DSUP Dayton Superior Corp (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

Form 10-K

 

 

Commission File Number 1-11781

DAYTON SUPERIOR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

7777 Washington Village Dr.

Suite 130

Dayton, Ohio 45459

(Address of principal executive office)

Registrant’s telephone number, including area code:

(937) 428-6360

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share, registered on The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

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  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

As of March 31, 2009, there were 19,070,697 shares of common stock outstanding. As of June 30, 2008, the aggregate market value of common stock held by non-affiliates was $23,295,879 based on the closing market price of the common stock.

 

DOCUMENT INCORPORATED BY REFERENCE

 

Dayton Superior Corporation’s proxy statement for its Annual Meeting of Stockholders; definitive copies of the proxy statement will be filed with the Commission within 120 days of the Company’s most recently completed fiscal year. Only such portions of the proxy statement as are specifically incorporated by reference into Part III of this Report shall be deemed filed as part of this Report.

 

 

TABLE OF CONTENTS

In this Annual Report on Form 10-K, unless otherwise noted, the terms “Dayton Superior,” “we,” “us” and “our” refer to Dayton Superior Corporation, a Delaware corporation and successor (pursuant to a reincorporation merger effective December 15, 2006) to an Ohio corporation of the same name, and its subsidiary.

 

Part I

 

 

Available Information

 

We file annual, quarterly, current reports, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov .

 

Recent Developments

 

We have been engaged in a process to evaluate possible strategic alternatives in light of the maturity of indebtedness under our senior credit facilities and the pending maturity of our outstanding senior subordinated notes. These alternatives have included the possible sale of the Company or a controlling interest in the Company, and an exploration of available options to refinance or otherwise restructure our outstanding indebtedness. We retained Harris Williams & Co. on November 6, 2008 to assist us in our evaluation of possible strategic alternatives to enhance stockholder value, including the possible sale of the Company or a controlling interest in the Company. We retained Morgan Stanley & Co. Incorporated on November 21, 2008 to advise us on options to refinance or otherwise restructure our outstanding indebtedness. On February 24, 2009, we terminated the engagement of Morgan Stanley and, on March 15, 2009, we retained Moelis & Company LLC to advise us on options to refinance or otherwise restructure our outstanding indebtedness.

 

On March 16, 2009 and March 23, 2009, we amended our senior credit facilities to, among other things, extend the scheduled maturities thereunder to April 9, 2009, to increase the rate of interest payable thereunder and to provide for the payment of certain fees. These credit agreement extensions provide us with additional time to evaluate our alternatives.

 

We can provide no assurance that the process to explore strategic alternatives will result in a transaction or that the process to restructure the company’s indebtedness will be successful. As previously announced, we do not intend to disclose developments regarding these initiatives unless and until a definitive agreement is entered into or the Board of Directors determines to terminate one or both processes. There can be no assurances that we will be able to successfully negotiate a more comprehensive amendment or forbearance agreement or that waivers or additional extensions can be obtained from its senior lenders on acceptable terms in the future. There can be no assurance that any alternative sources of capital and/or alternative transactions will be available to us on acceptable terms or at all in the current challenging economic environment. We may be required to enter into a transaction that substantially dilutes or eliminates the value of our outstanding common stock. If we are unable to find suitable strategic alternatives or restructure our outstanding indebtedness on a consensual basis, we will be required to seek protection under the federal bankruptcy laws. See also “Risk Factors” and “Liquidity and Capital Resources”.

 

General

 

We believe we are both the leading North American provider of specialized products consumed in non-residential, concrete construction and the largest concrete forming and shoring rental company serving the domestic, non-residential construction market. In many of our product lines, we believe we are the lowest-cost

provider, competing primarily with smaller, regional suppliers that offer a more limited range of products and one other smaller national competitor. Our products can be found on construction sites nationwide and are used in non-residential construction projects, including:

 

 

Although certain of our products can be used in residential construction projects, we believe that less than 5% of our revenues are attributable to residential construction activity.

 

We sell most of our 17,000 products under well-established brand names. Our products are used to help form, strengthen, move, stabilize, cure, or color concrete. Our products are generally imbedded in, or applied to, concrete and consumed during the construction process, thereby providing us with a source of recurring revenue. Our products include metal and plastic bar supports, anchor bolts, snap ties, wall forming products, rebar splicing devices, load transfer units, precast and tilt-up construction lifting hardware, and construction chemicals. In addition, we sell a complete line of new and used forming and shoring systems, which may be combined to create solutions for a wide variety of customer-specific applications. We also rent a complete line of forming and shoring systems, and believe our rental fleet is the largest and most diverse in North America.

 

We manufacture and source our products through a balanced combination of North American manufacturing facilities and strategic outsourcing relationships. We use our network of 45 distribution, manufacturing, and sales and service centers to establish a strong local presence in each of the markets we serve, which also allows us to deliver our broad product offering, technical expertise, and customer service in a timely and efficient manner to our customers. We serve approximately 3,800 customers, consisting primarily of regional dealers and a broad array of general contractors and sub-contractors. We believe our distribution, manufacturing and service network is the largest in our industry.

 

In 2008, we generated $476 million in net sales, 84% of which were from product sales. Approximately 84% of our 2008 product sales (or approximately 72% of our total net sales) were generated through the sale of consumable products. This mix of consumable versus reusable products, which is typical for our business, represents a significant source of recurring revenue for our company.

 

Products

 

We offer more than 17,000 products, which we believe to be significantly more than our competitors who are mostly regional suppliers with limited product offerings. Most of our products are consumable, providing us with a source of recurring revenue. We continually attempt to increase the number of products we offer by using engineers and product development teams to introduce new products and refine existing products. Most of our products are sold under industry-recognized brand names including: Dayton/Richmond ^® , Aztec ^® , Symons ^® , BarLock ^® , Jahn ^® , Swift Lift ^® , Steel-Ply ^® , Dayton Superior ^® , Conspec ^® , Edoco ^® , Dur-O-Wal ^{® ,} and American Highway Technology ^® .

 

Product Sales Consist Of:

 

 

 

Rental Revenues and Sales of Used Rental Equipment Consist Of:

 

 

Manufacturing

 

We manufacture a majority of the products we sell and rent in 18 facilities throughout North America. These facilities incorporate semi-automated and automated production lines, heavy metal presses, forging equipment, stamping equipment, robotic welding machines, drills, punches and other heavy machinery typical for this type of manufacturing operation. Our production volumes and product mix enable us to use a combination of custom-designed and standard production equipment. We support our equipment with a team of experienced manufacturing engineers and tool and die makers.

 

Through investment in advanced technology for both production equipment and ERP-driven product planning, combined with our lean manufacturing management techniques, we believe we generally have achieved significantly greater productivity, lower capital equipment costs, lower scrap rates, higher product quality, faster changeover times, and lower inventory levels than most of our competitors. We also have a flexible manufacturing setup and can make the same products at several locations, which allows us to respond to local market requirements in a timely manner.

 

Given the high volume of certain of our products, we have recently been able to reduce our costs of sales by sourcing finished products and components through our manufacturing facility in Reynosa, Mexico and through foreign sourcing initiatives, including in China.

Fleet Management

 

We believe our rental fleet is the largest in North America. We actively manage our fleet mix to ensure certain products are regionally focused to address geography-specific applications. We also monitor our fleet purchases to maintain appropriate equipment levels and to manage our deployment of capital resources.

 

Distribution

 

We distribute our products to customers through our network of 22 service/distribution centers located in the United States and Canada. We ship most of our products to our service/distribution centers from our manufacturing plants. We have an on-line inventory tracking system that enables us to identify, reserve, and ship inventory quickly from our locations in response to customer orders.

 

Sales and Marketing

 

We employed approximately 260 sales and marketing personnel at December 31, 2008, of whom approximately two-thirds were field sales people and one-third were customer service representatives. Sales and marketing personnel are located in most of our service/distribution centers and are instrumental in driving the productivity of our regional operating model. We provide product documentation and consult on certain non-residential construction techniques in which our products can be used to solve typical construction problems. We promote our products through seminars and other customer education efforts and work directly with architects, engineers, and contractors to secure the use of our products whenever possible.

