<PAGE>
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, 1998
-------------------------------------------------
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 IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
COMMON STOCK - 21,276.2 SHARES AS OF NOVEMBER 10, 1998
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL STATEMENTS
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 33,891,066 $ 37,190,414 $ 107,105,282 $ 110,569,102
Costs and expenses (credits):
Cost of products sold 21,444,515 23,564,357 67,496,404 69,653,487
Marketing, engineering, general and adminstrative 7,473,047 8,014,861 23,207,973 23,596,394
Single business tax 100,282 231,900 (733,716) 695,700
------------- ------------- ------------- -------------
Operating income 4,873,222 5,379,296 17,134,621 16,623,521
Other (income) expenses
Interest and other financing expenses 3,861,723 4,286,979 12,013,020 12,639,368
Other (499,249) 253,406 (110,170) 1,317,011
------------- ------------- ------------- -------------
Income before income taxes and extraordinary item 1,510,748 838,911 5,231,771 2,667,142
Income taxes 576,936 485,738 1,868,446 1,289,842
------------- ------------- ------------- -------------
Income before extraordinary item 933,812 353,173 3,363,325 1,377,300
Extraordinary item, net of $2,534,000 of income taxes
(Extinguishment of debt) 0 0 (4,918,000) 0
------------- ------------- ------------- -------------
Net earnings (loss) $ 933,812 $ 353,173 ($ 1,554,675) $ 1,377,300
============= ============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------- ---------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and equivelents $ 1,031,916 $ 701,072
Accounts receivable 23,040,621 22,174,234
Inventories 32,376,908 27,953,158
Other current assets 2,809,234 2,220,852
------------- -------------
Total current assets 59,258,679 53,049,316
Other assets:
Goodwill, net of accumulated amortization 6,610,982 6,839,952
Other intangible assets, net of accumulated amortization 5,880,612 4,492,380
Deferred income taxes 4,524,363 2,323,362
Investment in affiliate 2,000,000 2,000,000
Other 454,223 390,895
------------- -------------
19,470,180 16,046,589
Properties:
Land 1,526,692 1,631,658
Buildings and improvements 11,627,361 12,072,592
Machinery and equipment 44,611,840 39,799,217
------------- -------------
57,765,893 53,503,467
Less accumulated depreciation (27,365,128) (24,064,119)
------------- -------------
30,400,765 29,439,348
------------- -------------
$ 109,129,624 $ 98,535,253
============= =============
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade $ 7,355,087 $ 9,641,314
Accrued expenses 8,114,152 2,225,444
Compensation and employee benefits 5,500,676 4,574,794
Taxes, other than income and single business tax 408,195 427,349
Income and single business tax 1,974,648 1,651,266
Current portion of long term debt 3,370,689 7,060,060
------------- -------------
Total current liabilities 26,723,447 25,580,227
Long-term debt, less current portion 152,969,987 135,696,137
Deferred retirement benefits 3,764,970 3,202,440
Deferred income taxes 48,470 536,428
------------- -------------
156,783,427 139,435,005
Redeemable warrant 3,102,138
Redeemable common stock 3,102,150
Minority interest in subsidiaries (redeemable upon the happening of certain
events outside the control of the Company:$1,142,083 in
1998 and $1,112,173 in 1997) 521,734 348,445
Common stock $.01 par value, 250,000 shares authorized:
20,000 shares oustanding and related additional
paid in capital (redeemable upon the happening of certain events outside
the control of the Company:$39,842,000 in 1998 and $54,931,000 in 1997) 1,500,000 1,500,000
Accumulated deficiency (78,569,923) (71,031,763)
Equity adjustment from foreign currency translation (931,211) (398,799)
------------- -------------
(78,001,134) (69,930,562)
------------- -------------
$ 109,129,624 $ 98,535,253
============= =============
</TABLE>
See accompanying notes
<PAGE>
NUMATICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30
-------------------------------------
1998 1997
------------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ($1,554,675) $1,377,300
Adjustments to reconcile net income (loss)to net cash
provided by (used in) operating activities:
Depreciation 3,289,898 2,875,267
