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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NOS. 33-93644 AND 333-51839
DAY INTERNATIONAL GROUP, INC.
130 West Second Street
Dayton, Ohio 45402
(937) 224-4000
State of Incorporation: Delaware
IRS Employer Identification No.: 31-1436349
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act: None
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]
There were 23,298 Common Shares of the Company, $0.01 per share par value,
outstanding as of May 1, 2003.
DAY INTERNATIONAL GROUP, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 5
Notes to Condensed 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 18
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signature 20
Certifications 21
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS)
ASSETS 2003 2002
Cash and cash equivalents $ 1,770 $ 996
Accounts receivable (less allowance for doubtful accounts of $2,692
and $2,735) 35,275 32,782
Inventories 40,260 34,851
Other current assets 7,202 6,064
--------- ---------
Total current assets 84,507 74,693
Property, plant and equipment, net of accumulated depreciation of
$40,370 and $37,817 75,662 74,319
Goodwill 128,185 127,080
Intangible assets (net of accumulated amortization of $41,050 and
$39,462) 25,245 26,696
Other assets 18,084 17,089
--------- ---------
TOTAL ASSETS $ 331,683 $ 319,877
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 9,526 $ 8,228
Current maturities of long-term debt 12,600 12,597
Other current liabilities 27,592 22,334
--------- ---------
Total current liabilities 49,718 43,159
Long-term and subordinated long-term debt 241,453 239,548
Other long-term liabilities 30,571 29,974
--------- ---------
Total liabilities 321,742 312,681
Redeemable preferred stock 131,123 126,646
STOCKHOLDERS' EQUITY (DEFICIT):
Common shares 1 1
Contra-equity associated with the assumption of majority
shareholder's bridge loan (68,772) (68,772)
Retained earnings (deficit) (51,168) (49,139)
Accumulated other comprehensive loss (1,243) (1,540)
--------- ---------
Total stockholders' equity (deficit) (121,182) (119,450)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 331,683 $ 319,877
========= =========
See notes to condensed consolidated financial statements.
3
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
2003 2002
NET SALES $ 68,819 $ 61,186
COST OF GOODS SOLD 44,137 39,154
-------- --------
GROSS PROFIT 24,682 22,032
SELLING, GENERAL AND ADMINISTRATIVE 14,549 12,404
RESTRUCTURING COSTS 163
AMORTIZATION OF INTANGIBLES 201 200
MANAGEMENT FEES 250 250
-------- --------
OPERATING PROFIT 9,682 9,015
OTHER EXPENSES:
Interest expense (including amortization of deferred financing cost of
$587 and $587) 6,525 6,770
Other expense (income) (777) 151
-------- --------
5,748 6,921
-------- --------
INCOME BEFORE INCOME TAXES 3,934 2,094
INCOME TAX EXPENSE 1,485 821
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,449 1,273
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF TAX EXPENSE OF $394) (Note H) 616
-------- --------
NET INCOME 2,449 1,889
ACCUMULATING PREFERRED STOCK DIVIDENDS (4,758) (4,106)
AMORTIZATION OF PREFERRED STOCK DISCOUNT AND
ISSUANCE COSTS (47) (47)
-------- --------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (2,356) $ (2,264)
======== ========
See notes to condensed consolidated financial statements.
4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,449 $ 1,889
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of change in accounting principle (616)
Depreciation and amortization 3,856 3,449
Deferred income taxes (647) (467)
Foreign currency (gain) loss (821) 147
Non-cash loss on disposal of fixed assets 157
Change in operating assets and liabilities (3,103) 971
------- -------
Net cash provided by operating activities 1,734 5,530
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (500)
Capital expenditures (2,374) (2,133)
------- -------
Net cash used in investing activities (2,874) (2,133)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan (3,150) (3,150)
Net (payments on) proceeds from revolving credit facility 5,000 (350)
------- -------
Net cash provided by (used in) financing activities 1,850 (3,500)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 64 42
------- -------
Net increase (decrease) in cash and cash equivalents 774 (61)
Cash and cash equivalents at beginning of period 996 609
------- -------
Cash and cash equivalents at end of period $ 1,770 $ 548
======= =======
NON-CASH TRANSACTIONS:
Preferred stock dividends $ 4,431 $ 4,106
======= =======
Amortization of preferred stock discount $ 47 $ 47
======= =======
Short-term note payable for acquisition $ 1,452 $
======= =======
See notes to condensed consolidated financial statements.
