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, 1999.
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
- --------------------------------------------------------------------------
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
- --------------------------------------------------------------------------
(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 30, 1999
----- ---------------------------------
Common stock $.01 par value 46,567,897
<PAGE>2
MARK IV INDUSTRIES, INC.
INDEX
Part I. Financial Information Page No.
- ------------------------------ --------
Consolidated Condensed Balance Sheets as of
August 31, 1999 and February 28, 1999 3
Consolidated Statements of Income
For the Three Month Periods Ended August 31, 1999 and 1998 4
Consolidated Statements of Income
For the Six Month Periods Ended August 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
For the Six Month Periods Ended August 31, 1999 and 1998 6
Consolidated Statements of Comprehensive Income and
Retained Earnings for the Three and Six Month Periods
Ended August 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information 21
- ---------------------------
Signature Page 22
Exhibit Index 23
<PAGE>3
MARK IV INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
August 31, February 28,
1999 1999
--------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and short-term investments $ 2,200 $ 125,700
Accounts receivable 404,700 406,000
Inventories 328,700 297,600
Net assets of discontinued operations 140,200 -
Other current assets 126,800 133,300
---------- ----------
Total current assets 1,002,600 962,600
Pension and other non-current assets 188,400 185,500
Property, plant and equipment, net 600,200 562,300
Cost in excess of net assets acquired 351,200 369,300
---------- ----------
TOTAL ASSETS $2,142,400 $2,079,700
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current maturities $ 138,400 $ 57,800
Accounts payable 237,300 219,900
Compensation related liabilities 70,500 79,000
Accrued interest 20,100 23,200
Other current liabilities 109,700 92,100
---------- ----------
Total current liabilities 576,000 472,000
---------- ----------
Long-Term Debt:
Senior debt 136,800 24,700
Subordinated debentures 658,100 772,800
---------- ----------
Total long-term debt 794,900 797,500
---------- ----------
Other non-current liabilities 233,300 213,500
---------- ----------
Stockholders' Equity:
Preferred stock - -
Common stock 500 500
Additional paid-in capital 350,600 440,700
Retained earnings 245,300 203,300
Foreign currency translation adjustment (58,200) (47,800)
---------- ----------
Total stockholders' equity 538,200 596,700
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $2,142,400 $2,079,700
========== ==========
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, 1999 and 1998
(Amounts in thousands, except per share data)
1999 1998
---- ----
(As Restated)
Net sales from continuing operations $479,500 $445,700
-------- --------
Operating costs:
Cost of products sold 326,100 304,200
Selling and administration 72,400 68,900
Research and development 14,400 12,300
Depreciation and amortization 23,100 19,400
-------- --------
Total operating costs 436,000 404,800
-------- --------
Operating income 43,500 40,900
Interest expense 13,800 12,400
-------- --------
Income from continuing operations,
before provision for taxes 29,700 28,500
Provision for income taxes 11,000 10,300
-------- --------
Income from continuing operations 18,700 18,200
Income from discontinued operations,
net of taxes 1,600 2,700
Extraordinary gain from early extinguishment
of debt, net of tax effects 800 -
-------- --------
Net income $ 21,100 $ 20,900
======== ========
Net income per share of common stock:
Basic:
Income from continuing operations $ .39 $ .32
Income from discontinued operations .03 .04
Extraordinary gain .02 -
-------- --------
Net income $ .44 $ .36
======== ========
Diluted:
Income from continuing operations $ .36 $ .31
Income from discontinued operations .03 .04
Extraordinary gain .01 -
-------- --------
Net income $ .40 $ .35
======== ========
Weighted average number of shares
outstanding:
Basic 48,500 57,600
======== ========
Diluted 57,300 66,200
======== ========
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, 1999 and 1998
(Amounts in thousands, except per share data)
1999 1998
---- ----
(As Restated)
Net sales from continuing operations $1,001,300 $919,500
---------- --------
Operating costs:
Cost of products sold 682,600 626,300
Selling and administration 148,000 139,700
Research and development 29,100 25,400
Depreciation and amortization 45,200 38,300
---------- --------
Total operating costs 904,900 829,700
---------- --------
Operating income 96,400 89,800
