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 June 30, 2003
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 000-29358
DENISON INTERNATIONAL plc
-------------------------
(Exact name of registrant as specified in its charter)
England and Wales Not Applicable
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14249 Industrial Parkway
Marysville, Ohio 43040
- ------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(937) 644-4437
--------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Ordinary Shares, $0.01 Par Value, 9,934,100 shares as of August 14, 2003
"A" Ordinary Shares, (pound)8.00 par value, 7,015 shares as of August 14,
2003
TABLE OF CONTENTS
FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
Item 1 Financial Statements 2
Condensed Consolidated Balance Sheets (Unaudited) 2
Condensed Consolidated Statements of
Operations (Unaudited) 3
Condensed Consolidated Statements of Cash Flows (Unaudited) 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Critical Accounting Policies and Estimates 10
Impact of Recently Adopted Accounting Pronouncements 12
Results of Operations 12
Liquidity and Capital Resources 14
Contractual Obligations 14
Impact of Inflation 15
Exposure to Currency Fluctuations 15
Market Risk 15
Order Receipts and Backlog 15
Access to Information 15
Forward-looking Information 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
Item 4 Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
1
Part I. Financial Information
Item 1. Financial Statements
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in thousands)
June 30, 2003 December 31, 2002
------------- -----------------
Current assets:
Cash and cash equivalents $ 48,749 $ 39,752
Accounts receivable, less allowances
of $2,417 and $2,242 at June 30, 2003
and December 31, 2002 respectively 39,455 32,554
Inventories 45,655 45,324
Other current assets 5,040 5,590
--------- ---------
Total current assets 138,899 123,220
Property, plant and equipment, net 32,066 31,132
Other assets 2,334 2,263
Goodwill 14,184 12,924
--------- ---------
Total assets $ 187,483 $ 169,539
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 895 $ 898
Accounts payable 14,052 14,553
Other accrued liabilities 24,301 19,372
--------- ---------
Total current liabilities 39,248 34,823
Noncurrent liabilities:
Pension accrual 14,681 13,201
Other noncurrent liabilities 4,541 5,159
--------- ---------
19,222 18,360
Shareholders' equity:
'A'ordinary shares (pound)8.00 par value;
7,125 shares authorized, and 7,015
issued and outstanding at June 30, 2003
and December 31, 2002 86 86
Ordinary shares $0.01 par value;
15,000,000 shares authorized, and
9,934,100 and 10,017,700 issued and
outstanding at June 30, 2003 and
December 31, 2002 respectively 101 102
Additional paid-in capital 5,202 5,202
Capital redemption reserve 1,090 1,090
Retained earnings 116,063 109,900
Accumulated other comprehensive (loss) 6,471 (24)
--------- ---------
Total shareholders' equity 129,013 116,356
--------- ---------
Total liabilities and
shareholders' equity $ 187,483 $ 169,539
========= =========
The accompanying notes are an integral part of these statements.
2
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS
(Unaudited)
(U.S. dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $ 46,356 $ 39,620 $ 90,800 $ 77,806
Cost of sales 29,893 25,618 58,186 50,208
-------- -------- -------- --------
Gross profit 16,463 14,002 32,614 27,598
Selling, general and administrative
expenses 11,470 9,890 22,472 19,228
-------- -------- -------- --------
Operating income 4,993 4,112 10,142 8,370
Other income/(expense) (183) (53) (92) (222)
Interest income, net 274 236 375 443
-------- -------- -------- --------
Income before taxes 5,084 4,295 10,425 8,591
Provision for income taxes 1,330 889 2,929 2,218
-------- -------- -------- --------
Net income, before cumulative effect of a
change in accounting principle 3,754 3,406 7,496 6,373
Cumulative effect of a change in accounting
principle -- -- -- 1,858
-------- -------- -------- --------
Net income $ 3,754 $ 3,406 $ 7,496 $ 8,231
======== ======== ======== ========
Basic earnings per share, before cumulative
Effect of a change in accounting
principle $ .38 $ .32 $ .75 $ .60
Cumulative effect of a change in
accounting principle -- -- -- .18
------ ------ ------ ------
Basic earnings per share $ .38 $ .32 $ .75 $ .78
====== ====== ====== ======
Diluted earnings per share $ .38 $ .32 $ .75 $ .77
====== ====== ====== ======
The accompanying notes are an integral part of these statements.
3
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Six months ended June 30,
2003 2002
---- ----
Net cash provided by operating activities $ 8,327 $ 4,374
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,304) (4,099)
Proceeds from disposal of property, plant
and equipment (169) (65)
Purchase of subsidiary, net of cash acquired -- (2,749)
-------- --------
Net cash used in investing activities (2,473) (6,913)
-------- --------
Cash flows from financing activities:
Net borrowings on lines of credit (47) (4,918)
Buyback of stock (1,334) --
Exercise of stock options -- 34
-------- --------
Net cash used in financing activities (1,381) (4,884)
-------- --------
Effect of exchange rate changes on cash 4,524 4,640
-------- --------
Net increase (decrease) in cash and
cash equivalents 8,997 (2,783)
Cash and cash equivalents at beginning of period 39,752 43,245
-------- --------
Cash and cash equivalents at end of period $ 48,749 $ 40,462
======== ========
The accompanying notes are an integral part of these statements.
