UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended August 31, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From ______ to _______.
Commission File Number 1-8862
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MARK IV INDUSTRIES, INC.
- ---------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 23-1733979
- ---------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 John James Audubon Parkway, P.O. Box 810, Amherst, New York 14226-0810
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(716) 689-4972
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(Registrant's telephone number, including area code)
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
---
Number of shares outstanding of each class of the Registrant's common stock,
as of the latest practicable date:
Class Outstanding at September 28, 1998
----- ---------------------------------
Common stock $.01 par value 54,440,437
<PAGE>2
MARK IV INDUSTRIES, INC.
INDEX
Part I. Financial Information Page No.
Consolidated Condensed Balance Sheets as of
August 31, 1998 and February 28, 1998 3
Consolidated Statements of Income
For the Three Month Periods Ended August 31, 1998 and 1997 4
Consolidated Statements of Income
For the Six Month Periods Ended August 31, 1998 and 1997 5
Consolidated Statements of Cash Flows
For the Six Month Periods Ended August 31, 1998 and 1997 6
Consolidated Statements of Comprehensive Income and
Retained Earnings For the Three and Six Month Periods
Ended August 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information 20
Signature Page 21
Exhibit Index 22
<PAGE>3
MARK IV INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
August 31, February 28,
1998 1998
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and short-term investments $ 1,300 $ 120,900
Accounts receivable 463,400 466,400
Inventories 381,800 393,400
Other current assets 117,200 105,600
---------- ----------
Total current assets 963,700 1,086,300
Pension and other non-current assets 235,300 226,600
Property, plant and equipment, net 666,400 668,400
Cost in excess of net assets acquired 439,500 439,200
---------- ----------
TOTAL ASSETS $2,304,900 $2,420,500
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current
maturities of debt $ 85,600 $ 133,800
8-3/4% Notes, called for redemption - 73,100
Accounts payable 211,300 222,400
Compensation related liabilities 71,000 75,500
Accrued interest 24,300 28,600
Other current liabilities 91,200 94,500
---------- ----------
Total current liabilities 483,400 627,900
---------- ----------
Long-Term Debt:
Senior debt 151,100 21,400
Subordinated debentures 772,600 772,500
---------- ----------
Total long-term debt 923,700 793,900
---------- ----------
Other non-current liabilities 262,100 246,700
---------- ----------
Stockholders' Equity:
Preferred stock - -
Common stock 600 600
Additional paid-in capital 467,900 617,800
Retained earnings 206,600 167,100
Foreign currency translation adjustment (39,400) (33,500)
---------- ----------
Total stockholders' equity 635,700 752,000
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $2,304,900 $2,420,500
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>4
MARK IV INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Month Periods Ended August 31, 1998, and 1997
(Amounts in thousands, except per share data)
1998 1997
---- ----
Net sales from continuing operations $578,500 $531,100
-------- --------
Operating costs:
Cost of products sold 403,400 357,600
Selling and administration 87,300 82,500
Research and development 14,100 12,000
Depreciation and amortization 24,300 18,500
-------- --------
Total operating costs 529,100 470,600
-------- --------
Operating income 49,400 60,500
Interest expense 16,800 15,600
-------- --------
Income before provision for taxes 32,600 44,900
Provision for income taxes 11,700 17,400
-------- --------
Net Income $ 20,900 $ 27,500
======== ========
Net income per share of common stock:
Basic: $ .36 $ .43
======== ========
Diluted: $ .35 $ .43
======== ========
Weighted average number of shares outstanding:
Basic: 57,600 63,700
======== ========
Diluted 66,200 64,200
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>5
MARK IV INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Six Month Periods Ended August 31, 1998, and 1997
(Amounts in thousands, except per share data)
1998 1997
---- ----
Net sales from continuing operations $1,183,000 $1,091,200
---------- ----------
Operating costs:
Cost of products sold 817,000 734,400
Selling and administration 182,100 171,900
Research and development 28,800 23,800
Depreciation and amortization 48,200 37,000
