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 March 31, 2003
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, Milford, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No [X]
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 May 14, 2003
INDEX
NUMATICS, INCORPORATED AND SUBSIDIARIES
PAGE NO. DESCRIPTION
- --------------------------------------------------------------------------------
1 PART I. FINANCIAL INFORMATION
1 Item 1 Consolidated Condensed Financial Statements (Unaudited)
5 Notes to Consolidated Condensed Financial Statements
(Unaudited)
14 Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
16 Item 3 Quantitative and Qualitative Disclosures About Market
Risk
16 Item 4 Controls and Procedures
17 PART II. OTHER INFORMATION
17 Item 4 Submission of Matters to a Vote of Security Holders
17 Item 6 Exhibits and Reports on Form 8-K
17 Signatures
18 Certifications
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUMATICS, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
-----------------------------------
2003 2002
---------------- ----------------
Net sales $ 29,531,254 $ 26,815,162
Costs and expenses:
Costs of products sold 18,484,935 16,363,461
Marketing, engineering, general and administrative 7,019,790 6,126,169
Single business tax 82,662 79,959
---------------- ----------------
Operating income 3,943,867 4,245,573
Other expenses
Interest and other financing expenses 4,167,444 4,557,032
Net gain on early extinguishment of debt and repurchase
of notes (2,153,049) -
Other (29,106) 681,512
---------------- ----------------
Income (loss) before income taxes 1,958,578 (992,971)
Income taxes 199,663 (178,423)
---------------- ----------------
Net income (loss) $ 1,758,915 $ (814,548)
================ ================
See accompanying notes.
1
NUMATICS, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
March 31 December 31
2003 2002
---------------- ----------------
ASSETS
Current assets:
Cash and equivalents $ 2,418,468 $ 1,316,250
Accounts receivable 19,121,691 18,537,257
Inventories 32,264,893 32,714,582
Income tax receivable 44,349 63,617
Deferred income taxes 131,293 126,485
Other current assets 2,733,873 2,890,208
---------------- ----------------
Total current assets 56,714,567 55,648,399
Other assets:
Goodwill, net of accumulated amortization 5,231,760 5,098,954
Debt issuance costs, net of accumulated amortization 5,489,845 5,745,140
Deferred income taxes 184,141 177,400
Investment in unconsolidated affiliates 2,242,811 2,231,664
Other 667,617 689,333
---------------- ----------------
13,816,174 13,942,491
Properties:
Land 1,336,960 1,321,309
Buildings and improvements 15,653,981 15,497,297
Machinery and equipment 56,169,483 55,607,088
---------------- ----------------
73,160,424 72,425,694
Less accumulated depreciation (45,986,466) (44,559,695)
---------------- ----------------
27,173,958 27,865,999
---------------- ----------------
$ 97,704,699 $ 97,456,889
================ ================
2
NUMATICS, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
(Unaudited)
March 31 December 31
2003 2002
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable trade $ 7,268,069 $ 5,981,993
Accrued interest 5,270,588 3,293,571
Other accrued expenses 1,631,363 1,325,700
Compensation and employee benefits 2,558,368 3,452,685
Income and single business tax 681,544 880,168
Current portion of long term debt 3,317,885 2,083,842
---------------- ----------------
Total current liabilities 20,727,817 17,017,959
Long term debt, less current portion 151,061,962 156,561,001
Deferred retirement benefits 11,597,614 11,358,111
Deferred income taxes 246,603 743,294
Minority interest in subsidiaries (redeemable at $720,821
in 2003 and $692,993 in 2002 upon the happening of certain
events outside the control of the Company) 516,793 487,668
Stockholders' Deficiency:
Common stock $.01 par value, 9,950,000 shares
authorized; 2,397,235 shares outstanding and related
additional paid in capital 4,602,151 4,602,151
Treasury stock, 262,340 shares (3,347,280) (3,347,280)
Accumulated deficiency (84,993,585) (86,752,500)
Accumulated other comprehensive loss (2,707,376) (3,213,515)
---------------- ----------------
(86,446,090) (88,711,144)
---------------- ----------------
$ 97,704,699 $ 97,456,889
================ ================
See accompanying notes.