4
DENISON INTERNATIONAL plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) Basis of Financial Statements
Interim Financial Information
The financial information at June 30, 2003 and for the three and six month
periods ended June 30, 2003 and June 30, 2002 is unaudited but includes all
adjustments which Denison International plc (the "Company") considers necessary
for a fair presentation of financial position at such date and the operating
results and cash flows for those periods. All adjustments made were of a normal,
recurring nature. Results for the interim period are not necessarily indicative
of results that may be expected for the entire year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission Rules
and Regulations. These condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements and the
notes thereto for the year ended December 31, 2002 included in the Company's
Annual Report on Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. The intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates.
2) Recent Accounting Developments
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. The amortization of
goodwill from past business combinations ceased upon adoption of this Statement
on January 1, 2002. Goodwill and intangible assets acquired in business
combinations completed after June 30, 2001 must comply with the provisions of
this Statement. Also under this Statement, companies were required to perform a
transitional impairment test of goodwill by evaluating all existing goodwill for
impairment within six months of adoption by comparing the fair value of each
reporting unit to its carrying value at the date of adoption. During 2002, the
Company performed both the transitional impairment test in June of 2002 and the
annual impairment test in the fourth quarter of 2002. Both of these tests
determined that no impairment existed.
Additionally, SFAS No. 141 requires that in a business combination in
which the fair value of the net assets acquired exceeds cost, any residual
negative goodwill is recognized as an extraordinary gain in the period in which
the business combination is initially recognized. The transition provisions of
SFAS No. 141 require that upon adoption of SFAS No. 142, any existing negative
goodwill be adjusted as a cumulative effect of a change in accounting principle
in the statement of operations. In the first quarter of 2002, the Company
recorded a cumulative effect of a change in accounting principle for its
remaining unamortized negative goodwill of $1.9 million.
A reconciliation of previously reported net income before cumulative
effect of a change in accounting principle and related per share amounts to the
amounts adjusted for the exclusion of goodwill and negative goodwill
amortization net of the related income tax effect follows:
5
Three months ended Six months ended
June 30, June 30,
(U.S. dollars in thousands, except per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net income, before cumulative effect of a
change in accounting principle as reported $3,754 $3,406 $7,496 $6,373
Less: Negative goodwill amortization -- -- -- 1,858
------ ------ ------ ------
Adjusted net income, after cumulative effect of
a change in accounting principle as adjusted $3,754 $3,406 $7,496 $8,231
Basic earnings per share:
Net income, before cumulative effect of a
change in accounting principle as reported $ .38 $ .32 $ .75 $ .60
Less: Negative goodwill amortization -- -- -- .18
------ ------ ------ ------
Adjusted net income, after cumulative effect
of a change in accounting principle as
adjusted $ .38 $ .32 $ .75 $ .78
Diluted earnings per share:
Net income, before cumulative effect of a
change in accounting principle as reported $ .38 $ .32 $ .75 $ .59
Less: Negative goodwill amortization -- -- -- .18
------ ------ ------ ------
Adjusted net income, after cumulative effect
of a change in accounting principle as adjusted $ .38 $ .32 $ .75 $ .77
Goodwill of $14,184 and $12,924 at June 30, 2003 and December 31, 2002,
respectively, relates to the Company's operations in its European segment. The
increase in goodwill from December 31, 2002 is the result of foreign currency
translation adjustments.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Among other things, SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred instead of at the date of an entity's commitment to an
exit plan, as under EITF Issue No. 94-3. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect the adoption of this
statement to have a significant effect on the Company's results of operations,
financial position, or cash flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosures", which amends FASB SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Statement No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent disclosure in the financial statements about the effects of stock-based
compensation. SFAS No. 148 is effective for fiscal years ended after December
15, 2002. Accordingly, the Company adopted the annual disclosure provisions of
SFAS No. 148 in its financial statements for the year ended December 31, 2002.
The Company has implemented SFAS No. 148 effective January 1, 2003 regarding
disclosure requirements for condensed financial statements for interim periods.
As provided by SFAS No. 123 and 148, the Company has chosen to continue use of
the accounting method under Accounting Principles Board Opinion No. 25 and the
related interpretations to account for the Company's stock compensation plans.
