UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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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
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DAL-TILE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3548809
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
7834 Hawn Freeway, Dallas, Texas 75217
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(Address of principal executive office)
(Zip Code)
(214) 398-1411
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(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
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As of May 2, 2000, the registrant had 54,823,376 outstanding shares of voting
common stock, par value $0.01 per share.
DAL-TILE INTERNATIONAL INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
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Item 1 - Financial Statements (Unaudited) 3
Notes to Consolidated Condensed Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
2
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
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MARCH 31, APRIL 2,
2000 1999
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Net sales $230,113 $200,692
Cost of goods sold 119,429 104,010
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Gross profit 110,684 96,682
Expenses:
Transportation 15,705 14,128
Selling, general and administrative 63,070 58,768
Amortization of intangibles 1,378 1,401
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Total expenses 80,153 74,297
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Operating income 30,531 22,385
Interest expense 7,897 10,185
Interest income 16 26
Other income 177 212
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Income before income taxes 22,827 12,438
Income tax provision 1,502 1,300
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Net Income $ 21,325 $ 11,138
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BASIC EARNINGS PER SHARE
Net income per common share $ 0.39 $ 0.21
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Average shares 54,809 53,568
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DILUTED EARNINGS PER SHARE
Net income per common share $ 0.39 $ 0.21
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Average shares 54,815 54,066
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The accompanying notes are an integral part
of the consolidated condensed financial statements.
3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
Current Assets:
Cash $ 364 $ 1,193
Trade accounts receivable 110,578 94,915
Inventories 141,675 140,153
Prepaid expenses 5,216 4,884
Other current assets 14,750 14,819
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Total current assets 272,583 255,964
Property, plant, and equipment, at cost 315,647 309,729
Less accumulated depreciation 105,081 102,405
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210,566 207,324
Goodwill, net of amortization 141,846 143,041
Finance costs, net of amortization 4,861 5,226
Tradename and other assets, net of amortization 26,348 27,149
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Total assets $656,204 $638,704
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The accompanying notes are an integral part
of the consolidated condensed financial statements.
4
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 32,082 $ 36,388
Accrued expenses 74,286 67,375
Current portion of long-term debt 56,796 56,796
Income taxes payable 1,658 1,153
Deferred income taxes 2,533 2,461
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Total current liabilities 167,355 164,173
Long-term debt 347,277 353,877
Other long-term liabilities 15,592 17,671
Deferred income taxes 2,412 2,039
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued and
outstanding shares - 54,815,686 548 547
Additional paid-in capital 449,031 447,738
Accumulated deficit (251,770) (273,095)
Accumulated other comprehensive loss (74,241) (74,246)
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Total stockholders' equity 123,568 100,944
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Total liabilities and stockholders' equity $ 656,204 $ 638,704
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The accompanying notes are an integral part
of the consolidated condensed financial statements.
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DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
------ ---------- ------------ ----------- ---------
Balance at December 31, 1999 $ 547 $ 447,738 $ (273,095) $ (74,246) $ 100,944
Proceeds from issuance of common stock 1 1,293 - - 1,294
Comprehensive Income
Net income - - 21,325 - 21,325
Foreign currency translation adjustments - - - 5 5
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Total Comprehensive Income 21,330
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Balance at March 31, 2000 $ 548 $ 449,031 $ (251,770) $ (74,241) $ 123,568
====== ========== =========== ========== =========
The accompanying notes are an integral part
of the consolidated condensed financial statements.
6
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
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MARCH 31, APRIL 2,
2000 1999
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OPERATING ACTIVITIES
Net income $ 21,325 $ 11,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,393 6,599
Other, net (68) 358
Changes in operating assets and liabilities:
Trade accounts receivable (15,411) (11,691)
Inventories (1,099) 4,006
Other assets 562 2,941
Trade accounts payable and accrued expenses 1,307 8,285
Accrued interest payable 1,035 303
Other liabilities (2,603) (9,104)
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Net cash provided by operating activities 11,441 12,835
INVESTING ACTIVITIES
Expenditures for property, plant
and equipment, net (7,891) (3,416)
FINANCING ACTIVITIES
Repayments of long-term debt (69,500) (67,600)
Borrowings under long-term debt 62,900 57,650
Proceeds from employee stock purchase 544 -
Proceeds from exercise of stock options 1,597 260
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Net cash used in financing activities (4,459) (9,690)
Effect of exchange rate changes on cash 80 73
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Net decrease in cash (829) (198)
Cash at beginning of period 1,193 1,546
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Cash at end of period $ 364 $ 1,348
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The accompanying notes are an integral part
of the consolidated condensed financial statements.
