Back to GetFilings.com
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 September 30, 2002
-------------------------------------------------
Commission File Number 333-51355
---------------------------------------------------------
NUMATICS, INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Michigan 38-2955710
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1450 North Milford Road, Highland, Michigan 48357
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(248) 887-4111
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 November 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
14 Item 3 Quantitative and Qualitative Disclosures About Market
Risk
14 Item 4 Controls and Procedures
15 PART II. OTHER INFORMATION
15 Item 6 Exhibits and Reports on Form 8-K
15 Signatures
16 Certifications
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Numatics, Incorporated
Consolidated Condensed Statements of Operations
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $28,496,350 $26,738,688 $83,335,597 $89,039,582
Costs and expenses:
Costs of products sold 17,666,855 15,707,620 51,494,860 54,657,914
Marketing, engineering, general and
administrative 6,734,109 6,070,301 19,151,707 21,214,371
Single business tax 78,312 75,936 234,932 246,508
----------- ----------- ----------- -----------
Operating income 4,017,074 4,884,831 12,454,098 12,920,789
Other expenses
Interest and other financing
expenses 4,547,176 3,882,040 13,731,955 12,122,854
Other (72,706) (317,140) (601,048) 549,008
----------- ----------- ----------- -----------
Income (loss) before income taxes (457,396) 1,319,931 (676,809) 248,927
Income taxes (102,268) 456,116 9,624 136,726
----------- ----------- ----------- -----------
Net income (loss) $ (355,128) $ 863,815 (686,433) $ 112,201
=========== =========== =========== ===========
See accompanying notes.
Numatics, Incorporated
Consolidated Condensed Balance Sheets
(Unaudited)
September 30 December 31
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and equivalents $ 1,033,196 $ 1,895,027
Accounts receivable 19,073,966 17,415,420
Inventories 32,926,074 33,119,341
Other current assets 3,760,967 3,935,360
------------ ------------
Total current assets 56,794,203 56,365,148
Other assets:
Goodwill 4,983,614 4,815,941
Debt issuance costs, net of accumulated amortization 5,441,176 6,102,917
Deferred income taxes 3,359,524 3,386,779
Investment in affiliates 2,225,935 2,199,919
Other 1,086,385 881,209
------------ ------------
17,096,634 17,386,765
Properties:
Land 1,306,994 1,351,037
Buildings and improvements 15,548,074 15,144,096
Machinery and equipment 55,062,520 53,165,838
------------ ------------
71,917,588 69,660,971
Less accumulated depreciation (43,509,403) (38,470,241)
------------ ------------
28,408,185 31,190,730
------------ ------------
$102,299,022 $104,942,643
============ ============
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade $ 6,417,213 $ 5,237,846
Accrued interest 6,149,278 3,382,493
Other accrued expenses 900,325 1,377,074
Compensation and employee benefits 2,681,234 2,346,072
Income and single business tax 309,655 704,467
Current portion of long term debt 37,170,030 1,980,418
------------ ------------
Total current liabilities 53,627,735 15,028,370
Long term debt, less current portion 120,349,584 159,866,260
Deferred retirement benefits 8,737,764 8,127,205
Deferred income taxes 898,921 260,643
Minority interest in subsidiaries (redeemable at $606,130
in 2002 and $475,074 in 2001 upon the happening
of certain events outside the control of the
company.) 463,832 397,576
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 (81,342,620) (80,656,187)
Accumulated other comprehensive loss (1,691,065) (1,593,379)
------------ ------------
(81,778,814) (78,737,411)
------------ ------------
$102,299,022 $104,942,643
============ ============
See accompanying notes.
2
Numatics, Incorporated
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30
-----------------------------
2002 2001
----------- -----------
Operating activities
Net income (loss) $ (686,433) $ 112,201
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,328,585 3,834,700
Amortization 950,859 954,369
Minority interest in subsidiary earnings 66,256 (239,307)
Deferred taxes 1,388,353 71,022
Deferred retirement benefits 723,990 681,440
Unrealized foreign currency (gains) losses (776,516) 292,147
Changes in operating assets and liabilities:
Trade receivables (38,467) 2,763,664
Inventories 792,560 3,203,784
Other current assets 297,536 146,724
Accounts payable and accrued expenses 3,410,550 (1,669,400)
Compensation and employee benefits 401,841 (1,966,227)
Income and single business taxes (1,695,932) 325,292
----------- -----------
Net cash provided by operating activities 8,163,182 8,510,409
Investing activities
Capital expenditures (312,992) (1,453,976)
Other investments -- (40,226)
----------- -----------
Net cash used in investing activities (312,992) (1,494,202)
Financing activities
Debt repayments (7,948,255) (6,428,818)
Debt issuance costs (463,655) (436,022)
----------- -----------
Net cash used in financing activities (8,411,910) (6,864,840)
Effect of exchange rate changes on cash (300,111) 55,236
----------- -----------
Net increase (decrease) in cash and equivalents (861,831) 206,603
Cash and equivalents at beginning of period 1,895,027 975,267
----------- -----------
Cash and equivalents at end of period $ 1,033,196 $ 1,181,870
=========== ===========
See accompanying notes.
