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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 28, 2003
-------------------------------------
Commission File Number: 0-23400
DT INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 44-0537828
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
907 West Fifth Street, Dayton, Ohio 45407
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(937) 586-5600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
The number of shares of Common Stock, $0.01 par value, of the registrant
outstanding as of November 5, 2003 was 23,667,932.
Page
Number
------
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 28, 2003
and June 29, 2003 2
Consolidated Statement of Operations for the three
months ended September 28, 2003 and September
29, 2002 3
Consolidated Statement of Changes in Stockholders'
Equity for the three months ended September 28,
2003 4
Consolidated Statement of Cash Flows for the three
months ended September 28, 2003 and September
29, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 24
Item 4. Controls and Procedures 24
Part II Other Information
Item 1. Legal Proceedings 25
Item 3 Defaults Upon Senior Securities 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 2
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SEPTEMBER 28, JUNE 29,
2003 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,841 $ 4,912
Accounts receivable, net 30,657 28,999
Costs and estimated earnings in excess of amounts billed
on uncompleted contracts 28,174 29,242
Inventories, net 26,718 28,905
Prepaid expenses and other 5,987 5,886
--------- ---------
Total current assets 96,377 97,944
Property, plant and equipment, net 29,231 30,041
Goodwill 74,803 75,316
Other assets, net 5,036 5,944
--------- ---------
$ 205,447 $ 209,245
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Senior secured term and revolving credit facility $ 46,929 $ 39,492
Current portion of other long-term debt 107 124
Accounts payable 15,053 16,200
Customer advances 11,267 15,739
Billings in excess of costs and estimated earnings on
uncompleted contracts 7,116 5,003
Accrued liabilities 25,704 26,137
--------- ---------
Total current liabilities 106,176 102,695
--------- ---------
Long-term debt 1,473 1,491
Other long-term liabilities 24,754 24,316
--------- ---------
Total non-current liabilities 26,227 25,807
--------- ---------
Commitments and contingencies (Note 9)
Company-obligated, mandatorily redeemable convertible
preferred
securities of subsidiary DT Capital Trust holding solely
convertible junior subordinated debentures of the Company 37,406 37,005
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value; 1,500,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized;
23,667,932 shares outstanding at September 28, 2003 and
June 29, 2003 246 246
Additional paid-in capital 188,060 188,060
Accumulated deficit (111,167) (103,394)
Accumulated other comprehensive loss (18,838) (18,479)
Unearned portion of restricted stock (146) (178)
Less -
Treasury stock (968,488 shares at September 28, 2003
and June 29, 2003), at cost (22,517) (22,517)
--------- ---------
Total stockholders' equity 35,638 43,738
--------- ---------
$ 205,447 $ 209,245
========= =========
See accompanying Notes to Consolidated Financial Statements.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 3
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THREE MONTHS ENDED
----------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2003 2002
------------ ------------
Net sales $ 46,813 $ 69,442
Cost of sales 39,852 55,568
------------ ------------
Gross profit 6,961 13,874
Selling, general and administrative expenses 11,181 13,197
Asset impairment 423
Restructuring charges 1,057 --
------------ ------------
Operating income (loss) (5,700) 677
Interest expense, net 1,672 1,438
Dividends on Company-obligated, mandatorily redeemable convertible preferred
securities of subsidiary DT Capital Trust holding solely convertible junior
subordinated debentures of the Company 401 401
------------ ------------
Loss before income taxes (7,773) (1,162)
Provision (benefit) for income taxes -- --
------------ ------------
Net loss $ (7,773) $ (1,162)
------------ ------------
Net loss per common share:
Basic $ (0.33) $ (0.05)
Diluted $ (0.33) $ (0.05)
------------ ------------
Weighted average common shares outstanding:
Basic 23,652,932 23,647,932
Diluted 23,652,932 23,647,932
------------ ------------
See accompanying Notes to Consolidated Financial Statements.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PAGE 4
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Unearned
Accumulated portion
Additional other of
Common paid-in Accumulated comprehensive Treasury restricted
stock capital deficit loss stock stock Total
----------- ------------- -------------- --------------- ----------- ---------- ------------
BALANCE, JUNE 29, 2003 $246 $188,060 $(103,394) $(18,479) $(22,517) $(178) $43,738
Comprehensive income:
Net loss (7,773)
Deferred hedging loss 3
Foreign currency translation (362)
Total comprehensive income (8,132)
Amortization of earned portion
of restricted stock 32 32
----------- ------------- -------------- --------------- ----------- ---------- ------------
BALANCE, SEPTEMBER 28, 2003 $246 $188,060 $(111,167) $(18,838) $(22,517) $(146) $35,638
----------- ------------- -------------- --------------- ----------- ---------- ------------
See accompanying Notes to Consolidated Financial Statements.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PAGE 5
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THREE MONTHS ENDED
------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2003 2002
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,773) $ (866)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 955 1,187
Amortization 589 582
Asset impairment 423
Other (5) --
Deferral of dividends on convertible trust preferred securities 401 401
(Increase) decrease in current assets, excluding the effect of dispositions:
Accounts receivable (1,506) 14,798
Costs and estimated earnings in excess of amounts billed on
uncompleted contracts 1,050 (7,754)
Inventories 2,214 (4,584)
Prepaid expenses and other 661 (452)
Increase (decrease) in current liabilities, excluding the effect of
dispositions:
Accounts payable (1,195) 862
Customer advances (4,490) (823)
Billings in excess of costs and estimated earnings on uncompleted
contracts 2,074 (1,781)
Accrued liabilities and others (554) (5,066)
-------- --------
Net cash used by operating activities (7,156) (3,496)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (108) (892)
-------- --------
Net cash used by investing activities (108) (892)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (paydowns) on revolving loans 7,500 (6,346)
Payments on borrowings (292) (5,046)
Financing costs (100) (174)
-------- --------
Net cash provided (used) by financing activities 7,108 (11,566)
-------- --------
Effect of exchange rate changes 85 611
-------- --------
Net decrease in cash (71) (15,343)
Cash and cash equivalents at beginning of period 4,912 18,847
-------- --------
Cash and cash equivalents at end of period $ 4,841 $ 3,504
-------- --------
See accompanying Notes to Consolidated Financial Statements.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 6
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1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of DT
Industries, Inc. (DTI or the Company) have been prepared in accordance
with the instructions for Form 10-Q and do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
However, in the opinion of management, the information includes all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results of operations for the periods
presented. Operating results for any quarter are not necessarily
indicative of the results for any other quarter or for the full year.