As adoption of Statement No. 148 only involves disclosures by the Company, the
Company does not expect any impact on its results of operations, financial
position, or liquidity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" (FIN No. 45). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The disclosure provisions of FIN No. 45 were effective
for the Company as of December 31, 2002. The Company currently has no
significant guarantees and claims arising during the course of its business
operations. As applicable the Company would accrue for losses under such
arrangements when they become probable and estimable. The initial recognition
and measurement provisions of FIN No. 45 are applicable to guarantees issued or
modified after December 31, 2002. The adoption of FIN No. has not had an impact
on the company's consolidated results of operations, financial position, or cash
flows.
6
3) Acquisitions
On May 31, 2002 the Company completed its acquisition of 100% of the
outstanding shares of Rander & Company Hydraulick-Systeme und Anlagenbau GmbH
("Rander"), effective as of June 1, 2002. The Rander acquisition improved the
Company's strategic presence in the German hydraulics market, one of the largest
hydraulics markets in Europe. The cash purchase price was $3,300,000 ($2,749,000
net of cash acquired and debt assumed). Rander designs, manufactures and
distributes hydraulic systems for industrial and mobile hydraulics applications,
and is located in Bremen, Germany. The acquisition has been accounted for
utilizing the purchase method of accounting, and the operating results of Rander
have been included in the operating results of the Company from June 1, 2002.
The purchase price resulted in $2.2 million of goodwill. The Company preformed
an evaluation of the operations of Rander, in accordance with the provisions of
SFAS 141 / 142, and has determined that there were no identifiable intangible
assets.
The following unaudited pro forma summary presents the Company's combined
June 2003 and 2002 results as if the Rander acquisition had occurred at January
1, 2002, after giving effect to certain adjustments. These pro forma results are
not necessarily indicative of those that would have occurred had the acquisition
occurred at January 1, 2002:
Six months ended
(U.S. dollars in thousands)
--------------------------------------
June 30, 2003 June 30, 2002
------------- --------------
Revenue $90,800 $79,325
Net Income $ 7,496 $ 8,358
Basic Earnings per share $ .75 $ .79
Diluted earnings per share $ .75 $ .78
4) Inventory
Inventories consisted of the following:
(U.S. dollars in thousands) June 30, 2003 December 31, 2002
------------- -----------------
Finished goods $26,308 $27,551
Work-in-progress 4,018 3,675
Raw materials and supplies 15,329 14,098
------- -------
$45,655 $45,324
======= =======
5) Property, Plant and Equipment
Property, plant and equipment, net, consisted of the following:
(U.S. dollars in thousands) June 30, 2003 December 31, 2002
------------- -----------------
Cost:
Land and buildings $ 7,421 $ 6,954
Machinery and equipment 57,440 53,939
Motor vehicles 1,028 978
-------- --------
$ 65,889 $ 61,871
Less: accumulated depreciation (33,823) (30,739)
-------- --------
Property, plant and equipment, net $ 32,066 $ 31,132
======== ========
6) Financial and Derivative Instruments
The Company's worldwide manufacturing facilities sell products to the
Company's sales and marketing subsidiaries under various currencies. In
addition, certain of the Company's subsidiaries record billings of export sales
in the customer's functional currency. Accordingly, the U.S. dollar-equivalent
cash flows may vary due to changes in related foreign currency exchange rates.
To reduce that risk, the Company enters into foreign currency forward contracts
with a maximum hedging period of 12 months. The Company has no other
freestanding or embedded derivative instruments.
7
Under the cash flow hedging model, gains and losses on the foreign
currency forward contracts are recorded in other comprehensive income (equity)
to the extent that the hedges are effective until the underlying sale or
purchase transactions are recognized in earnings. Gains and losses on sale and
purchase transactions are classified as sales or cost of sales, respectively.
No amounts were reclassified to earnings during the three and six months
ended June 30, 2003 in connection with forecasted transactions that were no
longer considered probable of occurring.
