to increased Boiler Group
research and development spending, and to increased expense associated with
performance-based compensation resulting from improved operating results.
Restructuring. The Company recorded no restructuring charges during the
first nine months of Fiscal 2001. By comparison, during the first nine months of
Fiscal 2000, the Company recorded restructuring charges totaling $1.7 million.
These charges were attributable to employee termination payments and related
contractual and outplacement costs.
Operating Income. For the reasons set forth above, operating income
increased $7.2 million to $14.2 million from $7.0 million.
Other Expense. Other expense for the nine months ended December 31,
2000 was $10.8 million as compared to $11.2 million during the comparable period
during Fiscal 2000. Interest expense totaled $11.1 million and $11.2 million
during the first nine months of Fiscal 2001 and Fiscal 2000, respectively.
Extraordinary Gain. During the second quarter of Fiscal 2001, the
Company purchased, on the open market, $2.1 million of the Company's 11 1/4%
Senior Subordinated Notes due July 1, 2008 ("Notes") at a price of $1.5 million,
or 70% of face value. The Company recognized a related pre-tax gain, after fees
and the early amortization of a pro-rata portion of original issuance costs
which were being amortized over the life of the Notes, of $.6 million. After
providing for income taxes, the extraordinary gain totaled $.3 million.
Discontinued Operations. During the nine months ended December 31,
2000, the Company experienced a pre-tax loss on its S&I Business of $0.9 million
as compared to a pre-tax loss of $0.7 million during the comparable period of
Fiscal 2000. See Note 4 to the Consolidated Financial Statements for further
information.
During the second quarter of Fiscal 2001, the Company sold to Aquatech
International Corporation ("Aquatech") certain assets and technology of its
Seawater and Industrial Business for approximately $1 million. The agreement
also provides for potential future payments to Aqua-Chem based upon Aquatech's
sales of certain products during the five years following this transaction. In
conjunction with this transaction, five employees of Aqua-Chem's Seawater and
Industrial Business agreed to become employees of Aquatech. To complete this
transaction, the Company amended its Indenture dated June 23, 1998 related to
its 11 1/4% Senior Subordinated Notes Due 2008 ("Notes") with the consent of the
holders of a majority of the outstanding Notes to reflect that a disposition or
discontinuance of all or a portion of the Company's Seawater and Industrial
Business shall not constitute an asset disposition as defined by the Indenture.
BACKLOG
The Company's backlog from continuing operations as of December 31,
2000 decreased $5.6 million to $58.1 million from $63.7 million at March 31,
2000. This reduction in backlog during the first three quarters of Fiscal 2001
is largely driven by a reduction in the Boiler Group's backlog due to strong
shipment volume during the first and second fiscal quarters of 2001 following
unusually high order volume during the fourth fiscal quarter of 2000. That high
order volume was related to customer release of orders delayed until after
December 31, 1999 associated with concerns regarding the Year 2000 computer
issue. The decrease in backlog also reflects an increase in throughput at the
Company's manufacturing plants as a result of the improvements in efficiency and
productivity. Order volume during the first three quarters of Fiscal 2001
totaled $162.7 million verses $161.9 million during the comparable period of
Fiscal 2000.
During the third quarter of Fiscal 2001, the Company realized a
slowdown in orders of firetube boilers, industrial watertube boilers and energy
recovery systems resulting from softening market conditions. These declines were
offset partially by an increase in fabrication orders reflecting increased
demand associated with power generation plant construction. The Company's
backlog decreased from $59.3 million at September 30, 2000 to $58.1 million at
December 31, 2000.
12
13
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $13.5 million during the nine
months ended December 31, 2000 as compared to cash used of $10.9 million during
the comparable period of Fiscal 2000. The increase of $24.4 million is
attributable to improved operating results as well as improved accounts
receivable and inventory management, an increase in interest payable due to the
timing of interest payments, and increased income taxes payable and accrued
performance based pay attributable to improved operating results.
Cash used in investing activities was $1.7 million during the period as
compared to cash used of $.4 million during the comparable period of Fiscal
2000. Capital spending during the period totaled $2.7 million whereas capital
spending during the comparable period of Fiscal 2000 totaled $4.1 million.
During the second quarter of Fiscal 2001, the Company received net proceeds of
$1.0 million related to the disposal of a portion of the S&I Business. During
the first nine months of Fiscal 2000, the Company also received proceeds of $1.2
million related to the sale of its vacant manufacturing facility in Lebanon, PA
and $2.2 million related to the settlement of a note receivable associated with
the acquisition of National Dynamics Corporation's assets that occurred in June
1998.
Cash used in financing activities was $2.8 million during the period as
compared to cash provided of $7.4 million during the comparable period of Fiscal
2000. Fiscal 2001 activity included $.5 million related to net repayments on the
Company's revolving credit facility, $1.5 million related to the repurchase of
Notes, and $.8 million related to the redemption of Series A Preferred Stock.
Fiscal 2000 activity included $7.5 million provided by short term borrowings.
BORROWING AVAILABILITY AND LIMITATIONS.
The Company has a $45.0 million revolving credit facility that is
secured by substantially all assets of the Company. Under the revolving credit
facility, the Company is required to comply with covenants included in the
agreement as amended. These covenants include a requirement to maintain a
specified level of consolidated tangible net worth, a specified fixed charge
coverage ratio, and a specified senior funded debt to consolidated EBITDA ratio.