These statements should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 29, 2003.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced operating losses in the past several years,
has an accumulated deficit of $111,167 and its operating performance
continues to be adversely impacted by depressed levels of capital
spending in the markets it serves. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern. In light of the availability under the credit facility, the
Company will need to effectively manage its cash to meet its liquidity
needs and debt reduction obligations through July 2, 2004, the maturity
date of the facility. The Company's ability to meet its short-term
liquidity needs and debt obligations could be materially adversely
affected if the Company incurs significant manufacturing costs for
projects that do not involve prepayments or if orders increase
materially. The Company has initiated discussions with several lenders
and is actively engaged in negotiations to sell certain assets for
purposes of refinancing borrowings under its credit facility, and
expects to complete such refinancing prior to July 2, 2004. While the
Company believes it will be able to replace the facility, the Company
may not be able to find new financing on terms acceptable to the
Company or the current bank group. If that is the case, the current
bank group may not be willing to further extend the credit facility. If
the current bank group is not willing to extend the credit facility,
new financing at acceptable terms is not available and the Company is
not able to generate sufficient cash by selling assets, the Company
will not be able to make the lump sum payment that will otherwise be
due on July 2, 2004. If sufficient funds to satisfy obligations under
the senior credit facility are not available, the Company will not be
able to continue its operations as currently anticipated and may need
to initiate bankruptcy proceedings in order to continue its operations
with minimal disruption and preserve the value of its assets.
The Company's senior credit facility, described in Note 4, matures on
July 2, 2004 and borrowings thereunder of approximately $46,929 are
presented as current debt in the accompanying September 28, 2003
consolidated balance sheet.
3. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
The accounts of the Company's foreign subsidiaries are maintained in
their respective local currencies. The accompanying consolidated
financial statements have been translated and adjusted to reflect U.S.
dollars in accordance with accounting principles generally accepted in
the United States.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 7
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STOCK COMPENSATION PLANS
The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under APB 25, the Company applies the intrinsic
value method of accounting. For employee stock options accounted for
using the intrinsic value method, no compensation expense is recognized
because the options are granted with an exercise price equal to the
market value of the stock on the date of grant. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123) prescribes the recognition of compensation expense based on
the fair value of options or stock awards determined on the date of
grant. However, SFAS 123 allows companies to continue to apply the
valuation methods set forth in APB 25. For companies that continue to
apply the valuation methods set forth in APB 25, SFAS 123 mandates
certain pro forma disclosures, as amended by Statement of Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure", as if the fair value method had been
utilized.
Had compensation costs for the Company's stock incentive plans been
determined based on the fair value of the options on the grant dates
consistent with the methodology prescribed by SFAS 123, the Company's
net loss and net loss per basic and diluted share would have been
increased to the pro forma amounts indicated below. Because future
stock option awards may be granted, the pro forma impacts shown below
are not necessarily indicative of the impact in future years.
For the Three Months Ended
----------------------------
September September
28, 2003 29, 2002
----------- -----------
Net loss - as reported $(7,773) $(1,162)
Add: Total stock-based compensation
expense included in net loss - as reported 32 81
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards (76) (164)
------- -------
Net loss - pro forma $(7,817) $(1,245)
------- -------
Loss per basic and diluted share - as
reported $ (0.33) $ (0.05)
Loss per basic and diluted share - pro
forma $ (0.33) $ (0.05)
------- -------
GOODWILL
The changes in the carrying amount of goodwill for the three months
ended September 28, 2003 were as follows:
Material Packaging Assembly &
Processing Systems Test
segment segment segment Total
------- ------- ------- -----
Balance as of June 29, 2003 $ 31,100 $ 11,500 $ 32,716 $ 75,316
Goodwill impairment charge -- -- (423) (423)
Foreign currency translation -- (58) (32) (90)
-------- -------- -------- --------
Balance as of September 28, 2003 $ 31,100 $ 11,442 $ 32,261 $ 74,803
-------- -------- -------- --------
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 8
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4. FINANCING
As of September 28, 2003 and June 29, 2003, current and long-term debt
consisted of the following:
SEPTEMBER 28, JUNE 29,
2003 2003
-------- ---------
Term and revolving loans under senior secured credit facility:
Term loan $ 5,747 $ 5,996
Revolving loans 41,182 33,496
Other debt 1,580 1,615
------- -------
48,509 41,107
Less - current portion of senior secured credit 46,929 39,492
facility
Less - current portions of other debt 107 124
------- -------
Long-term debt $ 1,473 $ 1,491
======= =======
As a result of covenant defaults in the fourth quarter of fiscal 2003
and the first quarter of fiscal 2004, the Company completed an
amendment to its senior credit facility on October 21, 2003 that
provided a permanent waiver of the covenant defaults and established
new covenants through the term of the facility, which is currently set
to mature on July 2, 2004. In conjunction with the amendment and in
accordance with previous amendments to the senior credit facility, the
Company made a term loan payment of $263 and the revolving credit line
was reduced by $2,217. The amended senior credit facility (as of
October 21, 2003), consisted of a $5,464 term loan and a $42,783
revolving loan ($783 represented a restricted line of credit requiring
lender consent to utilize).
Significant terms of the senior credit agreement as amended through the
date hereof are:
o $1,500 quarterly scheduled commitment reductions prorated
between the term and revolving loan commitments through June
2004;
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 9
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o Interest rates for amounts borrowed under the credit facility
are based on Prime Rate plus 4.0% or Eurodollar Rate plus
4.5%. The interest rates will increase 1/2 percentage point on
January 31, 2004 if the Company does not reduce the
outstanding revolving loans to $18,000 or less. At September
28, 2003, interest rates on outstanding indebtedness were 8.0%
on domestic borrowings and 7.95% on Sterling Pound borrowings.
o Commitment fees of 0.50% per annum payable quarterly on any
unused portion of the revolving credit facility, an annual
agency fee of $150 and a 1% annual facility fee. The annual
facility fee will be forgiven if the debt is paid in full and
the credit facility is cancelled before the annual due dates
or if the Company has sold assets of not less than $22,000
prior to January 31, 2004.
o Borrowings under the credit facility are secured by
substantially all of the assets of DTI and its domestic
subsidiaries.
Total borrowing availability under the credit facility, as of
September 28, 2003, was $507 (after using availability for outstanding
letters of credit of $973). The Company had cash on hand of $4,841 as
of September 28, 2003.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 10
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5. COMPANY-OBLIGATED, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY DT CAPITAL TRUST HOLDING SOLELY CONVERTIBLE
JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY (CONVERTIBLE PREFERRED
SECURITIES OR TIDES)
The conversion price of the $35,000 outstanding TIDES (and the Junior
Debentures of the Company held by the DT Capital Trust) is $14.00 per
share, distributions on the TIDES payable are not required to be paid
from April 1, 2002 until July 2, 2004, and the maturity date of the
TIDES is May 31, 2008. Distributions are payable on the TIDES at 7.16%
beginning September 2004 through their maturity date of May 31, 2008.
