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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 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 1-13421
DAN RIVER INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1854637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2291 Memorial Drive 24541
Danville, Virginia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (434) 799-7000
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
Number of shares of common stock outstanding as of June 29, 2002:
Class A: 20,357,773 Shares
Class B: 2,062,070 Shares
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2
Forward Looking Statements.
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This Quarterly Report contains forward-looking statements within the meaning
of the Securities Act of 1933 and the Securities and Exchange Act of 1934.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those included in such forward
looking statements. The words "believes," "expects," "intends," "estimates"
or "anticipates" and similar expressions, as well as future or conditional
verbs such as "will," "should," "would," and "could," are intended to
identify forward-looking statements. Specific forward looking statements
contained in this Quarterly Report include, among others, the expected
impairment writedown of goodwill, and statements regarding refinancing of
certain indebtedness. These forward looking statements are found in Part I,
Item 2. There can be no assurance that our assumptions are correct.
The forward looking statements in this Quarterly Report are also subject to
certain risks and uncertainties including, among others, that our performance
in future periods may be adversely impacted by the cyclical nature of the
textile industry, intense competition within the textile industry from both
foreign imports and domestic sources of supply, fluctuations in the price and
availability of cotton and other raw materials, our inability to make capital
improvements necessary to maintain competitiveness, our inability to increase
prices in order to recover increased energy, raw material, labor or other
costs, possible adverse changes in governmental regulation regarding the
import of cotton and textile products, difficulties in integrating acquired
businesses and achieving cost savings, changes in environmental regulations,
deterioration of relationships with or the loss of material customers, and
adverse changes in general market and industry conditions, including but not
limited to high inventory levels at retail or within the textile industry
generally.
We believe that the forward looking statements in this Quarterly Report are
reasonable; however, such statements are based on current expectations and
undue reliance should not be placed on such statements. We undertake no
obligation to update publicly any forward-looking statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
3
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, December 29,
2002 2001
----------- -----------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 1,181 $ 8,316
Accounts receivable, net 78,478 75,029
Inventories 143,303 156,508
Prepaid expenses and other current assets 12,588 7,577
Deferred income taxes 15,720 17,530
----------- -----------
Total current assets 251,270 264,960
Property, plant and equipment 525,967 524,959
Less accumulated depreciation and amortization (267,168) (251,224)
----------- -----------
Net property, plant and equipment 258,799 273,735
Goodwill, net 115,134 115,134
Other assets 11,375 12,540
----------- -----------
$ 636,578 $ 666,369
=========== ===========
4
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, December 29,
2002 2001
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 41,344 $ 26,375
Accounts payable 23,351 22,911
Accrued compensation and related benefits 22,332 21,064
Other accrued expenses 11,677 10,247
----------- -----------
Total current liabilities 98,704 80,597
Other liabilities:
Long-term debt 243,953 299,024
Deferred income taxes 17,921 9,709
Other liabilities 26,993 26,701
Shareholders' equity:
Preferred stock, $.01 par value; authorized
50,000 shares; no shares issued -- --
Common stock, Class A, $.01 par value;
authorized 175,000,000 shares; issued
and outstanding 20,357,773 shares
(19,926,189 shares at December 29, 2001) 204 199
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; issued
and outstanding 2,062,070 shares 21 21
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; no shares
outstanding -- --
Additional paid-in capital 209,962 209,778
Retained earnings 45,532 47,009
Accumulated other comprehensive loss (6,121) (6,121)
Unearned compensation--restricted stock (591) (548)
------------ -----------
Total shareholders' equity 249,007 250,338
------------ -----------
$ 636,578 $ 666,369
============ ===========
See accompanying notes.