 

Technical and Customer Service

 

Each of our eight regions is supported by product specialists, engineers, and customer service representatives who provide our customers with product application technical support, engineering consultation, and product training. In addition, all of our regions are supported by one or more captive distribution facilities with make-to-order manufacturing capabilities. These capabilities allow us to deliver our products to any construction site in the United States in a timely manner and support our belief that our customer support infrastructure is a significant competitive strength in our industry. We employ approximately 80 individuals in our engineering department who combine region-specific product and application expertise with proprietary software applications to advise and consult on non-residential construction projects. We also make our library of product literature and training manuals readily available to our customers.

 

Customers

 

Of our approximately 3,800 customers, approximately half purchase our products for resale and half are end users. On a sales basis, 72% of our sales are purchased for resale and 28% of our sales are purchased by end users. Our customer base is geographically diverse and consists of distributors, rebar fabricators, precast and prestressed concrete manufacturers, brick, and concrete block manufacturers, general contractors, and sub-contractors.

 

Raw Materials

 

Our principal raw materials are steel wire rod, steel hot rolled bar, metal stampings and flat steel, aluminum sheets and extrusions, plywood, cement and cementitious ingredients, liquid chemicals, zinc, plastic resins and injection-molded plastic parts. We currently purchase materials from over 800 vendors and are not dependent on any single vendor or small group of vendors for any significant portion of our raw material purchases. Steel, in its various forms, typically constitutes approximately 30% of our product cost of sales.

 

Competition

 

Our industry is highly competitive in most product categories and geographic regions. We compete with smaller, regional suppliers that offer a more limited range of products, and one smaller national competitor. We believe competition in our industry is largely based on, among other things, price, quality, breadth of product offering, distribution capabilities (including quick delivery times), customer service, and expertise. Due primarily

to factors such as freight rates, quick delivery times and customer preference for local suppliers, some local or regional manufacturers and suppliers may have a competitive advantage over us in a given region. We believe the size, breadth, and quality of our product offerings provide us with advantages of scale in both distribution and production relative to our competitors.

 

Trademarks and Patents

 

Our products are sold under our registered trademarks that are well known throughout the concrete construction industry and are therefore important to our business. Among our better-known trademarks are Dayton Superior ^® , Dayton/Richmond ^® , Symons ^® , Aztec ^® , Dur-O-Wal ^® , American Highway Technology ^® , Conspec ^® , Edoco ^® , Jahn ^® , Swift Lift ^® , Bar Lock ^® , Steel-Ply ^® , the Hexagon Logo ^® and the S & Diamond ^® design. Many of our products are protected by our patents, which we consider an important asset. As of December 31, 2008, we had 111 patents and 37 pending patent applications, domestic and foreign, and 189 registered trademarks and pending applications for registration.

 

Employees

 

We employ approximately 600 salaried and 800 hourly personnel, of whom approximately 400 of the hourly personnel are represented by labor unions. Employees at the Miamisburg, Ohio; Parsons, Kansas; Elk Grove, Illinois; New Braunfels, Texas; Tremont, Pennsylvania; City of Industry, California, and Aurora, Illinois facilities are covered by collective bargaining agreements. Of the union contracts, three expire in 2009, two expire in 2010, and three expire in 2011. We believe we have good employee and labor relations and that no one contract is individually significant.

 

Seasonality

 

Due to weather, the non-residential construction industry is seasonal in most of North America. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales and income from operations typically are the lowest of the year. Our net sales and income from operations in the fourth quarter are also generally less than in the second and third quarters. Consequently, our working capital requirements related to accounts receivable and inventories, and therefore our peak revolving credit facility borrowings, tend to be higher in the second and third quarters.

 

Backlog

 

We typically ship most of our products, other than paving products and most specialty forming systems, within one week and often within 24 hours after we receive the order. Other product lines, including paving products and specialty forming systems, may be produced and shipped up to one year after we receive the order, depending on our customers’ needs. Accordingly, we do not maintain significant backlog, and backlog as of any particular date has not been representative of our actual sales for any succeeding period.

 

 

There is substantial doubt about our ability to continue as a going concern and, if we are unable to find suitable strategic alternatives or restructure our outstanding indebtedness on a consensual basis, we will be required to seek protection under the federal bankruptcy laws. As of March 27, 2009, we had $367.8 million in principal amount of debt (excluding debt discounts) maturing on or before June 15, 2009. If we are unable to refinance or extend that debt before its maturity, or if that debt is accelerated due to our default, and our lenders require immediate repayment, we will not be able to repay them.

 

Our $150 million revolving credit facility and our term loan, with an outstanding balance of $99.25 million, are each scheduled to mature on April 9, 2009. In addition, our Senior Subordinated Notes, which have a face value of $154.7 million, mature on June 15, 2009; however, the maturity of the Senior Subordinated Notes may be accelerated by the holders if we fail to repay our revolving credit facility and term loan when due.

Our independent, registered public accounting firm has issued an opinion on our financial statements that states that the financial statements were prepared assuming that we will continue as a going concern and further states that our recurring losses, stockholders’ deficit and inability to generate sufficient cash flow to meet our obligations as they come due and sustain our operations raise substantial doubt about our ability to continue as a going concern. If we are unsuccessful in refinancing or extending the term of our revolving credit facility, term loan and the Senior Subordinated Notes, our ability to continue as a going concern would be doubtful and we likely would be required to seek protection under the federal bankruptcy laws. In addition, it is possible that creditors could file an involuntary petition in bankruptcy against us. Even if we were successful in pursuing a negotiated restructuring of our outstanding debt and equity, we might be required to implement the restructuring through a proceeding under the federal bankruptcy laws.

 

There is no assurance that the terms of any refinanced indebtedness would be commercially reasonable, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Our consolidated financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or amounts and reclassification of liabilities that might be necessary should we be deemed to be unable to continue as a going concern.

 

If we file for bankruptcy protection our business and operations will be subject to certain additional risks.   A bankruptcy filing by or against us would subject our business to various risks, including the following:

 

 

We may not have sufficient cash to maintain our operations.   Due to weather, the non-residential construction industry is seasonal in most of North America. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales and income from operations typically are the lowest of the year. Our business requires us to increase our inventories in advance of the spring and summer construction season, which requires us to invest cash in our inventories. In addition, because of our financial condition, many of our vendors have refused to continue to extend us credit, or have reduced the terms on which they will extend us credit, requiring us to accelerate the payment of cash to our vendors. We also face significantly higher expenditures due in part to payments to our financial and legal advisers, as well as fees and other amounts payable to our lenders and their advisors in connection with amendments to our loan agreements to extend the maturity of their loans. Those

amendments also restrict how we utilize our operating cash flows. In addition, our cash inflow also is negatively affected by the downturn in the nonresidential construction industry in which we primarily operate. The lender under our revolving credit facility also has imposed additional limitations on the amount of cash we may borrow under the facility. In the event that the cash available to us from operations and under the revolving credit facility is insufficient to fund our operating expenses, we may be required to file for bankruptcy protection, as described above.

 

Our debt instruments impose significant operating restrictions on us.   Our debt agreements, among other things, restrict our ability to incur additional indebtedness; create liens; pay dividends and make distributions in respect of our capital stock; enter into agreements that restrict our subsidiary’s ability to pay dividends or make distributions; redeem or repurchase capital stock; make investments or other restricted payments; issue or sell preferred stock of subsidiaries; enter into transactions with affiliates; and consolidate, merge, or sell all or substantially all of our assets.