However, annual dividend expense of $1,604 on the TIDES is being
recorded, reflecting an approximate effective yield of 4.6% over the
life of the TIDES. Distributions accrued during the period through July
2, 2004 are added to the amount outstanding ($37,406 at September 28,
2003).
6. BUSINESS SEGMENTS
In July 2003, the Company announced the closure of its Precision
Assembly segment manufacturing facility in Buffalo Grove, Illinois and
the transfer of its manufacturing operation to the Material Processing
segment's Lebanon, Missouri facilities. An engineering, sales and
service office will remain in Illinois to serve Precision Assembly's
customers. Beginning with this Form 10-Q for the first quarter of
fiscal 2004, the Precision Assembly segment has been consolidated into
the Material Processing segment for financial reporting purposes and
the financial information presented for fiscal 2003 has been
reclassified to reflect that the Company currently has three business
segments.
Net sales for the Company's reportable segments consisted of the
following:
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER 28, 2003 SEPTEMBER 29, 2002
------------------ ------------------
Net sales
Material Processing $20,880 $41,940
Packaging Systems 5,141 5,851
Assembly & Test 20,792 21,651
------- -------
Consolidated total $46,813 $69,442
------- -------
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 11
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The reconciliation of segment operating income (loss) to consolidated
loss before income taxes consisted of the following:
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 28, 2003 SEPTEMBER 29, 2002
------------------ ------------------
Material Processing $(2,921) $ 3,362
Packaging Systems 53 (52)
Assembly & Test (451) (669)
------- -------
Operating income (loss) for reportable segments (3,319) 2,641
Corporate (2,381) (1,964)
Interest expense, net (1,672) (1,438)
Dividends on Company-obligated, mandatorily
redeemable
convertible preferred securities of subsidiary DT
Capital
Trust holding solely convertible junior
subordinated
debentures of the Company (401) (401)
------- -------
Consolidated loss before income taxes $(7,773) $(1,162)
------- -------
Total assets for the Company's reportable segments consisted of the
following:
AS OF AS OF
SEPTEMBER 28, 2003 JUNE 29, 2003
------------------ -------------
Total assets
Material Processing $ 82,567 $ 86,137
Packaging Systems 28,720 30,199
Assembly & Test 84,393 83,321
Corporate 9,767 9,588
-------- --------
Consolidated total $205,447 $209,245
-------- --------
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 12
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7. SUPPLEMENTAL BALANCE SHEET INFORMATION
SEPTEMBER 28, 2003 JUNE 29, 2003
------------------ -------------
Accounts receivable
Trade receivables $ 32,493 $ 30,547
Less - allowance for doubtful accounts (1,836) (1,548)
--------- ---------
$ 30,657 $ 28,999
--------- ---------
Costs and estimated earnings in excess of amounts
billed on uncompleted contracts
Costs incurred on uncompleted contracts $ 136,195 $ 119,133
Estimated earnings 12,575 17,121
--------- ---------
148,770 136,254
Less - Billings to date (127,712) (112,015)
--------- ---------
$ 21,058 $ 24,239
--------- ---------
Included in the accompanying balance sheets:
Costs and estimated earnings in excess of amounts $ 28,174 $ 29,242
billed
Billings in excess of costs and estimated earnings (7,116) (5,003)
--------- ---------
$ 21,058 $ 24,239
--------- ---------
Inventories, net
Raw materials $ 15,160 $ 11,698
Work in process 13,662 18,609
Finished goods 3,234 4,029
Less - inventory reserves (5,338) (5,431)
--------- ---------
$ 26,718 $ 28,905
--------- ---------
Accrued liabilities
Accrued employee compensation and benefits $ 6,383 $ 6,862
Accrued warranty 2,781 2,619
Restructuring accrual 1,441 1,004
Income tax refund accrual 8,285 8,285
Other 6,814 7,367
--------- ---------
$ 25,704 $ 26,137
--------- ---------
The Company routinely incurs warranty costs after projects are
installed and completed. The Company reserves for such warranty costs
based on its historical warranty experience and consideration of any
known warranty issues. A summary and rollforward of the warranty
reserves for the three months ended September 28, 2003 were as follows:
Beginning Balance Expense Charges Ending Balance
----------------- ------- ------- --------------
Warranty reserves
for the three months
ended September 28, 2003 $2,619 $416 $(254) $2,781
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 13
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8. ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the
reporting and consolidation of variable interest entities as they
relate to a business enterprise. This interpretation incorporates and
supersedes the guidance set forth in ARB No. 51, "Consolidated
Financial Statements." It requires the consolidation of variable
interests into the financial statements of a business enterprise if
that enterprise holds a controlling financial interest via other means
than the traditional voting majority. The provisions of FIN 46 are
effective immediately for variable interest entities created after
January 31, 2003 and thereafter. In October 2003, the FASB decided to
defer the implementation date of FIN 46. The new effective date for FIN
46 is the end of the first interim or annual period subsequent to
December 15, 2003, which is the second quarter of fiscal 2004 for the
Company. The Company's wholly-owned consolidated subsidiary trust
(the "Trust") is the issuer of the Trust Preferred Securities. Pursuant
to FIN 46, it could be determined that (i) the Trust is a variable
interest entity and (ii) the Company is not the primary beneficiary of
the Trust. If such determinations are made, the Company will be
required to de-consolidate the Trust, effective for the reporting
period ended December 28, 2003. The Company would, however, maintain a
liability to the Trust relative to the debentures of the Company held
by DT Capital Trust. The Company has not created any new variable
interest entities since January 31, 2003 and is currently assessing the
overall impact of adopting FIN 46.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity and requires that an
issuer classify a financial instrument that is within its scope as a
liability. Certain provisions of this statement have been indefinitely
deferred. The Company is currently considering the impact this standard
will have, in conjunction with FIN 46, with respect to its TIDES
securities.
9. COMMITMENTS AND CONTINGENCIES
The staff of the Securities and Exchange Commission (the "Commission")
is conducting an investigation of the accounting practices at the
Company's Kalish and Sencorp subsidiaries that led to the restatements
of its consolidated financial statements for fiscal years 1997, 1998
and 1999 and the first three quarters of fiscal 2000, as well as the
issues at the Company's AMI subsidiary that led to the accounting
adjustments to the Company's previously reported audited consolidated
financial results for the fiscal years ended June 24, 2001, June 25,
2000 and June 27, 1999, and to the Company's previously reported
unaudited consolidated financial results for the first three fiscal
quarters of 2002. The Company is cooperating fully with the
Commission in connection with its investigation and cannot currently
predict the duration or outcome of the investigation.
