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 March 31, 2005
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. Yes þ 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 þ
There were 23,323 Common Shares of the Company, $0.01 per share par value, outstanding as of May 1, 2005.
DAY INTERNATIONAL GROUP, INC.
INDEX
| Page | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 17 | ||||||||
| 20 | ||||||||
| 21 | ||||||||
| 21 | ||||||||
| 22 | ||||||||
| EX-31.1 Certification | ||||||||
| EX-31.2 Certification | ||||||||
| EX-32.1 Certification | ||||||||
| EX-32.2 Certification | ||||||||
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 1,111 | $ | 843 | ||||
Accounts receivable (less allowance for doubtful accounts of $3,480 and $3,694) |
53,656 | 51,967 | ||||||
Inventories (Note B) |
51,115 | 50,334 | ||||||
Other current assets |
17,663 | 17,812 | ||||||
Total current assets |
123,545 | 120,956 | ||||||
Property, plant and equipment, net of accumulated depreciation of $63,856 and $61,592 |
72,928 | 74,735 | ||||||
Goodwill |
142,895 | 143,444 | ||||||
Intangible assets (net of accumulated amortization of $41,440 and $40,203) |
17,607 | 18,842 | ||||||
Other assets |
10,284 | 12,258 | ||||||
TOTAL ASSETS |
$ | 367,259 | $ | 370,235 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
Accounts payable |
$ | 9,060 | $ | 11,020 | ||||
Current maturities of long-term debt |
4,790 | 4,576 | ||||||
Other current liabilities |
24,277 | 33,466 | ||||||
Total current liabilities |
38,127 | 49,062 | ||||||
Long-term and subordinated long-term debt |
251,119 | 247,814 | ||||||
Other long-term liabilities |
40,719 | 39,572 | ||||||
Redeemable preferred stock (Note C) |
176,248 | 169,805 | ||||||
STOCKHOLDERS’ EQUITY (DEFICIT): |
||||||||
Common shares |
1 | 1 | ||||||
Contra-equity associated with the assumption of majority shareholder’s bridge loan |
(68,673 | ) | (68,673 | ) | ||||
Retained earnings (deficit) |
(77,769 | ) | (75,201 | ) | ||||
Accumulated other comprehensive loss |
7,487 | 7,855 | ||||||
Total stockholders’ equity (deficit) |
(138,954 | ) | (136,018 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
$ | 367,259 | $ | 370,235 | ||||
See notes to condensed consolidated financial statements.
3
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
NET SALES |
$ | 89,919 | $ | 89,713 | ||||
COST OF GOODS SOLD |
56,878 | 56,382 | ||||||
GROSS PROFIT |
33,041 | 33,331 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE |
20,522 | 20,100 | ||||||
AMORTIZATION OF INTANGIBLES |
9 | 9 | ||||||
MANAGEMENT FEES |
250 | 250 | ||||||
OPERATING PROFIT |
12,260 | 12,972 | ||||||
OTHER EXPENSES: |
||||||||
Interest expense: |
||||||||
Long-term debt (including
amortization of deferred financing
costs and discount of $456 and $426) |
5,467 | 5,636 | ||||||
Redeemable preferred stock dividends
(including amortization
of discount and issuance costs
of $47 and $47) |
6,428 | 5,562 | ||||||
Other (income) expense—net |
310 | (878 | ) | |||||
INCOME (LOSS) BEFORE INCOME TAXES |
55 | 2,652 | ||||||
INCOME TAX EXPENSE |
2,624 | 4,667 | ||||||
NET INCOME (LOSS) |
$ | (2,569 | ) | $ | (2,015 | ) | ||
See notes to condensed consolidated financial statements.
