10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 ------------------------------------------------- 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 - 2,397,235 shares as of August 13, 2002 INDEX NUMATICS, INCORPORATED AND SUBSIDIARIES Page No. Description -------------------------------------------------------------------------------- 1 PART I. FINANCIAL INFORMATION 1 Item 1 Consolidated Condensed Financial Statements (Unaudited) 4 Notes to Consolidated Condensed Financial Statements (Unaudited) 10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION 14 Item 6 Exhibits and Reports on Form 8-K 14 Signatures PART I. FINANCIAL INFORMATION Item 1. Financial Statements Numatics, Incorporated Consolidated Condensed Statements of Operations

See accompanying notes. 1 Numatics, Incorporated Consolidated Condensed Balance Sheets

See accompanying notes. 2 Numatics, Incorporated Consolidated Condensed Statements of Cash Flows (Unaudited) Six Months Ended June 30 --------------------------- 2002 2001 ------------ ------------ Operating activities Net loss $ (331,305) $ (751,614) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 2,342,045 2,760,524 Amortization 634,963 595,325 Minority interest in subsidiary earnings 45,128 (138,641) Deferred taxes 813,289 112,441 Deferred retirement benefits 487,529 402,627 Unrealized foreign currency (gains) losses (825,402) 574,072 Changes in operating assets and liabilities: Trade receivables (424,763) 393,192 Inventories 651,387 3,128,239 Other current assets 46,927 (280,102) Accounts payable and accrued expenses 273,394 (2,763,173) Compensation and employee benefits 323,455 (1,549,925) Income and single business taxes (1,219,690) (90,840) ----------- ----------- Net cash provided by operating activities 2,816,957 2,392,125 Investing activities Capital expenditures (431,521) (1,283,992) Other investments - 1,397 ----------- ----------- Net cash used in investing activities (431,521) (1,282,595) Financing activities Debt repayments (3,007,315) (1,413,597) Debt issuance costs (309,563) (123,909) ----------- ----------- Net cash used in financing activities (3,316,878) (1,537,506) Effect of exchange rate changes on cash (42,849) 213,430 ----------- ----------- Net decrease in cash and cash equivalents (974,291) (214,546) Cash and equivalents at beginning of period 1,895,027 975,267 ----------- ----------- Cash and equivalents at end of period $ 920,736 $ 760,721 =========== =========== See accompanying notes. 3 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 2002 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 six-month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2001. Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" was adopted as of January 1, 2002. Under this statement, goodwill is no longer amortized but is subject to annual impairment tests or more frequent tests if impairment indicators arise. The impairment tests of our goodwill were performed as required and it was determined that no impairment of the goodwill existed at January 1, 2002. The adoption of SFAS 142 has had no material effect on the Company's financial statements. In April 2002, SFAS No. 145, "Rescission of FASB Statement 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," was issued. Under the provisions of SFAS 145 gains and losses associated with the extinguishment of debt will no longer be classified as extraordinary. The Company will be required to adopt SFAS 145 January 1, 2003. Accordingly, the Company will reclassify on that date the $303,818 (net of income taxes of $148,000) recorded in 2001 as extraordinary item - early extinguishment of debt. 4 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 2002 2. COMPREHENSIVE INCOME The components of comprehensive income for the three-month and six-month periods ended June 30, 2002 and 2001 are as follows: Three Months Ended Six Months Ended June 30 June 30 ----------------------- -------------------------- 2002 2001 2002 2001 --------- ---------- ---------- ---------- Net income (loss) $ 483,243 $(192,923) $(331,305) $(751,614) Foreign currency translation adjustments 466,524 265,745 483,000 (20,905) --------- --------- --------- --------- $ 949,767 $ 72,822 $ 151,695 $(772,519) The components of accumulated other comprehensive loss at June 30, 2002 and December 31, 2001 are as follows: 6/30/2002 12/31/2001 ------------- ------------ Foreign currency translation adjustments $ (557,671) $(1,040,671) Minimum pension liability (552,708) (552,708) ----------- ----------- $(1,110,379) $(1,593,379) =========== =========== 3. LONG-TERM DEBT On August 13, 2002, the Company and its lenders agreed to amendments to the terms of the senior credit facilities, which include two term loans payable and two revolving notes payable. These amendments revised certain covenant requirements concerning tangible net worth, debt service coverage and interest coverage through December 31, 2002. The Company was in compliance with all covenants as amended. 4. 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: 5 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 2002 4. SEGMENT AND GEOGRAPHIC INFORMATION (continued) Three Months Ended Six Months Ended June 30 June 30 -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net sales North America $23,241,384 $24,632,006 $45,514,455 $51,251,830 International 4,782,701 4,906,974 9,324,792 11,049,064 ----------- ----------- ----------- ----------- $28,024,085 $29,538,980 $54,839,247 $62,300,894 Three Months Ended Six Months Ended June 30 June 30 -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Operating income North America $ 3,737,267 $ 3,913,351 $ 7,551,823 $ 7,063,107 International 454,184 286,752 885,201 972,851 ----------- ----------- ----------- ----------- $ 4,191,451 $ 4,200,103 $ 8,437,024 $ 8,035,958 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES The $115 million of 9 5/8 % senior subordinated notes issued by Numatics, Incorporated 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 June 30, 2002 and December 31, 2001 and consolidating condensed statements of operations for the three and six month periods ended June 30, 2002 and 2001 and consolidating condensed statements of cash flows for the six months ended June 30, 2002 and 2001. 2. Numatics, Incorporated (the Parent), combined guarantor subsidiaries and combined non-guarantor subsidiaries (consisting of the Parent'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 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 2002 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued) BALANCE SHEET June 30, 2002