7) Stock Options
Effective January 1, 2003, the Company adopted SFAS No. 148 "Accounting
for Stock-Based Compensation --Transition and Disclosure", which allowed the
Company to continue following the guidance of Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees", for measurement and
recognition of stock-based transactions with employees. Accordingly, no
compensation cost has been recognized for the Company's stock option plan in the
Consolidated Statements of Operations, as all options granted under the plan had
an exercise price equal to the market value of the Company's stock on the date
of grant. Had the determination of the compensation cost for the plan been based
on the fair value at the grant dates for awards under the plan, the Company's
net income would have decreased to the pro forma amounts indicated below:
(U.S. dollars in thousands, except Three months ended Six months ended
per share data) June 30, 2003 June 30, 2003
2003 2002 2003 2002
---- ---- ---- ----
Net Income
As reported: $3,754 $3,406 $7,496 $8,231
Deduct: Total stock-based employee
compensation expense determined
utilizing the Black-Scholes
option pricing model
for all awards, net of tax (10) (159) (43) (355)
------ ------ ------ ------
Pro-Forma Net Income $3,744 $3,247 $7,453 $7,876
====== ====== ====== ======
Earnings per Share
Basic - as reported $.38 $.32 $.75 $.78
- pro forma $.38 $.31 $.75 $.75
Diluted - as reported $.38 $.32 $.75 $.77
- pro forma $.38 $.31 $.75 $.74
8) Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(U.S. dollars and shares in thousands, Three months ended Six months ended
except per share data) June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income $ 3,754 $ 3,406 $ 7,496 $ 8,231
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share weighted-average shares 9,934 10,568 9,972 10,568
Effect of dilutive stock options 49 72 32 54
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 9,983 10,640 10,004 10,622
======= ======= ======= =======
Basic earnings per share $ .38 $ .32 $ .75 $ .78
======= ======= ======= =======
Diluted earnings per share $ .38 $ .32 $ .75 $ .77
======= ======= ======= =======
8
9) Shareholders Equity
At the Company's 2003 Annual General Meeting of Shareholders held on May
22, 2003, shareholders unanimously approved a plan under which the Company may
purchase up to 993,410 of its ordinary shares under certain terms and
conditions. The approval will expire on November 7, 2004. As of June 30, 2003,
the Company had remaining authorization for future purchases under the plan of
993,410 shares or approximately $19.1 million at market price as of June 30,
2003.
10) Comprehensive Income
The Company's total comprehensive income (loss) was as follows:
Three months ended Six months ended
June 30, June 30,
(U.S. dollars in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Net income $3,754 $ 3,406 $ 7,496 $ 8,231
Foreign currency translation
adjustment 5,236 8,978 6,690 7,652
Derivative instruments,
net of tax (60) 570 (195) 601
------ ------- ------- -------
Comprehensive income $8,930 $12,954 $13,991 $16,484
====== ======= ======= =======
The components of accumulated other comprehensive income (loss), net of related
tax, at December 31, 2002 and June 30, 2003 is as follows:
Accumulated
Foreign Other
Currency Derivative Comprehensive
Translation Instruments Income (Loss)
----------- ----------- -------------
Balance at December 31, 2002 $ (219) $ 195 $ (24)
Current period other
comprehensive income 6,690 (195) 6,495
------ ------ ------
Balance at June 30, 2003 $6,471 $ 0 $6,471
====== ====== ======
11) Segment Information
A summary of the Company's operations by geographic area follows:
Three months ended Six months ended
(U.S. dollars in thousands) June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Sales to unaffiliated companies:
Europe $ 28,297 $ 21,948 $ 55,219 $ 43,322
North America 11,889 11,874 23,882 23,496
Asia-Pacific 6,170 5,798 11,699 10,988
-------- -------- -------- --------
Total consolidated $ 46,356 $ 39,620 $ 90,800 $ 77,806
======== ======== ======== ========
Transfers between geographic areas:
Europe $ 12,225 $ 10,108 $ 24,422 $ 19,243
North America 3,253 3,213 6,493 6,449
Asia-Pacific 73 28 155 139
-------- -------- -------- --------
Total transfers 15,551 13,349 31,070 25,831
Eliminations (15,551) (13,349) (31,070) (25,831)
-------- -------- -------- --------
Total consolidated $ 0 $ 0 $ 0 $ 0
======== ======== ======== ========
9
Operating income (loss):
Europe $ 3,645 $ 2,972 $ 7,578 $ 6,171
North America 541 687 1,745 1,142
Asia-Pacific 445 417 702 713
Corporate 362 36 117 344
-------- -------- -------- --------
Total consolidated $ 4,993 $ 4,112 $ 10,142 $ 8,370
======== ======== ======== ========
Identifiable assets: June 30, 2003 December 31, 2002
------------- -----------------
Europe $133,893 $119,065
North America 34,069 31,694
Asia-Pacific 19,521 18,780
-------- --------
Total consolidated $187,483 $169,539
======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the Company's Condensed
Consolidated Financial Statements and the Notes related thereto appearing in
Item 1. Financial Statements.
Although the Company reports its financial results in U.S. dollars,
approximately 79% of the Company's revenues and expenses are incurred in foreign
currencies. The fluctuation of the functional currencies earned by the Company
against the U.S. dollar has had the effect of increasing or decreasing (as
applicable) U.S. dollar reported net sales, as well as the cost of goods sold,
gross profit and selling, general and administrative expenses denominated in
such foreign currencies when translated into U.S. dollars as compared to prior
periods. The table below summarizes the results of operations for the three and
six months ended June 30, 2003 at the actual currency rates utilized for the
period and as adjusted utilizing the currency rates in effect for the comparable
period of 2002.
