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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
-------------------------------------------------
Commission File Number 333-51355
---------------------------------------------------------
NUMATICS, INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Michigan 38-2955710
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1450 North Milford Road, Milford, Michigan 48357
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(Address of principal executive offices) (Zip Code)
(248) 887-4111
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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:
Common Stock - 2,397,235 shares as of August 13, 2002
INDEX
NUMATICS, INCORPORATED AND SUBSIDIARIES
Page No. Description
- --------------------------------------------------------------------------------
1 PART I. FINANCIAL INFORMATION
1 Item 1 Consolidated Condensed Financial Statements (Unaudited)
4 Notes to Consolidated Condensed Financial Statements
(Unaudited)
10 Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
13 Item 3 Quantitative and Qualitative Disclosures About Market Risk
14 PART II. OTHER INFORMATION
14 Item 6 Exhibits and Reports on Form 8-K
14 Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Numatics, Incorporated
Consolidated Condensed Statements of Operations
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- -------------------------
2002 2001 2002 2001
-------------- ------------ ------------ ------------
Net sales $ 28,024,085 $ 29,538,980 $ 54,839,247 $ 62,300,894
Costs and expenses:
Costs of products sold 17,464,544 18,079,745 33,828,005 38,950,294
Marketing, engineering, general
and administrative 6,291,429 7,184,046 12,417,598 15,144,070
Single business tax 76,661 75,086 156,620 170,572
------------ ------------ ------------ ------------
Operating income 4,191,451 4,200,103 8,437,024 8,035,958
Other expenses
Interest and other financing
expenses 4,627,747 4,132,923 9,184,779 8,240,814
Other (1,209,854) 329,758 (528,342) 866,148
------------ ------------ ------------ ------------
Income (loss) before income taxes 773,558 (262,578) (219,413) (1,071,004)
Income taxes 290,315 (69,655) 111,892 (319,390)
------------ ------------ ------------ ------------
Net income (loss) $ 483,243 $ (192,923) (331,305) $ (751,614)
============ ============ ============ ============
See accompanying notes.
1
Numatics, Incorporated
Consolidated Condensed Balance Sheets
(Unaudited)
June 30 December 31
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and equivalents $ 920,736 $ 1,895,027
Accounts receivable 19,633,362 17,415,420
Inventories 33,288,628 33,119,341
Other current assets 3,818,563 3,935,360
------------- -------------
Total current assets 57,661,289 56,365,148
Other assets:
Goodwill 5,032,423 4,815,941
Debt issuance costs, net of accumulated amortization 5,826,425 6,102,917
Deferred income taxes 3,355,800 3,386,779
Investment in affiliates 2,226,596 2,199,919
Other 889,636 881,209
------------- -------------
17,330,880 17,386,765
Properties:
Land 1,377,459 1,351,037
Buildings and improvements 15,085,451 15,144,096
Machinery and equipment 52,583,934 53,165,838
------------- -------------
69,046,844 69,660,971
Less accumulated depreciation (39,445,321) (38,470,241)
------------- -------------
29,601,523 31,190,730
------------- -------------
$ 104,593,692 $ 104,942,643
============= =============
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade $ 6,436,227 $ 5,237,846
Accrued interest 3,343,604 3,382,493
Other accrued expenses 834,835 1,377,074
Compensation and employee benefits 2,631,539 2,346,072
Income and single business tax 418,656 704,467
Current portion of long term debt 1,980,428 1,980,418
------------- -------------
Total current liabilities 15,645,289 15,028,370
Long term debt, less current portion 160,557,535 159,866,260
Deferred retirement benefits 8,501,303 8,127,205
Deferred income taxes 289,861 260,643
Minority interest in subsidiaries (redeemable at $562,782 in 2002 and $475,074
in 2001 upon the happening of certain events outside the control of the
company.) 442,704 397,576
Common stock $.01 par value, 9,950,000 shares authorized; 2,397,235 shares
outstanding at 2002 and 2,607,318 shares outstanding at 2001 and
related additional paid in capital 4,602,151 4,602,151
Treasury stock; 262,340 shares at 2002 and 52,257 shares at 2001 (3,347,280) (1,089,996)
Accumulated deficiency (80,987,492) (80,656,187)
Accumulated other comprehensive loss (1,110,379) (1,593,379)
------------- -------------
(80,843,000) (78,737,411)
------------- -------------
$ 104,593,692 $ 104,942,643
============= =============
See accompanying notes.