5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
----------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- -------- -------- --------
(in thousands, except per share data)
Net sales $ 153,942 $ 161,858 $ 312,360 $ 325,859
Costs and expenses:
Cost of sales 123,874 144,515 260,539 292,460
Selling, general
and administrative
expenses 17,150 16,846 34,965 33,666
Amortization of
goodwill -- 889 -- 1,694
Other operating
costs, net (310) -- (310) --
--------- --------- --------- ---------
Operating income (loss) 13,228 (392) 17,166 (1,961)
Other income (expense) 148 (113) 207 48
Equity in loss of
joint venture -- (177) -- (244)
Interest expense (7,146) (8,407) (14,528) (17,055)
--------- --------- --------- ---------
Income (loss) before
income taxes 6,230 (9,089) 2,845 (19,212)
Provision (benefit) for
income taxes 2,572 (2,950) 4,322 (6,553)
--------- --------- --------- ---------
Net income (loss) $ 3,658 $ (6,139) $ (1,477) $ (12,659)
========= ========= ========= =========
Earnings (loss) per share:
Basic $ 0.17 $ (0.28) $ (0.07) $ (0.58)
========= ========= ========= =========
Diluted $ 0.16 $ (0.28) $ (0.07) $ (0.58)
========= ========= ========= =========
See accompanying notes
6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
---------------------------
June 29, June 30,
2002 2001
------------ ------------
(in thousands)
Cash flows from operating activities:
Net loss $ (1,477) $ (12,659)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Noncash interest expense 1,376 574
Depreciation and amortization of
property, plant and equipment 18,819 19,763
Amortization of goodwill -- 1,694
Amortization of restricted stock
compensation 146 33
Deferred income taxes 10,022 (6,553)
Writedown/disposal of assets 19 153
Equity in loss of joint venture -- 244
Other operating costs, net (310) --
Changes in operating assets and liabilities:
Accounts receivable (3,449) (2,044)
Inventories 13,205 29,086
Prepaid expenses and other assets (5,001) 1,039
Accounts payable and accrued expenses 4,409 (1,698)
Other liabilities 253 436
---------- ----------
Net cash provided by operating
activities 38,012 30,068
---------- ----------
Cash flows from investing activities:
Capital expenditures (5,337) (12,055)
Proceeds from sale of assets 325 80
Acquisitions -- (3,810)
---------- ----------
Net cash used by investing activities (5,012) (15,785)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (5,602) (14,178)
Borrowings against cash surrender value of life
insurance -- 5,404
Finance costs (33) (1,013)
Net borrowings (payments)-working capital
facility (34,500) (7,000)
---------- ----------
Net cash used by financing activities (40,135) (16,787)
---------- ----------
Net decrease in cash and cash equivalents (7,135) (2,504)
Cash and cash equivalents at beginning of period 8,316 3,675
---------- ----------
Cash and cash equivalents at end of period $ 1,181 $ 1,171
========== ==========
7
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned
subsidiaries, (collectively, the "Company"). In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of results for the interim
periods presented have been included. Interim results are not
necessarily indicative of results for a full year. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 29, 2001.
2. Adoption of New Accounting Standard
Effective as of the beginning of fiscal 2002, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets." This new standard
eliminates the amortization of goodwill and intangible assets with
indefinite useful lives. Instead these assets must be tested at least
annually for impairment. In the year of adoption, SFAS No. 142 also
requires the Company to perform an initial assessment of its reporting
units to determine whether there is any indication that the goodwill
carrying value may be impaired. This transitional assessment is made by
comparing the fair value of each reporting unit, as determined in
accordance with the new standard, to its book value. To the extent the
fair value of any reporting unit is less than its book value, which
would indicate that potential impairment of goodwill exists, a second
transitional test is required to determine the amount of impairment.
For purposes of goodwill impairment testing, SFAS No. 142 requires that
goodwill be assigned to one or more reporting units. The Company has
assigned goodwill to the following reporting units:
bedding products;
import specialty products;
apparel fabrics; and
engineered products.
The bedding products and import specialty products business units are
components of the home fashions reportable segment, for which separate
financial information is reported pursuant to SFAS No. 131. The apparel
fabrics and engineered products business units correspond directly to
reportable segments under SFAS No. 131 (refer to Note 8 for current
segment disclosures).
The Company, with the assistance of an outside consultant, completed the
initial transitional assessment of its reporting units in the second
quarter of fiscal 2002 and has determined that potential goodwill
impairment exists in the import specialty products, apparel fabrics and
engineered products business units. The Company expects to complete the
second portion of the transitional test in the third quarter of fiscal
2002, and estimates that it will result in an impairment writedown of up
8
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to $21 million. Any impairment writedown resulting from the
transitional testing will be reported as a cumulative effect of a change
in accounting principle, retroactive to the first day of fiscal 2002.
In future years, a goodwill impairment review will be conducted at least
annually, and any impairment charges that are required to be recorded
would be charged to operating income.
In accordance with SFAS No. 142, prior period amounts were not restated.