3
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
September 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 nine-month period ended September 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 an extraordinary item - early extinguishment of debt.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS 146 requires that costs associated with an
exit or disposal plan be recognized when incurred rather than at the date of
commitment to an exit or disposal plan, and is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The Company
anticipates that the adoption of SFAS 146 will have no effect on its financial
statements.
4
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
September 30, 2002
2. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three-month and nine-month
periods ended September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------- ---------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- ------------------
Net income (loss) $ (355,128) $ 863,815 $ (686,433) $ 112,201
Foreign currency
translation adjustments (580,686) (439,866) (97,686) (460,771)
----------------- ----------------- ----------------- ------------------
$ (935,814) $ 423,949 $ (784,119) $ (348,570)
The components of accumulated other comprehensive loss at September 30, 2002 and
December 31, 2001 are as follows:
9/30/2002 12/31/2001
------------------------ -----------------------
Foreign currency translation $ (1,138,357) $ (1,040,671)
adjustments
Minimum pension liability (552,708) (552,708)
------------------------ -----------------------
$ (1,691,065) $ (1,593,379)
======================== =======================
3. LONG-TERM DEBT
The Company reclassified $35.2 million of its senior debt from long-term
liabilities to current liabilities because it is probable the Company will not
be able to comply with existing loan covenant requirements at measurement dates
within the next twelve months. Such failure to meet covenants would result in an
event of default which, if not cured or waived, could have a material adverse
effect on the Company. The Company has had discussions with prospective new
senior lenders and has preliminarily selected a new lender who is performing due
diligence procedures for a transaction which, if consummated, would refinance
all of the senior debt and result in its reclassification to long-term by
December 31, 2002.
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)
September 30, 2002
4. SEGMENT AND GEOGRAPHIC INFORMATION (continued)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------- ------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- -------------------
Net sales
North America $ 23,714,346 $ 22,319,602 $ 69,228,801 $ 73,571,432
International 4,782,004 4,419,086 14,106,796 15,468,150
-------------------- -------------------- -------------------- -------------------
$ 28,496,350 $ 26,738,688 $ 83,335,597 $ 89,039,582
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------- ------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- -------------------
Operating income
North America $ 3,914,495 $ 4,793,135 $ 11,466,318 $ 11,856,242
International 102,579 91,696 987,780 1,064,547
-------------------- -------------------- -------------------- -------------------
$ 4,017,074 $ 4,884,831 $ 12,454,098 $ 12,920,789
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 September 30, 2002 and
December 31, 2001 and consolidating condensed statements of operations for
the three and nine month periods ended September 30, 2002 and 2001 and
consolidating condensed statements of cash flows for the nine months ended
September 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)
September 30, 2002
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
BALANCE SHEET
September 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------------- ------------- -------------- ---------------- --------------
Trade receivables $ 9,542,744 $ 1,934,232 $ 7,596,990 $ - $ 19,073,966
Inventories 18,893,052 4,618,829 10,368,193 (954,000) 32,926,074
Other 3,736,883 381,841 675,439 - 4,794,163
----------------- ------------- -------------- ---------------- --------------
Total current assets 32,172,679 6,934,902 18,640,622 (954,000) 56,794,203
Goodwill 1,248,777 - 2,608,992 1,125,845 4,983,614
Other 22,993,034 40,573 1,158,489 (12,079,076) 12,113,020
Intercompany amounts 17,859,916 1,844,366 7,728,168 (27,432,450) -
Property, plant and equipment, net of
accumulated depreciation 22,935,047 916,004 4,557,134 - 28,408,185
----------------- ------------- -------------- ---------------- --------------
$ 97,209,453 $ 9,735,845 $ 34,693,405 $ (39,339,681) $ 102,299,022
================= ============= ============== ================ ==============
Accounts payable and accrued expenses $ 10,063,645 $ 1,058,880 $ 2,344,291 $ - $ 13,466,816
Compensation and employee benefits 1,457,545 143,258 1,080,431 - 2,681,234
Current portion of long-term debt 33,425,963 - 3,744,067 - 37,170,030
Other 154,575 (6,900) 161,980 - 309,655
----------------- ------------- -------------- ---------------- --------------
Total current liabilities 45,101,728 1,195,238 7,330,769 - 53,627,735