December 31, 2001

7 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 2002 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued) STATEMENT OF OPERATIONS Three Months Ended June 30, 2002

Three Months Ended June 30, 2001

Six Months Ended June 30, 2002

Six Months Ended June 30, 2001

8 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 2002 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued) STATEMENT OF CASH FLOWS Six Months ended June 30, 2002

Six Months ended June 30, 2001

9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 2002 Compared With Three Months Ended June 30, 2001 Net Sales. Net sales of $28.0 million for the three months ended June 30, 2002 were 5.1% lower than the $29.5 million in the same period of 2001. Net sales of traditional valve products decreased 5.8% or $1.1 million while net sales of motion control products decreased 3.2% or $0.2 million and sales of other products decreased 4.6% or $0.2 million. North American sales decreased 5.6% or $1.4 million and international sales decreased 2.5% or $0.1 million. This decline in sales was a result of the economic downturn that began in North America in the last quarter of 2000 and in our International segment mid-year 2001. Gross Profit. Gross profit was $10.6 million, or 37.7% of net sales, for the three months ended June 30, 2002 compared with $11.5 million, or 38.8% of net sales, in the same period of 2001. The 1.1% reduction in gross profit margin was primarily a result of lower sales volumes and product mix. Marketing, Engineering, General and Administrative. Marketing, engineering, general and administrative expenses were $6.3 million for the three months ended June 30, 2002, compared to $7.2 million for the same period in 2001. This $0.9 million reduction reflects the Company's continued focus on cost savings in response to the lower sales levels. In addition to an overall 28% headcount reduction, the Company eliminated or reduced discretionary spending to offset the effects of the lower sales volume. Operating Income. Operating income for the three months ended June 30, 2002 was $4.2 million, substantially equal to the same period in 2001 as lower marketing, engineering, general and administrative expenses offset lower sales volumes and reduced gross margins. Operating income in North America decreased $0.2 million, or 4.5%, while the international segment's operating income increased by $0.2 million, or 58.4%. Interest and Other Financing Expenses. Interest and other financing expenses increased $0.5 million from $4.1 million in the second quarter of 2001 to $4.6 million in 2002 as a result of higher interest rates. Other (Income) Expense. Other income of $1.2 million for the three months ended June 30, 2002 was primarily attributable to unrealized foreign exchange gains, which resulted from the strengthening of major foreign currencies against the U.S. dollar, compared to other expense of $0.3 million in the three months ended June 30, 2001. 10 Net Income (Loss). Due to the factors discussed above, net income increased $0.7 million, to $0.5 million during the three months ended June 30, 2002 from a net loss of $0.2 million in the second quarter of 2001. Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001 Net Sales. Net sales of $54.8 million for the six months ended June 30, 2002 were 12.0% lower than the $62.3 million in the same period of 2001. Net sales of traditional valve products decreased 11.2% or $4.5 million while net sales of motion control products decreased 11.7% or $1.4 million and sales of other products decreased 15.3% or $1.5 million. North American sales decreased 11.2% or $5.7 million and international sales decreased 15.6% or $1.7 million. This decline in sales was a direct result of the continuing economic downturn that began in North America in the last quarter of 2000 and in our international segment mid-year 2001. Gross Profit. Gross profit was $21.0 million, or 38.3% of net sales, for the six months ended June 30, 2002 compared with $23.4 million, or 37.5% of net sales, in the same period of 2001. This 0.8% improvement in gross profit margin resulted from the effect of cost savings and containment programs that were not fully realized until the second quarter of 2001 and production efficiencies, which helped offset lower sales volumes and product mix. These cost savings included decreases in direct and indirect labor as a result of an overall 28% headcount reduction, depreciation savings on reduced capital expenditures, reduced scrap costs and the elimination of discretionary spending in manufacturing overhead. Marketing, Engineering, General and Administrative. Marketing, engineering, general and administrative expenses were $12.4 million for the six months ended June 30, 2002, compared to $15.1 million for the same period in 