<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 June 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 No.)
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 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 - 21,276.2 shares as of August 11, 1998
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Numatics, Incorporated
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $35,391,579 $37,313,418 $73,214,216 $73,378,688
Costs and expenses (credits):
Cost of products sold 22,386,984 23,167,718 46,051,889 46,089,130
Marketing, engineering, general and administrative 7,888,178 7,933,626 15,734,926 15,581,533
Single business tax 92,017 231,900 (833,998) 463,800
----------- ----------- ----------- -----------
Operating income 5,024,400 5,980,174 12,261,399 11,244,225
Other expenses
Interest and other financing expenses 3,740,809 4,223,281 8,151,297 8,352,389
Other (152,684) 287,493 389,079 1,063,605
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 1,436,275 1,469,400 3,721,023 1,828,231
Income taxes 408,980 530,919 1,291,510 804,104
----------- ----------- ----------- -----------
Income before extraordinary item 1,027,295 938,481 2,429,513 1,024,127
Extraordinary item, net of $2,534,000 of income taxes
(Extinguishment of debt) 0 0 (4,918,000) --
----------- ----------- ----------- -----------
Net earnings (loss) $ 1,027,295 $ 938,481 $(2,488,487) $ 1,024,127
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
Numatics, Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 1,143,421 $ 701,072
Accounts receivable 22,819,063 22,174,234
Inventories 30,255,401 27,953,158
Single business taxes receivable 1,082,135 -
Other current assets 2,862,492 2,220,852
------------ ------------
Total current assets 58,162,512 53,049,316
Other assets:
Goodwill, net of accumulated amortization 6,593,685 6,839,952
Other intangible assets, net of accumulated amortization 5,925,229 4,492,380
Deferred income taxes 4,582,363 2,323,362
Investment in affiliate 2,000,000 2,000,000
Other 451,644 390,895
------------ ------------
19,552,921 16,046,589
Properties:
Land 1,509,879 1,631,658
Buildings and improvements 11,449,296 12,072,592
Machinery and equipment 42,861,146 39,799,217
------------ ------------
55,820,321 53,503,467
Less accumulated depreciation (26,167,856) (24,064,119)
------------ ------------
29,652,465 29,439,348
------------ ------------
$107,367,898 $98,535,253
============ ============
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade $8,936,801 $9,641,314
Accrued expenses 5,290,250 2,225,444
Compensation and employee benefits 4,831,301 4,574,794
Taxes, other than income and single business tax 373,688 427,349
Income and single business tax 1,664,620 1,651,266
Current portion of long term debt 3,239,391 7,060,060
------------ ------------
Total current liabilities 24,336,051 25,580,227
Long-term liabilities:
Long-term debt, less current portion 154,414,245 135,696,137
Deferred retirement benefits 3,577,461 3,202,440
Deferred income taxes 129,007 536,428
------------ ------------
158,120,713 139,435,005
Redeemable warrant 3,102,138
Redeemable common stock 3,102,150
Minority interest in subsidiaries (redeemable upon the happening of certain 471,688 348,445
events outside the control of the Company: $1,083,374 in 1998 and $1,112,173
in 1997)
Accumulated deficiency:
Common stock $.01 par value, 250,000 shares authorized:
20,000 shares outstanding and related additional
paid in capital (redeemable upon the happening of certain events outside
the control of the Company: $41,317,000 in 1998 and $54,931,000 in 1997) 1,500,000 1,500,000
Accumulated deficiency (79,530,030) (71,031,763)
Equity adjustment from foreign currency translation (632,674) (398,799)
------------ ------------
(78,662,704) (69,930,562)
------------ ------------
$107,367,898 $98,535,253
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Numatics, Incorporated
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Operating activities
Net income (loss)...................................... $ (2,488,487) $1,024,127
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation....................................... 2,281,538 1,904,251
Amortization....................................... 580,209 654,663
Extraordinary item (Extinguishment of debt)........ 4,918,000 0
Deferred interest expense.......................... 2,059,894 3,472,386
Minority interest expense.......................... 123,243 21,526
Deferred taxes..................................... 126,383 (84,428)
Deferred retirement benefits....................... 375,021 369,103
Unrealized foreign currency losses................. 117,020 896,243