---------- ----------
Total operating costs 1,076,100 967,100
---------- ----------
Operating income 106,900 124,100
Interest expense 32,400 29,900
---------- ----------
Income before provision for taxes 74,500 94,200
Provision for income taxes 26,700 36,600
---------- ----------
Income before extraordinary loss 47,800 57,600
Extraordinary loss from early extinguishment
of debt, net of tax benefits (2,600) -
---------- ----------
Net income $ 45,200 $ 57,600
========== ==========
Net income per share of common stock:
Basic:
Income before extraordinary loss $ .80 $ .89
Extraordinary loss (.04) -
---------- ----------
Net income $ .76 $ .89
Diluted: ========== ==========
Income before extraordinary loss $ .76 $ .89
Extraordinary loss (.04) -
---------- ----------
Net income $ .72 $ .89
========== ==========
Weighted average number of shares outstanding:
Basic 59,600 64,600
========== ==========
Diluted 68,300 65,100
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>6
MARK IV INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Periods Ended August 31, 1998 and 1997
(Dollars in thousands)
1998 1997
---- ----
Cash flows from operating activities:
Income before extraordinary loss $ 47,800 $ 57,600
Items not affecting cash:
Depreciation and amortization 48,200 37,000
Pension and compensation related items (13,100) (9,000)
Deferred income taxes 11,600 16,100
Changes in assets and liabilities, net of
effects of acquired and divested businesses:
Accounts receivable 1,300 (36,300)
Inventories 7,100 (17,000)
Other assets (3,800) (32,300)
Accounts payable (11,300) 1,400
Other liabilities (19,500) (23,300)
-------- --------
Net cash provided by (used in) operating
activities, before extraordinary loss 68,300 (5,800)
Extraordinary loss before deferred charges (3,300) -
-------- --------
Net cash provided by (used in)
operating activities 65,000 (5,800)
Cash flows from investing activities:
Acquisitions and investments (2,400) (6,600)
Divestitures and asset sales - 35,500
Purchase of plant and equipment, net (35,400) (70,400)
-------- --------
Net cash used in investing activities (37,800) (41,500)
-------- --------
Cash flows from financing activities:
Credit agreement borrowings, net 130,000 -
Retirement of subordinated debt (73,100) -
Issuance of subordinated notes - 248,700
Other changes in long-term debt, net 900 (9,900)
Changes in short-term bank borrowings (48,400) (21,500)
Common stock transactions (150,500) (63,600)
Cash dividends paid (5,700) (5,000)
-------- --------
Net cash provided by (used in)
financing activities (146,800) 148,700
-------- --------
Net increase (decrease) in cash and
short-term investments (119,600) 101,400
Cash and short-term investments:
Beginning of the period 120,900 1,300
-------- --------
End of the period $ 1,300 $102,700
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>7
MARK IV INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
AND RETAINED EARNINGS (UNAUDITED)
For the Three and Six Month Periods Ended August 31, 1998 and 1997
(Dollars in thousands)
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
Comprehensive Income
- --------------------
Net income $ 20,900 $ 27,500 $ 45,200 $ 57,600
Balance sheet effect of foreign
currency translation adjustments (10,100) (6,900) (5,900) (6,800)
-------- -------- -------- --------
Comprehensive net income $ 10,800 $ 20,600 $ 39,300 $ 50,800
======== ======== ======== ========
Retained Earnings
- -----------------
Retained earnings at the
beginning of the period $188,500 $106,900 $167,100 $ 79,300
Net income 20,900 27,500 45,200 57,600
Cash dividends of $.05, $.04, $.10
and $.08 per share, respectively (2,800) (2,500) (5,700) (5,000)
-------- -------- -------- --------
Retained earnings at the
end of the period $206,600 $131,900 $206,600 $131,900
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>8
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statements
The unaudited consolidated financial statements include the accounts of
the Company and all of its subsidiaries. All significant intercompany
transactions have been eliminated. The unaudited consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of such financial statements, and the reported amounts of
revenues and expenses during the reporting periods. It should be
recognized that the actual results could differ from those estimates.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company at August 31, 1998,
and the results of its operations and its cash flows for the periods
ended August 31, 1998 and 1997. Such results are not necessarily
indicative of the results to be expected for the full year.