In November 1998, pursuant to the agreement by which the Company
acquired Kalish, Mr. Graham L. Lewis, a former executive officer and
director of DTI, received an additional payment based on Kalish's
earnings for each of the three years after the closing. As a result of
the prior restatement due to accounting practices at Kalish, the
Company believes that the additional payment should not have been made.
During fiscal 2001, we commenced legal action against Mr. Lewis in
Superior Court, Civil Division in Montreal, Quebec to recover this
payment and certain bonuses paid to Mr. Lewis. Mr. Lewis has
counter-sued for wrongful termination and is seeking to recover
monetary damages, including severance, loss of future income, emotional
distress and harm to reputation, equal to $2.8 million Canadian
dollars. There has been little discovery in these actions to date.
Management believes that the Company's suit against Mr. Lewis has
merit. Management further believes that Mr. Lewis' counter-suit is
without merit. The Company intends to pursue vigorously its claims
against Mr. Lewis and defend against his counter-suit.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 14
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In July 2003, Green Packaging SDN BHD and Green Earth Packaging Corp.
(collectively, "Green Packaging") filed a complaint against Detroit
Tool & Engineering Company ("DTE"), a wholly-owned subsidiary of DTI,
in the Superior Court of the State of California, County of Santa
Barbara. As causes of action, the complaint alleges breach of contract,
misappropriation of trade secrets, breach of confidence, unfair
business practices, conversion and similar claims arising out of a
purchase order pursuant to which DTE was to manufacture for Green
Packaging four lines of equipment for the purpose of producing
biodegradable food packaging using technology and processes licensed by
Green Packaging from Earthshell Corporation. In its complaint, Green
Packaging seeks damages "believed to be in excess of $3.3 million,"
punitive damages and injunctive relief. Prior to the filing of the
complaint, Green Packaging had notified DTE that it was canceling its
purchase order for the equipment, and DTE had invoiced Green Packaging
for cancellation charges in excess of $6.4 million, which has not been
paid. DTE filed a motion to quash service of the summons and complaint
for lack of personal jurisdiction. Rather than responding to the
motion, on September 29, 2003 Green Earth amended its complaint and
added DTI as a defendant in that action. The causes of action in the
amended complaint are the same as those asserted in the original
complaint, with the addition of a breach of guarantee and breach of an
additional agreement claims. The Company intends to file a motion to
quash service of the summons and complaint for lack of personal
jurisdiction. In addition, the Company intends to vigorously defend
Green Packaging's action and to vigorously pursue its claim again Green
Packaging for the above-referenced cancellation charges.
Regarding the Green Packaging project, the Company has incurred
approximately $8,500 in costs, received approximately $3,300 from the
customer and established a reserve of approximately $1,700. The Company
has since contracted to sell a majority of the inventory to another
customer and expects to recover the approximate $3,000 of net value on
its balance sheet at September 28, 2003. The contract with this other
customer includes a number of conditions and contingencies, some of
which are outside the control of the Company. Because of the
contractual risks associated with these contingencies, the Company will
not recognize any revenues or profits on this project until such time
that the customer fully accepts installed machinery.
Product liability claims are asserted against the Company from time to
time for various injuries alleged to have resulted from defects in the
manufacture and/or design of its products. At September 28, 2003, there
were seven such claims either pending or that may be asserted against
the Company. The Company does not believe that the resolution of these
claims, either individually or in the aggregate, will have a material
adverse effect on its financial condition, results of operations or
cash flow. Product liability claims are covered by the Company's
comprehensive general liability insurance policies, subject to certain
deductible amounts. The Company has established reserves for these
deductible amounts, which it believes to be adequate based on its
previous claims experience. However, there can be no assurance that
resolution of product liability claims in the future will not have a
material adverse effect on the Company's financial condition, results
of operations or cash flow.
The Company is from time to time subject to claims and suits arising in
the ordinary course of business. Although the ultimate disposition of
such proceedings is not presently determinable, management does not
believe that the ultimate resolution of these matters will have a
material adverse effect on the Company's financial condition, results
of operations or cash flows. The Company maintains comprehensive
general liability insurance that it believes to be adequate for the
continued operation of its business.
DT INDUSTRIES, INC.
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
PAGE 15
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10. RESTRUCTURING
As outlined in its Annual Report on Form 10-K for the fiscal year ended
June 29, 2003, during fiscal 2003, 2002 and 2001, the Company took
several actions in connection with a plan to restructure its business
operations.
In July 2003, the Company announced the decision to transfer its
manufacturing operations in Buffalo Grove, Illinois of the Precision
Assembly segment to its Lebanon, Missouri manufacturing facilities as
part of the Material Processing segment. Beginning with this Form 10-Q
for the first quarter of fiscal 2004, the Precision Assembly segment
has been consolidated into the Material Processing segment for
financial reporting purposes. The Company recorded a restructuring
charge of $1,057 in the first quarter of fiscal 2004, including
severance costs of $1,032 for the termination of 69 employees.
The restructuring reserve at June 29, 2003 pertains to two vacant
facilities and one facility sublet at approximately 75% of the current
lease rates. The reserve represents lease payments on the vacant
facilities through June 2004 and the partial lease payments on the
sublet facility through the life of the sublease(2013).