2001. This $2.7 million decrease was a result of cost savings implemented in response to the reduced sales. In addition to an overall 28% headcount reduction, the Company eliminated or reduced discretionary spending to offset the effects of the lower sales volume. Operating Income. Operating income for the six months ended June 30, 2002 was $8.4 million compared to $8.0 million in the same period in 2001. This $0.4 million increase was a result of the lower costs and improved production efficiencies. Operating income in North America increased $0.5 million, or 6.9%, while the international segment's operating income decreased by $0.1 million, or 9.0%. Interest and Other Financing Expenses. Interest and other financing expenses increased $1.0 million from $8.2 million in the first half of 2001 to $9.2 million in 2002 as a result of higher interest rates. 11 Other (Income) Expense. Other income of $0.5 million for the six months ended June 30, 2002 was primarily attributable to unrealized foreign exchange gains, which resulted from the strengthening of major foreign currencies against the U.S. dollar, compared to a loss of $0.9 million in the six months ended June 30, 2001. Income Tax. As of June 30, 2002, the Company had $3.1 million of net deferred tax assets, primarily all of which were in the United States jurisdiction. Based on known and projected earnings information and tax planning strategies, the Company assesses quarterly the likelihood that the deferred tax assets will be recovered. To the extent that the Company believes recovery is not likely, it establishes a valuation allowance. As of June 30, 2002, the Company had no valuation allowance recorded. Net Loss. Due to the factors discussed above, net income increased $0.5 million, to a loss of $0.3 million during the six months ended June 30, 2002 from a loss of $0.8 million in the first half of 2001. Liquidity and Capital Resources Working capital was $42.0 million at June 30, 2002 compared to $41.3 million at December 31, 2001. 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. Total debt outstanding was $162.5 million at June 30, 2002 compared to $161.8 million at December 31, 2001. This increase was a result of the issuance of $2.2 million of notes payable to former shareholders, offset by the cash generated by operating activities and normal scheduled debt payments. The Company estimates that borrowing base limitations would have limited the Company's revolving credit availability to approximately $23.4 million as of June 30, 2002. On August 13, 2002, the Company and its lenders agreed to amendments to the terms of the senior credit facilities, which include two term loans payable and two revolving notes payable. These amendments revised certain covenant requirements concerning tangible net worth, debt service coverage and interest coverage through December 31, 2002. The Company was in compliance with all covenants as amended. Contractual obligations and commercial commitments for the Company as of June 30, 2002 were as follows:

The Company has no other contractual obligations or commercial commitments. 12 Significant Accounting Policies and Estimates The interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which requires the making of estimates, judgments and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures and contingencies. The estimates used in preparation of our financial statements are evaluated on a continual basis. The significant accounting policies as previously disclosed in Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations -- Significant Accounting Policies, as described in the Numatics, Incorporated annual report on Form 10-K for the year ended December 31, 2001, have not changed with the exception of goodwill due to the adoption of SFAS 142 as described in note 1 in the accompanying notes to interim condensed consolidated financial statements. 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 from the end of the preceding fiscal year to June 30, 2002. 13 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 4.1 Second Amendment to Note Purchase Agreement by and among Numatics, Incorporated; Numatics, GmbH; Numatics Ltd.; other loan parties and American Capital Financial Services, Inc., as agent dated August 13, 2002. 4.2 Third Amendment to Loan and Security Agreement among Numatics, Incorporated; Micro-Filtration, Inc.; Numation, Inc.; Numatech, Inc.; Ultra Air Products, Inc.; Microsmith, Inc.; Empire Automation Systems, Inc. and LaSalle Business Credit, Inc. dated August 13, 2002. 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the three months ended June 30, 2002. 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; on behalf of the registrant and as its principal financial officer Date: August 14, 2002 ---------------- 14

NUMATICS INC 10-Q