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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 September 28, 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 November 1, 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, statements
regarding our prospects for the 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. Our financial liquidity and results of
operations could be materially and adversely affected by numerous market and
industry factors, many of which are outside our control, including, for
example, declines in consumer demand for textile products at retail such that
we are forced to sell an unfavorable mix of products and/or are unable to run
our manufacturing facilities at efficient rates of production, or our
inability to achieve the expected savings from manufacturing consolidations.
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, changes in environmental regulations, deterioration of
relationships with, or financial problems affecting 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
Sept. 28, December 29,
2002 2001
----------- -----------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,459 $ 8,316
Accounts receivable, net 77,710 75,029
Inventories 151,384 156,508
Prepaid expenses and other current assets 6,538 7,577
Deferred income taxes 15,270 17,530
----------- -----------
Total current assets 253,361 264,960
Property, plant and equipment 521,596 524,959
Less accumulated depreciation and amortization (268,851) (251,224)
----------- -----------
Net property, plant and equipment 252,745 273,735
Goodwill, net 91,701 115,134
Other assets 10,739 12,540
----------- -----------
$ 608,546 $ 666,369
=========== ===========
4
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 28, December 29,
2002 2001
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 44,327 $ 26,375
Accounts payable 21,564 22,911
Accrued compensation and related benefits 20,492 21,064
Other accrued expenses 14,609 10,247
------------ -----------
Total current liabilities 100,992 80,597
Other liabilities:
Long-term debt 230,174 299,024
Deferred income taxes 17,237 9,709
Other liabilities 27,063 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
(19,928,689 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 209,940 209,778
Retained earnings 29,530 47,009
Accumulated other comprehensive loss (6,121) (6,121)
Unearned compensation--restricted stock (494) (548)
------------ -----------
Total shareholders' equity 233,080 250,338
------------ -----------
$ 608,546 $ 666,369
============ ===========
See accompanying notes.
5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------- --------- --------- ----------
(in thousands, except per share data)
Net sales $ 147,411 $ 159,390 $ 459,771 $ 485,249
Costs and expenses:
Cost of sales 116,470 139,965 377,010 432,424
Selling, general
and administrative
expenses 16,441 15,643 51,406 49,309
Amortization of
goodwill -- 1,021 -- 2,715
Other operating
costs, net -- -- (310) --
--------- --------- --------- ---------
Operating income 14,500 2,761 31,665 801
Other income (expense) (103) 647 105 695
Equity in loss of
joint venture -- -- -- (244)
Interest expense (6,450) (7,688) (20,978) (24,744)
--------- --------- --------- ---------
Income (loss) before
income taxes and
cumulative effect
of accounting
change 7,947 (4,280) 10,792 (23,492)
Provision (benefit) for
income taxes 3,248 (6,092) 7,570 (12,645)
--------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting change 4,699 1,812 3,222 (10,847)
Cumulative effect of
accounting change,
net of tax -- -- (20,701) --
--------- --------- --------- ---------
Net income (loss) $ 4,699 $ 1,812 $ (17,479) $ (10,847)
========= ========= ========= =========
See accompanying notes.
6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------- --------- --------- ----------
Earnings (loss) per
share--basic:
Income (loss) before
cumulative effect
of accounting
change $ 0.22 $ 0.08 $ 0.15 $ (0.50)
Cumulative effect of
accounting change,
net of tax -- -- (0.95) --
--------- --------- --------- --------
Net Income (loss) $ 0.22 $ 0.08 $ (0.80) $ (0.50)
========= ========= ========= ========
Earnings (loss) per share
--diluted:
Income (loss) before
cumulative effect
of accounting
change $ 0.21 $ 0.08 $ 0.15 $ (0.50)
Cumulative effect of
accounting change,
net of tax -- -- (0.94) --
--------- --------- --------- --------
Net income (loss) $ 0.21 $ 0.08 $ (0.79) $ (0.50)
========= ========= ========= ========
See accompanying notes.