7
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The operating results of Dal-Tile International Inc. for the three
months ended March 31, 2000 reflect the results of operations of
Dal-Tile International Inc. and its consolidated subsidiaries (the
"Company") on the basis of a 52/53 week accounting cycle.
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 necessary for a
fair presentation of the financial position, results of operations and
cash flow have been included. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 29, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the December 31, 1999 annual report on
Form 10-K of the Company.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
2. EARNINGS PER SHARE
Basic earnings per share are based on the average number of shares
outstanding during each period presented. Diluted earnings per share are
based on the average number of shares outstanding including any dilutive
effects of options, warrants and convertible securities.
3. COMPREHENSIVE INCOME
Total comprehensive income includes net income and foreign currency
translation adjustments. For the first quarter of 2000 and 1999, total
comprehensive income was $21,330 and $11,208, respectively.
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4. INVENTORIES
Inventories are as follows:
March 31, December 31,
2000 1999
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Raw Materials $ 9,192 $ 9,966
Work-in-process 4,277 4,316
Finished goods 128,206 125,871
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$ 141,675 $ 140,153
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5. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2000 1999
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Term A Loan $ 155,000 $ 165,000
Term B Loan 122,750 123,000
Revolving Credit Loan 112,850 108,800
Other 13,473 13,873
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404,073 410,673
56,796 56,796
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Less current portion $ 347,277 $ 353,877
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6. INCOME TAXES
The income tax provision for the first quarter of 2000 reflects an
effective tax rate of approximately 6.6 percent compared to 10.5 percent
for the first quarter of 1999. These rates reflect Mexico tax liabilities
and U.S. state and possession taxes based on estimated taxable income in
those jurisdictions. The decrease in effective rate for the first quarter
of 2000 versus 1999 was due to increased levels of pretax income, which
primarily effect the federal tax jurisdiction. No U.S. federal income tax
expense was recorded for the first quarter of 2000 or 1999 due to an
offset by a valuation allowance against U.S. federal deferred tax assets
recorded during 1997.
The pro-forma effective tax rate, assuming no benefits from the
Company's net operating losses, would have been 38.5 percent.
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7. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state, local and foreign laws and
regulations relating to the environment and to work places. Laws that
affect or could affect the Company's United States operations include,
among others, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and the Occupational Safety and Health
Act. The Company believes that it is currently in substantial compliance
with such laws and the regulations promulgated thereunder.
The Company is involved in various proceedings relating to environmental
matters. The Company, in the past, has disposed, or arranged for the
disposal of, substances which are now characterized as hazardous and
currently is engaged in the investigation and cleanup of hazardous
substances at certain sites. It is the Company's policy to accrue
liabilities for remedial investigations and cleanup activities when it
is probable that such liabilities have been incurred and when they can
be reasonably estimated. The Company has provided reserves, which
management believes are adequate to cover probable and estimable
liabilities of the Company with respect to such remedial investigations
and cleanup activities, taking into account currently available
information and the Company's contractual rights of indemnification.
However, estimates of future response costs are necessarily imprecise
due to, among other things, the possible identification of presently
unknown sites, the scope of contamination of such sites, the allocation
of costs among other potentially responsible parties with respect to any
such sites and the ability of such parties to satisfy their share of
liability. Accordingly, there can be no assurance that the Company will
not become involved in future litigation or other proceedings or, if the
Company were found to be responsible or liable in any litigation or
proceeding, that such costs would not be material to the Company.