 

In addition to these restrictions, we are also restricted in the amount we may borrow under our revolving credit facility by a borrowing base calculation and are required to comply with certain financial covenants under our revolving credit and term loan agreements. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, and an adverse development affecting our business could require us to seek waivers or amendments of covenants, alternative or additional sources of financing or reductions in expenditures. We may not be able to obtain such waivers, amendments or alternative or additional financings on terms acceptable to us or at all. A breach of any of the covenants or restrictions contained in any of our existing or future debt agreements could result in an event of default under those agreements. Such a default could allow the creditors under the debt agreements to discontinue lending, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies, and to declare all borrowings outstanding thereunder to be due and payable. If our creditors require immediate repayments, we may not be able to repay them.

 

The non-residential construction industry is cyclical, and we are currently experiencing depressed market conditions for our products and services.   The non-residential construction industry is cyclical, and the downturn in the non-residential construction industry has caused a decline in the demand for our products. Our products are primarily used in domestic, non-residential construction; therefore our sales and earnings are strongly influenced by non-residential construction activity, which historically has been cyclical. Most recently, during 2007, 2008 and the first quarter of 2009, the non-residential construction market experienced a downward trend, and as a result, our sales unit volume was negatively affected. Non-residential construction activity can decline because of many other factors we cannot control, such as:

 

 

Demand for some of our products is seasonal, and we may experience significant variations in quarterly performance.   Due to weather, the non-residential construction industry is seasonal in most of North America. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales and income from operations typically are the lowest of the year. Our net sales and income from operations in the fourth quarter are also generally less than in the second and third quarters. Consequently, our working capital requirements related to accounts receivable and inventories tend to be higher in the second and third quarters and, accordingly, can adversely affect our liquidity and cash flow. Adverse weather, such as unusually prolonged periods of cold, rain, blizzards, hurricanes and other severe weather patterns, could delay or halt construction activity over wide regions of the country. A severe winter could lead to reduced construction activity and thus magnify the seasonal decline in our revenues and earnings during the winter months. Sustained extreme adverse weather conditions could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We have a history of losses and may experience substantial losses in the future. We cannot assure you that our net operating loss carryforwards will result in any significant tax savings in future periods.   Our business has experienced substantial net losses over the past several years and may continue to do so in the future. We reported net losses of $18.0 million in 2006, $6.7 million in 2007, and $12.0 million in 2008, and our stockholders’ deficit was $106.3 million as of December 31, 2008. Our results of operations and cash flows will continue to be affected by events and conditions both within and beyond our control, including competition, economic, financial, business and other conditions. We cannot assure you that our operations will become or remain profitable in the future. As of December 31, 2008, we had deferred tax assets of $55.6 million related to net operating loss carryforwards. We had valuation allowances for these net operating loss carryforwards and other net deferred tax assets as of December 31, 2008, as estimated levels of taxable income are less than the amount needed to realize these assets. In addition, the use of net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986, as amended. Section 382 imposes limitations on a company’s ability to use net operating loss carryforwards if a company experiences a more-than-50-percent ownership change over a three-year testing period. Some of the restructuring alternatives we are evaluating would cause a more-than-50-percent ownership change. As a result, our ability to use some of our net operating loss carryforwards in future periods may be limited as provided in Section 382.

 

Increased costs of raw materials and energy resources may result in increased operating expenses and adversely affect our results of operations and cash flows.   Significant variations in the costs, quality and availability of raw materials and energy may negatively affect our results of operations and cash flows. Steel, in its various forms, is our principal raw material, constituting approximately 30% of our product cost of sales in 2008. Any decrease in our volume of steel purchases could affect our ability to secure volume purchase discounts that we have obtained in the past. In addition, an overall increase in energy costs, including the cost of natural gas and petroleum products, could adversely impact our overall operating costs in the form of higher raw material, utilities, and freight costs. We typically do not enter into forward contracts to hedge commodity price risks that we face. Even though our costs may increase, our customers may not accept corresponding price increases for our products, or the prices for our products may decline. Our ability to achieve acceptable margins is principally dependent on managing our cost structure and managing changes in raw materials prices, which fluctuate based upon factors beyond our control. If the prices of our products decline, or if our raw material costs increase, such changes could have a material adverse effect on our operating margins and profitability.

 

Losing certain key customers could materially affect our revenues, and continuing consolidation of our customer base could reduce our profit margins.   Our top ten customers accounted for 26% of our net sales for the year ended December 31, 2008 and our largest customer accounted for 5%, 6%, and 7% of our net sales for the years ended December 31, 2008, 2007, and 2006, respectively. The loss of any of these customers could have a material adverse effect on our revenue and could also adversely affect our liquidity and cash flow from operating activities. Further, increasing consolidation of our customers may negatively affect our earnings. We believe there is an increasing trend among our distributor customers to consolidate into larger entities. As our customers increase in size and gain market power, they may be able to exert pressure on us to reduce prices or increase price competition by dealing more readily with our competitors. If the consolidation of our customers does result in increased price competition, our sales and profit margins may be adversely affected.

 

Our business may be subject to significant environmental investigation, remediation and compliance costs.   Our business and our facilities are subject to a number of federal, state and local environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the use, generation, handling, storage, transport and disposal of these materials. Many of these laws and regulations provide for substantial fines and criminal sanctions for violations. Permits are required for operation of our businesses (particularly air emission permits), and these permits are subject to renewal, modification and, in certain circumstances, revocation. Pursuant to certain environmental laws, a current or previous owner or operator of land may be liable for the costs of investigation and remediation of hazardous materials at the property. These laws can often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Persons who arrange (as defined under these statutes) for the disposal or treatment of hazardous materials also may be liable for the costs of investigation and remediation of these substances at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. We may be liable for costs under certain environmental laws even if we did

not cause the condition causing such liability. Changes in environmental laws or unexpected investigations could adversely affect our business. Since we own and operate a number of facilities where industrial activities have been historically conducted and because we arrange for the disposal of hazardous materials at many disposal sites, we may incur costs for investigation and remediation, as well as capital costs associated with compliance with these laws. More stringent environmental laws as well as more vigorous enforcement policies or discovery of previously unknown conditions requiring remediation could impose material costs and liabilities on us which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

Our Mexican operations and foreign sourcing relationships are subject to local business risks which could have a material adverse effect on our financial condition, results of operations and cash flows.   We operate a manufacturing facility in Reynosa, Mexico and purchase finished goods from China and other foreign sources. The success of our operations in Mexico and our foreign sourcing initiatives depend on numerous factors, many of which are beyond our control, including our inexperience with operating abroad, general economic conditions, restrictions on the repatriation of assets, compliance with foreign laws and standards and political risks. Our Mexican operations and foreign outsourcing relationships are affected directly and indirectly by global regulatory, economic and political conditions, including:

 

 

We cannot assure you that we will succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where we do business. Some or all of these factors may have a material adverse effect on our operations or upon our financial condition, results of operations, and cash flows in the future.

 

The high level of competition in our industry could materially adversely affect our business.   The markets in which we compete are highly competitive. Many of the markets in which we operate are served by numerous competitors, ranging from multi-regional companies to small, independent businesses with a limited number of locations. We generally compete on the basis of, among other things: price, quality, breadth of product offering, distribution capabilities (including quick delivery times), customer service and expertise. However, the uniformity of products among our competitors results in substantial pressure on pricing and profit margins. As a result of these pricing pressures, we may experience reductions in the profit margins on our sales, or we may be unable to pass any cost increases on to our customers. We cannot assure you that we will be able to maintain or increase the current market share of our products or compete successfully in the future. If competitive pressures were to cause us to reduce our prices, our operating margins may be adversely impacted. If we were to maintain our prices in the face of

price reductions by our competitors, our net sales could decline. We may encounter increased competition from existing competitors or new market entrants in the future, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

We are effectively controlled by a major stockholder, whose interests may conflict with yours.   Odyssey Investment Partners Fund, LP (“Odyssey”) and its affiliates control the voting of 47.8% of our common stock and, therefore, have the power to control or substantially affect the outcome of matters on which stockholders are entitled to vote. These include the election of directors, the adoption or amendment of our certificate of incorporation and by-laws, and possible mergers, corporate control contests and significant corporate transactions. Through their control of our board of directors, Odyssey and its affiliates also have the ability to appoint or replace our senior management, issue additional shares of our common stock or repurchase common stock, declare dividends or take other actions. Our controlling stockholder may make decisions regarding our company and business that are opposed to your interests or with which you disagree. To the extent the interests of our public stockholders are harmed by the actions of our controlling stockholder, the price of our common stock may be harmed.