3
NUMATICS, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
-----------------------------------
2003 2002
---------------- ----------------
OPERATING ACTIVITIES
Net income (loss) $ 1,758,915 $ (814,548)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,195,209 1,256,760
Amortization 306,239 297,384
Early extinguishment of debt 2,883,619 -
Gain on repurchase of senior subordinated notes (5,801,668) -
Minority interest in subsidiary earnings 29,125 18,877
Deferred taxes - 109,038
Deferred retirement benefits 239,503 251,069
Unrealized foreign currency losses 677,201 476,695
Changes in operating assets and liabilities:
Trade receivables (295,447) (1,359,012)
Inventories 836,882 (217,198)
Other current assets (64,505) (27,300)
Accounts payable and accrued expenses 2,676,910 3,008,029
Compensation and employee benefits (766,679) (204,304)
Income and single business taxes 239,521 (434,790)
---------------- ----------------
Net cash provided by operating activities 3,914,825 2,360,700
INVESTING ACTIVITIES
Capital expenditures (309,684) (191,198)
Other investments 20,778 -
---------------- ----------------
Net cash used in investing activities (288,906) (191,198)
FINANCING ACTIVITIES
Debt proceeds (repayments) 48,500,327 (2,855,638)
Prior debt repayments (38,135,595) -
Repurchase of senior subordinated notes (8,870,225) -
Debt issuance costs (3,200,376) (76,204)
---------------- ----------------
Net cash used in financing activities (1,705,869) (2,931,842)
Effect of exchange rate changes on cash (817,832) (232,309)
---------------- ----------------
Net increase (decrease) in cash and equivalents 1,102,218 (994,649)
Cash and equivalents at beginning of period 1,316,250 1,895,027
---------------- ----------------
Cash and equivalents at end of period $ 2,418,468 $ 900,378
================ ================
See accompanying notes.
4
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
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 three-month period ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
The balance sheet at December 31, 2002 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, 2002.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an Amendment of FASB Statement No. 123"
was issued. SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation"
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for employee stock-based compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosure in annual and interim financial statements about the method
of accounting for stock-based compensation and its effect on reported results.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plan. Accordingly,
no compensation expense has been recognized for the stock option plan. The
following table reflects pro-forma financial results, had compensation expense
been determined based on the fair value at the grant dates for awards under the
plan consistent with the method of SFAS No. 123.
5
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
1. BASIS OF PRESENTATION (continued)
(Unaudited)
Three Months Ended
March 31
2003 2002
---------------------------------
Net income (loss) as reported $ 1,758,915 $ (814,548)
Deduct: Total stock-based employee compensation expense
determined under the fair-value based method of accounting (14,000) (14,000)
---------------------------------
Pro-forma net income (loss) $ 1,744,915 $ (828,548)
=================================
2. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for three-month periods ended
March 31, 2003 and 2002 are as follows:
Three Months Ended
March 31
----------------------------------
2003 2002
---------------- ---------------
Net income (loss) $ 1,758,915 $ (814,548)
Foreign currency translation
adjustments 506,139 16,476
---------------- ---------------
$ 2,265,054 $ (798,072)
================ ===============
The components of accumulated other comprehensive loss at March 31, 2003 and
December 31, 2002 are as follows:
March 31, 2003 December 31, 2002
---------------- -----------------
Foreign currency translation
adjustments $ (546,389) $ (1,052,528)
Minimum pension liability (2,160,987) (2,160,987)
---------------- -----------------
$ (2,707,376) $ (3,213,515)
================ =================
6
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
3. LONG-TERM DEBT
Effective January 6, 2003, the Company entered into a new senior loan agreement
with a group of lenders for which Foothill Capital Corporation acts as agent.
The new loan agreement provides for: (a) $25,000,000 of three-year revolving
credit facilities, subject to borrowing base requirements; (b) an additional
$7,500,000 of three-year revolving credit facilities, subject to borrowing base
requirements and monthly reductions of $125,000 beginning April 1, 2003; (c)
$23,500,000 of three-year term loans; and (d) an additional $10,000,000 of term
loans that could be made during the next six months, subject to conditions
specified in the loan agreement, to provide additional funds in connection with
repurchases of the Company's 9-5/8% senior subordinated notes. The term loans
are payable in monthly installments of $114,583 beginning April 1, 2003. The
Company repaid all of the indebtedness outstanding under its former senior
credit facilities with LaSalle Business Credit, Inc. and its Canadian affiliate
and all of its indebtedness to American Capital Strategies, Ltd. from proceeds
of the initial borrowings under the new loan agreement, and as a result recorded
net charges related to the write-off of deferred financing costs for its old
senior debt and early termination fees of $3,483,619.