Amortization 935,305 979,162
Extraordinary item (Extinguishment of debt) 4,918,000 0
Deferred interest expense 2,059,894 5,351,362
Minority interest expense 173,289 63,156
Deferred taxes 102,422 (167,816)
Deferred retirement benefits 562,530 553,654
Unrealized foreign currency (gains) losses (406,300) 1,142,258
Changes in operating assets and liabilities:
Trade receivables (795,523) (3,856,972)
Inventories (4,294,829) (4,098,879)
Other current assets (698,446) (745,233)
Accounts payable and accrued expenses 3,521,240 3,526,857
Compensation and employee benefits 917,546 673,566
Income and single business taxes (43,771) 1,587,309
------------- -------------
Net cash provided by operating activities 8,686,580 9,260,991
INVESTING ACTIVITIES
Capital expenses (4,171,294) (6,068,886)
------------- -------------
Net cash used in operating activities (4,171,294) (6,068,886)
FINANCING ACTIVITIES
Proceeds from long-term borrowing 115,000,000 1,721,420
Debt repayments (103,763,466) (4,453,039)
Debt issuance costs (5,087,146) --
Dividends (6,000,001) --
Extraordinary item (Extinguishment of debt) (4,194,345)
Issuance of stock 13 --
------------- -------------
Net cash (used in) financing activities (4,044,945) (2,731,619)
Effect of exchange rate changes on cash (139,497) (162,217)
------------- -------------
Net increase (decrease) in cash and cash equivalents 330,844 298,269
Cash and cash equivalents at beginning of period 701,072 853,129
------------- -------------
Cash and cash equivalents at end of period $1,031,916 $1,151,398
============= =============
</TABLE>
See accompanying notes
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
2. COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components. The adoption of this Statement requires unrealized gains or losses
on foreign currency translation be included in other comprehensive income, which
prior to adoption were reported separately in shareholders' equity. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
The components of comprehensive income, net of related tax, for three and nine
month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $ 934,000 $ 353,000 $(1,555,000) $ 1,377,000
Foreign currency translation
adjustments (194,000) ( 6,000) ( 346,000) ( 56,000)
-------- --------- ----------- ----------
$ 740,000 $ 347,000 $(1,901,000) $ 1,321,000
======= ======= ========== ==========
</TABLE>
The components of accumulated comprehensive income, net of related tax, at
September 30, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Foreign currency translation adjustments $(605,000) $(259,000)
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
3. SENIOR SUBORDINATED NOTES AND EXTRAORDINARY ITEM
In March 1998, the Company issued $115,000,000 of 9 5/8% Senior Subordinated
Notes due 2008 (Senior Subordinated Notes) and replaced its existing credit
agreements with banks. In connection with the issuance of the Senior
Subordinated Notes and new credit agreement, the Company recognized as
extraordinary items $2,150,000, net of taxes, for the write-off of deferred
financing costs, $1,591,000, net of taxes, for the amortization of the previous
unamortized discount on its previous debt arrangement with Harvard Capital and
$1,177,000, net of taxes, for prepayment penalties associated with the previous
debt agreement.
4. WARRANT
On March 24, 1998 Harvard Private Capital Holdings, Inc. exercised its warrant
to purchase 1,276.6 shares of common stock at a price of $.01 each.
5. DIVIDEND
On March 26, 1998 the Company paid a dividend on the shares of its common stock
to the holders of record on March 25, 1998. The amount of the dividend paid in
cash was $6,000,001.
6. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The $115 million of 9 5/8 % Senior Subordinated Notes issued by the Company in
March 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, 1998 and December
31, 1997, consolidating condensed statements of operations for the three and
nine month periods ended September 30, 1998 and 1997 and consolidated condensed
statements of cash flows for the nine months ended September 30, 1998 and 1997.
2. Numatics, Incorporated (the Parent), combined Guarantor Subsidiaries and
combined Non- Guarantor Subsidiaries (consisting of the Company'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.
