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 October 2, 1998
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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
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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
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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 November 9, 1998, the registrant had outstanding 53,552,246 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 16
Item 6 - Exhibits and Reports on Form 8-K 16
PAGE 2
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 194,068 $ 177,731 $ 570,806 $ 518,882
Cost of goods sold 101,392 131,461 300,575 315,811
---------- ---------- ---------- ----------
Gross profit 92,676 46,270 270,231 203,071
Expenses:
Transportation 14,438 18,673 43,182 45,064
Selling, general and administrative 55,955 90,871 170,158 213,060
Amortization of intangibles 1,401 1,401 4,203 4,204
---------- ---------- ---------- ----------
Total expenses 71,794 110,945 217,543 262,328
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Operating income (loss) 20,882 (64,675) 52,688 (59,257)
Interest expense 11,153 11,461 34,406 28,820
Interest income 48 30 104 235
Other income 1,313 147 1,318 695
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Income (loss) before income taxes 11,090 (75,959) 19,704 (87,147)
Income tax provision 1,154 4,980 3,493 1,063
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Net income (loss) $ 9,936 $ (80,939) $ 16,211 $ (88,210)
---------- ---------- ---------- ----------
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BASIC EARNINGS PER SHARE
Net income (loss) per common share $ 0.19 $ (1.51) $ 0.30 $ (1.65)
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Average shares 53,522 53,435 53,464 53,435
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DILUTED EARNINGS PER SHARE
Net income (loss) per common share $ 0.18 $ (1.51) $ 0.30 $ (1.65)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average shares 53,725 53,435 54,125 53,435
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The accompanying notes are an integral part of the consolidated condensed
financial statements.
PAGE 3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
OCTOBER 2, JANUARY 2,
1998 1998
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ASSETS
Current Assets:
Cash $ 2,250 $ 7,488
Trade accounts receivable 104,770 96,296
Inventories 134,806 130,747
Prepaid expenses 5,675 3,120
Notes receivable and other current assets 20,016 18,438
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Total current assets 267,517 256,089
Property, plant, and equipment, at cost 287,819 299,232
Less accumulated depreciation 83,490 71,547
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204,329 227,685
Goodwill, net of amortization 148,987 152,560
Finance costs, net of amortization 5,697 6,599
Tradename and other assets 29,331 29,136
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Total assets $ 655,861 $ 672,069
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The accompanying notes are an integral part of the consolidated condensed
financial statements.
PAGE 4
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
OCTOBER 2, JANUARY 2,
1998 1998
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 23,276 $ 18,231
Accrued expenses 68,745 55,043
Accrued interest payable 955 2,287
Current portion of long-term debt 46,941 19,261
Income taxes payable 101 801
Deferred income taxes 981 863
Other current liabilities 4,657 4,715
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Total current liabilities 145,656 101,201
Long-term debt 470,638 537,830
Other long-term liabilities 29,510 27,230
Deferred income taxes 2,320 1,888
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued
and outstanding shares - 53,545,101 535 534
Additional paid-in capital 436,279 436,100
Accumulated deficit (354,675) (370,886)
Accumulated other comprehensive loss (74,402) (61,828)
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Total stockholders' equity 7,737 3,920
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Total liabilities and stockholders' equity $ 655,861 $ 672,069
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The accompanying notes are an integral part of the consolidated condensed
financial statements.
PAGE 5
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
OCTOBER 2, 1998
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
------ -------- ---------- ------------- --------
Balance at January 2, 1998 $ 534 $436,100 $(370,886) $(61,828) $ 3,920
Proceeds from Issuance of Common Stock 1 1,037 - - 1,038
Common stock registration expenses - (858) - - (858)
Comprehensive income (loss)
Net Income - - 16,211 - 16,211
Foreign currency translation adjustments - - - (12,574) (12,574)
------ -------- --------- -------- --------
Total Comprehensive income 3,637
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Balance at October 2, 1998 $ 535 $436,279 $(354,675) $(74,402) $ 7,737
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------ -------- --------- -------- --------
The accompanying notes are an integral part of the consolidated condensed
financial statements.