The new revolving credit and term loans are secured by liens on substantially
all of the assets of Numatics, Incorporated and its U.S., Canadian, and German
subsidiaries. The new revolving credit loans bear interest at variable rates
based on prime or LIBOR, at the Company's election. The weighted average of the
initial rates for the revolving credit facility is approximately 5.31% per
annum. $5,500,000 of the new term loans bear interest at the greater of prime
plus 4% per annum or 9% per annum. The remaining $18,000,000 of the new term
loans bear interest at the greater of prime plus 6% per annum or 11% per annum,
plus 2% per annum which may be paid in kind at the Company's option. An
additional $10,000,000 of term loans that could be made during the next six
months, subject to conditions specified in the loan agreement, to provide
additional funds in connection with repurchases of the Company's 9-5/8% senior
subordinated notes, bear interest at 13% per annum.
On February 26, 2003, the Company entered into agreements to repurchase
$9,730,000 face amount of its 9-5/8% senior subordinated notes for a total
purchase price of $5,667,725 and on March 25, 2003, the Company entered into an
agreement to repurchase $5,250,000 face amount of its 9-5/8% senior subordinated
notes for a total purchase price of $3,202,500, resulting in a net gain of
$5,636,668, net of costs and the write-off of deferred financing fees of
$473,107.
The Company's long-term debt as of March 31, 2003 and December 31, 2002
consisted of the following:
7
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
3. LONG-TERM DEBT (continued)
MARCH 31, 2003 DECEMBER 31, 2002
---------------------------------------
Senior subordinated notes due in 2008 bearing interest at 9.625% $ 100,020,000 $ 115,000,000
Term loans payable in minimum monthly installments of $119,250
plus interest at the greater of prime plus 6.5% or 12% (12%
at December 31, 2002), due in 2006 - 12,202,479
Term loans payable with no principal installments and interest at
19%, due in 2006 - 17,000,000
Term loans payable in minimum monthly installments of $114,583
beginning April 1, 2003 plus interest at the greater of prime
plus 4% or 9% (5.25% at March 31, 2003), due in 2006 5,500,000 -
Term loans payable with no principal installments and interest at
the greater of prime plus 6% or 11%, plus 2% PIK (13% at March 31,2003),
due in 2006 18,000,000 -
Term loans payable with no principal installments and interest at
13%, due in 2006 9,970,225 -
Revolving notes payable, bearing interest at prime (4.25% at
December 31, 2002), due in 2004 - 8,757,747
Revolving notes payable, bearing interest at prime plus 1% (5.25%
at March 31, 2003), due in 2006 8,017,210 -
Revolving notes payable, subject to monthly reductions of
$125,000 beginning April 1, 2003, bearing interest at prime
plus 1.25% (5.5% at March 31, 2003), due in 2006 7,500,000 -
Williamston County Tennessee Industrial Revenue Bond with no principal
installments, bearing interest at prime plus 2.5% (6.75% at March 31,
2003), due in 2011 2,300,000 2,300,000
Other 3,072,412 3,384,617
---------------------------------------
$ 154,379,847 $ 158,644,843
Less current maturities 3,317,885 2,083,842
---------------------------------------
Long-term debt $ 151,061,962 $ 156,561,001
=======================================
8
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
4. INCOME TAXES
For the period ended March 31, 2002 the Company recorded a tax benefit on losses
at its U.S. locations which, when combined with income tax expense at its
foreign locations, resulted in a net benefit of $178,423. During 2003, the
Company utilized its net operating losses in the U.S., resulting in no U.S.
federal income tax expense and a total income tax expense for the period of
$199,663.
5. 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:
Three Months Ended March 31
2003 2002
-------------------------------
Net sales:
North America $ 23,972,083 $ 22,273,071
International 5,559,171 4,542,091
-------------------------------
$ 29,531,254 $ 26,815,162
===============================
Three Months Ended March 31
2003 2002
-----------------------------
Operating income:
North America $ 3,570,063 $ 3,814,556
International 373,804 431,017
-----------------------------
$ 3,943,867 $ 4,245,573
=============================
9
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
6. 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 March 31, 2003 and December
31, 2002 and consolidating condensed statements of operations and cash
flows for the three-month periods ended March 31, 2003 and 2002.