The following table adjusts the reported net loss for the three and
six months ended June 30, 2001 and the loss per share amounts to exclude
amortization of goodwill:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- ----------------
(in thousands, except per share data)
Reported net loss $ (6,139) $(12,659)
Amortization of goodwill
(net of tax effect) 852 1,619
------- -------
Adjusted net loss $ (5,287) $(11,040)
======== ========
Reported loss per share $ (0.28) $ (0.58)
Amortization of goodwill
(net of tax effect) 0.04 0.07
------- -------
Adjusted net loss per share $ (0.24) $ (0.51)
======== ========
9
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
The components of inventory are as follows:
June 29, December
2002 29, 2001
---------- ---------
(in thousands)
Finished goods $ 56,182 $ 56,194
Work in process 72,759 85,936
Raw materials 3,487 2,987
Supplies 10,875 11,391
-------- --------
Total Inventories $143,303 $156,508
======== ========
4. Income Taxes
The income tax provision for the first six months of fiscal 2002
includes a one-time increase to income tax expense of $2,800,000
attributable to the Job Creation and Worker Assistance Act of 2002,
enacted on March 9, 2002. The Act changed the period for carrying back
taxable losses generated in fiscal 2001 from 2 to 5 years, which
resulted in our receiving a $5,500,000 refund of taxes in July 2002.
However, the carryback also freed up investment credits that had
previously offset tax in the carryback years. A $2,800,000 tax
provision was recorded in the first quarter of fiscal 2002, representing
the amount of these freed up credits that expired during the carryback
period without being utilized.
5. Other Operating Costs, Net
In the fourth quarter of fiscal 2001 the Company recorded a $4,722,000
pre-tax charge relating to a plant consolidation program announced by
the Company in December 2001. The charge consisted of a $3,292,000 non-
cash writedown of fixed assets, $1,324,000 for severance and benefits
associated with the termination of approximately 380 employees, and
other exit costs of $107,000. The Company has completed all significant
aspects of the consolidation of operations, and anticipates that the
payout of severance and benefits will be substantially completed by the
end of fiscal 2002. Due mostly to better than anticipated proceeds from
the sale of equipment and the Newnan, Georgia plant, which was closed in
connection with the consolidation, the Company recorded a $310,000 gain
from reversal of a portion of the fixed assets writedown recorded in
fiscal 2001.
10
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the reserve account activity for severance,
benefits and other exit costs during the first six months of fiscal 2002
related to the consolidation (in thousands):
Balance at beginning of the period $ 1,431
Expenditures (668)
-------
Balance at end of the period $ 763
=======
6. Shareholders' Equity
Activity in Shareholders' Equity is as follows:
Accumu-
lated Unearned
Addi- Other Compen- Total
tional Compre- sation- Share-
Common Stock Paid-in Retained hensive Restricted holders'
Class A Class B Capital Earnings Loss Stock Equity
------- ------- -------- -------- ------- -------- --------
(in thousands)
Balance at
December 29,
2001 $ 199 $ 21 $ 209,778 $ 47,009 $ (6,121) $ (548) $ 250,338
Net loss -- -- -- (1,477) -- -- (1,477)
Restricted stock
awards 5 -- 184 -- -- (189) --
Amortization of
unearned compen-
sation -- -- -- -- -- 146 146
------- ------ --------- -------- -------- ------- --------
Balance at
June 29, 2002 $ 204 $ 21 $ 209,962 $ 45,532 $ (6,121) $ (591) $ 249,007
======= ====== ========= ========= ========= ========= =========
11
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
----------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- -------- -------- --------
(in thousands, except per share data)
Numerator for basic
and diluted earnings
per share -- net
income (loss) $ 3,658 $ (6,139) $ (1,477) $ (12,659)
========= ========= ========= =========
Denominator:
Denominator for
basic earnings
per share--
weighted-average
shares 21,840 21,766 21,815 21,766
Effect of dilutive
securities:
Employee stock
options and
restricted
stock awards 495 -- -- --
--------- --------- --------- ----------
Denominator for
diluted earnings
per share--weighted
average shares
adjusted for
dilutive securities 22,335 21,766 21,815 21,766
========= ========= ========= =========
Earnings (loss) per share:
Basic $ 0.17 $ (0.28) $ ($0.07) $ (0.58)
========= ========= ========= =========
Diluted $ 0.16 $ (0.28) $ (0.07) $ (0.58)
========= ========= ========= =========
12
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Segment Information
Summarized information by reportable segment is shown in the following
tables:
Three Months Ended Six Months Ended
----------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- -------- -------- --------
(in thousands)
Net sales:
Home fashions $ 107,194 $ 116,962 $ 223,202 $ 237,493
Apparel fabrics 36,951 33,835 68,882 66,036
Engineered products 9,797 11,061 20,276 22,330
--------- --------- --------- ---------
Consolidated net
sales $ 153,942 $ 161,858 $ 312,360 $ 325,859
========= ========= ========= =========
Operating income (loss):
Home fashions $ 12,211 $ 2,675 $ 17,525 $ 3,160
Apparel fabrics 1,323 (1,777) (253) (2,274)
Engineered products (307) (340) (610) (737)
Corporate items not
allocated to
segments:
Amortization of
goodwill -- (889) -- (1,694)
Other operating
costs, net 310 -- 310 --
Other (309) (61) 194 (416)
--------- --------- --------- ---------
Consolidated operating
income (loss) $ 13,228 $ (392) $ 17,166 $ (1,961)
========= ========= ========= =========
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 29, 2002 and June 30, 2001
NET SALES
Net sales for the second quarter of fiscal 2002 were $153.9 million, a
decrease of $7.9 million or 4.9% from the second quarter of fiscal 2001.