2
Numatics, Incorporated
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30
---------------------------
2002 2001
------------ ------------
Operating activities
Net loss $ (331,305) $ (751,614)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,342,045 2,760,524
Amortization 634,963 595,325
Minority interest in subsidiary earnings 45,128 (138,641)
Deferred taxes 813,289 112,441
Deferred retirement benefits 487,529 402,627
Unrealized foreign currency (gains) losses (825,402) 574,072
Changes in operating assets and liabilities:
Trade receivables (424,763) 393,192
Inventories 651,387 3,128,239
Other current assets 46,927 (280,102)
Accounts payable and accrued expenses 273,394 (2,763,173)
Compensation and employee benefits 323,455 (1,549,925)
Income and single business taxes (1,219,690) (90,840)
----------- -----------
Net cash provided by operating activities 2,816,957 2,392,125
Investing activities
Capital expenditures (431,521) (1,283,992)
Other investments - 1,397
----------- -----------
Net cash used in investing activities (431,521) (1,282,595)
Financing activities
Debt repayments (3,007,315) (1,413,597)
Debt issuance costs (309,563) (123,909)
----------- -----------
Net cash used in financing activities (3,316,878) (1,537,506)
Effect of exchange rate changes on cash (42,849) 213,430
----------- -----------
Net decrease in cash and cash equivalents (974,291) (214,546)
Cash and equivalents at beginning of period 1,895,027 975,267
----------- -----------
Cash and equivalents at end of period $ 920,736 $ 760,721
=========== ===========
See accompanying notes.
3
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Numatics, Incorporated annual report on Form
10-K for the year ended December 31, 2001.
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" was adopted as of January 1, 2002. Under this
statement, goodwill is no longer amortized but is subject to annual impairment
tests or more frequent tests if impairment indicators arise. The impairment
tests of our goodwill were performed as required and it was determined that no
impairment of the goodwill existed at January 1, 2002. The adoption of SFAS 142
has had no material effect on the Company's financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statement 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," was issued. Under
the provisions of SFAS 145 gains and losses associated with the extinguishment
of debt will no longer be classified as extraordinary. The Company will be
required to adopt SFAS 145 January 1, 2003. Accordingly, the Company will
reclassify on that date the $303,818 (net of income taxes of $148,000) recorded
in 2001 as extraordinary item - early extinguishment of debt.
4
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2002
2. COMPREHENSIVE INCOME
The components of comprehensive income for the three-month and six-month periods
ended June 30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------- --------------------------
2002 2001 2002 2001
--------- ---------- ---------- ----------
Net income (loss) $ 483,243 $(192,923) $(331,305) $(751,614)
Foreign currency
translation
adjustments 466,524 265,745 483,000 (20,905)
--------- --------- --------- ---------
$ 949,767 $ 72,822 $ 151,695 $(772,519)
The components of accumulated other comprehensive loss at June 30, 2002 and
December 31, 2001 are as follows:
6/30/2002 12/31/2001
------------- ------------
Foreign currency translation
adjustments $ (557,671) $(1,040,671)
Minimum pension liability (552,708) (552,708)
----------- -----------
$(1,110,379) $(1,593,379)
=========== ===========
3. LONG-TERM DEBT
On August 13, 2002, the Company and its lenders agreed to amendments to the
terms of the senior credit facilities, which include two term loans payable and
two revolving notes payable. These amendments revised certain covenant
requirements concerning tangible net worth, debt service coverage and interest
coverage through December 31, 2002. The Company was in compliance with all
covenants as amended.
4. SEGMENT AND GEOGRAPHIC INFORMATION
The Company reports its segments based on geographic area. The operating
segments' accounting policies are consistent with those described in Note 1.
Financial information, summarized by geographic area, is as follows:
5
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2002
4. SEGMENT AND GEOGRAPHIC INFORMATION (continued)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales
North America $23,241,384 $24,632,006 $45,514,455 $51,251,830
International 4,782,701 4,906,974 9,324,792 11,049,064
----------- ----------- ----------- -----------
$28,024,085 $29,538,980 $54,839,247 $62,300,894
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Operating income
North America $ 3,737,267 $ 3,913,351 $ 7,551,823 $ 7,063,107
International 454,184 286,752 885,201 972,851
----------- ----------- ----------- -----------
$ 4,191,451 $ 4,200,103 $ 8,437,024 $ 8,035,958
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The $115 million of 9 5/8 % senior subordinated notes issued by Numatics,
Incorporated in 1998 are guaranteed by the Company's United States subsidiaries
in which it owns 100 % of the voting stock. Each of the guarantor subsidiaries
has fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal, premium, if any, and interest on the Notes.