The following table summarizes the changes in the restructuring
accruals during the first quarter of fiscal 2004:
ACCRUED ACCRUED
AS OF INCREASES IN CASH CHARGES AS OF
JUNE 29, 2003 RESERVE TO ACCRUAL SEPTEMBER 28, 2003
---------------- ---------------- --------------- --------------------
Severance costs $ -- $ 1,032 $ (363) $ 669
Future lease costs on closed 1,004 -- (232) 772
facilities
Other -- 25 (25) --
------- ------- ------- -------
$ 1,004 $ 1,057 $ (620) $ 1,441
------- ------- ------- -------
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 16
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Certain information contained in this Quarterly Report, including, without
limitation, the information appearing under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," includes forward-looking statements made
pursuant to the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended. These statements comprising all statements herein which
are not historical reflect our current expectations and projections about our
future results, performance, liquidity, financial condition, prospects and
opportunities and are based upon information currently available to us and our
interpretation of what we believe to be significant factors affecting our
businesses, including many assumptions regarding future events. References to
the words "opportunities," "growth potential," "objectives," "goals," "will,"
"anticipate," "believe," "intend," "estimate," "expect," "should," and similar
expressions used herein indicate such forward-looking statements. Our actual
results, performance, liquidity, financial condition, prospects and
opportunities could differ materially from those expressed in, or implied by,
these forward-looking statements as a result of various risks, uncertainties and
other factors, including the amount and availability of, and our ability to
comply with restrictions and covenants relating to, our indebtedness under our
senior credit facility, our ability to effectively manage our cash to meet our
liquidity needs and debt reduction needs through July 2, 2004, our ability to
refinance or further extend our senior credit facility in order to meet our
liquidity needs and continue as a going concern after July 2, 2004, our ability
to achieve anticipated cost savings from our corporate restructuring and cost
reduction initiatives, our ability to continue upgrading and modifying our
financial, information and management systems and controls to manage our
operations on an integrated basis and report our results, continued economic
downturns in industries or markets served, delays or cancellations of customer
orders, delays in shipping dates of products, significant cost overruns on
projects, customer demand for new products and applications, the loss of a key
customer, significant pre-tax charges, including for goodwill impairment, the
write-down of assets, warranty-related expenses and restructuring charges,
foreign currency exchange rate fluctuations, changes in interest rates,
increased inflation and collectibility of past due customer receivables. See
"Business - Risks Related to Our Business" in the Company's Annual Report on
Form 10-K for the fiscal year ended June 29, 2003 for a description of these and
other risks, uncertainties and factors.
You should not place undue reliance on any forward-looking statements. Except as
expressly required by the federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason.
GENERAL OVERVIEW
The following discussion summarizes the significant factors affecting the
consolidated operating results and financial condition of DT Industries, Inc.
(DTI or the Company) for the three months ended September 28, 2003 compared to
the three months ended September 29, 2002. This discussion should be read in
conjunction with the consolidated financial statements and notes to the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 29, 2003 and the unaudited consolidated
financial statements and notes thereto included in this Quarterly Report on Form
10-Q.
We have experienced operating losses in the past several years, have an
accumulated deficit of $111.1 million and our operating performance continues to
be impacted by depressed levels of capital spending in the markets we serve. As
discussed below under "Liquidity and Capital Resources," these circumstances
raise substantial doubt about the Company's ability to continue as a going
concern.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 17
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Almost all of our net sales are derived from the sale and installation of
equipment and systems primarily under fixed-price contracts. We also derive net
sales from the sale of spare and replacement parts and servicing installed
equipment and systems. We recognize revenue under the percentage of completion
method or upon delivery and acceptance in accordance with SEC Staff Accounting
Bulletin 101 (SAB 101).
We principally utilize the percentage of completion method of accounting to
recognize revenues and related costs for the sale and installation of equipment
and systems pursuant to customer contracts. These contracts are typically
engineering-driven design and build contracts of automated production equipment
and systems used to manufacture, test or package a variety of industrial and
consumer products. These contracts are generally for large dollar amounts and
require a significant amount of labor hours with durations ranging from three
months to over a year. Under the percentage of completion method, revenues and
related costs are measured based on the ratio of engineering and manufacturing
labor hours incurred to date compared to total estimated engineering and
manufacturing labor hours. Any revisions in the estimated total costs of the
contracts during the course of the work are reflected when the facts that
require the revisions become known.
For those contracts accounted for in accordance with SAB 101, we recognize
revenue upon shipment (FOB shipping point). We utilize this method of revenue
recognition for products produced in a standard manufacturing operation whereby
the product is built according to pre-existing bills of materials, with some
customization occurring. These contracts are typically of shorter duration (one
to three months) and have smaller contract values. The revenue recognition for
these products follows the terms of the contracts, which calls for transfer of
title at time of shipment after factory acceptance tests with the customer. If
installation of the product is included in the contracts, revenue for the
installation portion of the contract is recognized when installation is
complete.
Costs and related expenses to manufacture products, primarily labor, materials
and overhead, are recorded as costs of sales when the related revenue is
recognized. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
Selling, general and administrative expenses primarily consist of salary and
wages for employees, research and development costs, sales commissions and
marketing and professional expenses.
In July 2003, we announced the closure of our Precision Assembly segment
manufacturing facility in Buffalo Grove, Illinois and the transfer of our
manufacturing operation to the Material Processing segment's Lebanon, Missouri
facilities. An engineering, sales and service office will remain in Illinois to
serve Precision Assembly's customers. Beginning with this quarterly report, the
Precision Assembly segment has been consolidated into the Material Processing
segment for financial reporting purposes and the financial information presented
for fiscal 2003 has been restated to reflect that the Company currently has
three business segments.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 18
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
consolidated net sales represented by certain items reflected in the Company's
consolidated statement of operations. The data presented below was derived from
our unaudited consolidated financial statements included in this Quarterly
Report:
Three Months Ended
---------------------------------------------
September 28, 2003 September 29, 2002
(Unaudited) (Unaudited)
-------------------- --------------------
Net sales 100.0% 100.0%
Cost of sales 85.1 80.0
----- -----
Gross profit 14.9 20.0
Selling, general and administrative expenses 23.9 19.0
Asset impairment 0.9 --
Restructuring charges 2.3 --
----- -----
Operating income (12.2)% 1.0%
----- -----
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 19
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THREE MONTHS ENDED SEPTEMBER 28, 2003
COMPARED TO THREE MONTHS ENDED SEPTEMBER 29, 2002
Consolidated net sales for the three months ended September 28, 2003 were $46.8
million, a decrease of $22.6 million, or 32.6%, from $69.4 million for the three
months ended September 29, 2002.
Net sales by segment were as follows (in millions):
Three Months Ended Three Months Ended
September 28, 2003 September 29, 2002 Decrease
-------------------- -------------------- -------------------
Material Processing $20.9 $41.9 $(21.0)
Packaging Systems 5.1 5.9 (0.8)
Assembly & Test 20.8 21.6 (0.8)
---- ---- ----
$46.8 $69.4 $(22.6)
===== ===== ======
Material Processing segment net sales decreased $21.0 million, or 50.2%, to
$20.9 million for the three months ended September 28, 2003 from $41.9 million
for the three months ended September 29, 2002. The decrease was primarily due to
the decrease in sales to our key electronics customer. Sales to this customer
for the three months ended September 28, 2003 were $5.7 million, down $19.1
million or 77.0% from the comparable three months of fiscal 2003. The decrease
in sales can be attributed to the completion of several capital spending
programs with this customer being recognized in fiscal 2003 and not being
replaced by other orders from this customer or other customers. In July 2003, we
announced the decision to transfer the manufacturing operations in Buffalo
Grove, Illinois to Lebanon, Missouri as part of the Material Processing segment.
