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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 March 31, 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 May 15, 2003
"A" Ordinary Shares, (pound)8.00 par value, 7,015 shares as of May 15, 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 11
Impact of Recently Adopted Accounting Pronouncements 12
Results of Operations 12
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
Access to Information 15
Forward-looking Information 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Item 4 Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 15
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 16
Signatures 17
Certifications 18
Exhibit Index 19
Part I. Financial Information
Item 1. Financial Statements
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in thousands, except share data)
March 31, 2003 December 31, 2002
-------------- -----------------
Current assets:
Cash and cash equivalents $ 40,424 $ 39,752
Accounts receivable, less allowances of
$2,389 and $2,242 at March 31, 2003 and
December 31, 2002 respectively 37,826 32,554
Inventories 45,408 45,324
Other current assets 5,120 5,590
-------- --------
Total current assets 128,778 123,220
Property, plant and equipment, net 30,847 31,132
Other assets 2,261 2,263
Goodwill 13,425 12,924
-------- --------
Total assets $175,311 $169,539
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 1,159 $ 898
Accounts payable 12,889 14,553
Other accrued liabilities 22,009 19,372
-------- --------
Total current liabilities 36,057 34,823
Noncurrent liabilities:
Pension accrual 13,902 13,201
Other noncurrent liabilities 5,269 5,159
-------- --------
19,171 18,360
Shareholders' equity:
`A' ordinary shares(pound)8.00 par value; 7,125
shares authorized, and 7,015 issued and
outstanding at March 31, 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 March 31, 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 112,309 109,900
Accumulated other comprehensive (loss) 1,295 (24)
-------- --------
Total shareholders' equity 120,083 116,356
-------- --------
Total liabilities and shareholders' equity $175,311 $169,539
======== ========
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
March 31,
2003 2002
---- ----
Net Sales $44,444 $38,186
Cost of sales 28,293 24,590
------- -------
Gross profit 16,151 13,596
Selling, general and administrative expenses 11,002 9,338
------- -------
Operating income 5,149 4,258
Other income/(expense) 91 (169)
Interest income, net 101 207
------- -------
Income before taxes 5,341 4,296
Provision for income taxes 1,599 1,329
------- -------
Net income, before cumulative effect of a
change in accounting principle 3,742 2,967
Cumulative effect of a change in accounting
principle -- 1,858
------- -------
Net income $ 3,742 $ 4,825
======= =======
Basic earnings per share, before cumulative
effect of a change in accounting principle $ .37 $ .28
Cumulative effect of a change in
accounting principle -- .18
------- -------
Basic earnings per share $ .37 $ .46
======= =======
Diluted earnings per share $ .37 $ .46
======= =======
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)
Three months ended March 31,
2003 2002
---- ----
Net cash provided by operating activities $ 175 $ 657
------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (498) (1,320)
Proceeds from disposal of property, plant
and equipment 23 (13)
------- --------
Net cash used in investing activities (475) (1,333)
------- --------
Cash flows from financing activities:
Net borrowings on lines of credit 240 570
Buyback of stock (1,334) --
Exercise of stock options -- 34
------- --------
Net cash provided by (used in) financing
activities (1,094) 604
------- --------
Effect of exchange rate changes on
cash 2,066 (606)
------- --------
Net increase (decrease) in cash and cash
equivalents 672 (678)
Cash and cash equivalents at beginning of period 39,752 43,245
------- --------
Cash and cash equivalents at end of period $40,424 $ 42,567
======= ========
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 March 31, 2003 and for the three month period
ended March 31, 2003 and March 31, 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 will cease 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
March 31,
(U.S. dollars in thousands, except per share data) 2003 2002
---- ----
Net income, before cumulative effect of a change
in accounting principle as reported $3,742 $2,967
Less: Negative goodwill amortization -- 1,858
------ ------
Adjusted net income, after cumulative effect of
a change in accounting principle as adjusted $3,742 $4,825
Basic earnings per share:
Net income, before cumulative effect of a change
in accounting principle as reported$ .37 $ .28
Less: Negative goodwill amortization -- .18
------ ------
Adjusted net income, after cumulative effect of
a change in accounting principle as adjusted $ .37 $ .46
Diluted earnings per share:
Net income, before cumulative effect of a change
in accounting principle as reported $ .37 $ .28
Less: Negative goodwill amortization -- .18
------ ------
Adjusted net income, after cumulative effect of
a change in accounting principle as adjusted $ .37 $ .46
Goodwill of $13,425 and $12,924 at March 31, 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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, which required that all gains
and losses from extinguishment of debt be reported as an extraordinary item. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 must be
applied in fiscal years beginning after May 15, 2002. The Company has early
adopted this statement for the year ended December 31, 2002. However, its
adoption will have no effect on the Company's future results of operations,
financial position, or cash flows.
