UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-64140
DAL-TILE INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3548809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
7834 Hawn Freeway, Dallas, Texas 75217
(Address of principal executive office)
(Zip Code)
(214)398-1411
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
As of May 13, 1996, the registrant had outstanding 15,873 shares of voting
common stock, par value $0.01 per share. As of May 13, 1996, the registrant
also had outstanding 4,074,620 shares of non-voting common stock, par value
$0.01 per share. There is no market for the registrant's voting common
stock or non-voting common stock.
DAL-TILE INTERNATIONAL INC.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) 3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 and 1995
(Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
1996 1995
Net sales $170,674 $119,353
Cost of goods sold 87,940 58,110
Gross profit 82,734 61,243
Expenses:
Transportation 9,957 8,042
Selling, general and administrat 48,362 35,433
Provisions for merger integratio 9,000 --
Amortization of goodwill 1,191 1,191
Total expenses 68,510 44,666
Operating income 14,224 16,577
Interest expense 13,843 13,567
Interest income 584 488
Other income 531 1,600
Income before income taxes 1,496 5,098
Income tax provision 566 4,272
Net income $930 $826
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(Amounts in Thousands)
(Unaudited)
March 31, December 31,
1996 1995
Assets
Current Assets:
Cash $39,131 $72,965
Trade accounts receivable 106,879 103,909
Inventories 121,876 118,811
Prepaid expenses 4,345 3,872
Other current assets 9,483 8,531
Total current assets 281,714 308,088
Property, plant, and equipment, at cost 216,089 209,996
Less accumulated depreciation 46,227 42,073
169,862 167,923
Goodwill, net of amortization 160,825 162,016
Finance costs, net of amortization 6,307 6,432
Tradename and other assets 23,806 27,934
Total assets $642,514 $672,393
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (continued)
MARCH 31, 1996 AND DECEMBER 31, 1995
(Amounts in Thousands)
(Unaudited)
March 31, December 31,
1996 1995
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable $19,798 $38,755
Accrued expenses 27,492 27,983
Accrued interest payable 7,928 17,398
Current portion of long-term debt 47,047 47,047
Deferred income taxes 4,001 3,981
Other current liabilities 10,307 20,796
Total current liabilities 116,573 155,960
Long-term debt 476,487 480,769
Other long-term liabilities 38,022 25,023
Deferred income taxes 1,068 1,002
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value:
Authorized shares - 6,584,207; issued and
outstanding shares - 4,090,493 41 41
Additional paid-in capital 334,035 334,035
Accumulated deficit (265,074) (266,004)
Currency translation adjustment (58,638) (58,433)
Total stockholders' equity 10,364 9,639
Total liabilities and stockholders' equ $642,514 $672,393
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
1996 1995
Operating Activities
Net income $930 $826
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,390 4,302
Deferred income tax provision 86 680
Foreign currency transaction loss (gain) 363 (1,576)
Zero coupon note interest expense 2,919 2,576
Changes in operating assets and liabilities:
Trade accounts receivable (2,905) 2,997
Inventories (3,049) (2,280)
Other assets (1,521) (584)
Trade accounts payable and accrued expe (16,270) (1,903)
Accrued interest payable (9,472) (8,685)
Other current liabilities 2,561 9,647
Net cash (used in) provided by operating ac (20,968) 6,000
Investing Activities
Expenditures for property, plant, and equip (5,673) (5,505)
Financing Activities
Repayment of long-term debt (44,300) (746)
Borrowings under long-term debt 37,100 14,000
Net cash (used in) provided by financing ac (7,200) 13,254
Effect of exchange rate changes on cash 7 (2,353)
Net (decrease) increase in cash (33,834) 11,396
Cash at beginning of period 72,965 12,973
Cash at end of period $39,131 $24,369
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
1. Basis of Presentation
The Company's operating results for the three months ended March 31, 1996
reflect the results of operations of American Olean Tile Company Inc. ("AO")
a wholly-owned subsidiary of Armstrong World Industries, Inc. ("AWI") and
the glazed and unglazed tile business of AWI, which were acquired (the "AO
Acquisition") by the Company on December 29, 1995. Because the Company's
results for the three months ended March 31, 1995 do not reflect the AO
Acquisition, the results for such periods are not directly comparable.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
financial position, results of operations, and cash flow have been included.