 

Labor disputes with our employees could interrupt our operations and adversely affect our business.   We depend on our highly trained employees, and any work stoppage or difficulty hiring similar employees would adversely affect our business. We could be adversely affected by a shortage of skilled employees. As of December 31, 2008, approximately 25% of our employees were unionized. We are subject to several collective bargaining agreements with employees at our Miamisburg, Ohio; Parsons, Kansas; Elk Grove, Illinois; New Braunfels, Texas; Tremont, Pennsylvania; City of Industry, California; and Aurora, Illinois facilities. These collective bargaining agreements are scheduled to terminate beginning in April 2009 through June 2011, and we cannot offer assurances that we will be able to negotiate a satisfactory renewal of these collective bargaining agreements or that our employee relations will remain stable. Any shortage of labor could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

We depend on our key personnel and the loss of the services provided by any of our executive officers or other key employees could harm our business and results of operations.   Our success depends to a significant degree upon the continued contributions of our senior management, many of whom would be difficult to replace. Generally, these employees may voluntarily terminate their employment with us at any time. In such event, we may not be able to successfully retain existing personnel or identify, hire and integrate new personnel. Accordingly, it is possible that our business would be materially adversely affected if one or more of these key individuals left. We do not maintain any key-man or similar insurance policies covering any of our senior management or key personnel.

 

The nature of our business involves product liability and construction-related risks that could adversely affect our operating results.   Our products are used in various construction projects, and defects in our products could result in claims for personal injury or death and property damage. While we maintain insurance to cover these claims, it is possible that existing or future claims will exceed our insurance coverage. In addition, it is possible that third-party insurance will not continue to be available to us on economically reasonable terms. Claims brought against us that are not covered by insurance could have a material adverse effect on our operating results and financial condition. Our operations are subject to hazards inherent in the construction industry that could result in personal injury or death, work stoppage or serious damage to our equipment or to the property of our customers. To protect ourselves against such casualty and liability risks, we maintain an insurance program. Our deductibles per incident are $500,000 for general liability, $350,000 for workers’ compensation liability and $1,000 for automobile liability. In addition, we maintain a one-time annual deductible of $4.0 million for general liability and $5.0 million for workers’ compensation liability coverage. We maintain outside insurance for such liability in excess of these deductibles. Our deductibles may cause us to incur significant costs. If our insurance premiums or other costs rise significantly in the future, our profitability could be reduced.

 

The price of our common stock may fluctuate significantly.   Volatility in the market price of our common stock may prevent you from being able to sell your stock at prices equal to or greater than your purchase price. The market price of our common stock could fluctuate significantly for various reasons, including:

 

 

 

In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including us. The changes frequently occur without regard to the operating performance of the affected companies. Hence, the price of our common stock has fluctuated significantly.

 

Our common stock may be delisted from the Nasdaq Stock Market.   Our common stock is currently listed on The Nasdaq Stock Market’s Global Market (“Nasdaq”). We may fail to comply with Nasdaq’s continued listing rules, which require, among other things, that our common stock maintain a minimum bid price per share of $1.00. While Nasdaq has suspended enforcement of its minimum bid price rule, that suspension currently is scheduled to end on April 20, 2009, and there are no assurances that Nasdaq will extend the suspension beyond that date. If the suspension ends and we fail to comply with the minimum bid price rule and are unable to cure the failure within the period provided in Nasdaq’s rules, Nasdaq might delist our common stock. Delisting likely would have an adverse effect on the liquidity of our common stock and, as a result, the market price for our common stock might become more volatile. Delisting also might make it more difficult for us to raise equity capital.

 

Our certificate of incorporation and by-laws contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our common stock.   Our certificate of incorporation and by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following:

 

 

These provisions could discourage proxy contests, make it more difficult for our stockholders to elect directors and take other corporate actions and may discourage, delay or prevent a change in control or changes in our management that a stockholder might consider favorable. Any delay or prevention of a change in control or change in management that stockholders might otherwise consider to be favorable could deprive holders of our common stock of the opportunity to sell their common stock at a price in excess of the prevailing trading price and cause the trading price of our common stock to decline.

 

 

None

 

Our corporate headquarters is located in leased facilities in Dayton, Ohio. We believe our facilities provide adequate manufacturing and distribution capacity for our needs. We also believe all of the leases were entered into on market terms. Our other principal facilities as of December 31, 2008 are located throughout North America, as follows:

 

 

 

During the ordinary course of our business, we are from time to time threatened with, or may become a party to, legal actions and other proceedings. While we are currently involved in various legal proceedings, we believe the results of these proceedings will not have a material effect on our business, financial condition, results of operations, or cash flows. We believe that our potential exposure to these legal actions is adequately covered by product and general liability insurance, our legal liability reserves included in our financial statements, and, in some instances, by indemnification arrangements.

 

 

Not applicable.

Executive Officers

 

Our executive officers and their ages as of March 31, 2009, are as follows:

 

 

Eric R. Zimmerman has been President, Chief Executive Officer and a director of our company since August 2005.

 

Peter J. Astrauskas has been Vice President, Engineering since September 2003.

 

Raymond E. Bartholomae has been employed with Symons since 1970 and has been Executive Vice President and President, Symons since November 2005. He served as Vice President, Sales and Marketing from August 2003 to November 2005.

 

Jeffrey S. Dawley has been employed with the Company since 2000 and has been Vice President, Manufacturing since January 2007. From February 2006 to January 2007, he served as Director, Manufacturing Operations. From December 2003 to February 2006, he served as Manager, Operations Analysis.

 

Edward J. Puisis has been employed with the Company since 2003 and has been Executive Vice President and Chief Financial Officer since November 2005. He served as Vice President and Chief Financial Officer from August 2003 to November 2005.

 

Thomas W. Roehrig has been employed with the Company since 1998 and has been Vice President, Finance and Secretary since January 2007. From November 2005 to January 2007, he served as Vice President of Corporate Accounting and Secretary. He served as Vice President of Corporate Accounting from February 2003 to November 2005 and was also Treasurer from August 2003 to December 2003.

 

Keith M. Sholos has been employed with the Company since 2002 and has been Vice President, Sales since January 2007. From September 2005 to January 2007, he served as Vice President, Sales. From August 2004 to September 2005, he served as Vice President, Dealer Sales. From January 2004 to August 2004, he served as Vice President, Sales & Marketing, Construction Products Group.

 

Part II

 

 

Our common stock is traded on The Nasdaq Stock Market’s Global Market under the symbol “DSUP.” The prices presented in the following table are the high and the low closing prices for the period presented as reported by The Nasdaq Stock Market’s Global Market.

 

 

As of February 26, 2009, we had approximately 100 holders of record of our common stock.

 

We have not paid dividends on our common stock. We intend to retain all future earnings, if any, for repayment of debt, use in our operations, and to fund expansion of our business and future growth. We do not anticipate paying any dividends for the foreseeable future. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, cash flows, financial condition and requirements, business condition and covenants under any applicable contractual arrangements. Our ability to pay dividends on our common stock is limited by the covenants of our revolving credit facility and the indentures governing our outstanding debt securities.

 

The following table sets forth selected historical consolidated financial information as of and for each of the years in the five-year period ended December 31, 2008 and has been derived from our audited consolidated financial statements. Our audited consolidated financial statements for the three years ended December 31, 2008 are included elsewhere herein. You should read the following table together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section below and our consolidated financial statements and their related notes included elsewhere herein.

 

 

 

 

 

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. See “Risk Factors” included elsewhere in this document for a discussion of important factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained in this discussion. Please refer to “Cautionary Note Concerning Forward-Looking Statements” included elsewhere in this document.