As of December 31, 2000, under the amended revolving credit facility, the
Company was eligible to borrow $40.7 million, had no borrowings against the
facility, and had $16.3 million of cash and cash equivalents. As of February 9,
2001, under the amended revolving credit facility, the Company was eligible to
borrow $41.4 million, had no borrowings against the facility, and had $15.1
million of cash and cash equivalents. The Company intends to fund future working
capital, capital expenditures and debt service requirements through cash flows
generated from operating activities and, when necessary, from borrowings under
the revolving credit facility.
At December 31, 2000, the Company had $123 million of 11 1/4% Senior
Subordinated Notes (the "Notes") outstanding under an Indenture dated June 23,
1998 (the "Indenture"). The Company is able to incur additional debt, provided
that the Company satisfies certain requirements identified in the Indenture. The
Company's ability to incur such additional indebtedness, however, is limited by
covenants included in the Company's revolving credit facility.
In January 2001, the Company funded $7.0 million of interest due under
the Indenture out of its cash reserves. The Company expects no further cash
needs for debt service under the Indenture during the remainder of Fiscal 2001.
When the Notes mature in 2008, the Company will be obligated to repay $123
million to the holders of the Notes. During Fiscal 2002, the Company is subject
to the mandatory redemption of the remaining $1 million of its outstanding
Series A Preferred Stock.
The Company believes that its manufacturing facilities and computer
software and hardware are generally adequate to meet projected needs. During
Fiscal 2001, the Company expects to make approximately $4.0 million of capital
expenditures to be spent primarily at its manufacturing facilities on projects
and equipment designed to improve quality and efficiency. During the first nine
months of Fiscal 2001, the Company's capital spending totaled $2.7 million.
Management believes that its existing cash resources, cash generated
from operating activities, and its borrowing availability under the revolving
credit facility will be adequate to cover the Company's working capital, debt
service and capital expenditure requirements on a short and long term basis.
13
14
At December 31, 2000, the Company had no material market risk exposure
(e.g., interest rate risk, foreign currency exchange rate risk or commodity
price risk).
STRATEGY
The Board of Directors of the Company has, in the past and may, from
time to time in the future, consider a variety of strategic alternatives to
maximize shareholder value for the holders of common and preferred stock,
including, but not limited to, the disposition of one or more of its business
units, the repurchase of its outstanding notes, entering into partnerships,
joint ventures or other strategic alliances or the pursuit of acquisitions
within its industry.
LEGAL PROCEEDINGS
The Company has been named as one of many defendants in numerous
lawsuits alleging personal injury arising from exposure to asbestos-containing
materials contained in certain boilers manufactured by the Company many years
ago. To date, the Company has disposed of approximately 3,400 lawsuits of this
nature which included at least 27,000 plaintiffs, including the settlement
during Fiscal 2001 of several lawsuits which included over 1,000 plaintiffs
each. In the vast majority of the closed cases, neither the Company nor its
insurers have made payments to the plaintiffs. The Company has not admitted
liability or been found liable for the plaintiffs' injuries in any case.
Currently, there are at least 13,500 lawsuits pending against the
Company which include at least 48,500 plaintiffs. This represents an increase of
more than 2,000 lawsuits and more than 7,000 plaintiffs from the quantities the
Company reported in its Annual Report filed on Form 10K for the fiscal year
ended March 31, 2000. While the Company intends to continue to work to dispose
of these lawsuits, the number of cases filed and the number of plaintiffs per
case have continued to increase, and the Company expects that additional
lawsuits will be filed in the future. The Company believes that substantially
all of the pending lawsuits are without merit. The Company will continue to
vigorously defend itself in the open cases which, in some instances, may not be
resolved for several years.
Various factors preclude certainty in the determination of the
Company's total potential cost to resolve the open cases or cases that may be
filed against the Company in the future. For example, pleadings generally do not
specify the amount of damages sought, and the Company is typically only one of
many defendants initially named. Additionally, bankruptcy filings of other
companies with asbestos-related litigation could affect the Company's
asbestos-related costs over time. These matters make it difficult to determine
the Company's proportionate share or amount of liability, if any, in these cases
with certainty. However, based on its historical experience, the Company
continues to believe that its insurance coverage should be adequate to cover
future costs in these cases. The Company is continuing to monitor this situation
and is undertaking appropriate actions to assess the potential impact of future
cases on the Company. Although Aqua-Chem believes the costs associated with
these matters will not have a material adverse effect on its results of
operations or financial condition, there can be no assurance to this effect.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this
report relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include general
economic conditions, the cyclical nature of its business, its customers' access
to credit, political uncertainty and civil unrest in various areas of the world,
pricing, product initiatives and other actions taken by competitors, disruptions
in production capacity, excess inventory levels, the effect of changes in laws
and regulations (including government subsidies and international trade
regulations), technological difficulties, changes in environmental laws, the
outcome of asbestos-related litigation, and employee and labor relations.
14
15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The Company is filing no exhibits with the Form 10Q.
(b) The Company filed no reports on Form 8-K during the quarter ended
December 31, 2000.
15
16
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 14, 2001 By: /s/ James A. Kettinger
--------------------------
James A. Kettinger
Senior Vice President and
Chief Financial Officer
16