Back to GetFilings.com

Table of Contents

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, 2004

Commission File No. 33-93644

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 23,323 Common Shares of the Company, $0.01 per share par value, outstanding as of May 1, 2004.

DAY INTERNATIONAL GROUP, INC.
INDEX

2

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(In thousands)

See notes to condensed consolidated financial statements.

3

Table of Contents

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands)

See notes to condensed consolidated financial statements.

4

Table of Contents

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands)

See notes to condensed consolidated financial statements.

5

Table of Contents

DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)

A. BASIS OF PRESENTATION

The balance sheet as of December 31, 2003, 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, 2004 and December 31, 2003, consist of:

C. REDEEMABLE PREFERRED STOCK

The Company’s 121/4% Senior Exchangeable Preferred Stock require that dividends must be paid in cash after March 15, 2003. The Company has not paid cash dividends after March 15, 2003, because of certain restrictions in the Company’s Senior Secured Credit Agreement and Notes Indentures limiting the ability to pay cash dividends. If not paid for four consecutive quarters, the holders of the Exchangeable Preferred Stock have the right to elect two directors to the Board of Directors until the dividends in arrears have been paid. All dividends through March 15, 2003, have been in the form of additional fully-paid and non-assessable shares of Exchangeable Preferred Stock. Dividends-in-arrears are $8,206 as of March 31, 2004, which are included in the redeemable preferred stock balance.

In May 2003, the FASB issued SFAS 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 the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Beginning in the third quarter of 2003, the Company reflects the redeemable preferred stock as a liability and accrued dividends as interest expense. This statement has no effect on the cash flows of the Company, net loss available to common shareholders or the Company’s compliance with its debt covenants.

6

Table of Contents

D. INCOME TAXES

The Company’s effective income tax rate is significantly different from the statutory rates in effect as a result of the adoption of SFAS No. 150 and the inclusion of the dividends on the redeemable preferred stock in income (loss) before income taxes. The non-deductible preferred stock dividends cause a significant difference between book income and taxable income subsequent to the adoption of SFAS No. 150. In addition, the effective rate is affected by dividends from non-U.S. subsidiaries taxable in the United States.

E. 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.

7

Table of Contents

The following is a reconciliation of the segment operating profit reported above to the amount reported in the consolidated financial statements:

F. COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) is comprised of net income (loss), net currency translation gains and losses and net unrealized gains and losses on cash flow hedges. Total comprehensive income (loss) for the three months ended March 31, 2004 and 2003 was $(2,279) and $2,746.

G. 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.

H. 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 (loss). The following table illustrates the effect on net income (loss) 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:

8

Table of Contents

I. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

A summary of the components of net periodic pension cost for the defined benefit retirement plans is as follows:

A summary of the components of net periodic postretirement cost for the postretirement health care and life insurance benefits plans is as follows:

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006. Pursuant to guidance provided in FASB Staff Position SFAS No. 106-1, the Company has chosen to defer recognition of the Act, and, accordingly, postretirement benefit obligations and net periodic postretirement benefit cost do not reflect any potential effect of the legislation. In addition, specific authoritative guidance on the accounting for certain aspects of the Act has not yet been determined and that guidance, when issued, could require the Company to change previously reported information. The Company believes that the impact of the legislation will not be material to the results of operations or financial position of the Company.

9

Table of Contents

J. SUPPLEMENTAL CONSOLIDATING INFORMATION

The Company has outstanding $115,000, 91/2% Senior Subordinated Notes (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, 2004 and December 31, 2003, and the supplemental combining condensed statements of operations and cash flows for the three months ended March 31, 2004 and 2003, 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.

10

Table of Contents

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
MARCH 31, 2004

11

Table of Contents

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2003

12

Table of Contents

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004

13

Table of Contents

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003

14

Table of Contents

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004

15

Table of Contents

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003

16

Table of Contents

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

On November 24, 2003, Network Distribution International (“NDI”) was acquired. Its results of operations are included in the Company’s consolidated results of operations for the period subsequent to the acquisition. Accordingly, the results of operations for historical as well as future periods may not be comparable to prior periods.

The following table sets forth selected financial information in millions of dollars and as a percentage of net sales:

17

Table of Contents

Comparison of Results of Operations

Three Months Ended March 31, 2004, Compared to Three Months Ended March 31, 2003

Net sales increased $20.9 million (30.4%) to $89.7 million, primarily as a result of sales from businesses acquired in 2003, favorable changes in foreign currency rates and higher sales volumes in the United States. Sales in 2004 include $12.6 million of sales from businesses acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $2.8 million in the United States and $5.0 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $21.4 million (38.5%) to $77.0 million. Image Transfer’s sales were positively affected by increased sales volumes of $15.9 million in the United States and $1.0 million in Europe and $3.9 million as a result of the effect of changes in foreign currency rates. The higher U.S. Image Transfer sales volume was primarily as a result of sales from business acquisitions in 2003 of $12.6 million and from higher sales volumes across substantially all product lines. Europe sales volume increased primarily from growth in the chemical products business in the United Kingdom and Germany. Textile Products’ sales decreased $0.5 million (3.9%) to $12.7 million, primarily as a result of lower sales volume in the United States of $0.5 million and in Europe of $1.1 million offset by favorable foreign currency rate changes of $1.1 million. The lower U.S. Textile Products sales volume is primarily due to reduced demand in the U.S. textile industry as a result of weak consumer demand for textile and apparel products coupled with increased imports of low cost goods from Asia and South America. The ongoing restructuring of the U.S. textile manufacturing industry has resulted in further consolidation and closure of yarn spinning mills as well as weaving facilities. Weak sales have forced textile manufacturers to cut expenses and reduce inventories, which have had a direct effect on reducing Textile Products’ sales. European Textile Products’ sales volumes were lower in 2004 compared to 2003, primarily as a result of lower sales to original equipment manufacturers (“OEMs”) and lower sales to Asia resulting from higher euro exchange rates and higher cotton prices. OEM sales in 2004 continued at a relatively strong level, but were not at the unusually high level of 2003. Although Textile Products’ sales volumes were lower than first quarter 2003, sales volumes were higher than the third and fourth quarters of 2003.

