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 2, 1999
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3548809
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
7834 Hawn Freeway, Dallas, Texas 75217
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(Address of principal executive office)
(Zip Code)
(214) 398-1411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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As of May 6, 1999, the registrant had outstanding 54,023,805 shares of voting
common stock, par value $0.01 per share.
DAL-TILE INTERNATIONAL INC.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
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 15
Item 6 - Exhibits and Reports on Form 8-K 15
2
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
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APRIL 2, APRIL 3,
1999 1998
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Net sales $ 200,692 $ 185,831
Cost of goods sold 104,010 98,503
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Gross profit 96,682 87,328
Operating expenses:
Transportation 14,128 14,533
Selling, general and administrative 58,768 57,433
Amortization of intangibles 1,401 1,401
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Total operating expenses 74,297 73,367
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Operating income 22,385 13,961
Interest expense 10,185 11,604
Interest income 26 26
Other income (expense) 212 (391)
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Income before income taxes 12,438 1,992
Income tax provision 1,300 1,164
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Net Income $ 11,138 $ 828
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BASIC EARNINGS PER SHARE
Net income per common share $ 0.21 $ 0.02
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Average shares 53,568 53,435
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DILUTED EARNINGS PER SHARE
Net income per common share $ 0.21 $ 0.02
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Average shares 54,066 54,149
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The accompanying notes are an integral part of
the consolidated condensed financial statements.
3
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
APRIL 2, JANUARY 1,
1999 1999
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ASSETS
Current Assets:
Cash $ 1,348 $ 1,546
Trade accounts receivable 105,109 93,331
Inventories 134,795 138,418
Prepaid expenses 3,583 4,213
Other current assets 15,656 17,319
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Total current assets 260,491 254,827
Property, plant, and equipment, at cost 291,081 288,060
Less accumulated depreciation 90,487 86,058
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200,594 202,002
Goodwill, net of amortization 146,605 147,796
Finance costs, net of amortization 6,322 6,687
Tradename and other assets, net of amortization 28,803 29,496
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Total assets $ 642,815 $ 640,808
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The accompanying notes are an integral part of
the consolidated condensed financial statements.
4
DAL-TILE INTERNATIONAL INC.
CONSOLDIATED CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
APRIL 2, JANUARY 1,
1999 1999
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 32,426 $ 28,684
Accrued expenses 64,396 59,420
Accrued interest payable 793 490
Current portion of long-term debt 49,009 46,509
Income taxes payable 1,658 169
Deferred income taxes 2,140 1,930
Other current liabilities 222 10
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Total current liabilities 150,644 137,212
Long-term debt 441,473 453,923
Other long-term liabilities 21,924 32,639
Deferred income taxes 1,847 1,575
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 200,000,000; issued and
outstanding shares - 53,577,996 536 535
Additional paid-in capital 436,441 436,182
Accumulated deficit (335,720) (346,858)
Accumulated other comprehensive loss (74,330) (74,400)
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Total stockholders' equity 26,927 15,459
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Total liabilities and stockholders' equity $ 642,815 $ 640,808
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The accompanying notes are an integral part of
the consolidated condensed financial statements.
5
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
APRIL 2, 1999
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
------ ------- ----------- ------------- --------
Balance at January 1, 1999 $ 535 $436,182 $ (346,858) $ (74,400) $ 15,459
Proceeds from exercise of stock options 1 259 - - 260
Comprehensive Income
Net income - - 11,138 - 11,138
Foreign currency translation adjustments - - - 70 70
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Total Comprehensive Income 11,208
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Balance at April 2, 1999 $ 536 $436,441 $ (335,720) $ (74,330) $ 26,927
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The accompanying notes are an integral part of
the consolidated condensed financial statements.