Long-term debt less current portion 120,195,844 118,205 35,535 - 120,349,584
Other 8,737,764 - 898,921 463,832 10,100,517
Intercompany amounts 7,120,903 4,403,660 15,907,887 (27,432,450) -
Accumulated deficiency (83,946,786) 4,018,742 10,520,293 (12,371,063) (81,778,814)
----------------- ------------- -------------- ---------------- --------------
$ 97,209,453 $ 9,735,845 $ 34,693,405 $ (39,339,681) $ 102,299,022
================= ============= ============== ================ ==============
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)
September 30, 2002
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF OPERATIONS
Three Months Ended September 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net sales $ 19,412,375 $ 3,705,397 $ 11,630,578 $ (6,252,000) $ 28,496,350
Costs and expenses 16,298,542 3,428,376 11,029,358 (6,277,000) 24,479,276
------------------------------------------------------------------------------
Operating income 3,113,833 277,021 601,220 25,000 4,017,074
Interest and other 4,017,940 99,194 233,940 21,128 4,372,202
------------------------------------------------------------------------------
Net income (loss) $ (904,107) $ 177,827 $ 367,280 $ 3,872 $ (355,128)
==============================================================================
Three Months Ended September 30, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net sales $ 17,949,153 $ 3,131,847 $ 10,319,688 $ (4,662,000) $ 26,738,688
Costs and expenses 13,722,590 2,892,095 9,910,606 (4,671,434) 21,853,857
------------------------------------------------------------------------------
Operating income 4,226,563 239,752 409,082 9,434 4,884,831
Interest and other 3,758,671 85,491 372,006 (195,152) 4,021,016
------------------------------------------------------------------------------
Net income $ 467,892 $ 154,261 $ 37,076 $ 204,586 $ 863,815
==============================================================================
Nine Months Ended September 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net sales $ 56,625,620 $ 10,803,773 $ 33,527,204 $ (17,621,000) $ 83,335,597
Costs and expenses 47,554,023 9,982,541 31,003,935 (17,659,000) 70,881,499
------------------------------------------------------------------------------
Operating income 9,071,597 821,232 2,523,269 38,000 12,454,098
Interest and other 11,875,582 288,197 910,496 66,256 13,140,531
------------------------------------------------------------------------------
Net income (loss) $ (2,803,985) $ 533,035 $ 1,612,773 $ (28,256) $ (686,433)
==============================================================================
Nine Months Ended September 30, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net sales $ 60,050,634 $ 10,166,730 $ 33,900,218 $ (15,078,000) $ 89,039,582
Costs and expenses 49,788,706 9,838,647 31,613,742 (15,122,302) 76,118,793
------------------------------------------------------------------------------
Operating income 10,261,928 328,083 2,286,476 44,302 12,920,789
Interest and other 11,550,635 129,010 1,651,712 (522,769) 12,808,588
------------------------------------------------------------------------------
Net income (loss) $ (1,288,707) $ 199,073 $ 634,764 $ 567,071 $ 112,201
==============================================================================
8
NUMATICS, INCORPORATED
Notes to Consolidated Condensed Financial Statements (Unaudited)
September 30, 2002
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF CASH FLOWS
Nine Months ended September 30, 2002
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net cash provided by operating $ 5,598,636 $ 788,878 $ 1,775,668 $ - $ 8,163,182
activities
Cash flows from investing activities:
Capital expenditures (200,078) (46,836) (66,078) - (312,992)
Other investments - - - - -
------------------------------------------------------------------------------
Net cash used in investing activities (200,078) (46,836) (66,078) - (312,992)
Cash flows from financing activities:
Debt repayments (6,547,148) (83,918) (1,317,189) - (7,948,255)
Debt issuance costs (464,193) - 538 - (463,655)
Other - - 33,773 (333,884) (300,111)
------------------------------------------------------------------------------
Net cash used in financing activities (7,011,341) (83,918) (1,282,878) (333,884) (8,712,021)
Intercompany accounts 1,287,722 (619,470) (1,002,136) 333,884 -
------------------------------------------------------------------------------
Net increase (decrease) in cash (325,061) 38,654 (575,424) - (861,831)
Cash and equivalents at beginning of
period 401,062 207,257 1,286,708 - 1,895,027
------------------------------------------------------------------------------
Cash and equivalents at end of period $ 76,001 $ 245,911 $ 711,284 $ - $ 1,033,196
==============================================================================
Nine Months ended September 30, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------
Net cash provided by operating
activities $ 4,919,781 $ 541,440 $ 3,062,648 $ (13,460) $ 8,510,409
Cash flows from investing activities:
Capital expenditures (1,013,000) (56,875) (384,101) - (1,453,976)
Other investments - - (40,226) - (40,226)
