10-Q 1 l95334ae10vq.txt DAYTON SUPERIOR CORPORATION 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED COMMISSION FILE NUMBER June 28, 2002 1-11781 DAYTON SUPERIOR CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 31-0676346 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 7777 Washington Village Dr., Suite 130 Dayton, Ohio 45459 ---------------------------------------- ------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 937-428-6360 NOT APPLICABLE -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed from last report) Indicate by 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 --------- --------- ____________ Common Shares were outstanding as of August 9, 2002 PART I. -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS Dayton Superior Corporation and Subsidiaries Condensed Consolidated Balance Sheets As of June 28, 2002 and December 31, 2001 (Amounts in thousands)
(Unaudited) June 28, December 31, 2002 2001 --------------- ----------------- ASSETS Current assets: Cash $ 4,597 $ 4,989 Accounts receivable, net of allowances for doubtful accounts and sales returns and allowances of $6,655 and $7,423 70,338 51,628 Inventories (Note 3) 55,360 47,900 Prepaid expenses and other current assets 7,082 9,637 Prepaid income taxes 1,959 1,225 Future income tax benefits 7,316 7,962 --------------- ----------------- Total current assets 146,652 123,341 --------------- ----------------- Rental equipment, net (Note 3) 67,345 71,323 --------------- ----------------- Property, plant and equipment 103,075 100,052 Less accumulated depreciation (42,157) (39,931) --------------- ----------------- Net property, plant and equipment 60,918 60,121 --------------- ----------------- Goodwill and intangible assets, net of accumulated amortization (Note 3) 117,006 136,626 Other assets 4,268 5,432 --------------- ----------------- Total assets $ 396,189 $ 396,843 --------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt (Note 4) $ 5,485 $ 5,001 Accounts payable 32,311 27,340 Accrued compensation 14,465 19,935 Other accrued liabilities 10,872 14,122 --------------- ----------------- Total current liabilities 63,133 66,398 Long-term debt, net (Note 4) 311,161 286,945 Deferred income taxes 10,167 13,365 Other long-term liabilities 12,158 13,414 --------------- ----------------- Total liabilities 396,619 380,122 --------------- ----------------- Shareholders' equity (deficit): Common shares 102,083 102,044 Loans to shareholders (2,945) (3,030) Treasury shares, at cost, 33,697 and 29,288 shares in 2002 and 2001, respectively (1,167) (979) Cumulative other comprehensive loss (416) (589) Accumulated deficit (97,985) (80,725) --------------- ----------------- Total shareholders' equity (deficit) (430) 16,721 --------------- ----------------- Total liabilities and shareholders' equity (deficit) $ 396,189 $ 396,843 =============== =================
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 2 Dayton Superior Corporation and Subsidiaries Condensed Consolidated Statements of Operations For The Three and Six Fiscal Months Ended June 28, 2002 and June 29, 2001 (Amounts in thousands) (Unaudited)
Three Fiscal Months Ended Six Fiscal Months Ended ----------------------------- ------------------------------ June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ------------ ------------ ------------- ------------- Net sales $ 106,506 $ 111,064 $ 185,008 $ 194,421 Cost of sales 69,919 69,610 121,904 125,950 ------------ ------------ ------------- ------------- Gross profit 36,587 41,454 63,104 68,471 Selling, general and administrative expenses 22,788 25,756 46,016 51,786 Facility closing and severance expenses (Note 7) 453 3,320 574 3,320 Amortization of goodwill and intangibles 78 1,054 151 1,991 ------------ ------------ ------------- ------------- Income from operations 13,268 11,324 16,363 11,374 Other expenses Interest expense 8,407 8,959 16,413 17,744 Other expense, net 45 (6) 150 4 ------------ ------------ ------------- ------------- Income (loss) before provision (benefit) for income taxes 4,816 2,371 (200) (6,374) Provision (benefit) for income taxes 1,926 1,126 (80) (3,028) ------------ ------------ ------------- ------------- Net income (loss) before cumulative effect of change in accounting principle 2,890 1,245 (120) (3,346) Cumulative effect of change in accounting principle, net of income tax benefit of $2,754 (Note 3) - - (17,140) - ------------ ------------ ------------- ------------- Net income (loss) $ 2,890 $ 1,245 $ (17,260) $ (3,346) ------------ ------------ ------------- -------------
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 3 Dayton Superior Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows For The Six Fiscal Months Ended June 28, 2002 and June 29, 2001 (Amounts in thousands) (Unaudited)
June 28, June 29, 2002 2001 ---------------- ---------------- Cash Flows From Operating Activities: Net loss $ (17,260) $ (3,346) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 10,004 10,035 Amortization of goodwill and intangibles 151 1,991 Cumulative effect of change in accounting principle (Note 3) 17,140 - Deferred income taxes 202 (1,148) Amortization of deferred financing costs and debt discount 1,150 1,066 Gain on sales of rental equipment and property, plant and equipment (7,959) (4,950) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (18,711) (14,273) Inventories (7,460) (4,045) Accounts payable 4,971 6,283 Accrued liabilities and other long-term liabilities (10,237) (2,386) Other, net 2,474 (907) ---------------- ---------------- Net cash used in operating activities (25,535) (11,680) ---------------- ---------------- Cash Flows From Investing Activities: Property, plant and equipment additions (6,518) (4,383) Proceeds from sales of fixed assets 1,888 - Rental equipment additions (6,022) (10,312) Proceeds from sales of rental equipment 11,426 7,908 Acquisitions (Note 2) - (40,163) ---------------- ---------------- Net cash provided by (used in) investing activities 774 (46,950) ---------------- ---------------- Cash Flows From Financing Activities: Repayments of long-term debt (1,686) (30,024) Issuance of long-term debt 25,944 85,925 Purchase of treasury shares (188) (734) Repayment of loans to shareholders 85 - Issuance of common shares, net of issuance costs 39 5,371 Financing costs incurred - (741) ---------------- ---------------- Net cash provided by financing activities 24,194 59,797 ---------------- ---------------- Effect of Exchange Rate Changes on Cash 175 (60) ---------------- ---------------- Net increase (decrease) in cash (392) 1,107 Cash, beginning of period 4,989 1,782 ---------------- ---------------- Cash, end of period $ 4,597 $ 2,889 ================ ================ Supplemental Disclosures: Cash paid (refunded) for income taxes, net $ 355 $ (3,351) Cash paid for interest 15,557 16,486 Issuance of common shares in conjunction with acquisition - 2,842 Issuance of common shares and loans to shareholders - 309
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 4 Dayton Superior Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss) For The Three and Six Fiscal Months Ended June 28, 2002 and June 29, 2001 (Amounts in thousands) (Unaudited)
Three Fiscal Months Six Fiscal Months Ended Ended ------------------------------- ----------------------------- June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ------------- --------------- ------------- -------------- Net income (loss) $2,890 $1,245 $(17,260) $(3,346) Other comprehensive income (loss): Foreign currency translation adjustment 128 55 175 (60) ------------- --------------- ------------- -------------- Comprehensive income (loss) $3,018 $1,300 $(17,085) $(3,406) ============= =============== ============= ==============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 5 DAYTON SUPERIOR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 28, 2002 AND JUNE 29, 2001 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) (1) CONSOLIDATED FINANCIAL STATEMENTS The interim consolidated financial statements included herein have been prepared by the Company, without audit, and include, in the opinion of management, all adjustments necessary to state fairly the information set forth therein. Any such adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these unaudited consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual financial statements for the year ended December 31, 2001. (2) ACQUISITIONS (a) AnconCCL Inc.--On June 19, 2001, the Company acquired the stock of AnconCCL Inc., dba BarLock ("BarLock"), for approximately $9,900 in cash, including acquisition costs. The payment was funded through the Company's credit facility. The business is being operated as part of the Company's concrete accessories business. The acquisition has been accounted for as a purchase, and the results of BarLock have been included in the accompanying financial statements since the date of acquisition. The purchase price has been allocated based on the fair values of the assets acquired (approximately $10,800, including goodwill of $7,100) and liabilities assumed (approximately $900). Pro forma financial information is not required as this was not a significant acquisition. (b) Aztec Concrete Accessories, Inc.--On January 4, 2001, the Company acquired the stock of Aztec Concrete Accessories, Inc. ("Aztec") for approximately $32,800, including acquisition costs. The payment of the purchase price consisted of cash of approximately $29,900 and 105,263 common shares valued at approximately $2,900. The cash portion was funded through the issuance of 189,629 common shares valued at approximately $5,100 to Odyssey Investment Partners, LLC ("Odyssey"), and an increase of approximately $24,800 to the credit facility. The business is being operated as part of the Company's concrete accessories business. 