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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of May 1998.
DENISON INTERNATIONAL plc
(Translation of registrant's name into English)
Masters House
107 Hammersmith Road
London W14 0QH
England
(Address of principal executive offices)
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DENISON INTERNATIONAL plc
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
December 31, March 31,
1997 1998
------------ ---------
(Note) (Unaudited)
Current assets:
Cash and cash equivalents $30,337 $31,457
Accounts receivable, less allowances of
$3,087 and $2,591 at December 31, 1997
and March 31, 1998 respectively 29,212 30,488
Inventories 28,182 31,523
Other current assets 3,327 3,156
-------- --------
Total current assets 91,058 96,624
Property, plant and equipment, net 14,948 15,368
Other assets 1,487 1,915
-------- --------
Total assets $107,493 $113,907
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 1,472 $ 1,367
Accounts payable 9,413 9,975
Other accrued liabilities 15,677 19,416
Current portion of capital lease obligations 662 589
-------- --------
Total current liabilities 27,224 31,347
Noncurrent liabilities:
Capital lease obligations, less
current portion 344 243
Pension accrual 9,482 9,918
Other noncurrent liabilities 6,733 5,636
Negative goodwill, net of accumulated
amortization of $3,406 and $3,595 at
December 31, 1997 and March 31, 1998
respectively 4,158 4,032
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20,717 19,829
Shareholders' equity:
`A' ordinary shares (pound)8.00 par value;
7,125 shares authorized, and 7,015
issued and outstanding 86 86
Ordinary shares $0.01 par value;
15,000,000 shares authorized, and
11,057,700 issued and outstanding 111 111
Additional paid-in capital 5,411 5,411
Capital redemption reserve 1,090 1,090
Retained earnings 58,115 61,992
Accumulated other comprehensive income (5,261) (5,959)
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Total shareholders' equity 59,552 62,731
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Total liabilities and shareholders'
equity $ 107,493 $113,907
========= ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by general accounting principales for complete financial
statements.
The accompanying notes are an integral part of these statements.
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DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(U.S. dollars in thousands, except share data)
Three months ended
March 31,
------------------------
1997 1998
---- ----
Net sales $36,912 $37,371
Cost of sales 24,019 23,509
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Gross profit 12,893 13,862
Selling, general and
administrative expenses 8,220 8,540
------- -------
Operating income 4,673 5,322
Other income 24 --
Interest (expense)
income, net 1 158
------- -------
Income before taxes 4,698 5,480
Provision for income taxes 1,142 1,603
------- -------
Net income $ 3,556 $ 3,877
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Basic earnings per share $ .34 $ .35
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Diluted earnings per share $ .33 $ .35
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The accompanying notes are an integral part of these statements.
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DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Three months ended
March 31,
-------------------------
1997 1998
---- ----
Net cash provided by
operating activities $ 4,128 $ 3,230
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property, plant
and equipment (1,883) (1,300)
Proceeds from disposal of
property, plant and
equipment 24 --
------- -------
Net cash used in investing
activities (1,859) (1,300)
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CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayment)
on lines of credit (341) (84)
Redemption of preferred stock (1,088) --
Repayment of capital lease
obligations (359) (162)
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Net cash used in financing
activities (1,788) (246)
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EFFECT OF EXCHANGE RATE
CHANGES ON CASH (1,223) (564)
-------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (742) 1,120
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 19,144 30,337
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $18,402 $ 31,457
======= ========
The accompanying notes are an integral part of these statements.
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DENISON INTERNATIONAL plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements
Interim Financial Information
The financial information at March 31, 1998 and for the three months ended
March 31, 1997 and March 31, 1998 is unaudited but includes all adjustments
which Denison International plc (the "Company") considers necessary for a fair
presentation of financial position at such date and the operating results and
cash flows for those periods. Results for the three month period ending March
31, 1998 are not necessarily indicative of results that may be expected for the
entire year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with United States generally
accepted accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission Rules and Regulations. These condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1997 included in the Company's Annual Report on Form 20-F.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in
conformity with United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements and accompanying notes. Actual
results could differ from these estimates.