The following supplemental consolidating condensed financial statements present:
1. Consolidating condensed balance sheets as of June 30, 2002 and December 31,
2001 and consolidating condensed statements of operations for the three and
six month periods ended June 30, 2002 and 2001 and consolidating condensed
statements of cash flows for the six months ended June 30, 2002 and 2001.
2. Numatics, Incorporated (the Parent), combined guarantor subsidiaries and
combined non-guarantor subsidiaries (consisting of the Parent's foreign
subsidiaries).
3. Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the guarantor
subsidiaries are material to investors. Therefore, separate financial statements
and other disclosures concerning the guarantor subsidiaries are not presented.
6
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2002
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
BALANCE SHEET
June 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------
Trade receivables $ 9,410,909 $ 2,154,973 $ 8,067,480 $ - $ 19,633,362
Inventories 19,465,468 4,263,267 10,538,893 (979,000) 33,288,628
Other 3,085,502 192,109 1,461,688 - 4,739,299
---------------------------------------------------------------------------------
Total current assets 31,961,879 6,610,349 20,068,061 (979,000) 57,661,289
Goodwill 1,248,777 - 2,657,801 1,125,845 5,032,423
Other 23,121,084 40,572 1,203,910 (12,067,109) 12,298,457
Intercompany amounts 19,011,431 1,641,881 8,073,352 (28,726,664) -
Property, plant and equipment, net of
accumulated depreciation 23,891,681 951,960 4,757,882 - 29,601,523
---------------------------------------------------------------------------------
$ 99,234,852 $ 9,244,762 $ 36,761,006 $ (40,646,928) 104,593,692
=================================================================================
Accounts payable and accrued expenses $ 7,033,228 $ 823,509 $ 2,757,929 $ - $ 10,614,666
Compensation and employee benefits 1,454,828 154,897 1,021,814 - 2,631,539
Current portion of long-term debt 1,711,249 - 269,179 - 1,980,428
Other (548,042) (15,034) 981,732 - 418,656
---------------------------------------------------------------------------------
Total current liabilities 9,651,263 963,372 5,030,654 - 15,645,289
Long-term debt less current portion 156,662,996 158,819 3,735,720 - 160,557,535
Other 8,501,303 - 289,861 442,704 9,233,868
Intercompany amounts 7,462,010 4,281,660 16,982,994 (28,726,664) -
Accumulated deficiency (83,042,720) 3,840,911 10,721,777 (12,362,968) (80,843,000)
---------------------------------------------------------------------------------
$ 99,234,852 $ 9,244,762 $ 36,761,006 $ (40,646,928) $ 104,593,692
=================================================================================
December 31, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------
Trade receivables $ 8,654,985 $ 1,753,498 $ 7,006,937 $ - $ 17,415,420
Inventories 19,582,043 4,317,761 10,211,537 (992,000) 33,119,341
Other 3,769,247 259,639 1,801,501 - 5,830,387
---------------------------------------------------------------------------------
Total current assets 32,006,275 6,330,898 19,019,975 (992,000) 56,365,148
Goodwill 1,248,777 - 2,441,319 1,125,845 4,815,941
Other 23,382,489 40,572 1,214,872 (12,067,109) 12,570,824
Intercompany amounts 19,400,659 895,713 7,539,936 (27,836,308) -
Property, plant and equipment, net of
accumulated depreciation 25,410,717 1,062,778 4,717,235 - 31,190,730
---------------------------------------------------------------------------------
$ 101,448,917 $ 8,329,961 $ 34,933,337 $ (39,769,572) $ 104,942,643
=================================================================================
Accounts payable and accrued expenses $ 6,916,818 $ 451,354 $ 2,629,241 $ - $ 9,997,413
Compensation and employee benefits 1,175,320 136,472 1,034,280 - 2,346,072
Current portion of long-term debt 1,711,249 - 269,169 - 1,980,418
Other 20,467 (20,171) 704,171 - 704,467
---------------------------------------------------------------------------------
Total current liabilities 9,823,854 567,655 4,636,861 - 15,028,370
Long-term debt less current portion 154,987,882 198,221 4,680,157 - 159,866,260
Other 8,013,774 - 374,074 397,576 8,785,424
Intercompany amounts 7,564,923 4,078,376 16,193,009 (27,836,308) -
Accumulated deficiency (78,941,516) 3,485,709 9,049,236 (12,330,840) (78,737,411)
---------------------------------------------------------------------------------
$ 101,448,917 $ 8,329,961 $ 34,933,337 $ (39,769,572) $ 104,942,643
=================================================================================
7
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2002
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF OPERATIONS
Three Months Ended June 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------------------