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Trade Receivables ........................ $ 11,553,951 $ 2,487,866 $ 8,998,804 $ 23,040,621
Inventories .............................. 17,567,261 3,791,057 12,010,590 (992,000) 32,376,908
Other .................................... 2,118,043 332,783 1,390,324 3,841,150
------------- ------------- ------------- ------------- -------------
Total current assets ..................... 31,239,255 6,611,706 22,399,718 (992,000) 59,258,679
Goodwill, net of accumulated amortization 1,587,223 0 3,644,412 1,379,347 6,610,982
Other .................................... 12,691,918 1,707 165,573 0 12,859,198
Intercompany amounts ..................... 32,892,134 604,230 5,415,273 (38,911,637) 0
Property, plant and equipment, net of
accumulated depreciation ............. 25,214,230 800,307 4,386,228 0 30,400,765
------------- ------------- ------------- ------------- -------------
$ 103,624,760 $ 8,017,950 $ 36,011,204 $ (38,524,290) $ 109,129,624
============= ============= ============= ============= =============
Accounts payable and accrued expenses .... $ 11,677,351 $ 853,666 $ 2,938,222 $ 15,469,239
Compensation and employee benefits ....... 4,368,164 142,715 989,797 5,500,676
Current portion of long-term debt ........ 2,908,036 462,653 3,370,689
Other .................................... 1,677,296 46,876 658,671 2,382,843
------------- ------------- ------------- ------------- -------------
Total current liabilities ................ 20,630,847 1,043,257 5,049,343 0 26,723,447
Long-term debt less current portion ...... 145,719,809 0 7,250,178 0 152,969,987
Other .................................... 6,867,120 0 48,470 521,734 7,437,324
Intercompany amounts ..................... 8,643,323 4,886,659 17,358,359 (30,888,341) 0
Accumulated deficiency ................... (78,236,339) 2,088,034 6,304,854 (8,157,683) (78,001,134)
------------- ------------- ------------- ------------- -------------
$ 103,624,760 $ 8,017,950 $ 36,011,204 $ (38,524,290) $ 109,129,624
============= ============= ============= ============= =============
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Trade Receivables ........................ $ 11,078,207 $ 2,188,502 $ 8,907,525 $ 22,174,234
Inventories .............................. 15,366,392 2,607,696 10,890,070 (911,000) 27,953,158
Other .................................... 1,550,468 179,705 1,191,751 2,921,924
------------- ------------- ------------- ------------- -------------
Total current assets ..................... 27,995,067 4,975,903 20,989,346 (911,000) 53,049,316
Goodwill, net of accumulated amortization 457,195 0 3,704,800 2,677,957 6,839,952
Other .................................... 9,069,132 1,707 135,798 0 9,206,637
Intercompany amounts ..................... 32,664,385 224,501 4,179,442 (37,068,328) 0
Property, plant and equipment, net of
accumulated depreciation ............. 24,183,658 670,466 4,585,224 0 29,439,348
------------- ------------- ------------- ------------- -------------
$ 94,369,437 $ 5,872,577 $ 33,594,610 $ (35,301,371) $ 98,535,253
============= ============= ============= ============= =============
Accounts payable and accrued expenses .... $ 7,167,784 $ 1,356,896 $ 3,342,078 $ 11,866,758
Compensation and employee benefits ....... 3,533,317 164,571 876,906 4,574,794
Current portion of long-term debt ........ 6,172,595 887,465 7,060,060
Other .................................... 793,156 46,416 1,239,043 2,078,615
------------- ------------- ------------- ------------- -------------
Total current liabilities ................ 17,666,852 1,567,883 6,345,492 0 25,580,227
Long-term debt less current portion ...... 129,260,490 0 6,435,647 0 135,696,137
Other .................................... 6,841,006 0 0 348,445 7,189,451
Intercompany amounts ..................... 8,961,055 3,122,466 16,179,742 (28,263,263) 0
Accumulated deficiency ................... (68,359,966) 1,182,228 4,633,729 (7,386,553) (69,930,562)
------------- ------------- ------------- ------------- -------------
$ 94,369,437 $ 5,872,577 $ 33,594,610 $ (35,301,371) $ 98,535,253
============= ============= ============= ============= =============
</TABLE>
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net Sales ................................ $23,393,427 $ 4,390,437 $12,369,202 $(6,262,000) $33,891,066