Changes in operating assets and liabilities:
Trade receivables................................ (793,924) (2,480,737)
Inventories...................................... (2,494,399) (2,492,145)
Other current assets............................. (799,098) (543,319)
Accounts payable and accrued expenses............ 2,607,360 1,201,647
Compensation and employee benefits............... 79,012 66,345
Income and single business taxes................. (1,404,717) 1,236,588
------------ ----------
Net cash provided by operating activities.............. 5,287,055 5,246,250
Investing activities
Capital expenses....................................... (2,547,596) (4,466,689)
------------ ----------
Net cash used in investing activities.................. (2,547,596) (4,466,689)
Financing activities
Proceeds from long-term borrowing...................... 115,000,000 1,850,973
Debt repayments........................................ (102,076,662) (2,602,833)
Debt issuance costs.................................... (4,905,850) -
Dividends.............................................. (6,000,001) -
Extraordinary item pertaining to early extinguishment
of debt (4,194,345)
Issuance of stock...................................... 13 -
------------ ----------
Net cash (used in) financing activities................ (2,176,845) (751,860)
Effect of exchange rate changes on cash................ (120,265) 33,411
------------ ----------
Net increase in cash and cash equivalents.............. 442,349 61,112
Cash and cash equivalents at beginning of year......... 701,072 853,129
------------ ----------
Cash and cash equivalents at end of period............. $ 1,143,421 $ 914,241
============ ==========
</TABLE>
See accompanying notes.
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
June 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 six month periods ended June
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 six
month periods ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -----------------------
1998 1997 1998 1997
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $1,027,000 $938,000 $(2,488,000) $1,024,000
Foreign currency translation
adjustments (144,000) (15,000) (152,000) (50,000)
---------- --------- ----------- ----------
$ 883,000 $923,000 $(2,640,000) $ 974,000
========== ======== =========== ==========
</TABLE>
The components of accumulated comprehensive income, net of related tax, at
June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Foreign currency translation adjustments $(411,000) $(259,000)
</TABLE>
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.
<PAGE>
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 June 30, 1998 and December 31,
1997, consolidating condensed statements of operations for the three and six
month periods ended June 30, 1998 and 1997 and consolidated condensed statements
of cash flows for the six months ended June 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
June 30, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Trade Receivables.......................... $ 11,402,376 $ 2,661,982 $ 8,754,705 $ 22,819,063
Inventories................................ 16,717,116 3,312,626 11,128,659 $ (903,000) 30,255,401
Other...................................... 2,723,712 271,683 2,092,653 5,088,048
------------ ----------- ------------ ------------ ------------
Total current assets....................... 30,843,204 6,246,291 21,976,017 (903,000) 58,162,512
Goodwill, net of accumulated amortization.. 1,609,785 0 3,555,881 1,428,019 6,593,685
Other...................................... 12,792,988 1,707 164,541 0 12,959,236
Intercompany amounts....................... 32,503,260 158,513 5,496,559 (38,158,332) 0
Property, plant and equipment, net of
accumulated depreciation.................. 24,693,535 744,266 4,214,664 0 29,652,465
------------ ----------- ------------ ------------ ------------
$102,442,772 $ 7,150,777 $ 35,407,662 $(37,633,313) $107,367,898
============ =========== ============ ============ ============
Accounts payable and accrued expenses...... $ 10,179,335 $ 1,177,916 $ 2,869,800 $ 14,227,051
Compensation and employee benefits......... 3,874,467 85,903 870,931 4,831,301
Current portion of long-term debt.......... 2,799,287 440,104 3,239,391
Other...................................... 1,291,724 59,405 687,179 2,038,308
------------ ----------- ------------ ------------ ------------
Total current liabilities.................. 18,144,813 1,323,224 4,868,014 $ 0 24,336,051
Long-term debt less current portion........ 147,551,392 0 6,862,853 0 154,414,245
Other...................................... 6,679,611 0 129,007 471,688 7,280,306
