<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-64140
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DAL-TILE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3548809
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
7834 Hawn Freeway, Dallas, Texas 75217
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(Address of principal executive office)
(Zip Code)
(214)398-1411
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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As of August 13, 1996, the registrant had outstanding 15,873 shares of voting
common stock, par value $0.01 per share. As of August 13, 1996, the registrant
also had outstanding 4,074,620 shares of non-voting common stock, par value
$0.01 per share.
<PAGE>
DAL-TILE INTERNATIONAL INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements (Unaudited) 3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Page 2
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS & SIX MONTHS ENDED JUNE 30, 1996 and 1995
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $180,849 $116,602 $351,523 $235,955
Cost of goods sold 95,515 55,188 183,455 113,298
-------- -------- -------- --------
Gross profit 85,334 61,414 168,068 122,657
Expenses:
Transportation 11,712 8,229 21,669 16,271
Selling, general and administrative 50,294 32,614 98,445 68,047
Provisions for merger integration charge -- -- 9,000 -
Amortization of intangibles 1,401 1,191 2,802 2,382
-------- -------- -------- --------
Total expenses 63,407 42,034 131,916 86,700
-------- -------- -------- --------
Operating income 21,927 19,380 36,152 35,957
Interest expense 13,600 13,720 27,429 27,287
Interest income 551 380 1,136 868
Other expense (income) 1,008 (423) 491 (2,023)
-------- -------- -------- --------
Income before income taxes 7,870 6,463 9,368 11,561
Income tax provision 2,981 1,982 3,549 6,254
-------- -------- -------- --------
Net income $ 4,889 $ 4,481 $ 5,819 $ 5,307
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
Page 3
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DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 33,576 $ 72,965
Trade accounts receivable 108,389 103,909
Inventories 118,960 118,811
Prepaid expenses 3,477 3,872
Other current assets 10,867 8,531
-------- --------
Total current asset 275,269 308,088
Property, plant, and equipment, at cost 221,027 209,996
Less accumulated depreciation 50,274 42,073
-------- --------
170,753 167,923
Goodwill, net of amortization 159,634 162,016
Finance costs, net of amortization 5,747 6,432
Tradename and other assets 24,095 27,934
-------- --------
Total assets $635,498 $672,393
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
<PAGE>
DAL-TILE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, 1996 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
June 30, December 31,
1996 1995
--------- -------
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable $ 18,688 $38,755
Accrued expenses 23,591 27,983
Accrued interest payable 15,255 17,398
Current portion of long-term debt 47,047 47,047
Deferred income taxes 5,604 3,981
Other current liabilities 15,014 20,796
--------- -------
Total current liabilities 125,199 155,960
Long-term debt 474,170 480,769
Other long-term liabilities 20,315 25,023
Deferred income taxes 1,002 1,002
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares - 6,584,207; issued and
outstanding shares - 4,090,493 41 41
Additional paid-in capital 334,035 334,035
Accumulated deficit (260,185) (266,004)
Currency translation adjustment (59,079) (58,433)
--------- -------
Total stockholders' equity 14,812 9,639
--------- -------
Total liabilities and stockholders' equity $ 635,498 $672,393
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
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DAL-TILE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1996 1995
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,819 $ 5,307
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 11,884 8,599
Deferred income tax provision 359 3,113
Foreign currency transaction loss (gain) 145 (3,148)
Zero coupon note interest expense 5,930 5,270
Changes in operating assets and liabilities:
Trade accounts receivable (4,455) 1,355
Inventories (131) (8,929)
Other assets (2,558) 868
Trade accounts payable and accrued expenses (21,233) (1,368)
Accrued interest payable (2,144) (325)
Other liabilities (9,313) (1,156)
-------- --------
Net cash (used in) provided by operating activities (15,697) 9,586
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment, net (11,188) (16,376)
-------- --------
FINANCING ACTIVITIES
Repayment of long-term debt (49,630) (17,422)
Borrowings under long-term debt 37,101 19,927
-------- --------
Net cash (used in) provided by financing activities (12,529) 2,505
Effect of exchange rate changes on cash 25 (432)
-------- --------
Net decrease in cash (39,389) (4,717)
Cash at beginning of period 72,965 12,977
-------- --------
Cash at end of period $ 33,576 $ 8,260
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
<PAGE>
DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. BASIS OF PRESENTATION
The operating results of Dal-Tile International Inc. and its consolidated
subsidiaries (the "Company") for the three and six months ended June 30, 1996
reflect the results of operations of Dal-Tile International Inc. and its
consolidated subsidiaries, including the operations of American Olean Tile
Company Inc. ("AO") and certain related assets of the ceramic tile business
of Armstrong World Industries, Inc. ("AWI"). AO and such related assets were
acquired (the "AO Acquisition") by the Company from AWI on December 29, 1995.
