<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, 1999
-------------------------------------------------
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, 1999
<PAGE>
INDEX
NUMATICS, INCORPORATED AND SUBSIDIARIES
Page No. Description
- ------------------------------------------------------------------------------
1 PART I. FINANCIAL INFORMATION
1 Item 1 Financial Statements (Unaudited)
4 Notes to Consolidated Financial Statements (Unaudited)
11 Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
15 Item 3 Quantitative and Qualitative Disclosures About Market
Risk
16 PART II. OTHER INFORMATION
16 Item 6 Exhibits and Reports on Form 8-K
16 Signatures
17 Exhibit 27 Financial Data Schedule
ii
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Numatics, Incorporated
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $35,249,776 $33,891,066 $103,694,410 $107,105,282
Costs and expenses (credits):
Costs of products sold 22,178,135 21,444,515 64,597,935 67,496,404
Marketing, engineering, general and
administrative 7,817,142 7,473,047 23,588,063 23,207,973
Single business tax 121,190 100,282 388,250 (733,716)
-------------- ------------- -------------- -------------
Operating income 5,133,309 4,873,222 15,120,162 17,134,621
Other (income) expenses
Interest and other financing expenses 3,988,035 3,861,723 11,991,628 12,013,020
Other (403,567) (499,249) 936,557 (110,170)
-------------- ------------- -------------- -------------
Income before income taxes and extraordinary item 1,548,841 1,510,748 2,191,977 5,231,771
Income taxes 570,989 576,936 1,153,278 1,868,446
-------------- ------------- -------------- -------------
Income before extraordinary item 977,852 933,812 1,038,699 3,363,325
Extraordinary item, net of $2,534,000 of income
taxes (extinguishment of debt) - - - (4,918,000)
-------------- ------------- -------------- -------------
Net earnings (loss) $ 977,852 $ 933,812 $ 1,038,699 $ (1,554,675)
============== ============= ============== =============
</TABLE>
See accompanying notes.
1
<PAGE>
Numatics, Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,207,115 $ 1,121,142
Accounts receivable 23,721,739 21,607,221
Inventories 34,451,747 33,064,783
Other current assets 4,613,448 4,489,792
---------------- ----------------
Total current assets 63,994,049 60,282,938
Other assets:
Goodwill, net of accumulated amortization 6,373,425 6,479,487
Other intangible assets, net of accumulated amortization 5,242,683 5,781,321
Deferred income taxes 2,248,729 2,000,730
Investment in affiliates 2,314,236 2,157,893
Other 388,969 485,398
---------------- ----------------
16,568,042 16,904,829
Properties:
Land 1,520,903 1,524,383
Buildings and improvements 12,068,782 11,620,518
Machinery and equipment 50,074,012 45,928,301
---------------- ----------------
63,663,697 59,073,202
Less accumulated depreciation (29,964,337) (27,049,324)
---------------- ----------------
33,699,360 32,023,878
---------------- ----------------
$114,261,451 $109,211,645
================ ================
LIABILITIES AND ACCUMULATED DEFICIENCY
Current liabilities:
Accounts payable trade $ 9,710,346 $ 8,498,737
Accrued expenses 7,440,110 5,379,770
Compensation and employee benefits 4,565,715 4,876,073
Taxes, other than income and single business tax 35,954 100,079
Income and single business tax 1,212,319 246,983
Current portion of long term debt 3,305,740 3,457,072
---------------- ----------------
Total current liabilities 26,270,184 22,558,714
Long term debt, less current portion 156,225,004 156,917,908
Deferred retirement benefits 4,870,050 4,202,480
Deferred income taxes 121,092 269,399
---------------- ----------------
161,216,146 161,389,787
Minority interest in subsidiaries (redeemable upon the
happening of certain events outside the control of
the Company: $1,116,154 in 1999 and $1,285,640
in 1998) 696,329 554,822
Common stock $.01 par value, 250,000 shares
authorized; 21,276 shares outstanding and related
additional paid in capital 4,602,151 4,602,151
Accumulated deficiency (78,065,283) (79,098,886)
Equity adjustment from foreign currency translation (458,076) (794,943)
---------------- ----------------
(73,921,208) (75,291,678)
---------------- ----------------
$114,261,451 $109,211,645
================ ================
</TABLE>
See accompanying notes.