7
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
---------------------------
Sept. 28, Sept. 29,
2002 2001
------------ ------------
(in thousands)
Cash flows from operating activities:
Net loss $ (17,479) $ (10,847)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Noncash interest expense 2,064 893
Depreciation and amortization of
property, plant and equipment 28,339 29,827
Amortization of goodwill -- 2,715
Amortization of restricted stock compensation 221 85
Deferred income taxes 12,520 (12,459)
Writedown/disposal of assets 42 257
Equity in loss of joint venture -- 244
Other operating costs, net (310) --
Cumulative effect of accounting change,
net of tax 20,701 --
Changes in operating assets and liabilities:
Accounts receivable (2,681) (5,959)
Inventories 5,124 39,210
Prepaid expenses and other assets 668 (1,087)
Accounts payable and accrued expenses 3,474 6,895
Other liabilities 336 653
---------- ----------
Net cash provided by operating activities 53,019 50,427
---------- ----------
Cash flows from investing activities:
Capital expenditures (8,587) (15,791)
Proceeds from sale of assets 642 88
Acquisitions -- (3,810)
---------- ----------
Net cash used by investing activities (7,945) (19,513)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (5,897) (24,985)
Borrowings against cash surrender value of
life insurance -- 5,427
Finance costs (34) (1,053)
Net borrowings (payments) - working
capital facility (45,000) (2,000)
---------- ----------
Net cash used by financing activities (50,931) (22,611)
---------- ----------
Net increase (decrease) in cash and
cash equivalents (5,857) 8,303
Cash and cash equivalents at beginning of period 8,316 3,675
---------- ----------
Cash and cash equivalents at end of period $ 2,459 $ 11,978
========== ==========
See accompanying notes.
8
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.
Any impairment charge resulting from the transitional test is recorded
as a cumulative effect of a change in accounting principle, retroactive
to the first day of fiscal 2002. After the initial adoption of SFAS No.
142, a goodwill impairment review must conducted at least annually, and
any impairment charge resulting from the review would be charged to
operating income.
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 reporting segment, for which separate
financial information is reported pursuant to SFAS No. 131. The apparel
fabrics and engineered products business units correspond directly to
reporting segments under SFAS No.131.
9
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company, with the assistance of an outside consultant, completed the
transitional impairment review of goodwill during the third quarter of
fiscal 2002, and recorded a non-cash charge of $20,701,000, representing
goodwill impairment of $23,433,000, less the deferred tax effect of
$2,732,000. The charge has been reported as a cumulative effect of a
change in accounting principle retroactive to the first day of fiscal
2002, and therefore increased the previously reported net loss per share
for the first quarter of fiscal 2002 from $0.24 to $1.19.
The following table summarizes the goodwill impairment charge by
reporting segment as well as the changes in the carrying amount of
goodwill for the nine months ended September 28, 2002:
Goodwill at Impairment Goodwill at
Reporting Segment Dec. 29, 2001 Charge Sept. 28, 2002
----------------- ------------- ---------- --------------
(in thousands)
Home fashions:
Bedding products $ 91,701 $ -- $ 91,702
Import specialty
products 7,087 (7,087) --
-------- --------- --------
98,788 (7,087) 91,702
Apparel fabrics 1,418 (1,418) --
Engineered Products 14,928 (14,928) --
-------- --------- --------
$115,134 $ (23,433) $ 91,702
======== ========= ========
For purposes of the transitional impairment test, the fair value of each
reporting unit was determined by using a combined discounted cash flow
and market approach. The resulting impairment is primarily attributable
to differences between the fair value approach required under SFAS No.
142 and the undiscounted cash flow approach that was used to evaluate
goodwill under previous accounting guidance.
In accordance with SFAS No. 142, prior period amounts were not restated.