As a result of this consolidation, we have consolidated the Precision Assembly
segment into the Material Processing segment for financial reporting purposes
beginning with the three months ended September 28, 2003. The decision to
transfer manufacturing operations in Buffalo Grove was based on the outlook for
future electronics projects and excess capacity issues. We expect to see
continued softness in our core electronics market throughout fiscal 2004.
Packaging Systems segment net sales decreased $0.8 million, or 12.1%, to $5.1
million for the three months ended September 28, 2003 from $5.9 million for the
three months ended September 29, 2002. This business segment primarily serves
the pharmaceutical and nutritional markets. The lower sales can be attributed to
the softness in capital spending by the large pharmaceutical companies.
Assembly & Test segment net sales decreased $.8 million, or 3.7%, to $20.8
million for the three months ended September 28, 2003 from $21.6 million for the
three months ended September 29, 2002. Our Assembly & Test segment primarily
serves the automotive market. This segment's sales were down primarily due to
the European operations and the timing of diesel and gasoline fuel systems.
Customer programs are currently being delayed or cancelled.
Gross profit decreased $6.9 million, or 49.8%, to $7.0 million for the three
months ended September 28, 2003 from $13.9 million for the three months ended
September 29, 2002. The decrease in our gross profits reflects the effect of the
$22.6 million decrease in net sales. Our gross margin decreased to 14.9% in
fiscal 2004 from 20.0% in fiscal 2003. The lower gross margins resulted from $.4
million of the process and equipment development costs for Earthshell's
biodegradable foam laminate packaging equipment in the Material Processing
segment, poor project performance in the Material Processing and Assembly & Test
segments, $.4 million of additional non-cash pension costs and the impact on
current profitability at the Buffalo Grove, Illinois facility as a result of the
announcement of the transfer of all manufacturing to Lebanon, Missouri.
Selling, general and administrative (SG&A) expenses were $11.2 million for the
three months ended September 28, 2003, a decrease of $2.0 million, or 15.6%,
from the $13.2 million for the three months ended September 29, 2002. The
decrease is primarily attributed to the cost reduction program that we
implemented in fiscal 2003, which achieved savings of $1.0 million a month
beginning in April 2003. The program included the discontinuance of 401-K
matching and discretionary contributions and salary and wage reductions of 5% to
10% across several divisions and our corporate office.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 20
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A restructuring charge of $1.1 million was recorded during the three months
ended September 29, 2003. The charge related primarily to severance costs
associated with the transfer of manufacturing in Buffalo Grove, Illinois to
Lebanon, Missouri.
Operating income decreased $6.4 million to a loss of $5.7 million for the three
months ended September 28, 2003 from income of $0.7 million for the three months
ended September 29, 2002.
Material Processing segment operating income decreased $6.3 million to a loss of
$2.9 million for the three months ended September 28, 2003 from income of $3.4
million for the three months ended September 29, 2002. Operating margin for the
Material Processing segment was a loss of 14.0% in the first quarter of fiscal
2004 versus income of 8.0% in the first quarter of fiscal 2003. As noted above,
the drop in sales resulted from the segment's core electronics market where the
segment has historically achieved better profit performance. The decrease in
operating margin was also due to process and equipment development costs for
Earthshell's biodegradable foam laminate packaging equipment, the impact on
profitability from announcing the shut down of manufacturing in Buffalo Grove,
Illinois and several loss projects. We have incurred a total of $8.5 million of
process and equipment development costs for the biodegradable foam laminate
packaging equipment and received $3.3 million from Green Packaging. The initial
orders for this equipment were cancelled by Green Packaging during fiscal 2003
and we have since contracted to sell a majority of the Green Packaging inventory
to another customer and expect to recover the $3.0 million of net value on our
balance sheet at September 28, 2003.
Packaging Systems segment operating income increased $0.2 million to $0.1
million for the three months ended September 28, 2003 compared to an operating
loss of $0.1 million for the three months ended September 29, 2002. Operating
margin for the Packaging Systems segment was income of 1.0% in the first quarter
of fiscal 2004 versus a loss of 0.1% in the first quarter of fiscal 2003.
Assembly & Test segment operating loss decreased $0.2 million to a loss of $0.5
million for the three months ended September 28, 2003 from a loss $0.7 million
for the three months ended September 29, 2002. Results for 2004 include $0.4
million of additional non-cash pension costs and a $0.4 million asset impairment
charge. Operating margin for the Assembly & Test segment was a loss of (2.2%) in
the first quarter of fiscal 2004 versus a loss of 3.1% in the first quarter of
fiscal 2003.
Corporate head office operating costs were $2.4 million for the three months
ended September 28, 2003 versus $2.0 million for the three months ended
September 29, 2002. The increase was primarily a result of increased directors
and officers insurance and lender's legal and professional fees partially offset
by the cost cutting programs implemented.
Interest expense increased $0.3 million, or 16.3%, to $1.7 million for the three
months ended September 28, 2003 from $1.4 million for the three months ended
September 29, 2002. The increase reflects the 1/4 point increase in interest
rates charged on the senior credit facility and an increase in the amortization
of deferred financing fees. Dividends on our trust preferred securities were
$0.4 million for the three months in fiscal 2004 and fiscal 2003. Annual
dividend expense of $1.6 million on the TIDES is being recorded, reflecting an
approximate effective yield of 4.6% over the life of the TIDES.
No income tax benefit has been recorded for the three months ended September 28,
2003, or for the prior quarter despite book losses. Based on the uncertainty of
future taxable income, we have not recorded any tax benefit for book losses.
Also, we have established valuation allowances against all of our United States
and United Kingdom deferred tax assets.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 21
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LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced operating losses in the past several years, has an
accumulated deficit of $111.1 million and its operating performance continues to
be impacted by depressed levels of capital spending in the markets it serves.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The Company's amended credit facility reduced the
revolving loan commitment from $45.0 million to approximately $42.0 million. In
light of the reduced availability under the amended credit facility, the Company
will need to effectively manage its cash to meet its liquidity needs and debt
reduction obligation through July 2, 2004, the maturity date of the facility.
The Company has initiated discussions with several lenders and, is actively
engaged in negotiations to sell certain assets for purposes of refinancing
borrowings under its credit facility, and expects to complete such refinancing
prior to July 2, 2004. While the Company believes it will be able to replace the
facility, the Company may not be able to find new financing on terms acceptable
to the Company or the current bank group. If that is the case, the current bank
group may not be willing to further extend the credit facility. If the current
bank group is not willing to extend the credit facility, new financing at
acceptable terms is not available and the Company is not able to generate
sufficient cash by selling assets, the Company will not be able to make the lump
sum payment that will otherwise be due on July 2, 2004. If sufficient funds to
satisfy obligations under the senior credit facility are not available, the
Company will not be able to continue its operations as currently anticipated and
may need to initiate bankruptcy proceedings in order to continue its operations
with minimal disruption and preserve the value of its assets.