(U.S. dollars in thousands) Three months ended June 30, 2003 Six months ended June 30, 2003
------------------------------------ ------------------------------------
Adjusted Adjusted
Utilizing Utilizing
As Reported 2002 Currency Rates As Reported 2002 Currency Rates
----------- ------------------- ----------- -------------------
Net Sales $46,356 $40,574 $90,800 $79,720
Gross Profit 16,463 14,266 32,614 28,376
SG&A Expenses 11,470 10,079 22,472 19,752
Operating Income 4,993 4,187 10,142 8,624
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition,
allowance for doubtful accounts, inventories, warranty obligations and deferred
tax assets. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
10
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as
amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Inventory
The Company establishes reserves against its inventory for estimated
obsolescence or unmarketable inventory based upon the difference between the
cost of inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory reserves may be required.
Goodwill
Effective January 1, 2002 the Company adopted SFAS 141, "Business
Combinations". SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 and prohibits the
use of the pooling-of-interests method. Additionally, SFAS 141 requires that in
a business combination in which the fair value of the net assets acquired
exceeds cost, any residual negative goodwill is recognized as an extraordinary
gain in the period in which the business combination is initially recognized.
The transition provisions of SFAS 141 require that upon adoption of the new
standard, any existing negative goodwill be adjusted as a cumulative effect of a
change in accounting principle in the statement of operations. In the first
quarter of 2002, the Company recorded a cumulative effect of a change in
accounting principle for its remaining unamortized negative goodwill of $1.9
million.
Effective January 1, 2002 the Company adopted SFAS 142, "Goodwill and
other Intangible Assets". Goodwill and intangible assets with indefinite lives
are not amortized; rather, they are tested for impairment at minimum on an
annual basis. Pursuant to SFAS 142, the Company was required to complete a
transitional impairment test of goodwill in the initial year of adopting the
standard, with any impairment charges recorded as a cumulative effect of a
change in accounting principal. Additionally, the Company completed its annual
impairment test in the fourth quarter of 2002. Both tests determined that no
impairment existed.
Warranties
Products sold are generally covered by a warranty for a period of one
year. The Company accrues a warranty reserve for estimated costs to provide
warranty services. The Company's estimate of costs to service its warranty
obligations is based on historical experience and expectation of future
conditions. To the extent the Company experiences increased warranty claim
activity or increased costs associated with servicing those claims, its warranty
accrual will increase resulting in decreased profits.
Deferred Tax Assets
Carrying value of the Company's net deferred tax assets assumes that the
Company will be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, the Company may be required to record
additional valuation allowances against its deferred tax assets resulting in
additional income tax expense in the Company's consolidated statement of
operations. Likewise, should the Company determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would result in a decrease in
the Company's income tax expense in the Company's consolidated statement of
operations. Management evaluates the
11
extent to which it will realize the future benefits of the deferred tax assets
annually and assesses the need for adjustments in its valuation allowances.
IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142 in the first quarter of 2002. Its adoption had a twofold impact on the
Company's results for the three months ended March 31, 2002. SFAS 142 provisions
pertaining to the immediate elimination of negative goodwill resulted in a
cumulative effect of a change in accounting principle and had a one time after
tax benefit to earnings in the first quarter of 2002 of $1.9 million, or $0.18
per diluted share. In addition, SFAS 142 provisions pertaining to the systematic
elimination of amortization of goodwill (approximately $75,000 per quarter) has
a recurring benefit of less than $0.01 per diluted share per quarter.
RESULTS OF OPERATIONS
Second quarter ended June 30, 2003 compared with second quarter ended June 30,
2002
The Company's net sales increased 17.2% to $46.4 million in the three
months ended June 30, 2003 from $39.6 million for the same period in 2002.
During the same period, net sales in Europe increased 29.2% to $28.3 million
from $21.9 million; net sales in North America remained unchanged at $11.9
million; and net sales in Asia-Pacific region increased 6.9% to $6.2 million
from $5.8 million. The increased sales in the second quarter of 2003 compared
with the first quarter of 2002 resulted from stronger demand for the Company's
products, particularly from its European segment, combined with the impact of a
strong Euro throughout the quarter and the resulting impact on the translation
of the Company's European operations.
The Company's gross profit increased to $16.5 million for the quarter
ended June 30, 2003 from $14.0 million in the same period of 2002. Gross profit
as a percentage of net sales of 35.5% in the quarter ended June 30, 2003 was
favorable to the gross profit as a percentage of net sales of 35.3% recorded for
the quarter ended June 30, 2002. The increased percentage of gross profit can be
attributed to the impact of higher production activity at the Company's
manufacturing facilities, to support the increased sales activity, and cost
controls implemented.
Gross profit in Europe increased 25.3% to $10.4 million for the three
months ended June 30, 2003 from $8.3 million in the same period of 2002. Gross
profit in North America of $3.6 million decreased 2.7% or $0.1 million versus
gross profit recorded in the comparable period of 2002. Asia-Pacific gross
profit of $2.0 million increased 5.3% or $0.1 million gross profit recorded in
the same period of 2002.