2. Accounts Receivable and Inventories
Accounts receivable are presented net of allowances for doubtful
accounts of $11.4 million and $13.6 million at August 31, 1998 and
February 28, 1998, respectively.
Inventories consist of the following components (dollars in thousands):
August 31, February 28,
1998 1998
--------- -----------
Raw materials $ 91,400 $ 86,200
Work-in-process 63,600 73,000
Finished goods 226,800 234,200
--------- ---------
Total $ 381,800 $ 393,400
========= =========
Since physical inventories taken during the year do not necessarily
coincide with the end of a quarter, management has estimated the
composition of inventories with respect to raw materials, work-in-
process and finished goods. It is management's opinion that this
estimate represents a reasonable approximation of the inventory
breakdown as of August 31, 1998. The amounts at February 28, 1998 are
based upon the audited balance sheet at that date.
<PAGE>9
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. Property, Plant and Equipment
Property, plant and equipment are stated at cost and consist of the
following components (dollars in thousands):
August 31, February 28,
1998 1998
---------- ------------
Land and land improvements $ 26,200 $ 25,900
Buildings 182,700 179,900
Machinery and equipment 675,500 641,800
-------- --------
Total property, plant and equipment 884,400 847,600
Less accumulated depreciation 218,000 179,200
-------- --------
Property, plant and equipment, net $666,400 $668,400
======== ========
4. Long-term debt
Long-term debt consists of the following (dollars in thousands):
August 31, February 28,
1998 1998
---------- -----------
Senior Debt:
Credit Agreement $ 130,000 $ -
Other borrowing arrangements 31,100 31,200
---------- ----------
Total 161,100 31,200
Less Current maturities (10,000) (9,800)
---------- ----------
Net senior debt 151,100 21,400
---------- ----------
Subordinated Debt:
7-3/4% Senior Subordinated Notes 248,800 248,700
7-1/4% Senior Subordinated Notes 248,800 248,800
4-3/4% Convertible Subordinated Notes 275,000 275,000
---------- ----------
Total subordinated debt 772,600 772,500
---------- ----------
Total long-term debt 923,700 793,900
Total stockholders' equity 635,700 752,000
---------- ----------
Total capitalization $1,559,400 $1,545,900
========== ==========
Long-term debt as a percentage
of total capitalization 59.2% 51.4%
========== ==========
<PAGE>10
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. Cash Flow
For purposes of cash flows, the Company considers overnight investments
as cash equivalents. The Company made cash interest payments of
approximately $38.4 million and $28.6 million in the six month periods
ended August 31, 1998 and 1997, respectively. The Company also made
cash income tax payments of approximately $21.1 million and $15.4
million in the six month periods ended August 31, 1998 and 1997,
respectively.
6. Common Stock Repurchase Programs
In May 1998, the Company announced completion of its 7.3 million share
repurchase program approved by the Board of Directors in March 1997.
The stock was purchased at an average price of $22.03 per share, for a
total cost of $160.8 million, with approximately 3.8 million shares
repurchased from March 1, 1998 at an average cost of $21.02 per share,
or approximately $80.4 million. Upon completion of this program, the
Board of Directors approved the purchase of an additional ten million
shares. It is expected that such shares will be purchased in the open-
market, or through privately negotiated transactions at prices which the
Company considers to be attractive. Through September 28, 1998 the
Company acquired approximately 4.7 million shares under the new
repurchase program, at an average cost of $18.18 per share, or a total
cost of approximately $85.5 million. Total purchases under both
authorizations in the current fiscal year through September 28, 1998
were approximately 8.5 million shares, at an average cost of $19.45 per
share, or a total cost of approximately $166.0 million.