Net sales $ 18,624,995 $ 3,746,938 $ 11,366,152 $ (5,714,000) $ 28,024,085
Costs and expenses 15,852,964 3,374,488 10,319,182 (5,714,000) 23,832,634
------------ ------------ ------------ ------------ ------------
Operating income 2,772,031 372,450 1,046,970 - 4,191,451
Interest and other 3,710,007 117,375 (145,425) 26,251 3,708,208
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (937,976) $ 255,075 $ 1,192,395 $ (26,251) $ 483,243
============ ============ ============ ============ ============
Three Months Ended June 30, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------
Net sales $ 20,415,493 $ 3,154,436 $ 10,977,051 $ (5,008,000) $ 29,538,980
Costs and expenses 17,029,688 3,118,961 10,184,662 (4,994,434) 25,338,877
------------ ------------ ------------ ------------ ------------
Operating income 3,385,805 35,475 792,389 (13,566) 4,200,103
Interest and other 4,107,946 15,199 490,494 (220,613) 4,393,026
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (722,141) $ 20,276 $ 301,895 $ 207,047 $ (192,923)
============ ============ ============ ============ ============
Six Months Ended June 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------
Net sales $ 37,213,245 $ 7,098,376 $ 21,896,626 $(11,369,000) $ 54,839,247
Costs and expenses 31,255,481 6,554,165 19,974,577 (11,382,000) 46,402,223
------------ ------------ ------------ ------------ ------------
Operating income 5,957,764 544,211 1,922,049 13,000 8,437,024
Interest and other 7,857,642 189,003 676,556 45,128 8,768,329
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1,899,878) $ 355,208 $ 1,245,493 $ (32,128) $ (331,305)
============ ============ ============ ============ ============
Six Months Ended June 30, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------
Net sales $ 42,101,481 $ 7,034,883 $ 23,580,530 $(10,416,000) $ 62,300,894
Costs and expenses 36,066,116 6,946,552 21,703,136 (10,450,868) 54,264,936
------------ ------------ ------------ ------------ ------------
Operating income 6,035,365 88,331 1,877,394 34,868 8,035,958
Interest and other 7,791,964 43,519 1,279,706 (327,617) 8,787,572
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1,756,599) $ 44,812 $ 597,688 $ 362,485 $ (751,614)
============ ============ ============ ============ ============
8
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2002
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF CASH FLOWS
Six Months ended June 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,542,259 $ 511,652 $ 763,046 $ - $ 2,816,957
Cash flows from investing activities:
Capital expenditures (405,662) (19,946) (5,913) - (431,521)
Other investments - - - - -
------------------------------------------------------------------------------
Net cash used in investing activities (405,662) (19,946) (5,913) - (431,521)
Cash flows from financing activities:
Debt repayments (1,794,710) (39,402) (1,173,203) - (3,007,315)
Debt issuance costs (310,101) - 538 - (309,563)
Other - - 47,793 (90,642) (42,849)
------------------------------------------------------------------------------
Net cash used in financing activities (2,104,811) (39,402) (1,124,872) (90,642) (3,359,727)
Intercompany accounts 605,847 (542,884) (153,605) 90,642 -
------------------------------------------------------------------------------
Net decrease in cash (362,367) (90,580) (521,344) - (974,291)
------------------------------------------------------------------------------
Cash and equivalents at beginning of period 401,062 207,257 1,286,708 - 1,895,027
------------------------------------------------------------------------------
Cash and equivalents at end of period $ 38,695 $ 116,677 $ 765,364 $ - $ 920,736
==============================================================================
Six Months ended June 30, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------
Net cash provided by operating activities $ 768,343 $ 285,724 $ 1,351,518 $ (13,460) $ 2,392,125
Cash flows from investing activities:
Capital expenditures (837,562) (54,406) (392,024) - (1,283,992)
Other investments - - 1,397 - 1,397
---------------------------------------------------------------------------
Net cash used in investing activities (837,562) (54,406) (390,627) - (1,282,595)
Cash flows from financing activities:
Proceeds from borrowing (repayments) (1,430,707) (39,402) 56,512 - (1,413,597)
Debt issuance costs (123,909) (123,909)
Other - - (35,967) 249,397 213,430
---------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,554,616) (39,402) 20,545 249,397 (1,324,076)
Intercompany accounts 1,697,808 (234,612) (1,213,799) (249,397) -
---------------------------------------------------------------------------
Net increase (decrease) in cash 73,973 (42,696) (232,363) (13,460) (214,546)
---------------------------------------------------------------------------