Home Fashions
Net sales of home fashions products were $107.2 million for the second
quarter of fiscal 2002, a decrease of $9.8 million or 8.4% from the second
quarter of fiscal 2001. The decrease was due primarily to the fact that the
second quarter of fiscal 2001 included the rollout of a large juvenile
program, whereas the second quarter of fiscal 2002 had no such introduction.
In addition sluggish consumer demand and the absence of aggressive inventory
reduction efforts in the second quarter of fiscal 2002 contributed to the
sales decline.
Apparel Fabrics
Net sales of apparel fabrics for the second quarter of fiscal 2002 were $37.0
million, up $3.1 million or 9.2% from the second quarter of fiscal 2001. The
increase is attributable to higher sales of sportswear fabrics, primarily
pant fabrics, which increased by $6.8 million, more than offsetting lower
sales of shirting fabrics.
Engineered Products
Net sales of engineered products for the second quarter of fiscal 2002 were
$9.8 million, a decrease of $1.3 million or 11.4% from the second quarter of
fiscal 2001. The decrease reflects soft demand from the industrial sector
and a very competitive pricing situation in the automotive sector.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $17.2 million for the
second quarter of fiscal 2002 (11.1% of net sales), an increase of $0.3
million or 1.8% from $16.8 million (10.4% of net sales) for the second
quarter of fiscal 2001. The increase is attributable to higher incentive
compensation expense.
OPERATING INCOME
Consolidated operating income for the second quarter of fiscal 2002 was $13.2
million, compared to a $0.4 million operating loss generated in the second
quarter of fiscal 2001.
14
Segment Operating Income:
Operating income for the home fashions segment was $12.2 million for the
second quarter of fiscal 2002, compared to $2.7 million in the second quarter
of fiscal 2001. Operating margins were unusually low in the second quarter of
fiscal 2001 due to a combination of factors, including the effects of
production curtailments, higher energy and raw material costs, and
promotional pricing resulting from our focus on inventory reduction. The
improved profitability in the second quarter of fiscal 2002 reflects better
capacity utilization and lower raw material costs. These factors, along with
an improved product mix due to the absence of aggressive promotional pricing
in the second quarter of fiscal 2002, more than offset the effects of the
lower sales volume.
The apparel fabrics segment generated $1.3 million in operating income for
the second quarter of fiscal 2002, including a $0.4 million operating loss
from our shirt manufacturing facility in Mexico. This compares to a $1.8
million operating loss for the second quarter of fiscal 2001, which also
included a $0.4 million operating loss from our Mexican operations. The
return to profitability in our domestic apparel fabrics business is
attributable to higher sales volume and lower per-unit manufacturing costs.
The lower costs reflect much better capacity utilization, due in part to the
plant consolidation program announced by the Company in December 2001, as
well as lower raw material costs. The losses from our Mexican operations
were caused by very low sales volume. Despite intense marketing efforts,
building sales volume to an acceptable level has been difficult in the
current economic environment.
The engineered products segment generated a $0.3 million operating loss in
the second quarter of fiscal 2002, approximately the same as the loss
generated in the second fiscal quarter of 2001. Profitability in both
periods was hampered by low sales volume, an unfavorable sales mix and
inefficient manufacturing performance.