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2. Inventories
Inventories consisted of the following:
(Unaudited)
December 31, March 31,
1997 1998
------------ ---------
(U.S. dollars in thousands)
Finished goods $16,365 $19,433
Work-in-progress 2,861 3,474
Raw materials and supplies 8,956 8,616
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$28,182 $31,523
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3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
(Unaudited)
Three months ended
March 31,
--------------------------------------
1997 1998
---- ----
(U.S. dollars in thousands except
share and per share data)
Numerator:
Net income $ 3,556 $ 3,877
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Denominator:
Denominator for basic
earnings per share -
weighted-average shares 10,535,965 11,064,715
Effect of dilutive stock options 141,319 61,918
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Denominator for diluted
earnings per share -
adjusted weighted-average shares 10,677,284 11,126,633
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Basic earnings per share $ .34 $ .35
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Diluted earnings per share $ .33 ` $ .35
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Options to purchase 50,000 shares at $17.60 per share and 5,000 shares at
$17.38 per share were outstanding during the 3-month period ending March 31,
1998, but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares, and therefore the effect would be antidilutive.
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4. Comprehensive Income
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130). The Company adopted this statement as of the beginning of 1998. SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however the adoption of the Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires foreign
currency translation adjustments and minimum pension liability adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. This Statement also requires that all
items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. The Company's annual
financial statements for prior periods will be reclassified, as required.
The Company's quarterly total comprehensive income was as follows:
(Unaudited)
Three months ended
March 31,
-----------------
1997 1998
---- ----
Net income $3,556 $3,877
Foreign currency translation
adjustment, net of tax
benefit (1,617) (698)
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Comprehensive net income $1,939 $3,179
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The components of accumulated other comprehensive income, net of related
tax, at December 31, 1997 and March 31, 1998 are as follows:
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Accumulated
Pension Foreign Other
Liability Currency Comprehensive
Adjustment Translation Income
---------- ----------- -------------
Balance at December 31,1997 $ (43) $ (5,218) $ (5,261)
Current period other
comprehensive income -- (698) (698)
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Balance at March 31, 1998 $ (43) $ (5,916) $ (5,959)
======== ========= ==========
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Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Although the Company reports its financial results in U.S. dollars,
approximately 65% of the Company's revenues and expenses are incurred in foreign
currencies. The fluctuation of the functional currencies earned by the Company
against the U.S. dollar has had the effect of increasing or decreasing (as
applicable) U.S. dollar reported net sales, as well as the cost of goods sold,
gross profit, selling, general and administrative expenses denominated in such
foreign currencies when translated into U.S. dollars as compared to prior
periods.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
The Company's net sales increased 1.2% to $37.4 million in the three month
period ended March 31, 1998 from $36.9 million in the comparable period in 1997.
During the same period, net sales in North America decreased 1.8% to $14.4
million from $14.6 million; net sales in Europe increased 7.3% to $18.5 million
from $17.3 million; and net sales in the Asia-Pacific region decreased 10.5% to
$4.5 million from $5.0 million. Despite a strengthening U.S. dollar against most
of the functional currencies earned by the Company, overall net sales revenue
increased due to increased demand for the Company's vane product line in North
America and Europe, as well as to improved economic conditions in Europe
providing a robust market for the Company's three product lines.
Restated, net sales (at average exchange rates for the three month period
ended March 31, 1997) for the three month period ended March 31, 1998, were
$39.4 million, a 6.7% increase over the comparable 1997 period. The decreased
sales revenue for the period attributable to the exchange rate differences was
$2.0 million. Restated (at average exchange rates for the three month period
ended March 31, 1997), net sales for the three month period ended March 31, 1998
for the Company's European operations increased 16.0% to $20.0 million from
$17.3 million, and net sales for the Asia-Pacific decreased 3.0% to $4.9 million
from $5.0 million.
The Company's gross profit increased 7.5% to $13.9 million in the three
month period ended March 31, 1998 from $12.9 million in the comparable 1997
period. Gross profit as a percentage of net sales increased to 37.1% in the
three months ended March 31, 1998 from 34.9% in the comparable period in 1997.