4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (2,569 | ) | $ | (2,015 | ) | ||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
4,089 | 3,720 | ||||||
Interest expense—redeemable preferred stock dividends |
6,428 | 5,562 | ||||||
Deferred income taxes |
2,155 | 2,421 | ||||||
Equity in earnings of investees |
(59 | ) | (23 | ) | ||||
Foreign currency (gain) loss |
(633 | ) | (412 | ) | ||||
(Gain) on disposal of fixed assets |
(360 | ) | ||||||
Change in operating assets and liabilities |
(12,021 | ) | (5,303 | ) | ||||
Net cash (used in) provided by operating activities |
(2,610 | ) | 3,590 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Cash paid for acquisitions |
(1,254 | ) | ||||||
Capital expenditures |
(1,821 | ) | (995 | ) | ||||
Proceeds from sale of property |
360 | |||||||
Net cash used in investing activities |
(1,821 | ) | (1,889 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from exercise of stock options |
25 | |||||||
Payments on term loans |
(1,022 | ) | (3,454 | ) | ||||
Net proceeds from revolving credit facility |
5,675 | 3,500 | ||||||
Net cash provided by financing activities |
4,653 | 71 | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
46 | 15 | ||||||
Net increase in cash and cash equivalents |
268 | 1,787 | ||||||
Cash and cash equivalents at beginning of period |
843 | 726 | ||||||
Cash and cash equivalents at end of period |
$ | 1,111 | $ | 2,513 | ||||
See notes to condensed consolidated financial statements.
5
DAY INTERNATIONAL GROUP, INC.
A. BASIS OF PRESENTATION
The balance sheet as of December 31, 2004, 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, 2005 and December 31, 2004, consist of:
| 2005 | 2004 | |||||||
| (audited) | ||||||||
Finished goods |
$ | 24,760 | $ | 24,384 | ||||
Work in process |
4,425 | 5,193 | ||||||
Raw materials |
21,930 | 20,757 | ||||||
| $ | 51,115 | $ | 50,334 | |||||
C. REDEEMABLE PREFERRED STOCK
The Company’s 12 1/4% 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 $17,464 and $15,043 as of March 31, 2005 and December 31, 2004 which are included in the redeemable preferred stock balance.
D. INCOME TAXES
The Company’s effective income tax rate for 2005 and 2004 is different from the statutory rates in effect as a result of the inclusion of the dividends on the redeemable preferred stock in income before income taxes. The non-deductible preferred stock dividends cause a significant difference between book income and taxable income. In addition, the effective rate for 2004 is affected by dividends from non-U.S. subsidiaries taxable in the United States.
6
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, flexographic and digital 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.
| 2005 | 2004 | |||||||
Third party sales: |
||||||||
Image Transfer |
$ | 77,813 | $ | 77,003 | ||||
Textile Products |
12,106 | 12,710 | ||||||
Total |
$ | 89,919 | $ | 89,713 | ||||
Segment operating profit: |
||||||||
Image Transfer |
$ | 12,496 | $ | 12,558 | ||||
Textile Products |
1,308 | 1,802 | ||||||
Total |
$ | 13,804 | $ | 14,360 | ||||
The following is a reconciliation of the segment operating profit reported above to the amount reported in the consolidated financial statements:
| 2005 | 2004 | |||||||
Segment operating profit |
$ | 13,804 | $ | 14,360 | ||||
APB #16 depreciation and amortization |
(1,119 | ) | (999 | ) | ||||
Non-allocated corporate expenses |
(166 | ) | (130 | ) | ||||
Amortization of intangibles |
(9 | ) | (9 | ) | ||||
Management fees |
(250 | ) | (250 | ) | ||||
Total operating profit |
$ | 12,260 | $ | 12,972 | ||||
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, 2005 and 2004 was $(2,937) and $(2,279).