2
<PAGE>
Numatics, Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Operating activities
Net income (loss) $ 1,038,696 $ (1,554,675)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 3,337,413 3,289,898
Amortization 923,688 935,305
Extraordinary item (extinguishment of debt) - 4,918,000
Deferred interest expense - 2,059,894
Minority interest expense 141,507 173,289
Deferred taxes (408,459) 102,422
Deferred retirement benefits 667,569 562,530
Unrealized foreign currency losses (gains) 698,765 (406,300)
Changes in operating assets and liabilities:
Trade receivables (2,019,801) (795,523)
Inventories (1,577,010) (4,294,829)
Other current assets (399,133) (698,446)
Accounts payable and accrued expenses 3,169,562 3,521,240
Compensation and employee benefits (289,496) 917,546
Income and single business taxes 1,131,685 (43,771)
-------------- --------------
Net cash provided by operating activities 6,414,986 8,686,580
Investing activities
Capital expenditures (5,224,026) (4,171,294)
Other investments (408,486) -
-------------- --------------
Net cash used in investing activities (5,632,512) (4,171,294)
Financing activities
Proceeds from long-term borrowing - 115,000,000
Debt repayments (688,347) (103,763,466)
Debt issuance costs 63,235 (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 (625,112) (4,044,945)
Effect of exchange rate changes on cash (136,329) (139,497)
-------------- --------------
Net increase in cash and cash equivalents 21,033 330,844
Cash and cash equivalents at beginning of period 1,186,082 701,072
-------------- --------------
Cash and cash equivalents at end of period $ 1,207,115 $ 1,031,916
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
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 nine-month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles 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, 1998.
2. COMPREHENSIVE INCOME
The components of comprehensive income for three-month and nine-month periods
ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net earnings (loss) $977,852 $ 933,812 $1,038,699 $(1,554,675)
Foreign currency
translation adjustments (47,639) (298,537) 336,867 (532,412)
-------------- -------------- -------------- ---------------
$930,213 $ 635,275 $1,375,566 $(2,087,087)
</TABLE>
The components of accumulated comprehensive income at September 30, 1999 and
December 31, 1998 are as follows:
9/30/1999 12/31/1998
-------------- --------------
Foreign currency translation
adjustments $ (458,076) $ (794,943)
========== ============
4
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
3. 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales
North America $30,350,822 $27,338,482 $ 87,798,087 $ 86,562,910
International 4,898,954 6,552,584 15,896,323 20,542,372
------------- ------------- ------------- -------------
$35,249,776 $33,891,066 $103,694,410 $107,105,282
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Income
North America $5,280,010 $4,583,137 $15,427,084 $15,731,396
International (146,701) 290,085 (306,922) 1,403,225
------------- ------------- ------------- -------------
$5,133,309 $4,873,222 $15,120,162 $17,134,621
</TABLE>
5
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
4. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The $115 million of 9 5/8 % senior subordinated notes issued by Numatics, Inc.
in 1998 are guaranteed by the Company's United States subsidiaries in which it
owns 100 % of the voting stock. Each of the Guarantor Subsidiaries has fully
and unconditionally guaranteed, on a joint and several basis, the obligation to
pay principal, premium, if any, and interest on the Notes.
The following supplemental consolidating condensed financial statements present:
1. Consolidating condensed balance sheets as of September 30, 1999 and December
31, 1998, consolidating condensed statements of operations for the three and
nine month periods ended September 30, 1999 and 1998 and consolidated condensed
statements of cash flows for the nine months ended September 30, 1999 and 1998.
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.