Intercompany amounts....................... 8,659,664 3,982,974 17,863,223 (30,505,861) 0
Accumulated deficiency..................... (78,592,708) 1,844,579 5,684,565 (7,599,140) (78,662,704)
------------ ----------- ------------ ------------ ------------
$102,442,772 $ 7,150,777 $ 35,407,662 $(37,633,313) $107,367,898
============ =========== ============ ============ ============
</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
<TABLE>
<CAPTION>
Three Months ended June 30, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales................. $24,269,835 $4,097,068 $13,104,676 $ (6,080,000) $35,391,579
Costs and expenses........ 20,529,558 3,701,135 12,222,814 (6,086,328) 30,367,179
----------- ---------- ----------- ------------ -----------
Operating income.......... 3,740,277 395,933 881,862 6,328 5,024,400
Interest and other........ 3,565,128 134,106 247,781 50,090 3,997,105
----------- ---------- ----------- ------------ -----------
Net income (loss) before
extraordinary item...... 175,149 261,827 634,081 (43,762) 1,027,295
Extraordinary item........ 0 0 0 0 0
----------- ---------- ----------- ------------ -----------
Net income (loss)......... $ 175,149 $ 261,827 $ 634,081 $ (43,762) $ 1,027,295
=========== ========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months ended June 30, 1997
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales................. $26,768,205 $3,059,328 $13,649,885 $ (6,164,000) $37,313,418
Costs and expenses........ 21,589,689 2,959,326 12,875,557 (6,091,328) 31,333,244
----------- ---------- ----------- ------------ -----------
Operating income.......... 5,178,516 100,002 774,328 (72,672) 5,980,174
Interest and other........ 4,517,820 35,840 476,719 11,314 5,041,693
----------- ---------- ----------- ------------ -----------
Net income................ $ 660,696 $ 64,162 $ 297,609 $ (83,986) 938,481
=========== ========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months ended June 30, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales................. $50,799,837 $8,725,363 $26,763,016 $(13,074,000) $73,214,216
Costs and expenses........ 41,615,986 7,719,467 24,602,020 (12,984,656) 60,952,817
----------- ---------- ----------- ------------ -----------
Operating income.......... 9,183,851 1,005,896 2,160,996 (89,344) 12,261,399
Interest and other........ 8,359,580 343,331 1,005,732 123,243 9,831,886
----------- ---------- ----------- ------------ -----------
Net income (loss) before
extraordinary item...... 824,271 662,565 1,155,264 (212,587) 2,429,513
Extraordinary item........ 4,918,000 0 0 0 4,918,000
----------- ---------- ----------- ------------ -----------
Net income (loss)......... $(4,093,729) $ 662,565 $ 1,155,264 $ (212,587) $(2,488,487)
=========== ========== =========== ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months ended June 30, 1997
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales................ 52,802,331 5,504,346 26,968,011 (11,896,000) 73,378,688
Costs and expenses....... 43,344,331 5,494,751 25,157,037 (11,861,656) 62,134,463
----------- ---------- ----------- ------------ -----------
Operating income......... 9,458,000 9,595 1,810,974 (34,344) 11,244,225
Interest and Other....... 8,688,282 (308) 1,510,598 21,526 10,220,098
----------- ---------- ----------- ------------ -----------
Net income............... $ 769,718 $ 9,903 $ 300,376 $ (55,870) $ 1,024,127
=========== ========== =========== ============ ===========
</TABLE>
<PAGE>
NUMATICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6 - Guarantor and Non-Guarantor Subsidiaries (Continued)
STATEMENT OF CASH FLOWS
Six Months ended June 30, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash used by operating activities............. $ 5,803,734 $(743,467) $ 226,788 $ 0 $ 5,287,055
Cash flows from investing activities:
Capital expenditures............................ (2,155,575) (156,524) (235,497) (2,547,596)
Other investments............................... 0 0 0 0 0
------------- --------- --------- --------- ------------
Net cash used in investing activities............. (2,155,575) (156,524) (235,497) 0 (2,547,596)
Cash flows from financing activities:
Proceeds from borrowing......................... 115,000,000 0 0 115,000,000
Debt repayments................................. (102,142,302) 0 65,640 (102,076,662)
Debt issuance costs............................. (4,878,129) 0 (27,721) (4,905,850)
Dividends....................................... (6,000,001) 0 0 (6,000,001)
Extraordinary item (extinguishment of debt)..... (4,194,345) 0 0 (4,194,345)
Issuance of stock............................... 13 0 0 13