The following table summarizes the reported results for the three- and
nine- month periods ended September 29, 2001 and the results that would
have been reported had the non-amortization provisions of SFAS No. 142
been in effect for fiscal 2001:
10
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Nine Months Ended
Sept. 29, 2001 Sept. 29, 2001
------------- ----------------
(in thousands, except per share data)
Reported net income (loss) $ 1,812 $(10,847)
Amortization of goodwill
(net of tax effect) 984 2,603
------- -------
Adjusted net income (loss) $ 2,796 $ (8,244)
======== ========
Reported earnings (loss)
per share $ 0.08 $ (0.50)
Amortization of goodwill
(net of tax effect) 0.05 0.12
------- -------
Adjusted net loss per share $ 0.13 $ (0.38)
======== ========
3. Inventories
The components of inventory are as follows:
Sept. 28, Dec. 29,
2002 2001
---------- ---------
(in thousands)
Finished goods $ 56,387 $ 56,194
Work in process 81,727 85,936
Raw materials 2,862 2,987
Supplies 10,408 11,391
-------- --------
Total Inventories $151,384 $156,508
======== ========
4. Income Taxes
The income tax provision for the first nine 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. 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.
11
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of fiscal 2001, the Internal Revenue Service
completed its examination of the Company's federal income tax returns
through tax year 1999. Based on the results of the examination and a
review of the Company's tax position, a $4,987,000 benefit for the
reversal of income tax liabilities recorded in prior years was recorded
and included in the "benefit for income taxes" for the three- and nine-
month periods ended September 29, 2001.
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
in the second quarter of fiscal 2002.
Following is a summary of the reserve account activity for severance,
benefits and other exit costs during the first nine months of fiscal
2002 related to the consolidation (in thousands):
Balance at beginning of the period $ 1,431
Expenditures (853)
-------
Balance at end of the period $ 578
=======
12
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 -- -- -- (17,479) -- -- (17,479)
Restricted stock
awards 5 -- 162 -- -- (167) --
Amortization of
unearned compen-
sation -- -- -- -- -- 221 221
------- ------ --------- -------- -------- ------- --------
Balance at
September 28,
2002 $ 204 $ 21 $ 209,940 $ 29,530 $ (6,121) $ (494) $ 233,080
======= ====== ========= ========= ========= ========= =========
13
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------- -------- -------- --------
(in thousands, except per share data)
Numerator for basic and
diluted earnings per share:
Income (loss) before
cumulative effect of
accounting change $ 4,699 $ 1,812 $ 3,222 $ (10,847)
Cumulative effect of
accounting change -- -- (20,701) --
--------- --------- --------- ---------
Net income (loss) $ 4,699 $ 1,812 $ (17,479) $ (10,847)
========= ========= ========= =========
Denominator:
Denominator for
basic earnings
per share--
weighted-average
shares 21,840 21,766 21,823 21,766
Effect of dilutive
securities:
Employee stock
options and
restricted
stock awards 459 225 316 --
--------- --------- --------- ---------
Denominator for
diluted earnings
per share--weighted
average shares
adjusted for
dilutive securities 22,299 21,991 22,139 21,766
========= ========= ========= =========
Earnings (loss) per share:
Basic:
Income (loss) before
cumulative effect of
accounting change $ 0.22 $ 0.08 $ 0.15 $ (0.50)
Cumulative effect of
accounting change -- -- (0.95) --
--------- --------- --------- ---------
Net income (loss) $ 0.22 $ 0.08 $ (0.80) $ (0.50)
========= ========= ========= =========
14
7. Earnings Per Share, continued
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------- -------- -------- --------
Diluted:
Income (loss) before
cumulative effect of
accounting change $ 0.21 $ 0.08 $ 0.15 $ (0.50)
Cumulative effect of
accounting change -- -- (0.94) --
--------- --------- --------- ---------
Net income (loss) $ 0.21 $ 0.08 $ (0.79) $ (0.50)
========= ========= ========= =========
8. Segment Information
Summarized information by reportable segment is shown in the following
tables:
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
--------- -------- -------- --------
(in thousands)
Net sales:
Home fashions $ 105,857 $ 123,681 $ 329,059 $ 361,174
Apparel fabrics 31,272 25,185 100,154 91,221
Engineered products 10,282 10,524 30,558 32,854
--------- --------- --------- --------
Consolidated net
sales $ 147,411 $ 159,390 $ 459,771 $ 485,249
========= ========= ========= ========
Operating income (loss):
Home fashions $ 13,632 $ 6,719 $ 31,157 $ 9,879
Apparel fabrics 1,681 (2,356) 1,427 (4,630)
Engineered products (531) (174) (1,141) (911)
Corporate items not
allocated to segments:
Amortization of
goodwill -- (1,021) -- (2,715)
Other operating
costs, net -- -- 310 --
Other (282) (407) (88) (822)
--------- --------- --------- --------
Consolidated
operating income $ 14,500 $ 2,761 $ 31,665 $ 801
========= ========= ========= ========
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 28, 2002 and September 29,
2001
NET SALES
Net sales for the third quarter of fiscal 2002 were $147.4 million, a
decrease of $12.0 million or 7.5% from the third quarter of fiscal 2001.
