UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2004
Commission File No. 33-93644
DAY INTERNATIONAL GROUP, INC.
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. Yesx No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There were 23,323 Common Shares of the Company, $0.01 per share par value, outstanding as of November 1, 2004.
DAY INTERNATIONAL GROUP, INC.
INDEX
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| EX-31.1 CERTIFICATIONS | ||||||||
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| EX-32.2 CERTIFICATIONS | ||||||||
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(In thousands)
| 2004 |
2003 |
|||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 3,361 | $ | 726 | ||||
Accounts receivable (less allowance for doubtful accounts of $3,073 and $3,407) |
50,089 | 44,687 | ||||||
Inventories (Note B) |
51,129 | 48,652 | ||||||
Other current assets |
12,442 | 12,881 | ||||||
Total current assets |
117,021 | 106,946 | ||||||
Property, plant and equipment, net of accumulated depreciation of $56,480 and $49,529 |
72,468 | 74,167 | ||||||
Goodwill |
142,737 | 142,580 | ||||||
Intangible assets (net of accumulated amortization of $38,927 and $35,306) |
20,103 | 23,223 | ||||||
Other assets |
17,744 | 24,624 | ||||||
TOTAL ASSETS |
$ | 370,073 | $ | 371,540 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
Accounts payable |
$ | 9,845 | $ | 7,563 | ||||
Current maturities of long-term debt |
4,301 | 3,489 | ||||||
Other current liabilities |
30,204 | 29,421 | ||||||
Total current liabilities |
44,350 | 40,473 | ||||||
Long-term and subordinated long-term debt |
262,780 | 276,331 | ||||||
Other long-term liabilities |
34,942 | 35,811 | ||||||
Redeemable preferred stock (Note D) |
163,535 | 146,649 | ||||||
STOCKHOLDERS’ EQUITY (DEFICIT): |
||||||||
Common shares |
1 | 1 | ||||||
Contra-equity associated with the assumption of majority shareholder’s bridge loan |
(68,673 | ) | (68,772 | ) | ||||
Retained earnings (deficit) |
(71,400 | ) | (65,180 | ) | ||||
Accumulated other comprehensive loss |
4,538 | 6,227 | ||||||
Total stockholders’ equity (deficit) |
(135,534 | ) | (127,724 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
$ | 370,073 | $ | 371,540 | ||||
See notes to condensed consolidated financial statements.
3
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands)
| Three Months | Nine Months | |||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
NET SALES |
$ | 90,494 | $ | 70,054 | $ | 269,014 | $ | 209,012 | ||||||||
COST OF GOODS SOLD |
57,122 | 45,050 | 170,196 | 134,543 | ||||||||||||
GROSS PROFIT |
33,372 | 25,004 | 98,818 | 74,469 | ||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE |
19,516 | 15,241 | 59,469 | 45,209 | ||||||||||||
AMORTIZATION OF INTANGIBLES |
9 | 205 | 26 | 612 | ||||||||||||
MANAGEMENT FEES |
250 | 250 | 750 | 750 | ||||||||||||
OPERATING PROFIT |
13,597 | 9,308 | 38,573 | 27,898 | ||||||||||||
OTHER (INCOME) EXPENSES: |
||||||||||||||||
Interest expense: |
||||||||||||||||
Long-term debt (including amortization of
deferred financing costs and discount of $456,
$606, $1,319 and $1,780 and loss on
extinguishment of debt of $542 and $542 in 2003) |
5,405 | 7,260 | 16,687 | 20,414 | ||||||||||||
Redeemable preferred stock dividends (including
amortization of discount and issuance costs of
$47, $47, $141 and $47) |
5,696 | 4,923 | 16,886 | 4,923 | ||||||||||||
Other (income) expense |
(340 | ) | (225 | ) | (1,881 | ) | (537 | ) | ||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
2,836 | (2,650 | ) | 6,881 | 3,098 | |||||||||||
INCOME TAX EXPENSE |
4,655 | 901 | 13,101 | 3,128 | ||||||||||||
NET INCOME (LOSS) |
(1,819 | ) | (3,551 | ) | (6,220 | ) | (30 | ) | ||||||||
ACCUMULATING PREFERRED STOCK DIVIDENDS (Note D) |
(9,574 | ) | ||||||||||||||
AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS |
(94 | ) | ||||||||||||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
$ | (1,819 | ) | $ | (3,551 | ) | $ | (6,220 | ) | $ | (9,698 | ) | ||||
See notes to condensed consolidated financial statements.