Cash and equivalents at beginning of period 144,294 318,130 499,383 13,460 975,267
---------------------------------------------------------------------------
Cash and equivalents at end of period $ 218,267 $ 275,434 $ 267,020 $ - $ 760,721
===========================================================================
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended June 30, 2002 Compared With Three Months Ended June 30, 2001
Net Sales. Net sales of $28.0 million for the three months ended June 30, 2002
were 5.1% lower than the $29.5 million in the same period of 2001. Net sales of
traditional valve products decreased 5.8% or $1.1 million while net sales of
motion control products decreased 3.2% or $0.2 million and sales of other
products decreased 4.6% or $0.2 million. North American sales decreased 5.6% or
$1.4 million and international sales decreased 2.5% or $0.1 million. This
decline in sales was a result of the economic downturn that began in North
America in the last quarter of 2000 and in our International segment mid-year
2001.
Gross Profit. Gross profit was $10.6 million, or 37.7% of net sales, for the
three months ended June 30, 2002 compared with $11.5 million, or 38.8% of net
sales, in the same period of 2001. The 1.1% reduction in gross profit margin was
primarily a result of lower sales volumes and product mix.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $6.3 million for the three months ended
June 30, 2002, compared to $7.2 million for the same period in 2001. This $0.9
million reduction reflects the Company's continued focus on cost savings in
response to the lower sales levels. In addition to an overall 28% headcount
reduction, the Company eliminated or reduced discretionary spending to offset
the effects of the lower sales volume.
Operating Income. Operating income for the three months ended June 30, 2002 was
$4.2 million, substantially equal to the same period in 2001 as lower marketing,
engineering, general and administrative expenses offset lower sales volumes and
reduced gross margins. Operating income in North America decreased $0.2 million,
or 4.5%, while the international segment's operating income increased by $0.2
million, or 58.4%.
Interest and Other Financing Expenses. Interest and other financing expenses
increased $0.5 million from $4.1 million in the second quarter of 2001 to $4.6
million in 2002 as a result of higher interest rates.
Other (Income) Expense. Other income of $1.2 million for the three months ended
June 30, 2002 was primarily attributable to unrealized foreign exchange gains,
which resulted from the strengthening of major foreign currencies against the
U.S. dollar, compared to other expense of $0.3 million in the three months ended
June 30, 2001.
10
Net Income (Loss). Due to the factors discussed above, net income increased $0.7
million, to $0.5 million during the three months ended June 30, 2002 from a net
loss of $0.2 million in the second quarter of 2001.
Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001
Net Sales. Net sales of $54.8 million for the six months ended June 30, 2002
were 12.0% lower than the $62.3 million in the same period of 2001. Net sales of
traditional valve products decreased 11.2% or $4.5 million while net sales of
motion control products decreased 11.7% or $1.4 million and sales of other
products decreased 15.3% or $1.5 million. North American sales decreased 11.2%
or $5.7 million and international sales decreased 15.6% or $1.7 million. This
decline in sales was a direct result of the continuing economic downturn that
began in North America in the last quarter of 2000 and in our international
segment mid-year 2001.
Gross Profit. Gross profit was $21.0 million, or 38.3% of net sales, for the six
months ended June 30, 2002 compared with $23.4 million, or 37.5% of net sales,
in the same period of 2001. This 0.8% improvement in gross profit margin
resulted from the effect of cost savings and containment programs that were not
fully realized until the second quarter of 2001 and production efficiencies,
which helped offset lower sales volumes and product mix. These cost savings
included decreases in direct and indirect labor as a result of an overall 28%
headcount reduction, depreciation savings on reduced capital expenditures,
reduced scrap costs and the elimination of discretionary spending in
manufacturing overhead.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $12.4 million for the six months ended
June 30, 2002, compared to $15.1 million for the same period in 2001. This $2.7
million decrease was a result of cost savings implemented in response to the
reduced sales. In addition to an overall 28% headcount reduction, the Company
eliminated or reduced discretionary spending to offset the effects of the lower
sales volume.