7
G. 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.
H. STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, the Company applied 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 was reflected in net (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:
| 2005 | 2004 | |||||||
Net (loss)–as reported |
$ | (2,569 | ) | $ | (2,015 | ) | ||
Less–stock-based compensation expense determined using
fair value based method in SFAS No. 123 |
(186 | ) | (195 | ) | ||||
Pro forma net (loss) |
$ | (2,755 | ) | $ | (2,210 | ) | ||
8
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:
| 2005 | 2004 | |||||||
Service cost |
$ | 108 | $ | 95 | ||||
Interest cost |
105 | 197 | ||||||
Expected return on plan assets |
(86 | ) | ||||||
Actuarial loss recognized |
13 | 10 | ||||||
Settlement loss |
703 | |||||||
Net periodic pension costs |
$ | 929 | $ | 216 | ||||
During the first quarter of 2005, the Company purchased annuity contracts to settle the remaining U.K. pension obligation and recognized a loss on the settlement.
A summary of the components of net periodic postretirement cost for the postretirement health care and life insurance benefits plans is as follows:
| 2005 | 2004 | |||||||
Service cost |
$ | 330 | $ | 275 | ||||
Interest cost |
253 | 212 | ||||||
Amortization of prior service cost |
(208 | ) | (160 | ) | ||||
Actuarial loss recognized |
112 | 59 | ||||||
Net periodic postretirement benefit costs |
$ | 487 | $ | 386 | ||||
J. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $115,000, 9 1/2% 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, 2005 and December 31, 2004, and the supplemental combining condensed statements of operations and cash flows for the three months ended March 31, 2005 and 2004, 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, 2005
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | 414 | $ | 15 | $ | 682 | $ | $ | 1,111 | |||||||||||
Accounts receivable–net |
21,402 | 32,254 | 53,656 | |||||||||||||||||
Inventories |
27,815 | 23,300 | 51,115 | |||||||||||||||||
Other current assets |
11,569 | 6,094 | 17,663 | |||||||||||||||||
TOTAL CURRENT ASSETS |
414 | 60,801 | 62,330 | 123,545 | ||||||||||||||||
Intercompany |
241,119 | (7,762 | ) | 8,714 | (242,071 | ) | ||||||||||||||
Property, plant and equipment, net |
41,764 | 31,164 | 72,928 | |||||||||||||||||
Investment in subsidiaries |
(18,316 | ) | 69,119 | (12,535 | ) | (38,268 | ) | |||||||||||||
Intangible and other assets |
153,450 | 17,336 | 170,786 | |||||||||||||||||
TOTAL ASSETS |
$ | 223,217 | $ | 317,372 | $ | 107,009 | $ | (280,339 | ) | $ | 367,259 | |||||||||
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||||||||||||||
Accounts payable |
$ | $ | 4,189 | $ | 14,054 | $ | (9,183 | ) | $ | 9,060 | ||||||||||
Current maturities of long-term debt |
4,671 | 119 | 4,790 | |||||||||||||||||
Other current liabilities |
479 | 9,107 | 14,691 | 24,277 | ||||||||||||||||
TOTAL CURRENT LIABILITIES |
5,150 | 13,296 | 28,864 | (9,183 | ) | 38,127 | ||||||||||||||
Intercompany |
(63,725 | ) | 297,457 | (6,481 | ) | (227,251 | ) | |||||||||||||
Long-term and subordinated
long-term debt |
249,928 | 1,191 | 251,119 | |||||||||||||||||
Other long-term liabilities |
29,772 | 10,947 | 40,719 | |||||||||||||||||
Redeemable preferred stock |
176,248 | 176,248 | ||||||||||||||||||
Total stockholders’ equity (deficit) |
(144,384 | ) | (23,153 | ) | 72,488 | (43,905 | ) | (138,954 | ) | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT) |
$ | 223,217 | $ | 317,372 | $ | 107,009 | $ | (280,339 | ) | $ | 367,259 | |||||||||
10