Gross profit increased $8.6 million (35.0%) to $33.3 million. Foreign currency rate changes increased gross profit by $1.9 million. As a percentage of net sales, gross profit increased to 37.2% for the three months ended March 31, 2004, compared to 35.9% for the three months ended March 31, 2003.

Selling, general and administrative expense (“SG&A”) increased $5.6 million (38.2%) to $20.1 million, primarily as a result of SG&A associated with NDI of $2.9 million and changes in foreign currency rates. As a percentage of net sales, SG&A increased to 22.4% from 21.1%. Changes in foreign currency rates increased SG&A costs by $1.0 million in the first quarter of 2004 compared to the first quarter of 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels.

Operating profit increased $3.3 million (34.0%) to $13.0 million. As a percentage of net sales, operating profit increased to 14.5% for the three months ended March 31, 2004, from 14.1% for the comparable

18

Table of Contents

period in 2003. Image Transfer’s operating profit increased $3.0 million (31.3%) to $12.6 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 16.3% for the three months ended March 31, 2004, from 17.2% in 2003. Operating margins on NDI’s distribution business are substantially lower than Day’s historical margins on manufactured products. Textile Products’ operating profit increased $0.2 million (16.0%) to $1.8 million. As a percentage of net sales, Textile Products’ operating profit increased to 14.2% for the three months ended March 31, 2004, from 11.8% in 2003. Textile Products’ operating profit was favorably affected by improved manufacturing operations in the United States in 2004 compared to 2003.

Other (income) expense was $(0.9) million and $(0.8) million for the three months ended March 31, 2004 and 2003. 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. Other (income) expense in 2004 includes a gain of $0.7 million on the mark-to-market of the euro-denominated Tranche A Term Loan and $0.4 million gain on the sale of fixed assets.

The effective tax rate was 176.0% and 37.6% in 2004 and 2003. The effective tax rate for 2004 is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. Adjusted for the preferred stock dividends, the effective tax rate would be 56.8% in 2004. The effective tax rate is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.

In May 2003, the FASB issued SFAS 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 the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Beginning in the third quarter of 2003, the Company reflects the redeemable preferred stock as long-term debt and accrued dividends are shown as interest expense. This statement will have no effect on the net loss available to common shareholders, cash flows of the Company or the Company’s compliance with its debt covenants.

Liquidity and Capital Resources

The Company has historically generated sufficient funds from its operations to fund its working capital and capital expenditure requirements.

Capital expenditures were $1.0 million and $2.4 million for the quarters ended March 31, 2004 and 2003.

As of March 31, 2004, there was $4.0 million outstanding under the Revolving Credit Facility and the Company had $14.6 million available under the Revolving Credit Facility. The Company’s aggregate indebtedness at March 31, 2004, is $279.1 million and the aggregate liquidation preferences of the Exchangeable Preferred Stock is $72.6 million and the Convertible Preferred Stock is $80.8 million. The

19

Table of Contents

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 international operations are mitigated due to the political and economic stability of the countries in which its largest international 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 exchange contracts was $10.3 million at March 31, 2004 and $15.9 million at December 31, 2003. These contracts generally expire within three to twelve months. At March 31, 2004, the Company has outstanding €25.0 million of term loans issued under the Senior Secured Credit Facility. The Company has issued euro-denominated debt in order to protect the Company’s investments in Europe from fluctuations in the euro compared to the U.S. dollar. Foreign currency (gains) losses, included in other (income) expense—net, were $(0.4) million in 2004 and $(0.8) million in 2003.

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. During 2003, the Company entered into a $25 million interest rate swap to swap a portion of the Company’s variable rate debt to fixed rates. The swap expires in September 2006. The Company does not expect

20

Table of Contents

changes in interest rates to have a material effect on income or cash flows in 2004, 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, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assesses the internal control and disclosure control systems as being effective as they encompass material matters for the three months ended March 31, 2004. To the best of management’s knowledge, there were no changes in the internal control and disclosure control systems during the quarter ended March 31, 2004, that would materially affect the control systems.

21

Table of Contents

PART II OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES

On February 28, 2004, the Company issued 25 shares of Common Stock to a former member of management upon exercise of a stock option granted under the Day International Group, Inc. Stock Option Plan and received $25,000 in payment of the exercise price. The sale was a private transaction made in reliance upon the exemption from registration in Section 4(2) of the Securities Act of 1933.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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.

22