5
DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
A. BASIS OF PRESENTATION
The balance sheet as of December 31, 2002, is condensed financial information
derived from the audited balance sheet. The interim financial statements are
unaudited. The financial statements of Day International Group, Inc. have been
prepared in accordance with accounting principles generally accepted in the
United States and, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation in
accordance with accounting principles generally accepted in the United States
for the periods presented. The results of operations and cash flows for the
interim periods presented are not necessarily indicative of the results for the
full year.
B. INVENTORIES
Inventories as of March 31, 2003 and December 31, 2002, consist of:
2003 2002
Finished goods $24,053 $20,510
Work in process 5,791 4,935
Raw materials 10,416 9,406
------- -------
$40,260 $34,851
======= =======
C. BUSINESS SEGMENTS
The Company produces precision-engineered products, specializing in the design
and customization of consumable image-transfer products for the graphic arts
(printing) industry and consumable fiber handling products for the textile
industry. The Image Transfer segment designs, manufactures and markets
high-quality printing blankets and sleeves, pressroom chemicals and automatic
dampening systems used primarily in the offset and flexographic printing
industries. The Textile Products segment manufactures and markets precision
engineered rubber cots and aprons sold to textile yarn spinners and other
engineered rubber products sold to diverse markets.
Segment performance is evaluated based on operating profit results compared to
the annual operating plan. Intersegment sales and transfers are not material.
The Company manages the two segments as separate strategic business units. They
are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.
6
2003 2002
Third party sales:
Image Transfer $ 55,599 $ 50,453
Textile Products 13,220 10,733
-------- --------
Total $ 68,819 $ 61,186
======== ========
Segment operating profit:
Image Transfer $ 9,565 $ 9,697
Textile Products 1,554 1,005
-------- --------
Total $ 11,119 $ 10,702
======== ========
The following is a reconciliation of the segment operating profit reported above
to the amount reported in the consolidated financial statements:
2003 2002
Segment operating profit $ 11,119 $ 10,702
APB #16 depreciation and amortization (842) (914)
Non-allocated corporate expenses (144) (160)
Restructuring costs (163)
Amortization of intangibles (201) (200)
Management fees (250) (250)
-------- --------
Total operating profit $ 9,682 $ 9,015
======== ========
D. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is comprised of net income, net currency
translation gains and losses and net unrealized gains and losses on cash flow
hedges. Total comprehensive income for the three months ended March 31, 2003 and
2002 was $2,746 and $654.
E. CONTINGENCIES
Claims have been made against the Company for the costs of environmental
remedial measures taken or to be taken. Reserves for such liabilities have been
established and no insurance recoveries have been anticipated in the
determination of the reserves. In management's opinion, the aforementioned
claims will be resolved without material adverse effect on the results of
operations, financial position or cash flows of the Company. The Company's
previous parent and its parent, PolyOne, have agreed to indemnify the Company
for certain of the costs associated with these matters.
F. RESTRUCTURING COSTS
A pre-tax charge of $500 was recorded in the first quarter of 2001 for severance
and termination costs for relocating the Textile Products operations from the
Asheville, North Carolina, facility to the Greenville, South Carolina, facility.
During the first quarter of 2002, the Company incurred additional relocation
costs of $109, recorded a charge of $157 for write-off of fixed assets and
recorded a reversal of $103 of the reserve for severance costs. As of March 31,
2002, final severance payments have been paid out to 47 associates.
7
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3,010 was recorded in
2001 for severance costs for 55 associates, write-off of abandoned assets and
costs related to closing the facility. As of March 31, 2002, final severance
payments have been paid out to 50 associates.
A pre-tax charge of $988 was recorded during the fourth quarter of 2001 for
severance costs for 21 associates, costs for relocating the Pressroom Chemicals
German sales office and the U.S. sales and administrative functions and loss on
the sale of fixed assets. As of March 31, 2002, final severance payments have
been paid out to 18 associates.
Below is a summary of the amounts charged against the reserves for severance and
facility shutdown in 2002:
TEXTILE IMAGE
PRODUCTS TRANSFER
Balance at December 31, 2001 $ 392 $ 1,508
Reversal of reserve (103)
Charges against the reserve for:
Severance costs (193) (549)
Facility shutdown (417)
-------- --------
Balance at March 31, 2002 $ 96 $ 542
======== ========
As of December 31, 2002, all restructuring programs had been completed.
G. STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company applies the intrinsic value method of recognition and measurement under
Accounting Principles Board Opinion No. 25 to its stock options and warrants. No
compensation expense related to employee stock options or warrants issued to
directors is reflected in net income. The following table illustrates the effect
on net income if compensation cost for all outstanding and unvested stock option
and warrants had been determined based on their fair values at the grant date,
consistent with the method prescribed by SFAS No. 123:
2003 2002
Net income-as reported $ 2,449 $ 1,889
Less-stock-based compensation expense determined using
fair value based method in SFAS No. 123 (208) (316)
-------- --------
Pro forma net income $ 2,241 $ 1,573
======== ========
8
H. NEW ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board issued SFAS Nos. 141,
"Business Combinations" and 142, "Goodwill and Other Intangible Assets." These
statements prohibit amortization of goodwill for periods beginning after
December 15, 2001. Instead an annual review of the recoverability of the
goodwill and intangible assets is required. These Statements were adopted as of
January 1, 2002. As of January 1, 2002, the Company recognized pre-tax income of
$1,010 for the cumulative effect of the change in accounting principle for the
amount of the unamortized deferred credit related to the excess over cost
arising from the TPO acquisition.
I. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $100,000, 11-1/8% Senior Notes and $115,000, 9 1/2%
Senior Subordinated Notes (collectively, the "Notes"). The Company has no assets
or operations other than its wholly-owned investment in Day International, Inc.
("Day International" or "Guarantor"). Day International has provided a full and
unconditional guarantee of the Notes. The wholly-owned foreign subsidiaries of
Day International are not guarantors with respect to the Notes and do not have
any credit arrangements senior to the Notes. The only intercompany eliminations
are the normal intercompany eliminations with regard to intercompany sales and
the Company's investment in the wholly-owned non-guarantor subsidiaries.
Intercompany notes are in place, which effectively transfers the interest
expense from the Company to Day International. The following are the
supplemental combining condensed balance sheets as of March 31, 2003 and
December 31, 2002, and the supplemental combining condensed statements of
operations and cash flows for the three months ended March 31, 2003 and 2002,
with the investments in the subsidiaries accounted for using the equity method.
Separate complete financial statements of the Guarantor are not presented
because management has determined that they are not material to the investors.
9
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
MARCH 31, 2003
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 543 $ (543) $ 1,770 $ $ 1,770
Accounts receivable-net 12,183 23,092 35,275
Inventories 21,169 19,091 40,260
Other current assets 5,689 1,513 7,202
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 543 38,498 45,466 84,507
Intercompany 252,744 (8,112) 9,970 (254,602)
Property, plant and equipment, net 47,949 27,713 75,662
Investment in subsidiaries (36,833) 37,799 (3,790) 2,824
Intangible and other assets 153,419 18,095 171,514
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 216,454 $ 269,553 $ 97,454 $ (251,778) $ 331,683
============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ $ 3,923 $ 5,603 $ $ 9,526
Current maturities of long-term debt 12,511 89 12,600
Other current liabilities 4,283 7,644 15,665 27,592
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 16,794 11,567 21,357 49,718
Intercompany (50,514) 301,912 (2,407) (248,991)
Long-term and subordinated long-term
debt 240,233 1,220 241,453
Other long-term liabilities 21,859 8,712 30,571
Redeemable preferred stock 131,123 131,123
Total stockholders' equity (deficit) (121,182) (65,785) 68,572 (2,787) (121,182)
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 216,454 $ 269,553 $ 97,454 $ (251,778) $ 331,683
============ ============ ============ ============ ============
10
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2002
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 496 $ (496) $ 996 $ $ 996
Accounts receivable-net 11,365 21,417 32,782
Inventories 19,165 15,686 34,851
Other current assets 4,754 1,310 6,064
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 496 34,788 39,409 74,693
Intercompany 250,883 (13,166) 13,644 (251,361)
Property, plant and equipment, net 48,256 26,063 74,319
Investment in subsidiaries (39,309) 35,588 (4,918) 8,639
Intangible and other assets 153,258 17,607 170,865
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 212,070 $ 258,724 $ 91,805 $ (242,722) $ 319,877
============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable $ $ 3,593 $ 4,635 $ $ 8,228
Current maturities of long-term debt 12,511 86 12,597
Other current liabilities 4,196 6,318 11,820 22,334
------------ ------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 16,707 9,911 16,541 43,159
Intercompany (50,205) 295,916 11,110 (256,821)
Long-term and subordinated long-term
debt 238,372 1,176 239,548
Other long-term liabilities 21,639 8,335 29,974
Redeemable preferred stock 126,646 126,646
Total stockholders' equity (deficit) (119,450) (68,742) 54,643 14,099 (119,450)
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 212,070 $ 258,724 $ 91,805 $ (242,722) $ 319,877
============ ============ ============ ============ ============
11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 35,713 $ 33,106 $ $ 68,819