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.
10
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
6. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
BALANCE SHEET
MARCH 31, 2003
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Trade receivables $ 8,921,888 $ 1,877,964 $ 8,321,839 $ - $ 19,121,691
Inventories 17,803,497 4,865,506 10,569,890 (974,000) 32,264,893
Other 2,986,825 155,533 2,185,625 - 5,327,983
-------------------------------------------------------------------------------
Total current assets 29,712,210 6,899,003 21,077,354 (974,000) 56,714,567
Goodwill, net of accumulated
amortization 1,248,777 - 2,857,138 1,125,845 5,231,760
Other 17,636,739 40,573 987,038 (10,079,936) 8,584,414
Intercompany amounts 16,178,589 2,054,963 5,506,791 (23,740,343) -
Property, plant and equipment, net of
accumulated depreciation 21,678,140 903,546 4,592,272 - 27,173,958
-------------------------------------------------------------------------------
$ 86,454,455 $ 9,898,085 $ 35,020,593 $ (33,668,434) $ 97,704,699
===============================================================================
Accounts payable and accrued expenses $ 9,686,877 $ 798,619 $ 3,684,524 $ - $ 14,170,020
Compensation and employee benefits 1,122,871 116,250 1,319,247 - 2,558,368
Current portion of long-term debt 3,226,158 78,803 12,924 - 3,317,885
Other 125,509 (50,990) 607,025 - 681,544
-------------------------------------------------------------------------------
Total current liabilities 14,161,415 942,682 5,623,720 - 20,727,817
Long-term debt less current portion 142,534,640 - 8,527,322 - 151,061,962
Other 11,597,614 - 246,603 516,793 12,361,010
Intercompany amounts 7,051,675 4,579,596 12,109,072 (23,740,343) -
Stockholders' deficiency (88,890,889) 4,375,807 8,513,876 (10,444,884) (86,446,090)
-------------------------------------------------------------------------------
$ 86,454,455 $ 9,898,085 $ 35,020,593 $ (33,668,434) $ 97,704,699
===============================================================================
DECEMBER 31, 2002
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Trade receivables $ 8,930,549 $ 1,660,527 $ 7,946,181 $ - $ 18,537,257
Inventories 18,222,807 4,834,926 10,623,849 (967,000) 32,714,582
Other 2,091,702 171,344 2,133,514 - 4,396,560
-------------------------------------------------------------------------------
Total current assets 29,245,058 6,666,797 20,703,544 (967,000) 55,648,399
Goodwill, net of accumulated
amortization 1,248,777 - 2,724,332 1,125,845 5,098,954
Other 20,270,566 40,572 611,475 (12,079,076) 8,843,537
Intercompany amounts 18,841,713 1,770,711 8,010,748 (28,623,172) -
Property, plant and equipment, net of
accumulated depreciation 22,442,827 914,736 4,508,436 - 27,865,999
-------------------------------------------------------------------------------
$ 92,048,941 $ 9,392,816 $ 36,558,535 $ (40,543,403) $ 97,456,889
===============================================================================
Accounts payable and accrued expenses $ 6,824,958 $ 653,508 $ 3,122,798 $ - $ 10,601,264
Compensation and employee benefits 1,903,535 208,786 1,340,364 - 3,452,685
Current portion of long-term debt 1,713,401 78,804 291,637 - 2,083,842
Other 384,955 (76,310) 571,523 - 880,168
-------------------------------------------------------------------------------
Total current liabilities 10,826,849 864,788 5,326,322 - 17,017,959
Long-term debt less current portion 153,545,590 39,401 2,976,010 - 156,561,001
Other 11,358,111 - 743,294 487,668 12,589,073
Intercompany amounts 7,256,719 4,344,375 17,022,078 (28,623,172) -
Stockholders' deficiency (90,938,328) 4,144,252 10,490,831 (12,407,899) (88,711,144)
-------------------------------------------------------------------------------
$ 92,048,941 $ 9,392,816 $ 36,558,535 $ (40,543,403) $ 97,456,889
===============================================================================
11
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
6. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Net sales $ 19,360,358 $ 3,709,903 $ 12,311,993 $ (5,851,000) $ 29,531,254
Costs and expenses 16,457,666 3,460,079 11,513,642 (5,844,000) 25,587,387
-------------------------------------------------------------------------------
Operating income 2,902,692 249,824 798,351 (7,000) 3,943,867
Interest and other 608,675 18,265 265,814 1,292,198 2,184,952
-------------------------------------------------------------------------------
Net income $ 2,294,017 $ 231,559 $ 532,537 $ (1,299,198) $ 1,758,915