Interest expense 27,000 23,900
---------- --------
Income from continuing operations,
before provision for taxes 69,400 65,900
Provision for income taxes 25,300 23,700
---------- --------
Income from continuing operations 44,100 42,200
Income from discontinued operations,
net of taxes 2,500 5,600
Extraordinary gain (loss) from early
extinguishment of debt, net of tax effects 800 (2,600)
---------- --------
Net income $ 47,400 $ 45,200
========== ========
Net income per share of common stock:
Basic:
Income from continuing operations $ .88 $ .71
Income from discontinued operations .05 .09
Extraordinary gain (loss) .02 (.04)
---------- --------
Net income $ .95 $ .76
========== ========
Diluted:
Income from continuing operations $ .82 $ .68
Income from discontinued operations .05 .08
Extraordinary gain (loss) .01 (.04)
---------- --------
Net income $ .88 $ .72
========== ========
Weighted average number of shares
outstanding:
Basic 49,800 59,600
========== ========
Diluted 58,500 68,300
========== ========
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, 1999 and 1998
(Dollars in thousands)
1999 1998
---- ----
(As Restated)
Cash flows from operating activities:
Income from continuing operations $ 44,100 $ 42,200
Items not affecting cash:
Depreciation and amortization 45,200 38,300
Pension and compensation related items, net (6,300) (13,100)
Deferred income taxes 9,300 11,600
Changes in assets and liabilities, net of
effects of acquired and divested businesses:
Accounts receivable 15,500 2,200
Inventories (11,400) 2,500
Accounts payable (14,300) (8,400)
Compensation related liabilities (10,300) (10,600)
Accrued expenses and other items, net (19,900) (11,800)
--------- ---------
Net cash provided by continuing
operating activities 51,900 52,900
Net cash provided by discontinued operations 800 15,400
Extraordinary gain (loss) before deferred charges 2,700 (3,300)
--------- ---------
Net cash provided by operating activities 55,400 65,000
--------- ---------
Cash flows from investing activities:
Acquisitions (55,700) -
Divestitures and asset sales 36,600 (2,400)
Purchase of plant and equipment, net (37,400) (35,400)
--------- ---------
Net cash used in investing activities (56,500) (37,800)
--------- ---------
Cash flows from financing activities:
Credit agreement borrowings, net 65,000 130,000
Retirement of subordinated debt (115,200) (73,100)
Other changes in long-term debt, net 39,800 900
Changes in short-term bank borrowings, net (16,300) (48,400)
Repurchase of common stock, net (90,100) (150,500)
Cash dividends paid (5,600) (5,700)
--------- ---------
Net cash used in financing activities (122,400) (146,800)
--------- ---------
Net decrease in cash and
short-term investments (123,500) (119,600)
Cash and short-term investments:
Beginning of the period 125,700 120,900
--------- ---------
End of the period $ 2,200 $ 1,300
========= =========
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
For the Three and Six Month Periods Ended August 31, 1999 and 1998
(Dollars in thousands)
(Unaudited)
Comprehensive Income
- --------------------
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 21,100 $ 20,900 $ 47,400 $ 45,200
Balance sheet effect of foreign
currency translation adjustments (2,200) (10,100) (10,400) (5,900)
-------- -------- -------- --------
Comprehensive net income $ 18,900 $ 10,800 $ 37,000 $ 39,300
======== ======== ======== ========
Retained Earnings
Retained earnings at the beginning
of the period $226,900 $188,500 $203,300 $167,100
Net income 21,100 20,900 47,400 45,200
Cash dividends of $.11, $.10, $.055
and $.05 per share (2,700) (2,800) (5,400) (5,700)
-------- -------- -------- --------
Retained earnings at the end
of the period $245,300 $206,600 $245,300 $206,600
======== ======== ======== ========
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, 1999,
and the results of its operations and its cash flows for the periods
ended August 31, 1999 and 1998. Such results are not necessarily
indicative of the results to be expected for the full year.
Certain reclassifications of the August 31, 1998 financial statements
have been made to reflect the Company's fiscal 1999 discontinued
operations which were divested near the end of fiscal 1999, as well as
the discontinued operations which were divested in the current fiscal
year.
2. Cash Flow
For purposes of cash flows, the Company considers overnight investments
as cash equivalents. The Company made cash interest payments of
approximately $34.2 million and $38.4 million in the six month periods
ended August 31, 1999 and 1998, respectively. The Company also made
cash income tax payments of approximately $15.8 million and $21.1
million in the six month periods ended August 31, 1999 and 1998,
respectively.