6 The acquisition has been accounted for as a purchase, and the results of Aztec have been included in the accompanying consolidated financial statements since the date of acquisition. The purchase price has been allocated based on the fair values of the assets acquired (approximately $44,000, including goodwill of approximately $35,400) and liabilities assumed (approximately $11,200, including a deferred compensation liability of approximately $7,700). Pro forma financial information is not required as this was not a significant acquisition. (3) ACCOUNTING POLICIES The interim consolidated financial statements have been prepared in accordance with the accounting policies described in the notes to the Company's consolidated financial statements for the year ended December 31, 2001. While management believes that the procedures followed in the preparation of interim financial information are reasonable, the accuracy of some estimated amounts is dependent upon facts that will exist or calculations that will be made at year end. Examples of such estimates include changes in the deferred tax accounts and management bonuses. Any adjustments pursuant to such estimates during the fiscal quarter were of a normal recurring nature. (a) Fiscal Quarter--The Company's fiscal year end is December 31. The Company's fiscal quarters are defined as the periods ending on the Friday nearest to the end of March, June and September. (b) Inventories--The Company values all inventories at the lower of first-in, first-out ("FIFO") cost or market. The Company provides net realizable value reserves which reflect the Company's best estimate of the excess of the cost of potential obsolete and slow moving inventory over the expected net realizable value. Following is a summary of the components of inventories as of June 28, 2002, and December 31, 2001:
June 28, December 31, 2002 2001 ---------------- ------------- Raw materials $ 14,091 $ 11,581 Work in progress 4,973 3,624 Finished goods and work in progress 38,105 34,639 ---------------- ------------- 57,169 49,844 Net realizable value reserve (1,809) (1,944) ---------------- ------------- $ 55,360 $ 47,900 ================ =============
(c) Rental Equipment--Rental equipment is manufactured or purchased by the Company for resale and for rent to others on a short-term basis. Rental equipment is recorded at the lower of FIFO cost or market and is depreciated over the estimated useful life of the equipment, three to fifteen years, on a straight-line basis. The balances as of June 28, 2002 and December 31, 2001 are net of accumulated depreciation of $23,064 and $20,002, respectively. Rental revenues and cost of sales associated with rental revenue are as follows: 7
Three Fiscal Months Six Fiscal Months Ended Ended ----------------------- ----------------------- June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ----------- --------- ---------- ---------- Rental revenue $10,685 $13,068 $21,516 $25,273 Cost of sales 3,360 2,508 6,698 6,984 ---------- --------- ---------- ---------- Gross profit $ 7,325 $10,560 $14,818 $18,289 ========== ========= ========== ==========
Effective January 1, 2002, the Company changed its accounting estimates relating to the depreciable life of a portion of its rental fleet. The change was based upon a study performed by the Company that showed that the useful life of certain items within the rental fleet was shorter than the fifteen-year life previously assigned. The study showed that a three-year life was more appropriate based upon the nature of these products. These products include smaller hardware and accessories that accompany steel forms and the recently introduced European forming systems. As a result of the change, the Company recorded incremental depreciation of approximately $1,000 in the three months ended June 28, 2002 and approximately $2,100 in the first six months of 2002, which is reflected in cost of goods sold in the accompanying June 28, 2002 consolidated statement of operations. Effective January 1, 2001, the Company changed its accounting estimates relating to the depreciable life of a portion of its rental fleet. The change was based upon a study performed by the Company that showed that the renovation of the plywood surface of certain products within the rental fleet extended the useful life beyond normal repair and maintenance. Accordingly, the Company began capitalizing rather than expensing these renovation related expenditures. Simultaneously, the useful lives of the plywood surface was reduced from fifteen years to three years to match the useful life of the renovation. As a result of the change, the Company recorded incremental depreciation of approximately $2,300 in the six months ended June 29, 2001, which is reflected in cost of goods sold in the accompanying June 28, 2001 consolidated statement of operations. (d) New Accounting Pronouncements--In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 revises the accounting for future business combinations to only allow the purchase method of accounting. In addition, the two statements preclude amortization of goodwill for periods beginning after December 15, 2001. Instead, an annual review of the recoverability of the goodwill and intangible assets is required. Certain other intangible assets continue to be amortized over their estimated useful lives. The Company adopted SFAS No. 142 effective January 1, 2002. As a result of adopting SFAS No. 142, the Company recorded a non-cash charge in the first quarter of 2002 of $17,140 ($19,894 of goodwill, less an income tax benefit of $2,754), which is reflected as a cumulative effect of change in accounting principle. This amount does not affect the Company's ongoing operations. The goodwill arose from the acquisitions of Dur-O-Wal in 1995, Southern Construction Products in 1999, and Polytite in 2000, all of which manufacture and sell metal accessories used in 8 masonry construction. The masonry products market has experienced weaker markets and significant price competition, which has had a negative impact on the product line's earnings and fair value. The following is a reconciliation from reported net income/(loss) to net income/(loss) adjusted for the amortization of goodwill:
Three Fiscal Months Six Fiscal Months Ended Ended -------------------------- -------------------------- June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ----------- ---------- ---------- ---------- Net income (loss) before cumulative effect of change in accounting principle, as reported $2,890 $ 1,245 $ (120) $(3,346) Amortization of goodwill, net of tax benefit - 933 - 1,688 --------- --------- --------- --------- Net income (loss) before cumulative effect of change in accounting principle, as adjusted $2,890 $ 2,178 $ (120) $(1,658) ========= ========= ========= =========
(e) Reclassifications--Certain reclassifications have been made to the 2001 amounts to conform to their 2002 classifications. (4) CREDIT ARRANGEMENTS Following is a summary of the Company's long-term debt as of June 28, 2002 and December 31, 2001:
June 28, December 31, 2002 2001 ------------- -------------- Revolving credit facility, weighted average interest rate of 5.2% $ 27,925 $ 2,000 Acquisition credit facility, weighted average interest rate of 4.7% 9,250 9,250 Term Loan Tranche A, weighted average interest rate of 4.8% 21,053 22,161 Term Loan Tranche B, weighted average interest rate of 5.2% 98,008 98,500 Senior Subordinated Notes, interest rate of 13.0% 170,000 170,000 Debt discount on Senior Subordinated Notes (10,836) (11,297) Debentures previously held by Dayton Superior Capital Trust, interest rate of 9.1%, due on demand 1,144 1,214 City of Parsons, Kansas Economic Development Loan, interest rate of 7.0% 102 118 ------------ ----------- Total long-term debt 316,646 291,946 Less current maturities (5,485) (5,001) ------------ ----------- Long-term portion $ 311,161 $ 286,945 ============ ===========
As of June 28, 2002, the Company's credit facility consisted of (i) a $50,000 revolving credit facility maturing June 2006, (ii) a $30,000 acquisition facility, converting from revolving loans into term loans three years from the closing and maturing June 2006 and (iii) term loan facilities in an aggregate principal amount of $122,000, consisting of a $23,500 tranche A facility maturing June 2006 and a $98,500 tranche B facility maturing June 2008. 9 The credit facility provides that the Company will repay (i) the tranche A facility in quarterly installments commencing March 2002, (ii) the tranche B facility in quarterly installments, commencing March 2002 and (iii) the acquisition facility, in equal quarterly installments commencing in June 2004. The credit facility has several interest rate options, which reprice on a short-term basis. At June 28, 2002, the Company had outstanding letters of credit of approximately $6,300, and the Company had available borrowings of approximately $15,800 under its revolving credit facility. The average borrowings, maximum borrowings, and weighted average interest rates on the revolving credit facility and its predecessor for the periods indicated were as follows:
Three Fiscal Months Six Fiscal Months Ended Ended ------------------------ -------------------- June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ----------- ----------- ---------- -------- Revolving Credit Facility: Average borrowing $19,713 $15,323 $14,448 $13,376 Maximum borrowing 29,275 26,425 29,275 26,425 Weighted average interest rate 5.8% 9.1% 6.5% 9.6%
