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 April 4, 1997
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 15, 1997 the registrant had outstanding 53,435,101 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 9
PART II - OTHER INFORMATION
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 4, 1997 AND MARCH 31, 1996
(Amounts in Thousands, Except Per Share Data) (Unaudited)
Three Months Ended
----------------------------
April 4, March 31,
1997 1996
-------- --------
Net sales $167,409 $170,674
Cost of goods sold 84,221 87,940
-------- --------
Gross profit 83,188 82,734
Expenses:
Transportation 11,490 9,957
Selling, general and
Administrative 52,994 48,362
Provision for merger
integration charge -- 9,000
Amortization of intangibles 1,401 1,191
-------- --------
Total expenses 65,885 68,510
-------- --------
Operating income 17,303 14,224
Interest expense 8,079 13,843
Interest income 139 584
Other income 681 531
-------- --------
Income before income taxes 10,044 1,496
-------- --------
Income tax provision 3,517 566
-------- --------
Net income $6,527 $930
======== ========
Net income per common share $0.12 $0.02
======== ========
Average outstanding common and
equivalent shares 55,443 46,795
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
APRIL 4, 1997 AND JANUARY 3, 1997
(Amounts in Thousands)
(Unaudited)
April 4, January 3
1997 1997
----------- -----------
Assets
Current Assets:
Cash $ --- $9,999
Trade accounts receivable 132,074 123,586
Inventories 162,606 142,413
Prepaid expenses 4,963 2,838
Other current assets 17,226 15,480
-------- ---------
Total current assets 316,869 294,316
Property, plant, and equipment, at cost 277,124 261,976
Less accumulated depreciation 61,709 58,350
-------- ---------
215,415 203,626
Goodwill, net of amortization 156,059 157,251
Finance costs, net of amortization 3,529 3,683
Tradename and other assets 30,393 29,621
-------- ---------
Total assets $722,265 $688,497
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (continued)
APRIL 4, 1997 AND JANUARY 3, 1997
(Amounts in Thousands)
(Unaudited)
April 4, January 3
1997 1997
------------ -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable $23,803 $38,827
Accrued expenses 22,753 27,809
Bank overdrafts 4,973 --
Accrued interest payable 3,412 3,293
Current portion of long-term debt 35,323 32,823
Income taxes payable 4,155 2,342
Deferred income taxes 1,120 1,367
Other current liabilities 6,645 7,036
--------- ---------
Total current liabilities 102,184 113,497
Long-term debt 470,739 433,035
Other long-term liabilities 23,882 24,369
Deferred income taxes 4,106 2,027
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares -
200,000,000; issued and
outstanding shares - 53,435,101 534 534
Additional paid-in capital 436,100 436,100
Accumulated deficit (254,123) (260,650)
Currency translation adjustment (61,157) (60,415)
--------- ---------
Total stockholders' equity 121,354 115,569
--------- ---------
Total liabilities and stockholders' equity $722,265 $688,497
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
5
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED APRIL 4, 1997 AND MARCH 31, 1996
(Amounts in Thousands)
(Unaudited)
Three Months Ended
--------------------------
April 4, March 31,
1997 1996
----------------------------
Operating Activities
Net income $6,527 $930
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,134 5,390
Deferred income tax provision 1,937 86
Foreign currency transaction (gain) loss (144) 363
Zero coupon note interest expense 4 2,919
Changes in operating assets and liabilities:
Trade accounts receivable (8,548) (2,905)
Inventories (20,353) (3,049)
Other assets (4,764) (1,521)
Trade accounts payable and accrued expenses (20,140) (16,270)
Accrued interest payable 120 (9,472)
Other liabilities (1,064) 2,561
---------- ---------
Net cash used in operating activities (41,291) (20,968)
Investing Activities
Expenditures for property, plant, and equipment, net (13,888) (5,673)
---------- ---------
Financing Activities
Repayments of long-term debt (7,800) (44,300)
Borrowings under long-term debt 48,000 37,100
---------- ---------
Net cash provided by (used in) financing activities 40,200 (7,200)
Effect of exchange rate changes on cash 7 7
---------- ---------
Net decrease in cash (14,972) (33,834)
Cash at beginning of period 9,999 72,965
---------- ---------
Cash (overdraft) at end of period ($4,973) $39,131
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
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 months ended April 4, 1997
reflect the results of operations of Dal-Tile International Inc. and its
consolidated subsidiaries. Due to the Company's 52/53 week accounting
cycle, the first quarter, 1997 quarter end is on April 4, 1997.