3. Acquisition
In April 1999, the Company acquired the net assets of Lombardini FIM
S.p.A. ("Lombardini"), an Italian-based manufacturer of small gasoline
and diesel engines for $148 million, consisting of a cash payment of $42
million and the assumption of $106 million of existing debt. Lombardini
produces small engines of up to 50kw (65 horsepower) in power and
competes in various markets, supplying engines to agricultural, marine,
automotive, electrical generation and home and lawn care markets,
primarily in Europe. It also exports its products to North America,
Africa, Latin America and Asia. Lombardini will be managed as a part of
the Company's Automotive Business Segment.
<PAGE>9
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. Divestitures
On September 10, 1999 the Company completed the sale of its Industrial
Filter Business for approximately $144.8 million in cash. The Company's
Industrial Filter Business was part of its Industrial Business Segment.
The results of operations of this business have been segregated from the
Company's continuing operations and accounted for as a discontinued
operation in the accompanying consolidated statements of income and cash
flows. The results of operations for the Industrial Filter Business
were as follows (dollars in thousands):
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $40,400 $38,500 $77,600 $74,400
======= ======= ======= =======
Income from discontinued
operations, net of taxes $ 1,600 $ 1,400 $ 2,500 $ 2,500
======= ======= ======= =======
Interest expense allocated to discontinued operations amounted to $1.3
million and $1.2 million in the three month periods ended August 31,
1999 and 1998, respectively. Corresponding amounts in the six month
periods ended August 31, 1999 and 1998 amounted to $2.6 million and $2.3
million, respectively.
The net assets of the Industrial Filter Business have been excluded from
their respective captions and reported as net assets of discontinued
operations in the consolidated condensed balance sheet at August 31,
1999. The net assets of the Industrial Filter Business at August 31,
1999 were as follows (dollars in thousands):
Cash $ 1,000
Accounts receivable 31,500
Inventory 30,500
Other assets 16,100
Property, plant & equipment, net 23,200
Cost in excess of
net assets acquired 60,800
Other liabilities (22,900)
--------
Net assets of
discontinued operations $140,200
========
<PAGE>10
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. Accounts Receivable and Inventories
Accounts receivable are presented net of allowances for doubtful
accounts of $10.1 million and $9.6 million at August 31, 1999 and
February 28, 1999, respectively. The amount at February 28, 1999
includes approximately 1.2 million related to the Industrial Filter
Business.
Inventories consist of the following components (dollars in thousands):
August 31, February 28,
1999 1999
--------- ------------
Raw materials $ 98,300 $ 76,200
Work-in-process 63,900 51,600
Finished goods 166,500 169,800
--------- ---------
Total $ 328,700 $ 297,600
========= =========
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, 1999. The amounts at February 28, 1999 are
based upon the audited balance sheet at that date, and include $30.5
million related to the Industrial Filter Business.
6. 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,
1999 1999
Land and land improvements $ 21,500 $ 24,900
Buildings 199,700 174,700
Machinery and equipment 636,300 599,200
-------- --------
Total property, plant and equipment 857,500 798,800
Less accumulated depreciation (257,300) (236,500)
-------- --------
Property, plant and equipment, net $600,200 $562,300
======== ========
The net amount at February 28, 1999 includes $23.2 million related to
the Industrial Filter Business.
<PAGE>11
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. Long-term debt
Long-term debt consists of the following (dollars in thousands):
August 31, 1999 February 28,
-------------------- -----------
Pro Forma Actual 1999
--------- ------ ----
Senior Debt:
Credit Agreement $ - $ - $ -
Other borrowing arrangements 146,100 146,100 42,400
---------- ---------- -----------
Total 146,100 146,100 42,400
Less current maturities (9,300) (9,300) (17,700)
---------- ---------- -----------
Net senior debt 136,800 136,800 24,700
---------- ---------- -----------
Subordinated Debt:
7-3/4% Senior Notes 66,700 134,200 248,900
7-1/2% Senior Notes 248,900 248,900 248,900
4-3/4% Convertible Notes 275,000 275,000 275,000
---------- ---------- ----------
Total subordinated debt 590,600 658,100 772,800
---------- ---------- ----------
Total long-term debt 727,400 794,900 797,500
Total stockholders' equity 538,200 538,200 596,700
---------- ---------- ----------
Total capitalization $1,265,600 $1,333,100 $1,394,200
========== ========== ==========
Long-term debt as a
percentage of total
capitalization 57.5% 59.6% 57.2%
========== ========== ==========
The pro forma amounts in the table above represent the actual long-term
debt position as of August 31, 1999, adjusted as if the sale of the
Industrial Filter Business had occurred as of that date, and the
proceeds were utilized first to eliminate current bank indebtedness in
the U.S. ($72.7 million) and the balance utilized to reduce long-term
indebtedness ($67.5 million).