===============================================================================
THREE MONTHS ENDED MARCH 31, 2002
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Net sales $ 18,588,250 $ 3,351,438 $ 10,530,474 $ (5,655,000) $ 26,815,162
Costs and expenses 15,402,517 3,179,677 9,655,395 (5,668,000) 22,569,589
-------------------------------------------------------------------------------
Operating income 3,185,733 171,761 875,079 13,000 4,245,573
Interest and other 4,147,635 71,628 821,981 18,877 5,060,121
-------------------------------------------------------------------------------
Net income (loss) $ (961,902) $ 100,133 $ 53,098 $ (5,877) $ (814,548)
===============================================================================
12
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003
6. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
Net cash provided by operating
activities $ 3,219,127 $ 129,206 $ 1,582,987 $ (1,016,495) $ 3,914,825
Cash flows from investing activities:
Capital expenditures (224,646) (44,213) (40,825) - (309,684)
Other investments 1,999,140 - (2,994,857) 1,016,495 20,778
----------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 1,774,494 (44,213) (3,035,682) 1,016,495 (288,906)
Cash flows from financing activities:
Debt proceeds (repayments) 40,224,849 (39,402) 8,314,880 - 48,500,327
Prior debt repayments (34,743,042) - (3,392,553) - (38,135,595)
Debt issuance costs (2,830,140) - (370,236) - (3,200,376)
Repurchase of senior subordinated
notes (8,870,225) - - - (8,870,225)
----------------------------------------------------------------------------------
Net cash provided by (used in) (6,218,558) (39,402) 4,552,091 - (1,705,869)
financing activities
Other - - 26,020 (843,852) (817,832)
Intercompany accounts 2,386,158 (49,034) (3,180,976) 843,852 -
----------------------------------------------------------------------------------
Net increase (decrease) in cash 1,161,221 (3,443) (55,560) - 1,102,218
Cash and equivalents at beginning of
year 325,266 104,001 886,983 - 1,316,250
----------------------------------------------------------------------------------
Cash and equivalents at end of period $ 1,486,487 $ 100,558 $ 831,423 $ - $ 2,418,468
==================================================================================
THREE MONTHS ENDED MARCH 31, 2002
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
Net cash provided by operating
activities $ 2,022,325 $ 304,767 $ 33,608 $ - $ 2,360,700
Cash flows from investing activities:
Capital expenditures (193,321) (5,113) 7,236 - (191,198)
----------------------------------------------------------------------------------
Net cash provided by (used in) (193,321) (5,113) 7,236 - (191,198)
investing activities
Cash flows from financing activities:
Debt repayments (2,234,969) (39,402) (581,267) - (2,855,638)
Debt issuance costs (76,742) - 538 - (76,204)
----------------------------------------------------------------------------------
Net cash used in financing activities (2,311,711) (39,402) (580,729) - (2,931,842)
Other - - (16,716) (215,593) (232,309)
Intercompany accounts 129,155 (397,600) 52,852 215,593 -
----------------------------------------------------------------------------------
Net decrease in cash (353,552) (137,348) (503,749) - (994,649)
Cash and equivalents at beginning of
year 401,062 207,257 1,286,708 - 1,895,027
----------------------------------------------------------------------------------
Cash and equivalents at end of year $ 47,510 $ 69,909 $ 782,959 $ - $ 900,378
==================================================================================
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared With Three Months Ended March 31,
2002
Net sales. Net sales of $29.5 million for the three months ended March 31, 2003
were 10.1% higher than the $26.8 million in the same period of 2002. Net sales
of traditional valve products increased 5.7% or $1.0 million while net sales of
motion control products increased 18.7% or $0.9 million and sales of air
preparation products increased 18.7% or $0.8 million. North American sales
increased 7.6% or $1.7 million and international sales increased 22.4% or $1.0
million. Of this $2.7 million increase in sales, $0.7 million resulted from
changes in currency rates on consolidated foreign subsidiaries. The remaining
$2.0 million increase in sales was attributed to new product introductions,
programs and focused selling targeting specific customer groups, coupled with
the generally improved business climate.