Because the Company's results for the three and six months ended June 30,
1995 do not reflect the AO Acquisition, the results for such periods are not
directly comparable.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the financial
position, results of operations, and cash flow have been included. The
results of operations for the six months ended June 30, 1996, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the December 31, 1995
annual report on Form 10-K of the Company.
Certain amounts in 1995 have been reclassified to conform to the 1996
presentation.
2. ACQUISITION
On December 29, 1995, the Company completed the AO Acquisition. As part of
the AO Acquisition, AWI paid $27,575,000 in cash to the Company. The AO
Acquisition was accounted for under the purchase method of accounting.
In exchange for the stock, cash and assets contributed as part of the AO
Acquisition, AWI received 37% of the issued and outstanding capital stock of
the Company. The fair value of the net assets acquired was approximately
$133,575,000 including the $27,575,000 cash. The financial statements for
1996 include the financial position and operating results of American Olean
but are excluded from the 1995 financial statements.
AO manufactures and markets commercial and residential glazed and unglazed
tile for sales to contractors, distributors, and home improvement centers in
the United States and Canada.
Page7
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DAL-TILE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REFINANCING
The Company has filed a Registration Statement with the Securities and
Exchange Commission for an initial public offering of equity securities and
also contemplates a private placement of its equity securities and entering
into a new bank credit agreement, all of which are designed to repay
substantially all the Company's existing debt.
4. CAPITAL STRUCTURE
Prior to the closing of the initial public offering of the Company's common
stock, the Company will effect a recapitalization of its current capital
stock. Pursuant to the common stock conversion, all the classes of the
Company's previously outstanding common stock will be converted into
45,404,472 shares of a single class of common stock.
5. INVENTORIES
Inventories consist of the following at June 30, 1996 and December 31, 1995
(In Thousands):
June 30, December 31,
1996 1995
---- ----
(Unaudited)
Raw materials $ 14,621 $ 12,224
Work-in-process 3,391 3,567
Finished goods 100,948 103,020
-------- --------
$118,960 $118,811
======== ========
Page8
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following at June 30 1996 and December 31,
1995 (In Thousands):
<TABLE>
<CAPTION>
June 30 December 31,
1996 1995
-------- ------------
(Unaudited)
<S> <C> <C>
Senior Secured Zero Coupon Notes $105,008 $ 99,078
Series A Notes payable, unsecured 176,000 220,000
Series B Notes payable, unsecured 100,000 100,000
Revolving Credit Loan, unsecured 123,197 91,197
Other 17,012 17,541
-------- --------
521,217 527,816
Less current portion 47,047 47,047
-------- --------
$474,170 $480,769
======== ========
</TABLE>
The Company has paid $27,600,000 out of the cash proceeds from the AO
Acquisition to redeem $32,600,000 aggregate principal amount at maturity
($26,000,000 aggregate accreted value at the Redemption Date) of the Zero
Coupon Notes at a redemption price of 106% of their accreted value on the
Redemption Date.
In July 1996 the Company commenced the Zero Coupon Tender Offer and the Zero
Coupon Solicitation with respect to the outstanding Zero Coupon Notes,
excluding the Redeemed Notes previously called for redemption. The Zero
Coupon Tender Offer will expire on August 19, 1996 unless extended.