The credit facility contains certain restrictive covenants, which require that, among other things, the Company maintain a minimum interest coverage ratio, not exceed a certain leverage ratio, maintain a minimum EBITDA, as defined, and limit its capital expenditures. The Company was in compliance with its loan covenants as of June 28, 2002. The Senior Subordinated Notes (the "Notes") have a principal amount of $170,000 and mature in June 2009. The Notes were issued at a discount, which is being accreted to the face value using the effective interest method and is reflected as interest expense. The Notes were issued with warrants that allow the holder to purchase 117,276 of the Company's Common Shares for $0.01 per share. The Company's wholly-owned domestic subsidiaries (Aztec Concrete Accessories, Inc.; Trevecca Holdings, Inc.; Dayton Superior Specialty Chemical Corp.; Symons Corporation; and Dur-O-Wal, Inc.) have guaranteed the Notes. The wholly-owned foreign subsidiaries of the Company are not guarantors of the Notes and do not have any credit arrangements senior to the Notes. Following are the supplemental consolidating condensed balance sheets as of June 28, 2002 and December 31, 2001, as well as the supplemental consolidating condensed statements of operations for the three and six fiscal months ended June 28, 2002 and June 29, 2001 and cash flows for the six fiscal months ended June 28, 2002 and June 29, 2001. 10 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Balance Sheet As of June 28, 2002
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Eliminations Consolidated ------------- -------------- --------------- -------------- ------------- ASSETS Cash $ 4,791 $ (1,184) $ 990 $ - $ 4,597 Accounts receivable, net 36,540 32,185 1,613 - 70,338 Inventories 27,916 26,507 937 - 55,360 Intercompany 64,511 (64,318) (193) - - Other current assets 8,547 7,642 168 - 16,357 ----------- ------------ ------------ ------------- ------------- TOTAL CURRENT ASSETS 142,305 832 3,515 - 146,652 Rental, net 5,997 61,293 55 - 67,345 Property, plant and equipment, net 25,843 34,878 197 - 60,918 Investment in subsidiaries 123,041 - - (123,041) - Other assets 55,428 65,846 - - 121,274 ----------- ------------ ------------ ------------- ------------- TOTAL ASSETS $352,614 $ 162,849 $3,767 $(123,041) $396,189 =========== ============ ============ ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current maturities of long-term debt $ 5,485 $ - $ - $ - $ 5,485 Accounts payable 15,360 16,550 401 - 32,311 Accrued liabilities 15,430 9,701 206 - 25,337 ----------- ------------ ------------ ------------- ------------- TOTAL CURRENT LIABILITIES 36,275 26,251 607 - 63,133 Long-term debt, net 311,161 - - - 311,161 Other long-term liabilities 1,505 20,625 195 - 22,325 Total shareholders' equity (deficit) 3,673 115,973 2,965 (123,041) (430) ----------- ------------ ------------ ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $352,614 $ 162,849 $3,767 $(123,041) $396,189 =========== ============ ============ ============= =============
11 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Balance Sheet As of December 31, 2001
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Eliminations Consolidated ------------- -------------- --------------- -------------- ------------ ASSETS Cash $ 2,714 $ 832 $1,443 $ - $ 4,989 Accounts receivable, net 20,014 30,516 1,098 51,628 Inventories 23,030 23,925 945 - 47,900 Intercompany 58,692 (58,584) (108) - - Other current assets 9,046 9,594 184 - 18,824 ------------ ------------- ------------- ------------ ------------ TOTAL CURRENT ASSETS 113,496 6,283 3,562 - 123,341 Rental equipment, net 6,256 65,009 58 - 71,323 Property, plant and equipment, net 23,708 36,222 191 - 60,121 Investment in subsidiaries 122,864 - - (122,864) - Other assets 55,899 86,159 - - 142,058 ------------ ------------- ------------- ------------ ------------ TOTAL ASSETS $322,223 $193,673 $3,811 $(122,864) $396,843 ============ ============= ============= ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current maturities of long-term debt $ 5,001 $ - $ - $ - $ 5,001 Accounts payable 12,579 14,548 213 - 27,340 Accrued liabilities 20,004 13,742 311 - 34,057 ------------ ------------- ------------- ------------ ------------ TOTAL CURRENT LIABILITIES 37,584 28,290 524 - 66,398 Long-term debt, net 286,945 - - - 286,945 Other long-term liabilities 4,461 22,132 186 - 26,779 Total shareholders' equity (deficit) (6,767) 143,251 3,101 (122,864) 16,721 ------------ ------------- ------------- ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $322,223 $193,673 $3,811 $(122,864) $396,843 ============ ============= ============= ============ ============
12 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Statement of Operations Three Fiscal Months Ended June 28, 2002
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ------------- -------------- --------------- -------------- Net sales $47,256 $57,594 $1,656 $106,506 Cost of sales 28,868 40,203 848 69,919 ---------- ----------- ---------- ----------- Gross profit 18,388 17,391 808 36,587 Selling, general and administrative expenses 10,049 12,378 361 22,788 Facility closing and severance expenses 364 89 - 453 Amortization of goodwill and intangibles 73 5 - 78 Management fees (75) - 75 - ---------- ----------- ---------- ----------- Income (loss) from operations 7,977 4,919 372 13,268 Other expenses Interest expense 8,207 200 - 8,407 Other expense (income), net 187 (78) (64) 45 ---------- ----------- ---------- ----------- Income (loss) before provision (benefit) for income taxes (417) 4,797 436 4,816 Provision (benefit) for income taxes (167) 1,919 174 1,926 ---------- ----------- ---------- ----------- Net loss $ (250) $ 2,878 $ 262 $ 2,890 ========== =========== ========== ===========
13 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Statement of Operations Three Fiscal Months Ended June 29, 2001
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ------------- -------------- --------------- -------------- Net sales $ 53,705 $54,575 $2,784 $111,064 Cost of sales 35,260 32,571 1,779 69,610 ---------- ---------- ----------- ----------- Gross profit 18,445 22,004 1,005 41,454 Selling, general and administrative expenses 10,126 15,139 491 25,756 Facility closing and severance expenses 1,935 1,385 - 3,320 Amortization of goodwill and intangibles 454 600 - 1,054 Management fees (110) - 110 - ---------- ---------- ----------- ----------- Income (loss) from operations 6,040 4,880 404 11,324 Other expenses Interest expense 8,777 182 - 8,959 Other expense (income), net (9) 2 1 (6) ---------- ---------- ----------- ----------- Income (loss) before provision (benefit) for income taxes (2,728) 4,696 403 2,371 Provision (benefit) for income taxes (1,299) 2,229 196 1,126 ---------- ---------- ----------- ----------- Net Income (loss) $(1,429) $ 2,467 $ 207 $ 1,245 ========== ========== =========== ===========
14 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Statement of Operations Six Fiscal Months Ended June 28, 2002
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ------------- -------------- --------------- -------------- Net sales $78,150 $104,184 $2,674 $185,008 Cost of sales 47,389 73,126 1,389 121,904 ---------- ----------- ---------- ----------- Gross profit 30,761 31,058 1,285 63,104 Selling, general and administrative expenses 20,349 24,901 766 46,016 Facility closing and severance expenses 485 89 - 574 Amortization of goodwill and intangibles 141 10 - 151 Management fees (150) - 150 - ---------- ----------- ---------- ----------- Income from operations 9,936 6,058 369 16,363 Other expenses Interest expense 16,087 326 - 16,413 Other expense, net 109 12 29 150 ---------- ----------- ---------- ----------- Income (loss) before provision (benefit) for income taxes (6,260) 5,720 340 (200) Provision (benefit) for income taxes (2,504) 2,288 136 (80) ---------- ----------- ---------- ----------- Net Income (loss) before cumulative effect of change in accounting principle (3,756) 3,432 204 (120) Cumulative effect of change in accounting principle, net of income tax benefit of $2,754 - (17,140) - (17,140) ---------- ----------- ---------- ----------- Net income (loss) $(3,756) $(13,708) $204 $(17,260) ========== =========== ========== ===========
15 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Statement of Operations Six Fiscal Months Ended June 29, 2001
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ------------- -------------- --------------- -------------- Net sales $ 93,483 $96,488 $4,450 $194,421 Cost of sales 61,839 61,289 2,822 125,950 ---------- ----------- ----------- ----------- Gross profit 31,644 35,199 1,628 68,471 Selling, general and administrative expenses 20,015 30,891 880 51,786 Facility closing and severance expenses 1,935 1,385 - 3,320 Amortization of goodwill and intangibles 913 1,078 - 1,991 Management fees (150) - 150 - ---------- ----------- ----------- ----------- Income from operations 8,931 1,845 598 11,374 Other expenses Interest expense 17,418 326 - 17,744 Other expense (income), net (3) 7 - 4 ---------- ----------- ----------- ----------- Income (loss) before provision (benefit) for income taxes (8,484) 1,512 598 (6,374) Provision (benefit) for income taxes (4,030) 718 284 (3,028) ---------- ----------- ----------- ----------- Net income (loss) $(4,454) $ 794 $ 314 $(3,346) ========== =========== =========== ===========
16 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Statement of Cash Flows Six Fiscal Months Ended June 28, 2002
