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 September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
- -------- ----------
(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 November 7, 1996, the registrant had outstanding 53,436,476 shares of
voting common stock, par value $0.01 per share.
DAL-TILE INTERNATIONAL INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements (Unaudited) 3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 19
Page 2
DAL-TILE lNTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE & NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Net sales $ 184,386 $117,991 $535,910 $353,947
Cost of goods sold 93,784 55,421 277,240 168,719
------------- ------------- ------------- -------------
Gross profit 90,602 62,570 258,670 185,228
Expenses:
Transportation 12,859 8,459 34,523 24,730
Selling, general and administrative 45,270 32,427 143,710 100,474
Provision for merger integration charge -- -- 9,000 --
Amortization of intangibles 1,401 1,191 4,204 3,574
------------- ------------- ------------- -------------
Total expenses 59,530 42,077 191,437 128,778
------------- ------------- ------------- -------------
Operating income 31,072 20,493 67,233 56,450
Interest expense 10,817 13,897 38,260 41,184
lnterest income 397 192 1,530 1,059
Other expense (income) 352 (164) 805 (2,187)
------------- ------------- ------------- -------------
Income before income taxes and 20,300 6,952 29,698 18,512
extraordinary item
Income tax provision 7,125 781 10,668 7,035
------------- ------------- ------------- -------------
Income before extraordinary item 13,175 6,171 19,030 11,477
Extraordinary item-loss on early
retirement of debt, net of taxes (29,072) -- (29,072) --
------------- ------------- ------------- ------------
Net income (loss) ($15,897) $ 6,171 ($10,042) $11,477
============= ============= ============= ============
lncome before extraordinary
item per common share $ 0.26 $0.21 $0.39 $0.38
Extraordinary item (0.57) -- (0.60) --
------------- ------------- ------------- ------------
Net income (loss) per common share ($0.31) $0.21 ($0.21) $0.33
============= ============= ============= ============
Average outstanding common and
equivalent shares 51,270 30,014 48,567 30,014
============= ============= ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
(Unaudited)
September 30, DECEMBER 31,
1996 1995
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ASSETS
Current Assets:
Cash $4,331 $72,965
Trade accounts receivable 125,412 103,909
Inventories 127,282 118,811
Prepaid expenses 4,479 3,872
Deferred income taxes 4,710 --
Other current assets 9,710 8,531
------------- ------------
Total current assets 275,924 308,088
Property, plant, and equipment, at cost 231,239 209,996
Less accumulated depreciation 47,139 42,073
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184,100 167,923
Goodwill, net of amortization 158,442 162,016
Finance costs, net of amortization 3,826 6,432
Tradename and other assets 22,866 27,934
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Total assets $645,158 $672,393
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
DAL-TILE, INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (continued)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $24,076 $ 38,755
Accrued expenses 25,399 27,983
Accrued interest payable 3,096 17,398
Current portion of long-term debt 25,546 47,047
Income taxes payable 1,985 --
Deferred income taxes -- 3,981
Other current liabilities 12,121 20,796
------------- ------------
Total current liabilities 92,223 155,960
Long-term debt 434,769 480,769
Other long-term liabilities 16,112 25,023
Deferred income taxes -- 1,002
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued and
outstanding shares - 53,436,476 121 41
Additional paid-in capital 436,513 334,035
Accumulated deficit (276,046) (266,004)
Currency translation adjustment (58,534) (58,433)
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Total stockholders' equity 102,054 9,639
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Total liabilities and stockholder's equity $645,158 $672,393
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
--------------------------------------
September 30, September 30,
1996 1995
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Operating Activities
Net income (loss) ($10,042) $ 11,477
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 17,553 12,913
Extraordinary item 29,072 --
Deferred income tax provision 4,995 3,708
Foreign currency transaction gains (125) (3,769)
Zero coupon note interest expense -- 8,058
Changes in operating assets and liabilities:
Trade accounts receivable (21,426) 4,277
Inventories (7,926) (13,640)
Other assets (2,887) (553)
Trade accounts payable and accrued expenses (11,068) (4,202)
Accrued interest payable (14,302) (8,587)
Other liabilities (16,951) (6,507)
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Net cash (used in) provided by operating activities (33,107) 3,175
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment, net (27,821) (26,631)
------------- -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 102,558 --
Borrowings under previous bank credit facility 52,028 44,241
Borrowings under new bank credit facility 444,000 --
Repayment of long-term debt (563,529) (23,572)
Fees and expenses associated with debt refinancing (42,765) --
------------- -------------
Net cash (used in) provided by financing activities (7,708) 20,669
Effect of exchange rate changes on cash 2 (781)
------------- -------------
Net decrease in cash (68,634) (3,568)
Cash at beginning of period 72,965 12,973
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Cash at end of period $4,331 $ 9,405
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The operating results of Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company") for the three and nine months ended September
30, 1996 reflect the results of operations of Dal-Tile International Inc. and
its consolidated subsidiaries, including the operations of American Olean
Tile Company Inc. ("AO") and certain related assets of the ceramic 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 and nine
months ended September 30, 1995 do not reflect the AO Acquisition, the
results for such periods are not directly comparable to 1996 results.