------------------------------------------------------------------------------
Net cash used in investing activities (1,013,000) (56,875) (424,327) - (1,494,202)
Cash flows from financing activities:
Debt repayments (5,713,195) (78,803) (636,820) - (6,428,818)
Debt issuance costs (436,022) - - - (436,022)
Other - - (32,779) 88,015 55,236
------------------------------------------------------------------------------
Net cash used in financing activities (6,149,217) (78,803) (669,599) 88,015 (6,809,604)
Intercompany accounts 2,340,622 (497,442) (1,755,165) (88,015) -
------------------------------------------------------------------------------
Net increase (decrease) in cash 98,186 (91,680) 213,557 (13,460) 206,603
Cash and equivalents at beginning of
period 144,294 318,130 499,383 13,460 975,267
------------------------------------------------------------------------------
Cash and equivalents at end of period $ 242,480 $ 226,450 $ 712,940 $ - $ 1,181,870
==============================================================================
9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautions Regarding Forward-Looking Statements
This Form 10-Q report contains forward-looking statements, which can be
identified by the use of the future tense or other forward-looking terms such as
"may," "intent," "will," "expect," "anticipate," "plan," "management believes,"
"estimate," "continue," "should," "strategy," or "position" or the negatives of
those terms or other variations on them or by comparable terminology. In
particular, any statements, express or implied, concerning future operating
results or the ability to generate net sales, income, or cash flow to service
indebtedness, or concerning future compliance with debt covenants or reaching
agreements with new senior lenders, are forward-looking statements. Investors
are cautioned that reliance on any of those forward-looking statements involves
risks and uncertainties and that, although Numatics' management believes that
the assumptions on which those forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate. As a result,
the forward-looking statements based on those assumptions also could be
incorrect, and actual results may differ materially from any results indicated
or suggested by those assumptions. The uncertainties in this regard include, but
are not limited to, the Company's ability to replace its senior credit facility
and to comply with financial covenants contained within the indenture and the
credit facilities, as well as those items identified in "Risk Factors" under
item 1 of the Company's Form 10-K for the year ended December 31, 2001.
Three Months Ended September 30, 2002 Compared With Three Months Ended
September 30, 2001
Net Sales. Net sales of $28.5 million for the three months ended September 30,
2002 were 6.6% higher than the $26.7 million in the same period of 2001. Net
sales of traditional valve products increased 7.1% or $1.3 million while net
sales of motion control products increased 4.6% or $0.2 million and sales of
other products increased 6.7% or $0.3 million. North American sales increased
6.2% or $1.4 million and international sales increased 8.2% or $0.4 million.
This improvement in sales was a result of a slight overall improvement in the
economy as well as new sales programs.
Gross Profit. Gross profit was $10.8 million, or 38.0% of net sales, for the
three months ended September 30, 2002 compared with $11.0 million, or 41.3% of
net sales, in the same period of 2001. The 3.3% reduction in gross profit margin
was primarily a result of product mix and depreciation savings during 2001 on
reduced capital expenditures.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $6.7 million for the three months ended
September 30, 2002, compared to $6.1 million for the same period in 2001. This
$0.6 million increase resulted
10
primarily from the restoration of bonus accruals not included in 2001 results,
professional fees and depreciation savings during 2001 on reduced capital
expenditures.
Operating Income. Operating income for the three months ended September 30, 2002
was $4.0 million, $0.9 million below the same period in 2001 as increased sales
levels were offset by reduced gross margins and increased marketing,
engineering, general and administrative expenses. Operating income in North
America decreased $0.9 million, or 18.3%, while the international segment's
operating income remained substantially unchanged.
Interest and Other Financing Expenses. Interest and other financing expenses
increased $0.6 million from $3.9 million in the third quarter of 2001 to $4.5
million in 2002 as a result of higher interest rates.
Other Income. Other income of $0.1 million for the three months ended September
30, 2002, compared to $0.3 million in the three months ended September 30, 2001.
The $0.3 million income in 2001 was primarily attributable to unrealized foreign
exchange gains, which resulted from the weakening of the U.S. dollar against
major foreign currencies.
Net Income (Loss). Due to the factors discussed above, the three months ended
September 30, 2002 resulted in a net loss of $0.4 million, compared to net
income of $0.9 million in the third quarter of 2001.