6
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
4. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trade receivables $ 12,984,937 $2,693,089 $ 8,043,713 $ - $ 23,721,739
Inventories 18,238,635 4,976,345 12,538,767 (1,302,000) 34,451,747
Other 3,842,803 421,995 1,555,765 - 5,820,563
---------------------------------------------------------------------------
Total current assets 35,066,375 8,091,429 22,138,245 (1,302,000) 63,994,049
Goodwill, net of accumulated amortization 1,451,844 - 3,277,256 1,644,325 6,373,425
Other 18,596,309 40,172 201,517 (8,643,381) 10,194,617
Intercompany amounts 22,824,559 428,518 4,257,318 (27,510,395) -
Property, plant and equipment, net of
accumulated depreciation 27,747,548 998,873 4,952,939 - 33,699,360
---------------------------------------------------------------------------
$105,686,635 $9,558,992 $34,827,275 $(35,811,451) $114,261,451
===========================================================================
Accounts payable and accrued expenses $ 12,649,783 $1,272,859 $ 3,227,814 - $ 17,150,456
Compensation and employee benefits 3,443,470 155,705 966,540 - 4,565,715
Current portion of long-term debt 2,915,338 - 390,402 - 3,305,740
Other 625,750 238,384 384,139 - 1,248,273
---------------------------------------------------------------------------
Total current liabilities 19,634,341 1,666,948 4,968,895 - 26,270,184
Long-term debt less current portion 155,478,257 338,006 7,399,883 - 161,216,146
Other - - - 696,329 696,329
Intercompany amounts 6,734,018 4,528,217 16,248,160 (27,510,395) -
Accumulated deficiency (74,159,981) 3,025,821 6,210,337 (8,997,385) (73,921,208)
---------------------------------------------------------------------------
$105,686,635 $9,558,992 $34,827,275 $(35,811,451) $114,261,451
===========================================================================
</TABLE>
December 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trade receivables $ 11,050,466 $2,531,514 $ 8,025,241 $ - $ 21,607,221
Inventories 17,459,136 4,255,940 12,422,707 (1,073,000) 33,064,783
Other 3,848,223 266,581 1,496,130 - 5,610,934
---------------------------------------------------------------------------
Total current assets 32,357,825 7,054,035 21,944,078 (1,073,000) 60,282,938
Goodwill, net of accumulated amortization 1,519,533 - 3,594,597 1,365,357 6,479,487
Other 18,286,954 41,707 154,660 (8,057,979) 10,425,342
Intercompany amounts 24,534,213 324,447 4,648,545 (29,509,205) -
Property, plant and equipment, net of
accumulated depreciation 26,239,969 827,492 4,956,417 - 32,023,878
---------------------------------------------------------------------------
$102,938,494 $8,249,681 $35,298,297 $(37,274,827) $109,211,645
===========================================================================
Accounts payable and accrued expenses $ 8,915,518 $1,431,386 $ 3,531,603 - $ 13,878,507
Compensation and employee benefits 3,897,935 111,927 866,211 - 4,876,073
Current portion of long-term debt 2,955,049 - 502,023 - 3,457,072
Other 219,893 39,344 87,825 - 347,062
---------------------------------------------------------------------------
Total current liabilities 15,988,395 1,582,657 4,987,662 - 22,558,714
Long-term debt less current portion 149,328,788 - 7,589,120 - 156,917,908
Other 4,202,480 - 269,399 554,822 5,026,701
Intercompany amounts 8,353,841 4,398,682 16,756,682 (29,509,205) -
Accumulated deficiency (74,935,010) 2,268,342 5,695,434 (8,320,444) (75,291,678)
---------------------------------------------------------------------------
$102,938,494 $8,249,681 $35,298,297 $(37,274,827) $109,211,645
===========================================================================
</TABLE>
7
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
4. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF OPERATIONS
Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $25,588,272 $4,928,220 $11,751,284 $(7,018,000) $35,249,776
Costs and expenses 21,271,950 4,385,115 11,369,730 (6,910,328) 30,116,467
-----------------------------------------------------------------------
Operating income 4,316,322 543,105 381,554 (107,672) 5,133,309
Interest and other 3,852,929 226,479 14,679 61,370 4,155,457
-----------------------------------------------------------------------
Net income (loss) $ 463,393 $ 316,626 $ 366,875 $ (169,042) $ 977,852
=======================================================================
</TABLE>
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) $ 356,372 $ 243,458 $ 521,700 $ (187,718) $ 933,812
=======================================================================
</TABLE>
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $74,011,537 $14,034,862 $35,825,011 $(20,177,000) $103,694,410
Costs and expenses 61,225,436 12,806,590 34,344,206 (19,801,984) 88,574,248
-------------------------------------------------------------------------