During the six month period ended August 31, 1999, the Company
repurchased approximately $115.3 million principal amount of its 7-3/4%
Senior Subordinated Notes, of which $89.7 million principal amount was
repurchased during the three month period ended August 31, 1999. The
Company recognized an extraordinary gain of $800,000 (net of taxes) in
the three and six month periods ended August 31, 1999 from the
repurchase of the Notes. Subsequent to August 31, 1999, the Company
acquired an additional $15.1 million principal amount of such Notes.
In April 1998, the Company redeemed the remaining $73.1 million
principal balance of its 8-3/4% Senior Subordinated Notes due April 1,
2003. The redemption resulted in a one-time charge for early debt
extinguishment of $2.6 million (net of tax) in the six month period
ended August 31, 1998.
<PAGE>12
MARK IV INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
8. Common Stock Repurchases
In May 1999, the Company announced completion of its ten million share
repurchase program approved by the Board of Directors in May 1998. Upon
completion of the 1998 program, the Company's 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. Total purchases under both authorizations
in the current fiscal year through August 31, 1999 were approximately
5.4 million shares, at an average cost of $16.70 per share, or a total
cost of $90.2 million. Subsequent to August 31, 1999, the Company
acquired approximately 1.5 million shares at an average cost of
approximately $20.21 per share, or a total cost of $30.3 million. As of
September 28, 1999 approximately 7.5 million shares remain available to
be purchased under the Company's current Board authorization.
9. Business Segment Information
Information concerning the Company's Business Segments is as follows
(dollars in thousands):
Six Months Ended August 31,
---------------------------
1999 1998
---- ----
NET SALES TO CUSTOMERS
Automotive $ 588,400 $ 482,800
Industrial 412,900 436,700
---------- ----------
Total related to
continuing operations $1,001,300 $ 919,500
========== ==========
OPERATING INCOME
Automotive $ 56,200 $ 44,400
Industrial 48,300 53,400
---------- ----------
Management's measure of the
segments' operating performance 104,500 97,800
General corporate expense (8,100) (8,000)
Interest expense (27,000) (23,900)
Provision for income taxes (25,300) (23,700)
---------- ----------
Income from continuing operations $ 44,100 $ 42,200
========== ==========
August 31, February 28,
1999 1999
--------- -----------
IDENTIFIABLE ASSETS
Automotive $1,172,600 $ 974,500
Industrial 799,000 800,600
---------- ----------
Total identificable assets
of the segments 1,971,600 1,775,100
General corporate assets 30,600 153,600
---------- ----------
Total assets related to
continuing operations 2,002,200 1,928,700
Discontinued operations 140,200 151,000
---------- ----------
Total consolidated $2,142,400 $2,079,700
========== ==========
The change in the level of identifiable assets of the Automotive segment
is primarily the result of the Lombardini acquisition.
