##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
 For the Quarterly Period ended September 30, 2006
 Commission File No. 333-51839
 DAY INTERNATIONAL GROUP, INC.
 
     þ o
  o o þ
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DAY INTERNATIONAL GROUP, INC.
INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    17Item 4. Controls and Procedures
    
    18PART II OTHER INFORMATIONItem 6. Exhibits
    
    20Signature
    
    20EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(In thousands)
 2006
    
    
    2005(Unaudited)ASSETSCash and cash equivalents
    
    $
    34,127
    
    
    $
    9,595Accounts receivable (less allowance for doubtful accounts of $3,000 and $2,927)
    
    
    48,975
    
    
    
    41,468Inventories (Note B)
    
    
    46,863
    
    
    
    41,119Other current assets
    
    
    22,759
    
    
    
    22,028Total current assets
    
    
    152,724
    
    
    
    114,210Property, plant and equipment, net of accumulated depreciation of $63,822 and $53,948
    
    
    63,277
    
    
    
    56,896Goodwill
    
    
    142,925
    
    
    
    136,988Intangible assets, net of accumulated amortization of $32,635 and $29,971
    
    
    15,275
    
    
    
    17,904Other assets
    
    
    11,075
    
    
    
    8,421Assets of discontinued operations (Note J)
    
    
    
    
    
    
    40,238TOTAL ASSETS
    
    $
    385,276
    
    
    $
    374,657LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    11,598
    
    
    $
    6,744Current maturities of long-term debt
    
    
    3,827
    
    
    
    12,604Other current liabilities
    
    
    28,797
    
    
    
    19,860Total current liabilities
    
    
    44,222
    
    
    
    39,208Long-term and subordinated long-term debt
    
    
    365,311
    
    
    
    386,702Other long-term liabilities
    
    
    38,007
    
    
    
    36,477Redeemable preferred stock (Note C)
    
    
    53,380
    
    
    
    48,657Liabilities of discontinued operations (Note J)
    
    
    
    
    
    
    14,867STOCKHOLDERS EQUITY (DEFICIT):Common shares
    
    
    1
    
    
    
    1Contra-equity associated with the assumption of majority shareholders bridge loan
    
    
    (68,673
    )
    
    
    (68,673
    )Accumulated
deficit
    
    
    (54,778
    )
    
    
    (81,391
    )Accumulated other comprehensive gain/(loss)
    
    
    7,806
    
    
    
    (1,191
    )Total stockholders equity (deficit)
    
    
    (115,644
    )
    
    
    (151,254
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    385,276
    
    
    $
    374,657
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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In thousands)
(Unaudited)
 Three Months
    
    
    Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005NET SALES
    
    $
    86,754
    
    
    $
    78,546
    
    
    $
    249,246
    
    
    $
    231,873COST OF GOODS SOLD
    
    
    54,310
    
    
    
    49,326
    
    
    
    155,908
    
    
    
    144,237GROSS PROFIT
    
    
    32,444
    
    
    
    29,220
    
    
    
    93,338
    
    
    
    87,636SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
    
    
    18,354
    
    
    
    16,745
    
    
    
    53,847
    
    
    
    51,207AMORTIZATION OF INTANGIBLES
    
    
    8
    
    
    
    8
    
    
    
    25
    
    
    
    22MANAGEMENT FEES
    
    
    250
    
    
    
    250
    
    
    
    750
    
    
    
    750OPERATING PROFIT
    
    
    13,832
    
    
    
    12,217
    
    
    
    38,716
    
    
    
    35,657OTHER EXPENSES:Interest expense:Long-term debt (including gain on interest rate swap, amortization of deferred financing costs and discount of $462, $456, $(4,599), and $1,319)
    
    
    8,818
    
    
    
    5,452
    
    
    
    20,804
    
    
    
    16,569Redeemable preferred stock dividends (including amortization of discount and issuance costs of $33, $47, $97, and $141)
    
    
    1,631
    
    
    
    6,594
    
    
    
    4,723
    
    
    
    19,540Other (income) expense
    
    
    (1,520
    )
    
    
    (1,193
    )
    
    
    3,093
    
    
    
    (1,837
    )INCOME FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    4,903
    
    
    
    1,364
    
    
    
    10,096
    
    
    
    1,385INCOME TAX EXPENSE
    
    
    3,343
    
    
    
    3,477
    
    
    
    6,279
    
    
    
    8,482INCOME (LOSS) FROM CONTINUING OPERATIONS
    
    
    1,560
    
    
    
    (2,113
    )
    
    
    3,817
    
    
    
    (7,097
    )DISCONTINUED OPERATIONS (Note J)INCOME FROM DISCONTINUED OPERATIONS (Including gain on disposal of $128, $0, $20,887, $0)
    
    
    128
    
    
    
    1,880
    
    
    
    23,676
    
    
    