Other........................................... 0 0 (17,278) (102,987) (120,265)
------------- --------- --------- --------- ------------
Net cash provided (used) in financing activities.. (2,214,764) 0 20,641 (102,987) (2,297,110)
Intercompany accounts............................. (1,471,809) 926,498 442,324 102,987 0
------------- --------- --------- --------- ------------
Net increase (decrease) in cash................... (38,414) 26,507 454,256 0 442,349
Cash and cash equivalents, at beginning of year... 169,311 102,480 429,281 0 701,072
------------- --------- --------- --------- ------------
Cash and cash equivalents, at end of year......... $ 130,897 $ 128,987 $ 883,537 $ 0 $ 1,143,421
============= ========= ========= ========= ============
</TABLE>
Six Months ended June 30, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities......... $ 5,260,449 $(141,312) $ 127,113 $ 0 $ 5,246,250
Cash flows from investing activities:
Capital expenditures............................ (4,083,850) (122,205) (260,634) (4,466,689)
Other investments............................... 0 0 0 0 0
----------- --------- --------- -------- -----------
Net cash used in investing activities............. (4,083,850) (122,205) (260,634) 0 (4,466,689)
Cash flows from financing activities:
Proceeds from borrowing......................... 1,850,973 0 0 1,850,973
Purchase of common and preferred stock.......... 0 0 0 0
Debt repayments................................. (2,162,113) 0 (440,720) (2,602,833)
Debt issuance costs............................. 0 0 0 0
Other........................................... 0 0 47,110 (13,699) 33,411
----------- --------- --------- -------- -----------
Net cash provided (used) in financing activities.. (311,140) 0 (393,610) (13,699) (718,449)
Intercompany accounts............................. (306,263) 302,310 (9,746) 13,699 0
----------- --------- --------- -------- -----------
Net increase (decrease) in cash................... 559,196 38,793 (536,877) 0 61,112
Cash and cash equivalents at beginning of year.... 168,512 188,358 496,259 0 853,129
----------- --------- --------- -------- -----------
Cash and cash equivalents at end of year.......... $ 727,708 $ 227,151 $ (40,618) $ 0 $ 914,241
=========== ========= ========= ======== ===========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended June 30, 1998 Compared With Three Months Ended June 30, 1997
Net Sales. The Company's net sales for the second quarter 1998 were $35.4
million compared to $37.3 million in the same 1997 quarter. This 5.1% decrease
resulted from an overall softness in the pneumatic market which started during
the second quarter of 1998. Net sales of traditional valve products decreased
6.3% or $1.4 million, and net sales of other products decreased 3.5% or $.5
million. North American sales decreased 6.0% or $1.8 million, and international
sales decreased 1.4% or $.1 million.
Gross Profit. Gross profit for the three months ended June 30, 1998 was 36.7%
of net sales compared to 37.9% in the second quarter of 1997. The decreased
percentage was attributable to the unfavorable impact of lower production
volumes at certain locations resulting from the lower level of sales.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $7.9 million for both the second
quarter of 1998 and 1997. Inflationary increases in these areas were offset by
increased efficiencies.
Single Business Tax. Single business tax for the three months ended June 30,
1998 was $.1 compared to $.2 million for the second 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 June 30, 1998 was $5.0 million, or 14.2% of net sales, compared
with $6.0 million, or 16.0% of net sales, for the three months ended June 30,
1997.
Interest and Other Financing Expenses. Interest expense of $3.7 million for the
three months ended June 30, 1998 was 11.8% below the $4.2 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.
Net Income. Due to the factors discussed above, net income increased $.1 million
to $1.0 million in the three months ended June 30, 1998 compared with $.9
million in the same period in 1997.
<PAGE>
Six Months Ended June 30, 1998 Compared With Six Months Ended June 30, 1997
Net Sales. Net sales of $73.2 million for the first half of 1998 were
essentially the same as the $73.4 million in the first half of 1997 principally
due to a general decline in the pneumatic market during the second quarter of
1998. Net sales of traditional valve products declined 3.4% or $1.5 million
while net sales of other products increased 4.3% or $1.3 million. North American
sales decreased .2% or $.1 million and international sales decreased .4% or $.1
million.