Overview

 

We believe we are both the leading North American provider of specialized products consumed in non-residential, concrete construction and the largest concrete forming and shoring rental company serving the domestic, non-residential construction market. Demand for our products and rental equipment is driven primarily by the level of non-residential construction activity in the United States, which consists primarily of:

 

 

Although certain of our products can be used in residential construction projects, we believe that less than 5% of our revenues are attributable to residential construction activity.

 

We use three segments to monitor gross profit by sales type: product sales, rental revenue, and used rental equipment sales. These sales are differentiated by their source and gross margin as a percentage of sales. Accordingly, this segmentation provides information for decision-making and resource allocation. Product sales represent sales of new products carried in inventories on the balance sheet. Cost of goods sold for product sales include material, manufacturing labor, overhead costs, and freight. Rental revenues represent the leasing of the rental equipment and are recognized ratably over the lease term. Cost of goods sold for rental revenues includes depreciation of the rental equipment, maintenance of the rental equipment, and freight. Sales of used rental equipment represent sales of the rental equipment after a period of generating rental revenue. Cost of goods sold for sales of used rental equipment consists of the net book value of the rental equipment.

 

Recent Developments

 

See “Business—Recent Developments”, “Risk Factors” and “Liquidity and Capital Resources” for a discussion of recent developments that are material to our Company.

 

Industry Conditions

 

The non-residential construction industry is cyclical, and we are currently experiencing depressed market conditions for our products and services. Our products are primarily used in domestic, non-residential construction; therefore our sales and earnings are strongly influenced by non-residential construction activity, which historically has been cyclical. Most recently, during 2007, 2008 and the first quarter of 2009, the non-residential construction market experienced a downward trend, and as a result, our sales unit volume was negatively affected. We have made headcount reductions, closed facilities, and curbed spending to align our operations with fourth quarter and anticipated 2009 unit volume declines.

Results of Operations

 

The following table summarizes our results of operations as a percentage of net sales for the periods indicated:

 

 

Comparison of Years Ended December 31, 2008 and 2007

 

Net Sales.   Our 2008 net sales were $475.9 million, a 1.5% decrease from $483.0 million in 2007. The following table summarizes our net sales by product type for the periods indicated:

 

 

Product sales increased $1.5 million, or 0.4%, to $399.9 million in 2008 from $398.4 million in 2007. The increase in product sales was due to price increases of $53.5 million, offset by a reduction in unit volume of $52.0 million as a result of declines in the nonresidential construction markets.

 

Rental revenue decreased $2.2 million, or 3.7%, to $57.5 million in 2008, compared to $59.7 million in 2007. The decrease was due to declines in the nonresidential construction markets.

 

Used rental equipment sales decreased to $18.5 million in 2008 from $24.9 million in 2007 due to lower customer demand. Used rental equipment sales may vary significantly from period to period.

Gross Profit.   Gross profit for 2008 was $159.3 million, a $7.5 million increase from the $151.8 million for 2007. Gross profit was 33.5% of sales in 2008, increasing from 31.4% in 2007.

 

Product gross profit in 2008 was $118.0 million, or 29.5% of product sales, in 2008, compared to $105.5 million, or 26.5% of product sales, in 2007. The $12.5 million increase in product gross profit was due to higher product sales prices of $53.5 million, offset by net cost inflation, primarily steel costs, of $27.2 million and unit volume declines of $13.8 million. Our cost savings and efficiencies partially offset the impact of inflation.

 

Rental gross profit decreased $1.1 million to $25.3 million, or 44.1% of rental revenue, in 2008, from $26.4 million, or 44.2% of rental revenue, in 2007. Depreciation on rental equipment in 2008 was $13.6 million, as compared to $16.6 million in 2007, due to lower rental equipment additions. Rental gross profit before depreciation decreased to $38.9 million, or 67.7% of rental revenue, in 2008 from $43.0 million, or 72.0% of rental revenue in 2007, due primarily to freight between facilities increasing as a result of regional demand.

 

Gross profit on used rental equipment sales in 2008 was $16.0 million, or 86.4% of used rental equipment sales, compared to $20.0 million, or 80.1% of used rental equipment sales, in 2007. The decrease in gross profit dollars was due to the decreased sales discussed previously. Gross profit as a percentage of sales fluctuates based on the age and type of the specific equipment sold and was higher than normal due to more sales of fully depreciated rental equipment.

 

Operating Expenses.   Selling, general, and administrative expenses increased to $110.7 million in 2008 as compared to $106.9 million in 2007. Personnel related expenses accounted for $1.7 million of the increase. Depreciation expense and taxes increased $0.8 million each, and professional fees increased $0.5 million.

 

Facility closing and severance expenses increased to $3.8 million in 2008 from $1.8 million in 2007. In the first half of 2008, we completed the move of our manufacturing and distribution operation from Des Plaines, Illinois to Elk Grove, Illinois that began in 2007. In the fourth quarter of 2008, we offered and completed a voluntary early retirement program and made other reductions to headcount and facilities to align our operations with fourth quarter and anticipated 2009 unit volume declines. The 2008 expense was comprised of $2.6 million of employee termination benefits and $1.2 million of facility closing costs. Expected future closing costs, primarily related to ongoing lease obligations of vacated facilities, of $1.8 million are expected to be incurred through the first quarter of 2013, $0.8 million of which is expected to be incurred in 2009.

 

Other Expenses.   During the first quarter of 2008, we refinanced a portion of our long-term debt. We entered into a new $150 million revolving credit facility and issued a $100 million term loan. The proceeds of the term loan and an initial draw on the revolving credit facility were used to repay our $165 million Senior Second Secured Notes.

 

Interest expense was $50.2 million in 2008, comprised of $37.5 million of interest charges and $12.7 of non-cash amortization of debt discount and financing costs. This compares to interest expense of $47.0 in 2007, comprised of $40.0 million of interest charges and $7.0 million of non-cash amortization of debt discount and financing costs. The decrease in interest charges was due to lower interest rates on the new revolving credit facility and new term loan as compared to the previous revolving credit facility and Senior Second Secured Notes. The increase in non-cash amortization of debt discount and financing costs was due to the debt discount and financing costs on the new term loan and revolving credit facility being amortized over the initial terms of the new facilities of approximately one year.

 

In conjunction with the refinancing, the Company recorded a loss on extinguishment of long-term debt, comprised of the following:

 

Loss Before Provision for Income Taxes.   The loss before income taxes in 2008 was $11.3 million, as compared to $6.3 million in 2007 due to the factors described above.

 

Provision for Income Taxes.   The provision for income taxes is a result of foreign earnings and state and local taxes. A non-cash valuation allowance has been recorded to reduce net deferred tax assets, primarily related to net operating loss carryforwards, to zero, as estimated levels of future taxable income are less than the amount needed to realize this asset. If such estimates change in the future, the valuation allowance will be decreased or increased appropriately, resulting in a non-cash increase or decrease to net income.

 

Net Loss.   Net loss for 2008 was $12.0 million, or $0.64 per share, compared to $6.7 million, or $0.37 per share, in 2007 due to the factors described above.

 

Comparison of Years Ended December 31, 2007 and 2006

 

Net Sales.   Our 2007 net sales were $483.0 million, a 0.8% increase from $479.3 million in 2006. The following table summarizes our net sales by product type for the periods indicated:

 

 

Product sales increased $10.3 million, or 2.7%, to $398.4 million in 2007 from $388.1 million in 2006. The increase in product sales was due to price increases of $15.9 million, partially offset by a reduction in unit volume of $5.6 million as a result of declines in the nonresidential construction markets.

 

Rental revenue decreased $3.1 million, or 4.9%, to $59.7 million in 2007, compared to $62.8 million in 2006. The decrease was due to declines in the nonresidential construction markets.

 

Used rental equipment sales decreased to $24.9 million in 2007 from $28.4 million in 2006 due to lower customer demand. Used rental equipment sales may vary significantly from period to period.

