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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, 2002
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 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, 10,567,700 shares as of August 14, 2002
"A" Ordinary Shares, (pound)8.00 par value, 7,015 shares as of August 14, 2002
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 9
Critical Accounting Policies and Estimates 10
Impact of Recently Adopted Accounting Pronouncements 11
Results of Operations 11
Liquidity and Capital Resources 13
Contractual Obligations 14
Impact of Inflation 14
Exposure to Currency Fluctuations 14
Market Risk 14
Order Receipts and Backlog 14
Forward-looking Information 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 17
Exhibit Index 18
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in thousands, except share data)
June 30, December 31,
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 40,462 $ 43,245
Accounts receivable, less allowances of
$2,206 and $2,185 at June 30, 2002
and December 31, 2001 respectively 36,456 27,715
Inventories 42,814 39,257
Other current assets 4,810 4,680
--------- ---------
Total current assets 124,542 114,897
Property, plant and equipment, net 30,206 27,912
Other assets 5,191 5,022
Goodwill, net of accumulated amortization of
$920 12,212 8,984
--------- ---------
Total assets $ 172,151 $ 156,815
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 5,960 $ 10,545
Accounts payable 12,281 11,921
Other accrued liabilities 23,456 19,808
--------- ---------
Total current liabilities 41,697 42,274
Noncurrent liabilities:
Pension accrual 12,000 11,345
Other noncurrent liabilities 5,779 5,113
Negative goodwill, net of accumulated
amortization of $8,715 at
December 31, 2001 -- 1,858
--------- ---------
17,779 18,316
Shareholders' equity:
`A' ordinary shares (pound)8.00 par value;
7,125 shares authorized, and 7,015
issued and outstanding at June 30, 2002
and December 31, 2001 86 86
Ordinary shares $0.01 par value;
15,000,000 shares authorized, and 10,567,700
and 10,563,950 issued and outstanding at
June 30, 2002 and December 31, 2001 respectively 107 107
Additional paid-in capital 5,116 5,150
Capital redemption reserve 1,090 1,090
Retained earnings 111,338 103,107
Accumulated other comprehensive (loss) (5,062) (13,315)
--------- ---------
Total shareholders' equity 112,675 96,225
--------- ---------
Total liabilities and shareholders' equity $ 172,151 $ 156,815
========= =========
The accompanying notes are an integral part of these statements.
2
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(U.S. dollars in thousands, except share data)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 39,620 $ 41,071 $ 77,806 $ 83,788
Cost of sales 25,618 26,186 50,208 54,195
-------- -------- -------- --------
Gross profit 14,002 14,885 27,598 29,593
Selling, general and
administrative expenses 9,890 9,344 19,228 18,263
-------- -------- -------- --------
Operating income 4,112 5,541 8,370 11,330
Other income/(expense) (53) (9) (222) (36)
Interest income, net 236 337 443 474
-------- -------- -------- --------
Income before taxes 4,295 5,869 8,591 11,768
Provision for income taxes 889 1,560 2,218 3,444
-------- -------- -------- --------
Net income, before cumulative
effect of a change in
accounting principle 3,406 4,309 6,373 8,324
Cumulative effect of a change
in accounting principle, net
of taxes -- -- 1,858 --
-------- -------- -------- --------
Net income $ 3,406 $ 4,309 $ 8,231 $ 8,324
======== ======== ======== ========
Basic earnings per share,
before cumulative effect of a
change in accounting principle $ .32 $ .41 $ .60 $ .79
Cumulative effect of a change
in accounting principle -- -- .18 --
-------- -------- -------- --------
Basic earnings per share $ .32 $ .41 $ .78 $ .79
======== ======== ======== ========
Diluted earnings per share $ .32 $ .41 $ .77 $ .79
======== ======== ======== ========
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,
2002 2001
---- ----
Net cash provided by
operating activities $ 4,374 $ 9,169
-------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property, plant
and equipment (4,099) (4,233)
Proceeds from disposal of
property, plant and
equipment (65) (37)
Purchase of subsidiary, net of cash acquired (2,749) (1,109)
-------- --------
Net cash used in investing activities (6,913) (5,379)
-------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings / (repayments)
on lines of credit (4,918) 832
Exercise of stock options 34 --
-------- --------
Net cash provided by (used in) financing activities (4,884) 832
-------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 4,640 (3,743)
-------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (2,783) 879
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 43,245 32,097
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 40,462 $ 32,976
======== ========
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, 2002 and for the three and six month
periods ended June 30, 2002 and June 30, 2001 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, 2001 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.