Gross profit. Gross profit was $11.0 million, or 37.4% of net sales, for the
three months ended March 31, 2003 compared with $10.5 million, or 39.0% of net
sales, in the same period of 2002. Change in product mix was primarily
responsible for the lower gross margin on sales.
Marketing, engineering, general and administrative. Marketing, engineering,
general and administrative expenses were $7.0 million for the three months ended
March 31, 2003, compared to $6.1 million for the same period in 2002. This $0.9
million increase was in response to the increased sales levels, as the Company
invested in its marketing and customer service areas and began filling vacant
positions.
Operating income. Operating income for the three months ended March 31, 2003 was
$3.9 million compared to $4.2 million in the same period in 2002. This $0.3
million decrease occurred as the increase in marketing and customer service
expense more than offset the higher gross profit. Operating income in North
America decreased $0.2 million, or 6.4%, while the International segment's
operating income decreased by $0.1 million, or 13.3%.
Interest and other financing expenses. Interest expense decreased $0.4 million
from $4.6 million in the first three months of 2002 to $4.2 million in 2003,
primarily as a result of the Company's more favorable interest rates on its new
senior debt facility.
Net gain on early extinguishment of debt and repurchase of notes. During January
2003 the Company refinanced its senior debt, and as a result recorded net
charges related to the write-off of deferred financing costs for its old senior
debt of $3.4 million. During February and March 2003 the Company repurchased
$14,980,000 face value of its 9 5/8% senior subordinated notes resulting in a
net gain of $5.6 million.
14
Other. Negligible other income for the three months ended March 31, 2003 was
primarily attributable to realized and unrealized foreign exchange gains, which
resulted from the weakening of the U.S. dollar against major foreign currencies,
compared to $0.7 million foreign exchange expense in the three months ended
March 31, 2002.
Income taxes. For the period ended March 31, 2002 the Company recorded a tax
benefit on losses at its U.S. locations which, when combined with income tax
expense at its foreign locations, resulted in a net benefit of $0.2 million.
During 2003, the Company utilized its net operating losses in the U.S.,
resulting in no U.S. federal income tax expense and a total income tax expense
for the period of $0.2 million.
Net income (loss). Due to the factors discussed above, net income increased $2.6
million, from a loss of $0.8 million during the three months ended March 31,
2002 to end this period at $1.8 million income.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $36.0 million at March 31, 2003 compared to $38.6 million at
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 $154.4 million at March 31, 2003 compared to $158.6
million at December 31, 2002. This decrease was primarily a result of the
Company's repurchase of $15.0 million of its 9 5/8% senior subordinated notes,
which was accomplished through additional term loan borrowings of $10.0 million.
The Company estimates that borrowing base limitations would have limited the
Company's revolving credit availability to approximately $25.8 million as of
March 31, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no "off-balance sheet arrangements" as defined in Item 303(a)(4)
of Regulation S-K.
SPECIFIED CONTRACTUAL OBLIGATIONS
Due to the refinancing of the Company's senior debt and the repurchase of some
senior subordinated notes during the first quarter of 2003, there have been
changes since December 31, 2002 in the future payments due on the Company's
long-term debt obligations. The following table shows the payments due by period
on the Company's long-term debt and capital lease obligations as of March 31,
2003. At that date, the Company had no capital lease obligations, material
purchase obligations, or other long-term liabilities reflected on its balance
sheet.
15
Payments Due by Period
-------------------------------------------------------------------------------------
Within one One to three Three to five Beyond five
Total year years years years
Long term debt $ 154,379,847 $ 3,317,885 $ 48,015,063 $ 726,899 $ 102,320,000
Operating leases 2,324,332 1,250,953 814,053 234,273 25,053
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
March 31, 2003.
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.
16
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 18, 2003 a written consent in lieu of a special meeting of
shareholders, dated as of June 29, 2000, was signed on behalf of the holders of
2,237,660 of the 2,397,235 outstanding shares of common stock approving the
Numatics, Incorporated Incentive Plan adopted by the Board of Directors on June
29, 2000.
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 March 31, 2003.
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: May 14, 2003
17
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
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: May 14, 2003
/s/ John H. Welker
- -----------------------------------------
John H. Welker,
Chief Executive Officer
19
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
20
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: May 14, 2003
/s/ Robert P. Robeson
- -----------------------------------------
Robert P. Robeson,
Chief Financial Officer
21