 

Gross Profit.   Gross profit for 2007 was $151.8 million, a $13.4 million increase from the $138.4 million for 2006. Gross profit was 31.4% of sales in 2007, increasing from 28.9% in 2006. Each segment experienced increased gross profit as a percentage of sales.

 

Product gross profit was $105.5 million, or 26.5% of product sales, in 2007, compared to $91.7 million, or 23.6% of product sales, in 2006. The $13.7 million increase in product gross profit was due to higher product sales, which contributed $14.6 million of product gross profit, and $9.7 million of lower costs due to operating efficiencies, partially offset by inflation in costs of $10.6 million.

 

Rental gross profit increased $0.5 million to $26.4 million, or 44.2% of rental revenue in 2007, from $25.9 million, or 41.3% of rental revenue, in 2006. Depreciation on rental equipment in 2007 was $16.6 million, as compared to $19.2 million in 2006, due to the rental equipment acquired in a 2003 acquisition having primarily a 3-year estimated useful life. Rental gross profit before depreciation decreased to $43.0 million, or 72.0% of rental revenue, in 2007 from $45.1 million, or 71.8% of rental revenue in 2006, due to decreased rental revenue as discussed above.

 

Gross profit on used rental equipment sales was $20.0 million, or 80.1% of used rental equipment sales, compared to $20.7 million, or 72.9% of used rental equipment sales, in 2006. The decrease in gross profit dollars was due to the decreased sales discussed previously. Gross profit as a percentage of sales fluctuates based on the age and type of the specific equipment sold and was higher than normal due to more sales of fully depreciated rental equipment.

Operating Expenses.   Selling, general, and administrative expenses was virtually flat at $106.9 million in 2007 as compared to $106.5 million in 2006. Stock compensation expense, a non-cash expense, was $2.8 million in 2007 as compared to $2.2 million in 2006. Professional fees decreased $2.2 million, as reduced consulting fees for profit improvement initiatives were partially offset by Sarbanes-Oxley compliance costs. Rent expense at distribution centers increased $2.1 million due to more square footage. Depreciation expense increased $0.8 million due to investments in information systems and distribution centers. All other items netted to a $0.9 million decrease.

 

Facility closing and severance expenses were $1.8 million in 2007 and $0.4 million in 2006, due to moving our manufacturing and distribution operation from Des Plaines, Illinois to Elk Grove, Illinois.

 

Other Expenses.   Interest expense decreased to $47.0 million in 2007 from $50.0 million in 2006 due to the proceeds of the Company’s December 2006 initial public offering being used to pay down debt. Other expense was $2.3 million in 2007 due to $2.2 million of costs related to terminated merger discussions.

 

Loss Before Provision for Income Taxes.   The loss before income taxes in 2007 was $6.3 million, as compared to $17.6 million in 2006 due to the factors described above.

 

Provision for Income Taxes.   The provision for income taxes is a result of foreign earnings and state and local taxes. A non-cash valuation allowance has been recorded to reduce net deferred tax assets, primarily related to net operating loss carryforwards, to zero, as estimated levels of future taxable income are less than the amount needed to realize this asset. If such estimates change in the future, the valuation allowance will be decreased or increased appropriately, resulting in a non-cash increase or decrease to net income.

 

Net Loss.   The net loss for 2007 was $6.7 million, or $0.37 per share, as compared to a loss of $18.0 million, or $1.76 per share, in 2006 due to the factors described above.

 

Liquidity and Capital Resources

 

Our $150 million revolving credit facility and $100 million term loan were scheduled to mature on March 14, 2009 unless we were able to repay or refinance our Senior Subordinated Notes due June 2009 prior to that time. We were unable to repay or refinance the Senior Subordinated Notes before the initial maturity date of the revolving credit facility and term loan. While we have entered into amendments to the revolving credit and term loan agreements to extend the scheduled maturities to give us time to continue negotiations on the terms of a more comprehensive amendment or forbearance arrangement and to allow us to continue to evaluate possible strategic alternatives to enhance stockholder value (including the possible sale of the Company or a controlling interest in the Company), as of March 31, 2009, those maturities had been extended only until April 9, 2009. In addition, the amendments to the revolving credit and term loan agreements, (i) increase the rate of interest payable thereunder and provide for the payment of certain fees, (ii) require us to make interest rate payments on a monthly basis, rather than quarterly; (iii) amend the reporting covenants under the agreements to provide for more frequent disclosures; (iv) provide that we will not extend our previously announced private exchange offer and concurrent consent solicitation with respect to the Senior Subordinated Notes due 2009 that expires on April 9, 2009 or accept for payment any Senior Subordinated Notes surrendered in connection therewith; and (v) require us to provide, on or prior to April 9, 2009, a letter of intent or definitive term sheet for the acquisition of the Company by a person acceptable to the lenders on terms and conditions satisfactory to the lenders.

 

Our Senior Subordinated Notes, which have a face value of $154.7 million, mature on June 15, 2009. We commenced a private offer in July 2008 to exchange the Senior Subordinated Notes in a private placement for an equal amount of newly issued Senior Secured Notes due September 2014 and we periodically have extended that offer. The current expiration date of the offer is April 9, 2009. As of March 31, 2009, that offer had not been accepted by the holders of the required 95% in aggregate principal amount of the Senior Subordinated Notes (as of the close of business on March 12, 2009, Senior Subordinated Notes with an aggregate principal amount of $9.6 million had been tendered and not withdrawn). The amendments to the revolving credit facility and the term loan agreements restrict us from further extending the offer or from accepting for payment any Senior Subordinated Notes surrendered in connection with the exchange offer.

 

Our independent, registered public accounting firm has issued an opinion on our consolidated financial statements that states that the financial statements were prepared assuming that we will continue as a going concern

and further states that our recurring losses, stockholders’ deficit and inability to generate sufficient cash flow to meet our obligations as they come due and sustain our operations raise substantial doubt about our ability to continue as a going concern. If we are unsuccessful in refinancing or extending the term of our revolving credit facility, term loan and Senior Subordinated Notes, our ability to continue as a going concern would be doubtful and we likely would be required to seek protection under federal bankruptcy laws. See “Risk Factors”.

 

We may not have sufficient cash to maintain our operations. Due to weather, the non-residential construction industry is seasonal in most of North America. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales and income from operations typically are the lowest of the year. Our business requires us to increase our inventories in advance of the spring and summer construction season, which requires us to invest cash in our inventories. In addition, because of our financial condition, many of our vendors have refused to continue to extend us credit, or have reduced the terms on which they will extend us credit, requiring us to accelerate the payment of cash to our vendors. We also face significantly higher expenditures due in part to payments to our financial and legal advisers, as well as fees and other amounts payable to our lenders and their advisors in connection with amendments to our loan agreements to extend the maturity of their loans. Those amendments also restrict how we utilize our operating cash flows. In addition, our cash inflow also is negatively affected by the downturn in the nonresidential construction industry in which we primarily operate. The lender under our revolving credit facility also has imposed additional limitations on the amount of cash we may borrow under the facility. In the event that the cash available to us from operations and under the revolving credit facility is insufficient to fund our operating expenses, we may be required to file for bankruptcy protection, as described above.

 

Historically, working capital borrowings under our revolving credit facility fluctuate with sales volume, such that our peak revolving credit borrowings are generally in the late second or early third quarter. Our key measure of liquidity and capital resources is the amount available under our revolving credit facility. As of December 31, 2008, we had $14.1 million available under our revolving credit facility, with an additional $0.4 million of cash.

 

Our capital uses relate primarily to capital expenditures and debt service. Our capital expenditures consist primarily of additions to our rental equipment fleet and additions to our property, plant, and equipment. Property, plant, and equipment consist primarily of manufacturing and distribution equipment and management information systems. We finance these capital expenditures with borrowings under our revolving credit facility and proceeds of sales of our used rental equipment. The following table sets forth a summary of these transactions for the years indicated.