7. INCOME TAXES
The income tax provision reflects effective tax rates of 38% and 31% for the
three months ended June 30, 1996 and 1995, and 38% and 54% for the six months
ended June 30, 1996 and 1995, respectively. The high effective rate for the
six months ended June 30, 1995 reflects the inability to record a tax loss
benefit in the United States due to the Company being in a net operating loss
carryforward position for U.S. federal income tax purposes.
8. MERGER INTEGRATION CHARGES
In the first quarter of 1996, the Company recorded a pre-tax merger
integration charge of $9.0 million for the closings of duplicative sales
centers, duplicative distribution centers, manufacturing facility closings
and severance costs associated with the elimination of overlapping positions.
The majority of the charge is related to lease commitments extending beyond
1996.
Page9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the three and six
months ended June 30, 1996 compared with the three and six months ended June 30,
1995 for Dal-Tile International Inc. and its consolidated subsidiaries (the
"Company"). The Company's operating results for the three and six months ended
June 30, 1996 reflect the results of operations of American Olean Tile Company
Inc. ("AO") and certain related assets of the ceramic tile business of Armstrong
World Industries, Inc. ("AWI"). AO and such related assets were acquired (the
"AO Acquisition") by the Company from AWI on December 29, 1995. Because the
Company's results for the three and six months ended June 30, 1995 do not
reflect the AO Acquisition, the results for such periods are not directly
comparable.
On December 29, 1995, the Company completed the AO Acquisition. As part of the
AO Acquisition, AWI paid $27,575,000 in cash to the Company. The AO
Acquisition was accounted for under the purchase method of accounting.
In exchange for the stock, cash and assets contributed as part of the AO
Acquisition, AWI received 37% of the issued and outstanding capital stock of the
Company. The fair value of the net assets acquired was approximately
$133,575,000 including the $27,575,000 cash.
As a result of the AO Acquisition, the 1996 results include the results of
operations of AO. After the consummation of the AO Acquisition, management
began to rapidly execute the company's merger integration plan. In connection
with the integration plan, the Company has started merging duplicative sales
service centers, restructured and consolidated its sales force, closed certain
manufacturing facilities and is in the process of restructuring its entire North
American distribution system. In addition, most general and administrative
functions are being consolidated. Consequently, the reported results of
operations for the Company for the three and six months ended June 30, 1996 are
not directly comparable to the reported results of operations for the Company
for the three and six months ended June 30, 1995.
Net Sales
Net sales for the second quarter increased from $116.6 million in 1995 to $180.8
million in 1996, an increase of $64.2 million or 55%. Net sales for the six
months ended June 30, 1996 increased to $351.5 million from $236.0 million for
the six months ended June 30, 1995, an increase of $115.5 million or 49%. The
increase in net sales for both the three and six months ended June 30, 1996 as
compared with the same periods in 1995 was due principally to the inclusion of
AO's operations in 1996 and increased shipments to home center retailers.
Gross Profit
Gross profit increased $23.9 million, or 38.9%, to $85.3 million in the second
quarter of 1996 from $61.4 million in the second quarter of 1995. For the six
months ended June 30, 1996 gross profit increased from $122.7 million for the
six months ended June 30, 1995 to $168.1 million, an increase of $45.4 million
or 37.0%. The increase in gross profit is principally the result of the
increase in net sales.
Page10
<PAGE>
Gross margin decreased in the second quarter of 1996 to 47.2% from 52.7% in the
second quarter of 1995 and decreased for the six months ended June 30, 1996 to
47.8% from 52.0% for the comparable period in 1995. The decrease in gross
margin is primarily due to production at higher cost facilities acquired as part
of the AO Acquisition, which historically resulted in AO generating lower gross
margins than the Company. These facilities were closed in March 1996 and
production has been shifted to lower cost manufacturing plants. In addition, as
a result of the AO Acquisition, the Company has a significantly increased
presence in the independent distributor channel. Sales through this channel
carry lower gross margins than sales made through the Company's sales service
centers, but due to lower operating expense levels comparable operating margins
are achieved.