7. Senior Subordinated Notes Redemption
On April 2, 1998, the Company redeemed the remaining $73.1 million
principal balance of its 8-3/4% Senior Subordinated Notes due April 1,
2003. The Notes were redeemed at a price of $1,043.75 per $1,000
principal amounts of Notes plus accrued interest. The redemption
resulted in a one-time charge for early debt extinguishment of $2.6
million (net of tax) for the three month period ended May 31, 1998.
8. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"). FAS 130 establishes standards for reporting and
measuring of all changes in equity that result from recognized
transactions and other economic events of the period. The Company has
reported the change in foreign currency translation items as a component
of comprehensive income in the Consolidated Statements of Comprehensive
Income and Retained Earnings for the periods ended August 31, 1998 and
1997. The accumulated effect of foreign currency translation items at
August 31, 1998 and February 28, 1998, is reported in the Stockholders
Equity section of the Company's Consolidated Condensed Balance Sheets.
<PAGE>11
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
9. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 133 ("FAS 133"). FAS 133
standardized the accounting for derivative instruments by requiring them
to be recognized as balance sheet assets or liabilities, measured at
their fair market value. Certain criteria have been established by FAS
133 to determine if a derivative is designated and qualifies as a hedge.
Changes in the fair value of derivatives that do not meet hedge
accounting criteria in FAS 133 are required to be reported in earnings.
The Company does not hold or issue derivatives for trading purposes and
is not a party to leveraged derivatives transactions. The Company's
sales from international locations and exports are significant;
therefore, the Company does enter into foreign currency forward
contracts as a hedge for certain existing or anticipated business
transactions denominated in various foreign currencies. FAS 133 is
effective for the Company's fiscal year ending February 29, 2000.
Management is in the process of assessing the impact of its FAS 133
adoption; however, it anticipates the effect on its financial statements
will not be significant.
<PAGE>12
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
10. Net Income Per Share
Following is a reconciliation of net income and weighted average common
shares outstanding for purposes of computing basic and diluted net
income per share (amounts in thousands, except per share data):
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Basic Net Income Per Share:
--------------------------
Net income $20,900 $27,500 $45,200 $57,600
======= ======= ======= =======
Weighted average number of
common shares outstanding 57,600 63,700 59,600 64,600
======= ======= ======= =======
Basic net income per share $ .36 $ .43 $ .76 $ .89
======= ======= ======= =======
Diluted Net Income Per Share:
----------------------------
Net income $20,900 $27,500 $45,200 $57,600
After-tax equivalent of interest
expense on 4-3/4% convertible
subordinated notes 2,000 - 4,000 -
------- ------- ------- -------
Income for purposes of computing
diluted net income per share $22,900 $27,500 $49,200 $57,600
======= ======= ======= =======
Weighted average common
shares outstanding 57,600 63,700 59,600 64,600
Dilutive stock options 200 500 300 500
Weighted average assumed
conversion of 4-3/4%
convertible subordinated
notes 8,400 - 8,400 -
------- ------- ------- -------
Weighted average number of
common shares outstanding for
purposes of computing diluted
net income per share 66,200 64,200 68,300 65,100
======= ======= ======= =======
Diluted net income per share $ .35 $ .43 $ .72 $ .89
======= ======= ======= =======
<PAGE>13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Company's operating performance for the six month period ended August 31,
1998 generated cash of $68.3 million, which compares to a net cash usage of
$5.8 million in the corresponding period last year. The Company's lower
income in the current period was offset by significant improvement in the
Company's net working capital investment. The resulting improvement in cash
generated from operating activities was $74.1 million in the current period in
comparison to the six month period ended August 31, 1997. The improvement
reflects the Company's success in reducing its working capital position as a
result of its increased emphasis on cash flow in the current fiscal year. The
cash generated from operating activities was sufficient to fund the Company's
capital expenditure requirements in the period, as well as to contribute
significantly to the cost of funding the Company's stock repurchase program.
Management anticipates that its working capital investment will be reduced
further during the remainder of fiscal 1999 as a result of the continuing
positive effects of its corporate-wide emphasis on increasing cash flow and
improving the Company's return on assets employed.