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
results of operations for the nine months ended September 30, 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 of the Company.
The 1995 statement of operations combines selling expenses and general and
administrative expenses 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 $28,225,000 in cash (after giving effect to a
post-closing adjustment) 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 as of December 31, 1995. The fair value of the net assets
acquired was approximately $134,225,000. The financial statements for 1996
include the financial position and operating results of AO but the operating
results of AO are excluded from the 1995 financial statements.
AO manufactures and markets commercial and residential glazed and unglazed
ceramic tile for sales to contractors, distributors, and home improvement
centers in the United States and Canada.
Page 7
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REFINANCING
During the third quarter, the Company completed an initial public offering
(the "Offering") of its common stock and a concurrent private placement of
its common stock to a subsidiary of AWI (the "Private Placement"). The
Offering of 7,316,343 shares of common stock, including the underwriter over
allotment, raised $102,428,802 of gross proceeds with net proceeds, after
underwriter commission and expenses, amounting to $92,557,930. The Private
Placement of 714,286 shares of common stock raised $10,000,000 of proceeds
with total net proceeds from the Offering and Private Placement amounting to
$102,557,930. In connection with the Offering and Private Placement, the
Company effected a recapitilization of its capital stock. Pursuant to a
common stock conversion, all of the classes of the Company's previously
outstanding common stock were converted into 45,404,472 shares of a single
class of common stock. Concurrently with the Offering the company entered
into a new bank credit agreement (the "New Bank Credit Agreement") which
along with the proceeds from the Offering and Private Placement were used to
repay substantially all of the Company's debt (collectively, the
"Refinancing"). The New Bank Credit Agreement includes a term loan of
$275,000,000 and a revolving credit facility of $250,000,000.
The Company used the net proceeds of the Refinancing: (i) to repay
substantially all of its outstanding Zero Coupon Notes at a tender price of
approximately 110% of their accreted value, (the Company having previously
called for redemption approximately 25% of its then outstanding Zero Coupon
Notes;) (ii) to repay in full outstanding borrowings by Dal-Tile's wholly
owned subsidiary, Dal-Tile Group Inc., under the previous bank credit
agreement (the "Previous Bank Credit Agreement"); (iii) to repay $176,000,000
of its Series A Notes and $100,000,000 of its Series B Notes; and (iv) to pay
accrued interest and prepayment premiums on certain debt to be repaid, a
$4,000,000 termination fee in connection with the termination of the
Company's management agreement with AEA Investors Inc. (the "Termination
Fee") and fees and expenses associated with the Refinancing. AEA Investors
Inc. is the manager of DTI Investors LLC, which is a significant stockholder
of the Company.
4. EXTRAORDINARY ITEM
In connection with the refinancing and early extinguishment of debt, the
Company recorded an extraordinary charge of $44,800,000 ($29,072,000, net of
tax), for prepayment premiums on certain debt repaid, the write-off of
existing deferred financing fees and the Termination Fee.