Cash Flow Activity
Net cash flow used by operations was $7.2 million for the three months ended
September 28, 2003, compared with $3.5 million for the three months ended
September 29, 2002. For the three months ended September 28, 2003, an increase
in working capital used $0.9 million of operating cash flow as compared to $4.8
million for the three months ended September 29, 2002.
The increase in working capital of $1.7 million in the first quarter of fiscal
2004 can be primarily attributed to the reduction in net sales of $22.9 million,
or 33.0%, from the first quarter of fiscal 2003. Note 8 to the unaudited
consolidated financial statements included herein provides a breakdown of the
components of costs and estimated earnings in excess of amounts billed on
uncompleted contracts (CIE) and billings in excess of costs and estimated
earnings (BIE). As shown in Note 8, costs incurred on uncompleted contracts
increased $17.1 million from June 29, 2003 to September 28, 2003 reflecting our
higher level of project activity at September 28, 2003, although net CIE/BIE has
actually decreased, reflecting lower estimated earnings on projects and a higher
level of billings on projects.
Our working capital balances can fluctuate significantly between periods as a
result of the significant costs incurred on individual contracts, the relatively
large amounts invoiced and collected for a number of large contracts, and the
amounts and timing of customer advances or progress payments associated with
certain contracts.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 22
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Capital expenditures for the three months ended September 28, 2003 were $0.1
million, reflecting the Company's conservation of cash. Management anticipates
capital expenditures for fiscal 2004 to be approximately $2.0 million,
consisting of recurring replacement or refurbishment of machinery and equipment.
Funding for capital expenditures is expected to be provided through the
Company's senior credit facility.
During the three months ended September 28, 2003, we borrowed $7.2 million under
our revolving line of credit to fund cash used by operating activities, capital
expenditures and $0.1 million in financing costs.
Senior Credit Facility and Trust Preferred Securities
We use our borrowings under our senior credit facility to fund working capital
requirements, capital expenditures and finance charges. Borrowings under our
senior credit facility are secured by substantially all of our domestic assets.
As of September 28, 2003, our senior credit facility consisted of a $45.0
million revolving credit facility (including a $3.0 million restricted line
subject to majority lender approval) and a $5.7 million term credit facility. As
of September 28, 2003, under the revolving line of credit, $41.5 million was
outstanding (including $0.9 million in outstanding letters of credit) and total
borrowing availability was $0.5 million. We had approximately $4.8 million in
cash as of September 28, 2003. We are required to make a scheduled quarterly
commitment reduction of $1.5 million on December 30, 2003.
As a result of our financial performance in fiscal 2003 and in July and August
of fiscal 2004, we were in default of the minimum EBITDA, minimum EBITDA to
interest expense and minimum net worth covenants of our senior credit facility
as of September 28, 2003. In July 2003, we received permanent waivers of the
covenant defaults in the first nine months of fiscal 2003. In conjunction with
the waiver of these covenant defaults, the revolving credit facility was
temporarily reduced to $45.0 million, with revolver advances in excess of $42.0
million requiring majority lender approval. In October 2003, we received
permanent waivers of the covenant defaults in the fourth quarter of fiscal 2003
and the first quarter of fiscal 2004 and established new covenants for the
remainder of the term of the senior credit facility beginning in November 2003.
The Company is subject to an increased interest rate on its outstanding
indebtedness if it fails to reduce to $18.0 million the outstanding principal
balance of the indebtedness and revolving loan commitment by January 31, 2004.
In connection with the amended facility, the Company agreed to pay an amendment
fee of 0.25% of the revolving loan commitment plus the outstanding term loan.
At September 28, 2003, interest rates were 8.0% on outstanding domestic
indebtedness and 7.95% on outstanding Sterling Pound indebtedness. Interest
rates at September 28, 2003 were based on the prime rate plus 4.0% or the
Eurodollar rate plus 4.5%. The facility requires commitment fees of 0.50% per
annum payable quarterly on any unused portion of the revolving credit facility,
an annual agency fee of $150,000 and a 1% annual facility fee. The annual
facility fee will be forgiven if the debt is paid in full and the credit
facility is cancelled before the annual due dates.
On June 12, 1997, we completed a private placement to several institutional
investors of $70.0 million of 7.16% convertible preferred securities ("TIDES").
The TIDES offering was made by our wholly-owned subsidiary trust, DT Capital
Trust (the "Trust"). The TIDES represent undivided beneficial ownership
interests in the Trust, the sole assets of which are the related aggregate
principal amount of junior subordinated debentures issued by us that the Trust
acquired with the proceeds of the TIDES offering. As originally structured, the
TIDES were convertible at the option of the holders at any time into shares of
our common stock at a conversion price of $38.75 per share. Furthermore, the
TIDES holders were entitled to receive cash distributions at an annual rate of
7.16%, payable quarterly in arrears on the last day of each calendar quarter. In
connection with the September 1999 amendment to our senior credit facility, we
elected to defer distributions on the TIDES for up to five years.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAGE 23
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In connection with our financial recapitalization transaction that we completed
on June 20, 2002 we restructured our agreement with the TIDES holders and, among
other things, exchanged half of the outstanding TIDES, plus the deferred
quarterly distributions of $15.1 million on the TIDES, for 6,260,658 shares of
our common stock. We have guaranteed the payment of distributions and payments
on liquidation of the Trust or the redemption of the TIDES. Through this
guarantee, our junior subordinated debentures, the debentures' indenture and the
Trust's declaration of trust, taken together, we have fully, irrevocably and
unconditionally guaranteed all of the Trust's obligations under the TIDES. Thus,
while the TIDES are not included in our liabilities for financial reporting
purposes and instead appear on our consolidated balance sheet between
liabilities and stockholders' equity, they represent obligations of DTI.
BACKLOG
The Company's backlog is based upon customer purchase orders that the Company
believes are firm. Backlog and orders by segment for the current and prior year
period are as follows:
Backlog as of Orders for the three months ended
------------------------------------- -------------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---------------- ---------------- ----------------- ----------------
Material Processing $ 32.2 $ 67.1 $ 18.7 $ 29.5
Packaging Systems 8.8 16.0 6.6 6.9
Assembly and Test 48.4 45.4 22.4 18.8
-------- -------- ------- -------
$ 89.4 $ 128.5 $ 47.7 $ 55.2
-------- -------- ------- -------
The level of backlog at any particular time is not necessarily indicative of our
future operating performance for any particular reporting period because we may
not be able to recognize as sales the orders in our backlog when expected or at
all due to various contingencies, many of which are beyond our control. For
example, many purchase orders are subject to cancellation by the customer upon
notification. Certain orders are also subject to delays in completion and
shipment at the request of the customer. However, our contracts normally provide
for cancellation and/or delay charges that require the customer to reimburse us
for costs actually incurred and a portion of the quoted profit margin on the
project. We believe most of the orders in our backlog as of September 28, 2003
will be recognized as sales during fiscal 2004.