4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands)
| 2004 |
2003 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (6,220 | ) | $ | (30 | ) | ||
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
11,067 | 11,890 | ||||||
Interest expense: |
||||||||
Redeemable preferred stock dividends |
16,886 | 4,923 | ||||||
Loss on extinguishment of debt |
542 | |||||||
Deferred income taxes |
5,459 | (3,151 | ) | |||||
Equity in earnings of investees |
(192 | ) | ||||||
Foreign currency (gain) loss |
(1,633 | ) | (1,017 | ) | ||||
(Gain) loss on disposal of fixed assets |
(61 | ) | 774 | |||||
Change in operating assets and liabilities |
(2,757 | ) | (3,124 | ) | ||||
Net cash provided by operating activities |
22,549 | 10,807 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Cash paid for acquisitions |
(1,346 | ) | (1,952 | ) | ||||
Capital expenditures |
(7,053 | ) | (5,456 | ) | ||||
Cash held for retirement of debt |
(97,971 | ) | ||||||
Proceeds from sale of properties |
1,410 | 939 | ||||||
Net cash used in investing activities |
(6,989 | ) | (104,440 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from exercise of stock options |
25 | |||||||
Proceeds from issuance of debt |
133,950 | |||||||
Payment of deferred financing costs |
(633 | ) | (3,537 | ) | ||||
Payments on term loans |
(14,267 | ) | (31,197 | ) | ||||
Net (payments on) proceeds from
revolving credit facility |
1,975 | (4,950 | ) | |||||
Net cash provided by (used in) financing
activities |
(12,900 | ) | 94,266 | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(25 | ) | 112 | |||||
Net increase (decrease) in cash and
cash equivalents |
2,635 | 745 | ||||||
Cash and cash equivalents at beginning of period |
726 | 996 | ||||||
Cash and cash equivalents at end of period |
$ | 3,361 | $ | 1,741 | ||||
NON-CASH TRANSACTIONS: |
||||||||
Preferred stock dividend |
$ | 1,901 | ||||||
Amortization of preferred stock discount |
$ | 94 | ||||||
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, 2003, is condensed financial information derived from the audited balance sheet. The interim financial statements are unaudited. The consolidated 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 consolidated 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 September 30, 2004 and December 31, 2003, consist of:
| 2004 |
2003 |
|||||||
Finished goods |
$ | 24,579 | $ | 24,917 | ||||
Work in process |
4,778 | 5,453 | ||||||
Raw materials |
21,772 | 18,282 | ||||||
| $ | 51,129 | $ | 48,652 | |||||
C. LONG-TERM DEBT
On June 2, 2004, the Company issued $126,473 of Tranche D Term Loans under the $185,000 Senior Secured Credit Facility to refinance the previously outstanding Tranche B and Tranche C Term Loans. The Tranche D Term Loans have terms identical to the refinanced Tranche B and Tranche C Term Loans, except that interest rates have been lowered 100 basis points and are now based on the banks’ base rate plus 2.50% or the LIBOR rate plus 3.50%. No change in the final maturity date was made. In accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, there was not a substantial difference between the debt instruments, thus no extinguishment of debt is recognized. Remaining unamortized deferred financing fees and debt discount from the Tranche B and C Term Loans have been added to the financing fees paid to the debtors and will amortized over the term of the Tranche D Term Loan.
On September 16, 2003, the Company issued $135,000 of senior secured debt under an $185,000 Senior Secured Credit Facility to refinance its $100,000 11-1/8% Senior Notes and repay its $24,850 term loan and $10,750 revolving credit facility. The Company issued a notice of redemption for the $100,000 11-1/8% Senior Notes and redeemed the Senior Notes in October 2003 at a call price of $101,236. In the third quarter of 2003, the Company recorded a loss of $542 on the write-off of the remaining deferred
6
financing fees related to the existing credit agreement and recorded an additional loss of $2,241 in the fourth quarter of 2003 to write-off an additional $1,005 of deferred financing fees related to the Senior Notes and to record the loss resulting from the $1,236 call premium.
D. 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 $12,695 as of September 30, 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 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement 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. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as a liability and accrued dividends as interest expense. The adoption of this statement had no effect on the cash flows of the Company, net loss available to common shareholders or the Company’s compliance with its debt covenants.
E. INCOME TAXES
The Company’s effective income tax rate for 2004 and 2003 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 for 2004 is affected by dividends from non-U.S. subsidiaries taxable in the United States.
F. 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, flexographic and digital printing industries. The Textile Products segment
7
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.
| Three Months | Nine Months | |||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Third party sales: |
||||||||||||||||
Image Transfer |
$ | 78,477 | $ | 58,424 | $ | 231,443 | $ | 171,546 | ||||||||
Textile Products |
12,017 | 11,630 | 37,571 | 37,466 | ||||||||||||
Total |
$ | 90,494 | $ | 70,054 | $ | 269,014 | $ | 209,012 | ||||||||
Segment operating profit: |
||||||||||||||||
Image Transfer |
$ | 13,578 | $ | 9,914 | $ | 37,944 | $ | 28,561 | ||||||||
Textile Products |
1,463 | 1,028 | 4,866 | 4,009 | ||||||||||||
Total |
$ | 15,041 | $ | 10,942 | $ | 42,810 | $ | 32,570 | ||||||||
The following is a reconciliation of the segment operating profit reported above to the amount reported in the consolidated financial statements:
| Three Months | Nine Months | |||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Segment operating profit |
$ | 15,041 | $ | 10,942 | $ | 42,810 | $ | 32,570 | ||||||||
APB #16 depreciation and amortization |
(999 | ) | (1,044 | ) | (2,997 | ) | (2,893 | ) | ||||||||
Non-allocated corporate expenses |
(186 | ) | (135 | ) | (464 | ) | (417 | ) | ||||||||
Amortization of intangibles |
(9 | ) | (205 | ) | (26 | ) | (612 | ) | ||||||||
Management fees |
(250 | ) | (250 | ) | (750 | ) | (750 | ) | ||||||||
Total operating profit |
$ | 13,597 | $ | 9,308 | $ | 38,573 | $ | 27,898 | ||||||||
G. 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 September 30, 2004 and 2003 was $(1,765) and $(3,288). Total comprehensive income (loss) for the nine months ended September 30, 2004 and 2003 was $(7,909) and $2,783.