5. EARNINGS PER SHARE
Earnings per share are based on the average number of shares of common stock
outstanding during each period and such shares issuable upon assumed exercise
of stock options, using the treasury stock method, adjusted for stock splits.
The average number of shares used in the calculation of earnings per share
was 51,269,985 and 48,566,856 for the three and nine months ended September
30, 1996, respectively, and 30,014,350 for both the three and nine months
ended September 30, 1995. The average number of shares used in the
calculation of pro forma earnings per share was 55,231,069.
Page 8
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVENTORIES
Inventories consist of the following at September 30, 1996 and December 31,
1995 (In Thousands):
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Raw materials $ 15,830 $ 12,224
Work-in-process 3,413 3,567
Finished goods 108,039 103,020
-------- --------
$127,282 $118,811
======== ========
7. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1996 and
December 31, 1995 (In Thousands):
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Term Loan, secured $275,000 $ --
New Revolving Credit Loan, secured 169,000 --
Senior Secured Zero Coupon Notes 136 99,078
Series A Notes payable, unsecured -- 220,000
Series B Notes payable, unsecured -- 100,000
Previous Revolving Credit Loan, unsecured -- 91,197
Other 16,179 17,541
-------- --------
460,315 527,816
Less current portion 25,546 47,047
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$434,769 $480,769
======== ========
During the third quarter the Company paid $27,558,410 million out of the cash
proceeds from the AO Acquisition to redeem $32,600,000 aggregate principal
amount at maturity ($25,998,392 aggregate accreted value at the Redemption
Date) of the Zero Coupon Notes at a redemption price of 106% of their
accreted value on the Redemption Date.
In connection with the New Bank Credit Agreement, the Company will be
required to make quarterly amortization payments on the $275,000,000 term
loan commencing March 1, 1997 through December 31, 2002 at various scheduled
amounts. Borrowings under the new $250,000,000 revolving credit facility
($169,000,000 outstanding at September 30, 1996) are payable in full on
December 31, 2002. Borrowings under the New Bank Credit Agreement bear
interest at variable rates based on Eurodollar rates or prime rate and is
secured by the capital stock of each Material Subsidiary (as defined in the
agreement). Under the New Bank Credit Agreement the Company is required,
among other things, to maintain certain financial covenants and has
restrictions on incurring additional debt and limitations on cash dividends.
A commitment fee at a rate per annum based on a pricing grid is payable
quarterly.
Page 9
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The income tax provision reflects effective tax rates of 35% and 11% for the
three months ended September 30, 1996 and 1995 and 34% and 38% for the nine
months ended September 30, 1996 and 1995, respectively.
9. MERGER INTEGRATION CHARGES
In the first quarter of 1996, the Company recorded a pre-tax merger
integration charge of $9,000,000 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 charge is related to lease commitments
extending beyond 1996.
10. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations for
the third quarter 1996 reflects the effect of adjustments to the unaudited
historical consolidated statement of operations of the Company necessary to
give pro forma effect to the Refinancing. The unaudited pro forma statement
of operations reflects the Refinancing (including the Offering and the
Private Placement) as if it took place at the beginning of the third quarter
and therefore adds back the interest expense savings that would have been
realized from the beginning of the quarter rather than the actual
transaction date in August. It also excludes the extraordinary charge
reflected in the unaudited historical consolidated statement of operations
for loss on early extinguishment of debt.
Management believes the assumptions used provide a reasonable basis on which
to present the pro forma financial data. The unaudited pro forma
consolidated statement of operations are provided for informational purposes
only and should not be construed to be indicative of the Company's statement
of operations had the Refinancing taken place at the beginning of the third
quarter, and are not intended to project the Company's statement of
operations or its financial position for any future period or any future
date.
The following Unaudited Pro Forma Consolidated statement of operations
should be read in conjunction with the Consolidated Financial Statements,
the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this document.