Net sales of home fashions products were $105.9 million for the third quarter
of fiscal 2002, a decrease of $17.8 million or 14.4% from the third quarter
of fiscal 2001. The decrease reflects lower sales to mass merchants, which
more than offset a modest increase in sales to department stores. Contri-
buting to the sales decline was an absence of aggressive selling at
promotional prices in the third quarter of fiscal 2002, which was present in
the comparable period of the prior year due to our efforts to reduce
inventories.
Net sales of apparel fabrics for the third quarter of fiscal 2002 were $31.3
million, up $6.1 million or 24.2% from the third quarter of fiscal 2001. The
increase is due primarily to new product introductions in pant fabrics and
stronger sales of shirting to the career apparel market.
Net sales of engineered products for the third quarter of fiscal 2002 were
$10.3 million, a decrease of $0.2 million or 2.3% from the third quarter of
fiscal 2001. The depressed sales levels in both periods reflect soft demand
from the industrial fabrics sector and a very competitive pricing situation
in the automotive sector.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $16.4 million for the third
quarter of fiscal 2002 (11.2% of net sales), an increase of $0.8 million or
5.1% from $15.6 million (9.8% of net sales) for the third quarter of fiscal
2001. The increase is attributable to higher incentive compensation expense.
OPERATING INCOME
Consolidated operating income for the third quarter of fiscal 2002 was $14.5
million, compared to $2.8 million in the third quarter of fiscal 2001.
Segment Operating Income:
Operating income for the home fashions segment was $13.6 million for the
third quarter of fiscal 2002, compared to $6.7 million in the third quarter
16
of fiscal 2001. Operating margins were low in the third quarter of fiscal
2001 due to a combination of factors, including the effects of unfavorable
manufacturing performance (caused by uneven running schedules and production
curtailments), and promotional pricing, both of which resulted from our focus
on inventory reduction. The improved profitability in the third quarter of
fiscal 2002 reflects better plant capacity utilization, cost savings from the
plant consolidation program implemented earlier in the year and lower raw
material costs. An improved product mix in the third quarter of fiscal 2002,
due to increased sales of higher end bedding to department stores and the
absence of aggressive promotional pricing, partially offset the effects of
the overall lower sales volume.
The apparel fabrics segment generated $1.7 million in operating income for
the third quarter of fiscal 2002, including a $0.5 million operating loss
from our shirt manufacturing facility in Mexico. This compares to a $2.4
million operating loss for the third quarter of fiscal 2001, which included a
$0.6 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 better capacity utilization, due in part to the plant consolidation
program implemented earlier this year, as well as lower raw material costs.
The losses from our Mexican operations were caused by low sales volume.
Despite intense marketing efforts, building sales volume to an acceptable
level has been difficult in the current economic environment. Recently, we
have received significant orders for shirts from our Mexican facility, for
the career apparel market. However, shipments on these orders will not begin
until late in fiscal 2002. Our Mexican plant was built in fiscal 2000.
The engineered products segment generated a $0.5 million operating loss in
the third quarter of fiscal 2002, compared to a $0.2 operating loss in the
third quarter of fiscal 2001. Profitability in both periods was hampered by
low sales volume, a competitive pricing environment and inefficient
manufacturing performance.
Corporate Items:
Corporate items not allocated to segments in the third quarter of fiscal 2002
consisted of idle facility costs and other expenses totaling $0.3 million.