8
H. CONTINGENCIES
The Company is involved in various litigation occurring incidental to normal operations. In the opinion of management, after consultation with legal counsel, the resolution of pending litigation and proceedings is not expected to have a material effect on the consolidated results of operations, financial position or cash flows of the Company.
I. 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:
| Three Months | Nine Months | |||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income (loss)–as reported |
$ | (1,819 | ) | $ | (3,551 | ) | $ | (6,220 | ) | $ | (30 | ) | ||||
Less–stock-based compensation
expense determined using fair value
based method in SFAS No. 123 |
(195 | ) | (203 | ) | (585 | ) | (619 | ) | ||||||||
Pro forma net income (loss) |
$ | (2,014 | ) | $ | (3,754 | ) | $ | (6,805 | ) | $ | (649 | ) | ||||
J. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
A summary of the components of net periodic pension cost for the defined benefit retirement plans is as follows:
| Three Months | Nine Months | |||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Service cost |
$ | 93 | $ | 81 | $ | 280 | $ | 240 | ||||||||
Interest cost |
194 | 172 | 583 | 513 | ||||||||||||
Expected return on plan assets |
(85 | ) | (81 | ) | (255 | ) | (243 | ) | ||||||||
Actuarial loss recognized |
9 | 167 | 28 | 501 | ||||||||||||
Net periodic pension costs |
$ | 211 | $ | 339 | $ | 636 | $ | 1,011 | ||||||||
9
A summary of the components of net periodic postretirement benefit cost for the postretirement health care and life insurance benefits plans is as follows:
| Three Months | Nine Months | |||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Service cost |
$ | 275 | $ | 207 | $ | 825 | $ | 621 | ||||||||
Interest cost |
212 | 221 | 636 | 663 | ||||||||||||
Amortization of prior service cost |
(160 | ) | (480 | ) | ||||||||||||
Actuarial loss recognized |
59 | 66 | 177 | 198 | ||||||||||||
Net periodic postretirement benefit costs |
$ | 386 | $ | 494 | $ | 1,158 | $ | 1,482 | ||||||||
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. Pursuant to guidance provided in FASB Staff Position SFAS No. 106-2, 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 associated with the subsidy because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act. In addition, specific authoritative guidance on 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 effect of the legislation will not be material to the results of operations or financial position of the Company.
K. 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 and the wholly-owned United States subsidiaries have provided full and unconditional guarantees of the Notes. The wholly-owned international 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 September 30, 2004 and December 31, 2003, and the supplemental combining condensed statements of operations and cash flows for the three and nine months ended September 30, 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
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
SEPTEMBER 30, 2004
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents
|
$ | 1,588 | $ | 158 | $ | 1,615 | $ | $ | 3,361 | |||||||||||
Accounts receivable–net
|
24,190 | 25,899 | 50,089 | |||||||||||||||||
Inventories
|
30,478 | 20,651 | 51,129 | |||||||||||||||||
Other current assets
|
6,880 | 5,562 | 12,442 | |||||||||||||||||
TOTAL CURRENT ASSETS
|
1,588 | 61,706 | 53,727 | 117,021 | ||||||||||||||||
Intercompany
|
265,669 | (767 | ) | 969 | (265,871 | ) | ||||||||||||||
Property, plant and equipment, net
|
43,693 | 28,775 | 72,468 | |||||||||||||||||
Investment in subsidiaries
|
(24,640 | ) | 62,420 | (12,535 | ) | (25,245 | ) | |||||||||||||
Intangible and other assets
|
160,784 | 19,800 | 180,584 | |||||||||||||||||
TOTAL ASSETS
|
$ | 242,617 | $ | 327,836 | $ | 90,736 | $ | (291,116 | ) | $ | 370,073 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||||||||||||||
Accounts payable
|
$ | 3,800 | $ | 6,045 | $ | $ | 9,845 | |||||||||||||
Current maturities of long-term debt
|
4,195 | 4 | 102 | 4,301 | ||||||||||||||||
Other current liabilities
|
554 | 11,955 | 17,695 | 30,204 | ||||||||||||||||
TOTAL CURRENT LIABILITIES
|
4,749 | 15,759 | 23,842 | 44,350 | ||||||||||||||||
Intercompany
|
(51,608 | ) | 307,583 | (7,705 | ) | (248,270 | ) | |||||||||||||
Long-term and subordinated
long-term debt
|
261,475 | 13 | 1,292 | 262,780 | ||||||||||||||||
Other long-term liabilities
|
24,841 | 10,101 | 34,942 | |||||||||||||||||
Redeemable preferred stock
|
163,535 | 163,535 | ||||||||||||||||||
Total stockholders’ equity (deficit)
|
(135,534 | ) | (20,360 | ) | 63,206 | (42,846 | ) | (135,534 | ) | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
|
$ | 242,617 | $ | 327,836 | $ | 90,736 | $ | (291,116 | ) | $ | 370,073 | |||||||||
11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2003