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
6
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.
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 and has determined that there were no
identifiable intangible assets.
The following unaudited pro forma summary presents the Company's combined
March 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:
Three months ended
(U.S. dollars in thousands)
---------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Revenue $44,444 $ 39,066
Net Income $ 3,742 $ 4,870
Basic Earnings per share $ .37 $ .46
Diluted earnings per share $ .37 $ .46
4) Inventory
Inventories consisted of the following:
(U.S. dollars in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Finished goods $27,239 $27,551
Work-in-progress 3,496 3,675
Raw materials and supplies 14,673 14,098
------- -------
$45,408 $45,324
======= =======
5) Property, Plant and Equipment
Property, plant and equipment, net,
consisted of the following:
(U.S. dollars in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Cost:
Land and buildings $ 7,147 $ 6,954
Machinery and equipment 53,991 53,939
Motor vehicles 949 978
--------- ---------
$ 62,087 $ 61,871
Less: accumulated depreciation (31,240) (30,739)
--------- ---------
Property, plant and equipment, net $ 30,847 $ 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
7
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 $60,000 gain recorded in equity at March 31, 2003 is expected to be
reclassified to earnings over the twelve-month period ending March 31, 2004. 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 months ended March 31,
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:
Three Months Ended
March 31,
-----------------------
2003 2002
------- -------
Net Income:
As reported $ 3,742 $ 4,825
Deduct: Total stock-based employee
Compensation expense determined utilizing
the Black-Scholes option option pricing
model for all awards, net of tax (34) (196)
------- -------
Pro-Forma Net Income $ 3,709 $ 4,629
======= =======
Earnings per Share:
Basic - as reported $ 0.37 $ 0.46
Basic - pro forma $ 0.37 $ 0.44
Diluted - as reported $ 0.37 $ 0.46
Diluted - pro forma $ 0.37 $ 0.44
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, except per share data)
Three months ended
March 31,
2003 2002
------- -------
Numerator:
Net income $ 3,742 $ 4,825
======= =======
Denominator:
Denominator for basic earnings per share
weighted-average shares 10,011 10,568
Effect of dilutive stock options 14 35
------- -------
Denominator for diluted earnings per
share - adjusted weighted-average shares 10,025 10,603
======= =======
Basic earnings per share $.37 $.46
======= =======
Diluted earnings per share $.37 $.46
======= =======
8
9) 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. During the first
quarter of fiscal 2003, 83,600 shares were purchased and retired under this plan
for an aggregate price of $1.3 million. As of March 31, 2003, the Company had
remaining authorization for future purchases under the plan of 423,170 shares or
approximately $7.1 million at market price as of March 31, 2003.