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ------------- -------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (3,756) $(13,708) $ 204 $(17,260) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 3,614 7,667 24 11,305 Cumulative effect of change in accounting principle - 17,140 - 17,140 Deferred income taxes 202 - - 202 Gain on sales of rental equipment and fixed assets (675) (7,274) (10) (7,959) Change in assets and liabilities (12,315) (15,735) (913) (28,963) ----------- ----------- ----------- ------------ Net cash used in operating activities (12,930) (11,910) (695) (25,535) ----------- ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (4,408) (2,081) (29) (6,518) Proceeds from sales of fixed assets 1,036 852 - 1,888 Rental equipment additions (346) (5,670) (6) (6,022) Proceeds from sales of rental equipment 350 11,059 17 11,426 ----------- ----------- ----------- ------------ Net cash provided by (used in) investing activities (3,368) 4,160 (18) 774 ----------- ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt, net 24,258 - - 24,258 Redemption of Class A common shares and purchase of treasury shares (188) - - (188) Repayment of loans to shareholders 85 - - 85 Issuance of common shares 39 - - 39 Intercompany (5,819) 5,734 85 - ----------- ----------- ----------- ------------ Net cash provided by financing activities 18,375 5,734 85 24,194 ----------- ----------- ----------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH - - 175 175 ----------- ----------- ----------- ------------ Net increase (decrease) in cash 2,077 (2,016) (453) (392) CASH, beginning of period 2,714 832 1,443 4,989 ----------- ----------- ----------- ------------ CASH, end of period $ 4,791 $ (1,184) $ 990 $ 4,597 =========== =========== =========== ============
17 Dayton Superior Corporation And Subsidiaries Supplemental Consolidating Condensed Statement of Cash Flows Six Fiscal Months Ended June 29, 2001
Dayton Superior Guarantor Non Guarantor Corporation Subsidiaries Subsidiaries Consolidated ------------- ------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (4,454) $ 794 $ 314 $ (3,346) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,178 8,891 23 13,092 Deferred income taxes (1,148) - - (1,148) Gain on sales of rental equipment and fixed assets (307) (4,584) (59) (4,950) Change in assets and liabilities, net of the effects of acquisitions (16,022) 3,059 (2,365) (15,328) ----------- ------------ ---------- ----------- Net cash provided by (used in) operating activities (17,753) 8,160 (2,087) (11,680) ----------- ------------ ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions (1,560) (2,802) (21) (4,383) Rental equipment additions (759) (9,514) (39) (10,312) Proceeds from sale of rental equipment 727 7,065 116 7,908 Acquisitions, net (40,163) - - (40,163) ----------- ------------ ---------- ----------- Net cash provided by (used in) investing activities (41,755) (5,251) 56 (46,950) ----------- ------------ ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt, net 55,901 - - 55,901 Purchase of treasury shares (734) - - (734) Issuance of common shares 5,371 - - 5,371 Financing costs incurred (741) - - (741) Intercompany (1,783) (59) 1,842 - ----------- ------------ ---------- ----------- Net cash provided by (used in) financing activities 58,014 (59) 1,842 59,797 ----------- ------------ ---------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (60) (60) ----------- ------------ ---------- ----------- Net increase (decrease) in cash (1,494) 2,850 (249) 1,107 CASH, beginning of period 1,603 (825) 1,004 1,782 ----------- ------------ ---------- ----------- CASH, end of period $ 109 $ 2,025 $ 755 $ 2,889 =========== ============ ========== ===========
18 (5) STOCK OPTION PLANS The Company has a stock option plan, which provides for an option exercise price equal to the stock's market price on the date of grant. The options are accounted for under APB Opinion No. 25, under which no compensation costs have been recognized. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) for the three and six fiscal months ended June 28, 2002 and June 29, 2001 would have been reduced to the following pro forma amounts:
Three Fiscal Months Six Fiscal Months Ended Ended ------------------------ -------------------------- June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ------------ ---------- ------------ ------------ Net income (loss) As Reported $2,890 $1,245 $(17,260) $(3,346) Pro Forma 2,844 1,061 (17,357) (3,725)
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the activity of the Company's stock option plans for the six fiscal months ended June 28, 2002 is presented in the table below:
Weighted Average Number of Exercise Price Shares Per Share ------------- ----------------- Outstanding at December 31, 2001 541,258 $ 24.17 Granted 7,839 27.50 Exercised (3,050) 2.29 Cancelled (4,865) 24.08 ------------- ----------------- Outstanding at June 28, 2002 541,182 $ 24.34 ============= =================
(6) SEGMENT REPORTING The Company operates in three segments: concrete accessories, concrete forming systems, and paving products. The segments are differentiated by their products and services, all of which serve the construction industry. Sales between segments are recorded at normal selling price by the selling division and at cost for the buying division, with the profit recorded as an intersegment elimination. Segment assets include accounts receivable; inventories; property, plant, and equipment; rental equipment; and an allocation of goodwill. Corporate and unallocated assets include cash, prepaid income taxes, future tax benefits, and financing costs. Export sales and sales by non-U.S. affiliates are not significant. 19 Information about the income (loss) of each segment and the reconciliations to the consolidated amounts for the three and six fiscal months ended June 28, 2002 and June 29, 2001 follows:
Three Fiscal Months Six Fiscal Months Ended Ended ------------------------- ------------------------ June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Concrete Accessories $ 57,337 $ 61,341 $ 103,503 $ 109,890 Concrete Forming Systems 30,211 34,846 55,149 59,807 Paving Products 18,958 14,877 26,356 24,724 ---------- ---------- ---------- ---------- Net sales to external customers $ 106,506 $ 111,064 $ 185,008 $ 194,421 ========== ========== ========== ========== Concrete Accessories $ 1,480 $ 1,467 $ 2,638 $ 2,565 Concrete Forming Systems 2,312 2,132 4,022 3,430 Paving Products 695 878 1,195 1,295 ---------- ---------- ---------- ---------- Net sales to other segments $ 4,487 $ 4,477 $ 7,855 $ 7,290 ========== ========== ========== ========== Concrete Accessories $ 10,155 $ 7,471 $ 14,739 $ 11,835 Concrete Forming Systems 4,590 5,780 6,083 4,135 Paving Products 2,711 2,355 2,664 2,634 Corporate (1,609) (1,650) (3,070) (3,238) Intersegment Eliminations (2,579) (2,632) (4,053) (3,992) ---------- ---------- ---------- ---------- Income from operations $ 13,268 $ 11,324 $ 16,363 $ 11,374 ========== ========== ========== ========== Concrete Accessories $ 2,734 $ 3,277 $ 5,518 $ 6,438 Concrete Forming Systems 4,676 4,967 9,181 9,980 Paving Products 997 715 1,714 1,326 ---------- ---------- ---------- ---------- Interest expense $ 8,407 $ 8,959 $ 16,413 $ 17,744 ========== ========== ========== ========== Concrete Accessories $ 7,311 $ 4,200 $ 9,079 $ 5,393 Concrete Forming Systems (21) 813 (3,111) (5,845) Paving Products 1,714 1,640 955 1,308 Corporate (1,609) (1,650) (3,070) (3,238) Intersegment Eliminations (2,579) (2,632) (4,053) (3,992) ---------- ---------- ---------- ---------- Income (loss) before income taxes $ 4,816 $ 2,371 $ (200) $ (6,374) ========== ========== ========== ========== Concrete Accessories $ 1,037 $ 1,326 $ 2,244 $ 2,608 Concrete Forming Systems 3,509 2,309 6,924 6,763 Paving Products 365 275 708 549 Corporate 73 53 128 115 ---------- ---------- ---------- ---------- Depreciation $ 4,984 $ 3,963 $ 10,004 $ 10,035 ========== ========== ========== ========== Concrete Accessories $ 23 $ 862 $ 83 $ 1,688 Concrete Forming Systems 10 148 10 210 Paving Products 45 44 58 93 ---------- ---------- ---------- ---------- Amortization of goodwill and intangibles $ 78 $ 1,054 $ 151 $ 1,991 ========== ========== ========== ==========
20 Information regarding capital expenditures by segment and the reconciliation to the consolidated amounts for the three and six fiscal months ended June 28, 2002 and June 29, 2001 is as follows:
Three Fiscal Months Six Fiscal Months Ended Ended --------------------- --------------------- June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ---------- --------- ---------- --------- Concrete Accessories $ 1,386 $ 1,460 $ 2,135 $ 2,481 Concrete Forming Systems 417 685 1,333 1,295 Paving Products 822 283 3,004 485 Corporate 46 122 46 122 -------- -------- -------- -------- Property, Plant and Equipment Additions $ 2,671 $ 2,550 $ 6,518 $ 4,383 ======== ======== ======== ======== Concrete Accessories $ 166 $ 483 $ 426 $ 812 Concrete Forming Systems 1,598 4,685 5,596 9,500 -------- -------- -------- -------- Rental Equipment Additions $ 1,764 $ 5,168 $ 6,022 $10,312 ======== ======== ======== ========
Information regarding each segment's assets and the reconciliation to the consolidated amounts as of June 28, 2002 and December 31, 2001 is as follows:
As of ------------------------ June 28, December 31, 2002 2001 --------- ----------- Concrete Accessories $191,720 $212,008 Concrete Forming Systems 134,230 135,302 Paving Products 41,843 24,858 Corporate and Unallocated 28,396 24,675 --------- ---------- Total Assets $396,189 $396,843 ========= ==========