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 742 | $ | (742 | ) | $ | 726 | $ | $ | 726 | ||||||||||
Accounts receivable — net |
22,280 | 22,407 | 44,687 | |||||||||||||||||
Inventories |
28,104 | 20,548 | 48,652 | |||||||||||||||||
Other assets |
7,186 | 5,695 | 12,881 | |||||||||||||||||
TOTAL CURRENT ASSETS |
742 | 56,828 | 49,376 | 106,946 | ||||||||||||||||
Intercompany |
278,389 | (811 | ) | 1,012 | (278,590 | ) | ||||||||||||||
Property, plant and equipment — net |
44,329 | 29,838 | 74,167 | |||||||||||||||||
Investment in subsidiaries |
(35,348 | ) | 44,173 | (3,682 | ) | (5,143 | ) | |||||||||||||
Intangible and other assets |
169,969 | 20,458 | 190,427 | |||||||||||||||||
TOTAL ASSETS |
$ | 243,783 | $ | 314,488 | $ | 97,002 | $ | (283,733 | ) | $ | 371,540 | |||||||||
LIABILITIES AND
STOCKHOLDERS’ EQUITY
(DEFICIT) |
||||||||||||||||||||
Accounts payable |
$ | $ | 3,415 | $ | 4,148 | $ | $ | 7,563 | ||||||||||||
Current maturities of long-term debt |
3,376 | 4 | 109 | 3,489 | ||||||||||||||||
Other current liabilities |
3,229 | 13,171 | 13,021 | 29,421 | ||||||||||||||||
TOTAL CURRENT LIABILITIES |
6,605 | 16,590 | 17,278 | 40,473 | ||||||||||||||||
Intercompany |
(56,760 | ) | 330,798 | (16,552 | ) | (257,486 | ) | |||||||||||||
Long-term and subordinated
long-term debt |
275,013 | 16 | 1,302 | 276,331 | ||||||||||||||||
Other long-term liabilities |
24,111 | 11,700 | 35,811 | |||||||||||||||||
Redeemable preferred stock |
146,649 | 146,649 | ||||||||||||||||||
Total stockholders’ equity (deficit) |
(127,724 | ) | (57,027 | ) | 83,274 | (26,247 | ) | (127,724 | ) | |||||||||||
TOTAL LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT) |
$ | 243,783 | $ | 314,488 | $ | 97,002 | $ | (283,733 | ) | $ | 371,540 | |||||||||
12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
Net sales |
$ | $ | 54,128 | $ | 36,366 | $ | $ | 90,494 | ||||||||||||
Cost of goods sold |
33,696 | 23,426 | 57,122 | |||||||||||||||||
Gross profit |
20,432 | 12,940 | 33,372 | |||||||||||||||||
Selling, general and administrative |
58 | 12,081 | 7,377 | 19,516 | ||||||||||||||||
Amortization of intangibles |
9 | 9 | ||||||||||||||||||
Management fees |
250 | 250 | ||||||||||||||||||
Operating profit (loss) |
(58 | ) | 8,092 | 5,563 | 13,597 | |||||||||||||||
Other (income) expenses: |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(3,910 | ) | (3,019 | ) | 6,929 | |||||||||||||||
Interest expense |
5,696 | 5,407 | (2 | ) | 11,101 | |||||||||||||||
Other (income) expense |
(3 | ) | (973 | ) | 636 | (340 | ) | |||||||||||||
Income (loss) before income taxes |
(1,841 | ) | 6,677 | 4,929 | (6,929 | ) | 2,836 | |||||||||||||
Income tax expense (benefit) |
(22 | ) | 2,767 | 1,910 | 4,655 | |||||||||||||||
Net income (loss) |
$ | (1,819 | ) | $ | 3,910 | $ | 3,019 | $ | (6,929 | ) | $ | (1,819 | ) | |||||||
13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
| Day | ||||||||||||||||||||
| DAY | Inter- | |||||||||||||||||||
| Inter- | national | Non- | ||||||||||||||||||
| national | Inc. | Guarantor | ||||||||||||||||||
| Group, Inc. |
(Guarantor) |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
Net sales |
$ | $ | 38,084 | $ | 31,970 | $ | $ | 70,054 | ||||||||||||
Cost of goods sold |
24,200 | 20,850 | 45,050 | |||||||||||||||||
Gross profit |
13,884 | 11,120 | 25,004 | |||||||||||||||||
Selling, general and administrative |
9 | 8,311 | 6,921 | 15,241 | ||||||||||||||||
Amortization of intangibles |
205 | 205 | ||||||||||||||||||
Management fees |
250 | 250 | ||||||||||||||||||
Operating profit (loss) |
(9 | ) | 5,118 | 4,199 | 9,308 | |||||||||||||||
Other (income) expenses: |
||||||||||||||||||||
Equity in (earnings) of subsidiaries |
(1,378 | ) | (2,700 | ) | 4,078 | |||||||||||||||
Interest expense |
4,923 | 7,257 | 3 | 12,183 | ||||||||||||||||
Other (income) expense |
12 | (237 | ) | (225 | ) | |||||||||||||||
Income (loss) before income taxes |
(3,554 | ) | 549 | 4,433 | (4,078 | ) | (2,650 | ) | ||||||||||||
Income tax expense (benefit) |
(3 | ) | (829 | ) | 1,733 | 901 | ||||||||||||||
Net income (loss) |
$ | (3,551 | ) | $ | 1,378 | $ | 2,700 | $ | (4,078 | ) | $ | (3,551 | ) | |||||||
14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
Net sales |
$ | $ | 160,271 | $ | 108,743 | $ | $ | 269,014 | ||||||||||||
Cost of goods sold |
101,150 | 69,046 | 170,196 | |||||||||||||||||
Gross profit |
59,121 | 39,697 | 98,818 | |||||||||||||||||
Selling, general and administrative |
75 | 37,324 | 22,070 | 59,469 | ||||||||||||||||
Amortization of intangibles |
26 | 26 | ||||||||||||||||||
Management fees |
750 | 750 | ||||||||||||||||||
Operating profit (loss) |
(75 | ) | 21,021 | 17,627 | 38,573 | |||||||||||||||
Other (income) expenses: |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(10,707 | ) | (9,381 | ) | 20,088 | |||||||||||||||
Interest expense |