Costs and expenses ....................... 19,416,638 4,018,451 11,707,083 (6,124,328) 29,017,844
----------- ----------- ----------- ----------- -----------
Operating income ......................... 3,976,789 371,986 662,119 (137,672) 4,873,222
Interest and other ....................... 3,620,417 128,528 140,419 50,046 3,939,410
----------- ----------- ----------- ----------- -----------
Net income(loss) before extraordinary
item.................................... 356,372 243,458 521,700 (187,718) 933,812
Extraordinary item ....................... 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net income (loss) ........................ $ 356,372 $ 243,458 $ 521,700 $ (187,718) $ 933,812
=========== =========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net Sales ........... $ 26,259,401 $ 3,991,653 $ 12,996,360 $ (6,057,000) $ 37,190,414
Costs and expenses... 21,696,077 3,544,702 12,543,667 (5,973,328) 31,811,118
------------ ------------ ------------ ------------ ------------
Operating income..... 4,563,324 446,951 452,693 (83,672) 5,379,296
Interest and other... 4,247,884 152,512 584,097 41,630 5,026,123
------------ ------------ ------------ ------------ ------------
Net income (loss).... $ 315,440 $ 294,439 $ (131,404) $ (125,302) 353,173
============ ============ ============ ============ ============
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net Sales ........................... $ 74,193,264 $ 13,115,800 $ 39,132,218 $ (19,336,000) $ 107,105,282
Costs and expenses .................. 61,032,624 11,737,918 36,309,103 (19,108,984) 89,970,661
------------- ------------- ------------- ------------- -------------
Operating income .................... 13,160,640 1,377,882 2,823,115 (227,016) 17,134,621
Interest and other .................. 11,979,997 471,859 1,146,151 173,289 13,771,296
------------- ------------- ------------- ------------- -------------
Net income(loss) before extraordinary
item .............................. 1,180,643 906,023 1,676,964 (400,305) 3,363,325
Extraordinary item .................. 4,918,000 0 0 0 4,918,000
------------- ------------- ------------- ------------- -------------
Net income (loss) ................... $ (3,737,357) $ 906,023 $ 1,676,964 $ (400,305) $ (1,554,675)
============= ============= ============= ============= =============
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net Sales .......... 79,061,732 9,495,999 39,964,371 (17,953,000) 110,569,102
Costs and expenses.. 65,040,408 9,039,453 37,700,704 (17,834,984) 93,945,581
------------ ------------ ------------ ------------ ------------
Operating income.... 14,021,324 456,546 2,263,667 (118,016) 16,623,521
Interest and Other.. 12,936,165 152,204 2,094,696 63,156 15,246,221
------------ ------------ ------------ ------------ ------------
Net income ......... $ 1,085,159 $ 304,342 $ 168,971 $ (181,172) $ 1,377,300
============ ============ ============ ============ ============
</TABLE>
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES
<S> <C> <C> <C>
Net cash used by operating activities .......... $ 9,282,874 $ (1,025,578) $ 429,284
Cash flows from investing activities:
Capital expenditures ......................... (3,485,119) (248,064) (438,111)
Other investments ............................ 0 0 0
------------- ------------- -------------
Net cash used in investing activities .......... (3,485,119) (248,064) (438,111)
Cash flows from financing activities:
Proceeds from borrowing ...................... 115,000,000 0 0
Debt repayments .............................. (103,865,137) 0 101,671
Debt issuance costs .......................... (5,057,711) 0 (29,435)
Dividends .................................... (6,000,001) 0 0
Extraordinary item (extinguishment of debt) .. (4,194,345) 0 0
Issuance of stock ............................ 13 0 0
Other ........................................ 0 0 22,182
------------- ------------- -------------
Net cash provided (used) in financing activities $ (4,117,181) 0 $ 94,418
Intercompany accounts .......................... (1,728,433) 1,384,466 182,288
------------- -------------
Net increase (decrease) in cash ................ (47,859) 110,824 267,879
Cash and cash equivalents, at beginning of year 169,311 102,480 429,281
------------- ------------- -------------