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET—AUDITED
DECEMBER 31, 2004
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and cash equivalents |
$ | (130 | ) | $ | 130 | $ | 843 | $ | $ | 843 | ||||||||||
Accounts receivable—net |
22,771 | 29,196 | 51,967 | |||||||||||||||||
Inventories |
29,264 | 21,070 | 50,334 | |||||||||||||||||
Other assets |
11,815 | 5,997 | 17,812 | |||||||||||||||||
TOTAL CURRENT ASSETS |
(130 | ) | 63,980 | 57,106 | 120,956 | |||||||||||||||
Intercompany |
250,993 | 3,997 | 555 | (255,545 | ) | |||||||||||||||
Property, plant and equipment—net |
42,674 | 32,061 | 74,735 | |||||||||||||||||
Investment in subsidiaries |
(22,174 | ) | 66,005 | (12,535 | ) | (31,296 | ) | |||||||||||||
Intangible and other assets |
154,984 | 19,560 | 174,544 | |||||||||||||||||
TOTAL ASSETS |
$ | 228,689 | $ | 331,640 | $ | 96,747 | $ | (286,841 | ) | $ | 370,235 | |||||||||
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||||||||||||||
Accounts payable |
$ | $ | 3,814 | $ | 7,206 | $ | $ | 11,020 | ||||||||||||
Current maturities of long-term debt |
4,452 | 124 | 4,576 | |||||||||||||||||
Other current liabilities |
3,209 | 13,096 | 17,161 | 33,466 | ||||||||||||||||
TOTAL CURRENT LIABILITIES |
7,661 | 16,910 | 24,491 | 49,062 | ||||||||||||||||
Intercompany |
(59,301 | ) | 300,853 | (10,119 | ) | (231,433 | ) | |||||||||||||
Long-term and subordinated long-term
debt |
246,542 | 1,272 | 247,814 | |||||||||||||||||
Other long-term liabilities |
28,354 | 11,218 | 39,572 | |||||||||||||||||
Redeemable preferred stock |
169,805 | 169,805 | ||||||||||||||||||
Total stockholders’ equity (deficit) |
(136,018 | ) | (14,477 | ) | 69,885 | (55,408 | ) | (136,018 | ) | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT) |
$ | 228,689 | $ | 331,640 | $ | 96,747 | $ | (286,841 | ) | $ | 370,235 | |||||||||
11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | $ | 50,797 | $ | 39,122 | $ | $ | 89,919 | ||||||||||||
Cost of goods sold |
32,175 | 24,703 | 56,878 | |||||||||||||||||
Gross profit |
18,622 | 14,419 | 33,041 | |||||||||||||||||
Selling, general and administrative |
11,989 | 8,533 | 20,522 | |||||||||||||||||
Amortization of intangibles |
9 | 9 | ||||||||||||||||||
Management fees |
250 | 250 | ||||||||||||||||||
Operating profit |
6,374 | 5,886 | 12,260 | |||||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(3,857 | ) | (3,114 | ) | 6,971 | |||||||||||||||
Interest expense |
6,425 | 5,425 | 45 | 11,895 | ||||||||||||||||
Other (income) expense |
(676 | ) | 986 | 310 | ||||||||||||||||
Income (loss) before income taxes |
(2,568 | ) | 4,739 | 4,855 | (6,971 | ) | 55 | |||||||||||||
Income tax expense (benefit) |
1 | 882 | 1,741 | 2,624 | ||||||||||||||||
Net income (loss) |
$ | (2,569 | ) | $ | 3,857 | $ | 3,114 | $ | (6,971 | ) | $ | (2,569 | ) | |||||||
12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | $ | 52,949 | $ | 36,764 | $ | $ | 89,713 | ||||||||||||
Cost of goods sold |
33,476 | 22,906 | 56,382 | |||||||||||||||||
Gross profit |
19,473 | 13,858 | 33,331 | |||||||||||||||||
Selling, general and administrative |
1 | 12,729 | 7,370 | 20,100 | ||||||||||||||||
Amortization of intangibles |
9 | 9 | ||||||||||||||||||
Management fees |
250 | 250 | ||||||||||||||||||
Operating profit |
(1 | ) | 6,485 | 6,488 | 12,972 | |||||||||||||||
Other expenses (income): |
||||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(3,546 | ) | (3,344 | ) | 6,890 | |||||||||||||||
Interest expense |
5,562 | 5,631 | 5 | 11,198 | ||||||||||||||||
Other (income) expense |
(3 | ) | (2,131 | ) | 1,256 | (878 | ) | |||||||||||||
Income (loss) before income taxes |