16,886 | 16,673 | 14 | 33,573 | ||||||||||||||||
Other (income) expense |
(7 | ) | (4,312 | ) | 2,438 | (1,881 | ) | |||||||||||||
Income (loss) before income taxes |
(6,247 | ) | 18,041 | 15,175 | (20,088 | ) | 6,881 | |||||||||||||
Income tax expense (benefit) |
(27 | ) | 7,334 | 5,794 | 13,101 | |||||||||||||||
Net income (loss) |
$ | (6,220 | ) | $ | 10,707 | $ | 9,381 | $ | (20,088 | ) | $ | (6,220 | ) | |||||||
15
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
| Day | ||||||||||||||||||||
| DAY | Inter- | |||||||||||||||||||
| Inter- | national | Non- | ||||||||||||||||||
| national | Inc. | Guarantor | ||||||||||||||||||
| Group, Inc. |
(Guarantor) |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
Net sales |
$ | $ | 109,892 | $ | 99,120 | $ | $ | 209,012 | ||||||||||||
Cost of goods sold |
70,852 | 63,691 | 134,543 | |||||||||||||||||
Gross profit |
39,040 | 35,429 | 74,469 | |||||||||||||||||
Selling, general and administrative |
68 | 25,468 | 19,673 | 45,209 | ||||||||||||||||
Amortization of intangibles |
612 | 612 | ||||||||||||||||||
Management fees |
750 | 750 | ||||||||||||||||||
Operating profit (loss) |
(68 | ) | 12,210 | 15,756 | 27,898 | |||||||||||||||
Other (income) expenses: |
||||||||||||||||||||
Equity in (earnings) of subsidiaries |
(4,934 | ) | (8,691 | ) | 13,625 | |||||||||||||||
Interest expense |
4,923 | 20,335 | 79 | 25,337 | ||||||||||||||||
Other (income) expense |
(1 | ) | (1,981 | ) | 1,445 | (537 | ) | |||||||||||||
Income (loss) before income taxes |
(56 | ) | 2,547 | 14,232 | (13,625 | ) | 3,098 | |||||||||||||
Income tax expense (benefit) |
(26 | ) | (2,387 | ) | 5,541 | 3,128 | ||||||||||||||
Net income (loss) |
$ | (30 | ) | $ | 4,934 | $ | 8,691 | $ | (13,625 | ) | $ | (30 | ) | |||||||
16
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
| DAY | |||||||||||||||||||||||
| Inter- | Non- | ||||||||||||||||||||||
| national | Guarantor | Guarantor | |||||||||||||||||||||
| Group, Inc. |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
|||||||||||||||||||
Cash Flows From Operating Activities: |
|||||||||||||||||||||||
Net income (loss) |
$ | (6,220 | ) | $ | 10,707 | $ | 9,381 | $ | (20,088 | ) | $ | (6,220 | ) | ||||||||||
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities: |
|||||||||||||||||||||||
Depreciation and amortization |
7,931 | 3,136 | 11,067 | ||||||||||||||||||||
Interest expense—redeemable preferred stock |
16,886 | 16,886 | |||||||||||||||||||||
Equity in earnings of subsidiaries |
(10,707 | ) | (9,381 | ) | 20,088 | ||||||||||||||||||
Deferred income taxes and other |
6,778 | (1,319 | ) | 5,459 | |||||||||||||||||||
Equity in earnings of investees |
(192 | ) | (192 | ) | |||||||||||||||||||
Foreign currency (gain) loss |
(2,559 | ) | 926 | (1,633 | ) | ||||||||||||||||||
(Gain) loss on disposal of fixed assets |
367 | (428 | ) | (61 | ) | ||||||||||||||||||
Changes in operating assets and liabilities |
(2,676 | ) | (738 | ) | 657 | (2,757 | ) | ||||||||||||||||
Net cash provided by (used in) operating
activities |
(2,717 | ) | 12,913 | 12,353 | 22,549 | ||||||||||||||||||
Cash Flows From Investing Activities: |
|||||||||||||||||||||||
Cash paid for acquisitions |
(1,346 | ) | (1,346 | ) | |||||||||||||||||||
Capital expenditures |
(3,955 | ) | (3,098 | ) | (7,053 | ) | |||||||||||||||||
Proceeds from sale of property |
1,410 | 1,410 | |||||||||||||||||||||
Net cash used in investing activities |
(5,301 | ) | (1,688 | ) | (6,989 | ) | |||||||||||||||||
Cash Flows From Financing Activities: |
|||||||||||||||||||||||
Proceeds from exercise of stock options |
25 | 25 | |||||||||||||||||||||
Payment of deferred financing fees |
(633 | ) | (633 | ) | |||||||||||||||||||
Payments on term loans |
(14,264 | ) | (3 | ) | (14,267 | ) | |||||||||||||||||
Net proceeds from credit facilities |
1,975 | 1,975 | |||||||||||||||||||||
Net cash provided by (used in) financing
activities |
(12,264 | ) | (636 | ) | (12,900 | ) | |||||||||||||||||
Intercompany transfers and dividends |
15,827 | (6,076 | ) | (9,751 | ) | ||||||||||||||||||
Effects of exchange rates on cash |
(25 | ) | (25 | ) | |||||||||||||||||||
Net increase (decrease) in cash and cash
equivalents |
846 | 900 | 889 | 2,635 | |||||||||||||||||||
Cash and cash equivalents at beginning of period |
742 | (742 | ) | 726 | 726 | ||||||||||||||||||
Cash and cash equivalents at end of period |
$ | 1,588 | $ | 158 | $ | 1,615 | $ | $ | 3,361 | ||||||||||||||
17
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
| Day | ||||||||||||||||||||
| DAY | Inter- | |||||||||||||||||||
| Inter- | national | Non- | ||||||||||||||||||
| national | Inc. | Guarantor | ||||||||||||||||||
| Group, Inc. |
(Guarantor) |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
Cash Flows From Operating Activities: |
||||||||||||||||||||
Net income (loss) |
$ | (30 | ) | $ | 4,934 | $ | 8,691 | $ | (13,625 | ) | $ | (30 | ) | |||||||