Cash and cash equivalents, at end of year ...... $ 121,452 $ 213,304 $ 697,160
============= ============= =============
ELIMINATIONS CONSOLIDATED
<S> <C> <C>
Net cash used by operating activities .......... $ 0 $ 8,686,580
Cash flows from investing activities:
Capital expenditures ......................... -- (4,171,294)
Other investments ............................ 0 0
------------- -------------
Net cash used in investing activities .......... 0 (4,171,294)
Cash flows from financing activities:
Proceeds from borrowing ...................... -- 115,000,000
Debt repayments .............................. -- (103,763,466)
Debt issuance costs .......................... -- (5,087,146)
Dividends .................................... -- (6,000,001)
Extraordinary item (extinguishment of debt) .. -- (4,194,345)
Issuance of stock ............................ -- 13
Other ........................................ (161,679) (139,497)
------------- -------------
Net cash provided (used) in financing activities $ (161,679) $ (4,184,442)
Intercompany accounts .......................... 161,679 0
------------- -------------
Net increase (decrease) in cash ................ 0 330,844
Cash and cash equivalents, at beginning of year 0 701,072
------------- -------------
Cash and cash equivalents, at end of year ...... $ 0 $ 1,031,916
============= =============
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES
<S> <C> <C> <C>
Net cash provided by operating activities ....... $ 8,397,259 $ (245,674) $ 1,109,406
Cash flows from investing activities:
Capital expenditures .......................... (5,481,839) (245,266) (341,781)
Other investments ............................. 0 0 0
Net cash used in investing activities ........... $(5,481,838) $ (245,266) $ (341,781)
Cash flows from financing activities:
Proceeds from borrowing ....................... 1,721,420 0 0
Purchase of common and preferred stock ........ 0 0 0
Debt repayments ............................... (3,305,169) 0 (1,147,870)
Debt issuance costs ........................... 0 0 0
Other ......................................... 0 0 (59,464)
----------- -----------
Net cash provided (used) in financing activities $(1,583,749) 0 $(1,207,334)
Intercompany accounts ........................... (1,461,782) 570,713 788,316
----------- ----------- -----------
Net increase (decrease) in cash ................. (130,111) 79,773 348,607
Cash and cash equivalents at beginning of year .. 168,512 188,358 496,259
----------- ----------- -----------
Cash and cash equivalents at end of year ........ $ 38,401 $ 268,131 $ 844,866
=========== =========== ===========
ELIMINATIONS CONSOLIDATED
<S> <C> <C>
Net cash provided by operating activities ....... $ 0 $ 9,260,991
Cash flows from investing activities:
Capital expenditures .......................... -- (6,068,886)
Other investments ............................. 0 0
----------- -----------
Net cash used in investing activities ........... 0 $(6,068,885)
Cash flows from financing activities:
Proceeds from borrowing ....................... -- 1,721,420
Purchase of common and preferred stock ........ -- 0
Debt repayments ............................... -- (4,453,039)
Debt issuance costs ........................... -- 0
Other ......................................... (102,753) (162,217)
----------- -----------
Net cash provided (used) in financing activities $ (102,753) $(2,893,836)
Intercompany accounts ........................... 102,753 0
----------- -----------
Net increase (decrease) in cash ................. -- 298,269
Cash and cash equivalents at beginning of year .. 0 853,129
----------- -----------
Cash and cash equivalents at end of year ........ $ 0 $ 1,151,398
=========== ===========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. The Company's net sales for the third quarter 1998 were $33.9 million
compared to $37.2 million in the same 1997 quarter. This 8.9% decrease resulted
from a continuation of the overall softness in the pneumatic market which
started during the second quarter of 1998. Net sales of traditional valve
products decreased 7.5% or $1.6 million, and net sales of other products
decreased 10.7% or $1.7 million. North American sales decreased 10.9% or $3.3
million, and international sales remained essentially the same as the prior
period.