(2,014 | ) | 6,329 | 5,227 | (6,890 | ) | 2,652 | |||||||||||||
Income tax expense (benefit) |
1 | 2,783 | 1,883 | 4,667 | ||||||||||||||||
Net income (loss) |
$ | (2,015 | ) | $ | 3,546 | $ | 3,344 | $ | (6,890 | ) | $ | (2,015 | ) | |||||||
13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash Flows From Operating Activities: |
||||||||||||||||||||
Net income (loss) |
$ | (2,569 | ) | $ | 3,857 | $ | 3,114 | $ | (6,971 | ) | $ | (2,569 | ) | |||||||
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
2,974 | 1,115 | 4,089 | |||||||||||||||||
Interest expense—redeemable preferred stock |
6,428 | 6,428 | ||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(3,857 | ) | (3,114 | ) | 6,971 | |||||||||||||||
Deferred income taxes and other |
2,340 | (185 | ) | 2,155 | ||||||||||||||||
Equity in earnings of investees |
(59 | ) | (59 | ) | ||||||||||||||||
Foreign currency (gain) loss |
201 | (834 | ) | (633 | ) | |||||||||||||||
Changes in operating assets and liabilities |
(2,731 | ) | (6,133 | ) | (3,157 | ) | (12,021 | ) | ||||||||||||
Net cash
(used in) provided by operating activities |
(2,729 | ) | 66 | 53 | (2,610 | ) | ||||||||||||||
Cash Flows From Investing Activities: |
||||||||||||||||||||
Capital expenditures |
(807 | ) | (1,014 | ) | (1,821 | ) | ||||||||||||||
Net cash used in investing activities |
(807 | ) | (1,014 | ) | (1,821 | ) | ||||||||||||||
Cash Flows From Financing Activities: |
||||||||||||||||||||
Payments on term loans |
(993 | ) | (29 | ) | (1,022 | ) | ||||||||||||||
Net proceeds from credit facilities |
5,675 | 5,675 | ||||||||||||||||||
Net cash provided by (used in) financing activities |
4,682 | (29 | ) | 4,653 | ||||||||||||||||
Intercompany transfers and dividends |
(1,409 | ) | 626 | 783 | ||||||||||||||||
Effects of exchange rates on cash |
46 | 46 | ||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
544 | (115 | ) | (161 | ) | 268 | ||||||||||||||
Cash and cash equivalents at beginning of period |
(130 | ) | 130 | 843 | 843 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 414 | $ | 15 | $ | 682 | $ | $ | 1,111 | |||||||||||
14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
| DAY | ||||||||||||||||||||
| Inter- | Non- | |||||||||||||||||||
| national | Guarantor | Guarantor | ||||||||||||||||||
| Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash Flows From Operating Activities: |
||||||||||||||||||||
Net income (loss) |
$ | (2,015 | ) | $ | 3,546 | $ | 3,344 | $ | (6,890 | ) | $ | (2,015 | ) | |||||||
Adjustments to reconcile net income (loss)
to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
2,607 | 1,113 | 3,720 | |||||||||||||||||
Interest expense—redeemable preferred stock |
5,562 | 5,562 | ||||||||||||||||||
Equity in (earnings) loss of subsidiaries |
(3,546 | ) | (3,344 | ) | 6,890 | |||||||||||||||
Deferred income taxes and other |
3,253 | (832 | ) | 2,421 | ||||||||||||||||
Equity in earnings of investees |
(23 | ) | (23 | ) | ||||||||||||||||
Foreign currency (gain) loss |
(1,398 | ) | 986 | (412 | ) | |||||||||||||||
(Gain) on disposal of fixed assets |
(360 | ) | (360 | ) | ||||||||||||||||
Changes in operating assets and liabilities |
(2,775 | ) | 688 | (3,216 | ) | (5,303 | ) | |||||||||||||
Net cash provided by operating activities |
(2,774 | ) | 5,329 | 1,035 | 3,590 | |||||||||||||||
Cash Flows From Investing Activities: |
||||||||||||||||||||
Cash paid for acquisitions |
(1,254 | ) | (1,254 | ) | ||||||||||||||||
Capital expenditures |
(688 | ) | (307 | ) | (995 | ) | ||||||||||||||
Proceeds from sale of property |
360 | 360 | ||||||||||||||||||