6
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
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APRIL 2, APRIL 3,
1999 1998
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OPERATING ACTIVITIES
Net income $ 11,138 $ 828
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,968 7,165
Other, net 358 149
Changes in operating assets and liabilities:
Trade accounts receivable (11,691) (13,936)
Inventories 4,006 6,218
Other assets 2,941 1,557
Trade accounts payable and accrued expenses 8,285 5,866
Accrued interest payable 303 (847)
Other liabilities (9,104) 511
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Net cash provided by operating activities 13,204 7,511
INVESTING ACTIVITIES
Proceeds from sale of (expenditures for) property, plant
and equipment, net (3,785) 3,272
FINANCING ACTIVITIES
Repayments of long-term debt (67,600) (44,650)
Borrowings under long-term debt 57,650 27,004
Fees and expenses associated with debt refinancing - (241)
Proceeds from exercise of stock options 260 -
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Net cash used in financing activities (9,690) (17,887)
Effect of exchange rate changes on cash 73 15
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Net decrease in cash (198) (7,089)
Cash at beginning of period 1,546 7,488
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Cash at end of period $ 1,348 $ 399
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The accompanying notes are an integral part of
the consolidated condensed financial statements.
7
DAL-TILE INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements for the three months
ended April 2, 1999 reflect the results of operations of Dal-Tile
International Inc. and its consolidated subsidiaries (the "Company"). Due
to the Company's 52/53 week accounting cycle, the first quarter of 1999
ended on April 2, 1999.
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, these
financial statements include all adjustments, consisting of normal
recurring items, necessary for a fair presentation of financial position,
results of operations and cash flow. The results of operations for the
three months ended April 2, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the January 1, 1999 annual report on Form
10-K of the Company.
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
2. EARNINGS PER SHARE
Basic earnings per share are based on the average number of shares
outstanding during each period presented. Diluted earnings per share are
based on the average number of shares outstanding including any dilutive
effects of options, warrants and convertible securities.
3. COMPREHENSIVE INCOME
Total comprehensive income includes net income and foreign currency
translation adjustments. For the first quarter of 1999 and 1998, total
comprehensive income (loss) was $11,208 and ($1,974), respectively.
8
4. INVENTORIES
Inventories are as follows:
April 2, January 1,
1999 1999
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Raw materials $ 8,007 $ 9,016
Work-in-process 4,334 4,053
Finished goods 122,454 125,349
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$ 134,795 $ 138,418
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5. LONG-TERM DEBT
Long-term debt consists of the following:
April 2, January 1,
1999 1999
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Term A Loan $ 195,000 $ 205,000
Term B Loan 123,750 124,000
Revolving Credit Loan 152,750 152,050
Other 18,982 19,382
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490,482 500,432
Less current portion 49,009 46,509
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$ 441,473 $ 453,923
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6. INCOME TAXES
The income tax provision reflects effective tax rates of 10% and 58%
for the three months ended April 2, 1999 and April 3, 1998,
respectively. These rates reflect expected Mexico tax liabilities and
U.S. state and possession taxes based on estimated taxable income in
those jurisdictions. The decrease in effective rate for the first
quarter of 1999 versus 1998 was due to increased levels of pretax
income, which primarily effect the federal tax jurisdiction. No U.S.
federal income tax expense was recorded in the first quarter of 1999
or 1998 due to an offset by a valuation allowance against U.S. federal
deferred tax assets recorded during 1997. The requirement for a valuation
allowance will continue to be reassessed in future reporting periods.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state, local and foreign laws and
regulations relating to the environment and to work places. Laws that
affect or could affect the Company's United States operations include,
among others, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and the Occupational Safety and Health Act.
The Company believes that it is currently in substantial compliance with
such laws and the regulations promulgated thereunder.
The Company is involved in various proceedings relating to environmental
matters. The Company,
9
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.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first quarter of 1999, the Company continued the positive momentum
generated during fiscal year 1998 as it reported record quarterly revenues and
improved profitability. Operating margin continued to improve through increased
capacity utilitization and reductions in transportation and operating costs. Net
income increased for the fourth consecutive quarter versus prior years
comparable quarters. For the remainder of 1999, the Company plans an extensive
roll-out of new products servicing both the commercial and residential markets.
New product lines will be distributed through the Company-operated sales centers
and to the independent distributor and home center channels. In addition, the
Company will continue efforts to reduce costs and streamline operations through
additional manufacturing efficiencies, improved material prices and overall cost
reductions within the Company's value-added cycles.
The following is a discussion of the results of operations for the three months
ended April 2, 1999 compared with the three months ended April 3, 1998 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 1999
ended on April 2, 1999.