The annual operating cycle for manufacturing and distribution of glazed and
unglazed tile is seasonal and thus the results of operations for the three
months ended March 31, 1996, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the December 31, 1995 annual report on Form 10-K for
Dal-Tile International Inc. (the "Company").
Certain amounts in 1995 have been reclassified to conform to the 1996
presentation.
2. Acquisition
On December 29, 1995, the Company completed the AO Acquisition. As part of
the AO Acquisition, AWI paid $27,575,000 in cash to the Company. The AO
Acquisition was accounted for under the purchase method of accounting.
In exchange for the stock, cash and assets contributed as part of the AO
Acquisition, AWI received 37% of the issued and outstanding capital stock of
the Company. The fair value of the capital stock issued was approximately
$133,575,000 including the $27,575,000 cash. The financial statements for
1996 include the financial position and operating results of American Olean
but are excluded from the 1995 financial statements.
AO manufactures and markets commercial and residential glazed and unglazed
tile for sales to contractors, distributors, and home improvement centers in
the United States and Canada.
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Inventories
Inventories consist of the following at March 31, 1996 and December 31, 1995
(In Thousands):
March 31, December 31,
1996 1995
(Unaudited)
Raw materials $12,989 $12,224
Work-in-process 2,998 3,567
Finished goods 105,889 103,020
$121,876 $118,811
4. Long-Term Debt
Long-term debt consists of the following at March 31, 1996 and December 31,
1995 (In Thousands):
March 31, December 31,
1996 1995
(Unaudited)
Senior Secured Zero Coupon Notes $101,997 $99,078
Series A Notes payable, unsecured 176,000 220,000
Series B Notes payable, unsecured 100,000 100,000
Revolving Credit Loan, unsecured 128,297 91,197
Other 17,240 17,541
523,534 527,816
Less current portion 47,047 47,047
$476,487 $480,769
5. Income Taxes
The income tax provision reflects effective tax rates of 38% and 84% for the
three months ended March 31,1996 and 1995, respectively. The high effective
rate in 1995 reflects the inability to record a tax loss benefit in the U.S.
due to the Company being in a net operating loss carryforward position for
U.S. federal income tax purposes.
6. Merger Integration Charges
In the first quarter of 1996, the Company recorded a pre-tax merger
integration charge of $9.0 million for the closings of duplicative sales
centers, duplicative distribution centers, manufacturing facility closings
and severance costs associated with the elimination of overlapping positions.
The majority of the $9.0 million is a cash charge related to lease
commitments extending beyond 1996.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the three
months ended March 31, 1996 compared with the three months ended March 31,
1995 for Dal-Tile International Inc. (the "Company"). The Company's
operating results for the three months ended March 31, 1996 reflect the
results of operations of American Olean Tile Company Inc. ("AO") and certain
related assets of the glazed and unglazed tile business of Armstrong World
Industries, Inc. ("AWI"). AO and such related assets were acquired (the "AO
Acquisition") by the Company from AWI on December 29, 1995. Because the
Company's results for the three months ended March 31, 1995 do not reflect
the AO Acquisition, the results for such periods are not directly comparable.
On December 29, 1995, the Company completed the AO Acquisition. As part of
the AO Acquisition, AWI paid $27,575,000 in cash to the Company. The AO
Acquisition was accounted for under the purchase method of accounting.
In exchange for the stock, cash and assets contributed as part of the AO
Acquisition, AWI received 37% of the issued and outstanding capital stock of
the Company. The fair value of the capital stock issued was approximately
$133,575,000 including the $27,575,000 cash.