Operating income 12,786,101 1,228,272 1,480,805 (375,016) 15,120,162
Interest and other 12,122,247 483,053 1,334,656 141,507 14,081,463
-------------------------------------------------------------------------
Net income (loss) $ 663,854 $ 745,219 $ 146,149 $ (516,523) $ 1,038,699
=========================================================================
</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 11,737,920 36,309,101 (19,108,984) 89,970,661
--------------------------------------------------------------------------
Operating income 13,160,640 1,377,880 2,823,117 (227,016) 17,134,621
Interest and other 16,897,997 471,857 1,146,153 173,289 18,689,296
--------------------------------------------------------------------------
Net income (loss) $(3,737,357) $ 906,023 $ 1,676,964 $ (400,305) $ (1,554,675)
==========================================================================
</TABLE>
8
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
4. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
STATEMENT OF CASH FLOWS
Nine Months ended September 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 5,790,127 $ 343,301 $ 281,558 $ - $ 6,414,986
Cash flows from investing activities:
Capital expenditures (4,219,069) (324,784) (680,173) - (5,224,026)
Other investments (490,984) 73,416 9,082 - (408,486)
-------------------------------------------------------------------------
Net cash used in investing activities (4,710,053) (251,368) (671,091) - (5,632,512)
Cash flows from financing activities:
Proceeds from borrowing - - - - -
Debt repayments (760,290) - 71,943 - (688,347)
Debt issuance costs - - 63,235 - 63,235
Dividends - - - - -
Extraordinary item (extinguishment of debt) - - - - -
Issuance of stock - - - - -
Other - - (19,134) (117,195) (136,329)
-------------------------------------------------------------------------
Net cash provided (used) in financing
activities (760,290) - 116,044 (117,195) (761,441)
Intercompany accounts (274,056) 27,465 129,396 117,195 -
-------------------------------------------------------------------------
Net increase (decrease) in cash 45,728 119,398 (144,093) - 21,033
Cash and cash equivalents at beginning of -------------------------------------------------------------------------
year 111,493 133,587 941,002 - 1,186,082
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 157,221 $ 252,985 $ 796,909 $ - $ 1,207,115
=========================================================================
</TABLE>
9
<PAGE>
NUMATICS, INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
4. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued)
Nine Months ended September 30, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash used in operating activities $ 9,282,874 $(1,025,578) $ 429,284 $ - $ 8,686,580
Cash flows from investing activities:
Capital expenditures (3,485,119) (248,064) (438,111) - (4,171,294)
Other investments - - - - -
----------------------------------------------------------------------------
Net cash used in investing activities (3,485,119) (248,064) (438,111) - (4,171,294)
Cash flows from financing activities:
Proceeds from borrowing 115,000,000 - - - 115,000,000
Debt repayments (103,865,137) - 101,671 - (103,763,466)
Debt issuance costs (5,057,711) - (29,435) - (5,087,146)
Dividends (6,000,001) - - - (6,000,001)
Extraordinary item (extinguishment of debt) (4,194,345) - - - (4,194,345)
Issuance of stock 13 - - - 13
Other - - 22,182 (161,679) (139,497)
----------------------------------------------------------------------------
Net cash provided (used) in financing (4,117,181) - 94,418 (4,184,442)
activities (161,679)
Intercompany accounts (1,728,433) 1,384,466 182,288 161,679 -
----------------------------------------------------------------------------
Net increase (decrease) in cash (47,859) 110,824 267,879 - 330,844
----------------------------------------------------------------------------
Cash and cash equivalents at beginning of
year 169,311 102,480 429,281 - 701,072
----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 121,452 $ 213,304 $ 697,160 $ - $ 1,031,916
============================================================================
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended September 30, 1999 Compared With Three Months Ended
September 30, 1998
Net Sales. Net sales of $35.2 million for the three months ended September 30,
1999 were 4.0% higher than the $33.9 million in the same period of 1998
principally due to a rebound in the pneumatic market, which had been suffering a
decline beginning in the second quarter of 1998, as well as new product
introductions. Net sales of traditional valve products increased 1.3% or $0.3
million while net sales of cylinder products increased 15.2% or $0.6 million and
other sales increased 4.7% or $0.5 million. North American sales increased 11.0%
or $3.0 million and international sales decreased 25.2% or $1.7 million.