Capital expenditures for the six month period ended August 31, 1998 were
approximately $35.4 million, which was lower than depreciation and
amortization expense of $48.2 million for the same period. Such expenditures
reflect a decrease of approximately $35.0 million in comparison to the $70.4
million expended in the six month period ended August 31, 1997. The reduced
level of expenditures relates primarily to the Company's anticipated return to
more normal levels of capital expenditure requirements as the Company
completes its restructuring plan and its European and South American expansion
efforts. Such activities resulted in above normal capital expenditure
requirements in the prior year. Management anticipates the Company's capital
expenditure requirements will continue at the current level for the remainder
of the fiscal year.
In May 1998, the Company announced completion of its 7.3 million share
repurchase program approved by the Board of Directors in March 1997. The
stock was purchased at an average price of $22.03 per share, for a total cost
of $160.8 million, with approximately 3.8 million shares repurchased from
March 1, 1998 at an average cost of $21.02 per share, or approximately $80.4
million. Upon completion of this program, the Board of Directors approved the
purchase of an additional ten million shares. It is expected that such shares
will be purchased in the open-market, or through privately negotiated
transactions, at prices which the Company considers to be attractive. Through
September 28, 1998 the Company acquired approximately 4.7 million shares under
the new program at an average cost of $18.18 per share, or a total cost of
approximately $85.5 million. Total purchases under both authorizations in the
current fiscal year through September 28, 1998 were approximately 8.5 million
shares at an average cost of $19.45 per share, or a total cost of
approximately $166.0 million.
<PAGE>14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On April 2, 1998, the Company redeemed the remaining $73.1 million principal
balance of its 8-3/4% Senior Subordinated Notes due April 1, 2003. The Notes
were redeemed at a price of $1,043.75 per $1,000 principal amounts of Notes
plus accrued interest through April 1, 1998. The redemption resulted in a
one-time charge for early debt extinguishment of approximately $2.6 million
(net of tax) for the six month period ended August 31, 1998.
The Company has borrowing availability under its primary credit agreements of
approximately $370.0 million, subject to certain covenants, and additional
availability under its various domestic and foreign demand lines of credit of
approximately $146.7 million as of August 31, 1998. Long-term debt at August
31, 1998 was $923.7 million, an increase of $129.8 million over the $793.9
million that was outstanding as of February 28, 1998. The change primarily
reflects increased borrowings to fund the Company's stock repurchase program.
Management believes cash generated from operations, as temporarily
supplemented by existing credit availability, should be sufficient to support
the Company's working capital requirements and anticipated capital expenditure
needs for the foreseeable future, including the costs associated with its
stock repurchase program, as well as its restructuring and repositioning
efforts.
Results of Operations
- ---------------------
The Company classifies its operations in two business segments: Automotive
and Industrial. The Company's current business strategy is focused upon the
enhancement of its business segments through internal growth, cost control and
quality improvement programs and selective, strategic acquisitions with an
emphasis on expanding each segment's international presence.
Net sales from continuing operations for the three and six month periods ended
August 31, 1998 increased by $47.4 million (9%) and $91.8 million (8%),
respectively, over the comparable periods last year. In the Company's
Automotive segment, net sales increased $28.0 million (9%) for the three month
period ended August 31, 1998 and $61.5 million (10%) for the six month period
ended August 31, 1998 over the comparable periods last year. The growth in
the Automotive segment was primarily generated by the segment's Automotive OEM
sector, which offset the negative effect of a weakening Automotive Aftermarket
sector. The Automotive OEM sector showed significant growth in its
international markets for the three and six month periods ended August 31,
1998 over the comparable periods last year. In the domestic Automotive OEM
market, sales were up for the three month period ended August 31, 1998 over
the comparable period last year, although the effect of the General Motors
strike in the Company's second quarter offset a portion of such increase. In
the Automotive Aftermarket sector, sales for the three and six month periods
ended August 31, 1998 were slightly lower, in both the domestic and
international markets, than in the comparable periods last year.