In the third quarter of fiscal 2001, Corporate expenses not allocated to
segments totaled $1.4 million, including $1.0 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 $6.5 million for the third quarter of fiscal 2002, a
decrease of $1.2 million from the third quarter of fiscal 2001. The decrease
reflects lower debt levels, and to a lesser extent, lower average interest
rates.
INCOME TAX PROVISION
The income tax provision was $3.2 million (40.9% of pre-tax income) for the
third quarter of fiscal 2002. The relatively high effective rate is due to
losses from our Mexican operations, for which no tax benefit was provided.
17
We recorded a $6.1 million income tax benefit for the third quarter of fiscal
2001. Included in that amount is a $5.0 million benefit for the reversal of
income tax liabilities recorded in prior years. During the third quarter of
fiscal 2001, the Internal Revenue Service completed its examination of our
federal income tax returns through tax year 1999. The examination resulted
in the assessment of approximately $1.0 million in taxes and interest, all of
which was offset against overpaid taxes for tax year 2000. Based on the
results of the examination and a review of the our tax position, the $5.0
million benefit referred to above was recorded.
Excluding the one-time $5.0 million income tax benefit discussed above, the
income tax benefit for the third quarter of fiscal 2001 was $1.1 million
(25.8% of the pre-tax loss). The low effective rate is due to nondeductible
goodwill amortization and losses from our Mexican operations, for which no
tax benefit was provided.
NET INCOME AND EARNINGS PER SHARE
Net income was $4.7 million or $0.21 per diluted share for the third quarter
of fiscal 2002, compared to net income of $1.8 million or $0.08 per diluted
share for the third quarter of fiscal 2001. Excluding the $5.0 million one-
time tax benefit discussed above and goodwill amortization of $1.0 million,
we would have incurred a net loss of $2.2 million or $0.10 per share in the
third quarter of fiscal 2001. In accordance with SFAS No. 142, goodwill
amortization was discontinued at the beginning of fiscal 2002.
Comparison of Nine Months Ended September 28, 2002 and September 29,
2001
NET SALES
Net sales for the first nine months of fiscal 2002 were $459.8 million, a
decrease of $25.5 million or 5.3% from net sales of $485.2 million for the
first nine months of fiscal 2001.
Net sales of home fashions products were $329.1 million for the first nine
months of fiscal 2002, down $32.1 million or 8.9% from the first nine months
of fiscal 2001. The sales decline reflects sluggish consumer demand and the
lack of aggressive inventory reduction efforts in the first nine months of
fiscal 2002 in comparison with the first nine months of fiscal 2001. Contri-
buting to the unfavorable sales comparison is the rollout of a large juvenile
program in April 2001; no comparable programs have been introduced in fiscal
2002.
Net sales of apparel fabrics for the first nine months of fiscal 2002 were
$100.2 million, up $8.9 million or 9.8% over the first nine months of fiscal
2001. The increase is attributable to higher sales of sportswear fabrics,
primarily pant fabrics, which more than offset a decline in sales of shirting
fabrics.
Net sales of engineered products were $30.6 million for the first nine months
of fiscal 2002, down $2.3 million or 7.0% from the first nine months of
fiscal 2001. The decrease reflects soft demand from the industrial fabrics
sector and a very competitive pricing situation in the automotive sector.
18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $51.4 million for the first
nine months of fiscal 2002 (11.2% of net sales), an increase of $2.1 million
or 4.3% from $49.3 million (10.2% of net sales) for the first nine months of
fiscal 2001. The increase was due to $1.4 million in bad debt expense
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
Consolidated operating income was $31.7 million for the first nine months of
fiscal 2002, compared to $0.8 million for the first nine months of fiscal
2001.