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities: |
||||||||||||||||||||
Depreciation and amortization |
9,341 | 2,549 | 11,890 | |||||||||||||||||
Interest expense: |
||||||||||||||||||||
Redeemable preferred stock dividends |
4,923 | 4,923 | ||||||||||||||||||
Loss on extinguishment of debt |
542 | 542 | ||||||||||||||||||
Equity in (earnings) of subsidiaries |
(4,934 | ) | (8,691 | ) | 13,625 | |||||||||||||||
Deferred income taxes and other |
(2,848 | ) | (303 | ) | (3,151 | ) | ||||||||||||||
Foreign currency (gain) loss |
(1,814 | ) | 797 | (1,017 | ) | |||||||||||||||
(Gain) loss on disposal of fixed assets |
113 | 661 | 774 | |||||||||||||||||
Changes in operating assets and liabilities |
(18 | ) | 3,806 | (6,912 | ) | (3,124 | ) | |||||||||||||
Net cash provided by (used in) operating
activities |
(59 | ) | 5,383 | 5,483 | 10,807 | |||||||||||||||
Cash Flows From Investing Activities: |
||||||||||||||||||||
Cash paid for acquisition |
(1,952 | ) | (1,952 | ) | ||||||||||||||||
Capital expenditures |
(2,725 | ) | (2,731 | ) | (5,456 | ) | ||||||||||||||
Cash held for retirement of debt |
(97,971 | ) | (97,971 | ) | ||||||||||||||||
Proceeds from sale of property |
939 | 939 | ||||||||||||||||||
Net cash used in investing activities |
(97,971 | ) | (3,738 | ) | (2,731 | ) | (104,440 | ) | ||||||||||||
Cash Flows From Financing Activities: |
||||||||||||||||||||
Proceeds from issuance of debt |
133,950 | 133,950 | ||||||||||||||||||
Payment of deferred financing fees |
(3,537 | ) | (3,537 | ) | ||||||||||||||||
Payments on long-term debt |
(31,150 | ) | (47 | ) | (31,197 | ) | ||||||||||||||
Net borrowings (payments) on revolving credit
facility |
(4,950 | ) | (4,950 | ) | ||||||||||||||||
Net cash provided by (used in) financing
activities |
97,850 | (3,537 | ) | (47 | ) | 94,266 | ||||||||||||||
Intercompany transfers and dividends |
281 | 1,791 | (2,072 | ) | ||||||||||||||||
Effects of exchange rates on cash |
112 | 112 | ||||||||||||||||||
Net increase (decrease) in cash and cash
equivalents |
101 | (101 | ) | 745 | 745 | |||||||||||||||
Cash and cash equivalents at beginning of period |
496 | (496 | ) | 996 | 996 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 597 | $ | (597 | ) | $ | 1,741 | $ | $ | 1,741 | ||||||||||
18
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 effect of competitive products and pricing; (v) the effect of changing general and industry specific economic conditions; (vi) the effect 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:
| THREE MONTHS | NINE MONTHS | |||||||||||||||||||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
Net sales |
90.5 | 100.0 | 70.1 | 100.0 | 269.0 | 100.0 | 209.0 | 100.0 | ||||||||||||||||||||||||
Costs of goods sold |
57.1 | 63.1 | 45.1 | 64.3 | 170.2 | 63.3 | 134.5 | 64.4 | ||||||||||||||||||||||||
Gross profit |
33.4 | 36.9 | 25.0 | 35.7 | 98.8 | 36.7 | 74.5 | 35.6 | ||||||||||||||||||||||||
Selling, general and administrative |
19.5 | 21.6 | 15.2 | 21.8 | 59.4 | 22.1 | 45.2 | 21.6 | ||||||||||||||||||||||||
Amortization of intangibles |
0.0 | 0.0 | 0.2 | 0.3 | 0.0 | 0.0 | 0.6 | 0.3 | ||||||||||||||||||||||||
Management fees |
0.3 | 0.3 | 0.3 | 0.3 | 0.8 | 0.3 | 0.8 | 0.4 | ||||||||||||||||||||||||
Operating profit |
13.6 | 15.0 | 9.3 | 13.3 | 38.6 | 14.3 | 27.9 | 13.3 | ||||||||||||||||||||||||
19
Comparison of Results of Operations
Three Months Ended September 30, 2004, Compared to Three Months Ended September 30, 2003
Net sales increased $20.4 million (29.2%) to $90.5 million, primarily as a result of sales from businesses acquired in 2003, higher sales volumes in the United States and Europe and favorable changes in foreign currency rates. Sales in 2004 include $12.8 million of sales from a business acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $2.6 million in the United States, increased sales volume of $2.4 million in Europe and $3.0 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $20.0 million (34.3%) to $78.5 million. Image Transfer’s sales were positively affected by increased sales volumes of $15.2 million in the United States and $2.7 million in Europe and $2.5 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 a business acquisition in 2003 of $12.8 million and from higher sales volumes across substantially all product lines. European sales volume increased primarily from growth in the United Kingdom and Germany. Textile Products’ sales increased $0.4 million (3.3%) to $12.0 million, primarily as a result of slightly higher sales volume in the United States of $0.2 million and by favorable foreign currency rate changes of $0.5 million and offset by lower sales volume in Europe of $0.3 million. European Textile Products’ sales volumes were lower in 2004 compared to 2003, primarily as a result of lower demand from original equipment manufacturers (“OEMs”).