The Company experienced lower gross margins in the second quarter of 1996 as
compared to the first quarter of 1996. The Company manufactured inventory at
certain AO plants prior to their closure at the end of the first quarter of
1996. This higher cost inventory, relative to inventory produced at the
remaining plants, has negatively affected the Company's gross margin in the
second quarter of 1996 and will negatively affect the Company's gross margin in
the third quarter of 1996 as it is sold.
Expenses
Expenses increased to $63.4 million in the second quarter of 1996 from $42.0
million in the second quarter of 1995 and increased to $131.9 million for the
six months ended June 30, 1996 from $86.7 million for the six months ended June
30, 1995. The increase in expenses is primarily due to inclusion of AO's
operations. In addition, results for the first quarter of 1996 include $9.0
million of merger integration charges, contributing to the increase for the six
months ended June 30, 1996. Expenses as a percent of sales decreased from 36.0%
in the second quarter of 1995 to 35.1% in the second quarter of 1996 and
increased from 36.7% for the six months ended June 30, 1995 to 37.5% for the
comparable period in 1996.
Excluding merger integration charges, expenses for the six months ended June 30,
1996 decreased to 35.0% of sales. The decrease in expenses as a percent of
sales for the second quarter of 1996 and for the six months ended June 30, 1996
(excluding merger integration charges) as compared to the same period in 1995,
respectively, is due to consolidation savings achieved by integrating sales
forces, closing duplicative sales service centers and consolidating
administrative functions. Additionally, sales made to independent distributors
require lower operating expense levels which offset the lower gross margins
generated through this distribution channel. These savings were offset in part
by increased advertising costs to increase brand name recognition, increased
information systems costs for integration to one system and retention of
duplicative personnel during a transition period while closing sales centers.
Page11
<PAGE>
Merger Integration Charges
In the first quarter of 1996, the Company recorded a pre-tax merger integration
charge of $9.0 million for the closings of duplicative sales centers,
duplicative distribution centers, and certain manufacturing facilities, as well
as incurrence of severance costs associated with the elimination of overlapping
positions. The majority of the $9.0 million is a cash charge related to lease
commitments associated with closings of duplicative facilities extending beyond
1996.
Operating Income
Operating income increased to $21.9 million in the second quarter of 1996 from
$19.4 million in the second quarter of 1995 and increased to $36.2 million for
the six months ended June 30, 1996 from $36.0 million for the six months ended
June 30, 1995. Operating income (excluding merger integration charges)
increased to $45.2 million for the six months ended June 30, 1996 from $36.0
million for the comparable period in 1995. Operating income for both the three
months ended June 30, 1996 and six months ended June 30, 1996 (excluding merger
integration charges) increased as a result of the AO Acquisition and related
cost savings, but was offset in part by lower gross margins.
Interest Expense (Net)
Interest expense (net) of $13.0 million in the second quarter of 1996 and $26.3
million for the six months ended June 30, 1996 is comparable to interest expense
(net) of $13.3 million in the second quarter of 1995 and $26.4 million for the
six months ended June 30, 1995, respectively.
Income Taxes
The income tax provision reflects effective tax rates of 38% and 31% for the
three months ended June 30, 1996 and 1995 and 38% and 54% for the six months
ended June 30, 1996 and 1995, respectively. The high effective rate in the six
months ended June 30, 1995 reflects the Company's inability to record a tax loss
benefit in the United States due to its being in a net operating loss carry
forward position for United States federal income tax purposes.
Net Income
Net income increased to $4.9 million in the second quarter of 1996 from $4.5
million in the second quarter of 1995 and increased to $5.8 million for the six
months ended June 30, 1996 from $5.3 million for the six months ended June 30,
1995. Excluding merger integration charges, net income increased to $11.4
million for the six months ended June 30, 1996 from $5.3 million for the
comparable period in 1995. The increase in net income (excluding merger
integration charges) reflects the improvements in operating income (excluding
merger integration charges) offset by transaction gain reductions in 1996 as a
result of the stabilizing of the peso in 1996.