21 (7) FACILITY CLOSING AND SEVERANCE EXPENSES During the second quarter of 2002, the Company approved and began implementing plans to exit one of its distribution facilities and to reduce overall Company headcount in order to keep its cost structure in alignment with its net sales. The total anticipated cost of the facility closure and severance was $440, and was to encompass approximately eight employee terminations. The total estimated exit costs are comprised of approximately $190 related to employee involuntary termination benefits, approximately $220 related to lease termination costs, and approximately $30 related to other post-closing maintenance costs. Accordingly, the Company recorded a facility closing and severance expense of approximately $440 in the second quarter of 2002. Of the amounts accruable at the time of the plan's approval, approximately $334 is included in "Other Accrued Liabilities" in the accompanying June 28, 2002 consolidated balance sheet. At the end of the second quarter of 2002, plans were also being developed to further reduce employee headcount throughout the Company. Since these plans were not yet fully developed, no facility closing and severance costs were reflected at the end of the second quarter of 2002, but these will be reflected in the third quarter results for 2002. During 2001, the Company approved and began implementing two plans to exit certain manufacturing and distribution facilities and to reduce overall Company headcount. As a result of the continued implementation of the plans, the Company has incurred $134 of facility closing and severance expense in 2002, which is related primarily to facility relocation activities. Of the amounts accruable at the time of the plans' approval, approximately $1,102 is included in "Other Accrued Liabilities" in the accompanying June 28, 2002 consolidated balance sheet. Below is a summary of the amounts charged against the facility closing and severance reserves in 2002:
Six Fiscal Months Ended June 28, 2002 --------------- Balance at December 31, 2001 $2,900 Facility Closing and Severance Expense 574 Items Charged Against Reserve: Involuntary Termination Costs (901) Lease Termination Costs (295) Other Post-Closing Costs (842) ------------- Balance at June 28, 2002 $1,436 =============
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We believe we are the largest North American manufacturer and distributor of metal accessories and forms used in concrete construction and of metal accessories used in masonry construction. Although almost all of our products are used in concrete or masonry construction, the function and nature of the products differ widely. As of June 28, 2002, we have three principal operating divisions, which are organized around the following product lines: - Concrete Accessories; - Concrete Forming Systems; and - Paving Products. ACQUISITIONS We have completed and integrated two acquisitions since the beginning of 2001. These acquisitions are summarized in the following table:
Purchase Price Date Business Acquired Division (In millions) ---- ----------------- -------- ------------- January 2001 Aztec Concrete Accessories Concrete Accessories $32.8 June 2001 BarLock Concrete Accessories 9.9
23 RESULTS OF OPERATIONS The following table summarizes our results of operations as a percentage of net sales.
Three Fiscal Months Six Fiscal Months Ended Ended June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ---------- ---------- --------- --------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 65.6 62.7 65.9 64.8 ---------- ---------- --------- --------- Gross profit 34.4 37.3 34.1 35.2 Selling, general and administrative expenses 21.4 23.2 24.9 26.6 Facility closing and severance expenses 0.4 3.0 0.3 1.7 Amortization of goodwill and intangibles 0.1 0.9 0.1 1.0 ---------- ---------- --------- --------- Income from operations 12.5 10.2 8.8 5.9 Interest expense, net 7.9 8.1 8.8 9.1 Other expense, net 0.1 - 0.1 0.1 ---------- ---------- --------- --------- Income (loss) before provision (benefit) for income taxes 4.5 2.1 (0.1) (3.3) Provision (benefit) for income taxes 1.8 1.0 - (1.6) ---------- ---------- --------- --------- Net before cumulative effect of change in accounting principle 2.7 1.1 (0.1) (1.7) Cumulative effect of change in accounting principle - - (9.2) - ---------- ---------- --------- --------- Net loss 2.7% 1.1% (9.3)% (1.7)% ========== ========== ========= =========
COMPARISON OF THREE FISCAL MONTHS ENDED JUNE 28, 2002 AND JUNE 29, 2001 NET SALES Net sales decreased $4.6 million, or 4.1%, to $106.5 million in the second quarter of 2002 from $111.1 million in the second quarter of 2001. The following table summarizes net sales by segment:
Three Fiscal Months Ended ------------------------------------------------------- June 28, 2002 June 29, 2001 -------------------------- -------------------------- (In thousands) Net Sales % Net Sales % % Change ------------- --------- ------------ --------- ----------- Concrete accessories $ 58,817 55.2% $ 62,808 56.5% (6.4)% Concrete forming systems 32,523 30.5 36,978 33.3 (12.0) Paving products 19,653 18.5 15,755 14.2 24.7 Intersegment eliminations (4,487) (4.2) (4,477) (4.0) 0.2 ------------- --------- ------------ --------- Net sales $106,506 100.0% $111,064 100.0% (4.1)% ============= ========= ============ =========
24 Net sales of concrete accessories decreased $4.0 million, or 6.4%, to $58.8 million in the second quarter of 2002 from $62.8 million in the second quarter of 2001. This was due to unfavorable volume and pricing as the concrete accessories markets were weaker in the second quarter of 2002 compared to 2001. This was partially offset by increased sales as a result of the BarLock acquisition, which contributed $1.4 million. Net sales of concrete forming systems decreased 12.0% to $32.5 million for the second quarter of 2002 compared to $37.0 million in the second quarter of 2001. This was also due to unfavorable volume and pricing as the concrete forming systems markets were weaker in the second quarter of 2002 compared to 2001. Net sales of paving products increased $3.9 million, or 24.7%, in the second quarter of 2002 compared to the second quarter of 2001. In the first quarter of 2002, state funding for highway construction projects was down as a result of the recession and continued delays in activity on some larger airport runway projects as a result of the September 11, 2001 terrorist attacks. During the second quarter of 2002, state funding was released for these projects, and accordingly the paving products division benefited from this increased volume. GROSS PROFIT Gross profit for the second quarter of 2002 was $36.6 million, a decrease of $4.9 million from $41.5 million in the second quarter of 2001. This was due to the unfavorable sales volume and pricing discussed previously, as well as $1.0 million of additional depreciation expense from the change in accounting estimate in 2002. These factors were offset partially by the cost savings realized from the implementation of the 2001 and 2002 facility closing and severance plans. Gross margin was 34.4% in the second quarter of 2002, decreasing from 37.3% in the same quarter of 2001. This was due to the unfavorable sales volume and unfavorable pricing, both of which are attributable to our markets being weaker in 2002 compared to 2001. Gross margins were also unfavorably impacted by a shift in the mix of products sold, as paving products have lower gross margins. These were offset partially by the cost savings realized from the implementation of the 2001 and 2002 facility closing and severance plans. OPERATING EXPENSES Selling, general, and administrative expenses ("SG&A expenses") decreased $3.0 million to $22.8 million in the second quarter of 2002, from $25.8 million in the second quarter of 2001, primarily due to the cost savings realized from the implementation of the 2001 and 2002 facility closing and severance plans and the receipt of approximately $0.4 million, net of recovery expenses, from Royal Surplus Lines Insurance Co. to cover certain costs related to the EFCO litigation. These factors were offset partially by the increased SG&A expenses as a result of the BarLock acquisition. During the second quarter of 2002, we approved and began implementing plans to exit one of our distribution facilities and to reduce overall headcount in order to keep our cost structure in alignment with our net sales. The total anticipated cost of the facility closure and severance is $0.4 million, and is to encompass approximately eight employee 25 terminations. The total estimated exit costs are comprised of approximately $0.2 million related to employee involuntary termination benefits, and approximately $0.2 million related to lease termination costs and other post-closing maintenance costs. Accordingly, we recorded a facility closing and severance expense of approximately $0.4 million in the second quarter of 2002. Of the amounts accruable at the time of the plan's approval, approximately $0.3 million is included in "Other Accrued Liabilities" in the accompanying June 28, 2002 consolidated balance sheet. At the end of the second quarter of 2002, plans were also being developed to further reduce employee headcount throughout the Company. Since these plans were not yet fully developed, no facility closing and severance costs were reflected at the end of the second quarter of 2002, but these will be reflected in the third quarter results for 2002. During 2001, we approved and began implementing two plans to exit certain manufacturing and distribution facilities and to reduce overall headcount. As a result of the continued implementation of the plans, we incurred $0.1 million of facility closing and severance expense in 2002, which is related primarily to facility relocation activities. Of the amounts accruable at the time of the plans' approval, approximately $1.1 million is included in "Other Accrued Liabilities" in the accompanying June 28, 2002 consolidated balance sheet. Below is a summary of the amounts charged against the facility closing and severance reserves in 2002:
Three Fiscal Months Ended June 28, 2002 ------------- Balance at March 29, 2002 $1.8 Facility Closing and Severance Expense 0.5 Items Charged Against Reserve: Involuntary Termination Costs (0.4) Lease Termination Costs (0.1) Other Post-Closing Costs (0.4) ------------- Balance at June 28, 2002 $1.4 =============
Amortization of goodwill and intangibles decreased to $0.1 million in the second quarter of 2002 from $1.1 million in the second quarter of 2001 due to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." This statement precludes amortization of goodwill for periods beginning after December 15, 2001. Instead, an annual review of the recoverability of the goodwill and intangible assets is required. Certain other intangible assets continue to be amortized over their estimated useful lives. The adoption of the new accounting standard will result in a reduction in annual amortization expense of approximately $3.7 million. The amount of amortization expense recognized in the second quarter of 2001, which was not recognized in the second quarter of 2002 was approximately $1.0 million. 26 OTHER EXPENSES Interest expense decreased to $8.4 million in the second quarter of 2002 from $9.0 million in the second quarter of 2001 due to lower interest rates in the second quarter of 2002 compared to 2001, offset partially by increased long-term debt resulting from the acquisition of BarLock in June 2001. INCOME BEFORE INCOME TAXES Income before income taxes in the second quarter of 2002 was $4.8 million as compared to $2.4 million in the second quarter of 2001 and was comprised of the following:
Three Fiscal Months Ended ------------------------------------- June 28, June 29, 2002 2001 ---------------- ----------------- Concrete accessories $7,311 $4,200 Concrete forming systems (21) 813 Paving products 1,714 1,640 Corporate (1,609) (1,650) Intersegment eliminations (2,579) (2,632) ------------ ------------- Income before income taxes $4,816 $2,371 ============ =============
Concrete accessories' income before income taxes of $7.3 million in the second quarter of 2002 increased from $4.2 million in the second quarter of 2001. This was due to the benefit of the cost reduction initiatives implemented by management, the benefit provided from the acquisition of BarLock, the reduction in amortization expense with the adoption of SFAS No. 142, and lower interest expense as a result of lower interest rates. In addition, the facility closing and severance charge recorded in the second quarter of 2001 was $2.9 million compared to $0.4 million in the second quarter of 2002. These were offset partially by the decreased sales volume, unfavorable pricing and unfavorable mix in the existing business due to weaker markets in 2002 compared to 2001. Concrete forming systems was virtually break-even in the second quarter of 2002 compared to income of $0.8 million in the second quarter of 2001. This was due to the decreased sales volume, unfavorable pricing and unfavorable mix, as well as $1.0 million of additional depreciation expense from the change in accounting estimate in 2002. These were offset partially by the benefit of the cost reduction initiatives implemented by management, and lower interest expense as a result of lower interest rates. Income before income taxes from paving products increased to $1.7 million in the second quarter of 2002 from $1.6 million in the second quarter of 2001. This was due to the increased net sales volume in the second quarter of 2002, offset partially by increased interest expense as a result of average borrowings being higher in 2002. The increase in average borrowings was due primarily to an inventory build as a result of the first quarter 2002 delays in releasing state funding for highway construction projects and delays in activity on some larger airport runway projects, and increased spending on the construction of a new facility in Birmingham, AL. Corporate expenses in the second quarter of 2002 decreased slightly from the second quarter of 2001 as a result of the cost reduction initiatives implemented by management. Elimination of profit on intersegment sales was virtually flat between periods at $2.6 million. 27 NET INCOME The effective tax rate decreased to 40.0% in the second quarter of 2002 from 47.5% in the second quarter of 2001. The reduction in the effective tax rate is due to the adoption of SFAS No. 142, which eliminated non-deductible goodwill amortization in the second quarter of 2002. Net income for the second quarter of 2002 was $2.9 million compared to $1.2 million in the second quarter of 2001 due to the factors described above. COMPARISON OF SIX FISCAL MONTHS ENDED JUNE 28, 2002 AND JUNE 29, 2001 NET SALES Net sales decreased $9.4 million, or 4.8%, to $185.0 million in the first half of 2002 from $194.4 million in the first half of 2001. The following table summarizes net sales by segment:
Six Fiscal Months Ended -------------------------------------------------------- June 28, 2002 June 29, 2001 --------------------------- --------------------------- Net Sales % Net Sales % % Change ------------- ------------ -------------- ----------- ------------ Concrete accessories $106,141 57.4% $112,455 57.8% (5.6)% Concrete forming systems 59,171 32.0 63,237 32.5 (6.4) Paving products 27,551 14.9 26,019 13.4 5.9 Intersegment eliminations (7,855) (4.3) (7,290) (3.7) 7.8 ------------- ------------ -------------- ----------- Net sales $185,008 100.0% $194,421 100.0% (4.8)% ============= ============ ============== ===========
Net sales of concrete accessories decreased $6.3 million, or 5.6%, to $106.1 million in the first half of 2002 from $112.4 million in the first half of 2001. This was due to unfavorable volume and pricing as the concrete accessories markets were weaker in the first half of 2002 compared to 2001. This was partially offset by increased sales as a result of the BarLock acquisition, which contributed $3.2 million. Net sales of concrete forming systems decreased 6.4% to $59.2 million for the first half of 2002 compared to $63.2 million in the first half of 2001. This was also due to unfavorable volume and pricing as the concrete forming systems markets were weaker in the first half of 2002 compared to 2001. Net sales of paving products increased $1.5 million, or 5.9%, in the first half of 2002 compared to the first half of 2001 due to an increase in volume as a result of the Transportation Equity Act for the 21st Century, known as TEA-21. GROSS PROFIT Gross profit for the first half of 2002 was $63.1 million, a decrease of $5.4 million from $68.5 million in the first half of 2001. This was due to the unfavorable sales volume and pricing discussed previously, offset partially by the cost savings realized from the implementation of the 2001 and 2002 facility closing and severance plans. 28 Gross margin was 34.1% in the first half of 2002, decreasing from 35.2% last year. This was due to the unfavorable sales volume and unfavorable pricing, both of which are attributable to our markets being weaker in 2002 compared to 2001. Gross margins were also unfavorably impacted by a shift in the mix of products sold, as paving products have lower gross margins. These were offset partially by the cost savings realized from the implementation of the 2001 and 2002 facility closing and severance plans. OPERATING EXPENSES Selling, general, and administrative expenses ("SG&A expenses") decreased $5.8 million to $46.0 million in the first half of 2002, from $51.8 million in the first half of 2001, primarily due to the cost savings realized from the implementation of the 2001 and 2002 facility closing and severance plans and the receipt of approximately $0.4 million, net of recovery expenses, from Royal Surplus Lines Insurance Co. to cover certain costs related to the EFCO litigation. These factors were offset partially by the increased SG&A expenses as a result of the BarLock acquisition. During the second quarter of 2002, we approved and began implementing plans to exit one of our distribution facilities and to reduce overall headcount in order to keep our cost structure in alignment with our net sales. The total anticipated cost of the facility closure and severance is $0.4 million, and is to encompass approximately eight employee terminations. The total estimated exit costs are comprised of approximately $0.2 million related to employee involuntary termination benefits, and approximately $0.2 million related to lease termination costs and other post-closing maintenance costs. Accordingly, we recorded a facility closing and severance expense of approximately $0.4 million in the first half of 2002. Of the amounts accruable at the time of the plan's approval, approximately $0.3 million is included in "Other Accrued Liabilities" in the accompanying June 28, 2002 consolidated balance sheet. At the end of the second quarter of 2002, plans were also being developed to further reduce employee headcount throughout the Company. Since these plans were not yet fully developed, no facility closing and severance costs were reflected at the end of the second quarter of 2002, but these will be reflected in the third quarter results for 2002. During 2001, we approved and began implementing plans to exit certain manufacturing and distribution facilities and to reduce overall headcount in order to keep our cost structure in alignment with our net sales. The total anticipated cost of the facility closures and severance was $4.7 million, and was to encompass approximately 200 employee terminations. Of this amount, approximately $3.3 million was expensed during the second quarter of 2001. The total estimated exit costs were comprised of approximately $1.7 million related to employee involuntary termination benefits, approximately $0.7 million related to lease termination costs, approximately $1.0 million related to relocation activities and approximately $1.2 million related to other post-closing maintenance costs. As a result of the continued implementation of the plans, we incurred approximately $0.2 million of facility closing and severance expense in 2002, which is related primarily to facility relocation activities. Of the amounts accruable at the time of the plans' approval, approximately $1.1 million is included in "Other Accrued Liabilities" in the accompanying June 28, 2002 consolidated balance sheet. 29 Below is a summary of the amounts charged against the facility closing and severance reserves in 2002:
Six Fiscal Months Ended June 28, 2002 --------------- Balance at December 31, 2001 $2.9 Facility Closing and Severance Expense 0.6 Items Charged Against Reserve: Involuntary Termination Costs (0.9) Lease Termination Costs (0.3) Other Post-Closing Costs (0.9) --------------- Balance at June 28, 2002 $1.4 ===============
Amortization of goodwill and intangibles decreased to $0.2 million in the first half of 2002 from $2.0 million in the first half of 2001 due to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." This statement precludes amortization of goodwill for periods beginning after December 15, 2001. Instead, an annual review of the recoverability of the goodwill and intangible assets is required. Certain other intangible assets continue to be amortized over their estimated useful lives. The adoption of the new accounting standard will result in a reduction in annual amortization expense of approximately $3.7 million. The amount of amortization expense recognized in the first half of 2001, which was not recognized in the first half of 2002 was approximately $1.8 million. OTHER EXPENSES Interest expense decreased to $16.4 million in the first half of 2002 from $17.7 million in the first half of 2001 due to lower interest rates in the first half of 2002 compared to 2001, offset partially by increased long-term debt resulting from the acquisition of BarLock in June 2001. LOSS BEFORE INCOME TAXES Loss before income taxes in the first half of 2002 was $0.2 million as compared to a loss of $6.4 million in the first half of 2001 and was comprised of the following:
Six Fiscal Months Ended --------------------------------- June 28, June 29, 2002 2001 ---------------- --------------- Concrete accessories $ 9,079 $ 5,393 Concrete forming systems (3,111) (5,845) Paving products 955 1,308 Corporate (3,070) (3,238) Intersegment eliminations (4,053) (3,992) ---------------- --------------- Income before income taxes $ (200) $(6,374) ================ ===============
30 Concrete accessories' income before income taxes of $9.1 million in the first half of 2002 increased from $5.4 million in the first half of 2001. This was due to the benefit of the cost reduction initiatives implemented by management, the benefit provided from the acquisition of BarLock, the reduction in amortization expense with the adoption of SFAS No. 142, and lower interest expense as a result of lower interest rates. In addition, the facility closing and severance charge recorded in the first half of 2001 was $2.9 million compared to $0.4 million in the first half of 2002. These were offset partially by the decreased sales volume, unfavorable pricing and unfavorable mix in the existing business due to weaker markets in 2002 compared to 2001. Concrete forming systems' loss before income taxes was $3.1 million in the first half of 2002 compared to a loss of $5.8 million in the first half of 2001. This was due to the benefit of the cost reduction initiatives implemented by management and lower interest expense as a result of lower interest rates. These were offset partially by the decreased sales volume, unfavorable pricing and unfavorable mix in the existing business due to weaker markets in 2002 compared to 2001. Income before income taxes from paving products decreased to $1.0 million in the first half of 2002 from $1.3 million in the first half of 2001. This was due primarily to an unfavorable mix of product sales, as well as higher interest expense as a result of higher average borrowings in 2002. The increase in average borrowings was due primarily to an inventory build as a result of the first quarter 2002 delays in releasing state funding for highway construction projects and delays in activity on some larger airport runway projects, and increased spending on the construction of a new manufacturing facility in Birmingham, AL. These were partially offset by the benefit of increased net sales volume in the first half of 2002. Corporate expenses decreased to $3.1 million in the first half of 2002 from $3.2 million in the first half of 2001 as a result of the cost reduction initiatives implemented by management. Elimination of profit on intersegment sales was $4.1 million in the first half of 2002 compared to $4.0 million in the first half of 2001. NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE The effective tax rate decreased to 40.0% in the first half of 2002 from 47.5% in the first half of 2001. The reduction in the effective tax rate is due to the adoption of SFAS No. 142, which eliminated non-deductible goodwill amortization in the first half of 2002. Net loss before cumulative effect of change in accounting principle for the first half of 2002 was $0.1 million compared to a loss of $3.3 million in the first half of 2001 due to the factors described above. 31 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 revises the accounting for future business combinations to only allow the purchase method of accounting. In addition, the two statements preclude amortization of goodwill for periods beginning after December 15, 2001. Instead, an annual review of the recoverability of the goodwill and intangible assets is required. Certain other intangible assets continue to be amortized over their estimated useful lives. We adopted SFAS No. 142 effective January 1, 2002. As a result of adopting SFAS No. 142, we recorded a non-cash charge in the first half of 2002 of $17.1 million ($19.9 million of goodwill, less an income tax benefit of $2.8 million), which is reflected as a cumulative effect of change in accounting principle. This amount does not affect our ongoing operations. The goodwill arose from the acquisitions of Dur-O-Wal in 1995, Southern Construction Products in 1999, and Polytite in 2000, all of which manufacture and sell metal accessories used in masonry construction. The masonry products market has experienced weaker markets and significant price competition, which has had a negative impact on the product line's earnings and fair value. The following is a reconciliation from reported net loss to net loss adjusted for the amortization of goodwill:
Six Fiscal Months Ended ------------------------- June 28, June 29, 2002 2001 ----------- ------------ Net loss before cumulative effect of change in accounting principle, as reported $(120) $(3,346) Amortization of goodwill, net of tax benefit - 1,688 ----------- ---------- Net loss before cumulative effect of change in accounting principle, as adjusted $(120) $(1,658) =========== ============
NET LOSS The net loss for the first half of 2002 was $17.3 million compared to a loss of $3.3 million in the first half of 2001 due to the factors described above. 32 LIQUIDITY AND CAPITAL RESOURCES Our key statistics for measuring liquidity and capital resources are net cash provided by operating activities, capital expenditures, amounts available under the revolving credit facility and cash gap, which is used to control working capital. Cash gap is defined as the number of days of outstanding accounts receivable, plus the number of days of inventory on hand, less the number of days of outstanding accounts payable. Our capital requirements relate primarily to capital expenditures, debt service and the cost of acquisitions. Historically, our primary sources of financing have been cash from operations, borrowings under our revolving line of credit and the issuance of long-term debt and equity. Net cash used in operating activities in the first half of 2002 was $25.5 million and was comprised of the following: Net loss $ (17.3) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 10.0 Amortization of goodwill and intangibles 0.2 Cumulative effect of change in accounting principle 17.1 Deferred income taxes 0.2 Amortization of deferred financing costs and debt discount 1.2 Gain on sales of rental equipment and property, plant and equipment (8.0) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (18.7) Inventories (7.5) Accounts payable 5.0 Accrued liabilities and other long-term liabilities (10.2) Other, net 2.5 -------- Net cash used in operating activities $ (25.5) ========