Page 10
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED F1NANCIAL STATEMENTS (continued)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS)
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Net sales $ 184,386 -- $184,386
Cost of goods sold 93,784 -- 93,784
----------- ----------- ----------
Gross Profit 90,602 -- 90,602
Expenses:
Transportation 12,859 -- 12,859
Selling, general and administrative 45,270 -- 45,270
Provisions for merge integration charge - --
Amortization of intangibles 1,401 -- 1,401
----------- ----------- ----------
Total expenses 59,530 -- 59,530
----------- ----------- ----------
Operating income 31,072 -- 31,072
Interest expense 10,817 (2,516)(a) 8,301
Interest income 397 -- 397
Other expense (income) 352 352
----------- ----------- ----------
Income before income taxes and extraordinary item 20,300 2,516 22,816
Income tax provision 7,125 883 (b) 8,008
----------- ----------- ----------
Income before extraordinary item 13,175 1,633 14,808
Extraordinary item-loss on early
retirement of debt, net of taxes (29,072) 29,072 (c)
----------- ----------- ----------
Net income (loss) ($15,897) $30,705 $14,808
=========== =========== ==========
Income before extraordinary
item per common share $0.26 $0.27 (d)
Extraordinary item (0.57)
----------- ----------
Net income (loss) per common share ($0.31) $0.27
=========== ==========
Average outstanding common and
equivalent shares 51,270 55,231
=========== ==========
(a) To reduce interest expense as if the refinancing of substantially all of the
Company's existing debt had taken place at the beginning of the third
quarter. The computation reflects interest savings resulting from the new
credit agreement and reduced indebtedness from application of initial public
offering proceeds and other refinancing transactions.
(b) Represents estimated pro forma net impact to tax expense resulting from the
pro forma adjustments.
(c) To eliminate the one time extraordinary charge for loss on early
extinguishment of debt pertaining to debt repaid under the refinancing
transactions.
(d) Pro forma earnings per share are computed using the weighted average number
of common shares and common share equivalents outstanding during the period,
assuming the shares from the initial public offering were outstanding for
the full period presented.
Page 11
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 and
nine months ended September 30, 1996 compared with the three and nine months
ended September 30, 1995 for Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company"). The Company's operating results for the three and
nine months ended September 30, 1996 reflect the results of operations of
American Olean Tile Company, Inc. ("AO") and certain related assets of the
ceramic 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 and nine months
ended September 30, 1995 do not reflect the AO Acquisition, the results for such
periods are not directly comparable to the 1996 results.
On December 29, 1995, the Company completed the AO Acquisition. As part of the
AO Acquisition, AWI paid $28.2 million in cash (after giving effect to a post-
closing adjustment) 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 as of December 31, 1995. The fair value of the net assets acquired was
approximately $134.2.
As a result of the AO Acquisition, the 1996 results include the results of
operations of AO. After the consummation of the AO Acquisition, management
began to execute the Company's merger integration plan. In connection with the
integration plan, the Company consolidated 46 duplicative sales service centers,
restructured and consolidated its sales force, closed certain manufacturing
facilities and is in the process of consolidating its distribution system. In
addition, most general and administrative functions have been consolidated.
Consequently, the reported results of operations for the Company for the three
and nine months ended September 30, 1996 are not directly comparable to the
reported results of operations for the Company for the three and nine months
ended September 30, 1995.
During the third quarter the Company completed an initial public offering (the
"Offering") of its common stock and a concurrent private placement of its common
stock to a subsidiary of AWI (the "Private Placement") at a per share price
equal to the Offering. The Offering of 7,316,343 shares of common stock,
including the underwriter over allotment, raised $102.4 million of gross
proceeds with net proceeds, after underwriter commission and expenses, amounting
to $92.6 million. The Private Placement of 714,286 shares of common stock raised
$10.0 million of proceeds with total net proceeds from the Offering and Private
Placement amounting to $102.6 million. In connection with the Offering and
Private Placement, the Company effected a recapitilization of its capital stock.