Gross profit increased $8.4 million (33.5%) to $33.4 million. Foreign currency rate changes increased gross profit by $1.1 million. As a percentage of net sales, gross profit increased to 36.9% for the three months ended September 30, 2004, compared to 35.7% for the three months ended September 30, 2003. The improvement in gross profit as a percentage of sales is a result of improved manufacturing performances offset by the effect of the acquisition in 2003, as that business had historically had lower gross margin percentages than Day’s businesses.
Selling, general and administrative expense (“SG&A”) increased $4.3 million (28.0%) to $19.5 million, primarily as a result of SG&A associated with a business acquired of $2.6 million and changes in foreign currency rates. Changes in foreign currency rates increased SG&A costs by $0.6 million compared to 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels. As a percentage of net sales, SG&A decreased to 21.6% from 21.8%.
Operating profit increased $4.3 million (46.1%) to $13.6 million. As a percentage of net sales, operating profit increased to 15.0% for the three months ended September 30, 2004, from 13.3% for the comparable period in 2003. Image Transfer’s operating profit increased $3.7 million (37.0%) to $13.6 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit increased to 17.3% for the three months ended September 30, 2004, from 17.0% in 2003. The improvement in operating margin as a percentage of sales is a result of improved manufacturing performances offset by substantially lower operating margins on NDI’s distribution business than Day’s historical margins on manufactured products. Textile Products’ operating profit increased $0.4 million (42.3%) to $1.5 million. As a percentage of net sales, Textile Products’ operating profit increased to 12.2% for the three months ended September 30, 2004, from 8.8% in 2003. Lower selling and administrative
20
costs in the United States and manufacturing cost efficiencies in Europe favorably affected Textile Products’ operating profit in 2004 compared to 2003.
Other (income) expense was $(0.3) million and $(0.2) million for the three months ended September 30, 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 loss of $0.6 million and $1.0 million in 2004 and 2003 from the mark-to-market of the euro-denominated Tranche A Term Loan.
The effective tax rate was 164.1% in 2004. The Company recorded income tax expense on a loss before income taxes in the third quarter of 2003. The effective tax rate is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. The effective tax rate in 2004 is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.
Nine Months Ended September 30, 2004, Compared to Nine Months Ended September 30, 2003
Net sales increased $60.0 million (28.7%) to $269.0 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 and Europe. Sales in 2004 include $38.3 million of sales from businesses acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $8.4 million in the United States, increased sales volumes of $2.5 million in Europe and $10.4 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $59.9 million (34.9%) to $231.4 million. Image Transfer’s sales were positively affected by increased sales volumes of $46.4 million in the United States and $4.3 million in Europe and $8.4 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 $38.3 million and from higher sales volumes across substantially all product lines. European sales volume increased primarily from growth in the chemical products business in the United Kingdom and Germany and transfer media products business in Germany. Textile Products’ sales increased $0.1 million (0.3%) to $37.6 million, primarily as a result of lower sales volume in the United States of $0.2 million and in Europe of $1.7 million offset by favorable foreign currency rate changes of $2.0 million. The lower U.S. Textile Products sales volume is due to reduced demand in the U.S. textile industry, mostly a result of 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”), in line with the OEMs own reduced level of business activity. OEM sales in 2004 continued at a relatively strong level, but were not at the unusually high level of 2003. Lower demand from textile mills in Europe also contributed to the shortfall.
21
Gross profit increased $24.3 million (32.7%) to $98.8 million. Foreign currency rate changes increased gross profit by $3.9 million. As a percentage of net sales, gross profit increased to 36.7% for the nine months ended September 30, 2004, compared to 35.6% for the nine months ended September 30, 2003. The improvement in gross profit as a percentage of sales is a result of improved manufacturing performances offset by the effect of the acquisition in 2003, as that business had historically had lower gross margin percentages than Day’s businesses.