GROSS PROFIT. Gross profit for the three months ended September 30, 1998 was
36.7% of net sales compared to 36.6% in the third quarter of 1997. The slightly
increased percentage was attributable to the favorable impact of cost
containment efforts which offset the unfavorable impact of lower production
volumes at certain locations resulting from the lower sales levels.
MARKETING, ENGINEERING, GENERAL AND ADMINISTRATIVE. Marketing, engineering,
general and administrative expenses were $7.5 million in the third quarter of
1998 compared to $8.0 million in the same 1997 quarter. This decrease resulted
from cost containment efforts implemented in the second quarter of 1998 in
response to the lower sales levels caused by the softness in the pneumatic
market.
SINGLE BUSINESS TAX. Single business tax for the three months ended September
30, 1998 was $.1 compared to $.2 million for the third quarter of 1997. This
decrease was caused by a tax ruling that redefined the reported sales included
in the tax calculation which favorably impacted the Company.
OPERATING INCOME. As a result of the foregoing, operating income for the three
months ended September 30, 1998 was $4.9 million, or 14.4% of net sales,
compared with $5.4 million, or 14.5% of net sales, for the three months ended
September 30, 1997.
INTEREST AND OTHER FINANCING EXPENSES. Interest expense of $3.9 million for the
three months ended September 30, 1998 was 9.9% below the $4.3 million of expense
for the same period in 1997. This decrease resulted from the interest rate
improvement achieved by the refinancing of the Company's subordinated debt on
March 24, 1998.
OTHER (INCOME) EXPENSE. Other income of $.5 million during the three months
ended September 30, 1998 consisted principally of unrealized foreign exchange
gains which resulted from the weakening of the U.S. dollar against major foreign
currencies. In the second quarter of 1997 other expense of $.3 million consisted
primarily of unrealized foreign exchange losses resulting from the U.S. dollar
strengthening during the quarter.
<PAGE>
NET INCOME. Due to the factors discussed above, net income increased $.5 million
to $.9 million in the three months ended September 30, 1998 compared with $.4
million in the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. Net sales of $107.1 million for the nine months ended September 30,
1998 were 3.1% less than the $110.6 million in the same period of 1997
principally due to a general decline in the pneumatic market which started
during the second quarter of 1998. Net sales of traditional valve products
declined 4.7% or $3.1 million while net sales of other products decreased 0.9%
or $.4 million. North American sales decreased 3.8% or $3.5 million and
international sales remained essentially the same as the prior period.
GROSS PROFIT. Gross profit was $39.6 million, or 37.0% of net sales, for the
nine months ended September 30, 1998 compared with $40.9 million, or 37.0% of
net sales, in the same period of 1998. The cost reductions which were realized
as a result of the cost containment efforts in 1998 offset the unfavorable
effect of the lower production volumes at certain locations due to lower sales
levels.
MARKETING, ENGINEERING, GENERAL AND ADMINISTRATIVE. Marketing, engineering,
general and administrative expenses were $23.2 million for the nine months ended
September 30, 1998 compared to $23.6 million for the first nine months of 1997.
This decrease is attributable to cost containment initiatives implemented in the
second quarter of 1998 in recognition of the lower sales levels resulting from
the softness in the pneumatic market.
SINGLE BUSINESS TAX. Single business tax for the first nine months of 1998 was a
credit of $.7 million compared to an expense of $.7 million in in 1997. The
credit resulted from filing amended tax returns in March 1998 for the years 1992
to 1996 due to a tax ruling which redefined the reported sales which are
included in the calculation of the tax which favorably impacted the Company.
OPERATING INCOME. Operating income for the nine months ended September 30, 1998
was $17.1 million compared to $16.6 million in the same period in 1997. This $.5
million increase was primarily due to the decrease in the single business tax
expense discussed above.