Our investing activities consisted of net proceeds from the sales of fixed assets and rental equipment of $0.8 million in the first half of 2002, compared to net capital expenditures of $6.8 million in the first half of 2001. As of June 28, 2002, we had long-term debt of $316.6 million, comprised of: (a) $170.0 million in principal amount of Senior Subordinated Notes, with a net book value of $159.2 million, (b) $156.2 million outstanding of a $202.0 million credit facility, which consists of a $50.0 million revolving credit facility, a $30.0 million acquisition facility, a $23.5 million term loan under the tranche A facility and a $98.5 million term loan under the tranche B facility, (c) $1.1 million of debentures previously held by the Dayton Superior Capital Trust, and (d) a $0.1 million note to the City of Parsons, Kansas. At June 28, 2002, we had outstanding letters of credit of $6.3 million, and we had available borrowings of $15.8 million under our revolving credit facility. Approximately $9.3 million of the $30.0 million acquisition facility, $21.1 million of the $23.5 million tranche A facility, and $98.0 million of the $98.5 million tranche B facility were outstanding. 33 Our net borrowings for the first six months of 2002 were $24.3 million, which was primarily due to the seasonal build in working capital. At June 28, 2002, working capital was $83.5 million, compared to $56.9 million at December 31, 2001. The increase in working capital is attributable to normal seasonal working capital growth. For the first half of 2002, our average cash gap days were 73, which is five days unfavorable from the 68 days reported in the first half of 2001. This is primarily due to increased inventory in the paving products segment because of the early 2002 delays in activity on some highway construction and airport runway projects. We expect this paving inventory to return to 2001 levels by year-end 2002. We believe our liquidity, capital resources and cash flows from operations are sufficient to fund planned capital expenditures, working capital requirements and debt service in the absence of additional acquisitions. As previously discussed in the "Results of Operations," we have experienced weakness in demand for some of our products as a result of general economic conditions. If economic conditions do not improve in the second half of 2002, we may elect to seek approval from the lenders under our credit facility to modify the financial ratios applicable to future periods. We intend to fund future acquisitions with cash, securities, or a combination of cash and securities, to the extent we use cash for all or part of any acquisitions. We expect to raise such cash from operations or from borrowings under our credit facility or, if feasible and attractive, issuances of long-term debt or additional common shares. SEASONALITY Our operations are seasonal in nature with approximately 55% of sales historically occurring in the second and third quarters. Working capital and borrowings fluctuate with sales volume. INFLATION We do not believe inflation had a significant impact on our operations over the past two years. In the past, we have been able to pass along all or a portion of the effect of increases in the price of steel, our principal raw material. There can be no assurance we will be able to continue to pass on the cost of such increases in the future. The United States has recently imposed tariffs on certain steel imported into the United States, which may have the effect of increasing steel prices. At this point, we are unable to determine the impact that these tariffs will have on our results of operations. FORWARD-LOOKING STATEMENTS This Form 10-Q includes, and future filings by us on Form 10-K, Form 10-Q, and Form 8-K, and future oral and written statements by us and our management may include certain forward-looking statements, including (without limitation) statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestitive opportunities and other similar forecasts and statements of expectation. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and "should," and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements by us and our management are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. We disclaim any obligation to 34 update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by us and our management as the result of a number of important factors. Representative examples of these factors include (without limitation) the cyclical nature of nonresidential building and infrastructure construction activity, which can be affected by factors outside our control such as weakness in the general economy, a decrease in governmental spending, interest rate increases, and changes in banking and tax laws; our ability to successfully identify, finance, complete and integrate acquisitions; increases in the price of steel (our principal raw material) and our ability to pass along such price increases to our customers; the effects of weather and seasonality on the construction industry; increasing consolidation of our customers; the mix of products we sell; the competitive nature of our industry; and the amount of debt we must service. This list is not intended to be exhaustive, and additional information can be found in our annual report on Form 10-K for the year ended December 31, 2001. In addition to these factors, actual future performance, outcomes and results may differ materially because of other, more general, factors including (without limitation) general industry and market conditions and growth rates, domestic economic conditions, governmental and public policy changes and the continued availability of financing in the amounts, at the terms and on the conditions necessary to support our future business. 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. At June 28, 2002, we had financial instruments that were sensitive to changes in interest rates. These financial instruments consist of $170.0 million of principal amount of fixed rate Senior Subordinated Notes, with a book value of $159.2 million, a $202.0 million credit facility, of which $156.2 million was outstanding, and $1.2 million in other fixed-rate, long-term debt. The Senior Subordinated Notes bear interest at 13.0% on the $170.0 million of principal and mature in 2009. The estimated fair value of the notes approximates the face value. Our credit facility has several interest rate options, which re-price on a short-term basis. Accordingly, the fair value of the credit facility approximates its $156.2 million face value. The interest rates at June 28, 2002 range from 4.7% to 5.2%. Other long-term debt consists of a.) $1.1 million of debentures previously held by the Dayton Superior Capital Trust, with a fair value of $1.8 million and b.) a $0.1 million, 7.0% loan due in installments of $32 thousand per year with an estimated fair value of $0.1 million. In the ordinary course of our business, we also are exposed to price changes in raw materials (particularly steel bar and rod and steel flat plate) and products purchased for resale. The prices of these items can change significantly due to changes in the markets in which our suppliers operate. We generally do not use financial instruments to manage our exposure to changes in commodity prices. 36 PART II. -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. As described in Dayton Superior's Annual Report on Form 10-K for the year ended December 31, 2001, Dayton Superior's Symons Corporation subsidiary is a defendant in a declaratory judgment action filed in the California Superior Court in San Francisco by Royal Surplus Lines Insurance Co., Symons' primary insurance carrier, and Symons' excess insurance carriers. The insurance carriers are seeking a declaration that Symons is not entitled to insurance coverage under their policies for the claims made by Symons to recover certain defense costs and damages paid by Symons in 1999 in a civil action brought by EFCO Corp. The excess insurance carriers have not asserted claims that would entitle them to the award of damages against Symons. In June 2002, Symons settled its claims against Royal. In addition to the $0.2 million partial payment that Royal had paid to Symons in 1999 in the defense of the underlying EFCO case, Royal paid an additional approximately $1.9 million ($1.1 million net of recovery costs) to Symons in the fourth quarter of 2001, after deducting the self-insured retention required under the insurance policy. In June of 2002, Royal paid an additional approximately $0.8 million ($0.4 million net of recovery costs) to Symons in final settlement of its defense and indemnity obligations under its primary insurance policies. Under the terms of the final settlement, Royal gave up its right to reclaim any amounts it has paid to Symons. Symons is proceeding against the excess insurance carriers in this lawsuit to recover certain amounts it paid in the EFCO case. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Index to Exhibit following the signature page to this report for a list of Exhibits. (b) Reports on Form 8-K. During the quarter ended June 28, 2002, we filed the following Current Reports on Form 8-K: Current Report on Form 8-K dated June 10, 2002, reporting under Item 4 (Changes in Registrant's Certifying Accountant) the dismissal of Arthur Andersen LLP as our independent accountants and the engagement of Deloitte & Touche LLP as our independent accountants for the year ending December 31, 2002. Current Report on Form 8-K dated June 21, 2002, reporting under Item 5 (Other Events) announcing the naming of Stephen R. Morrey as chief executive officer, effective July 15, 2002. 37 SIGNATURES 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. DAYTON SUPERIOR CORPORATION DATE: August 9, 2002 BY: /s/ Alan F. McIlroy -------------- ----------------------- Alan F. McIlroy Vice President and Chief Financial Officer 38 INDEX TO EXHIBITS ----------------- Exhibit No. Description ----------- ----------- (10) Material Contracts 10.1 Form of Amended and Restated Stock Option Agreement entered into between Dayton Superior Corporation and certain of its executive officers 10.2 Employment Agreement dated and effective June 12, 2002 by and between Dayton Superior Corporation and Stephen R. Morrey (99) Additional Exhibits 99.1 Sarbanes-Oxley certification of President and Chief Executive Officer. 99.2 Sarbanes-Oxley certification of Vice President and Chief Financial Officer. 39