    5,171INCOME TAX EXPENSE
    
    
    51
    
    
    
    751
    
    
    
    880
    
    
    
    2,045INCOME FROM DISCONTINUED OPERATIONS
    
    
    77
    
    
    
    1,129
    
    
    
    22,796
    
    
    
    3,126NET INCOME (LOSS)
    
    $
    1,637
    
    
    $
    (984
    )
    
    $
    26,613
    
    
    $
    (3,971
    )
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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In thousands)
(Unaudited)
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    26,613
    
    
    $
    (3,971
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    9,180
    
    
    
    11,425Loss on the sale of Kompac Division
    
    
    1,321
    
    
    
    Gain on the sale of Textile Division
    
    
    (22,208
    )
    
    
    Gain on unwinding the interest rate swaps
    
    
    (5,981
    )
    
    
    Gain on
expired stock options
    
    
    (1,105
    )
    
    
    Interest expenseredeemable preferred stock dividends
    
    
    4,723
    
    
    
    19,540Deferred income taxes
    
    
    4,196
    
    
    
    5,267Equity in earnings of investees
    
    
    (491
    )
    
    
    (59
    )Foreign currency loss (gain)
    
    
    4,892
    
    
    
    (2,937
    )Gain on disposal of fixed assets
    
    
    
    
    
    
    (8
    )Change in operating assets and liabilities
    
    
    (721
    )
    
    
    (16,451
    )Net cash provided by operating activities
    
    
    20,419
    
    
    
    12,806CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from the sale of Kompac Division
    
    
    816
    
    
    
    Proceeds from the sale of Textile Division
    
    
    48,786
    
    
    
    Cash paid for acquisitions
    
    
    (5,385
    )
    
    
    (379
    )Capital expenditures
    
    
    (8,631
    )
    
    
    (5,207
    )Net cash provided by (used in) investing activities
    
    
    35,586
    
    
    
    (5,586
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from unwinding interest rate swap
    
    
    5,981
    
    
    
    Payments on long-term debt
    
    
    (35,158
    )
    
    
    (8,943
    )Net proceeds from revolving credit facility
    
    
    
    
    
    
    1,575Net cash used in financing activities
    
    
    (29,177
    )
    
    
    (7,368
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (2,296
    )
    
    
    66Net increase (decrease) in cash and cash equivalents
    
    
    24,532
    
    
    
    (82
    )Cash and cash equivalents at beginning of period
    
    
    9,595
    
    
    
    843Cash and cash equivalents at end of period
    
    $
    34,127
    
    
    $
    761
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DAY INTERNATIONAL GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands)
 (Unaudited)
 A. BASIS OF PRESENTATION
  B. INVENTORIES
  2006
    
    
    2005Finished goods
    
    $
    22,651
    
    
    $
    20,139Work in process
    
    
    3,709
    
    
    
    3,235Raw materials
    
    
    20,503
    
    
    
    17,745$
    46,863
    
    
    $
    41,119
 C. EXCHANGEABLE PREFERRED STOCK
 1 4
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1 4
 D. INCOME TAXES
   E. BUSINESS SEGMENTS
  7




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F. COMPREHENSIVE INCOME (LOSS)
  G. CONTINGENCIES
  H STOCK-BASED COMPENSATION
 1998 Stock Option Plan
   2006 Stock Option Plan
  8




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Day Stock Option Plan
   Accounting for Stock-Based Compensation
    9




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Three Months
    
    
    Nine Months2005
    
    
    2005Net lossas reported
    
    $
    (984
    )
    
    $
    (3,971
    )Lessstock-based compensation expense determined using fair value based method in SFAS No. 123
    
    
    (184
    )
    
    
    (552
    )Pro forma net loss
    
    $
    (800
    )
    
    $
    (3,419
    )
 I. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
  Three Months
    
    
    Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    28
    
    
    $
    36
    
    
    $
    83
    
    
    $
    111Interest cost
    
    
    15
    
    
    
    15
    
    
    
    44
    
    
    
    45Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Actuarial loss recognized
    
    
    5
    
    
    
    5
    
    
    
    17
    
    
    
    14Net periodic pension costs
    
    $
    48
    
    
    $
    56
    
    
    $
    144
    
    
    $
    170
  Three Months
    
    
    Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    346
    
    
    $
    330
    
    
    $
    1,038
    
    
    $
    990Interest cost
    
    
    247
    
    
    
    253
    
    
    
    741
    
    
    
    759Amortization of prior service cost
    
    
    (209
    )
    
    
    (208
    )
    
    
    (627
    )
    
    
    (625
    )Actuarial loss recognized
    
    
    61
    
    
    
    112
    
    
    
    183
    
    
    
    336Net periodic postretirement benefit costs
    
    $
    445
    
    
    $
    487
    
    
    $
    1,335
    
    
    $
    1,460
  Medicare Prescription Drug, Improvement and
Modernization Act of 2003
 10