As a result of the AO Acquisition, the 1996 first quarter results include for
the first time the results of operations of AO. After the consummation of
the merger, management began to rapidly execute the company's merger
integration plan. In connection with the integration plan, the Company
started merging duplicative sales service centers, restructured and
consolidated its sales force, closed certain manufacturing facilities and is
in the process of restructuring its entire North American distribution
system. In addition, most general and administrative functions have been
consolidated. Consequently, the reported results of operations for the
Company for the three months ended March 31, 1996 are not directly comparable
to the reported results of operations for the Company for the three months
ended March 31, 1995.
Net Sales
Net sales for the first quarter increased from $119.4 million in 1995 to
$170.7 million in 1996, an increase of $51.3 million or 43%. The increase
in net sales was due to the inclusion of AO's operations in the 1996 first
quarter and increased shipments to home improvement centers. Sales in
Mexico (which account for 3% of consolidated sales) decreased approximately
$3.0 million as a result of translating peso revenues at devalued exchange
rates.
Gross Profit
Gross profit increased $21.5 million, or 35.1%, to $82.7 million in the first
quarter of 1996 from $61.2 million in the first quarter of 1995 principally
as a result of the increase in net sales. Gross margin decreased in the
first quarter of 1996 to 48.5% from 51.3% in the first quarter 1995 due to
inefficient production at higher cost facilities acquired as part of the AO
Acquisition. These facilities were closed at the end of the quarter and
production has been shifted to lower cost manufacturing plants.
In addition as a result of the AO Acquisition, the Company now sells to third
party independent distributors. Sales through this channel carry lower
gross margins than sales made through the Company's sales service centers,
but due to lower operating expense levels comparable operating margins are
achieved.
Expenses
Expenses increased to $68.5 million in the first quarter of 1996 from $44.7
million in the first quarter of 1995 due to the inclusion of AO's operations
and $9.0 million of merger integration charges. Expenses as a percent of
sales increased from 37.4% in 1995 to 40.1% in 1996 principally as a result
of the 1996 merger integration charges. Excluding merger integration
charges, expenses decreased to 34.9% of sales due to consolidation savings
achieved by integrating sales forces, closing duplicative sales service
centers and consolidating administrative functions. Additionally as
mentioned above, sales made to independent distributors require lower
operating expense levels which offset the lower gross margins generated
through this channel.
Merger Integration Charges
In the first quarter of 1996, the Company recorded a pre-tax merger
integration charge of $9.0 million for the closings of duplicative sales
centers, duplicative distribution centers, manufacturing facilities as well
as severance costs associated with the elimination of overlapping positions.
The majority of the $9.0 million is a cash charge related to lease
commitments extending beyond 1996.
Operating Income
Operating income decreased to $14.2 million in the first quarter of 1996 from
$16.6 million in the first quarter of 1995 principally as a result of
merger integration charges. Operating income increased to $23.2 million in
1996, excluding non-recurring merger integration charges, as compared to $16.6
million in 1995 as a result of the AO acquisition and related cost savings
offset in part by lower gross margins.
Interest Expense
Interest expense of $13.8 million in the first quarter of 1996 is comparable
to interest expense in 1995 of $13.6 million.
Income Taxes
The income tax provision reflects effective tax rates of 38% and 84% for the
three months ended March 31,1996 and 1995, respectively. The high effective
rate in 1995 reflects the inability to record a tax loss benefit in the U.S.
due to the Company being in a net operating loss carryforward position for
U.S. federal income tax purposes.
Net Income
Net income increased to $0.9 million in 1996 from $0.8 million in 1995. Net
income increased $5.7 million from $0.8 million in 1995 to $6.5 million in
1996, excluding the merger integration charges, as a result of the
improvements in operating income (excluding merger integration charges)
offset by transaction gain reductions in 1996 as a result of the stabilizing
of the peso in the first quarter of 1996.
Liquidity and Capital Resources
Historically, the Company's principal sources of cash are from operating
activities and bank borrowings. Cash used in operating activities was $21.0
million for the three months ended March 31, 1996 and cash provided by
operating activities was $6.0 million for the same period in 1995. Excluding
the effect of the AO Acquisition cash was used in 1996 to fund payments of
trade accounts payable as a result of the timing of payments to vendors,
capital expenditures and to pay the $17.0 million semi-annual interest
payment in respect to the Series A Notes and the Series B Notes.