<PAGE>13
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,
------------------ ----------------
Basic Net Income Per Share: 1999 1998 1999 1998
--------------------------- ---- ---- ---- ----
Net income $21,100 $20,900 $47,400 $45,200
======= ======= ======= =======
Weighted average number of
common shares outstanding 48,500 57,600 49,800 59,600
======= ======= ======= =======
Basic net income per share $ .44 $ .36 $ .95 $ .76
======= ======= ======= =======
Diluted Net Income Per Share:
----------------------------
Net income $21,100 $20,900 $47,400 $45,200
After-tax equivalent of interest
expense on the 4-3/4% Convertible
Subordinated Notes 2,000 2,000 4,000 4,000
------- ------- ------- -------
Income for purposes of computing
diluted net income per share $23,100 $22,900 $51,400 $49,200
======= ======= ======= =======
Weighted average common
shares outstanding 48,500 57,600 49,800 59,600
Dilutive stock options 400 200 300 300
Weighted average effect of the
assumed conversion of the 4-3/4%
Convertible Subordinated Notes 8,400 8,400 8,400 8,400
------- ------- ------- -------
Weighted average number of
common shares outstanding
for purposes of computing
diluted net income per share 57,300 66,200 58,500 68,300
======= ======= ======= =======
Diluted net income per share $ .40 $ .35 $ .88 $ .72
======= ======= ======= =======
<PAGE>14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Company's working capital investment decreased by $64.0 million (13%)
during the six month period ended August 31, 1999, to $426.6 million from
$490.6 million at February 28, 1999. Eliminating the effects of acquisitions
and divestitures, as well as cash and current financial indebtedness, the
Company's working capital investment was approximately $422.6 million at
August 31, 1999. Such amount reflects a nominal (1%) increase from the $418.5
investment which existed at February 28, 1999 on a comparable basis, and a
nominal reduction (2%) from the $429.2 million investment which existed at
August 31, 1998 on a comparable basis.
Capital expenditures for the six month period ended August 31, 1999 were
approximately $37.9 million, which was $7.3 million lower than depreciation
and amortization expense of $45.2 million in the same period, and reflects a
consistent level of expenditures in comparison to the six month period ended
August 31, 1998. Management anticipates that the Company's capital expenditure
requirements will continue to be less than its depreciation and amortization
expense for the remainder of fiscal 2000.
In May 1999, the Company announced completion of its ten million share
repurchase program approved by the Board of Directors in May 1998. Upon
completion of the 1998 program, the Company's 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. Total
purchases under both authorizations in the current fiscal year through August
31, 1999 were approximately 5.4 million shares, at an average cost of $16.70
per share, or a total cost of $90.2 million. Subsequent to August 31, 1999,
the Company acquired approximately 1.5 million shares at an average cost of
approximately $20.21 per share, or a total cost of $30.3 million. As of
September 28, 1999, approximately 7.5 million shares remain available to be
purchased under the Company's current Board authorization.
During the six month period ended August 31, 1999, the Company repurchased
approximately $115.3 million principal amount of its 7-3/4% Senior
Subordinated Notes, of which $89.7 million principal amount was repurchased
during the three month period ended August 31, 1999. The Company recognized
an extraordinary gain of $800,000 (net of taxes) from the repurchase of the
Notes in the three and six month periods ended August 31, 1999. Subsequent to
August 31, 1999, the Company acquired an additional $15.1 million principal
amount of such Notes.
<PAGE>15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In April 1999, the Company acquired the net assets of Lombardini FIM S.p.A.
("Lombardini"), an Italian-based manufacturer of small gasoline and diesel
engines for $148 million, consisting of a cash payment of $42 million and the
assumption of $106 million of existing debt. Lombardini produces small
engines of up to 50kw (65 horsepower) in power and competes in various
markets, supplying engines to agricultural, marine, automotive, electrical
generation and home and lawn care markets, primarily in Europe. It also
exports its products to North America, Africa, Latin America and Asia.
Lombardini is managed as a part of the Company's Automotive Business Segment.
On September 10, 1999 the Company completed the sale of its Industrial Filter
Business, part of its Industrial business segment, for approximately $144.8
million in cash. The results of operations of this business have been
segregated from the Company's continuing operations and accounted for as
discontinued operations in the accompanying consolidated statements of income
and cash flows. A portion of the net proceeds will be used to pay-down
borrowings outstanding under the Company's revolving credit facility with the
remainder available for common stock repurchases, debt extinguishment and/or
future acquisitions.
Management believes cash generated from operations, as temporarily
supplemented by existing credit availability, should be sufficient to support
the Company's stock repurchase program, working capital requirements and
anticipated capital expenditure needs for the foreseeable future.
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. The results of
operations of Lombardini have been included in the Company's results of
operations from its respective date of acquisition. The results of operations
of the Company's Industrial Filter Business have been segregated from the
results of the Company's continuing operations and reported as discontinued
operations for all periods presented. The results of operations in fiscal
1999 have also been restated to exclude the results related to the operations
divested at the end of fiscal 1999, consisting primarily of the Company's
former Purolator Automotive Filter Business.