<PAGE>15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the Company's Industrial segment, net sales increased $19.4 million (8%)
and $30.3 million (6%), respectively, for the three and six month periods
ended August 31, 1998 over the comparable periods last year. The growth was
led by the segment's Transportation and Industrial Filters sectors which
helped to offset slower growth in the segment's Industrial Rubber Products
sector.
The cost of products sold as a percentage of consolidated net sales increased
to 69.7% and 69.1% for the three and six month periods ended August 31, 1998
as compared to 67.3% in the prior year periods. This increase is primarily
attributable to the effects of the duplicative costs and inefficiencies
incurred in the current period due to additional time required to complete the
Company's restructuring program. The General Motors strike also had a
negative effect on the Company's cost of products sold relationship in the
three month period ended August 31, 1998.
Selling and administration costs as a percentage of consolidated net sales
were 15.1% and 15.4% for the three and six month periods ended August 31,
1998, as compared to 15.5% and 15.8% for the three and six month periods ended
August 31, 1997. The slight reduction in the level of costs indicates
operating efficiencies achieved from the integration of operations acquired,
as well as the reorganization of the Company's business segments. The lower
level of costs also indicates the Company's continued emphasis on cost control
and cycle time reduction has been successful in substantially offsetting the
impact of inflation on such costs.
Research and development costs increased by $2.1 million (18%) and $5.0
million (21%), respectively, for the three and six month periods ended August
31, 1998 as compared to the three and six month periods ended August 31, 1997.
As a percentage of consolidated net sales, these expenses increased to 2.4% as
compared to 2.3% and 2.2% in the comparable periods last year. The increase
is primarily related to the Company's launching of a number of new product and
system initiatives, as well as bringing new technology to the North American
Automotive OEM market from acquisitions made in Europe in the latter part of
fiscal 1998.
Depreciation and amortization expense increased by $5.8 million (31%) and
$11.2 million (30%) respectively, for the three and six month periods ended
August 31, 1998 as compared to the three and six month periods ended August
31, 1997. The increase is primarily attributable to the Company's increased
level of capital equipment expenditures in fiscal 1998 to support the
Company's restructuring efforts, as well as new facilities and equipment
required to support new products and markets in Europe and South America. To
a lesser extent, additional goodwill amortization related to acquisitions in
the latter part of fiscal 1998 also contributed to the increase.
Interest expense for the three and six month periods ended August 31, 1998
increased $1.2 million (8%) and $2.5 million (8%) from the level incurred in
the three and six month periods ended August 31, 1997. The increase is
primarily due to borrowings incurred to finance the Company's stock repurchase
program and the acquisitions in the latter part of fiscal 1998. The increase
was substantially offset by the benefits of reduced rates on the Company's
domestic debt, primarily related to the issuance in the latter part of fiscal
1998 of the 7-1/2% and 4-3/4% Notes, which refinanced higher rate debt.
<PAGE>16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The effective tax rate as a percentage of pre-tax accounting income for the
three and six month periods ended August 31, 1998 and 1997 decreased to 35.9%
from 39%, respectively. The decrease in the effective tax rate in the three
and six month periods ended August 31, 1998 as compared to the comparable
period last year, is primarily the result of a more favorable mix of foreign
income, as well as the benefits of certain tax planning opportunities.
As a result of all of the above, income before the extraordinary loss for the
three and six month periods ended August 31, 1998 reflects decreases of $6.6
million (24%) and $9.8 million (17%) as compared to the comparable periods in
the prior year. Net income decreased approximately $6.6 million (24%) and
$12.4 million (22%) for the three and six month periods ended August 31, 1998
as compared to the three and six month periods ended August 31, 1997, with the
current year period also including the $2.6 million extraordinary loss from
the early extinguishment of debt.
Impact of Inflation
- -------------------
The competitive environment in which the Company operates makes it extremely
difficult to pass on increased costs to its customers. In many instances, the
Company is not able to increase its prices at all, and in certain situations
is forced to reduce its selling prices. This environment makes it critical
for the Company to be able to operate in a continuously more efficient manner.
The Company must also work closely with its suppliers to minimize price
increases and push for pricing improvements in the same manner that its
customers demand of the Company.