The increase in gross profit was primarily due to a shift in product mix in the
three months ended March 31, 1998 toward the Company's higher margin vane pumps
and motors compared to the three months ended March 31, 1997. Increased sales in
general, and higher vane product sales in particular, improved profitability in
Europe and North America, and margins were further enhanced by improvements
derived from efficiencies attained from greater throughput at the Company's
production facilities.
Gross profit in North America increased 13.5% to $4.7 million in the three
months ended March 31, 1998 from $4.2 million in the comparable 1997 period,
while gross profit in Europe increased 13.3% to $7.9 million in the three months
ended March 31, 1998 from $6.9 million in the comparable 1997
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period, and gross profit in the Asia-Pacific decreased 28.4% to $1.3 million in
the same 1998 period from $1.8 million in the comparable period in 1997. The
decline in gross profit in the Asia-Pacific was due primarily to the depressed
economic conditions throughout the region, as well as to the strength of the
U.S. dollar relative to the functional currencies earned by the Company's sales
subsidiaries in Japan, Australia and Singapore. Additionally, reductions in
revenues from project oriented contracts in the Asia-Pacific for the three
months ended March 31, 1998 as compared to the same period in 1997, contributed
to the overall decline in gross profits for the region.
Restated (at average exchange rates for the three months ended March 31,
1997), gross profit in Europe was $8.5 million, or a 22.7% increase over the
comparable 1997 period, and gross profit in the Asia-Pacific was $1.4 million,
or a 22.2% decrease over the comparable 1997 period. The total decreased gross
profit for the period attributable to the exchange rate differences was $0.8
million. Restated, gross profit as a percentage of net sales increased to 37.2%
for the three months ended March 31, 1998 compared to 34.9% for the comparable
period in 1997.
Selling, general and administrative ("SG&A") expense increased 3.9% to $8.5
million in the three month period ended March 31, 1998 from $8.2 million in the
comparable 1997 period. These expenses as a percentage of net sales increased to
22.9% in the three month period ended March 31, 1998 compared to 22.3% in the
comparable 1997 period. The increase in these expenses as a percentage of net
sales for the three month period ended March 31, 1998 as compared to the same
1997 period, is due generally to the reduction in revenues in North America, and
more specifically to the larger relative sales decline in the Asia-Pacific,
spread across a relatively static SG&A cost base.
Operating income increased 13.9% to $5.3 million in the three months ended
March 31, 1998 from $4.7 million in the comparable 1997 period. Operating income
as a percentage of net sales increased to 14.2% in 1998 from 12.6% in the
comparable 1997 period. Restated (at average exchange rates for the three months
ended March 31, 1997), operating income increased 19.8% to $5.6 million (14.2%
of net sales) in 1998, from $4.7 million (12.6% of net sales) in 1997. The
decreased operating income for the period attributable to the exchange rate
differences was $0.3 million.
Net interest income was $158,000 in the three month period ended March 31,
1998 compared to $1,000 of interest income in the comparable 1997 period. The
increase in interest income was primarily due to increased profitability, and by
reductions in cash used in financing activities, resulting in higher interest
bearing cash balances at the subsidiary level. Additionally, unused funds from
the Company's initial public offering increased total interest bearing cash
balances held by the Company.
The effective tax rate for the three month period ended March 31, 1998 was
29.3% compared to 24.3% for the comparable 1997 period. The provision for taxes
increased 40.4% to $1.6 million for 1998 compared to $1.1 million for the same
1997 period. This provision as a percentage of net sales increased to 4.3% in
1998 from 3.1% in the same 1997 period.
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LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended and At March 31,
------------------------------------
1997 1998
----------- ------------
(Dollars in thousands)
Cash & cash equivalents 30,337 31,457
Net cash provided by operating activities 4,128 3,230
Net cash used in investing activities (1,859) (1,300)
Net cash used in financing activities (1,788) (246)
Effect of exchange rate changes on cash (1,223) (564)
Net cash provided by operating activities for the three month period ended
March 31, 1998 decreased to $3.2 million from $4.1 million as compared to the
same 1997 period. The decrease in the Company's cash generated from operations
reflects primarily an increase in working capital requirements. The $0.9 million
decrease in net cash provided by operating activities for the three months ended
March 31, 1998 as compared to the same 1997 period was attributable to a $2.5
million net increase in cash used for inventories, by a $1.6 million net
increase in cash used for receivables, and by a $3.3 million increase in accrued
and other liabilities. The Company anticipates that operating cash and capital
expenditure requirements will continue to be funded by cash flow from
operations, cash on hand and bank borrowings.