Gross Profit. Gross profit was $13.1 million, or 37.1% of net sales, for the
three months ended September 30, 1999 compared with $12.4 million, or 36.7% of
net sales, in the same period of 1998. The current period's improved gross
margins are principally due to cost savings implemented in prior periods as well
as the increased sales levels for the quarter.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $7.8 million for the three months ended
September 30, 1999, $0.3 million higher than the same period in 1998.
Single Business Tax. Single business tax for the third quarter of 1999 was $0.1
million, substantially equal to the same period in 1998.
Operating Income. Operating income for the three months ended September 30, 1999
was $5.1 million compared to $4.9 million in the same period in 1998. This $0.2
million increase was primarily due to the increased sales levels in the third
quarter, 1999. Operating income in North America increased $0.7 million, or
15.2%, while the international segment's operating income declined by $0.4
million.
Interest and Other Financing Expenses. Interest expense increased $0.1 million
to $4.0 million in the third quarter of 1999 from $3.9 million in 1998 due to
higher interest rates on the Company's variable rate debt.
11
<PAGE>
Other (Income) or Expense. Other income of $0.4 million for the three months
ended September 30, 1999 was attributable to unrealized foreign exchange gains,
which resulted from the weakening of the U.S. dollar against major foreign
currencies, compared to a gain of $0.5 million in the three months ended
September 30, 1998.
Net Earnings. Due to the factors discussed above, net earnings increased $0.1
million, to $1.0 million during the three months ended September 30, 1999 from
$0.9 million in the third quarter of 1998.
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
Net Sales. Net sales of $103.7 million for the nine months ended September 30,
1999 were 3.2% less than the $107.1 million in the same period of 1998
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 5.0% or $3.1 million while net sales of other products decreased 2.8%
or $0.9 million and cylinder sales increased 4.1% or $0.6 million. North
American sales increased 1.4% or $1.2 million and international sales decreased
22.6% or $4.6 million.
Gross Profit. Gross profit was $39.1 million, or 37.7% of net sales, for the
nine months ended September 30, 1999 compared with $39.6 million, or 37.0% of
net sales, in the same period of 1998. Cost savings implemented in response to
the reduced sales levels contributed to the current period's improved gross
margins.
Marketing, Engineering, General and Administrative. Marketing, engineering,
general and administrative expenses were $23.6 million for the nine months ended
September 30, 1999, $0.4 million higher than the first nine months of 1998.
Single Business Tax. Single business tax for the first nine months of 1999 was
$0.4 million compared to a credit of $0.7 million in 1998. 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, 1999
was $15.1 million compared to $17.1 million in the same period in 1998. This
$2.0 million decrease was primarily due to the reduced sales combined with the
lower single business tax in 1998, as described above. Operating income in North
America dropped $0.3 million, or 1.9%, while the international segment's
operating income declined by $1.7 million.
Interest and Other Financing Expenses. Interest expense for the nine-month
period in 1999 was equal to the $12.0 million for the same period in 1998.
12
<PAGE>
Other (Income) Expense. Other expense of $0.9 million for the nine months ended
September 30, 1999 was attributable to unrealized foreign exchange losses, which
resulted from the strengthening of the U.S. dollar against major foreign
currencies, compared to a gain of $0.1 million in the nine months ended
September 30, 1998.
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 subordinated 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 Earnings (Loss). Due to the factors discussed above, net earnings increased
$2.6 million, to $1.0 million during the nine months ended September 30, 1999
from a loss of $1.6 million in the first nine months of 1998.
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 $6.4 million for the nine months ended
September 30, 1999 compared to $8.7 million for the same period in 1998. This
decrease was primarily a result of the deferred interest expense on the
Company's previous subordinated debt in 1998, an increase in accounts receivable
in North America due to the timing of certain sales activities and changes in
accrued compensation and benefits, partially offset by greater inventory growth
in 1998.
Cash used in investing activities of $5.6 million during the nine months ended
September 30, 1999 was $1.4 million more than the $4.2 million used in the first
nine months of 1998. This increase was principally the result of higher capital
expenditures during 1999 primarily due to $825,000 expended on construction of a
new 40,000 square foot manufacturing facility in Lapeer, Michigan. The Company
does not have any material commitments for capital expenditures.