Pursuant to a common stock conversion, all of the classes of the Company's
previously outstanding common stock were converted into 45,404,472 shares of a
single class of common stock. Concurrently with the Offering the Company entered
into a new bank credit agreement (the "New Bank Credit Agreement") which along
with the proceeds from the Offering and Private Placement were used to repay
substantially all of the Company's debt (collectively, the "Refinancing").
Page 12
Net Sales
Net sales for the third quarter increased from $118.0 million in 1995 to $184.4
million in 1996, an increase of $66.4 million or 56.2%. Net sales for the nine
months ended September 30, 1996 increased to $535.9 million from $353.9 million
for the nine months ended September 30, 1995, an increase of $182.0 million or
51.4%. The increase in net sales for both the three and nine months ended
September 30, 1996 as compared with the same periods in 1995 was due principally
to the inclusion of AO's operations in 1996 and increased shipments to home
center retailers and independent distributors. These increases have been
partially offset by the consolidation of 46 duplicative sales centers.
Gross Profit
Gross profit increased $28.0 million, or 44.7%, to $90.6 million in the third
quarter of 1996 from $62.6 million in the third quarter of 1995. For the nine
months ended September 30, 1996 gross profit increased from $185.2 million to
$258.7 million, an increase of $73.5 million or 39.7%. The increase in gross
profit is principally the result of the increase in net sales.
Gross margin decreased in the third quarter of 1996 to 49.1% from 53.0% in the
third quarter of 1995 and decreased for the nine months ended September 30, 1996
to 48.3% from 52.3% for the comparable period in 1995. The decrease in gross
margin for the third quarter is principally due to the increased presence in the
independent distributor channel as a result of the AO Acquisition and increased
sales to home centers. Sales through these channels carry lower gross margins
than sales made through the Company's sales centers, but due to lower operating
expense levels, comparable operating margins are achieved. The decrease for the
nine months ended September 30, 1996 is attributable to increased sales to the
independent distributor and home center channels as well as the higher cost
production facilities acquired as part of the AO Acquisition. These facilities
were closed in March 1996 and production shifted to lower cost manufacturing
plants.
Expenses
Expenses increased to $59.5 million in the third quarter of 1996 from $42.1
million in the third quarter of 1995 and increased to $191.4 million for the
nine months ended September 30, 1996 from $128.8 million for the nine months
ended September 30, 1995. The increase in expenses is primarily due to the
inclusion of AO's operations. In addition, results for the first quarter of
1996 include $9.0 million of non-recurring merger integration charges,
contributing to the increase for the nine months ended September 30, 1996.
Expenses as a percent of sales decreased from 35.7% in the third quarter of 1995
to 32.3% in the third quarter of 1996 and decreased from 36.4% for the nine
months ended September 30, 1995 to 35.7% for the comparable period in 1996.
Excluding non-recurring merger integration charges, expenses for the nine months
ended September 30, 1996 decreased to 34.0% of sales as compared to 36.4% for
the comparable period in 1995. The decrease in expenses as a percent of sales
for the third quarter of 1996 and the nine months ended September 30, 1996
(excluding merger integration charges) as compared to the same periods in 1995,
respectively, are due to consolidation savings achieved by integrating sales
forces, closing duplicative sales centers and consolidating administrative
functions. Additionally, sales made to independent distributors require lower
operating expense levels which offset the lower gross margins generated through
this distribution channel. These savings were offset in part by increased
advertising and sample costs to increase brand name recognition and increased
information systems costs for integration to one system.
Page 13
Merger Integration Charges
In the first quarter of 1996, the Company recorded a pre-tax non-recurring
merger integration charge of $9.0 million for the closing of duplicative sales
centers, consolidation of the Company's distribution system, manufacturing
facility closings and severance costs associated with the elimination of
overlapping positions. The majority of the charge is related to lease
commitments extending beyond 1996.