The Company is also a defendant in various lawsuits arising from normal
business activities. In the opinion of management, the ultimate liability
likely to result from the contingencies described above is not expected
to have a material adverse effect on the Company's consolidated
financial condition, results of operations or liquidity.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company achieved record sales and profits during the first quarter of
2000. Sales through Company-operated sales centers substantially increased due
to strong market acceptance of new residential products and growth in
commercial sales. Profits increased approximately 92 percent as a result of
the sales growth and reductions in corporate spending and interest expense.
In addition, management of working capital improved through increased
inventory turns and reduced days sales outstanding. Capital expenditures
increased over the prior year to expand and modernize various manufacturing
locations, and additional expenditures are expected through the remainder of
the year in support of initiatives to improve manufacturing efficiency and
expand capacity.
The following is a discussion of the results of operations for the three
months ended March 31, 2000 compared with the three months ended April 2,
1999 for Dal-Tile International Inc. and its consolidated subsidiaries (the
"Company"). Due to the Company's 52/53 week accounting cycle, the first
quarter of 2000 ended on March 31, 2000.
NET SALES
Net sales for the first quarter of 2000 increased $29.4 million, or 14.6
percent, to $230.1 million from $200.7 million in 1999. The increase was due
primarily to increased sales volume through the Company-operated sales
centers, which increased 19.1 percent compared to the prior year quarter. Sales
to independent distributors increased approximately 3.2 percent and sales to
home center retailers were flat.
GROSS PROFIT
Gross profit for the first quarter of 2000 increased $14.0 million, or 14.5
percent, to $110.7 million from $96.7 million in 1999 principally as a result
of increased sales volume. Gross margin was 48.1 percent in the first quarter
of 2000 versus 48.2 percent in the first quarter of 1999.
OPERATING EXPENSES
Operating expenses in the first quarter of 2000 increased $5.9 million, or
7.9 percent, to $80.2 million from $74.3 million in the first quarter of
1999. This increase was due primarily to additional spending related to new
product introductions and higher costs associated with the growth in sales.
Operating expenses as a percent of sales in the first quarter of 2000
improved to 34.9 percent from 37.0 percent in 1999. The decrease was due
primarily to higher sales and lower corporate spending. Transportation costs,
as a percent of sales, declined from 7.0 percent of sales in the first
quarter of 1999 to 6.8 percent in 2000.
OPERATING INCOME
Operating income in the first quarter of 2000 increased $8.1 million, or 36.2
percent, to $30.5 million from $22.4 million in the first quarter of
1999. Operating margin improved to 13.3 percent in the first quarter of 2000
from 11.2 percent in 1999 due primarily to higher sales and decreased
corporate spending.
11
INTEREST EXPENSE (NET)
Interest expense (net) in the first quarter of 2000 decreased $2.3 million, or
22.5 percent, to $7.9 million from $10.2 million in the first quarter of
1999. The Company decreased borrowing requirements on its credit facility, and
due to improved financial performance, borrowing spreads decreased from 2.0
percent to 0.875 percent on the revolver and Term A loan borrowings and from
2.5 percent to 1.75 percent on the Term B loan borrowings.
INCOME TAXES
The income tax provision for the first quarter of 2000 reflects an effective
tax rate of approximately 6.6 percent compared to 10.5 percent for the first
quarter of 1999. These rates reflect Mexico tax liabilities and U.S. state and
possession taxes based on estimated taxable income in those jurisdictions. The
decrease in effective rate for the first quarter of 2000 versus 1999 was due
to increased levels of pretax income, which primarily effect the federal tax
jurisdiction. No U.S. federal income tax expense was recorded for the first
quarter of 2000 or 1999 due to an offset by a valuation allowance against
U.S. federal deferred tax assets recorded during 1997.
The pro-forma effective tax rate, assuming no benefits from the Company's net
operating losses, would have been 38.5 percent.
NET INCOME
Net income in the first quarter of 2000 increased $10.2 million or 91.9
percent, to $21.3 million from $11.1 million in the first quarter of 1999. Net
income increased due to higher operating income and reduced interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Company's bank credit
agreement (the "Third Amended Credit Facility") continue to provide the
Company with liquidity and capital resources for working capital
requirements, capital expenditures and debt service. For the three months
ended March 31, 2000, cash provided by operating activities was $11.4 million
compared to $12.8 million for the same period in 1999. During the quarter,
trade accounts receivable increased in relation to higher sales volume, and
inventory levels increased slightly versus a decline during the first quarter
of 1999. However, significant improvements were made in working capital
utilization through increased inventory turns and reduced days sales
outstanding.