<PAGE>16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales from continuing operations for the three and six month periods ended
August 31, 1999 increased by $33.8 million (7.6%) and $81.8 million (8.9%),
respectively, over the comparable periods last year. In the Company's
Automotive product lines, net sales increased $12.5 million (5.4%) and $39.2
million (8.1%) in the three and six month periods ended August 31, 1999,
respectively, over the comparable periods last year. Excluding the effects of
the acquisition of Lombardini, internal growth in the Company's Automotive
product lines amounted to $7.4 million (3.2%) and $29.8 million (6.2%) in the
three and six month periods ended August 31, 1999, respectively, over the
comparable periods last year. The internal growth in the Automotive product
lines was generated by the domestic Automotive OEM and Aftermarket sectors,
with internal growth in the domestic OEM sector up 12.6% and 18.1% and the
Aftermarket sector up 2.5% and 10.3%, respectively, for the three and six
month periods ended August 31, 1999 as compared to the same periods in the
prior year. The internal growth in each of these domestic sectors compared to
relatively flat sales in the corresponding international sectors.
In the Company's Industrial product lines, net sales increased $21.3 million
(10%) and $42.6 million (9.7%) in the three and six month periods ended August
31, 1999, respectively, over the comparable periods last year. Excluding the
effects of the acquisition of Lombardini, net sales in the Company's
Industrial product lines decreased $13.4 million (6.3%) and $23.8 million
(5.4%) in the three and six month periods ended August 31, 1999, respectively,
in comparison to the corresponding prior year periods. The decreases were
primarily attributable to unfavorable year-over-year comparisons in the
Industrial sector's agricultural and petrochemical markets, which suffered
deep cutbacks in the second half of fiscal 1999 which continued into fiscal
2000. These markets have shown some recent signs of strengthening, which
should allow for a more favorable year-over-year comparison in the second half
of fiscal 2000. The Industrial product lines also experienced decreases in
the Transportation sector in the three and six month periods ended August 31,
1999 in comparison to the same periods in the prior year. Such decreases were
due to the contract nature of this business which can result in an uneven
shipment schedule and related revenue recognition over the short-term. It is
anticipated that sales in the Transportation product lines will show a
positive year-over-year comparison for fiscal 2000 on a full year basis.
The cost of products sold as a percentage of consolidated net sales remained
consistent at approximately 68% for the three and six month periods ended
August 31, 1999 and 1998. This consistent level is primarily attributable to
somewhat improved operating efficiencies offset by reduced pension income
resulting from lower earnings assumptions for the pension trust's assets in
fiscal 2000.
Selling and administration costs as a percentage of consolidated net sales
were 15.1% and 14.8% for the three and six month periods ended August 31,
1999, as compared to 15.5% and 15.2% for the three and six month periods ended
August 31, 1998. The reduction in the level of costs indicates operating
efficiencies achieved and the benefits of continued emphasis on cost control.
The lower rates also reflect the effects of the Lombardini acquisition, which
has a lower level of such costs than the Company's historical experience.
<PAGE>17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Research and development costs increased by $2.1 million (17%) and $3.7
million (15%), respectively, for the three and six month periods ended August
31, 1999 as compared to the three and six month periods ended August 31, 1998.
As a percentage of consolidated net sales, these expenses increased to
approximately 2.9% as compared to 2.8% in the comparable periods last year.
This steady level of costs is primarily related to bringing new technology to
the North American Automotive OEM market from acquisitions made in Europe, and
the launching of a number of new products and system initiatives.
Depreciation and amortization expense increased by $3.7 million (19%) and $6.9
million (18%), respectively, for the three and six month periods ended August
31, 1999 as compared to the three and six month periods ended August 31, 1998.
The increase is attributable to the inclusion of the results of operations of
Lombardini, as well as the effects of the Company's capital equipment
expenditures in the latter half of fiscal 1999.
Interest expense for the three and six month periods ended August 31, 1999
increased $1.4 million (11%) and $3.1 million (13%) from the level incurred in
the three and six month periods ended August 31, 1998. The increase is
primarily attributable to debt assumed in the acquisition of Lombardini, and
increased indebtedness to fund the Company's stock repurchase program. These
increases were somewhat offset by the repurchase of 7-3/4% Senior Subordinated
Notes with the Company's lower rate revolving credit facility.