Selling, general and administrative ("SG&A") expenses increased by 16.2%
to $11.5 million for the quarter ended June 30, 2003 versus SG&A expenses of
$9.9 million for the quarter ended June 30, 2002. These expenses as a percentage
of net sales were 24.7% for 2003 as compared to 25.0% for 2002. The increase in
SG&A expenses as a percent of net sales for the three months ended June 30, 2003
as compared to the three months ended June 30, 2002 can be attributed to the
impact of the conversion, in 2003, of the foreign currency denominated SG&A
expenses utilizing a weaker dollar than in 2002.
Operating income increased 22.0% to $5.0 million for the quarter ended
June 30, 2003 from $4.1 million in the same period of 2002. Operating income as
a percentage of net sales increased to 10.8% in the quarter ended June 30, 2003
from 10.4% in the quarter ended June 30, 2002. The changes in exchange rates had
the effect of increasing operating income for the period by $0.8 million. The
increase in operating income as a percentage of net sales resulted from the
variances noted in gross profit and SG&A expenses.
Other expense was recorded in the quarter ended June 30, 2003 of $183,000
(0.4% of net sales) versus other expense of $53,000 (0.1% of net sales) for the
comparable period of 2002. The other expense recorded for the second quarter of
2003 was the result of the recognition of non-cash currency losses on
inter-company loans versus gains recorded for the comparable period in 2002 as
other income. The change in non-cash currency losses for 2003 versus the gains
in 2002 can be attributed to the weakening dollar and its impact on translation.
Net interest income was $274,000 for the quarter ended June 30, 2003, as
compared to net interest income of $236,000 for the comparable period in 2002.
The increase reflects the Company's higher cash balances available, partially
offset by lower short term interest rates available worldwide.
The effective tax rate for the three months ended June 30, 2003 was 26.2%
compared with 20.7% for the three months ended June 30, 2002. The increased
effective tax rate reflects the recognition, in the second quarter of 2002, of
certain deferred tax assets in the Company's German operations, which had the
effect of lowering the effective
12
tax rate for the three months ended June 30, 2002. There were no similar
recognitions in the three months ended June 30, 2003.
Net income for the three months ended June 30, 2003, was $3.8 million, or
$0.38 per diluted share, compared to $3.4 million, or $0.32 per diluted share
for the comparable period in 2002.
Six months ended June 30, 2003 compared with six months ended June 30, 2002
The Company's net sales increased 16.7% to $90.8 million in the six months
ended June 30, 2003 from $77.8 million for the same period in 2002. During the
same period, net sales in North America increased 1.7% to $23.9 million from
$23.5 million; net sales in Europe increased 27.5% to $55.2 million from $43.3
million; and net sales in the Asia-Pacific region increased 6.4% to $11.7
million from $11.0 million. The increased sales for the six months ended June
30, 2003 as compared to the similar period of 2002 reflects stronger demand for
the Company's products on a worldwide basis, combined with the impact of a
strong Euro throughout the first six months of 2003 and the resulting impact on
the translation of the Company's European operations.
The Company's gross profit increased 18.1% to $32.6 million for the six
months ended June 30, 2003 from $27.6 million in the same period of 2002. Gross
profit as a percentage of net sales increased to 35.9% for year to date 2003
from 35.5% in the comparable period of 2002. The increased gross profit was
primarily attributable to the higher sales volumes recorded, while the increased
gross profits as a percentage of net sales was the result of the impact of cost
reductions made throughout 2003 at the Company's manufacturing facilities.
Gross profit in North America increased 7.0% to $7.6 million for the six
months ended June 30, 2003 from $7.1 million in the same period of 2002. Gross
profit in Europe of $21.0 million increased 26.5% or $4.4 million versus gross
profit recorded in the comparable period of 2002. Asia-Pacific gross profit
increased 2.9% to $3.6 million from $3.5 million.
SG&A expenses increased 17.2% to $22.5 million for the six months ended
June 30, 2003 from $19.2 million for the six months ended June 30, 2002. SG&A
expenses as a percentage of net sales were 24.7% for 2003 as compared to 24.7%
for 2002, and reflect the impact of a weaker dollar on the translated results of
the Company's worldwide operations.
Operating income increased 20.2% to $10.1 million in the six month period
ended June 30, 2003 from $8.4 million in the comparable period of 2002.
Operating income as a percentage of net sales increased to 11.2% in the six
months ended June 30, 2003 from 10.8% in the six months ended June 30, 2002.
Other expense was recorded in the six months ended June 30, 2003 of
$92,000 as compared to other expense of $222,000 for the comparable period of
2002. The increase in other expense was the result of recognition of non-cash
currency losses on inter-company loans for the six months ended June 30, 2003,
at lower levels than the comparable period of 2002.