Effective Income Tax Rate
The effective tax rate for the three and six months ended June 30, 2002, on
income before taxes and the cumulative effect of a change in accounting
principle reflects the Company's additional recognition of $450,000 in deferred
tax assets from its Germany subsidiary.
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 No. 141 ("SFAS 141"), Business
Combinations, and Statement of Financial Accounting Standards No. 142 ("SFAS
142"), Goodwill and Other Intangible Assets. 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. SFAS 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 are required to evaluate 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 has performed the required transitional impairment tests of goodwill as
of January 1, 2002. The Company has determined, after performing the
transitional impairment tests, that the fair value of each reporting unit
exceeds its carrying value, and therefore there is no impact on the earnings and
financial position of the Company arising from any impairment of goodwill upon
the adoption of SFAS 142 on January 1, 2002.
Additionally, SFAS 141 requires that in a business combination in which the
fair value of the net assets acquired exceeds cost, any resulting negative
goodwill is recognized as an extraordinary gain in the period in which the
business combination is initially recognized. The transition provision of SFAS
141 requires that upon adoption of the new accounting rules, 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
adjustment for its remaining unamortized negative goodwill totaling $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
(U.S. dollars and shares in thousands Three months ended Six months ended
except per share data) June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
Net income, before cumulative effect of a change in
accounting principle as reported $ 3,406 $ 4,309 $ 8,231 $ 8,324
Add back: goodwill amortization -- 75 -- 150
Less: Negative goodwill amortization -- (300) -- (600)
--------- --------- --------- ---------
Adjusted net income, before cumulative effect of a
change in accounting principle as adjusted $ 3,406 $ 4,084 $ 8,231 $ 7,874
Basic earnings per share:
Net income, before cumulative effect of a change in
accounting principle as reported $ .32 $ .41 $ .60 $ .79
Add back: goodwill amortization -- .00 -- .01
Less: Negative goodwill amortization -- (.03) -- (.06)
--------- --------- --------- ---------
Adjusted net income, before cumulative effect of a
change in accounting principle as adjusted $ .32 $ .38 $ .60 $ .74
Diluted earnings per share:
Net income, before cumulative effect of a change in
accounting principle as reported $ .32 $ .41 $ .59 $ .79
Add back: goodwill amortization -- .00 -- .01
Less: Negative goodwill amortization -- (.03) -- (.06)
--------- --------- --------- ---------
Adjusted net income, before cumulative effect of a
change in accounting principle as adjusted $ .32 $ .38 $ .59 $ .74
- ------------------------------------------------------------------------------------------------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. SFAS No. 143 is effective January 1, 2003. The Company has determined
that the adoption of SFAS 143 had no impact on its financial position or its
results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations -- Reporting the Transactions for the Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. SFAS No. 144 also sets forth requirements for recognizing and
measuring impairment losses on certain long-lived assets to be held or used.
SFAS No. 144 was effective January 1, 2002. The adoption of SFAS No. 144 had no
impact on the Company's financial statements.
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 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 Stuhr, 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 initial purchase price resulted in $2.2 million of
goodwill. The purchase price allocation is preliminary subject to the Company's
evaluation as to the existence of identifiable intangible assets.
The following unaudited pro forma summary presents the Company's combined
results as if the acquisition 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 actually occurred at
January 1, 2002:
6
Six months ended
(U.S. dollars in thousands)
---------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Revenue $ 79,325 $ 85,808
Net Income $ 8,358 $ 8,497
Basic Earnings per share $ .79 $ .80
Diluted earnings per share $ .79 $ .80
In December 2001 the Company acquired certain assets (accounts receivable,
inventories and fixed assets) of a California distributor of the Company's U.S.
subsidiary for $963,000. The Company began operations utilizing the assets
establishing West Coast Fluid Power, a division of the Company's U.S.
subsidiary, on January 1, 2002 as a distributor serving the general hydraulics
market in California.