PAGE 6
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
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OCTOBER 2, OCTOBER 3,
1998 1997
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OPERATING ACTIVITIES
Net income (loss) $ 16,211 $ (88,210)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 21,062 17,517
Asset write-down 1,700 -
Provision for losses on accounts receivable 4,791 26,696
Other, net (309) 196
Changes in operating assets and liabilities:
Trade accounts receivable (14,326) (16,423)
Inventories (6,763) (188)
Other assets (5,810) (6,425)
Trade accounts payable and accrued expenses 19,011 2,768
Accrued interest payable (1,332) (863)
Other liabilities 2,587 (2,636)
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Net cash provided by (used in) operating activities 36,822 (67,568)
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment, net (3,083) (33,590)
FINANCING ACTIVITIES
Borrowings under long-term debt 107,157 230,498
Repayments of long-term debt (146,669) (135,598)
Debt refinancing and stock registration (335) (3,310)
Proceeds from issuance of common stock 1,038 --
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Net cash provided by (used in) financing activities (38,809) 91,590
Effect of exchange rate changes on cash (168) (38)
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Net decrease in cash (5,238) (9,606)
Cash at beginning of period 7,488 9,999
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Cash at end of period $ 2,250 $ 393
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The accompanying notes are an integral part of the consolidated condensed
financial statements.
PAGE 7
DAL-TILE INTERNATIONAL INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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 October 2,
1998 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 third quarter of 1998 ended on October 2, 1998.
The accompanying unaudited consolidated condensed 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 October 2,
1998 are not necessarily indicative of the results that may be expected for
the year ending January 1, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
January 2, 1998 annual report on Form 10-K of the Company.
Certain prior year amounts have been reclassified to conform to the 1998
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
As of January 3, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS 130
had no impact on the Company's net income or stockholders' equity. SFAS 130
requires foreign currency translation adjustments, which prior to adoption
were reported separately in stockholder's equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to the requirements of SFAS 130.
For the nine months ended October 2, 1998 and October 3, 1997, total
comprehensive income (loss) amounted to $3,637 and ($87,461), respectively.
PAGE 8
DAL-TILE INTERNATIONAL INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
4. INVENTORIES
Inventories are as follows:
October 2, January 2,
1998 1998
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Raw materials $ 9,261 $ 9,891
Work-in-process 3,771 3,960
Finished goods 121,774 116,896
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$134,806 $130,747
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5. ASSET WRITE-DOWN
As a result of refinement of the Company's manufacturing strategy, the
Company has decided to pursue the sale of its Mt. Gilead, North Carolina
glazed floor tile facility. A $1,700 provision, which was included in
selling, general and administrative expenses, was recorded in the second
quarter of 1998 to reduce the carrying value of the facility to its
estimated net realizable value.
6. LONG-TERM DEBT
Long-term debt consists of the following:
October 2, January 2,
1998 1998
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Term Loan A $ 215,000 $ 217,500
Term Loan B 124,250 125,000
Revolving Credit Loan 156,350 190,000
Other 21,979 24,591
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517,579 557,091
Less current portion 46,941 19,261
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$ 470,638 $ 537,830
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7. INCOME TAXES
The income tax provision for the three and nine months ended October 2,
1998 reflects effective tax rates of approximately 10% and 18%,
respectively. These rates reflect expected Mexico tax liabilities and U.S.
state and possession income tax based on estimated taxable income in those
jurisdictions. No U.S. federal income tax expense has been recorded for
1998 due to an offset by a valuation allowance against U.S. federal
deferred tax assets recorded during 1997. The valuation allowance will
continue to be reassessed in future reporting periods.
PAGE 9
DAL-TILE INTERNATIONAL INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
(UNAUDITED)
The effective rates for the three and nine months ended October 3, 1997
were based on the estimated annual income of 1997. Subsequent to the first
quarter of 1997, the Company incurred significant U.S. losses which
eliminated the U.S. federal and state income tax liability for that period.
A valuation allowance was established in 1997 to offset any benefit from
the net operating losses and to reflect management's estimation as to the
future realization of the deferred tax assets. The resulting provision for
1997 was due to taxes incurred on earnings in Mexico.
8. 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 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 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 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.
PAGE 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the third quarter of 1998, the Company reported increased profitability
through revenue growth and lower manufacturing and operating costs. Sales
increased across all product segments and per unit manufacturing costs declined
compared to the prior year period. During the remainder of 1998, the Company
will continue efforts to reduce transportation and operating costs while
focusing on future growth opportunities.
The following is a discussion of the results of operations for the three and
nine months ended October 2, 1998 compared with the three and nine months ended
October 3, 1997 for Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company"). Due to the Company's 52/53 week accounting cycle,
the third quarter of 1998 ended on October 2, 1998.