Net cash used in investing activities decreased to $1.3 million for the
three month period ended March 31, 1998 from $1.9 million in the comparable 1997
period. Investing activities consisted largely of investment in manufacturing
machinery and equipment for the Company's three production facilities. Purchases
of machinery and equipment were $1.3 million for the three months ended March
31, 1998 compared to $1.9 million for the same period in 1997. The Company
anticipates that it will incur approximately $9.0 million for capital
expenditures for fiscal 1998.
Net cash used in financing activities decreased to $246,000 for the three
months ended March 31, 1998 from $1.8 million in the comparable 1997 period. The
decrease of $1.5 million in net cash used by financing activities was primarily
attributable to a reduction of $454,000 in net repayments of lines of credit and
capital lease obligations, and by a decrease of $1.1 million in the three month
period ended March 31, 1998 as compared to the three month period ended March
31, 1997 for nonrecurring costs associated to redemption of preferred stock.
The effect of exchange rate changes on cash and cash equivalents was
($0.6 million) and ($1.2 million) for the three month period ended March 31,
1998 and 1997, respectively. As approximately two thirds of the Company's
business is transacted in currencies other than the U.S. dollar, foreign
currency fluctuations had a significant impact on dollar reported balances for
the three month period ended March 31, 1998 compared to the same period in 1997.
The ($0.6 million) decrease in the exchange rate impact on cash and cash
equivalents was attributable to a strengthening U.S. dollar against most of the
functional currencies earned by the Company in its European and Asia-Pacific
operations. The average dollar-weighted foreign currency decline for the three
month period ended March 31, 1998 for the Company's European and Asia-Pacific
operations was 8.7% and 7.5%, respectively.
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In September 1995, the Company's U.S. subsidiary entered into a loan
agreement with a bank that provides for a revolving line of credit of up to $3.0
million. The loan agreement was renewed in September 1997. Borrowings under the
loan agreement are secured by substantially all of the U.S. subsidiary's assets.
Interest on the revolving line of credit, which is at the prime rate (8.5% at
March 31, 1998) minus 0.5%, is payable monthly. The loan agreement contains
various restrictions and financial maintenance requirements, including the
requirement to maintain a compensating balance of $100,000. At March 31, 1998,
the Company's U.S. subsidiary had $3.0 million of unused credit available under
this facility.
Short-term borrowings outside the United States under available informal
credit facilities are typically a result of overdrafts. At March 31, 1998, the
Company had $1.4 million of foreign debt outstanding. The Company also has an
additional $1.0 million of unused foreign credit facilities. The banks may
withdraw these facilities at any time.
Use of Proceeds
The Company has not used the net proceeds of the initial public offering
held in August 1997. The net proceeds totaling approximately $4.8 million are
currently being held in cash and short-term investments.
Year 2000 (Millennium) Issues
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company and third parties with which the Company does business rely on numerous
computer programs in their day to day operations. The Company is evaluating the
Year 2000 issue, and as it relates to the Company's internal computer systems
and third party computer systems with which the Company interacts. The Company
is being advised by a majority of its vendors and suppliers that certain of
their products are Year 2000 compliant, or can be upgraded, or will not be
affected by the Year 2000 problem.
The Company expects to incur consulting and other expenses related to these
issues; these costs will be expensed as incurred. In addition, the appropriate
course of action may include a replacement of, or an upgrade to certain systems
or equipment. There can be no assurance that the Year 2000 issues will be
resolved in 1998 or 1999. The Company may incur significant costs in resolving
its Year 2000 issues, however, the Company believes this issue will not have a
significant adverse impact on the Company's operations.
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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.
DENISON INTERNATIONAL plc
By: /s/ Anthony D. Mustacchio
-------------------------
Anthony D. Mustacchio
Chief Financial Officer
Date: May 14, 1998
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