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 three
months ended April 4, 1997, are not necessarily indicative of the results
that may be expected for the year ending January 2, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the January 3, 1997 annual report on Form 10-K of the
Company.
2. 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 55,443,329 and 46,794,633 for the three months
ended April 4, 1997 and March 31,1996, respectively.
3. INVENTORIES
Inventories consist of the following at April 4, 1997 and January 3, 1997
(In Thousands):
April 4, January 3,
1997 1997
---- ----
(Unaudited)
Raw materials $14,706 $12,660
Work-in-process 3,760 3,516
Finished goods 144,140 126,237
------- ---------
$162,606 $142,413
======== ========
7
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following at April 4, 1997 and January 3,
1997 (In Thousands):
April 4, January 3,
1997 1997
---- ----
(Unaudited)
Term Loan $267,500 $275,000
Revolving Credit Loan 224,000 176,000
Senior Secured Zero Coupon Note 143 140
Other 14,418 14,718
------ --------
506,062 465,858
Less current portion 35,323 32,823
------ -----------
$470,739 $433,035
======== =========
5. INCOME TAXES
The income tax provision reflects effective tax rates of 35% and 38% for
the three months ended April 4, 1997 and March 31, 1996, respectively.
6. 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 and certain manufacturing
facilities, as well as incurrence of severance costs associated with the
elimination of overlapping positions. The majority of the charge is
related to lease commitments on closed facilities and severance costs.
8
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 April 4, 1997 compared with the three months ended March 31, 1996 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 1997
ended on April 4, 1997. All references herein to the first quarter of 1997 are
intended to include the Company's operations through April 4,1997.
The Company completed its acquisition of American Olean in December 1995 (the
"AO Acquisition"). Since the AO Acquisition, the Company has been engaged in the
complex task of migrating information systems to those previously used by
American Olean. The objective of this migration is to achieve the benefits of
one fully integrated information system encompassing manufacturing,
distribution, and sales.
The Company is behind its originally anticipated timetable in completing the
integration of its information systems to one operating system. As a result, the
Company has incurred additional costs associated with the completion of this
project as well as higher distribution and operating costs in the first quarter
of 1997 amounting to approximately $4.5 million. The additional operating costs
are expected to continue through the second quarter of 1997. In addition, the
Company has seen a negative impact on revenues in the Company-operated sales
centers. This distribution channel carries a more extensive product offering and
has more complex service requirements. As a result, service in this distribution
channel has been most notably affected by the delay in the systems integration.
As of April 30, 1997 the Company had converted 156 of its 222 sales centers to
the integrated system. As sales centers migrate to the integrated system, the
difficulties encountered during the first quarter of 1997 are expected to lessen
and service is expected to improve. The delay in completing the systems
integration is expected to have a negative impact on full year 1997 results. The
Company continues to make progress in the systems integration and anticipates
substantial completion of the sales centers conversion by the second half of
1997.
Net Sales
Net sales for the first quarter decreased from $170.7 million in 1996 to $167.4
million in 1997, a decrease of $3.3 million or 1.9%. While U.S. sales in the
first quarter of 1997 were comparable to the first quarter of 1996, sales in
Mexico decreased $2.1 million to $3.1 million in the first quarter of 1997 from
$5.2 million in the first quarter of 1996. Sales decreased due to a larger
allocation of the Company's Mexican production to distribution in the United
States. The demand for glazed wall and floor tile products remains weak in
Mexico due to the economic conditions in Mexico.
In the U.S., sales by volume increased 5% in the first quarter of 1997 as
compared to the first quarter of 1996. The shift in channel mix from Company-
operated sales centers to the lower priced independent distributors resulted in
sales by dollar comparable to 1996. The Company-operated sales centers were
negatively impacted by the delay in the systems integration as well as the
consolidation of 57 duplicative sales centers since the first quarter of 1996.
Average sales by sales center increased from approximately $470,000 in the first
quarter of 1996 to approximately $522,000 in the first quarter of 1997.