 

 

We believe we can manage the capital requirements of the rental fleet, and thus our cash flow, through the careful monitoring of rental fleet additions. Subject to market demand, sales of used equipment can be adjusted to increase cash available for fleet additions or other corporate purposes. We expect rental equipment and property, plant, and equipment additions in 2009 to be similar to 2008.

 

Our cash requirements relate primarily to capital expenditures and debt service and, in the near term, professional fees related to our evaluation of possible strategic alternatives to refinance or restructure our indebtedness. Historically, our primary sources of financing have been cash generated from operations before interest, net borrowings under our revolving credit facility, and the issuance of long-term debt and equity. In December 2006, we completed an initial public offering of our common stock and received $87.8 million in proceeds, net of issuance costs.

Comparison of Years Ended December 31, 2008 and 2007

 

Net cash provided by operating activities for 2008 was $3.2 million compared to net cash used in operating activities for 2007 of $1.2 million, comprised of the following:

 

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities were $32.0 million for 2008 as compared to $17.6 million for 2007, primarily due to the loss on extinguishment of long-term debt and higher amortization of deferred financing costs and debt discount, as discussed in “Other Expenses” above.

 

Changes in assets and liabilities resulted in a $16.8 million use of cash in 2008 as compared to $12.1 million in 2007. The change consisted primarily of the following:

 

 

Net cash used in investing activities was $0.4 million in 2008 compared to $21.4 million in 2007. Property, plant, and equipment additions decreased to $12.3 million in 2008 from $19.9 million in 2007 as fewer investments were needed. Proceeds from sales of property, plant, and equipment of $1.5 million in 2008, were primarily related to the sale of a facility we previously vacated. Additions to rental equipment decreased to $12.6 million in 2008 as compared to $25.2 million in 2007 as the decline in demand for rental equipment required less investment in additional rental equipment. Proceeds from sales of used rental equipment, which tend to lag the actual sales of the equipment approximately by a quarter, were $23.0 million in 2008 as compared to $23.7 million in 2007.

 

During the first quarter of 2008, we refinanced a portion of our long-term debt. We entered into a new $150.0 million revolving credit facility and issued a $100.0 million term loan, which was issued at a discount for net proceeds of $94.2 million. The proceeds of the term loan and an initial $88.7 million draw on the revolving credit facility were used to repay our $165.0 million Senior Second Secured Notes, including prepayment premium of $4.6 million, accrued interest of $9.8 million, and financing costs related to the new debt instruments of $3.4 million.

 

For the fiscal year ended December 31, 2008, our net borrowings on the new revolving line of credit facility and its predecessor were $84.8 million, which primarily related to the initial $88.7 million draw discussed above. Net borrowings were comprised of gross borrowings of $234.2 million and gross repayments of $149.3 million.

 

Comparison of Years Ended December 31, 2007 and 2006

 

Net cash used in investing activities was $21.4 million in 2007 compared to $11.2 million in 2006. Net PP&E additions increased to $19.9 million in 2007 from $13.2 million in 2006 due to the move to the Elk Grove, Illinois facility, and increased investments in manufacturing and distribution equipment and facilities and information systems. Net additions to rental equipment were a $1.5 million use of cash in 2007 as compared to a $2.0 million source of cash in 2006 due to the higher additions of rental equipment.

 

For the year ended December 31, 2007, our gross long-term debt borrowings, which represent the sum of individual days with borrowings on the revolving credit facility, were $106.4 million. This was offset by repayments on the revolving credit facility of $106.4 million and $2.3 million of repayments of other long-term debt.

Credit Arrangements

 

Under the revolving credit facility, borrowings are limited to 85% of eligible accounts receivable and 60% of eligible inventories and rental equipment. At December 31, 2008, $107.9 million was available, of which $84.8 million was outstanding at a weighted average interest rate of 5.3%. Outstanding letters of credit were $9.0 million, resulting in available borrowings of $14.1 million. The revolving credit facility is secured by substantially all of our assets.

 

As of December 31, 2008, our other long-term debt consisted of the following:

 

 

The Senior Subordinated Notes mature in June 2009. The Senior Subordinated 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 term loan was issued at a discount, which is being accreted to the face value using the effective interest method and reflected as interest expense. The term loan is subject to financial covenants for debt to adjusted EBITDA, as defined in the agreement, and interest coverage, and has a second security interest in substantially all of our assets. We are in compliance with both of these covenants. Adjusted EBITDA would have had to decrease by approximately $14.0 million for us to have been out of compliance with the more restrictive covenant.

 

At December 31, 2008, working capital (deficit) was $(259.0) million, compared to $62.0 million at December 31, 2007. The decrease was comprised primarily of the following:

 

Commitments

 

Scheduled payments of long-term debt, interest, future minimum lease payments under capital leases, future minimum lease payments under non-cancelable operating leases and unrecognized tax benefits at December 31, 2008 were as follows:

 

 

 

 

Seasonality

 

Due to weather, the non-residential construction industry is seasonal in most of North America. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales and income from operations typically are the lowest of the year. Our net sales and income from operations in the fourth quarter are also generally less than in the second and third quarters. Consequently, our working capital requirements related to accounts receivable and inventories, and therefore our peak revolving credit facility borrowings, tend to be higher in the second and third quarters.

 

Inflation

 

We may not be able to pass on the cost of commodity price increases to our customers. Steel, in its various forms, is our principal raw material, constituting approximately 30% of our product cost of sales in 2008. Although our steel costs decreased slightly during the fourth quarter of 2008, costs remain significantly higher than at the beginning of 2008. In 2009, we expect our overall steel costs to continue increasing, perhaps significantly.

 

Forward-Looking Statements

 

This Form 10-K 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 our management and us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. We disclaim any obligation to 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 as a 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 the general economy, governmental expenditures, interest rate increases, and changes in banking and tax laws; the amount of debt we must service; the effects of weather and the seasonality of the construction industry; our ability to implement cost savings programs successfully and on a

timely basis; cost increases in raw materials and operating costs; and favorable market response to sales price increases. This list of factors is not intended to be exhaustive, and additional information concerning relevant risk factors can be found under the heading Risk Factors above and in future Quarterly Reports on Form 10-Q, and current Reports on Form 8-K we file with the Securities and Exchange Commission.

 

Critical Accounting Policies

 

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position, results of operations, and cash flows. We continually review our accounting policies and financial information disclosures. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, inventories, long-lived assets, income taxes, self-insurance reserves, litigation, and the fair value of the Company and its business segments. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Accounts Receivable Reserves

 

We maintain reserves for sales discounts and allowances and for doubtful accounts for estimated losses resulting from customer disputes and/or the inability of customers to make required payments. Receivables are charged to the allowance for doubtful accounts when an account is deemed to be uncollectible.

 

Inventories

 

We value our inventories at the lower of first-in, first-out, or FIFO, cost or market and include all costs associated with manufacturing products: materials, inbound freight, labor and manufacturing overhead. We provide net realizable value reserves that reflect our best estimate of the excess of the cost of potential obsolete and slow moving inventory over the expected net realizable value. Excluding newly introduced products, we reserve 100% of inventory items that have had no sales or usage in the trailing twelve-month period. We additionally reserve for items that have a quantity on hand in excess of the trailing twelve months’ sales and usage, ranging from 25% to 100% of the excess, depending on the number of years’ supply on hand. Based on this calculation, our reserve was approximately $4.8 million as of December 31, 2008. If the range were decreased by 10%, the reserve at December 31, 2008 would be reduced by $400,000. If the range were increased by 10%, the reserve at December 31, 2008 would be increased by $225,000.

 

Rental Equipment

 

We manufacture and purchase rental equipment for rent to others on a short-term basis and for resale. We record rental equipment at the lower of FIFO cost or market and depreciate it over the estimated useful life of the equipment, three to fifteen years, on a straight-line method. Rental equipment that is sold is charged to cost of sales on a FIFO basis.