Corporate Items:
Corporate items not allocated to segments in the second quarter of fiscal
2002 consisted of idle facility costs and other expenses totaling $0.3
million, and a $0.3 million pre-tax gain reported as "Other operating costs,
net." The gain results from the reversal of a portion of the loss recorded
in the prior year relating to the plant consolidation program announced in
December 2001. Most of the gain is due to better than anticipated proceeds
from the sale of equipment and our plant in Newnan, Georgia.
Corporate expenses not allocated to segments totaled $1.0 million in the
second quarter of fiscal 2001, including $0.9 million in amortization of
goodwill. In accordance with SFAS No. 142, we discontinued amortization of
goodwill beginning in the first quarter of fiscal 2002.
INTEREST EXPENSE
Interest expense was $7.1 million for the second quarter of fiscal 2002, a
decrease of $1.3 million from the second quarter of fiscal 2001. The
decrease reflects both lower debt levels and lower average interest rates.
15
INCOME TAX PROVISION
The Company recorded a $2.6 million income tax provision (41.3% of pre-tax
income) for the second quarter of fiscal 2002, compared to a $3.0 million
benefit (32.5% of the pre-tax loss) for the second quarter of fiscal 2001.
The lower effective rate in the first quarter of fiscal 2001 is due to the
effect of nondeductible goodwill amortization.
NET INCOME AND EARNINGS PER SHARE
Net income was $3.7 million or $0.16 per diluted share for the second quarter
of fiscal 2002, compared to a net loss of $6.1 million or $0.28 per diluted
share for the second quarter of fiscal 2001. As noted above, results for the
second quarter of fiscal 2002 included a $0.3 million pre-tax gain ($0.2
million after tax, or $0.01 per share) from reversal of reserves recorded in
fiscal 2001 due to the plant consolidation program. The net loss for the
second quarter of fiscal 2001 included goodwill amortization of $0.9 million
or $0.04 per share. In accordance with SFAS No. 142, goodwill amortization
was discontinued at the beginning of fiscal 2002.
Comparison of Six Months Ended June 29, 2002 and June 30, 2001
NET SALES
Net sales for the first six months of fiscal 2002 were $312.4 million, a
decrease of $13.5 million or 4.1% from net sales of $325.9 million for the
first six months of fiscal 2001.
Net sales of home fashions products were $223.2 million for the first six
months of fiscal 2002, down $14.3 million or 6.0% from the first six months
of fiscal 2001. A significant part of the decrease is attributable to the
rollout of a large juvenile program in April 2001; no comparable programs
were introduced in the first six months of fiscal 2002. The sales decline
also reflects sluggish consumer demand and the lack of aggressive inventory
reduction efforts in the second quarter of fiscal 2002 in comparison with the
second quarter of fiscal 2001.
Net sales of apparel fabrics for the first six months of fiscal 2002 were
$68.9 million, up $2.8 million or 4.3% over the first six months of fiscal
2001. The increase is attributable to higher sales of sportwear fabrics,
primarily pant fabrics, which increased by $10.7 million, more than
offsetting lower sales of shirting fabrics.
Net sales of engineered products were $20.3 million for the first six months
of fiscal 2002, down $2.1 million or 9.2% from the first six months of fiscal
2001. The decrease reflects soft demand from the industrial sector and a
very competitive pricing situation in the automotive sector.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $35.0 million for the first
six months of fiscal 2002 (11.2% of net sales), an increase of $1.3 million
or 3.9% from $33.7 million (10.3% of net sales) for the first six months of
fiscal 2001. The increase was due to $1.4 million in bad debt expense
16
attributable to Kmart Corporation's Chapter 11 filing and higher incentive
compensation expense, offset in part by generally lower expenses in other
areas.
OPERATING INCOME
Total operating income was $17.2 million in the first six months of fiscal
2002, compared to a $2.0 million operating loss for the first six months of
fiscal 2001.
Segment Operating Income:
Operating income for the home fashions segment was $17.5 million for the
first six months of fiscal 2002, compared to $3.2 million in operating income
earned in the first six months of fiscal 2001. Operating margins were
unusually low in the first six months of fiscal 2001 due to a combination of
factors, including the effects of production curtailments, higher energy and
raw material costs, and promotional pricing resulting from our focus on
inventory reduction. The improved profitability in the first six months of
fiscal 2002 reflects better capacity utilization and lower raw material
costs. These factors, along with an improved product mix due to the absence
of aggressive promotional pricing in the first half of fiscal 2002, more than
offset the effects of the lower sales volume.