Net interest income was $375,000 for the six months ended June 30, 2003,
as compared to net interest income of $443,000 for the comparable period in 2002
due to lower worldwide short term interest rates, partially offset by higher
investable cash balances.
The effective tax rate for the six months ended June 30, 2003, on income
before taxes and the cumulative of a change in accounting principal, was 28.1%
compared with 25.8% for the six months ended June 30, 2002. The lower effective
tax rates for the six months ended June 30, 2002 reflects the additional one
time recognition of deferred tax assets for the Company's German operations of
$450,000.
Net income, before cumulative effect of the change in accounting
principle, for the six months ended June 30, 2003, as detailed above, was $7.5
million, or $0.75 per diluted share, compared to $6.4 million, or $0.60 per
diluted share for the comparable period in 2001.
The cumulative effect of a change in accounting principle, net of taxes,
resulted in a benefit of $1.9 million, or $0.18 per diluted share for the six
months ended June 30, 2002. There were no such effects in the six months ended
June 30, 2003.
Net income, after the effects of the change in accounting principle, was
$7.5 million, or $0.75 per diluted share for the six months ended June 30, 2003
versus net income of $8.2 million, or $0.77 per diluted share for the comparable
period of 2002.
13
LIQUIDITY AND CAPITAL RESOURCES
(U.S. dollars in thousands) Six months ended June 30,
2003 2002
---- ----
Cash and cash equivalents $48,749 $40,462
Net cash provided by operating activities 8,327 4,374
Net cash used in investing activities (2,473) (6,913)
Net cash provided by (used in) financing activities (1,381) (4,884)
Effect of exchange rate changes on cash 4,524 4,640
Historically the Company has funded its cash requirements through cash
flow from operations, although short-term fluctuations in working capital
requirements for some of the Company's subsidiaries have been met through
borrowings under revolving lines of credit obtained locally. The Company's
primary uses of cash have been to fund capital expenditures, acquisitions and to
re-purchase shares of the Company.
Net cash provided by operating activities for the six months ended June
30, 2003 increased to $8.3 million from $4.4 million for the same period in
2002. The $3.9 million increase in net cash provided by operating activities for
the six months ended June 30, 2003 compared to the comparable period in 2002 was
attributable to a $1.1 million increase in net income, before the cumulative
effect in change in accounting principle, lower utilization of cash for accounts
receivable and inventories and higher sources of cash from accounts payable. The
Company anticipates that operating cash and capital expenditure requirements
will continue to be funded by cash flow from operations, cash on hand and bank
borrowings.
Net cash used in investing activities was $2.5 million for the six months
ended June 30, 2003, compared to $6.9 million for the same period in 2002. The
decrease in cash used for investing activities in the six month period ended
June 30, 2003 consisted of capital expenditures to invest in manufacturing
equipment for the Company's six production facilities of $2.3 million for the
six months ended June 30, 2003 versus $4.1 for the similar period in 2002,
combined with cash utilized in 2002 for the acquisition off Rander & co. of $2.7
million.
Net cash used in financing activities was $1.4 million for the six months
ended June 30, 2003 as compared to cash used of $4.9 million for the same period
in 2002. The decrease of $3.5 million in cash used in financing activities for
the six months ended June 30, 2003 as compared to the same period in 2002 was
attributable to funds utilized in 2002 to repay lines of credit totaling $4.9
million, partially offset by $1.3 million in funds utilized in 2003 to
repurchase 86,300 shares of the Company's common stock.
The effect of exchange rate changes on cash and cash equivalents was $4.5
million and $4.6 million, respectively, of cash provided for 2003 and 2002. As
approximately 79% of the Company's business is transacted in currencies other
than the U.S. dollar, foreign currency fluctuations potentially can have a
significant impact on dollar reported balances for the Company.
CONTRACTUAL OBLIGATIONS
As of June 30, 2003, the Company had the following contractual obligations
(U.S. dollars in thousands):
Payments Due By Period
------------------------------------------------------------
Less After
Total Than 1 Year 1-3 Years 4-5 Years 5 Years
----- ----------- --------- --------- -------
Notes payable to bank $ 795 $ 795 -- -- --
Short-term borrowings 100 100 -- -- --
Purchase commitments
1,600 1,600 -- -- --
Non-cancelable
operating leases 4,100 2,074 1,805 221 --
------ ------ ------ ------ ----
Total contractual cash
obligations $6,595 $4,569 $1,805 $ 221 $ --
====== ====== ====== ====== ====
14
IMPACT OF INFLATION
The impact of inflation on the operating results of the Company has been
moderate in recent years reflecting generally lower rates of inflation in the
economy and relative stability in the Company's cost structure. Although
inflation has not had, and the Company does not expect that it will have, a
material impact on operating results, there is no assurance that the Company's
business will not be affected by inflation in the future.