Page12
<PAGE>
Peso-U.S. Dollar Exchange Rate.
The Company's Mexican facility is primarily a provider of ceramic tile to the
Company's U.S. operations and in addition sells ceramic tile in Mexico. In both
the three and six months ended June 30, 1996, sales in Mexico represented 3% of
the Company's consolidated net sales. The Company's sales in Mexico are peso-
denominated and primarily all of the Mexican facility's cost of sales and
operating expenses are peso-denominated. In the three and six months ended June
30, 1996, peso-denominated cost of sales and operating expenses represented 10%
of the Company's consolidated cost of sales and expenses. The Company's
exposure to exchange rate changes is favorable to operating results when the
peso devalues against the U.S. dollar, since peso costs exceed peso revenues.
As the peso appreciates against the U.S. dollar, the effect is unfavorable to
the Company's operating results. In addition to exchange rate changes on
operating results, foreign currency transaction gains or losses are recognized
in other income and expense. During the three and six months ended June 30,
1996, the Company recorded transaction losses of approximately $1.3 million and
$0.5 million, respectively. Except for peso transactions, management utilizes
foreign currency forward contracts to offset exposure to exchange rate changes,
although the number and amount of such contracts are not significant. Since the
exposure to the peso exchange rate change is favorable when the peso devalues
against the U.S. dollar and management does not expect the peso to appreciate
significantly against the U.S. dollar in the near term, management has not
entered into peso currency forward contracts.
Liquidity and Capital Resources
Historically, the Company's principal sources of cash were from operating
activities and bank borrowings. Cash used in operating activities was $15.7
million for the six months ended June 30, 1996 and cash provided by operating
activities was $9.6 million for the same period in 1995. Cash was used in the
six months ended June 30, 1996, principally to fund payments of trade accounts
payable as a result of the timing of payment to vendors, capital expenditures
and the payment of the $17.0 million semiannual interest due in respect to the
Series A Notes and the Series B Notes.
The Company's liquidity requirements arise primarily from working capital needs,
which consist principally of inventory and accounts receivable, capital
expenditures and debt service. Cash used in financing activities was
approximately $12.5 million for the six months ended June 30, 1996, which
reflected borrowings under the Company's existing bank credit agreement (the
"Existing Bank Credit Agreement") to repay $44.0 million in principal under the
Series A Notes and $17.0 million in interest on the Series A Notes and the
Series B Notes. The payments were funded from borrowings on the Existing Bank
Credit Agreement and cash on hand. At June 30, 1996, amounts available under
the Existing Bank Credit Agreement amounted to approximately $36.8 million. In
connection with the AO Acquisition, the Company received $27.6 million in cash,
which is included in the June 30, 1996 Consolidated Financial Statements as
cash. The Company had an additional $6.0 million in cash balances, for total
cash balances of $33.6 million at June 30, 1996.
Page13
<PAGE>
The Company has filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission for the initial public offering of equity securities
(the "Offering") and also contemplates a private placement of its equity
securities (the "Private Placement") and entering into a new bank credit
agreement (the "New Bank Credit Agreement"), all of which are designed to repay
substantially all of the Company's debt (collectively, the "Refinancing"). In
connection with the initial public offering, the Company will effect a
recapitalization of its current capital stock. Pursuant to the common stock
conversion, all of the classes of the Company's previously outstanding common
stock will be converted into 45,404,472 shares of a single class of common
stock.
The Company is undertaking the the Refinancing to improve its financial and
operating flexibility, to reduce its interest expense and to extend the
amortization of its senior indebtedness.
The Company has paid $27.6 million out of the cash proceeds from the AO
Acquisition to redeem $32.6 million aggregate principal amount at maturity
($26.0 million aggregate accreted value at the Redemption Date) of the Zero
Coupon Notes at a redemption price of 106% of their accreted value on the
Redemption Date. The total redemption, including the 106%, was $27.6 million.