9
Gross Profit
Gross profit increased $0.5 million, or 0.5%, to $83.2 million in the first
quarter of 1997 from $82.7 million in the first quarter of 1996. Gross margin
increased in the first quarter of 1997 to 49.7% from 48.5% in the first quarter
of 1996. The increase in gross margin is primarily due to the closings of
higher-cost manufacturing facilities in March 1996, as well as other
productivity improvements, partially offset by the Company's increased presence
in the independent distributor and home center retailer channels. Sales through
these channels 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 decreased to $65.9 million in the first quarter of 1997 from $68.5
million in the first quarter of 1996 due primarily to $9.0 million of
non-recurring merger integration charges in the first quarter of 1996. Excluding
merger integration charges, expenses increased from $59.5 million in the first
quarter of 1996 to $65.9 million in the first quarter of 1997. Expenses,
excluding merger integration charges as a percentage of sales, increased to
39.4% in the first quarter of 1997 from 34.9% in the first quarter of 1996. The
principal reason for the increase in operating expenses, excluding merger
integration charges, is $4.5 million from increased distribution and operating
costs resulting from the delay in the Company's systems integration and a $1.2
million increase in the leasing costs of the Company's computer system.
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 and certain manufacturing facilities, as well
as incurrence of severance costs associated with the elimination of overlapping
positions. The majority of the $9.0 million is a cash charge related to lease
commitments on closed facilities and severance costs.
Operating Income
Operating income increased to $17.3 million in the first quarter of 1997 from
$14.2 million in the first quarter of 1996. Operating income, excluding merger
integration charges, decreased $5.9 million to $17.3 million in the first
quarter of 1997 from $23.2 million in the first quarter of 1996. Operating
income, excluding merger integration charges, decreased principally as a result
of higher distribution and operating costs resulting from the delay in the
Company's systems integration offset in part by higher gross margins.
Interest Expense (Net)
Interest expense (net) decreased to $7.9 million in the first quarter of 1997
from $13.3 million in the first quarter of 1996. Interest expense (net) has
decreased as a result of interest savings from the refinancing of the Company's
debt concurrent with the initial public offering which occurred in the third
quarter of 1996.
Income Taxes
The income tax provision reflects effective tax rates of 35% and 38% for the
first quarter of 1997 and 1996, respectively.
10
Net Income
Net income increased to $6.5 million in the first quarter of 1997 from $0.9
million in the first quarter of 1996. Net income, excluding merger integration
charges, was $6.5 million in both the first quarter of 1997 and 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 $41.3
million for the first quarter of 1997 and $21.0 million for the same period in
1996. Cash was used in the first quarter of 1997 primarily to fund payments of
trade accounts payable as a result of the timing of payments to vendors and
inventory and trade accounts receivable increases.
Both inventory and trade accounts receivable have been impacted by the delay in
the systems integration. Inventories have increased as a result of the
manufacturing plants operating at full capacity in order to improve product
availability and prepare for anticipated revenue increases in the second quarter
due to the seasonal nature of the construction market. It is expected that the
fully integrated system will provide improved coordination and inventory
management within the Company's distribution network. Additionally, inventories
have increased as a result of new product introductions. Trade accounts
receivable have increased due to extended terms granted to customers and limited
access by sales centers personnel during the systems transition period to
certain customer account information. As the systems integration progresses,
Company personnel are expected to receive improved access to customer account
information to assist in collections.
Expenditures for property, plant and equipment were $13.9 million for the first
quarter of 1997. The expenditures were used to fund modifications and start-up
costs of the recently acquired floor tile plant in Mt. Gilead, North Carolina,
floor tile expansion in Mexico, routine capital improvements and the integration
of management information systems after the AO Acquisition. During the next
twelve months the Company plans to spend approximately $60 million to expand its
manufacturing capacity, improve manufacturing efficiencies, continue integration
of management information systems, make leasehold improvements for new sales
centers, and routine capital improvements. As of April 4, 1997, the Company had
entered into commitments of approximately $20 million for these expansion plans.
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 revolving credit facility 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.
Cash provided by financing activities was $40.2 million for the first quarter of
1997, which reflects borrowings under the Company's revolving credit facility to
fund working capital, capital expenditures, interest payments and to repay $7.5
million in principal under its term loan facility.
The Company is in discussions with its bank lenders in connection with amending
the Company's current lending arrangements to provide, among other things,
additional capacity during the systems transition period, which has resulted in
increased demands on the Company's liquidity resources. The Company believes
cash flow from operating activities together with borrowings available under its
credit facilities, as proposed to be amended, 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. The completion of
the systems integration is expected to improve operations and cash flow in the
second half of 1997.
11
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 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 AO
Acquisition Agreement (as defined), 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 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 17%, to be reduced ratably to
8 1/2% by 2005. 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.
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 first quarter of 1997 and 1996. Approximately 84% 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 of 1997 operating results; however, the future impact is
uncertain at this time.
12
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,
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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter ended April 4, 1997.
13
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:
May 15, 1997 /s/ RICHARD D. SEWELL
- - ------------ ------------------------
Richard D. Sewell
Vice President- Finance
14