NET SALES
Net sales for the first quarter of 1999 increased $14.9 million, or 8.0%, to
$200.7 million from $185.8 million in 1998. The increase was due primarily to
increased sales volume through the Company-operated sales centers, which
increased 13.1% compared to the prior year quarter. Net sales increased 7.7%
through the home center services channel and decreased 11.1% within the
independent distributor channel. First quarter 1998 net sales to independent
distributors included a one time sale of inventories of approximately $3.5
million related to the sale of three remaining American Olean stores. Excluding
this sale of inventories, first quarter 1999 net sales to independent
distributors were comparable to 1998.
GROSS PROFIT
Gross profit for the first quarter of 1999 increased $9.4 million, or 10.8%, to
$96.7 million from $87.3 million in 1998 principally as a result of increased
sales volume. Gross margin increased in the first quarter of 1999 to 48.2% from
47.0% in the first quarter of 1998. The increase was due to higher sales and
lower manufacturing costs.
OPERATING EXPENSES
Operating expenses in the first quarter of 1999 increased $0.9 million, or 1.2%,
to $74.3 million from $73.4 million in the first quarter of 1998. This increase
was due primarily to additional spending related to new product introductions
and higher costs associated with the growth in sales. Operating expenses as a
percent of sales in the first quarter of 1999 improved to 37.0% from 39.5% in
1998. The decrease was due primarily to higher sales and reductions in general
and administrative costs. In addition, transportation costs decreased from 7.8%
of sales to 7.0% due to improvements in inventory positioning and lower freight
rates from carrier consolidation.
11
OPERATING INCOME
Operating income in the first quarter of 1999 increased $8.4 million, or 60.0%,
to $22.4 million from $14.0 million in the first quarter of 1998. Operating
margin improved to 11.2% in the first quarter of 1999 from 7.5% in 1998 due
primarily to higher sales and decreased manufacturing and general and
administrative expenses.
INTEREST EXPENSE (NET)
Interest expense (net) in the first quarter of 1999 decreased $1.4 million, or
12.1%, to $10.2 million from $11.6 million in the first quarter of 1998. This
decrease was due to reduced borrowing requirements on the Company's credit
facility and related reductions in interest rates and fees.
INCOME TAXES
The income tax provision reflects effective tax rates of approximately 10% and
58% for the first quarter of 1999 and 1998, respectively. These rates reflect
expected Mexico tax liabilities and U.S. state and possession taxes based on
estimated taxable income in those jurisdictions. The decrease in effective rate
for the first quarter of 1999 versus 1998 was due to increased levels of pretax
income, which primarily effect the federal tax jurisdiction. No U.S. federal
income tax expense was recorded for the first quarter of 1999 or 1998 due to an
offset by a valuation allowance against U.S. federal deferred tax assets
recorded during 1997. The requirement for a valuation allowance will continue to
be reassessed in future reporting periods.
NET INCOME
Net income in the first quarter of 1999 increased to $11.1 million from $0.8
million in the first quarter of 1998. Net income increased due to higher gross
profit and operating income and reduced interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations and funds available under the Company's bank credit
agreement (the "Third Amended Credit Facility") continue to provide the Company
with liquidity and capital resources for working capital requirements, capital
expenditures and debt service. For the three months ended April 2, 1999, cash
provided by operating activities was $13.2 million compared to $7.5 million for
the same period in 1998. The improvement in operating cash flow was due to
increased profitability compared to the first quarter of 1998.
Net expenditures for property, plant and equipment were $3.8 million for the
first quarter of 1999 compared to cash provided of $3.3 million in the first
quarter of 1998. Net cash provided in 1998 included $8.1 million of net cash
proceeds from the sale of the Lansdale, PA manufacturing facility. Expenditures
for the first quarter of 1999 included costs for multiple projects to improve
manufacturing, distribution and information systems. Capital expenditures during
the remainder of 1999 will be comprised of routine capital improvements and
continued costs to upgrade production capacity, distribution facilities and
information systems.
12
Cash used in financing activities was $9.7 million for the first quarter of
1999, which reflects term debt amortization on the Company's Third Amended
Credit Facility of $10.3 million. Total availability under the Third Amended
Credit Facility as of April 2, 1999 was $82.8 million.
Although the Company believes cash flow from operating activities, together with
borrowings available under the Third Amended Credit Facility, will be sufficient
to fund working capital needs, capital expenditures and debt service
requirements, the Company is constantly pursuing opportunities to improve its
capital structure and may seek alternative financing arrangements.