 

Goodwill

 

We review the recorded value of our goodwill annually for the product sales reporting unit, the only business segment with goodwill, as of the end of the fiscal third quarter, or more frequently if events or changes in circumstances indicate that the carrying amount may exceed fair value. An additional review was performed as of December 31, 2008. The review for impairment requires us to estimate the fair value of our product sales reporting unit and considerable judgment must be exercised in determining these values.

When exercising judgment, we consider all of the relevant facts and circumstances available to us at the time. The critical factors affecting this analysis include:

 

 

Taking all of these factors into account, we determine the fair value of our product sales reporting unit by deriving enterprise value indications using a weighted average of multiple valuation approaches, including discounted cash flow analyses and a range of adjusted EBITDA multiples from market prices of companies that provide a reasonable basis of comparison. The fair value of our product sales reporting unit would have had to decrease by approximately 20% and 40% as of September 30, 2008 and December 31, 2008, respectively, for our goodwill to have been impaired.

 

Income Taxes

 

Deferred tax assets and liabilities are recorded for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities reflect the enacted tax rates in effect for the years the differences are expected to reverse. We evaluate the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that we will realize deferred tax assets in the future. In estimating whether deferred tax assets are realizable, we consider both positive and negative evidence. We estimate levels of future taxable income by considering historical results of operations in recent years and would, if necessary, consider the implementation of prudent and feasible tax planning strategies to generate taxable income. We record liabilities for uncertain tax matters based on an assessment of the likelihood of sustaining certain tax positions.

 

Insurance Reserves

 

We are self-insured for certain of our group medical, workers’ compensation and product and general liability claims. We have stop loss insurance coverage at various per occurrence and per annum levels depending on type of claim. Actual claims experience can impact these calculations and, to the extent that subsequent claim costs vary from estimates, future earnings could be impacted and the impact could be material.

 

Our group medical reserve is undiscounted and based on the dollar-weighted average historical lag between the date the service was incurred and the date the claim is paid, which was approximately 110 days at December 31, 2008. A 5-day increase or decrease in the lag would increase or decrease the reserve by approximately $40,000.

 

Our workers’ compensation reserve is undiscounted and estimated based on industry development factors of incurred and paid losses. A one-percentage point increase or decrease in the development factor would increase or decrease the reserve by $130,000 at December 31, 2008.

 

The product and general liability reserve is undiscounted and is the sum of the loss estimate of known claims and the estimate of incurred but not reported (IBNR) claims. IBNR claims are estimated based on the historical annual number of claims times the historical cost per claim. A 10% increase or decrease in the average cost would increase or decrease the December 31, 2008 reserve by approximately $50,000.

 

Pension Liabilities

 

Pension and other retirement benefits, including all relevant assumptions required by accounting principles generally accepted in the United States of America, are evaluated each year. Since there are many assumptions used to estimate future retirement benefits, differences between actual future events and prior estimates and assumptions could result in adjustments to pension expense and obligations. Certain actuarial assumptions, such as the discount

rate and expected long-term rate of return, have an impact on the amounts reported for net periodic pension cost and the related benefit obligations. In estimating the discount rate for our plans, we use a rate derived from a corporate yield curve.

 

A one percentage point change in the discount rate would have the following effects:

 

 

The Company’s expected return on plan assets is 8.0%, which represents a weighted average of 11% for equity securities, 5.5% for debt securities, and 4% for cash and cash equivalents and an insurance contract applied to the Plan’s target asset allocation. A one percentage point change in the expected return on plan assets would have the following effects:

 

 

Revenue Recognition

 

Revenue is generally recognized from product sales when the product is shipped from our facilities and risk of loss and title have passed to the customer. Additionally, revenue is recognized at the customer’s written request and when the customer has made a fixed commitment to purchase goods on a schedule consistent with the customer’s business, where risk of ownership has passed to the buyer, the goods are physically segregated, and we do not retain any specific performance obligations. For customer-requested bill and hold transactions in which a performance obligation exists on our part prior to the delivery date, we do not recognize revenue until the total performance obligation has been met and all of the above criteria related to bill and hold transactions have been met. In instances where the customer provides payment for these services prior to the delivery date, the revenue is deferred until all performance obligations have been met. Sales recognized under bill and hold arrangements were $3.8 million, $3.1 million, and $3.7 million as of December 31, 2008, 2007, and 2006, respectively. For rental equipment sales, revenue is recognized and recorded on the date of shipment. Rental revenues are recognized ratably over the terms of the rental agreements. Sales orders with multiple deliverables are allocated among the components based on the fair values of the individual components.

 

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board has issued several pronouncements that we adopted in 2008 or are required to adopt in 2009. However, currently these pronouncements are either not applicable to us or not material to our consolidated financial statements.

 

 

As of December 31, 2008, the financial instruments we had that were sensitive to changes in interest rates are our $150.0 million revolving credit facility and our term loan with an outstanding balance of $99.3 million.

 

The outstanding balance under the revolving credit facility as of December 31, 2008 was $84.8 million, and the average borrowings for the fiscal year ended December 31, 2008 were $95.5 million. The facility has several interest rate options that re-price on a short-term basis. During the fiscal year ended December 31, 2008, our weighted average interest rate on the facility was 6.0%. A one percentage point increase or decrease in our weighted average interest rate on the facility would have increased or decreased our annual interest expense by approximately $1.0 million. Pursuant to recent amendments to the revolving credit agreement, effective as of March 23, 2009, (a) the interest rate has been increased to, at our option, the adjusted base rate, as defined, plus 5.5%, or LIBOR plus 6.5%, plus (i) an additional 1.5% on special overadvances, (other than additional special overadvances), as defined, and (ii) an additional 3.5% on additional special overadvances, as defined, (with up to (1) other than in the case of

interest on special overadvances and additional special overadvances, 4.0% of the total interest rate paid-in-kind at our option, (2) in the case of interest of special overadvances (other than additional special overadvances), 3% of such interest paid-in-kind at our option and (3) in case of interest on additional special overadvances), 5% of such interest paid-in-kind at our option) and (b) the minimum adjusted base rate was established at 4.25% and the minimum LIBOR was established at 3.25%.

 

The term loan bears interest at three-month LIBOR plus 4.50%, with a LIBOR floor of 3.25%. Due to the floor, a one percentage point increase or decrease in three-month LIBOR would not have changed our annual interest expense. Effective March 16, 2009, pursuant to an amendment to the term loan credit facility, the interest rate increased to, at our option, the adjusted base rate, as defined, plus 11.50% or LIBOR plus 12.50% (with up to 8.00% of the total interest rate paid-in-kind at our option). Effective March 23, 2009, pursuant to an additional amendment to the term loan credit facility, the minimum adjusted base rate was increased to 4.25% from 3.25%.

 

In the ordinary course of our business, we also are exposed to price changes in raw materials (particularly steel rod and steel bar), freight due to fuel costs, 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 do not use financial instruments to manage our exposure to changes in commodity prices.

 

The risk of changes in foreign exchange rates on the translation of the financial statements of our Canadian subsidiary is not material.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Dayton Superior Corporation

Dayton, OH

 

We have audited the accompanying consolidated balance sheets of Dayton Superior Corporation and subsidiary (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ deficit, cash flows, and comprehensive loss for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dayton Superior Corporation and subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s recurring losses, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations as they come due and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 7, effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes — an Interpretation of Financial Accounting Standards Board Statement No. 109.” Also, as discussed in Note 6, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R), on December 31, 2006.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2009 expresses an unqualified opinion on the Company’s internal control over financial reporting.

 

DELOITTE & TOUCHE LLP

 

Dayton, Ohio

March 31, 2009

Dayton Superior Corporation and Subsidiary

 

Consolidated Balance Sheets

As of December 31

 

 

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

Dayton Superior Corporation and Subsidiary

 

Consolidated Statements of Operations

Years Ended December 31

 

 

The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

 

Dayton Superior Corporation and Subsidiary

Consolidated Statements of Stockholders’ Deficit
Years Ended December 31, 2008, 2007, and 2006