Operating Income
Operating income increased to $31.1 million in the third quarter of 1996 from
$20.5 million in the third quarter of 1995 and increased to $67.2 million for
the nine months ended September 30, 1996 from $56.5 million for the nine months
ended September 30, 1995. Operating income (excluding merger integration
charges) increased to $76.2 million for the nine months ended September 30, 1996
from $56.5 million for the comparable period in 1995. Operating income for both
the three months and nine months ended September 30, 1996 increased as a result
of the AO Acquisition and related cost savings.
Net Interest Expense
Net interest expense decreased to $10.4 million in the third quarter of 1996
from $13.7 million in the third quarter of 1995 and decreased to $36.7 million
for the nine months ended September 30, 1996 from $40.1 for the comparable
period in 1995. Net interest expense has decreased due to reduced debt levels
as a result of the third quarter Offering and Private Placement whose proceeds
were used to reduce debt. Net interest expense has also decreased as a result
of lower borrowing rates from the Refinancing.
Income Taxes
The income tax provision reflects effective tax rates of 35% and 11% for the
three months ended September 30, 1996 and 1995 and 34% and 38% for the nine
months ended September 30, 1996 and 1995, respectively.
Income before Extraordinary Item
Income before extraordinary item increased to $13.2 million in the third quarter
of 1996 from $6.2 million in the third quarter of 1995 and increased to $19.0
million for the nine months ended September 30, 1996 from $11.5 million for the
nine months ended September 30, 1995. Excluding non-recurring merger integration
charges, income before extraordinary item increased to $24.8 million for the
nine months ended September 30, 1996 from $11.5 million for the comparable
period in 1995. The increase in income before extraordinary item (excluding
merger integration charges) is due to the increase in operating income and
decrease in net interest expense offset in part by transaction gain reductions
in 1996 as a result of a stable peso during the first six months of 1996. The
$7.0 million increase in income before extraordinary item for the third quarter
of 1996 as compared to 1995 was also offset in part by the higher effective tax
rate in 1996.
Extraordinary Item
In connection with the refinancing and early extinguishment of debt, the Company
recorded an extraordinary charge of $44.8 million ($29.1 million, net of tax)
for prepayment premiums on certain debt repaid, the write-off of existing
deferred financing fees and a termination fee in connection with the termination
of the Company's management agreement with AEA Investors Inc. (the "Termination
Fee"). AEA Investors Inc. is the manager of DTI Investors LLC, which is a
significant stockholder of the Company.
Page 14
Net Income (Loss)
As a result of the extraordinary charge, the Company reported a net loss of
$15.9 million in the third quarter of 1996 as compared to net income of $6.2
million in the third quarter of 1995. For the nine months ended September 30,
1996 net loss was $10.0 million, as a result of the extraordinary charge and the
first quarter non-recurring merger integration charge, and net income for the
nine months ended September 30, 1995 was $11.5 million. Excluding non-recurring
merger integration charges and the third quarter extraordinary item, net income
for the nine months ended September 30, 1996 would have been $24.8 million as
compared to net income for the comparable period in 1995 of $11.5 million.
Pro-forma Net Income
Pro-forma net income for the third quarter excludes the one time charge for
early retirement of debt, adds back the interest expense savings that would have
been realized had the Company completed its refinancing at the beginning of the
quarter rather than in late August and increases the average number of shares
outstanding to reflect the issuance of additional shares in the Company's
initial public offering. On a pro-forma basis net income increased to $14.8
million for the third quarter of 1996 from $6.2 million in the third quarter of
1995 as a result of the interest expense savings.
Liquidity and Capital Resources
Cash flow from operations and funds available under the Company's revolving
credit facility continue to provide the Company with liquidity and capital
resources for working capital requirements, capital expenditures, expansion and
debt service.
Cash used in operating activities was $33.1 million for the nine months ended
September 30, 1996 and cash provided by operating activities was $3.2 million
for the same period in 1995. Cash was used in the nine months ended September
30, 1996 to fund several areas of working capital. Increases in trade accounts
receivable resulted from increased sales volume in the last half of the quarter
and extended terms granted to new distributors. Inventory increased due to
receipts of imported product not yet distributed to sales centers. Cash was also
used to fund payments of trade accounts payable as a result of the timing of
payment to vendors and to pay accrued interest in connection with the
Refinancing.