Nine Months Ended September 30, 2002 Compared With Nine Months Ended
September 30, 2001
Net Sales. Net sales of $83.3 million for the nine months ended September 30,
2002 were 6.4% lower than the $89.0 million in the same period of 2001. Net
sales of traditional valve products decreased 5.8% or $3.4 million while net
sales of motion control products decreased 6.7% or $1.1 million and sales of
other products decreased 8.3% or $1.2 million. North American sales decreased
5.9% or $4.3 million and international sales decreased 8.8% or $1.4 million.
This decline in sales was a direct result of the economic downturn that began in
North America in the last quarter of 2000 and in our international segment
mid-year 2001, although showing an upward trend during the most recent quarter.
Gross Profit. Gross profit was $31.8 million, or 38.2% of net sales, for the
nine months ended September 30, 2002 compared with $34.4 million, or 38.6% of
net sales, in the same period of 2001. This 0.4% decline in gross profit margin
was primarily a result of product mix and depreciation savings during 2001 on
reduced capital expenditures.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $19.2 million for the nine months ended
September 30, 2002, compared to $21.2 million for the same period in 2001. This
$2.0 million decrease was a result of cost savings implemented in response to
the reduced sales. In addition to an overall 28%
11
headcount reduction, the Company eliminated or reduced discretionary spending to
offset the effects of the lower sales volume.
Operating Income. Operating income for the nine months ended September 30, 2002
was $12.5 million compared to $12.9 million in the same period in 2001. This
$0.4 million decrease was a result of the lower sales and gross profit margin,
offset by reduced marketing, engineering, general and administrative expenses.
Operating income in North America decreased $0.3 million, or 3.3%, while the
international segment's operating income decreased by $0.1 million, or 7.2%.
Interest and Other Financing Expenses. Interest and other financing expenses
increased $1.6 million from $12.1 million in the first nine months of 2001 to
$13.7 million in 2002 as a result of higher interest rates.
Other (Income) Expense. Other income of $0.6 million for the nine months ended
September 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 $0.5 million in the nine months ended
September 30, 2001.
Income Tax. As of September 30, 2002, the Company had $2.5 million of net
deferred tax assets, substantially all of which related to United States federal
income tax. 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 September 30, 2002, the
Company had no valuation allowance recorded.
Net Income (Loss). Due to the factors discussed above, net income declined $0.8
million, from net income of $0.1 million during the nine months ended September
30, 2001 to a loss of $0.7 million during the nine months ended September 30,
2002.
Liquidity and Capital Resources
Working capital was $3.2 million at September 30, 2002 compared to $41.3 million
at December 31, 2001. The Company reclassified $35.2 million of its senior debt
from long-term liabilities to current liabilities because it is probable the
Company will not be able to comply with existing loan covenant requirements at
measurement dates within the next twelve months. Such failure to meet covenants
would result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company. The Company has had discussions with
prospective new senior lenders and has preliminarily selected a new lender who
is performing due diligence procedures for a transaction which, if consummated,
would refinance all of the senior debt and result in its reclassification to
long-term by December 31, 2002. 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 $157.5 million at September 30, 2002 compared to
$161.8 million at December 31, 2001. This decrease was a result of the cash
generated by operating activities and
12
normal scheduled debt payments, offset by the issuance of $2.2 million of notes
payable to former shareholders in January 2002 in connection with the repurchase
of their shares in the Company. The Company estimates that borrowing base
limitations would have limited the Company's revolving credit availability to
approximately $23.5 million as of September 30, 2002.
Contractual obligations and commercial commitments for the Company as of
September 30, 2002 were as follows:
Payments Due by Period
--------------------------------------------------------------------------------------------
Total 2002-2003 2004-2005 2006-2007 Beyond 2007
Debt $157,519,614 $37,547,285 $1,610,193 $2,162,136 $116,200,000
Operating leases 2,598,274 1,759,581 732,776 105,513 404
The Company has no other contractual obligations or commercial commitments.
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.
13
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
September 30, 2002.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer have
evaluated the Company's disclosure controls and procedures within 90 days of the
filing of this report and have concluded that there are no significant
deficiencies or material weaknesses. Subsequent to the evaluation, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls.
14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification of Chief Executive Officer - Section 906 of
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer - Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the three
months ended September 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: November 14, 2002
---------------------------------------------------------
15
CERTIFICATION
I, John H. Welker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Numatics,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
16
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John H. Welker
- -----------------------------------------------------
John H. Welker,
Chief Executive Officer
17
CERTIFICATION
I, Robert P. Robeson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Numatics,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
18
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert P. Robeson
- -----------------------------------------------------
Robert P. Robeson,
Chief Financial Officer
19