Operating Income. Operating income for the six months ended June 30, 2002 was
$8.4 million compared to $8.0 million in the same period in 2001. This $0.4
million increase was a result of the lower costs and improved production
efficiencies. Operating income in North America increased $0.5 million, or 6.9%,
while the international segment's operating income decreased by $0.1 million, or
9.0%.
Interest and Other Financing Expenses. Interest and other financing expenses
increased $1.0 million from $8.2 million in the first half of 2001 to $9.2
million in 2002 as a result of higher interest rates.
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Other (Income) Expense. Other income of $0.5 million for the six months ended
June 30, 2002 was primarily attributable to unrealized foreign exchange gains,
which resulted from the strengthening of major foreign currencies against the
U.S. dollar, compared to a loss of $0.9 million in the six months ended June 30,
2001.
Income Tax. As of June 30, 2002, the Company had $3.1 million of net deferred
tax assets, primarily all of which were in the United States jurisdiction. Based
on known and projected earnings information and tax planning strategies, the
Company assesses quarterly the likelihood that the deferred tax assets will be
recovered. To the extent that the Company believes recovery is not likely, it
establishes a valuation allowance. As of June 30, 2002, the Company had no
valuation allowance recorded.
Net Loss. Due to the factors discussed above, net income increased $0.5 million,
to a loss of $0.3 million during the six months ended June 30, 2002 from a loss
of $0.8 million in the first half of 2001.
Liquidity and Capital Resources
Working capital was $42.0 million at June 30, 2002 compared to $41.3 million at
December 31, 2001. Historically, the Company has utilized cash from operations
and borrowings under its credit facilities to satisfy its operating and capital
needs and to service its indebtedness.
Total debt outstanding was $162.5 million at June 30, 2002 compared to $161.8
million at December 31, 2001. This increase was a result of the issuance of $2.2
million of notes payable to former shareholders, offset by the cash generated by
operating activities and normal scheduled debt payments. The Company estimates
that borrowing base limitations would have limited the Company's revolving
credit availability to approximately $23.4 million as of June 30, 2002.
On August 13, 2002, the Company and its lenders agreed to amendments to the
terms of the senior credit facilities, which include two term loans payable and
two revolving notes payable. These amendments revised certain covenant
requirements concerning tangible net worth, debt service coverage and interest
coverage through December 31, 2002. The Company was in compliance with all
covenants as amended.
Contractual obligations and commercial commitments for the Company as of June
30, 2002 were as follows:
Payments Due by Period
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Total 2002 2003-2005 2006-2007 Beyond 2007
Long term debt $162,537,963 $1,042,622 $17,399,085 $27,460,257 $116,635,999
Operating leases 3,034,009 871,469 2,056,623 105,513 404
The Company has no other contractual obligations or commercial commitments.
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Significant Accounting Policies and Estimates
The interim condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States,
which requires the making of estimates, judgments and assumptions that affect
the reported amounts of certain assets, liabilities, revenues, expenses and
related disclosures and contingencies. The estimates used in preparation of our
financial statements are evaluated on a continual basis. The significant
accounting policies as previously disclosed in Item 7. Management Discussion and
Analysis of Financial Condition and Results of Operations -- Significant
Accounting Policies, as described in the Numatics, Incorporated annual report on
Form 10-K for the year ended December 31, 2001, have not changed with the
exception of goodwill due to the adoption of SFAS 142 as described in note 1 in
the accompanying notes to interim condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information that would be provided
under Item 305 of Regulation S-K from the end of the preceding fiscal year to
June 30, 2002.
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 Second Amendment to Note Purchase Agreement by and among Numatics,
Incorporated; Numatics, GmbH; Numatics Ltd.; other loan parties and
American Capital Financial Services, Inc., as agent dated August 13,
2002.
4.2 Third Amendment to Loan and Security Agreement among Numatics,
Incorporated; Micro-Filtration, Inc.; Numation, Inc.; Numatech, Inc.;
Ultra Air Products, Inc.; Microsmith, Inc.; Empire Automation Systems,
Inc. and LaSalle Business Credit, Inc. dated August 13, 2002.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 2002.
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.
NUMATICS, INCORPORATED
By: /s/ Robert P. Robeson
----------------------------------------
Robert P. Robeson
Vice President, Treasurer and
Chief Financial Officer;
on behalf of the registrant and
as its principal financial officer
Date: August 14, 2002
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