Gross Profit. Gross profit was $27.2 million, or 37.1% of net sales, for the six
months ended June 30, 1998 compared with $27.3 million, or 37.2% of net sales,
in the same period of 1997. The cost reductions which were realized in the first
quarter of 1998 were offset by the lower sales and production volumes during the
second quarter of 1998.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $15.7 million for the first half of
1998 compared to $15.6 million for the first half of 1997. This slight increase
of $.1 million is primarily attributed to increased salaries.
Single Business Tax. Single business tax for the first half of 1998 was a credit
of $.8 million compared to an expense of $.5 million in 1997. This 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 six months ended June 30, 1998 was
$12.3 million compared to $11.2 million in 1997. This $1.1 million increase was
primarily due to the decrease in the single business tax expense discussed
above.
Interest and Other Financing Expenses. Interest expense decreased $.2 million to
$8.2 million in the first half of 1998 from $8.4 in 1997 due to the improved
interest rate resulting from the refinancing of the subordinated debt on March
24, 1998.
Other (Income) Expense. Other expenses decreased to $.4 million in 1998 from
$1.1 million in 1997 due principally to a decline in unrealized foreign exchange
losses resulting from a more stable U.S. dollar in the first half of 1998 versus
the significant strengthening of the dollar in the first half of 1997.
Extraordinary Item. The extraordinary item in the first half of 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.
<PAGE>
Net Income (Loss). Due to the factors discussed above, net income decreased $3.5
million, to a loss of $2.5 million from income of $1.0 million.
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 $5.3 million for the six months ended
June 30, 1998 compared to $5.2 million for the same period in 1997.
Cash used in investing activities of $2.6 million during the six months ended
June 30, 1998 was $1.9 million less than the $4.5 million used in the first half
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 $2.2 million in 1998 compared to the
use of $0.8 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 $33.8 million at June 30, 1998 compared to $27.5 million at
December 31, 1997. The increase is primarily attributable to a $2.3 million
increase in inventories relating to buildups associated with new product
introductions, a $1.7 million increase in accounts and taxes receivable and a
$3.8 million decrease in the current position of long-term debt. Total assets
were $107.4 million at June 30, 1998 compared to $98.5 million at December 31,
1997. This increase includes the increased working capital together with a $2.3
million increase in deferred income tax debits relating to the debt refinancing.
Total debt outstanding was $157.7 million at June 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
<PAGE>
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 $28.7 million as of June 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 2001, $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 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.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description
- ----------- -----------
3.1.1 Articles of Incorporation of Numatics, Incorporated, as amended
(1)
3.1.2 Bylaws of Numatics, Incorporated (1)
3.2.1 Articles of Incorporation of Numation, Inc., as amended (1)
3.2.2 Bylaws of Numation, Inc. as amended (1)
3.3.1 Articles of Incorporation of Numatech, Inc., as amended (1)
3.3.2 Bylaws of Numatech, Inc. as amended (1)
3.4.1 Articles of Incorporation of Micro-Filtration, Inc., as amended
(1)
3.4.2 Bylaws of Micro-Filtration, Inc. as amended (1)
3.5.1 Articles of Incorporation of Ultra Air Products, Inc., as amended
(1)
3.5.2 Bylaws of Ultra Air Products, Inc. as amended (1)
3.6.1 Articles of Incorporation of Microsmith, Inc., as amended (1)
3.6.2 Bylaws of Microsmith, Inc. as amended (1)
3.7.1 Articles of Incorporation of I.A.E. Incorporated (1)
3.7.2 Bylaws of I.A.E. Incorporated (1)
4.1.1 Indenture, dated as of March 23, 1998, relating to 9 5/8% Senior
Subordinated Notes due 2008 (the "Notes"), among the Registrant,
its subsidiaries that guaranteed the Notes (the "Guarantors"), and
First Trust National Association, as trustee, including forms of
the Notes and related guarantees (1)
4.1.2 A/B Exchange Registration Rights Agreement, dated as of March 23,
1998, among the Registrant, the Guarantors, and the initial
purchasers of the Notes (1)
<PAGE>
MCP&S 8/12/1998
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ---------------------------------------------------------------
<C> <S>
4.2.1 Amended and Restated Loan Agreement, dated March 23, 1998,
among Numatics, Incorporated, Numatics GmbH, Numatics, Ltd., NBD
Bank, as Administrative Agent, and BankBoston, N.A., as
Documentation Agent, and the Lenders party thereto (1)
4.2.2 Amended and Restated Guaranty Agreement, dated as of March 23,
1998, by the Registrant and Guarantors in favor of NBD Bank, as
Administrative Agent, and BankBoston, N.A., as Documentation
Agent (1)
10.1 Purchase Agreement dated March 18, 1998 among the initial
purchasers of the Notes, the Registrant, and the Guarantors (1)
10.2.1 Securities Purchase Agreement, dated as of January 3, 1996,
between Numatics, Incorporated and Harvard Capital Management,
Inc. ("Harvard") (1)
10.2.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement, dated
January 3, 1996, among Numatics, Incorporated, its shareholders,
and Harvard (1)
10.2.3 Registration Agreement, dated as of January 3, 1996, between
Numatics, Incorporated and Harvard (1)