Backlog was negatively impacted by the lower order level and by the previously
announced fourth quarter fiscal 2003 contract termination by a customer
purchasing the Company's Earthshell equipment. Although the cancelled order
reduced year end backlog by $12.3 million, the Company received a $5.3 million
purchase order for this equipment from a new customer in the first quarter of
fiscal 2004, which is included in its September 2003 backlog.
In September, we booked a $3.1 million order at our Assembly & Test operation
from a Chinese auto supplier.
We have been expanding our sales efforts in Asia and developing markets, where
we expect significant capital equipment purchases to occur over the remainder
of the decade.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the reporting and
consolidation of variable interest entities as they relate to a business
enterprise. This interpretation incorporates and supersedes the guidance set
forth in ARB No. 51, "Consolidated Financial Statements." It requires the
consolidation of variable interests into the financial statements of a business
enterprise if that enterprise holds a controlling financial interest via other
means than the traditional voting majority. The provisions of FIN 46 are
effective immediately for variable interest entities created after January 31,
2003 and thereafter. In October 2003, the FASB decided to defer the
implementation date of FIN 46. The new effective date for FIN 46 is the end of
the first interim or annual period subsequent to December 15, 2003, which is the
second quarter of fiscal 2004 for the Company. The Trust, which is the issuer of
the TIDES, is a wholly-owned consolidated subsidiary of the Company. Pursuant to
FIN 46, it could be determined that (i) the Trust is a variable interest entity
and (ii) the Company is not the primary beneficiary of the Trust. If such
determinations are made, the Company will be required to de-consolidate the
Trust, effective for the reporting period ended December 28, 2003. The Company
has not created any new variable interest entities since January 31, 2003 and is
currently assessing the overall impact of adopting FIN 46.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity and requires that an issuer classify a financial instrument that is
within its scope as a liability. Certain provisions of this statement have been
indefinitely deferred. The Company is currently considering the impact this
standard will have, in conjunction with FIN 46, with respect to its TIDES
securities.
DT INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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SEASONALITY AND FLUCTUATIONS IN QUARTERLY RESULTS
In general, the Company's business is not subject to seasonal variations in
demand for its products. However, because orders for certain of the Company's
products can be several million dollars, a relatively limited number of orders
can constitute a meaningful percentage of its revenue in any one quarterly
period. As a result, a relatively small reduction or delay in the number of
orders can have a material impact on the timing of recognition of the Company's
revenues. Almost all of the Company's net sales are derived from fixed price
contracts. Therefore, to the extent that original cost estimates prove to be
inaccurate, profitability from a particular contract may be adversely affected.
Gross margins may vary between comparable periods as a result of the variations
in profitability of contracts for large orders of special machines as well as
product mix between the various types of custom and proprietary equipment
manufactured by the Company. Accordingly, the Company's results of operations
for any particular quarter are not necessarily indicative of results that may be
expected for any subsequent quarter or related fiscal year.
FOREIGN OPERATIONS
Our primary foreign operations are conducted through subsidiaries in the United
Kingdom and Germany. Our Canadian subsidiary was closed in August 2002. The
functional currencies of these subsidiaries are the currencies native to the
specific country in which the subsidiary is located.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS
See the Company's Annual Report on Form 10-K for the fiscal year ended June 29,
2003. There were no significant updates to the disclosure as of September 28,
2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to DTI's exposures to market risk during the
three months ended September 28, 2003 that would require an update to the
disclosures provided in DTI's Form 10-K for the fiscal year ended June 29, 2003.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
1934 Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our President and Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Management necessarily applies its judgment in
assessing the costs and benefits of such controls and procedures, which, by
their nature, can provide only reasonable assurance regarding management's
control objectives.
We carried out an evaluation pursuant to Exchange Act Rule 13a-15, under the
supervision and with the participation of our management, including our
President and Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the first quarter of fiscal 2004. Based upon the
foregoing, our President and Chief Executive Officer, along with our Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to us
(including our consolidated subsidiaries) required to be included in our
Exchange Act reports. There has been no change in our internal control over
financial reporting that occurred during the first quarter of fiscal 2004
identified in connection with the evaluation described above that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. However, we do note that during the first quarter of
fiscal 2004, our director of internal audit and a staff internal auditor left
the Company to pursue other job opportunities. Other accounting personnel are
currently fulfilling the responsibilities of these positions and we are
actively searching for individuals to fill these two positions.
DT INDUSTRIES, INC.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal and regulatory proceedings, as
described in "Part 1, Item 3. Legal Proceedings" of the Company's
Annual Report on Form 10-K for the fiscal year ended June 29, 2003.
Since the disclosure in the Company's Annual Report on Form 10-K for
the fiscal year ended June 29, 2003, there have been no material
developments in previously reported legal proceedings.
In addition to the above-described items, the Company is from time to
time subject to claims and suits arising in the ordinary course of
business. Although the ultimate disposition of such proceedings is not
presently determinable, management does not believe that the ultimate
resolution of these matters will have a material adverse effect on the
Company's financial condition, results of operations or cash flows. The
Company maintains comprehensive general liability insurance that it
believes to be adequate for the continued operation of its business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources", above for a
discussion of covenant defaults under the Company's bank credit
facility. The defaults referenced therein were permanently waived
subsequent to quarter end pursuant to the amendment to our credit
facility, executed in October 2003.
DT INDUSTRIES, INC.
PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Fourteenth Amendment to Fourth Amended and Restated
Credit Facilities Agreement, dated as of October 21,
2003, among Bank of America, N.A., as Administrative
Agent, and Bank of America, N.A. and the other
lenders listed therein and DT Industries, Inc. and
other Borrowers listed therein.
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934
32 Certification Pursuant to 18 U.S.C. Section 1350 As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On September 5, 2003, the Company filed a Current Report on
Form 8-K to report, pursuant to Items 7 and 9 thereof, a
release of the Company's earnings for the fourth quarter of
fiscal 2003, among other things.
DT INDUSTRIES, INC.
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.
DT INDUSTRIES, INC.
Date: November 12, 2003 /s/ John M. Casper
---------------------------------------
(Signature)
John M. Casper
Senior Vice President - Finance
and Chief Financial Officer