Selling, general and administrative expense (“SG&A”) increased $14.3 million (31.5%) to $59.5 million, primarily as a result of SG&A associated with a business acquired of $8.1 million and changes in foreign currency rates. As a percentage of net sales, SG&A increased to 22.1% from 21.6%. Changes in foreign currency rates increased SG&A costs by $2.1 million in the first nine months of 2004 compared to 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 $10.7 million (38.3%) to $38.6 million. As a percentage of net sales, operating profit increased to 14.3% for the nine months ended September 30, 2004, from 13.3% for the comparable period in 2003. Image Transfer’s operating profit increased $9.4 million (32.9%) to $37.9 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 16.4% for the nine months ended September 30, 2004, from 16.6% 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 $0.9 million (21.4%) to $4.9 million. As a percentage of net sales, Textile Products’ operating profit increased to 13.0% for the nine months ended September 30, 2004, from 10.7% in 2003. Lower selling and administrative costs in the United States and manufacturing cost efficiencies in Europe favorably affected Textile Products’ operating profit in 2004 compared to 2003.
Other (income) expense was $(1.9) million and $(0.5) million for the nine months ended September 30, 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 includes a gain of $0.5 million in 2004 on the mark-to-market of the euro-denominated Tranche A Term Loan and $0.4 million gain on the sale of fixed assets. Other income in 2003 includes a loss of $1.0 million on the mark-to-market of the euro-denominated Tranche A Term Loan, a loss of $1.1 million from the sale of the South African business, a gain of $0.9 million from the sale of excess land in Mauldin, South Carolina and a loss of $0.5 million on the sale and disposal of equipment from the Longwood, Florida, facility.
The effective tax rate was 190.4% and 101.0% in 2004 and 2003. The effective tax rate is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. The effective tax rate in 2004 is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.
In October 2004, the American Jobs Creation Act of 2004 (the “Jobs Act”) was enacted. The Jobs Act provides a deduction with respect to U.S. manufacturing activities, allows for tax-favored repatriation of offshore earnings and makes numerous changes to various tax rules. The Company’s ability to take
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advantage of certain provisions of the Jobs Act is limited because of the U.S. net operating loss carryforward position of the Company and because of various restrictions in the Company’s debt agreements. For these reasons, the Company does not believe that the Jobs Act will have a material effect on the Company’s tax expense or cash flows over the next several years.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement 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. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as long-term debt and accrued dividends are shown as interest expense. The adoption of this statement had 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 $7.1 million and $5.5 million for the nine months ended September 30, 2004 and 2003.
On June 2, 2004, the Company issued $126.5 million of Tranche D Term Loans under the $185.0 million Senior Secured Credit Facility to refinance the outstanding Tranche B and Tranche C Term Loans. The Tranche D Term Loans have terms identical to the outstanding Tranche B and Tranche C Term Loans, except that interest rates have been lowered 100 basis points and are now based on the banks’ base rate plus 2.50% or the LIBOR rate plus 3.50%. No changes in maturity dates were made.
As of September 30, 2004, there was $2.4 million outstanding under the Revolving Credit Facility and the Company had $17.0 million available under the Revolving Credit Facility. The Company’s aggregate indebtedness at September 30, 2004, is $267.1 million and the aggregate liquidation preferences of the Exchangeable Preferred Stock is $77.1 million and the Convertible Preferred Stock is $87.5 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.
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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 consolidated 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 cash is paid or collected. 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 $8.3 million at September 30, 2004 and $15.9 million at December 31, 2003. The fair value of these contracts is a payable of $0.1 million at September 30, 2004 and $0.7 million at December 31, 2003. These contracts generally expire within three to twelve months. At September 30, 2004 and December 31, 2003, the Company had outstanding €22.7 million and €25.8 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 transaction (gains) losses, included in other (income) expense, were $(0.7) million and $0.3 million for the three months ended September 30, 2004 and 2003 and $(1.6) million and $(1.2) million for the nine months ended September 30, 2004 and 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 fair value of the interest rate swap was a payable of $0.1 million and $0.3 million at September 30, 2004 and December 31, 2003. The Company does not expect 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.
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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. Chemical Products is exposed to changes in the cost of certain petroleum-based components. The largest raw material component in Chemical Products’ 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 significantly higher costs, management believes that a 10% change in the cost of its components could have a short-term effect until sales price increases take effect, but overall would not have a material effect on income or cash flows for a longer term.
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 September 30, 2004. To the best of management’s knowledge, there were no changes in the internal control and disclosure control systems during the quarter ended September 30, 2004, that would materially affect the control systems.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS
| (31) | Rule 13a-14(a)/15d-14(a) Certifications |
| 31.1 | Chief Executive Officer Certification | |||
| 31.2 | Chief Financial Officer Certification | |||
| (32) | Section 1350 Certifications |
| 32.1 | Chief Executive Officer Certification | |||
| 32.2 | Chief Financial Officer Certification | |||
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: November 1, 2004 | /s/ Thomas J. Koenig |
|||
| Thomas J. Koenig | ||||
| Vice President and | ||||
| Chief Financial Officer | ||||
| (Principal Financial Officer) |
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