10) Comprehensive Income
The Company's total comprehensive income (loss) was as follows:
Three months ended
March 31,
(U.S. dollars in thousands) 2003 2002
---- ----
Net income $ 3,742 $ 4,825
Foreign currency translation adjustment 1,454 (1,326)
Derivative instruments, net of tax (135) 31
------- --------
Comprehensive income $ 5,061 $ 3,530
======= ========
The components of accumulated other comprehensive income (loss), net of
related tax, at December 31, 2002 and March 31, 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 1,454 (135) 1,319
-------- -------- --------
Balance at March 31, 2003 $ 1,235 $ 60 $1,295
======== ======== ========
11) Segment Information
A summary of the Company's operations by geographic area follows:
Three months ended
(U.S. dollars in thousands) March 31,
2003 2002
---- ----
Sales to unaffiliated companies:
Europe $ 26,922 $ 21,374
North America 11,993 11,622
Asia-Pacific 5,529 5,190
--------- ---------
Total consolidated $ 44,444 $ 38,186
========= =========
9
Transfers between geographic areas:
Europe $ 12,197 $ 9,135
North America 3,240 3,236
Asia-Pacific 82 111
--------- ---------
Total transfers 15,519 12,482
Eliminations (15,519) (12,482)
--------- ---------
Total consolidated $ 0 $ 0
========= =========
Operating income (loss):
Europe $ 3,933 $ 3,199
North America 1,204 455
Asia-Pacific 257 296
Corporate (245) 308
--------- ---------
Total consolidated $ 5,149 $ 4,258
========= =========
Identifiable assets: March 31, 2003 December 31, 2002
-------------- -----------------
Europe $ 123,963 $ 119,065
North America 33,399 31,694
Asia-Pacific 17,949 18,780
--------- ---------
Total consolidated $ 175,311 $ 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
months ended March 31, 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 March 31, 2003
---------------------------------
Adjusted Utilizing
As Reported 2002 Currency Rates
----------- -------------------
Net Sales $ 44,444 $ 39,146
Gross Profit 16,151 14,110
SG&A Expenses 11,002 9,673
Operating Income 5,149 4,437
10
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.
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.
11
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 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
First Quarter March 31, 2003 Compared with First Quarter ended March 31, 2002
The Company's net sales increased 16.2% to $44.4 million in the three
months ended March 31, 2003 from $38.2 million for the same period in 2002.
During the same period, net sales in Europe increased 26.0% to $26.9 million
from $21.4 million; net sales in North America increased 2.8% to $12.0 million
from $11.6 million; and net sales in Asia-Pacific region increased 6.5% to $5.5
million from $5.2 million. The increased sales in the first quarter of 2003
compared with the first quarter of 2002 resulted from stronger demand for the
Company's products on a worldwide basis, 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 $16.2 million for the quarter ended
March 31, 2003 from $13.6 million in the same period of 2002. Gross profit as a
percentage of net sales of 36.3% in the quarter ended March 31, 2003 was
favorable to the gross profit as a percentage of net sales of 35.6% recorded for
the quarter ended March 31, 2002. The increased dollar value and percentage of
gross profit can be attributed to the increase in net sales volume recorded,
combined with 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 28.9% to $10.7 million for the three
months ended March 31, 2003 from $8.3 million in the same period of 2002. Gross
profit in North America of $4.0 million increased 21.2% or $0.7 million versus
gross profit recorded in the comparable period of 2002. Asia-Pacific gross
profit of $1.7 million increased 6.3% or $0.01 million gross profit recorded in
the same period of 2002.
Selling, general and administrative ("SG&A") expenses increased by 18.3% to
$11.0 million for the quarter ended March 31, 2003 versus SG&A expenses of $9.3
million for the quarter ended March 31, 2002. These expenses as a percentage of
net sales were 24.8% for 2003 as compared to 24.5% for 2002. The increase in
SG&A expenses as a percent of net sales for the three months ended March 31,
2003 as compared to the three months ended March 31, 2002 can be attributed to
the expenses associated with the Rander acquisition, completed in the second
quarter of 2002.
12
Operating income increased 18.6% to $5.1 million for the quarter ended
March 31, 2003 from $4.3 million in the same period of 2002. Operating income as
a percentage of net sales increased to 11.5% in the quarter ended March 31, 2003
from 11.2% in the quarter ended March 31, 2002. The changes in exchange rates
had the effect of increasing operating income for the period by $0.7 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 March 31, 2003 of $91,000
(0.2% of net sales) versus other income of $169,000 (0.4% of net sales) for the
comparable period of 2002. The other expense recorded for the first 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 $101,000 for the quarter ended March 31, 2003, as
compared to net interest income of $207,000 for the comparable period in 2002.
The decrease reflects lower short term interest rates worldwide.
The effective tax rate for the three months ended March 31, 2003 was 29.9%
compared with 30.9% for the three months ended March 31, 2002, resulting from a
mix of profits generated in the Company's overseas operations, with varying
effective tax rates.