The apparel fabrics segment generated a $0.3 million operating loss for the
first six months of fiscal 2002, including a $1.0 million operating loss from
our shirt manufacturing facility in Mexico. This compares to a $2.3 million
operating loss for the first six months of fiscal 2001, which included a $0.4
million operating loss from our Mexican operations, all of which was
attributable to the second quarter of fiscal 2001. Prior to the buyout of
our joint venture partner in the first quarter of fiscal 2001, results from
this business were reported as "Equity in loss of joint venture." The
improved operating results for the domestic apparel fabrics business is
attributable to higher sales volume and lower per-unit manufacturing costs.
The lower costs reflect much better capacity utilization, due in part to the
plant consolidation program announced by the Company in December 2001, as
well as lower raw material costs. The losses from our Mexican operations
were caused by very low sales volume. Despite intense marketing efforts,
building sales volume to an acceptable level has been difficult in the
current economic environment.
The engineered products segment generated a $0.6 million operating loss for
the first six months of fiscal 2002, compared to a $0.7 million operating
loss for the first six months of fiscal 2001. Profitability in both periods
was hampered by low sales volume, an unfavorable sales mix and inefficient
manufacturing performance.
Corporate Items:
Amortization of goodwill was $1.7 million in the first six months of fiscal
2001. In accordance with SFAS No. 142, we discontinued amortization of
goodwill beginning in the first quarter of fiscal 2002.
Reported under "Other operating costs, net" for the first six months of
fiscal 2002 is a $0.3 million pre-tax gain from the reversal of a portion of
17
the loss recorded in the prior year relating to the plant consolidation
program announced in December 2001. Most of the gain is due to better than
anticipated proceeds from the sale of equipment and our plant in Newnan,
Georgia.
Other items not allocated to segments totaled $0.2 million (income) for the
first six months of fiscal 2002 compared to $0.4 million (expense) for the
first six months of fiscal 2001. The fiscal 2002 amount includes income
items of $0.2 million related to a litigation settlement and $0.5 million
from a net decrease in intersegment profits remaining in inventory, and idle
facility costs and other expenses totaling $0.5 million. The fiscal 2001
amount consists mostly of idle facility costs.
INTEREST EXPENSE
Interest expense was $14.5 million for the first six months of fiscal 2002, a
decrease of $2.5 million from the first six months of fiscal 2001. The
decrease reflects both lower debt levels and lower average interest rates.
INCOME TAX PROVISION
We recorded a $4.3 million income tax provision in the first six months of
fiscal 2002, which included a one-time increase to income tax expense of $2.8
million attributable to the Job Creation and Worker Assistance Act of 2002,
enacted on March 9, 2002. The Act changed the period for carrying back
taxable losses generated in fiscal 2001 from 2 to 5 years, which resulted in
our receiving a $5.5 million refund of taxes in July 2002. However, the
carryback also freed up investment credits that had previously offset tax in
the carryback years. A $2.8 million tax provision was recorded in the first
quarter of fiscal 2002, representing the amount of these freed up credits
that expired during the carryback period without being utilized.
Excluding the one-time tax adjustment discussed above, the tax provision for
the first six months of fiscal 2002 was $1.5 million, or 53.5% of pre-tax
income, compared to a $6.6 income tax benefit, or 34.1% of the pre-tax loss
for the first six months of fiscal 2001. The high effective tax rate in the
first six months of fiscal 2002 is due to losses from our Mexican operations
for which no tax benefit has been provided. The effect of nondeductible
goodwill amortization decreased the income tax benefit for the first six
months of fiscal 2001 by 3.0% of the pre-tax loss.
NET INCOME AND EARNINGS PER SHARE
The net loss for the first six months of fiscal 2002 was $1.5 million or
$0.07 per diluted share compared to a net loss of $12.7 million or $0.58 per
diluted share for the first six months of fiscal 2001. Results for the first
six months of fiscal 2002 were affected by the following one-time or unusual
items (discussed above):
- a $2.8 million income tax provision related to the Job Creation and
Worker Assistance Act of 2002;
- $1.4 million in bad debt expense ($0.8 million after tax) relating to
Kmart Corporation's bankruptcy filing; and
- a $0.3 million pre-tax gain ($0.2 million after tax) from reversal of a
portion of the loss recorded in fiscal 2001 in connection with
the plant consolidation program.
18
Excluding the above items, we would have reported net income of $2.0 million
or $.09 per diluted share for the first six months of fiscal 2002.