Segment Operating Income:
Operating income for the home fashions segment was $31.2 million for the
first nine months of fiscal 2002, compared to $9.9 million in operating
income earned in the first nine months of fiscal 2001. Operating margins
were low in the first nine months of fiscal 2001 due to a combination of
factors, including the effects of unfavorable manufacturing performance
(caused by uneven running schedules and production curtailments), and
promotional pricing, both of which resulted from our focus on inventory
reduction. The improved profitability in the first nine months of fiscal
2002 reflects better plant capacity utilization, cost savings from the plant
consolidation program implemented earlier in the year and lower raw material
costs. These factors, along with an improved product mix due to the absence
of aggressive promotional pricing in the first nine months of fiscal 2002,
more than offset the effects of the lower sales volume.
The apparel fabrics segment generated $1.4 million in operating income for
the first nine months of fiscal 2002, including a $1.5 million operating loss
from our shirt manufacturing facility in Mexico. This compares to a $4.6
million operating loss for the first nine months of fiscal 2001, which
included a $1.0 million operating loss from our Mexican operations, all of
which was attributable to the second and third quarters 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 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 implemented
earlier this year, as well as lower raw material costs. The losses from our
Mexican operations were caused by low sales volume. Despite intense
marketing efforts, building sales volume to an acceptable level has been
difficult in the current economic environment. Recently, we have received
significant orders for shirts from our Mexican facility, for the career
apparel market. However, shipments on these orders will not begin until late
in fiscal 2002. Our Mexican plant was built in fiscal 2000.
The engineered products segment generated a $1.1 million operating loss for
the first nine months of fiscal 2002, compared to a $0.9 million operating
loss for the first nine months of fiscal 2001. Profitability in both periods
was hampered by low sales volume, a competitive pricing environment and
inefficient manufacturing performance.
19
Corporate Items:
Amortization of goodwill was $2.7 million in the first nine 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 nine months of
fiscal 2002 is a $0.3 million pre-tax gain 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.
Other items not allocated to segments totaled $0.1 million (expense) for the
first nine months of fiscal 2002 compared to $0.8 million (expense) for the
first nine 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 $0.8 million. The fiscal 2001
amount consists of idle facility costs and other expenses.
INTEREST EXPENSE
Interest expense was $21.0 million for the first nine months of fiscal 2002,
a decrease of $3.8 million from the first nine months of fiscal 2001. The
decrease reflects both lower debt levels and lower average interest rates.
INCOME TAX PROVISION
We recorded a $7.6 million income tax provision in the first nine 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.
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 nine months of fiscal 2002 was $4.8 million, or 44.1% of pre-tax
income. The relatively high effective rate is due to losses from our Mexican
operations, for which no tax benefit was provided.
For the first nine months of fiscal 2001, we recorded a $12.6 million income
tax benefit. Included in that amount is a $5.0 million benefit for the
reversal of income tax liabilities recorded in prior years. During the third
quarter of fiscal 2001, the Internal Revenue Service completed its examina-
tion of the our federal income tax returns through tax year 1999. Based on
the results of the examination and a review of our tax position, the $5.0
benefit referred to above was recorded.
20
Excluding the one-time $5.0 million income tax benefit discussed above, the
income tax benefit for first nine months of fiscal 2001 was $7.7 million
(32.6% of the pre-tax loss). The low effective rate is due to nondeductible
goodwill amortization and losses from our Mexican operations, for which no
tax benefit was provided.
NET INCOME AND EARNINGS PER SHARE
For the first nine months of fiscal 2002, we reported a loss of $17.5 million
or $0.79 per diluted share. Before the cumulative effect of the accounting
change for goodwill impairment (discussed below) we earned $3.2 million or
$0.15 per diluted share. These results include 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.
Excluding the above items, we would have reported income (before the
cumulative effect of an accounting change) of $6.7 million or $0.30 per
diluted share.
The net loss for the first nine months of fiscal 2001 was $10.8 million or
$0.50 per diluted share. Included in these results are the one-time tax
benefit of $5.0 million, discussed above, and goodwill amortization of $2.7
million ($2.6 million after tax). In accordance with SFAS No. 142, goodwill
is no longer amortized as of the beginning of fiscal 2002. Excluding the
one-time tax benefit and goodwill amortization, the loss for the first nine
months of fiscal 2001 would have been $13.2 million or $0.61 per diluted
share.