NET SALES
Net sales for the third quarter of 1998 increased $16.4 million, or 9.2%, to
$194.1 million from $177.7 million in 1997. Net sales for the nine months ended
October 2, 1998 increased $51.9 million, or 10.0%, to $570.8 million from $518.9
million for the same period in 1997. The increase in net sales was due
primarily to better product availability and the restructuring of the sales
organization to improve customer service. During the third quarter of 1998, net
sales within the company-operated sales centers increased 10.5% and sales to
home centers increased 9.3% compared to last year. Independent distributor sales
were comparable to the prior year period. For the nine months ended October 2,
1998, net sales increased across all distribution channels versus last year.
GROSS PROFIT
Gross profit for the third quarter of 1998 increased $46.4 million to $92.7
million from $46.3 million in 1997. Gross profit for the nine months ended
October 2, 1998 increased $67.1 million to $270.2 million from $203.1 million
for the same period in 1997. Gross margin increased in the third quarter of
1998 to 47.8% from 26.1% in the third quarter of 1997. Gross margin increased
for the nine months ended October 2, 1998 to 47.3% from 39.1% for the comparable
period in 1997. The increases were due in part to higher sales and lower
manufacturing costs. In addition, gross margin for the three and nine months
ended October 3, 1997 were negatively affected by second and third quarter
inventory valuation adjustments of $8.4 million and $28.1 million, respectively.
EXPENSES
Expenses in the third quarter of 1998 decreased $39.1 million, or 35.3%, to
$71.8 million from $110.9 million in the third quarter of 1997. For the nine
months ended October 2, 1998, expenses decreased $44.8 million, or 17.1%, to
$217.5 million from $262.3 million for the same period in 1997. Expenses as a
percent of sales in the third quarter of 1998 decreased to 37.0% from 62.4% in
1997. For the nine months ended October 2, 1998, expenses as a percent of sales
decreased to 38.1% from 50.6% in 1997. The decreases were due in part to higher
sales, reductions in staffing, lower bad debt expense and reduced professional
fees. These decreases were offset by a second quarter write-down of assets at
the Company's Mt. Gilead manufacturing facility. In addition, expenses for the
three and nine months ended October 3, 1997 were negatively affected by second
and third quarter charges of $16.3 million and $37.3 million, respectively.
These charges consisted of $21.3 million to write-down uncollectible
PAGE 11
trade accounts receivable, $6.7 million in respect of terminated employees,
$6.2 million primarily related to liabilities incurred for lease
terminations, executive search fees and other items, $8.5 million in respect
of accrued expenses, primarily related to freight and insurance, $5.3 million
in respect of fixed asset impairment and $5.6 million in respect of other
charges, primarily related to write-down of notes, non-trade receivables and
certain other assets.
OPERATING INCOME (LOSS)
Operating income in the third quarter of 1998 increased $85.6 million to $20.9
million from a loss of $64.7 million in the third quarter of 1997. The Company
had operating income of $52.7 million for the nine months ended October 2, 1998
as compared to a loss of $59.3 million for the same period in 1997. Operating
income increased due to higher sales and decreased operating expenses.
INTEREST EXPENSE (NET)
Interest expense (net) in the third quarter of 1998 decreased $0.3 million, or
2.6%, to $11.1 million from $11.4 million in the third quarter of 1997. For the
nine months ended October 2, 1998, interest expense (net) increased $5.7
million, or 19.9%, to $34.3 million from $28.6 million for the same period in
1997. This increase was due to increased borrowing requirements through the end
of 1997 and higher fees and interest rates in connection with second and third
quarter 1997 amendments to the Company's credit facility offset by decreases
associated with the work-down of debt through the first three quarters of 1998.
INCOME TAXES
The income tax provision for the three and nine months ended October 2, 1998
reflects effective tax rates of approximately 10% and 18%, respectively. These
rates reflect expected Mexico tax liabilities and U.S. state and possession
income tax based on estimated taxable income in those jurisdictions. No U.S.
federal income tax expense has been recorded for 1998 due to an offset by a
valuation allowance against U.S. federal deferred tax assets recorded during
1997. The valuation allowance will continue to be reassessed in future
reporting periods.
The effective rates for the three and nine months ended October 3, 1997 were
based on the estimated annual income of 1997. Subsequent to the first quarter
of 1997, the Company incurred significant U.S. losses which eliminated the U.S.
federal and state income tax liability for that period. A valuation allowance
was established in 1997 to offset any benefit from the net operating losses and
to reflect management's estimation as to the future realization of the deferred
tax assets. The resulting provision for 1997 was due to taxes incurred on
earnings in Mexico.