INTEREST AND OTHER FINANCING EXPENSES. Interest expense decreased $.6 million to
$12.0 million in the first nine months of 1998 from $12.6 in 1997 due to the
improved interest rate resulting from the refinancing of the subordinated debt
on March 24, 1998.
<PAGE>
OTHER (INCOME) EXPENSE. Other income of $.1 million for the nine months ended
September 30, 1998 was attributable to unrealized foreign exchange gains which
resulted from the weakening of the U.S. dollar against major foreign currencies,
particularly in the third quarter of 1998. Other expense of $1.3 million in the
nine months ended September 30, 1997 consisted primarily of unrealized foreign
exchange losses resulting from the strengthening of the U.S.
dollar during that period.
EXTRAORDINARY ITEM. The extraordinary item in the nine months ended
September 30, 1998 resulted from the write off of unamortized debt financing
costs relating to the refinancing of the Company's debt of $1.6 million, net of
taxes, write off of previous unamortized discount on its previous debt
arrangement of $2.1 million, net of taxes and a prepayment penalty of $1.2
million, net of taxes. The amount is reported net of $2.5 million tax benefit.
NET INCOME (LOSS). Due to the factors discussed above, net income decreased $2.9
million, to a loss of $1.5 million during the nine months ended September 30,
1998 from income of $1.4 million in the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
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.
Cash provided by operating activities was $8.7 million for the nine months ended
Septemer 30, 1998 compared to $9.3 million for the same period in 1997.
Cash used in investing activities of $4.2 million during the nine months ended
September 30, 1998 was $1.9 million less than the $6.1 million used in the first
nine months of 1997. This decrease was principally the result of higher capital
expenditures during 1997 primarily due to the construction of a new 68,000
square foot manufacturing facility for the Actuator Division in Franklin,
Tennessee. The Company does not have any material commitments for capital
expenditures.
Net cash used in financing activities was $4.0 million in 1998 compared to the
use of $2.7 million in 1997. The 1998 amount includes the net results of
refinancing the Company's debt together with the payment of a $6.0 million
dividend.
Working capital was $32.5 million at September 30, 1998 compared to $27.5
million at December 31, 1997. The increase is primarily attributable to a $4.4
million increase in inventories relating to buildups associated with new product
introductions as well as higher inventory levels resulting from decreased sales
levels, a $.9 million increase in accounts receivable, a $3.6 million increase
in accounts payable and accrued expenses relating to interest on the
$115,000,000 of senior subordinated notes and a $3.7 million decrease in the
current position of long-term debt. Total assets were $109.1 million at
September 30, 1998 compared to $98.5 million at December 31, 1997. This increase
includes the increased working capital together with a $2.2 million increase in
deferred income tax debits relating to the debt refinancing.
<PAGE>
Total debt outstanding was $156.3 million at September 30, 1998 compared to a
$142.8 million at December 31, 1997. This increase was caused by the costs and
expenditures associated with the refinancing of the Company's debt together with
a $6.0 million dividend paid in March 1998.