Cost of goods sold 23,403 20,734 44,137
------------ ------------ ------------ ------------ ------------
Gross profit 12,310 12,372 24,682
Selling, general and administrative 45 8,486 6,018 14,549
Amortization of intangibles 201 201
Management fees 250 250
------------ ------------ ------------ ------------ ------------
Operating profit (45) 3,373 6,354 9,682
Other expenses (income):
Equity in (earnings) loss of subsidiaries (2,476) (3,339) 5,815
Interest expense 6,491 34 6,525
Other (income) expense (1,667) 890 (777)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 2,431 1,888 5,430 (5,815) 3,934
Income tax expense (benefit) (18) (588) 2,091 1,485
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,449 $ 2,476 $ 3,339 $ (5,815) $ 2,449
============ ============ ============ ============ ============
12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 36,221 $ 24,965 $ $ 61,186
Cost of goods sold 23,253 15,901 39,154
------------ ------------ ------------ ------------ ------------
Gross profit 12,968 9,064 22,032
Selling, general and administrative 16 7,577 4,811 12,404
Restructuring costs 163 163
Amortization of intangibles 200 200
Management fees 250 250
------------ ------------ ------------ ------------ ------------
Operating profit (16) 4,778 4,253 9,015
Other expenses (income):
Equity in (earnings) loss of subsidiaries (1,899) (3,130) 5,029
Interest expense 6,769 1 6,770
Other (income) expense (357) 508 151
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 1,883 1,496 3,744 (5,029) 2,094
Income tax expense (benefit) (6) (403) 1,230 821
------------ ------------ ------------ ------------ ------------
Income (loss) before
cumulative effect of change
in accounting principles 1,889 1,899 2,514 (5,029) 1,273
Cumulative effect of change in
accounting principles 616 616
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,889 $ 1,899 $ 3,130 $ (5,029) $ 1,889
============ ============ ============ ============ ============
13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income $ 2,449 $ 2,476 $ 3,339 $ (5,815) $ 2,449
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 3,137 719 3,856
Equity in (earnings) loss of subsidiaries (2,476) (3,339) 5,815
Deferred income taxes and other (477) (170) (647)
Foreign currency (gain) loss (1,249) 428 (821)
Changes in operating assets and
liabilities 86 (469) (2,720) (3,103)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities 59 79 1,596 1,734
Cash Flows From Investing Activities:
Cash paid for acquisition (500) (500)
Capital expenditures (1,048) (1,326) (2,374)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (1,548) (1,326) (2,874)
Cash Flows From Financing Activities:
Payments on term loan (3,150) (3,150)
Net borrowings on credit facilities 5,000 5,000
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 1,850 1,850
Intercompany transfers and dividends (1,862) 1,422 440
Effects of exchange rates on cash 64 64
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 47 (47) 774 774
Cash and cash equivalents at beginning
of period 496 (496) 996 996
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period $ 543 $ (543) $ 1,770 $ $ 1,770
============ ============ ============ ============ ============
14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income $ 1,889 $ 1,899 $ 3,130 $ (5,029) $ 1,889
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Cumulative effect of change in
accounting principles (616) (616)
Depreciation and amortization 2,882 567 3,449
Equity in (earnings) loss of subsidiaries (1,899) (3,130) 5,029
Deferred income taxes and other (463) (4) (467)
Foreign currency (gain) loss (44) 191 147
Non-cash restructuring charge 157 157
Changes in operating assets and
liabilities (155) 1,242 (116) 971
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (165) 2,543 3,152 5,530
Cash Flows From Investing Activities:
Capital expenditures (1,646) (487) (2,133)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (1,646) (487) (2,133)
Cash Flows From Financing Activities:
Payments on term loan (3,150) (3,150)
Net borrowings on credit facilities (350) (350)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (3,500) (3,500)
Intercompany transfers and dividends 3,256 (488) (2,768)
Effects of exchange rates on cash 42 42
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (409) 409 (61) (61)
Cash and cash equivalents at beginning
of period 702 (702) 609 609
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period $ 293 $ (293) $ 548 $ $ 548
============ ============ ============ ============ ============
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This Quarterly Report contains forward-looking statements within the meaning of
the Securities Act of 1933. These are subject to certain risks and
uncertainties, including those identified below, which could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. The words "believe," "anticipate,"
"expect," "intend," "will likely result," "will continue," and similar
expressions identify forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include but are not limited to (i) the effect of
leverage, including the limitations imposed by the Company's various debt
instruments; (ii) risks related to significant operations in foreign countries,
including the translation of operating results to the U.S. dollar; (iii) the
timely development and market acceptance of new products; (iv) the impact of
competitive products and pricing; (v) the effect of changing general and
industry specific economic conditions; (vi) the impact of environmental
regulations; and (vii) the potential for technology obsolescence.