Expenditures for property, plant and equipment were $27.8 million for the nine
months ended September 30, 1996. The expenditures were used to fund expansion of
the floor and mosaic production lines in Monterey, Mexico, purchase a floor tile
plant in Mt. Gilead, North Carolina for $3.5 million, routine capital
improvements and integration of the Company's and AO's management information
systems. During 1997 the Company plans to spend approximately $60.0 million to
expand its manufacturing capacity, improve manufacturing efficiencies, continue
integration of management information systems, leasehold improvements for new
sales centers, expansion of a regional distribution center, and routine capital
improvements. As of September 30, 1996 the company had entered into commitments
of approximately $8.0 million for these expansion plans.
During the third quarter, the Company completed the Refinancing as discussed
above. The Refinancing provides the Company with financial and operating
flexibility to extend the amortization of its indebtedness and to significantly
reduce its interest expense.
Page 15
In connection with the Refinancing, the Company paid $27.6 million out of the
cash proceeds from the AO Acquisition to redeem $32.6 million aggregate
principal amount at maturity ($26.0 million aggregate accreted value at the
Redemption Date) of the Zero Coupon Notes at a redemption price of 106% of their
accreted value on the Redemption Date.
The Company used the net proceeds of the Refinancing: (i) to repay
substantially all of its outstanding Zero Coupon Notes at a tender price of
approximately 110% of their accreted value, the Company having previously called
for redemption approximately 25% of its then outstanding Zero Coupon Notes; (ii)
to repay in full outstanding borrowings by Dal-Tile's wholly owned subsidiary,
Dal-Tile Group Inc., under the previous bank credit agreement (the "Previous
Bank Credit Agreement"); (iii) to repay $176.0 million of its Series A Notes and
$100 million of its Series B Notes; and (iv) to pay accrued interest and
prepayment premiums on certain debt to be repaid, the Termination Fee and fees
and expenses associated with the Refinancing.
In connection with its tender for substantially all of its Zero Coupon Notes,
not otherwise called for redemption, the Company solicited sufficient consents
to amend the indenture pursuant to which the Zero Coupon Notes were issued.
Among other things such amendments eliminated substantially all of the
restrictive covenants in such indenture and terminated the pledge agreement
pursuant to which all of the outstanding stock of Dal-Tile Group Inc. had been
pledged.
In connection with the Refinancing, the Company recorded an extraordinary charge
of $44.8 million ($29.1 million net of tax), for the prepayment premiums on
certain debt repaid, write off of existing deferred financing fees and the
Termination Fee.
Cash used in financing activities was $7.7 million for the nine months ended
September 30, 1996, which reflects borrowings under the Company's Previous Bank
Credit Agreement to repay $44.0 million in principal under its Series A Notes
and $17.0 million in semi-annual interest on the Series A Notes and Series B
Notes. Cash was provided by the Offering and Private Placement and borrowings
under the New Bank Credit Agreement which were used to repay substantially all
of the Company's debt and fees and expenses associated with the Refinancing.
The New Bank Credit Agreement includes a term loan of $275.0 million and a
revolving credit facility of $250.0 million. The Company will be required to
make quarterly amortization payments on the term loan commencing March 1, 1997
through December 31, 2002 at various scheduled amounts. Borrowings under the
revolving credit facility are payable in full on December 31, 2002. Borrowings
under the New Bank Credit Agreement bear interest at variable rates based on
Eurodollar rates or prime rate and are secured by the capital stock of each
Material Subsidiary (as defined in the agreement). Under the New Bank Credit
Agreement the Company is required, among other things, to maintain certain
financial covenants and has restrictions on incurring additional debt and
limitations on cash dividends. The Company was in compliance with such covenants
at September 30, 1996. A commitment fee at a rate per annum based on a pricing
grid is payable quarterly.
The Company believes that existing cash balances and cash flow from operating
activities together with borrowings available under the New Bank Credit
Agreement will be sufficient to fund future working capital needs, capital
spending requirements, expansion plans and debt service requirements of the
Company in the foreseeable future. Additional availability under the revolving
credit facility was $81.0 million at September 30, 1996.