On March 24, 1998, the Company issued $115,000,000 of 9 5/8% senior subordinated
notes, the proceeds of which were utilized to repay outstanding subordinated
debt and pay a $6,000,000 dividend with the balance being paid against the
Company's bank debt. At the same time, the Company entered into a new bank
credit facility, which included (i) term loans of $29.0 million, $4.0 million,
and $2.0 million to the Company and its German and Canadian subsidiaries,
respectively and (ii) revolving credit facilities, including letters of credit,
of $32.0 million and $3.0 million to the Company and its German subsidiary,
respectively. The revolving credit facilities permit each of the Company and its
German subsidiary to borrow up to the lesser of the total amount of its
respective revolving credit facility or a borrowing base computed as a
percentage of inventory and accounts receivable. Interest on term loans to the
Company's Canadian and German subsidiaries and the revolving facilities accrues
at an annual rate based on an applicable margin over NBD Bank's prime rate, or
LIBOR. The Company estimates that the borrowing base limitations would have
limited the Company's revolving credit availability to approximately $28.9
million as of September 30, 1998. All borrowings under the revolving credit
facilities mature in March 2004. The term loans are payable in quarterly
installments, which quarterly installments in 1998 will aggregate $1.6 million,
in 1999, $2.5 million, in 2000, $3.0 million, in 2001, $3.5 million in 2002,
$4.0 million, in 2003 $4.9 million, in 2004, $8.4 million, and in 2005, $7.1
million. This credit facility, and the guarantees thereof by the Company's
domestic subsidiaries, is secured by substantially all the Company's domestic
subsidiaries and, with respect to the loans to the Company's foreign
subsidiaries, substantially all the assets of such subsidiaries. This credit
facility includes certain financial and operating covenants which, among other
things, restrict the ability of the Company to incur additional indebtedness,
make investments and take other actions.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company implemented an assessment project to address the Year 2000 Issue
including information technology (IT) and non-IT systems. The Company has
determined that it will be required to modify or replace significant portions of
its software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has contracts in place with external resources
and has allocated internal resources to replace or reprogram, and test the
software for Year 2000 modifications. The Company has initiated remediation and
testing, and is implementing an action plan to address the Year 2000 issue and
estimates that the majority of testing will be completed by the end of the
second quarter of 1999 and that the Year 2000 project will be completed within
one year. A number of third party audits are being performed and others are
planned. The Company presently believes that with modifications to the existing
software and conversions to new software, the Year 2000 issue can be mitigated.
However, if such modifications and conversions are not made, or not completely
timely, the Year 2000 issue could cause production interruptions that could have
a material impact on the operations of the Company. The Company is developing
contingency plans and will continue to do so throughout the program.
The Company has initiated formal communications with its significant suppliers
and large customers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issue. While
the Company expects a successful resolution of all issues, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted in a timely manner, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company. The Company
has determined it has no exposure to contingencies related to the Year 2000
Issue for the products it has sold.
The Company plans to complete the Year 2000 project within one year. The total
cost of the Year 2000 project is estimated to be $4.0 million and is being
funded through operating cash flows. Of the total project cost, approximately
$2.8 million is attributable to the purchase of new software and hardware which
will be capitalized. The remaining $1.2 million represents maintenance and
repair of existing systems and other project costs and will be expensed as
incurred over the next year. As of September 30, 1998 the Company has expended
approximately $1.7 million related to the assessment activities, the development
of a remediation plan and the implementation of the remediation plan in
connection with its Year 2000 project.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit Description
------- -----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the three months
ended September 30, 1998.
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
Date: 11-13-98
----------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 1,031,916 701,072
<SECURITIES> 0 0
<RECEIVABLES> 23,098,958 22,174,234
<ALLOWANCES> 58,337 61,000
<INVENTORY> 32,376,908 27,953,158
<CURRENT-ASSETS> 59,258,679 53,049,316
<PP&E> 57,765,893 53,503,467
<DEPRECIATION> (27,365,128) (24,064,119)
<TOTAL-ASSETS> 109,129,624 98,535,253
<CURRENT-LIABILITIES> 26,723,447 25,580,227
<BONDS> 152,969,987 135,696,137
0 0
0 0
<COMMON> 4,602,151 1,500,000
<OTHER-SE> (78,569,923) (71,031,763)
<TOTAL-LIABILITY-AND-EQUITY> 109,129,624 98,535,253
<SALES> 107,105,282 147,097,265
<TOTAL-REVENUES> 107,105,282 147,097,265
<CGS> 67,496,404 93,784,880
<TOTAL-COSTS> 22,474,257 32,775,774
<OTHER-EXPENSES> (110,170) 1,348,059
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12,013,020 17,020,961
<INCOME-PRETAX> 5,231,771 2,167,591
<INCOME-TAX> 1,868,446 903,768
<INCOME-CONTINUING> 3,363,325 1,263,823
<DISCONTINUED> 0 0
<EXTRAORDINARY> (4,918,000) 0
<CHANGES> 0 0
<NET-INCOME> (1,554,675) 1,263,823
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