While made in good faith and with a reasonable basis based on information
currently available to the Company's management, there is no assurance that any
such forward-looking statements will be achieved or accomplished. The Company is
under no obligation to update any forward-looking statements to the extent it
becomes aware that they are not achieved or likely to be achieved for any
reason.
BASIS OF PRESENTATION
The following table sets forth selected financial information in millions of
dollars and as a percentage of net sales:
THREE MONTHS ENDED MARCH 31,
2003 2002
$ % $ %
Net sales 68.8 100.0 61.2 100.0
Costs of goods sold 44.1 64.1 39.2 64.0
----- ----- ----- -----
Gross profit 24.7 35.9 22.0 36.0
Selling, general and administrative expense 14.5 21.1 12.4 20.3
Restructuring costs 0.1 0.3
Amortization of intangibles 0.2 0.3 0.2 0.3
Management fees 0.3 0.4 0.3 0.4
----- ----- ----- -----
Operating profit 9.7 14.1 9.0 14.7
===== ===== ===== =====
16
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net sales increased $7.6 million (12.5%) to $68.8 million. Image Transfer's
sales increased $5.1 million (10.2%) to $55.6 million, primarily as a result of
higher sales volume in Europe of $1.4 million and favorable foreign currency
rate changes of $3.3 million. Textile Products' sales increased $2.5 million
(23.2%) to $13.2 million, primarily as a result of higher sales volume in Europe
of $1.1 million and favorable foreign currency rate changes of $1.4 million.
Gross profit increased $2.7 million (12.0%) to $24.7 million. As a percentage of
net sales, gross profit declined slightly to 35.9% for the three months ended
March 31, 2003, compared to 36.0% for the three months ended March 31, 2002.
Selling, general and administrative expense ("SG&A") increased $2.1 million
(17.3%) to $14.5 million. As a percentage of net sales, SG&A increased to 21.1%
from 20.3%. Changes in foreign currency rates increased SG&A costs by $0.9
million in the first quarter of 2003 compared to the first quarter of 2002. SG&A
costs increased as a result of higher insurance costs and higher selling and
distribution costs from higher sales levels.
A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for
severance and termination costs to relocate the Textile Products operations from
its Asheville, North Carolina, facility to its Greenville, South Carolina,
facility. During the first quarter of 2002, the Company reversed $0.1 million of
the reserve. Additionally, a pre-tax charge of $0.3 has been recorded in the
first quarter ended of 2002 for relocation of machinery and equipment and
write-off of abandoned assets.
Operating profit increased $0.7 million (7.4%) to $9.7 million. As a percentage
of net sales, operating profit decreased to 14.1% for the three months ended
March 31, 2003, from 14.7% for the comparable period in 2002. Image Transfer's
operating profit decreased $0.1 million (1.4%) to $9.6 million. As a percentage
of net sales, Image Transfer's operating profit decreased to 17.2% for the three
months ended March 31, 2003, from 19.2% in 2002. Textile Products' operating
profit increased $0.6 million (54.6%) to $1.6 million. As a percentage of net
sales, Textile Products' operating profit increased to 11.8% for the three
months ended March 31, 2003, from 9.4% in 2002.
Other income was $0.8 million for the three months ended March 31, 2003,
compared to other expense of $0.2 million for the three months ended March 31,
2002. The other (income) expense is primarily due to foreign currency
transaction (gains) losses incurred in the normal course of international
subsidiaries doing business in other than their functional currency as well as a
result of intercompany financing arrangements.
The effective tax rate was 37.6% and 39.2% in 2003 and 2002.