The net loss for the first six months of fiscal 2001 included goodwill
amortization of $1.7 million ($1.6 million after tax), which increased the
net loss by $.07 per share. In accordance with SFAS No. 142, goodwill
amortization was discontinued at the beginning of fiscal 2002.
ADOPTION OF NEW ACCOUNTING STANDARD
Effective as of the beginning of fiscal 2002, we adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." This new standard eliminates the
amortization of goodwill and intangible assets with indefinite useful lives.
Instead these assets must be tested at least annually for impairment. In the
year of adoption, SFAS No. 142 also requires that we perform an initial
assessment of our reporting units to determine whether there is any
indication that the goodwill carrying value may be impaired. This
transitional assessment is made by comparing the fair value of each reporting
unit, as determined in accordance with the new standard, to its book value.
To the extent the fair value of any reporting unit is less than its book
value, which would indicate that potential impairment of goodwill exists, a
second transitional test is required to determine the amount of impairment.
For purposes of Goodwill impairment testing, SFAS No. 142 requires that
goodwill be assigned to one or more reporting units. We have assigned
goodwill to the following reporting units:
bedding products;
import specialty products;
apparel fabrics; and
engineered products.
The bedding products and import specialty products business units are
components of the home fashions reportable segment, for which separate
financial information is reported pursuant to SFAS No. 131. The apparel
fabrics and engineered products business units correspond directly to
reportable segments under SFAS No.131.
With the assistance of an outside consultant, we completed the initial
transitional assessment of our reporting units in the second quarter of
fiscal 2002, and have determined that potential goodwill impairment exists in
the import specialty products, apparel fabrics and engineered products
business units. We expect to complete the second portion of the transitional
test in the third quarter of fiscal 2002, and estimate that it will result in
an impairment writedown of up to $21 million. Any impairment writedown
resulting from the transitional testing will be reported as a cumulative
effect of a change in accounting principle, retroactive to the first day of
fiscal 2002. In future years, a goodwill impairment review will be conducted
at least annually, and any impairment charges that are required to be
recorded would be charged to operating income.
19
LIQUIDITY AND CAPITAL RESOURCES
General
We generally rely on internally generated cash flow, supplemented by
borrowings under our working capital line of credit, to meet debt service
requirements, capital expenditures, and working capital needs. We had a debt
to total capital ratio of 53.4% at June 29, 2002.
Credit Facilities
We maintain a credit facility comprised of a term loan and a secured working
capital line of credit. This credit facility is secured by our accounts
receivable, inventories and real and personal property. The credit facility
bears interest at the Base Rate plus applicable percentage, as defined (6.50%
as of August 6, 2002) or LIBOR plus applicable percentage (4.78% as of August
6, 2002), for periods of one, two, three or six months, at our option.
The working capital line has a borrowing base and is non-amortizing. Any
amounts outstanding are due at the final maturity of September 30, 2003. As
of June 29, 2002, $75.0 million was used and $47.9 million was unused and
available for borrowing. The term loan had an outstanding principal balance
of $79.9 million at June 29, 2002. Scheduled amortization payments for fiscal
2002 on the term loan total $25.0 million, $5.0 million of which was paid in
the first two fiscal quarters. The credit facility provides that we will prepay
an additional $3.0 million of the term loan on September 30, 2002 if $23.0
million or more is available under the working capital line as of September
27, 2002, the last day of the third fiscal quarter. For the second half of
fiscal 2002, two scheduled amortization payments of $10 million each will be
made on September 30 and December 13, both of which fall in the fourth fiscal
quarter. The prepayment of $3 million, if paid, will also be made on
September 30.
The borrowing base is determined weekly by evaluation of the eligible
inventories and accounts receivable and cannot exceed $150 million. Interest
payments are required to be made on a monthly basis for all outstanding loans
and we are required to meet a minimum cumulative EBITDA covenant (as defined)
and an interest coverage ratio covenant (as defined) on a monthly basis.
Under the credit facility, the interest rate margin is determined by the
level of funded debt (as defined) to EBITDA (as defined). At the end of the
second quarter, the Company had successfully reduced outstanding funded debt
to $287.8 million. On July 30, 2002, the effective interest rate margin on
new or outstanding loans and letters of credit under the credit facility
agreement was reduced by 125 basis points.
In addition to the covenants described above, the credit facility contains
limitations on mergers and consolidations, affiliated transactions, incurring
liens, disposal of assets and investments. An event of default under the
credit facility includes change of control (as defined in the credit
facility) as well as non-compliance with certain other provisions.