NET INCOME (LOSS)
Net income in the third quarter of 1998 increased to $9.9 million from a loss of
$80.9 million in the third quarter of 1997 and increased to income of $16.2
million for the nine months ended October 2, 1998 from a loss of $88.2 million
for the same period in 1997. Net income increased due to higher sales and lower
operating expenses.
PAGE 12
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Company's bank credit
agreement (the "Second Amended Credit Facility") continue to provide the Company
with liquidity and capital resources sufficient to meet working capital, capital
expenditure and debt service requirements. Cash provided by operating
activities for the nine months ended October 2, 1998 was $36.8 million compared
to cash usage of $67.6 million for the same period in 1997. Cash provided
during the nine months ended October 2, 1998 resulted from increased
profitability and improved management of working capital.
Expenditures for property, plant and equipment were $3.1 million for the nine
months ended October 2, 1998, inclusive of $8.1 million in net cash proceeds
from the sale of the Company's Lansdale, PA manufacturing facility. During the
remainder of 1998, the Company expects to incur expenditures for the expansion
of its Monterrey, Mexico manufacturing facility, information systems
enhancements and routine capital improvements.
Cash used in financing activities was $38.8 million for the nine months ended
October 2, 1998, which reflects revolver repayments and term debt amortization
on the Company's Second Amended Credit Facility of $33.6 million and $3.2
million, respectively. Total availability as of October 2, 1998 under the
Second Amended Credit Facility was $79.7 million. The Company believes cash
flow from operating activities, together with borrowings available under the
Second Amended Credit Facility (or replacement thereof), will be sufficient to
fund future working capital needs, capital expenditures and debt service
requirements.
Given increasingly stringent financial covenants and debt service requirements
under the Second Amended Credit Facility, the Company expects that it will be
required to seek to refinance its indebtedness or amend the terms thereof in
1999 or possibly sooner. The Company is currently in discussions with its
lenders regarding amending the covenants contained in the Second Amended Credit
Facility. The Company's ability to amend or refinance its obligations with
respect to its indebtedness and to raise capital through alternative means such
as selling assets or raising equity capital, as well as its ability to comply
with its obligations under any new or amended debt facilities, depends on its
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors beyond its
control. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's stockholders at that time
would be diluted. Further, such equity securities may have rights, preferences
or privileges senior to those of the Company's common stock. There can be no
assurance that future borrowing facilities will be available for the repayment
or refinancing of the Company's indebtedness or that the Company's existing
lenders will agree to any requested modification of the terms of its
indebtedness or that the Company's operating results will be sufficient for
compliance with obligations under any new or amended debt facilities. The
Company expects that debt incurred as part of a refinancing would involve higher
borrowing costs.
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's liquidity. Any future fluctuation of the peso
against the U.S. dollar may adversely affect the Company's results of operations
or financial condition.
PAGE 13
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
glazed ceramic tile from non-North American countries at 15%, to be reduced
ratably to 8 1/2% 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 13%, 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 nine months ended October 2, 1998 and October 3, 1997. 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.
IMPACT OF YEAR 2000
Some of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer
programs have time-sensitive software that may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company is continuing its efforts to modify and replace certain portions of
its software and hardware so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total project cost
is estimated at approximately $6.0 million and will be expensed as incurred. To
date, the Company has incurred expenses totaling $2.8 million and has completed
the Year 2000 assessment, development of a modification plan and a significant
portion of the activities called for in the plan.
PAGE 14
The project is estimated to be completed no later than the end of the second
quarter of 1999, which is prior to any anticipated impact on the Company's
operating systems. The Company believes that, with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material adverse impact on operations.
The cost of the project and the date by which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, non-performance of key software and
hardware vendors and similar uncertainties.
In addition, material disruptions to the operations of the Company's major
customers and suppliers as a result of Year 2000 issues could also have a
material adverse impact on the Company's operations and financial condition.
OTHER DEVELOPMENTS
On November 10, 1998, the Company filed a registration statement on behalf of
Armstrong World Industries, Inc. in connection with the proposed sale of
7,822,322 shares of Company common stock held by them.
PAGE 15
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, 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 October 2,
1998.
PAGE 16
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 10, 1998 /s/ W. Christopher Wellborn
- ----------------- -------------------------------
Executive Vice President, Chief
Financial Officer and Treasurer
PAGE 17