4. Inventory
(U.S. dollars in thousands)
June 30, December 31,
Inventories consisted of the following: 2002 2001
------- -------
Finished goods $23,646 $21,111
Work-in-progress 4,079 3,510
Raw materials and supplies 15,089 14,636
------- -------
$42,814 $39,257
======= =======
5. Property, Plant and Equipment
Property, plant and equipment, net, consisted of the following:
(U.S. dollars in thousands)
June 30, December 31,
2001 2002
---- ----
Cost:
Land and buildings $ 6,324 $ 5,384
Machinery and equipment 49,627 43,960
Motor vehicles 923 827
------- -------
56,874 50,171
Less accumulated depreciation (26,668) (22,259)
------- -------
Property, plant and equipment, net $30,206 $27,912
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.
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.
The $539,000 gain recorded in equity at June 30, 2002 is expected to be
reclassified to earnings over the twelve-month period ending June 30, 2003. The
actual amounts that will be reclassified to earnings over the next twelve months
will vary from this amount as a result of changes in market conditions. No
amounts were reclassified to earnings during the three and six months ended June
30, 2002 in connection with forecasted transactions that were no longer
considered probable of occurring.
7. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
7
(U.S. dollars and shares in thousands Three months ended Six months ended
except per share data) June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $ 3,406 $ 4,309 $ 8,231 $ 8,324
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share weighted-average shares 10,568 10,564 10,568 10,564
Effect of dilutive stock options 72 18 54 15
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted-average shares 10,640 10,582 10,622 10,579
======= ======= ======= =======
Basic earnings per share $ .32 $ .41 $ .78 $ .79
======= ======= ======= =======
Diluted earnings per share $ .32 $ .41 $ .77 $ .79
======= ======= ======= =======
8. Shareholders Equity
At the Company's 2002 Annual General Meeting of Shareholders held on May
28, 2002, shareholders unanimously approved a plan under which the Company may
purchase up to 1,056,770 of its ordinary shares under certain terms and
conditions. The approval will expire on November 7, 2003. As of June 30, 2002,
the Company had made no purchases under the plan.
9. Comprehensive Income
The Company's total comprehensive income (loss) was as follows (U.S. dollars in
thousands):
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 3,406 $ 4,309 $ 8,231 $ 8,324
Foreign currency translation
adjustment 8,978 (1,210) 7,652 (5,344)
Derivative instruments, net of tax 570 (406) 601 (545)
------- ------- ------- -------
Comprehensive income $12,954 $ 2,693 $16,484 $ 2,435
======= ======= ======= =======
The components of accumulated other comprehensive income (loss), net of related
tax, at December 31, 2001 and June 30, 2002 is as follows:
Foreign Accumulated Other
Currency Derivative Comprehensive
Translation Instruments Income (loss)
----------- ----------- ------------------
Balance at December 31, 2001 $(13,253) $ (62) $(13,315)
Current period other
Comprehensive Income 7,652 601 8,253
Balance at June 30, 2002 $ (5,601) $ 539 $ (5,062)
10. Segment Information
8
A summary of the Company's operations by geographic area follows:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales to unaffiliated companies:
Europe $ 21,948 $ 21,633 $ 43,322 $ 45,555
North America 11,874 13,628 23,496 27,821
Asia-Pacific 5,798 5,810 10,988 10,412
-------- -------- -------- --------
Total consolidated $ 39,620 $ 41,071 $ 77,806 $ 83,788
======== ======== ======== ========
Transfers between geographic areas:
Europe $ 10,108 $ 10,926 $ 19,243 $ 23,015
North America 3,213 2,931 6,449 6,838
Asia-Pacific 28 6 139 6
-------- -------- -------- --------
Total transfers 13,349 13,863 25,831 29,859
Eliminations (13,349) (13,863) (25,831) (29,859)
-------- -------- -------- --------
Total consolidated $ 0 $ 0 $ 0 $ 0
======== ======== ======== ========
Operating Income (Loss):
Europe $ 2,972 $ 3,731 $ 6,171 $ 8,748
North America 687 630 1,142 1,870
Asia-Pacific 417 615 713 848
Corporate 36 565 344 (136)
-------- -------- -------- --------
Total consolidated $ 4,112 $ 5,541 $ 8,370 $ 11,330
======== ======== ======== ========
Identifiable assets: June 30, 2002 December 31, 2001
------------- -----------------
Europe $117,938 $107,952
North America 36,034 31,400
Asia-Pacific 18,179 17,463
-------- --------
Total consolidated $172,151 $156,815
======== ========
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 74% 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, 2002 at the actual currency rates utilized for the
period and as adjusted utilizing the currency rates in effect for the comparable
period of 2001.