Payments of outstanding indebtedness under our credit facility and our $120
million of 10 1/8% Senior Subordinated Notes are due at maturity on September
30, 2003 and December 15, 2003, respectively. This indebtedness must be
20
refinanced on or before the respective maturity dates. Although we believe
we will be successful in refinancing these obligations prior to maturity,
there can be no assurance that conditions will permit the required
refinancing, or that refinancing will be available on terms that we consider
to be in the best interests of our shareholders. If the indebtedness is not
refinanced, we will be in default, and the holders of such indebtedness will
be entitled to the remedies provided in the respective debt instruments.
Such an event would have a material adverse effect on our financial condition
and results of operations. Our success in refinancing this indebtedness will
be dependent upon a number of factors, including, for example, our operating
performance, operating performance of our peers in the textile and apparel
industries, perception of our industry in the capital markets, general
economic and political conditions, and the general condition of the capital
markets, including specifically the high yield debt markets.
Working Capital
Net cash generated from operating activities in the six months ended June 29,
2002 was $38.0 million. Included in that amount is cash from operating assets
and liabilities of $9.4 million, comprised of a $14.2 million source from
operating working capital (accounts receivable - $3.4 million use,
inventories - $13.2 million source, and accounts payable and accrued expenses
- - $4.4 million source) and a $4.7 million use of cash for prepaid expenses
and other assets and other liabilities.
During the comparable six month period ended June 30, 2001, net cash
generated from operating activities was $30.1 million. Included in that
amount is a source of cash from operating assets and liabilities of $26.8
million, comprised of a $25.3 million source of operating working capital
(accounts receivable - $2.0 million use, inventories - $29.1 million source,
and accounts payable and accrued expenses - $1.7 million use) and a $1.5
million source of cash for prepaid expenses and other assets and other
liabilities.
Investing Activities
During the first six months of fiscal 2002, we purchased $5.3 million in
equipment and manufacturing improvements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
21
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on April 30, 2002. The
following is a brief description of each matter voted upon at the
meeting and the number of votes cast for, against or withheld, as
well as the number of abstentions and broker non-votes, as to each
such matter.
1. Election of Director
Election of Richard L. Williams to hold office until the Annual
Meeting of Shareholders in 2005, or until his successor is elected
and qualified:
Richard L. Williams For: 26,643,207 Withheld: 1,751,106
Continuing directors are Donald J. Keller, Joseph L. Lanier, Jr.,
Edward J. Lill and John F. Maypole.
2. To approve amendments to the amended and restated articles of
incorporation which will effect a reverse stock split of each class
of our issued and outstanding Common Stock and combine a whole
number of shares of Common Stock between two and five into one
share of Common Stock, depending upon determination by the board of
directors that a reverse stock split is in our best interests and
the best interest of our shareholders, and authorizing the board of
directors to file one such amendment.
For: 26,926,505 Against: 455,499 Abstained: 12,309
Item 5. Other Information
During the fourth quarter of fiscal 2001, the average closing price
of our Class A Common Stock fell below $1.00 for a thirty consecu-
tive trading day period, thus failing to meet New York Stock
Exchange requirements for continued listing on the exchange.
Pursuant to NYSE rules, we had six months to cure this deficiency.
At the close of trading on June 26, 2002, the end of the six month
period, our Class A Common Stock was trading at $5.23, with a
thirty consecutive trading day average closing price of $4.28.
The NYSE confirmed that we had successfully met its minimum share
price requirement for continued listing on the exchange. Accord-
ingly, we did not effect the reverse split authorized at our annual
meeting of shareholders in April 2002.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(The exhibits to this Form 10-Q are listed in the accompanying
index to Exhibits.)
(b) Reports on Form 8-K: None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAN RIVER INC.
Date: August 9, 2002 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
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EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- -------
3.1 Amended and Restated Articles of Incorporation
of Dan River Inc. (incorporated by reference
to Exhibit 3.1 in Amendment No. 1 to
Registration Statement on Form S-1 (File
No. 333-36479)).
3.2 Bylaws of Dan River Inc. (incorporated by
reference to Exhibit 3.2 in Amendment No. 1
to Registration Statement on Form S-1 (File
No. 333-36479)).
11 Statement regarding Computation of
Earnings per share (incorporated by
reference to Note 7 to the Unaudited
Condensed Consolidated Financial
Statements included in this
Quarterly Report on Form 10-Q)
99 Certification Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002