The peso fluctuation and economic uncertainties in Mexico are not expected to
have a significant impact on the Company's liquidity. Since the Company has no
peso-based borrowings, high interest rates in Mexico are not expected to
directly affect the Company's liquidity. Any future devaluation of the peso
against the U.S. dollar may adversely affect the Company's results of operations
or financial condition.
The Company is involved in various proceedings relating to environmental matters
and is currently engaged in environmental investigation and remediation programs
at certain sites. The Company has provided reserves for remedial investigation
and cleanup activities that the Company has determined to be both probable and
reasonably estimable. The Company is entitled to indemnification with respect to
certain expenditures incurred in connection with such environmental matters and
does not expect that the ultimate liability with respect to such investigation
and remediation activities will have a material adverse effect on the Company's
liquidity and financial condition.
The United States is a party to the General Agreement on Tariffs and Trade
("GATT"). Under GATT, the United States currently imposes import duties on
ceramic tile from non-North American countries at no more than 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 ceramic tile from
Mexico of approximately 12%, although these duties on imports from Mexico are
being phased out ratably under NAFTA by 2008. It is uncertain what ultimate
effect NAFTA will have on the Company's results of operations.
EFFECTS OF INFLATION
The Company believes it has generally been able to increase productivity to
offset increases in costs resulting from inflation in the U.S. and Mexico.
Inflation has not had a material impact on the Company's results of operations
during the three months ended April 2, 1999 and April 3, 1998. However, any
future increases in the inflation rate, and any increases in interest rates
which affect financing costs, may negatively affect the Company's results of
operations.
13
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 recognize a date using "00" as the year 1900
rather than the year 2000. This could cause system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in normal business
activities.
The Company is continuing its efforts to modify and replace certain portions of
its software and equipment so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000 cost
is estimated at approximately $5.4 million and will be expensed as incurred. To
date, the Company has completed the updating of "mission critical" software for
Year 2000 date processing and has implemented these changes into the day-to-day
business systems. In addition, customers, suppliers and carriers have been
required to certify their readiness for Year 2000. Through the end of the first
quarter of 1999, expenses totaling $4.0 million were incurred for Year 2000
activities.
The testing of all "mission critical" software and equipment, including the
testing of interrelationships of all components is estimated to be completed no
later than the second quarter of 1999, which is prior to any anticipated impact
on the Company's operating systems. Less critical activities, including the
upgrade of stand-alone equipment and monitoring of supplier and carrier
progress, will continue for the balance of 1999. 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 in a timely manner, 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. At
present, the Company is preparing a detailed Year 2000 contingency plan. The
contingency plan will include a more definitive risk assessment related to major
customers and suppliers and how the Company plans to mitigate such risk. The
plan is expected to be in place by the end of the third quarter of 1999.
NEW ACCOUNTING PRONOUNCEMENTS
Effective for fiscal year 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
statement requires capitalization of certain costs incurred in the development
of internal-use software, including external direct material and service costs,
employee payroll and payroll-related costs and capitalized interest. Prior to
adoption of SOP 98-
14
1, the Company expensed these costs as incurred. The effect of this change in
accounting principle on earnings in 1999 is not expected to be material.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of SFAS 133 will have a significant effect on earnings or the
financial position of the Company.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Cautionary Statement for purposes of "Safe Harbor Provisions" of the
Private Securities Litigation Reform Act of 1995.
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to risks, uncertainties
and other factors which could cause actual results to differ materially
from future results expressed or implied by such forward looking
statements. Potential risks and uncertainties include, but are not
limited to, the impact of competitive pressures and changing economic
conditions on the Company's business and its dependence on residential
and commercial construction activity, the fact that the Company is
highly leveraged, currency fluctuations and other factors relating to
the Company's foreign manufacturing operations, the impact of pending
reductions in tariffs and custom duties, system integration issues and
environmental laws and other regulations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 - Dal-Tile International Inc. 1999 Employee Stock
Purchase Plan
27.1 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
April 2, 1999.
15
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 10, 1999 /s/ W. Christopher Wellborn
- ------------ -----------------------------------------
Executive Vice President, Chief Financial
Officer and Assistant Secretary
16