Page 16
The Company estimates total cash AO merger integration costs for 1996 of
approximately $22.1 million pertaining to severance, lease commitments and shut
down costs for manufacturing, distribution and corporate facility
consolidations, as well as elimination of duplicate and overlapping positions.
Of this amount, the Company incurred cash costs for the nine months ended
September 30, 1996 of $18.1 million.
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 any peso
devaluation on income from operations has been 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 AO Acquisition and prior to January 9, 1990 (when AEA
Investors Inc., a privately held corporation headquartered in New York, arranged
for Dal-Tile International Inc. to acquire all of the outstanding capital stock
of Dal-Tile Corporation, its affiliated companies and certain related assets
(the "AEA Acquisition")). The Company maintains a reserve for remediation
relating to environmental conditions and activities existing 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 conditions of AWI's indemnification obligations under the
Stock Purchase Agreement dated as of December 21, 1995, by and among the
Company, Armstrong Enterprises, Inc., Armstrong Cork Finance Corporation and
AWI, 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.
The United States is a party to GATT. Under GATT, the United States currently
imposes import duties on ceramic tile outside North America countries at 17%, to
be reduced ratably to 8 1/2% by 2005. Accordingly, GATT may stimulate
competition from manufacturers outside North America 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.
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 nine months ended September 30, 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 third quarter 1996 and nine months ended
September 30, 1996 operating results, however, the future impact is uncertain at
this time.
Page 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
A consent in writing of stockholders of the Registrant, dated as of
July 17, 1996, was signed on behalf of all of the stockholders
entitled to vote thereon, whereby the stockholders approved the
Agreement and Plan of Merger by and among the Registrant, DTI
Investors LLC and DTI Merger Company, providing for the merger of DTI
Merger Company with and into the Registrant, with the Registrant
surviving.
A consent in writing of stockholders of the Registrant, dated as of
August 14, 1996 was signed on behalf of all of the stockholders
entitled to vote thereon, whereby the stockholders approved the Second
Amended and Restated Certificate of Incorporation of the Registrant.
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,
uncertainties relating to the realization of benefits expected from
the integration of AO's operations, 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, and environmental laws and
other regulations.
Page 18
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
2.1 Agreement and Plan of Merger, among Dal-Tile International Inc.
DTI Investors LLC and DTI Merger Company, dated as of August 7,
1996.
3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Amended and Restated By-laws of the Registrant. (Filed as Exhibit
3.2 to the Registrant's Registration Statement of Form S-1 No.
333-5069 and incorporated herein by reference).
10.1 Credit and Guarantee Agreement, dated August 14, 1996 among Dal-
Tile International Inc., Dal-Tile Group Inc., the several banks,
financial institutions and other entities from time to time party
thereto, Credit Suisse as Documentation Agent, Goldman Sachs
Credit Partners L.P., as Syndication Agent, and the Chase
Manhattan Bank as Administrative Agent.
10.2 Pledge Agreement dated as of October 4, 1996, made by Dal-Tile
Group Inc. in favor of The Chase Manhattan Bank, as Administrative
Agent, relating to the pledge of Common Stock of Dal-Tile Mexico,
S.A. de C.V.
10.3 Pledge Agreement dated as of August 14, 1996, made by Dal-Tile
International Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent, relating to the pledge of Common Stock of
Dal-Tile Group Inc.
10.4 Pledge Agreement dated as of August 14, 1996, made by Dal-Tile
Group Inc. in favor of The Chase Manhattan Bank, as Administrative
Agent, relating to the pledge of Common Stock of Dal-Tile
Corporation.
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the quarter ended September 30, 1996.
Page 19
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.
---------------------------
(Registrant)
Date:
November 7, 1996 /s/ CARLOS E. SALA
- ---------------- -------------------------------------
Carlos E. Sala
Executive Vice President, Chief Financial
Officer and Treasurer
Page 20