The effective tax rate as a percentage of pre-tax accounting income for the
three and six month periods ended August 31, 1999 increased to 37.0% and
36.5%, respectively, from 36% for the comparable periods last year. The
increase in the effective tax rate is primarily the result of an increased
income mix in higher taxed European countries.
As a result of all of the above, income from continuing operations for the
three and six month periods ended August 31, 1999 reflects increases of $.5
million (3%) and $1.9 million (5%) as compared to the comparable periods in
the prior year. Net income for the three months ended August 31, 1999 was
$21.1 million, including $1.6 million from discontinued operations, and an
$800,000 gain from early debt extinguishment. Such amounts compare to net
income for the three months ended August 31, 1998 of $20.9 million, which
included $2.7 million from discontinued operations.
Net income in the first half of fiscal 2000 increased to $47.4 million,
including $2.5 million from discontinued operations and an $800,000 gain from
early debt extinguishment. Net income in the comparable period last year was
$45.2 million, which included income from discontinued operations of $5.6
million, and an extraordinary loss from early debt extinguishment of $2.6
million.
<PAGE>18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
The Company's plan to resolve the Year 2000 Issue includes four major phases -
assessment, remediation, testing, and implementation. The Company has
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.
<PAGE>19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For its Information Technology exposures, the Company has substantially
completed all remaining phases (remediation, testing and implementation) of
its plan for all of its significant systems. The remediation, testing and
implementation phases for the Company's Operating Equipment have also been
substantially completed. 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 has utilized 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 for its continuing
operations through August 31, 1999, was approximately $6.8 million, with
approximately $800,000 of that amount being expended in the six month period
ended August 31, 1999. Such total costs included $1.9 million for capital
expenditures related to new systems and equipment, and $4.9 million for
operating expenses related to modifications of existing systems and equipment.
The Company presently believes that with its 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
successful, and if the Year 2000 plans of its significant customers and
suppliers (and, in turn, their 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>20
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;
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 successful completion of the Company's Year 2000 plan, as well
as the plans of its significant customers and suppliers; and,
g. 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.
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>21
Part II. OTHER INFORMATION
- ---------------------------
Items 1, 2, 3, 4 and 5 are inapplicable and have been omitted.
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>22
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: October 1, 1999 /s/ Sal H. Alfiero
--------------- ------------------------
Sal H. Alfiero
Chairman of the Board
DATE: October 1, 1999 /s/ William P. Montague
--------------- ------------------------
William P. Montague
President
DATE: October 1, 1999 /s/ John J. Byrne
--------------- ------------------------
John J. Byrne
Vice President - Finance
and Chief Financial Officer
DATE: October 1, 1999 /s/ Richard L. Grenolds
--------------- ------------------------
Richard L. Grenolds
Vice President and
Chief Accounting Officer
DATE: October 1, 1999 /s/ Clement R. Arrison
--------------- ------------------------
Clement R. Arrison
Director
<PAGE>23
EXHIBIT INDEX
Description
- -----------
Page No.
* 27 Financial Data Schedule 24
* 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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> AUG-31-1999
<CASH> 2,200
<SECURITIES> 0
<RECEIVABLES> 414,800
<ALLOWANCES> 10,100
<INVENTORY> 328,700
<CURRENT-ASSETS> 1,002,600
<PP&E> 857,500
<DEPRECIATION> 257,300
<TOTAL-ASSETS> 2,142,400
<CURRENT-LIABILITIES> 576,000
<BONDS> 794,900
0
0
<COMMON> 500
<OTHER-SE> 537,700
<TOTAL-LIABILITY-AND-EQUITY> 2,142,400
<SALES> 1,001,300
<TOTAL-REVENUES> 1,001,300
<CGS> 686,600
<TOTAL-COSTS> 904,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,000
<INCOME-PRETAX> 69,400
<INCOME-TAX> 25,300
<INCOME-CONTINUING> 44,100
<DISCONTINUED> 2,500
<EXTRAORDINARY> 800
<CHANGES> 0
<NET-INCOME> 47,400
<EPS-BASIC> .95
<EPS-DILUTED> .88
</TABLE>