In July 1996 the Company commenced a tender offer (the "Zero Coupon Tender
Offer") and the zero coupon consent solicitation (the "Zero Coupon
Solicitation") with respect to the outstanding Zero Coupon Notes, excluding
those Zero Coupon Notes previously called for redemption. The Zero Coupon
Tender Offer will expire on August 16, 1996 unless extended.
The Company will use the net proceeds of the Refinancing: (i) to effect the
Zero Coupon Tender Offer and the Zero Coupon Solicitation; (ii) to repay in full
outstanding borrowings by Dal-Tile's wholly owned subsidiary, Dal-Tile Group,
under the Existing Bank Credit Agreement; (iii) to repay $176.0 million of the
Series A Notes and $100.00 million of the Series B Notes; and (iv) to pay
accrued interest and estimated prepayment premiums on certain debt to be repaid,
a $4.0 million fee in connection with the termination of the Company's
management agreement with AEA Investors (the "Termination Fee") and fees and
expenses; provided, however, that the net proceeds from the Offering will not be
used to repay Series A Notes or Series B Notes. In connection with the
Refinancing, The Company will record an extraordinary charge of $20.7 million,
net of tax, for the write off of existing deferred financing fees, the
Termination Fee and prepayment premiums on certain debt to be repaid. This
charge will be recorded in the Company's third quarter of 1996 upon completion
of the Refinancing.
The New Bank Credit Agreement will include a new term loan of $275.0 million and
a new revolving credit facility of $250.0 million. Loans under the New Bank
Credit Agreement will bear interest at variable rates. The Company will be
required to make annual amortization payments in respect of the New Bank Credit
Agreement starting in the first quarter of 1997. The New Bank Credit Agreement
will contain customary affirmative and restrictive covenants, as well as
financial covenants, under which the Company must operate.
The Company believes that existing cash balances and cash flow from operating
activities (if generated as anticipated) together with borrowings available
under the New Bank Credit Agreement will be sufficient to fund future working
capital needs, capital spending requirements and debt service requirements of
the Company in the foreseeable future.
Page14
<PAGE>
Capital expenditures were $11.2 million for the six months ended June 30, 1996.
The expenditures during 1996 were used to fund routine capital improvements.
During 1996 and 1997 the Company plans to spend approximately $50.0 million (of
which $11.2 million has been expended through June 30, 1996) and $55.0 million,
respectively, to expand its manufacturing capacity, improve manufacturing
efficiencies, upgrade its research and development facilities, integrate the
Company's and AO's management information systems, make leasehold improvements
at certain sales centers and fund routine capital maintenance. As of June 30,
1996, the company had entered into commitments of approximately $14.0 million
for these expansion plans. The Company estimates total cash AO merger
integration costs of approximately $17.0 million pertaining to severance and
lease commitments for manufacturing, distribution and corporate facility
consolidations, as well as elimination of duplicate and overlapping positions.
Of this amount, the Company incurred cash costs of $12.8 million in connection
with the AO merger integration in the first six months of 1996. The Company
believes cash generated from operations and availability under the New Bank
Credit Agreement will be sufficient to fund expansion of its manufacturing
facilities and merger integration costs.
At June 30, 1996, the Company's accumulated deficit was $260.2 million. The
Company believes that the deficit has not affected its ability to obtain
financing or negotiate favorable terms with its vendors due in part to working
capital of $150.1 million at June 30, 1996, cash flow from operations and
additional availability of $36.8 million under the Existing Bank Credit
Agreement at June 30, 1996.
The peso devaluation and economic uncertainties in Mexico are not expected to
have a significant impact on the Company's liquidity. Since the Company has no
peso-based borrowings, high interest rates in Mexico are not expected to
directly affect the Company. The Company may encounter changes in its credit
terms to Mexican customers; however, the consolidated impact is not expected to
be material. Since the Company's Mexican subsidiaries incur more peso-
denominated costs than revenues generated in pesos, the effect of any peso
devaluation on income from operations has been favorable to the Company.