10.2.4 Form of Guaranty Agreement between Harvard and I.A.E.
Incorporated, dated as of March 23, 1998 (Each of the Guarantors
has executed an Amended and Restated Guaranty Agreement in
substantially the same form.) (1)
10.2.5 Agreement, dated as of March 23, 1998, between Numatics,
Incorporated and Harvard (1)
10.3 Amended and Restated Stock Transfer Agreement, dated December
28, 1995, among Numatics, Incorporated and its shareholders
other than Harvard (1)
10.3.1 First Amendment, dated June 30, 1998, to Amended and Restated
Stock Transfer Agreement (2)
10.4 Voting Agreement, dated as of November 29, 1990, among Numatics,
Incorporated (under its former name, Numatics Acquisition
Corporation) and certain of its shareholders (1)
10.5 Employment Agreement, dated January 3, 1996, between Numatics,
Incorporated and John H. Welker* (1)
</TABLE>
<PAGE>
Exhibit No. Description
- ----------- -----------
10.6 Employment Agreement, dated September 15, 1996, between
Numatics, Incorporated and David M. Tenniswood* (1)
10.7 Numatics, Incorporated Amended and Restated Deferred
Compensation Plan, adopted December 28, 1995, and related
acknowledgements by Eligible Employees (as therein defined)* (1)
27.1 Financial Data Schedule
* Indicates contract or compensatory plan or arrangements with one or more
directors and/or executive officers
(1) Filed as an exhibit (having the same exhibit number) to Registration
Statement on Form S-4 filed April 29, 1998 (Registration No. 333-51355)
and incorporated herein by reference
(2) Filed as an exhibit (having the same exhibit number) to Amendment No. 1
to Registration Statement on Form S-4 filed July 10, 1998 (Registration
No. 333-51355) and incorporated herein by reference
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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: August 14, 1998
-------------------
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 1,143,421 701,072
<SECURITIES> 0 0
<RECEIVABLES> 22,878,306 22,174,234
<ALLOWANCES> 59,243 61,000
<INVENTORY> 30,255,401 27,953,158
<CURRENT-ASSETS> 58,162,511 53,049,316
<PP&E> 55,850,321 53,503,467
<DEPRECIATION> (26,167,856) (24,064,119)
<TOTAL-ASSETS> 107,367,897 98,535,253
<CURRENT-LIABILITIES> 24,336,051 25,580,227
<BONDS> 154,414,245 135,696,137
0 0
0 0
<COMMON> 4,602,150 1,500,000
<OTHER-SE> (79,530,030) (71,031,763)
<TOTAL-LIABILITY-AND-EQUITY> 107,367,898 98,535,253
<SALES> 73,214,216 147,097,265
<TOTAL-REVENUES> 73,214,216 147,097,265
<CGS> 46,051,889 93,784,880
<TOTAL-COSTS> 14,900,928 32,775,774
<OTHER-EXPENSES> 389,079 1,348,059
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,151,297 17,020,961
<INCOME-PRETAX> 3,721,023 2,167,591
<INCOME-TAX> 1,291,510 903,768
<INCOME-CONTINUING> 2,429,513 1,263,823
<DISCONTINUED> 0 0
<EXTRAORDINARY> (4,918,000) 0
<CHANGES> 0 0
<NET-INCOME> (2,488,487) 1,263,823
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