Net expenditures for property, plant and equipment were $7.9 million for the
first quarter of 2000 compared to $3.4 million in the first quarter of
1999. Expenditures for the first quarter of 2000 were primarily related to
projects to expand and modernize various manufacturing facilities and to
re-engineer distribution facilities. During the remainder of 2000, the Company
plans to continue its expansion and modernization efforts, along with
expenditures for routine capital improvements.
Cash used in financing activities was $4.5 million for the first quarter of
2000. Cash outflows for term debt of $10.3 million and other debt of $0.4
million were offset by cash inflows of $4.1 million on the Company's
revolving credit facility, and $2.1 million related to employee stock
purchases and the exercise of options of common stock. Total availability
under the Third Amended Credit Facility as of March 31, 2000 was $124.0
million.
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Although the Company believes cash flow from operating activities, together
with borrowings available under the Third Amended Credit Facility, will be
sufficient to fund working capital needs, capital expenditures and debt
service requirements, the Company is constantly pursuing opportunities to
improve its capital structure and may seek alternative financing arrangements.
The peso fluctuation 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's liquidity. Any future devaluation of the peso
against the U.S. dollar may adversely affect the Company's results of
operations or financial condition.
The Company is involved in various proceedings relating to environmental
matters and is currently engaged in environmental investigation and
remediation programs at certain sites. The Company has provided reserves for
remedial investigation and cleanup activities that the Company has determined
to be both probable and reasonably estimable. The Company is entitled to
indemnification with respect to certain expenditures incurred in connection
with such environmental matters and does not expect that the ultimate
liability with respect to such investigation and remediation activities will
have a material adverse effect on the Company's liquidity and financial
condition.
The United States is a party to the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at no more than 14 percent, to
be reduced ratably to 8 1/2 percent by 2004. Accordingly, GATT may stimulate
competition from non-North American manufacturers who now export, or who may
seek to export, ceramic tile to the United States. The Company cannot predict
with certainty the effect that GATT may have on the Company's operations.
In 1993, Mexico, the United States and Canada approved the North American
Free Trade Agreement ("NAFTA"). NAFTA has, among other things, removed and
will continue to remove, over a transition period, most normal customs duties
imposed on goods traded among the three countries. In addition, NAFTA will
remove or limit many investment restrictions, liberalize trade in services,
provide a specialized means for settlement of, and remedies for, trade
disputes arising thereunder, and will result in new laws and regulations to
further these goals. Although NAFTA lowers the tariffs imposed on the
Company's ceramic tile manufactured in Mexico and sold in the United States,
it also may stimulate competition in the United States and Canada from
manufacturers located in Mexico. The United States currently imposes import
duties on glazed ceramic tile from Mexico of approximately 11 percent,
although these duties on imports from Mexico are being phased out ratably
under NAFTA by 2008. It is uncertain what ultimate effect NAFTA will have on
the Company's results of operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to increase 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, 2000 and April 2, 1999.
However, any future increases in the inflation rate, and any increases in
interest rates which affect financing costs, may negatively affect the
Company's results of operations.
13
PART II.OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Cautionary Statement for purposes of "Safe Harbor Provisions" of
the Private Securities Litigation Reform Act of 1995.
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to risks,
uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such
forward looking statements. Potential risks and uncertainties
include, but are not limited to, the impact of competitive pressures
and changing economic conditions on the Company's business and its
dependence on residential and commercial construction activity, the
fact that the Company is highly leveraged, currency fluctuations and
other factors relating to the Company's foreign manufacturing
operations, the impact of pending reductions in tariffs and custom
duties, system integration issues and environmental laws and other
regulations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
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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.
DAL-TILE INTERNATIONAL INC.
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(Registrant)
Date: May 10, 2000 /s/ W. Christopher Wellborn
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Executive Vice President and
Chief Financial Officer
15