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 September 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 incorporation or organization) Identification Number) 1450 North Milford Road, Highland, 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 November 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 14 Item 3 Quantitative and Qualitative Disclosures About Market Risk 14 Item 4 Controls and Procedures 15 PART II. OTHER INFORMATION 15 Item 6 Exhibits and Reports on Form 8-K 15 Signatures 16 Certifications ii PART I. FINANCIAL INFORMATION Item 1. Financial Statements Numatics, Incorporated Consolidated Condensed Statements of Operations

See accompanying notes. Numatics, Incorporated Consolidated Condensed Balance Sheets

See accompanying notes. 2 Numatics, Incorporated Consolidated Condensed Statements of Cash Flows

See accompanying notes. 3 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) September 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 nine-month period ended September 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 an extraordinary item - early extinguishment of debt. In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. SFAS 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of commitment to an exit or disposal plan, and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company anticipates that the adoption of SFAS 146 will have no effect on its financial statements. 4 NUMATICS, INCORPORATED Notes to Consolidated Condensed Financial Statements (Unaudited) September 30, 2002 2. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2002 and 2001 are as follows:

The components of accumulated other comprehensive loss at September 30, 2002 and December 31, 2001 are as follows:

3. LONG-TERM DEBT The Company reclassified $35.2 million of its senior debt from long-term liabilities to current liabilities because it is probable the Company will not be able to comply with existing loan covenant requirements at measurement dates within the next twelve months. Such failure to meet covenants would result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. The Company has had discussions with prospective new senior lenders and has preliminarily selected a new lender who is performing due diligence procedures for a transaction which, if consummated, would refinance all of the senior debt and result in its reclassification to long-term by December 31, 2002. 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) September 30, 2002 4. SEGMENT AND GEOGRAPHIC INFORMATION (continued)

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 September 30, 2002 and December 31, 2001 and consolidating condensed statements of operations for the three and nine month periods ended September 30, 2002 and 2001 and consolidating condensed statements of cash flows for the nine months ended September 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) September 30, 2002 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (continued) BALANCE SHEET September 30, 2002