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue is the result of computer software programs being written
using two digits rather than four to define the applicable year. Any of the
Company's software programs, computer hardware or equipment that have date-
sensitive software or embedded chips 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,
manufacture products or engage in other normal business activities.
The Company has developed a formal plan to ensure that all of its significant
date-sensitive computer software and hardware systems ("Information
Technology") and other equipment utilized in its various manufacturing,
distribution and administration activities (utilizing embedded chips or
software..."Operating Equipment") will be Year 2000 compliant and operational
on a timely basis. The plan addresses all of the Company's locations
throughout the world, and includes a review of computer applications that
connect elements of the Company's business directly to its customers and
suppliers. The plan also includes an assessment process to determine that the
Company's significant customers and suppliers ("Third-Party Activities") will
also be Year 2000 compliant.
<PAGE>17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's plan to resolve the Year 2000 Issue includes four major phases -
assessment, remediation, testing, and implementation. The Company has
substantially completed the assessment phase of its plan for all of its
significant Information Technology and Operating Equipment that it believes
could be affected by the Year 2000 Issue. Based upon its assessment, the
Company concluded that it would be necessary to reprogram and/or replace
certain of its Information Technology. The Company also determined that
certain of its Operating Equipment would also require modifications to make
sure they remain operational.
For its Information Technology exposures, the Company is approximately 80%
complete on the remediation phase for all of its significant systems, and
estimates that it will complete software reprogramming and/or replacement by
the end of its current fiscal year. To date, the Company has completed
approximately 50% of its testing and has implemented approximately 25% of the
required remediation for such systems. The testing and implementation phases
are targeted to be substantially completed during the second quarter of next
year.
The remediation of Operating Equipment is approximately 20% complete,and the
Company is targeting completion of its related remediation efforts by the
first quarter of next year. Testing and implementation of the affected
equipment is targeted to be substantially completed during the second quarter
of next year.
With respect to Third-Party Activities, the Company has made inquiries of its
significant customers and suppliers and, at the present time, is not aware of
problems that would materially impact the Company's operations. However, the
Company has no means of ensuring that these customers and suppliers (and in
turn their customers and suppliers) will be Year 2000 compliant in a timely
manner. The inability of these parties to successfully resolve their Year
2000 issues could have a material adverse effect on the Company.
The Company is utilizing both internal and external resources to reprogram or
replace, test, and implement the required Year 2000 modifications. The
Company's total cost to address the Year 2000 Issue is estimated at $10.0
million and is being funded through operating cash flow. The elements of such
costs are as follows ( amounts in thousands of dollars):
Incurred
Through Costs Yet Total
August 31, to be Estimated
1998 Incurred Cost
---------- --------- ---------
Capital expenditures related to
new systems and equipment $ 500 $2,200 $ 2,700
Operating expenses related to
modifications of existing
systems and equipment 2,900 4,400 7,300
------ ------ -------
Total capital and expense $3,400 $6,600 $10,000
====== ====== =======
<PAGE>18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's plan to complete its Year 2000 modifications is based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
and other factors. Management does not believe that the cost of achieving
Year 2000 compliance will significantly impact the results of the Company's
operations or its financial position. 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, the ability of the Company's significant customers and suppliers (and,
in turn, their significant customers and suppliers) to also achieve Year 2000
compliance, and similar uncertainties.
The Company presently believes that with modifications and replacement of
existing hardware and software, and continued contact with its significant
customers and suppliers, problems related to the Year 2000 Issue can be
mitigated. However, if such modifications and replacements are not
successfully completed, and if the Year 2000 plans of its significant
customers and suppliers are not completed on a timely basis, the Year 2000
Issue could have a material adverse effect on the Company's results of
operations, cash flows and financial condition.