Net cash used in financing activities was $0.6 million in 1999 compared to $4.0
million in 1998. 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 $37.7 million at September 30, 1999, substantially equal to
December 31, 1998. Total assets were $114.3 million at September 30, 1999
compared to $109.2 million at December 31, 1998. This increase of $5.1 million
includes $2.1 million in accounts receivable, $1.3 million in inventories, and
$1.7 million in properties.
Total debt outstanding was $159.5 million at September 30, 1999 compared to
$160.4 million at
13
<PAGE>
December 31, 1998. The Company estimates that the borrowing base limitations
would have limited the Company's revolving credit availability to approximately
$30.8 million as of September 30, 1999.
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 determined
that it would be required to modify or replace significant portions of its
software so that its computer systems would 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's Year 2000 project includes modification of existing software,
replacement of software with programs that are Year 2000 compliant and
implementation of a new enterprise system. To date, the Company has modified and
tested its legacy systems using the windowing methodology to ensure continued
utilization beyond December 31, 1999. All identifiable ancillary internal
systems have been upgraded or replaced, as necessary. The Company presently
believes that the modifications to existing software have mitigated any effects
of the Year 2000 Issue. However, if such modifications and conversions have not
been made properly, the Year 2000 Issue could cause production interruptions
that could have a material impact on the operations of the Company. The Company
has developed contingency plans for that possibility and others and will
continue to plan for other contingencies that come to its attention throughout
the program.
The implementation of the new enterprise system, originally planned to be
completed in the third quarter of 1999, has been delayed until the first quarter
of 2000 to allow for enhancements considered important to the business function.
The implementation of this system, although beneficial to the Company's long-
term growth plans, is not required to alleviate the Year 2000 Issue.
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
14
<PAGE>
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 total cost of the Year 2000 project, including implementation of the new
enterprise system, is estimated to be $4.3 million and is being funded through
operating cash flows. Of the total project cost, approximately $3.0 million is
attributable to the purchase of new software and hardware, which will be
capitalized or leased. The remaining $1.3 million represents maintenance and
repair of existing systems and other project costs and will be expensed as
incurred. As of September 30, 1999 the Company has expended approximately $4.0
million related to the assessment activities, the development of a remediation
plan, the implementation of the remediation plan and the implementation of the
new enterprise system in connection with its Year 2000 project.
The costs of the project and the date on which the Company plans to complete the
implementation of the new enterprise system 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.
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, including information on Interest Rate Risk
and Foreign Currency Risk, from the end of the preceding fiscal year to
September 30, 1999.
15
<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, 1999.
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: November 10, 1999
---------------------------------
16
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<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 1,207,115 1,121,142
<SECURITIES> 0 0
<RECEIVABLES> 23,780,832 21,665,615
<ALLOWANCES> (59,093) (58,394)
<INVENTORY> 34,451,747 33,064,743
<CURRENT-ASSETS> 63,994,049 60,282,938
<PP&E> 63,663,679 59,073,202
<DEPRECIATION> (29,964,337) (27,049,324)
<TOTAL-ASSETS> 114,261,451 109,211,645
<CURRENT-LIABILITIES> 26,270,184 22,558,714
<BONDS> 156,225,004 156,917,908
0 0
0 0
<COMMON> 4,602,151 4,602,151
<OTHER-SE> (78,523,359) (79,893,829)
<TOTAL-LIABILITY-AND-EQUITY> 114,261,451 109,211,645
<SALES> 103,694,410 139,414,542
<TOTAL-REVENUES> 103,694,410 139,414,542
<CGS> 64,597,935 87,955,957
<TOTAL-COSTS> 23,976,313 30,162,018
<OTHER-EXPENSES> 936,557 236,455
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,991,628 15,926,521
<INCOME-PRETAX> 2,191,977 5,133,591
<INCOME-TAX> 1,153,278 2,282,713
<INCOME-CONTINUING> 1,038,699 2,850,878
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (4,918,000)
<CHANGES> 0 0
<NET-INCOME> 1,038,699 (2,067,122)
<EPS-BASIC> 0 0
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