9
(U.S. dollars in Thousands)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------------ ----------------
Adjusted Adjusted
Utilizing 2001 Utilizing 2001
As Reported Currency Rates As Reported Currency Rates
----------- -------------- ----------- --------------
Net Sales $39,620 $38,611 $77,806 $78,332
Gross Profit 14,002 13,608 27,598 27,776
SG&A Expenses 9,890 9,645 19,228 19,345
Operating Income 4,112 3,963 8,370 8,431
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses 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.
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.
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
10
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 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. For the six months ended June 30, 2002
the Company has recorded additional deferred tax assets associated with its
German operations based on an analysis of the additional future amounts to be
realized. The additional amount realized had the impact of reducing income tax
expense, on a one time basis, for the six months ended June 30, 2002, by
$450,000.
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 six months ended June 30, 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. There were no such impacts from a change in accounting
principle for the six months ended June 30, 2001. 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. The Company has completed its transitional
impairment tests of goodwill. The transitional impairment tests resulted in no
impact on the Company's earnings and financial position.
RESULTS OF OPERATIONS
Second Quarter June 30, 2002 Compared with Second Quarter ended June 30, 2001
The Company's net sales decreased 3.6% to $39.6 million in the three months
ended June 30, 2002 from $41.1 million for the same period in 2001. During the
same period, net sales in Europe increased .9% to $21.9 million from $21.7
million; net sales in North America decreased 12.5% to $11.9 million from $13.6
million; and net sales in Asia-Pacific region remained unchanged at $5.8
million. The primary reason for the decreased volume in the second quarter of
2002 compared with the second quarter of 2001 was the continued weakness in the
economic conditions in the Company's North American segment operations.
The Company's gross profit decreased to $14.0 million for the quarter ended
June 30, 2002 from $14.9 million in the same period of 2001. Gross profit as a
percentage of net sales of 35.3% in the quarter ended June 30, 2002 was
unfavorable to the gross profit as a percentage of net sales of 36.2% recorded
for the quarter ended June 30, 2001. The decreased dollar value and percentage
of gross profit can be attributed to the decrease in net sales volume recorded,
combined with the impact of lower production activity at the Company's
manufacturing facilities as production levels are matched to customer volume
levels.
Gross profit in Europe decreased 4.8% to $8.3 million for the three months
ended June 30, 2002 from $8.8 million in the same period of 2001. Gross profit
in North America of $3.7 million decreased 5.1% or $0.2 million versus gross
profit recorded in the comparable period of 2001. Asia-Pacific gross profit of
$1.9 million was unchanged compared to the gross profit recorded for the same
period of 2001.
Selling, general and administrative ("SG&A") expenses increased by 5.8% to
$9.9 million for the quarter ended June 30, 2002 versus SG&A expenses of $9.3
million for the quarter ended June 30, 2001. These expenses as a percentage of
net sales were 25.0% for 2002 as compared to 22.8% for 2001. The increase in
these expenses as a percentage of net sales for the quarter ended June 30, 2002
as compared to the quarter ended June 30, 2001 is due primarily to the absence
of amortization of negative goodwill of $300,000 in the 2002 period.
Operating income decreased 25.8% to $4.1 million in the three month period
ended June 30, 2002 from $5.5 million in the comparable period of 2001.
Operating income as a percentage of net sales decreased to 10.4% in the
11
quarter ended June 30, 2002 from 13.5% in the quarter ended June 30, 2001. The
changes in exchange rates had the effect of increasing operating income for the
period by $0.1 million. The reduction in operating income and 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, 2002 of $53,000
(0.1% of net sales) versus other expense of $9,000 for the comparable period of
2001. The increase in other expense was the result of an increase in the
recognition of non-cash currency losses on inter-company loans for the quarter
ended June 30, 2002, versus the comparable period in 2001.
Net interest income was $236,000 for the quarter ended June 30, 2002, as
compared to net interest income of $337,000 for the comparable period in 2001.
The decrease reflects lower short term interest rates worldwide.
The effective tax rate for the three months ended June 30, 2002 was 20.7%
compared with 26.6% for the three months ended June 30, 2001, resulting from the
one time recognition of $450,000 in additional deferred tax assets for the
Company's German operations, combined with the mix of profits generated in the
Company's overseas operations, with varying effective tax rates.