Forward-Looking Information
- ---------------------------
This Management's Discussion and Analysis and other sections of this Quarterly
Report contain forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, as well as management's beliefs and assumptions. Words such
as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE>19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Future Factors that may affect the operations, performance and results of
the Company's businesses include the following:
a. general economic and competitive conditions in the markets and
countries in which the Company operates, and the risks inherent in
international operations and joint ventures;
b. the Company's ability to continue to control and reduce its costs
of production;
c. the level of consumer demand for new vehicles equipped with the
Company's products;
d. the level of consumer demand for the Company's aftermarket
products, which varies based on such factors as the severity of
winter weather, the age of automobiles in the Company's markets
and the impact of improvements or changes in original equipment
products;
e. the effect of changes in the distribution channels for the
Company's aftermarket and industrial products;
f. the strength of the U.S. dollar against currencies of other
countries where the Company operates, as well as cross-currencies
between the Company's operations outside of the U.S. and other
countries with whom they transact business; and
g. the successful completion of the Company's Year 2000 plan, as well
as the plans of its significant customers and suppliers.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those described in the forward-looking statements. The Company does not
intend to update forward-looking statements.
<PAGE>20
Part II. OTHER INFORMATION
- ---------------------------
Items 1, 2, 3 and 5 are inapplicable and have been omitted.
Item 4 - Results of Votes of Security Holders
- ---------------------------------------------
On July 21, 1998, the Annual Meeting of Stockholders of the Company was held.
At this meeting, the stockholders voted on the following matters:
(1) Gerald S. Lippes and Herbert Roth, Jr. were elected to serve as
Class II Directors until the 2001 Annual Meeting. Mr. Lippes was
elected with 55,939,332 shares voting for his election, and
1,799,626 shares withholding authority. Mr. Roth was elected with
56,381,603 shares voting for his election, and 1,357,357 shares
withholding authority.
The following is a list of Directors whose term of office
continued after the meeting:
Sal H. Alfiero
William P. Montague
Gerald S. Lippes
Clement R. Arrison
Joseph G. Donohoo
Herbert Roth, Jr.
Item 6(a) - Exhibits
- --------------------
Exhibit No.
* 27 Financial Data Schedule
* Filed herewith by direct transmission pursuant to the EDGAR
Program
Item 6(b) Reports on Form 8-K
- -----------------------------
None
<PAGE>21
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.
MARK IV INDUSTRIES, INC.
Registrant
DATE: September 30, 1998 /s/ Sal H. Alfiero
------------------------
Sal H. Alfiero
Chairman of the Board
DATE: September 30, 1998 /s/ William P. Montague
------------------------
William P. Montague
President
DATE: September 30, 1998 /s/ John J. Byrne
------------------------
John J. Byrne
Vice President - Finance
and Chief Financial Officer
DATE: September 30, 1998 /s/ Richard L. Grenolds
------------------------
Richard L. Grenolds
Vice President and
Chief Accounting Officer
DATE: September 30, 1998 /s/ Clement R. Arrison
------------------------
Clement R. Arrison
Director
<PAGE>22
EXHIBIT INDEX
Description
- -----------
PageNo.
-------
* 27 Financial Data Schedule 23
* Filed herewith by direct transmission pursuant to the EDGAR
Program
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Mark IV Industries, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> AUG-31-1998
<CASH> 1,300
<SECURITIES> 0
<RECEIVABLES> 474,800
<ALLOWANCES> 11,400
<INVENTORY> 381,800
<CURRENT-ASSETS> 963,700
<PP&E> 884,400
<DEPRECIATION> 218,000
<TOTAL-ASSETS> 2,304,900
<CURRENT-LIABILITIES> 483,400
<BONDS> 923,700
0
0
<COMMON> 600
<OTHER-SE> 635,100
<TOTAL-LIABILITY-AND-EQUITY> 2,304,900
<SALES> 1,183,000
<TOTAL-REVENUES> 1,183,000
<CGS> 817,000
<TOTAL-COSTS> 1,076,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,400
<INCOME-PRETAX> 74,500
<INCOME-TAX> 26,700
<INCOME-CONTINUING> 47,800
<DISCONTINUED> 0
<EXTRAORDINARY> 2,600
<CHANGES> 0
<NET-INCOME> 45,200
<EPS-PRIMARY> .76
<EPS-DILUTED> .72
</TABLE>