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J. DISCONTINUED OPERATIONS
  Three Months
    
    
    Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    
    
    
    $
    11,548
    
    
    $
    25,448
    
    
    $
    35,342Pre-tax income
    
    
    98
    
    
    
    2,042
    
    
    
    25,803
    
    
    
    5,045
  December 31, 2005Cash
    
    $
    28Accounts receivable
    
    
    4,420Inventories
    
    
    8,000Other current assets
    
    
    80Property, plant and equipment
    
    
    9,948Intangible assets (net of amortization)
    
    
    8,487Other long term assets
    
    
    5,050TOTAL ASSETS
    
    $
    36,013Accounts payable
    
    $
    1,080Other current liabilities
    
    
    3,290Other long term liabilities
    
    
    8,407TOTAL LIABILITIES
    
    $
    12,777
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Three Months
    
    Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    
    
    
    $
    1,760
    
    
    $
    3,072
    
    
    $
    5,947Pre-tax income (loss)
    
    
    30
    
    
    
    (162
    )
    
    
    (2,127
    )
    
    
    126
  December 31, 2005Cash
    
    $
    (181
    )Accounts receivable
    
    
    1,035Inventories
    
    
    2,031Other current assets
    
    
    25Property, plant and equipment
    
    
    1,237Intangible assets (net of amortization)
    
    
    Other long term assets
    
    
    78TOTAL ASSETS
    
    $
    4,225Accounts payable
    
    $
    246Other current liabilities
    
    
    1,844Other long term liabilities
    
    
    TOTAL LIABILITIES
    
    $
    2,090
 K. ACQUISITIONS
  12




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L. SUBSEQUENT EVENT
   M. RECENTLY ISSUED ACCOUNTING STANDARDS
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Safe Harbor Statement
  13




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Basis of Presentation
  Three Months
    
    
    
    
    
    
    
    
    
    Nine Months2006
    
    2005
    
    2006
    
    2005$
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Net sales
    
    
    86.7
    
    
    
    100.0
    
    
    
    78.5
    
    
    
    100.0
    
    
    
    249.2
    
    
    
    100.0
    
    
    
    231.9
    
    
    
    100.0Costs of goods sold
    
    
    54.3
    
    
    
    62.6
    
    
    
    49.3
    
    
    
    62.8
    
    
    
    155.9
    
    
    
    62.6
    
    
    
    144.2
    
    
    
    62.2Gross profit
    
    
    32.4
    
    
    
    37.4
    
    
    
    29.2
    
    
    
    37.2
    
    
    
    93.3
    
    
    
    37.4
    
    
    
    87.7
    
    
    
    37.8Selling, general and administrative expense
    
    
    18.4
    
    
    
    21.2
    
    
    
    16.7
    
    
    
    21.3
    
    
    
    53.9
    
    
    
    21.6
    
    
    
    51.3
    
    
    
    22.1Management fees
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.7
    
    
    
    0.3
    
    
    
    0.7
    
    
    
    0.3Operating profit
    
    
    13.7
    
    
    
    15.9
    
    
    
    12.2
    
    
    
    15.5
    
    
    
    38.7
    
    
    
    15.5
    
    
    
    35.7
    
    
    
    15.4
 Comparison of Results of Operations
 Three Months Ended September 30, 2006, Compared with Three Months Ended September 30, 2005
   14




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Nine Months Ended September 30, 2006, Compared with Nine Months Ended September 30, 2005
   15




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Liquidity and Capital Resources
   16




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Risks Associated with International Operations
   
 17




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Interest Rate Risks
 
 Commodity Risks
  
 ITEM 4. CONTROLS AND PROCEDURES
  18




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ITEM 5. OTHER INFORMATION
  Dennis R. Wolters
    
    
    280David B. Freimuth
    
    
    185Dermot Healy
    
    
    120Thomas J. Koenig
    
    
    185Steven Noe
    
    
    215William C. Ferguson
    
    
    75Duncan P. Varty
    
    
    25
  Dennis R. Wolters
    
    
    1,200David B. Freimuth
    
    
    310Dermot Healy
    
    
    200Dwaine R. Brooks
    
    
    112.5
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PART II OTHER INFORMATION
 
 ITEM 6. EXHIBITS
 (10)
    
    Material Contracts
 10.1
    
    2006 Stock Option Plan10.1
    
    Restricted Stock Unit Plan
 (31)
    
    Rule 13a-14(a)/15d-14(a)Certifications
 31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification
 (32)
    
    Section 1350 Certifications
 32.1
    
    Chief Executive Officer Certification32.2
    
    Chief Financial Officer Certification
 
 Signature
  Day International Group, Inc.(Registrant)Date: November 13, 2006
    
    /s/ Thomas J. KoenigThomas J. KoenigVice President andChief Financial Officer(Principal Financial Officer)
 20