Net income, before and after the cumulative effect of the change in
accounting principle, for the three months ended June 30, 2002, as detailed
above, was $3.4 million, or $0.32 per diluted share, compared to $4.3 million,
or $0.41 per diluted share for the comparable period in 2001.
Six months ended June 30, 2002 Compared with Six months ended June 30, 2001
The Company's net sales decreased 7.1% to $77.8 million in the six months
ended June 30, 2002 from $83.8 million for the same period in 2001. During the
same period, net sales in North America decreased 15.5% to $23.5 million from
$27.8 million; net sales in Europe decreased 5.5% to $43.3 million from $45.6
million; and net sales in the Asia-Pacific region increased 5.5% to $11.0
million from $10.4 million. The primary reason for the decreased volume recorded
year to date 2002 compared with the same period in 2001 were the slow economic
conditions in the Company's North American and European markets, and the
de-stocking of inventory by the Company's United States distributors. Partially
offsetting these negative factors were the continuing recovery of the economies
in the Asia-Pacific region, combined with the Company's increased efforts to
further penetrate those markets.
The Company's gross profit decreased 6.7% to $27.6 million for the six
months ended June 30, 2002 from $29.6 million in the same period of 2001. Gross
profit as a percentage of net sales increased to 35.4% for year to date 2002
from 35.3% in the comparable period of 2001. The decreased gross profit was
primarily attributable to the lower sales volumes recorded, while the favorable
showing of gross profits as a percentage of net sales was the result of the
impacts of cost reductions made throughout 2002 at the Company's manufacturing
facilities.
Gross profit in North America decreased 3.9% to $7.1 million for the six
months ended June 30, 2002 from $7.4 million in the same period of 2001. Gross
profit in Europe of $16.6 million decreased 13.3% or $2.5 million versus gross
profit recorded in the comparable period of 2001. Asia-Pacific gross profit
increased 2.4% to $3.5 million from $3.4 million.
SG&A expenses increased 5.2% to $19.2 million for the six months ended June
30, 2002 from $18.3 million for the six months ended June 30, 2001. SG&A
expenses as a percentage of net sales were 24.7% for 2002 as compared to 21.8%
for 2001. The increase in these expenses for the six months ended June 30, 2002
as compared to the six months ended June 30, 2001 is due primarily the absence
of amortization of negative goodwill of $600,000 in the 2002 period.
Operating income decreased 26.1% to $8.4 million in the six month period
ended June 30, 2002 from $11.3 million in the comparable period of 2001.
Operating income as a percentage of net sales decreased to 10.8% in the six
months ended June 30, 2002 from 13.5% in the six months ended June 30, 2001.
Other expense was recorded in the six months ended June 30, 2002 of
$222,000 as compared to other expense of $36,000 for the comparable period of
2001. 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, 2002,
at higher levels than the comparable period of 2001.
Net interest income was $443,000 for the six months ended June 30, 2002, as
compared to net interest income of $474,000 for the comparable period in 2001
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, 2002, on income
before taxes and the cumulative of a change in accounting principal, was 25.8%
compared with 29.3% for the six months ended June 30, 2001. The lower
12
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, 2002, as detailed above, was $6.4 million, or
$0.60 per diluted share, compared to $8.3 million, or $0.79 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, 2001.
Net income, after the effects of the change in accounting principle, was
$8.2 million, or $0.77 per diluted share for the six months ended June 30, 2002
versus net income of $8.3 million, or $0.79 per diluted share for the comparable
period of 2001.
LIQUIDITY AND CAPITAL RESOURCES
(U.S. dollars in thousands)
Six months ended June 30,
2002 2001
---- ----
Cash & Cash Equivalents $ 40,462 $ 32,976
Net cash provided by operating activities 4,374 9,169
Net cash used in investing activities (6,913) (5,379)
Net cash provided by financing activities (4,884) 832
Effect of exchange rate changes on cash 4,640 (3,743)
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
service and repay debt.
Net cash provided by operating activities for the six months ended June 30,
2002 decreased to $4.4 million from $9.2 million for the same period in 2001.
The $4.8 million decrease in net cash provided by operating activities for the
six months ended June 30, 2002 compared to the comparable period in 2001 was
attributable to a $2.0 million decrease in net income, before a cumulative
change in accounting principle, combined with a $1.6 million increase in cash
utilized for tax payments worldwide, and a $1.2 million increase in utilization
of cash for primary working capital. 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 $6.9 million for the six months
ended June 30, 2002, compared to $5.4 million for the same period in 2001.