EXPOSURE TO CURRENCY FLUCTUATIONS
A significant portion of the Company's business is conducted in currencies
other than the dollar, including pounds sterling, euros and Japanese yen. The
Company's financial statements are prepared in dollars, and therefore
fluctuations in exchange rates in the pound sterling and other currencies in
which the Company does business relative to the dollar may cause fluctuations in
reported financial information, which are not necessarily related to the
Company's operations. For the six months ended June 30, 2003 as compared to the
six months ended June 30, 2002, for example, the Company experienced a 4.6%
increase in net sales in its European segment (denominated in local currencies);
however, the dollar-translated net sales figures showed a net increase of 27.5%
due to the fluctuation of the dollar against the local currencies. Due to the
volatility of currency exchange rates, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. Although the Company
is not currently engaging in transactions to hedge a portion of the risks
associated with fluctuations in currency exchange rates, it may do so in the
future. There can be no assurance that the Company's business, financial
condition and results of operations will not be materially adversely affected by
exchange rate fluctuations or that any hedging techniques implemented by the
Company will be effective.
MARKET RISK
Information regarding market risk of the Company as of December 31, 2002
is presented under the caption "Quantitative and Qualitative Disclosures About
Market Risk" which is included in Item 7A of the Company's annual report on Form
10-K for the year ended December 31, 2002. There has been no material changes in
the Company's exposure to market risk during the six month period ended June 30,
2003.
ORDER RECEIPTS AND BACKLOG
Worldwide customer order receipts were $95.2 million for the six months
ended June 30, 2003, a 21.1% increase over the same period in 2002. On a volume
basis, utilizing constant currency exchange rates, order receipts for the six
months ended June 30, 2003 were $83.4 million and represent a 6.1% increase over
the six months ended June 30, 2002.
The worldwide backlog of unshipped orders at June 30, 2003 totaled $33.1
million, a $3.8 million or 13.0% increase versus the backlog at June 30, 2002,
and represents a 25.9% increase versus the order backlog at December 31, 2002.
ACCESS TO INFORMATION
The Company makes available, free of charge, its annual reports on Form
10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K and all
other filings with the Securities and Exchange Commission ("SEC"), as
applicable, through its internet website. Such SEC filings are made available as
soon as reasonably practicable after they have been electronically filed with or
furnished to the SEC. To access these reports, interested parties should log on
to the Company's website at www.denisonhydraulics.com, and then click on the
Investor Relations tab.
FORWARD-LOOKING INFORMATION
This Form 10-Q includes and incorporates forward-looking statements within
the meaning of section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated in this Form 10-Q regarding the
Company's strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "suggests," "plans," "projects," "will," "would,"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. The
Company cannot guarantee that it will actually achieve the plans, intentions or
expectations disclosed in its forward-looking statements and undue reliance
should not be placed on the Company's forward-looking statements. Actual results
or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements. The
15
Company has included important factors in the cautionary statements included or
incorporated in this Form 10-Q that the Company believes could cause actual
results or events to differ materially from the forward-looking statements made.
These important factors include, but are not limited to, demand for the
Company's products, competition by rival developers of hydraulic components and
systems, changes in technology, customer preferences, growth in the hydraulics
industries, fluctuations in the functional currencies of the Company and general
economic and business conditions. In addition the Company's forward-looking
statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments the Company may make. These
important factors and other factors, which could affect the Company's results,
are detailed in the Company's filings with the Securities and Exchange
Commission and are included herein by reference. The Company assumes no
obligation to update the information in this filing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding market risk of the registrant is presented under the
caption "Market Risk" which is included in Item 2 of this report and is
incorporated herein by reference.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's management, including the chief executive
officer and chief financial officer, conducted an evaluation as of the end of
the period covered by this report, of the effectiveness of the company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the chief executive officer and chief financial
officer have concluded that, as of the end of the period covered by this report,
the Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed in the Company's periodic reports filed
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
regulations. As required by Rule 13a-15(d), the Company's management, including
the chief executive officer and chief financial officer, also conducted an
evaluation of the Company's internal control over financial reporting to
determine whether any changes occurred during the quarter covered by this report
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting. Based on that
evaluation, the chief executive officer and chief financial officer have
concluded that there has been no such change during the quarter covered by this
report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain legal proceedings incidental to the
normal conduct to its business. The Company does not believe that any
liabilities relating to any of the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a).
32.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
Form 8-K filed on April 17, 2003 relating to the Company's press
release reporting financial results for the three months ended March
31, 2003.
Form 8-K filed on May 23, 2003 relating to the Company's Annual
General Meeting.
17
SIGNATURE
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.
DENISON INTERNATIONAL plc
(Registrant)
Date August 14, 2003 By /s/ Bruce A. Smith
--------------- ---------------------------------------
Bruce A. Smith
Director and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
18
Index To Exhibits
Exhibit No. Description
----------- -----------
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a).
32.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
19