Net cash used in investing activities |
(1,942 | ) | 53 | (1,889 | ) | |||||||||||||||
Cash Flows From Financing Activities: |
||||||||||||||||||||
Proceeds from exercise of stock options |
25 | 25 | ||||||||||||||||||
Payments on term loans |
(3,453 | ) | (1 | ) | (3,454 | ) | ||||||||||||||
Net proceeds from credit facilities |
3,500 | 3,500 | ||||||||||||||||||
Net cash provided by (used in) financing activities |
72 | (1 | ) | 71 | ||||||||||||||||
Intercompany transfers and dividends |
2,658 | (2,223 | ) | (435 | ) | |||||||||||||||
Effects of exchange rates on cash |
15 | 15 | ||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(44 | ) | 1,163 | 668 | 1,787 | |||||||||||||||
Cash and cash equivalents at beginning of period |
742 | (742 | ) | 726 | 726 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 698 | $ | 421 | $ | 1,394 | $ | $ | 2,513 | |||||||||||
15
K. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised), Share-based Payment. In April 2005, the Financial Accounting Standards Board deferred the effective date of this standard. Previously, the Company had announced its intention to adopt this Statement effective January 1, 2005. As a result of the deferred effective date, the Company has elected to continue accounting for its Share-based Payments under SFAS 123.
This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under APB Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. This statement will have no effect on the cash flows of the Company, or the Company’s compliance with its debt covenants. Net income (loss) after the adoption will be affected by the stock option expense that was previously only disclosed.
16
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, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
Net sales |
89.9 | 100.0 | 89.7 | 100.0 | ||||||||||||
Costs of goods sold |
56.9 | 63.3 | 56.4 | 62.8 | ||||||||||||
Gross profit |
33.0 | 36.7 | 33.3 | 37.2 | ||||||||||||
Selling, general and administrative expense |
20.5 | 22.8 | 20.1 | 22.4 | ||||||||||||
Stock option expense |
0.3 | 0.3 | ||||||||||||||
Amortization of intangibles |
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Management fees |
0.2 | 0.2 | 0.2 | 0.3 | ||||||||||||
Operating profit |
12.0 | 13.4 | 13.0 | 14.5 | ||||||||||||
17
Comparison of Results of Operations
Three Months Ended March 31, 2005, Compared to Three Months Ended March 31, 2004
Net sales increased $0.2 million (0.2%) to $89.9 million, primarily as a result of favorable changes in foreign currency rates and offset by lower sales volumes in the United States. Sales in 2005 were positively affected by increased sales volumes of $0.2 million in Europe and $1.6 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars offset by lower sales volumes in the United States. Image Transfer’s sales increased $0.8 million (1.1%) to $77.8 million. Image Transfer’s sales were positively affected by increased sales volumes of $1.5 million in Europe and $1.3 million as a result of the effect of changes in foreign currency rates offset by $2.0 million of lower sales volumes in the United States. The lower U.S. Image Transfer sales volume was primarily as a result of lower sales volumes in the US distribution business. Europe sales volume increased primarily from growth in both the blanket and chemical products lines in the United Kingdom and Germany along with growth in flexographic base sleeves. Textile Products’ sales decreased $0.6 million (5.0%) to $12.1 million, primarily as a result of lower sales volume in Europe of $1.0 million offset by favorable foreign currency rate changes of $0.3 million.