Net income for the three months ended March 31, 2003, was $3.7 million, or
$0.37 per diluted share, compared to $4.8 million, or $0.46 per diluted share
for the comparable period in 2002. Net income, before the cumulative effect of
the change in accounting principle, was $0.37 per diluted share for the quarter
ended March 31, 2003 versus $0.28 per share for the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
(U.S. dollars in thousands) Three months ended March 31,
2003 2002
---- ----
Cash and cash equivalents $ 40,424 $ 42,567
Net cash provided by operating activities 175 657
Net cash used in investing activities (475) (1,333)
Net cash provided by (used in) financing activities (1,094) 604
Effect of exchange rate changes on cash 2,066 (606)
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 three months ended March
31, 2003 decreased to $0.2 million from $0.7 million for the same period in
2002. The $0.5 million decrease in net cash provided by operating activities for
the three months ended March 31, 2003 compared to the comparable period in 2002
was attributable to a $1.1 million decrease in net income partially offset by a
$1.0 million decrease in cash primarily utilized for 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 $0.5 million for the three months
ended March 31, 2003, compared to $1.3 million for the same period in 2002.
Investing activities in the three month period ended March 31, 2003 consisted of
investment in manufacturing equipment for the Company's six production
facilities.
Net cash used in financing activities was $1.1 million for the three months
ended March 31, 2003 as compared to cash provided of $0.6 million for the same
period in 2002. The decrease of $1.7 million in cash provided by (used in)
financing activities for the three months ended March 31, 2003 as compared to
the same period in 2002 was primarily attributable to funds utilized to
repurchase 86,300 shares of the Company's common stock totaling $1.3 million.
The effect of exchange rate changes on cash and cash equivalents was $2.1
million of cash provided and $0.6 million of cash utilized for the three months
ended March 31, 2003 and 2002, respectively. 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. The $2.1 million increase in the
exchange rate impact on cash and cash equivalents is attributable to a
strengthening, during the first three months of 2003, of
13
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 three months of 2002.
CONTRACTUAL OBLIGATIONS
As of March 31, 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 $ 1,059 $ 1,059 -- -- --
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 $ 6,859 $ 4,833 $1,805 $221 $ --
=======================================================
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 three months ended March 31, 2003 as compared to
the three months ended March 31, 2002, for example, the Company experienced a
3.8% increase in net sales in its European segment (denominated in local
currencies); however, the dollar-translated net sales figures showed a net
increase of 26.0% 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 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, 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 have been no material changes
in the Company's exposure to market risk during the three month period ended
March 31, 2003.
ORDER RECEIPTS AND BACKLOG
Worldwide customer order receipts were $47.7 million for the quarter ended
March 31, 2003, a 25.5% increase over the same period in 2002. On a volume
basis, utilizing constant currency exchange rates, order receipts for the
quarter ended March 31, 2003 were $41.2 million and represent an 8.4% increase
over the quarter ended March 31, 2002.
The worldwide backlog of unshipped orders at March 31, 2003 totaled $29.7
million, a $5.1 million or 20.7% increase versus the backlog at March 31, 2002,
and represents a 12.9% increase versus the order backlog at December 31, 2002.
14
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 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
(a) Evaluation of disclosure controls and procedures.
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this quarterly report, have concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were effective and
designed to ensure that material information relating to the Company and the
Company's consolidated subsidiaries would be made known to them by others within
those entities.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
Evaluation Date.
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.
15
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:
99.1 Certification of Principal Executive Officer, David L. Weir,
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
toss.906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer, Bruce A. Smith,
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Form 8-K filed on February 25, 2003 relating to the Company's press release
reporting financial results for the fourth quarter and full year 2002.
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 May 15, 2003 By /s/ Bruce A. Smith
---------------- -------------------
Bruce A. Smith
Director and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
17
CERTIFICATIONS
I, David L. Weir, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Denison
International plc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material aspects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ David L. Weir
------------ -----------------------
Chief Executive Officer
and President
18
CERTIFICATIONS
I, Bruce A. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Denison
International plc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material aspects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Bruce A. Smith
-----------------------
Chief Financial Officer
20
Index To Exhibits
Exhibit No. Description
99.1 Certification of Principal Executive Officer, David L. Weir, Pursuant
to 18 U.S.C Section 1350, as adopted Pursuant toss.906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer, Bruce A. Smith,
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant toss.906 of
the Sarbanes-Oxley Act of 2002.
21