Investing activities in the six month period ended June 30, 2002 consisted of
investment in manufacturing equipment for the Company's six production
facilities of $4.2 million and $2.7 million for the acquisition of Rander & Co.,
net of cash acquired and debt assumed.
Net cash used in financing activities was $4.9 million for the six months
ended June 30, 2002 as compared to cash provided of $.8 million for the same
period in 2001. The decrease of $5.7 million in cash provided by financing
activities for the six months ended June 30, 2002 as compared to the same period
in 2001 was primarily attributable to repayments made on certain of the
Company's credit facilities.
The effect of exchange rate changes on cash and cash equivalents was $4.6
million of cash provided and $3.7 million of cash utilized for the six months
ended June 30, 2002 and 2001, respectively. As approximately 77% 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. The $8.4 million increase in the
exchange rate impact on cash and cash equivalents is attributable to a
strengthening, during the first six months of 2002, of most of the functional
currencies earned by the Company in its European and Asia-Pacific operations
against the U.S. dollar, as compared to the impact of weakening of most of the
functional currencies earned by the Company in its European operations during
the first six months of 2001.
13
CONTRACTUAL OBLIGATIONS
As of June 30, 2002, the Company had the following contractual obligations (U.S.
dollars in thousands):
Payments Due By Period
Less
Than After
Total 1 Year 1-3 years 4-5 years 5 years
Notes payable to bank $ 5,160 $ 5,160 -- -- --
Short-term borrowings 800 800 -- -- --
Purchase commitments 1,200 1,200 -- -- --
Non-cancelable
Operating leases 3,006 1,499 1,405 102 --
------- ------- ------- ------- -----
Total contractual cash $10,166 $ 8,659 $ 1,405 $ 102 $ --
Obligations
======= ======= ======= ======= =====
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, equivalent European euro
currencies 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, 2002 as
compared to the six months ended June 30, 2001, for example, the Company
experienced an 8.9% increase in net sales in the Asia-Pacific region
(denominated in local currencies); however, the dollar-translated net sales
figures showed a net increase of 5.5% due to the fluctuation of the dollar
against the local currencies. Another example can be shown in increase in the
Company's primary working capital, which increased from $72.6 million at
December 31, 2001 to $82.8 million at June 30, 2002; an increase of $10.2
million. Of the $10.2 million increase in primary working capital nearly 80% or
$8.0 million can be attributed to the weakening US dollar against primarily the
Euro. 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 currently engages in transactions to hedge a portion of the
risks associated with fluctuations in currency exchange rates, it may not 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, 2001 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, 2001. There have been no material changes
in the Company's exposure to market risk during the six month period ended June
30, 2002.
ORDER RECEIPTS AND BACKLOG
Worldwide customer order receipts were $40.2 million for the quarter ended
June 30, 2002, a 7.5% increase over the same period in 2001. On a volume basis,
utilizing constant currency exchange rates, order receipts for the quarter ended
June 30, 2002 were $39.1 million and represent a 4.5% increase over the quarter
ended June 30, 2001.
The worldwide backlog of unshipped orders at June 30, 2002 totaled $29.3
million, a $.2 million or .6% increase versus the backlog at June 30, 2001, and
represents a 21.1% increase versus the order backlog at December 31, 2001.
14
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 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.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement, dated May 31, 2002, by and among Denison Hydraulicks GmbH
and the shareholders of Rander & Co. Hydraulick-Systeme und Anlagenbau
GmbH ("Rander"), for the acquisition of 100% of the outstanding shares
of Rander. (Informal English Translation)
99.1 Certification of Chief Executive Officer, David L. Weir, Pursuant to
18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
15
99.2 Certification of Chief Financial Officer, Bruce A. Smith, Pursuant to
18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certificate of English Translation.
(b) Reports on Form 8-K:
None.
16
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, 2002 /s/ Bruce A. Smith
--------------- ---------------------------------
Bruce A. Smith
Director and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
17
Index To Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Agreement, dated May 31, 2002, by and among Denison Hydraulicks
GmbH and the shareholders of Rander & Co. Hydraulick-Systeme und
Anlagenbau GmbH ("Rander"), for the acquisition of 100% of the
outstanding shares of Rander. (Informal English Translation)
99.1 Certification of Chief Executive Officer, David L. Weir, Pursuant
to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Bruce A. Smith, Pursuant
to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.3 Certificate of English Translation.
18