The Company's liquidity requirements arise primarily from working capital
needs which consist principally of inventory and accounts receivable, capital
expenditures and debt service. Cash used in financing activities was
approximately $7.2 million at March 31, 1996 which reflects repayments under
the Revolving Credit Loan. On January 9, 1996 the Company paid $44.0
million in principal and $17.0 million in interest on the Series A Notes and
the Series B Notes. The payments were funded from borrowings on the
Revolving Credit Loan and cash. At March 31, 1996, amounts available under
the Revolving Credit Loan amounted to approximately $32.0 million.
Additionally, the Company has $39.1 million in cash balances.
Capital expenditures were $5.7 million for the three months ended March 31,
1996. The expenditures during 1996 were used to fund routine capital
improvements. During the next twelve months, in addition to routine capital
expenditures to maintain the Company's facilities, the Company plans to
spend approximately $35 million to expand its manufacturing capacity, improve
manufacturing efficiencies, upgrade its research and development facilities,
integrate Dal-Tile and AO's management information systems and make
leasehold improvements to upgrade certain sales centers. The Company
has commitments for approximately $5.0 million of this amount. The Company's
ability to continue to expand its manufacturing facilities in the future will
be dependent on cash generated from operations, the availability of
borrowings under the Bank Credit Agreement and the long-term availability of
other financing sources. There can be no assurance that the Company will
generate sufficient cash from operations or from other sources to be able to
fund these expenditures.
The peso devaluation and economic uncertainties in Mexico are not expected to
have a significant impact on the Company's liquidity. Since the Company has
no peso based borrowings, high interest rates in Mexico are not expected to
directly affect the Company. The Company may encounter changes in its
credit terms to Mexican customers, however, the consolidated impact is not
expected to be material. Since the Company's Mexican subsidiaries incur more
peso denominated costs than revenues generated in pesos, the effect of the
peso devaluation on income from operations is favorable to the Company.
The Company is involved in various judicial and administrative proceedings
relating to environmental matters. The Company is currently engaged in
environmental investigation and remediation programs at certain sites
relating to activities prior to the AEA Acquisition and AO Acquisition,
respectively. The Company maintains a reserve for remediation relating to
environmental conditions and activities prior to the AEA Acquisition, and is
entitled to indemnification with respect to certain expenditures incurred
in connection with environmental matters. It does not expect the ultimate
liability with respect to such investigation and remediation activities to
have a material effect on the Company's liquidity and financial condition.
In addition, with respect to the investigation and remediation programs
relating to environmental conditions and activities prior to the AO
Acquisition, the Company believes that, based on currently available
information and the terms and condidtions of AWI's indemnification
obligations under the AO Acquisition Agreement, any liability of AO that is
reasonably likely to arise with respect to such sites would not result in a
material adverse effect on the Company.
Effects of Inflation
The Company believes it has generally been able to increase selling prices
and productivity to offset increases in costs resulting from inflation in the
U.S. and Mexico. Inflation has not had a material impact on the Company's
results of operations during the three months ended March 31, 1996 and 1995.
Approximately 80% of the Company's inventory is valued using the LIFO
inventory accounting method. Therefore, current costs are reflected in cost
of sales rather than in inventory balances. The impact of inflation in
Mexico has not had a significant impact on the first quarter 1996 operating
results however the future impact is uncertain at this time.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by the Registrant on January 16, 1996
which reported the AO Acquisition. A Current Report on Form 8-K/A was filed
by the Registrant on March 13, 1996 which included, (i) certain Financial
Statements of AO and related assets of the Ceramic Tile Operations of AWI,
and (ii) Unaudited Pro Forma Financial Statements of the Registrant combined
with AO and related assets of the Ceramic Tile Operations of AWI.
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 of the
undersigned thereunto duly authorized.
DAL-TILE INTERNATIONAL INC.
(Registrant)
Date:
May 14, 1996 /s/ CARLOS E. SALA
Carlos E. Sala
Vice President, Chief Financial Officer and Treasurer