As of January 1, 2002, the Company adopted SFAS Nos. 141, "Business
Combinations" and 142, "Goodwill and Other Intangible Assets" and recognized
pre-tax income of $1.0 million for the
17
cumulative effect of the change in accounting principle for the amount of the
unamortized deferred credit related to the excess over cost arising from the TPO
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient funds from its operations to
fund its working capital and capital expenditure requirements. The Company is
able to maintain relatively low levels of working capital as its converters and
distributors typically carry a greater portion of inventory and finance
receivables of the Company's end users.
Capital expenditures were $2.4 million and $2.1 million for the quarters ended
March 31, 2003 and 2002.
As of March 31, 2003, there was $10.0 million outstanding under the Revolving
Credit Facility and the Company had $9.5 million available under the Revolving
Credit Facility (calculated by applying the applicable borrowing base
limitation). The Company's aggregate indebtedness at March 31, 2003, is $254.1
million and the aggregate liquidation preferences of the Exchangeable Preferred
Stock is $64.0 million and the Convertible Preferred Stock is $68.5 million. The
Company is highly leveraged. The Company's ability to operate its business,
service its debt requirements and reduce its total debt will depend upon its
future operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, certain of which are
beyond its control, as well as the availability of revolving credit borrowings.
See the Company's Annual Report on Form 10-K for a more extensive discussion of
liquidity and capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located, the stand-alone
nature of the operations, the Company's limited net asset exposure, forward
foreign exchange contract practices and pricing flexibility. Thus, while changes
in foreign currency values do affect earnings, the longer-term economic effect
of these changes should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases and sales in
designated currencies other than their functional currency. As a result, they
are subject to transaction exposures that arise from foreign exchange movements
between the date that the foreign currency transaction is recorded and the date
it is consummated. In addition, the Company has intercompany loans outstanding
with certain international subsidiaries in their local currencies, exposing it
to the effect of changes in exchange rates at loan issue and loan repayment
dates. The Company periodically enters into forward foreign exchange contracts
to protect it against such foreign exchange movements. The contract value of
these foreign
18
exchange contracts was $11.5 million at March 31, 2003 and $10.1 million at
December 31, 2002. These contracts generally expire within three to twelve
months. Foreign currency (gains) losses, included in other (income) expense,
were $(0.8) million in 2003 and $0.2 million in 2002.
INTEREST RATE RISKS
The Company is subject to market risk from exposure to changes in the interest
rates based on its financing activities. The Company utilizes a mix of debt
maturities along with both fixed- and variable-rate debt to manage its exposure
to changes in interest rates and to minimize interest expense. The Company does
not expect interest rate changes to have a material effect on income or cash
flows in 2003, although there can be no assurance that interest rates will not
materially change.
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Image Transfer and
Textile products. The Company is exposed to changes in the costs of these
components. Pressroom Chemicals is exposed to changes in the cost of certain
petroleum-based components. The largest raw material component in Pressroom
Chemicals' products is petroleum distillates, such as aliphatics and aromatics.
When commodity prices increase, the Company has historically passed on increases
to its customers to maintain its profit margins. Conversely, when commodity
prices decline, the Company generally lowers its sales prices to meet
competitive pressures. Because the Company has historically been able to raise
sales prices to offset higher costs, management believes that a 10% change in
the cost of its components could have a short-term impact until sales price
increases take effect, but overall would not have a material effect on income or
cash flows for a fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded. In addition, a system of disclosure controls is maintained
to ensure that information required to be disclosed is recorded, processed,
summarized and reported in a timely manner to management responsible for the
preparation and reporting of the Company's financial information.
Management assesses the internal control and disclosure control systems as being
effective as they encompass material matters for the three months ended March
31, 2003. To the best of management's knowledge, there were no changes in the
internal control and disclosure control systems subsequent to March 31, 2003,
that would significantly affect the control systems.
19
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(99) ADDITIONAL EXHIBITS
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 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
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Day International Group, Inc.
-----------------------------
(Registrant)
Date: May 13, 2003 /s/ Thomas J. Koenig
------------ ----------------------------
Thomas J. Koenig
Vice President and
Chief Financial Officer
(Principal Financial Officer)
20
CERTIFICATIONS
I, Dennis R. Wolters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Day International
Group, 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 officer 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 officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 By: /s/ Dennis R. Wolters
---------------------------------
Dennis R. Wolters
President and Chief Executive Officer
(Principal Executive Officer)
21
I, Thomas J. Koenig, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Day International
Group, 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 officer 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 officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 By: /s/ Thomas J. Koenig
--------------------------------------
Thomas J. Koenig
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
22