Gross profit decreased $0.3 million (0.9%) to $33.0 million. Foreign currency rate changes increased gross profit by $0.6 million. As a percentage of net sales, gross profit decreased to 36.7% for the three months ended March 31, 2005, compared to 37.2% for the three months ended March 31, 2004.
Selling, general and administrative expense (“SG&A”) increased $0.4 million (2.1%) to $20.5 million, primarily as a result of changes in foreign currency rates. As a percentage of net sales, SG&A increased to 22.8% from 22.4%. Changes in foreign currency rates increased SG&A costs by $0.3 million in the first quarter of 2005 compared to the first quarter of 2004. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels.
Operating profit decreased $1.0 million (8.5%) to $12.0 million. As a percentage of net sales, operating profit decreased to 13.4% for the three months ended March 31, 2005, from 14.5% for the comparable period in 2004. Image Transfer’s operating profit remained relatively constant at $12.5 million. As a percentage of net sales, Image Transfer’s operating profit decreased to 16.1% for the three months ended March 31, 2005, from 16.3% for the three months ended March 31, 2004, primarily as a result of higher sales volumes in Europe where operating profit margins are slightly lower and the decrease in the U.S. distribution business sales volumes. Textile Products’ operating profit decreased $0.5 million (27.6%) to $1.3 million. As a percentage of net sales, Textile Products’ operating profit decreased to 10.8% for the three months ended March 31, 2005, from 14.2% for the three months ended March 31, 2004. Textile Products’ operating profit was affected by the lower sales volumes in Europe and the unfavorable foreign currency impact related to the importing of product into the U.S. market manufactured in Europe.
Other (income) expense was $(0.3) million and $(0.9) million for the three months ended March 31, 2005 and 2004. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries doing business in currencies other than their functional currency as well as a result of intercompany financing arrangements. Other (income) expense in
18
2005 and 2004 includes a gain of $1.1 million and $0.7 million on the mark-to-market of the euro-denominated Tranche A Term Loan, a $1.0 million of expenses associated with a discontinued acquisition in 2005 and $0.4 million gain on the sale of fixed assets in 2004.
The effective tax rate was (997.6)% and 176.0% for the three months ended March 31, 2005 and 2004. The effective tax rate is affected by the non-deductible preferred stock dividends reflected as interest expense. The effective tax rate is further affected in the three months ended March 31, 2004 by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised), Share-based Payment. In April 2005, the Financial Accounting Standards Board deferred the effective date of this standard. Previously, the Company had announced its intention to adopt this Statement effective January 1, 2005. As a result of the deferred effective date, the Company has elected to continue accounting for its Share-based Payments under SFAS 123.
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 $1.8 million and $1.0 million for the quarters ended March 31, 2005 and 2004, respectively.
As of March 31, 2005, there was $6.7 million outstanding under the Revolving Credit Facility and the Company had $13.3 million available under the Revolving Credit Facility. The Company’s aggregate indebtedness at March 31, 2005, is $255.9 million and the aggregate liquidation preferences of the Exchangeable Preferred Stock is $81.9 million and the Convertible Preferred Stock is $95.3 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.
19
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 $6.6 million at March 31, 2005 and $9.5 million at December 31, 2004. These contracts generally expire within three to twelve months. At March 31, 2005 and December 31, 2004, the Company had outstanding €19.9 million and €20.4 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 $(0.6) million in 2005 and $(0.4) million in 2004.
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 receivable of $0.4 million and $0.2 million at March 31, 2005 and December 31, 2004. 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.
20
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, 2005. 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, 2005, that would materially affect the control systems.
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 | |||||
21
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, 2005 | /s/ Thomas J. Koenig | ||||
| Thomas J. Koenig | |||||
| Vice President and | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) |
22