December 31, 2001

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

Three Months Ended September 30, 2001

Nine Months Ended September 30, 2002

Nine Months Ended September 30, 2001

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

Nine Months ended September 30, 2001

9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautions Regarding Forward-Looking Statements This Form 10-Q report contains forward-looking statements, which can be identified by the use of the future tense or other forward-looking terms such as "may," "intent," "will," "expect," "anticipate," "plan," "management believes," "estimate," "continue," "should," "strategy," or "position" or the negatives of those terms or other variations on them or by comparable terminology. In particular, any statements, express or implied, concerning future operating results or the ability to generate net sales, income, or cash flow to service indebtedness, or concerning future compliance with debt covenants or reaching agreements with new senior lenders, are forward-looking statements. Investors are cautioned that reliance on any of those forward-looking statements involves risks and uncertainties and that, although Numatics' management believes that the assumptions on which those forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based on those assumptions also could be incorrect, and actual results may differ materially from any results indicated or suggested by those assumptions. The uncertainties in this regard include, but are not limited to, the Company's ability to replace its senior credit facility and to comply with financial covenants contained within the indenture and the credit facilities, as well as those items identified in "Risk Factors" under item 1 of the Company's Form 10-K for the year ended December 31, 2001. Three Months Ended September 30, 2002 Compared With Three Months Ended September 30, 2001 Net Sales. Net sales of $28.5 million for the three months ended September 30, 2002 were 6.6% higher than the $26.7 million in the same period of 2001. Net sales of traditional valve products increased 7.1% or $1.3 million while net sales of motion control products increased 4.6% or $0.2 million and sales of other products increased 6.7% or $0.3 million. North American sales increased 6.2% or $1.4 million and international sales increased 8.2% or $0.4 million. This improvement in sales was a result of a slight overall improvement in the economy as well as new sales programs. Gross Profit. Gross profit was $10.8 million, or 38.0% of net sales, for the three months ended September 30, 2002 compared with $11.0 million, or 41.3% of net sales, in the same period of 2001. The 3.3% reduction in gross profit margin was primarily a result of product mix and depreciation savings during 2001 on reduced capital expenditures. Marketing, Engineering, General and Administrative. Marketing, engineering, general and administrative expenses were $6.7 million for the three months ended September 30, 2002, compared to $6.1 million for the same period in 2001. This $0.6 million increase resulted 10 primarily from the restoration of bonus accruals not included in 2001 results, professional fees and depreciation savings during 2001 on reduced capital expenditures. Operating Income. Operating income for the three months ended September 30, 2002 was $4.0 million, $0.9 million below the same period in 2001 as increased sales levels were offset by reduced gross margins and increased marketing, engineering, general and administrative expenses. Operating income in North America decreased $0.9 million, or 18.3%, while the international segment's operating income remained substantially unchanged. Interest and Other Financing Expenses. Interest and other financing expenses increased $0.6 million from $3.9 million in the third quarter of 2001 to $4.5 million in 2002 as a result of higher interest rates. Other Income. Other income of $0.1 million for the three months ended September 30, 2002, compared to $0.3 million in the three months ended September 30, 2001. The $0.3 million income in 2001 was primarily attributable to unrealized foreign exchange gains, which resulted from the weakening of the U.S. dollar against major foreign currencies. Net Income (Loss). Due to the factors discussed above, the three months ended September 30, 2002 resulted in a net loss of $0.4 million, compared to net income of $0.9 million in the third quarter of 2001. Nine Months Ended September 30, 2002 Compared With Nine Months Ended September 30, 2001 Net Sales. Net sales of $83.3 million for the nine months ended September 30, 2002 were 6.4% lower than the $89.0 million in the same period of 2001. Net sales of traditional valve products decreased 5.8% or $3.4 million while net sales of motion control products decreased 6.7% or $1.1 million and sales of other products decreased 8.3% or $1.2 million. North American sales decreased 5.9% or $4.3 million and international sales decreased 8.8% or $1.4 million. This decline in sales was a direct result of the economic downturn that began in North America in the last quarter of 2000 and in our international segment mid-year 2001, although showing an upward trend during the most recent quarter. Gross Profit. Gross profit was $31.8 million, or 38.2% of net sales, for the nine months ended September 30, 2002 compared with $34.4 million, or 38.6% of net sales, in the same period of 2001. This 0.4% decline in gross profit margin was primarily a result of product mix and depreciation savings during 2001 on reduced capital expenditures. Marketing, Engineering, General and Administrative. Marketing, engineering, general and administrative expenses were $19.2 million for the nine months ended September 30, 2002, compared to $21.2 million for the same period in 2001. This $2.0 million decrease was a result of cost savings implemented in response to the reduced sales. In addition to an overall 28% 11 headcount reduction, the Company eliminated or reduced discretionary spending to offset the effects of the lower sales volume. Operating Income. Operating income for the nine months ended September 30, 2002 was $12.5 million compared to $12.9 million in the same period in 2001. This $0.4 million decrease was a result of the lower sales and gross profit margin, offset by reduced marketing, engineering, general and administrative expenses. Operating income in North America decreased $0.3 million, or 3.3%, while the international segment's operating income decreased by $0.1 million, or 7.2%. Interest and Other Financing Expenses. Interest and other financing expenses increased $1.6 million from $12.1 million in the first nine months of 2001 to $13.7 million in 2002 as a result of higher interest rates. Other (Income) Expense. Other income of $0.6 million for the nine months ended September 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 $0.5 million in the nine months ended September 30, 2001. Income Tax. As of September 30, 2002, the Company had $2.5 million of net deferred tax assets, substantially all of which related to United States federal income tax. 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 September 30, 2002, the Company had no valuation allowance recorded. Net Income (Loss). Due to the factors discussed above, net income declined $0.8 million, from net income of $0.1 million during the nine months ended September 30, 2001 to a loss of $0.7 million during the nine months ended September 30, 2002. Liquidity and Capital Resources Working capital was $3.2 million at September 30, 2002 compared to $41.3 million at December 31, 2001. The Company reclassified $35.2 million of its senior debt from long-term liabilities to current liabilities because it is probable the Company will not be able to comply with existing loan covenant requirements at measurement dates within the next twelve months. Such failure to meet covenants would result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. The Company has had discussions with prospective new senior lenders and has preliminarily selected a new lender who is performing due diligence procedures for a transaction which, if consummated, would refinance all of the senior debt and result in its reclassification to long-term by December 31, 2002. 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 $157.5 million at September 30, 2002 compared to $161.8 million at December 31, 2001. This decrease was a result of the cash generated by operating activities and 12 normal scheduled debt payments, offset by the issuance of $2.2 million of notes payable to former shareholders in January 2002 in connection with the repurchase of their shares in the Company. The Company estimates that borrowing base limitations would have limited the Company's revolving credit availability to approximately $23.5 million as of September 30, 2002. Contractual obligations and commercial commitments for the Company as of September 30, 2002 were as follows:

The Company has no other contractual obligations or commercial commitments. 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. 13 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 September 30, 2002. Item 4. Controls and Procedures The Company's Chief Executive Officer and its Chief Financial Officer have evaluated the Company's disclosure controls and procedures within 90 days of the filing of this report and have concluded that there are no significant deficiencies or material weaknesses. Subsequent to the evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls. 14 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.1 Certification of Chief Executive Officer - Section 906 of Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer - Section 906 of Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the three months ended September 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: November 14, 2002 --------------------------------------------------------- 15 CERTIFICATION I, John H. Welker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Numatics, Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 16 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ John H. Welker ----------------------------------------------------- John H. Welker, Chief Executive Officer 17 CERTIFICATION I, Robert P. Robeson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Numatics, Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 18 b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Robert P. Robeson ----------------------------------------------------- Robert P. Robeson, Chief Financial Officer 19

NUMATICS INC 10-Q