The Company is involved in various judicial and administrative proceedings
relating to environmental matters. The Company is currently engaged in
environmental investigation and remediation programs at certain sites relating
to activities prior to the AEA Acquisition and AO Acquisition, respectively.
The Company maintains a reserve for remediation relating to environmental
conditions and activities existing prior to the AEA Acquisition and is entitled
to indemnification with respect to certain expenditures incurred in connection
with environmental matters. It does not expect the ultimate liability with
respect to such investigation and remediation activities to have a material
effect on the Company's liquidity and financial condition. In addition, with
respect to the investigation and remediation programs relating to environmental
conditions and activities prior to the AO Acquisition, the Company believes
that, based on currently available information and the terms and conditions of
AWI's indemnification obligations under the AO Acquisition Agreement (as defined
below), any liability of AO that is reasonably likely to arise with respect to
such sites would not result in a material adverse effect on the Company.
Page15
<PAGE>
The United States is a party to GATT. Under GATT, the United States currently
imposes import duties on ceramic tile outside North America countries at 17%, to
be reduced ratably to 8 1/2% by 2005. Accordingly, GATT may stimulate
competition from manufacturers outside North America who now export, or who may
seek to export, ceramic tile to the United States. The Company cannot predict
with certainty the effect that GATT may have on the Company's operations.
Effects of Inflation
The Company believes it has generally been able to increase selling prices and
productivity to offset increases in costs resulting from inflation in the United
States and Mexico. Inflation has not had a material impact on the Company's
results of operations during the six months ended June 30, 1996 and 1995.
Approximately 80% of the Company's inventory is valued using the LIFO inventory
accounting method. Therefore, current costs are reflected in cost of sales
rather than in inventory balances. The impact of inflation in Mexico has not
had a significant impact on the second quarter 1996 and six months ended June
30, 1996 operating results, however, the future impact is uncertain at this
time.
Page16
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
10.1 Consulting Agreement dated as of August 1, 1995 among Harold L. Turk,
Dal-Tile International Inc., Dal-Tile Corporation, DTM/CM Holdings
Inc., Dal-Minerals Company, Ceramica Regiomontana S.A. de C.V. and
Materiales Ceramicos, S.A. de C.V. (Filed as Exhibit 10.2 to the
Registrant's Amendment No. 1 to its Registration Statement on Form S-1,
Number 333-5069 and incorporated herein by reference).
10.2 First Supplemental Indenture dated as of August 1, 1996, between Dal-
Tile International Inc. and Citibank, N.A., as trustee, relating to the
Zero Coupon Notes. (Filed as Exhibit 10.8 to the Registrant's Amendment
No. 2 to its Registration Statement on Form S-1, Number 333-5069 and
incorporated herein by reference).
10.3 Agreement, dated July 15, 1995, among Dal-Tile International Inc., AEA
Investors Inc., DTI Investors LLC, Armstrong World Industries, Inc.,
Armstrong Enterprises, Inc. and Armstrong Cork Finance Corporation.
(Filed as Exhibit 10.17 to the Registrant's Amendment No. 2 to its
Registration Statement on Form S-1, Number 333-5069 and incorporated
herein by reference).
10.4 Commitment Letter, dated June 26, 1996, among Dal-Tile Group Inc. and
Chase Securities Inc., The Chase Manhattan Bank, N.A., Credit Suisse,
Goldman, Sachs & Co. and Pearl Street, L.P. (Filed as Exhibit 10.17 to
the Registrant's Amendment No. 1 to its Registration Statement on Form
S-1, Number 333-5069 and incorporated herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
Page17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
DAL-TILE INTERNATIONAL INC.
---------------------------
(Registrant)
Date:
August 13, 1996 /s/ CARLOS E. SALA
- --------------- ------------------------------------------
Carlos E. Sala
Executive Vice President, Chief Financial Officer
and Treasurer
Page18
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