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. SFAS
No. 142 also requires that a transitional impairment test of goodwill be
performed as of the first day of the year of adoption.
With the assistance of an outside consultant, we completed the transitional
impairment review of goodwill during the third quarter of fiscal 2002, and
determined that goodwill in our apparel fabrics, engineered products and
import specialty products businesses was impaired. As a result, we recorded
a non-cash charge of $20.7 million, representing goodwill impairment of $23.4
million, less the deferred tax effect of $2.7 million. The charge has been
reported as a cumulative effect of a change in accounting principle
retroactive to the first day of fiscal 2002, and therefore increased the
previously reported net loss per share for the first quarter of fiscal 2002
from $0.24 to $1.19.
21
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 54.1% at September 28, 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 (6.00%
as of November 4, 2002) or LIBOR plus applicable percentage (4.15% as of
November 4, 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 September 28, 2002, $64.5 million was used and $61.3 million was unused
and available for borrowing. The term loan had an outstanding principal
balance of $79.9 million at September 28, 2002. Scheduled amortization
payments for fiscal 2002 on the term loan total $28.0 million, of which $5.0
million was paid in the first three fiscal quarters. In addition to the
regular scheduled fiscal fourth quarter payments of $10.0 million on
September 30, 2002 and $10.0 million on December 16, 2002, the scheduled
$28.0 million amortization includes $3.0 million of the term loan that we
prepaid on September 30, 2002. The credit facility provides that we will
prepay an additional $3.0 million of the term loan on December 31, 2002,
which falls in our first quarter of fiscal 2003, if $23.0 million or more is
available under the working capital line as of December 27, 2002, the last
business day of the fourth fiscal quarter of 2002.
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). During the third
quarter of fiscal 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. At the end of the third quarter, the
Company had successfully further reduced outstanding funded debt to $277.0
million. On November 4, 2002, the effective interest rate margin on new or
outstanding loans and letters of credit under the credit facility agreement
was reduced by an additional 50 basis points.
22
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
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
Operating activities generated $53.0 million in net cash for the first nine
months of fiscal 2002, of which $6.9 million was attributable to changes in
operating assets and liabilities. The net source of cash from operating
assets and liabilities is comprised of a $5.9 million source from operating
working capital (accounts receivable - $2.7 million use, inventories - $5.1
million source, and accounts payable and accrued expenses - $3.5 million
source) and a $1.0 million source of cash from prepaid expenses and other
assets and other liabilities.
During the comparable nine month period ended September 29, 2001, net cash
generated by operating activities was $50.4 million. Included in that amount
is a source of cash from operating assets and liabilities of $39.7 million,
comprised of a $40.1 million source from operating working capital (accounts
receivable - $6.0 million use, inventories - $39.2 million source, and
accounts payable and accrued expenses - $6.9 million source) and a $0.4
million net use of cash for prepaid expenses and other assets and other
liabilities.
Investing Activities
During the first nine months of fiscal 2002, we purchased $8.6 million of
equipment and manufacturing improvements.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures
As of September 28, 2002, we carried out an evaluation, under the supervision
and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-14
of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to Dan River Inc. (including its
consolidated subsidiaries) required to be included in our Exchange Act
filings. There have been no significant changes in our internal controls or
in other factors which could significantly affect internal controls
subsequent to the date we carried out our evaluation.
24
PART II - OTHER INFORMATION
Items 1-5. No disclosure required.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The Exhibits listed as applicable on the accompanying Exhibit
Index are filed as part of this Quarterly Report.
(b) Reports on Form 8-K. None
25
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: November 8, 2002 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
26
CERTIFICATIONS
I, Joseph L. Lanier, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dan River Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
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
27
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 8, 2002
/s/ Joseph L. Lanier, Jr.
___________________________
Joseph L. Lanier, Jr., Chief
Executive Officer
28
CERTIFICATIONS
I, Barry F. Shea, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dan River Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
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
29
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 8, 2002
/s/ Barry F. Shea
------------------------------
Barry F. Shea, Chief Financial Officer
30
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
- ------------------